How Much Cash Should I Hold in My Portfolio?

Cash alternatives (“cash”) can fill several needs for investors, although they should not be viewed as a primary, long-term investment.

Cash Alternatives Can Play an Important Role

By “cash,” we don’t mean just dollar bills or even the money in your checking account. By “cash” we mean investments used as “alternatives” to cash holdings. They include a spectrum of assets that are typically stable in value and can usually be liquidated quickly when you need to cover an expense. Each type of cash alternative has advantages and disadvantages. They typically offer lower rates of return than longer-term equity or fixed-income securities and may not keep pace with inflation over extended periods of time. Short-term Treasury bills and money market funds are the classic examples. Unlike a money market fund, Treasury bills are guaranteed by the U.S. government and, if held to maturity, offer a fixed rate of return and fixed principal value.

Important considerations for cash alternatives

  1. Cash alternatives have important uses, but we believe they are not an appropriate primary, long-term investment for investors.
  2. For investors, we believe cash should not represent the majority of their asset allocation dollars.
  3. Retail investors may tend to hold much more cash than their financial advisors recommend.

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Wells Fargo Investment Institute, Inc. is a registered investment adviser and wholly owned subsidiary of Wells Fargo Bank, N.A., a bank affiliate of Wells Fargo & Company.