Cash is stability, not a weapon

TL;DR — Most investors hold cash waiting for "the right moment to buy." That moment never feels right during a crash. Cash has one job in a portfolio: to provide stability. And separately, you need a personal cash floor outside your portfolio entirely, sized to cover your actual life.

There is a version of portfolio thinking that sounds smart: hold a lot of cash, wait for prices to fall, then buy at the bottom.

In theory this works. In practice it almost never does.

The problem is psychological. When markets fall, when the "right moment" arrives, the news is terrible. Everyone is panicking. The future looks bleak. Every instinct tells you to wait a bit longer. The dip gets worse. You wait more. Then the market recovers faster than anyone expected. The cash that was supposed to be your weapon became a reason to miss the recovery.

Research shows that missing just the 10 best market days over a 20-year period cuts your total returns roughly in half. Those 10 best days almost always happen during or immediately after the most volatile and frightening stretches. Cash-holders are on the sidelines exactly then.

Cash in your portfolio is not dry powder. It is the structural CHF or SGD position in your protection layer. It is there to bring the portfolio's volatility down, to hold value when other assets fall, and to perform its role in the protection layer. That is its job. Not timing the market.

There is a second, separate concept here that beginners often miss: your personal cash floor.

Your portfolio is not supposed to be your entire financial life. Before you invest anything, you need a personal cash reserve kept completely outside the portfolio, in a savings account or similar. This is the money you need to live on.

The size of this reserve is personal. It is not 3 months of expenses or 6 months of expenses by some generic rule. It is the minimum amount of cash that lets you sleep at night, cover your fixed costs (rent, food, insurance, subscriptions), and handle a surprise without touching your investments at all.

Why does this matter? Because if you invest money you might need in the next year or two, you will be forced to sell at the worst possible time. A market downturn hits exactly when economic uncertainty is highest, which is also when you are most likely to face a job loss, a medical bill, or an unexpected expense. If your investments are your only cash, you sell at the bottom.

The personal cash floor is not an investment. It earns little or nothing. That is fine. Its job is to give your investments the time they need to work.

Example — An investor has 40,000 euros in savings. They decide their personal cash floor is 8,000 euros (about 5 to 6 months of their core fixed expenses). They invest 32,000 euros. In 2022, markets fall hard and they lose their job. Because they kept the 8,000 euros untouched, they do not sell a single position. They live on the cash floor for several months while the market recovers. Investors who put everything into the market had to sell at the bottom to cover rent.