HornedToad,HornedToad wrote:Here's the thing. We've now switched the discussion of stock/bond percentage from asset allocation to instead focus cash available in the event of a recession. I'm fine with that topic and think it's more appropriate, but then you have to look at the entire picture.KlangFool wrote:Folks,
Let's forget about the emotional part for a while.
So, you have a choice:
A) Carry 3 to 6 months EF and 100/0. You assume that you will have an above-average luck in finding a job across multiple recessions over 20 to 30 years. You will not run out of EF before you find a job and forced to sell your stock for a severe loss.
B) Carry 3 to 6 months EF and another 6 to 12 months of expense in fixed income. You may invest the remainder in stock. You assume that you have average luck in finding a job in a recession across 20 to 30 years. It may take you more than 1 year to find a job. Hence, you do not need to sell your stock at a severe loss after you run out of EF.
What would you choose? Are you that lucky all the time?
Someone who's 100/0 but with very low expenses might be able to last 12-18 months in a recession with unemployment benefits, cutting costs, etc. While another person who's 80/20 but who's living expenses match their income (mortgage, daycare, private school, etc) might only have 9-12 months of salary available even with the higher bond amount and considering the early withdrawal penalty.
So we shouldn't look at it as a hard and fast percentage but how it fits into your overall financial picture. And that picture is not just about panic selling, but also ability to survive in a recession, existing expenses, income replacement options, etc
That then gets the stock/bond split back to what it's original purpose should be: Reducing volatility, asset diversification, rebalancing bonus, etc
That is a fair point.