3L Disclaimer: Timeframes may vary. Strategies are subject to individual client goals, objectives and suitability. This approach is not a promise or guarantee that wealth, or any financial results, can or will be achieved.
Why hold cash?
To build resilience against bear markets—and provide cash flow for unexpected expenses—we recommend setting aside 3–5 years of cash flow needs in a “Liquidity strategy.” This approach should be funded with resources that are insulated from stock market and credit risk: cash, high-quality bonds, and reserved borrowing capacity.
This Liquidity strategy approach can help individuals and families to maintain their lifestyle during a bear market or during a temporary drop in their employment income.
Similarly, business owners can build up Liquidity strategy resources within their companies for use in cases of extraordinary expenses or to cover overhead in periods when demand wanes.
Potential advantages of precautionary savings include the ease of availability, flexibility, and cash’s ability to hold its nominal value (although negative interest rates challenged this until recently for many euro and Swiss franc depositors).
Why too much cash can hurt
Investors and business owners who don’t evaluate the appropriate size of their savings for the next 3–5 years may undermine their long-term financial resilience. While cash may have outperformed other investment approaches in 2022, holding excessive savings rather than investing for the long term can entail opportunity costs. One cost could be the inflation-adjusted erosion of an entrepreneur’s or investor’s wealth.
Rising general price levels eat into the spending power of cash held in major developed market currencies. Cash is a useful tool for meeting short-term expenses. But for satisfying long-run objectives or as a means of meeting unexpected bills farther in the future, cash is a foe—not a friend.
As such, sizing the amount of cash to be held in the short and long term is critical. The level of precautionary savings that best supports a financial resilience strategy depends on personal and commercial goals, circumstances, and a variety of other factors.
How much does one need in a Liquidity strategy?
There is no catch-all answer. Personal circumstances will determine how much an entrepreneur or investor will need to pull from their invested assets over the next three to five years. After this, it may be possible to fund a Liquidity strategy with enough cash, high-quality bonds, and borrowing capacity to finance that spending.
Why three to five years? This amount of time should be long enough for most diversified portfolios to fully recover from even the worst market losses. The presence of a Liquidity strategy can help to confidently invest the rest of one’s wealth, knowing that one can satisfy business, personal, and family obligations while generally avoiding the risk of forced asset sales that lock in otherwise-temporary losses on long-term investments.
Read the full report Financial resilience for entrepreneurs and investors part 1, 25 January 2025.
Main contributor: Matthew Carter
This content is a product of the UBS Chief Investment Office.
