What role does cash play in asset allocation?

Cash plays a significant role in asset allocation by providing liquidity and flexibility in investment decisions. It acts as a buffer that allows investors to quickly access funds when needed, whether for emergencies, market opportunities, or other expenses. Having cash on hand means that investors are not forced to sell other investments at potentially unfavorable times, thus allowing for more strategic decision-making regarding their portfolios.

By maintaining an appropriate level of cash, investors can also take advantage of new investment opportunities as they arise without needing to liquidate other assets. This accessibility supports overall financial stability and ensures that one's portfolio can be adjusted as market conditions change. Therefore, including cash in an asset allocation strategy is essential for managing risk and maintaining liquidity.