How do you invest the Cash portion?

Discussion of the Cash portion of the Permanent Portfolio

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jhogue
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Re: How do you invest the Cash portion?

Post by jhogue » Mon Nov 25, 2019 2:36 pm

dualstow wrote:
Sun Nov 24, 2019 2:51 pm
by jhogue » Today, 3:26 pm \
I am alternately fascinated and perplexed by the endless hunt for yield in Cash that populates this thread and others like it.
I'm too lazy to chase yield, but I do enjoy reading the threads of those who chase it.

Setting aside the long bonds I bought for the vp, I have a small set of notes of various maturities that pay between 1 and 2% overall.
Some began life (in my holdings) as ten year notes, others as 5-years, and so on. Putting them in order by maturity date, there will be one reaching the finish line about every year or year and a half.

I used to think what a mistake it was to buy them. Now the yield is looking pretty good. I want to draw a tacky analogy, but I'll resist.
But, I like watching what was pathetic deep cash turn into pretty good cash.

The pp has notes paying 2.6% and 2.75%, hooray. But what happens when they mature? I'll probably be buying notes at 1% or VUSXX which is going down (the yield) every week. 1.71% compounded, right now.
dualstow,

Looking in the rear view mirror, your ten year ladder of CDs must seem like a sure-fire-no-brainer-strategy for any amount of cash up to the $250,000 FDIC limit. Low inflation and Trump’s tax cut didn’t hurt either.

Here’s the problem as I see it:

Domestic STTs and ITTs are now stuck in a lower-bound range of 1.5 - 1.8%, and trillions in negative yielding euro and Swiss franc bonds are piling ever higher in Europe. There is no way that you can build a new ladder of of ten year CDs going forward that will bring you the after-inflation and after-tax yield your old CD ladder did. Interest rates can stay the same or they can rise, but they cannot continue to fall at the rate they did over the last decade for the next decade.
“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: How do you invest the Cash portion?

Post by dualstow » Mon Nov 25, 2019 3:20 pm

Who knows what the future holds, jhogue.
It's very tempting to just have a large stock-heavy vp with zaftig dividends.
RIP Marcello Gandini
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Re: How do you invest the Cash portion?

Post by ochotona » Mon Nov 25, 2019 3:48 pm

dualstow wrote:
Mon Nov 25, 2019 3:20 pm
Who knows what the future holds, jhogue.
It's very tempting to just have a large stock-heavy vp with zaftig dividends.
DWX foreign dividend stock ETF yielding 3.3% now. I own this one.
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Re: How do you invest the Cash portion?

Post by dualstow » Mon Nov 25, 2019 3:53 pm

Nice
RIP Marcello Gandini
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Re: How do you invest the Cash portion?

Post by Kbg » Mon Nov 25, 2019 6:09 pm

ochotona wrote:
Mon Nov 25, 2019 3:48 pm
dualstow wrote:
Mon Nov 25, 2019 3:20 pm
Who knows what the future holds, jhogue.
It's very tempting to just have a large stock-heavy vp with zaftig dividends.
DWX foreign dividend stock ETF yielding 3.3% now. I own this one.
SCHD yields 3.18 (SEC yield) and no foreign currency risk...
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Re: How do you invest the Cash portion?

Post by ochotona » Mon Nov 25, 2019 6:48 pm

Kbg wrote:
Mon Nov 25, 2019 6:09 pm
ochotona wrote:
Mon Nov 25, 2019 3:48 pm
dualstow wrote:
Mon Nov 25, 2019 3:20 pm
Who knows what the future holds, jhogue.
It's very tempting to just have a large stock-heavy vp with zaftig dividends.
DWX foreign dividend stock ETF yielding 3.3% now. I own this one.
SCHD yields 3.18 (SEC yield) and no foreign currency risk...
Yup, that's a good one too
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Re: How do you invest the Cash portion?

Post by mathjak107 » Tue Nov 26, 2019 7:50 am

no stock fund ever should be used as a proxy for cash and interest . dividends are not interest ...

they serve two different purposes ... stocks are stocks whether they distribute a piece of your share price back to you as a dividend or not . they are never a proxy for interest and the safety of cash instruments .
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Re: How do you invest the Cash portion?

Post by dualstow » Tue Nov 26, 2019 9:10 am

mathjak107 wrote:
Tue Nov 26, 2019 7:50 am
no stock fund ever should be used as a proxy for cash and interest . dividends are not interest ...

they serve two different purposes ... stocks are stocks whether they distribute a piece of your share price back to you as a dividend or not . they are never a proxy for interest and the safety of cash instruments .
Totally agree. Not a proxy. All the same, I have cash in the vp that will probably become dividend stocks.
PP cash is sacrosanct with regard to both quality and proportion of the whole.

Even notes longer than 3-years don't belong in the pp cash section. They've got the quality, but they are just not cash.
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Re: How do you invest the Cash portion?

Post by jhogue » Tue Nov 26, 2019 1:26 pm

I haven’t bought a T-bill with a maturity longer than one year for several years now.

Unless you have some specific liability matching in mind, which would rather buy today?

-A one year Treasury bill at 1.64%, or ,
-A three year Treasury bill at 1.57%,.
“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: How do you invest the Cash portion?

Post by dualstow » Tue Nov 26, 2019 4:23 pm

One of each, please. O0
Seriously, it depends on which way you think rates are going. I do in fact buy both.
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Re: How do you invest the Cash portion?

Post by dualstow » Wed Nov 27, 2019 8:07 am

Looks like Ally checking's interest rate has dipped from 0.6% to 0.5%.

Vanguard treasury mm/VUSXX/Fund 0011 is down to 1.69% compounded.
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Re: How do you invest the Cash portion?

Post by drumminj » Wed Nov 27, 2019 8:45 am

dualstow wrote:
Tue Nov 26, 2019 9:10 am
Even notes longer than 3-years don't belong in the pp cash section. They've got the quality, but they are just not cash.
What about a 5-year CD with a small early breakage penalty? Good as cash, no? (well, good as cash in any other bank account/instrument)
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Re: How do you invest the Cash portion?

Post by dualstow » Wed Nov 27, 2019 8:46 am

I don't have a problem with it, even though I don't buy them. I guess I would have to try it to really know.
I would ask jhogue, though.
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Re: How do you invest the Cash portion?

Post by jhogue » Wed Nov 27, 2019 10:10 am

drumminj,

I do not buy 5 year CDs. I buy Treasury-backed securities because safety and liquidity is more important for my HBPP Cash quadrant than yield.

More important than what I think, however, is what you think:

Why do you want to buy a 5 year FDIC-backed CD, which is illiquid (as you yourself described it) and not as safe as a T-bill?
“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: How do you invest the Cash portion?

Post by sophie » Wed Nov 27, 2019 10:50 am

dualstow wrote:
Tue Nov 26, 2019 4:23 pm
One of each, please. O0
Seriously, it depends on which way you think rates are going. I do in fact buy both.
Good for you dualstow! Stick to your guns!

I never got the 3 year rolling ladder thing going. The I bonds I have are soaking up my "deep cash" permissible level, so I'm sticking to short maturities or treasury money market funds for the rest. If I had the deep cash space, I'd be super tempted to use CDs. You can wait to break them until a higher interest rate outweighs the 3 month interest penalty, and the face value isn't at risk. With a short term treasury though, you pretty much are stuck with holding to maturity because their value and bid-ask spread will erase any such interest rate arbitration.
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Re: How do you invest the Cash portion?

Post by drumminj » Wed Nov 27, 2019 1:07 pm

jhogue wrote:
Wed Nov 27, 2019 10:10 am
Why do you want to buy a 5 year FDIC-backed CD, which is illiquid (as you yourself described it) and not as safe as a T-bill?
I buy both, to be honest. For "deep cash", as folks tend to call it, I have some 5-yr CDs fetching > 3%. Yes, I'm chasing yield, but I can withdraw the money immediately (for a small penalty). It's a bit less accessible than cash in an FDIC-insured account, but for some of my cash, the difference in yield is worth it.

I also have a bunch of 13-week treasuries, cash in a bank account, and cash on hand. There's some risk with FDIC, but there's also risk with SIPC (possibly more?) if you're holding STTs with Fidelity, and there's risk with TreasuryDirect (as discussed on this forum).

Pick your poison!
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Re: How do you invest the Cash portion?

Post by jhogue » Wed Nov 27, 2019 2:48 pm

11/27/19
drumminj,

I am not picking your poison because I agree with Harry Browne and craigr that all financial risks are not created equal:

From CraigR’s FAQ:

"Q: Why a Treasury Money Market Fund and not something else with better yield?

A: Because you are not looking to take risk with your cash. Treasury Money Market Funds that are properly run are one of the most liquid investments you can own. There are no FDIC limits to worry about, no bank credit worthiness to worry about, and you will always be paid barring some extremely catastrophic event in the country. Chasing yield with your cash means you are taking on more risk and those risks can show up when you least expect (or want) them to."

The FDIC ran short of cash during the 2008-2009 financial crisis and had to be bailed out by Congress to the tune of $100 billion. That is a fact, not an opinion or a theory.

During that same time period, there was no interruption in the secondary market in T-bills.

Happy Thanksgiving to one and all.
“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: How do you invest the Cash portion?

Post by drumminj » Wed Nov 27, 2019 9:08 pm

jhogue wrote:
Wed Nov 27, 2019 2:48 pm
11/27/19
drumminj,

I am not picking your poison because I agree with Harry Browne and craigr that all financial risks are not created equal:
That's fair, and to be clear I'm not trying to convince anyone.

I disagree though that there are no "FDIC limits to worry about". Your MM funds are held by a financial institution (in "street name", possibly even?) which may become insolvent, halt withdrawls, etc. You have insurance issues there, no? Asking sincerely, is this less risky than FDIC?

Treasuries held directly? Sure. Treasuries held on your behalf? Less so. Treasury MM? Also has risks.

Again, not trying to convince anyone to do what I do -- just trying to be clear about the risks here in the margins.
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Re: How do you invest the Cash portion?

Post by Pet Hog » Fri Nov 29, 2019 1:57 am

A general question, not addressed to anyone in particular: Isn't a treasury money market fund just a treasury ladder held by someone else on your behalf? If so, there's not magic to it. You can set up your own and cut out the middleman. And set the duration/maturity however you like. Personally, I have no problem with cash being defined as up to five-year treasuries/CDs, but I am in the accumulation phase. I can understand someone in the withdrawal phase having a different opinion.
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Re: How do you invest the Cash portion?

Post by dualstow » Fri Nov 29, 2019 3:29 am

Pet Hog wrote:
Fri Nov 29, 2019 1:57 am

I have no problem with cash being defined as up to five-year treasuries/CDs, but I am in the accumulation phase. I can understand someone in the withdrawal phase having a different opinion.
I’m accumulating, too. But, imagine you suddenly need to use cash at the same time that five-year treasuries sharply decrease in value. How mature is that ladder? How many of those treasuries can you really sell in a pinch without much of a loss?

It’s not the same as a treasury mm, from which you can withdraw what you need and a share = $1. If you’re really going to go five years out, maybe you had better go with those CDs with low penalties.
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Re: How do you invest the Cash portion?

Post by sophie » Fri Nov 29, 2019 11:38 am

MangoMan wrote:
Fri Nov 29, 2019 10:51 am
dualstow wrote:
Fri Nov 29, 2019 3:29 am
Pet Hog wrote:
Fri Nov 29, 2019 1:57 am

I have no problem with cash being defined as up to five-year treasuries/CDs, but I am in the accumulation phase. I can understand someone in the withdrawal phase having a different opinion.
I’m accumulating, too. But, imagine you suddenly need to use cash at the same time that five-year treasuries sharply decrease in value. How mature is that ladder? How many of those treasuries can you really sell in a pinch without much of a loss?

It’s not the same as a treasury mm, from which you can withdraw what you need and a share = $1. If you’re really going to go five years out, maybe you had better go with those CDs with low penalties.
Yep. And that, in a nutshell, is why I think savings bonds (any series) are also a bad choice.
Really? They're easy to liquidate and won't lose value. Even with the one year lockup and 3 month interest penalty if you sell before 5 years, I'd prefer them to > 1 year STTs for emergency cash withdrawals, which is why I've never found a place for treasury ladders.
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Re: How do you invest the Cash portion?

Post by Pet Hog » Fri Nov 29, 2019 4:45 pm

dualstow wrote:
Fri Nov 29, 2019 3:29 am
... imagine you suddenly need to use cash at the same time that five-year treasuries sharply decrease in value. How mature is that ladder? How many of those treasuries can you really sell in a pinch without much of a loss?
Can you give an example of such a situation? Because as a PP investor in the accumulation phase, my first response would be to pay for this sudden emergency with money from my emergency fund (not five-year treasuries), or with earnings from my job, or put it on a credit card. Ideally, I wouldn't touch my PP cash. Furthermore, as a PP investor I have several options, like selling appreciated stocks and potentially paying little (nothing?) in capital gains taxes. But let's say I have to suddenly liquidate all of my 25% cash component (and that includes five-year treasuries that I bought at 1.5% and now the interest rate is 10%**) -- well, I'd just suck it up and be grateful that I didn't have to go to a loan shark.## I'm not being facetious; I think as PP investors we have lots of options and can weather most storms.

**In such a high-rate environment, we'd also have high inflation, which would presumably boost stock and gold prices. Perhaps I'd be better off selling those assets. They are just as easy to liquidate as treasuries. So my response would depend on taxes and fees. That's why I asked for an example.

##Or maybe going to a loan shark would be smarter than selling my five-year treasuries! Again, many options for the PP investor.
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Re: How do you invest the Cash portion?

Post by Pet Hog » Fri Nov 29, 2019 5:01 pm

MangoMan wrote:
Fri Nov 29, 2019 4:52 pm
Pet Hog wrote:
Fri Nov 29, 2019 4:45 pm

##Or maybe going to a loan shark would be smarter than selling my five-year treasuries! Again, many options for the PP investor.
Ah yes, PP investors' personality profiles certainly would be the type to use loan sharks. ::) :o
I'll admit, there I was being facetious!
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Re: How do you invest the Cash portion?

Post by dualstow » Sat Nov 30, 2019 8:03 am

Pet Hog wrote:
Fri Nov 29, 2019 4:45 pm
dualstow wrote:
Fri Nov 29, 2019 3:29 am
... imagine you suddenly need to use cash at the same time that five-year treasuries sharply decrease in value. How mature is that ladder? How many of those treasuries can you really sell in a pinch without much of a loss?
Can you give an example of such a situation? Because as a PP investor in the accumulation phase, my first response would be to pay for this sudden emergency with money from my emergency fund (not five-year treasuries), or with earnings from my job, or put it on a credit card. Ideally, I wouldn't touch my PP cash.
A situation more specific than a sharp rise in interest rates plus some kind of catastrophe that would require cash? Use your imagination.

It does change things if you have an emergency fund that is separate from pp cash. I didn't really use to hold cash pre-pp, and now I've grown used to it. Like a lot of people who run this portfolio, though, I don't have a separate emergency fund of cash in addition to pp cash.

I was responding to
I have no problem with cash being defined as up to five-year treasuries/CDs
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Re: How do you invest the Cash portion?

Post by sophie » Sat Nov 30, 2019 10:48 am

MangoMan wrote:
Fri Nov 29, 2019 1:29 pm
Yes, really. They won't lose value? Maybe not in the sense of the return of principal, but certainly in the sense of opportunity. And you are talking about I bonds. EEs are even worse.
What kind of opportunity do you mean?

I bonds are much better than CDs for me, because of the state/local tax exemption and tax deferral for the life of the bond. I'm not aware of any opportunities that would qualify as cash.

I think five year treasuries, CDs etc all have a place (if you're not a PP purist I guess, when it comes to the CDs). You still need a source of cash in its most liquid form. Like dualstow, I hold money markets and 4 week T bills as part of my cash allocation, not separately from the PP.
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