Help a newbie to trust the PP

General Discussion on the Permanent Portfolio Strategy

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Xy345
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Help a newbie to trust the PP

Post by Xy345 » Thu Nov 24, 2022 2:56 pm

Hello,

I have increased my assets through company sales and real estate sales this year. After some consideration, I have now built a European Permanent Portfolio last month. I live in Germany.

The portfolio consists of:

- Developed Europe Stock ETF
- German Gov Bond (2050)
- German Gov Bond (2023)
- Gold (50/50 physical/Xetra Gold)

My goal is to withdraw about 4% annually from the portfolio to pay for some of my expenses.

I have been very involved with the portfolio since the beginning of the year and know the theory behind the Permanent Portfolio.

Now the portfolio has made a good 10% gain within a month and I am now afraid that this is just a short recovery and the strong increase will end in a strong decrease. Actually totally irrational but the fear is there. I did not expect the portfolio to rise so quickly.

What is the best way to deal with this? Should I look less into the portfolio and just trust the plan? I hope you guys can take away my fear.

Many greetings
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Re: Help a newbie to trust the PP

Post by welderwannabe » Thu Nov 24, 2022 3:22 pm

Don't check it all the time if you get anxiety from the volatility. Investing has ups and downs.
Only alternative is 100% cash, which won't grow much.

The PP is a heavy cash portfolio. Focus on the cash portion. As long as you have a couple years expenses in that cash, you can ride out short term drops.
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Re: Help a newbie to trust the PP

Post by Vil » Fri Nov 25, 2022 1:37 am

Hey there, I live in EU also. What you may consider as part of the diversification game - put some cash into US(D) related stuff.
I have US-PP on top of my EU-PP (or other way round), that make me feels better - you know the theory is more leaning to US(D) PP as the one that is supposed to work, not the EU-PP ...
Re ups and downs - stash some cash (I prefer to keep way more than the advised amount 6 months survival) and/or invest in other things. Don't look too often in what's going on with markets (a.k.a. daily gyrations) and do not trust strangers in Internet (Amazon Kindle inclusive). Stop believing you can get rich quick. Oddly enough, markets do not like arrogant investors too.
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Re: Help a newbie to trust the PP

Post by mathjak107 » Fri Nov 25, 2022 2:08 am

welderwannabe wrote:
Thu Nov 24, 2022 3:22 pm
Don't check it all the time if you get anxiety from the volatility. Investing has ups and downs.
Only alternative is 100% cash, which won't grow much.

The PP is a heavy cash portfolio. Focus on the cash portion. As long as you have a couple years expenses in that cash, you can ride out short term drops.
While the PP has a lot of cash , the cash still needs to respect the rebalance bands .

The cash serves a function , such as acting as a barbell to the long treasuries to temper duration.

The cash also so serves as an option to buy other assets at lower prices but with no expiration date .

So it isn’t like that cash can or should be used as a spending fund for expenses in my opinion
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Re: Help a newbie to trust the PP

Post by Xy345 » Fri Nov 25, 2022 2:20 am

Thanks for your responses!

I probably do look in way too often though surprisingly I tend to panic when one of the assets significantly outperforms.

The 25% cash is invested as a bank deposit and short-dated Germany bonds. Here I also try to keep a 50/50 split when the short bond expires.

Rabalancing is to be triggered classically at 35/15 whereby I want to make deposits and withdrawals only via the cash position. My plan is to designate 4% of the portfolio in January and then set up a standing order of 4%/12 to my bank account. Any surplus will go back into the portfolio.

Maybe I really should be a little more relaxed....
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Re: Help a newbie to trust the PP

Post by mathjak107 » Fri Nov 25, 2022 8:01 am

My opinion is one has to look at cash as integral part of the portfolio…

It isn’t really there as a traditional source of spending money , it has a roll and job function in the portfolio so you want it in the right allocation to all the other assets .

So usually that means if you do use it for spending you still have to sell assets you may not want to refill tge cash .

My opinion is keep the portfolio away from what ever your spending needs may be , use other cash for that purpose and don’t mix the two
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Re: Help a newbie to trust the PP

Post by welderwannabe » Fri Nov 25, 2022 8:04 am

mathjak107 wrote:
Fri Nov 25, 2022 2:08 am
So it isn’t like that cash can or should be used as a spending fund for expenses in my opinion
Everybody does this a little differently, but spending is exactly what its for. The most simple method I saw for executing the PP was to put all new moneys into the 'cash' area throughout the year, and pull from it for spending throughout the year. No one wants to sell part of a 30 year treasury to pay the light bill.

Then at the end of the year, you rebalance. I know most of us are interested in investing so we rebalance more often, market time etc, but really the advantage of the PP for many is simplicity. A lot of that simplicity comes from having one bucket of cash for investing and spending, and then simple annual rebalancing.

Now, if you have a PP and a VP, then whatever cash you have allocated to the PP wouldn't get spent for expenses throughout the year and I agree with you, but having 2 portfolios again complicates things.
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Re: Help a newbie to trust the PP

Post by mathjak107 » Fri Nov 25, 2022 8:05 am

Well if markets are down where is all the money you spend down from cash coming from to refill for the following year if that is the source of spending cash ?.

Depending how far other assets are hit you may have to buy more of the other assets with any cash left further reducing your cash for spending going forward .

It would be a hell of a way to fund a retirement that way when you have bills to pay and need a certain amount of money to get you through the year .

So spending down that cash at the same time other assets are falling and have to be bought to rebalance can leave you with little cash to live on or certainly a lot less .

You may want to really think trying to live off the cash in the pp if that was the plan.

I am retired and living off my portfolios for over 7 years but I would never try to use the cash that was an integral part of the portfolio as my spending money to live off of.

That is money with two very distinct different purposes
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Re: Help a newbie to trust the PP

Post by welderwannabe » Fri Nov 25, 2022 3:23 pm

mathjak107 wrote:
Fri Nov 25, 2022 8:05 am
Well if markets are down where is all the money you spend down from cash coming from to refill for the following year if that is the source of spending cash ?.

Depending how far other assets are hit you may have to buy more of the other assets with any cash left further reducing your cash for spending going forward .

It would be a hell of a way to fund a retirement that way when you have bills to pay and need a certain amount of money to get you through the year .

So spending down that cash at the same time other assets are falling and have to be bought to rebalance can leave you with little cash to live on or certainly a lot less .

You may want to really think trying to live off the cash in the pp if that was the plan.

I am retired and living off my portfolios for over 7 years but I would never try to use the cash that was an integral part of the portfolio as my spending money to live off of.

That is money with two very distinct different purposes
Just to make sure I understand what you're saying. Looking at all of your assets, you are advocating keeping your cash at above the 25%? The 25% in the PP is untouchable and only used for rebalancing purposes, and you recommend keeping a slug of cash outside of that for spending? So depending on annual expenses, someone could have 30%+ of all their liquid assets in cash?

Looking at someone's entire liquid assets, thats really the same thing im saying, except that you have separated this cash and that cash in two different piles and have decided to have an overall cash allocation > 25% so that you can have a separate pile for annual spending.

All works for me, you of course manage your $$$ the way you want. However, it doesn't change my point that the PP is a heavy cash portfolio, and that should give an investor comfort that even if all of their assets are down, the cash should hold strong and they can pull from the cash if they need money, since the cash is likely swelled passed the other assets unless someone rebalances weekly.
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Re: Help a newbie to trust the PP

Post by mathjak107 » Fri Nov 25, 2022 4:44 pm

What I do is I fill our checking account with the years spending money every jan 2 ..

Done .

That money is separate from our portfolio and gets spent to zero by years end ..

All dividends and interest goes towards the following years Money ….it gets buffered in a bucket so to speak .

We never try to live off the dividends or interest in the current year as it can vary from 29k to 69k .

So it becomes to much work to fill the shortfalls while eating hand to mouth we found .

Then on Jan 2 we see what we are short and rebalance the portfolio to refill .


So to reiterate we don’t over fund the cash in the pp …the checking account has nothing to do with our portfolio because we are retired and constantly spending daily.

You can do it anyway you want , but just be aware that the cash in the pp is really not there for spending like a checking account .

It has very important job functions to do like balancing out duration on the long term bonds.

We pull about a 100k a year from our portfolio to add to other other sources of income so if I used the pp , the cash bucket of the pp would be serving little use as the other end of the barbell not tempering the long term bonds anymore
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Re: Help a newbie to trust the PP

Post by barrett » Sat Nov 26, 2022 5:08 am

I'm curious welderwannabe if you are retired and withdrawing from your portfolio as mathjak is. If you are still working and saving a bunch of "cash" each year, it might explain, at least in part, why you have a different view of how the cash quadrant should be used.
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Re: Help a newbie to trust the PP

Post by mathjak107 » Sat Nov 26, 2022 5:14 am

He said his goal was to draw 4% from the pp eventually …

But in Practice when you think about using the cash portion to spend down you are taking away from its job in the pp which is to counter the long term bonds duration .

As well as still needing the cash portion to likely buy other assets in a down year .

That can be pretty depleting of the cash bucket at a 4% draw ….it is really asking to much from that cash bucket ..

Simply keeping cash for spending outside the pp and simply rebalancing the pp yearly up or down should work best while preserving the integrity of all four asset classes.

But , Kitces has shown many times that this belied that cash buckets protect us in down markets when spending is only a mental thing .

There is no benefit that cash buckets offer that simply rebalancing assets to raise cash , whether up or down offers .

In fact most scenarios show simply rebalancing up or down with no cash buffer actually works better because of the drag of that cash position .

Personally I like my cash bucket compartmentalized approach even if just mentally a benefit .

However in the pp the cash bucket plays a functional role unlike just a traditional cash bucket which only provides spending money .
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Re: Help a newbie to trust the PP

Post by Xy345 » Sat Nov 26, 2022 2:09 pm

Perhaps I have misunderstood.

I invested my assets in my European Permanent Portfolio in October.

At the beginning of next year, I will start drawing 4% of the portfolio as a monthly standing order (4%/12) and live at least partially off of it.

Rabalancing will take place based on bands (35/15). My understanding is that these bands should give each asset enough leeway.

Here is an example with 100k:

25k each in stocks, bonds, gold, cash. I now withdraw 4k from the cash position in a year, giving me 25/25/25/21. If now all 3 assets fall by 50%, I have 12,5/12,5/12,5/21 and a rebalancing would be triggered, because the cash position would have reached the 35% threshold. Then I would hold 14.6/14.6/14.6/14.6. So next year I would have to get by with 2.3k withdrawal, etc.

Have I misunderstood something?
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Re: Help a newbie to trust the PP

Post by mathjak107 » Sat Nov 26, 2022 2:12 pm

So what if you spent your 4% or even more if there are unexpected big expenses and now you need to refill cash but markets are down ..you will need to sell what’s down , which is what you hoped to avoid
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Re: Help a newbie to trust the PP

Post by seajay » Sat Nov 26, 2022 4:23 pm

With stock dividends added to 'cash' I find there's no need to 'rebalance' other than directing withdrawals from whichever asset value is up the most at the time of the withdrawal.

From a UK backtest from the start of 2001, 4% SWR, 2008 year end had the least stock/highest gold weights of 14%/36% respectively, and where income was sourced from gold for 2007 through to 2012 inclusive, that pulled gold weighting back into alignment with stocks. Of the 21 years, 12 had the yearly income sourced from gold, and only 4 from stocks (rest were sourced from cash/bonds). And with no other rebalancing ended 2020 for instance at near-as 25% equal weights.

Broadly you might expect stock price only, gold, bonds/cash to offset inflation, but individually in a volatile manner, adding stock dividends to 'cash' along with withdrawals, is inclined to level the stock/gold/bond field so to speak and draw yearly income according to whichever of stock, gold, bond had 'spiked'.
Last edited by seajay on Sat Nov 26, 2022 4:29 pm, edited 1 time in total.
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Re: Help a newbie to trust the PP

Post by mathjak107 » Sat Nov 26, 2022 4:28 pm

Keep in mind that to be considered a swr , technically you need to use the same data that defines a safe withdrawal rate .

That means getting through 1907 , 1929 ,1937, 1965,,1966 .
Those dates were the worst years for a retiree to start their retirement ,and these are the starting dates a safe withdrawal rate is based on .

Any other years you use like 2000 , 2008 , etc are not worst of times starting dates , so at best you have a 4% draw rate but it does not meet the criteria of what we call a safe withdrawal rate .

The term has a very specific meaning and is stress tested by the worst outcomes to date , none of which we had the likes of since 1966
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Re: Help a newbie to trust the PP

Post by welderwannabe » Sat Nov 26, 2022 4:42 pm

mathjak107 wrote:
Sat Nov 26, 2022 2:12 pm
So what if you spent your 4% or even more if there are unexpected big expenses and now you need to refill cash but markets are down ..you will need to sell what’s down , which is what you hoped to avoid
So what is your recommendation?
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Re: Help a newbie to trust the PP

Post by mathjak107 » Sat Nov 26, 2022 5:00 pm

As far as what ? .

My recommendation is to not mix the portfolio and spending cash .

My recommendation is also this :according to kitces every worst case outcome happened when the 15 year average of a 30 year retirement fell below 2% real return .

Every failure was determined in the first 15 years .

So just monitor things along the way ..since you can end 30 years with a buck and it counts as a success you want better than 2% real returns .

So five years in if you find the portfolio is averaging less a red flag should go up .

By 8 years in I would take pay cuts
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Re: Help a newbie to trust the PP

Post by welderwannabe » Sat Nov 26, 2022 5:04 pm

mathjak107 wrote:
Sat Nov 26, 2022 5:00 pm
As far as what ? .

My recommendation is to not mix the portfolio and spending cash .
Fine if you don't want to mix PP cash and spending cash, but you posed a scenario where spending cash is drawn down to 0 due to "unexpected big expenses" as you put it, so what should he/she do if that were to happen? What is your recommendation? That is what I am asking.
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Re: Help a newbie to trust the PP

Post by mathjak107 » Sat Nov 26, 2022 5:10 pm

I never said it goes to zero but it could be heavily depleted leaving the long treasury bonds with not much fighter cover.

Your only recourse is to rebalance whether up or down.

Plus if stocks took a nasty hit and cash was already low what would you use to bring back up the stocks ?
Last edited by mathjak107 on Sat Nov 26, 2022 5:12 pm, edited 1 time in total.
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Re: Help a newbie to trust the PP

Post by welderwannabe » Sat Nov 26, 2022 5:12 pm

barrett wrote:
Sat Nov 26, 2022 5:08 am
I'm curious welderwannabe if you are retired and withdrawing from your portfolio as mathjak is. If you are still working and saving a bunch of "cash" each year, it might explain, at least in part, why you have a different view of how the cash quadrant should be used.
Im still accumulating. My extra income goes into the cash pile. If I need to spend some money, like to do a roof, I pull from that cash pile. Periodically I sweep spare cash into the other PP areas. Im also a poser PPer as I do 40% stocks, 20% bonds, 20% LTT, 20% cash.

Its mental accounting/bucketing to state that this cash is for this and that cash is for that. I assume its a form of budgeting for some to make sure they don't blow their portfolio by telling themselves a certain account of cash is 'off limits' for spending. But if something happens in their life, im sure that cash won't be off limits for long.

I also think it makes sense for a nervous person to point them to that pile of cash to give them some comfort, as it is the least volatile portion of the PP. To say its off limits is going to make them more nervous about the other 3 volatile assets daily movements.
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Re: Help a newbie to trust the PP

Post by seajay » Sat Nov 26, 2022 5:12 pm

Separate PP 'cash' from regular spending cash account. ATM cash.

Some might review/draw from the PP once/year in order to top up their ATM account with a years spending. Others might dilute that down to monthly reviews/movements. I get a free trade each month with my broker so there's no difference in costs either way for me, but in practice tend to have no fixed review dates, rather I just move money into my ATM account whenever that's running low.

If you feel valuations are high at the present time, would otherwise perhaps withdraw from the PP to add to your regular spending/cash account at year end, no reason why not to bring that 'review date' forward and make that trade/action now rather than at year end. If you were right - you win, if you'd have been better off waiting until year end then - you lose. And there's always the halfway option, so you're neither fully right nor wrong.
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Re: Help a newbie to trust the PP

Post by welderwannabe » Sat Nov 26, 2022 5:14 pm

mathjak107 wrote:
Sat Nov 26, 2022 5:10 pm
I never said it goes to zero but it could be heavily depleted leaving the long treasury bonds with not much fighter cover.
I was referring to the spending cash going to 0 as you are recommending it being carved out, not the PP cash. Again, in my world I just have one set of cash, but in yours your PP cash is separate from spending cash. My question was what is one to do if their spending cash goes to 0?

I do agree that long bonds have needed a heck of a lot of fighter cover lately. It hasn't been fun owning them for a bit. They make me sad.
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Re: Help a newbie to trust the PP

Post by welderwannabe » Sat Nov 26, 2022 5:32 pm

seajay wrote:
Sat Nov 26, 2022 5:12 pm
Separate PP 'cash' from regular spending cash account. ATM cash.

Some might review/draw from the PP once/year in order to top up their ATM account with a years spending. Others might dilute that down to monthly reviews/movements. I get a free trade each month with my broker so there's no difference in costs either way for me, but in practice tend to have no fixed review dates, rather I just move money into my ATM account whenever that's running low.

If you feel valuations are high at the present time, would otherwise perhaps withdraw from the PP to add to your regular spending/cash account at year end, no reason why not to bring that 'review date' forward and make that trade/action now rather than at year end. If you were right - you win, if you'd have been better off waiting until year end then - you lose. And there's always the halfway option, so you're neither fully right nor wrong.
Makes sense to me and a fine approach. I have several cash 'buckets'.

#1 Checking account is first bucket (which I basically ignore for portfolio purposes as its too variable). This is my "ATM" cash as you put it. Its around a month of expenses in here.
#2 The second bucket is bank savings account, in same bank as checking so its easy to move some to checking if I have a tight month.
#3 Third bucket is government money market at Fidelity and in that same account I roll tbills.

#2 and #3 I consider part of my PP cash allocation, but I don't have any rules against not spending from it if I need the money. If the water heater blows, or I need to buy a new car, this is where it comes from. I have a low and high water mark for these buckets. Cash over the high water mark gets put in Stocks, Gold, Bonds. If I go under the low water mark I consider selling Gold, Bonds, Stocks to raise it up. However, I try to keep enough cash in buckets 2 and 3 to have that not happen.

Thats why all my cash is my cash. The cash in buckets #2 and #3 is suitable to keep me from panic selling. It gives me comfort.
Last edited by welderwannabe on Sat Nov 26, 2022 5:32 pm, edited 1 time in total.
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Re: Help a newbie to trust the PP

Post by seajay » Sat Nov 26, 2022 5:32 pm

welderwannabe wrote:
Sat Nov 26, 2022 5:04 pm
mathjak107 wrote:
Sat Nov 26, 2022 5:00 pm
As far as what ? .

My recommendation is to not mix the portfolio and spending cash .
Fine if you don't want to mix PP cash and spending cash, but you posed a scenario where spending cash is drawn down to 0 due to "unexpected big expenses" as you put it, so what should he/she do if that were to happen? What is your recommendation? That is what I am asking.
Depends upon how much. If not too much you might just draw from the asset that was the most highly valued at the time. $1M portfolio, $250K originally in each of the four assets, but where gold is up to $300K stocks are down to $200K and there's a $50K car deal going, then fund that purchase by selling $50K of gold.

If your daughters getting married and you're funding a $100K expense as part of that, then sell down all four PP assets in their current individual weightings to scale down your PP by $100K value.

Few if any actually follow the likes of a 4% SWR rigidly, its more of a guide. If your current yearly withdrawal rate is near or into double digit percentage of total portfolio value then you need to take action, cut spending. 1937 50/50 stock/cash with 5% SWR and by 1947 maintaining that would have been a double digit percentage of the portfolio value being drawn, so a indicator you needed to cut SWR (spending) down to the equivalent of a 4% SWR (4/5 x what you might otherwise have continued drawing). A couple of years later and that danger flag was again flying, so yet a further cut (3/4 x). Which then went on to successfully cover more than 30 years (the duration to which most SWR measures are measured).

Life. During working years you may lose a good job and have to make savings due a lower waged job.
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