Comment by ryangittins | Hacker News Reader

Comment by ryangittins | Hacker News Reader

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Consider this scenario (which is not out of the realm of possibility):

You stick $10k in the market when shares are $10 each. This means you get 1000 shares. Then the market crashes and now those 1000 shares are worth $5k. Normally this would be fine; you know the market will rebound eventually. Then you lose your job and have no cash on hand.

You're out of the job for a few months, and you slowly sell your shares until you find a new job. Say it takes $4k to keep you afloat for a few months. You now have $1k left in the market, 200 shares. That $4k of spending actually cost you $8k. Though the market rebounds eventually and your remaining 200 shares are worth the $2k they originally were, you're still $8k short and you always will be. That money is gone. It would've taken more than 20 years for inflation to turn $8k in cash into $4k.

In short, cash is a cheap hedge against some bad luck eating up your investments. The inflation that slowly devalues your cash is a much more acceptable risk than the one I describe. Markets can be rough in the short term. It's easy to hedge against them. Do it.

To that I say you can have an even cheaper way to hedge against risk by having put options on the stock you own.

Also your example assumes that all the shares were bought at the same time and declined 50%. If you've been investing for years, the value of your gains/losses wouldn't simply be a "market crash" it would include the price at which you bought the stock at plus any dividends you reinvested. So a 50% downturn from a certain high point could be much less from how much capital you initially committed. Add to that you can take capital losses as a way to reduce tax liability in a given year.

There's enough ways to hedge without having too high of a cash drag.

The cost of inflation (at, say, 3%) is $30 for every $1k you have in your emergency account. That's $150 per year if your emergency fund is $5k, or $300 if it's $10k.

I'd be surprised if the combination of the effort it takes and the fees that are charged are less than that for your method.

That being said, it's sounds like you have a firm grasp on your system and it works for you. That's much more than can be said for a vast majority of people.

Cash is a great thing, it's something you don't have to worry about and usually is FDIC insured. Personally, I'm holding onto quite a bit right now because I think much of the market might be overvalued. I think I was just trying to see if I could think out a case where you could in theory not worry about not having too much of it on hand.

Hedging with options is great... if you know how to hedge with options. Most people don't so the six months of cash on hand is more broadly applicable as a rule of thumb.

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