5 – Cash buffer or not?

This surprised me.

I’d heard of keeping a cash buffer in your current account so that when markets crash, you use the cash buffer and stop withdrawing from investments.  The idea is to leave the investments to recover (as is typical after a crash).

This can apply to ISA and cash buffer, and just as easily to Pension investments and cash buffer.

It sounds sensible so I thought I’d model in a spreadsheet to see how effective it was.  Four scenarios:

  • hold no buffer and stay invested,
  • hold a one year buffer at all times,
  • hold a one year buffer and after a crash leave money invested for one year,
  • hold a one year buffer and use psychic abilities to leave money invested whenever works best.

I’ve tried different rates, different initial values, single crashes, consecutive crashes, etc..  Every time I see the same pattern.  The worst is to have a cash buffer and leave it.  The best is usually to stay fully invested with no buffer.  Using the buffer to stay invested in the year after a crash improves the worst scenario but never as good as being always invested.  With psychic ability I can sometimes beat the “stay invested” scenario, but not always.  Here are the scenarios over 16 years:

Staying invested is easier in principle to manage.  I will look online for the next few years to see if I’ve missed something, but as far as I can see I should be fully invested for growth.