Things about the PP that do not make sense to me

[FF9000]

Another question - I understand that a large part of the reason that HB recommends 25% in cash/T-bills is in case of deflation. Fair point. However, I understand that another reason he believes in 25% cash is that it can represent an "emergency fund".

I personally do not subscribe to the need for an emergency fund as I am employed and have very marketable skills that make me as confident as anybody that in case I lost my job, I would not be unemployed for long. I also do not have a family and have no dependents, and am healthy with good health insurance. Moreover, I have a strong social safety net with family that could support me for a bit in the case that somehow, despite all of the above, I completely ran out of money. Which won't happen.

Point being, I do not believe in keeping more than $15-20K in cash, ever, for emergency fund purposes given my specific situation. Now, I am pretty sure I know the answer will be "keep 25% in cash anyway", but I wanted to ask the peanut gallery whether this fact should in any way influence the cash holdings %.

I know the party line is 25/25/25/25, but I am looking for some contrarian/thoughtful opinions. Thanks again!

[goodasgold]

Point being, I do not believe in keeping more than $15-20K in cash, ever, for emergency fund purposes given my specific situation...., but I want... to ask the peanut gallery whether this fact should in any way influence the cash holdings %.

I know the party line is 25/25/25/25, but I am looking for some contrarian/thoughtful opinions. Thanks again!

It is great that you can soon find another job. But what if circumstances change? What if something unexpected happens, such as a horrendous car crash, which leaves you unable to work? This can happen in a fraction of a second, changing your life forever.

This is just one scenario pointing out why St. Harry B's wisdom is still sound with regard to emergency cash.

[iwealth]

I personally do not subscribe to the need for an emergency fund as I am employed and have very marketable skills that make me as confident as anybody that in case I lost my job, I would not be unemployed for long. I also do not have a family and have no dependents, and am healthy with good health insurance. Moreover, I have a strong social safety net with family that could support me for a bit in the case that somehow, despite all of the above, I completely ran out of money. Which won't happen.

Falling back on a strong social safety net because you didn't put aside enough of an emergency fund is pretty much the equivalent of putting aside someone else's cash as your emergency fund.

[FF9000]

Interesting hypothetical, but at the end of the day, if I am in a horrendous car crash that changes my life forever, 25/25/25/25 vs. 35/25/10/25 will be the least of my worries. I am trying to focus on non-doomsday scenarios. I am quite risk-averse, but not so risk-averse that I am willing to financially optimize for a personal catastrophe situation - which, even if it happened, would not be improved substantially by an extra few % in cash. I am trying to maximize my ability to hit my targets in a 5th or 10th percentile "really bad luck" scenario, not a .0001% scenario. Because if I was, I would be 100% in TIPS and not considering early financial independence.

Falling back on a strong social safety net because you didn't put aside enough of an emergency fund is pretty much the equivalent of putting aside someone else's cash as your emergency fund.

My point was, I am as "insured" as I need to be. I foresee a <1% chance of needing to tap my social safety net, it's not really part of the conversation. I certainly do not expect it.

I think that at times people tend to be way too conservative. As mentioned above, if you really want to be bullet-proof for a "worst possible case" scenario, you should dedicate your life to building a bomb shelter with 10 years of food preserves, in multiple countries to avoid government risk, work until you are 75, and never invest in equities.

There is a line that needs to be drawn between "conservative/risk-averse" and "unwilling to accept any risk whatsoever at any point."

[Xan]

The other thing about cash is that it's the way to benefit immediately from interest rate increases. Yes, in this 0% world, it seems like cash is "parked" and useless. But that won't last forever. Historically, 100% cash actually hasn't had such a bad return. It's also the only part of the portfolio you can actually use to buy groceries.

[stuper1]

Try your model with 1/3 in each of stocks, long bonds, and gold. You'll probably like what you see. Although keeping some percentage in cash, maybe 10%, can help with rebalancing. Unfortunately this approach will give you a longer duration in bonds/cash which won't be pretty when rates rise.

[FF9000]

Great points, guys. I admit I forgot about the LTT + Cash = ITT duration match but with incremental benefits in different economic scenarios.

[Xan]

All that said, for my PP that's in my traditional IRA (I have a PP in each different tax treatment, at least at the moment), I'm 33/33/33/0, with no cash. But that's money that won't be touched for decades.

[iwealth]

Great points, guys. I admit I forgot about the LTT + Cash = ITT duration match but with incremental benefits in different economic scenarios.

Also, consider your max drawdown tolerance. Some people are more inclined than others to do unwise things once portfolio values fall a certain amount. It's hard to know though until you've experienced some pain.

[ochotona]

Or try 25% stocks, 25% gold, and 50% 10 year Treasury bonds. It's actually better performing than the PP... but you can never buy anything. Waffle House doesn't take 10-Ts

[buddtholomew]

Or try 25% stocks, 25% cash, and 50% 10 year Treasury bonds. It's actually better performing than the PP... but you can never buy anything. Waffle House doesn't take 10-Ts

I think you mean 25% stocks and 25% gold with the balance in ITT's.

I like cash and low volatility, so choose to hold a total of 40% in savings accounts and CD's when including emergency funds in the calculation.

[MachineGhost]

Or try 25% stocks, 25% gold, and 50% 10 year Treasury bonds. It's actually better performing than the PP... but you can never buy anything. Waffle House doesn't take 10-Ts

Depends on your definition of "better performing". It makes slightly less CAGR but also slightly less MaxDD.

[KevinW]

The cash component:
- Retains value during tight-money recessions, so that you can "buy low" on stocks, or even consumer purchases such as real estate and cars.
- Prevents you from "selling low" on other assets when you withdraw from the portfolio (as Sophie has analyzed).
- Performs well when interest rates rise quickly (as Xan pointed out). Cash drove a lot of PP returns during the inflationary 1980s.
- Makes moving money in or out of the portfolio tax-free and convenient.
- Reduces the volatility of the overall portfolio.

Yes, it can also function in place of an emergency fund, which is a happy side effect. But PP cash wasn't designed to be an emergency fund. It was designed to do the items listed above, as part of a cohesive whole.

[mukramesh]

Answers to many of these questions used to be listed in the full Cash FAQ on crawlingroad.com, but it seems like all of that material has been removed. The best way to get get the details on the Permanent Portfolio is probably by reading Craig and MediumTex's book.
https://www.amazon.com/Permanent-Portfo ... 1118288254

Additionally you should play with the backtester and calculators on Tyler's. Provides lots of good information.
http://www.portfoliocharts.com

[Xan]

I didn't find a Cash FAQ, but did find pages tagged "cash". It wasn't much. But maybe somebody else can find more.

https://web.archive.org/web/20140425133 ... /tag/cash/

[KevinW]

I believe the Cash FAQ sticky thread on this forum has essentially the same contents as the Crawling Road blog post:
http://www.gyroscopicinvesting.com/foru ... p?f=4&t=17

[sophie]

There was a great discussion in another thread about the impact of the emergency fund on different portfolios.

Basically, a portfolio that excludes cash requires the investor to hold cash as an emergency fund. If you consider the e-fund to be part of the portfolio, then the portfolio does in fact include a large slice of cash. It's great that the PP incorporates the e-fund right into the asset allocation - a brilliant move on Harry Browne's part. It's also important to note that cash has not always been the lowest yielding asset. In years past, cash has sometimes been the biggest gainer, and as Harry Browne once noted, a portfolio of 100% T bills over the past 30 years would actually have produced a better CAGR than what most investors playing randomly with stocks manage to achieve. For that reason, he recommended that for people who can't cope with managing a PP.

If you have a retirement account with access to gold that you truly don't intend to touch for a long time, and you don't want to make it part of a spread-out PP that includes your taxable accounts, you could make a case for putting a 33x3 PP (excluding cash) in that account. Personally, I would simply include it as part of my PP, and use taxable accounts and US savings bonds to hold most of the cash.

[koekebakker]

The problem of using the cash part of the PP as an emergency fund is that it's too small when you start out and it can easily feel too big when you have a sizeable portfolio.
It's important to remember that when your portfolio starts to get bigger that you're holding three pretty volatile assets at all times. The cash part is needed to reduce the overall risk of the portfolio to acceptable levels.
Just because stocks, bonds and gold haven't crashed at the same time doesn't mean that won't happen in the future. Backtesting might make the PP seem more safe, more stable than it really is.
I consider the PP as a medium risk portfolio, and I'm comfortable with that, and I do feel the need to hold an emergency fund besides my PP.

[dualstow]

The problem of using the cash part of the PP as an emergency fund is that it's too small when you start out and it can easily feel too big when you have a sizeable portfolio.

Well, you don't have to consider the entire cash portion to be an emergency fund, even if the entire emergency fund is part of the cash share.

[buddtholomew]

The problem of using the cash part of the PP as an emergency fund is that it's too small when you start out and it can easily feel too big when you have a sizeable portfolio.
It's important to remember that when your portfolio starts to get bigger that you're holding three pretty volatile assets at all times. The cash part is needed to reduce the overall risk of the portfolio to acceptable levels.
Just because stocks, bonds and gold haven't crashed at the same time doesn't mean that won't happen in the future. Backtesting might make the PP seem more safe, more stable than it really is.
I consider the PP as a medium risk portfolio, and I'm comfortable with that, and I do feel the need to hold an emergency fund besides my PP.

I am in the same category 4x25 + EF
What is your allocation after accounting for the EF?

I try to make sure that the EF total stays stable so I am forced into allocating new capital to the PP. So easy for me to place new investable money in cash and end up too cash heavy.

[koekebakker]

I am in the same category 4x25 + EF
What is your allocation after accounting for the EF?

I try to make sure that the EF total stays stable so I am forced into allocating new capital to the PP. So easy for me to place new investable money in cash and end up too cash heavy.

I sort of do the same. I keep 3 months of living expenses outside my PP, that should cover the majority of emergencies. Anything above that goes into my PP.
My PP is 30-20-20-30 (S/G/B/C) so I'm already a bit cash heavy. I consider the cash and bond part of the PP as one asset class. I like this barbell approach as it gives me the opportunity to get a higher combined yield than if I'd put everything in intermediate bonds.

[Kbg]

What is C?

[dualstow]

What is C?

Probably cash.

[koekebakker]

Cash, I was too lazy to type stocks/gold/bonds/cash.

[Kbg]