How I became "bankrupt" from investing "too much"
Do this so you don't make the same mistake as me.
The stock market has left me “bankrupt”.
Just this month alone, I have bought shares of 2 US stocks.
Then when Meta fell due to higher AI capex guidance despite solid earnings, I realised I was running low on cash.
No more bullets to deploy.
This taught me a lesson, which until now I hadn’t realised.
A warchest and emergency fund are 2 different things.
My mistake was that I used to view them as one and the same.
This also sparked a thought in my head “How much cash should we be holding in our portfolio?”
Am I holding too little?
Warchest
Warchest refers to cash sitting on the sidelines, waiting to be deployed in times of war (in the markets, not in real life).
Having a sizeable warchest allows us to capitalise opportunities presented by market downturns.
One mistake that I made was combining both my warchest and emergency funds, leaving me with insufficient cash.
Call me crazy but I am someone who gets most excited when I see my favourite stocks coming down to my buy levels.
Imagine the feeling I got when I realised my warchest wasn’t big enough.
While there’s no magic number, I would say at least 15% of our liquid net worth.
For every $100,000, that’s $15,000 in the warchest.
The amount in our warchest is likely to increase when the market goes up, a time when opportunities are few and far between.
And that’s fine.
Emergency fund
Without trying to state the obvious, the size of this fund depends on our individual circumstances.
A breadwinner in a family of 5 will need a larger emergency fund than a single with no dependents.
This can be adjusted to account for inflation and other needs as we age.
We can ask ourselves a few questions:
What are our monthly expenses on average over the last 12 months (both our own and our dependents)?
How old are we?
Like it or not, we live in a world where the younger we are, the easier it is for us to get a job.
It is easier for someone in their 20s to land a job than someone who is in their 40s.
If we are in our 20s, 6 months worth of expenses may be sufficient.
If we are in our 30s, 12 months.
If we are in our 40s, 24 months.
You get the gist.
Maintain 2 different accounts
It can get a little messy if we keep both our emergency funds and our warchest in the same place.
That’s what happened to me- when I combine both, I’m left with insufficient funds.
We want to keep our emergency funds in a high-yield savings account. Somewhere that’s highly liquid and easy to access when emergencies arise.
Our warchest monies can either be kept in a brokerage account, or a separate high yield savings account.
If you have faced a similar situation before, you’ll know the importance of separate the 2 accounts.
I hope you enjoyed reading this piece as much as I did writing it.
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