The Savage Truth on Money, 3rd Edition

CHAPTER 4The Savage Truth on Chicken MoneyNest Eggs Need Some Safety

How much money can you afford to lose? That’s a startling question—and the first automatic response is likely to be: “Nothing!” But without risk, there is no opportunity for reward. Taking an appropriate amount of well-calculated risk is the essence of investing. But you may have more peace of mind in volatile markets if you have set aside some money that is safe from the ups and downs of the stock market.

That’s where “chicken money” comes into the picture. We all have a certain percentage of our savings that we absolutely cannot afford to lose. Having some chicken money can give you the resolve needed to ride out the volatility in other investments that are designed to bring you growth in the long run.

Just how much money you should set aside depends on your personal situation—age, assets, time horizon, and risk tolerance. As noted in Chapter 1, chicken money is nothing to be embarrassed about; it’s simply money that you’re unwilling to risk. That may be because you have a very short time horizon. For example, you have almost enough for a down payment on your first house, or your child’s college tuition is due in a few years. That cash does not belong in the stock market, no matter what your enthusiasm for stocks, because of your short time horizon.

Or you may have chicken money because you have a limited amount of assets that must last for an indefinite period of time. If you’re already well into retirement ...