What Percent of Your Portfolio Should Be In Cash? It’s an important question to ask as you consider the pros and cons of investing and hedging against fluctuations in the stock market.
Having some of your investments in cash, or liquid assets, is beneficial because it will give you a financial cushion if things go wrong with your investments, leaving you with money if needed. On the other hand, if you keep too much of your money tied up in liquid asset like cash, then it can be more difficult to grow your wealth over time.
Table of Contents
How Much Cash Should I Keep in My Portfolio?
When it comes to investing, one of the most important questions new investors ask is how much cash they should keep in their portfolio. This is especially relevant in today’s world of low or effectively 0% interest rates.
Keeping too much cash in a portfolio can mean missing out on potential returns from other investments, but having too little can leave an investor vulnerable to market volatility and unable to take advantage of opportunities when they arise.
Investors should keep an amount of cash in their portfolio that is suited to their individual risk tolerance, investment goals, and time horizon. More conservative investors may want to hold more cash than more aggressive ones, while those with shorter time horizons may also want to hold more.
How Much Should I Keep in Cash Reserves?
The Great Recession brought about a new era of interest rates, which has caused many to ask the question: “How much should I keep in cash reserves?” It wasn’t long ago that you could open a brokerage account and select a money market account or similar alternative, collecting 4%, 5%, or even 6% on your money.
This was an attractive option for those who wanted to keep liquidity on hand while still earning dividends and interest.
Professionals advise that investors should keep cash reserves on hand, rather than investing in blue chips or index funds. This offers security against unexpected market shifts and provides the flexibility to take advantage of investment opportunities without needing to liquidate other investments first.
Determining the Level of Cash To Keep in Your Portfolio
Having a sufficient level of cash in your portfolio is essential for financial security. An emergency fund should be the absolute minimum amount of cash to keep on hand, which should cover typical expenses for at least six months. This will ensure that you can get through unexpected disasters or surprises without having to sell off your assets and potentially trigger excess taxes and suboptimal returns.
For investors who are at least 10 years away from retirement and with a net worth of less than $500,000, it can be beneficial to keep their brokerage account invested in equities.
However, they should still maintain an emergency fund near their local bank; the emergency fund must be managed with a capital preservation or asset protection strategy to protect their investments from losses due to market volatility or other risks.
After Building Your Emergency Fund
It is important to strike a balance between having enough cash reserves for unexpected expenses, and taking on investment opportunities for long-term growth. Too much risk can lead to greater losses if the markets turn. Maintaining healthy levels of cash reserves while investing is key to protecting against financial risks and building wealth over time.
A Common-Sense Strategy
It may be wise to commit no fewer than 5% of your portfolio to cash, while a number of careful experts may opt to maintain somewhere between 10-20% as the bottom limit.
Data points towards the highest risk/benefit balance being achieved in this area of cash assignment. By joining together cash and fixed income security, the maximum risk/return ratio climbs slightly higher, presumably close to 30%. For a collection with a value of $5 million, that would range between $250,000-$1.5 million.
