How Much Cash Should You Hold?

Cash allocation decision inside a portfolio — a minimal 3D isometric glass panel hero with two scenarios side by side, one fully invested and one with a cash buffer during a crisis, and a central allocation dial showing the adjustment in the Kistack fintech tone

Open an investing book and the line "full investment is best for the long run" comes up often. Cash is the asset inflation eats — get into the market quickly. Run a real portfolio for a while though, and you've had a moment where you wished you held more cash. Let's walk through how to size cash inside your portfolio from a practical angle.

What cash actually does in your portfolio

Cash isn't just money sitting idle. Inside your portfolio, it does two jobs.

First, emergency reserve. Sudden expenses, medical bills, job loss — situations where you don't want to sell long-term assets at a loss. Selling assets in a downturn locks in the loss. Holding some cash means you don't have to.

Second, opportunity capital. When the market falls sharply, cash gives you room to add. Assets you wanted but felt were too expensive become reachable. Without cash, you can only watch the opportunity pass.

Only cash can do both jobs. Bonds, gold, and other assets don't substitute for the emergency role. They can fall during the same crisis, and converting them to cash takes time.

What cash costs you

Cash carries two trade-offs too.

First, low return. Sitting in a savings account or a money market fund typically yields 2% to 3% annually. The long-run US stock average sits closer to 9% to 10%. The bigger your cash share, the slower your overall portfolio compounds.

Second, inflation erodes it. Long-run inflation in both Korea and the US runs around 2% to 3%. If your deposit rate roughly matches that, your real return is near zero. The purchasing power of your money drops over time.

So sizing cash too large carries its own cost. You have to find an appropriate level for your situation.

Start with your emergency reserve

The first step in sizing cash inside your portfolio is settling your emergency reserve.

A common guideline is 3 to 6 months of your monthly expenses. If you spend 3 million won a month, that's 9 to 18 million won. Self-employed or freelance with less predictable income, 6 to 12 months gets recommended.

Keep this reserve separate from your investment assets. If you suddenly need money, you shouldn't have to sell investments to cover it. Savings accounts, high-yield savings, or money market funds are the typical homes for this.

When the emergency reserve sits mixed with your investment portfolio, a crisis means selling assets that just dropped to cover the emergency. That locks in losses and quietly damages your long-term result.

Cash inside your investment portfolio

Cash allocation guide inside the investment portfolio — a minimal 3D isometric glass panel hero with a bar chart of conservative, balanced, and aggressive cash levels, and a central dial for selecting your own risk profile in the Kistack fintech tone

With the emergency reserve set aside, the next question is how much cash to hold inside the investment portfolio itself. The size depends on your risk profile and time horizon.

Aggressive — 0% to 10% cash. If you're in your 30s or 40s with 20+ years of horizon and can tolerate market volatility, running close to fully invested is fine. Close to full investment. Captures the long-run average return.

Balanced — 10% to 20% cash. If you've felt rattled during a big market drop, some cash helps. It also gives you something to deploy when the market falls. Smooths the year-to-year ride.

Conservative — 20% to 30% cash. If you're in your 50s or 60s with a 5 to 10 year horizon, raising cash is generally advised. As the time to actually withdraw money approaches, large swings in your portfolio become a bigger concern.

These ranges aren't strict. Read them against your own situation and your own emotional response. If you ran at 5% cash through a 30% drawdown and stayed steady, that's your right level. If you need 25% cash to sleep well, that's your answer.

What about raising cash when the market looks expensive?

The other thought that comes up often — when the market looks expensive, raise cash, then redeploy after it falls.

The strategy is attractive on paper, with two costs in practice. First, when the market looks expensive and you trim, the market often runs another 1 to 2 years higher. You're sitting in cash through that gain. Second, even if the drop comes, calling the bottom exactly is extremely hard.

The general guidance is not to swing your cash level with the market. Set a level based on your risk profile and time horizon and hold it. Adding more during a sharp drop is fine — frequent swings turn into market timing, and that historically underperforms staying invested.

Wrapping up in one line

Think about cash in two layers. First, the emergency reserve — 3 to 6 months of expenses, kept separate from your investments. Second, cash inside the investment portfolio — somewhere between 0% and 30% depending on your risk profile and horizon. Holding your level steady tends to beat moving it around with the market. Start by checking that the emergency reserve is in place.

This information is not investment advice.
Past performance does not guarantee future results.
Backtest results are simulations and may differ from actual trading outcomes.