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#1
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How Much to Leave Out of the Market
So I have money saved up and most of it is in the market. However, there is (obviously) some money that I have in my savings account to pay for monthly expenses. My questions is how much I should have in there. I am invested in Index Funds through Zecco so if I wreck my car and need money I don’t have to worry about paying fees to sell the ETFs.
I’ve heard people say that you should keep money out so that you’re not forced to sell in a ‘down market.’ However, I don’t really understand this. I don’t try and time the market so I don’t know when it is a ‘down market.’ If I don’t try and time when I put my money in why should I try and time taking it out? Here are what I think are the important things I need to consider: Buy/Ask spread (which is a fraction of a percent) How stable my income is (right now is very stable) Assuming the market will go up 12% (makes math easy) then that’s 1% a month. Therefore if your money is in the market 1 month before you having to pull it out for some reason (taxes, car/house repairs, etc.) According to these things I would think that I would need to have very little money in a savings account and I could just sell when I need to buy something more expensive (like pay car insurance for 6 months, etc). This seems to go against what I believe to be the common consensus so please let me know how incredibly wrong I am. |
#2
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Re: How Much to Leave Out of the Market
As a general rule, 6 months' expenses in an easy access high interest account is good to have - so you could essentially pay rent, bills, food etc for 6 months with no job. This should cover most emergencies.
If you live in The US, this should help avoid some of the tax hassles I know you folkes have with moving money around. |
#3
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Re: How Much to Leave Out of the Market
Good point. I forgot about taxes. So let's say that taxes are 30% (mine happen to be lower but for now we'll say 30%). In an average month I will make 0.7% on the investment. I still don't understand the argument for keeping 6 months of expenses out of the market.
I have heard it many times, but I have also heard it in terms of bankroll management and I am wondering if people are confusing the two for some reason. There may be some tax issue that I'm missing though where it should be more than the 30% tax on the gains. Any other ideas or ways to explain it to me? |
#4
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Re: How Much to Leave Out of the Market
if you are a passive investor (leaving aside for now how you structure that investment), then the best thing for you is to have as much money as you can colelcting gains.
there is a catch, though, in that should an emergency occur, the loss you make in selling + taxes probably seriously outweighs the opportunity cost of keeping reserve funds earning ~5% in nominal terms. therefore, leaving some % in savings is a good idea. that % needs to be enough to sustain you should any # of emergencies occur. 6mo expenses is just a benchmark. Barron |
#5
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Re: How Much to Leave Out of the Market
I'm sorry I'm so slow about these things and I really appreciate the insight/help. What are the losses associated with selling? I was under the impression that it was just the buy/sell spread and then taxes.
Maybe I am misunderstanding the taxes. I was under the impression that with ETFs I would just pay taxes on the gains. It seems like those two things would only add up to 1%. What am I forgetting about that adds the extra 4%? |
#6
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Re: How Much to Leave Out of the Market
[ QUOTE ]
I'm sorry I'm so slow about these things and I really appreciate the insight/help. What are the losses associated with selling? I was under the impression that it was just the buy/sell spread and then taxes. Maybe I am misunderstanding the taxes. I was under the impression that with ETFs I would just pay taxes on the gains. It seems like those two things would only add up to 1%. What am I forgetting about that adds the extra 4%? [/ QUOTE ] transaction costs mostly. pretty minor and taxes on gains is what i'm talking about. thing is, you can earn about 5% risk free so if you're earning more than that, and then have to sell, you will actuallyb e earning less after taxes. if you are earning <5%, then having it out of the market is a gain for you (although in expectation a small loss). Barron |
#7
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Re: How Much to Leave Out of the Market
The six months expenses is a rule of thumb, and a pretty poor one. There's no strong, logical argument for treating your emergency fund and portfolio separately. As long as you won't be hurt by taxes/commissions, put most of it in the market. (this all assumes your income is generally uncorrelated with the stock market)
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#8
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Re: How Much to Leave Out of the Market
[ QUOTE ]
The six months expenses is a rule of thumb, and a pretty poor one. There's no strong, logical argument for treating your emergency fund and portfolio separately. As long as you won't be hurt by taxes/commissions, put most of it in the market. (this all assumes your income is generally uncorrelated with the stock market) [/ QUOTE ] we've all agreed that the 6mo is a rule of thumb. the point is that you don't know when you'll need it so you don't want to be exposed to tax/TC issues when youdo need the money. therefore, having some money in cash (given that you earn 5% on it) won't significantly hurt your returns, and will save you money in taxes/TC if such an emergency should occur. Barron |
#9
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Re: How Much to Leave Out of the Market
The whole question is dependent on how old you are and how much risk you want.
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