Volatile times: How much should I keep in cash vs investments?

At a high level, cash and investments perform different jobs. Cash is designed to provide accessibility, stability and short-term security. Investments are typically intended to provide long-term growth and help preserve spending power over time.

Neither is inherently better than the other. Most people will benefit from having some combination of both. The key is understanding where each fits within your wider financial plan.

While this comparison can be helpful, it doesn’t answer the most important question: how much should you hold in each? The answer depends on far more than percentages alone.

Search online, and you’ll find plenty of rules of thumb about how much cash you should hold versus how much you should invest. Some suggest fixed percentages. Others propose age-based formulas or model portfolios. You may even come across references to Warren Buffett’s famous asset allocation comments or various retirement cash rules.

The difficulty is that these approaches can only ever be generalisations. Periods of uncertainty often tempt people to focus on what markets might do next. What matters more is whether your existing mix of cash and investments still reflects your own circumstances and objectives.

A 45-year-old business owner with irregular income, a couple planning to retire in five years and a retired investor drawing income from their portfolio are all likely to have very different requirements, even if they have similar levels of wealth. That’s because the right balance between cash and investments is influenced by a range of factors, including:

• your financial goals
• your investment time horizon
• your income stability
• your attitude to risk
• your capacity for loss
• future spending plans
• retirement objectives
• existing savings and investments

Rather than asking, “What percentage should I keep in cash?”, it can be more helpful to ask: “What is this money likely to be needed for, and when might I need it?” The answer often provides a better starting point than any formula ever could.

You might recognise this situation. The emergency fund is healthy, the mortgage is becoming more manageable and there’s a growing amount sitting in savings. The question becomes: how much needs to stay there?

During your working years, the focus is often on building wealth and funding future goals. That might include retirement planning, helping children through education, paying off a mortgage or building long-term financial security. At this stage, many people want their money to achieve two things at the same time. They want enough cash to deal with life’s surprises, but they also want their wealth to grow over the years ahead. This is where the balance between accessibility and growth becomes particularly important.

For example, an employed professional with a stable income may feel comfortable keeping a smaller proportion of their wealth in cash than someone whose income fluctuates significantly from month to month. A business owner may choose to retain larger cash reserves because income can be less predictable, while a higher-rate taxpayer may place greater emphasis on long-term investment and retirement planning.

Two people with similar levels of wealth may quite reasonably reach different conclusions.

However, one common challenge during the accumulation phase is holding significantly more cash than is likely to be needed in the foreseeable future. Sometimes it happens almost by accident. An inheritance arrives, a property is sold, a bonus gets paid into a savings account, and before long there’s a sizeable sum sitting in cash because no one has got round to deciding what to do with it.

While having cash available can feel reassuring, it’s worth considering whether all of it needs to remain there indefinitely.

It’s one thing to ride out market ups and downs when retirement is 20 years away. It’s another when you’re hoping to stop work in the next few years and start relying on those assets for income.

This doesn’t necessarily mean investors should move large amounts of money into cash as retirement approaches. However, many people begin to think more carefully about how and when they might need access to their money. For example, someone planning to retire soon may want confidence that spending needs over the next few years can be met without being overly reliant on market conditions at a particular point in time.

This is sometimes referred to as sequencing risk – the risk that significant market falls occur shortly before or during the early years of retirement.
Periods of uncertainty often bring this concern into sharper focus. But rather than reacting to headlines, the more important question is whether your existing arrangements still align with your plans and timescales.

Many retirees tell us they sleep better knowing there’s a pot of readily accessible money available for holidays, home repairs or helping family members if needed. Retirement introduces a different challenge. Instead of focusing primarily on building wealth, attention often shifts towards generating income, maintaining flexibility and ensuring assets can continue supporting future spending needs. Cash can play an important role here.

At the same time, retirement can last several decades. That means maintaining some exposure to long-term growth may remain important, particularly as retirement can last several decades.

This creates a balancing act. Hold too little cash and you may feel uncomfortable during periods of market volatility. Hold too much cash and there is a risk that inflation gradually reduces the purchasing power of your savings over the years ahead.

The appropriate balance will depend on factors such as spending requirements, other sources of income, health considerations, family circumstances and overall financial objectives.

It’s easy to see why cash feels safe. You can log into your account and see exactly how much is there. It doesn’t move up and down with the markets or come with worrying headlines. But that doesn’t necessarily mean it’s risk-free.

One of the biggest risks is inflation. If the cost of goods and services rises faster than the return earned on cash savings, the real value of that money gradually declines. This isn’t always obvious in the short term. A savings account balance may remain unchanged or even grow slightly. However, its spending power may be reducing over time. For someone holding substantial sums in cash over many years, the impact can become significant.

There’s also the opportunity cost to consider. Money held in cash may provide reassurance, but it may also miss opportunities for long-term growth that could help support future retirement income, family goals or legacy planning objectives.

Of course, this doesn’t mean large cash balances are automatically inappropriate. Sometimes they serve a specific purpose. The key is understanding whether the amount being held in cash reflects a deliberate decision or simply a lack of attention.

The opposite challenge can arise when too little cash is available. Without sufficient accessible savings, unexpected expenses can become more difficult to manage.

People may find themselves selling investments at an inconvenient time, relying on borrowing or disrupting long-term plans to meet short-term needs. This is one reason financial resilience is so important, whatever the market conditions. Having access to appropriate cash reserves can provide flexibility and reduce the pressure to make investment decisions based on immediate circumstances. It can also help investors remain focused on their longer-term objectives when markets become volatile.

Ultimately, this is rarely an either-or decision. Cash and investments perform different roles and can work together within a wider financial plan. Cash can provide accessibility, flexibility and reassurance. Investments can offer long-term growth potential and help support future spending needs.

Alongside pensions, Stocks & Shares ISAs and other investments, cash forms part of a broader financial picture. Having assets across different tax wrappers and different types of investments can also create greater flexibility as circumstances evolve.

The objective isn’t usually to maximise returns at all costs. Nor is it to eliminate every possible risk. Instead, it’s about creating a balance that reflects your goals, priorities and personal circumstances.

Questions about cash and investments are rarely just about cash and investments. More often, they’re linked to bigger questions.

Can I afford to retire when I want to? Will my money last throughout retirement? How much flexibility will I need in the future? How do I pass wealth on efficiently to the next generation? How should different assets work together?

These are financial planning questions rather than investment questions. That’s why the most appropriate balance between cash and investments often emerges as part of a wider discussion about retirement planning, tax efficiency, income needs, estate planning and long-term objectives.

The real question isn’t how much cash or how many investments someone should hold in isolation. It’s how all their assets can work together to support the life they want to live.