As a financial advisor who likes to assort my clients' accounts based on time horizons and the timing of cash needs — as opposed to the old way of just based on client age or account value — I can tell you that cash and cash equivalents play a critical role in portfolio composition.

A few things to consider with regard to allocating to cash the right way.

Age is not the only determinant when it comes to it. If you're 35 and you are saving money to buy a home in less than a few years, your down-payment money should be in cash. If you are 65, retired and have a pension, your cash needs may very well be only six months' worth of expenses.

If you're 45 and you are investing every month into a retirement plan, your cash is actually the future dollars that you'll be contributing to it. When that same person reaches 60, he or she will have fewer years of contributions, so it'll make a lot of sense to move some of your current holdings to cash.

Then again, if you're like most people, you'll have different accounts with different goals. An example could be three 529 college savings plans, one for each of your three children; a checking account for bills; a savings account for unexpected emergencies and various retirement accounts. Now, if your kids are ages 4, 10 and 17, the 17-year-old's 529 will most likely have a much greater percentage allocation to cash than the 4-year-old's. The money in the savings account would most likely be in liquid, stable cash equivalents so that it could easily be liquidated without risk to principal.