[Moodles]

I actually have a somewhat controversial opinion (that shouldn’t be controversial because it’s all math, but it still is regardless) that, after you save 5-6x your emergency fund, you don’t need an emergency fund at all and you’re better off investing it all in a total market index fund. The reason being that even if there is a market crash, you’ll still be able to afford the emergency since you’ve saved multiples of it already, and in general in the long run having stocks instead of cash or T-bonds in an EF will be better. Various blogs have done the math and it all checks out, but people still push back at me for this. Having an EF if your net worth is a few multiples of your emergency fund, is entirely psychological. Which is fine. But people should just be aware that it’s a bias they have.

Perhaps investing on margin is the same. I have personally taken the leap and got rid of my emergency fund. But I haven’t looked at investing long-term on margin yet. I did see a test from HEDGEFUNDFIE on bogleheads forums about this. But I haven’t looked into it. I definitely think taking out a margin loan while simultaneously having an EF in cash makes no sense though.

[imtringued]

You have $100k. Put 80% of it in the stock market. The stock market drops by 40%, your investment is worth $48k and you withdraw nothing but spend your entire emergency fund. The market recovers and now your portfolio is worth $80k.

You have $100k. Put all of it in the stock market. The stock market drops by 40%, your investment is worth $60k and you withdraw $20k. The market goes back to 100% and now you have $67k in your portfolio.

If the market dropped by 80% your portfolio would be gone entirely. Meanwhile if you had enough emergency funds you would have kept everything.

The worse the emergency, the higher the ROI of the emergency fund. Since there is no upper bound for how bad an emergency can be the theoretical ROI of an emergency fund is also unbounded.

In this comment the definition of an emergency is a stock market drop combined with unexpected unemployment.

[Moodles]

You've just given a cherry picked example to show that yes, withdrawing during market downturns is bad. I don't disagree with this? I'm merely saying that, on average, over the long-term, it makes more mathematical sense to ditch the EF if you're a high net worth individual. For example, you have literally just picked the worst case scenario and used that to justify why the strategy is bad. What about all the times your emergency doesn't coincide with a total market crash? My all stock "emergency fund" will actually grow larger than yours, on average. You probably have several emergencies over the course of your life.

Honestly your example is about as useful as me saying investing in stocks in general is bad, because sometimes, they go down. So what? We're talking about broad long-term averages here, nothing more.

It's fine to argue about personal psychological preferences, but as I say, this purely a mathematical statement I am making here. It should not be controversial, but it always is.

[paulpauper]

in theory, all your money should be in the market if the market is efficient and has a positive drift

[Moodles]

Yeah, I mean there's also some practicalities involved like having cash to withdraw from an ATM or paying rent, but yeah pretty much I'm fully invested.

[hanoz]

That's all for an emergency on day one! If the stock market goes up 70% before your emergency, you'd have been better off with the all in strategy.

[Moodles]

I know. I get the exact same push back every time I mention this. I don't know why? I'm literally saying, on average, over the long-term, it's mathematically better to ditch the EF. This is a mathematical statement, but always someone says ""but what about 2008!?" as if I havn't considered it. It's quite bizarre. I suppose an EF is an emotional issue for a lot of people maybe.

[sokoloff]

That’s another use of margin. Invest 100% (but not more). Emergency hits and you can withdraw cash without selling stocks (up to a point).

[Moodles]

I mean honestly, using a credit card for a month before interest hits is usually fine too? My credit limit is like 50k or something ridiculous across all my cards. Not to mention when all in on stocks you can sell for better long-term capital gains tax treatment or even tax loss harvest losses too, which you can't do with a savings account. And ETFs are actually pretty liquid: I can sell and withdraw in a few days if I wanted to anyway.

[sokoloff]

Yes, but then you need cash to pay off the credit card, which is cheaper to pull from your margin available than to let the credit card charge you interest.

[Moodles]

I'm not suggesting to pay credit card interest. I'm saying you can cover any emergency expense with a credit card which buys you a month, and then you might have ordinary salary or time to sell your stocks before interest is due.

No offense but I'm pretty surprised you commented what you did. Literally my first sentence says "... before interest hits...".

[sokoloff]

I’m perhaps equally surprised that you’d consider anything an emergency that would covered by your ordinary salary within a month’s time. I mean, that’s just normal credit card use, right?

[fairity]

I’ve thought about this too, and came to a different conclusion. The primary reason is just because the markets haven’t collapsed more than 85% over a months long period before, doesn’t mean it won’t in the future. And, my marginal utility for money gets so high below a certain level, that it’s not worth risking this outcome when the marginal utility of more money is relatively smaller.

[Moodles]

Yeah, it’s essentially just estimating the probability of you getting an emergency which coincides with a total market collapse so horrific it reduces your semi-liquid net worth to less than your emergency. I’m at a point where I’m ok with that risk. At some point you would be too: 85%? 90%? 99%? Clearly we agree Jeff Bezos doesn’t need 6 months cash on hand at all times. So the limit is somewhere. I think a total market collapse reducing the Dow Jones to like 3,000 is pretty unthinkable at this point. Or rather, if it did happen, there are bigger problems than my cash, like the zombie apocalypse which caused this horrific stock market collapse.

[pedrosorio]

> a total market collapse so horrific it reduces your semi-liquid net worth to less than your emergency

I don’t follow the logic here. It doesn’t need to reduce your funds anywhere near the emergency amount.

If it reduces your investments to 3x your emergency you were just forced to sell 1/3 of your portfolio at what is potentially the lowest point.

[Moodles]

Because there are actually two goals, not one:

1. To have enough money to survive an emergency no matter what.

2. To maximize long-term net worth on average.

I was only talking about 1. You are talking about 2. But, to address your point: yes, stocks can indeed go down, but on average they go up. Sometimes your emergency will coincide with a good stock market. You're literally choosing the worst possible situation and then saying "see, this strategy doesn't work!". But I'm actually being very careful with my words here. I am saying: mathematically, backtesting with real data and with monte carlo simulations, you will maximize your long-term net worth on average if you forgo the EF after a certain net worth level.

Consider also the original comment I replied to talked about investing on margin while simultaneously having an EF. Which, if you're against me forgoing an EF, you must really be against investing on margin while having an EF: That's kind of the same to what I'm currently doing, only paying interest for it!

[pedrosorio]

People don’t keep EFs to maximize their expected net worth. They do it to keep worst case scenarios within reasonable bounds.

You argue keeping stocks is ideal for 2 (sure) and it doesn’t hurt 1 (assuming your net worth is significantly higher than what you’d keep as EF). Agreed.

An EF is for 3. Maximize long-term net worth in x th percentile of outcomes (where x < 10)

EDIT: “ you must really be against investing on margin while having an EF”. Yep.

[Moodles]

Ok but now we're just personally disagreeing on what x is, which as I said in my first post, is fine. But just be aware of the bias.

[fairity]

Makes sense. 99% sounds about right for myself. But, how do I estimate the degree of downswing that I'm 99% confident will never happen in my lifetime? Or, is there a way to buy options to protect against this outcome that would economically make sense? Thanks!

[Moodles]

Yeah it’s hard. There is about 200 years of stock market data so I would look at the biggest crashes to get a sense of what the biggest of them all could be. I guess that’s the German tank problem. It seems very unlikely we’ll get a crash relatively twice as bad as the Great Depression though

[sanderjd]

Why does that seem very unlikely? It seems to me that the right way to think about that is that the likelihood is simply unknowable either way.

[Moodles]

It seems very unlikely since there's 200 years of data to show that was the biggest crash ever. So a crash twice that size is very unlikely. You could do the math to calculate the exact probability given the sample size of stock market years.

[icedchai]

I keep roughly 10% of my net worth in cash... That equates to several years of expenses. It may be excessively high but it lets me sleep at night. You joke, but the past year shows something like a zombie apocalypse is a possibility.

[Moodles]

Yeah as I say, it's fine to do whatever you want with your money to provide emotional comfort. I'm merely saying it's a psychological bias you may want to be aware of.

I mean, you chose a 10% figure. Why 10%? Why not 20% or 5%? I think it's helpful to really think through the math sometimes.

[icedchai]

Yes, you're right... Mathematically, I know I can be fine with less, it just makes me feel uneasy. I was actually trending towards a lower percentage, but I got scared and depressed earlier in the year. I sold off some poorly performing stocks and ETFs, giving me some more cash cushion. It felt like the sh*t was really hitting the fan. It still does, in many ways, just not for my investment accounts. When (if?) things "go back to normal" I will re-assess...

[Moodles]

I suspect if you know not to trust yourself to stay the course when the sky is falling, then you are in fact probably better off in the long-run with a less risky asset allocation. There’s plenty of evidence out there to show that the more you buy/sell/tinker, the more likely you are to get worse returns. Literally the best investors are dead people. So if you need some % of cash or bonds to stay the course and do nothing, that’s good. Which shows some self awareness and maturity. Ideal would be to dispassionately follow the math, but your strategy is the next best thing.

[twblalock]

> You joke, but the past year shows something like a zombie apocalypse is a possibility.

For me the past year shows that the economy has been more resilient than most people expected, that the Fed is willing to drop rates to zero in order to keep it that way, and that the stock market actually goes up when that happens because it is the only investment that might return more than a fraction of a percent.

If you are going to keep that much in cash, I might suggest putting some of it in inflation-protected securities like I-bonds. They are backed by the US government, and I can't forsee a situation where the government could default on them without the value of the dollar also tanking. They are better protected from inflation than money in a savings account.

[icedchai]

I agree with what you say about the economy. I am also impressed by the resilience there. My apocalypse comment was more in reference to the non-economic aspects... sickness, death, isolation. I put on the news and it's awful. Working-from-home has also really worn me out. Many nights, I have trouble sleeping.

I will look into something like the I-bonds more seriously.

[lotsofpulp]

In the very worst scenario, you’re going to need guns, source of food, land, and most importantly a network of people who you can call to help defend you (or go on offense with you to acquire necessary resources).

The dollar is only useful as long as the US government continues to perform as an organization. However, as the US approaches dissolution, I would expect the value of USD to approach zero as the government increases the supply of money and prospective owners of the currency lose trust in its ability to retain value in the future.

[marvin]

>or go on offense with you to acquire necessary resources

Are you seriously suggesting, on a hacker forum, to be prepared to use the proceeds of your emergency fund to violently steal life-critical resources from other people in a crisis?

I really hope I've misunderstood, and you're using the phrase "go on offense" as a euphemism for deer hunting.

[lotsofpulp]

No, I am suggesting that in a worst case scenario, an emergency fund full of cash is useless (on a multiple year timescale, of course how many years is subjective).

It’s conceivable to imagine a scenario where resources are so limited that acquiring them becomes a do or die situation, which is what I imagine the previous poster meant by “zombie apocalypse” scenario (or more realistically, war). Or I erroneously assumed “zombie apocalypse” to mean worst case scenario.

I also forgot to include a less drastic measures of also owning assets in a different country and the rights to live there in case you need to immigrate.

[icedchai]

This is true. However, I think there are a variety of scenarios, less extreme than total societal collapse, where it still may be useful to have a large emergency fund. It may not be rational.

[sanderjd]

Do we all agree with that? I feel like I'd probably still keep 6 months of cash on hand if I were Jeff Bezos... But presumably that's one of the many reasons I'm not.

[xchaotic]

I think the central banks and government will prevent any future collapse of that scale. Don’t fight the fed. They have more money than you.

[loxs]

This sounds true if you only optimize for (hedge against) one risk only - stock market crash.

To me, an emergency fund is a hedge against various different risks like these (I am guilty of not being prepared for all of them):

1. A pandemic. For this I was ready even before we thought it's indeed possible - I have funds in several different banks (debit cards) that allow me to not have to visit a bank physically for several years (even if some of the cards expire in the meantime, or one bank suddenly goes bust)

2. AI glitch, identity theft, a bank holiday (this happened to me actually some years ago) that blocks you from accessing banks (and investment brokers if you have nowhere to withdraw your funds) for several weeks/months - for that you hold paper cash, physical gold and cryptocurrencies stashed at different physical locations.

3. Natural disasters - again some combination of diversified physical and virtual funds

4. Legal trouble - yes, even if you are not guilty you could get your funds blocked.

I presume you are from the US, hence the purple goggles ;) (I hope I'm not offending you)

[Moodles]

purple goggles?

[xchaotic]

Rose tinted glasses

[loxs]

Yes, sorry, not a native speaker

[cortesoft]

The bad part is that you are going to have to pull money out of the market at the worst time, when prices are way down.

[Moodles]

You won't necessarily have to, but yes, no risk no reward. Doing this is what people who have retired have to do whenever there is a market crash.

Really this shouldn't be that controversial. It's super simple: Which does better long-term? Stocks or cash? That's pretty much all I'm saying. There's a ton of data to back up what I'm saying.

https://earlyretirementnow.com/2016/05/05/emergency-fund/