How much of your portfolio should you hold in cash equivalents? It depends on your goals and how long you have to meet them. If you have major expenses, such as college tuition, a down payment on a house, or retirement that you'll have to cover in the next two or three years, you'll want to keep a substantial amount of the money you've set aside for those costs in nonvolatile cash investments.
That's because your portfolio may not have time to recover from a potential market downturn, and you don't want to risk cashing out a substantial portion of your portfolio at a loss. Even so, you may still want to keep a limited percentage of your short- and medium-term investments in stocks or stock mutual funds for the potential growth they may provide.
On the other hand, if you tie up all of your long-term investments in cash equivalents you risk falling short of what you'll need to meet your future goals. That's because cash investments don't provide enough growth to outpace taxes and inflation over the long run.
Your next move
It can be smart to put a certain amount of cash aside — say 5% to 10% of your long-term portfolio — to take advantage of new investment opportunities you've researched, or so that you can invest the same amount on a regular schedule, say every month, or every quarter. But in general, you'll want to keep the majority of your long-term portfolio invested for
growth,
in stocks and higher-yielding bonds.
