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Guidance

Is cash a good investment for your portfolio?

Is cash a good part of your investment portfolio?

When it comes to investments, the amount of cash you hold in financial products such as savings accounts or term deposits can often be a factor in whether your investment strategy is likely to actually deliver on your financial goals.

Ultimately, your investment strategy will be specific to you and your situation, but there are some things to be aware of when investing in cash.

Liquidity

Cash investments are the most liquid investment type. You always know the exact value of cash investments and they are the cheapest to access. On savings accounts, there’s often no fee for moving your money if you need to put it somewhere else quickly. This can be very useful if you have an emergency or another investment opportunity comes up that you want to act on.

Quick and simple

Cash investments are easy to understand and very quick to action. You can set up some savings accounts and term deposits almost instantly. You can choose between a fixed rate of interest or a floating rate. And while interest rates can change, if you choose a floating rate you can still make an estimation of what your returns will be within relative timeframes by looking at how interest rates have changed over the past few years.

Security

Cash investments are considered the most secure type of investment. The Australian Government guarantees term deposits and savings balances up to $250,000 per person per Australian Deposit-taking Institution (ADI) under the Financial Claims Scheme.

Returns

As mentioned above, because cash investments are secure, the return can be small in comparison to investment in shares and property. Cash investments are classified as defensive investments, which are investments that provide a steady income and stable returns. In comparison, shares and property are known as growth investments as they can provide an income and increase in capital value, although they tend to be more volatile than defensive investments.

In reality, what this means is having too little of your portfolio in cash could be a risk to achieving your financial goals in the event another investment you had made went poorly. But likewise, having too much of your portfolio in cash could mean you struggle to generate the returns you need.  

Timing

Given the stability of cash investments and the relative ease to withdraw or transfer the investment, they’re typically suited to shorter terms of investment. Growth investments on the other hand are typically suited to medium to long term where the returns have the opportunity to outlast any market instability.

Cashing out

Basically cash investments allow you to secure part of your investment portfolio. The amount this should make up in your portfolio depends on your risk tolerance. It’s also worthwhile noting that a cash investment may be helpful when in between investments.  

This article is intended to provide general information of an educational nature only. It does not have regard to the financial situation or needs of any reader and must not be relied upon as financial product advice.