Cash balances in your accounts rarely stay constant, but it’s still useful to set a target for how much cash you want to hold—just as you would for stocks and bonds. The right amount varies by circumstance and can be expressed as either a percentage of your portfolio or a specific dollar figure. Consider your goals, time horizon and whether the account is for long-term growth or short-term needs when deciding on a cash allocation.
Accumulating
When you are in the accumulation phase of investing—adding new deposits regularly—cash should typically be a staging area for funds that you will invest on a consistent schedule. New contributions, dividends, interest and other distributions can be pooled and invested according to your plan so they are not needlessly sitting idle.
If an account is designated for long-term retirement savings, such as an RRSP or a long-horizon taxable investment account, there is often limited reason to hold a meaningful cash allocation. Remaining fully invested in stocks and bonds over long periods tends to maximize growth potential. One exception is if you have a specific short-term need from that account—such as an intended RRSP withdrawal under a homebuyer program—where holding some cash in advance makes practical sense.
Some investors like to keep “dry powder” on hand to buy stocks during steep market declines. While the impulse is understandable, markets historically rise more often than they fall, and being out of the market waiting for a crash can be costly. A disciplined alternative is to keep your long-term portfolio invested and use systematic rebalancing: selling bonds or other assets that have appreciated to buy underweighted stocks when their prices decline. This approach captures value opportunities without attempting to time market bottoms, and bonds typically earn more than cash while potentially rising when stocks fall.
Decumulating
During retirement or any drawdown phase, having cash or near-cash holdings becomes more important. You’ll need liquidity to make monthly or quarterly withdrawals without being forced to sell investments at potentially unfavorable times. The amount to hold in cash should align with your withdrawal schedule and comfort with market volatility.
There is no universal rule such as “hold 10% in cash” that fits everyone. One practical approach is to set aside a cash buffer that covers a specific number of months of expenses—three, six, or even a year—depending on how conservative you want to be and whether you have other sources of income. Personal risk tolerance, the size of your portfolio, other guaranteed income (like pensions or annuities), and your spending needs all shape the right cash level for you.
Some retirees advocate a “cash wedge” strategy, holding a large cash reserve to avoid selling stocks during market downturns. While appealing in theory, it raises timing questions: when should you deploy the cash? If you spend the reserve early in a downturn and markets continue to fall, you may still be forced to sell at the bottom. Conversely, remaining fully invested would have allowed you to sell at higher prices on the way down. Because accurately timing market troughs is extremely difficult even for professionals, many investors find it more reliable to use a combination of moderate cash reserves, planned withdrawals, and rebalancing rules.
As a historical note, past peak-to-trough declines in major stock indices suggest that retirees can expect multiple severe drawdowns—two to three declines of about 30%—over the course of a long retirement, so planning for volatility is prudent.
Dividend reinvestment
Many investments offer dividend reinvestment plans (DRIPs) that automatically use cash dividends to purchase additional shares or units. DRIPs are effective when an account does not require regular withdrawals or new external deposits, because they keep distributions working in the investment rather than accumulating as idle cash.
If you do make frequent contributions, it’s easy to combine deposits and dividend distributions into scheduled purchases. Conversely, if you are relying on your portfolio to generate income, you may prefer that distributions accumulate in cash so they can be used to meet living expenses without selling holdings. Decide based on whether the account’s role is growth or income, and whether automatic reinvestment supports your overall cashflow needs.
Summary
Determining how much cash to hold in a particular account or across your overall portfolio is a personal decision influenced by horizon, goals, withdrawal needs and risk tolerance. For long-term growth accounts, staying invested and using disciplined rebalancing tends to outperform trying to time market declines. For retirement spend-downs, a deliberate cash buffer aligned with your spending schedule and comfort with market swings provides liquidity and peace of mind. Use these considerations to design a cash allocation that supports your financial plan and personal circumstances.