100% stocks 'emergency fund'?

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mortal
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100% stocks 'emergency fund'?

Post by mortal » Fri Dec 07, 2012 12:10 am

Now that you've spit out your coffee... retract your claws, bear with me. :wink:

At what point does it no longer make since to have an 'emergency fund'? Is it always mathematically worth it to have a 6-12mo emergency fund so you won't have to sell stocks in case of a job loss?

My taxable account is currently at 4x my yearly living expenses. I could suffer through a recession, lose 50% of my portfolio, lose my job and *still* have 2 years worth of living expenses available. Of course, I also have a few k in checking, so it's not like I'd have to sell stock for a major expense like a car repair.

I currently have roughly 12mo expenses in cash and Ibonds. I'm just curious about my 'opportunity cost' of doing this over time.

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nedsaid
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Re: 100% stocks 'emergency fund'?

Post by nedsaid » Fri Dec 07, 2012 12:41 am

I still like good old fashioned money in the bank.

Selling part of your taxable portfolio could generate capital gains taxes at the point you could least afford it.

You could try to use your stocks as collateral for a bank loan. That might work in a pinch. Don't have to sell either at a loss or triggering a taxable event. Or just open a line of credit at your bank.

Volatile instruments are just not good for emergency money.

In your situation, 3 months of living expenses in the bank plus what you have in checking is sufficient.
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Re: 100% stocks 'emergency fund'?

Post by Elbowman » Fri Dec 07, 2012 12:49 am

I believe when your taxable account is at least 2x the amount you believe you need for an emergency fund, and you have at least 1x what you need in bonds in your tax advantaged space, you can skip the separate emergency fund.

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Padlin
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Re: 100% stocks 'emergency fund'?

Post by Padlin » Fri Dec 07, 2012 6:03 am

"At what point does it no longer make since to have an 'emergency fund'? Is it always mathematically worth it to have a 6-12mo emergency fund so you won't have to sell stocks in case of a job loss?"

If you are like me and consider an E fund for real emergencies like a job loss and not new car, then I believe it is prudent to put your E fund in a retirement investment as long as it is liquid enough so you can get to it if needed. Keep it conservative enough where any market drop won't leave you short if you were to need it.

I put mine in I bonds and a pair of Roths (30/70 Balanced fund) where I can get the funds in roughly a month if needed. At the time I could not afford the Roths so it worked out. It took a couple years to get what was in a CD ladder into the I bonds and Roths. It's not really an Emergency fund any more.
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Re: 100% stocks 'emergency fund'?

Post by Call_Me_Op » Fri Dec 07, 2012 6:33 am

mortal wrote:Now that you've spit out your coffee... retract your claws, bear with me. :wink:

At what point does it no longer make since to have an 'emergency fund'? Is it always mathematically worth it to have a 6-12mo emergency fund so you won't have to sell stocks in case of a job loss?

My taxable account is currently at 4x my yearly living expenses. I could suffer through a recession, lose 50% of my portfolio, lose my job and *still* have 2 years worth of living expenses available. Of course, I also have a few k in checking, so it's not like I'd have to sell stock for a major expense like a car repair.

I currently have roughly 12mo expenses in cash and Ibonds. I'm just curious about my 'opportunity cost' of doing this over time.


Having to sell stocks during a downturn is obviously a bad strategy. You need some liquidity, even if it is a home equity line that is only tapped if needed.
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livesoft
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Re: 100% stocks 'emergency fund'?

Post by livesoft » Fri Dec 07, 2012 7:03 am

I would say that folks in the OP's situation usually have a tiered emergency fund:
Wiki article link: Emergency fund
and put their cash to work:
Wiki article link: Placing Cash Needs in a Tax-Advantaged Account

I think cash in checking account to cover the next week or two of online bill paying are all the cash one needs, but lots of folks disagree with me. Selling equities is easy nowadays to get money. And if you sell equites at a loss, that's just called Tax-Loss Harveting which everybody should do:
Wiki article link: Tax Loss Harvesting
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Call_Me_Op
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Re: 100% stocks 'emergency fund'?

Post by Call_Me_Op » Fri Dec 07, 2012 7:13 am

livesoft wrote: And if you sell equites at a loss, that's just called Tax-Loss Harveting which everybody should do:
Wiki article link: Tax Loss Harvesting


But if you use the proceeds for expenses rather than re-investing, that's selling low - not tax-loss harvesting.
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Re: 100% stocks 'emergency fund'?

Post by livesoft » Fri Dec 07, 2012 7:14 am

Channelling chaz here: "Read the Wiki."
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Taylor Larimore
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Is a separate Emergency Fund necessary?

Post by Taylor Larimore » Fri Dec 07, 2012 7:40 am

Mortal:
Emergency Fund definition: "Cash set aside in a dedicated interest account to cover unanticipated emergencies such as property repairs, medical expenses and car repairs."--Financial Glossary


In my opinion, most investors do not need a separate "Emergency Fund" as described above. What we need is a "source" of ready cash--not necessarily another separate, low-yielding account (other than a checking account).

Pat and I have not had a separate "Emergency Fund" for many years. Like most Bogleheads, we know that if it becomes necessary, we can get money from our checking account, portfolio, credit card, bank, home equity loan, life insurance, family, etc.

For young working investors, a Roth IRA can be an excellent emergency fund. Of course, no one likes to take emergency funds from contributions in a retirement account, but if it is necessary (and may never be), its better than delaying the start of a tax-free Roth.

For older investors, with sizeable retirement portfolios, emergency funds are normally no problem.

In my opinion, the idea that everyone must have a separate "emergency fund" is an investing myth.

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Taylor
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southport
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Re: 100% stocks 'emergency fund'?

Post by southport » Fri Dec 07, 2012 8:25 am

I'm with Taylor. A credit card does the trick for me. Money sitting in a money market, etc., isn't really working very hard.

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Re: 100% stocks 'emergency fund'?

Post by nisiprius » Fri Dec 07, 2012 9:22 am

Well, you need to decide. If you don't need an emergency fund, you don't need an emergency fund. If you do need an emergency fund, you are engaging in dangerous self-delusion if you regard an investment in stocks as a suitable emergency fund.

This sounds like wanting to have your cake and eat it to. You want an emergency fund but you don't want to sacrifice any returns to it. It can't be done; having an emergency fund costs something.
Last edited by nisiprius on Fri Dec 07, 2012 9:23 am, edited 1 time in total.
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Re: 100% stocks 'emergency fund'?

Post by Placenshow » Fri Dec 07, 2012 9:23 am

Should peace of mind ever enter into the equation?

I've always thought that once your emergency account is funded, it's time to start investing for the long-term, and those long-term investments can be tapped in the event of a major crisis. Having an emergency fund gives you some flexibility in deciding how and when to tap them.

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Re: 100% stocks 'emergency fund'?

Post by livesoft » Fri Dec 07, 2012 9:28 am

Lots of things enter into the equation, but "peace of mind" is an emotional reaction which we try to drive out of investing.

If you have no money, then you would not have "4x my yearly living expenses" in a taxable account. You would probably want to build up an emergency fund before investing.

Also one should not be 100% equities in their overall portfolio (taxable, 401(k), IRA, Roth IRA, 529, HSA) which in turn suggests that there should be some non-equities that might be useful in an emergency. But is job-loss really an "emergency" in the true sense of the word?
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Re: 100% stocks 'emergency fund'?

Post by ddunca1944 » Fri Dec 07, 2012 10:01 am

At what point does it no longer make since to have an 'emergency fund'? Is it always mathematically worth it to have a 6-12mo emergency fund so you won't have to sell stocks in case of a job loss?

Emergency Fund definition: "Cash set aside in a dedicated interest account to cover unanticipated emergencies such as property repairs, medical expenses and car repairs."--Financial Glossary

We’re retired, so not worried about job loss. So we don’t have an “emergency fund” of 6-12 months income.

However, we still have to deal with unexpected expenses (auto or house repairs, oop medical expenses or emergency vet expenses). I do keep cash set aside for those contingencies. It helps that our checking account is “high interest” (2% on up to $10K). I don’t consider a credit card an emergency fund.

And in the case of a really bad situation, needing more money than our checking account holds, I consider our retirement accounts as an emergency fund.

MrMatt2532
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Re: 100% stocks 'emergency fund'?

Post by MrMatt2532 » Fri Dec 07, 2012 10:20 am

I didn't read much of the posts in this thread, but I think it is potentially ok.

A typical suggestion is 6 months of expenses (in cash).

Then if you assume that stocks will drop 50% max, then a 12 month emergency fund in stocks is fine in terms of handling your 6 month in cash needs.

Of course, if this emergency strikes the same time the stock market drops big time you will potentially be locking in your losses. On the other hand, assuming it doesn't drop 50% or much more you will have your emergency needs covered regardless.

Personally, my take is that it's fine, but I would always keep at least 3 months of emergency fund in cash for convenience of access. So I would do something like 3 months cash, 6 months in stock at a minimum for an emergency fund of this nature.

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Re: 100% stocks 'emergency fund'?

Post by nisiprius » Fri Dec 07, 2012 5:52 pm

P.S. Just for the record, I think this guy is a jerk--I believe this guy always talking up stocks and always talking down bonds--and I think the article is nonsense. And it's a Sept. 2009 article, so I don't know if he still thinks this. And I think the definition of "blue-chip" stocks is elusive, there's no way to tell what stocks will or will not have the supposed characteristics of "blue chips" going forward. Just strictly for the record, though, this article does exist:
"Putting Your Emergency Money in Blue Chips: With Cash Accounts Offering Negligible Interest, Stashing Some Emergency Money in Blue-Chip Stocks Could Pay Dividends." Ugh. Shudder. Brrrrr.
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Re: 100% stocks 'emergency fund'?

Post by Edmund » Fri Dec 07, 2012 11:50 pm

In my experience, I have found it's good to have some liquid cash lying around in a savings account, for things like the semi-annual insurance bills, car repairs, plane tickets, medical bills, etc. Now whether you want to call that an emergency fund, that's semantics.

Now assume someone has a traditional IRA/401K and a Roth IRA, and suppose he/she wants to use the Roth as a dual role retirement vehicle/emergency fund repository. Wouldn't it make sense to put a chunk of one's bond allocation (at least the amount of the desired emergency fund) in the Roth, and stash equities mostly in the traditional IRA?

The logic here is that if the stock market tanks and you badly need your emergency fund (think 2008-2009), the emergency fund is in a safer (though by no means bullet-proof) investment, rather than volatile equities, but if you end up ever needing the emergency fund, then you never disturbed your asset allocation in your retirement accounts.

Does this make sense to folks? Or am I off base here?

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Re: 100% stocks 'emergency fund'?

Post by Dandy » Sun Dec 09, 2012 11:48 am

When you have enough assets the need for a very conservatively invested emergency fund changes. You should have enough liquid assets to cover your expenses in case you lose your job and the market plunges (a la 2008). You don't want to be selling depressed stocks and bonds (you actually want to be buying/rebalancing). You also should have access to credit e.g. cards and home equity line. That should position you to withstand most emergencies.

Watch out for the "opportunity cost" calculation of having an emergency fund (or enough liquid assets). The EF is like insurance. Most people don't skip house insurance because they could do better by investing the money instead of paying home owner insurance. Sounds good until there is a fire.

As others have pointed out you can reduce your taxes by having the emergency fund in your IRA in a bond fund for example and the same amount in a stock fund in your taxable account. If an emergency arises you can sell your stock fund in your taxable account to cover the emergency and pay cap gains rate and then exchange your IRA bond fund to buy some of a stock fund to mainatain your desired stock/bond allocation. Of course that is based on the current tax rules.

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Re: 100% stocks 'emergency fund'?

Post by livesoft » Sun Dec 09, 2012 12:00 pm

Dandy wrote:....

If an emergency arises you can sell your stock fund in your taxable account to cover the emergency and pay cap gains rate and then exchange your IRA bond fund to buy some of a stock fund to mainatain your desired stock/bond allocation.

Or deduct the loss on taxes if you have a capital loss. See, it is win-win. :)
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Re: 100% stocks 'emergency fund'?

Post by KyleAAA » Sun Dec 09, 2012 12:20 pm

Think of it this way : if you already have a taxable portfolio that large, just how much drag do you think those ibonds are causing? It's a non -issue IMO. Your lost opportunity cost isn't large enough to bother with, so flip a coin.

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Re: 100% stocks 'emergency fund'?

Post by papito23 » Sat Jan 12, 2013 9:53 pm

Haven't heard this mentioned here (specifically): What if you just tapped the bond portion of your portfolio?

Bond percentages +/- 10% are not very significant from a returns or risk tolerance perspective anyway. IF you know this ahead of time (planned), it could be a good plan B. Drift from your AA until the emergency has passed, then drift back as soon as practical. One could use I-Bonds for a portion of their bonds without dipping into a Roth (see below*). I can't max tax-advantaged space so I have used I-Bond for EF explicitly. Implementing this for me would essentially be switching some TBM in my Roth to Total US & Int'l, with my I-Bonds now comprising the 10% of my 10/90 split.

EF issues for low-income folks with substantial-ish assets:
*I'd prefer not to tap Roth IRA so I wouldn't lose the Earned Income Tax Credit in subsequent years.
**If my 100% stocks EF had a big run-up I might not be able to "afford" the capital gains in the event I would be laid off and need to redeem. Keeping investment income below $3300 for the Earned Income Tax Credit is a game changer. $3301 and I lose it all (no phase-out).
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Re: 100% stocks 'emergency fund'?

Post by 555 » Sun Jan 13, 2013 12:43 am

Emergency funds, like buckets, are just mental accounting.

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Re: 100% stocks 'emergency fund'?

Post by Dandy » Sun Jan 13, 2013 8:07 am

If you keep your emergency fund seperate and the "rule" is not to touch it unless there is an emergency - it is more real accounting then mental accounting. If you just have a pot of money and say that in an emergency you will use $X then that is more mental accounting. In a real emergency you will probably use whatever it takes but having a defined emergency fund is still a good idea for most people.

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Re: 100% stocks 'emergency fund'?

Post by Valuethinker » Sun Jan 13, 2013 8:13 am

mortal wrote:Now that you've spit out your coffee... retract your claws, bear with me. :wink:

At what point does it no longer make since to have an 'emergency fund'? Is it always mathematically worth it to have a 6-12mo emergency fund so you won't have to sell stocks in case of a job loss?

My taxable account is currently at 4x my yearly living expenses. I could suffer through a recession, lose 50% of my portfolio, lose my job and *still* have 2 years worth of living expenses available. Of course, I also have a few k in checking, so it's not like I'd have to sell stock for a major expense like a car repair.

I currently have roughly 12mo expenses in cash and Ibonds. I'm just curious about my 'opportunity cost' of doing this over time.


You need to know that during the 1972-74 period, the UK stock market dropped something over 85% after inflation.

No revolution. No lost war. Labour picketing but not anything like the violence we see in Greece, say. Democracy continued. Law and order fully in place. Just one of the world's 7 largest economies in a thoroughgoing mess.

You didn't get your money back until the early-middlish 80s, despite Margaret Thatcher's election in 1979.

*that* is a measure of just how badly equities can do.

You need to hold cash and cash like investments to a level -- probably 6-12 months of expenses.

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Re: 100% stocks 'emergency fund'?

Post by john94549 » Sun Jan 13, 2013 9:07 am

As with most "rules of thumb", the mythology surrounding the various EF "1X, 2X (fill in the blank)" comes, I suspect, from popular financial writers. Who knows, maybe it's perpetuated by banks and CUs offering next to zilch on savings accounts.

That said, stuff happens, and not just bad stuff, mind you. Anecdote alert.

We recently re-fi'd. One of the menu "options" was a permanent 15 basis point reduction in the mortgage rate over the life of the loan in exchange for a "handshake" deposit of $50K "new money" into a non-interest-bearing FDIC-insured account for a "reasonable" amount of time, so as to establish a "special relationship"* with the bank. The fact that this "new money" just happened to be the proceeds of a recently-matured CD at their bank didn't matter, since I had transferred the funds the month before to my CU savings account.

If you've stopped laughing, well, the math worked. The monthly opportunity cost of the lost interest was well below the monthly mortgage savings. So I did it. A year or so from now, I'll discreetly close the account and move it to a yield-generating investment.

So, it helped that we had the money available to take advantage of the deal. Ready-access cash isn't just for emergencies, I guess.

*Mind you, "handshake", "reasonable" and "special relationship" were the exact words used by two different bankers, the loan officer and the "private banker" assigned to the account. As these words appeared nowhere in the documents, I asked what might happen if I closed the non-interest-bearing account in a month or so. The private banker said "well, (fill in name of loan officer)'s bonus might take a hit, but that's about it."

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