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Re: emergency fund and cash

Posted: Fri Aug 23, 2013 11:36 am
by buddtholomew
"This approach could be considered counter-productive as the bonds may end up being more risky than having all of the funds invested in the PP portfolio."

I now realize that conservative investments outside of the PP could introduce more risk to the overall portfolio than simply diversifying into the HBPP. As mentioned recently, the investment earmarked for an emergency (IT-TE Municipal Bonds) has been liquidated with the proceeds reinvested into the 4x25 allocation. I do however maintain some additional cash to purchase lagging assets when a re-balancing band is breached as these funds are held in a taxable account and minimizing taxes is a priority.

Re: emergency fund and cash

Posted: Fri Aug 23, 2013 7:08 pm
by sophie
Juergen wrote: I just wanted to get something clear in my mind: Is the money I saved as an emergency fund (say the living expenses for one year) part of the cash portion of the PP? If so, any withdrawal in a case of emergency would mean that one could be forced to sell assets like stocks and gold even if there are in the red when the cash portion drops below 15%. Is this correct? And if so, wouldn't it be better to keep the emergency fund outside of the PP? appreciate eery answer  :)
Getting back to the second part of your question....

If all the volatile assets are down, then the cash allocation will have increased relative to the entire portfolio.  Thus, it's unlikely you'll see cash dropping below 15% after a withdrawal.  See the following thread for backtests regarding portfolio performance during a "withdrawal" phase: ... or-a-myth/

UNLESS, of course, your withdrawal constitutes a large portion of the cash allocation.  The problem would be compounded if part of your cash allocation is in tax-deferred accounts and difficult to access.  For this reason, it's probably better to keep your emergency fund separate from the PP until your PP has grown sufficiently large.

I'm wrestling with this very issue myself.  It's compounded by the fact that rebalancing might call for savings account cash to be used to buy gold, since cash in tax-advantaged accounts may only be able to buy stocks and bonds.  Thus, how about this for a rule of thumb:

Keep the e-fund separate until the taxable portion of the PP has built up to at least twice the amount needed for a generous emergency fund.  Note that "taxable portion of the PP" excludes savings for 529 accounts, new car, house down payment, etc.

Re: emergency fund and cash

Posted: Sat Aug 24, 2013 3:58 am
by frugal
WHAT % of our savings shall we have at home for emergency?

1% hidden at home ?


Re: emergency fund and cash

Posted: Sat Aug 24, 2013 4:30 am
by gizmo_rat
frugal wrote: WHAT % of our savings shall we have at home for emergency?
1 months expenses is a popular choice, but check your home contents insurance for it's coverage of cash in the home.

Re: emergency fund and cash

Posted: Sun Oct 13, 2013 4:08 pm
by smurff
Here's an interesting take on where you should put you emergency fund--in stocks: ... -is-wrong/

The (moderated) comments are as interesting as the blog article.  And this topic seems to have gotten the most comments of any I've seen there.

A lot depends on one's definition of emergency.  I found it interesting when one of the bloggers said IHO repairs for a busted transmission do not constitute an emergency.  That response must have something to do with the company being HQ in a region (NYC) fertile with an egalitarian mass transit infrastructure of subways, suburban trains, light rail, buses, coaches, and shuttles for getting around.

BTW, Betterment is a new, set-it-and-forget-it online investment/advisory service with automated asset allocations and investment schedules based on customers specific goals.  The computer algorithms do all the work.  I don't know anymore about them (not a customer) but what I read on their website.  Their fees seem to average about 0.25% annually, and they seem to have a couple of  family office divisions as their advisors and startup investors.

Re: emergency fund and cash

Posted: Tue Oct 15, 2013 2:35 pm
by sophie
There is an entry in the Boglehead wiki about using stocks in taxable as an emergency fund: ... ed_account

It works by keeping an equal amount of cash in a retirement account.  If you need money, you can sell stocks in taxable, and buy an equal amount in the retirement account with the cash you have saved in there.  It's purely to take advantage of favorable tax treatment of stocks, including tax loss harvesting, but it doesn't make a whole lot of sense with the current low interest rates.

Outside of an arrangement like this, the suggestion to keep emergency funds in stocks is totally irresponsible.  It would be a disaster in a recession, and certainly would have been in 2008-2009.  One more reason to steer clear of "services" like Betterment.

Re: emergency fund and cash

Posted: Tue Oct 15, 2013 4:57 pm
by smurff
Sophie and Rye, the folks at Betterment seem a bit smug and naive.  Apparently they have not lived through many recent stock market corrections, otherwise I can't see how they can give such advice.  It was just in 1998 that a bunch of algorithm geniuses at Long Term Capital nearly imploded the world's economies, and proved that even Nobel Prize-winning economists can't think of every contingency.

It's a good point you made, Rye, about emergency funds which (by intent, use, and necessity) are made of money you CAN afford to lose.  That would disqualify them from being in the Permanent Portfolio.

Re: emergency fund and cash

Posted: Wed Oct 16, 2013 11:25 pm
by mortalpawn
I think it depends on the size of your taxable portfolio.  If you have a small taxable portfolio, then having a separate emergency cash fund is probably more appropriate to avoid having to constantly rebalance, which can have bad tax implications in a taxable PP.  Also if your portfolio is small, you are more susceptible to needing that emergency fund (at least in my experience!).

However, as your portfolio gets larger and the emergency fund becomes a smaller percentage of the total, then it probably matters a lot less as the loss of some emergency funds to handle life's unexpected moments is much less likely to trigger a rebalance event or subsequent tax bill. 

Also I've found as the portfolio size (and income) goes up, the emergency fund gets dipped into less anyways because you have more money in your monthly budget to absorb life's unexpected events.

The key, as always, is to grow your income faster than you grow your spending!