A reserve outside the market: why it matters more than picking securities

The advice to keep a reserve for unexpected expenses sounds dull and unconnected to the stock market. The connection is direct, and it is mechanical.

What happens without a reserve

Expenses arrive suddenly and pay no attention to the state of the market. An investor without a reserve is forced to sell securities exactly when the money is needed. The odds of that moment coinciding with a local high are slim.

Worse: for many people unexpected expenses correlate with the state of the economy. Job losses cluster in recessions — that is, exactly when the portfolio is already down. Selling at that moment locks in the worst available outcome.

How much

Count from expenses rather than income: several months of ordinary spending. The exact multiple depends on how stable the income is — an employee in a rare profession needs a larger reserve than one in constant demand.

Where to hold it

Somewhere the money can be withdrawn within a day and where the balance does not fluctuate. The reserve's job is to be available, not to earn. Trying to make it "sit there and work at the same time" turns it into an investment with a term, which strips it of its defining property.

A bank deposit is protected by the insurance scheme up to RUB 1.4m; for the size of a reserve that limit is usually sufficient.

What it changes in the portfolio

Having a reserve allows a longer horizon and makes drawdowns easier to sit through — see Drawdowns: why duration matters more than depth. Not having one makes every horizon short regardless of intentions: The horizon: the one parameter you cannot change by deciding to.