I keep seeing advice saying you should hold a year or more in cash or cash equivalents for when the market goes down, and I don’t get it.
Isn’t the whole idea of holding bonds or bond funds to sell them when stocks are down, so you don’t have to sell your stocks at a loss? Bonds are your reserve for market drops, right?
From what I’ve seen, it only takes a few business days to cash them out with most brokers, some even just 1 business day. I can understand having a couple of months’ worth of cash for emergencies like car repairs, but beyond that, I don’t see why you’d need so much cash.
If you hold individual bonds in a ladder, that should be liquid enough. You’d only need enough instant cash to cover a few months while waiting for bonds to mature.
Plus, if you sell your bonds to rebalance during a market drop, you could even come out ahead when the market recovers since you’ll have bought stocks at a discount.
Yes, a few years ago, bond funds went down a bit, but not as much as stocks. And that was a rare situation that we probably won’t see again anytime soon.
If you’re still in the accumulation phase, like when you’re younger, you don’t even need to do this. You can ride out the downturns with dollar-cost averaging and come out ahead in the long run. It’s people near or in retirement who need to protect their portfolio or income sources.
When people talk about holding cash, they don’t mean literal cash. They mean something that won’t lose value during a downturn and is easy to access. When you hear about Warren Buffett’s ‘cash’ stash, it’s not actually physical money in a vault like Scrooge McDuck—it’s probably treasury bills or something similar.
Your emergency fund is where the cash part comes in. You want to make sure you have something available if you face a sudden need, like losing your job. It doesn’t all have to be physical cash, though. You could have part in a money market account for quick access and the rest in something that takes a few days to settle.
When people say ‘cash equivalents,’ they often mean bonds, bond funds, or money market funds. These tend to have slightly better returns than a high-yield savings account but are still pretty liquid. Many folks choose to keep their emergency funds in these types of investments instead of cash.
I think you’re splitting hairs. People often consider short-term government bonds or money market funds to be cash equivalents because they’re easy to access and less volatile than stocks.
What are you reading that tells you to hold a year’s worth of cash? The point of bonds isn’t to sell them when stocks are down—it’s to reduce the overall risk in your portfolio so you don’t freak out when the market drops.
Yes, bond funds went down a bit during the last downturn, but some bond funds are much more volatile than others. For example, funds like ZROZ or EDV dropped more than stocks in 2022. Just be careful—bonds can vary a lot in risk.
Bonds are meant to lower volatility, not as something to sell for cash. Emergencies can add up fast, especially if you have something like a hospital visit or your heater breaks down. Liquid cash is there to cover any emergency that pops up, not just small stuff like a flat tire.
Are you saying that you don’t need an emergency fund if you have bonds?
You might be mixing up different strategies. In your 401k, you might only hold 10% in bonds, but for a short-term goal like buying a house, you might keep more in safer investments. Cash in tax-advantaged accounts isn’t always easily accessible, so it’s important to have some liquid money too.
Sounds like you’ve never lost power for a week or had to use cash because your grocery store only takes debit. Bonds are useful, but having liquid cash for up to 3 years’ worth of expenses can be a good idea. For example, my 88-year-old mother keeps cash easily accessible since she doesn’t want to deal with CDs or bonds.
Funny enough, I’m a prepper! I had to live off my preps for months when my income got slashed, and I’ve been through plenty of power outages in Alaska. Now I’ve got backup batteries, generators, food, and wood to last through just about anything.
You sound well-prepared! For most people, bonds act as a safe part of their portfolio, but in a downturn, bonds—especially corporate ones—can drop in value just like stocks. This is why some, like Warren Buffett, keep a chunk of their money in short-term treasuries that don’t lose value as easily. For me, I keep some in EDV, a long-term treasury fund, which tends to go up when stocks go down.
Great advice! Most of my bonds are in PIMIX, which is a diversified fund with a good track record. I’m thinking about switching to T-bills directly to lower the risk, but it’s hard to give up the higher yield. I’ve got a bad feeling about the market though, so maybe it’s time.