Bonds and cash

In One Sentence

Keep money you'll need soon in bank deposits and short-term bonds; bonds are there for stability, not for betting on interest rates.

Why It Matters

Every family needs some money that stays out of the stock market: a six-month emergency fund, money you'll need within three to five years, and a year or two of living expenses after you retire. Keep it in NT dollar deposits or short-term, high-quality bonds, so you won't have to dump stocks at fire-sale prices in a crash. Long-term bonds don't protect your principal — when interest rates rise, they fall — and foreign-currency bonds carry exchange-rate risk on top of that.

One Number

In the US since 1871, after inflation, stocks (with dividends) returned about 7.8% a year and government bonds (10-year) about 2.6%, while idle cash lost about 2.3% of its purchasing power each year (Shiller data · Chapter V).

In the Book

Section 7 of Chapter V has a table showing where to keep money for different purposes. Appendix 2 in the Appendix is the detour I took betting on interest rates with long-term US bonds.

Go Further

• Inflation Cash that sits still has its purchasing power eaten away by inflation year after year.
• The timing trap Betting on interest rates with long bonds is market timing too; the patterns I had worked out all failed that time.
• Defensive investing Keeping an ample emergency fund is part of defensive investing.
• Warren Buffett His instructions for his estate's trust: 90% in index funds, 10% in short-term government bonds.
• Broad-market index ETFs Most of the money still goes into broad-market index ETFs; bonds are only a small slice.