Moving into the PP

General Discussion on the Permanent Portfolio Strategy

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Moving into the PP

Post by ppnewbie » Fri May 03, 2019 10:39 pm

Hello everyone. I am semi new to the PP concept. I have a decent sized investment portfolio that is pretty much all stocks. I am in the process of allocating some of the portfolio into gold with new cash. This seems ideal because the gold price is relatively cheap. But I am worried about starting to balance out the portfolio with either selling stocks to buy long term t-bonds or by buying long term t-bonds with new cash.

Admittedly I am pretty much incompetent when it comes to bonds, but it seems interest rates are historically low and I would be buying into bonds that pretty much seem like they need to go down because rates likely need to increase. Is this when I should start building my long term treasury bond portfolio? Or should I wait and just start allocating in gold?

And I'm still trying to figure out how to buy long term bonds on treasurydirect.gov. I could also buy them from Vanguard but have not figured that out yet either.
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Re: Moving into the PP

Post by ochotona » Fri May 03, 2019 10:55 pm

There are concerns expressed on Bogleheads and echoed here about the security at TreasuryDirect, mainly they won't say whether they will make you whole if your stuff gets hacked. I have I-Bonds up there, but I would not put 25% or more of my assets up there. It's super easy to buy new issue or secondary US Treasuries at Fidelity or Schwab, then it's all in one place with you equities, and your cash if you buy 30 - 365 day T-Bills.

As for long duration bonds, it's always psychologically easier to ease into a potentially volatile position gradually. Start with all of your fixed income being cash, then buy the bonds over time. 5% a month over 5 months? Or have more of a ladder of US Treasuries, 0-30 years, as opposed to a barbell. I'm looking at the Permanent Portfolio conventional vs with 10-year Treasuries since 1978 right now, and the differences are not large. You give up 0.27% per year return with 10-year Treasuries. What can you live with is an important question, too, or you won't stick with it.
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Re: Moving into the PP

Post by mathjak107 » Sat May 04, 2019 3:38 am

with the pp it is not about the interest so much when you hold long term bonds , it is about the oomph and lifting power they have in a flight to safety ... you actually would need 3x the dollars in your bonds to offset the fact you use intermediate term bonds instead of long term bonds to have the same lifting power . so my opinion is don't change things or you lose your fighter cover and your ability to optimize a full cycle which includes the boom and the bust .

while the short term bonds and long term bonds form a barbell that averages out to an intermediate term bond there is one big difference to an intermediate term bond . long term bonds are driven not only by rates but like stocks they are driven more by fear , greed and perception ...

the further out you go the bigger the roll fear ,greed and perception play .

that gives them far more lifting power in a flight to safety then mere interest rates alone imply. of course the reverse is true too and a whiff of inflation can send them down farther too
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Re: Moving into the PP

Post by pmward » Sat May 04, 2019 9:59 am

Yeah I personally would not invest in gold without investing in bonds at the same time. Gold, bonds, and stocks all hedge each other. A concentrated and unhedged bet on gold is a risky gamble. If you are transitioning to a PP you are agreeing not to speculate on the future of any asset, you are buying them and deciding to rebalance over time to buy low and sell high. This means at any point you buy into the PP at least one of the assets you buy into is likely to lose money over the coming years, and you will have to sell your winners to buy more of the losers. This can mentally be difficult, but over the course of a full cycle it balances itself out. I think at this point in time it's pretty much a toss up as to whether gold, bonds, or stocks are going to be the under performing asset going forward. Currently expectations are for bond rates to go down. They can even go negative, the Fed has on record in their minutes discussed going negative in the next downturn. So I wouldn't count bonds out just yet. We could potentially still have another decade or longer in the great bond bull market.

You're best to not concentrate and just buy in if you're going to buy in. Though, like Ocho said, dollar cost averaging in might have some psychological benefits if you're nervous about doing so (though in the meantime you will be concentrated in stocks so there is risk in that route as well).
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Re: Moving into the PP

Post by ppnewbie » Sat May 04, 2019 12:08 pm

This is super helpful. Especially the last comment by pmward. Based on these responses, I realize pretty much my feeling of buying something that feels scary is what the PP and it’s rebalancing philosophy is all about. If I think I should not rebalance into long term bonds because they seem like they are on downward trajectory, I’m not actually putting in place the hedging mechanisms of this portfolio. And I will probably need to get very comfortable with this feeling!

Also what do folks think about the optimal rebalancing frequency? I’ll also search the forum for this topic which I am sure is covered.
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Re: Moving into the PP

Post by pmward » Sat May 04, 2019 12:27 pm

ppnewbie wrote:
Sat May 04, 2019 12:08 pm
This is super helpful. Especially the last comment by pmward. Based on these responses, I realize pretty much my feeling of buying something that feels scary is what the PP and it’s rebalancing philosophy is all about. If I think I should not rebalance into long term bonds because they seem like they are on downward trajectory, I’m not actually putting in place the hedging mechanisms of this portfolio. And I will probably need to get very comfortable with this feeling!

Also what do folks think about the optimal rebalancing frequency? I’ll also search the forum for this topic which I am sure is covered.
Exactly. Larry Swedroe says that if you're not holding at least one asset you're uncomfortable with at the moment then you're not fully diversified.

As for optimal rebalancing frequency, it depends what your goals are. The less frequently you rebalance, the more return you will get (lets the winners and losers run a bit) but the more you are exposed to a potential downturn in the outperforming assets.

You can do yearly rebalancing, 5% bands, 10% bands, etc. Also with either of the bands you can balance back to 25% or you can go halfway and say with a 10% band do a 5% rebalance (say you hit the bottom 15% line on cash, you could rebalance that to 20% instead of 25%). I don't think there is any right or wrong here, it's just what works best for you.
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Re: Moving into the PP

Post by jhogue » Sat May 04, 2019 3:03 pm

Remember that the purpose of rebalancing is to reduce overall risk in the portfolio, not to make short-term gains.
“Groucho Marx wrote:
A stock trader asked him, "Groucho, where do you put all your money?" Groucho was said to have replied, "In Treasury bonds", and the trader said, "You can't make much money on those." Groucho said, "You can if you have enough of them!"
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Re: Moving into the PP

Post by ochotona » Sat May 04, 2019 8:58 pm

jhogue wrote:
Sat May 04, 2019 3:03 pm
Remember that the purpose of rebalancing is to reduce overall risk in the portfolio, not to make short-term gains.
In this context, short term can be years...
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Re: Moving into the PP

Post by mathjak107 » Sun May 05, 2019 3:11 am

one of the issues i have with gold in particular is i have to rebalance it frequently or risk any gains it made evaporating ..gold is more about timing the market than time in the market . i tend to take profits in gold every chance i can and i have actually done very well with it bcause you know as soon as it gets some action it is rolling right back .

i have been going for about 3% bands with gold .... yeah it is being a dirty lil market timer in a way but it has worked well . i ran up nice profits in gld making it my biggest gainer last time i owned gold .. i own some currently but only 1/3 of what i typically do as i took profits .

i don't follow the pp but i do add gold and long term treasuries to my regular portfolio's at times but i don't use them all the time ... in fact i guess you can say they are my variable portfolio ... they get added at times to my portfolio that i run through thick and thin to fly fighter cover and generate profits where i can with them . .in other words i use them to generate some extra alpha on the portfolio's i have been using for more then 30 years now .
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Re: Moving into the PP

Post by Kriegsspiel » Sun May 05, 2019 7:40 am

Sort of reframing what jhogue said, but if you think about the PP as a single unit, you can feel more assured about owning the 4 assets. While the 3 volatile assets can be swinging around wildly, the PP 'black box' acts more like an intermediate bond. Keeping the components balanced just makes sure the black box doesn't have any holes, so it can do its thing.
You there, Ephialtes. May you live forever.
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Re: Moving into the PP

Post by pmward » Sun May 05, 2019 9:05 am

mathjak107 wrote:
Sun May 05, 2019 3:11 am
one of the issues i have with gold in particular is i have to rebalance it frequently or risk any gains it made evaporating ..gold is more about timing the market than time in the market . i tend to take profits in gold every chance i can and i have actually done very well with it bcause you know as soon as it gets some action it is rolling right back .

i have been going for about 3% bands with gold .... yeah it is being a dirty lil market timer in a way but it has worked well . i ran up nice profits in gld making it my biggest gainer last time i owned gold .. i own some currently but only 1/3 of what i typically do as i took profits .

i don't follow the pp but i do add gold and long term treasuries to my regular portfolio's at times but i don't use them all the time ... in fact i guess you can say they are my variable portfolio ... they get added at times to my portfolio that i run through thick and thin to fly fighter cover and generate profits where i can with them . .in other words i use them to generate some extra alpha on the portfolio's i have been using for more then 30 years now .
Remember, the last 10 years is not the permanent state of the markets. So what has worked for gold recently will not work going forward. Be very careful of projecting the recent past infinitely into the future.

Gold has been consolidating for 8 years now. An 8 year consolidation is huge, generally speaking the longer an asset consolidates the stronger the bull market following. Case in point, stocks consolidated from 2000-2013 and look what has happened since then. Gold consolidated for almost 20 years between the early 80s and early 2000s, and look what happened after. I don't know when gold will finally break out, it could be weeks or it could be years, but when it does, look out!
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Re: Moving into the PP

Post by ochotona » Sun May 05, 2019 11:48 am

Kriegsspiel wrote:
Sun May 05, 2019 7:40 am
Sort of reframing what jhogue said, but if you think about the PP as a single unit, you can feel more assured about owning the 4 assets. While the 3 volatile assets can be swinging around wildly, the PP 'black box' acts more like an intermediate bond. Keeping the components balanced just makes sure the black box doesn't have any holes, so it can do its thing.
I find the PP is like a junk bond with good manners. The performance is similar, but less puking.
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Re: Moving into the PP

Post by ppnewbie » Sun May 05, 2019 11:54 am

It’s funny my brain keeps groping for a pattern to predict the future. Demographics, Fed balance sheets, Chinese debt levels, coming boom in new innovations...etc, etc...I’m still working on taming this beast. Funny I barely even understand half of what I’m reading!

Just saw a good video on youtube by Investopedia and Ray Dalio called “Ray Dalio’s holy grail”. It seems like he’s created a sophisticated PP. He shows briefly how multiple uncorrellated assets can reduce risk to very low levels.

Also - how do PP proponents view Real Estate. What asset class does it fall into? Or is it apart of the VP portion of the portfolio? If you had an opportunity to invest in property paying in the 10 percent return range but not liquid - would you view this is a long term bond?
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Re: Moving into the PP

Post by mathjak107 » Sun May 05, 2019 12:30 pm

ochotona wrote:
Sun May 05, 2019 11:48 am
Kriegsspiel wrote:
Sun May 05, 2019 7:40 am
Sort of reframing what jhogue said, but if you think about the PP as a single unit, you can feel more assured about owning the 4 assets. While the 3 volatile assets can be swinging around wildly, the PP 'black box' acts more like an intermediate bond. Keeping the components balanced just makes sure the black box doesn't have any holes, so it can do its thing.
I find the PP is like a junk bond with good manners. The performance is similar, but less puking.


i find my junk bond fund swings less then when all the parts of the pp don't like something ..
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Re: Moving into the PP

Post by pmward » Sun May 05, 2019 5:30 pm

ppnewbie wrote:
Sun May 05, 2019 11:54 am
It’s funny my brain keeps groping for a pattern to predict the future. Demographics, Fed balance sheets, Chinese debt levels, coming boom in new innovations...etc, etc...I’m still working on taming this beast. Funny I barely even understand half of what I’m reading!

Just saw a good video on youtube by Investopedia and Ray Dalio called “Ray Dalio’s holy grail”. It seems like he’s created a sophisticated PP. He shows briefly how multiple uncorrellated assets can reduce risk to very low levels.
You will see that Ray Dalio basically took Harry Browne and added risk parity and leverage into the mix. He does have an "all-seasons portfolio" which is his recommendation for an unlevered all-weather variation for an average retail investor, you will see it looks eerily familiar to the PP, only with risk parity weightings: https://portfoliocharts.com/portfolio/a ... portfolio/
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Re: Moving into the PP

Post by ochotona » Sun May 05, 2019 7:03 pm

mathjak107 wrote:
Sun May 05, 2019 12:30 pm
ochotona wrote:
Sun May 05, 2019 11:48 am
Kriegsspiel wrote:
Sun May 05, 2019 7:40 am
Sort of reframing what jhogue said, but if you think about the PP as a single unit, you can feel more assured about owning the 4 assets. While the 3 volatile assets can be swinging around wildly, the PP 'black box' acts more like an intermediate bond. Keeping the components balanced just makes sure the black box doesn't have any holes, so it can do its thing.
I find the PP is like a junk bond with good manners. The performance is similar, but less puking.
i find my junk bond fund swings less then when all the parts of the pp don't like something ..

Mmmmm, not so sure about that. Blue - my current "hideout because it's all a fake market now and I don't trust the V-shaped rebound" portfolio*. Red - HBPP. Golden - high yield bond index.

Image

* 25% equity, 12% gold, 13% cash, 50% 5-year US Treasuries
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Re: Moving into the PP

Post by boglerdude » Sun May 05, 2019 11:42 pm

> It’s funny my brain keeps groping for a pattern to predict the future.

Thats what brains do, and investing (morlike savings allocation) is frustrating because its the one area where thinking backfires. You cant get the real insider info on what's going on inside China or inside companies.

And the market is mostly efficient, you have no advantage as someone reading mainstream news (which always has an agenda or is click bait)

In real estate, your efforts can make a difference. You can research your local market and put in sweat equity.

I got trolled into buying a rental in 05 by everyone's confidence that real estate doesnt go down. Its value is influenced by inflation and the US economy, so I hold less gold and tilt away from US stocks
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Re: Moving into the PP

Post by sophie » Mon May 06, 2019 7:25 am

Welcome PPnewbie!

It sounds to me like you're looking for a less volatile alternative to 100% stocks, but you're not yet sold on the PP. In which case, the best thing to do may be more research/reading before you touch anything. Try reading the epic "Permanent Portfolio" thread on Bogleheads, and also examine different options on portfoliocharts.com. Real estate is in several of them, but not the PP. The PP was simplified to 4 basic assets that are orthogonal to each other. Other assets, like corporate bonds, behave sort of like a mixture of the PP assets so there's no point to owning them. Also, the PP's cash allocation can contain your emergency fund, which I assume you have in addition to the 100% stock portfolio.

Another question: what life phase are you in, are you still accumulating, or are you in or near retirement? If you're still accumulating, the easiest way to ease into the portfolio of your choice is to devote new contributions to buying the non-stock assets (in equal measure - that's very important to keep the portfolio balanced). Also, are these stocks in tax-advantaged accounts? Selling in taxable and taking a large capital gains hit may be something to approach carefully.
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Re: Moving into the PP

Post by ppnewbie » Mon May 06, 2019 12:53 pm

sophie wrote:
Mon May 06, 2019 7:25 am
Welcome PPnewbie!

It sounds to me like you're looking for a less volatile alternative to 100% stocks, but you're not yet sold on the PP. In which case, the best thing to do may be more research/reading before you touch anything. Try reading the epic "Permanent Portfolio" thread on Bogleheads, and also examine different options on portfoliocharts.com. Real estate is in several of them, but not the PP. The PP was simplified to 4 basic assets that are orthogonal to each other. Other assets, like corporate bonds, behave sort of like a mixture of the PP assets so there's no point to owning them. Also, the PP's cash allocation can contain your emergency fund, which I assume you have in addition to the 100% stock portfolio.

Another question: what life phase are you in, are you still accumulating, or are you in or near retirement? If you're still accumulating, the easiest way to ease into the portfolio of your choice is to devote new contributions to buying the non-stock assets (in equal measure - that's very important to keep the portfolio balanced). Also, are these stocks in tax-advantaged accounts? Selling in taxable and taking a large capital gains hit may be something to approach carefully.
I am now kind of in the lowering of risk lowering / protection phase of my investment life and hopefully in the next few years gently moving into a harvesting phase. The reason I ask about real estate is that I want to ease into the PP or something close to the PP without getting killed on taxes while I make the move. It would be a bonus if I could jigger in real estate into the bond portion (because my investments basically act like bonds no debt plus a consistent cashflow) and just add long term treasuries on top to create enough liquidity to that quadrant of the portfolio for rebalancing.

Anyway thanks for the heads up on the Bogleheads PP thread. I will definitely go over it in detail. I've been all over portfolio charts lately but need to dig into the portfolio's that include real estate. And will also use the modeling tool he has created to add in real estate into the PP and see what happens.
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Re: Moving into the PP

Post by Xan » Mon May 06, 2019 1:10 pm

ppnewbie wrote:
Mon May 06, 2019 12:53 pm
sophie wrote:
Mon May 06, 2019 7:25 am
Welcome PPnewbie!

It sounds to me like you're looking for a less volatile alternative to 100% stocks, but you're not yet sold on the PP. In which case, the best thing to do may be more research/reading before you touch anything. Try reading the epic "Permanent Portfolio" thread on Bogleheads, and also examine different options on portfoliocharts.com. Real estate is in several of them, but not the PP. The PP was simplified to 4 basic assets that are orthogonal to each other. Other assets, like corporate bonds, behave sort of like a mixture of the PP assets so there's no point to owning them. Also, the PP's cash allocation can contain your emergency fund, which I assume you have in addition to the 100% stock portfolio.

Another question: what life phase are you in, are you still accumulating, or are you in or near retirement? If you're still accumulating, the easiest way to ease into the portfolio of your choice is to devote new contributions to buying the non-stock assets (in equal measure - that's very important to keep the portfolio balanced). Also, are these stocks in tax-advantaged accounts? Selling in taxable and taking a large capital gains hit may be something to approach carefully.
I am now kind of in the lowering of risk lowering / protection phase of my investment life and hopefully in the next few years gently moving into a harvesting phase. The reason I ask about real estate is that I want to ease into the PP or something close to the PP without getting killed on taxes while I make the move. It would be a bonus if I could jigger in real estate into the bond portion (because my investments basically act like bonds no debt plus a consistent cashflow) and just add long term treasuries on top to create enough liquidity to that quadrant of the portfolio for rebalancing.

Anyway thanks for the heads up on the Bogleheads PP thread. I will definitely go over it in detail. I've been all over portfolio charts lately but need to dig into the portfolio's that include real estate. And will also use the modeling tool he has created to add in real estate into the PP and see what happens.
Is your real estate in several nationwide REITs, or is it in a handful of individual properties in a single market? If the latter, it's not possible to model your real estate situation. It would be like working with individual stocks. Your local market could go haywire in either direction completely independently of any overall trend.
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Re: Moving into the PP

Post by pmward » Mon May 06, 2019 1:43 pm

ppnewbie wrote:
Mon May 06, 2019 12:53 pm
sophie wrote:
Mon May 06, 2019 7:25 am
Welcome PPnewbie!

It sounds to me like you're looking for a less volatile alternative to 100% stocks, but you're not yet sold on the PP. In which case, the best thing to do may be more research/reading before you touch anything. Try reading the epic "Permanent Portfolio" thread on Bogleheads, and also examine different options on portfoliocharts.com. Real estate is in several of them, but not the PP. The PP was simplified to 4 basic assets that are orthogonal to each other. Other assets, like corporate bonds, behave sort of like a mixture of the PP assets so there's no point to owning them. Also, the PP's cash allocation can contain your emergency fund, which I assume you have in addition to the 100% stock portfolio.

Another question: what life phase are you in, are you still accumulating, or are you in or near retirement? If you're still accumulating, the easiest way to ease into the portfolio of your choice is to devote new contributions to buying the non-stock assets (in equal measure - that's very important to keep the portfolio balanced). Also, are these stocks in tax-advantaged accounts? Selling in taxable and taking a large capital gains hit may be something to approach carefully.
I am now kind of in the lowering of risk lowering / protection phase of my investment life and hopefully in the next few years gently moving into a harvesting phase. The reason I ask about real estate is that I want to ease into the PP or something close to the PP without getting killed on taxes while I make the move. It would be a bonus if I could jigger in real estate into the bond portion (because my investments basically act like bonds no debt plus a consistent cashflow) and just add long term treasuries on top to create enough liquidity to that quadrant of the portfolio for rebalancing.

Anyway thanks for the heads up on the Bogleheads PP thread. I will definitely go over it in detail. I've been all over portfolio charts lately but need to dig into the portfolio's that include real estate. And will also use the modeling tool he has created to add in real estate into the PP and see what happens.
Real estate is not similar to bonds. Stocks give cash flows as well, but they are different to a bond.

What we ask in the PP is what macro environments are the fundamental strengths and weaknesses of the asset? Real estate is weak in deflation and tight money, strong in an inflation, and generally decent in prosperity. What is this similar to? Gold.

Real estate would be a very poor bond replacement, because bonds are strong where real estate is weak. If anything, having a lot of real estate assets would tempt me to want to hold more bonds and less gold to hedge the real estate. Or, you could just consider it a business, and look at the cashflow as nothing more than income that then gets funneled into your PP. It really depends on how heavy you are in real estate as a percentage of your networth, and how nervous you are about the future of the properties you own. Since you have no loan your chances of taking a loss are much lower than most real estate investors. What are the odds you could take a substantial loss in the value of the real estate? Is that chance and total money at risk high enough to warrant hedging? Or is it something that will always provide decent cash flows, hold value well enough from the purchase price, and not something you really want to spent time worrying about and complicating your portfolio over? There's definitely a lot to consider here.

One last thing I will mention is that if you are heavy enough in real estate and decide to hedge you might want to look into long treasury zero coupons (ticker EDV) as it has a lot more volatility than the standard long term treasury that pays a coupon. That extra volatility gives it a bit more oomph, so you get a greater hedging effect out of it per dollar invested. This is what Harry recommended for those that had a large chunk of their networth in physical real estate that desired a hedge. Even if you decide to count your real estate as either a VP or as a business, you could still swap LTT's out for EDV in your PP just so you know you have a bit more protection against deflation.
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Re: Moving into the PP

Post by mathjak107 » Mon May 06, 2019 2:08 pm

i agree , real estate is no sub for bonds .. real estate is wishy washy which is why harry does not include it .. when inflation rises and mortgages are high like they were in the 1980's and mortgages were 18% real estate sucked ... when we have recessions real estate sucks ... it is only after things get better that real estate responds usually. So they are no proxy for bonds or protection from a weak dollar in high inflation
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Re: Moving into the PP

Post by sophie » Mon May 06, 2019 8:26 pm

pmward, you're right about EDV having more oomph than TLT, but...beware holding it in a taxable account. It's had some giant December payouts in the past. If you instead buy a zero coupon Treasury directly, realize that you owe taxes on the interest as it accrues, but can't access said interest until you sell.

ppnewbie, if you're nearing retirement maybe you can also consider how complex vs simple you want your portfolio to be? That's a consideration too, that may eventually be more important than optimizing CAGR. Also, all the more reason to avoid selling appreciated stock shares, if you expect your tax bracket to go down to 12%-land in the near future.
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Re: Moving into the PP

Post by boglerdude » Mon May 06, 2019 9:27 pm

If the US issued 100 year bonds, do you still do 25% weighting? whats the math
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Re: Moving into the PP

Post by jhogue » Tue May 07, 2019 8:21 am

ppnewbie:

Your residential real estate is a business, not an investment. The market for your business is highly localized and relatively ill-liquid—which means your principal is not guaranteed and cannot be converted into cash overnight. Also, the income stream from your rental is not guaranteed. It carries the risks that your tenants don’t pay or the property sits vacant while you continue to pay taxes and upkeep. Those kinds of risks explain why you are presently making 10% in rent, versus about 3% for Treasury bonds.

Long term Treasury bonds (LTTs) are an investment, not a business. The market for LTT’s is global and highly liquid—you could sell any amount you hold and convert its value to cash in 24-48 hours. The principal and the income stream from interest payments is guaranteed by the full faith and credit of the U.S. Treasury—which, unlike some tenants, has never defaulted on its scheduled payments.

Converting the value of your business into an investment will probably be a complicated process. Harry Browne did not specifically recommend putting businesses in your VP, but it sounds as though your are confident about the future prospects of your cash flow. If you are concerned about the tax liability from an immediate sale, you could offer to negotiate a lease-to-own arrangement spread over several years or more. My parents sold their house in a small town that way to a trustworthy young couple who did not have enough in savings for a traditional 20% down payment and mortgage. I have wondered why such arrangements have not been more common.
“Groucho Marx wrote:
A stock trader asked him, "Groucho, where do you put all your money?" Groucho was said to have replied, "In Treasury bonds", and the trader said, "You can't make much money on those." Groucho said, "You can if you have enough of them!"
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