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|Subject: Re: 5 Year "Cushion"||Date: 4/28/2000 12:15 AM|
|Author: dory36||Number: 3753 of 20147|
Jangle1 wrote I've let this lay dorment for a while now, but I just read the FoolU Q&A on assett allocation and there the advise is to have 3 to 6 months of cash and the rest 100% in stocks. This seems to be 180 degrees from your position of 5 years of cash.
I can suggest one resolution of this apparent inconsistency. In short, the 3-6 month reserve is to get you through until you get a new job. The 5 year cushion assumes you aren't getting a new job.
A little elaboration:
The goal is to have enough cash on hand to meet any likely emergency, or last until income is restored, without having to liquidate other assets at "fire sale" prices or inopportune times.
Why 3-6 months? At least according to one old rule of thumb, that was about how long it would take the "typical" person to find an equivalent new job, in "typical" economic conditions. (Monster.com and low unemployment haven't always been with us.)
The 3-6 months is for when the paycheck comes in every month and is reasonably expected to continue. If you know your income will stop in a few months, and you don't expect another paycheck for a year, you'd certainly try to build up at least a year's cash before putting more into the third world growth fund you've been paying into each month. If the delay is three years, you'd build up a lot more.
At some point, it no longer makes sense to have all your reserve in cash, and you can start taking the chance that the illiquid investments, or those with price volatility, can be sold at a good price within the "lifespan" of the reserve fund.
This is where the retiree finds himself -- no anticipated paycheck, ever again.
In looking back over many years of investment returns, market crashes, inflation, and so forth, it looks like about five years of living expenses in cash and about twenty years of income in stocks would have been the best single mix to weather all of the different situations that occurred in the past 100+ years.
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