I think the recommendation to hold 6-12 months of cash is for job loss or other emergencies, so you don’t have to sell your investments to pay the bills.
This ‘perfect storm’ you mentioned, where both stocks and bonds fall together, has happened before, especially before 1981. It can happen again, so having some cash or short-term bonds later in life is never a bad idea.
According to Investopedia, ‘When inflation is high and volatile, stocks and bonds tend to go down together.’ That’s why some people keep cash.
Totally agree. Most people don’t have even $500 saved for an emergency. I keep a few months of expenses in bonds and treasuries, but I rarely need more than a few weeks’ worth of cash at once. I also have a credit card I can use and pay off later if something unexpected comes up.
The cash is for covering your rent or other essential bills if you lose your job. You don’t want to sell your bonds and trigger capital gains taxes when you’re already in a tough spot.
There’s a difference between short-term bonds (like under 2 years) and longer bonds (up to 30 years). They act differently during certain situations. Diversifying your bonds is just as important as diversifying your stocks.
Bonds and equities balance each other out, but you still need cash for safety and opportunity. You don’t want to sell your bonds at a bad time to cover an emergency. Having some cash lets you handle unexpected expenses and take advantage of good deals when the market drops.
Selling bonds to cover stock drops didn’t work out so well in 2022, though.
I see where you’re coming from, but here’s another thought. If interest rates drop, you won’t want to sell bonds that are locked in with a higher rate. On the other hand, if rates rise, you might have to sell them at a loss. Cash doesn’t fluctuate like that.