How much cash should you hold vs invest? What's the right mix?

There are always two ways for individuals to hold cash, emergency fund cash and investment cash. This needs to be clarified before discussing any investment mix.

Emergency cash (not in your portfolio)

Life has a habit of delivering the unexpected, so it’s a good idea to keep 3 to 6 months of living expenses in cash, readily accessible in a savings account or mortgage offset account. Make that 6 to 9 months if your income is variable and you would like extra peace of mind. Other reasons for setting aside cash might include saving for a particular goal, such as a car purchase, an overseas holiday or a wedding. This emergency or special purpose cash does not count as part of your investment portfolio.

Cash as part of your investment portfolio

Once your emergency fund is established, the question becomes how much investment cash, in savings accounts (preferably high interest savings accounts) or term deposits, to hold as part of your overall investment mix? While cash investments certainly earn their keep as a very low risk option, the interest rate you earn will usually trail behind the inflation rate over the medium to long term, which means that even if you reinvest all your interest income back into cash, the value of your investment will be constantly eroded.

That’s because, generally speaking, the lower the risk, the lower the rate of return. And the converse is also true: the higher the risk, the higher the potential for asset growth, meaning that shares for example, typically offer a higher return than cash over the long term. But this does not mean that cash does not have a place in your portfolio. It’s just a question of balancing your investment mix with your financial goals.

Cash equivalents in your portfolio

Fixed interest investments such as government bonds, corporate bonds and debentures are regarded as ‘cash equivalents’. They are riskier and not as liquid as a purely cash investment, since selling listed bonds and debentures usually requires 2 to 3 business days before settlement and the proceeds for unlisted products may not be available before their agreed maturity date.

However, fixed interest investments will usually offer better rates than savings accounts or term deposits to compensate for the higher risk, thus providing better capital preservation.

Match your mix to your investment horizon and financial goals

With the question of what is and isn’t cash established and the role cash plays in your portfolio, it’s time to get serious about the mix in 2026. There’s no ‘one size fits all’ answer.

Younger individuals with high risk tolerance investing for long-term goals could be well served by 5% cash, 20% fixed interest, around 65% to 70% shares and 5% to 10% property.

A balanced portfolio for those in midlife with family responsibilities might tend towards 10% or more in cash, with a lower allocation of shares.

Those approaching retirement or already retired, are usually aiming to avoid risk and preserve capital and income. They might consider holding 30% or more of their portfolio in cash and defensive cash equivalents such as fixed interest bonds.

The key to cash investment is to get your emergency fund in place first and then decide what proportion of your portfolio to allocate to cash, based on a definite strategy rather than either fear or optimism. But don’t over allocate to cash, because you may miss out on growth opportunities.

Find out what’s right for you

Actual portfolio mix advice can only be constructed around your personal financial profile and aims, not on generalisations. Seeking guidance from a licensed financial adviser is highly recommended to ensure that your 2026 investment portfolio meets your needs and protects your future.

Source:  Financial Writers Australia