WE feel comfortable with cash. It shields you from volatility, helps you sleep at night, and gives you the flexibility to act. But in a world of persistent inflation and evolving investment opportunities, holding too much cash may quietly drag on long-term returns.
Let’s explore here when cash makes sense, when it becomes a drag – and how different types of investors can put idle funds to better use, all while maintaining liquidity and managing risk.
Cash provides a buffer against uncertainty – whether that’s funding near-term expenses without disturbing long-term investments or being ready to deploy capital quickly to invest during drawdowns.
An example in numbers:
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Let’s say you have S$500,000 in cash earning 1.5 per cent interest. Compare that to three alternative options over five years:
Even conservative allocation strategies can significantly outperform holding cash – and without sacrificing liquidity or increasing risk. Excessive cash allocations dilute portfolio returns during upcycles or recoveries, due to missed participation in market rebounds, delayed compounding of income and capital gains, and increased emotional hesitation to re-enter markets while “waiting for the right time”. This performance lag compounds silently, creating a material gap between potential and actual outcomes.
So why revisit cash now? One of the key reasons is that interest rates are on the way down. This means that bank saving rates and money market rates are likely to follow downwards as central banks across the world enter policy easing mode. Despite this, inflation remains elevated so real returns on cash are almost guaranteed to be negative. In this economic environment, holding cash for safety is still valid but should not be at the expense of losing out on new opportunities completely.
How to better use cash
So rather than letting cash sit idle, consider treating it as part of your overall portfolio strategy. When considering how to best utilise cash, your goals, risk appetite, and timeline should guide just how much cash to hold for liquidity, safety or optionality. This could mean deploying it carefully across several functional buckets, depending on your needs.
Emergency cash: Set aside for life’s unknowns – job changes, health issues, or short-term disruptions. This allocation should remain highly liquid, and instruments such as high-interest savings accounts, money market funds such as SPDR Bloomberg, one to three-month T-bills, exchange traded funds (ETFs), or Ultra-short Bond ETFs like iShares USD Ultrashort Bond UCITS ETF can be considered.
Defensive assets: Defensive assets are designed to preserve capital and provide portfolio stability, especially in times of market uncertainty. Some defensive assets include short duration bonds, dividend paying stocks and defensive stocks and ETFs in sectors such as utilities, consumer staples and healthcare.
Growth strategies: After setting aside an emergency fund and building a defensive portfolio, excess cash can be gradually deployed into longer-term investments, based on the investor’s goals and risk appetite. This portion of your portfolio is positioned for capital appreciation through benefiting from structural trends and a diversified global equity exposure.
Instruments to consider for growth include diversifying geographically in global equities across the US, Europe or emerging markets. You can also explore structural themes by diversifying across sectors such as AI, digital infrastructure and clean energy. Further, including commodities exposure in your portfolio and ensuring allocation is well-balanced across multiple asset classes can help to reduce exposure risk.
Investors who are unsure about timing their entry into growth assets could consider starting with defensive assets or using a dollar-cost averaging (DCA) approach. This allows them to stay partially invested while gradually building exposure as conviction grows.
Income-generating hybrids: For investors seeking cash flow with modest growth, which can be especially useful in retirement planning or income-focused portfolios, instruments like multi-asset income funds or investing in sectors via Reits that combine yield with capital appreciation potential can be helpful.
Bottom line: Cash is not a strategy
There are many factors to consider when it comes to financial planning and how to effectively safeguard your financial future. The bottom line is that once you’ve secured your financial foundations – such as an emergency buffer, health insurance, and life cover for dependents –you can start thinking about how to align your remaining cash with your investment goals.
Not every dollar needs to be invested aggressively. But idle cash that exceeds your immediate needs can and should be distributed more thoughtfully. Cash has a role but it is not a strategy. In today’s environment, prudent deployment of cash is one of the most underappreciated drivers of long-term wealth. You don’t have to go all-in, but staying all-out may cost you more than you realise.
The writer is chief investment strategist at Saxo
