Why Do Investors Keep Part of Their Portfolio in Cash?

Many investors think of a portfolio as a collection of stocks, ETFs, bonds or other investments.

But cash can also play a deliberate role.

Holding cash does not necessarily mean an investor has “failed to invest” the money. It can provide liquidity, support near-term spending needs, make rebalancing easier or give an investor flexibility between investment decisions.

Investor.gov defines asset allocation as dividing investments among categories such as stocks, bonds and cash, with the appropriate mix depending on factors including time horizon and risk tolerance. Investor.gov explains the role of asset allocation.

So the useful question is not simply:

“Why isn’t this money invested?”

It is:

“What role is the cash supposed to play?”

1. Cash can provide liquidity

One of the clearest reasons to hold cash is access.

An investor may need money in the near future and may not want to depend on selling an investment at an inconvenient time.

Cash might be kept available for:

• upcoming expenses
• planned purchases
• emergency needs
• tax payments
• future investment contributions
• expected withdrawals

Stocks and other market investments can fall in value, sometimes sharply.

If money may be needed soon, keeping part of it in cash can reduce the risk of having to sell an investment during a downturn.

Investor.gov notes that investors with shorter time horizons may prefer less risky or less volatile assets, while longer time horizons can allow greater tolerance for market fluctuations. Investor.gov explains how time horizon affects asset allocation.

Cash therefore serves a different purpose from assets held primarily for long-term growth.

2. Cash can reduce exposure to market volatility

Cash generally behaves differently from stocks and other market-linked investments.

Increasing the cash portion of a portfolio can therefore reduce the portfolio’s sensitivity to short-term market movements.

That does not make cash risk-free, nor does it guarantee a better result.

It simply changes the risk profile.

Investor.gov describes asset allocation as spreading money among categories such as stocks, bonds and cash based partly on an investor’s ability and willingness to take risk. Investor.gov discusses risk tolerance and asset allocation.

An investor approaching a financial goal may, for example, value stability and access to funds more than someone investing for a goal several decades away.

3. Cash can make rebalancing easier

Portfolio allocations change as markets move.

Suppose someone starts with:

• 70% stocks
• 20% bonds
• 10% cash

If stocks rise significantly, they may become a much larger share of the portfolio than originally intended.

Rebalancing means adjusting the portfolio back toward its target allocation.

Investor.gov explains that rebalancing can involve reducing an overweight asset category or adding to one that has fallen below its intended allocation. Investor.gov provides guidance on portfolio rebalancing.

Existing cash or new contributions can sometimes be used for that purpose without immediately selling another investment.

That is different from holding cash because an investor believes they can predict the next market move.

4. Cash often accumulates naturally between investments

Not all brokerage cash is the result of a deliberate long-term allocation.

It can appear naturally when an investor:

• sells a stock or ETF
• receives dividends
• deposits new money
• delays reinvesting
• researches the next investment

The investor may still intend to invest the money later.

Until then, it remains uninvested.

That raises a practical question:

What happens to the cash while it is waiting?

Different brokerage platforms can treat uninvested balances differently. Depending on the provider and account structure, the money may remain as cash, earn interest, be swept into a bank arrangement or be placed into an eligible money market structure.

For more detail, see our guide: What Happens to Cash in Your Brokerage Account While It Isn’t Invested?

5. Cash can provide flexibility for future investment decisions

Some investors keep cash available so they can act when another investment opportunity appears.

The advantage is straightforward: they may not need to sell an existing holding before making the next purchase.

But there is a trade-off.

Markets may rise while the investor waits.

Holding cash because it serves a clear liquidity or portfolio-management purpose is different from holding it because an investor expects to predict the perfect moment to enter the market.

Investor.gov’s asset-allocation guidance focuses on objectives, time horizon and risk tolerance rather than attempting to forecast short-term market movements. Investor.gov explains the principles behind asset allocation.

Cash provides flexibility.

It does not provide certainty about what markets will do next.

What is the opportunity cost of holding cash?

Cash can be useful, but it comes with trade-offs.

If markets rise while money remains uninvested, the investor may participate less in those gains.

Long-term investment assets such as stocks have historically offered greater return potential than cash-like holdings, but they also expose investors to significantly greater volatility and loss risk.

Investor.gov notes that investors with longer time horizons may be more willing to hold volatile assets, while cash investments can be more appropriate for shorter-term objectives. Investor.gov provides an introduction to asset categories and risk.

The point is not that one is universally better.

They serve different purposes.

Inflation can reduce the purchasing power of cash

Cash may preserve its nominal value while still losing purchasing power.

If the return on cash is lower than inflation, the same amount of money can buy less over time.

Investor.gov identifies inflation risk as a key concern for cash and cash-equivalent investments because inflation can outpace their returns. Investor.gov explains inflation risk in cash investments.

Consider a simple example.

If €10,000 remains unchanged while prices rise by 3%, the account may still display €10,000.

But those euros no longer have the same purchasing power.

This is the difference between:

• nominal value — the number shown in the account
• real value — what that money can purchase

That does not mean an investor should automatically move cash into riskier assets.

It means inflation is one of the trade-offs to consider when deciding why cash is being held and for how long.

Not all “cash” in an investment account is the same

This distinction is particularly important.

The word cash may refer to several different arrangements.

Money might be:

• held as a brokerage cash balance
• deposited with a bank
• moved through a bank sweep arrangement
• invested in a money market fund
• held through another short-term cash-management structure

These are not interchangeable.

The European Commission describes money market funds as investment funds that invest in short-term debt instruments issued by entities such as banks, companies and governments. The European Commission explains the EU investment-fund framework.

A money market fund is an investment product, not a bank deposit.

That means its legal structure, risks and protections differ from money held in a traditional savings account.

The EU maintains a specific regulatory framework for money market funds, including requirements related to liquidity, diversification and resilience. The European Commission has published information on the EU money market fund framework.

That distinction matters whenever an investment platform advertises a return on uninvested cash.

If you hold cash, how your broker treats it can matter

Once an investor has decided that holding some cash serves a purpose, another question becomes relevant:

How is that cash treated while it remains uninvested?

Two brokers may provide access to similar stocks and ETFs while handling idle balances very differently.

Depending on the provider, cash may:

• earn no return
• earn a variable rate
• be subject to balance thresholds
• require an opt-in
• be placed into another financial product
• have different liquidity conditions

For someone who rarely has cash sitting in an account, this may not matter much.

For someone who frequently moves between investments and cash, it can become a meaningful comparison point.

The headline rate alone is not enough.

Investors should also understand:

• where the money is held
• whether it remains cash or is invested
• how the return is generated
• whether the rate can change
• whether fees apply
• how quickly the money can be accessed
• what regulatory protections apply

How much cash should an investor hold?

There is no universal percentage that is appropriate for every investor.

The answer depends on factors such as:

• financial goals
• time horizon
• upcoming spending needs
• risk tolerance
• other savings available
• portfolio composition
• personal circumstances

Investor.gov describes asset allocation as a personal decision influenced by an investor’s objectives, time horizon and tolerance for risk. Investor.gov explains how investors may think about asset allocation.

Someone expecting to use money within a year may think about cash very differently from someone investing for retirement decades away.

That is why generic rules such as “always keep 10% of your portfolio in cash” should be treated cautiously unless they are connected to a specific strategy and individual circumstances.

A simple checklist for cash inside an investment portfolio

Question	Why it matters
Why am I holding this cash?	Liquidity, spending and investment flexibility serve different purposes
When might I need it?	A shorter time horizon may change the level of risk that is appropriate
Is it actually cash?	Some brokerage arrangements use funds or other structures
Does it earn a return?	Treatment varies between providers
Is the rate variable?	A current rate may change
Can I access it immediately?	Liquidity conditions can differ
What risks apply?	Bank deposits, brokerage cash and investment funds are different structures
How does inflation affect it?	A stable nominal balance can still lose purchasing power
Am I following a plan or trying to time the market?	Those are different reasons for holding cash

FAQ

Conclusion

There are several reasons why investors hold cash as part of a portfolio.

Cash can provide liquidity, support near-term spending needs, help with rebalancing and provide flexibility between investment decisions.

But cash also comes with trade-offs.

Inflation can reduce its purchasing power, while remaining out of the market can mean participating less in potential investment gains.

The relevant question is therefore not whether cash is universally good or bad.

It is whether the cash has a clear purpose.

And once an investor decides to keep part of a portfolio uninvested, it becomes worth understanding how the brokerage platform treats that money, how any return is generated and what risks and conditions apply.

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Disclaimer: This article is for general informational and educational purposes only and does not constitute investment, financial, tax or legal advice. Investing involves risk, including the possible loss of capital. Asset allocation, cash holdings and investment decisions depend on individual circumstances, goals, time horizons and risk tolerance. Cash-management arrangements, rates, investment structures, fees and regulatory protections vary by provider, jurisdiction and account type and may change over time. Always review relevant product documentation and consider your own circumstances before making a financial decision.

Sources & References

Investment guides & beginner resources

• Investor.gov explains inflation risk in cash investments

EU regulations & taxation

• European Commission / Taxation & Customs — The European Commission has published information on the EU money market fund framework
• The European Commission provides information on money market funds and other investment funds

Additional educational resources

• Investor.gov explains how investors may think about asset allocation
• Trading.com