There are generally two ways to hold cash — emergency funds and investment cash. It’s important to distinguish between the two before considering your overall investment mix.
Emergency cash (not part of your investment portfolio)
Life has a habit of delivering the unexpected, so it’s wise to keep 3–6 months of living expenses in readily accessible cash, such as a savings account or mortgage offset account. If your income is variable, you may prefer holding 6–9 months for added peace of mind.
You may also set aside cash for specific short-term goals, such as a car purchase, overseas holiday or wedding. This type of cash should not be considered part of your investment portfolio.
Cash as part of your investment portfolio
Once your emergency fund is established, the next step is determining how much cash to hold within your investment portfolio. This typically includes savings accounts (ideally high-interest) and term deposits.
While cash is a low-risk option, returns often trail inflation over the medium to long term. This means that even if you reinvest interest, the real value of your money may decline over time.
Generally, lower risk investments deliver lower returns, while higher risk assets such as shares offer greater long-term growth potential. That said, cash still plays an important role — it’s about finding the right balance based on your goals and risk tolerance.
Cash equivalents as part of your investment portfolio
Fixed interest investments — including government bonds, corporate bonds and debentures — are often considered ‘cash equivalents’. They carry slightly more risk and are less liquid than cash, as access to funds may be delayed depending on the investment structure.
However, they typically offer higher returns than standard savings accounts or term deposits, helping to better preserve capital over time.
Match your mix to your investment horizon and financial goals
There is no one-size-fits-all approach to portfolio construction. Your allocation to cash and other assets should reflect your personal circumstances:
- Younger investors with a higher risk tolerance may allocate around 5% to cash, with a greater proportion in growth assets such as shares and property.
- Midlife investors with family responsibilities may increase their cash allocation to around 10% or more, balancing growth with stability.
- Those approaching or in retirement often prioritise capital preservation and income, with 30% or more allocated to cash and defensive assets.
The key is to first establish your emergency fund, then determine your investment allocation based on a clear strategy — not short-term market movements or emotional decisions. Over-allocating to cash can limit your long-term growth potential.
Find out what’s right for you
Your ideal portfolio mix should be tailored to your individual financial situation, goals and risk profile. Seeking advice from a qualified financial adviser can help ensure your investment strategy is aligned with your long-term objectives.
If you’re unsure how much cash to hold or invest, speak with one of our financial advisers to make confident, well-informed decisions.
