Financial Planning / The Compound Effect
Cash Isn't a Strategy -- But It's Not Useless Either
| 7 min | By Heath J. Harris
Cash won't make you rich, but it can stop you from making wealth-destroying mistakes. Here's how smart investors use cash as a financial shock absorber.
There are two types of people when it comes to cash.
Type 1: "Cash is trash! You are losing money to inflation -- invest everything."
Type 2: "I keep everything in cash. It is safer that way."
Both of these are wrong -- for different reasons.
Cash is not going to build long-term wealth. But it is not worthless either. In fact, when used strategically, cash can be one of the most powerful tools in your financial plan. It will not make you rich -- but it can stop you from making wealth-destroying mistakes.
Let us dig into how smart investors -- especially retirees and business owners post-sale -- use cash not as a growth engine, but as a financial shock absorber. At Compound Advisory, serving clients from Annapolis, Maryland to all 50 states through virtual planning, this is one of the most important conversations we have with new clients.
Why Cash Still Matters
Cash is often overlooked because it does not grow. It does not yield 8%. It does not have exciting headlines or ticker symbols. But it does something far more important in certain moments: it buys you time.
Here is what cash allows you to do:
- Buy time in down markets -- so you never have to sell investments at a loss to fund your lifestyle
- Cover large, unexpected expenses without liquidating investments at the wrong time
- Avoid panic selling or emotional decisions during volatile periods
- Sleep better when the market, news, or life feels uncertain
That is why, at Compound Advisory, we often recommend that clients -- especially those nearing or in retirement -- hold 12 to 36 months of cash or cash-like assets. Not because we are scared of the market. But because we want your long-term investments to breathe -- and for you to breathe, too.
The Retirement Stress Test: Why Cash Reserves Matter
Consider a hypothetical client who retired in late 2019. He was excited, well-funded, and ready for the next chapter. Then 2020 happened.
You know the story: global pandemic, markets crashed over 30% in weeks, fear everywhere, panic headlines 24/7, and investors scrambling to sell "before it gets worse."
But this client did not flinch. He did not call in a panic. He did not ask to sell. He did not change his plan.
Why? Because he had two years of cash set aside. His retirement income for the next 24 months was already in place -- safe, accessible, and untouched by the chaos in the market.
His long-term investments took a hit (as all portfolios did), but he never had to sell a single stock to fund his life. That gave his portfolio time to recover -- and it did. By 2021, he was back on track. No losses locked in. No stress-induced mistakes. Just a plan that worked.
What Cash Cannot Do
Now, let us be clear: Cash is not a long-term investment strategy. Here is what cash cannot do:
- It will not outpace inflation over time
- It will not compound meaningfully over decades
- It will not build wealth for the future
If you keep your entire portfolio in cash for too long, you are quietly eroding purchasing power. You are safe from volatility, but vulnerable to inflation -- and at 3% annual inflation, your purchasing power is cut in half every 24 years.
That is why cash is not a growth tool. It is a defense tool -- a bodyguard, not a business partner. The key is knowing how much to hold, when to use it, and where to keep it.
Our Approach: The Bucket Strategy
At Compound Advisory, we use a bucket strategy as part of our Compound Cultivator™ framework to help clients manage risk and sleep better in retirement. It breaks your money into three distinct time horizons:
Bucket 1: Short-Term Cash (0-2 Years)
This is where your lifestyle lives. Bills, travel, healthcare -- all of it. It includes:
- Cash in high-yield savings accounts
- Money market funds
- Short-term Treasury bills
- CDs or cash-like alternatives
The goal here is not growth -- it is stability. This bucket allows you to fund your life without needing to pull from the market during a downturn.
Bucket 2: Intermediate-Term Assets (3-10 Years)
These funds are not needed immediately but should be reasonably stable. It includes:
- Bonds and fixed-income securities
- Balanced or income-generating funds
- Defensive equities or dividend-paying stocks
This bucket provides some growth, some income, and a middle ground between safety and returns. It also serves as the refill source for Bucket 1 as those reserves are spent down.
Bucket 3: Long-Term Growth (10+ Years)
This is where your real wealth building happens. It is your future fund. It includes:
- Diversified stock portfolios
- Alternatives and real assets
- Private investments (where appropriate)
- Real estate investment trusts
This bucket is volatile -- and that is perfectly fine. You are not touching this money for a decade or more. It has time to ride out the market cycles and compound significantly.
How Much Cash Should You Hold?
There is no magic number, but here is a general guideline we use for most clients:
- Still working with stable income? 3 to 6 months of expenses
- Retired or drawing from portfolio? 12 to 24 months (sometimes more)
- Post-business sale or major liquidity event? Up to 36 months, depending on timing and goals
We tailor this based on market conditions, withdrawal needs, health and family dynamics, your tolerance for risk, and your actual capacity to take it. This is where working with a fee-only fiduciary makes a meaningful difference -- we can model these scenarios specific to your situation.
Where to Hold Your Cash
Not all cash is created equal. A good cash strategy includes yield and accessibility. Best options for holding cash include:
- High-yield savings accounts
- Money market funds (within a brokerage)
- Short-term Treasury ETFs
- CD ladders
- Cash management accounts with FDIC sweep programs
Avoid: letting large sums sit in checking accounts earning nothing, overcomplicating with illiquid "cash alternatives," and chasing yield with unnecessary risk.
Final Thought: Cash Buys You Time
You do not need to choose between "all in the market" or "everything in cash." The right strategy is almost always somewhere in the middle -- a plan that matches your goals, protects your downside, and gives your long-term assets room to breathe.
Cash will not grow your wealth, but it can protect it. It is the buffer between you and a bad decision. It is the difference between reacting emotionally and responding intentionally. It is the insurance policy that lets you stick to the rest of your plan.
At Compound Advisory, we help clients build systems that include cash -- not as an afterthought, but as an essential tool in a long-term retirement planning strategy. If you are not sure whether your cash position is right for your situation, we invite you to schedule a complimentary Retirement Clarity Assessment. We work with clients across the country from our Maryland office -- and we would be glad to help you find the right balance.
Compound Advisory is a registered investment advisor. All investing involves risk, including the possible loss of principal. Past performance is not indicative of future results.