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How much of my stock allocation is a reasonable amount to keep in bonds versus cash?

Answer

Bonds and cash play different roles, so decide by purpose, not by lumping them together. Cash (high-yield savings, money market funds, short T-bills) is for your emergency fund and any money you'll spend within a year or two; it shouldn't fluctuate. Bonds are for medium-term stability and portfolio ballast, money you won't need for several years but want less volatile than stocks.

A common setup: keep a separate 3-6 month emergency fund in cash outside your investment portfolio, then let bonds handle the stabilizing role inside it. Holding large cash piles inside your long-term portfolio creates 'cash drag,' since cash historically lags both stocks and bonds over time, eroding real value to inflation. Use cash for near-term certainty, bonds for the medium-term cushion, and stocks for long-term growth, each matched to when you'll need the money.

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