If I go PP, do I still need a Cash Emergency Fund?

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MiniB

If I go PP, do I still need a Cash Emergency Fund?

Post by MiniB » Fri Sep 10, 2010 3:44 pm

The purpose of the PP is to provide a stable source of money with low standard deviation.  So far it's been true over the last 30 years.  Does this mean I can forgo having a 6 months cash emergency fund and instead invest that money into the PP?

Right now, my 6 months emergency fund is about 10% of my overall net worth.  If I keep that in cash and go PP with the other 90% then I feel like am holding a lot of cash for a young person.

If I put my 6 months emergency fund along with all of my holdings into PP, then if I have an emergency, I can withdraw from the 25% cash portion, and if that causes me to drop below 15% cash then I rebalance.  Or it may push another allocation beyond 35% because of reducing overall assets (the denominator of the % calculation gets smaller so even with the same numerator it becomes a bigger ratio).

The downside of putting your emergency fund into your 60/40 or 80/20 stock/bonds traditional portfolio is that you may be forced to sell when both stocks and bonds are down.  With the PP, there is rarely times where the whole thing is down, and if so, it's not down by much.

Does anyone else feel comfortable merging their emergency cash fund with their PP?

Does this provide an added advantage to younger and lower net worth investors to use the PP, because it allows them to better grow their money?  For these people, a 6 month emergency fund may be 50% or more of their total assets. Having that large percentage of your assets sitting in cash for emergencies will severely reduce growth.  If the PP is safe enough to encompass your emergency fund, then you should be able to increase growth.
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Re: If I go PP, do I still need a Cash Emergency Fund?

Post by melveyr » Fri Sep 10, 2010 3:55 pm

I am quite young, 19 in fact. I have 90% of my money in the PP. I am very comfortable with this because it has proven itself to me. I don't think it would be crazy for you to put your emergency money in the Permanent Portfolio. The reason I use the PP is because I am so comfortable putting a lot of money into it. I'm sure many advisors would tell me I'm too conservative for my age, but I enjoy having flexibility, especially when the economy is doing poorly. If I were you I would go for it. I think the PP is low risk enough to pull off use as an emergency fund. Why not let your emergency fund grow?
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Re: If I go PP, do I still need a Cash Emergency Fund?

Post by KevinW » Fri Sep 10, 2010 4:16 pm

MiniB wrote: Does anyone else feel comfortable merging their emergency cash fund with their PP?
Yes.  I asked a similar question in this thread: http://crawlingroad.com/forum/index.php?topic=152.0

I don't think you need a separate emergency fund when you're using the PP.  One proviso is that, if you're using tax deferred accounts such as 401(k)s, you need to carve out 6-12 months' expenses in a taxable account that you can liquidate at any time.  My plan is to keep that much in a taxable cash account, and count the balance toward the 25% cash allocation.
MiniB wrote: Does this provide an added advantage to younger and lower net worth investors to use the PP, because it allows them to better grow their money?  For these people, a 6 month emergency fund may be 50% or more of their total assets. Having that large percentage of your assets sitting in cash for emergencies will severely reduce growth.  If the PP is safe enough to encompass your emergency fund, then you should be able to increase growth.
I think it does.  If someone starts from scratch, saves 2 months of expenses per year (to make for round numbers), and follows the advice to save a 6 month emergency fund before investing in a 80/20 portfolio, then for ~3 years they are 100% in cash.  After ~4 years they are 87.5% cash, 10% stock, and 2.5% bond.  Cash is the majority position for many years, and the PP will likely provide greater returns during this ramp-up period.

IMO this is an important counterargument to the complaint that the PP is too conservative for a young investor.  Actually, when you consider the emergency fund as part of the portfolio, which it is, the PP has a beginner invested in productive assets and earning healthy returns from day one.  The conventional advice amounts to saving cash for several years before investing to any significant degree.
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Re: If I go PP, do I still need a Cash Emergency Fund?

Post by ochotona » Thu May 28, 2015 12:21 pm

Hey, why not resurrect a really old thread? It's relevant  ;)

I have been through a hairball of a year, and I have tons of cash lying around. I'm going to push it into a taxable account PP, therefore spendable but I want to keep more than like 36% in cash, rest divided evenly equity / gold / bonds. And ETFs, in case I have to sell it quickly for any reason.

An over-cashed PP backtests great, very smooth, like 1 down year in the past 40.
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Re: If I go PP, do I still need a Cash Emergency Fund?

Post by LC475 » Thu May 28, 2015 12:51 pm

It's a great resurrect, and to the question "If I go PP, do I still need a Cash Emergency Fund?", I say No.  KevinW put it well.  The cash portion of the portfolio is, as long as you keep it liquid and accessible, well, cash.  There is no need to have even more cash.  Just make sure that you have enough of it not locked up in a 401k or IRA, giving you ready access to enough of a slush fund to make you comfortable.

The one downside is complexity.  It's a lot easier to just maintain a checking account and keep adding funds to it as your savings plan than it is to set up a HBPP, especially when you're young and not talking about tons of money, just a few thousand, and the returns you're missing out on are also relatively small.  Now if someone were to set up an extremely easy way to have a HBPP account with a debit card that worked like a checking account..... 8)  That would be the bees knees.
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Re: If I go PP, do I still need a Cash Emergency Fund?

Post by ochotona » Thu May 28, 2015 1:14 pm

LC475 wrote: Now if someone were to set up an extremely easy way to have a HBPP account with a debit card that worked like a checking account..... 8)  That would be the bees knees.
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Re: If I go PP, do I still need a Cash Emergency Fund?

Post by dualstow » Thu May 28, 2015 7:02 pm

ochotona wrote: Hey, why not resurrect a really old thread? It's relevant  ;)
And who can resist a title like "If I go pp"
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pariah — 1610s member of a low caste in S. India; Tamil (Dravidian) “drummer”, as members of the lowest caste played drums at festivals. “social outcast,” 1819.
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Re: If I go PP, do I still need a Cash Emergency Fund?

Post by ochotona » Sat May 30, 2015 6:57 am

How about this ETF for the "Emergency Pee-Pee"  ;D ?

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Re: If I go PP, do I still need a Cash Emergency Fund?

Post by atrus138 » Fri Jun 26, 2015 12:26 pm

I keep mine separate. The emergency fund for me is for unforeseen events now. My Permanent Portfolio is for my future. Personally, I don't want to use my emergency fund money to rebalance if the other pieces drop. I feel that that would add risk in an area intended for security.
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Re: If I go PP, do I still need a Cash Emergency Fund?

Post by mathjak107 » Fri Jun 26, 2015 12:48 pm

we are retiring. we keep the permanent portfolio cash seperate from our spending down money and our emergency stash.

i treat the pp cash like owning call options for lower asset prices down the road.

it will be a fully ear from now when we will pull equally from all 4 parts and refill the following years spending money.

it took some thinking to get this all under some plan.
Last edited by mathjak107 on Fri Jun 26, 2015 12:50 pm, edited 1 time in total.
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Re: If I go PP, do I still need a Cash Emergency Fund?

Post by sophie » Fri Jun 26, 2015 3:43 pm

Agree with Kevin - the PP functions as your cash reserve as well as investment strategy.  It's amazing how comprehensive a financial management plan it is.  But yes, don't be in too much of a hurry to jump into the PP before you've got enough cash saved up.
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Re: If I go PP, do I still need a Cash Emergency Fund?

Post by mathjak107 » Fri Jun 26, 2015 4:13 pm

i agree with the don't jump in to the pp to quickly in time. it  is more for preserving assets rather than making them.  the fact it did both for a while was out of the ordinary.
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