Is it safe to treat stocks and ETFs in my brokerage account as savings and emergency funds as long as I have a significant number of lots with a Stop Loss or Stop Limit Order in place? My Savings Account technically doesn’t cover 3 months of expense, but combined with my brokerage account it does. Is it safe to be have 1 month in savings and 2 months in stock/ETF with stop loss orders in place that if exercised equate to 2 months of expenses?
It’s not as safe as you think. In normal situations, market orders fill almost instantly.
If the market drops below your threshold due to major news, like the Covid shutdowns, your sell order will enter a queue. Depending on the ability of your brokerage to execute orders in competition with the rest of the market, your sell order may complete quickly, or not. You’re potentially taking a huge loss.
I’d recommend building up your savings account. Getting more than 4.5% in a risk-free HYSA is an easy choice in this case.
One of the benefits of an emergency fund is instant availability. I can access those funds almost immediately if needed. If my house burns down or gets wiped out by a tornado, I would rather not have to deal with liquidating investments and waiting for the funds to clear. At that point there will be more pressing issues to deal with.
Earning a return on my emergency fund is secondary to availability in terms of importance, to me at least. There are plenty of good options out there for high interest savings accounts.
I think the conventional wisdom is “no”. Cash is king and if you have a legit emergency you want that stability from basic savings.
For me, I work for a company in n NASDAQ (big fucking deal). If the overall market takes a shit both my investments AND my job will be at risk. Liquid emergency savings cover that possibility in a way that stonks and ETFs can’t. OFC savings rates kinda suck so there’s sort of a loss there too.
I would agree with the other comments that this is probably a risky idea. 90% of the time it will hold up fine without a problem, but given that the money is allocated as an emergency fund, it should be liquid and stable to help you during times of instability. I would argue that 90% isn’t good enough for this purpose.
There are currently quite a few high yield savings accounts or even money market funds with interest rates around 5%. IMO, with that level of guaranteed return, it is hard to justify putting emergency funds into any higher risk investments.
One other point to consider with stop loss and stop limit orders is that they typically only execute during market hours. It’s not unusual for the market to make big swings overnight or over weekends. In the event of a major market change, there is a good possibility that the order would execute far from the limit that was set. That in addition to the execution queue times in a sell off scenario could result in lower prices than you expect. Not to mention also the possibility of a circuit breaker stopping trading altogether if conditions are bad enough.
TL:DR do whatever you want with the rest of your money, but don’t risk your lifeline for the chance of gaining a couple extra bucks.
This is generally not advisable, as it would mean you are likely to end up selling during a market downturn, at a significant discount.
Willingness to take risks is one thing but ability to take risks is another one. In you case, since you need the funds in case of emergency, your ability to take risks is 0.
So your options are limited to riskless assets such as CDs, govt bonds, savings accounts, etc.
As you grow your assets and portfolio, naturally, some part of your portfolio will be invested into bonds, and some part into equity. In that situation, you will be able to count the bonds portion, specifically riskless ones, as part of an emergency fund, provided they are liquid and of small duration. But in the meantime, savings account would probably be the way to go
