The great cash stash and the risk of doing nothing

With geopolitical tensions rising and global economic uncertainty, many investors are holding high levels of cash, which exposes them to the harsh effects of inflation and a real rate of return less than zero.

Livewire recently surveyed its readers along with those of Market Index on the investment opportunities, challenges, and risks they see in 2025 following an extraordinary year for financial markets in 2024.

The survey findings were revealing. As part of its annual Outlook Series survey, over 4,800 respondents shared their perspectives. Many investors are positioning their portfolios with the expectation of ongoing share market volatility, largely attributable to the uncertainty around Donald Trump’s government and policy changes.

In response to the question of ‘how much of your portfolio is currently held in cash and term deposits’, Australian investors reported the following:

• 39.2% are holding 0–10% of their portfolios in cash.
• 23.7% have allocated 11–20%.
• 14.5% are cash deployed at 21–30%.

I suspect many investors are so heavily weighted to cash as they are bracing for more share market volatility given the uncertainty about global economic growth and the potential for a trade war. We could also see the potential reemergence of sharp price rises given the inflationary impact of Trump’s tariffs which are already being introduced.

Staying on the sidelines

Other data validates the significant cash holdings of investors. Self-managed superannuation funds (SMSFs) especially like cash. For the first time, SMSFs managed over $1 trillion in assets in the September 2024 quarter, reaching $1.02 trillion. Of this, a record $161.7 billion (about 16%) was held in cash and term deposits. Investments in Australian shares also reached a new high of $286.3 billion. Another 16% of SMSF assets were invested in direct property.

In contrast, allocations to fixed income investments remained at much lower levels in the September quarter.

Fixed income investments totalled a $18.7 billion or less than 1.8% of all SMSF assets. This is surprising given the premium above cash and the defensive nature of these investments.

Examination of fixed income allocations is needed

This low allocation to fixed income and generally high allocations to cash demand a re-examination.

With inflation sitting at around 2.5% in December, and one-year term deposits averaging a return of just 3.35% p.a.,[1] down from 4.55% a year ago, that’s a real return of less than 1% p.a. on cash.

Returns on online savings accounts were even less, just 1.75% in January 2025, and down from 2.05% a year earlier. The big banks have reduced savings and term deposit rates despite the rise in market interest rates or bond yields late last year. So, banks are paying savers less, while they make more.

In such an environment, where inflation could reignite, and falling rates on savings accounts, investors should be cautious about holding so much money in cash.

Ideally, more should be allocated to fixed income, a defensive investment ideal for the times, with an allocation of between 5% to 10% to private credit a possibility for investors who don’t like share market uncertainty or losing money on cash. The percentage of an investor’s portfolio allocated to private credit depends on an investor’s goals, risk tolerance, and investment horizon.

The rising flows to private credit

While institutional investors have allocated to private credit, retail investors and retirees should feel reassured by endorsements from central banks about the asset class.

In a 2024 report^[2], the US Federal Reserve stated: “Over the past decade, the asset class, particularly direct lending, has generated higher returns than most other comparable asset classes, including 2-4 per cent over syndicated leveraged loans,”

"Borrowers have been willing to pay a premium for the speed and certainty of execution, agility, and customisation that private lenders offer.”

The US Fed has also pointed out that the largest investors in private credit funds are pension funds, insurance companies, family office, sovereign wealth funds and high net worth individuals. “These institutional investors invest in private debt due to various factors such as portfolio diversification, low correlation to public markets and relatively high returns.”

Separately, the RBA has stated: “Default rates in private credit have been relatively low and less frequent in recent times relative to comparatively risky investments, such as in the syndicated loan or high-yield bond markets (Cai and Haque 2024). The sector has greater capacity than other forms of lending to postpone losses and defaults due to the bilateral nature of lending agreements. This has made it more resilient thus far in the cycle,” the RBA said in October 2024.^[

While the RBA considers the direct risks to financial stability from private credit to be low, transparency issues remain a concern. This view is shared by ASIC which is monitoring the sector in 2025 due to concerns about leverage visibility and potential systemic risks as the private credit markets grows. Vado Private welcomes any regulation that results in greater transparency for investors.