The size of cash reserves for retirees would also depend on comfort and convenience. A separate function of cash within an investment portfolio is to temper portfolio volatility that is the result of investments in riskier asset classes. In general, stocks provide the most growth. Cash has the advantage of immediate liquidity, but the disadvantage of lower levels of income. The long-term returns from cash investments have been the lowest of the three main asset classes.
Taxes can take a further bite out of returns.
Thus, if cash is held in a taxable account, your aftertax return could easily be below the rate of inflation. For this reason, allocation of a substantial percentage of assets to cash as a long-term investment can be highly risky. When interest rates rise, a bond s value will drop, and the longer the maturity, the greater the drop, all other things equal. It is this characteristic of cash investments virtually no downside risk over the short term that makes it quite useful when combined with more risky, growth-oriented investments in an investment portfolio. Adding cash to the portfolio mix can allow you to lower your portfolio s downside risk, or it can allow you to increase your investment in more growth-oriented stocks without increasing your downside risk.