Cash Drag Estimator
Compare the ending value of a portfolio with an initial cash allocation against the same amount fully invested. Enter annual return assumptions and a horizon to see the dollar gap and its annualized relative wealth measure.
How to use the cash drag estimator
Enter the starting portfolio value, the percentage initially held in cash, annual market and cash return assumptions, and a whole number of years. The model splits the starting portfolio into cash and invested portions once, then compounds each initial portion separately without rebalancing.
The comparison uses the same starting portfolio in two scenarios: one with the entered initial cash share and one fully invested at the assumed market return. The yearly table shows both ending values and their dollar gap.
A positive gap means the fully invested scenario ends higher. A negative gap means the cash scenario ends higher under the assumptions entered. Neither result describes a guaranteed outcome or a probability.
The annualized relative wealth gap expresses the ratio of the two ending values per year. When the ending value with cash is zero, the dollar gap remains available but this annualized measure is undefined.
Step by step
- Enter a starting portfolio value and initial cash share.
- Enter annual market and cash return assumptions.
- Choose a whole number of years from 1 to 100 and compare ending values.
Worked example
Start with a $10,000 portfolio, allocate 20% to cash, assume a 10% annual market return and a 2% annual cash return, and project two years. The cash scenario ends at $11,760.80. The fully invested scenario ends at $12,100.00, so the ending value gap is $339.20.
The annualized relative wealth gap is (12,100 ÷ 11,760.80)^(1 ÷ 2) − 1, or 1.43%. This expresses the ending wealth ratio per year. It is not the difference between the scenarios’ CAGRs.
When to use this calculator
Use this calculator to compare an initial cash allocation with a fully invested scenario using the same starting value and your own annual return assumptions.
Use the result to understand how the selected assumptions affect ending values. It does not predict which scenario will occur.
Common interpretation errors
Do not interpret the initial cash percentage as a target weight that the model restores each year. Cash and invested portions compound from their initial dollar amounts without rebalancing.
The dollar gap can be negative when cash outperforms. The annualized relative wealth gap is based on ending values, not the difference between annualized returns.
How the calculation works
Initial invested amount = Portfolio value × (1 − Cash share ÷ 100)
Initial cash amount = Portfolio value × Cash share ÷ 100
Each year:
Invested amount = Prior invested amount × (1 + Market return ÷ 100)
Cash amount = Prior cash amount × (1 + Cash return ÷ 100)
Ending value gap = Fully invested ending value − Ending value with cash
Annualized relative wealth gap (%) = ((Fully invested ending value ÷ Ending value with cash)^(1 ÷ Years) − 1) × 100
Displayed ending values are rounded to cents, and the annualized calculation uses those rounded values. The annualized relative wealth gap is not the difference between compound annual growth rates or an annual percentage of the starting portfolio. It is undefined when ending value with cash is zero.
Assumptions and limitations
The model repeats the same annual return assumptions in every year. It compounds each initial portion separately without rebalancing. It excludes taxes, fees, inflation, deposits, and withdrawals. Results are scenarios based only on the entered assumptions. The annualized relative wealth gap is not a CAGR difference and is undefined when the ending value with cash is zero.
Key terms
- Ending value gap
- The difference between the two scenario ending values under the entered annual return assumptions.
- Annualized relative wealth gap
- The ratio of fully invested ending value to ending value with cash, expressed per year over the selected horizon.
- Initial cash allocation
- The starting portfolio split into cash and invested dollar amounts once, then compounded separately without rebalancing.
Compare related scenarios
Cash drag compares two return assumptions. An inflation calculator answers a separate question about purchasing power, while this tool compares a portfolio with an initial cash allocation against the same starting amount invested in the market scenario.
A dollar cost averaging comparison can help examine a planned schedule for investing cash. It does not change this calculator’s fixed initial allocation model.
FAQ
What does cash drag measure?
Cash drag is the difference in ending value between the portfolio with an initial cash allocation and the same starting amount fully invested under the entered return assumptions. Cash can also outperform when its assumed return is higher than the market return.
What does annualized relative wealth gap mean?
The calculator divides the fully invested ending value by the ending value with cash, raises that ratio to the power of one divided by the number of years, then subtracts one. It is an annualized relative wealth gap, not the difference between the two compound annual growth rates.
Can the cash scenario outperform?
A negative gap means the cash scenario ended with more value than the fully invested scenario under the returns entered. It can happen when the assumed cash return exceeds the market return.
Does the model rebalance the cash allocation each year?
No. The calculator divides the starting portfolio into an invested portion and a cash portion once, then compounds each portion separately. It does not rebalance to maintain a constant cash percentage.
Are these returns forecasts?
They are user supplied scenarios, not forecasts or probabilities. The model applies the same annual market and cash return in each year and excludes fees, taxes, inflation, deposits, and withdrawals.
Related tools
Use an inflation calculator to examine purchasing power separately. A dollar cost averaging comparison can help assess a staged plan for investing cash. These tools answer different questions from this fixed allocation comparison.