With the ongoing conflicts in Ukraine and the Middle East, many are not only concerned about travel (“Is it safe to fly past Iran?”), but also about their money.
The Bank of England has warned that the oil blockade in the Strait of Hormuz could drive up UK inflation later in 2026. If so, what might happen to your savings if interest rates fail to increase enough with the rising cost of living?
Market downturns are an inevitable part of investing. Whether driven by inflation, interest rate shocks, geopolitical events or economic slowdowns, periods of volatility can feel uncomfortable and, at times, overwhelming.
During these moments, cash can be a simple yet powerful tool. Here, we’re not suggesting that you use cash to avoid investment risk altogether. Rather, we aim to show how it can play a practical and strategic role within a well-structured financial plan, particularly during times of uncertainty.
The Role of Cash in a Financial Plan
Cash is often viewed as the least exciting asset class. It does not offer the potential long-term growth potential of equities or the income profile of bonds. However, its value lies in stability and accessibility.
In simple terms, cash provides:
- Liquidity: immediate access to funds when needed.
- Stability: protection from market volatility.
- Optionality: the flexibility to act when opportunities arise.
During periods of market stress, the role of cash becomes even more important. When markets fall, investors without sufficient cash reserves may be forced to sell investments at depressed values to meet short-term needs.
By holding an appropriate level of cash, you have more “dry powder” to cover living expenses without selling investments.
This is particularly important for those approaching or in retirement, where withdrawals coincide with market volatility.
Long-term investing should remain focused on growth assets. Yet cash acts as a buffer, supporting the rest of your portfolio.
Why Cash Matters More During a Crisis
If you rely on your portfolio for income, cash could help smooth withdrawals. Rather than taking income directly from investments during a downturn, you can draw from cash reserves instead.
This can really help to reduce the impact of sequencing risk (withdrawing during market falls). In a crisis, cash also provides a more stable and predictable income, helping preserve invested assets for future recovery.
Market volatility can trigger emotional reactions. Fear and uncertainty often lead to decisions that are not aligned with long-term objectives. Holding cash provides reassurance.
Knowing that your short-term needs are likely to be covered can help you stay invested during downturns, avoid panic selling and maintain confidence in your overall strategy. In many cases, the behavioural benefit of cash is just as valuable as the financial one.
Crisis-induced market downturns are challenging. Yet, they can also present opportunities. Investors with available cash are in a stronger position to invest at lower valuations and rebalance their portfolios – taking advantage of market dislocations.
Without cash, these opportunities are often missed. But you need to be careful. This is not an encouragement to try to “time the bottom” of the market. Instead, it’s about having flexibility when opportunities arise.
How Much Cash Should You Hold?
There is no one-size-fits-all answer. The appropriate level of cash will depend on your circumstances, such as:
- Your income stability.
- Your expenditure requirements.
- Your attitude to risk.
- Your stage of life.
However, here are some general guidelines to help guide you.
Emergency Fund
Most individuals should hold between 3 and 6 months of essential expenditure in cash. If your income is variable or uncertain, then a buffer of 6-12 months is usually better. This fund is designed to cover unexpected events such as job loss or unforeseen expenses.
Pre-Retirement and Retirement
For those approaching or in retirement, cash plays a more strategic role. You may want to hold 1-2 years of planned withdrawals in cash. Additional reserves may be appropriate if market conditions are particularly uncertain. This helps manage income needs without relying on market timing.
High Net Worth / Complex Situations
For individuals with larger or more complex portfolios, cash allocations may also reflect planned large expenditures or tax planning considerations. You may also have business or property commitments to evaluate. In these cases, cash becomes part of a broader planning strategy rather than a simple emergency reserve.
Where Should You Hold Cash?
Not all cash “vehicles” are the same. For instance, a regular savings account differs from a Cash ISA. Accessibility is key, but it’s also important to ensure your cash is working as efficiently as possible.
You may consider:
- Easy-access savings accounts for emergency funds.
- Fixed-term deposits for funds not required immediately.
- Cash ISAs for tax-efficient savings.
- Platform cash accounts within investment portfolios.
Interest rates have been falling over the last 12 months. In turn, interest rates on savings accounts have generally fallen, too. This might change later in the year if energy costs and other inflationary pressures rise.
While cash plays an important role, be mindful not to hold too much. This can be detrimental over the long term, reducing portfolio growth and leading to missed opportunities in the markets.
The key is to strike a balance. Cash should support your financial plan, not replace it. A well-diversified portfolio will typically include a mix of:
- Equities for growth.
- Bonds for stability and income.
- Cash for liquidity and flexibility.
Final Thoughts
Cash is often underestimated within a financial plan, particularly during periods of strong market performance. However, its importance becomes clear during times of uncertainty.
As with all aspects of financial planning, the right approach will depend on your individual circumstances.
If you are wondering how to best accumulate and deploy your savings, an independent financial adviser can help you make sense of your options.
Please don’t hesitate to contact a member of the team to find out more about saving.
The content in this article was correct on 24/04/2026.
The value of your investment can go down as well as up and you may get back less than the amount invested
The Financial Conduct Authority does not regulate Tax Planning
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