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I’ve thought about this too, and came to a different conclusion. The primary reason is just because the markets haven’t collapsed more than 85% over a months l

I’ve thought about this too, and came to a different conclusion. The primary reason is just because the markets haven’t collapsed more than 85% over a months long period before, doesn’t mean it won’t in the future. And, my marginal utility for money gets so high below a certain level, that it’s not worth risking this outcome when the marginal utility of more money is relatively smaller.

Moodles 6y ago
Yeah, it’s essentially just estimating the probability of you getting an emergency which coincides with a total market collapse so horrific it reduces your semi-liquid net worth to less than your emergency. I’m at a point where I’m ok with that risk. At some point you would be too: 85%? 90%? 99%? Clearly we agree Jeff Bezos doesn’t need 6 months cash on hand at all times. So the limit is somewhere. I think a total market collapse reducing the Dow Jones to like 3,000 is pretty unthinkable at this point. Or rather, if it did happen, there are bigger problems than my cash, like the zombie apocalypse which caused this horrific stock market collapse.
- fairity 6y ago
  Makes sense. 99% sounds about right for myself. But, how do I estimate the degree of downswing that I'm 99% confident will never happen in my lifetime? Or, is there a way to buy options to protect against this outcome that would economically make sense? Thanks!
  - Moodles 6y ago
    Yeah it’s hard. There is about 200 years of stock market data so I would look at the biggest crashes to get a sense of what the biggest of them all could be. I guess that’s the German tank problem. It seems very unlikely we’ll get a crash relatively twice as bad as the Great Depression though
    - sanderjd 6y ago
      Why does that seem very unlikely? It seems to me that the right way to think about that is that the likelihood is simply unknowable either way.
      - Moodles 6y ago
        It seems very unlikely since there's 200 years of data to show that was the biggest crash ever. So a crash twice that size is very unlikely. You could do the math to calculate the exact probability given the sample size of stock market years.
        sanderjd 6y ago
        But ... that 200 years of data has nothing to do with what is going to happen in the future...
        Moodles 6y ago
        Not nothing.
        sanderjd 6y ago
        I guess this always devolves into philosophy, but yes, the future is actually unknowable.
        Moodles 6y ago
        Right, and at some point you have to choose to live your life assuming there isn't an undetectable asteroid about to wipe out all human civilization, even though you don't know the probability of it happening.
- pedrosorio 6y ago
  > a total market collapse so horrific it reduces your semi-liquid net worth to less than your emergency I don’t follow the logic here. It doesn’t need to reduce your funds anywhere near the emergency amount. If it reduces your investments to 3x your emergency you were just forced to sell 1/3 of your portfolio at what is potentially the lowest point.
  - Moodles 6y ago
    Because there are actually two goals, not one: 1. To have enough money to survive an emergency no matter what. 2. To maximize long-term net worth on average. I was only talking about 1. You are talking about 2. But, to address your point: yes, stocks can indeed go down, but on average they go up. Sometimes your emergency will coincide with a good stock market. You're literally choosing the worst possible situation and then saying "see, this strategy doesn't work!". But I'm actually being very careful with my words here. I am saying: mathematically, backtesting with real data and with monte carlo simulations, you will maximize your long-term net worth on average if you forgo the EF after a certain net worth level. Consider also the original comment I replied to talked about investing on margin while simultaneously having an EF. Which, if you're against me forgoing an EF, you must really be against investing on margin while having an EF: That's kind of the same to what I'm currently doing, only paying interest for it!
    - pedrosorio 6y ago
      People don’t keep EFs to maximize their expected net worth. They do it to keep worst case scenarios within reasonable bounds. You argue keeping stocks is ideal for 2 (sure) and it doesn’t hurt 1 (assuming your net worth is significantly higher than what you’d keep as EF). Agreed. An EF is for 3. Maximize long-term net worth in x th percentile of outcomes (where x < 10) EDIT: “ you must really be against investing on margin while having an EF”. Yep.
      - Moodles 6y ago
        Ok but now we're just personally disagreeing on what x is, which as I said in my first post, is fine. But just be aware of the bias.
- icedchai 6y ago
  I keep roughly 10% of my net worth in cash... That equates to several years of expenses. It may be excessively high but it lets me sleep at night. You joke, but the past year shows something like a zombie apocalypse is a possibility.
  - lotsofpulp 6y ago
    In the very worst scenario, you’re going to need guns, source of food, land, and most importantly a network of people who you can call to help defend you (or go on offense with you to acquire necessary resources). The dollar is only useful as long as the US government continues to perform as an organization. However, as the US approaches dissolution, I would expect the value of USD to approach zero as the government increases the supply of money and prospective owners of the currency lose trust in its ability to retain value in the future.
    - icedchai 6y ago
      This is true. However, I think there are a variety of scenarios, less extreme than total societal collapse, where it still may be useful to have a large emergency fund. It may not be rational.
    - marvin 6y ago
      >or go on offense with you to acquire necessary resources Are you seriously suggesting, on a hacker forum, to be prepared to use the proceeds of your emergency fund to violently steal life-critical resources from other people in a crisis? I really hope I've misunderstood, and you're using the phrase "go on offense" as a euphemism for deer hunting.
      - lotsofpulp 6y ago
        No, I am suggesting that in a worst case scenario, an emergency fund full of cash is useless (on a multiple year timescale, of course how many years is subjective). It’s conceivable to imagine a scenario where resources are so limited that acquiring them becomes a do or die situation, which is what I imagine the previous poster meant by “zombie apocalypse” scenario (or more realistically, war). Or I erroneously assumed “zombie apocalypse” to mean worst case scenario. I also forgot to include a less drastic measures of also owning assets in a different country and the rights to live there in case you need to immigrate.
- sanderjd 6y ago
  Do we all agree with that? I feel like I'd probably still keep 6 months of cash on hand if I were Jeff Bezos... But presumably that's one of the many reasons I'm not.
xchaotic 6y ago
I think the central banks and government will prevent any future collapse of that scale. Don’t fight the fed. They have more money than you.

Moodles 6y ago

Yeah, it’s essentially just estimating the probability of you getting an emergency which coincides with a total market collapse so horrific it reduces your semi-liquid net worth to less than your emergency. I’m at a point where I’m ok with that risk. At some point you would be too: 85%? 90%? 99%? Clearly we agree Jeff Bezos doesn’t need 6 months cash on hand at all times. So the limit is somewhere. I think a total market collapse reducing the Dow Jones to like 3,000 is pretty unthinkable at this point. Or rather, if it did happen, there are bigger problems than my cash, like the zombie apocalypse which caused this horrific stock market collapse.

fairity 6y ago
Makes sense. 99% sounds about right for myself. But, how do I estimate the degree of downswing that I'm 99% confident will never happen in my lifetime? Or, is there a way to buy options to protect against this outcome that would economically make sense? Thanks!
- Moodles 6y ago
  Yeah it’s hard. There is about 200 years of stock market data so I would look at the biggest crashes to get a sense of what the biggest of them all could be. I guess that’s the German tank problem. It seems very unlikely we’ll get a crash relatively twice as bad as the Great Depression though
  - sanderjd 6y ago
    Why does that seem very unlikely? It seems to me that the right way to think about that is that the likelihood is simply unknowable either way.
    - Moodles 6y ago
      It seems very unlikely since there's 200 years of data to show that was the biggest crash ever. So a crash twice that size is very unlikely. You could do the math to calculate the exact probability given the sample size of stock market years.
      - sanderjd 6y ago
        But ... that 200 years of data has nothing to do with what is going to happen in the future...
        Moodles 6y ago
        Not nothing.
        sanderjd 6y ago
        I guess this always devolves into philosophy, but yes, the future is actually unknowable.
        Moodles 6y ago
        Right, and at some point you have to choose to live your life assuming there isn't an undetectable asteroid about to wipe out all human civilization, even though you don't know the probability of it happening.
pedrosorio 6y ago
> a total market collapse so horrific it reduces your semi-liquid net worth to less than your emergency I don’t follow the logic here. It doesn’t need to reduce your funds anywhere near the emergency amount. If it reduces your investments to 3x your emergency you were just forced to sell 1/3 of your portfolio at what is potentially the lowest point.
- Moodles 6y ago
  Because there are actually two goals, not one: 1. To have enough money to survive an emergency no matter what. 2. To maximize long-term net worth on average. I was only talking about 1. You are talking about 2. But, to address your point: yes, stocks can indeed go down, but on average they go up. Sometimes your emergency will coincide with a good stock market. You're literally choosing the worst possible situation and then saying "see, this strategy doesn't work!". But I'm actually being very careful with my words here. I am saying: mathematically, backtesting with real data and with monte carlo simulations, you will maximize your long-term net worth on average if you forgo the EF after a certain net worth level. Consider also the original comment I replied to talked about investing on margin while simultaneously having an EF. Which, if you're against me forgoing an EF, you must really be against investing on margin while having an EF: That's kind of the same to what I'm currently doing, only paying interest for it!
  - pedrosorio 6y ago
    People don’t keep EFs to maximize their expected net worth. They do it to keep worst case scenarios within reasonable bounds. You argue keeping stocks is ideal for 2 (sure) and it doesn’t hurt 1 (assuming your net worth is significantly higher than what you’d keep as EF). Agreed. An EF is for 3. Maximize long-term net worth in x th percentile of outcomes (where x < 10) EDIT: “ you must really be against investing on margin while having an EF”. Yep.
    - Moodles 6y ago
      Ok but now we're just personally disagreeing on what x is, which as I said in my first post, is fine. But just be aware of the bias.
icedchai 6y ago
I keep roughly 10% of my net worth in cash... That equates to several years of expenses. It may be excessively high but it lets me sleep at night. You joke, but the past year shows something like a zombie apocalypse is a possibility.
- lotsofpulp 6y ago
  In the very worst scenario, you’re going to need guns, source of food, land, and most importantly a network of people who you can call to help defend you (or go on offense with you to acquire necessary resources). The dollar is only useful as long as the US government continues to perform as an organization. However, as the US approaches dissolution, I would expect the value of USD to approach zero as the government increases the supply of money and prospective owners of the currency lose trust in its ability to retain value in the future.
  - icedchai 6y ago
    This is true. However, I think there are a variety of scenarios, less extreme than total societal collapse, where it still may be useful to have a large emergency fund. It may not be rational.
  - marvin 6y ago
    >or go on offense with you to acquire necessary resources Are you seriously suggesting, on a hacker forum, to be prepared to use the proceeds of your emergency fund to violently steal life-critical resources from other people in a crisis? I really hope I've misunderstood, and you're using the phrase "go on offense" as a euphemism for deer hunting.
    - lotsofpulp 6y ago
      No, I am suggesting that in a worst case scenario, an emergency fund full of cash is useless (on a multiple year timescale, of course how many years is subjective). It’s conceivable to imagine a scenario where resources are so limited that acquiring them becomes a do or die situation, which is what I imagine the previous poster meant by “zombie apocalypse” scenario (or more realistically, war). Or I erroneously assumed “zombie apocalypse” to mean worst case scenario. I also forgot to include a less drastic measures of also owning assets in a different country and the rights to live there in case you need to immigrate.
sanderjd 6y ago
Do we all agree with that? I feel like I'd probably still keep 6 months of cash on hand if I were Jeff Bezos... But presumably that's one of the many reasons I'm not.

xchaotic 6y ago

I think the central banks and government will prevent any future collapse of that scale. Don’t fight the fed. They have more money than you.