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.

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? ›

To make $1,000 per month on T-bills, you would need to invest $240,000 at a 5% rate. This is a solid return — and probably one of the safest investments available today. But do you have $240,000 sitting around? That's the hard part.

What is a good portfolio percentage? ›

Investors in their 20s, 30s and 40s all maintain about a 41% allocation of U.S. stocks and 9% allocation of international stocks in their financial portfolios. Investors in their 50s and 60s keep between 35% and 39% of their portfolio assets in U.S. stocks and about 8% in international stocks.

How much is too much cash in savings? ›

How much is too much savings? Keeping too much of your money in savings could mean missing out on the chance to earn higher returns elsewhere. It's also important to keep FDIC limits in mind. Anything over $250,000 in savings may not be protected in the rare event that 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 too much? ›

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. For most people, it's not anywhere near enough to retire on, but accumulating that much cash is usually a sign that something's going right with your finances.

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

  1. 14 Proven Ways to Make $2,000-$3,000 Per Month in Passive Income. ...
  2. Build a High-Earning Blog. ...
  3. Self-Publish Books on Amazon Kindle. ...
  4. Invest in a High Cash Flow Duplex House. ...
  5. Fund Real Estate Projects with Crowdfunding. ...
  6. Invest in Triple Net Lease Properties. ...
  7. Launch Multiple Affiliate Websites.
Jan 2, 2024

How to make 1k a month passively? ›

Passive Income: 7 Ways To Make an Extra $1,000 a Month
  1. Buy US Treasuries. U.S. Treasuries are still paying attractive yields on short-term investments. ...
  2. Rent Out Your Yard. ...
  3. Rent Out Your Car. ...
  4. Rental Real Estate. ...
  5. Publish an E-Book. ...
  6. Become an Affiliate. ...
  7. Sell an Online Course. ...
  8. Bottom Line.

How to invest $100 000 to make $1 million? ›

4 Ways to Grow $100,000 Into $1 Million for Retirement Savings
  1. Index funds. ...
  2. Dividend-paying stocks. ...
  3. Growth stocks. ...
  4. Value stocks.
Feb 17, 2024

What is the best portfolio balance by age? ›

The common rule of asset allocation by age is that you should hold a percentage of stocks that is equal to 100 minus your age. So if you're 40, you should hold 60% of your portfolio in stocks. Since life expectancy is growing, changing that rule to 110 minus your age or 120 minus your age may be more appropriate.

What is the ideal portfolio mix? ›

If you are a moderate-risk investor, it's best to start with a 60-30-10 or 70-20-10 allocation. Those of you who have a 60-40 allocation can also add a touch of gold to their portfolios for better diversification. If you are conservative, then 50-40-10 or 50-30-20 is a good way to start off on your investment journey.

What is the ideal portfolio mix by age? ›

The Rule of 100 determines the percentage of stocks you should hold by subtracting your age from 100. If you are 60, for example, the Rule of 100 advises holding 40% of your portfolio in stocks. The Rule of 110 evolved from the Rule of 100 because people are generally living longer.

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.

How much money do I need to invest to make $3 000 a month? ›

Imagine you wish to amass $3000 monthly from your investments, amounting to $36,000 annually. If you park your funds in a savings account offering a 2% annual interest rate, you'd need to inject roughly $1.8 million into the account.

How much cash should you keep at home? ›

“We would recommend between $100 to $300 of cash in your wallet, but also having a reserve of $1,000 or so in a safe at home,” Anderson says. Depending on your spending habits, a couple hundred dollars may be more than enough for your daily expenses or not enough.

How much cash should I have in the bank? ›

The recommended amount of cash to keep in savings for emergencies is three to six months' worth of living expenses. If you have funds you won't need within the next five years, you may want to consider moving it out of savings and investing it.

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