Investors are being advised to hold more cash then they usually do for a few years. This is because if the recovery goes sour, as may well happen, they will have enough put by to live without having to sell stocks, bonds and any property investments they have at bargain basement prices.

The question is how much cash. Some advisors say take what you had in cash in 2008 and multiply it by at least two, but better would be to treble it. Alternatively you could take your living expenses and double them. For retirees this will give two years for asset prices to recover. If you are working it will give you a solid protection against unemployment, or a fall in income. For most investors this may seem a bit steep, but cash is likely to offer the most effective means of getting a good return in the current environment.

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The key to having more cash however is to maximise its earnings potential – maximise interest rates and minimise fees. The good news is banks are looking for deposits to fund themselves as the global financial crisis has raised the cost of capital markets and securitisation funding. Depositors can expect rates well over the current official cash rate of 2.5%, and this is likely to get better when the Reserve Bank starts tightening later in the year. The timing of the Reserve Bank’s interest rate increases is still subject to wide debate, but the consensus now seems to be September.

However banks are still going to try to gather deposits while paying as little interest as possible, while charging them as much in the way of fees as possible. The best ways to get a good return on cash are firstly, locking it away in term deposits. Banks value term depositors most. However if you need access to your funds all the time, online savings accounts can offer good interest if you shop around. The main thing to watch is the fees you may be charged. Many banks have zero or low fee accounts, so keep your eyes open.

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