Using a mutual fund for an emergency fund

[usnavy_233]

I was wondering what everyone else thought of the idea. I've read here and there of other people doing it and it makes good since to me.

I currently have 10% of my pay going into TSP (Active Duty Navy) and I have a ROTH IRA. I don't want to keep more than a couple thousand in my HSBC account and have been thinking of using DODFX or CGMRX as a potential emergency savings fund in addition to a regular investment fund. I have a credit card that could pay for any major expense (over the amount in HSBC) immediately, then I'd just sell a little of my holdings in the fund to pay off the card.

Thoughts? Anyone have some good funds they would recommend in addition to the couple I've mentioned? Thanks in advance.

[poundwise]

I'm of the opinion that an emergency fund needs to be reasonably liquid and accessible. A money market account fits this nicely. I understand your statement about using the credit card and liquidating as needed, however, that opens you up to additional hassle during a time when you may not want/need it, plus, you may be forced to sell some of your position when it may be unfavorable to do.

Now, if you have a substantial level of funds, as in 3 to 6 months of expenses or something, then I could see having 1/3 or 1/2 in a money market and the remainder in something else.

That's just my take.

[sweeps]

Bad idea. Mutual funds -- particularly international stock and real estate funds -- are long-term investments. An emergency fund should be highly stable and highly liquid, neither of which describe mutual funds.

[smartatmoney]

I agree with poundwise. Keep it liquid unless you have more than 3 months worth. Even then I would put the remaining funds in something "safe" like a balanced fund.

[usnavy_233]

Well,
May I'm just young and naive but I look at it this way:

I'm Active Duty and have VERY good job security.

Medical and Dental are covered so there won't be any costly emergencies on that front.

I'm 25 and have always been on the aggressive side.

I plan on buying these two funds anyway, as long-term investments, so it makes since to me to use one of them (or part of both) as a partial emergency fund.

I will have a couple grand in a high interest savings for anything that pops up.

I have thousands more available on a M/C just in case I need more than a couple grand.

My game plan would be to save about $2500-$3000 in HSBC, then use most of it for the initial purchase of the fund. After that, I'll stock the HSBC back up to $2000-ish. Then I'll start a monthly contribution into the fund. I'll repeat the process for the other fund after a few months of stocking HSBC back up.

So basically, I'd have two dedicated retirement accounts and two very well respected mutual funds that are aggressive and have proven to do well over the last 5-10 years. In addition to this I'll have $2K+ in HSBC, and $7K+ on the M/C. Now, 9K+ is just a hair shy of 4 months of living expenses for my family and me. I'd have almost a full month in HSBC and then right at three more on the M/C. I'd already have the money to cover the M/C amount in the mutual(s) if I ever needed it and unless the funds had an outright horrible first year (and it would have to be HORRIBLE to offset my monthly additions) I don’t foresee a big problem there. And of course, the amount in the mutual(s) would continue to grow with each year.

[kv968]

Just a couple of things to touch on...

You say that these funds would be "long-term" investment. What do you consider "long-term" and what would these investments be used for?

If you want a REIT, you should hold it in your Roth and not in a taxable account. REIT's are very unfriendly tax-wise and your returns will be significantly decreased by the taxes.

More importantly, you've got to realize the risk of your funds. I know you're young and being aggressive (which IMO is good) but don't be naive about the possiblity of losing a lot of money. I know they have great looking 5- and 10-year returns but don't get blinded by the numbers.

Originally Posted by usnavy_233

unless the funds had an outright horrible first year (and it would have to be HORRIBLE to offset my monthly additions) I don’t foresee a big problem there. And of course, the amount in the mutual(s) would continue to grow with each year.

The funds wouldn't have to have an "outright horrible first year" for you to lose a significant amount of money. You could lose half or more at any given time and your monthly additions WON'T be able to compensate for that. And that's an even bigger determinent of risk...your willingness to stick with them in times of loss. If the funds were to fall significantly (30-40%) would you continue to put money in them or would you sell? Again, I'm not knocking the funds or your decision to go with them; although depending on what they're to be used for maybe you shouldn't. I just want you to know that the possiblity to lose a lot of money is there.

[usnavy_233]

These funds would be held for 5-10 years or more. Probably much more. They have no specific goal. Yeah, I know, you should always have a goal for your money. Ok, the goal for these funds are to make as much money as possible until I decide to start moving into “safer” investments. I agree that a REIT would be ruff for tax purposes, I wasn't thinking about that at the time but you are very correct about that. Strike off CGMRX, although I will still be adding it to my ROTH.

I think we may have different opinions of what "horrible" is. If my fund lost 30% in a week, right after I opened it with $2500, I'm only out $750. I don't see this as horrible. Would I keep it? Yes. Why? Because as long as the dynamics of the fund or the fund manager don't change, I could reasonably expect the fund to perform at a level that it has over the years. As for my additions, my dollar cost averaging would help to recoup my losses even more if I continue to buy monthly after a very bad year. Granted past performance is not an indicator of future profit, but lets face it, if they've been doing it right for the last 5 years and nothing changes, one can (with a certain degree of confidence) expect them to conitue to do it right for the next 5. Obviously, the risk of losing allot of money exist, but for the potential rewards, there's a certain level of risk I'm willing to take.

Now mind you, if the 30% drop was because the fund manager was retiring, the fund decided to shift focus from what they've been doing in the past, the fund manager was asleep at the wheel at didn't shift sectors when one was clearly overplayed, etc then yes, I would have to seriously reconsider my position.

Case and point, the other day CGMFX dropped about 10%. CGMRX drop over 20%, both on the same day. There was new negative news, no rumors of change, no bad quarterly report, etc. Essentially it just happened, with no real explanation. I didn't pull out of CGMFX. Everyone knows that funds go up and fund go down. Since CGMFX has been up far more than down, I'll continue to put money into it until I feel they won't be going up anymore for whatever reason.

Also, I can understand the comments from everyone about being more "safe" but I have a multilayered approach and really, all of my investments could serve as a emergency fund if needed. While I would never want to tap my ROTH, I have that option. While I would never want to borrow from my TSP, I have that option as well, and I can pay it back while still earning 4-5% interest. While I wouldn't plan on selling any of my mutual funds, the option exists if I absolutely had to.

In addition to DODFX, I'm also looking at JMVSX and TRRDX. So far, I like TRRDX allot and it may become the fund I chose to start with instead of DODFX. It's "safer" in that they are a targeted fund and are well diversified amongst many different sectors. They also have only 89% of their allocation in stocks. For me, this is LESS aggressive than I'm used to but since this provides a bit more stability, it's an option I may pursue. It looks like this:
Cash: 3.67%
Stocks: 89.01%
Bonds: 6.51%
Other: 0.81%

I typically like to keep a very aggressive allocation with usually 95% or more in stocks, and very little to nothing in bonds. Even within my TSP account, I have the allocation spread between Common, Small-cap, and International stock with no bond funds. This may not work for those that are very risk adverse but it works well for me. I would be making an exception if I went with a mutual like TRRDX, but in this case, I can see the merits of it.

[scfr]

Do you have any dependents (spouse or children)? Or are you single and dependent-free?

[sweeps]

If you plan on holding the mutual funds for 5-10 years and are willing to take substantial losses, that's fine. But then we're not really talking about an emergency fund. So I think this is an issue of semantics.

[kv968]

I know you want to be aggressive (which is good) but you should really set up some "core" funds first and build off of those. It sounds like you're keeping track of what's going on with your investments (which is also good), but it seems like your allocation is going to go all over the place with all the funds you're adding. You should sit down and decide what percentage you want allocated to each style and size. You have the stock/bond ratio set but you need to determine what percentages you want within each. If you don't keep track of that you're going to find that you have way too much in one sector and not enough in another. TRRDX (although not quite the stock/bond ratio you'd like) might be a good core fund to start with.

It's also great that you're willing to keep track of funds that aren't performing well due to manager changes and the like however you have to realize that due to the structure of most mutual funds, managers can't just pull out of a sector because it's not "hot". That's why having a diversified portfolio that covers all sectors is key.

And a couple of other things just to comment on...JMVSX is closed to new investors unless it is available to you through some other method (ie. work). And the reason CGMFX and CGMRX fell considerably a couple of weeks ago is that they both had huge capital gains distributions.

I don't mean to sound preachy or anything. I just want you to realize the benefits and risks of having and not having a diversified portfolio.

[usnavy_233]

Originally Posted by scfr

Do you have any dependents (spouse or children)? Or are you single and dependent-free?

Wife and two kids.

[usnavy_233]

Originally Posted by Sweepsplayer

If you plan on holding the mutual funds for 5-10 years and are willing to take substantial losses, that's fine. But then we're not really talking about an emergency fund. So I think this is an issue of semantics.

Perhaps you're right. It's not so much an "emergency fund" in the traditional sense. It's more a fund that I could use for an emergency if needed.

[usnavy_233]

Originally Posted by kv968

I know you want to be aggressive (which is good) but you should really set up some "core" funds first and build off of those. It sounds like you're keeping track of what's going on with your investments (which is also good), but it seems like your allocation is going to go all over the place with all the funds you're adding. You should sit down and decide what percentage you want allocated to each style and size. You have the stock/bond ratio set but you need to determine what percentages you want within each. If you don't keep track of that you're going to find that you have way too much in one sector and not enough in another. TRRDX (although not quite the stock/bond ratio you'd like) might be a good core fund to start with.

It's also great that you're willing to keep track of funds that aren't performing well due to manager changes and the like however you have to realize that due to the structure of most mutual funds, managers can't just pull out of a sector because it's not "hot". That's why having a diversified portfolio that covers all sectors is key.

And a couple of other things just to comment on...JMVSX is closed to new investors unless it is available to you through some other method (ie. work). And the reason CGMFX and CGMRX fell considerably a couple of weeks ago is that they both had huge capital gains distributions.

I don't mean to sound preachy or anything. I just want you to realize the benefits and risks of having and not having a diversified portfolio.

You have some good points here. Yet another reason that I like to purchase funds such as CGMFX is because the manager IS free to move in and out of a particular arena where as most managers essentially have their hands tied in regards to the amount of risk they can take. You'll notice that CGMFX is 99.12% stock and has over 75% of it's assetts in just three sectors. I like the fact the Ken Heeber can put larger portions of the pot in the sectors that he thinks will make the most money at any given time. Most funds will not allow such risks.


I didn't see that JMVSX was closed to new investors. I'll have to take another look and see how I missed that. Oh well, it was on the bottom of the list anyway!

[kv968]

Originally Posted by usnavy_233

You have some good points here. Yet another reason that I like to purchase funds such as CGMFX is because the manager IS free to move in and out of a particular arena where as most managers essentially have their hands tied in regards to the amount of risk they can take.

Focus funds, or "boutique" funds as they're sometimes called, are nice funds to hold as a smaller part of a portfolio since they can "roam" wherever the manager sees fit. However for that reason and the limited holdings some have, they shouldn't be considered a "core" fund in your portfolio since it's hard to keep track of where it's at and not enough diversification within the fund causes huge standard deviations. One other aspect to keep track of with these type funds is their total asset amounts. They tend to post really good returns and in seeing that people dump money into them which in turn could become too much for the manager to handle. If he/she doesn't close the fund and has to end up either sitting on cash or investing in things they really don't want to but have to due to the continually huge influx of money, the returns could start to suffer. This is mostly seen in smaller-cap funds but can occur in larger cap ones also if there's only a limited number of stocks to be held by the fund.

[poundwise]

Originally Posted by usnavy_233

It's not so much an "emergency fund" in the traditional sense. It's more a fund that I could use for an emergency if needed.

: I don't think this solved the semantic issue at all. Is it just me?

[LivingAlmostLarge]

I do it. I invest my EF in stocks/play money for DH. I leave $15k in there and figure if it's a loss it's a loss. I also invest our EF in a S and P index fund for $10k and the other $5k is liquid. But my DH loves risk and refuses to let me sink cash sitting around, of course I circumvent this by stockpiling cash for things that are coming like tuition bill, etc. So like right now in the bank I have $10k in cash for $6k tuition bill coming up. umm...yeah. Guess it depends on how you manage money.

I don't think that any one answer is right or wrong.

[scfr]

Thank you for your service to the country!

Please think of your Emergency Fund not only as a way to cover unexpected expenses or setbacks, but also as a safety cushion for your wife and children if, God forbid, something should happen to you.

My personal opinion/suggestion would be that you build the EF up to at least $7K (to cover 3+ months expenses) and that you keep that money invested in liquid accounts or, at a minimum, conservatively invested. If you really want to have some of your EF in a mutual fund, what about a conservative and broadly-diversified one like the Vanguard STAR Fund, (wich happens to have a minimum investment of only $1K)?

Once you have a really good EF, then that would be the time to start thinking about other outside investments which can be as aggressive as you are comfortable with.

I'd also suggest that you discuss your options with your wife, and try to do something that you are both comfortable with.

[disneysteve]

Originally Posted by usnavy_233

Perhaps you're right. It's not so much an "emergency fund" in the traditional sense. It's more a fund that I could use for an emergency if needed.

Until I got to this post, I was going to vote no along with the others. Once you said this, however, I changed my mind. As long as you recognize that these funds don't constitute a true emergency fund, I think you are probably fine. I have 3 mutual fund accounts that are not in retirement accounts. My total investment in the 3 is about $145,000 right now. I don't consider that my EF at all, but if it ever became necessary, that's a big chunk of money that I could live on for a couple of years if I needed to.

[usnavy_233]

Originally Posted by scfr

I'd also suggest that you discuss your options with your wife, and try to do something that you are both comfortable with.

This is very good advice for anyone to follow. My wife and I share the finances. It's really simple; I make the money and she spends it.....
Just kidding, but we are both involved in the finances. However, she leaves the investing aspects to me and I let her run the bills and the budget. Of course, we do allot of talking to make sure we both know what's going on in the each other's arena and before either one of us makes a big decision, we discuss it. I sit down with her and talk over the budget and she sits down with me and I discuss and explain investments. It works very well for us.

[LuxLiving]

You could break up your money into tiered brackets of:

Current Living: 60%
Once Yearly Expenses: 5%
Emergency Fund: 10%
Retirement Accounts: 10%
Safer Investments: 10%
Aggressive Growth Fun Money: 5%

Or some variation thereof. Only you know how you'd draw down the money in the event of a layoff or disability.