Is the PP Safer Than Cash?

[MediumTex]

Anyone want to take a crack at this one?

[Indices]

Yes!

I am using it to raise money for a downpayment on a home. Yes it's safer. If it loses, it will lose only a little, and it's virtually inflation proof.

If it failed it would mean society is probably breaking down anyway and I'd have more pressing concerns than saving money.

[foglifter]

Same here. I use PRPFX (sort of PP) as:

- a general saving vehicle as well as a downpayment basket in my taxable account.
- a temporary cash holder in my IRAs until it gets invested into my PP

[TripleB]

PP is safer than Cash if the goal is buying power preservation.

PP is less safe than Cash if the goal is nominal dollar preservation.

Just a matter of defining your frame of reference.

[KevinW]

The PP is safer.  The only thing that could wipe out the PP is a complete obliteration of the market system.  Cash can be wiped out by that, and also a hyperinflation or collapse of government.  Also, cash tends to lose value in brisk-but-not-hyper-inflation, and that happens somewhat regularly under fiat currencies.

[moda0306]

It depends on what you mean by "safe."

I'd imagine some people won't accept the losses the PP sustained at one point in 2008.  Some people won't accept negative or zero real returns.

I don't know I'd be able to say which is worse for the psyche.

I prefer the PP to cash, but I don't necessarily think it's more safe.

[clacy]

Over a 39 year history, it certainly has been.  Look at $10,000 invested in 2yr Treasuries or money market compared with the HBPP.

Cash is very destructive in inflationary environments and not a great investment (purchasing power) during prosperity.

[longeyes]

If safety means preservation of purchasing power, definitely; it's why I initiated portfolios in both PRPFX and HBPP at the beginning of this year after being largely in short-term Treasuries for a considerable period.

[craigr]

I would almost certainly say yes. Diversified assets are safer than concentrated bets.

[clacy]

So, if we assume that a PP is safer than cash because of its diversification over 4 asset classes instead of cash-only, then how do we account for our emergency funds?

Let's say you keep an emergency of roughly 6 months spending reserves. Do you guys include that in your cash portion of your portfolio?

OR

Do you actually run your emergency fund as its own PP?

This is what I'm contemplating right now.  I have roughly 6-7 months spending reserves sitting in a savings account earning nothing.  All of my investable assets are in IRA/401k's. All of my other wealth is tied up in my business and home equity.  I won't really count that as it's not liquid at all.

I'm not really comfortable using that money in it's own PP, but I am leaning toward counting it in my PP's cash portion.  Because in a time of need, I would likely be willing to add this money into an account in order to re-balance up.

Thoughts???

[WildAboutHarry]

Thoughts???

One incidental aspect of the large cash position of the PP is that the need for a separate emergency fund is reduced.  Assuming you have a sufficiently large PP, I don't see much reason to maintain a separate emergency fund.

I include all cash-type accounts (savings accounts, I-Bonds, etc.) in the PP's cash portion.  I don't include checking account cash in the PP.

[TripleB]

Thoughts???

One incidental aspect of the large cash position of the PP is that the need for a separate emergency fund is reduced.  Assuming you have a sufficiently large PP, I don't see much reason to maintain a separate emergency fund.

I include all cash-type accounts (savings accounts, I-Bonds, etc.) in the PP's cash portion. 

I completely agree. Essentially, let's say you need a $20k emergency fund. If your PP is at least $80k then you have $20k in cash anyway.

In the event of an emergency, use the $20k cash, and then re-balance the remaining $60k into 25x4.

[KevinW]

Yeah, I maintain a chunk of taxable cash for emergency purposes, and count as part of my PP cash allocation.

[Reido]

Well, I refuse to hold any cash outside of an IRA (and only as part of permanent portfolio)

Why?

Well I hadn't checked the CPI lately - until I read this post, that is; Inflation is chugging away at 3.7% now!!

Cash yields 1.1% if you're lucky.  I don't like locking in a 2.6% loss!

[dualstow]

I know an Italian national who lost 10% of his wealth overnight due to to his large lira holdings back in the very early 90s.
I'm sure he could appreciate the beauty of the pp.

[WildAboutHarry]

Well, I refuse to hold any cash outside of an IRA...Inflation is chugging away at 3.7% now!!

How does cash being in an IRA protect it from inflation?

[Pkg Man]

Yes!

I am using it to raise money for a downpayment on a home. Yes it's safer. If it loses, it will lose only a little, and it's virtually inflation proof.

If it failed it would mean society is probably breaking down anyway and I'd have more pressing concerns than saving money.

Depending on the time frame, yes it is safer.  I am not sure I would use it as a vehicle for short term savings, but overall I think it is safer than cash.  I tried - to no avail - to convince my father of this.

[moda0306]

Depending on the time frame, yes it is safer.  I am not sure I would use it as a vehicle for short term savings, but overall I think it is safer than cash.  I tried - to no avail - to convince my father of this.

I was lucky enough to convince my dad after quite a few conversations about it.  It helped that he didn't like his Wells Fargo Investments "advisor."  He went partially (about 30% of his retirement) into a modified PP (45/35/20 Stocks/Bonds/Gold... ok that's hardly the PP but it's MUCH better than what he was in, and he has some cash on the side in taxable accounts) back in March.

More luckily, he moved the other 70% in back in late July, right before the debt-downgrade.  Even with 45% in stocks, he's up reasonably well from when he put in, and is very happy.

It was tough convincing him, but he seems to trust me (now, a little too much) with any predictions I have about what will happen in the market... I try to hold back for that reason, because it was pure luck, not prediction, that saved him from big losses in August.

I wish I had advice for you other than to show him in as many ways possible... A few things that I think helped are the following:

- Illustrating the principle of Modern Portfolio Theory
- Showing how gold did vs other commodities in 2008
- Showing how LT treasuries did vs other bonds in 2008
- Showing him rates in Japan and comparing our demographics and currency (now in US vs early 90's Japan
- Showing that it only had 2 loss years (duh)
- Illustrating that the stock market had flat returns from 1966-1982 and 2000-today (latter may have changed a bit).
- Showing him Japan's stock market over the past 25 years.

I can't think of any more now, but these things, when taken together, can really start to change someone's perspective.

[moda0306]

What about 1980 through 2002 gold losing -5.7% p.a. annualised in real terms.

Or how stocks, bonds and cash have all benefited from a general high to low interest rate transition from the 1980's to recent.

Or how asset price motions (velocity and magnitudes)  have been highly favourable to the PP's choice of rebalance bands - but might not be so good in future years.

Consider how it might impact your relationship with your father if after all your convincing arguments the PP's future results disappoint.

IMF 2012 futures figures presently show commodities down, inflation down - that could have gold down as well, perhaps by a sizeable amount. And with some stability QE shorter date depression rates might vanish such that rates rise and all three of the non cash assets might decline simultaneously. There have been instances of the PP being down -25% at times - just that the down's haven't coincided with year end time points such that they were recorded within yearly figures.

- Regarding Gold, I made it clear that a disinflationary prosperity is bound to be a loser for gold, will be amazing for stocks, and even though yield spreads are probably closing during this period, very good for long-term treasuries as well... I've also mentioned that this MAY not continue, but the deleveraging process in Japan with the same demographics would seem to indicate at least a reasonable possibility otherwise.

- I did annual rebalances when showing him returns, so rebalance bands were irrelevant... the PP works well whether you use bands or annual rebalance, so I don't see that being a material fact discounting PP performance.

- I've warned him of the risk that if the Fed raises ST rates above the rate of inflation it could be bad for all three and that it's likely the "achilles heel" of the portfolio.  He's very "anti-cash," though... it's his decision to keep a cash-light portfolio, and I often warn him against it.  I've also told him that while I'm not bullish on stocks, I don't expect the PP to perform as amazingly going forward as it has in the past.

In all, I'm not suggesting to him the PP will definitely outperform other strategies, but I haven't seen a reason to believe the correlations will break down.

I haven't seen any investment class, or mix of classes, that seems to me to be viable as a better risk-adjusted return than the PP, with maybe some tweaking away from gold and into the other assets.

Clive, I can't disagree with your assertion that the PP won't perform as well in the future than it has in the past, but neither will any other safe investment.  Trying to ride technical waves is hardly a safe bet when we're possibly on the cusp of a prolonged deleveraging period.

I see no reason to believe that long-term treasuries are anything but an amazing diversifier to stocks, and for macroeconomic reasons.  Further, given the huge drops in oil, copper, silver, etc prices correlating with the most recent stock market crashes, I see no reason to abandon gold as the "diversifier of choice" against stocks & LT treasury bonds.  If I'd had my dad in your 5-year treasury ladder instead of TLT he would have had significantly larger problems with his portfolio in the last months, as he also would have with a commodity index.

I'm not saying they'll continue to zig as much as we want them to when stocks zag, but employing a RS strategy or shortening the duration of his bonds or diversifying outside of gold hasn't shown to be the answer yet... when will it?  Maybe now that 30 year bonds are at 3.25%, they're worth speculating out of, but you were making that call when they were at 4.7% and trying to tell the rest of us that they weren't as good as a 5-year ladder, and a stock-heavy portfolio would have been much more risky as a result of diverting long-term treasuries into a 5-year ladder in the past few months.  I'll take fundamental macroeconomics over technical waves in unprecedented economic times any day.

A PP malaise (utter failure is unlikely) would most likely involve rising short-term interest rates.  This will likely, at least in the short term, hurt bonds, gold and stocks alike.  Do you see Bernanke raising ST rates any time soon with unemployment at 9%+?  Now, if Rick Perry or Ron Paul are elected (or appear likely to be), I will definitely move my PP, as well as my dad's (if he'll let me), much more heavily into cash.  Until then, I see little evidence to the effect that the correlations will break down, or that any one PP asset is significantly over/underpriced.

When was the PP down 25%?  I think the recorded figure is -15% for 2008 at its worst, and I'd imagine 1981 being another tough year?

Your depression era figures using silver as a proxy (best possible substitute, but hardly a pure monetary metal.... 2008-today seem to illustrate that the difference is crucial) and shorter-duration treasury bonds (once again, probably the best you could find (we appreciate greatly your efforts with this stuff) but not ideal) both served to over-exaggerate the losses of that time from what a typical PP would be... if that's what you're referring to.  Further, I don't consider any non-US PP to be an ideal example of what we might see, as when you're talking about local stock markets against a worldwide gold market, you're not going to get the proper macroeconomic fundamentals that drive our PP's in the US, using the worlds reserve currency as its basis, and upon which gold's moves will be much more reliable.

[moda0306]

Clive,

Just to expand and get to the bottom of what you're saying... if you could employ a single investment strategy (I know one of your theories is to use various strategies, but bare with me for a sec) for a recent retiree, what would it be?

Why would you choose that strategy over the PP, and do you think it will be more or less volatile over the next 10-20 years?

Thanks for any input you can give.

[Gumby]

When was the PP down 25%?  I think the recorded figure is -15% for 2008 at its worst, and I'd imagine 1981 being another tough year?

I believe he's talking about inflation-adjusted terms in 1980 that nobody would have ever seen because the "real" returns wouldn't have been calculated by the time that the portfolio had recovered. Although, the last time Clive talked about this, he said the "real" drawdown was closer to -20%. Somehow it's now -25%. In a few months I'm sure it will be -30%. Since everyone can only track their short term performance in nominal terms, its like wondering if the tree that falls in a forest made a noise when no one was around.

Moda, I'm not sure I would debate it with Clive too much...He's just going to end up deleting everything he says in a few days anyway.

[moda0306]

Why does he do that again?  Too much intellectual property to let be freely accessed going forward?

[Gumby]

Why does he do that again?  Too much intellectual property to let be freely accessed going forward?

I'm not sure, but I kind of think it messes up the forum.

If you were a newcomer and you went through some old discussions, they wouldn't make any sense.

Next to his avatar it says he only has 85 posts under his belt

[MediumTex]

Why does he do that again?  Too much intellectual property to let be freely accessed going forward?

I'm not sure, but I kind of think it messes up the forum.

If you were a newcomer and you went through some old discussions, they wouldn't make any sense.

Next to his avatar it says he only has 85 posts under his belt

We would miss Clive if he was gone.

I appreciate him, even though it drives me crazy that he deletes all of these intricate and thoughtful posts.

[Gumby]

We would miss Clive if he was gone.

I appreciate him, even though it drives me crazy that he deletes all of these intricate and thoughtful posts.

Yes, but his posts are gone. We do miss them. Isn't there a setting to prevent users from destroying entire sections of the forum in that manner? Most forums I've been to don't let you edit or delete a post after a day has elapsed.