Blogger’s note: Amended version of an email sent to clients in March, 2009.
I came across this interesting statement in one of the most successful investment newsletters of the past 25 years:
“Prudent investors keep a minimum of the next couple of year’s worth of living expenses out of the market.”
Really!?! Other than from The Fiscal Fitness Company, have you ever received that advice from a financial advisor? I have never heard it, seen it written or found it established in a client’s account since I have been in the business.
The most I have ever heard a planner advise his clients to have in cash is 6 months emergency fund. And then they rarely, if ever, actually insisted upon that by having it built into their plans.
The reason for this is simple. In 2007, the median household income was slightly over $50,000. Therefore, based on a 6 month reserve, most people should have $25,000 in CASH before ever getting into the market. If you use the 2-year rule, then the figure is $100,000 in CASH. How many people have that?
So in order to make a living, investment “professionals” can’t wait for you to save up $25,000 (or $100,000) before selling you anything. So instead of devising a plan that would keep you at a PRUDENT level of cash, they “advise” you to have an emergency fund, then quickly spend the very money you should be saving on products they sell.
It is not completely their fault. They do have to make a living and the advisors are not the ones who created the flawed system of distribution that we have.
Still, the wise advisor realizes that common sense rules, like the one to have a substantial pile of cash for emergencies, are time-tested and TRUE. If you violate those rules, you do so at your own peril…and the peril of your clients. That is why I have striven to do two things in my practice:
- Create a system of distribution that is mutually beneficial to me and the client; one which allows me to make a living NOT at the expense of my client’s needs and goals; and, MORE IMPORTANTLY
- Create a plan that incorporates as many SOUND MONEY and SOUND ECONOMIC principles as can be accomplished at one time.
I think I have done just that…and looking for ways to improve it still.
So here is the acid test: Do you have 6 months or 2 years of “living expenses out of the market”? If not, have you established a plan to get there SOON? In all cases, the answer should be “yes”. And if you have not been shown a way to do so, then you are NOT getting very good advice.