In investing, attention is often focused on returns and the selection of the right assets, while much less is said about the role of cash. Yet the way an investor works with cash can significantly influence their decision-making, resilience to market fluctuations, and long-term results.

What Cash Represents in a Portfolio

To understand the role of cash, it is important to view it as a source of liquidity and flexibility—that is, the ability to have capital available without having to sell investments at an inopportune time. At the same time, cash is not a single, universal type of money. A financial reserve primarily serves to cover unexpected life situations and should not be exposed to investment risk. Investment cash, on the other hand, has a clearly defined purpose: it is prepared for gradual investing, portfolio rebalancing, or taking advantage of market opportunities. This distinction helps investors remain calm while working with capital in a systematic and goal-oriented way.

Room for Better Decisions

The importance of cash becomes most evident in situations when markets are not functioning ideally. Cash allows investors to respond to opportunities as they arise without being forced to sell other assets under pressure. At the same time, it reduces the risk of poor timing, since investing all capital at once increases the likelihood of entering the market at an unfavorable moment. The psychological aspect is no less important. Knowing that part of the capital is readily available helps investors cope with market fluctuations with greater perspective and stick to their long-term strategy even during periods of increased volatility.

Managing Capital Over Time

For cash to fulfill its role, it must be used actively and according to predefined rules. One effective approach is gradual investing, which spreads market entries over time and reduces the risk of incorrect timing (if this topic interests you, we discuss it in more detail in our previous article). Cash also plays a key role in portfolio rebalancing. This means that after significant growth in certain assets, part of the capital is moved back into cash and then allocated where the strategy requires. Clearly defined rules help investors avoid impulsive decisions and maintain a consistent approach even in a changing market environment.

Risks of Holding Cash

Although cash has its justification in a portfolio, holding it also involves risks that cannot be ignored. The most significant of these is inflation, which gradually reduces the real value of money (if you are interested in how to behave as an investor in inflationary and deflationary environments, we address this topic in a separate article). Equally problematic can be an excessively high share of cash, which may reduce short-term portfolio volatility but at the same time limits its long-term growth potential. Therefore, it is important to view cash as a temporary and purpose-driven tool, not as a permanent shelter for capital.

An Individual Approach to Allocation

There is no single universal number that determines the ideal share of cash in a portfolio. It depends on the investment horizon, risk tolerance, experience, and overall goals of the investor. A more conservative approach may include a higher share of cash as a stabilizing element, while a more dynamic investor uses it primarily tactically and in the short term. What matters is that the decision about the amount of cash is based on strategy, not on emotions or an attempt to predict short-term market movements.

The Balance That Holds the Portfolio Together

Cash is not a passive part of a portfolio, but an active tool that significantly influences the quality of investment decisions. A properly set cash allocation provides flexibility, increases the investor’s psychological resilience, and helps maintain discipline even in challenging market conditions. True investment success does not arise from extremes, but from a balance between invested capital and liquid assets. It is this balance that makes it possible to build a portfolio capable of long-term growth while also managing uncertainty and unforeseen situations.

For more investment trends and useful tips, please see our previous articles on the AxilAcademy website.

“This text constitutes marketing communication for educational purposes. It does not represent any form of investment advice, investment research, or an offer of any transaction involving a financial instrument. The content of the text does not take into account the individual circumstances of readers, their experience, or their financial situation. Investing involves risk and may lead to financial loss. Past performance is not a guarantee or a prediction of future results.”