I picked that number because, at the moment, it represents my annual expenses. I’m officially obsessed with cost of living. And I’m heartened by Mark Cuban’s updated advice on emergency funds. He thinks you should keep a year’s worth of cash on hand to cover expenses, not six months.
Don’t dis Cuban. He knows his stuff. He might have inspired Russ Hanneman from HBO’s Silicon Valley, but he’s nothing like the guy. Cuban’s smart.
Source: Pied Piper
Ever since I brought up the notion of keeping more cash on hand than the experts recommend (it’s so nice to see Cuban diverge), the stories roll in from Seeking Alpha subscribers about why they do the same. And here’s the thing about each and every account – they’re personal. Deeply personal.
Something happened in somebody’s life, all at once or over time, that made them make the decision to create a relatively outsized cash cushion. These investors aren’t making counterproductive moves in the face of danger. Rather, they’re taking stock of their psychological and emotional makeup. They got introspective and figured out how they function, on the ground, when things go wrong and how they can stop self sabotaging the wealth-building process.
It’s something we don’t discuss enough in relation to investing – doing the financial walk of shame. You invest a bunch of money, only to sell and transfer the cash back to the relative and perceived (perception is reality) safety of your checking or savings account. I’ll gladly keep that $30,000 in cash. This money makes every dollar I invest after it work harder and smarter.
Don’t have a one-night stand with your money
Dollar cost averaging with modest amounts of money – vs. investing a large lump sum – provides benefits to investors we don’t talk about much.
When you dollar cost average with a few bucks each month, you tend to not be in the home run mindset. It’s psychologically difficult to think you’re going to get rich quick investing $50 or even $500 or $1,500 a month, every month, into a stock or three. This makes it easier to pick a stock. I’m more likely to go with best of breed when I dollar cost average (which is pretty much what I do) because we tend to perceive these stocks as slow and steady wins the race. Even if Apple (AAPL) is flying, I’m not going to make myself think I’ll see massive gains by incrementally creating a position.
This makes it psychologically attractive to take the $29,988.44, act like it’s not $29,988.44, pick five stocks, and start investing $500 into each stock every month. In a year, you’ll have that 30 grand fully entrenched in the stock market and you will likely have bought on a dip or two or more. You can adjust the amounts and number of stocks to shorten (or lengthen) the time it takes to move your $29,988.44 from cash to stocks.
This is a well thought out psychological trick you play on yourself.
Because consider the alternative, again, from a psychological standpoint.
You have $29,988.44 and you’re chomping at the end of a disgusting cigar to invest it. You know the feeling. You get a bunch of money all at once. It’s like picking up takeout and driving home with it sitting in the passenger seat. You become ravenously hungry. Your mouth literally waters. You lick your lips. You can’t wait to get that food out of the car and on your table. This is how many financial one-night stands unfold.
You’re looking to score. Because $30,000 (or $29,988.44) is a lot of money. And $29,988.44 invested in Apple at $112.89 gets you 265.745415892 shares. And when Apple inevitably rises to $400 again, those 265.745415892 shares will be worth $106,298.17. Look at you! You turned five figures into six figures. You’re glowing. Sounds great in theory, but it’s an excellent way to say goodbye to your money. Or, to do the financial walk of shame – again.
There’s something about making that type of investment under that type of emotional influence that leads otherwise sane people to do crazy things. In this regard, money isn’t all that different from ephemeral relationships. They’re not always bad, but they often leave us questioning why did what we did. Most of the time, you can blame impulsiveness triggered by psychology and the attendant emotion.
If Apple doesn’t go up, you get impatient. It’s the classic case of experiencing highs and lows. You got into Apple with this incredible optimism. When it doesn’t do what you expected (wanted), you get upset. Like somehow it’s unfair. So you lash out. The financial equivalent of lashing out is selling and getting even more aggressive. This can lead to a whole host of horrible decisions, such as trading, getting too speculative, buying penny stocks, using margin, or trying to enhance returns with risky options strategies.
For similar reasons, some investors might not diversify their $30,000 investment quite enough. Again, if you spread $30,000 over five, 10, or 15 stocks you’re less likely to hit a home run. That doesn’t make any sense. However decisions fueled by emotion tend to use false and backwards logic. Of course, you’re better off and more likely to come out ahead over the long term by investing 30 grand in a basket of stocks rather than one. Same as I’d rather have Wade Boggs over Steve Balboni any day of the week. Contact hitters win in investing.
Not everyone takes these routes, however quite a few people do. Of course, I never have done any of the above. I’m writing for a friend.
That’s all. This type of thing has been on my mind lately. I’m so happy to be part of such a thoughtful community where we can throw our investing strategies, thoughts, insecurities, successes, and failures out there and learn about them and one another in the process.
Somebody hands you $29,988.44 today. What do you do with it?
Disclosure: I am/we are long AAPL. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.
Additional disclosure: I am long Wade Boggs and Don Mattingly. I might short Steve Balboni over the next 72 hours.