Cash drag refers to the situation where a relatively large proportion of an investor’s portfolio is not invested in securities such as stocks or bonds, but is held as cash instead. Due to the fact that cash holdings do not yield any interest at all, or at least offer significantly lower returns than stocks or bonds, cash drag ensures a long-term deterioration of the portfolio’s overall return. High cash holdings thus reduce the return on the portfolio, and this deterioration in the total return due to excessive cash holdings is referred to as cash drag. If the broker even charges a negative interest rate, the cash drag is all the higher. Even if cash holdings lead to a lower total return in the investor’s portfolio, at least 20 percent of the portfolio should always consist of cash. This primarily serves the purpose of diversification and the ability to act, so that action can be taken at any time when opportunities are favourable from the investor’s point of view.
