Cash has been the asset class king since the GFC because the government-backed bank
term deposits offered something that other investment markets largely could not
- a capital guarantee.

Australian investors have also enjoyed higher interest rates than most other
parts of the developed world courtesy of the strength of our local economy and
relatively low levels of government debt.

The recent Vanguard/Investment Trends research report into self-managed super
funds highlighted the fact that a staggering amount of cash - around $130
billion according to the Investment Trends estimates - is now held within
SMSFs. Breaking that down a good chunk of that money is consciously being held
there as a proxy for more traditional fixed income investing but Investment
Trends still estimates that about $50 billion of the cash stockpile is
effectively "parked" there awaiting a signal to move into growth assets like
shares.

The trustee research strongly pointed to confidence returning in the share
market or a sense that the economic recovery was "real" being required before
that money would move.

The problem of course is that no-one famously rings a bell signalling either
the top or the bottom of market cycles. So the risk that is being perpetuated
throughout the system - and this is not exclusively an SMSF issue - is what
such a conservative asset allocation may mean for people with a long-term
investment horizon.

The risk is one of potential under performance and hence a small superannuation
account balance which means a lower standard of living in retirement.

If we look back over the past three financial years cash has delivered 4.5% a
year as measured by the UBS bank bill index. Over the same time period a
portfolio of Australian government bonds has returned 8.6% while a portfolio of
high yield Australian shares - as measured by the FTSE-ASFA Australia High
Dividend Yield index has returned investors 9.4%. The broader Australian share
market (using the S&P/ASX 300 index) returned 5.6%.

Those return figures may surprise some people and come with the usual warnings about
past performance not being a reliable predictor of returns in the future. That
is not suggesting the time is right to jump back into growth assets. Rather it
is about going back to first principles of investing.

The asset allocation decision is the primary driver of a portfolio's return and
volatility. So the start of a new tax year could be a good time to check on
what your asset allocation is within the SMSF portfolio. If you are a retiree
or nearing the point of retirement you may be completely comfortable with the
more defensive shift in the asset allocation.

But if you are still some years away from retirement then it may be time to
rebalance the portfolio back to restore the asset allocation to within your
agreed target ranges in order to get appropriate diversification and manage the
risk.

Rebalancing a portfolio is something that sounds like common sense but is a lot
easier to talk about than actually do. The notion of rebalancing away from the
security of cash into the volatile world of growth assets will crystallise a
lot of investor's fears - no-one should underestimate the psychological
challenges these types of portfolio reviews will throw up. It is also when the
guidance of a professional and trusted adviser can provide a valuable sounding
board.

The point is to make a conscious decision about the cash holding - and understand
that even an all-cash portfolio is not risk free.

By Robin Bowerman
Smart Investing
Principal & Head of Retail, Vanguard Investments Australia

20th July 2012