Key insights
- The article argues that beyond a certain savings threshold (e.g., $800k-$2M), it's reasonable to move emergency and home savings out of cash accounts and into the stock market. The author suggests that even a severe market crash (60-70%) would not deplete an entire diversified portfolio, and withdrawing funds for a down payment, regardless of market conditions, does not impact future portfolio performance. This perspective challenges conventional advice on cash holdings for savings goals.
Contentious statement I know but hear me out.
Say you want to maintain a $20,000 emergency fund and a $100,000 reserve for a down payment on a home in a year or two. The conventional advice is to put this in a high yield savings account or some similar financial instrument. However, over a certain threshold of savings, this isn't necessary anymore. On average you will be losing out of potential gains from the market, and even if there was a catastrophic crash, provided you held a diversified portfolio, you likely aren't going to lose your entire portfolio. Depending on your risk tolerence, I think after your portfolio is past a certain threshold (800k, 1mil, 2mil, etc.) it's reasonable to no longer place a big emphasis on cash accounts.
Let's consider the worst case scenario and say the entire market drops by 60-70%. Of course psychologically it would feel terrible to say, lose the majority of your portfolio in a crash and then immediately withdraw the remainder to purchase a home, but that's a sunk cost fallacy. Withdrawing $100k during a bull or bear market has no bearing on your future portfolio performance, it's just psychologically we feel better doing so when markets are doing well.