How Cash Plays a Role in a Portfolio

Cash in an invested portfolio does three jobs: it pays for planned withdrawals and rebalancing without forcing a sale, it keeps money ready to invest, and it softens bad years. The cost is that it barely keeps pace with prices. From 1928 to 2025, three-month Treasury bills returned 0.33% a year after inflation, and a 10% cash slice lowered a 60/40 portfolio's long-run return by 0.43 percentage point a year. Where the cash sits matters too: yields on different kinds of "cash" can differ by more than 3 points.

Key takeaways

In Aswath Damodaran's 1928–2025 data, T-bills never lost dollars but lost buying power in 40 of 98 years. From the end of 1933 to the end of 1951 they lost 45.8% of it.
Holding 10% in T-bills instead of a fully invested 60/40 mix, both rebalanced yearly, cut the worst year from −27.3% to −24.4% (1931). It also trailed in all 69 rolling 30-year periods, by 11.8% of ending value at the median.
The Fed voted on September 16, 2026 to raise its target range to 3.75%–4.00%, effective September 17. The FDIC's latest national savings average was 0.37%. Crane Data's retail government money fund average for the week ended October 9 was 3.42%.
In a 2019 study of 21 countries over 115 years, Javier Estrada of IESE Business School found that a cash bucket of several years' withdrawals did worse than simple rebalanced mixes on most measures. Its value is mostly behavioral.

Where portfolio cash actually sits

"Cash" on a statement usually means money that can be spent within days at a known dollar value. It covers several products, each with its own protection and its own way of setting the yield:

Holding	What it is	Protection	What sets the yield
Treasury bills	US government debt maturing in 4 to 52 weeks, sold at a discount and repaid at face value	A direct obligation of the US government; not FDIC-insured	Auction and market prices, which track the expected Fed policy rate
Government money market fund	A mutual fund holding Treasury and agency debt and repurchase agreements backed by them; usually priced at a stable $1.00	No FDIC insurance; SIPC if held at a failed broker	The fund's holdings, minus its expenses
Prime money market fund	A money fund that also holds short-term corporate and bank debt	As above, with more credit risk; institutional versions float their price	As above, usually a little higher
Savings, money market deposit account, CD	Bank deposits; a CD locks money up to a maturity date	FDIC up to $250,000 per depositor, per bank, per ownership category	The bank's own decision
Brokerage sweep	Uninvested cash moved automatically into bank deposits or a money fund, or left with the broker	FDIC for a bank sweep, up to $250,000 at each program bank; SIPC for a money fund sweep or cash left with the broker	The firm's sweep program terms

The FDIC's coverage page lists Treasury bills and mutual funds among the products it does not insure, even when bought through an insured bank. SIPC protects up to $500,000 per customer, including a $250,000 limit for cash, when a member brokerage firm fails and customer assets are missing. It does not protect against a fall in the value of securities.

Money market fund rules since 2023

The SEC's investor page on money market funds splits them into government, prime and tax-exempt funds. Retail and government funds aim for a stable $1.00 share price. Institutional prime and institutional tax-exempt funds must float their price under rules the SEC adopted in July 2014. Reforms adopted in July 2023 took effect on October 2, 2023 (Federal Register). Per the SEC's fact sheet, minimum liquid assets rose to 25% daily and 50% weekly, and funds lost the power to suspend redemptions with "gates." Liquidity fees are covered in the FAQ below.

How cash yields are set

The starting point is the federal funds rate. On September 16, 2026 the Federal Open Market Committee voted to raise its target range by a quarter point to 3-3/4 to 4 percent, effective September 17 under the Fed's implementation note. T-bill yields track where investors expect that rate to be over the bill's life. Money fund yields follow, minus expenses and with a lag as older holdings mature; Crane reported them still catching up almost four weeks after the hike. Banks set deposit rates themselves, and many pass on little.

Month end	Effective fed funds	3-month T-bill	Money funds (Crane 100)	FDIC national savings rate	T-bill minus savings
Dec 2018	2.40%	2.40%	not shown	0.09%*	2.31 points
Dec 2021	0.07%	0.06%	not shown	0.06%	0.00 points
Dec 2023	5.33%	5.20%	5.20%	0.47%	4.73 points
Dec 2024	4.33%	4.23%	4.28%	0.41%	3.82 points
Dec 2025	3.64%	3.57%	3.58%	0.39%	3.18 points
Aug 2026	3.63%	3.78%	3.51%	0.37%	3.41 points

Fed funds and T-bill rates are month-end values from FRED (DFF and DTB3); the bill rate is quoted on a discount basis, which slightly understates an investor's yield. Money fund yields are Crane 100 7-day averages (the 100 largest taxable funds), from Crane Data's October 14, 2026 update. Savings rates are FDIC national rates based on each month-end. *The 2018 figure uses the FDIC's older branch-weighted method; since April 2021 the average has been weighted by deposits.

At the four dates with Crane figures, money funds stayed within about 0.3 point of the T-bill rate. The average savings rate rose only from 0.06% to 0.47% while bills went from 0.06% to 5.20%, though individual accounts pay above or below it. The latest readings: the T-bill rate was 4.06% on October 9, 2026; Crane's averages for that week were 3.42% for retail government funds and 2.54% for tax-exempt funds; and the September 2026 national rates show savings at 0.37%, interest checking at 0.07% and 12-month CDs at 1.73%. With consumer prices up 3.7% in the 12 months to September 2026 (BLS CPI-U), the average savings account was losing about 3.4 points of buying power a year and a retail government money fund about 0.3 point.

The jobs cash does in a portfolio

Paying bills and rebalancing without a forced sale

A cash balance lets a withdrawal, a tax bill or a rebalancing trade happen on schedule, whatever markets are doing. The amount needed depends on known outflows, such as a quarter or a year of withdrawals, not on a market view. Money above that level is doing a different job.

Money ready to invest

Cash can also be held to buy after prices fall. A 54/36 stock-and-Treasury mix with 10% in bills, reset every January, moves cash into stocks after a bad year. The fully invested 60/40 benchmark is rebalanced the same way, from bonds, so the test isolates what the cash sleeve itself costs. It uses Damodaran's annual returns (January 2026 update) for the S&P 500 with dividends, the 10-year Treasury and three-month bills. These are historical results without fees or taxes, not a forecast.

Test, 1928–2025	60/40, fully invested	54/36 plus 10% cash
Annualized return	8.34%	7.91%
Standard deviation of annual returns	12.1%	10.9%
Worst calendar year (1931)	−27.3%	−24.4%
2022	−18.0%	−15.9%
Rolling 10-year periods where it ended ahead	73 of 89	16 of 89
Rolling 30-year periods where it ended ahead	69 of 69	0 of 69

A softer ride, at a price

The cash sleeve delivered smaller swings and shallower bad years. Its 16 winning ten-year periods all started in 1928–1930, 1964–1974 or 1999–2000, with a best margin of 3.6% of ending value (1965–1974); its losing shortfalls reached 9.2%. Over 30 years the cost grew to between 4.3% and 18.9% of ending value, 11.8% at the median. For $100,000 invested from 1996 through 2025, that meant $933,659 instead of $1,087,790, or $154,131 less (14.2%).

What cash costs over time

The table converts Damodaran's T-bill series, the year's average three-month rate, into real returns using the December-to-December change in the BLS consumer price index.

Period	T-bills, per year	Inflation, per year	Real return, per year	Years with a real loss
1930s	0.98%	−2.04%	+3.08%	4 of 10
1940s	0.48%	5.36%	−4.63%	9 of 10
1950s	2.00%	2.22%	−0.22%	3 of 10
1960s	3.97%	2.52%	+1.42%	0 of 10
1970s	6.28%	7.36%	−1.01%	6 of 10
1980s	9.02%	5.10%	+3.73%	1 of 10
1990s	4.99%	2.93%	+2.00%	0 of 10
2000s	2.75%	2.52%	+0.22%	5 of 10
2010s	0.57%	1.75%	−1.16%	9 of 10
2020–2025	2.84%	3.94%	−1.06%	3 of 6
1928–2025	3.37%	3.04%	+0.33%	40 of 98

Rates are geometric averages; 1928–1929 appear only in the full-period row. What mattered was the gap between bill rates and inflation, not the yield's level. Real returns were high in the 1980s and negative in the 1940s and 2010s, when bill rates sat near zero while prices rose. In the 1970s bills paid 6.28% a year and still lost 1.01% a year after inflation.

Illustrative example: $50,000 left in cash for 10 years

Real value = P × ((1 + y) / (1 + i))^n

P is the starting amount, y the yearly yield, i the yearly inflation rate and n the number of years.

At the 1928–2025 average real return of 0.327%: $50,000 grows to $51,659 in today's dollars, a gain of $1,659 in buying power over a decade.
At a 0.5% yield with 3% inflation: the balance reaches $52,557 in dollars, but prices rise enough that $67,196 would be needed to match the starting buying power. In today's dollars the account is worth $39,107, a loss of $10,893, or 21.8%.

With inflation similar in both cases, the difference comes from the yield. The Purchasing Power calculator runs the same formula with other rates.

Cash buffers in retirement

A common retirement plan keeps one to five years of withdrawals in cash so that stocks never have to be sold in a slump, guarding against losses early in retirement. Javier Estrada tested the idea in "The Bucket Approach for Retirement: A Suboptimal Behavioral Trick?" (May 2019). He ran 86 rolling 30-year retirements from 1900 to 2014 in 21 countries, with a 4% initial withdrawal raised yearly for inflation, comparing static stock-and-bill mixes, rebalanced every year, with bucket rules that keep withdrawals in bills.

In the US results, static mixes with 70% or 50% in stocks failed in 1.2% of periods. The bucket rules failed in 3.5% to 4.7% of periods with two years of withdrawals set aside, and in 25.6% to 27.9% with five years. Even the best bucket version, holding one year in bills, trailed. Estrada's explanation: buckets move money from stocks into cash but never back, so they miss the buying at low prices that rebalancing does.

Across all 21 countries the static mixes again came out ahead on most measures, though a 50/50 mix had a slightly higher failure rate (33.5%) than the best bucket rules (30.1% to 31.6%). Estrada attributes the bucket's popularity to comfort, simplicity and mental accounting. If a visible reserve keeps someone from selling everything in a crash, that value is real, but it argues for a small reserve refilled during rebalancing.

Sweep rates, fees and taxes

According to the SEC's May 14, 2025 investor bulletin on cash sweep programs, many firms default to a bank sweep, rates "can vary significantly," and bank sweeps often pay less than money fund sweeps. Investors can choose another option or move cash elsewhere, and a broker must give 30 days' written notice of sweep changes. Cash left as a "free credit balance" may or may not earn interest. Asset-based fees apply to cash too: a 1% annual fee on cash swept at 0.5% leaves the holder 0.5% a year worse off before inflation.

Illustrative example: $40,000 in a sweep for a year

Assume $40,000 sits for a year in a bank sweep at a hypothetical 0.5%, or in a retail government money fund at 3.42%, Crane's category average for the week ended October 9, 2026. Rates stay fixed; taxes are ignored.

Sweep: $40,000 × 0.5% = $200.
Money fund: $40,000 × 3.42% = $1,368, or about $1,390 if monthly dividends are reinvested.
Gap: $1,168 a year on the simple calculation, traded against FDIC insurance on the sweep, which the fund lacks.

How interest on cash is taxed

Interest from bank accounts and CDs is taxable at federal and usually state level. IRS Publication 550 says Treasury bill interest is federally taxable but exempt from state and local income taxes, and that money fund payouts are reported as dividends. "Exempt-interest dividends" from a tax-exempt (municipal) fund are left out of federal taxable income but must still be shown on the return, and the part from certain private activity bonds can be subject to the alternative minimum tax. At 2.54% against 3.42%, the municipal fund came out ahead only for a federal rate above about 25.7% (1 − 2.54 ÷ 3.42), before state taxes. That tax-exempt average fell 0.39 point in that week alone, so the break-even moves too.

Frequently asked questions

Can a money market fund lose money?

Yes. The SEC notes there is no FDIC guarantee, and a stable-price fund must reprice if its value per share moves more than half a cent from $1.00, called "breaking the buck," which rarely happens. Floating-price funds can lose value like any other mutual fund. When rates are very low, fees can also exceed a fund's income.

Does a CD count as cash if the money is locked up?

A CD from an insured bank keeps FDIC coverage; its disclosure should state any early-withdrawal penalty, per Investor.gov's CD page. Several CDs in one name at one bank share a single $250,000 limit, because the FDIC adds together deposits in the same ownership category. Brokered CDs often cannot simply be cashed in: FINRA's Notice 02-69 tells firms to disclose that selling one before maturity may bring less than was paid, especially after rates rise, and that the firm does not have to keep a secondary market.

Is an IRA deposit insured separately from savings at the same bank?

Yes. In the FDIC's example, someone with a checking account, a savings account and an IRA at one bank has the two single-owner accounts insured together up to $250,000 and the IRA separately up to another $250,000. Joint accounts are also a separate category.

Can a money market fund charge a fee to withdraw?

Yes, in some cases. Under the 2023 rules, institutional prime and institutional tax-exempt funds must charge a liquidity fee when daily net redemptions exceed 5% of net assets, unless the fund's liquidity costs are de minimis. Any non-government fund must charge a discretionary fee, of up to 2% of the value of the shares redeemed, if its board decides one is in the fund's best interest. Government funds are not required to, but rule 2a-7 lets them opt in to discretionary fees. The prospectus says which applies.

Can a bank sweep insure more than $250,000?

It can, if the program spreads cash across several banks: the SEC bulletin says coverage is up to $250,000 per customer at each participating bank. One condition is easy to miss. The FDIC adds together all deposits in the same ownership category at the same bank, so money already held directly at one of the sweep banks shares that bank's $250,000 limit. The firm's sweep disclosure lists the banks it uses.

Checking the cash in your accounts

Add up cash across every account, including sweeps, and compare it with the withdrawals, taxes and rebalancing trades it must cover over the next year or two.
For each balance, find out where it sits (bank sweep, money fund or free credit balance) and note the rate and the date checked.
Compare that rate with the latest 3-month T-bill rate on FRED. A gap of several points means the cash is costly.
Check whether an advisory fee is charged on the cash, and work out the net rate after the fee.
For balances near or above $250,000, list ownership categories, the banks the sweep uses, and any deposits already held at those banks.
Decide in advance how the cash gets refilled and spent, for example in a yearly rebalance, so it does not grow by default.