orpheusNY wrote:
- quote -

ONY:
It really depends on what process you go through when allocating the
remaining 2/3 of your money. If you're plugging these figures into some
allocation tool online, that tells you ranges for gains and losses that
have been experienced with a given set of investments, then you need to
include the fact that you've got that money in I-bonds/EEs. Otherwise
you'll end up with a more-conservative investment mix than you probably
want.

Let's say you play around with different allocations and decide that,
you know, 60% stocks 40% bonds would be "acceptable" to you, and let's
say you have $150k total. If you ignore the $50k you have in savings
bonds and buy $40k in bonds and $60k in stocks, you end up with a
portfolio whose performance will reflect the actual allocation of
90k/150k = 60% bonds and 40% stocks. It doesn't matter whether you call
that $50k an "emergency fund" or "the other part of your bond
allocation", that's where the money is invested so that's the way the
performance is going to go.

But taking a step back...keep in mind that an "emergency fund" is simply
a way for an investor to deal with investment volatility, to avoid
"needing to sell at a bad time". In a perfect world where stocks and
bonds never went down in value, you wouldn't need an emergency fund. But
most investments have some degree of volatility to them, and if you MUST
sell during a dip, you lose, and if the dip is big enough, you might not
have enough money to meet your need. That's part of the reason that the
short-term volatility of stocks represents risk. If you can somehow
avoid that risk of needing to sell, then your long-term investment
performance is going to be better, and you won't risk being evicted from
your home.

So this leads to the advice to "keep an emergency fund equal to..."
usually some multiple of monthly expenses. That cash provides a cushion
during which you can ride out a bad period in the stock market, or bond
market, or REIT market, or whatever you invest in.

But it's not the only way to think of this problem and as wealth builds
the notion of an emergency fund becomes much less important. You can
tack onto that rule of thumb "...of course if you've gotten to the point
where you have $100k sitting in a short-term bond fund, and your
bare-bones annual expenses are $30k, you might rethink this whole
thing." At a certain point your emergency fund is really going to be a
mental subset of your investment portfolio, and your cash balances will
be set by checking account logistics - how much is a convenient amount
to keep on hand? The point is being able to raise cash when you need it
and at a certain point a well-diversified portfolio will have plenty of
sources of cash even if you needed the money the week after 9/11. And at
that point keeping a big stash in I-bonds isn't necessary, except
perhaps for their own sake (they are a nice way to earn tax-deferred
interest for part of your bond allocation).

-Tad

"Derek Lyons" <fairwater[at]gmail.com> wrote
- quote -

You mean a money market fund? I do the same thing. The interest is
"reinvested gravy," if you prefer.

I never "got" the purpose of the "cash portion" of one's retirement
allocation. What's the point of keeping it all in cash, unless one is
expecting deflation? Whence one will be snookered most likely, too, unless
the cash is literally kept in one's mattress and not in a money market fund.

Some sites say by "cash" they mean a money market fund. But that's not even
a breath away from short-term CDs, which are not a breath away from
short-term treasuries. It's not really cash but a part of the bond/fixed
income allocation, IMO.

So my emergency fund is in EE bonds and a money market fund. I keep tabs on
likely "emergencies," of course, and so increase it or decrease as needed.
E.g. I'm expecting to need a new roof on my house in five years. I have to
boost the emergency fund a bit, or otherwise set aside some dough regularly.

It's a matter of subtle juggling over which I fret little, because I know my
average monthly expenses almost to the dollar and what to expect that might
change them. Cars, illness, new furnace, yada.

Live within one's means. Anticipate. Be honest about your expenses.

- quote -

My point is that I don't expect any meaningful growth from the emergency
fund. Not compared to stocks, anyway. To invest for meaningful growth means
to take significant risks, which then defeats the purpose of an emergency
fund. It's also not clear that the rates you're getting with your emergency
fund will necessarily keep up with inflation. Your inflation rate may be
worse than the infamous Cosumer Price Index's.

"Derek Lyons" <fairwater[at]gmail.com> wrote in message
news:434573a3.35711800[at]supernews.seanet.com...
- quote -

Whether you put it into the allocation or not, its part of your portfolio.
An allocation is an arbitrary set of numbers (sometimes with forethought,
but arbitrary nonetheless). Whether or not you include your emergency fund
in this calculation matters not. As your portfolio grows, your emergency
fund will likely become a smaller percentage of the whole.

Elizabeth Richardson

"Elle" <elle_navorski[at]nospam.earthlink.net> wrote:

- quote -

Personally, I do - it's the 'cash' portion of my allocation.

- quote -

The interest from my emergency fund (which is in a CD ladder with some
liquid cash) is re-invested into the fund. Since I don't know when
the fund will be tapped, failing to re-invest the interest means the
total fund is losing purchasing power to inflation.

D.
--
Touch-twice life. Eat. Drink. Laugh.

-Resolved: To be more temperate in my postings.
Oct 5th, 2004 JDL

"anoop" <ghanwani[at]gmail.com> writes:

- quote -

Well, when I put my money into a bond fund, bonds were paying more than 4%,
and savings accounts were paying less. :-P

-Sandra

Sandra Loosemore wrote:
- quote -

It's hard to find a bond fund that returns more than the guaranteed
4% that you get from Emigrant Direct. For the time being (until
interest rate stabilize), does it really make sense to put new
money in bond funds?

Anoop

"orpheusNY" <orpheusNYNOSPAM[at]yahoo.com> wrote
- quote -

I agree one cannot measure precisely the probability of each item one may
need.

But some are awfully darn certain, like cars and major home renovations.
These are not random catastrophes, but things that one can and should budget
for over the intermediate term. It takes some effort, but such effort is
redundant to the phrase "financial planning." In my opinion, anyway... Don't
want to push you around.

- quote -

So the breakdown of your NRP+Emergency fund combined right now is about 67%
(money market and CDs) and 33% stocks. So what you're thinking is maybe
moving more of the NRP to stocks so as to get closer to, say, a 45% overall
(NRP + emergency fund) stock allocation.

It's a matter of taste: How much risk tolerance do you have?

I don't think there's any conventional wisdom to add other than just
remember you could lose maybe 20% of the stock value. Would you still be
able to remodel (or buy your car, or whatever)? If not, is this a big deal?
One can live without remodeling. Cars properly maintained should last ten
years pretty easily. So maybe your time frame is much closer to 15 years
than five years.

Long bonds... pfft. I agree with you. The yield curve (that is, yield vs.
years to maturity) has flattened and may invert. That doesn't happen often
but it may.

I think folks are just fine going out no longer than intermediate, tops. An
all short-term portfolio is something I certainly wouldn't reject. Ideally,
to me, one should have a bond/CD ladder as a part of one's conservative
investment strategy.

- quote -

Your risk tolerance is different than mine and closer to Jim's. I buy stocks
and stock mutual funds with the intent of not needing to cash in for at
least 15 years.

- quote -

With all due respect, since this is a matter of taste, there's no "right"
numerical answer on which there will be general agreement on this point.

I personally do not count my emergency funds as part of my overall portfolio
allocation. The interest that comes off them is just gravy.

"Right now, excluding the emergency fund, which is in savings bonds,
it's
about 55 percent short term (money market, Cds, Emigrant Direct, etc)
and 45 percent equities. If I'm being honest, I'd say that's more the
product of misgivings about the various non-cash options than
reasoning.
Figuring out where to put savings not needed until the medium-term
(which I define as 5 to 15 years) has been a real conundrum lately,
since we aren't particularly bullish on the equity markets, we don't
want to take any long bond positions in this interest rate environment,

and real estate, well... "

one question:
How long until retirement?

and my additional comment:
move the cash "slowly" into a conservative equity position. Maybe buy
one dividend paying stock per month, or buy positions in an equity
income type fund with a portion of the cash allocation. This assumes
you have 12 months in savings bonds.

and another suggestion:
are the savings bonds laddered? maybe, as they mature, purchase one
per month and have one maturing each month and continue this. I saw
another post where someone suggested putting the interest in a 13th
account, then when this account has the equivalent of one months
expenses in it, invest it in another asset class or use for a major
purchase.

I would believe if you had 12 months expenses in savings bonds, you
have the discipline to build up the savings if you tap into it for
orthodontia or a car repair.

OrpheusNY

To some degree, accounting is a representation of conceptualizations,
and that is part of what you seem to be working out for yourself -
"naming" your allocations. Apart from that, you're looking at expected
returns and market prices, and this is the problem all investors try to
solve. Within those parameters:

1) Emergency Funds - these have to be liquid (by definition), so
T-bills, which are now creeping to a marginally positive real rate of
return, should be the bulk of that - that's how most money parks; keep
the cash portion as sufficient to cover quick checks you might write
"instantly".

2) Invested portion - for an individual, normally this is diversified
and allocated cash-bonds-stocks-other. It's functions of liquidity,
risk, age, expectation, and other. The idea for the "cash and
equivalents" portion here is not so much an EF (which you already
have), as it is a reserve to invest in very favorable market
conditions. To save space and half-baked repetition here - there are
authoritative text books out there by the dozens on how to allocate
investments. You should consider ALL the investment portion of your
funds "invested". How well you do is up to you and your 'advisors'.

3) Back to the 'conceptualization' - if it helps you out, you could
break up your investments into a "retirement portfolio" and a "growth
portfolio".

Hope I got the drift of your questions and that I've helped a bit.

"jIM" <noreplysoccer[at]hotmail.com> wrote
- quote -

To me, allocating implies choosing between minimally (1) stocks (high risk
but good returns in the long run) and (2) CDs, investment grade bonds, or
money markets (low risk but not so great returns in the long run).

But let's see what the original poster says. :-)

- quote -

Well, I don't feel the items (car, major home repairs, orthodontia) listed
are particularly unknown at all. The orthodontia is probably the toughest
one to anticipate, but even that I think can be reasonably guessed at, based
on family history and "average child" statistics.

I think the original poster has a little more study to do. S/he could even
ask about lifes of cars; major home repairs; orthodontia in three separate
threads here and elsewhere.

I could comment on at least two of these. Of course. ;-)

- quote -

Or disappear. :-)

I stick with my suggestion to dig a little more on the aforementioned
subjects and refine one's monthly budget so as to set money aside for them,
putting the money into conservative instruments in category (2) above. Or,
at most, figure 50% of the emergency "we lost our jobs" fund can also be
used for major car, home, or teeth expenses.

In article <4rj0f.2613$4h2.2373[at]newsread3.news.pas.earthlink.net> ,
"Elle" <elle_navorski[at]nospam.earthlink.net> wrote:
So if

- quote -

I am a little baffled, too. If one were to vow not to put money one
*may* need within five years into equities, then nobody but the very,
very wealthy would ever invest in equities at all, since there are many
catastrophes imaginable which could wipe out your average middle-class
nest egg.


- quote -

We live in a cooperative, so roofs and boilers are budgeted into our
maintenance payments. I really meant more discretionary stuff like
kitchen or bathroom renovations. And we certainly are keeping enough of
a cash cushion to take care of the expected stuff.

- quote -

Right now, excluding the emergency fund, which is in savings bonds, it's
about 55 percent short term (money market, Cds, Emigrant Direct, etc)
and 45 percent equities. If I'm being honest, I'd say that's more the
product of misgivings about the various non-cash options than reasoning.
Figuring out where to put savings not needed until the medium-term
(which I define as 5 to 15 years) has been a real conundrum lately,
since we aren't particularly bullish on the equity markets, we don't
want to take any long bond positions in this interest rate environment,
and real estate, well...

So our cash positions keep edging up, but that doesn't seem wise when
the likelihood is that that money won't be needed in the next 5 years.
So we're trying to rebalance, which is why I asked whether we should
include our significant (to us) cash position in the EF in coming up
with the right mix.

"I am a little baffled. These costs you list are somewhat predictable.
Many
people do plan for them by saving regularly, investing the savings
conservatively. Yet you seem to be implying that you have the
non-retirement
portfolio (NRP) allocated into, well, stocks. Is this right? This is
not a
good place to put funds you *may* need within five years. "

Very little of the original post led me to believe the short term needs
were in equities. The question is whether the cash/ short term
reserves should be considered part of overall allocation percentages.

"whatever comes up" implies investing for unknown, and my comments
would be to take moderate risk with a portion of this allocation. Give
the money a chance to grow, but also have enough cash available to take
care of smaller issues. The bond fund idea listed below is a good one,
maybe a small portion in dividend paying large caps, maybe 12 months
expenses worth of CDs, then another month of expenses in equities.

"orpheusNY" <orpheusNYNOSPAM[at]yahoo.com> wrote
- quote -

I am a little baffled. These costs you list are somewhat predictable. Many
people do plan for them by saving regularly, investing the savings
conservatively. Yet you seem to be implying that you have the non-retirement
portfolio (NRP) allocated into, well, stocks. Is this right? This is not a
good place to put funds you *may* need within five years.

Sure, your kids might not need orthodontia at all. But you don't know that.
Cars and major home repairs can be somewhat anticipated, and one should have
a separate, second fund (call it emergency or NRP or whatever) for them.

What tool did you use to allocate your NRP? Or, if you wish, just say
roughly how it's allocated and give some of the reasoning behind this
allocation.

This is a financial planning newsgroup, so may I suggest, if you haven't
already, that you start recording your monthly expenses on a spreadsheet,
making an estimate of when you'll need a new car, how much orthodontia may
run you, and the cost of, say, re-roofing your house, buying a new furnace,
painting your home, etc. would be, then calculating how much should be put
aside monthly in a conservative vehicle (bond ladder? CDs? bond mutual
fund?). Account for every dollar. Know, don't guess, what sort of financial
shape in which you'd be should you need, say, a new roof next year. 'cause
that ain't cheap.

I believe there are resources to assist your planning in these subject areas
(car life; orthodontia; home maintenance costs) on the web. One won't be
able to nail down the numbers exactly, but the ballpark is fine. The point
is not to be caught totally with one's proverbial pants down.

- quote -

That makes sense.

- quote -

It's a good start.

orpheusNY wrote:


- quote -

The emergency fund is analogous to training wheels for the financial
illiterate. At some point, all cash equivalents have to be dealt with in
terms of a risk-free portfolio. IOW, the risk-free portfolio is the core
investment and is the basis for departure into the variance world.

FWIW, I've compromised on this issue by putting about half my
emergency fund into a bond fund. It's possible that I might lose a
little money if I ever have to dig into it.... but in the meantime
it's racking up a better rate of return than the other half which is
just sitting in a money market account.

-Sandra

orpheusNY wrote:
- quote -

My preference is to include emergency funds as part of the allocation
calculations. My philosophy is to come up with an ideal allocation that
suits your goals, without considering the emergency fund. Then look at
the allocation to see if the cash/savings bonds are enough to cover an
emergency.

In article <2Pf0f.6556$oc.3954[at]newsread2.news.pas.earthlink.net> ,
"Elle" <elle_navorski[at]nospam.earthlink.net> wrote:

- quote -

Call it an all-purpose discretionary nest egg. We have 2 young children,
we own our home, we're not thinking of moving anytime soon, we'll
probably be able to get at least 5 more years out of our car. I'd say
the time horizon is in that fuzzy 5 to 10 to 15 year area, depending on
what comes up. Orthodontia? Home repairs? Another car eventually? So if
you ask me what it's for, I guess I'd say "whatever comes up."

We've segregated out our education savings into separate accounts, with
allocations for those specific time horizons. Likewise retirement.

The emergency fund is essentially there as an insurance policy against
extended joblessness, which seems very unlikely right now, but things
can change, and we don't want to worry about it. Knock wood, the
emergency fund will just sit there and accumulate interest until the
kids are out of college and eventually go to other uses.

That being said, my strong instinct is to disregard it in allocating our
discretionary funds, but since it's such a significant portion of our
non-retirement savings, it feels like then putting 30 or 40% of the rest
of it into cash or bonds might be too conservative.

Does that clarify?


- quote -

"orpheusNY" <orpheusNYNOSPAM[at]yahoo.com> wrote
- quote -

To clarify the situation:
What is the purpose of the non-retirement investment portfolio?

If you plan to hold this "non-retirement portfolio" for more than 20 years,
then I'd calculate what fraction the emergency fund is of your total
portfolio (retirement or otherwise). That might help in your understanding
of the situation.

Either way, I would disreguard the "emergency fund" in my portfolio
allocation planning, because portfolio allocation tools are designed around
optimizing returns for a certain period of time. But this emergency fund's
lifetime is unknown.

I would also be more aggressive in my non-retirement investments if I
had a 12 month reserve. If you are going to play the conservative side
of things, make sure not to go too heavy into bonds with the rest of
your money, just in case interest rates continue to rise. Short term
CDs and even Auction Rate Preffered Securities have a nice yield and
can tide you over until things smooth out.

If I had 12 months expenses in cash investments, I would be more
aggressive with my other investments.

In my case I would not hold as much bonds (basically be about 70% stock
and 30% cash in my case). One benefit I see to this is if market goes
lower, there is lots of cash for buying cheap stocks.