Money Matters

What percent of your portfolio should be in cash?

It can tricky to determine the right cash allocation in your portfolio, balancing immediate liquidity needs against long-term growth potential. The right cash percentage depends on factors like your risk tolerance, age, income stability, and upcoming expenses. Understanding how to balance these priorities helps you maintain financial flexibility without sacrificing returns.

March 23, 20269 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.  

Here’s what we’ll cover:

How much cash in a portfolio is enough? 

Most financial experts recommend holding between 2% and 10% of your investment portfolio in cash, though this varies based on individual circumstances.

What percent of your portfolio should be in cash depends largely on your investor profile.  

Different investor types tend to lean toward different allocations: 

• Conservative investors: often hold 10% or more in cash, valuing security and flexibility over higher returns.

• Growth-focused investors: typically keep 2% to 5% in cash, maintaining just enough for opportunistic purchases or minor rebalancing.

• Business owners: may maintain 15% to 25% in readily accessible accounts, prioritizing having reserves on hand for operational expenses, seasonal fluctuations, and unexpected business needs.

• Pre-retirees and retirees: often increase cash holdings to 5% to 15% or more to reduce the need to sell investments during downturns.  

It’s important to note that these are guidelines, not rules. Your specific circumstances will determine your optimal cash allocation.

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 acts as a buffer between your short-term needs and your long-term assets. It reduces the likelihood that you’ll need to sell stocks or bonds during market downturns, allows you to rebalance efficiently, and gives you the ability to act quickly when opportunities arise. 

In portfolio terms, “cash” includes checking and savings accounts, money market funds, certificates of deposit, and short-term Treasury bills.

These vehicles prioritize preserving capital and providing near-term access over growth. 

Cash in an investment portfolio serves several important functions: 

• Liquidity for opportunities: allows you to invest during market corrections or pursue business opportunities without scrambling to sell other assets.

• Volatility buffer: reduces the risk of forced sales during downturns.  

• Peace of mind: helps you stay disciplined during market swings. 

• Operational flexibility for businesses: covers payroll gaps, uneven revenue cycles, or unexpected expenses. 

• Rebalancing tool: makes it easier to adjust allocations as market conditions change.  

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? 

Your emergency fund should be a separate, untouchable fund to be used only for crucial needs, while investment cash is actively used to help you manage your portfolio. 

Emergency fund 

Your emergency fund should be enough to cover three to six months of essential expenses. It should be held in a dedicated, easily accessible account outside of your investment portfolio. 

Business owners should increase this to six to 12 months of combined personal and business expenses. This fund protects you from financial catastrophes like an unexpected job loss or the sudden need for major repairs to your home or vehicle. 

Investment cash

Investment portfolio cash is the 2%-10% (or more) held within your investment accounts for opportunistic investing, portfolio rebalancing, and short-term liquidity needs. Unlike your emergency fund, this cash fluctuates based on market conditions and opportunities. 

Establish your emergency fund first, before optimizing your investment portfolio cash. Once it’s funded, resist the temptation to invest emergency money. Its purpose is stability, not growth. 

Pros and cons of holding cash in portfolios 

Understanding the advantages and disadvantages of having cash in a portfolio helps you make informed allocation decisions. 

Advantages 

Benefits of a healthy cash percentage in your portfolio include:

• Immediate access to funds. 

• No market volatility risk to principal.

• Flexibility to seize opportunities.

• Reduced emotional pressure during downturns.

Disadvantages 

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

• Inflation erosion over time.

• Opportunity cost compared to higher-return assets.

• Structurally lower long-term returns.

• Risk of excessive conservatism.

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. 

Factors that influence cash allocation in a portfolio 

Several personal factors should guide your decision on what percent of your portfolio should be in cash. 

Risk tolerance 

Risk tolerance describes your comfort with investment volatility and potential losses. 

It’s both psychological and financial, encompassing your willingness to take on risk as well as your ability to absorb losses. 

• Conservative investors with low risk tolerance often hold 10% to 20% or more in cash, prioritizing capital preservation and certainty over higher returns.  

• Aggressive investors with higher risk tolerance may keep only 2% to 5% in cash, viewing it primarily as a resource to use when buying opportunities arise. 

Age and timeline 

Your age and investment timeline significantly influence the appropriate amount of cash to keep in your portfolio. 

• Younger investors (20s-40s): often hold 2% to 5% in cash, putting the rest into investments that can produce long-term growth. 

• Mid-career investors (40s-50s): typically maintain 5% to 10% in cash, balancing growth with awareness of upcoming expenses like college tuition or business expansion. 

• Pre-retirees (50s-60s): generally hold 10% to 15% or more, focusing on preserving capital as retirement nears. 

• Retirees: often maintain 10% to 20% or more in cash and cash equivalents, prioritizing having enough access to funds for living expenses and avoiding having to sell stocks or bonds at unfavorable times.

Personal and business cash flow needs 

Income stability significantly affects cash needs. For instance, salaried employees with predictable paychecks can typically hold less cash in their portfolios. 

But business owners and commission-based workers have more variable incomes that make higher cash allocations practical.

A consultant who earns 70% of their annual income in the first quarter might keep 20% of their portfolio in cash to help smooth out their cash flow without touching long-term investments. 

Upcoming expenses also matter. If you’re planning a major purchase within two years, keep those funds in cash or near-cash vehicles rather than volatile assets.

The certainty of having funds when you need them outweighs potential investment gains you might miss. 

Inflation and opportunity cost 

Opportunity cost represents what you give up by choosing one option over another. When you hold cash instead of investing it, the opportunity cost is the potential returns you miss. 

For example, if stocks return 8% annually and your cash earns 4%, the opportunity cost is roughly 4% per year.  

Inflation erodes the purchasing power of cash over time.

If inflation runs 3% annually and your cash earns 4%, your real return is only 1%. In contrast, earnings from stocks have historically outpaced inflation by wider margins over long periods. 

However, liquidity also has value. The goal shouldn’t be to have no cash in your portfolio but to hold the minimum amount necessary for your needs. 

Guidelines for balancing growth and liquidity 

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

Market timing rarely works consistently, and shifting allocations around to pursue short-term gains often means missing out on the gains you could have realized with a more consistent, long-term approach. Instead: 

• Set a baseline allocation aligned with your risk tolerance and timeline. 

• Review your allocations quarterly or semi-annually. 

• Rebalance your portfolio when allocations drift meaningfully (e.g., 5% off target). 

Maintaining adequate cash makes rebalancing smoother and reduces the need to sell other assets unexpectedly. 

Where to keep your cash 

Where you keep the cash in your portfolio affects both its accessibility and potential returns. The right vehicle depends on when you’ll need the money. 

High-yield savings or money market funds 

High-yield savings accounts offer FDIC insurance up to $250,000, instant access, and competitive rates. They’re ideal for emergency funds and short-term cash you might need to use quickly. 

Money market funds invest in short-term debt securities and typically offer slightly higher returns, though they’re not FDIC-insured.

Access is generally same-day or next-day. They’re available through most brokerage accounts, so you can keep your cash and investments in one place. 

Short-term Certificates of Deposit or Treasury bills 

Certificates of Deposit lock in a fixed interest rate for a specified term, typically three months to five years.

Rates often exceed those for savings accounts, but you face penalties for early withdrawal. CDs work well when you know you won’t need specific funds for a set period. 

You may want to consider spreading out maturities: put a portion of your cash in a three-month CD, another in a six-month CD, and the rest in a 12-month CD. 

You’ll gain access to the funds as each one matures while earning higher yields on the longer-term options. 

Treasury bills are short-term government securities maturing in four, eight, 13, 26, or 52 weeks. 

They’re extremely safe, backed by the U.S. government, and interest is exempt from state and local taxes. You can sell T-bills before maturity, though prices fluctuate slightly with interest rates. 

Final thoughts  

There’s no single right cash allocation for your portfolio, as the best percentage will vary for each person. 

Most investors benefit from holding 2% to 10% in cash within their portfolios, adjusting that figure higher for those who own a business or are closer to retirement. 

The optimal allocation ultimately depends on your risk tolerance, age, income stability, and upcoming expenses. Review your allocations periodically, but resist making dramatic changes based on market predictions. 

For business owners managing both personal investments and business finances, maintaining clear visibility of both is essential. 

Investment accounting software like Sage Intacct helps you monitor cash flow patterns across accounts, maintain a clear separation between personal and business finances, and make data-driven decisions about allocations.

This visibility prevents common mistakes like over-investing business cash needed for operations or under-funding personal emergency reserves. 

Frequently asked questions about cash in portfolios 

How often should I review the cash allocation in my portfolio? 

Most investors should review their cash allocation quarterly or semi-annually, aligning these reviews with broader portfolio check-ins. You should also review your portfolio whenever you experience a major life or business change. 

Should I hold more cash if I run a seasonal business? 

Yes. Seasonal business owners typically need higher cash reserves than people with steadier revenue. Consider maintaining 15% to 25% of your overall assets in accessible cash to bridge revenue gaps and avoid selling long-term investments during slow periods. 

How much cash is too much in a portfolio? 

For most investors, holding more than 20% in cash within an investment portfolio can be problematic. It may begin to create a noticeable opportunity cost unless there is a specific near-term need. Cash becomes excessive when it meaningfully slows long-term growth without serving a clear liquidity purpose. 

Should you increase cash during a market downturn? 

As a general rule of thumb, no. Increasing cash during a downturn often locks in losses rather than reduces risk. Selling investments after prices have fallen can undermine long-term returns and disrupt your allocation strategy.

Instead of reacting to short-term volatility, maintain your predetermined cash allocation. If your allocation is already aligned with your goals, market fluctuations alone usually don’t justify major shifts.