How much cash should I hold in my portfolio?

What extra cash cost a 70/30 portfolio since 1970

Take a 70/30 portfolio, 70% global stocks and 30% U.S. bonds. Since 1970, an investor who left it alone ended with about 26% more wealth than one who moved 10% of the stocks to cash. The bonds stayed the same. The only difference was 10% of the stocks sitting in cash for a long time.

Ending value of $100 invested in January 1970 and held through August 2026:

• 70/30 with no extra cash: $11,526
• 65/30/5 with 5% to cash: $10,294
• 60/30/10 with 10% to cash: $9,164

What the extra cash bought

The extra cash did buy something. The 70/30 portfolio's yearly swings ran about 11%, against 9% for the version with 10% in cash, and in the 2008 crisis it fell roughly 5 points further. Across every major decline since 1970, the difference averaged about 3 points.

Average decline in drops of 10% or more: 20.4% for 70/30, 18.9% with 5% in cash, and 17.3% with 10% in cash.

A market drop shows up on a statement the month it happens. Nobody gets a statement showing what the extra cash gave up, so that cost is easy to miss.

Why the gap widens over time

Cash earns a short-term interest rate. Stocks are ownership in businesses that reinvest, grow earnings and pay dividends. Over any one year the two can land anywhere. Over decades the ownership claim has pulled ahead, and each year's gain becomes the base for the next.

Share of rolling periods from 1970 to 2026 in which each asset beat Treasury bills, with its average lead:

• 1 year: global stocks 68% (about 6 points), U.S. bonds 63% (about 2 points)
• 5 years: global stocks 72% (about 37 points), U.S. bonds 76% (about 13 points)
• 10 years: global stocks 89% (about 103 points), U.S. bonds 84% (about 40 points)

Waiting for a better price

The most common reason to hold extra cash is a plan to buy after the next drop, but the market often sits near a peak. Since 1970, global stocks closed a month at a record high about 30% of the time, and at or within 5% of one 53.4% of the time.

Only about 3 months in 10 were more than 10% below a prior high, the kind of dip sideline cash waits for. A new high on its own says little about the next year's return, and further gains have often followed.

Three jobs for cash

How much cash is enough depends on what it has to pay for.

• The next 1 to 2 years of spending. Living expenses in retirement, a tax bill, a tuition payment. This money can't afford a bad year, so it sits in cash on purpose.
• A purchase with a date. A home, a vehicle, a wedding. If the check is going out on a known date, the money should already be there.
• A cushion against selling low. Enough on hand that a rough market never forces the sale of long-term investments at the wrong time.