In short, there’s no set of circumstances where my decision tree comes down on the side of taking the loan.
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.
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.
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!
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.
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.
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.
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.
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.
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.
I will look into something like the I-bonds more seriously.
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.
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.
No offense but I'm pretty surprised you commented what you did. Literally my first sentence says "... before interest hits...".
But regardless I’m just saying you can use a credit card to buy time interest-free before you pay off the emergency with your salary/stocks/whatever. It’s better than taking a margin loan, no?
i mean that's not really an emergency.
An emergency is one such that if you weren't prepared for it, you can't handle it. For example, losing one's job can be considered an emergency (a short one, if you're in high demand).
A medical emergency is a good example of an emergency - to which you prepare for by purchasing insurance.
So by saying that a person's portfolio would perform better by ditching the emergency fund is just the same as saying 'take on more risk and get more return'.
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.
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)
I work at a small prop trading firm and we run 10x or even more leverage most of the time. Without leverage, we wouldn't be able to run the vast majority of our strategies.
Basically, leverage is immaterial: what matters is the risk of the strategy. A leveraged strategy could be less risky than an unleveraged one.
Things that you should consider when deciding leverage: beta exposure, correlation to the market, volatility of the strategy, and the risk adjusted return of the strategy.
A classic example of this is risk parity: risk parity uses high leverage but is often safer than a classic 60/40 portfolio.
Diversification, Risk and Leverage https://cryptm.org/posts/2019/11/28/div.html
If I was rewriting the post today, I would make some changes, but by and large, I stand by the post.
Most information about trading either falls into the total bullshit camp designed for idiot retail investors, or complex papers/books designed for academics or professionals.
My blog tries to straddle the two: providing rigorous material but geared to those without a background in finance.
I see. Would your thinking change if your emergency fund was sufficiently large but much smaller than your investable cash?
For example, let's say your rainy day fund was $10, and you have $100. You have $90 to invest. In this case, the short-term loan you're taking out could range from $0-270 (the majority of cases would not be covered by your rainy day fund).
For example in crypto, market makers are commonly making 100% return. You haven't heard of these firms and they aren't interested in your money.
Market makers usually do quite well for themselves, but are capacity constrained: they can earn stellar returns on tens of millions of capital, but maybe not hundreds of millions or billions. You probably haven't heard of most of these firms and they would prefer to keep it that way.
of course if you want a public example, look at RenTec. They are unique in generating eye popping returns with such a large amount of capital. This is extremely uncommon. However generating comparable returns on 500-1000x less capital is significantly more common. These returns often don't compound tho, as they are severely capacity constrained.
But I’m a retail investor, and will almost certainly remain one— Not only do I not have the training to come up with these strategies, I don’t have the knowledge to judge the veracity of anyone claiming to sell them to me either. I’m content with my suboptimal portfolio that I don’t have to think about more than once a year, and have more important things to spend my time on.
Equities are different because their connection (however tenuous) to actual earnings gives them a very steady long-term uptrend. The hard part is just staying in during a crash so you don’t miss the recovery. Half of S&P 500 returns came on its ten best days.
In my opinion, and practice, emergency funds should not be used for investments ever, this includes covering the losses from investing. Yes it can feel like you are not maximizing your returns on that amount of money but its job isn't to generate returns, it is your help smooth out the bumps in the road of life for you. In my experience life can punch hard and it never throws just one punch, it is usually a 1,2,3 combo. That emergency fund is merely there to help raise the chances of you standing on your feet after the vicious flurry.
If you want leverage and you are in the US or have a US based brokerage account use options. By using options your all in is basically the cost of the option and this ensures you will not ever lose more than you paid. PLEASE note the previous sentence is predicated on the golden rule of NEVER WRITE an uncovered/naked option, seriously do not do it!!!! I also use the 5% rule, which no one trade is more than 5% of my portfolio so no one trade will destroy me.
I am personally too risk adverse to go taking loans all the time. But I can imagine it being a good option.