The Illusion of Safety
On the surface, cash often seems like the prudent choice. It doesn’t fluctuate like equities, it’s liquid and in times of uncertainty, it’s natural for investors to seek refuge in cash. However, it is important to recognize that while cash is a safe haven and should be utilized in a portfolio, over time it can quietly but significantly erode your wealth.
It’s important for investors to understand that while cash is typically considered risk free it does carry inflation risk, opportunity cost, and potential tax inefficiencies that can undermine long-term financial goals.
Inflation
The main risk lies in inflation which can quietly diminish the purchasing power of your money. Cash is often referred to as “lazy money” because it does nothing while inflation and time work against it. For example, In South Africa, inflation has averaged around 5.5% over the past 20 years, according to data from the South African Reserve Bank (SARB).
For context, in South Africa, inflation has averaged around 5.5% over the past 20 years, based on data from the South African Reserve Bank (SARB). This means that R1 million held in cash today could lose half its purchasing power within 13 years.
Even with the current repo rate at 8.25% and money market yields ranging between 7% and 8.5%, the real (inflation-adjusted) after-tax returns are often negligible or even negative once you factor in personal income tax rates of 20% to 45% and inflation running around 5%.
Opportunity Cost:
Data from Fidelity highlights a striking illustration of opportunity cost: an investor who contributed $5,000 annually into an all-stock portfolio between 1980 and 2023, even with the worst possible market timing, would have ended up with over $4.2 million. In contrast, making the same $5,000 annual contributions into a cash account over that same period would have yielded only about $349,999.
Furthermore, when factoring in inflation, the cash holder would have faced an average annual erosion of 3.5% (USD) in purchasing power — meaning that not only did their cash holdings fail to grow meaningfully, but they were also steadily losing value in real terms.
Put simply, the real-world cost of staying in cash over that multi-decade period amounted to approximately $3.85 million in lost growth potential — a powerful reminder that avoiding market exposure can quietly but dramatically undermine long-term wealth accumulation.
Tax considerations:
Cash holdings are often taxed at an individual’s marginal income tax rate. In South Africa, there are annual exclusions of R23,800 (under 65) and R34,500 (Over 65). In contrast, dividends and capital gains are typically taxed at net effective tax rates. CGT has a net effective tax rate between 12%-18% while local and foreign dividends are taxed at 20% and foreign dividends often have further tax deductions based on double tax agreements.
Investors looking to preserve capital while still generating returns above cash and inflation have a wide array of alternatives such as bonds, structured products and Multi-Asset Portfolios.
Bonds are one of the most used alternatives to holding cash. Typically, bonds provide a higher yield to cash as they assume a higher risk. In South Africa, bond funds are currently delivering average returns of over 10.60% (ZAR) per annum-well above the rate of inflation and typical bank savings rates (Coronation Fund Managers, 2025).
Structured Products can also offer a higher return potential than cash. These investments are specifically designed to deliver fixed returns over a set term, often with built-in capital protection mechanisms that reduce downside risk.
While structured products do carry risk and are subject to market conditions and issuer creditworthiness, they offer a compelling balance of capital preservation and income generation.
Multi-Asset Portfolios consisting of a diversified mix of equities, bonds, and inflation-hedging assets have consistently outperformed cash over time. According to research from Hartford Funds, a balanced 60/40 (equity/bonds) portfolio has outperformed cash in 75% of all one-year periods following major market shocks since 1990—and in 100% of three-year periods—with average excess returns of 9% (USD) and 20% (USD) respectively.
Conclusion
Investors must ask themselves: Why am I sitting in cash? Is it a deliberate wait for attractive entry points, a reaction to heightened market volatility, or simply an aversion to risk? While cash undeniably plays an important role in a well-structured portfolio—providing liquidity and flexibility—it should never become a long-term default position without strategic purpose.
There is nothing inherently wrong with holding liquid reserves to capitalise on market swings or seize tactical opportunities. However, it is critical to consider the alternatives. History consistently shows that the greatest long-term destroyer of wealth is not market volatility—it is inertia. Sitting on large cash balances while waiting for the “perfect moment” to invest often leads to missed gains and diminished financial outcomes. Market timing is exceptionally difficult, and evidence demonstrates that remaining invested, even through periods of uncertainty, delivers markedly better results over time.
Even Warren Buffett, frequently (and inaccurately) portrayed as a cash hoarder, emphasised in his most recent Berkshire Hathaway shareholder letter that the overwhelming majority of the firm’s capital remains allocated to equities—a stance, he affirmed, that “won’t change.”
While cash may provide a sense of safety, it should not become the default resting place for capital.
Money is meant to be productive; it should work actively on your behalf, not sit idle. Investors today have access to a wide array of strategies—whether income-generating, capital-preserving, or growth-oriented—that can be aligned with individual financial goals and risk profiles. The key is to ensure each rand in your portfolio is intentionally positioned, contributing to your long-term wealth creation.
