How do you invest the Cash portion?

Discussion of the Cash portion of the Permanent Portfolio

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pugchief
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Re: How do you invest the Cash portion?

Post by pugchief » 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.
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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 pugchief » 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
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Re: How do you invest the Cash portion?

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

pugchief 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

pugchief 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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Re: How do you invest the Cash portion?

Post by Pet Hog » Sat Nov 30, 2019 1:15 pm

dualstow wrote:
Sat Nov 30, 2019 8:03 am
I was responding to
I have no problem with cash being defined as up to five-year treasuries/CDs
And the rest of that sentence is, "but I'm in the accumulation phase." I think someone in the accumulation phase has greater risk-tolerance toward any changes in interest rates and/or emergencies and, therefore, can be a bit more aggressive with all aspects of the PP, but particularly with the cash component. Ergo, my tolerance toward five-year treasuries and CDs.

I'm still curious if anyone can provide an example of an emergency situation that would be problematic to the PP investor in the accumulation phase and holding five-year treasuries. I'll suggest my own. Consider a PP valued at $400,000, so $100,000 in cash with $20,000 in each of five rungs of a five-year treasury ladder, currently all yielding about 1.6%. The investor is in the accumulation phase and adds $500 every month. If interest rates suddenly spike to about 5% (gains of 3.4%-ish) -- after a terrorist attack, a state government default, or surprise presidential election result** -- and we approximate the dollar effect to be "duration multiplied by percentage change," then the one-year treasuries would decline by about 3.4% (maybe $700 of $20,000) and the five-years by about 17% (maybe $3400 of $20,000). An emergency strikes and this investor needs $20,000. Cashing out the one-year treasuries would come with a loss of $700, but that would be made up in a month or two with earnings from employment. If the emergency is for $100,000, then I suggest taking the money wisely from the portfolio as a whole## and not necessarily from the four- and five-year treasuries. With that spike in interest rates, 30-year treasuries would surely suffer badly, but maybe stocks and gold would be doing OK. Paying 10% capital gains tax (or maybe 0%) on the sale of $20,000 of stocks (maybe only $10,000 of which is capital gains, so $1000 in tax -- covered by two months of work) would be better than locking in a loss of $3400 when selling those five-year treasuries. The accumulation-phase PP investor should have options to weather a storm without having to resort to selling depreciated five-year treasuries.

**I suspect some of these surprises might cause investors to buy treasuries and lower their yields; feel free to consider a more appropriate disaster.

##Taking $100,000 from cash alone would necessitate rebalancing the whole PP, resulting in a similar tax effect as withdrawing equally from each of the assets.
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Re: How do you invest the Cash portion?

Post by jhogue » Sat Nov 30, 2019 3:23 pm

Pet Hog,
I disagree with your assumption that “someone in the accumulation phase has greater risk-tolerance” and therefore can be (ought to be?) more aggressive with their investments.

Consider a couple of real-world examples:

Example #1. 52 year old female (divorced, with 3 kids) came down with brain cancer. Got fired from her long-time nursing job because she could not work any more. Had to liquidate IRAs and 403b to meet monthly mortgage payments and medical bills before she died at age 56. I would not have suggested that she invest in 5 year CDs- or 5 year T-bills. Would you?

Example #2. 40 year old male working in the red-hot real estate market in Las Vegas before the financial crisis of 2008-2009. Lost his job when the local construction industry abruptly collapsed. Could not find another job in the area, and with his own house now under water, he stopped making mortgage payments. He subsequently lost the house, but not before his wife divorced him and took 50% of his retirement funds as well as alimony payments. I would not have suggested that he invest in 5 year CDs- or 5 year T-bills. Would you?

To be sure, not all emergencies are strictly financial in nature. Nevertheless, these examples illuminate why safety and liquidity must come before yield, particularly in Cash.
Last edited by jhogue on Sat Nov 30, 2019 3:30 pm, edited 1 time in total.
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Re: How do you invest the Cash portion?

Post by pugchief » Sat Nov 30, 2019 3:29 pm

jhogue wrote:
Sat Nov 30, 2019 3:23 pm
Pet Hog,
I disagree with your assumption that “someone in the accumulation phase has greater risk-tolerance” and therefore can be (ought to be?) more aggressive with their investments.

Consider a couple of real-world examples:

Example #1. 52 year old female (divorced, with 3 kids) came down with brain cancer. Got fired from her long-time nursing job because she could not work any more. Had to liquidate IRAs and 403b to meet mortgage payments and medical bills before she died at age 56. I would not have suggested that she invest in 5 year CDs- or 5 year T-bills. Would you?

Example #2. 40 year old male working in the red-hot real estate market in Las Vegas before the financial crisis of 2008-2009. Lost his job when the local construction industry abruptly collapsed. Could not find another job in the area, and with his own house now under water, he stopped making mortgage payments. He subsequently lost the house, but not before his wife divorced him and took 50% of his retirement funds as well as alimony payments. I would not have suggested that he invest in 5 year CDs- or 5 year T-bills. Would you?

To be sure, not all emergencies are strictly financial in nature. Nevertheless, these examples illuminate why safety and liquidity must come before yield, particularly in Cash.
Would you have suggested that they invest in EE savings bonds?
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Re: How do you invest the Cash portion?

Post by jhogue » Sat Nov 30, 2019 3:41 pm

EE bonds can be redeemed for more than their nominal value after one year. 5 year CDs cannot.

Which would be better in a really bad situation?

Snowing like hell in Minnesota. How is the weather in Chicago, Pugchief?
“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 pugchief » Sat Nov 30, 2019 3:45 pm

jhogue wrote:
Sat Nov 30, 2019 3:41 pm
EE bonds can be redeemed for more than their nominal value after one year. 5 year CDs cannot.

Which would be better in a really bad situation?

Snowing like hell in Minnesota. How is the weather in Chicago, Pugchief?
That EE question was facetious. Less bad is still not good.

40 degrees and rainy. Not pleasant, but better than snow. You don't have to shovel rain.
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Re: How do you invest the Cash portion?

Post by Pet Hog » Sat Nov 30, 2019 4:48 pm

jhogue wrote:
Sat Nov 30, 2019 3:23 pm
Pet Hog,
I disagree with your assumption that “someone in the accumulation phase has greater risk-tolerance” and therefore can be (ought to be?) more aggressive with their investments.

Consider a couple of real-world examples:

Example #1. 52 year old female (divorced, with 3 kids) came down with brain cancer. Got fired from her long-time nursing job because she could not work any more. Had to liquidate IRAs and 403b to meet monthly mortgage payments and medical bills before she died at age 56. I would not have suggested that she invest in 5 year CDs- or 5 year T-bills. Would you?

Example #2. 40 year old male working in the red-hot real estate market in Las Vegas before the financial crisis of 2008-2009. Lost his job when the local construction industry abruptly collapsed. Could not find another job in the area, and with his own house now under water, he stopped making mortgage payments. He subsequently lost the house, but not before his wife divorced him and took 50% of his retirement funds as well as alimony payments. I would not have suggested that he invest in 5 year CDs- or 5 year T-bills. Would you?

To be sure, not all emergencies are strictly financial in nature. Nevertheless, these examples illuminate why safety and liquidity must come before yield, particularly in Cash.
I wouldn't consider either of these unfortunate people to be in the accumulation phase any more. Without jobs and without insurance and without a home I think it's more likely they are in the drawdown phase. Perhaps they shouldn't be in the PP at all. Go to 100% savings accounts. But if you had asked me to give them advice before their misfortunes occurred, I wouldn't have had a problem suggesting five-year treasuries because they haven't done poorly recently. That is, there hasn't been a big spike in yields, as far as I can recall, in recent years. Also, please note than I am not saying invest 100% of your cash in five-year treasuries. If you do hold five-year treasuries (and, personally, I don't), I would suggest holding them only as part of a ladder while also keeping an emergency fund (in or out of the PP) of something more liquid.

A couple of other points. First, I didn't say anyone "ought" to be more aggressive, just that having a job and accumulating means that you can be a bit more risk-taking if you want to. And if that risk involves extending a treasury ladder out from three years to five -- well, that's not really that much extra risk, is it?

Second, we are all PP investors on this forum. We don't like risk. I lost a lot of money, too, in 2000-2002 and in 2008-2009 and I wish I had been in the PP then -- with any type of 25% cash strategy!
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