At home, we are firm believers that we have to consistently invest part of our income every month to have more options and freedom in the future. Having money in the bank brings security and peace of mind, and also, brings a lot of freedom to (and maybe freedom from).
Our first savings (what would later become investments) were made on the first paychecks around 2009 and since then we have tried to save consistently through the years.
But my portfolio changed a lot since we first started, from just savings to total individual stocks to the late all low-cost ETF (of stocks) portfolio. At the current moment, all our investments are in low-cost ETFs. The only cash we have is our Emergency Found which is not really accounted for in the investments.
But after listening again to the book The Psychology of Money: Timeless Lessons on Wealth, Greed, and Happiness (I read it first in 2020) and hearing that Morgan Housel has 20% of the cash it brought some second thoughts about keeping all stocks.
Here is where he mentioned the reasoning for keeping the 20% of cash.
“We also keep a higher percentage of our assets in cash than most financial advisors would recommend — something around 20% of our assets outside the value of our house. This is also close to indefensible on paper, and I’m not recommending it to others. It’s just what works for us. We do it because cash is the oxygen of independence, and — more importantly— we never want to be forced to sell the stocks we own.”
And here is a nice snippet from the book.
“We’re so far committed to the independence camp that we’ve done things that make little sense on paper. […]. But our goal isn’t to be coldly rational; just psychologically reasonable.”
These phases resonate a lot with our current situation and beliefs. We want to continue to own stocks (via ETF) for the rest of our lives, and for sure, we will face many crises and down periods during our investment life. So if one of these crises happens and the Emergency Fund is not enough (extreme scenarios) we will have safety and will not have to be forced to sell our investments on a low point of the market.
The downside is that cash in general yields a lot less than stocks (over the long run) so we will be reducing the growth of the money and our compound rate. But that is the price of the security and peace of mind.
We are still not sure about how much cash we want to have in our portfolio, but we don’t have to decide now as well. We can slowly build up the cash reserve while we mature the idea more and check to refine the percentage.
The goal is not to get it right but to get to a point where we feel more comfortable and safe.
Happy investing!
Photo by Kenny Eliason on Unsplash.