What is "idle cash"?
“Idle cash” is the balance you have in cash or cash-equivalent securities including currencies and money market funds. It is “idle” because it’s not invested - and not working for you.
Note that your portfolio may actually contain additional cash within the funds you hold because the fund manager may decide to hold cash or be required to in order to meet redemptions. While you’ll see this in our “current portfolio allocation”, we don’t include this “fund cash” here because you cannot invest it. Your only option is to sell the fund and buy a fund like an index fund that minimizes cash.
Betterment believes that cash does not belong in a long-term investment portfolio due to its low return after you adjust for the fact that it’s purchasing power is eroded by inflation over time. Learn more about how cash affects your investments.
I didn’t realize I had cash in my portfolio, how did it get there?
Cash can build up if cash dividend payouts from investments aren’t automatically reinvested. If your brokerage doesn’t offer fractional shares, you might also have additional cash that wasn’t enough to purchase full shares. Betterment offers fractional shares to put every penny in your investment account to work.
How much cash is too much?
While a small portion of cash may seem insignificant, it can still significantly drag down your returns due to compounding. However, we recognize that practical issues in accounts that don't have free trading and fractional shares like Betterment may cause you to have a bit of cash. Generally, if your cost to re-invest cash into securities outweighs the value of the trade by some threshold, you should hold the cash until you have more to invest.
If we assume an average trading cost of $7 per trade (typical of discount brokerages) and you don’t want to reduce your returns by more than 1%, then you should have, at most, $700 of cash. Again, it’s still better to hold the least amount of cash possible.
How can I invest cash in my external account into my Betterment account?
To use Betterment which automatically buys the correct securities for your allocation and reinvests cash over time, first transfer the cash from your brokerage account to the bank account used by your Betterment account. Then, make a deposit on the Transfer tab.
What is "idle cash"?