Cash in a lower-rate cycle: Safe Haven or Silent Risk

Cash offers comfort. It doesn’t fluctuate, it’s easy to access and the balance doesn’t move when markets wobble. Many clients tell me, ‘At least the cash is safe.’

But as interest rates trend lower, I’m increasingly discussing a different risk with clients, not the risk of taking on more market exposure but the risk of doing nothing, holding too much cash for too long while returns shrink in the background.

What lower rates mean for cash investors
Cash returns are closely linked to interest rates. When rates fall, yields on money market funds, call accounts and fixed deposits tend to fall as well. And unlike growth assets, cash has limited upside, the outcome is largely known upfront.

The challenge is that the damage rarely feels dramatic. It happens quietly, over months and years, so it’s easy to overlook.

One real-world example shows how quickly ‘temporary’ cash can become a long-term holding.

A couple I worked with built up a substantial cash balance over several years. After selling an investment property and with markets looking uncertain, they chose to ‘wait for clarity’ before reinvesting and placed the proceeds in a money market fund. What started as a temporary holding simply stayed in place as months turned into years.

Over that period, interest rates fell and the cash yield declined. Tax reduced the interest earned and inflation did the rest. By the time the position was revisited, the cash had made little progress in real (purchasing-power) terms, while the goals it was meant to fund were unchanged and the remaining time horizon for growth was shorter.

This pattern is common; cash is intended as a short-term parking bay but becomes a long-term decision simply because no reinvestment plan is made.

The hidden drag: tax and inflation
Tax is a key part of the cash story. Interest is taxed as income once it exceeds the annual exemption, so investors in higher tax brackets can lose a meaningful portion of the return making the advertised return much lower. After inflation, the real return, what your money can buy in future, is often far lower than expected and can even be negative if inflation is higher than the interest rate received on cash. Cash would not feel as safe if you could see inflation on your bank statement silently eating away at your money.

Where cash still plays a valuable role
None of this means cash has no place in a financial plan. The point isn’t to sit in cash until markets feel comfortable or to try to time the ‘right’ moment to invest. Instead, cash should be held deliberately for specific purposes and timeframes, such as an emergency fund, planned near-term expenses or a liquidity buffer that helps you stay invested through normal market volatility.

The challenge arises when cash is used for objectives it is not designed to achieve, especially long-term ones. Cash can keep the amount of money you have from going down, but it usually won’t grow enough to keep up with rising prices over time.

Growth assets: uncomfortable in the short term, useful in the long term
This is where comparisons with equities can feel uncomfortable. Equities fluctuate and market downturns test investor discipline. Cash, by contrast, feels calm and predictable. But over longer periods, ownership in quality businesses can grow earnings, increase dividends and adjust prices over time, helping investors keep pace with inflation. Volatility is part of the journey; long-term growth potential is the reason many investors include growth assets in their plans.

It’s not about being ‘safe” or ‘reckless’. It’s about using the right place for the right job. Cash works well for short-term needs and emergencies. Shares, in a diversified portfolio, are usually better for long-term goals because they have more chance to grow over time, even if the value goes up and down along the way.

In a falling-interest rate environment, the cost of holding excessive cash becomes more pronounced. Investors don’t pay for safety through visible losses, but through missed opportunities and the gradual erosion of purchasing power. Years can pass without meaningful progress towards goals, even though the money never appears to be ‘at risk’.

A practical way to right-size cash
A more balanced approach starts with clarity, how much liquidity do you truly need for emergencies, what expenses must be met in the next 12–24 months and how much capital needs to grow for future income or retirement? Once those answers are clear, cash can be sized intentionally, rather than emotionally.

So, is cash still king in a lower-interest rate South Africa? Cash still deserves respect and remains an important supporting tool. Used wisely, it provides flexibility and peace of mind. Used excessively, it can quietly undermine the financial security investors are trying to protect.

In today’s environment, cash can be a haven for the right purpose, but left unchecked, it can become a silent risk.