Emergency fund contradiction

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Emergency fund contradiction

Postby boggler » Mon Jul 01, 2013 2:44 pm

The general advice on this forum to so keep your emergency fund in a highly liquid account, like a bank account, under the following reasoning: (from the wiki) "The emergency fund provides security against having to sell longer term investments at inopportune times (e.g. selling equities during down markets)."

Yet when we talk about investing, we often say "it is always a good time to buy" and "the markets are efficient". If this is true, isn't it always a good time to sell, as well? How do we reconcile this discrepancy?
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Re: Emergency fund contradiction

Postby Mingus » Mon Jul 01, 2013 2:49 pm

boggler wrote: Yet when we talk about investing, we often say "it is always a good time to buy" and "the markets are efficient". If this is true, isn't it always a good time to sell, as well? How do we reconcile this discrepancy?


Its always a good time* to buy, and hold.

If selling, you are not holding.

* Some times better than others.
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Re: Emergency fund contradiction

Postby Quickfoot » Mon Jul 01, 2013 3:02 pm

As long as your assets are valued at more than you paid for them it can be a good time to sell, generally when bad things happen to people (layoffs, credit crunches, etc) bad things are also happening to stocks so if you sell in that situation you are giving away money that you could have captured. That's the point of having an emergency fund, so that you don't have to sell when stocks are low and you can capture more profit by selling when prices are higher.
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Re: Emergency fund contradiction

Postby ogd » Mon Jul 01, 2013 3:06 pm

The negative force of buying high and selling low is powerful enough to overwhelm even the fabled efficiency of the market.
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Re: Emergency fund contradiction

Postby rkhusky » Mon Jul 01, 2013 3:12 pm

It is advisable to get keep your emergency funds in a collection of buckets - very liquid to cover a couple of months, short term for a few years, intermediate for problems lasting 2-5 years.
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Re: Emergency fund contradiction

Postby Aptenodytes » Mon Jul 01, 2013 3:19 pm

Quickfoot wrote:As long as your assets are valued at more than you paid for them it can be a good time to sell,

That's a mental accounting fallacy. You can have assets that have appreciated, but it could still be a terrible time to sell them (if they are expected to appreciate further). Likewise you can have assets that have depreciated, but it could be a very good time to sell them (if you expect them to depreciate further). Apart from tax considerations, there's nothing relevant about whether or not the asset is up or down when it comes to figuring out whether selling is a good idea or not.

Regarding the OP, it is precisely because "it is always a good time to invest" that you want to keep your emergency fund liquid. If it weren't liquid, you'd have to disinvest it when the emergency came up, which is the opposite of what you want. A liquid emergency fund lets you keep your portfolio fully invested.
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Re: Emergency fund contradiction

Postby boggler » Mon Jul 01, 2013 3:46 pm

Quickfoot wrote:That's the point of having an emergency fund, so that you don't have to sell when stocks are low and you can capture more profit by selling when prices are higher.


How do you know prices will be higher?
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Re: Emergency fund contradiction

Postby momar » Mon Jul 01, 2013 3:49 pm

The point of keeping your emergency fund liquid isn't to avoid selling, it is to ensure that your emergency fund is big enough and won't suddenly shrink to less than your needs.
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Re: Emergency fund contradiction

Postby boggler » Mon Jul 01, 2013 3:49 pm

Aptenodytes wrote:Regarding the OP, it is precisely because "it is always a good time to invest" that you want to keep your emergency fund liquid. If it weren't liquid, you'd have to disinvest it when the emergency came up, which is the opposite of what you want. A liquid emergency fund lets you keep your portfolio fully invested.


But if you then have an emergency and have to sell, that's always a good time too. If I've missed your point, can you elaborate?
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Re: Emergency fund contradiction

Postby boggler » Mon Jul 01, 2013 3:50 pm

momar wrote:The point of keeping your emergency fund liquid isn't to avoid selling, it is to ensure that your emergency fund is big enough and won't suddenly shrink to less than your needs.


Presumably for many on this forum, their taxable account is many times larger than their emergency fund.
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Re: Emergency fund contradiction

Postby FafnerMorell » Mon Jul 01, 2013 3:50 pm

Markets may be efficient, but taxes certainly aren't (and selling often has tax implications)
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Re: Emergency fund contradiction

Postby IlliniDave » Mon Jul 01, 2013 3:52 pm

boggler wrote:The general advice on this forum to so keep your emergency fund in a highly liquid account, like a bank account, under the following reasoning: (from the wiki) "The emergency fund provides security against having to sell longer term investments at inopportune times (e.g. selling equities during down markets)."

Yet when we talk about investing, we often say "it is always a good time to buy" and "the markets are efficient". If this is true, isn't it always a good time to sell, as well? How do we reconcile this discrepancy?


My way of thinking is the markets are efficient in terms of reflecting human beings' collective perception of them, but aren't necessarily accurate (they efficiently manifest the flaws in human perception, e.g., the dot-com bubble). "It's always a good time to buy" is mostly a slogan for encouraging people towards persistent long-term investing.

I use a tier approach for my emergency fund, 1/3 in cash at the bank (4 months worth) and 2/3 in short-term bonds at VG, so the downside is very limited in terms of having an emergency when prices are deflated. I wouldn't use long-term bonds or stocks as a vehicle to hold my emergency fund.
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Re: Emergency fund contradiction

Postby neurosphere » Mon Jul 01, 2013 3:53 pm

boggler wrote:Yet when we talk about investing, we often say "it is always a good time to buy" and "the markets are efficient". If this is true, isn't it always a good time to sell, as well? How do we reconcile this discrepancy?


At any given time, the "price is right". Sure. But it is still also true that over time, stocks/bonds should go up. So if you HAVE to sell, any day is as good as any other. But, when we talk about investing in the "markets" we are generally talking about taking advantage of future potential price appreciation. So if you have money to save for the future/retirement/etc, today is as good as any to buy. If you have cash needs which requires you to sell securities, today is as good as any other to sell. There is no discrepancy.
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Re: Emergency fund contradiction

Postby momar » Mon Jul 01, 2013 3:56 pm

boggler wrote:
momar wrote:The point of keeping your emergency fund liquid isn't to avoid selling, it is to ensure that your emergency fund is big enough and won't suddenly shrink to less than your needs.


Presumably for many on this forum, their taxable account is many times larger than their emergency fund.

Yes. And this is why myself and others don't keep dedicated emergency funds.
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Re: Emergency fund contradiction

Postby Quickfoot » Mon Jul 01, 2013 4:21 pm

That's a mental accounting fallacy. You can have assets that have appreciated, but it could still be a terrible time to sell them (if they are expected to appreciate further)


Actually the fallacy is expecting it may appreciate further. Technically it is a good time to sell an asset any time it has increased in value over your purchase price, and likewise a bad time to sell is when the value is below the purchase price. That said there is a difference between a good time to sell an asset and an ideal time to sell an asset, the problem is we'll never know when the ideal time to sell the asset is in advance. Generally the only way we'll know the ideal time to sell is the asset will drop in value significantly, thus showing us the ideal time to sell is already in the past.

How do you know prices will be higher?


The emergency fund isn't to protect you while assets are increasing in value, it's to protect you while assets are decreasing in value. Say you were to have a significant financial expense in 2008-2009 and were forced to sell stocks at their lowest value, you more than likely lose twice #1 because you are probably selling at a loss and #2 those assets wont be able to enjoy the recovery.

In good economic times one doesn't necessarily have to tap an emergency fund for unexpected expenses, there are quite a few cases it might be better to take a little out of the market than to drastically decrease the emergency fund. If the market tanks before you can rebuild your emergency fund you will be in an unnecessarily negative position.
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Re: Emergency fund contradiction

Postby avalpert » Mon Jul 01, 2013 5:59 pm

Quickfoot wrote:
That's a mental accounting fallacy. You can have assets that have appreciated, but it could still be a terrible time to sell them (if they are expected to appreciate further)


Actually the fallacy is expecting it may appreciate further. Technically it is a good time to sell an asset any time it has increased in value over your purchase price, and likewise a bad time to sell is when the value is below the purchase price.

No, you are incorrect. The price you paid is completely irrelevant to whether it is a good time to buy or sell - that is an anchoring fallacy. Once you paid what you paid, other than for tax considerations, you need never think of it again - it's done. If after that the price collapses and the company is heading towards bankruptcy waiting until it is literally worth zero just because it is lower than when you bought is downright silly.

And it is not a fallacy to expect further appreciation - if that were the case than you shouldn't be investing in it. We invest in equities because we expect future appreciation.
Last edited by avalpert on Mon Jul 01, 2013 6:02 pm, edited 1 time in total.
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Re: Emergency fund contradiction

Postby avalpert » Mon Jul 01, 2013 6:02 pm

boggler wrote: If this is true, isn't it always a good time to sell, as well?


No because you have positive expected returns from not selling. You sell because you need the liquidity, the corollary to it always being a good time to buy is that it is always a bad time to sell.

The emergency fund is to ensure you have enough liquidity that isn't at risk. The degree to which that is necessary does vary based on the size of your portfolio - if you have a large portfolio an 'emergency fund' in a bank account can be unnecessary. What is a large portfolio is a different question with an answer that will vary from person to person.
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Re: Emergency fund contradiction

Postby Dandy » Mon Jul 01, 2013 7:26 pm

Here is how I look at it. An emergency fund should be safe --if it is in risky assets then it should be larger to account for a possible plunge in value when an emergency occurs during a bad market.

When the market is down it is nice to have some "safe" assets that can be used to buy "low". I think that money should not come from the emergency fund. You shouldn't be using your emergency for investing or rebalancing -- it is for large unanticipated expenses e.g. loss of job, medical expense, replace a car etc.

To take advantage of a market decline and buy "low" to me that comes from a small fixed income allocation to "safe" assets e.g. CDs, FDIC savngs and if necessary short term bond funds that is seperate from any emergency fund.
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Re: Emergency fund contradiction

Postby red5 » Tue Jul 02, 2013 6:02 am

boggler wrote:The general advice on this forum to so keep your emergency fund in a highly liquid account, like a bank account, under the following reasoning: (from the wiki) "The emergency fund provides security against having to sell longer term investments at inopportune times (e.g. selling equities during down markets)."

Yet when we talk about investing, we often say "it is always a good time to buy" and "the markets are efficient". If this is true, isn't it always a good time to sell, as well? How do we reconcile this discrepancy?


My personal opinion is that you should extend your quote to say "it is always a good time to buy if you plan on holding for a long time and you believe long range returns will be positive." Do the markets go up and down in the short term? Of course. Emergencies may decide to occur in the short term before you've had your investment for a long time and while they may have lost value. After all investments can still lose value in an efficient market.
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Re: Emergency fund contradiction

Postby SumOfDivs » Tue Jul 02, 2013 6:32 am

Stocks are volatile and sometimes they are cheap and sometimes they are expensive based on price to book or p/e or dividend yield. Due to their volatile nature, you want to have the liquidity to avoid selling when others are desperately trying to raise cash by selling stocks. It is a good idea to dca into the market over time, but I would not agree that it is always a good time to buy stocks. In the late 90s the dividend yield on the S&p 500 was 1.2 to 1.5% and intermediate govt bond yields were around 6%. This was not a good time to buy the S&P 500 or tsm.
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Re: Emergency fund contradiction

Postby G-Money » Tue Jul 02, 2013 6:51 am

avalpert wrote:
boggler wrote: If this is true, isn't it always a good time to sell, as well?


No because you have positive expected returns from not selling. You sell because you need the liquidity, the corollary to it always being a good time to buy is that it is always a bad time to sell.

Right. This is always how I've viewed it.
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When to sell ?

Postby Taylor Larimore » Tue Jul 02, 2013 7:17 am

Technically it is a good time to sell an asset any time it has increased in value over your purchase price, and likewise a bad time to sell is when the value is below the purchase price.

In a taxable account, in order to capture the tax-loss benefit, it is nearly always a good time to sell when the value is below the purchase price .

Best wishes.
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Re: Emergency fund contradiction

Postby nisiprius » Tue Jul 02, 2013 8:31 am

boggler wrote:The general advice on this forum to so keep your emergency fund in a highly liquid account, like a bank account, under the following reasoning: (from the wiki) "The emergency fund provides security against having to sell longer term investments at inopportune times (e.g. selling equities during down markets)."

Yet when we talk about investing, we often say "it is always a good time to buy" and "the markets are efficient". If this is true, isn't it always a good time to sell, as well? How do we reconcile this discrepancy?
If the wiki says that, then I completely disagree with the wiki (shrug). Because I don't believe it's possible to identify "inopportune" or "opportune" times.

It is not completely self-contradictory, however. Suppose one is making regular withdrawals from a 60/40 balanced portfolio, and stocks drop. One could do three things:

a) Keep rebalancing to 60/40 as needed, and keep making 60% of your withdrawals from stocks and 40% form bonds.
b) Use the emergency fund to avoid selling stocks at in a down market, regarding it as an inopportune time for selling. ("Ride through a bear market with your cash bucket...")
c) Use the emergency fund to buy stocks in a down market, regarding it as an opportune time for buying. ("Use your 'dry powder....')

As I say, I regard b and c as questionable. To begin with, there's the question of risk/reward. Deploying what is supposed to be an emergency fund for something that is not an emergency is reducing safety in hope of increasing return. Shrug. Everyone to their tastes, of course.

Second, I think the concept of riding through a down market on a cash reserve is deeply, deeply flawed. It makes the semiconscious assumption that you know the length of a "typical" or "average" bear market and that you can set an upper bound on it. The people who advocate this never talk about what you do if the bear market lasts long enough to empty the bucket. Or dismiss it by using the "historic" maximum. I think that you are a little better off if the bucket outlasts the bear market, but much worse off if the bear market outlasts the bucket. So, it's like a gambler's martingale. A high probability of a small improvement in outcome and a low probability of serious harm, and the improbable is treated as impossible.
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Re: Emergency fund contradiction

Postby nisiprius » Tue Jul 02, 2013 8:46 am

Well, the Wiki article, Emergency fund, says something a little different now. :)

Seriously, as with Wikipedia--or the Encyclopӕdia Britannica--one always need to maintain a critical view. The Bogleheads Wiki doesn't have anything like the volume of editors that Wikipedia does, and it can be opinionated. The language about "inopportune times" is the contribution of editor linuxizer, but no subsequent editors have made change other than wordsmithing, so I don't know what the consensus is. I will PM linuxizer and warn him about my edit, so the Wiki may be different again soon.
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Re: Emergency fund contradiction

Postby staythecourse » Tue Jul 02, 2013 9:18 am

boggler wrote:The general advice on this forum to so keep your emergency fund in a highly liquid account, like a bank account, under the following reasoning: (from the wiki) "The emergency fund provides security against having to sell longer term investments at inopportune times (e.g. selling equities during down markets)."

Yet when we talk about investing, we often say "it is always a good time to buy" and "the markets are efficient". If this is true, isn't it always a good time to sell, as well? How do we reconcile this discrepancy?


Are you confusing two different issues, i.e. why a EF and when is it okay to sell??

The point of an EF is that if you need money to fix a leaking roof or pay for some huge medical bill or get fired and need money for food for the next 6 months you are not forced to sell you equities at the same time they may be down. Now the first two examples I gave would be just bad luck if they happened the same time as the market is down, but the third is quite common in a downturn of the economy. MANY folks lost their jobs when the market tanked in 2008 when their employers had to cut costs to survive. This is not surprising in any recession.

Good luck.
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Re: Emergency fund contradiction

Postby Aptenodytes » Tue Jul 02, 2013 11:08 am

boggler wrote:
Aptenodytes wrote:Regarding the OP, it is precisely because "it is always a good time to invest" that you want to keep your emergency fund liquid. If it weren't liquid, you'd have to disinvest it when the emergency came up, which is the opposite of what you want. A liquid emergency fund lets you keep your portfolio fully invested.


But if you then have an emergency and have to sell, that's always a good time too. If I've missed your point, can you elaborate?

This is very basic, but here goes:

Accumulation takes place over the long term. Short-term fluctuations don't matter for accumulation. If you are trying to decide between putting new money into a portfolio today or waiting for a better time, stop doing that -- today is always a good day to add to your accumulations. This is what people mean when they say that it is always a good time to invest.

Emergencies pop up in the short term. Short-term fluctuations do matter for emergencies. If you end up getting hit with an emergency during a trough you will pay a big price.

I think you are confused about the logic behind the folk wisdom that it is always a good day to invest. The logic is NOT that the market always has prices right. It is that over the long run prices end up following a trajectory that is fairly predictable. But on any given day you should expect market prices to be oscillating around that trajectory, sometimes wildly. You never know exactly where you are in such a short-term cycle, even if they are clear in retrospect. It is the knowledge that such oscillations are normal that leads almost everyone here who is in the accumulation stage to set aside cash for emergency use.
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Re: Emergency fund contradiction

Postby nisiprius » Tue Jul 02, 2013 12:38 pm

I probably shouldn't have been coy; what the Wiki article now says, as of my edit, is this:
Controversially, some argue that an emergency fund can also provide security against having to sell longer term investments at inopportune times (e.g. selling equities during down markets); those advocating this approach generally recommend larger emergency funds than those who define emergencies solely in terms of unanticipated expenses. Thus, for example, a U.S. News writer, in an article entitled "Increase Cash Reserves in Retirement", suggests "3 to 6 months" living expenses for workers, but "at least a year" for retirees, because "the average length of a bear market is around a year and a half, so two years worth of cash reserves is likely to be a prudent amount." This approach is related to the "buckets" withdrawal strategies, also debated.
What I didn't put in the article is, "average length of a bear market, my foot."

Personally, I haven't ever seen any good, data-based, thoughtful analysis of the "emergency fund" concept. For example, the canonical emergency is job loss, yet the unemployment situation varies enormously from state to state, and, rationally, if the emergency is job loss, than the required size of the emergency fund ought to be related to that. And I honestly don't know a good way to research it! Obviously one does not go to the HR department and start asking questions! It's not too hard to find a table of maximum weekly benefits, which is at least a start.

It would be very interesting to see some kind of statistical analysis of what sorts of "emergencies" actually do occur, although it's just the kind of area where statistical analysis is problematical because there would be so much difference in individual situation.
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Re: Emergency fund contradiction

Postby garlandwhizzer » Tue Jul 02, 2013 1:09 pm

For those like me who typically keep a very high percentage of assets in stocks and must periodically sell them to generate income, a significant emergency fund is critical. I keep 2 years living expenses in MM funds and another 1+ year of living expenses in Vanguard's short term muni fund, all in my personal account so I can access those funds for living expenses without generating any taxes. All bear markets in US history, even the worst secular bears like the Great Depression, have been interrupted in I to 3 years by a cyclical bull market, often a strong one that provides an opportunity to sell stocks. It is important to remember that one of the greatest bull markets in US history was 1933-1935, when stocks rapidly climbed more than 100% not including dividends. The same happened following the 2008-2009 disaster, and the ability to hold on through the panic of the downturn saved me a lot of money.

If one has a bond dominated portfolio, the emergency fund is less important because bonds do well in market downturns. It is important to realize, however, that volatility in stocks works both ways. People get fearful because stocks can lose a lot quickly, but on the other hand they can gain a lot quickly which bonds never do. An emergency fund gives you a critical asset, time, to wait out the panic. I do my best never to sell into weakness. When the market has made a nice run like the last 3 - 4 years or so, that is when I replenish my emergency fund, so I'll be ready (hopefully) for the next downturn.

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Re: Emergency fund contradiction

Postby staythecourse » Tue Jul 02, 2013 1:15 pm

garlandwhizzer wrote:For those like me who typically keep a very high percentage of assets in stocks and must periodically sell them to generate income, a significant emergency fund is critical. I keep 2 years living expenses in MM funds and another 1+ year of living expenses in Vanguard's short term muni fund, all in my personal account so I can access those funds for living expenses without generating any taxes. All bear markets in US history, even the worst secular bears like the Great Depression, have been interrupted in I to 3 years by a cyclical bull market, often a strong one that provides an opportunity to sell stocks. It is important to remember that one of the greatest bull markets in US history was 1933-1935, when stocks rapidly climbed more than 100% not including dividends. The same happened following the 2008-2009 disaster, and the ability to hold on through the panic of the downturn saved me a lot of money.

If one has a bond dominated portfolio, the emergency fund is less important because bonds do well in market downturns. It is important to realize, however, that volatility in stocks works both ways. People get fearful because stocks can lose a lot quickly, but on the other hand they can gain a lot quickly which bonds never do. An emergency fund gives you a critical asset, time, to wait out the panic. I do my best never to sell into weakness. When the market has made a nice run like the last 3 - 4 years or so, that is when I replenish my emergency fund, so I'll be ready (hopefully) for the next downturn.

Garland Whizzer


Don't know if I agree that the worst can be only 3 years, but I do agree that for a high equity investor a large EF is best and also a high bond investor it is less important.

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Re: Emergency fund contradiction

Postby Grt2bOutdoors » Tue Jul 02, 2013 1:21 pm

I don't subscribe to normal views on what constitutes a proper level of savings to tide one over during a prolonged job loss or emergency. Everyone's situation will be different depending on level of wealth, job stability, health issues, family that could provide a backstop or not, etc. My thought is to severely discount state provided unemployment benefits, as quite of those funds were heavily taxed during the most recent economic downturn and could be subject to cuts (it's not an impossible thought). The minimum level of funding should be 12 months of relatively easy to convert, sum certain investments - that means no equities, but could include cash, savings accounts, money market funds, t-bills, savings bonds older than 1 year to meet Treasury minimum threshold for liquidation, cd's, short term bonds. Others may want to hold 2-3 years worth, that may seem excessive to some but I've known quite a few folks who were out of work for 2+ years - they needed every penny of that liquidity and then some. If you've been in the workforce for 10-15 years, you should be able to accumulate some level of assets, though not necessarily the 2-3 years.

When folks ask why should I not be fully invested, well after the e-fund is depleted, what would you sell next? Equities or fixed income? If you have zero fixed income, then you are banking on those equities having held their value through a period that could be what we experienced in the latter half and early stages of 2008/2009. What then? Sometimes being somewhat conservative can serve many useful roles.
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Re: Emergency fund contradiction

Postby ruralavalon » Tue Jul 02, 2013 2:12 pm

boggler wrote:The general advice on this forum to so keep your emergency fund in a highly liquid account, like a bank account, under the following reasoning: (from the wiki) "The emergency fund provides security against having to sell longer term investments at inopportune times (e.g. selling equities during down markets)."

I do understand the benefit in avoiding having to sell investments during down markets. But why is it just assumed that the markets will be down (rather than up) when my particular emergency occurs. An individual's personal emergency (e.g. serious injury or illness, layoff or firing, fire, flood, earthquake, hurricane, tornado, sustantial property damage or theft loss) is most likely not going to be correlated with any particular stock or bond market movement.

So why not an emergency fund in some kind of fairly sensible investment (e.g. broadly diversified, low cost index fund), in a taxable account. Shouldn't the prime criteria for the investment of emergency money be a high degree of liquidity, that is the ability to rapidly convert to cash within perhaps 48 hours?

Personally we never have more than about three months living expenses (net of social security) in cash, in a checking account. We do have a 50/50 asset allocation in retirement.

Even before retirement we never had anything more sophisticated than a regular savings account, we which we never thought of as an "emergency fund". It never held anything close to 6 months of living expenses, except when we were accumulating a down payment for the purchase of our first home.

And in the last 15 years before retirement we had a large joint taxable account, which could allow us quick and penaty free access to cash from some of our investments.


nisiprius wrote:Personally, I haven't ever seen any good, data-based, thoughtful analysis of the "emergency fund" concept. For example, the canonical emergency is job loss, yet the unemployment situation varies enormously from state to state, . . . . .

Fully agree. I would like to see some good data, rather than just an ipse dixit to the effect that XX months is needed. But I would guess that serious injury or illness would be the more common emergency than job loss.
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Re: Emergency fund contradiction

Postby technovelist » Tue Jul 02, 2013 2:18 pm

ruralavalon wrote:
boggler wrote:The general advice on this forum to so keep your emergency fund in a highly liquid account, like a bank account, under the following reasoning: (from the wiki) "The emergency fund provides security against having to sell longer term investments at inopportune times (e.g. selling equities during down markets)."

I do understand the benefit in avoiding having to sell investments during down markets. But why is it just assumed that the markets will be down (rather than up) when my particular emergency occurs. An individual's personal emergency (e.g. serious injury or illness, layoff or firing, fire, flood, earthquake, hurricane, tornado, substantial property damage or theft loss) is most likely not going to be correlated with any particular stock or bond market movement.



I agree with all but the bolded part. Layoffs are definitely correlated with the economy, and I would assume the market is also correlated with the economy, so logically layoffs should also be correlated with the market.
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Re: Emergency fund contradiction

Postby ruralavalon » Tue Jul 02, 2013 2:34 pm

technovelist wrote: I agree with all but the bolded part. Layoffs are definitely correlated with the economy, and I would assume the market is also correlated with the economy, so logically layoffs should also be correlated with the market.

I gave some thought to that, but reasoned that even most layoffs would be be caused by problems in a particular company or industry rather than by a general downturn in the overall U.S. or world economy.

And as I said in a later edit, I would guess that serious injury or illness would be the more common emergency than job loss.
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Re: Emergency fund contradiction

Postby nisiprius » Tue Jul 02, 2013 3:26 pm

staythecourse wrote:Don't know if I agree that the worst [bear market] can be only 3 years, but I do agree that for a high equity investor a large EF is best and also a high bond investor it is less important.

Good luck.
Which is just a way of saying "either cash or bonds works as the low-risk, low-return, volatility-diluting part of a portfolio." A high equity investor with a large emergency fund isn't really a high equity investor, just a moderate equity investor who for some reason isn't counting some of his assets within his "portfolio."

A separate question, of course, is whether the withdrawal strategy involves any tactical shifts in the assets that are liquidated for withdrawal. Thus, bob90245 used to have several papers his website comparing a "bonds first" withdrawal strategy to a constant-allocation withdrawal strategy. It's all just a continuum, with "ride out a bear market in cash" being basically a bonds-first strategy with cash instead of bonds. An objection to all such strategies is that you are allowing portfolio risk to increase, rather than making it decrease, with time.
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Re: Emergency fund contradiction

Postby Quickfoot » Tue Jul 02, 2013 4:07 pm

But why is it just assumed that the markets will be down (rather than up) when my particular emergency occurs.


It isn't assumed, the emergency fund is insurance against a worst case scenario. If the market is up when your emergency occurs there's no rule that you have to tap the fund rather than sell investments, selling investments while they are down is going to hurt though.

I gave some thought to that, but reasoned that even most layoffs would be be caused by problems in a particular company or industry rather than by a general downturn in the overall U.S. or world economy.


But that's not how layoffs always work, companies often will layoff during times of uncertainty even before their own company is affected to insure they can minimize the pain the company feels. There doesn't have to be anything fundamentally wrong with a company for them to decide laying off is the right thing to do during uncertain economic times. The market hates uncertainty so the chances of the market being down during such layoffs is high.

In 2008+ we saw broad prolonged layoffs in just about every industry, even some that are normally considered pretty safe. A lot of the companies that laid off hadn't done anything to put the company in jeopardy, they were just being affected by the widespread economic problems.

Better to plan for the worst and be pleasantly surprised when it isn't as bad as expected than to be blindsided by a situation that's much worse than anticipated.
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Re: Emergency fund contradiction

Postby btraven » Tue Jul 02, 2013 4:52 pm

I am going to take a contrarian view on emergency funds. It seems to me that, if your living expenses for at least a couple of years are a significant portion of your assets, you need an emergency fund to provide your living expenses until the problem blows over. If the amount of your investment portfolio far dominates your living expenses for a few years, you don't likely need a separate emergency fund if you are in something as liquid as a mutual fund, heavily traded stock or bond, especially if there are no tax consequences, e.g. Roth contributions. By maintaining a separate emergency fund over the course of your life, you are missing out on the expected returns of a diversified portfolio over decades. That is a lot of foregone return that Bogleheads would expect over a long period of time. This large opportunity cost must be weighed against any benefit (again, assuming that you are in a position to weather a severe market downtown as far as living expenses go).

To maintain an emergency fund to avoid selling invested assets at "inopportune time" or to have some dry powder to invest when the market is down contradicts the philosophy "that the market is what is currently is". There is no way of knowing if the current moment is an inopportune time (at least as far as the market is concerned) or that a market that is down from a previously reached high will continue descending or will go up -- thinking that there is, is market timing. Tax or transaction costs could make timing personally inopportune, but that is different.
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Re: Emergency fund contradiction

Postby technovelist » Tue Jul 02, 2013 5:11 pm

This is a very interesting discussion. So on the basis that you should remain fully invested (in whatever AA you prefer) at all times rather than having an emergency fund, should you also avoid buying life insurance? After all, it has a negative expected return, and if you invest that money instead, you should expect to end up with more money on average. The same argument, of course, goes for any other type of insurance, as all of them have negative expected returns.
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Re: Emergency fund contradiction

Postby LadyGeek » Tue Jul 02, 2013 5:20 pm

nisiprius wrote:Well, the Wiki article, Emergency fund, says something a little different now. :)

Seriously, as with Wikipedia--or the Encyclopӕdia Britannica--one always need to maintain a critical view. The Bogleheads Wiki doesn't have anything like the volume of editors that Wikipedia does, and it can be opinionated. The language about "inopportune times" is the contribution of editor linuxizer, but no subsequent editors have made change other than wordsmithing, so I don't know what the consensus is. I will PM linuxizer and warn him about my edit, so the Wiki may be different again soon.

Yes, it is different again. :) I didn't like the wording, so I moved that paragraph into the "Discussion" tab so we can get a consensus. Here's what I moved:

Controversially, some argue that an emergency fund can also provide security against having to sell longer term investments at inopportune times (e.g. selling equities during down markets); those advocating this approach generally recommend larger emergency funds than those who define emergencies solely in terms of unanticipated expenses. Thus, for example, a U.S. News writer, in an article entitled "Increase Cash Reserves in Retirement", suggests "3 to 6 months" living expenses for workers, but "at least a year" for retirees, because "the average length of a bear market is around a year and a half, so two years worth of cash reserves is likely to be a prudent amount." This approach is related to the "buckets" withdrawal strategies, also debated.


(Sorry, I saw this thread after I moved the update.)
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Re: Emergency fund contradiction

Postby btraven » Tue Jul 02, 2013 5:38 pm

technovelist wrote:This is a very interesting discussion. So on the basis that you should remain fully invested (in whatever AA you prefer) at all times rather than having an emergency fund, should you also avoid buying life insurance? After all, it has a negative expected return, and if you invest that money instead, you should expect to end up with more money on average. The same argument, of course, goes for any other type of insurance, as all of them have negative expected returns.


I believe in insurance to take care of needs that will could not otherwise be accommodated reasonably comfortably. If the need for life insurance is taken care of by other means, you should not buy life insurance. So, if the need is take care of your family via your lifetime earnings, you should buy life insurance. If you have taken care of them by other means, most likely via accumulated wealth, or they are in a position to take care of themselves, you are better off investing the money. Most people could not afford a $1M or $2M liability claim, so it makes sense to buy liability insurance. Five years in a nursing home at $100k/ yr would be too much for a lot of people -- so long-term care insurance makes sense for those people, but not for someone with a $10M portfolio. If you have a $1M portfolio and your living expenses are $30k/year, I think that you are better off investing a $60k emergency fund of two year living expenses over the decades of your life -- you will survive even if your portfolio decreases by 50%. The compounded return on $60k over 30 years is substantial and unlikely to be compensated by the avoidance of a spurious "inopportune" selling time since we can never know when is opportune.

The concept of an emergency fund is valuable, in general, because the vast majority of Americans do not have two years living expenses available, much less assets that dominate a couple of years of living expenses.
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Is a separate emergency fund always necessary ?

Postby Taylor Larimore » Tue Jul 02, 2013 5:50 pm

boggler wrote:The general advice on this forum to so keep your emergency fund in a highly liquid account, like a bank account, under the following reasoning: (from the wiki) "The emergency fund provides security against having to sell longer term investments at inopportune times (e.g. selling equities during down markets)."

Boggler:

In my opinion, the idea that everyone must have a separate "emergency fund" is a myth. This is Investopedia's definition of an "emergency fund":

"An account that is used to set aside funds to be used in an emergency, such as the loss of a job, an illness or a major (unexpected) expense."

Pat and I have not had a separate emergency fund for many years. This is because we knew, like many other investors, that we can obtain cash for most emergencies from:

An ATM
Our credit card
Our portfolio
Insurance policies
Bank loan
Mortgage (takes time)
Family

For us, there is no need to complicate our finances with a separate low-yielding emergency fund that may never be used.

That said, for many people, particularly young investors who don't have savings or credit, an "emergency fund" is essential.

Like many financial "truths" which are not always true, the need for a separate emergency fund may not be necessary.

Best wishes.
Taylor
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Re: Emergency fund contradiction

Postby Hector » Tue Jul 02, 2013 6:07 pm

technovelist wrote:This is a very interesting discussion. So on the basis that you should remain fully invested (in whatever AA you prefer) at all times rather than having an emergency fund, should you also avoid buying life insurance? After all, it has a negative expected return, and if you invest that money instead, you should expect to end up with more money on average. The same argument, of course, goes for any other type of insurance, as all of them have negative expected returns.


This is very extreme comparison of emergency account with the life insurance!
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Re: Emergency fund contradiction

Postby ruralavalon » Tue Jul 02, 2013 7:37 pm

I will suggest that the function of an emergency fund (e.g. ensuring [not insuring] against the financial needs caused by serious injury or illness, layoff or firing, etc.) can be served without tying up large amounts in completely unproductive "cash". This can be done with:
1. a reasonable bond allocation in a portfoio,
2. a short term bond fund in a taxable account,
3. a large taxable account, even if invested in stock index funds, or even
4. credit cards with large unused balances available.

This is not to say one should not have medical or disability insurance, I am proposing that the potentially large losses still not covered by that insurance can be taken care of without a large cash hoard.

In my opinion, the point needs to be a high degree of liquidity (i.e. quickly convertible to cash) with no penalty attached.
Last edited by ruralavalon on Tue Jul 02, 2013 7:55 pm, edited 1 time in total.
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Re: Emergency fund contradiction

Postby IlliniDave » Tue Jul 02, 2013 7:55 pm

Hector wrote:
technovelist wrote:This is a very interesting discussion. So on the basis that you should remain fully invested (in whatever AA you prefer) at all times rather than having an emergency fund, should you also avoid buying life insurance? After all, it has a negative expected return, and if you invest that money instead, you should expect to end up with more money on average. The same argument, of course, goes for any other type of insurance, as all of them have negative expected returns.


This is very extreme comparison of emergency account with the life insurance!


Haha, yeah, to each his own--there's probably an infinite number of ways to skin the cat. It's largely situational too. Being single, if I lose employment, going around borrowing money won't be an option. No one in my family can support me financially. There will be nothing but my money. I am not a young man. At my age equivalent re-employment is not guaranteed. For now I don't have sufficient taxable assets to survive keeping me afloat very long in a bad bear market. Therefore I park cash and ST-bonds within easy reach to hopefully keep my retirement investments out of any temporary situation so they can eventually bounce back. In a few years I may well be affluent enough that that measure is unnecessary. Bill Gates doesn't need a stable liquid emergency fund. I believe I do at least for a time. Sleeping well at night now is important to me and something that has not been a given in my life. So when it comes to the rainy day fund, what I leaned from my grandparents trumps the Bogleheads :wink:
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Re: Emergency fund contradiction

Postby LadyGeek » Tue Jul 02, 2013 8:47 pm

boggler wrote:The general advice on this forum to so keep your emergency fund in a highly liquid account, like a bank account, under the following reasoning: (from the wiki) "The emergency fund provides security against having to sell longer term investments at inopportune times (e.g. selling equities during down markets)."

Yet when we talk about investing, we often say "it is always a good time to buy" and "the markets are efficient". If this is true, isn't it always a good time to sell, as well? How do we reconcile this discrepancy?

FYI - That contradictory statement was removed when I moved that paragraph into the discussion tab (where wiki editors collaborate).

The question is: What do we replace it with?
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Re: Emergency fund contradiction

Postby garlandwhizzer » Tue Jul 02, 2013 9:42 pm

boggler wrote:
The general advice on this forum to so keep your emergency fund in a highly liquid account, like a bank account, under the following reasoning: (from the wiki) "The emergency fund provides security against having to sell longer term investments at inopportune times (e.g. selling equities during down markets)."

Yet when we talk about investing, we often say "it is always a good time to buy" and "the markets are efficient". If this is true, isn't it always a good time to sell, as well? How do we reconcile this discrepancy?

Lady Geek replied to Bogler: FYI - That contradictory statement was removed when I moved that paragraph into the discussion tab (where wiki editors collaborate).

The question is: What do we replace it with?


Quite simply whether we often say "it is always a good time to buy" or not it simply isn't true. Buying tech stocks at outrageous multiples in 1999 was most definitely not a good time to buy. The efficient market hypothesis is just that, a hypothesis, and quite clearly Mr. Market gets carried away in up with euphoria sometimes (tech bubble 1999) and with panic other times (market crashes like 2008-9). Mr. Market is usually but not always rational, hence markets are usually efficient, more so than most of us, but even John Bogle says that they are not always efficient. It is in my mind an absurd to say that it makes no difference when you buy stocks. Run that one by Warren Buffett and see what he says or perhaps instead listen as he howls with laughter.

I think the Wiki doesn't in the least need to be changed because it doesn't always jive with a hypothesis that quite clearly sometimes fails to describe reality.

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