How Much to Leave Out of the Market

[Jeff W]

[ QUOTE ]

i think you are looking at this too narrowly.

we don't know when the random expenses will occur, if they trigger capital gains on assets you've held for a while, then the taxes will be substantial. thats just an example.

[/ QUOTE ]

So you sell shares that you recently purchased that have fewer capital gains(Highest In, First Out).

When you hold cash, you have to pay all the taxes as you accrue interest and growth on that money is lost. Much of equity return is tax-deferred(dividends being the exception) and transaction costs these days are miniscule.

[mtgordon]

Yeah, it seems like everything should be dumped into the market. Tax argument doesn't seem to hold water because you can view your savings account as a market that earns less (on average) and forces you to take your gains every year. Keeping money in this 'worse market' doesn't really make you pay less taxes.

I believe that I am also immune to the transaction costs since I am using Zecco. I'm not saying that Zecco is the best thing ever, but this is where it does happen to shine.

I ran some numbers using 0.05% bid/ask spread, 12% growth for market, 5% for savings, 30% tax bracket, and $0 in TC. On $10,000 the savings account missed out on $486.08 or 4.86% in earnings over the course of a year. This is assuming that you need to take the money out at the end of the year for some emergency.

One exception that I would make is for someone that has little savings. I could definitely see an argument for someone that has 6 months or less expenses saved up to stay out of the market. I think that 6 months is a perfectly reasonable amount to have around in case you lose your job, etc. So let's say that a person invests this 6 months expenses but the market takes a 10% dip. Now the person just lost almost 3 weeks worth of expenses that they may need to get back on their feet.

Now this is different for someone who has a full year's worth of expenses saved up. If you invest 12 month's worth and you lose 10% you're still above the 6 month threshold which feels very safe.

[DcifrThs]

[ QUOTE ]
[ QUOTE ]

i think you are looking at this too narrowly.

we don't know when the random expenses will occur, if they trigger capital gains on assets you've held for a while, then the taxes will be substantial. thats just an example.

[/ QUOTE ]

So you sell shares that you recently purchased that have fewer capital gains(Highest In, First Out).

When you hold cash, you have to pay all the taxes as you accrue interest and growth on that money is lost. Much of equity return is tax-deferred(dividends being the exception) and transaction costs these days are miniscule.

[/ QUOTE ]

thats definitely true assuming you're constantly putting more money into your portfolio. i was picturing two alternatives with some random time period in between.

even so, overall i think i'm wrong here and that there should be no difference, as another poster mentioned, between money you have invested in a liquid portfolio & "emergency" money.

Thanks,
Barron

[wpr101]

The whole question is dependent on how old you are and how much risk you want.