What Percentage of My Portfolio Should Be in Cash? | U.S. Bank (2024)

Key takeaways

Cash and cash equivalents play a variety of roles in your investment portfolio and financial plan, including providing liquidity, portfolio stability and emergency funds for unexpected events. Cash equivalent vehicles are typically defined as money held in different types of accounts, such as savings, checking and money markets, as well as short-term investments with maturities less than 90 days, such as CDs, bonds and Treasuries.

The proper role for cash in a portfolio is determined in part by your risk tolerance and your current stage in life. For retirees who are no longer generating a paycheck, cash can help provide peace of mind that they have sufficient liquid reserves to weather periods of uncertainty or a downturn in the economy.

For investors who are willing to take on more risk, cash and cash equivalents also offer liquidity that can allow them to move quickly to take advantage of investment opportunities, particularly when there is disruption or fluctuation in the market.

What can I expect to earn on cash and cash-equivalent investments?

Today’s interest rate environment is dramatically changed from what existed just a few years ago. This creates an opportunity to enhance your overall portfolio results. “A first step is to move cash into short-term instruments that pay more attractive yields given today’s interest rates,” says Haworth.

How much cash should I have in my portfolio?

Determining the appropriate cash level for your portfolio is a common question, and the answer varies depending on your unique circ*mstances and current market conditions. Some factors that help to determine how much cash and cash equivalents to hold include:

  • Your financial goals and objectives
  • Your time horizon for investing
  • Your spending needs
  • Your risk tolerance

A general rule of thumb is that cash or cash equivalents should range from 2% to 10% of your portfolio, although the right answer for you will depend on your individual circ*mstances.

One situation where extra cash may make more sense is if you’re planning on a big purchase or expense within the next few years, such as buying a home, paying for college tuition or undergoing a major home renovation. On the other hand, some people might maintain a lower cash position based on their leverage opportunities. “In a low-interest rate environment, for example, you might have equity built up in your home that you can tap into, such as through a home equity line of credit, versus holding extra cash,” says D.J. Verhaalen, Wealth Management Advisor for U.S. Bancorp Investments.

Income and net worth are two additional considerations. For example, people with a steady income can often count on liquidity from a paycheck or annual bonus which may allow them to reduce their cash position. Others who work as independent contractors or have jobs where income may vary may want to hold more in cash reserves to protect against an unexpected income shortfall or be prepared for a sudden expense, notes Verhaalen.

Cash and cash equivalents: Weighing the pros & cons

It can be challenging to find the right balance of cash and cash equivalent holdings. A common mistake people make is carrying too much or too little cash for their situation, as well as putting cash in the wrong investments.

As an example, with the market volatility that occurred in 2022 and the allure of higher interest rates that followed, some investors increased their cash positions and reduced stock and bond holdings. But this might have had negative consequences for their overall portfolio. “Despite the elevated yields for cash vehicles, a diversified portfolio of stocks and bonds likely generated superior performance in 2023,” says Haworth. “Historically speaking, a diversified portfolio emphasizing stocks and bonds will outperform cash.”

What are the pros and cons of holding significant cash position in your portfolio? The answer may vary depending on an your situation.

  • Maintaining high cash levels in your portfolio: For some people, it’s a matter of personal preference. They may feel more comfortable with a conservative mix of assets. Another advantage of holding a meaningful cash position is that additional liquidity gives you more flexibility to take advantage of new investment opportunities should they arise. The number one drawback of having too much cash is that you may be sacrificing the return potential of investments in stocks and bonds.
  • Keeping too little cash in your portfolio: The primary advantage of holding a limited amount of cash is that you have more money available to invest with the goal of earning potentially higher returns with stocks and bonds. On the downside, you don’t have the liquidity to take advantage of new investment opportunities, and you have less of a buffer against periods of negative stock and bond market performance.

The role of cash and cash equivalents in your financial plan

Cash equivalents should be part of a regular discussion about your holistic financial plan. “When we build a financial plan for clients, we tend to be a little bit more conservative, because we believe managing risk is important,” says Verhaalen.

Verhaalen often recommends clients maintain a cash reserve that’s, at a minimum, the equivalent of six months of income. In addition, he’ll run a financial plan to determine an ideal amount of cash to hold based on an individual’s unique circ*mstances, as well as how to ladder it into different types of cash equivalents depending on the time horizon and when cash might be needed.

  • Shorter-term cash needs of 0-6 months should generally be kept in liquid accounts, such as savings, checking, money market accounts or Treasury notes.
  • Cash needs between six months and three years can be supported using vehicles such as a 12-month CD or Treasury notes and bonds.
  • For funds not needed for at least three-to-five years, longer-term cash equivalents such as CDs, Treasuries or bonds with a fixed maturity should be considered.

“Laddering cash into short-, mid- and longer-term investment vehicles is very important because it provides liquidity and backup and is a good way to diversify your fixed-income portfolio,” says Verhaalen. For example, if your child is going to college, you might decide to set aside cash in a checking or money market account to cover the first semester’s tuition, put the second semester’s tuition in a six-month CD, the following year’s tuition savings in a 12-month CD and so on.

Verhaalen may also recommend that clients ladder cash equivalents in fixed-income assets with maturities on a regular basis, allowing them to reinvest and capture yield as rates go up.

Investors should review the percentage of cash positions in their investment portfolio periodically as part of regular financial plan review. Consider reviewing your financial plan with your financial professional at least annually or more often if circ*mstances change.

Just as your life evolves, so should your financial plan. Learn how we can help you design a plan that fits your life.

What Percentage of My Portfolio Should Be in Cash? | U.S. Bank (2024)


What Percentage of My Portfolio Should Be in Cash? | U.S. Bank? ›

A general rule of thumb is that cash and cash equivalents should comprise between 2% and 10% of your portfolio.

What percentage of cash should I have in my portfolio? ›

“The current low interest-rate environment is challenging investors who are maintaining larger cash allocations as a percentage of assets,” Edstrom says. “Historically, clients held approximately six percent of cash in their investment portfolio; today that number is closer to 11.

What is a good percentage of cash? ›

Key Takeaways

At the least, you should have enough cash to keep your emergency fund fully flush. That means enough cash to cover expenses for six moths, should you need it. Many investors keep as much as 20% to 30% of their portfolios in cash.

How much money should I have in cash? ›

Most financial experts suggest you need a cash stash equal to six months of expenses: If you need $5,000 to survive every month, save $30,000. Personal finance guru Suze Orman advises an eight-month emergency fund because that's about how long it takes the average person to find a job.

How much money do I need to invest to make $1000 a month? ›

Reinvest Your Payments

The truth is that most investors won't have the money to generate $1,000 per month in dividends; not at first, anyway. Even if you find a market-beating series of investments that average 3% annual yield, you would still need $400,000 in up-front capital to hit your targets. And that's okay.

How much is too much cash in savings? ›

Anything over that amount would exceed the FDIC coverage limits. So if you keep more than $250,000 in cash at a single bank, then you run the risk of losing some of those funds if your bank fails.

What is the 50 30 20 rule? ›

The 50-30-20 rule recommends putting 50% of your money toward needs, 30% toward wants, and 20% toward savings. The savings category also includes money you will need to realize your future goals. Let's take a closer look at each category.

Is $100,000 in cash good? ›

For many people, financial stability means being confident in your ability to pay for all the expenses in your life — whether expected or not. There's no one-size-fits-all number in your bank or investment account that means you've achieved this stability, but $100,000 is a good amount to aim for.

Is a 7% cash on cash return good? ›

Q: What is a good cash-on-cash return? A: It depends on the investor, the local market, and your expectations of future value appreciation. Some real estate investors are happy with a safe and predictable CoC return of 7% – 10%, while others will only consider a property with a cash-on-cash return of at least 15%.

Is having 100k in cash good? ›

Having $100,000 in savings means that you have a good amount of money saved up that you can use in case of an emergency. It also means that you have a lot of financial security and are doing well financially.

What bank do most millionaires use? ›

The Most Popular Banks for Millionaires
  1. JP Morgan Private Bank. “J.P. Morgan Private Bank is known for its investment services, which makes them a great option for those with millionaire status,” Kullberg said. ...
  2. Bank of America Private Bank. ...
  3. Citi Private Bank. ...
  4. Chase Private Client.
Jan 29, 2024

Is it better to save money in cash or bank? ›

And it's one some adults might follow, too. But while you may find it easier to keep your savings in actual cash, putting your money into the bank is a far better bet.

Is $20000 a good amount of savings? ›

Is $20,000 a Good Amount of Savings? Having $20,000 in a savings account is a good starting point if you want to create a sizable emergency fund. When the occasional rainy day comes along, you'll be financially prepared for it. Of course, $20,000 may only go so far if you find yourself in an extreme situation.

How long to become a millionaire investing $1,000 a month? ›

If you invest $1,000 per month, you'll have $1 million in 25.5 years.
Monthly contributionTime to reach $1 million with an 8% annual return
$50033.3 years
$1,00025.5 years
$2,50016.3 years
$5,00010.6 years
1 more row
Nov 20, 2023

How much do I need to invest to make $2000 a month? ›

Earning $2,000 in monthly passive income sounds unbelievable but is achievable through dividend investing. However, the investment amount required to produce the desired income is considerable. To make $2,000 in dividend income, the investment amount and rate of return must be $400,000 and 6%, respectively.

How to make $2,500 a month in passive income? ›

One of the easiest passive income strategies is dividend investing. By purchasing stocks that pay regular dividends, you can earn $2,500 per month in dividend income.

What is the 10% portfolio rule? ›

It suggests that 10% of your portfolio should be allocated to high-risk, high-reward investments, 5% to medium-risk investments, and 3% to low-risk investments. By following this rule, you can spread your investment risk across different asset classes and investment types, such as stocks, bonds, real estate, and cash.

Do I have too much cash? ›

Your savings exceed your basic living expenses for six to 12 months. You consistently have money left over after maxing out your IRA and other tax-advantaged retirement accounts each year. You are losing purchasing power to inflation over time as your cash earns little interest.

Is an 80 20 portfolio good? ›

The Stocks/Bonds 80/20 Portfolio is a Very High Risk portfolio and can be implemented with 2 ETFs. It's exposed for 80% on the Stock Market. In the last 30 Years, the Stocks/Bonds 80/20 Portfolio obtained a 9.53% compound annual return, with a 12.48% standard deviation.

What is average net worth by age? ›

Net worth is the difference between the values of your assets and liabilities. The average American net worth is $1,063,700, as of 2022. Net worth averages increase with age from $183,500 for those 35 and under to $1,794,600 for those 65 to 74. Net worth, however, tends to drop for those 75 and older.

Top Articles
Latest Posts
Article information

Author: Geoffrey Lueilwitz

Last Updated:

Views: 5505

Rating: 5 / 5 (60 voted)

Reviews: 91% of readers found this page helpful

Author information

Name: Geoffrey Lueilwitz

Birthday: 1997-03-23

Address: 74183 Thomas Course, Port Micheal, OK 55446-1529

Phone: +13408645881558

Job: Global Representative

Hobby: Sailing, Vehicle restoration, Rowing, Ghost hunting, Scrapbooking, Rugby, Board sports

Introduction: My name is Geoffrey Lueilwitz, I am a zealous, encouraging, sparkling, enchanting, graceful, faithful, nice person who loves writing and wants to share my knowledge and understanding with you.