Money Matters

What percentage of your portfolio should be cash?

There’s no single percentage of a portfolio that should be held in cash. Learn how your goals, time horizon, risk tolerance, and liquidity needs can help you find the right balance.

Published July 17, 202613 min read Share

Deciding how much cash to hold in your investment portfolio means balancing competing priorities.

Hold too little and you may be forced to sell investments during downturns or miss buying opportunities.

Hold too much and inflation erodes your purchasing power while long-term returns suffer.

For business owners and investors managing both personal wealth and business operations, often with variable income, decisions about cash allocation in a portfolio become even more nuanced.

Determining the right percentage requires understanding common allocation guidelines, evaluating personal risk factors, and aligning liquidity needs with long-term growth objectives.

Key takeaways

• There ‘s no universal percentage of a portfolio that should be held in cash—the right amount depends on your goals, time horizon, income stability, liquidity needs, and risk tolerance.
• Keep emergency savings separate and readily accessible. The Financial Consumer Agency of Canada suggests aiming for three to six months of regular expenses.
• Cash equivalents such as GICs, money market funds, and Treasury bills can offer lower volatility, but their accessibility, returns, risks, and deposit protection vary.
• Business owners should calculate operating reserves using cash-flow forecasts and upcoming obligations rather than applying a fixed percentage to their personal investment portfolio.
• Review your cash allocation when your goals or financial circumstances change, rather than making major adjustments based only on short-term market movements.

Here’s what we’ll cover:

How much cash in a portfolio is enough?

There’s no standard percentage of a portfolio that should be held in cash. The appropriate allocation depends on when you will need the money, your emergency savings, risk tolerance, income stability, and investment goals.

What percent of your portfolio should be in cash should reflect your objectives, investment time horizon, and risk tolerance—not a single rule based on age or investor type.

Different investor types tend to lean toward different allocations:

• An investor with stable income, a separate emergency fund, and a long investment horizon may need relatively little cash within their portfolio.
• Someone expecting a major purchase or withdrawal within the next few years may hold more cash or lower-risk investments.
• A business owner with uneven income may value additional liquidity, while keeping personal and business reserves separate.
• Someone approaching retirement may hold more readily accessible assets to cover planned withdrawals without selling longer-term investments at an unfavourable time.

It’s important to note that these are guidelines, not rules. Your cash position should support a defined purpose, such as covering planned withdrawals, managing uncertainty, or maintaining the flexibility to rebalance.

What is the goal of having cash in your portfolio?

Having cash in your portfolio provides liquidity, stability, and flexibility without disrupting your long-term investment strategy.

Cash can act as a buffer between your short-term needs and your long-term assets. It may reduce the likelihood that you’ll need to sell stocks or bonds during market downturns, and it can provide funds for portfolio rebalancing or planned withdrawals.

For portfolio-planning purposes, the term cash and cash equivalents may include:

• Chequing and savings account deposits.
• High-interest savings accounts.
• Guaranteed Investment Certificates (GICs).
• Money market funds.
• Short-term Government of Canada Treasury bills (T-bills).

These products are not interchangeable. Their accessibility, potential returns, price stability, tax treatment, and eligibility for deposit protection can differ.

Cash and cash equivalents in an investment portfolio may serve several purposes:

• Short-term liquidity: provides access to funds for upcoming expenses or withdrawals.
• Reduced forced-selling risk: lowers the likelihood that you will need to sell longer-term investments unexpectedly.
• Portfolio stability: generally experiences less price volatility than equities, although the level of risk depends on the product.
• Rebalancing flexibility: provides funds that can be directed towards underweighted parts of your portfolio.
• Business flexibility: helps business owners maintain personal liquidity while separate business reserves support operating needs.

Cash isn’t meant to drive long-term returns. Instead, its role is to provide stability and flexibility that allows you to keep the rest of your portfolio invested with confidence.

What’s the difference between an emergency fund and investment cash?

An emergency fund is money reserved for unexpected essential expenses, while investment cash forms part of your portfolio and supports its ongoing management.

Emergency fund

An emergency fund is money reserved for unexpected essential expenses, while investment cash forms part of your portfolio and supports its ongoing management.

The Financial Consumer Agency of Canada (FCAC) recommends working towards the equivalent of three to six months of regular expenses, although the appropriate amount depends on your personal circumstances.

Emergency savings can help you manage events such as:

• An unexpected reduction in income.
• Urgent home or vehicle repairs.
• Unplanned medical or family costs.
• Other essential expenses that cannot reasonably be delayed.

Business owners should avoid combining personal emergency savings and business operating reserves into one target.

Maintain a personal emergency fund for household needs and calculate a separate business reserve using your operating expenses, payroll obligations, debt payments, seasonality, customer payment patterns, and cash-flow forecasts.

Investment cash

Investment cash is held within or alongside your investment accounts to support planned withdrawals, rebalancing, or other short-term portfolio needs.

Unlike an emergency fund, the amount of investment cash may change as your objectives, spending plans, and portfolio allocation evolve.

Establishing an emergency fund before investing money that may be needed unexpectedly can help protect your long-term strategy. Emergency savings are intended to provide stability rather than maximise returns.

What are the pros and cons of holding cash in a portfolio?

Holding cash can improve liquidity and reduce short-term volatility, but an unnecessarily large allocation may limit long-term growth and lose purchasing power to inflation.

Advantages of holding cash

Benefits of a healthy cash percentage in your portfolio include:

• Easier to access to funds, depending on the account or investment.
• Lower price volatility than many longer-term investments.
• Less pressure to sell investments to cover an unexpected need.
• Greater flexibility when rebalancing your portfolio.
• More certainty for known short-term expenses.

Disadvantages of holding cash

But there are some disadvantages to be aware of as well:

• Loss of purchasing power when returns do not keep pace with inflation.
• Lower long-term return potential than growth-oriented investments.
• Opportunity cost from keeping money out of other asset classes.
• Restrictions or charges when accessing certain products before maturity.
• The possibility of holding more cash than your goals require.

The right allocation strategy acknowledges both sides. You need enough cash to support stability, but not so much that it meaningfully slows your ability to build wealth.

What factors influence cash allocation in a portfolio?

Your risk tolerance, time horizon, upcoming expenses, income stability, and existing emergency savings should all influence the amount of cash you hold.

Risk tolerance

Risk tolerance describes both your willingness to accept investment volatility and your financial ability to absorb losses.

An investor who is uncomfortable with large fluctuations may choose a more conservative asset mix. However, holding substantially more cash is not the only way to reduce risk. A diversified mix of cash, fixed-income investments, and equities may provide a better balance between stability and long-term return potential.

Your ability to accept risk may also differ from your emotional comfort with it. Someone may feel comfortable taking significant risk but lack the financial capacity to recover from a major loss before they need the money.

Time horizon and withdrawal needs

Your investment time horizon is the period between investing your money and expecting to use it.

A longer time horizon may give you more time to recover from market fluctuations. For goals that are only a few years away, readily accessible and lower-risk options may be more appropriate than investments that can change significantly in value. The Ontario Securities Commission (OSC) explains that time horizon is an important part of assessing investment risk.

Rather than relying on age bands, consider:

• When you expect to start withdrawing money.
• How much you expect to withdraw.
• Whether the withdrawal date is flexible.
• Whether other income will cover your essential expenses.
• How a market decline could affect your plans.

If you are planning a major purchase within the next few years, keeping the required amount in cash or other lower-volatility options can help ensure it is available when needed.

Personal and business cash flow needs

Income stability can affect how much cash liquidity you need. For instance, a person receiving predictable paycheques may need less investment cash than someone whose income changes considerably from month to month.

Business owners, consultants, and commission-based workers may value additional personal liquidity because their income can fluctuate. However, personal investment cash should not be used as a substitute for suitable business working capital.

The Business Development Bank of Canada defines working capital as the cash and other current assets available after current liabilities are accounted for. It also identifies separate forms of regular, reserve, temporary, and seasonal working capital, reflecting the fact that business cash needs depend on operations rather than a fixed percentage.

Business reserves should be based on factors such as:

• Payroll and supplier-payment schedules.
• Tax and debt obligations.
• Seasonal changes in sales and expenses.
• Customer payment terms.
• Planned purchases or expansion.
• Cash-flow forecasts and possible shortfalls.

Inflation and opportunity cost

Inflation gradually reduces how much the same amount of money can buy. If the return on your cash is lower than inflation, its purchasing power declines in real terms.

For example, if a cash account earns 3% while inflation is 4%, the money has a negative real return of approximately 1% before considering tax or fees.

The OSC explains that inflation reduces purchasing power and affects an investment’s real rate of return.

Opportunity cost represents the potential benefit you give up by choosing one option over another. When you hold cash instead of investing it elsewhere, the opportunity cost is the potential return that another suitable investment might have generated.

Liquidity also has value, however. The goal is not necessarily to minimise cash at all costs. It’s to hold enough to meet your needs without unnecessarily limiting your ability to pursue longer-term objectives.

How can you balance growth and liquidity?

Balance growth and liquidity by setting a target asset mix based on your goals, reviewing it periodically, and rebalancing when your circumstances or portfolio meaningfully change.

Avoid making large allocation changes based solely on short-term market forecasts. Instead:

• Establish a baseline allocation that reflects your goals, risk tolerance, time horizon, and spending plans.
• Review your portfolio periodically and after major personal or business changes.
• Consider upcoming withdrawals before moving money into volatile investments.
• Rebalance according to your financial plan rather than reacting to every market movement.
• Account for transaction costs and possible tax consequences before selling investments.

Rebalancing brings your portfolio back towards its intended asset mix as different holdings change in value.

The OSC notes that investors do not need to react to every small change and that rebalancing too frequently can increase trading costs.

Its general guidance suggests that once- or twice-yearly rebalancing may be sufficient for many investors, although your approach should reflect your own investment plan.

Maintaining an appropriate cash position can make rebalancing easier, particularly when you can direct new contributions or available cash towards an underweighted asset class rather than selling another investment.

Where should you keep your portfolio cash?

Keep portfolio cash in a product that matches when you will need the money, how quickly you need to access it, and how much risk you are prepared to accept.

High-interest savings and money market funds

A high-interest savings account can provide convenient access to short-term funds while earning interest.

Deposits held in an eligible account at a Canada Deposit Insurance Corporation (CDIC) member institution may receive CDIC protection.

CDIC insures eligible deposits up to $100,000, including principal and interest, in each separately insured category at each member institution.

Not every savings product or financial institution qualifies, so check the institution and account before relying on the coverage. Learn more about which deposits CDIC covers.

Money market funds invest in short-term instruments and may be available through brokerage accounts. However, they are investment products rather than insured bank deposits.

Mutual funds, exchange-traded funds, stocks, and bonds are not protected by CDIC. A product described as a high-interest savings fund or money market fund should not be assumed to have the same protection as an eligible savings-account deposit.

Before choosing an account or fund, compare:

• Access and settlement times.
• Interest rates or expected yields.
• Account or management fees.
• Minimum balance requirements.
• Investment and liquidity risks.
• CDIC eligibility, where applicable.

Guaranteed Investment Certificates and Treasury bills

Guaranteed Investment Certificates (GICs) provide a specified return over an agreed term. At the end of the term, you generally receive the amount invested together with the applicable interest.

Access before maturity depends on the product. Some GICs are cashable or redeemable, while others may restrict early access or reduce the interest you receive. Federally regulated financial institutions must disclose whether a GIC can be cashed before its end date, how early redemption affects interest, and any applicable charges. Review the terms and rights associated with a GIC before investing.

A GIC ladder can help stagger access to your money. For example, you might divide an amount between GICs that mature at different times instead of locking the entire amount away for one term.

This approach can provide regular maturity dates while allowing you to choose different terms. It does not guarantee that longer-term GICs will pay higher rates, so compare the rates and conditions available when investing.

Government of Canada Treasury bills, commonly known as T-bills, are short-term debt securities. Bank of Canada auction data reports three-month, six-month, and one-year Treasury bill maturities.

T-bills are issued at a discount to their maturity value. Your return is generally based on the difference between the amount paid and the amount received at maturity. They can be sold before maturity, but the price received may change as market interest rates change.

In a non-registered account, Treasury bill income generally needs to be reported for tax purposes. The Canada Revenue Agency (CRA) states that, when a T-bill matures, the difference between its purchase price and proceeds is generally reported as interest. Selling before maturity may also result in a capital gain or loss.

Review the CRA’s current guidance on Treasury bills and investment income or consult a qualified tax professional about your circumstances.

Final thoughts

There’s no single right cash allocation for every investment portfolio.

The appropriate amount depends on your emergency savings, investment goals, time horizon, risk tolerance, income stability, and upcoming expenses.

Cash should support a clear need—whether that is covering planned withdrawals, protecting short-term funds, or providing flexibility within your portfolio.

Review your allocation periodically, but resist making dramatic changes solely in response to short-term market forecasts.

For business owners managing personal investments and business finances, maintaining a clear distinction between the two is essential.

Personal cash reserves should support your household and investment goals, while business reserves should be based on operating costs, working capital, and cash-flow forecasts.

Financial services accounting software provides finance teams with real-time visibility into business payments, transactions, bank accounts, cash positions, and working capital across locations and entities. This can help your business understand where cash is coming from, where it is going, and how much is available for upcoming operating needs.

Personal emergency savings and investment-allocation decisions should remain separate from your company’s financial-management processes.

Frequently asked questions about cash in portfolios

Disclaimer: This article is for general information only and does not constitute investment, financial, tax, or legal advice. Consider speaking with a qualified financial professional about your individual circumstances.

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