Why not put part of your Efund into total market ETF?

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Bwlonge
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Why not put part of your Efund into total market ETF?

Post by Bwlonge » Tue Jan 09, 2018 9:39 am

I have a relatively small emergency fund, its a robust 6 months expenses. But I also love earning interest. So I'm stuck. I have like 2 months of expenses in USMV, minimum volatility. My thinking being that, the max drawdown over the last couple years was ~5%, an amount I'm not scared of losing. However, I know its been a bull market and nothing would save this money from another 2008.

But why not do something like this: buy into the ETF and let it grow now. It will grow momentum and in say 6 months, it could in theory be pretty far up from where the principal was. If I start feeling jittery, there's uncertainty about my job, or I just feel like it, I can set it to sell if/when the fund declines to what I bought it for. I don't lose my principal and am still able to try for some gains.

And this could work with any fund, because a 2008 can happen to any fund and you stand to lose what you put in. However, with something like a LifeStrategy fund, you would be seeing even less volatility and so wouldn't even have to worry about an auto-sell in a time where you wouldn't need that portion of the e-fund. I have 4 months expenses in savings accounts, so there's fair buffer to decide when to sell.

exigent
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Re: Why not put part of your Efund into total market ETF?

Post by exigent » Tue Jan 09, 2018 9:45 am

Bwlonge wrote:
Tue Jan 09, 2018 9:39 am
But why not do something like this: buy into the ETF and let it grow now.
Because it could shrink instead of grow, perhaps by a significant amount. And since it’s your “emergency” fund, you could need it unexpectedly.

RRAAYY3
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Re: Why not put part of your Efund into total market ETF?

Post by RRAAYY3 » Tue Jan 09, 2018 9:56 am

Your emergency fund should not be in something that can go down ... this is why its the emergency fund

grog
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Re: Why not put part of your Efund into total market ETF?

Post by grog » Tue Jan 09, 2018 10:02 am

You can shift money from cash into stocks if you're comfortable with risk, but it really ceases to be an emergency fund at that point.

Also, don't fool yourself with low volatility strategies. They are only "low" compared to overall equity markets, but still far riskier than cash. The MSCI Min Vol Index that USMV follows would have lost 28% in 2008 and 16% in 2002. And those are annual returns. Max drawdown would be worse.

https://www.bogleheads.org/wiki/Low_vol ... ex_returns

Rather than holding safer equity, you could go full strength equities and just not put as much in. That is what I do.

Bwlonge
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Re: Why not put part of your Efund into total market ETF?

Post by Bwlonge » Tue Jan 09, 2018 10:20 am

exigent wrote:
Tue Jan 09, 2018 9:45 am
Bwlonge wrote:
Tue Jan 09, 2018 9:39 am
But why not do something like this: buy into the ETF and let it grow now.
Because it could shrink instead of grow, perhaps by a significant amount. And since it’s your “emergency” fund, you could need it unexpectedly.
I'm saying though, you sell if it shrinks to principle, plus any fees you pay, so you don't ever lose money.

grog
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Re: Why not put part of your Efund into total market ETF?

Post by grog » Tue Jan 09, 2018 10:33 am

When there's a crash, there are a lot more sellers than buyers and prices plummet for the markets to clear. Prices can fall quickly. In the '87 crash, prices fell over 20% in one day. Someone has to be left holding the bag and you will not be the one with the advantage.

exigent
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Re: Why not put part of your Efund into total market ETF?

Post by exigent » Tue Jan 09, 2018 10:35 am

Bwlonge wrote:
Tue Jan 09, 2018 10:20 am
I'm saying though, you sell if it shrinks to principle, plus any fees you pay, so you don't ever lose money.
In order to sell it when it shrinks to “principal,” it has to first grow to be more than the starting value.

If you want to put more money in equities, that's fine. But don't pretend it's still an emergency fund at that point, because the money might not all be there when you need it. And don't pretend that you've dreamt up some new loophole for taking advantage of the stock market. If this was a viable, low risk strategy, others would be doing it.
Last edited by exigent on Tue Jan 09, 2018 10:09 pm, edited 1 time in total.

Jack FFR1846
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Re: Why not put part of your Efund into total market ETF?

Post by Jack FFR1846 » Tue Jan 09, 2018 10:47 am

Worst case scenario: You put your money into some fund based on equities.

We get a specific industry sudden collapse. Your company goes bankrupt because the CEO has been stealing funds for years. You're out of a job.

Ok, so let's say that the fund you invested in is heavily connected with the sector that just tanked. So you're out of a job and your emergency fund is having an emergency of its own, now that it's worth 25% of what it was last week.

That's why you keep it in things that can't drop. High yield savings account, CD, iBonds. Stuff that was unaffected in 08 AT ALL.
Bogle: Smart Beta is stupid

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oldcomputerguy
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Re: Why not put part of your Efund into total market ETF?

Post by oldcomputerguy » Tue Jan 09, 2018 10:53 am

Bwlonge wrote:
Tue Jan 09, 2018 9:39 am
I have a relatively small emergency fund, its a robust 6 months expenses. But I also love earning interest. So I'm stuck. I have like 2 months of expenses in USMV, minimum volatility. My thinking being that, the max drawdown over the last couple years was ~5%, an amount I'm not scared of losing.
Repeat after me: "Past Performance is No Guarantee of Future Results." USMV is an equity fund. "Minimum volatility" does not mean that it will not lose money, even if it has had relatively lower drawdowns over the last couple of years.
But why not do something like this: buy into the ETF and let it grow now. It will grow momentum and in say 6 months, it could in theory be pretty far up from where the principal was.
What you're describing seems to me to be the very definition of market timing.
If I start feeling jittery, there's uncertainty about my job, or I just feel like it, I can set it to sell if/when the fund declines to what I bought it for.
That's assuming that you can find a buyer willing to purchase it for that amount. Bear in mind that ETFs trade like stocks, not like mutual funds. You can't simply turn in a sell order at a particular price and take it for granted that it will execute. Before you can sell, you have to have a buyer willing to buy. In the scenario you describe (economic uncertainty), your prospective buyers also will be feeling the same uncertainty, and will be less willing to give you your price.
It’s taken me a lot of years, but I’ve come around to this: If you’re dumb, surround yourself with smart people. And if you’re smart, surround yourself with smart people who disagree with you.

Snowjob
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Re: Why not put part of your Efund into total market ETF?

Post by Snowjob » Tue Jan 09, 2018 11:03 am

Because its an insurance policy. It costs you, but your covered if you need it.

When your portfolio grows large enough your emergency fund is no longer needed and it should be just part of your asset allocation. But those first 5 years or however long it takes of working 10 years, it really should be looked at as a separate item to be used in the worst case scenario -- like 2008/2009/2010 - collapsing equity valuations and a job loss

quantAndHold
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Re: Why not put part of your Efund into total market ETF?

Post by quantAndHold » Tue Jan 09, 2018 11:05 am

The problem is that the “emergency” that causes you to tap your emergency fund will likely be correlated with a recession that causes a drop in stock prices.

Low volatility is not the same as no volatility.

Chadnudj
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Re: Why not put part of your Efund into total market ETF?

Post by Chadnudj » Tue Jan 09, 2018 11:14 am

Everyone else is, of course, correct -- an emergency fund should be safe, so it should be in cash in a bank you can access relatively easily.

Now, saying that, not all "emergencies" are equal. A 6 month emergency fund for me, for instance, includes far more than any reasonable non-job-loss emergency would cost (think new roof or expensive car repair, etc.). So, in essence, my emergency fund is more a "job loss" fund.

Now, there is one way to get away from having so much tied up in cash -- build up a separate taxable account large enough that you can, comfortably, take the cash emergency fund down to a more "non-job-loss emergency" level rather than 6 months of no job income.

Say, your 6-month emergency fund is $30k ($5k per month). You keep that in cash. Then you separately build up a taxable, VTSAX account of $60k. At this point, if you think $10k is enough to fund any non-job-loss emergency, you could probably move $20k from your "emergency" fund to your taxable account of VTSAX (bringing it up to $80k), because if there WAS a job loss emergency, even in a really bad 50% loss for the market time, you'd still have $40k (i.e. 50% of the $80k) available, more than covering a 6 month emergency.

Of course, you might sleep a lot better knowing that you don't have to touch your stocks/pay capital gains, etc. in an emergency, or just have that taxable account available as a second-level emergency fund beyond your 6-month fund. But that's what make personal finance personal.

aristotelian
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Re: Why not put part of your Efund into total market ETF?

Post by aristotelian » Tue Jan 09, 2018 11:24 am

Putting your EF into stock is in effect the same as not having an EF. People do this if they have a high risk tolerance and a large enough balance that a sharp decline would still leave them with sufficient liquidity to cover any circumstance.

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Phineas J. Whoopee
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Re: Why not put part of your Efund into total market ETF?

Post by Phineas J. Whoopee » Tue Jan 09, 2018 4:00 pm

Two things for OP:

1) Stocks do not have principal. I'm not just being picky about terminology. Principal is money somebody owes somebody else, and usually there's interest charged on it. If you own a share of stock nobody owes you nothin'. Mistaking a stock for a bond leads to serious portfolio errors.

2) It is entirely possible to proceed as you suggested. It just means you need a greater quantity of the more volatile asset. If you need, say, x dollars in a high-yield savings account, you might need 1.05x in a short-term bond fund, 1.1x intermediate-term, or 2.5x in stocks.

I just made up those numbers. They have no underlying reasoning.

Here's a wiki article that touches the subject: Placing cash needs in a tax-advantaged account.

PJW

mega317
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Re: Why not put part of your Efund into total market ETF?

Post by mega317 » Wed Jan 10, 2018 5:05 pm

OP: your plan seems to hinge on the fund going up first.

Once your taxable account is large enough, say 2x whatever you'd decided your emergency needs are, or 2.5x as PJW suggested, you can eliminate the emergency fund and hold all stocks since even in a crash you'll still have x. You don't even have to sell stocks to spend the money.

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