#31
Psychology and minimise stress in difficult situations:



1) Consider the situation where there is an economic crash. Your funds drop drastically and your employer goes bust. With the emergency fund there is no need to panic. During the times when a crash doesnt happen you know you are safe if it should - it helps one get a good night's sleep..



2) You should regard your investments as sacrosanct until their objective is attained. Once you start treating your investments as another bank account to be dipped into when the going gets difficult you could be on a slippery slope.



Emergency funds arent wasted money. If they didnt exist you would need to design your portfolio to be able to cope with unexpected demands for large amounts of cash outside your normal budget. Much easier to pass that job over to a pot of cash and focus your portfolio on its long term objective.



Emergency funds are particularly important for new/small investors to ensure that they dont invest at too high a risk to cope with the normal problems of life. In retirement when one is dependent on steady income from investments a large cash buffer is also important so one doesnt have to regularly sell investments in good times and bad. Experienced investors with a large portfolio still accumulating perhaps could argue that they need less cash. On the other hand the suggested 6 months living expenses would probably be a fairly small % of their wealth.

#32
Masonic - just hedge instead maybe? And not for overall market timing, just for emergencies



Robin - insurance instead perhaps? I can outperform it, or just work out how far JSA will take us, that's a kind of insurance already, my pay wouldn't be miles from it

#33
Linton - as long as it's well hedged though, that should in theory cover a market crash? Or a credit line or insurance. It's the liquidity of said fund that's in question, I accept needing something

#35



Gold and property to hedge the equities?
Originally posted by MatthewAinsworth


If there was another pandemic like swine flu that was as deadly as SARS... a near certainty at some point. The global population takes a hit, property and stocks would therefore crash, and you'd need cash to pay for urgent needs (flights, medical care, supplies) which have suddenly become more expensive.



This may sound like a Domesday scenario but every generation before the baby boomers had to face a crisis as dramatic as this (war, famine, disease etc).

#37
I keep a sum of money in cash which happens to be equal to several months expenses, but don't call it an emergency fund.



It's more an opportunity fund, a hassle-free fund. Say April creeps up and I want a new sofa and the kids have a school trip and the old car needs retiring and so does the mower and the guy who fixed the roof needs paying and it's time to renew car and buildings insurance and we spot a deal on a summer holiday to the Canary Islands. No biggy. The fund might need topping up after but I know that any expenses we can reasonably accrue can be met without having to plunder investments which have been made for other reasons.

#38



Masonic - just hedge instead maybe? And not for overall market timing, just for emergencies
Originally posted by MatthewAinsworth


What are you going to hedge with? Equities, property, gold and bonds all fell during the global financial crisis. Gold was at a 20 year low during the dotcom crash, etc. The cost of using futures or derivatives is likely to be a bigger drag on returns than holding some cash and introduces counterparty risk.

#39



For me, a last minute flight to the US would do it - say if a family member was taken ill.
Originally posted by Rosemary7391


I can think of reasons but that wouldn't be one of them. If I need to book a flight I pay by card. Probably one reason I run a lower cash level than others.

#40



Linton - as long as it's well hedged though, that should in theory cover a market crash? Or a credit line or insurance. It's the liquidity of said fund that's in question, I accept needing something
Originally posted by MatthewAinsworth


An emergency fund may typically be perhaps £10-15K. For a large long term investor that is a minor matter. Much less effort and possibly cost to keep it in cash and not allow the requirement for relatively short term emergency cover to complicate one's portfolio. For a small investor, if one hasnt got £10K any form of investment beyond an employers pension is in my view highly risky. In any case long term hedging is far from guaranteed



You cant insure against all possible emergencies (major car breakdown?) and the costs of extensive insurance cover (health of oneself and family, redundancy, central heating boiler etc) could well exceed the lost returns from keeping the emergency fund in cash.



However it's your choice, you may have the resources, experience and luck to make it work. My choice is to keep a significant amount in cash and not worry at all about the short term. I dont think one should suggest to the mainly inexperienced and small investors who ask questions on this forum that investing without a sizable cash emergency fund is a sensible way to manages one's finances.

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