This.

And for people with unstable jobs, as many poor people are, the probability they'll need to tap into said savings is much higher.

To be quite honest, having a nest egg of emergency funds is smart for most people. 50k sounds high, but the usual recommended 6 months would be 20 or 30k so it's really not as extreme as some people believe.

Having a good nest egg can, in fact, provide the peace of mind that facilitates the discipline necessary to "ride things out" in long term stock market investing.

30k seems pretty extreme too imo

I disagree that avoiding the stock market is the main reason people fail to build wealth. Not saving is the main reason people fail to build wealth. And if she is committed to a lifestyle of saving, keeping 50k in bonds isn't a huge deal, it would amount to maybe 100k lost over thirty years. You have to respect other people's risk thresholds. It isn't an objective matter, it is very personal.

Now, if she wants to avoid the stock market outside of that 50k nest egg that is very different and could substantially effect her prospective net worth.

But one thing that most people have no idea of is how different investing strategies can compound wealth in the very long term. It would probably be useful to come up with a simple excel sheet demonstrating the difference between saving 10k a year in bonds (at say a 2% real rate of return) versus stocks (at say a 6% real rate of return). She will probably be quite struck by the difference

Just did that real quick and bonds will yield 400k in today's dollars versus 800k for stocks

She's already done the math. She knows this. But she just comes back with the risk aversion argument. Which I guess I should just let her do what she wants. I suppose I should consider myself lucky that she saves so diligently.

As TS touches on frequently, savings rate % is far more important than expected return % for those with x < 100-200k or whatever.

I guess a good goal would be laying building blocks so that when the time comes for her with that level of wealth she can progress into getting productive assets working for her in addition to her labor.

Do a 20 year compound interest calculation on 50$k with a 1% return and 8 or 9% return and let me know if you think the difference is not important. I'll give you a hint, $61k or $280k. I know which one I'll choose.

Someone who is risk averse is going to freak out and sell at the bottom when losses occur.

She is probably more correct than the vast majority of people ITT who are only temporarily risk tolerant because we have had a 5 year long bull market.

I once read an article by Peter Lynch where he wrote that he liked investing in businesses who's products & services he personally liked, i.e., Dunkin' Donuts.

I thought about buying stock in a company I really like a year or two ago, but never pulled the trigger; today I looked at their stock price and of course it's doubled in the last year. Still interested in buying the stock, but concerned that now it is perhaps over-valued & so would like to hear opinions from others who can read & understand financials better than I. FYI: I am a total noob when it comes to evaluating stocks.

The company is Flanigan's Enterprises, stock symbol BDL;

http://www.google.com/finance?cid=213866

http://www.marketwatch.com/investing/stock/bdl

The company operates a chain of bars/restaurants in south Florida called Flanigan's, and attached to the restaurant is usually a full service package liquor store called "Big Daddy's Liquors".

I've eaten at various Flanigan's restaurants all over south Florida & never had a bad meal. Restaurants are always busy, & at night you usually have to wait for a seat in the bar area. Plus I've heard it said that in good times & bad times, liquor stores usually do well.

That said, I realize that none of the above means that this is a good company to buy stock in. Thanks in advance for any feedback.

Reading comprehension fail. I didn't say that expected returns and a high savings rate together wasn't the most preferable option, of course. I said that until you get wealth of six figures that savings rate was relatively more important.

Point being, I see many real life mid-20s friends that are obsessed with trying to get their increased 10% stock market return with their 10k investable assets and 60k jobs. Meanwhile, their savings rate is tiny or non existent.

Bumping savings up just 10% increases wealth by 6k; market return increase of 10% increases wealth by 1k.

Ceteris paribus, savings rate is more important wealth determinate at under six figures. Both is best obvi...

Never understood why an emergency account needed to be in cash.

Ask yourself what happened to 6 months living expenses when the market was down 50% during the recession. It's now 3 months and people are losing their jobs.

Me neither. It's a good rule of thumb in general but I've never seen it discussed in depth here.

We don't keep our emergency money in cash because it's significantly -EV and we have enough savings that we could handle the very worst case of needing access during a really bad downturn.

I responded to exactly what you wrote, below. For someone with 200k and a middle class income asset allocation and expected return is more important than savings rate, in the long run.

Still missing it, will try again:

If you graphed the relative importance of savings rate and expected return, the utility from savings rate would be far higher than expected return until roughly six figures or so. At that point they would cross and expected return would become more important and that would continue indefinitely.

No one would argue that w/ 1k net worth and middle class income, savings rate is more important than expected return at that time. Likewise, at 10M net worth, expected return is vastly more important at that time. Only thing interesting is when they cross which is why I threw out 100-200k as a guesstimate.

Low net worth+average income people spend lots of time trying to improve expected returns and far too little improving savings rates.

I think anyone with just six months of savings or less should keep it in cash. If was to put some of my emergency fund in stocks I would want more than a year's worth of expenses available outside of retirement accounts, probably three months in cash and twelve in stocks.

Although right now like half of my "emergency fund" is my Bovada bankroll so who gives a **** what I think...

I think it still depends on at least a couple of other factors:

1. How much borrowing capacity do you have?

2. What are your likely emergencies? My wife and I are in very different fields that are both in relatively high demand. And her job is pretty robust against economic downturns. So our 'emergency' money is less about the risk of both being unemployed and more about handling large unexpected expenses while one of us is unemployed.

So for example, I think a young 'diversified dual income' family with an extended family that would help them out in a really unfortunate event probably shouldn't be keeping 6 months of cash around - especially if they have unused tax sheltered saving room.

You are in a somewhat rare situation. The main issue for less wealthy people is that not having an emergency fund could be catastrophic (market tanks + loss of employment income means that they are up **** creek). For you it would only really suck to have to lock in losses due to the situation.

Right, but I think there are more people out there that are actually in a somewhat similar situation when you really think about the situation. In that the really bad situation for them is quite rare and they have other ways to keep them from being up **** creek.

And I think we often downplay the cost of keeping 6 months worth of expenses in cash.

Edit: For example, here in Ontario once a teacher has enough seniority (say 5 years of full time working) their job is unbelievably secure. I don't think they need to keep 6 months worth of expenses in cash around.

Well for me the cost of keeping six months expenses in cash is like 40k over twenty years. Not really a huge deal. And that would be if I kept zero in cash, which isn't realistic. So probably like 30k over 20 years.

I found a somewhat middle ground solution: I had seven seven-month term deposits set up in a cascading manner: thus, if I lost my job or something, I would have a term deposit mature once a month for seven months.

It gave me a better return than an ordinary savings account without the risk of shares etc.

I'll pitch in on the Emergency Fund savings as it is something I have done a good amount of thinking and researching about in the past month or so.

I think it all depends on your situation how much you should keep in cash as opposed to how much, if any, should be invested.

I am in a pretty good situation being a 28 year old single male, with above average income for where I live and relatively low expenses that allows me to double the company 401k match contribution and max out my Roth. Being that I only have myself to take care of, I feel like there is less of a possibility that things take a drastic change for the worse and wipe out my emergency funds. I have 3 months expenses that I keep in an FDIC insured savings account at 0.75% APY, and another 3+ months in a Vanguard Intermediate bond etf. I still make regular biweekly contributions to the invested (bond) portion of the emergency fund, but not as much as I originally did when building this. The hope is that I can let the bond portion of my emergency fund grow over the years, as my expensives grow (wife,family etc.) and then I can rebalance the invested portion to the cash portion as my life dictates later on. In the meantime, if something were to go extremely wrong and I needed to withdraw everything included the invested portion, it is a very liquid and yet still relatively safe investment where I would be able to do so with minimal (if any) losses.

Are there any portfolio tracking programs that calculate annualized returns? I was looking at a few and all they do is calculate the total gain%

It would be useful to be able to calculate the annualized return of a portfolio to be able to compare it to market returns.