Cash in Portfolio During Market Volatility: A Guide for Investors

These last couple of weeks have been wild ones for Wall Street, with the markets taking a nosedive and then staging comeback rallies before dipping again on coronavirus concerns. This kind of volatility tends to give investors whiplash, and can cause people to make knee-jerk reactions out of worry for a longer-term market slump.

Something that many investors start to explore or revisit during periods of volatility is the balance of cash vs. other investments in their portfolio and how they should be treating cash in an uncertain market and interest rate environment. It may be tempting to liquidate until things get more stable, but that’s often a bad idea that can have a negative long-term impact on your portfolio.

How to Think About Your Cash Position in a Volatile Market

Here are some things to consider about the balance of cash and investments in your portfolio during a volatile market:

1. Make Sure You Have an Adequate Emergency Fund

We generally recommend that most people should have an emergency fund covering three to six months expenses, but this number might vary depending on your age, time horizon, and other factors.

Holding the right amount in cash is extremely important — you don’t want to be forced to sell stocks in a down market to finance your day-to-day living expenses. Making a sale during a severe correction or a market pullback is one of the most damaging things you can do to your portfolio, so make sure you have enough cash to cover living expenses so you don’t have to tap your portfolio at inopportune times.

Setting aside cash in advance of any market movements is especially important for retirees, as it gives them control over their cash flow and protects them from having to raise cash during a downturn because they’re short on funds. For retirees, making a sale during a down market is particularly damaging.