$100 lent to the US government through three-month Treasury bills at the end of 2005 grew to $143 by August 2026. After inflation, it was worth $84 in 2005 dollars.
Cash is money held where its price barely moves. It can still lose value slowly, when prices rise faster than it earns. So how much of it should a portfolio hold? Here is what cash earned over 20 years, how it behaved inside a stock portfolio and the questions that set the amount.
How much cash should a portfolio hold? There is no single right amount. A portfolio's cash allocation depends on when the money is needed, how deep a fall its owner can sit through and what cash pays after inflation.
In August 2026, three-month US Treasury bills paid 3.72% a year. Consumer prices rose 3.4% in the year to August.
$100 in Treasury bills at the end of 2005 grew to $143 by August 2026. After inflation it was worth $84 in 2005 dollars.
From June 2016 to September 2026, a mix of 80% US stocks and 20% cash fell 27.5% at its worst, against 33.7% for stocks alone. It returned 12.9% a year, against 15.4%.
What counts as cash in a portfolio
Cash in a portfolio is money that can be spent at once, at a price that barely moves. It sits in three main places:
Bank deposits: current and savings accounts that pay a rate set by the bank.
Money market funds: funds that hold cash and easy-to-sell loans that are due soon.
Treasury bills, or T-bills: US government loans that last a year or less. A bill is sold below its face value and repays the full amount at the end. The gap is the interest. The yield is that interest as a % of the price, per year.
This guide uses the three-month Treasury bill as the measure of what cash earns. Its yield moves with the Federal Reserve's key rate. We explain that rate in What Is the Fed Funds Rate?
Holding cash is a position like any other. It has a return, which is the interest. It has a risk, which is inflation. In our guide to the main asset classes, cash was the only asset that never fell by more than 0.01% since 2017.
Treasury bill yields since 2006, against inflation
The chart sets the three-month bill yield against inflation. Inflation here is the rise in the Consumer Price Index over the previous 12 months.
Source: FRED (TB3MS, CPIAUCNS); YX Insights
The bill yield was 4.24% in January 2006. It peaked at 5.03% in February 2007, then fell to 0.03% by December 2008. It stayed below 0.25% for most of the years from 2009 to 2015. It did so again from April 2020 to January 2022. In all, it was below 0.25% in 108 of the 248 months shown.
It then rose to 5.34% by October 2023. In August 2026 it was 3.72%, while inflation was 3.4%.
The bill yield was below inflation in 65% of the months shown. The widest gap came in March 2022. Inflation was 8.5%, while bills paid 0.44%. The most recent month with bills below inflation was May 2026, at 3.60% against 4.25%.
What $100 in cash earned, before and after inflation
Chart 2 follows $100 held in three-month bills, reinvested as each one ends. The orange line removes inflation, so it shows what the money could buy in December 2005 prices.
Source: FRED (DTB3, CPIAUCNS); YX Insights
Before inflation, $100 grew to $111 by the end of 2008. Seven years later, at the end of 2015, it had gained just 64 cents more. By August 2026 it reached $143.
After inflation, the picture is different. The money's buying power peaked at $104 at the end of 2008. US consumer prices fell 4.4% from July to December 2008, so each dollar bought more. Buying power hit a low of $79 in June 2022. It was $84 in August 2026.
Over the whole span, cash earned 1.75% a year. Prices rose 2.61% a year. Cash beat inflation in 7 of the 20 full calendar years: 2006 to 2008, 2018 and 2023 to 2025. The worst year was 2021. Bills paid 0.05% while prices rose 7.04%.
How cash changed a stock portfolio's return and worst fall
The test below mixes US stocks with cash:
Stocks: SPY (the S&P 500 exchange-traded fund, or ETF), which holds about 500 of the largest US companies. An ETF is a fund that trades on a stock exchange like a share.
Cash: earns the three-month bill rate, reinvested as each bill ends.
Rebalancing: each mix is reset to its target share at the end of every month. Costs and taxes are left out.
The test starts on 20 June 2016, the first day of our SPY price data. The worst fall is the largest drop from a peak to a later low.
Source: YX Insights price data; FRED (DTB3); YX Insights
From 20 June 2016 to 24 September 2026, stocks alone returned 15.4% a year, with dividends counted. Their worst fall was 33.7%, from 19 February to 23 March 2020. Adding cash lowered both numbers:
10% cash: returned 14.2% a year. Its worst fall was 30.6%.
20% cash: returned 12.9% a year. Its worst fall was 27.5%.
30% cash: returned 11.6% a year. Its worst fall was 24.3%.
50% cash: returned 9.1% a year. Its worst fall was 17.7%.
So each extra 10% in cash took about 3 percentage points off the worst fall. It also took about 1.25 percentage points a year off the return. In 2022, stocks alone lost 18.2%. The mix of 80% stocks and 20% cash lost 14.1%.
These were strong years for stocks, so cash cost a lot of return. In years when stocks return less than cash, holding cash adds to the return. In a systematic portfolio, cash can also be where money sits when a rule steps out of the market. Our guide to systematic investing explains how such rules work.
The risks of holding cash
Cash avoids price falls. It carries three other risks:
Inflation. Cash lost 6.5% of its buying power in 2021 alone.
Falling rates. A three-month bill keeps its rate for three months only. When it ends, the money is reinvested at whatever rate is on offer. Bill yields fell from 5.03% in February 2007 to 0.03% in December 2008. A bond keeps its rate until it ends, as our guide to bond prices and yields explains.
Missed gains. In the test above, $100 in stocks alone grew to $435. With 50% in cash, it grew to $243.
The questions that set a portfolio's cash allocation
The right amount depends on the owner. These questions set it:
When is the money needed? Money needed soon cannot wait for a recovery. US stocks took until August 2020 to regain their February 2020 peak.
How deep a fall can the owner sit through without selling? The test above shows how much each slice of cash cushioned the worst fall.
What does cash pay after inflation today? In August 2026, bills paid 3.72% against inflation of 3.4%, a gap of about 0.3 percentage points.
What is the cash for? It can cover spending, fund a rebalance after a fall or hold money while a rule is out of the market.
There is no single right amount of cash. Since the end of 2005, $100 in bills kept a steady price, but ended with the buying power of $84. In a stock portfolio, each extra 10% in cash cut the worst fall by about 3 percentage points, at a cost of about 1.25 percentage points of return a year. The right amount depends on when the money is needed, how deep a fall its owner can sit through and what cash pays after inflation.
Learn more with YX Insights
This explainer is part of the YX Insights Academy. Each one takes a single idea and checks it against real data.
The same approach runs through everything else we publish:
Systematic Portfolio: ready-made portfolios for Macro & Megacaps and for Commodities. We publish the holdings and every change.
Multi-model Signals: a daily long-or-flat call on every name we cover. Each call shows how strongly our four models agree.
Research: company deep dives, macro commentary and essays on how we test.
Good places to start on the website:
Academy: more explainers like this one.
Start here: get our free weekly letter by email.
Macro & Megacaps Systematic Portfolio and Commodities: the two portfolios in detail.
Track record: live results since 3 August 2026, plus the ten-year backtest.
Upgrade: get the Systematic Portfolio, Multi-model Signals and research in full.
DISCLAIMER: This article is strictly educational. Any information or analysis in this note is not an offer to sell or the solicitation of an offer to buy any securities. Nothing in this note is intended to be investment advice and nor should it be relied upon to make investment decisions. Any opinions, analyses, or probabilities expressed in this note are those of the author as of the note's date of publication and are subject to change without notice.