3 ms·

Can you elaborate about not needing much cash to weather a downturn?

• dragontamer 3y ago
  You should have enough cash to weather your emergencies (job loss, or whatever). This is not "investment money", but instead your emergency fund. ------- But even small amounts of cash can help protect you from a downturn. 90% stock / 10% cash on a $100,000 investment will save you $3000 in a 30% stock-market downturn. ($70,000 vs $73,000). If this 30% decline happens over a year, you'll have to factor in the 5%-ish you'll get from the $10k cash investment (MMF is still returning 5.25%, and I expect rates to remain higher for longer). So you'll actually be $73,500, even with just a small 10% left in cash. All in all, you're a full 5% better than the all-stock portfolio under this scenario. --------- In an upwards market, of course stocks do better. Ex: a 20% increase in stocks does better if you're 100% invested in stocks instead of Stock+Cash, but note that Cash is earning 5.25% this year (assuming you use a money-market fund like VMFXX or SWVXX). $100k turns into $120k after a 20% upswing. But... you really didn't fall behind that much. A 90% stock / 10% cash portfolio would rise to $108k stock + $10,500 (5%) after a year, or $118,500, meaning you're only down by $1.5k in the optimistic scenario. (Or you're 1.26% behind). ---------- EDIT: VTI (Vanguard's total stock market ETF) is a 1.35% dividend yield, which I forgot to add in the above math. But still, a 5.25% Cash interest rate is far above the ETF dividend yields and to cash's advantage. Stocks must grow above-and-beyond cash's interest rate to be worthwhile (and in a downturn, its doubly bad because Cash "would have earned money" as the stock crashes).