Читать книгу Investing For Dummies - Eric Tyson - Страница 51

As interest rates drifted lower during the 1990s, keeping emergency money in money market accounts became less and less rewarding. When interest rates were higher, fewer people questioned the wisdom of an emergency reserve. However, in the late 1990s, which had low money market interest rates and stock market returns of 20 percent per year, more investors balked at the idea of keeping a low-interest stash of cash.

I began seeing articles that suggested you simply keep your emergency reserve in stocks. After all, you can easily sell stocks (especially those of larger companies) any day the financial markets are open. Why not treat yourself to the 20 percent annual returns that stock market investors enjoyed during the 1990s instead of earning a paltry few percent?

At first, that logic sounds great. But as I discuss in Chapter 2, stocks historically have returned about 9 percent per year. In some years — in fact, about one-third of the time — stocks decline in value, sometimes substantially.

Stocks can drop and have dropped 20, 30, or 50 percent or more over relatively short periods of time. Consider the major drops in stock prices in the early 2000s, then again in the 2008 financial crisis, and most recently in early 2020 thanks to the COVID-19 pandemic. Suppose that such a drop coincides with an emergency — such as the loss of your job, major medical bills, and so on. Your situation may force you to sell at a loss, perhaps a substantial one.

Here’s another reason not to keep emergency money in stocks: If your stocks appreciate and you need to sell some of them for emergency cash, you get stuck paying taxes on your gains. And those gains on stocks held less than one year are taxed at the relatively high ordinary income tax rates.

I suggest that you invest your emergency money in stocks (ideally through well-diversified mutual or exchange-traded funds) only if you have a relative or some other resource to tap for money in an emergency. Having a backup resource for money minimizes your need to sell your stock holdings on short notice. As I discuss in Chapter 5, stocks are intended to be a longer-term investment, not an investment that you expect (or need) to sell in the near future.