Discuss Latest POF Blog Post: The Emergency Fund: It’s Still Useless!

[CM]

Do you change your asset allocation depending on PE10?

Yes. That's why I invest in international indexes. The EAFE PE10 is about 1/2 the US PE10 despite lower interest rates in most of the developed world, and thus has a wider equity risk premium.

Edit:

From a previous thread:

I estimate the real return to stocks as 1/PE10 (1/CAPE), or the dividend yield plus LT real earnings growth. I use the 30 year TIPS yield for the bond return.

When I did the calculation, 1/CAPE was 2.61%. https://www.multpl.com/shiller-pe

The dividend was 1.36%. https://www.barrons.com/market-data/market-lab

The LT rate of real eps growth is about 1.55% based on my examination of Shiller's data sheet when I looked several years ago. http://www.econ.yale.edu/~shiller/data.htm (Third link down that page.)

Real earnings growth was 1.25% from 1871-2001 according to Siegel, but 2.05% from 1946-2001. (Table 6-1 on page 94 of Stocks for the Long Run, third edition.)

The 30-year TIPS yield was -0.28%.

The equity risk premium (ERP) is the real stock return minus the TIPS yield.

For perspective, the realized ERP was 5.1% during the 20th century (calculations from Triumph of the Optimists, Dimson et al, Table 33-2 on p. 308). It was 3.5% during the first half of the century, and 6.7% during the second half of the century.*

For an eye-opening comparison of global bond yields versus the low US yields: https://tradingeconomics.com/bonds

*Some folks prefer to use t-bills to measure the ERP. In that case, the historical and projected ERP figures are higher, but the conclusion is the same; current circumstances are unkind to US investors.

[Shant]

hard to pay off the credit card cash advance ASAP when you have no money coming in AND unexepcted bills at the same time (my situation in 2017)- rent , medical bills, insurance payments (cobra means paying the employers side also) etc. Again to most 30 year old's it wont happen, but it happened to me.

Shant did you ever keep money in bonds also? Similar argument by the 100% equities crowd- why use bonds when in the accumulation phase, it delays reaching financial independence.

I wont fault anyone for an EFund, nor for going bare on it- just know what your risk tolerance is. My efund helped me also leave my terrible job, which mentally I dont know if I couldve if I was back in a huge debt after that month.

Uh no, you cash out your investments and take the tax hit, leaving you with more investments than you would have had with a cash fund, most of the time. It's not save cash versus don't save at all. It's the same funds.

I do not keep money in bonds, except for short term planned spending.

[billy]

I kinda wonder about something here.

I wonder if anesthesiologists (minus POF of course) are less likely to forgo insurance and an EF than some other types of docs?

We are constantly preparing for unlikely but catastrophic events like anaphylaxis, MH, local anesthetic systemic toxicity, lost airways, fat emboli, amniotic fluid emboli, massive blood loss, venous air embolism, coronary thrombosis, tension pneumothorax, high spinals etc. in patients who show up for "elective" procedures.

Just an observation, but I wonder how many anesthesia docs have emergency drugs and airway equiptment ready and similarly have an EF and insurance for unlikely catastrophic events?

Sometimes you need an EF and insurance at the same time (Billy in 2017) and you don't need the extra stress of dealing with a loan officer.

Almost went into detail explaining 2017 but don't want to dominate this thread.

To answer the anesthesia specific qs - EF yes. Main insurance (disability, term life for me, umbrella rent car for both of us) yes. Useless insurance/warranties/etc -no

Emed drugs- always check to have them handy, dont draw them up unless its an expected situation. Will have an empty syringe w needle on it though to help speed things up if needed. Our anesthesia carts have premade sux syringes for us.

Airway equipment- readily available, DL or mcgrath checked, close by, but I admittedly do not open the ETT from their packages prior to the emergency happening.

Overall risk tolerance- Not extreme in either direction. I also own a little in bonds.

[Nysoz]

To those who advocate no EF, do you also advocate no insurance?

Kinda apples and oranges. The emergency fund sits there as “insurance” from unexpected costs that arise but it’s still your money that you spend which could be doing something else.

Most insurances are usually required to have. Otherwise they protect you for far more than you pay into it.

If the emergency fund functioned similarly, it would be like keeping $50k around as a drag on your overall portfolio and not getting the $300 a month you would get otherwise. In return, if something catastrophic did happen to you, you would get $1M like disability or umbrella insurance.

Instead if you kept it invested, the majority of the time you can pull it back out for as much or more than you put in when needed.

Don’t get me wrong, an emergency fund is fine if it’s a part of your emergency plan. It’s just not as necessary to everyone in all situations as personal finance is personal.

[Shant]

To those who advocate no EF, do you also advocate no insurance?

I advocate insuring risks where the loss is prohibitively expensive and rare. If the risk is common I save for it. If it's cheap I cashflow it. The guaranteed loss is small to prevent a small risk of a large loss.

By contrast, maintaining a large emergency fund uninvested before financial independence guarantees a large loss due to the compounding effects over decades, while preventing a small risk (because most of the time you come out financially ahead since you need the double triggers of actually encountering and markets to be in decline at the same time) of the same damage (needing to work extra years).

[billy]

Uh no, you cash out your investments and take the tax hit, leaving you with more investments than you would have had with a cash fund, most of the time. It's not save cash versus don't save at all. It's the same funds.

I do not keep money in bonds, except for short term planned spending.

If my month and a half of 2017 happened during the corona bear, and I had my EF money invested instead of in an EF, I wouldve had to pull out a significant amount of money (low-mid 5 figures) out of a taxable account that would've had high turning into mid 5 figures (due to 33% drop that month) in it at the time (or used 401k accounts/roth accounts)without the ability to to put money back in (so miss the rebound), and loss of 2 incomes for a long time (I would've been furloughed for sure, since I almost was fired in 2017 for taking time off for my wife's care), and higher expenses (cobra x2, deductibles, food/parking/hotels near the hospital, etc). I was also in no mental shape to care about anything outside of my wife's care, including my own sleep and health. You asked for a specific example of when your math didnt work, and I gave you one. I know its rare, so I dont tell people to have the same amount in an EF as I did back then, but the math wouldn't have worked in that particular situation. At least taking money out in a bear may have saved me some taxes. But mentally the toll would've been even worse, and I was almost at my stressed out breaking point as it was. Honestly if my wife didnt have a rare cancer I probably would think differently. But thats why its personal finance.

[Shant]

What was your rate of return over the 2-3 years preceding the corona bear?

[billy]

I became an attending in 2015- This would've been a 1-2 year investment period were talking about. All the returns wouldve been wiped out and then some, plus the new expenses. So to make it a comparison, I used july 2018-march 2020 (same time period) with a 10,000 initial investment and a 2000 monthly buy in of the sp500 instead of an emergency fund. My return wouldve been -6.34 % before taking the money out. https://dqydj.com/sp-500-periodic-re...tor-dividends/, so again the math doesnt work for that particular situation. If I were "lucky" and needed the money the month before, a 16% return. But that also would've been wiped out when taking money out during a bear AND not being able to replace it for the ride back up. Later on in my life the math would be different.

[Tangler]

Stocks in taxable for emergency is a recipe for risk.

I needed cash in march-may 2020 as i described above, and i needed it at the same place time as the market was down over 20%.

You don’t pick when the market drops nor when emergencies happen.

Some other plan (cash EF, HELOC or loan that is set up and guaranteed, M1 finance loan etc.) is needed.

I like the cash EF. It does not need to be 10 years of cash but some cash smooths the ride.

Once you have over 4M in stocks, a smoother ride is more valuable than a slightly higher return during a bull.

I urge anyone with a 100% stock AA and an EF composed of stocks in taxable to at least consider a “plan b” for market downturns.

A small amount of cash, say 1-3 months worth, or a guaranteed loan is a much better plan IMPO.

Sorry to keep beating a dead horse.

[Turf Doc]

Considering the zeitgeist is to get an EF before you do anything, it would seem to me that a person ends up ahead as long as when they withdraw from their accounts stocks are higher than when they first began investing. I would imagine this is the case the vast, vast majority of the time.

Of course when you’re rich enough it simply doesn’t matter, and if you’re already FI that’s a nice privilege to have, but it’s just not statistically optimal.

[Tangler]

Considering the zeitgeist is to get an EF before you do anything, it would seem to me that a person ends up ahead as long as when they withdraw from their accounts stocks are higher than when they first began investing. I would imagine this is the case the vast, vast majority of the time.

Of course when you’re rich enough it simply doesn’t matter, and if you’re already FI that’s a nice privilege to have, but it’s just not statistically optimal.

Just please consider a plan b. You are clearly brilliant and interested in finance. Check out M1 finance or some other possible credit source as a back up EF / E plan option.

I have not personally used M1 but know people who have and like it. (i am not paid by them)

Here is a link:
https://www.m1finance.com/how-it-works/borrow/

I prefer boring old cash. No debt.

Simple Dave Ramsey type old critter = me.

Plan B young jedi, have a plan B.

[Turf Doc]

Just please consider a plan b. You are clearly brilliant and interested in finance. Check out M1 finance or some other possible credit source as a back up EF / E plan option.

I have not personally used M1 but know people who have and like it. (i am not paid by them)

Here is a link:
https://www.m1finance.com/how-it-works/borrow/

I prefer boring old cash. No debt.

Simple Dave Ramsey type old critter = me.

Plan B young jedi, have a plan B.

Why thank you, I appreciate the kind words.

Of course you’re right, plan b is very important. As an attending I’ll have a HELOC, margin loans available, high credit limit, etc.

the two sides of this argument remind me of the pay off debt vs invest debate. Many times paying off debt isn’t “ideal” mathematically, but who really didn’t become rich because they were too focused on paying off debt?

I think creating a life with fixed expenses as low as possible also comes into play here. 3x monthly emergency fund doesn’t matter much when x isn’t so big

[Nysoz]

I still strongly urge an emergency fund for normal people (non physician non high earners) as well as physicians just starting out.

As people have said, you don’t get to pick when the bad times happen which could be right when you’re starting.

The EF protects people from a large setback and resorting to payday loans or carrying a balance on credit cards. The difference for high earners is that they should be able to build that cushion as well have sources of possible low interest credit quicker than the average person. Once you establish that base, the EF doesn’t have to play as large of a role in everyone’s plan anymore (but still can).

[tex]

Like others said, not what I consider "emergency fund", but if saving up cash or selling taxable for large expenses that you could cash flow in a shortish period of time, you should look into margin account at Interactive Brokers. At current rates it would some time before cap gains would come out ahead.

FWIW I only keep 2 months expenses cash (at current lavish spending levels, which would be significantly lower in emergency)

[MPMD]

given that the vast majority of people if faced w/ a $50k pile of money would immediately blow it on consumer goods, arguing about whether a huge pile of cash is a good thing or if it should be invested aggressively is about the most WCIF thing ever.

only thing that would top it is if 30 people replied to this thread and said "rent."