Is an emergency fund just about market timing?

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FireProof
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Is an emergency fund just about market timing?

Post by FireProof » Tue Oct 02, 2018 9:48 am

Given that equities are perfectly liquid nowadays and generally free to trade (or at the very least, functionally free), what is the rationale for keeping an emergency fund when you can just sell investments to meet any expenses?

The only clear one seems to be so that you can avoid selling stocks at a "bad time," but of course judging a "bad time" is classic market timing. I'm not saying the rationale isn't attractive - the biggest emergency like losing a job is most likely to happen after a big market crash, and it is certainly painful to sell when the market is low. But still, we have to admit that is market timing.

It can't be for tax purposes - the amount of capital gains that will be accumulated in three months (the duration of the emergency fund) are minimal.

Can't really be the three-day delay if something happened on the Friday of a long weekend. I can't really imagine any massive expenses with a three day deadline that don't involve the mafia. Besides, worst case, I can withdraw money from my brokerage, and it will just create margin at 8%/year.

Jack FFR1846
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Re: Is an emergency fund just about market timing?

Post by Jack FFR1846 » Tue Oct 02, 2018 9:53 am

Say that some economic catastrophe occurs and you lose your job as a result. The market loses half its value. You really need your e fund now and where you thought you had 6 months saved, in fact, you now only have 3 months saved.
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lostdog
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Re: Is an emergency fund just about market timing?

Post by lostdog » Tue Oct 02, 2018 9:57 am

I would say this would be ok if you have a large taxable account. For example 100K+ in equities say if you only spend 25k a year.

badger42
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Re: Is an emergency fund just about market timing?

Post by badger42 » Tue Oct 02, 2018 10:03 am

An EF is also about helping you avoid behavioral finance mistakes.

For example, without an EF, it can be really tempting when the market is down to pay 24% credit card interest to avoid selling stocks when they're down. With an EF, you give yourself permission to just spend the cash on what you need to spend it on (e.g. new roof or transmission).

For us, the "EF" is pretty graduated. We have a couple months expenses in cash, definitely not the "6mos-1yr" people tend to recommend.

However, we also have quite a bit of equity (the usual index ETFs with some small/mid cap value tilt) and bonds (treasuries, short-intermediate, individual bonds) in taxable. If we need $$ and the markets are down, we'll sell some bonds. Treasuries a couple years out are essentially perfectly liquid and don't lose much value.

If we need more $$ than the buffer and equities are doing well, we'll sell equities.

And remember, almost anything can be floated for 30 days on a credit card.

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dm200
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Re: Is an emergency fund just about market timing?

Post by dm200 » Tue Oct 02, 2018 10:10 am

I don't know how strong the "correlation", but I suspect that some "emergencies" like loss of employment are more likely to happen when equities are down.

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Re: Is an emergency fund just about market timing?

Post by JoMoney » Tue Oct 02, 2018 10:13 am

FireProof wrote:
Tue Oct 02, 2018 9:48 am
Given that equities are perfectly liquid nowadays...
They're extremely illiquid on Saturdays, Sundays, and holidays... On September 11th 2001, the NYSE and the Nasdaq closed for the week.
I can imagine weather, power, Internet issues being problematic.
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Clever_Username
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Re: Is an emergency fund just about market timing?

Post by Clever_Username » Tue Oct 02, 2018 10:14 am

I posted the following (other than I'm fixing a typo) in another thread 5-6 months ago. It still represents my view.


After a certain point, it becomes less important to have a designated emergency fund than to have an emergency plan. In my case, I have some cash which I suppose works like an emergency fund; I have maybe a month and a half expenses on hand routinely, plus a little more as summer approaches (teacher, nine month salary, summer school paid separately).

I also have almost a year's expenses in Series I Bonds; I suppose I'd go to that in a spending emergency, such as losing my job. I count them as part of my portfolio.

I don't have a designated "fixed income" part of my asset allocation. I have higher risk portion (stock index funds) and a lower risk portion (total bond market in tax-advantaged, Series I Bonds and a municipal bond fund outside of such accounts). This also resolves the "are I Bonds bonds?" question as far as my own portfolio/allocation is concerned.
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Re: Is an emergency fund just about market timing?

Post by AnalogKid22 » Tue Oct 02, 2018 10:23 am

I consider my Roth my emergency fund, though I do have plenty of cash in a savings account as well. The Roth is 100% invested in equities and large enough that during a huge correction it will still contain enough cash for regular (tax-free) withdrawals if I needed.
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Re: Is an emergency fund just about market timing?

Post by KlangFool » Tue Oct 02, 2018 10:29 am

OP,

Have you ever went through a market crash and facing a laid off at the same time? I did.

A) The market crashes

B) On 1/1/2009, my employer laid off 50% of my co-worker at my location. I was fighting to keep my job and trying to do my job while half of my Co-workers are gone. I could be nest. My friend on the next cubicle is crying everyday.

So, please tell me

i) Is it better to have an emergency fund and you do not need to think about your portfolio at all?

Or,

2) On top of all the stress related to your job, you have to face the potential pain and suffering of selling your stock at a huge loss every month?

I have one year of emergency fund and I have 500K in my taxable account.

You only have to experience this kind of event once. Then, you will understand how the emergency fund could save your sanity in those stressful situations.

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Re: Is an emergency fund just about market timing?

Post by Fallible » Tue Oct 02, 2018 10:44 am

FireProof wrote:
Tue Oct 02, 2018 9:48 am
Given that equities are perfectly liquid nowadays and generally free to trade (or at the very least, functionally free), what is the rationale for keeping an emergency fund when you can just sell investments to meet any expenses?

The only clear one seems to be so that you can avoid selling stocks at a "bad time," but of course judging a "bad time" is classic market timing. ...
Market timing is about predicting what the market will do (e.g., go up or down by a certain amount at a certain time) and then investing based on that prediction. So how is "judging a bad time" market timing?
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aristotelian
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Re: Is an emergency fund just about market timing?

Post by aristotelian » Tue Oct 02, 2018 10:51 am

There may be tax reasons to have an allocation of cash on hand to avoid realizing losses or gains any time you have a big expense.

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Re: Is an emergency fund just about market timing?

Post by Nate79 » Tue Oct 02, 2018 10:53 am

Our emergency funds counts as part of our fixed income allocation. Therefore there we are still fully invested at an allocation we are comfortable with. But reality is as a percent of total portfolio it doesnt have much impact. If having an emergency fund is truly hurting your portfolio then you got bigger problems.

In the end we have an emergency plan. We plan for the worst and if others decide not to prepare then no tears are shed for them.

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Re: Is an emergency fund just about market timing?

Post by FireProof » Tue Oct 02, 2018 10:53 am

Fallible wrote:
Tue Oct 02, 2018 10:44 am
FireProof wrote:
Tue Oct 02, 2018 9:48 am
Given that equities are perfectly liquid nowadays and generally free to trade (or at the very least, functionally free), what is the rationale for keeping an emergency fund when you can just sell investments to meet any expenses?

The only clear one seems to be so that you can avoid selling stocks at a "bad time," but of course judging a "bad time" is classic market timing.

Market timing is about predicting what the market will do (e.g., go up or down by a certain amount at a certain time) and then investing based on that prediction. So how is "judging a bad time" market timing? ...
Because we aren't just judging that it's a bad time, we are planning our investment actions around having to sell at that "bad time," i.e. making investment decisions based on perceived valuations. Without market timing, the expected value is identical for selling at any time or valuation.

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Re: Is an emergency fund just about market timing?

Post by sillysaver » Tue Oct 02, 2018 10:56 am

KlangFool wrote:
Tue Oct 02, 2018 10:29 am
I have one year of emergency fund and I have 500K in my taxable account.

You only have to experience this kind of event once. Then, you will understand how the emergency fund could save your sanity in those stressful situations.
500K of what in your taxable? Cash?

I agree with you, as I experienced job losses and portfolio declines from 2008-2010 that made it difficult to invest. As a result, I became very risk-averse and like to make sure I have adequate reserves. However, there is such a thing as "too much" cash, since it earns such low returns.

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Re: Is an emergency fund just about market timing?

Post by Mike Scott » Tue Oct 02, 2018 10:57 am

If you have (a big number $$$) then it may not matter. On the lower end of the spectrum, having $1000 in cash is very helpful when the washer/dryer dies or you need a new set of tires unexpectedly etc. The question is where is the tipping point in the middle and what level of risk are you comfortable with?

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Re: Is an emergency fund just about market timing?

Post by KlangFool » Tue Oct 02, 2018 11:00 am

sillysaver wrote:
Tue Oct 02, 2018 10:56 am
KlangFool wrote:
Tue Oct 02, 2018 10:29 am
I have one year of emergency fund and I have 500K in my taxable account.

You only have to experience this kind of event once. Then, you will understand how the emergency fund could save your sanity in those stressful situations.
500K of what in your taxable? Cash?

I agree with you, as I experienced job losses and portfolio declines from 2008-2010 that made it difficult to invest. As a result, I became very risk-averse and like to make sure I have adequate reserves. However, there is such a thing as "too much" cash, since it earns such low returns.
sillysaver,

500K of 100% stock. My overall AA is 60/40.

<<However, there is such a thing as "too much" cash, since it earns such low returns.>>

1) My portfolio is at 20 years of my current annual expense. My emergency fund is equal to 1 year of my annual expense. Hence, it is 5%. I can afford this easily.

2) I save 1 year of annual expense every year. It did not take long to build up my emergency fund.

KlangFool

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Re: Is an emergency fund just about market timing?

Post by watchnerd » Tue Oct 02, 2018 11:04 am

FireProof wrote:
Tue Oct 02, 2018 9:48 am
Given that equities are perfectly liquid nowadays and generally free to trade (or at the very least, functionally free), what is the rationale for keeping an emergency fund when you can just sell investments to meet any expenses?

The only clear one seems to be so that you can avoid selling stocks at a "bad time," but of course judging a "bad time" is classic market timing. I'm not saying the rationale isn't attractive - the biggest emergency like losing a job is most likely to happen after a big market crash, and it is certainly painful to sell when the market is low. But still, we have to admit that is market timing.

It can't be for tax purposes - the amount of capital gains that will be accumulated in three months (the duration of the emergency fund) are minimal.

Can't really be the three-day delay if something happened on the Friday of a long weekend. I can't really imagine any massive expenses with a three day deadline that don't involve the mafia. Besides, worst case, I can withdraw money from my brokerage, and it will just create margin at 8%/year.
In addition to psychological benefits, my Emergency Fund (1 year of cash in CDs):

1. Augments my bond holdings such that I can be more thoughtful and patient with any need to sell my bonds under duress, allowing me to tax manage it better

2. Allow me to hold municipal bond funds in my taxable, which have a tax advantage compared to CDs. By having 'enough' liquid cushion in CDs, I can be more comfortable with the duration risk of a muni bond fund

3. Have more assets that are uncorrelated with the stock market to buy stocks after they crash.

If that meets the definition of timing, so be it. I think of it more like insurance.
Last edited by watchnerd on Tue Oct 02, 2018 11:10 am, edited 2 times in total.
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Re: Is an emergency fund just about market timing?

Post by Hoosier CPA » Tue Oct 02, 2018 11:06 am

I see the e-fund as insurance against job loss. My job was eliminated (but in a good way with a stay bonus, notice and severance) and I discovered I didn't like that uncertainty without a designated e-fund. I really don't think I'd like it if I lost my job without notice and had to dig into equities.

I am working on building an e-fund now.

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Re: Is an emergency fund just about market timing?

Post by Theoretical » Tue Oct 02, 2018 11:08 am

This strikes me as yet another symptom of a bull market. An E fund is for the fact that life is full of uncertainty, including personal, local, and national/global black swans.

I might also add that Stay-the-Course investing requires an iron stomach and a lot of discipline, and having sufficient reserves helps with the behavioral side.

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Re: Is an emergency fund just about market timing?

Post by alpine_boglehead » Tue Oct 02, 2018 11:12 am

An emergency fund has the same function as the spare tire around your waist - it keeps you from starving when times get tough.

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Re: Is an emergency fund just about market timing?

Post by watchnerd » Tue Oct 02, 2018 11:13 am

Theoretical wrote:
Tue Oct 02, 2018 11:08 am
This strikes me as yet another symptom of a bull market. An E fund is for the fact that life is full of uncertainty, including personal, local, and national/global black swans.
Yes, all the increase in "I'm all in on equities, having cash is stupid" posts are making me wonder if these are Joseph Kennedy & the shoeshiner type moments....
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Re: Is an emergency fund just about market timing?

Post by ThrustVectoring » Tue Oct 02, 2018 12:12 pm

Clever_Username wrote:
Tue Oct 02, 2018 10:14 am
I posted the following (other than I'm fixing a typo) in another thread 5-6 months ago. It still represents my view.


After a certain point, it becomes less important to have a designated emergency fund than to have an emergency plan. In my case, I have some cash which I suppose works like an emergency fund; I have maybe a month and a half expenses on hand routinely, plus a little more as summer approaches (teacher, nine month salary, summer school paid separately).

I also have almost a year's expenses in Series I Bonds; I suppose I'd go to that in a spending emergency, such as losing my job. I count them as part of my portfolio.

I don't have a designated "fixed income" part of my asset allocation. I have higher risk portion (stock index funds) and a lower risk portion (total bond market in tax-advantaged, Series I Bonds and a municipal bond fund outside of such accounts). This also resolves the "are I Bonds bonds?" question as far as my own portfolio/allocation is concerned.
IMHO the percentage-based asset allocation isn't the overall best choice. My investments are also roughly in two buckets - stock index funds for long term growth, and defensive fixed-income products for short-term protection. The right allocation between them is "enough fixed income to handle expected life challenges, and then literally everything else is for long-term growth". Once I've got enough saved to think about retiring in the next decade, that short-term bucket is going to creep up in value, but as it stands it's pretty minimal. (My thinking on that is that I don't have a house or dependents, I have a really good private disability insurance policy in case of injury, and my career is highly in demand so I don't expect to deal with extended unemployment.)
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Re: Is an emergency fund just about market timing?

Post by Fallible » Tue Oct 02, 2018 1:07 pm

FireProof wrote:
Tue Oct 02, 2018 10:53 am
Fallible wrote:
Tue Oct 02, 2018 10:44 am
FireProof wrote:
Tue Oct 02, 2018 9:48 am
Given that equities are perfectly liquid nowadays and generally free to trade (or at the very least, functionally free), what is the rationale for keeping an emergency fund when you can just sell investments to meet any expenses?

The only clear one seems to be so that you can avoid selling stocks at a "bad time," but of course judging a "bad time" is classic market timing.

Market timing is about predicting what the market will do (e.g., go up or down by a certain amount at a certain time) and then investing based on that prediction. So how is "judging a bad time" market timing? ...
Because we aren't just judging that it's a bad time, we are planning our investment actions around having to sell at that "bad time," i.e. making investment decisions based on perceived valuations. Without market timing, the expected value is identical for selling at any time or valuation.
But you are not predicting that bad time or when it will happen or by how much. You are just reacting to what the market always does, always will do at some point. The prediction that is true market timing is not needed.
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Re: Is an emergency fund just about market timing?

Post by FireProof » Tue Oct 02, 2018 4:41 pm

watchnerd wrote:
Tue Oct 02, 2018 11:13 am
Theoretical wrote:
Tue Oct 02, 2018 11:08 am
This strikes me as yet another symptom of a bull market. An E fund is for the fact that life is full of uncertainty, including personal, local, and national/global black swans.
Yes, all the increase in "I'm all in on equities, having cash is stupid" posts are making me wonder if these are Joseph Kennedy & the shoeshiner type moments....
Actually, personally I'm retired, I have about 1.5 years of expenses in cash, and less than 10% in US equities (cant deny market timing, but I just cant stomach these valuations).

But I was trying to explain the reasoning for an emergency fund to my sister, and it struck me that in reality it is somewhat anti-Boglehead, largely premised on the idea that is worse to sell when the market has dropped (which assumes expected return will be better when the market has dropped, and would equally imply that it would be ideal to change to a higher allocation of stocks after the market drops a lot).

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Re: Is an emergency fund just about market timing?

Post by ThrustVectoring » Tue Oct 02, 2018 4:53 pm

FireProof wrote:
Tue Oct 02, 2018 4:41 pm
watchnerd wrote:
Tue Oct 02, 2018 11:13 am
Theoretical wrote:
Tue Oct 02, 2018 11:08 am
This strikes me as yet another symptom of a bull market. An E fund is for the fact that life is full of uncertainty, including personal, local, and national/global black swans.
Yes, all the increase in "I'm all in on equities, having cash is stupid" posts are making me wonder if these are Joseph Kennedy & the shoeshiner type moments....
Actually, personally I'm retired, I have about 1.5 years of expenses in cash, and less than 10% in US equities (cant deny market timing, but I just cant stomach these valuations).

But I was trying to explain the reasoning for an emergency fund to my sister, and it struck me that in reality it is somewhat anti-Boglehead, largely premised on the idea that is worse to sell when the market has dropped (which assumes expected return will be better when the market has dropped, and would equally imply that it would be ideal to change to a higher allocation of stocks after the market drops a lot).
That doesn't really sound anti-boglehead to me. If the market drops, you are no longer taking as much risk as you used to be. So in order to take enough risk, you'd need to further buy equities to fix things. "Buying when the market falls" is simply a natural consequence of having a stock allocation percentage between 0 and 100%.

Take an appropriate amount of risk, rebalance regularly, and make decisions based off personal liquidity needs and other such circumstances rather than trying to time the market.
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Re: Is an emergency fund just about market timing?

Post by columbia » Tue Oct 02, 2018 5:00 pm

AnalogKid22 wrote:
Tue Oct 02, 2018 10:23 am
I consider my Roth my emergency fund, though I do have plenty of cash in a savings account as well. The Roth is 100% invested in equities and large enough that during a huge correction it will still contain enough cash for regular (tax-free) withdrawals if I needed.
+1
Although I took a minor tax hit, I dipped in to my Roth earlier this year, after some very unexpected and expensive trips, due to a near death in the family.

I don’t miss that money and have $0 credit card balance.

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Re: Is an emergency fund just about market timing?

Post by UpperNwGuy » Tue Oct 02, 2018 5:27 pm

FireProof wrote:
Tue Oct 02, 2018 9:48 am
Given that equities are perfectly liquid nowadays and generally free to trade (or at the very least, functionally free), what is the rationale for keeping an emergency fund when you can just sell investments to meet any expenses?
Exactly. And this is one of the reasons why I do not have an emergency fund.

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Re: Is an emergency fund just about market timing?

Post by jalbert » Tue Oct 02, 2018 5:34 pm

Given that equities are perfectly liquid nowadays and generally free to trade (or at the very least, functionally free), what is the rationale for keeping an emergency fund when you can just sell investments to meet any expenses?
They get a lot less liquid at the times people are most likely to lose their jobs.
Risk is not a guarantor of return.

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Re: Is an emergency fund just about market timing?

Post by BigJohn » Tue Oct 02, 2018 5:57 pm

Not even close to the same in my opinion.

Market timing = thinking your judgement is good enough to predict the future

EF = an insurance policy that helps cover the potential impacts of unpredictable bad events. Like all insurance policies, there is a cost and you hope you never gave to use it but.... you’re really glad to have it if/when needed.

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Re: Is an emergency fund just about market timing?

Post by dknightd » Tue Oct 02, 2018 6:17 pm

The purpose of an "emergency" fund is you never have to pay credit cards excessive interest. And you never have to to withdraw, or take a loan against, your retirement savings. Either one could mess up your finances for life!
If you have lots of money, it probably does not matter, then could be considered partly market timing.
I still keep some money in the house, earning nothing, in case the ATM goes down and I need beer, or food. YMMV

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Re: Is an emergency fund just about market timing?

Post by Hyoga » Tue Oct 02, 2018 7:07 pm

Fallible wrote:
Tue Oct 02, 2018 10:44 am
Market timing is about predicting what the market will do (e.g., go up or down by a certain amount at a certain time) and then investing based on that prediction. So how is "judging a bad time" market timing?
Because saying that it's a bad time implies that there will be better times ahead, meaning the market will go up.
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Re: Is an emergency fund just about market timing?

Post by Fallible » Tue Oct 02, 2018 9:16 pm

Hyoga wrote:
Tue Oct 02, 2018 7:07 pm
Fallible wrote:
Tue Oct 02, 2018 10:44 am
Market timing is about predicting what the market will do (e.g., go up or down by a certain amount at a certain time) and then investing based on that prediction. So how is "judging a bad time" market timing?
Because saying that it's a bad time implies that there will be better times ahead, meaning the market will go up.
But there is no prediction involved, just an acknowledgement that the market will drop at some point, which it always does and always will do, along with going up at some point. As I understand the OP, there is no predicting here what the market will do or when or by how much and then placing his bets, which is true market timing. He plans only to react to the market when it goes down.
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Re: Is an emergency fund just about market timing?

Post by bottlecap » Tue Oct 02, 2018 9:41 pm

Market timing is moving money in and out of the market based on your guess as to whether the market is heading up or down.

Having an emergency fund is knowing that occasionally the market goes down - way down for periods of years - and also knowing that you need to eat while it does.

Please explain how knowing the latter is the same as guessing the former.

JT
Last edited by bottlecap on Tue Oct 02, 2018 9:56 pm, edited 1 time in total.

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Re: Is an emergency fund just about market timing?

Post by willthrill81 » Tue Oct 02, 2018 9:44 pm

If you want to invest your EF in stocks, you can prudently do so. Just put in twice as much as you would if it was a 'safe' investment, so that if the market tanks by 50% and you need the money, you still have enough.

I am no longer concerned with labels like whether something is 'market timing' or not.
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Re: Is an emergency fund just about market timing?

Post by jclear » Tue Oct 02, 2018 10:12 pm

Hyoga wrote:
Tue Oct 02, 2018 7:07 pm
Fallible wrote:
Tue Oct 02, 2018 10:44 am
Market timing is about predicting what the market will do (e.g., go up or down by a certain amount at a certain time) and then investing based on that prediction. So how is "judging a bad time" market timing?
Because saying that it's a bad time implies that there will be better times ahead, meaning the market will go up.
If you sell an investment because you don't have an emergency fund, the sale could be at a "good" time or at a "bad" time. You're exposed to some variance. Essentially, if you're in accumulation phase, you are temporarily in a decumulation phase, which is not the way your investment assets have been deployed. Disclaimer: I'm not a fan of emergency funds except for those just starting out or with investment emotion challenges. I prefer to use float, and to roll the emergency risk into my asset allocation. Some people can't get a proper gauge for including contingencies into their investment allocation, so separation of emergency assets can be useful for them, just like bucket way of thinking can be useful for some people in their decumulation allocation.

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Re: Is an emergency fund just about market timing?

Post by BogleMelon » Tue Oct 02, 2018 10:43 pm

bottlecap wrote:
Tue Oct 02, 2018 9:41 pm
Market timing is moving money in and out of the market based on your guess as to whether the market is heading up or down.

Having an emergency fund is knowing that occasionally the market goes down - way down for periods of years - and also knowing that you need to eat while it does.

Please explain how knowing the latter is the same as guessing the former.

JT
+1

OP, you making it looks like the default option is that money should be all in the market, else we are timing the market! Where did you get that assumption from in the first place? People should invest only based on their 1) need 2) ability and 3) willingness to take risk. If I don't need to invest my EF as they are enough now to sustain my needs had I got laid off, and if I am not able to take that risk with that kind of money as I won't be able to sleep well at night, and hence I will not be willing to take that risk, why would I put the money in the market? It is called "being conservative" not "market timing"
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Scott S
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Re: Is an emergency fund just about market timing?

Post by Scott S » Tue Oct 02, 2018 11:27 pm

Methinks a lot of people around here haven't actually read the definition of an emergency fund: https://www.bogleheads.org/wiki/Emergency_fund

It's a pile of money that you can access any day, RIGHT NOW for emergencies, that won't suddenly shrink by 50% when you need it most. There may be behavioral advantages to having one, but that is secondary to its raison d'etre!

And as JoMoney points out, the stock market has no obligation to be open during your emergency. ;)
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Re: Is an emergency fund just about market timing?

Post by AlohaJoe » Tue Oct 02, 2018 11:49 pm

Jack FFR1846 wrote:
Tue Oct 02, 2018 9:53 am
Say that some economic catastrophe occurs and you lose your job as a result. The market loses half its value. You really need your e fund now and where you thought you had 6 months saved, in fact, you now only have 3 months saved.
If that happens, six months isn't enough. It is easy to look at actual unemployment statistics during the Global Financial Crisis.

https://fivethirtyeight.com/features/th ... -your-job/

You will most likely be unemployed well over 12 months.

Also, someone could have a 60/40 portfolio and just withdraw from the bond portion, which would have a similar impact as just rebalancing. They wouldn't see this "six months is suddenly three months" scenario because their bonds wouldn't fall by 50%.

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Re: Is an emergency fund just about market timing?

Post by AlohaJoe » Wed Oct 03, 2018 12:00 am

Scott S wrote:
Tue Oct 02, 2018 11:27 pm
And as JoMoney points out, the stock market has no obligation to be open during your emergency. ;)
Neither do banks or credit cards, so I'm unclear what options people are suggesting? Keeping six months in cash in a safe in the house?

At some point everyone has to draw at line on "this is so unlikely to happen I'm not going to worry about it". Remember that even in the depths of the Global Financial Crisis, 90% of workers kept their jobs, that stocks didn't fall 50% over night, that credit cards kept working, that unemployment benefits were paid (and extended to 99-weeks), and even most home equity lines of credit were kept open (though perhaps with reduced amounts of draw available).

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Re: Is an emergency fund just about market timing?

Post by Finridge » Wed Oct 03, 2018 1:00 am

I don't see the need for a separate sizable emergency fund (other than a modest buffer in checking) if you have liquid investments in taxable. Have several credit cards available. In a pinch, just charge it, and then withdraw funds from the taxable account to cover the credit card bill before any interest accrues. "But what if equities are down 50%!?" you're asking? Take it out of the bond fund... Yes, there is a possibility that bonds will be down a lot also--but when bonds are down "a lot", it really isn't that much (unless you're invested in junk bonds, which you shouldn't do).

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Re: Is an emergency fund just about market timing?

Post by Finridge » Wed Oct 03, 2018 1:03 am

jalbert wrote:
Tue Oct 02, 2018 5:34 pm
Given that equities are perfectly liquid nowadays and generally free to trade (or at the very least, functionally free), what is the rationale for keeping an emergency fund when you can just sell investments to meet any expenses?
They get a lot less liquid at the times people are most likely to lose their jobs.
They're still liquid--just worth less.

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Re: Is an emergency fund just about market timing?

Post by watchnerd » Wed Oct 03, 2018 4:27 am

In addition to some strange semantic confusion between being conservative and market timing, there is also a sense of proportion:

If your emergency fund is <5% of your investable assets, don't worry about it.

Proportionally, it's not going to be a big needle mover, one way or the other.
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Re: Is an emergency fund just about market timing?

Post by watchnerd » Wed Oct 03, 2018 4:38 am

Finridge wrote:
Wed Oct 03, 2018 1:00 am
I don't see the need for a separate sizable emergency fund (other than a modest buffer in checking) if you have liquid investments in taxable. Have several credit cards available. In a pinch, just charge it, and then withdraw funds from the taxable account to cover the credit card bill before any interest accrues. "But what if equities are down 50%!?" you're asking? Take it out of the bond fund... Yes, there is a possibility that bonds will be down a lot also--but when bonds are down "a lot", it really isn't that much (unless you're invested in junk bonds, which you shouldn't do).
That's very different from what the OP suggested; there are bonds in that scenario.

The OP is talking about being 100% equities.
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Re: Is an emergency fund just about market timing?

Post by Theoretical » Wed Oct 03, 2018 7:03 am

Finridge wrote:
Wed Oct 03, 2018 1:03 am
jalbert wrote:
Tue Oct 02, 2018 5:34 pm
Given that equities are perfectly liquid nowadays and generally free to trade (or at the very least, functionally free), what is the rationale for keeping an emergency fund when you can just sell investments to meet any expenses?
They get a lot less liquid at the times people are most likely to lose their jobs.
They're still liquid--just worth less.
Actually no, because not only are they worth less, the spreads on the underlying stocks can be a lot worse, which adds up. This goes whether it’s you that’s suffering the spread (ETF) or the manager (mutual fund or ETF sales).

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Re: Is an emergency fund just about market timing?

Post by Nissanzx1 » Wed Oct 03, 2018 7:13 am

Sounds like a risky emergency fund. Isn't "risk" the reason why a person has an emergency fund?

No thanks, I'll keep my savings account for my 6 months of expenses. It only earns 1.65% and that's fine with me. Helps me sleep well at night.

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Re: Is an emergency fund just about market timing?

Post by Hyoga » Wed Oct 03, 2018 11:18 am

bottlecap wrote:
Tue Oct 02, 2018 9:41 pm
Market timing is moving money in and out of the market based on your guess as to whether the market is heading up or down.

Having an emergency fund is knowing that occasionally the market goes down - way down for periods of years - and also knowing that you need to eat while it does.

Please explain how knowing the latter is the same as guessing the former.

JT
What is the point of having the emergency money? It's to avoid taking money out of the market when it is down you say. Because, well, that would be losing money, right? Losing compared to what exactly? compared to if I take it out later.

Let's look at the moment the investor decides he needs a emergency fund, and makes it. This is essentially a prediction that at some point the market will be lower than at this very moment. But let's say that since the investor is also not able to predict that "the market will never be lower than right now", he edges his risk and thakes all possibilites into account. Fair enough.

Now, let's look at when the market is down and our investor uses his emergency fund. The prediction here is that when using the emergency fund, the investor is betting that the market will be back up by the time he has used up all of the emergency fund. And if the bet is lost he will end up selling at even lower prices.

I can agree that making the decision that one needs the emergency fund is not a market timing decision. Because you decide to make it regardless of the market levels. Now what about the time when you decide to use the funds?
If you are still accumulating, I assume you only use the emergency fund in a life emergency, like when you lost your job. Otherwise y'oure not supposed to touch those investments, and if you need to touch them, well you were not supposed to invest that in the first place then.
So, retirement phase. Say, you retired early 1999. End of 2001 you decide you need to use the emergency fund to avoid selling when the market is down. It's a one year expenses fund. By the end of 2003, you don't look so well. You chose the wrong moment to judge that the market was "down". Yes the exemple is conveniently chosen (life is a bitch). Well, you only use that fund in a bear market, right? I could have taken end of 2008 instead? Same result, maybe. Now, maybe you will say that the emergency fund must be larger than 1 year expenses. How large? 2 years? 3? Are we sure we will never get a very long bear market?

The conclusion is that actually the emergency fund's point is not what you said. It's not here to avoid selling when the market goes down. It's to avoid selling altogether when you need to spend money on something that you did not expect. Regardless of the market level.
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Re: Is an emergency fund just about market timing?

Post by watchnerd » Wed Oct 03, 2018 11:38 am

Hyoga wrote:
Wed Oct 03, 2018 11:18 am

The conclusion is that actually the emergency fund's point is not what you said. It's not here to avoid selling when the market goes down. It's to avoid selling altogether when you need to spend money on something that you did not expect. Regardless of the market level.
That's how I view it.

It's savings, not investment capital. It's essentially self-funded insurance to take care of "sh** happens" moments in life that aren't covered by other forms of insurance, so you don't have to sell anything at all from your long term investment portfolio.
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Re: Is an emergency fund just about market timing?

Post by bottlecap » Wed Oct 03, 2018 12:00 pm

Hyoga wrote:
Wed Oct 03, 2018 11:18 am
The conclusion is that actually the emergency fund's point is not what you said. It's not here to avoid selling when the market goes down. It's to avoid selling altogether when you need to spend money on something that you did not expect. Regardless of the market level.
I trimmed to narrow it down to all that was necessary.

I don't disagree with this statement. I consider it self-evident.

But you are really saying the same thing as I am. If either of us knew the market would never go below the point at which we established our emergency fund, we would keep it in the market.

So, in reality, we are establishing an emergency fund outside of our portfolios for the same reasons, no?

JT

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Re: Is an emergency fund just about market timing?

Post by Scott S » Wed Oct 03, 2018 12:51 pm

AlohaJoe wrote:
Wed Oct 03, 2018 12:00 am
Scott S wrote:
Tue Oct 02, 2018 11:27 pm
And as JoMoney points out, the stock market has no obligation to be open during your emergency. ;)
Neither do banks or credit cards, so I'm unclear what options people are suggesting? Keeping six months in cash in a safe in the house?
I can use my credit card or debit card *right now* if the bank isn't open -- withdrawing from Vanguard takes a day or two for the money to be available, and that's if the stock market is open. There is a definite difference in liquidity, and I think immediacy of access is what sets a proper emergency fund apart from the "low risk" part of your portfolio.

Like you and many others, I think 6+ months in cash is a little much, but if that's what makes someone comfortable, I won't judge them.
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Re: Is an emergency fund just about market timing?

Post by AlohaJoe » Wed Oct 03, 2018 4:53 pm

Scott S wrote:
Wed Oct 03, 2018 12:51 pm
AlohaJoe wrote:
Wed Oct 03, 2018 12:00 am
Scott S wrote:
Tue Oct 02, 2018 11:27 pm
And as JoMoney points out, the stock market has no obligation to be open during your emergency. ;)
Neither do banks or credit cards, so I'm unclear what options people are suggesting? Keeping six months in cash in a safe in the house?
I can use my credit card or debit card *right now*
Credit cards have no guarantee to work at all times:

https://www.theguardian.com/world/live/ ... ve-updates

I've had two cases in my past where I tried to charge something and the credit card network was down. Once it was the whole Visa network and once it was just my bank.

Also, it should be obvious that banks can and do have "bank holidays", limit withdrawals, and so on. All of which are much more likely to happen when stocks fall 50% (or whatever worst case scenario it is that people are imagining).

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