1 Critical Choice to Protect Your Investment Returns

While putting as much money as possible into the stock market can seem exciting, setting aside money in an emergency fund is not something to overlook. In fact, if you have an emergency fund, all of a sudden downturns may not have to be emergencies.

In this video from Motley Fool Live, recorded on March 5, Fool.com contributors Brian Withers and Brian Feroldi reminisce on how an emergency fund could have been a saving grace during a period of layoffs and tough financial times following the global financial crisis of 2007–2008.

Brian Withers: 2009 -- That was a tough year for our family. The financial crisis had hit, and the business that I worked for at the time was Dell. They were going through a big transition, and I was laid off.

I was five or so years into investing and was really excited about the whole investing process and wanted to have as much money invested in the market as I could.

I had a stable job, we had two kids, decent mortgage with a decent rate, but I didn't have an emergency fund. Getting laid off was a bit of a surprise. I ended up selling some stocks to raise some cash.

You'll love this list Brian. Here we go. [laughs]

Brian Feroldi: March 2009 was a great time to sell Netflix, and MercadoLibre and Starbucks.

Withers: No. Those 13 positions, even with some of the losers that I sold, it went on to average a 24-bagger return from there had I held until now.

I've been pushing this, I mentioned this in "The Wrap" yesterday, make sure you have an emergency fund. Stuff happens. Have money outside of the stock market for your water heater, who knows? There'll be a storm that damages the roof, your car will break down, hope nobody has health problems in the family. But there are a million things why you might need some cash that was unexpected. A lot of times those unexpected things aren't going to wait.

I talked about being a desperate seller yesterday. I was a desperate seller, and trying to pick the things off that would raise some money, and I wasn't able to go back in and buy them. That was a tough piece. It took a while for me to get back in a job and get to where we had a stable cash flow.

Feroldi: Brian, what was your mindset in 2009 when you were going through this? Because I'm sure you realized "I don't want to sell these things, but I have to."

Withers: Yeah, it was very much. In fact, I sold them before I got laid off, or right around, either right before, or right after, to raise some cash, because I got a little bit of hint that I might be laid off. I was scared. This is the first time I'd ever gotten laid off.

I got a family, I got a wife and two kids at home, and I knew eventually things would come back, but I felt like I had no choice, that I needed cash, and who knows what the market was doing at that point, it could go down even further.

I did exactly the wrong thing at exactly the wrong time. I didn't feel like I could do anything different.

Feroldi: It just goes to show, assume that you had an emergency fund in place, assume that you had multiple sources of income, assume that you had no debt. All of a sudden, downturns are not emergencies.

Withers: Right.

Feroldi: They're still emergencies, but your mindset isn't racing about, "What are we going to do? We are screwed. We need to sell, sell, sell." It's, "This sucks. But we can ride it out." [laughs]

Withers: Right. Yeah. I didn't have any levers to pull. My wife was at home, she didn't have a job. The job market at that point, I was very worried that I would be out of work for potentially even six months, or more. We ended up having to move from our home in Nashville to San Antonio so that I could go back to work.