We here at The Weddle Team greatly emphasize the importance of cash. During the 2020 COVID crash, many of our clients weathered the storm well, in part due to their easy access to their cash. They didn't need to sell investments when the market was crazy, and that is one of the main disciplines that allows you to be able to make money in the market for the long term. So when we get to retirement, and we feel wealthy, the importance of an emergency fund can be overlooked.
So, how do we think of an emergency fund? To illustrate this, I often refer back to a classic vending machine that I used to frequent between lawn mowing jobs in the summers in high school. There was a Pepsi machine near where I worked, and I would frequently go and get a Mountain Dew for a cost which by today's standards seems scandalous. (Alas, inflation).
But on the rare occasion that I would see the machine being stocked, I got to see how it worked from the inside. It was a classic old school vending machine that was fed by gravity. More specifically, if you selected a Mountain Dew, the bottom can would slide out and all of the other cans would slide down, each one closer to being consumed. Depending on your pace of consumption, the Mountain Dew can near the top of the vending machine might be there for weeks before you worked your way to buying and drinking it.
You can think of your investments in the same fashion. The first thing to reach for when you need it is cash. Whether the cash is in your bank account, or part of your investment accounts, this is the money that you could have tomorrow if you needed it. If it's a debit card linked to your checking account, you could have it in the next 15 minutes. And the whole point of this is so that you do not have to go sell the other assets in your “stack” when their value is temporarily lower.
At its simplest terms, the market has two rules for making money: Buy low, and sell high. The simplest way to be able to do this is to have access to cash.
We know that as wealth managers in an inflationary environment, we’re “supposed” to tell you to put more money into the market. But we would be hypocrites if we didn't remind our clients of the importance of cash. As Morgan Housel puts it, “[cash in] savings is hedge against life’s inevitable ability to surprise the heck out of you at the worst possible moment.”
So by all means, keep the vending machine of your wealth stocked with all different kinds of great things. But keep some cash right there near the bottom that you can use when you need it. It’ll do you more good than a Mountain Dew on a hot summer day.