Why Holding Cash Is Important, But Can Be Costly

Holding a certain percentage of one's portfolio in cash is a wise move, for a number of notable reasons. Having the ability to take advantage of market downturns and buy equities on the cheap is the most obvious reason; the larger a portfolio gets, the greater the need for diversification - having access to cash, either from dividend distributions or fresh capital, allows investors the freedom to continue to diversify holdings without selling specific stocks or sectors which have grown to be a larger percentage of one's portfolio than what was initially invested.

That being said, cash can be costly to hold over long periods of time for investors, for a few key reasons. Cash in most investment accounts is put into money market funds which are highly liquid and operate as cash would, with the added bonus of providing investors with short term interest.

This interest is often far below other high-interest savings accounts which trading platforms such as E*Trade provide via their banking subsidiaries, so make sure to check the interest rate before parking cash in your investment account.

Additionally, holding cash in lieu of investing in nearly anything carries opportunity costs associated with potentially missing out on the upside that cash may have otherwise generated, meaning holding too much cash is generally considered to be a losing strategy over the long term for investors serious about putting their money to work.

Having a little cash set aside (10% or so) is a prudent strategy, however, and one which I personally implement.

Invest wisely, my friends.