Emergency Fund in Lifestratehy 60?

[ModernMicawber]

Been mulling this over. I have probably 1 year's "outgoings" in a 60-day notice Cash ISA, and a similar amount in LS 60 after recent S&S ISA consolidation.

The emergency fund is for actual lifechanging emergencies; we have a Santander 123 account which is normally close to being maxed out, with any overspill shuffled back and forth to Premium bonds, this includes funds for car replacement, boiler replacement, blah blah. Current car is worth less than its tyres, and is still going strong. I have a small mortgage, about £150 a month, which I don't intend to pay off as it is providing some gently diminishing leverage to the rest of the portfolio. Mortgage balance is less than the sum of the two ISAs mentioned above, from memory it is about 30% less.

Been thinking about binning the cash ISA and transferring it all to LS 60, in the hope that the bond component would dampen volatility sufficiently to still provide a useful "insurance policy". I suppose in the event of a "forced sale" at a time of market meltdown one could combine this with rebalancing ito LS80 or LS100 to preserve equity exposure.

Will someone convince me that this is a bad idea?

[Stonge]

Liquidity is the issue here, and LS60 is pretty good both in its equity and bond components (but you may be able to do better for bond liquidity with something like iShares £ Corp Bond 0-5yr UCITS ETF)

1. The market hasn't collapsed, but you need some money. You can sell and the price of LS60 won't be affected by your sale because it'll be pretty small beer in the grand scheme

2. The market has collapsed and you need some money. Then you'll be locking in some loss. How likely is this situation? Only you can guess.

[ModernMicawber]

2. Requires stock and bond markets to have collapsed simultaneously, doesn't it?

My thinking is as follows; assume 100K invested in LS60, this gives you 60K in equities, 40K in bonds.

Assume stock market halves in a day and bond market is flat, you now have 30K in equities and 40K in bonds. That night, Vanguard sell 12K of bonds to buy equities, leaving you with 42K equities, 28K bonds.

Assume you need to realise 20K the following day you are left with 30K equities, 20K bonds. Optionally, you can preserve most of the original equity exposure by switching to LS100, leaving 50K in equities.

[Backache]

Why not just DIY the LS 60 with a short term bond fund and an LS100 in the appropriate amounts, Then if you need to sell you can choose what proportion of bonds and stocks you wish to sell rather than having it forced on you , Particularly if you are intending to buy some back.

[tikunetih]

2. Requires stock and bond markets to have collapsed simultaneously, doesn't it?

My thinking is as follows; assume 100K invested in LS60, this gives you 60K in equities, 40K in bonds.

Assume stock market halves in a day and bond market is flat, you now have 30K in equities and 40K in bonds.

You've laid out one possible scenario but there's a spectrum of possibilities, including the one where all long duration assets such as equities and many bonds decline in tandem in the face of unexpected inflation, for example.

For LS60 I'd mentally prudently prepare for an up to ~25% maximum decline if you were particularly unlucky. Does that sound OK for your emergency funds? Probably not, unless you can afford to maintain this pot 33% larger than you would intend to draw from it, in order to negate that "25% worst case" decline potential.

The "best" emergency fund is likely to be cash or cash-like (eg. short dated high quality govvies), but clearly it's all a trade off between the lowly returns you may "suffer" on this emergency pot vs. the volatility and risk to that pot's balance at the point you might need to rely on it.

Just make you understand the various trade-offs and choose something that you're comfortable with.

[Itsallaguess]

The "best" emergency fund is likely to be cash or cash-like (eg. short dated high quality govvies), but clearly it's all a trade off between the lowly returns you may "suffer" on this emergency pot vs. the volatility and risk to that pot's balance at the point you might need to rely on it.

I see any 'lowly return' that I might get from my 'Emergency Fund' simply as the 'insurance premium' that I must pay to ensure it's there when I need it....

Insurance has a cost...

Cheers,

Itsallaguess

[Hariseldon58]

Emergency Fund=NS&I Income Bond’s is my choice.

Instant access effectively, zero capital risk and 1.16%

Don’t confuse cash with corporate bonds, long gilts etc.
You can get a return on risk assets and the lack of a great return on NS&I income bonds is the “insurance premium” you pay for total security.

I personally hold around 12% of the portfolio in £ & $ denominated totally safe assets and let rip the equity risk on the rest of the portfolio. The % varies from time to time but it loses me around .35% or so in pa returns but provides security of income for 10 years or so, a price worth paying.

[JNC3]

Emergency Fund=NS&I Income Bond’s is my choice.

Instant access effectively, zero capital risk and 1.16%

Don’t confuse cash with corporate bonds, long gilts etc.
You can get a return on risk assets and the lack of a great return on NS&I income bonds is the “insurance premium” you pay for total security.

I personally hold around 12% of the portfolio in £ & $ denominated totally safe assets and let rip the equity risk on the rest of the portfolio. The % varies from time to time but it loses me around .35% or so in pa returns but provides security of income for 10 years or so, a price worth paying.

What do you use for the $ denominated safe asset ?
Do you have 88% in Global equity trackers?
I based my Portfolio on that advocated by Warren Buffet for his bequest for his wife :-

90% Global equity trackers + 10% short dated Gov Bonds (Cash)

[Hariseldon58]

@JNC3

My choice of a dollar asset for safe funds for two reasons:

One is because I don’t have total confidence in the £

Secondly as the bulk of my other assets are not based on sterling, then the safe asset follows the currency that is most representative of that portfolio.

If I might add Warren Buffets portfolio was 90% US stocks and 10% US treasuries. He would not advocate a world equity tracker because he is very firmly convinced as a while that the US markets have a strong international content and the the US market has strong legal and accounting protections and a generally supportive business approach.

Not that a World Equity tracker is a bad idea !

My personal preferences are more inclined to a global outlook with some exposure to factors.

I am not sure that following a % based asset split is a great idea without considering liabilities and the size of the portfolio, is sensible.

10% of Warren Buffets portfolio would be an enormous sum of money on its own and would be sufficient for any of his widows needs, in pretty much any foreseeable circumstances, the 90% equity portfolio is just jam on top.

10% of a Small portfolio might not provide sufficient security to cover spending needs in “bad times” for a pensioner.