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

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  • Originally posted by Turf Doc View Post

    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
    The bolded items are low cost liquidity. That solves the problem IF the loss of income or expense is covered. Smart choices. I have used all. Cheap alternatives. Of course any use of them changes your on risk. Eliminates the "emergency". It then is simply how to deal with the issue on a longer term basis.

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    • I would argue that if your the money in large EF would otherwise be in a taxable account, then it's not really an EF, but part of a more conservative asset allocation. If you have a $2.9 million portfolio ($2.4 million stocks, $500k in bonds) plus 100k in cash then you really just have an asset allocation of 80/16.7/3.3 of stocks/bonds/cash. Most people arguing for larger EF's just have a more conservative asset allocation. Of course, nothing wrong with that.

      If you're holding on to 10k cash for emergencies instead of paying down your higher interest student loans or car loan, that's a true EF. Obviously this isn't black/white, but a continuum.

      Comment


      • I have more than a plan B, I have a plan E. It rolls down like this in a true financial emergency
        A Immediately slash all non-essential spending
        B 3 credit cards all with no balance carried that give 3-7 weeks of free financing, depending on the trigger date
        C Small checking account balance to eliminate banking fees (spend balance, incur fees $10 bucks a month, this is my cashflow float)
        D Temporarily accumulated cash in taxable accounts
        E Cash advance on credit card, repaid in 3 days
        F Pending income 3 sources paying on 3 different days of the month
        G HELOC (was $160k, collapsed now as no longer needed due to other assets) - this was really only intended by me to cover house destruction type emergencies
        H Taxable account
        I Non-taxable accounts
        J Friends and family

        Which I guess is a plan J.

        I have had to trigger A a few times when uncertainty rears up. But in the modern world there's rarely an expense that can't be handled with a credit card or delayed a short while and dealt with in a few weeks when things are less urgent. I don't have ready funds, but I have ready access to funds. Oh and I have a small cash float to pay the cleaners that is available if the electronic financial system goes down, plus probably a couple of months of food in the cupboard.

        Comment


        • Shant you are also later on in attending life- like I mentioned in my earlier post my EF has actually gotten smaller now. I'd encourage new attendings to build an EF along with the retirement savings first, then taxable. As the taxable grows and expenses lessen (mortgages, loans paid off etc) the amount in the EF can lessen. Sort of like if you are gambling/ playing poker, if you have a large stack, you can make large bets and withstand a short term of bad luck early. But if you only have a few chips to start with, you should play more conservatively.

          Your plan wouldnt have worked in my situation (2017) as my spending went UP during that, and significantly. And with no added income for over a month, the credit card bills then start racking up interest (so there goes A and B). C in your example actually acts as your emergency fund. I have no cash in taxable accounts because that is just a drag on investments, just as you say an EF is. E would not have been able to be paid back in 3 days (see A-B). F again was nil- loss of 2 incomes suddenly- 1 permanently, and 1 almost for a few months. So other than an efund (C) it wouldve been H-I-J only for me. H and I would've incurred a net loss, and J well, I came close to utilizing that anyway but my family has no money and I wouldnt want to burden them to save myself. No Heloc option because like a good WCI I was renting as I was a few months from partnership in a brutal malignant group (so renting absolutely helped me out long term). Never made partner btw, it was a bs junior partner no real equity deal.

          An emergency for an EF is not "my car broke down" or my AC broke. It's that happening while also losing income, getting sick, (disability wont pay out for 3-6 months depending on how optimal you wanted to be with it, IF you were lucky enough to even have it), bills starting to snowball/pile up (with interest) with no end in sight.
          Last edited by billy; 07-21-2021, 05:43 PM.

          Comment


          • Originally posted by billy View Post

            Cant do that if you are 100% invested in stocks... which if you are all about optimizing returns long term...
            I've been 90 / 10 for years, but I have to agree it's not so easy to sell bonds in an account that has none.

            Comment


            • billy yeah I don't think any amount of cash would have saved you, you were really going through it. It's true that I am late career now but this is the approach that I have used from the beginning.

              Comment


              • Originally posted by CM View Post

                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.
                Interesting. Has using CAPE ever actually predicted the stock market? Not after back testing but actual predictions. Who using cape has predicted the next 10 years of market returns?

                I read some bogleheads threads and they all basically said that whatever correlation is due to data mining and back testing

                I know Bernstein has given his thoughts on future returns (he thinks they’ll be bad) but he mentions a 95% percentile confidence includes like a 10% return or something, which doesn’t seem super useful

                Comment


                • Originally posted by Turf Doc View Post

                  Interesting. Has using CAPE ever actually predicted the stock market? Not after back testing but actual predictions. Who using cape has predicted the next 10 years of market returns?

                  I read some bogleheads threads and they all basically said that whatever correlation is due to data mining and back testing

                  I know Bernstein has given his thoughts on future returns (he thinks they’ll be bad) but he mentions a 95% percentile confidence includes like a 10% return or something, which doesn’t seem super useful
                  Stock returns are composed of dividends, growth (in dividends/earnings/cash flow), and change in valuation. This is just arithmetic.

                  One can't reliably predict the change in valuation over any limited horizon, but the dividend is known, and the higher the valuation the lower the dividend yield.

                  If you pay a higher valuation (i.e., CAPE) than the historical average, then your return will be lower than the historical average unless future growth is greater than historical growth and/or the valuation increases over time, and these factors exceed historical values by enough to overcome the high purchase valuation. It's a bad bet to make.

                  This is why the graph of CAPE versus 10-year returns slopes downward to the right throughout history. Higher valuations produce lower returns, ceteris paribus.

                  There is noise around the relationship because of the factors above. That is, real earnings growth waxes and wanes a bit over time. It was about 3% real for the 20 years after WWII, but it has been flat or negative in some decades as well. More importantly, the valuation rises and falls, and this change swamps the contribution of dividends and growth over 10- to 30-year periods.

                  See the table on page 3 of this paper to see how the mean 10-year return falls reliably with each higher decile of CAPE, but with significant variation around the mean. It provides the high and low returns and the std deviation for each decile: http://file:///C:/Users/Curt/Downloa...20PE%20(1).pdf

                  From the paper: "Ten-year forward average returns fall nearly monotonically as starting Shiller P/E’s increase. Also, as starting Shiller P/E’s go up, worst cases get worse and best cases get weaker (best cases remain OK from any decile, so there is generally hope even if it should not triumph over experience!)"

                  For example, in the highest decile (where we are now), the mean 10-year real return (from starting position 1926-2002) was 0.5%, but the worst and best were -6.1% and 6.3%, respectively.

                  From the lowest CAPE decile, the mean 10-year total real return was 10.3%, with a range of 4.8% to 17.5%

                  The CAPE has risen from 6.6 to 38.73 over the last 40 years as interest rates on 10-year treasurys fell from about 15% to a current 1.276%. The rise in valuation has been the most important factor in returns during our investing lifetimes.
                  Erstwhile Dance Theatre of Dayton performer cum bellhop. Carried (many) bags for a lovely and gracious 59 yo Cyd Charisse. (RIP) Hosted epic company parties after Friday night rehearsals.

                  Comment


                  • Originally posted by CM View Post

                    Stock returns are composed of dividends, growth (in dividends/earnings/cash flow), and change in valuation. This is just arithmetic.

                    One can't reliably predict the change in valuation over any limited horizon, but the dividend is known, and the higher the valuation the lower the dividend yield.

                    If you pay a higher valuation (i.e., CAPE) than the historical average, then your return will be lower than the historical average unless future growth is greater than historical growth and/or the valuation increases over time, and these factors exceed historical values by enough to overcome the high purchase valuation. It's a bad bet to make.

                    This is why the graph of CAPE versus 10-year returns slopes downward to the right throughout history. Higher valuations produce lower returns, ceteris paribus.

                    There is noise around the relationship because of the factors above. That is, real earnings growth waxes and wanes a bit over time. It was about 3% real for the 20 years after WWII, but it has been flat or negative in some decades as well. More importantly, the valuation rises and falls, and this change swamps the contribution of dividends and growth over 10- to 30-year periods.

                    See the table on page 3 of this paper to see how the mean 10-year return falls reliably with each higher decile of CAPE, but with significant variation around the mean. It provides the high and low returns and the std deviation for each decile: http://file:///C:/Users/Curt/Downloa...20PE%20(1).pdf

                    From the paper: "Ten-year forward average returns fall nearly monotonically as starting Shiller P/E’s increase. Also, as starting Shiller P/E’s go up, worst cases get worse and best cases get weaker (best cases remain OK from any decile, so there is generally hope even if it should not triumph over experience!)"

                    For example, in the highest decile (where we are now), the mean 10-year real return (from starting position 1926-2002) was 0.5%, but the worst and best were -6.1% and 6.3%, respectively.

                    From the lowest CAPE decile, the mean 10-year total real return was 10.3%, with a range of 4.8% to 17.5%

                    The CAPE has risen from 6.6 to 38.73 over the last 40 years as interest rates on 10-year treasurys fell from about 15% to a current 1.276%. The rise in valuation has been the most important factor in returns during our investing lifetimes.
                    Wow! amazing analysis!

                    What really strikes me is this:

                    “For example, in the highest decile (where we are now), the mean 10-year real return (from starting position 1926-2002) was 0.5%, but the worst and best were -6.1% and 6.3%, respectively.“

                    mean Real return of 0.5%!

                    range of real returns: -6.1-6.3%!


                    My portfolio had a 13.6% ten year return for last ten years.

                    I seriously doubt i will get that for the next ten.

                    No guarantees but the next 10 years are more likely to be more similar to 2000 to 2010.

                    Having a cash EF for me is independent of cape and market valuations but my “guilt” is influenced.

                    These valuations make my cash EF seem remarkably reasonable!

                    Comment


                    • Originally posted by Tangler View Post
                      These valuations make my cash EF seem remarkably reasonable!
                      Cash has the lowest expected return today, but expectations are not always realized. If interest rates rise substantially due to higher inflation in the next 10-20 years (not my prediction), then bond values will be crushed and stock valuations will fall markedly, leading to negative returns for both, but rising rates would benefit cash.

                      If "nobody knows nuthin'," as bogleheads like to write, then a significant cash allocation is just a sensible component of a diversified portfolio.
                      Erstwhile Dance Theatre of Dayton performer cum bellhop. Carried (many) bags for a lovely and gracious 59 yo Cyd Charisse. (RIP) Hosted epic company parties after Friday night rehearsals.

                      Comment


                      • Originally posted by CM View Post

                        Cash has the lowest expected return today, but expectations are not always realized. If interest rates rise substantially due to higher inflation in the next 10-20 years (not my prediction), then bond values will be crushed and stock valuations will fall markedly, leading to negative returns for both, but rising rates would benefit cash.

                        If "nobody knows nuthin'," as bogleheads like to write, then a significant cash allocation is just a sensible component of a diversified portfolio.
                        but if there is massive inflation your cash is also worth less.

                        something people don’t discuss in these situations is how DCA plays a role, ie you could have a period where you get 0 real return on lump sum, ie let’s say the s&p craters to 2000 and takes 10 years to return to current point. If you are lump summed and contribute no new money you obviously have negative real return due to inflation and nominal values being stagnant over this time, but if you are continually contributing (ie most non retired people ) then you harvest that drop and still have some gains.

                        Obviously this depends on how far along in your career and the ratio of further earnings to current investment value. I feel this concept doesn’t give enough credit when we talk about future diminished returns and who it would impact.

                        Comment


                        • Originally posted by Panscan View Post

                          but if there is massive inflation your cash is also worth less.

                          something people don’t discuss in these situations is how DCA plays a role, ie you could have a period where you get 0 real return on lump sum, ie let’s say the s&p craters to 2000 and takes 10 years to return to current point. If you are lump summed and contribute no new money you obviously have negative real return due to inflation and nominal values being stagnant over this time, but if you are continually contributing (ie most non retired people ) then you harvest that drop and still have some gains.

                          Obviously this depends on how far along in your career and the ratio of further earnings to current investment value. I feel this concept doesn’t give enough credit when we talk about future diminished returns and who it would impact.
                          The sooner the better for us!

                          Comment


                          • Originally posted by Panscan View Post

                            1. but if there is massive inflation your cash is also worth less.

                            2. something people don’t discuss in these situations is how DCA plays a role, ie you could have a period where you get 0 real return on lump sum, ie let’s say the s&p craters to 2000 and takes 10 years to return to current point. If you are lump summed and contribute no new money you obviously have negative real return due to inflation and nominal values being stagnant over this time, but if you are continually contributing (ie most non retired people ) then you harvest that drop and still have some gains.
                            1. Cash might be worth less or more in real terms. Currently, it has a negative real return. If we have unexpectedly high inflation and the Fed tries to control it (as Paul Volcker did), then short rates will be raised to a level greater than inflation. For most of history, cash provided a roughly 1% real return (from Triumph of the Optimists, Dimson et al), so if we returned to that regime it would be a "normal" environment. Cash returns in that scenario would be better than stocks and bonds until/unless rates stabilized.

                            2. Yes, if the valuation drops, then the money you invest at lower valuations will likely provide higher returns. The money you have invested right now, at extremely high valuations, will likely provide low returns. If you don't have much invested right now, then getting a poor return on your money may not move the needle. Nevertheless, I'd rather earn more than less, even if its small potatoes.
                            Erstwhile Dance Theatre of Dayton performer cum bellhop. Carried (many) bags for a lovely and gracious 59 yo Cyd Charisse. (RIP) Hosted epic company parties after Friday night rehearsals.

                            Comment


                            • I guess I'm just not that interested in predictions that range from -6% to +6%... it doesn't seem useful. There's so much information out there that I feel it's just a distraction. If i'm concerned about CAPE maybe I should seek out stocks that have low CAPE, it's not like you have to deal with index funds. But now that makes me a stock picker.

                              Valuations seem high right now but are they really? how do we know that in 50 years intl won't be where us is now and us even higher? We have no clue. Maybe they'll go down maybe they'll go up. Investing worldwide makes a ton of sense, I'm just not sure using CAPE to justify it does. Again, to my knowledge, no one has actually ever predicted stock returns correctly going forward using CAPE.

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