I'm curious if this can be a legitimate way to calculate your emergency fund. I always like to think outside the box to maximize returns:
If you have 20-30% stocks, no reserve is needed.
If you have between 30-35% stocks, a 5% reserve is needed.
If you have between 35-45% stocks, a 10% reserve is needed.
If you have between 45 - 50% stocks, a 15% reserve (for losses) is needed.
If you have between 50 - 60% stocks, a 20% reserve is needed.
In other words, a $20,000 put into FBALX is a $16,000 emergency fund predicated in the belief that your maximum expected loss is 20%.
If you have between 60-70% stocks, a 35% reserve is needed
If you have between 70-80% stocks, a 45% reserve is needed.
If you have between 80-90% stocks, a 60% reserve is needed.
If you have between 90-100% stocks, a 75-80% reserve is needed;
in other words, you either need to separate your emergency fund or have investment holdings that are 400% greater than what is needed for everyday expenses. Thus, $70,000 invested in the stock market would be approximately equal to a $14K to $17.5K emergency fund. It could, in the worst market be worth less than $7,000 or if it is un-diversified.
I think that once you reach 70% stocks, separating the emergency fund and discretionary capital is wise, if not prudent as the reserve needed increases dramatically. After about 20-25 years, except for the 1953 to 1978 bear market and from July 1897 to July 1932, or the Nikkei 225 (1989-2004) stocks are the place to be.
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