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Cash and Cash Equivalents: What to Know

Cash and cash equivalents are a primary type of asset class that offer flexibility and stability. Learn more about them and how they work.

A complete investment portfolio often includes various asset classes, each with different purposes. While we often think of long-term assets such as stocks or bonds, an investor may also hold short-term securities such as cash and cash equivalents.

In this article, we’ll explain what cash and cash equivalents are and detail the role they typically play in a portfolio. We’ll also outline important drawbacks to consider and highlight some of the most common types of cash equivalents people use.

Key Takeaways

  • Cash and cash equivalents are any assets that are either liquid or are easily liquidated.
  • Certificates of deposit (CDs), money market funds, and treasury bills are all prominent examples of cash and cash equivalents.
  • The primary benefit of cash and cash equivalents is that they aren’t as prone to market fluctuations as other asset classes.
  • While cash and cash equivalents are relatively stable investments, they can cause you to lose purchasing power over time due to inflation.

Understanding Cash and Cash Equivalents

Cash and cash equivalents are any assets you have that are either liquid or ready to quickly liquidate. Taking on several forms, these would be money that you could use to pay for an emergency, a large purchase, or a specific investment. Unlike other asset classes, such as equities or alternatives, which may be difficult to sell at the right price due to fluctuations in value, cash allows you to have some flexibility for short-term needs.

Cash and cash equivalents are not the same, however. Cash refers to any liquid funds you currently have either physically or stored at a bank, ranging from bills in your wallet to money sitting in checking and savings accounts. Conversely, cash equivalents are “short-term investments that mature in 90 days or less” that you can easily turn into cash, says Eric Croak, CFP, president at Croak Capital, a wealth management firm based in Toledo, Ohio. Examples include but are not limited to certificates of deposit (CDs), treasury bills, and money market funds.

Role of Cash and Cash Equivalents in a Portfolio

Having cash or easily liquidated assets at your disposal can have various uses and benefits in a portfolio, including being of functional use to fund other investments and being a flexible tool for risk management in case of market fluctuations and emergencies. Of course, how you decide to use them is ultimately up to your goals, circumstances, and the overall financial plan you have in place.

Stephen Kates, CFP, Principal Financial Analyst for, explains, “The most important features of cash and cash equivalents are liquidity or the ability to readily turn the asset into cash, price stability, which means the asset’s value will not fluctuate in unpredictable ways, and access, which means the owner shouldn’t have any restrictions to use the funds.”

Below is a breakdown of how cash and cash equivalents fit into a portfolio:

Balance and Stability

One of the primary characteristics of cash and cash equivalents in a portfolio is their ability to stay relatively stable and avoid fluctuations. Unlike assets such as stocks or mutual funds that rely on the performance of companies or external factors affecting the market in general to hold their value, cash stays at a consistent value in the short term and over time, even if affected by inflation. “Cash and cash equivalents might not seem like the most exciting investments, but they are crucial for maintaining balance in most investment portfolios,” Croak emphasizes.

The benefit of holding your money in a cash equivalent asset is that you should reasonably expect to get it back at the same value as you put it in, plus whatever you’ve earned from interest. Offering the example of money market funds, a common type of cash equivalent, Croak says, “These funds aim to produce some interest and are primarily managed to keep their net asset value stable. Essentially, if you invest $1 in a share, you should expect to get $1 back upon selling it, although there may be minor fluctuations and interest accruals in between.”

Therefore, a balanced portfolio may comprise some level of short-term assets, such as cash and cash equivalents. At the same time, it may also include funds going toward longer-term asset classes, such as equities, fixed-income securities, or real estate. This acts as a means of diversification, letting you include different types of assets with different trajectories, functions, and levels of stability in your portfolio.

Flexibility and Funding

The next common function of cash in your portfolio is the flexibility it offers. Specifically, having some liquidity allows you to be able to have more freedom to take care of challenges, emergencies, or purchases that require large amounts of cash. “Without a proper cash emergency fund, investors are at risk of needing to sell their securities to fund unexpected expenses,” Kates says. “In this way cash acts as a buffer or defense against unplanned and premature sales.”

Cash also grants you the ability to have more discretion on the types of investments you’d like to fold into your portfolio. For example, imagine that you would like to buy a piece of property with a large price tag. If you have more cash on hand, you’re more able to jump on the chance without liquidating other assets that you originally planned to hold onto for the long run.

Drawbacks to Consider

Holding cash or equivalent assets, especially at a significant volume, can have some disadvantages. However, chief among them is that, aside from interest from some vehicles, cash’s value doesn’t appreciate over time. It can also be vulnerable to losing some of its purchasing power because of inflation, making it less valuable than when you initially put it away. In that way, while stability can be a benefit, it can also be a negative if you hold onto significant cash for a long period rather than investing in appreciable assets.

However, though cash isn’t always ideal for long-term plans, Croak points out that “the benefits and drawbacks of holding cash and equivalents vary depending on individual financial situations, goals, and risk tolerance.” He continues, “For instance, a person with high risk tolerance might opt to keep less cash, whereas someone with a single income source might need a larger cash reserve than someone with multiple income sources.”

Ultimately, as Croak suggests, how much cash you decide to hold will depend on your circumstances and the amount of risk you prefer to take on as an investor. You’ll have to weigh factors such as your age, time horizon, and goals. To get a better handle on how to construct your portfolio, it’s a good idea to meet with a financial advisor.

Types of Cash Equivalents

While cash is relatively straightforward, essentially being any money you have ready to spend around the house or in a bank account, there are many types of cash equivalents. As mentioned, these are assets with short maturation periods that you can quickly liquidate.

Below are some of the most common types of cash equivalents:

  • Treasury bills (T-bills)
  • Guaranteed investment certificates
  • Commercial paper
  • Certificates of deposit (CDs)
  • Money market funds
  • Short-term government bonds

Frequently Asked Questions

What do cash and cash equivalents not include?

Cash and cash equivalents don’t include any assets that aren’t liquid or very easy to liquidate without the risk of taking a loss. This includes securities such as stocks, bonds, real estate, commodities, or alternatives.

What are the primary benefits of cash and cash equivalents?

Holding cash or cash equivalents in your portfolio can have many benefits, depending on the situation. Stephen Kates, CFP, underlines that the main ones “are flexibility, stability, and predictability,” continuing that “[if] you put $1,000 into an FDIC-insured savings account, you are guaranteed to have that $1,000 there tomorrow or a year from now, plus interest. It is accessible whenever you need it.” Ultimately, your cash is yours and its value should stay relatively stable, which can be helpful while you have other assets going up or down because of a myriad of factors and market influences.

How much cash should a portfolio have?

The ideal amount of cash to have in your portfolio varies based on various factors, including your risk profile and time horizon. For instance, you’ll have to consider whether you want to have more money readily available for unforeseen circumstances or if you’re more comfortable earmarking more of your funds for long-term, sometimes more speculative assets.

Are bonds cash equivalents?

Certain types of bonds can be cash equivalents, while others are not. Specifically, they can qualify as cash equivalent securities if they have a short maturation time of around three months or less, such as short-term government bonds. If they’re longer than this, you’d have to wait longer to cash them out, making them less liquid.