The Retirement War Chest: How to Stay Invested When Markets Crash | Ep. 45

Can you stomach market drops? Most investors say they can handle them, but that confidence usually disappears when the portfolio actually falls.

In this episode, Tré Bynoe explains the idea of a retirement “war chest” — also called a cash wedge — and why it can help people stay invested when markets get ugly. He breaks down the tradeoff clearly: holding cash may lower long-term returns, but it can also buy time, reduce panic, and make a good investment plan easier to stick with.

Tré also explains why this decision should be based on time, not portfolio percentage, why cashflow management matters so much, and how retirees can build a plan for bad markets before they happen.

This episode is for Canadians who want a more resilient retirement plan without pretending market crashes will not happen.

What listeners will learn

• What a retirement war chest or cash wedge is
• Why market crashes require a plan, not hope
• Why the right cash amount is based on time, not percentages
• How cashflow management helps determine the size of the war chest
• Why peace of mind can matter more than technical optimization
• How to think about safe assets in retirement

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Transcript

Speaker 2 0:00

Hello and welcome to the Plain English Finance Pod podcast, the podcast dedicated to helping you make smart financial decisions. You just asked what this one was about. This one is about the, the war chest, the retirement war chest.

Speaker 0:13

Interesting. I have no idea what that means.

Speaker 2 0:16

You'll know as soon as I start talking about

Speaker 0:17

it, it sounds like a video game thing. Go find the war chest.

Speaker 2 0:21

There may be. okay, so. How, what is the technically right way to invest allocation wise? Bonds. Lots of bonds. Oh,

Speaker 0:33

technically a hundred percent equity.

Speaker 2 0:35

Correct. Unfortunately, we're human and the reason that we,

Speaker 0:40

unfortunately,

Speaker 2 0:40

unfortunately we can't invest that. I wish we weren't

Speaker 0:43

human

Speaker 2 0:44

like robots. Um, so while that is. Statistically the right way to invest for the lowest throughout your entire life, no matter what stage you're in, for the lowest risk of a bad outcome, it's unlikely to allow somebody to stick through it for the long time. So what I do is build a plan for when something bad happens.

Speaker 1:07

Mm-hmm.

Speaker 2 1:07

Okay. And that is an important thing that everybody should have because the markets are gonna crash. At some point during your lifetime, probably multiple times, and you need to have a plan for what you're going to do when that happens. And when you're in retirement, what you do is a little different, and it's a lot scarier because when you are working, if you're in a career that is pretty stable, let's say you're a nurse, right? Or your, I worked with all of engineers, go with engineers, or something that, that isn't strictly tied to the markets. You will have your income. It's a little different for somebody me if the markets crash 50% and 'cause I charge a percent of the assets that I manage, right? So my income drops 50% if markets drop 50%. So I need to be more careful than the average person. But if you. Or real estate agents, another good example. Mm-hmm. They do very well. When the markets are booming and people are spending money and when, when we're in the middle of a, of a financial crisis, people aren't buying tons of houses, so their work dries up. Right. So unless you are in a high risk profession that, where you're very tied to the, to the markets, you'll probably just keep working and it won't matter to you at all that the markets are down 10, 20, 30, 40%. But when you're relying on money. It's a lot more concerning

Speaker 2:32

in retirement.

Speaker 2 2:33

Yeah. When you're relying on the money and I, I, I don't saying in retirement, 'cause I mean it depends on what part of life you're in, but just oftentimes it's retirement. But yeah, when you are relying on that money to put food on your table. It is a lot scarier when markets drop.

Speaker 2:48

Yeah.

Speaker 2 2:49

So you need to have a plan for what you're going to do when that happens.

Speaker 2:54

Mm-hmm.

Speaker 2 2:55

What I like to do as part of a plan can be to hold cash.

Speaker 3:01

Cash wedge.

Speaker 2 3:02

That's the war chest. Yes. That is the, the, the cash wedge that people call it various things. That's your, when it hits the fan, we have this.

Speaker 3:14

Mm-hmm.

Speaker 2 3:14

And the price of that. Is very often going to be a negative impact on your overall portfolio. It is more often than not, you holding that cash wedge, you would've been better off if you'd invested it and just

Speaker 3:29

bit the bullet,

Speaker 2 3:30

just bit the bullet and still taken out even when markets were down Technically we are human. It is very difficult to do that and understand that. If somebody's, if I help somebody grow their portfolio to a million dollars and the markets drop 40%, that is $400,000. It doesn't matter to them that if they hadn't been invested that way, they would only be at $600,000 now anyway. Nobody cares. The only thing they care about is that it used the same million dollars and now it says $600,000. I love that is what they care about. Right.

Speaker 4:05

I think we talked about that, where it's the moment it gets to the highest number, it's that's

Speaker 2 4:09

the number. Yeah. The whole numbers are the worst as well.

Speaker 4:11

Yeah,

Speaker 2 4:11

because the amount of people, you, the portfolio passes a million dollars and I, I always get the message. I always get the, the email I pass a million dollars. it's, yeah. 'cause it's a big moment for a lot of people. So it's I get that and then I'm just thinking to myself, please don't drop 2%. Please don't drop 2%.

Speaker 4:27

Well, or please don't check until next month or three months later. Because you said, the markets are changing all the time.

Speaker 2 4:35

Yeah. you know what, 2% change in a day is. Another day in the market. But that's $20,000 on a million dollar portfolio, right?

Speaker 4:42

That's, yeah,

Speaker 2 4:42

I was at a million now. Now I'm back down below a million anyway, people get tired. It's called anchoring bias. Anyway, that aside. So I need a plan to keep somebody invested during those timeframes because we know it's going to happen. The issue is what do we do about it? So, war, chest, cash wedge. How much would you, how much do you think we'd keep in this?

Speaker 5:06

Hmm. Just, I kind of wanna say something to do with expenses similar to an emergency fund, but I would guess a little longer than three months.

Speaker 2 5:22

But that's a great, that's what I like about what you just said is that you didn't use a percentage. Because percentages are irrelevant to the amount that I would keep. It is not about a percentage. It is amount about time, especially with the way that I'm invested. I am a market investor, I invest in index funds, that type of, that type of thing.

Speaker 5:44

Mm-hmm.

Speaker 2 5:45

So it's not a case of if it's gonna recover. We know from history, it's a case of when it's, it recovers, how long is it gonna take to recover? That is the real question. How long is it going to take? So I need to buy myself. Time. So it is about time and that is how you, how I help people determine how much we're gonna keep in the cash wedge. And the last episode was, or not the last one, I guess one of the previous episodes I've spoken about is cashflow management. Guess how? It's very easy to determine the time. If you manage your cash flow well, right? Yeah. So in that, that episode I gave the example of $120,000. If I was, if I knew it was costing me $120,000 a year to do the things that I want to do, then I know that's one year. If I choose to keep two years, 'cause we'll have this conversation two years get you through these type of events, I'm sorry, allows the two years allows the, the markets to recover in these type of events. Three years allows you to recover in these type of events. And however long we decide time-wise is how big the cash wedge, and it doesn't increase the more that markets go out poor as the interest is earned or anything that. It's based on time. I want to give us two years, three years, four years, five years, whatever the timeframe is that we decide.

Speaker 7:06

Mm-hmm.

Speaker 2 7:07

That is how much cash that we, we keep, and that depends on how much you spend. How big the portfolio is. it's, it depends. That's, that's it isn't a percentage that we pick out. It's based on you and your life.

Speaker 7:21

Yeah. Which again, is the whole reason you're always stressing the fundamental of cashflow management because it really does revolve around every decision

Speaker 2 7:31

It does. Because if I say to you, if we pick a hundred thousand dollars, right? And we say we keep a hundred thousand dollars of cash. How does that actually help me stay invested to the, to the investment strategy? It doesn't. What if I need that a hundred thousand dollars of cash tomorrow? Right? That what if that only lasts me two years and I am terrified that this, this thing, this crazy event, it's gonna last five years. Right? What, not knowing how much you, not knowing how much you're spending a year is, is detrimental to you feeling confident that you can weather this storm. Yeah. Now I say that this is. The war chest is what I use. That is part of the plan of what ifs, right? So what are we going to do? Another plan for some clients where they're pretty aggressive and the plan is to sell the land, right? They have land, they get renting and rental and income from the land. They know if we sell the land, we're gonna get X amount. That can be part of the plan if, if something crazy happens, right? For some people, the plan is to start CPP earlier than we would otherwise want to. It takes start government pensions and things like that. That means that that a hundred thousand dollars that we left, maybe that now lasts three or four years if things are looking really, really scary. Right? So it just has to be, you just have to have a plan to know what you are going to do. If this happens for some people, it could be reduced spending. Right. There's, there's other clients that that's the plan. The plan is we're spending this amount now. We know we're spent, our spending is high. We know that it's not sustainable. If the markets crash. If the markets crash, we will cut back. That's an okay plan as well. The important part is you must have a plan no matter what you're doing, no matter what part stage you are in life, it's just much scarier to the individual during retirement. But this counts across the board, especially with the way that I invest. 'cause I recommend people. Invest what they need for the vehicle. Right? you, I don't recommend people save for spec specific things. So it's a case of if we needed a car and the markets were down and we really needed one, what's the plan? Well, for us, I, we have debt that we can access, right? That's the plan. That is the price that we'd pay. It's unlikely to happen, but it could happen. Mm-hmm.

Speaker 9:47

If

Speaker 2 9:47

we need a vehicle, I have to get a car loan. That could be part of the time. You just need a plan.

Speaker 9:53

Yeah.

Speaker 2 9:53

Okay. And that is the, that is the, the war chest. That is the how I build, how the fundamental building blocks of a resilient retirement is. Certain types of assets are good for certain things if you use the assets for the right thing. Equity is good for growth. The price is ups and downs. We know that we don't hope that the ups and downs don't come. And then if they, when they come, we are no,

Speaker 10:19

we hope the ups come. We hope the downs don't come.

Speaker 2 10:22

Yeah, but that's not, that's not how we, that's not how we build everything. Just cross our fingers and hope it doesn't happen.

Speaker 10:28

Hey, that's a great strategy.

Speaker 2 10:29

No, it's a terrible strategy.

Speaker 10:30

That's my chess strategy. Don't you remember

Speaker 2 10:32

Hope Chess? Yes. That is literally, that is, you hope the person doesn't see it. It's like, no, you can't play chess hoping that the individual doesn't see what you're trying to do. You have to play chess knowing that that individual is gonna see what you're trying to do and can't do anything about it. That's how you play chess. I

Speaker 10:50

why maybe he won't see his queen is under a,

Speaker 2 10:53

not the way to play chess, but it's, it's a great, it's the same way with the markets. That is not how you, there's not how you navigate the markets. You can't hope that bad stuff doesn't happen. You have to plan for what we are going to do when it does happen. Mm-hmm. Part of that can be a war chest, can be the way that I I build, build retirement. Even for me, I say to myself, I would, I hope I can be a hundred percent equity investor throughout my life. I'm very likely when, when it actually push comes to shove, probably keep two or three years of cash.

Speaker 11:23

Yeah.

Speaker 2 11:24

I'm not gonna keep, I'm not gonna keep anything else. Right. I am gonna keep, I'm gonna be very high equity content. Probably won't hold bonds or very many bonds definitely won't be holding. What a lot of people do is they will hold higher risk bonds.

Speaker 11:36

Oh yeah. Are we talking about this?

Speaker 2 11:38

Which blows my mind. So their, their goal is that I'm a low risk investor, so I'm now gonna hold risky bonds so I can get 5% in bonds instead of just holding higher quality equity where you are more likely to get that. It's just scary. And that's something that, again, happened in 2008 when people, this, this piece of your portfolio, the fixed income piece of your portfolio is there to. If the equity piece drops or when it drops, it's your safety net. Keep it in safe assets. Mm-hmm. So this cash wedge, I like GICs for it. Hmm.

Speaker 12:15

Wow.

Speaker 2 12:16

You know,

Speaker 12:17

everyone, just take a moment. Craig

Speaker 2 12:19

just said, can't believe I said that. Yeah. Said she

Speaker 12:22

sees,

Speaker 2 12:22

yeah. I, I want something. I want something really, or I'll, I'll use investment grade bonds or something like that. high, high quality investment or government grade bonds or something like that. But the goal is short term safety, and I know that bonds long term are more risky than equity.

Speaker 12:40

Mm-hmm.

Speaker 2 12:41

But that is a trade off I'm willing to make for the mental.

Speaker 12:45

Peace of mind.

Speaker 2 12:45

Peace of mind. I know I have my plan. I know what I'm gonna do. When it happens, I'm still gonna be scared. I'm still gonna be panicked. The world's still gonna look like it's on fire, but I will be able to stick to the plan.

Speaker 12:58

Yeah, stick to the plan.

Speaker 2 13:00

That's all it is. That's, that's the, that is ther chest us.

Speaker 13:06

I like that. I, I've already told, I've already talked about this story before, where you started in your career, and I immediately asked you, what if the markets are down and someone's in retirement, and your, your response was, we planned for it. And I was like, wow, that's a great answer.

Speaker 2 13:27

That's a great idea. Maybe I should do it. Yeah. It's like you, you can't go through retirement expecting it not to happen. Right. If you do, you are setting yourself up for failure. It is much better that you plan for what you're going to do when it happens, and then you leave your plan there. Because the worst thing to do would be, I'm scared about what if it happens? And then I'm over planning. And there's definitely those people where they have, they, I. I have clients that I've brought on where they are worth millions of dollars of financial assets and 90% of it is in cash and or GICs and things like that. And I, I, I get the allure of it, but you are opening yourselves up to other types of risk.

Speaker 14:11

Yeah.

Speaker 2 14:11

So just because it looks safe doesn't make it safe. You want to, you want to make your decisions based on what's gonna give you the lowest chance of a bad outcome, which means that you should be very heavy equity for the, for the, for your entire life. Right? But heavy equity doesn't mean a hundred percent equity.

Speaker 14:31

Yeah.

Speaker 2 14:32

It means that you have to have a plan. When, when things blow up, when things go wrong. 'cause they will, they're gonna go wrong at some point.

Speaker 14:40

You know, I just wanted to add, I just saw, I follow this guy on Instagram and he just made a post about people giving up on their New Year's resolutions. And this is reminding me of it because there's a theory and of course I can't remember probably the most important part, it's an acronym, but part of it is, Making that statement.

Speaker 2 15:03

Mm-hmm.

Speaker 15:03

If this happens, then this. So he used the example of working out, because that's what a lot of people do in the new year. They wanna start working out.

Speaker 2 15:11

didn't you just say you got a gym?

Speaker 15:13

Yeah, I know. I'm like, am I basic? Oh, no, no. Uh, anyway, he, he said, so. You, you mentally prepare for obstacles. Okay. So some obstacles are going going to be after work. I'm really tired. I don't wanna go to the gym because I'm tired after work.

Speaker 2 15:34

Mm-hmm.

Speaker 15:35

So you start by saying, if after work I'm really tired and don't want to go to the gym, then I'm going to put on my workout clothes and do a five minute warmup with no obligation to Do anything. That was the example he gave and that reminds me of this. And it increases success a ton because your, your brain is wired that way to, of course, most people, once you do that five minute workout, oh, let's just get it over with. Right. You've done it kind of the hard part.

Speaker 2 16:03

Mm-hmm.

Speaker 16:04

Which is that mental, just do this one thing and

Speaker 2 16:08

but you plan for the obstacles instead of hoping the obstacles don't come.

Speaker 16:11

Yeah. Or even it's the same again, it's the same. saying that you have, where closing your eyes doesn't make the demons go away. Just pretending like there's no obstacles gonna come, or, oh, I really hope that

Speaker 2 16:23

doesn't make it true.

Speaker 16:23

Yeah. I hope that I'm just gonna love mornings and start working out at 5:00 AM I know that about myself, that that is never ever going to happen. So I've planned for the obstacles. Okay. What do I need to do to make it actually work?

Speaker 2 16:37

Yeah.

Speaker 16:39

So anyway, sorry. Oh, I'm sorry. I'm boring you.

Speaker 2 16:41

No, no, it's,

Speaker 16:42

I'm just kidding. I was, I would try so hard not to yawn. We're tired over here.

Speaker 2 16:49

Yeah. And saying that didn't go to the gym after work, so maybe I should plan for that.

Speaker 16:52

Well, I'll go find that acronym for everybody that Tre needs it. Just kidding.

Speaker 2 16:59

Yeah,

Speaker 17:00

no,

Speaker 2 17:00

that's a, that's a great example because, and I, I think the, 'cause the amount of people that ask me that, well, what are. That's their biggest fear is investing money and it dropping and it's like, I can, there's very little I can guarantee you in this industry, yet I can guarantee that that's gonna happen. I can guarantee that you're going to invest money and at some point it's gonna be worth less than the day it was before.

Speaker 17:25

Yeah. promise.

Speaker 2 17:26

No, I promise. I picky promise it's going to happen. it's not a. It's not a hope, it doesn't happen. It, it's going to happen. Right. It is a guarantee that that is going to happen. So you have to plan for what you're going to do when that happens to a big degree, when that happens, seriously when something major happens. But that also feeds into the investment philosophy.

Speaker 17:52

Mm-hmm. And

Speaker 2 17:53

that feeds into why I don't make bets. I had a conversation with somebody the other day that they. They were invested very heavily into cannabis when it first blew up, and they lost a lot of money before I was involved in their stuff.

Speaker 18:08

mm-hmm.

Speaker 2 18:09

And they, yeah. And then they said to me that we, we, they end up buying some resource stuff, and it did very well. It lasted a while. And they said to me, okay, well we're gonna put this extra money in, what should we do with it? And my response is the same thing that I say to everybody. I do not take bets. Global equity fund, global whole market index type fund. That's my recommendation, right? For this was long-term money. That's my recommendation. Doesn't matter what's going on with geopolitically doesn't it is an investment philosophy that has worked time and time and time and time again. And because it is a. Decision that you can make time and time and time and time again, even if that person is right and they, uh, they guess that silver went, went up a is gonna go up a ton and they, they get this one right. Maybe the next one is wrong. Mm-hmm. Maybe the one after that is wrong. The fact is, is I have averaged over the last five years of investing market returns. Right? It's 13, 14, 15% or whatever it is in their portfolio. I would've had to been right a lot in order to match those returns

Speaker 19:25

consistently.

Speaker 2 19:26

Consistently.

Speaker 19:27

Yeah,

Speaker 2 19:27

right. Over the long run, the markets have returned about 8% or so.

Speaker 19:31

Yeah,

Speaker 2 19:33

I would have to be right a lot in order for me to outpace that. The easiest decision, the most likely right decision is just going to be to make the right decision that's been correct.

Speaker 19:45

Based on the data.

Speaker 2 19:46

Based on the data, right. Then I can focus on other things and optimize them. But as I said, it's make decisions that you can stick to and think about the consequences beforehand for the stuff that is likely to happen. Plan for it. It's as simple. It is really as simple as that. Sounds scary, but it is. I don't know. I don't know how else to,

Speaker 20:08

yeah.

Speaker 2 20:08

Dunno how else to stress it. Keep it, keep it simple.

Speaker 20:11

Yep.

Speaker 2 20:11

But anyway, that's the war chest, so. The cash wedge is part of the war chest, but the war chest can be lots of different things, lots of different tools that you can put in the war chest.

Speaker 20:21

Quick question. Why is it called a war chest?

Speaker 2 20:24

Well, do you know what a war chest is?

Speaker 20:26

No.

Speaker 2 20:26

Okay. It's like what, uh, like ancient places would have if you're under, if you're under siege or whatever, or you're, if you are, if you have to go to war. It's what funds that. So when things get really bad, it's your backup plan.

Speaker 20:41

Okay? It's

Speaker 2 20:42

what you do when it's hit the fan and you need something to rely on. Everything else has kind of failed.

Speaker 20:50

So what you're

Speaker 2 20:51

saying, at least I have my war chest.

Speaker 20:52

It is. Literal chest.

Speaker 2 20:56

Yeah. It used to be a little literal chest.

Speaker 20:57

What you're

Speaker 2 20:58

saying and stuff that

Speaker 20:59

you're saying is I was completely right at the beginning when I said it sounded like a video game thing because that's when a lot of video games

Speaker 2 21:05

you think it is Zelda, just chest.

Speaker 21:06

I might been thinking Zelda. I might even thinking

Speaker 2 21:09

maybe

Speaker 21:10

something else, but

Speaker 2 21:12

yeah, that's, yeah, that's, that's why it's called the War Chest. It's just.

Speaker 21:16

I just know so many audience members are thanking me for asking that right now. Just kidding. They probably all knew and they're like, oh my gosh. End the episode

Speaker 2 21:27

probably. Okay, perfect. that's everything. This is the shorter one.

Speaker 21:30

Yay.

Speaker 2 21:31

Sweet. Good. See you in the next one.

Speaker 21:34

Bye. Bye.

21:35

Thanks for listening to this episode of the Plain English Finance Podcast. Trey BYO, certified Financial Planner. Chartered Investment Manager is a financial planner with TC Wealth Management and a Visa wealth. You should always consult with your financial, legal, and tax advisors before making changes. This podcast is provided as a general source of information and should not be considered personal investment advice or solicitation to buy or sell at any securities. The views expressed are those of the individual and are not necessarily those of a Visa Financial Inc. Mutual funds and other securities offered through a Visa wealth, a division of a Visa Financial, Inc.