Another 401k Question

General Discussion on the Permanent Portfolio Strategy

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stuper1
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Another 401k Question

Post by stuper1 » Sun Mar 10, 2013 5:16 pm

I think I've dropped my idea of tweaking the PP.  As I read more here and in the new book, I'm starting to understand the ying/yang beauty of PP.  I'll start at 4x25 and let the market decide where things should go.  Then, the rebalancing will lock in gains and buy value (sell high and buy low). 

Having said that, I still need to figure out how to make the best PP lemonade out of my 401k bond lemons, if I may borrow someone else's phrase.  I'm seeking advice on two alternatives:

1.  Put 60% of my cash into my 401k stable-value fund (the other 40% cash will be my taxable emergency fund).  This stable-value fund is diversified among government/non-government high-quality short-term bonds.  I think the government portion is about 40%.  I couldn't find the average maturity, but it uses the Citigroup 3-month T-bill index + 1% as an index.

2.  Put 30% cash and 30% bonds into my 401k U.S. aggregate bond index fund, which again includes both government/non-government bonds (36% government).  The average maturity is 6.3 years.

I'm inclined to go with #1 because:  a) it seems  better to use non-PP-ideal funds in only one category if possible, rather than two; and b) cash seems like the least sensitive of the four asset classes to mess with.

I will receive any input very gratefully.
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KevinW
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Re: Another 401k Question

Post by KevinW » Sun Mar 10, 2013 5:54 pm

stuper1 wrote: ...I'm starting to understand the ying/yang beauty of PP.
That's a good way of putting it.

I'm afraid I don't understand your two alternatives. E.g. when you say "30%" bonds, is that a percentage of the bond allocation or the whole portfolio? Maybe it would be clearer if you wrote out what the entire PP would look like in both cases.
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AgAuMoney
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Re: Another 401k Question

Post by AgAuMoney » Sun Mar 10, 2013 5:59 pm

stuper1 wrote: I'm inclined to go with #1 because:  a) it seems  better to use non-PP-ideal funds in only one category if possible, rather than two; and b) cash seems like the least sensitive of the four asset classes to mess with.
I'm with you entirely.

The most critical aspect of cash for the PP is safety.  It has to be there when you need it.  Return on your cash is a distant second to return of your cash.  If it were me I would be very comfortable with 60% of my cash allocation in your described stable value fund.

When it was me trying to deal with a 401(k), I had far more than 100% of my cash allocation in a very similar stable value.  Now I use a mix of approx. 2/3 my allocation in SHY and the rest in my broker's generic FDIC insured cash account.  Since my PP is only ca. 40% of my assets I also have cash in my VP.  That part is roughly 1/4 in IBonds and not quite 3/4 in 5yr FDIC CDs and a pittance scattered about in various money market funds and FDIC insured accounts.
stuper1
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Re: Another 401k Question

Post by stuper1 » Sun Mar 10, 2013 6:57 pm

Sorry for the confusion.  For simplicity, let's say my total portfolio is $400k.  Here are the two alternatives:

1.  Put $60k of cash into the 401k stable-value fund.  The other $40k of cash will be in my taxable emergency fund.

2.  Put $60k into my 401k U.S. aggregate bond index fund (remember this is a mix of government and corporate bonds), which is an intermediate-term bond fund.  For PP purposes, I would treat this as $30k of cash and $30k of bonds.

Hope that clears it up.  Please let me know what any of you advise.  Thanks!
rhymenocerous
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Re: Another 401k Question

Post by rhymenocerous » Sun Mar 10, 2013 10:33 pm

stuper1 wrote: Sorry for the confusion.  For simplicity, let's say my total portfolio is $400k.  Here are the two alternatives:

1.  Put $60k of cash into the 401k stable-value fund.  The other $40k of cash will be in my taxable emergency fund.

2.  Put $60k into my 401k U.S. aggregate bond index fund (remember this is a mix of government and corporate bonds), which is an intermediate-term bond fund.  For PP purposes, I would treat this as $30k of cash and $30k of bonds.

Hope that clears it up.  Please let me know what any of you advise.  Thanks!
Option 1 is preferable.
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KevinW
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Re: Another 401k Question

Post by KevinW » Sun Mar 10, 2013 10:48 pm

rhymenocerous wrote: Option 1 is preferable.
+1
stuper1
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Re: Another 401k Question

Post by stuper1 » Mon Mar 11, 2013 9:17 pm

#1 sounds better to me too, but I backtested it from 1972 - 2010 with the RiskCog portfolio optimizer and #2 came out slightly better (this assumes that the stable-value fund acts just like T-bills, which probably isn't true).  #1 had an annual return of 9.37% with a worst year of -5.32%, and #2 had an annual return of 9.50% with a worst year of -4.93%.

I know backtesting doesn't predict the future, and these results are pretty close, so I guess either one will work.

What I didn't mention is that #2 has an expense ratio of about 1/2 of #1, so I think I'll go with #2.
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