Markets go up and down. We have no control over when recessions will happen. What we can control, though, is how they affect us.
Imagine for a second that cash is like gas. And your comfortable, worry-free life is your car.
Now running out of cash in a recession is like running out of gas 100 miles from the nearest gas station. It’s just about the worst thing that can happen. You’ll be forced to sacrifice some of your portfolio to get through, selling some of your assets for less than they’re worth.
Two Tanks Win
The best way to prepare for the next recession is to prepare more than what’s just sitting in your ordinary tank. In practice, what this means is that rather than keeping all of your portfolio in reserve, you open a secondary, reserve cash account and keep two years’ worth of living expenses in it.
As John Spoto, CFP® describes in “How to Build a Winning Retirement Portfolio”, holding such a reserve cash account gives you the peace of mind that comes with having ready access to cash – no matter what happens in the markets – leaving you free to ride out the storm.
From the safety of your nice, comfortable (well stocked) car.