Cash acting as an emotional safety net during market volatility

Despite having less growth potential than other assets, financial advisers have said cash is providing a sense of comfort for clients, allowing them to ride out volatility without sacrificing their lifestyle.

This sense of control has proved particularly valuable of late, with concerns looming among advisers and their clients in the wake of significant market upheaval over the last six months. As a result, industry reports have suggested that investors and some advisers are moving to a more defensive position to protect their portfolios against further downturns.

For example, Betashares found cash ETFs saw inflows of $782 million in the first six months of 2025 compared to $38 million of outflows in the same period last year.

Looking deeper into the role of defensive assets, Coastal Advice Group chief executive Daniel Brown suggested that while the investment value of cash fluctuates as the economic environment shifts and typically generates a lower return than equities, the real value for clients in holding cash is the sense of security and freedom it provides them.

“I think it’s better to talk with the clients about the worst case scenario, and hold a certain cash portion that just allows them to ride out that short period of volatility,” Brown told Money Management.

“For example, if they think $50,000 would maintain their lifestyle for 12 months, make sure that they’ve always got $50,000 in their cash account, in whatever product they’re using. Then, if markets are volatile, as is often happening, yes their balance changes but their lifestyle does not, and we just don’t want to trade off lifestyle.”

Vanguard’s Emotional and Time Value of Advice report recently shone a light on advisers’ ability to boost investor confidence, with 86 per cent of respondents stating they now have greater peace of mind than when they were managing their own finances. Notably, this positive trend is held across both human-advised and digitally advised clients, with some 71 per cent and 47 per cent, respectively, reporting an increase in positive emotions.

Brown explained that when things change, this is where it is the adviser’s job to demonstrate that markets do swing back and forth.

“It’s done it before and it will do it again, that’s what’s called investing, otherwise it would be called savings,” Brown said.

Adding to the discussion, Robert Devlin, a partner and head of advice at Tribeca Financial, suggested that when interest rates have been low, holding cash beyond the practical, short-term needs made little sense from an investment perspective. Now the economic environment has shifted and interest rates are high, cash is being seen as a more valuable asset. 

“We can get 4–5 per cent on your cash account. It’s actually not a terrible investment, and then it can also make some practical sense as well. But we invest clients in a range of defensive assets like bonds as well, so they usually have some exposure there,” Devlin said.

Although, even when markets do favour cash, Devlin explained it is important to maintain appropriate diversification to weather changes. This includes by holding buckets of assets to maintain sufficient cash reserves, regardless of interest rates, to avoid needing to liquidate assets quickly to meet short-term expenses.

Taking a similar view, Viola Private Wealth founding partner and financial adviser Charlie Viola said his firm views allocation to cash as a “practical solution”.

Cash, he said, is intended to cover expenses and ensure liquid assets are available to take advantage of opportunities as they arise, but not as part of a long-term portfolio strategy.

“Over the longer-term, cash will not hold its value against inflation and will erode the purchasing power of investors who hold excessive amounts,” Viola said.

“We can enhance portfolio stability through a well-structured strategic asset allocation, high-quality asset selection, and sufficient diversification without needing to hold a material amount of the portfolio in cash. 

“We are happy for clients to hold cash amounts to be able to capitalise on opportunistic investments, but it is not typically part of a longer-term SAA model due to the drag it causes on performance.”