Liquidity is part of the investment plan
Having access to money when you need it is essential. It helps you sleep at night, and when your income is uneven, it becomes even more important.
I think a cash buffer creates opportunity. Money held in cash equivalents or short-term reserves may look idle, but it can give you the confidence to invest the rest of your portfolio more aggressively. When short-term needs and long-term investments have separate jobs, the whole plan usually works better.
How much cash should you hold in your portfolio?
This is one of the most common questions I hear. How much cash should investors hold? What percentage of a portfolio should be cash? How much cash should stay on the sidelines?
My answer is that it depends on what that money needs to do.
When I talk to clients, I do not think about cash only as an emergency fund. Standard guidance often points to 3 to 6 months of expenses, but I often prefer a more conservative buffer. In some situations, especially where income is uneven or spending needs are less predictable, I may recommend holding more.
This is especially relevant for business owners, whose cash flow can change from month to month, quarter to quarter, or year to year. If your income is variable, liquidity is not just a safety feature. It can be what allows the rest of the portfolio to stay invested through uncertainty.
This approach can also be very useful for retirees. If you are drawing from your portfolio to live on, having a meaningful cash reserve can reduce the pressure to sell long-term investments during a bad market.
Should you hold cash or invest now?
I do not see this as an either-or decision.
The cash portion of the portfolio has a different job than the growth portion. Cash is there for stability, flexibility, and near-term spending. Long-term investments are there for growth. When people mix those jobs together, they often end up feeling like the whole portfolio is wrong.
That is also how I think about cash drag. If cash is sitting around with no purpose, that is a problem. If cash is there to cover spending needs, absorb uneven income, or give you room to stay invested through volatility, then it is doing real work.
Where should that cash sit?
Here are a few places to consider depending on your situation: high-yield savings accounts, money market funds, and short-term Treasury ETFs that can provide liquidity.
In some cases, short-term Treasury ETFs can also be useful from a tax perspective, especially for people in higher-tax states or cities, because interest from Treasurys is generally exempt from state and local taxes. Capital gains from selling ETF shares can still be taxable, and Treasury ETFs still carry interest-rate and market risk.
Do not try to chase yield with money that needs to remain stable and available. The point is to make sure the cash is accessible, intentional, and still doing some work.
Should you keep cash to invest during a market crash?
I would not recommend keeping cash reserves just in the hope of perfectly timing a market decline.
I recommend having more cash when it gives people options. It lets you handle life without disturbing the long-term part of the portfolio. And if markets do fall, having that reserve can give you the emotional and financial ability to keep investing instead of freezing or selling.
A good portfolio gives you growth, but it should also give you room to breathe and help you sleep at night.
If you are trying to decide how much cash to hold, the answer depends on your income, spending needs, and how much flexibility your portfolio needs to provide.
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