I'm not saying you don't have a point in your original post, but you should absolutely not use the stock market as your savings account. There's a reason it's recommended that you have 6 months of living expenses liquid.
Yes, you're very likely to gain much more by investing in index funds. But "the market can stay irrational longer than you can stay solvent." If there is a stock market crash, that's likely to coincide with personal issues, like losing your job.
Even if you can weather the market, having to pull out money at the bottom of the market will destroy your gains.
> There's a reason it's recommended that you have 6 months of living expenses liquid.
Do you mean cash equivalents? Public stocks are liquid.
Personally I think the 6 months advice is too conservative. If everyone calculated the damage inflation tax did to their savings account each year, probably more people would be willing to take a bit of a risk and invest their savings (or a greater portion of it).
You're right, public stocks are liquid and I meant cash equivalent.
There's a lot of variance on how much is recommended in an emergency fund. Most seem to say 3-6 months. I know if I lost my job I could cut down my living expenses and stretch it out. But if I had to move for a job, had an extended gap, or had to take a lower paying job I might have to dip into those investments prematurely. Having to cash out at the bottom of the market burns years of investments where it would have been better if you just held onto cash even if your interest rate is a pittance. Just like putting money into 401k is more than negated if you have to cash out early.
Everybody has different risk tolerances and the amount needed in an emergency fund varies depending on a bunch of things (if you have debt, variety of incomes vs a single paycheck, gap between expenses and earning). I've never seen anyone actually do a study or source why they chose 3-6months--so it's really hard to argue for or against. I'd be curious if anyone has done a study.
It hurts to have money just sitting there, but I'm not trying to eek out every penny. I really don't think all those extra risks are worth it. Keep your living expenses low and it won't be that much money ;)
I get that. That's why you diversify your assets and hold a bit of cash as well. But 6 months is a bit extreme.
It's not as if a diversified portfolio is going to drop to zero during a major recession (unless the government collapses, in which case cash might not be useful either). It might lose around 30%, depending on how you diversify and how extreme the recession is.
Completely agree that the market should not be where you put all of your money without having liquid reserves. I'm not advocating that.
Howerver as a long-term (> 10 yrs) strategy and assuming you also keep a pool of capital in a checking and savings account ETF's are the way to go if you just want to fire and forget.
Yes, you're very likely to gain much more by investing in index funds. But "the market can stay irrational longer than you can stay solvent." If there is a stock market crash, that's likely to coincide with personal issues, like losing your job.
Even if you can weather the market, having to pull out money at the bottom of the market will destroy your gains.