Why I Tell Almost Every Client to Keep More Cash Than They Think They Need
When markets drop and headlines get scary, a lot of people want to know what their financial advisor is doing about it.
My answer is simple: we prepared for this.
Not because we predicted when the drop would happen — nobody can do that reliably — but because we built your plan with the assumption that it would. Market downturns are inevitable. The timing is unpredictable. The occurrence is not.
That's the foundation of how I think about cash reserves — and why I almost always encourage clients to keep more cash on hand than feels strictly necessary.
The problem with being fully invested
There's a version of financial planning that says cash is a drag on returns. Every dollar sitting in a money market account is a dollar not growing in the stock market. On paper that's true. In practice it misses something important.
When you're drawing income from your portfolio — as most retirees are — you need to sell something to generate that income. If the market is up, no problem. But if the market is down 20% and you need to pay your bills, you're selling investments at exactly the wrong time. You're locking in losses.
This is the sequence of returns problem — and it's one of the most underappreciated risks in retirement planning. A market drop early in retirement, combined with ongoing withdrawals, can do lasting damage to a portfolio that a younger investor who isn't drawing income would simply ride out.
Cash reserves aim to solve this problem.
What a cash reserve actually does
When I structure a client's portfolio, I want them to have enough in cash and short-term reserves to cover their living expenses for a meaningful period — typically two to three years, sometimes more depending on the situation.
Here's why this matters: when the market drops, you don't touch your investments. You draw from the cash reserve instead. Your portfolio is left alone to recover. And when markets eventually recover — as they historically have — we replenish the cash reserve by taking some profits.
The goal is that you're never forced to sell at the wrong time. We're approaching market turbulence from a position of strength rather than a position of fear.
I said this in a video I recorded recently for clients and it's worth repeating here: when the market goes up, I'm excited because you've made money. When the market goes down, I'm also positive about it — because I know we have a chance to do something that's going to move the needle long term.
That's not spin. That's what it genuinely feels like when you've done the preparation.
Market downturns as planning opportunities
This might sound counterintuitive, but a market downturn — when you're prepared for it — is actually a good time to be an investor.
When prices drop, dollars that are earmarked for long-term growth can buy more shares than they could before. If we're rebalancing your portfolio, we're buying the assets that have dropped and trimming the ones that have held up — systematically buying low and selling high, which is what every investor wants to do, but few actually execute, because it requires acting against the emotional grain.
It also opens other planning windows — Roth conversion opportunities when account values are temporarily lower, tax-loss harvesting, strategic repositioning. Good markets and bad markets both create opportunities. The difference is knowing where to look and having the stability to act rather than react.
The emotional value of preparation
There's a financial case for cash reserves — and then there's the human case, which I think matters just as much.
When you have a plan, when you know your income is covered regardless of what the market does next month, you can read the headlines without panic. You don't have to make decisions under pressure. You don't have to call me in a panic at 7am wondering if you should sell everything.
And I don't have to hide under my desk.
The women I work with have often spent years — sometimes decades — watching someone else manage the finances. When they become responsible for their own financial decisions, the last thing they need is a plan that requires nerves of steel to execute. They need a plan that was designed to weather the storms that are coming — because the storms are always coming eventually.
Cash reserves are a big part of how we build that resilience in.
How much is enough?
There's no universal answer — it depends on your income sources, your expenses, your risk tolerance, and how you sleep at night. Some clients feel comfortable with one year of expenses in cash. Others want five years. Both can be appropriate depending on the situation.
What I'd caution against is keeping too little because it feels like leaving money on the table. The cost of a cash reserve — slightly lower returns on that portion of your portfolio — is the premium you pay for the ability to stay invested through downturns without being forced to sell. For most retirees that's a very reasonable tradeoff.
The bottom line
We can't control the market. What we can control is how prepared we are for whatever it does next.
If you have a financial plan that would require you to sell investments in a down market to pay your bills — that's worth revisiting. Not because a downturn is imminent, but because the next one will come eventually. And the best time to prepare for it is before it arrives.
If you'd like to talk through how your current plan is positioned for the next inevitable market cycle, I'd be glad to have that conversation.
If you're approaching retirement and thinking through how to structure your finances for the years ahead, I created the Ready to Retire guide just for you. It walks through income planning, investment positioning, and what this transition actually looks like — in plain English.
Download Ready to Retire — A Guide to Entering Your Next Season with Confidence
Or if you'd like to talk through your specific situation directly, you're welcome to schedule a 15-minute intro call.
The opinions voiced in this material are for general information only and are not intended to provide specific advice or recommendations for any individual. All performance referenced is historical and is no guarantee of future results.
All investing involves risk including loss of principal. No strategy assures success or protects against loss.