How much cash should investors be holding?

Stocks took a nosedive on Friday after Federal Reserve Chair Jerome Powell gave every indication that the central bank would continue raising interest rates to combat inflation.

Investors with a weak stomach for volatility may be wondering if its better to stay in cash during these volatile markets. In continuation of our series, "What to do in a bear market," Yahoo Finance asked the experts if holding cash is wise given how inflation eats away at savings.

Do you recommend holding cash during these volatile markets, even with levels of high inflation?

“Even with these volatile markets coupled with high inflation, we believe investors should stay invested. Cash is difficult to perfectly time, since the market is difficult to perfectly time," Greg Bassuk, CEO of AXS Investments in New York, told Yahoo Finance. "Put another way, if the market nosedives, investors may wish they held more cash, whereas if the market catapults higher, they regret holding cash."

Bassuk pointed to the July rally as an example of the cash-holding dilemma. With U.S. stocks rising 9% in July, one of the all-time best months for equities, "cash allocations were a source of investor remorse. Solution? Stay invested."

Some strategists highlight the continuation of a higher interest rates are poised to send the markets lower in the months to come. So cash on the sidelines could be used for a lower entry point.

“We’re continuing to stay very defensive, with a lot of cash. We want to see what direction they’re [The Fed} go in,” Eddie Ghabour, managing partner at KeyAdvisors Group, recently told Yahoo Finance Live. “Our money is betting that they tighten higher and longer than what the market is actually positioned for. And then we’ll have a better entry point in the 4th quarter to dip back into the equity side."

At the end of the day, one expert stressed, investors should hold a portfolio well matched to their financial objectives and personal tolerance for market volatility.

“For investors with relatively short time horizons, such as retirees, some level of cash holdings can make sense," said James Solloway, Chief Market Strategist at SEI. "The same might be true for investors with relatively low tolerance for market volatility, but that comes at a cost given that cash tends to be the lowest-returning class of financial asset over any meaningful period of time."

Solloway add that any decision to exit the market "has to be relatively well-timed and requires a subsequent and similarly well-timed decision to reenter the market. And once you take into consideration that actual market peaks and troughs are only identifiable well after the fact, it should become apparent that attempts at market timing are far more likely to impose a net cost on an investor’s portfolio over the long run."

If holding cash is recommended, how much of a portfolio?

“While we don’t recommend cash holdings for investment purposes, it is prudent for investors to maintain modest cash positions of about 5% of their portfolios for the ability to quickly put 'dry powder' to work in these volatile times," Bassuk of AXS Investments said.

One expert says "cash should only be held for known expenditures that will occur within the next 3-6 months."

"We would prefer to own short duration investment grade fixed income today over cash for anything longer than near-term liabilities," Alex Chaloff, Co-Head of Investment Strategy at Bernstein Private Wealth Management, told Yahoo Finance. "While short duration instruments earn more than cash today by a substantial margin, neither keep up with the current elevated levels of inflation."

Keeping in mind a timeline of retirement is also important.

"For those who have a long ways until retirement and taking into account the current economic environment, typically an emergency fund of 6-12 months reserves is sufficient," Rachelle Tubongbanua, private wealth advisor at U.S. Bank Private Wealth Management, told Yahoo Finance. "For those closer to retirement or in retirement, an emergency fund of 12 – 24 months reserve is typically ideal, especially during volatile times like what we are experiencing today."

Is there a better alternative to holding cash?

Depending on your time horizon and risk tolerance, there are investment options available aside from holding cash.

"If you are seeking an option for non-emergency funds that is relatively short term and low risk, a laddered treasury portfolio (bonds that mature at different dates) can provide for that," Tubongbanua said. "Treasuries are backed by the full faith of the government, and there’s also a tax benefit, as the income is exempt from state and local taxes."

Tubongbanua noted that treasury yields have drastically increased the past few months and provide a better return as compared to savings or money-market accounts.

Furthermore, liquid alternatives are also a way to stay exposed to equities during upside movements while also offering hedging.

"Liquid alternatives represent the best-of-both-worlds: A way to stay invested for upward equity market participation with imbedded risk mitigation needed to weather the volatile and high inflationary storm,” Bassuk said.