Gyroscopic Investing

Hi tdepaula!

There is a lot of advice on this thread (and in this forum in general) about keeping a separate PP in each separate account, with the aim of simplifying rebalancing.  In your case, I don't think that's necessary.  Correct me if I am wrong, but you will have a regular taxable brokerage account with $44,000 in it and a nontaxable individual 401k with $3,600.  So a total PP value of $47,600.  Split four ways, that's $11,900 per asset class.  I suggest keeping just one asset class, perhaps the most taxable (gold ETF?), in your individual 401k.  But for simplicity, let's consider your current situation with a stock index in that account ($3,600).  That leaves $8,300 for stocks in your regular account.  So, a split of about 30% stocks in the 401k and 70% in the taxable account.  (Each of the other three assets is $11,900 in the taxable.)  Why do I suggest this approach?  Assuming 35/15 rebalancing bands, even if you have to rebalance three times in a row out of stocks you won't have to touch the 401k.  And with rebalacing occurring these days about once every three or four years, that means it would be maybe a decade before you would need to sell anything in the 401k — if ever.  (Has there ever been an instance of four consecutive rebalances out of a single asset?)

Here's my logic:  Starting from a balanced PP, assume stocks go up to 35% of the portfolio; you sell 10/35 (28.6%) of your shares to get back to 25%.  In your current case, 28.6% of $11,900 would be $3,400, which you could take from your taxable account ($8,300) without having to touch the 401k.  After the next rise in stocks, you would again sell 28.6% of your shares; each time you retain 71.4% of your shares (100 – 28.6%), so two rebalances would mean retaining 51.0% (0.714^2) of your initial shares, and three would mean retaining 36.4% (0.714^3).  Because you began with 30% of your shares in the 401k, you have enough shares in the taxable account to do all your rebalancing there.

I believe this approach is simpler than having a separate PP in each account.  I'm going to go out on a limb and make the following rule:  If an account contains less than 9.1% (36.4% of initial 25% holding) of the total value of your PP, then you can put just one asset in it and never have to worry about touching it until it's time for an extremely rare fourth consecutive rebalance out of that asset.  This 9.1% rule (actually, 9.11%, so let's call it the "9/11 rule") can apply to four different sub-accounts: one each dedicated to gold, stocks, bonds, and cash.  The remaining 63.6% can be in a single account used for all rebalancing.

My apologies if the numbers are confusing — lots of percentages of percentages!

Pet Hog wrote: If an account contains less than 9.1% (36.4% of initial 25% holding) of the total value of your PP, then you can put just one asset in it and never have to worry about touching it until it's time for an extremely rare fourth consecutive rebalance out of that asset.  This 9.1% rule (actually, 9.11%, so let's call it the "9/11 rule") can apply to four different sub-accounts: one each dedicated to gold, stocks, bonds, and cash.  The remaining 63.6% can be in a single account used for all rebalancing.

My apologies if the numbers are confusing — lots of percentages of percentages!

Peter, I will have to reread your post again to make sure I'm getting the exact logic of it.  But in general terms, this seems like an attractive set up for me due to the ease of it and the fact I wouldn't have to start multiple funds within my retirement account. And for the record,  you do have the numbers right (44k in brokerage account and 3.6k in a retirement account).  A question that comes up if I were to follow this set up is if the approach would work as I contribute more money to these accounts on a monthly/yearly basis, and how that would affect my percentages.  But this question is related to how I'm gonna deal with contributions in general, another question that I have to figure out in regards to setting up my PP.

Thanks again! This has given me food for thought as to a different way to split up my PP over retirement/non-retirement accounts.

goodasgold wrote:

stuper1 wrote:
Regarding insuring physical gold, be aware that there is a specialized insurance company that offers much better rates than your standard insurance companies.  They are mentioned in some older threads on this board, or maybe someone will remember the name.

The specialized insurance company is Hugh Wood Inc. (tel. 212-509-3777).

Great, will look into this going forward.  Thanks for the tip.

tdepaula wrote: So, your suggestion here in terms of setting up my PP would be to to keep a PP portfolio set up within my retirement account and a different PP portfolio in my brokerage account, is that correct?  I'm all for simplicity and ease in terms of rebalancing.

Not different, they should all be the same 25%x4 -- within the limitations of each account.  But I think PetHog's method is very sensible too if some of the accounts are small.  Best to minimize transanction costs as much as possible.

MachineGhost wrote: Would you recommend that I hold my treasuries straight from Treasury Direct as opposed to Fidelity, which I saw on a different post, offered the possibility of holding the treasuries is a free and easy manner?

I think eliminating counterparty risk as much as you can is a prudent thing to do.  Especially in a crisis.  Imagine if an EMP attack were to be detonated by terrorists.  Do you trust Fidelity to have been fully prepared or the U.S. Treasury?  Who has more of a vested interest in surviving?  Politicans and bureaucrats are like cockroaches.

tdepaula wrote: Dear Barret, thank you for your asnwer.  I'm indeed self-employed.  All my income comes to me via my LLC.  I have thought about setting up a Roth Individual 401K but in doing the math, it seemed to me that it would be more beneficial for me to benefit from tax write offs now that my wife and I are on a higher income bracket than later, in retirement, when we will likely be on a lower one and will pay our taxes upon our distributions based on our tax bracket then.  Does that make sense?  This is why I opted to set up a regular Individual 401K instead of a Roth now.

Yes, that makes sense. It's what I did for many years. It just made a lot of sense for me to get the tax breaks up front. Now that my income is less and I have some liquidity to work with, most years it makes more sense to funnel money into the Roth accounts. Because the limits are high on the individual 401(k) Roth, you can sock away a decent amount even in 5-10 years. My own thought process in retirement is to withdraw first from taxable, then from regular IRAs and finally (if/when I take social security) from Roth accounts. Because the Roth money will have longer to grow, those accounts don't need to be funded as heavily (at least that is what I tell myself!). Again, I just think that having all three gives you more options but you are still young and have time to hopefully build all three. Good luck with all this!