A few years ago, I wrote a book called "How to Stash That Cash," in which I argued that high yield savings accounts were a bad choice for emergency funds. Instead, I suggested a simple two-ETF model that had outperformed a high-yield savings account over virtually every period in a backtested 90-year view. The idea was to use ETFs to protect emergency funds and preserve capital.

However, in 2022, the worst year for bonds in 250 years, my suggested portfolio went down about 13% in nominal terms and far worse in real terms. This was a gray swan event that I should have anticipated. As I’ve reflected on this process, here are some things I learned.

Firstly, I realized that writing a book can make you too attached to an idea. The idea of an optimized portfolio was great for a blog post, but once it was enshrined in a book, it can seem more permanent and harder to revise. This made me more cautious and defensive about the idea, even when new evidence suggested I should add a third asset class. Therefore, in hindsight, I should have been more open to feedback and critique and less focused on justifying the idea in the book. Edits to a book aren’t an admission of failure!

Secondly, I overemphasized simplicity and underemphasized robustness. I discussed at length in my book that there were economic periods where such a portfolio would perform badly, but I countered that by saying that while there were better portfolios, but they weren’t worth the complication. (The economic periods where the portfolio performed badly were periods of rapidly rising interest rates and periods of increasing inflation – 2022 in a nutshell). I underrated the value of having at least some nominal protection (cash-like) because when the value of everything goes down, nominal products actually do relatively well.  I could have anticipated this economic environment, but too easily traded for ease of implementation.

Thirdly, I enjoyed the process of writing a book, and I would do it again even knowing I would have to add chapters and revise at a later date.  But I likely wouldn’t enshrine specific investment advice in a book again.

Lastly, I still hate high yield savings accounts for emergency funds. Right now (March 2023), you’re best off in treasury bills. However, throughout my 20+ years of investing, the best place to keep your low-risk money has changed approximately every six months!  I keep tabs on this on my blog.  If you want to optimize this part of your portfolio, counterintuitively, you need to constantly be moving stuff around. It’s funny because we tend to want to be most active in our stock accounts, but your low-risk accounts are the ones to manage the most. It’s important to note, though, that the suggested 88/12 portfolio has still had a great long-term track record in spite of this past year.  And by simply adding some gold and cash you can still trounce high yield savings.