Seeking advice: Do I have the wrong approach in my attempt at the PP in my 401k?

[samuraidog]

All,

I’m fairly new to the Permanent Portfolio and I’d like to get some opinions on whether I’m going about it the wrong way. My employer’s 401k plan is with Vanguard. This entire discussion relates to my 401k, as I have no other investment funds (other than 6-months worth of emergency savings).

My situation is as follows.
Age: 43
Current 401k balance: $230k
Monthly contribution: About $1,500
Previous 401k holding: 100% in Target Retirement 2035 (VTTHX)
Started PP on Jan. 1, 2013 with a balance of $236k
Position as of 1/1/2013 (obviously, percentages have changed since then):

  25% in Vanguard Institutional Index Fund (VINIX) -- 0.04% expense ratio
  25% in Vanguard Retirement Savings Trust II -- 0.31% expense ratio
  25% in PIMCO Total Return Fund Institutional Class (PTTRX) – 0.46% expense ratio
  25% in brokerage option for gold ETF (SGOL)

My balance has dropped about $6k, even though I’ve contributed around $9k so far this year. I know that others using the PP have also taken a beating this year, so I'm not entirely discouraged. However, I’m wondering if I’m going about it the wrong way and whether I’m positioned for long term success with this portfolio (assuming the track record of the PP holds true).

Bottom line, I guess the questions I have are…

1) Is my 401k portfolio consistent with the Permanent Portfolio?

2) Is it even a good idea to attempt the Permanent Portfolio with one’s 401k? Or, is the PP a better strategy for funds outside of one’s 401k? In other words, if you were me, would you give up on the idea of the PP in your 401k?

Thank you in advance for your help.

P.S.
I realize that I am leaving out some information that may be important, e.g. the other Vanguard offerings in my company’s 401k plan, but I’d like to keep it short, as I wouldn’t want to discourage anyone from reading the thread because it is too long. I can provide more details if necessary.

[Pointedstick]

Welcome!

It looks to me that you basically have a portfolio that's 25% stocks, 25% gold, and 50% cash-ish-short-term-bond-ish-income-producing-ish funds.

Some here say that it can work to smush cash and long bonds together into something with an intermediate duration--say, 13-15 years--and it looks like that's sort of what you've done, but I worry that the effective duration of your cash/bond half is high enough. PTTRX's average duration is 5.16 years, which is not nearly enough to assure you any reasonable degree of deflation protection. That Vanguard Retirement Savings Trust II fund also scares me. Nearly 2% return for a money-market-type fund? I wonder where they're getting all that yield from. Perhaps this sheds some light on it (from their promotional material):

"Invests largely in investment contracts backed by high-quality, shorter-term securities."

"Underlying investments can carry more risks than securities in a typical money market fund."

Sounds like the kind of thing that could blow up in a 2008-like financial crisis.

If you can put more in your brokerage, why not use PTTRX as your cash and swap out the Vanguard fund for some Treasury bonds or TLT or something? The recent spike in yield makes this a great time to make such a move, should you have the opportunity to do so.

[AdamA]

Bottom line up front, what you have in your 401k is very good. 

You have a decent mix of stocks, bonds and precious metals. 

I agree with what Pointedstick said above, and would also add that your bond funds (although okay if they are the best you can do) aren't really appropriate for the PP. 

You really want to own US Treasury Bonds and Bills (for the bond and cash portion of your PP), if you can.

Since it seems you have access to a brokerage window, why not use the ETFs TLT and SHV?

Having said that, I'd reiterate that any reasonable mix of stocks, bonds, and precious metals is probably going to do fine in the long run.  Just make sure that you're comfortable with the changes you've made.  You might want to read Craig's bond and cash FAQs.

https://web.archive.org/web/20160324133 ... ation-faq/

http://gyroscopicinvesting.com/forum/cash/cash-faq/

To answer your specific questions:

1) Is my 401k portfolio consistent with the Permanent Portfolio?

It is not consistent with the PP because of the bond/cash funds you're using.  However, it is consistent with the spirit of the PP because it is a well diversified mix of stocks, bonds and gold all held in low expense funds.

2) Is it even a good idea to attempt the Permanent Portfolio with one’s 401k? Or, is the PP a better strategy for funds outside of one’s 401k? In other words, if you were me, would you give up on the idea of the PP in your 401k?

I think it's a great to implement a PP within your 401k. 

You should also realize, though, that you don't have to limit the PP to your 401k.  I have a 401k, a Roth, and some taxable accounts and I mix them all together, trying to keep the more tax friendly investments in taxable accounts and things like long term bonds in tax protected accounts. 

Again, even if you stick with what you have, I think you'll do fine, as long as you realize that it will vary from the PP at times.  Also, you have to stick to it...ie, don't monkey around with it every time you get worried because it takes a loss (this holds true for any investment strategy, but I mention it to you b/c your setup is a little different that what others here have, so you may feel "wrong and alone" at times, which can be psychologically difficult). 

[KevinW]

IMO, your:

- stocks are great.

- gold is great, but consider diversifying into some physical gold.

- cash is acceptable but could be better. You appear to have a stable value fund which carries some credit risk. I think a Treasury bill money market is best for PP cash. Do you have access to a cash fund which is all T-bills, or mostly T-bills?

- bonds need work. You want to hold only long term Treasury bonds, but PTTRX is an intermediate-term fund, holds a lot of non-Treasury bonds, is actively managed, and has a moderately high expense ratio. Can you buy individual Treasury bonds or TLT through your brokerage option? If not do you have access to VUSTX?

[samuraidog]

Guys,

Thank you very much for your help.

I am able to do a further brokerage option, as you guys have recommended. Unfortunately, I don't think there is any way for me to get exposure to physical gold with my 401k plan (KevinW's recommendation) and I have no way to safely store it anyway.

I'm glad you've given the green light for Permanent Portfolio in 401k, as I've read in some threads that some posters recommend against it since it can be tricky. 

Just to clarify (please correct me if I'm mistaken)...Based on your recommendations, I will implement the following.

  Stocks (no change): 25% in Vanguard Institutional Index Fund (VINIX) -- 0.04% expense ratio (sounds like you guys like this fund)
  Gold (no change): 25% in brokerage option for gold ETF (SGOL)
  Cash (change): 25% in iShares Barclays Short Treasury Bond Fnd (SHV) via brokerage -- low expense ratio at 0.14%
  Bonds (change): 25% in iShares Barclays 20+ Yr Treas.Bond ETF (TLT) via brokerage -- seems like a low expense ratio at 0.15%

I really like too that the expense ratios are even lower than what I currently have.

Since inception, my VINIX balance is now 29% vs. SGOL at 18%. Since I am changing funds around now, should I rebalance everything to 25%, or just leave those balances alone until Jan. 1, 2014 (my one-year anniversary)? 

[l82start]

i think the recommendation to diversify into physical is generally meant to mean, find some outside the 401k funds to buy coin to hold "in hand" this will also allow more room for the other three assets inside the 401k..  this may not always be possible depending on how you budget or save money, but having some coins to take out boating  is always a good idea if you can manage it

[rhymenocerous]

I think the Vanguard Retirement Savings Trust II is good enough.  I'd only change the Pimco fund to TLT.

[KevinW]

i think the recommendation to diversify into physical is generally meant to mean, find some outside the 401k funds to buy coin to hold "in hand" this will also allow more room for the other three assets inside the 401k.

Yes, I was suggesting buying some physical coins directly and storing them yourself.

Your new implementation looks great.

  Cash (change): 25% in iShares Barclays Short Treasury Bond Fnd (SHV) via brokerage -- low expense ratio at 0.14%

SHV is good, but if I were you I'd use BIL instead. That way you are diversified across a different fund sponsor for each asset. SHV and IAU are both sponsored by iShares. This is a minor splitting-hairs sort of thing.

Since I am changing funds around now, should I rebalance everything to 25%, or just leave those balances alone until Jan. 1, 2014 (my one-year anniversary)? 

IMO it doesn't really matter. Personally I follow the rebalancing bands strictly, so I would just leave the 29% stock where it is since it's inside the 15/35 bands. Likewise if your SGOL position is still within 15/35% I'd leave it alone and save yourself a trade commission. Since you're rebuying all of your cash and bond holdings anyway I'd rebalance them to roughly equal proportions.

[rhymenocerous]

I wanted to add that you need to pay attention to fees with these brokerage options.  Are you being charged for every trade?  If so, I would consider not using the brokerage option, or saving up in the regular 401k and then transferring to the brokerage funds maybe once or twice a year.

[samuraidog]

This looks great.  Other options you might consider:

SHY instead of SHV (SHY is a 1-3 year duration, vs. SHV which is less than one year)
GTU instead of SGOL (GTU is currently available at a 6% discount)
Buy 30 year treasuries within your 401k if you can.

My reason for using SGOL....

I like reading Marc Faber's blog, and he is against holding any U.S. gold, as he warns investors that the U.S. govt could confiscate gold as was done in the 1930's. He recommends SGOL or AGOL.

If the collective braintrust here believes I'd be better served using GTU instead of SGOL, I'll go for it.

Thanks.

[samuraidog]

I wanted to add that you need to pay attention to fees with these brokerage options.  Are you being charged for every trade?  If so, I would consider not using the brokerage option, or saving up in the regular 401k and then transferring to the brokerage funds maybe once or twice a year.

Brokerage option fees in my 401k plan are $7 per transaction.

[samuraidog]

This is from the website in my Vanguard plan. Does this change anyone's mind about which ETFs I should go for?

No commissions

Buy and sell Vanguard ETFs commission-free* in a Vanguard Brokerage Account, giving you even more value for your investment.
Low expenses

Pay almost 75% less for Vanguard ETFs than you'd pay for other ETFs.**

* Trading limits, fund expenses, and minimum investments may apply. See the Vanguard Brokerage Services commission and fee schedules for full details.

** Vanguard average ETF expense ratio: 0.15%. Industry average ETF expense ratio: 0.58%. Sources: Vanguard and Lipper Inc. as of December 31, 2012.

[rocketdog]

GTU instead of SGOL (GTU is currently available at a 6% discount)

OK, dumb question:  how did you determine that GTU is available at a 6% discount? 

[rhymenocerous]

GTU instead of SGOL (GTU is currently available at a 6% discount)

OK, dumb question:  how did you determine that GTU is available at a 6% discount?

It's updated daily on their website here:

http://www.gold-trust.com/asset_value.htm

[samuraidog]

Per my 401k plan, since Vanguard ETF commissions are free, and non-Vanguard ETFs are $7 per trade, would it be better to go with the following?

  Stocks (no change): 25% in Vanguard Institutional Index Fund (VINIX) -- 0.04% expense ratio (sounds like you guys like this fund)
  Gold (no change): 25% in brokerage option for gold ETF (SGOL) (I can't find an equivalent Vanguard ETF for gold)
  Cash (change): 25% in Vanguard Short-Term Govmt Bond ETF (VGSH) via brokerage -- 0.12% expense ratio
  Bonds (change): 25% in Vanguard Long-Term Govmt Bond ETF (VGLT) via brokerage -- 0.12% expense ratio

I'm not even sure that VGSH and VGLT are equivalent to the SHV and TLT that you guys recommended.

Given fees, commissions, etc. I'd just like to pick the right funds for my situation and not have any regrets.

[rhymenocerous]

I'm not even sure that VGSH and VGLT are equivalent to the SHV and TLT that you guys recommended.

Take a look at the portfolio holdings for VGLT on VG's website:

https://personal.vanguard.com/us/FundsA ... bleIndex=0

This fund mostly holds long-term treasuries, but there's also:
Federal National Mortgage Assn.
Tennessee Valley Authority
Federal Home Loan Mortgage Corp.
Federal Home Loan Banks
Israel Government AID Bond
Private Export Funding Corp.

If you graph a chart with TLT, they move pretty closely though:
https://www.google.com/finance?chdnp=1& ... EJS80QHnDA

I wouldn't get too complicated with the cash since it's essentially earning 0% right now.  I think you'd be fine to stick with the VG Retirement Trust.  I wouldn't pay any fees to hold a different cash fund.

[AdamA]

Stocks (no change): 25% in Vanguard Institutional Index Fund (VINIX) -- 0.04% expense ratio (sounds like you guys like this fund)

Gold (no change): 25% in brokerage option for gold ETF (SGOL)

Cash (change): 25% in iShares Barclays Short Treasury Bond Fnd (SHV) via brokerage -- low expense ratio at 0.14%

Bonds (change): 25% in iShares Barclays 20+ Yr Treas.Bond ETF (TLT) via brokerage -- seems like a low expense ratio at 0.15%

Exactly.

This is from the website in my Vanguard plan. Does this change anyone's mind about which ETFs I should go for?

No commissions

Buy and sell Vanguard ETFs commission-free* in a Vanguard Brokerage Account, giving you even more value for your investment.
Low expenses

Pay almost 75% less for Vanguard ETFs than you'd pay for other ETFs.**

* Trading limits, fund expenses, and minimum investments may apply. See the Vanguard Brokerage Services commission and fee schedules for full details.

** Vanguard average ETF expense ratio: 0.15%. Industry average ETF expense ratio: 0.58%. Sources: Vanguard and Lipper Inc. as of December 31, 2012.

The funds you mentioned (VINIX, SGOL, SHV and TLT) are perfect for the PP. 

Since you are contributing $1500 a month, you're going to need somewhere to put that put that money, and you're not going to want to pay a commission to buy SHV b/c that would obviously add up quickly. 

You could just add cash to Vanguard's money market fund and then periodically (every year or so) rebalance into the other funds. 

If you really don't want to deal with commissions, then there are some ETF's and mutual funds that Vanguard offers that are decent substitutes.

Vanguard Long Term Government Bond ETF (VGLT) mirrors TLT pretty closely, but holds bonds with maturities of over 10 years (vs 20 for TLT), so is a little less volatile. 

Vanguard Extended Duration ETF (EDV) uses 20-30 year zero coupon treasury bonds which are even more volatile than normal 30 year US treasuries. 



I think on another thread a few years back we discussed splitting bond holdings between VGLT and EDV as an option as well. 

For cash you could use Vanguard's short term treasury fund (VFISX).  Just keep in mind that the fund manager is only required to keep 80% of the money in short term US treasuries, meaning they may occasionally invest in other types of short term government-like bonds (usually to try to reach for a little bit of yield). 

There's nothing wrong with letting it pile up in Vanguard's prime money market fund either.  I just wouldn't want more than 10% or so of my cash there and would probably move it to VFISX or SHV when it got to be that much.

You could see if the 401k brokerage window gives you access to the fixed income (bond) desk.  If it does, you could just buy the bonds/t-bills directly, which is very very very easy once you know how. 

http://gyroscopicinvesting.com/forum/bo ... -tutorial/

Most of the above are just small details.  Any combination of these funds should work fine.  At this point, your goal is just to minimize taxes and fees without taking any unnecessary risks.

[samuraidog]

Ok. Maybe I'm over-thinking it. The advice you guys are giving with the Vanguard funds is starting to go over my head. I don't want things to get complicated, so I'll just go back to the original plan of going with:

  Stocks (no change): 25% in Vanguard Institutional Index Fund (VINIX) -- 0.04% expense ratio (sounds like you guys like this fund)
  Gold (no change): 25% in brokerage option for gold ETF (SGOL)
  Cash (change): 25% in iShares Barclays Short Treasury Bond Fnd (SHV) via brokerage -- low expense ratio at 0.14%
  Bonds (change): 25% in iShares Barclays 20+ Yr Treas.Bond ETF (TLT) via brokerage -- seems like a low expense ratio at 0.15%

Up to now, for my brokerage option, I've been stashing it in Vanguard LifeStyle Option A - Conservative (one of the plans in my 401k) and transferring it over to SGOL every 3 months. I think I'll just do this for SHV and TLT as well.

Thanks to all for the advice. 

[AdamA]

Ok. Maybe I'm over-thinking it. The advice you guys are giving with the Vanguard funds is starting to go over my head. I don't want things to get complicated...

Sorry for that.

Your plan (VINIX, SGOL, TLT and SHV), is great.

The other stuff we were talking about (VGLT, EDV, etc) are just some other options to help reduce fees and add a little bit of additional security.

[samuraidog]

Ok. Maybe I'm over-thinking it. The advice you guys are giving with the Vanguard funds is starting to go over my head. I don't want things to get complicated...

Sorry for that.

Your plan (VINIX, SGOL, TLT and SHV), is great.

The other stuff we were talking about (VGLT, EDV, etc) are just some other options to help reduce fees and add a little bit of additional security.

No need to apologize. I really appreciate the help, even if the complexity of it makes my brain hurt.

I'm curious. If I may ask....What do you mean by adding a little bit of additional security?

[AdamA]

I'm curious. If I may ask....What do you mean by adding a little bit of additional security?

Mostly I'm talking about physical gold ownership.  If there's some kind of problem with your broker or
the bank issuing the ETF, then you and your investments can take a hit.  Physical gold ownership
offers some insurance against this counterparty risk. 

Some people also think it's better to hold Treasuries (bonds and bills) directly than within a fund b/c this
removes one more person (your broker) who can cause problems for you. 

Also, I misread one of your previous posts.

VINIX, VGLT, VGSH and SGOL are fine options, especially if they'll save you commission fees.

If you want to keep it simple, just leave it at that. 

I personally would probably do this:  VINIX, VGLT/EDV, VGSH, SGOL

I would then try to buy a few gold coins outside of the 401k.

[samuraidog]

I'm curious. If I may ask....What do you mean by adding a little bit of additional security?

Mostly I'm talking about physical gold ownership.  If there's some kind of problem with your broker or
the bank issuing the ETF, then you and your investments can take a hit.  Physical gold ownership
offers some insurance against this counterparty risk. 

Some people also think it's better to hold Treasuries (bonds and bills) directly than within a fund b/c this
removes one more person (your broker) who can cause problems for you. 

Also, I misread one of your previous posts.

VINIX, VGLT, VGSH and SGOL are fine options, especially if they'll save you commission fees.

If you want to keep it simple, just leave it at that. 

I personally would probably do this:  VINIX, VGLT/EDV, VGSH, SGOL

I would then try to buy a few gold coins outside of the 401k.

Thanks. Maybe I will go with VINIX, VGLT, VGSH, and SGOL (or GTU). Seems like GTU is gaining popularity around here.

I love the idea of owning some physical gold, but it would make me incredibly nervous. I don't have anywhere safe to store it and I'd be constantly paranoid about someone finding out about it/stealing it. Right now, any extra savings goes straight towards principal paydown on the mortgage, so the physical gold thing will have to wait for now.