The obvious answer is that it depends on your financial situation, age, net worth and risk tolerance. I am trying to decide on the right amount of cash I should hold.
I found this through internet search on this topic:
“According to the U.S. Trust Survey of Affluent Americans, investors with over $3 million in investable assets typically hold around 15% of their portfolios in cash and cash equivalents. However, the amount of cash an investor holds can vary depending on their age and net worth:
The Silent Generation
Investors in this age group (ages 77 and up) tend to hold around 23% of their portfolio in cash.This is because they prioritize capital preservation and stability.
Millennials
Younger high-net-worth Millennials tend to hold around 11% of their portfolio in cash. This is because they have a greater appetite for risk and growth.
Here is a link that provides more details:
https://finance.yahoo.com/news/guess-percentage-wealth-rich-keep-170015736.html
What has been your strategy to decide on what % cash to hold in your investment portfolio?
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My wife has always liked (and therefore we’ve kept) an emergency fund in cash of about $100,000. That’s become a smaller percentage of our world as our net worth has increased, but the EF has stayed about the same. That amounts to around one year of household expenses.
Frankly, it’s probably “too much” and it appears to be more than most financial experts advise. But I’ve come to enjoy it and I take comfort in the security it gives us. And it makes me feel better about being more aggressive in our stock portion of our portfolio.
I’ve always thought that one’s personal financial situation coupled with risk tolerance provided an answer. As we learned a couple of years ago, even bond funds/ETFs can be riskier than we might think them to be.
I run an exercise to aid me, and I re-run this each year. I consider the impact a 20 or 30% decline in the equity portion of my portfolio. For example, at one time my portfolio was 70/30% equities/bonds-cash. A 20% equity decline would reduce the value of the portfolio by 14% and would yield a 65/35 portfolio allocation.
For a 50/50 portfolio a similar decline in equities would reduce the value of the portfolio by 10%. The resulting portfolio would have a 44/56% allocation.
A question I always asked was simply “Can I tolerate such a market decline and the reduction in the value of my portfolio?” Only I can answer that question. As retirement drew near, and RMDs, I decided I preferred a lower equity allocation than 70/30%.
I also consider the impact of low returns on cash and bonds because low interest rates can have an outsize impact on my long-term plan which assumes a specific inflation of 3.6%. When returns on bonds/cash were lower than they currently are, I was more inclined to hold more equities. As time goes by, I’ve shortened our horizon to match our probable lifespans.
I think it also depends on the total financial picture and intended use of the investments. If they are relied upon for income, the answer may be different from other purposes. How is cash equivalents defined?
Washington, DC; March 27, 2025—Total money market fund assets increased by $11.80 billion to $7.01 trillion for the week ended Wednesday, March 26, the Investment Company Institute reported.
This amount is up from the record $6.22 trillion parked in US money market funds as of August 2024 noted in the original article and comments by smr1082 four months ago.
I knew of some upcoming 2025 expensive plumbing issues and other life events demanding near term cash. In January I had also decided to lower my 70% allocation to equities. In hindsight I think I have been lucky to have taken those actions early in January and February.
I did not stay in my past asset allocation as I worried about my level of cash to meet our needs in the event of additional unexpected 2025 cash needs. Absent a near term major unexpected life event I expect my change to a 50% equity asset allocation will not change going forward.
I wonder if the trend of higher amounts in money market funds is partly the result of a huge number of other baby boomers making similar decisions.
The recent rise in money-market fund assets reported by the ICI may be a short-term phenomenon, reflecting folks’ need to raise cash to pay taxes owed on April 15. I believe something similar happens every year.
Another excellent post and excellent discussion!!
Keep on Keeping on HD!!!
I don’t think there is one single answer – it depends where you are in your life. Pre home ownership you might want to build most of your net worth in cash for a home deposit.
Then in accumulation years with earnings flowing in it might only be an emergency fund for roughly as long as it will take to secure a new job.
Then transitioning to decumulation years you may want to build cash so a sudden market reversal doesn’t impact plans.
Then later once SS etc has kicked in maybe you pare back cash again if it’s clear that whatever happens your portfolio will likely outlive you.
I distinguish between investment portfolio and savings. My savings, for emergencies and major purchases, is held in cash (T-bills, T-notes, and HYSA). My investments are in index funds, not cash. I’m counting on time in the market to grow my mone.
In my Forum question, I was focusing on % cash or money market investment in a portfolio and not cash you would generally keep to handle emergencies (X years of expenses).
For example, a record $6.22 trillion is parked in US money market funds as of August 2024, of which about 60% is from institutional investors. High yields, low risks, and potential concerns about market downturns, were some reasons why investors allocated such record amounts to money market funds.
As the Fed starts rate cuts, fund managers are predicting this cash will flow to other more risk-on asset classes.
The question is – Should we have certain % of our portfolio in money market funds all the time to reduce market volatility risk, and be ready to invest when opportunities present themselves?
https://www.asianinvestor.net/article/market-views-where-will-6-2tn-money-market-assets-move-as-rates-fall/497885
I don’t think where one keeps the cash should matter, whether that is in a taxable account, a tax-advantaged account, or an account that happens to also contain stocks and bonds.
I agree that holding cash simply for “dry powder” to invest during market declines is not a good use of cash, as the opportunity cost for holding too much cash is probably greater than the potential return one could have received for purchasing stocks on sale.
I’d say no. Cash investments are great for meeting short-term spending needs, but I don’t believe they have a role in a long-term investment portfolio.
Agree, money market funds are not suitable for long-term investment goals as they don’t offer capital appreciation. The record inflow in to money market funds in last two years may be due to attractive yields.
As most HD topics, it depends. Our situation is different than most. We have pensions and SS accounts that cover our expenses so we don’t keep much in cash.
We have an emergency fund and apart from that we have about six months of expenses in cash
Not a cash person, have never held any cash as an investment asset. I do have an emergency fund that I keep around 1 year of expenses (likely more because it’s full not essential expenses)
I worry more about inflation than deflation
I don’t think you should ever target a percentage of your assets for cash; instead, you should target an amount of cash that helps you achieve your goals while ignoring whatever resulting percentage of your portfolio this happens to be.
I agree with your logic. I held little in cash during the accumulation phase. I am now retired and choose to deal with market volatility by holding enough in cash and short term bonds to fund X years of future withdrawals, with the balance in stocks. The value of “X” must vary considerably for others. For me, choosing a value of 10 years for “X”, with a relatively low burn rate of less than 3%, still allows for a 70/30 allocation. My point is that I did not pick a random allocation, but rather I derived it.
I agree with basing cash holdings on anticipated spending needs rather than a percentage.
We’re holding cash worth well past five several years of expenses based on our current spend rate. Why? Because at some point we will likely want to buy a house, and our ongoing expenses will also likely go up. Will these happen in the next five years, and how much more are we talking about? I’m not sure, but am happy to err on the side of caution.
Almost all of this cash allocation is in a 401k common assets fund which has similar safety to a money market fund but a better return.
We don’t maintain a separate emergency fund per se, but the balance in the taxable money market fund we spend from might hold anywhere from several months to more than a year of current expenses.
I agree. Cash shouldn’t be part of a long-term investment portfolio. Instead, it’s the place to keep your emergency fund and money you expect to spend within the next five years.
We keep about two years of a rough average of our annual expenses (we do not have a budget, just spend frugally) between our credit union, and a money market account in our retirement funds.
We usually only keep about $2K in the CU as the interest rate is so low. Additionally we have about eight years in short term tips or of a short term bond index fund. We do not have an emergency fund per se, but would tap the short term bonds if necessary. But with an eight year old house that we had built and two Toyota vehicles less than five years old with less than 40K miles owned outright we are unlikely to have any major expenses with our three major physical assets (sorry RDQ 😆).
Not to argue that, but to put in another way that might better resonate with the original poster or others. A different way of saying the same thing.
One way to arrive at your cash allocation is to decide what kind of emergency fund you need and what money you expect to spend in the next few years.
What do you expect to spend in the next X years? Jonathan recommends five but it depends on your own risk tolerance (but not just your own digestion and sleep, but also on who’s depending on you and consequences of failure). Include yearly living expenses as well as any other major expenses you foresee in that time.
How big an emergency fund to keep? Think about the security of your job, whether you and your partner work for the same company, risk tolerance again, etc. Some might say six months, some might say a year…
Add those two together and there’s your cash allocation.