Is it necessary to have different asset allocation for short-term needs?
I'm in my early 20s and have 60K in retirement accounts and 80K in taxable accounts. Both are invested in low-cost mutual funds, 80/20 stock/bond split (specifically 60% VTSAX, 20% VTIAX, 20% VBTLX). After paying rent and other expenses, I contribute whatever's left to the taxable account (calculated for no-sell rebalancing), so my bank account never has more than a few thousand in it. I also have 10K for emergencies in a money market fund. And no debt.
I'm comfortable with this level of risk because I have a stable job, live frugally, and don't really need the money for anything soon. My plan is to just "stay the course" no matter what the market does.
Now let's say I decide I will be making a 25K purchase in the next couple years. Advice I've seen online would suggest having a separate, more conservative bucket for this money. But I would instead think like this. The majority of my investments carry some risk, so it's very possible that it will lose 30% in a year. However, the chance of losing 80% is very small. So even in a worst-case scenario, I will still have enough left.
Of course, in that absolute worst case, my retirement savings restart from 0. But restarting from 20% is already terrible.
Is there anything wrong with this logic? Does it depend a lot on the specific number?
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(Short term -- less than a year or two -- money should be in savings account.)
The purpose of keeping the money in a conservative portfolio is so that you don't have to sell low.
Here's an example: K is 31.25% of the K in your investment accounts. If the market drops 50% like it did 12 years ago, you'd have K remaining. K is 62.5% of K. Effectively, you'd have paid K (62.5% of K) for whatever you're buying instead of K.
Just as importantly, you'd only have K remaining in the account when the market finally rebounds, instead of K.
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