PP as Emergency Fund / Income Source

[Jack Jones]

I had a recent modification to the Permanent Portfolio I wanted to share w/ you all. I hope that it leads to feeling more secure and free.

Take the cash portion, divide it by 12, and set up a 12 month treasury bill ladder. Every month bills will mature, providing you w/ the precious US Dollars you may need that month. Every month, you have a responsibility to purchase treasury bills to fund this month a year from now. In this way, you're planning ahead for next year, adapting to rising prices, and purchasing next year's US Dollars at a discount (treasury bills are bought today at a discount). If you don't have enough US Dollars on hand to purchase enough treasury bills for next year, you'd probably want to sell some of the other assets to ensure your ladder has all its rungs. However, if you miss a month, you can always plug it later by buying a bill w/ the proper maturity.

This also helps answer the Permanent Portfolio sizing question. When your PP is large enough to deliver enough US Dollars to cover your mortgage each month for the next 12 months, that's a certain level of financial stability and peace of mind. Once your PP grows large enough to deliver your current income in cash, perhaps you can retire?

Anyway, I thought this was a novel way to view the Permanent Portfolio: As an engine for delivering cash to us in the future.

[425]

The PP isn't reliable enough to provide a 1 year positive return over cash in a FDIC savings account. This is why I do the same thing but 5 years out instead and make sure that the cash you are spending isn't part of the cash portion because like many have mentioned before, the cash serves a purpose and you really shouldn't touch it for spending.

[Jack Jones]

Ah yeah. I see in your post history that you have a similar and more sophisticated approach. Cool.

[ArthurPooh]

This also helps answer the Permanent Portfolio sizing question. When your PP is large enough to deliver enough US Dollars to cover your mortgage each month for the next 12 months, that's a certain level of financial stability and peace of mind. Once your PP grows large enough to deliver your current income in cash, perhaps you can retire?

I might be too stupid to understand this. If this ladder delivered my current income in cash, wouldn't spending it instead of reinvesting burn through 25% of my portfolio within a year?

[Jack Jones]

This also helps answer the Permanent Portfolio sizing question. When your PP is large enough to deliver enough US Dollars to cover your mortgage each month for the next 12 months, that's a certain level of financial stability and peace of mind. Once your PP grows large enough to deliver your current income in cash, perhaps you can retire?

I might be too stupid to understand this. If this ladder delivered my current income in cash, wouldn't spending it instead of reinvesting burn through 25% of my portfolio within a year?

You're correct. I suppose this would better serve as a milestone that your PP is now a proper emergency fund.

[ArthurPooh]

This also helps answer the Permanent Portfolio sizing question. When your PP is large enough to deliver enough US Dollars to cover your mortgage each month for the next 12 months, that's a certain level of financial stability and peace of mind. Once your PP grows large enough to deliver your current income in cash, perhaps you can retire?

I might be too stupid to understand this. If this ladder delivered my current income in cash, wouldn't spending it instead of reinvesting burn through 25% of my portfolio within a year?

You're correct. I suppose this would better serve as a milestone that your PP is now a proper emergency fund.

I understand. Although personally, in such a case I secure have a proper emergency fund first and only invest the excess in the other assets. For example, if I felt I needed an emergency fund of $10k and had $13k worth of savings, I would buy $1k each of cash, gold and bonds (or likewise in any other asset allocation) and keep the remainder in cash. I assume this is treyf in PP world, as it results in cash allocation exceeding the 25% until the investor accumulates at least four times the desired emergency fund.

[Jack Jones]

Yeah. I’m just looking for more ways to get mileage out of a portfolio that holds 25% in cash. Im starting to think of the PP more as a personal financial system, and less as an investment portfolio.

Seems like using the 25% cash allocation to ensure you have a steady supply of US dollars coming in each month would make me feel kore secure. In the same way as a stack of wood or a tank of fuel, or even better, a fuel delivery arrangement brings peace of mind.

[425]

When you first wrote this my thoughts were, if you're going to commit to buying a 1 year T-bill every month and spend the maturing one, then it's not really doing much since we're dealing with such short duration they are basically the same thing.

It was where you get the new cash to purchase the new 1 year treasury bill each month that is key.

If it is from income, then it really doesn't make a difference and now I get that you want to treat the cash in the PP mentally as an emergency fund. I would say that in an emergency your entire liquid assets serve as part of that emergency fund (in a true emergency).

I think most people allocate to an emergency fund in the sense that they can draw that amount down without impacting their investments. In which case, this is why you cannot use the PP's cash as emergency funds in that scenario.

What might be a better idea, and this is what I do in a way, is that I consider my available credit as an emergency fund and the amount of total debt or leverage I have as part of that emergency strategy. If you think you can take on a cashless PP, then in an emergency you might have to "lever up", at least that is a source of funding that does not require credit. Beyond that, having many diversified sources of secured and unsecured credit would be a good way to mentally account for an emergency fund.

[seajay]

Even with just stocks and gold I don't see any issues with cash flows. Sell some of whichever is the most-up (above target % weighting) at the time. Use/have a credit card and that can cover a modest sized emergency, above that and its just a case of selling some shares or gold (T+2 "withdrawal notice" for stocks, maybe same day for gold). For more regular/similar withdrawals (selling enough stock or gold to cover paying off the credit card + top up debit card) selling some of the most-up is a form of partial rebalancing, and averaging-out - some months and you maybe selling at a relative low, other months at a relative high ... broadly washes.

A 'nasty' situation would be for a very large emergency amount, well above credit cards limits, when both stocks and gold were down a lot. In which case if you expected that to be a temporary dip leverage could be employed, if stocks were down the least then sell $80K of 1x stock (SPY), buy $40K of 2x stock (SSO), releasing $40K of 'borrowed' hard cash, supplemented with $10K of credit card 'cash'.