How do you know if current allocation to cash is sufficient or not? Does it need to fully cover required return (before factoring in inflation)?
For example, Required return = 6% + 2% inflation = 8%.
Would 5% allocation to cash equivalent be sufficient in this case?
Should be liquidity requirement divided by asset base.
Event though liquidity requirement / asset base = 6% in this example, I felt allocation to cash equivalence of 5% is sufficient, because there will also be equity in the portfolio. Are you saving minimum allocation to cash equivalence much be at least 6% in this case?
If the requirement is really short-term, say within a year, then yes you will need that 6% otherwise you won’t be able to cover your expenses if you have no financial flexibility. Drawing down on equity in say a crisis is a really bad move since 1. you’re selling at a low price reducing future return potential and 2. liquidity may not be in favor of sellers.
On a longer time horizon rounding to 5% should be fine (in my opinion).
Just out of curiousity, did you see a past CFAI question which asked for cash allocation percentage?