Diehl makes another point. The wild market swings of the past few years have spooked some investors from risk-taking. And without some risk taking, investment returns are likely to lag over a longer-term horizon. It's particularly important for younger investors—who generally have time to ride out market gyrations—to maintain a healthy view of the risk-reward relationship.
"It's no wonder people are confused. There are two forces at work—a shaky job market that highlights the need for emergency funds, but at the other end, safe investments paying virtually nothing. The opportunity cost that comes with sitting out of the market has never been higher," says Diehl.
So while it's unwise to ignore an emergency fund, it's also not so smart to keep it all "under the mattress" and not growing (with up and down swings) in the market. With a little discipline, you can do both.