Cash isn't king for the conservative investor

'Cash is king' the saying goes, which is useful if you're bargaining for a discount in Good Guys. But it's not always the friend of the conservative investor.

My mum was changing her superannuation recently and she was running me through her options. I could tell she was keen to get into a fund that was as 'cash-like' as possible.

I didn't give her personal advice of course but I did explain to her that a cash heavy fund could be just as risky, or more so, than the higher growth options she was keen to avoid. Cash's enemy is inflation, or more simply being left behind as an economy grows. In the long run this is likely to erode the purchasing power of savings left in a cash heavy super fund (or bank account).

Of course, if the reverse occurs - a shrinking economy and plummeting asset prices - cash would be king. But that's an overly aggressive investment strategy for most people, since it's basically a bet that the politicians will fail in their continual efforts to inflate the economy and deflation will take hold.

Our conservative portfolio holds cash, but it also holds Australian and international shares and property. The cash (and bonds) it holds protect it from large capital losses (and allow it to take advantage of cheap assets)). But it will grow as the businesses it invests in grow their profits and pay out larger dividends.

As you become more conservative (generally with age) you should hold more cash but, unless asset prices are completely out of hand, not lots of it.

Of course all rules of thumb have their exceptions and this is no exception to that general rule of thumb.

Cash is best when:

1. The money's to be spent in a timeframe that's too short to cope with the volatility that can occur with growth assets like shares and property. Depending on your risk appetite, this might be five to ten years (you need a surprisingly long time frame to be highly confident of shares outperforming cash). If you're conservative, you might decide anything that needs to be spent over the next decade should be in cash. This is a reason why you should hold more cash as you age (since you are spending an ever increasing proportion of your capital after you retire and stop saving).

2. Share and property prices have gone crazy. But it would still be a brave person who invests everything in cash.

3. You're starting out. If you're starting small it can be best to build up a decent balance first, then start building your share portfolio (or whichever asset you choose). Buying small investments can lead to high transaction costs, poor choices and little diversification.

If you're just trying to be conservative then a simple, sensible, diversified portfolio is the way to go. Anytime you invest all, or most, your savings in one asset class you're taking a lot of risk and investing in cash is no different.