Cash Is Often Dismissed for the Wrong Reasons
In investing, cash is frequently described as “idle” or “unproductive.” In periods where markets rise steadily, holding cash can feel unnecessary, even negligent. The comparison is usually framed narrowly: cash earns little, while other assets offer growth.
That framing misses the role cash actually plays.
Cash is not held to outperform. It is held to shape the behavior and resilience of the rest of the portfolio. When viewed this way, its contribution becomes clearer—and harder to dismiss.
The Structural Role of Cash
Every portfolio is built around a small number of structural decisions. One of them is liquidity: how much capital is immediately available without selling other assets.
Cash provides three functions that are difficult to replicate elsewhere:
- Stability: it does not fluctuate with markets
- Optionality: it can be deployed without timing pressure
- Continuity: it absorbs short-term needs without disrupting long-term assets
These functions do not show up in return tables, but they influence outcomes nonetheless.
Capital, like infrastructure, benefits from load-bearing components that are not designed for speed.
A Simple Illustration
Consider two portfolios of €100,000 invested over 20 years:
- Portfolio A: 100% equities
- Portfolio B: 85% equities, 15% cash
Assume long-term real returns:
- Equities: 7%
- Cash: 0%
Portfolio A compounds faster in uninterrupted markets. Portfolio B lags slightly in ideal conditions.
Now introduce a common interruption: a 30% market decline in year 10, paired with an unexpected need for €15,000.
- Portfolio A must sell equities at depressed prices
- Portfolio B uses cash, leaving equities untouched
The difference is subtle but lasting. Portfolio A reduces its future compounding base. Portfolio B preserves it.
Over time, these small disruptions often matter more than the return gap created by holding cash.
Cash and Behavior
Portfolios do not fail only because of market movements. They fail because investors are forced into decisions under pressure.
Cash reduces the frequency of those moments.
By covering short-term needs and providing psychological distance from volatility, cash acts as insulation. It does not prevent storms, but it limits how much of the structure they reach.
This is particularly relevant during extended drawdowns, when selling assets feels rational in the moment but proves costly in hindsight.
The Trade-Off Is Real
Holding cash comes with an explicit cost: lower expected returns.
That cost is visible and easy to calculate. What is less visible is the cost of not holding cash:
- Forced asset sales
- Abandoned strategies
- Reduced flexibility
These costs are irregular and uneven, which is why they are often underestimated.
In practice, many long-term plans are disrupted not by poor asset selection, but by insufficient liquidity.
Cash Is a Design Choice, Not a Forecast
Holding cash is sometimes mistaken for a market view. It is not.
It is a design choice about how much uncertainty a portfolio can absorb without breaking. This choice becomes more important as time horizons shorten or obligations become less flexible.
Ignoring this relationship rarely causes immediate failure. It tends to surface later, when options are fewer and adjustments are more expensive.
Takeaway
Cash is not a return engine. It is a stabilizer. In portfolios designed to last, stability is not an afterthought—it is a prerequisite. The absence of cash often looks efficient until it quietly limits the ability to stay invested when it matters most.
