How much cash should you hold? That depends

Read time: 7-8 minutes

Since our inception, Vanguard's prioritized long-term success for its investors through disciplined and low-cost investing. There are four principles that define how investors can achieve that success:

Goals—Create clear, appropriate investment goals.
Balance—Keep a balanced and diversified mix of investments.
Cost—Minimize costs.
Discipline—Maintain perspective and long-term discipline.

Depending on your goals, cash may help you maintain balance and diversification. So what role could cash play in your investments? Let’s explore.

A framework for considering cash

A common financial planning recommendation is that investors keep at least some cash available for emergencies. Cash is a readily available short-term asset with high liquidity, lower market risk, and a short maturity period.

Some investors may wish to include cash in their investment portfolios. “Our approach to assessing how much cash might be appropriate to hold is built on the relationship between an investor’s goals and three critical factors,” said Anatoly Shetkhman, Chartered Financial Analyst (CFA), head of Global Advised Portfolio Construction at Vanguard. These factors are:

Risk tolerance—how much market risk an investor is willing to take on. Risk and return are a trade-off. So in many cases, including cash not only moves a portfolio toward the more conservative end of the risk spectrum, it also decreases the chances of providing a high return.
Time horizon—the length of time an investor can keep their money invested. The shorter that period is, the less likely the investor is to benefit from investing in stocks or bonds. That’s because over the long term, the returns of those riskier assets tend to be higher than those for cash, while over the short term, they tend to be more volatile—and may even lose money.
Funding level—how close to fully funded a financial goal is. An investor who is close to fully funding their goal may be comfortable having some additional cash available. On the other hand, an investor who is far from reaching their investment goal may be willing to allocate more money to riskier assets for potentially higher returns to improve their chances of success, especially if they have a longer time horizon.

Applying the framework

Let's look at two individuals with different investment goals and how they might consider cash within their investment portfolio.

These examples are for illustrative purposes only and are not a recommendation to buy or sell a particular security. They do not take into consideration your personal circumstances or other factors that may be important in making investment decisions.

Johan is in his 50s, and his primary investment goal is funding his retirement.

Cash is less likely to be beneficial for Johan's retirement portfolio because he's more risk-tolerant, has a longer horizon to reach his goal, and his portfolio is underfunded.

WHAT ELSE COULD HE DO?

If Johan is already contributing to his employer-sponsored plan, he can increase his contribution rate, open an IRA, or explore other ways to maximize his retirement savings.

Dana is just starting out in her career and has two primary financial goals—maintaining her emergency savings and saving for a down payment on a home, which she hopes to buy within the next 18 months.

Cash is more likely to be beneficial for Dana's goals because she's less risk-tolerant, has a shorter horizon to needing her down payment, and her goal is well-funded.

WHAT ELSE COULD SHE DO?

Dana could think about putting her short-term savings in a few different investments including money market funds (which could be tax exempt) and brokered CDs. She could also consider a cash management account, which is an alternative to a traditional savings account (and typically FDIC insured) but can offer a competitive annual percentage yield compared to savings accounts. To help her maximize her short-term savings, Dana could open a Vanguard Cash Plus Account a savings account alternative, which offers a bank sweep with a competitive yield* and FDIC coverage.**

Dana’s investment choice would be based on her specific circumstances and risk tolerance—picking an investment isn’t one size fits all.

Johan’s and Dana’s framework at a glance

Get help reaching your goals

Saving for a short-term goal?

Consider a Vanguard Cash Plus Account to help you get more from your emergency and short-term savings.

Saving for a long-term goal?

Developing a plan and picking the right asset mix to help you reach financial goals can be complicated. That’s why many people turn to a financial advisor for help.

Discover a new home for your cash

Learn more

Find out if your plan offers advice

Want to learn more on this topic? Check out:

Whenever you invest, there's a chance you could lose money.

Diversifying means having different types of investments. It doesn’t guarantee you’ll make a profit or that you won’t lose money.

Advice is provided by Vanguard Advisers, Inc. (VAI), a federally registered investment advisor. Eligibility restrictions may apply. VAI cannot guarantee a profit or prevent a loss.

*The bank sweep program annual percentage yield (APY) will vary and may change at any time.

**The Cash Plus Bank Sweep program balances are held at one or more participating banks, earn a variable rate of interest, and are not covered by SIPC. See the list of participating Program Banks (PDF). Balances are eligible for FDIC insurance subject to applicable limits.

The Vanguard Cash Plus Account is a brokerage account offered by Vanguard Brokerage Services, a division of Vanguard Marketing Corporation, member FINRA and SIPC. Under the Sweep Program, Eligible Balances swept to Program Banks are not securities: they are not covered by SIPC, but are eligible for FDIC insurance, subject to applicable limits. Money market funds held in the account are not guaranteed or insured by the FDIC, but are securities eligible for SIPC coverage. See the Vanguard Bank Sweep Products Terms of Use and Program Bank list for more information.

CFA® and Chartered Financial Analyst® are registered trademarks owned by CFA Institute.