New poster with a couple of questions

[clacy]

Hi everyone,

I have been reading this forum for the past few days and appreciate the venue as well as the wealth of info from others that have found the PP to be valuable.

Here are a couple of questions that I've been thinking through recently and haven't found answered yet.  A little about me....

I use 3 different investing/trading techniques in my tax advantaged IRA accounts.  About 1/3rd of my money is allocated to the PP with a couple of minor tweaks.  For another 1/3rd I use a similar timing and allocation technique to the one that Mebane Faber advocates. The remaining portion is allocated to a relative strength system using ETF's, which has higher returns, but higher volatility as well, and not a long history of backtested or real results for me.  I consider the PP the safest portion of my assets.

My questions are:

1. I am going to be adding a taxable account where 100% of that money will be allocated to PP.  Should run this completely independent from my tax advantaged account, or lump the allocations together?  I suppose there might be a smarter way to do this, than to separate because of the tax implications of the two types of accounts.  If I should "lump" them together, what type of assets should be held first in my taxable account vs the IRA?

2. I have cash in savings that I will be using to put into my and my wife's IRA's in 2011, so my thought is to consider that money as part of my cash portion of the PP.  Does that sound reasonable?

3. I've read that PRPFX fund is better suited for taxable accounts.  Would this be a better approach for my taxable account that I'm going to be creating soon, or would you guys rather DIY?  (I haven't read through the PRPFX board yet but will look to it for further advice)

Thanks in advance and I look forward to being a part of this board!

[Lone Wolf]

Welcome to the forum!

1. I am going to be adding a taxable account where 100% of that money will be allocated to PP.  Should run this completely independent from my tax advantaged account, or lump the allocations together?  I suppose there might be a smarter way to do this, than to separate because of the tax implications of the two types of accounts.  If I should "lump" them together, what type of assets should be held first in my taxable account vs the IRA?

While holding all of the PP in taxable accounts will work, you gain a big advantage if you place certain assets in your tax-deferred accounts.

First, I would do everything you can to hold all of your long-term bonds in a tax-deferred account.  These hack up lots of interest income that it'd be best to defer.  Really try to keep these in your retirement accounts.

After that, the general advice is to prefer cash, then stocks, then gold last for your tax-deferred accounts.  In this low interest rate environment, your choices here aren't likely to matter quite as much as they will if interest rates climb higher (and cash starts throwing off a lot of income.)  On the other hand, it's impractical (IMO) to have too much cash locked in a retirement account versus being available to provide you real-world liquidity.

The one additional thing that I do is hold some shares of a gold ETF in a tax-advantaged account so that if I am forced to sell gold as part of a rebalance I can try to avoid paying the 28% collectibles tax on any gains that I make (and am unable to defray with any capital losses that I've carried with me.)  This trick was suggested to me courtesy of our very own MediumTex.

2. I have cash in savings that I will be using to put into my and my wife's IRA's in 2011, so my thought is to consider that money as part of my cash portion of the PP.  Does that sound reasonable?

Cash in an FDIC-insured savings account doesn't meet the "pure" PP definition of cash but many of us count our cash in savings accounts or HSAs as PP "cash" so long as it is not too large a percentage of our holdings.  If I were you, I'd call this cash for rebalance purposes, especially since you're going to be filtering this into IRAs over time.

3. I've read that PRPFX fund is better suited for taxable accounts.  Would this be a better approach for my taxable account that I'm going to be creating soon, or would you guys rather DIY?  (I haven't read through the PRPFX board yet but will look to it for further advice)

I don't personally use PRPFX, as I prefer to DIY.  PRPFX's expense ratios are a bit much for me and the 4x25 is a pretty easy allocation to run on your own.  However, it's a nice fund and I'm sure someone who uses it can give you some more insight.

[chrikenn]

3. I've read that PRPFX fund is better suited for taxable accounts.  Would this be a better approach for my taxable account that I'm going to be creating soon, or would you guys rather DIY?  (I haven't read through the PRPFX board yet but will look to it for further advice)

PRPFX is probably not a "better approach" for a taxable account.  See this thread: http://gyroscopicinvesting.com/forum/in ... opic=622.0.

PRPFX is more tax efficient, but overall it is far less cost efficient, in total.

That being said, PRPFX has the advantage of being as simple as it gets.  You put your money in there and you never have to worry about it.  Also, the holdings of PRPFX are not equivalent to a typical 4x25.  PRPFX has some silver, Swiss Franc assets, and fewer long-term treasuries.  So if you really want extreme simplicity and are comfortable with the slightly different holdings of PRPFX, then it may be right for you.

But its tax efficiency is decidedly not a reason to get it.

[chrikenn]

By the way, I would add that since you do have a chunk of tax-deferred space allocated to the PP, I would not view the taxable account as a separate PP.  I would view it + your tax-deferred PP as your "single" PP chunk.  This way, you could put the less tax efficient holdings (namely, long-term bonds) in the tax-deferred space of your PP, and hold the more tax-efficient assets in the taxable space of your PP.

To me, this seems like the overall most cost-efficient solution.

[clacy]

Thanks guys.  I appreciate the helpful posts.

[Lone Wolf]

Just to add to chrikenn's very good analysis on tax-friendliness versus expenses, check out MediumTex's thread on creating a Permanent Portfolio with expenses of only 2 basis points (yes, that .02%!) to see how just how far you can drive down the expenses involved in a 4x25 allocation.  If you do that and keep the tax-unfriendliest entities in your tax-deferred accounts, you are really cooking with gas.

[moda0306]

I think in low interest rate environments it's worth pondering where you want your cash to be.  The first reason to keep cash in taxable accounts is that I-bonds are extremely safe tax-deferred options that tend to pay higher than 1-3 year treasuries.  The second is that Ally 5 year CD's (w/ 60-day interest penalties) are paying 2.4% interest now, and I don't think that can be accessed by your tax-deferred account.  With rates so low, if one were to have all their cash in taxable accounts and all their stocks in tax-deferred, once rates rise (if they do), you could easily sell the stocks in your IRA, and switch it to cash, and at that point invest your taxable account in stocks.

Usually, I hate the idea of taxable interest hitting my 1040, but when rates are this low I think the usual (keep cash in the IRA) rule doesn' necessarily apply.

Last but not least, I think the nature of cash and the reason you're even holding it in the first place lends itself to not being trapped in an IRA.  Cash is your recession asset... your "dry powder"... your "cushion"... your one asset that you DON'T want going down, even if it's just for 1 year.  To me, if you have that kind of asset sitting in an IRA (or all of it anyway), it's a bit of a waste of the natural strengths of that asset.  Cash would probably tend to be the asset you want to dip into in case of a financial emergency or unemployment.  Keep these things in mind when doing tax planning.  Just like gold.  Gold may usually serve the purpose as just a good rebalancer or hedge against inflation, uncertainty and failing institutions, but you want it to actually be there for its core purpose.  You don't want your entire gold portion sitting in an ETF in your IRA.  It's just very frictional to its intended purpose.  You know what they say about a bird in the hand... I know some people disagree, but that's my 2 cents..

[upside]

What's up Clive!

[AdamA]

That being said, PRPFX has the advantage of being as simple as it gets. 

I think PRPFX is best used in 2 circumstances:

1.  Investment advice to an investment naive friend (I don't usually give investment advice to friends, but if I did I would recommend PRPFX).

2.  To earmark funds for a dependent.  Psychologically, this is easier for me than pulling money out of my own PP.