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How a Large Cash Reserve Protects You from Forced Selling in a Crisis
Key takeaways
- Forced selling in a deep crisis is the most expensive mistake an investor can make.
- A reserve of 3–6 months of expenses in liquid instruments protects against this scenario.
- The reserve belongs in savings accounts or short-term bond funds — not in equities.
- Without a reserve, the portfolio becomes a last-resort source of cash and you will inevitably end up selling at the wrong time.
- The size of the reserve depends on income stability and the number of dependants.
Forced selling in a crisis — selling equities simply because you have nothing else to live on — is the most costly investment mistake. A portfolio you've built over years can be destroyed in a single bad decision made under pressure. A liquid reserve prevents this.
What Happens Without a Reserve
A loss of income, an unexpected expense, or a crisis hits. Your portfolio is down 30%. If you have no reserve, you have to sell — precisely when prices are lowest. You lock in the loss and miss out on the future recovery. Yet all it would have taken was setting aside three to six months of expenses in a safe, quickly accessible instrument.
How Much Reserve Is Enough
- 3 months of expenses — the minimum for employees with stable income
- 6 months — recommended for most households, self-employed, or parents with children
- 12 months — appropriate for self-employed in unstable industries, single parents, or before a planned major life change
Where to Keep the Reserve
A savings account with instant withdrawal is the simplest option. In the Czech Republic, banks and online providers offer interest rates of 4–6% per annum (depending on the rate environment). For a larger reserve, part can be placed in a short-term bond fund or money market ETF — still accessible within a few days, with slightly higher yield. More on building a portfolio from scratch can be found in the article how to put together your first portfolio.
FAQ
Why is forced selling so costly?
Because the deepest falls tend to be temporary. If you sell in a 30–40% decline, you lock in the loss permanently. Investors with a reserve can ride out the slump and benefit from the recovery. Without a reserve, you have no choice.
How much money should I have in an emergency reserve?
The standard recommendation is 3–6 months of expenses. Self-employed individuals and those with unstable income should aim for 6–12 months. The amount depends on job stability, the number of dependants, and planned major expenses.
Where should I keep an emergency reserve?
In a savings account with instant withdrawal or a short-term bond ETF. These instruments are liquid and carry low risk of decline. Equities and real estate are not suitable for a reserve — they fall or become illiquid in a crisis.
Can a reserve be too large?
Yes. More than 12 months of expenses in cash is overly conservative — an excessive reserve sacrifices returns. Anything above the recommended threshold should be put to work in investments.