Is it necessary to have different asset allocation for short-term needs?

Question

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?

Answer 1

(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: $25K is 31.25% of the $80K in your investment accounts. If the market drops 50% like it did 12 years ago, you'd have $40K remaining. $25K is 62.5% of $40K. Effectively, you'd have paid $50K (62.5% of $80K) for whatever you're buying instead of $25K.

Just as importantly, you'd only have $15K remaining in the account when the market finally rebounds, instead of $40K.