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How to Build Your Opportunity Fund

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How to Build Your Opportunity FundLast month, I read about an interesting concept at Get Rich Slowly – The Opportunity Fund. The opportunity fund is basically the money you set aside to take advantage of opportunities. Once in a while, you’ll come across a good opportunity and you need money to take advantage of it. These opportunities can be anything from a chance to travel to Iceland with friends or investing in the stock market when the price is low. But where does the opportunity fund sit in your portfolio? Should it be in cash or something else? Today, we’ll see how to build your opportunity fund and where it should be in your portfolio.

Emergency Fund

Before we look at the opportunity fund, we’ll need to go over the emergency fund quickly. The emergency fund is money set aside for those financial surprises life inevitably throws our way. Nearly half of Americans can’t come up with $400 in an emergency. That’s living close to the edge. If the car broke down, they’d need to put it on the credit card and pay it off over time. This is a slippery slope because the balance on high interest loans tend to keep increasing.

This is why we all need an emergency fund. If you have a stable job and good cash flow, then the emergency fund can be a smaller amount. Personally, I like to keep about $10,000 in our reward checking account for this purpose. The $10,000 can cover 2 months of expense and it should take care of almost any emergency for us. If we need more cash, we’ll raise it by selling some investments.

I also keep an eye on upcoming big expenses. For example, we pay our property taxes in October and that’s a 5 figures bill. When I know there is a big bill coming, I increase our cash fund by that amount. So by October, we need to have about $25,000 in cash.

Opportunity Fund

The opportunity fund concept is very intriguing to me because I couldn’t capitalize on past opportunities. During the Great Recession, the stock market crashed and I didn’t have much extra money to invest. Our portfolio was 100% stocks and it plunged like everything else. The only way to invest was to save as much of our income as we could, and invest that.

We powered through the Financial Crisis because we both had good stable income. We kept investing through it all and didn’t miss out on the recovery like many investors did. I think we could have done much better if we set aside some money in an opportunity fund. We could have taken advantage of the opportunity to invest more when the stock market was down.

Life has changed quite a bit since the Great Recession. Now, I’m a stay-at-home dad/blogger and my income is very uncertain. My blog income was incredible in 2017, but I’m sure it will drop like a rock when a recession strikes. Mrs. RB40’s income is great right now, but she plans to retire early by 2020. Our income is much more tenuous than in 2008. If we don’t plan ahead, we won’t be able to take advantage of the next big opportunity to invest.

Building Your Opportunity Fund

How do you build an opportunity fund? Here is a diagram I made. Our opportunity fund is split in a few accounts. Part of it is in our saving account and the rest is in money market funds.

Opportunity fund

We put our income into our bank accounts as they come in. This will shore up our emergency fund and there should be $10,000 to $20,000 in that account. Anything over this amount will flow into our opportunity fund. New money will trickle in from this side every month as long as we don’t have unexpected expenses. Your income needs to consistently exceed your expense for this part to work well.

On the other side, we have our investment. I split them into two boxes – bonds and everything else. Our target asset allocation is 20% bond and 80% everything else. As the stock market gets overheated, I plan to shift some stock investment into the opportunity fund. My goal is to increase our opportunity fund to about 10% of our portfolio value. So it to be 10/20/70, opportunity fund/bond/everything else.

Yes, this is market timing. It is similar to Value Based asset allocation. If the stock market is overpriced, then shift some allocation to bond and cash. The US stock market valuation is very high at this time and the expected return is low for the next decade. Many experts predict 4-5% annual gains. That’s much lower than 21% we got in 2017. Nobody knows what the stock market is going to do, though. It could grow slowly over the next decade. Or it could keep shooting up and crash.

The global economy is doing so well and consumers are very optimistic. I think 2018 will be a good year on the stock market. We had a correction in January, but it is recovering quickly. I suspect the stock market will keep going up while the global economy looks this great.

Here is the CAPE ratio. This looks scary to me. The S&P 500 index is approaching the dot com era valuation and we all know how well that turned out.

CAPE ratio

Do you have an opportunity fund?

New investors shouldn’t worry about the stock market fluctuation. When you’re starting out, you should focus on increasing your saving rate. Older investors who are nearing retirement have to be more conservative. I think increasing our bond/cash allocation a bit is a good idea for us. We’ll have better access to cash. 10% isn’t a huge shift so it won’t screw up our long term plan even if I’m wrong. Also, it will give me something to write about. We’ll see how it plays out over the next few years.

What about you? Do you have an opportunity fund?

*Sign up for a free account at Personal Capital to help keep track of your investment. I log in almost every day to check on my accounts and cash flow. It’s a great tool for DIY investors and I highly recommend it.

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Image by Christian Spies

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Joe started Retire by 40 in 2010 to figure out how to retire early. He spent 16 years working in computer design and enjoyed the technical work immensely. However, he hated the corporate BS. He left his engineering career behind to become a stay-at-home dad/blogger at 38. At Retire by 40, Joe focuses on financial independence, early retirement, investing, saving, and passive income.

For 2018, Joe plans to diversify his passive income by investing in US heartland real estate through RealtyShares. He has 3 rental units in Portland and he believes the local market is getting overpriced.

Joe highly recommends Personal Capital for DIY investors. He logs on to Personal Capital almost daily to check his cash flow and net worth. They have many useful tools that will help every investor analyze their portfolio and plan for retirement.
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{ 75 comments… add one }
  • Mr. Tako February 26, 2018, 12:21 am

    I guess I do have an opportunity fund. Unused cash piles-up (either from dividends or forced capital gains) in our brokerage account. It sits around waiting for “opportunities” to reinvest at reasonable rates of return. Sometimes I find them, sometimes I don’t.

    Lately it’s just been piling up as I good reinvestment prospects have been limited.

    • retirebyforty February 26, 2018, 8:51 am

      Good investments are getting harder to come by. We rarely have cash piling up. Usually, I just stick any extra cash into the index funds. This year, I’ll try to build up our opportunity fund more. Some cash on the sideline is good.

  • Ernie Zelinski February 26, 2018, 1:03 am

    You ask, “Do you have an opportunity fund?”

    Yes, but I call it my “Prosperity Account.” Funds in my “Prosperity Account” are “touchables” versus funds in my “Retirement Account” which are “untouchables.”

    I have always been quite lazy and don’t get around to spending my money on things that I think of spending it on. So my Prosperity Account has become quite big with about $550,000 in it.

    Insofar as an emergency account, I don’t really need one. At any time, my US distributor of my books owes me around $75,000 to $100,000 US, to be paid out over the following year. This is good enough for an emergency fund. Of course, if my US distributor went bankrupt, I would have somewhat of a cash flow problem to fund everyday operations. But I would still have pretax income of $4,000 to $5,000 a month from my ebooks and the Canadian sales of my books.

    • retirebyforty February 26, 2018, 8:52 am

      Ahh.. That’s right. I like the Prosperity fund too. That’s a good concept. $550,000 is a ton of cash, though. That’s plenty to cover a new print edition.

      • Ernie Zelinski February 27, 2018, 11:31 pm

        Speaking of a print edition, could you email me your address again. I lost it. I would like to send you a copy of my latest book “Life’s Secret Handbook (Reminders for Adventurous Souls Who Want to Make a Big Difference in This World.” I jokingly tell my author friends that this book, unlike the vast majority of books, has “swagger.” There are 5 reasons:
        1. It is dedicated to my friend Forrest Bard who passed away on September 5, 2017 a few hours after driving me to the airport.
        2. It is done in a limited Leather Edition.
        3. It has a suggested price of $97 / $127 CAN on it.
        4. It’s written by me.
        5. It’s a damn good book.

        Incidentally, this limited Leather Edition of this book was published as an expensive business card (an ego project) but my Canadian book distributor thinks it is the best book I have put together and that I should publish it for the general book market and for the gift store market. I now have to check with my US distributor to find out what they think.

  • Michael @ Financially Alert February 26, 2018, 1:27 am

    Hi Joe, I don’t think I ever called out an opportunity fund, but I definitely tried to hold some excess cash when going into the Great Recession. I was able to use some of that to pickup a couple of fantastic real estate deals.

    • retirebyforty February 26, 2018, 8:53 am

      That’s it. We didn’t have much cash back then and I couldn’t invest in some really nice deals. There was a really nice house in a great area for around $500,000. It needs some renovation, but it was still a really nice deal. Probably worth over a million now. Oh well..

  • Lily | The Frugal Gene February 26, 2018, 1:29 am

    We don’t have an opportunity fund although now you have me thinking of getting one! The current cape ratio scares me too and future growth looks lackluster domestically. Although you never know, one stroke of innovation can bring lots of possibilities.

    • retirebyforty February 26, 2018, 8:55 am

      Yeap, talk to your hubby about it. You probably don’t need a huge fund. Maybe just a small fraction of cash on the sideline since you guys are young.

  • Olivia February 26, 2018, 2:57 am

    We don’t have an opportunity fund, but modeled up a SBL/margin loan for our stock/bond portfolio. Something like: If the market dips X percent, were ready to invest Y in the stock market dependent on historical dips and when we’d reach margin call. IA has a 3% borrowing rate and the other banks charge like + spread. It remains to be seen if the margin program will function during a crisis. I wasn’t alive and working in finance in 2008, and no one seems to be able to answer our question.

    • retirebyforty February 26, 2018, 8:57 am

      That sounds risky to me. I wouldn’t buy on a margin when the market is dropping. You need to wait until it’s on the upswing again.

  • Mrs. Adventure Rich February 26, 2018, 3:05 am

    We just started an “investment fund” (essentially an opportunity fund) a few months ago. We are putting some extra cash in there to save for an investment opportunity that has yet to come our way (real estate, stocks in a downturn, etc). Great post!

    • retirebyforty February 26, 2018, 8:57 am

      I think the opportunity will come in a year or two. If the stock market keeps going up like this, the valuation will be too high. It will revert to means at some point.

  • Chris Urbaniak @ deliberatechange.ca February 26, 2018, 3:11 am

    Hi Joe,

    I was going to ask how much to keep in your opportunity fund, but you mentioned 10%. Obviously a bigger amount allows you to better pounce on opportunities, but also creates more drag on your overall portfolio, but 10% seems pretty reasonable to me.

    Have you run the numbers on potential total returns based on for different timing scenarios where the opportunity presents itself soon, in a while, or not for a long time? That would be a neat analysis to share 🙂

    As for where to keep emergency and opportunity funds, I use my mortgage/LOC prepayments (aka over-payments), where my return is measured in interest payments avoided. It’s very dangerous if you’re NOT financially disciplined. In my case, I tracked ever single mortgage prepayment and then used a variation on the Smith Manoeuvre (Google it) to correspondingly increase my LOC limit and give me access to that money back whenever I needed it. And when that happened (cars, parental leave travel, etc.), I would simply “un-prepay” the mortgage.

    The key is tracking the total cumulative prepayments so that I knew how much I could safely pull from the line of credit without exceeding where I would have otherwise been without the prepayments, had everything just been sitting in cash or money market funds.

    • retirebyforty February 26, 2018, 9:01 am

      You’ll have to find your own number that you’re comfortable with. We’re more conservative now so 30% in cash/bond is a good amount. I’d probably just go with 5-10% if we were younger and still working full time. It is a drag on the returns, but the pain of loss is higher for us now. I’ll work on a table. It’s pretty complicated.
      The LOC strategy sounds good if you can keep track of it. Mrs. RB40 wouldn’t want to do that though. She hates debt of any kind.

  • Lady Dividend February 26, 2018, 3:35 am

    Very interesting concept! My first thought when I read this is that amazing opportunities don’t seem to come my way. ? Maybe I need to work on geting some business-focused people into my life….

    • retirebyforty February 26, 2018, 9:03 am

      I think you will see more opportunities as you get older. Net working more would definitely help.

  • DocG February 26, 2018, 3:40 am

    We don’t have much of an opportunity fund or even much of an emergency fund. I use our wages and our real estate cash flow to pay the bills. I would rather have that 10% compounding all the time. If an opportunity comes up, we could always get a HELOC and pay it off quickly with wages or when the market becomes suitable.

    • Maximum Cents February 26, 2018, 6:12 am

      You should NOT use debt to fund an investment. Read Warren Buffett’s annual letter this year.

      • DocG February 26, 2018, 8:52 am

        Our cash flow is good enough, any HELOC would be for only a few months. Almost like a credit card.

        • Maximum Cents February 26, 2018, 6:20 pm

          People generally shouldn’t use credit cards to fund investments either. If they don’t have enough cash then they can’t afford it.

  • Accidental FIRE February 26, 2018, 3:54 am

    I don’t have one but if I really wanted to take advantage of a sale in the market I would just use some money from my emergency fund and then replace. I probably have too much in there but with an aging parent it gives me piece of mind. Nice chart BTW!

    • retirebyforty February 26, 2018, 9:57 am

      Thanks! How much do you have in your emergency fund? I don’t like to drain that. It makes us nervous.

  • MrFireby2023 February 26, 2018, 4:13 am

    Great post and I agree, you need emergency fund AND an Opportunity fund for those stock market sell offs! just wrote about holding ample cash as an asset class:
    https://firechecklist.net/2018/02/25/cash-as-an-asset-class/

    • retirebyforty February 26, 2018, 9:58 am

      Having some cash is good in this environment. Bond fund will keep dropping so cash is more palatable this year. Stocks and bond are inflated according to many sources.

  • Nicoleandmaggie February 26, 2018, 4:36 am

    My philosophy is that if it should be in the market, it should be there now and not waiting for a crash. But I do like your idea of keeping it in bonds and moving to essentially rebalance when the market drops. Something to keep in mind for the future.

    • retirebyforty February 26, 2018, 9:59 am

      That’s a good philosophy. You can’t go wrong with that.

  • Tom February 26, 2018, 4:43 am

    That would be too much over-analyzing for me 🙂
    I keep most money in stocks, when it feels right I keep 10 – 30% of that in a savings account. Like right now I have 28% of my stock portfolio value in a savings account. That is both for emergencies and opportunities. Can´t be bothered with flowcharts 🙂

    • retirebyforty February 26, 2018, 10:00 am

      That’s a lot of cash. You’re right about over-analyzing. 🙂

  • Mr. Freaky Frugal February 26, 2018, 4:43 am

    I don’t have an opportunity fund, but I do like the idea. Like you, I didn’t have any extra money to invest during the crash. I did rebalance my portfolio which ultimately was one of the things that allowed me to retire early.

    Warren Buffet has the ultimate opportunity fund – $116 billion. 🙂

    • retirebyforty February 26, 2018, 10:00 am

      WB’s opportunity fund is huge. It’s pretty crazy.

  • [email protected] February 26, 2018, 4:46 am

    I’m strongly against market timing. I have an emergency fund with a few months living expenses. I have a buffer in my checking account in case I need cash fast. I have investments in both retirement and brokerage accounts. When an opportunity comes up, I’ll pull the money from one of these accounts to take advantage. I don’t have any interest in delaying investing today to take advantage of a potential future opportunity.

    • retirebyforty February 26, 2018, 10:01 am

      That’s a proven strategy. You can’t lose over the long haul. I suspect you’ll be more conservative as you get older, though.

  • Tom @ Dividends Diversify February 26, 2018, 4:56 am

    Hello Joe,
    Great thought process as always. I follow these concepts, but more loosely. I always have enough cash on hand for emergencies, opportunities, whatever. I know I give up some return not having the money in higher potential investments, but I don’t care. The cash also insulates my portfolio somewhat to market volatility which helps me stay invested at my target allocation when stocks take a dive. Tom

    • retirebyforty February 26, 2018, 10:02 am

      That sounds good. How much cash do you keep on hand? I’m still trying to find the right amount for us.

  • Budget on a Stick February 26, 2018, 5:23 am

    We don’t have an opportunity fund and probably wouldn’t since I automate the crap of my finances to prevent myself from timing the market. The caveat there is if we do end up in a big recession that I would likely take what we have in savings and throw it into a brokerage or Roth to try to take advantage of the situation.

    I could see having an opportunity fund if we want to go and buy a rental property on a whim. Never know when the perfect place would show up.

  • Ms. Frugal Asian Finance February 26, 2018, 5:54 am

    Great diagram! An opportunity fund is a new concept to me too. Our finances are pretty simple. We have an emergency fund, a savings account, and a checking account for direct deposit and expenses. Right now we’re just trying to build up our savings account.

    Mr. FAF and I have been talking about buying a new house if the market crashes and if we are still employed. If not, we will just stock up on that cash (while paying off the mortgage) and wait for the right opportunity to present itself hehe 😀

    • retirebyforty February 26, 2018, 10:03 am

      Good idea. I’m not sure if the housing market will crash along with the stock market next time. It probably depends on your location. Many markets are still recovering.

  • Dave @ Married with Money February 26, 2018, 6:25 am

    We have sadly depleted our opportunity fund, but I love that you have one! We’ll work on it, but honestly first priority is saving for a car – if we could avoid a loan that’d be great.

    After that, we’ll rebuild our opportunity fund. 🙂

  • David February 26, 2018, 6:33 am

    This is where I believe debt can be used to an individuals advantage. Having a 20-40k LOC that is available for solid opportunities is absolutely fantastic and still allows you to capitalize on having all of your funds invested.

  • Jim @ Route To Retire February 26, 2018, 6:46 am

    I haven’t heard this before, but I like the idea. We had rolled over my wife’s 401(k) into an IRA in Sept. We let most of that sit in cash in the account for a little bit and I’ve been pushing money in as we see dips in the market.

    Other than that, we continue to build up our emergency savings. We don’t use it for anything, but I’m not afraid to touch some of it to take advantage should a great deal present itself – like a good rental property for instance.

    — Jim

  • Big-D February 26, 2018, 6:47 am

    I subscribe to the bucket-waterfall theory but calling a fund an opportunity fund also works. You have a few buckets, and once the first bucket fills, you waterfall to fill the next bucket, then the next, etc. I have four buckets: 1) Slush fund (my daily in-out money, should cover 4-6 months expenses, normal checking account). 2) Backup fund (cover 6 months expenses, in a money market account getting higher interest rate). 3) Non-Restricted investments (this is a taxable investment account which can have investments sold to cover higher expense items). 4) Restricted investments (this is my retirement funds, 401k, Rollover and Roth IRA). Most the time money goes to my 4th bucket no matter the balance of my 1st bucket so I don’t lose out on those opportunities for long term investing in my retirement.

    • retirebyforty February 26, 2018, 10:06 am

      I like the bucket theory. We probably need to refine our a bit. I like the way you set up your 4 buckets.

  • freebird February 26, 2018, 7:27 am

    Do you really need an ‘opportunity fund’? Your portfolio is mostly liquid assets like stocks and stock funds right? So if something promising comes along, you could trade out of something you have that you may have turned lukewarm about and buy into your new idea, whether it’s shares or anything else. If the new idea doesn’t look better than anything I currently own, I guess I wouldn’t call it an ‘opportunity’.

    • retirebyforty February 26, 2018, 10:09 am

      The problem is that when the stock market crashes, everything is down. There is no point trading. It’s good for the tax deduction, but that’s about it. I’ll trade bond for stocks at that point.

  • Angela @ Tread Lightly Retire Early February 26, 2018, 7:46 am

    Warren Buffet is all about the Opportunity Fund. My favorite quote of his:

    “Every decade or so, dark clouds will fill the economic skies, and they will briefly rain gold. When downpours of that sort occur, it’s imperative that we rush outdoors carrying washtubs, not teaspoons. And that we will do.”

    • retirebyforty February 26, 2018, 10:10 am

      Thanks for the quote. It’s really good. He has a huge opportunity fund now. We’ll see how the next few years go.

  • fin$avvy panda @ finsavvypanda.com February 26, 2018, 7:56 am

    Hi Joe!

    I absolutely love this opportunity fund idea. That’s what my fiancé and I are planning to do with any of our extras. Our goal this year is to lower our leverage from by making extra mortgage payments but at same time start saving for our “opportunity” fund on the side in case stock markets take a dip sometime in the future. Warren Buffet calls this “cash opportunity” like a call option with no expiration date and I love the concept!!

    Great post, Joe!

  • Young FIRE Knight February 26, 2018, 8:37 am

    I like this idea if the Opportunity Fund. I don’t have one specifically, but I suppose part of my emergency fund could be considered that.

    I usually carry a bit more in my emergency fund than I should, since I have a very stable job and solid cash flow. I suppose I’ve always thought that if the stock market dramatically dropped I could pull a bit from this. Like, emergency! Urgent investments are needed haha.

    But I think I should start to separate this out!

    • retirebyforty February 26, 2018, 10:05 pm

      Right. I’m not sure if pulling from the emergency fund to invest is a good idea. Your job can be much more tenuous during a recession.

  • Steve @ familyonfire.org February 26, 2018, 8:39 am

    We are currently trying to free up a bit of cash to enable us to look for opportunities, but realistically this is INM the medium term rather than short.

  • freddy smidlap February 26, 2018, 10:05 am

    i used to keep my overtime dollars in an opportunity fund. usually tried to keep a few thousand in there and if it went above i bought stocks in an after tax brokerage. it was separate from the family finances as it was blood money but outside of one spur of the moment trip to vegas with friends it all ended up in investments. i took on a little more risk with these dollars, which has paid off nicely so far.

    • retirebyforty February 26, 2018, 10:07 pm

      That’s a good idea. Most of the extra money went into investment because you put it in a separate bucket. Good going.

  • Ful lTime Fiannce February 26, 2018, 10:09 am

    No opportunity fund here. The most efficient investment policy in the long run is to set the correct asset allocation for your risk tolerance and stick to it. Any opportunities come in the form of new money and rebalancing. This avoid the under performance of money due to market timing.

    The anecdote I always use. In 1996 Alan Greenspan spoke on irrational exhuberance. CAPE was higher then it is today. Years later the market crashed via the dotcom bubble, but even after the crash it was still higher then 1996.

    • retirebyforty February 26, 2018, 10:08 pm

      Right, it could take a few years to crash. I’m willing to accept a little under performance at this point in my life. We need more stability and more cash. Our income isn’t as secure anymore.

  • Revanche @ A Gai Shan Life February 26, 2018, 11:07 am

    Yes! I’ve been crafting an opportunity fund this year.

    Cash on hand (for I don’t know, what do you spend your cash on?): $7-27
    Hiccup money for when a month is too expensive or a missed paycheck: $5000
    Emergency fund for job loss, serious illness: $XXX,XXX = 18 months of expenses

    Anything I save over the above categories goes into the opportunity fund, no cap yet since it’s still relatively small. I might plan to invest anything over $20k.

    Did you pick your 10% cap using any particular math or was that just what sounded good to you?

    • retirebyforty February 26, 2018, 10:10 pm

      Your emergency fund is huge. That’s good for uncertain times. More security.
      I picked 10% because I wanted to change our asset allocation to 70/30. The 30 will be bond and money market fund.
      Bond is dropping so I figure money market is a good alternative this year.

  • Mrs. Groovy February 26, 2018, 12:11 pm

    Mr. Groovy wrote a post on castle-in-the-sky investing. We’ve kept cash on the sidelines for investing in emerging technology he’s read about and found exciting. We’ve done pretty well with 3D printing and now we’re watching for our lithium stock to rise. It’s gone down but we believe it will go back up. If it doesn’t, oh well. We only invest in this kind of crap shoot with money we don’t need.

    • retirebyforty February 26, 2018, 10:11 pm

      Yes, I read that one. You guys did very well. Nice job.
      I’m horrible at recognizing those new technologies. I always think they’ll fail. 🙂

  • Greenbacks Magnet February 26, 2018, 12:47 pm

    Great post. I always advocate for saving. It just gives you more options. I even wrote a post called How to build an emergency fund just to help give people ideas on how to start.

    Thanks,
    GBM

  • Dan February 26, 2018, 3:07 pm

    Hey joe,

    I have always been a value-style-allocator so I can appreciate this strategy. However, I have not built up an opportunity fund. I have been finding many opportunities in stocks and otherwise. I am also younger and poorer than you and many commentators. If you make, in the short term, 10% vs. 15% on your already large investment portfolio it doesn’t really matter since it will probably pay for your expenses and more. If you have a larger portfolio you can take a longer view without it affecting your longterm lifestyle.

    An interesting thing to think about is investing in companies that are well positioned to take advantage of any downturn. Berkshire Hathaway, Equity Commonwealth, Markel or basically any high net cash company or really strong cash flow.

    Dan

    • retirebyforty February 26, 2018, 10:13 pm

      Good point about investing in companies with a lot of cash. BKR is a good one.
      I don’t know about the other companies. Tech companies likes to buy back or buy up smaller companies. I think that’s a waste. BKR is better managed.

  • Kris February 26, 2018, 4:44 pm

    I don’t have an opportunity fund though I do have an emergency fund which is about close to a year’s worth in expenses. Makes me consider having one since I may need a pool of money if an opportunity arises. So maybe I can transfer some of my emergency fund along with funds from my investment and checking accounts. That way my emergency fund can be six to nine months worth of expenses. Thanks for bringing up this concept!!

  • David @iretiredyoung February 27, 2018, 2:31 am

    Very thought provoking, and I really like that you say that the opportunity fund can be used for lifestyle events, and not just for investment opportunities.

    I just looked, and I have cash equivalent to about 12 months of expenses. Even if I say this is emergency and opportunity fund, it feels a bit high, so probably I should put some into index funds, especially as I probably wouldn’t recognize an opportunity if it slapped me in the face!

  • FIRECracker February 28, 2018, 2:28 pm

    “Nearly half of Americans can’t come up with $400 in an emergency.”

    Yikes! That’s terrifying. Always good to have at least 6 months of costs in emergency funds–retired or not.

    Too many people think of the upside with no consideration for the downside. History always proves this is a bad idea. Having an opportunity fund is a great idea!

  • Mr. Groovy February 28, 2018, 5:23 pm

    I love it, Joe. The opportunity fund is FI on steroids. And opportunities don’t always come in the form of investments. In 2010, my father turned 70 and wanted to celebrate that milestone birthday in Italy. Because Mrs. Groovy and I had an opportunity fund, we had no problem handling that unexpected expense/opportunity. It turned out to be the best $6K I ever spent. Great post, my friend. Bravo.

  • GYM February 28, 2018, 9:38 pm

    With that correction we had in January/early February I was plowing more cash into my investment accounts worrying about whether I had enough cash should the market keep dipping. I have a large cash amount but it still doesn’t feel enough. I have over 2 years of expenses in cash but that can get eaten up quickly when you are paying cheap stocks and ETFs!

  • John March 3, 2018, 2:11 pm

    Do you have a method that helps you to decide when to deploy the opportunity fund into the stock market? Thanks.

    • retirebyforty March 3, 2018, 9:19 pm

      Here is my plan. You’ll have to figure out something like this for yourself.
      S&P 500 drops from peak
      less than 10% Sit tight
      drops 10% Invest 25% of opportunity fund
      drops 15% Invest 50% of opportunity fund
      drops 20% Invest the rest of opportunity fund
      drops 25% Rebalance bond to 15%
      drops 30% Rebalance bond to 10%
      drops 35% Rebalance bond to 5%

  • James March 10, 2018, 10:38 pm

    Hi Joe,
    Yes, I have an opportunity fund. I think everyone who is looking for value in their investments should have one.
    If you are investing for the long-term, then when a buying opportunity does turn up, you won’t necessarily want to raise capital by selling other assets.
    The idea is to keep building.
    When markets dip, correct, or crash, these are golden chances for people with funds to spend.
    Yes, absolutely you should have cash available to spend when the markets get dragged down in panic.

  • Dave March 14, 2018, 4:26 am

    I like the idea of an opportunity fund. Like you, I keep about $10k in cash. It is labeled as an emergency fund. It is used for repairs or upcoming bills. I use it and simply replenish this little stash. I might save up another $10k and call it an opportunity fund.

  • freddy smidlap March 14, 2018, 5:58 am

    oh, i also turned off automatic dividend reinvestment for almost everything in the portfolio. when the cash builds up to over 1-2k i’ll then take a quick scan of where i want that reinvested for what i think are the best opportunities.

  • JoeHx March 14, 2018, 12:50 pm

    While I don’t currently have an opportunity fund – since I just learned about right via this post – I do have an emergency fund. I think I want to focus on paying off by debt – pretty much all student loans – first though.

  • Robert March 19, 2018, 9:29 am

    I have used an opportunity fund historically in periods where it seems the market is “too high.” It’s a tricky balance to strike as you don’t want to let your pessimism nor your sense of market timing (you can’t time the market!) guide your investing strategy too much.

    I usually made use of dividends, rollovers, consolidation, rebalancing, etc. to build up an opportunity fund when the time seemed right. This also overlapped with my gambling account which is a Ben Graham (Warren Buffet’s mentor) concept where you set aside a small percentage of your portfolio to actively manage to get it out of your system.

    Most of the time I don’t think you want to see your opportunity fund exceed something like 10% of your position unless you are preparing for a specific opportunity. We’re just not good enough at market timing in general. Ben Graham’s recommendation for the gambling fund is about 5%.

    • retirebyforty March 19, 2018, 9:31 pm

      10% is actually a lot. I think 5% is a better target for me. And that’s only because bond funds will drop in this rising rate environment.
      Sounds like you’re doing well. Keep at it!

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