How much cash should I have in my portfolio?

Put your cash to work and leverage this highly liquid asset class to your strategic advantage.

An illustration of cash in a bank vault.

Due to its lower return potential, the role of cash and cash-equivalent investments can be easily undervalued by investors. However, this asset class plays a critical — and practical — function in a well-rounded portfolio. It can help you meet short-term liquidity needs, offer more stability during periods of market volatility and provide a degree of risk management.

An Ameriprise financial advisor can help you determine how much cash to allocate in your portfolio and which type of cash investments are appropriate based on your unique circumstances, risk tolerance and financial goals.

Here’s a look at cash investments, their advantages and disadvantages, and the strategic role they can play in your portfolio:

Types of cash investments

In financial planning terms, cash isn’t just hard currency. Instead, it’s a term that is broadly used to describe safe, liquid holdings that are often low in risk and provide a relatively low yield compared to other, longer-term investments. There are many different types of cash and cash-equivalent investments available, each with unique characteristics. Some of the most common include:

  • Savings accounts: These interest-bearing deposit accounts are typically offered through banks or credit unions, are designed for long-term saving and are insured by the Federal Deposit Insurance Corporation (FDIC),1 which is a U.S. federal government agency. But there may be a limit on how often you can withdraw money without incurring a fee.
  • Checking accounts: These FDIC-insured accounts,1 typically held at a bank or credit union, are designed to facilitate short-term spending and cash flow management. Most people use checking accounts to pay regular bills and for their paycheck direct deposit needs. However, these accounts typically earn little to no interest, meaning you wouldn’t want to keep large sums of cash in this account due to inflationary risk.
  • High-interest savings accounts and money market accounts: Offered by banks and credit unions, these accounts typically offer higher interest rates than traditional savings and checking accounts, though you may be required to keep a minimum balance. High-interest savings accounts and money market accounts are also lower risk, as both are insured by the FDIC up to $250,000 per institution, per depositor.1
  • Certificates of deposit (CDs): With a CD, an investor agrees to deposit a sum of money for a fixed time period (ranging up to several years) in exchange for a higher interest rate than a traditional savings account. Offered by banks and credit unions and insured by the FDIC, CDs are often considered cash investments.1
  • Face-amount certificates: These are securities subject to regulation under federal and state securities laws. Similar to CDs, these certificates generate interest and dividends, but they are not backed by FDIC insurance1 because they are often backed by the issuer. The investor agrees to deposit a sum of money for a fixed time period in exchange for a higher interest rate than a traditional savings or checking account.
  • Treasury bills: These short-term debt obligations are backed by the U.S. government and have a maturity that can range from only a few days to one year. Since they’re considered a low-risk investment, interest earned can sometimes be lower compared to the overall market.
  • Money market funds: Money market funds are a type of mutual fund that invests in highly liquid, high-quality cash instruments, and they can offer higher yields than savings or checking accounts. As they are offered by brokerages, money market funds are not insured by the FDIC.

Learn more: 3 tips for short-term investing

Pros and cons of cash and cash-equivalent investments

As with any investment, cash investments have their advantages and disadvantages, and it is important to understand their benefits and drawbacks when deciding how to make these investments work for you:

Pros Cons
  • Safety and liquidity: Cash tends to be among the safer and more accessible investment available. During periods of market volatility or economic uncertainty, cash investments tend to hold their value (before inflation), providing stability to a portfolio that may be experiencing losses in other asset classes. Many cash investments (but not all) are also insured by the FDIC up to $250,000.
  • Availability: Cash offers liquidity that can allow investors to move quickly to take advantage of investment opportunities when they arise, particularly when there is a disruption or fluctuation in the market. Having liquidity for personal spending, investing opportunities and other obligations may be another benefit for some investors.
  • Diversification: Having a cash position in your portfolio can help manage risk. Especially during periods of market volatility or economic uncertainty, cash investments tend to hold their value, providing stability to a portfolio that may be experiencing losses in other asset classes. 
  • Security: For many people (including retirees who are no longer generating a paycheck) holding cash can be a source of comfort – especially if they have sufficient liquid reserves to weather periods of uncertainty or a downturn in the economy. 
  • Lower returns: The tradeoff for cash's low risk is having the lowest returns of any major asset class over time. 
  • Inflation risk: While there is almost always no risk of losing money with cash, inflation can erode purchasing power, meaning less can be purchased in the future with the same dollar in a cash investment.
  • Interest rate risk: Many cash solutions are tied to the interest rates set by the Federal Reserve. When interest rates begin to decline, so do the returns you will receive on certain cash vehicles.
  • Reinvestment risk: Due to their lower returns, some cash investments can be prone to reinvestment risk, which is the financial cost of having to invest cash flows at potentially lower yields in the future. For example, if an investor purchased a 1-year CD at 3% interest and rates drop, the investor would have to accept lower yield if purchasing another short-term CD after the original one matures.
  • Opportunity cost: During rising markets, cash may struggle to keep up with the return on other investments, potentially limiting overall portfolio performance and keeping an investor from taking advantage of higher-performing assets.

Learn more: How to determine risk tolerance for investing

How much cash should I have in my portfolio?

How much cash you should hold in your portfolio depends on a range of factors, such as the number of short-term financial goals you have, your risk tolerance, how large of a cash reserve you feel comfortable with and how close you are to retirement. For example, retirees generally may want to keep a larger cash allocation to insulate them from the possibility of a market downturn. If you are saving for multiple short-term financial goals — such as a large purchase, a wedding or home downpayment — then you may have a higher allocation of cash investments in your portfolio since you’ll soon need access to those funds.

 

Learn more: Establishing a cash reserve: How much should you have?

How to make your cash work for you

Here's a framework to consider for different cash solutions:

Time horizon Goals and liquidity needs Solutions to consider
Immediate Immediate cash needs; daily expenses Checking accounts; savings accounts
Less than a month Preservation of principal; access to funds in case of emergency or unexpected expenses Checking accounts; savings accounts
1–3 months Preservation of principal with enhanced yields; near-term (but not immediate) cash needs Money market funds
3–12 months Growth of principal; intermediate liquidity needs; management of large purchase or expense Laddered certificates or CDs; laddered Treasury bills; high-yield savings accounts
12–36 months Longer-term cash reserve growth; longer-term cash needs; management of large purchase or expense

Laddered certificates or CDs; laddered Treasury bills; high-interest savings accounts; money market accounts

 

Put your cash to work with our help

An Ameriprise financial advisor can work with you to determine the role that cash and cash investments should play in your portfolio as part of your overall financial strategy.

How much of my portfolio should I have cash investments? Which cash solutions make sense for my situation? How can I put my excess cash to work?

When you’re ready to reach out to an Ameriprise financial advisor for a complimentary initial consultation, consider bringing these questions to your meeting.

When you’re ready to reach out to an Ameriprise financial advisor for a complimentary initial consultation, consider bringing these questions to your meeting.

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related information

Establishing a cash reserve: How much should you have?

3 tips for short-term investing

What to know about bonds and fixed income investing

Make your cash work for you.

Or, request an appointment online to speak with an advisor. 

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At Ameriprise, the financial advice we give each of our clients is personalized, based on your goals and no one else's. 

If you know someone who could benefit from a conversation, please refer me.

Background and qualification information is available at FINRA's BrokerCheck website.

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1Ameriprise Financial Services, LLC is not a FDIC-insured bank; FDIC insurance only covers the insolvency of FDIC-insured banks.
Certain conditions must be satisfied for pass-through FDIC insurance coverage to apply.
This information is being provided only as a general source of information and is not a solicitation to buy or sell any securities, accounts or strategies mentioned. The information is not intended to be used as the primary basis for investment decisions, nor should it be construed as a recommendation or advice designed to meet the particular needs of an individual investor. Please seek the advice of a financial advisor regarding your particular financial situation.
Ameriprise Financial cannot guarantee future financial results.
The U.S. government may be unable or unwilling to honor its financial obligations. Securities issued or guaranteed by federal agencies and U.S. government-sponsored instrumentalities may or may not be backed by the full faith and credit of the U.S. government.
You could lose money by investing in the mutual fund. Although the mutual fund seeks to preserve the value of your investment at $1.00 per share, it cannot guarantee it will do so.
All prime and tax-exempt Money Market Mutual funds may impose discretionary fees if the Board of the mutual fund determines it would be in the best interest of the mutual fund. Any such discretionary fee cannot exceed 2% of the value of the shares redeemed.
An investment in a Money Market Mutual Fund is not insured or guaranteed by the Federal Deposit Insurance Corporation or any other government agency. The mutual fund's sponsor has no legal obligation to provide financial support to the mutual fund, and you should not expect that the sponsor will provide financial support to the mutual fund at any time.
The initial consultation provides an overview of financial planning concepts.  You will not receive written analysis and/or recommendations.
Ameriprise Financial, Inc. and its affiliates do not offer tax or legal advice. Consumers should consult with their tax advisor or attorney regarding their specific situation.
Investment products are not insured by the FDIC, NCUA or any federal agency, are not deposits or obligations of, or guaranteed by any financial institution, and involve investment risks including possible loss of principal and fluctuation in value.
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