Short to medium long term PP investment

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Omsa

Short to medium long term PP investment

Post by Omsa » Sat Oct 20, 2012 7:39 am

I have some cash just sitting there around $15.000 on a savings account paying close to zero interest.
I don't need to spend it till 2 or 3 years from now. To put it in my regular PP would cast to much in fees for buying and selling the diff asset classes in a few years.

So I'm now split between just buying PERM and sell it in 2/3 years (only one fee for one fund) and hope I get more back then the broker fee + fund costs,
OR
just leave it sitting in my savings account.

Any advice?
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sophie
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Re: Short to medium long term PP investment

Post by sophie » Sat Oct 20, 2012 9:13 am

If you're sure you won't be spending that money within two years, you have several options that are better than that savings account:

1. High yield online savings account (Ing, Ally, ...)
2. Buy a CD
3. Buy PRPFX or PERM

Realize that while the third option carries a risk (small though it may be) that your dollars will decrease, it is the only one that is likely to beat inflation.  With pure cash vehicles, your purchasing power will erode over those 2-3 years. 

Note also that now is a good time to buy as share prices are down.  Also worth noting that several of us (me and PointedStick at least) use option #3 for short/medium term savings.
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Re: Short to medium long term PP investment

Post by Pointedstick » Sat Oct 20, 2012 10:08 am

As sophie said, I did that with a chunk of change in PERM and I'm very satisfied. It trades commission-free at eTrade, which lowers the cost even more if you want to make frequent deposits.

You have to watch out for the wide bid-ask spreads, of course.
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Re: Short to medium long term PP investment

Post by Dieter » Sat Oct 20, 2012 11:09 am

I Bonds could also be an option (10k per year per SSN)

Haven't done myself yet, but thinking of putting some of my emergency fund in there over time (can't withdraw within first year, loose three months interest if withdraw in first 5 years.

I have some PERM in my Roth, which is deep emergency fund for me.
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Re: Short to medium long term PP investment

Post by Omsa » Sat Oct 20, 2012 2:44 pm

Thanks for the great input,
I'm starting to lean towards just going for PERM an sell it when I need the money in 2 years,
I used to find it scary not the have all my money right there in my savings account available at any time, but I feel like the reverse now, seems like its just wasted sitting there eroding
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Re: Short to medium long term PP investment

Post by Reub » Sat Oct 20, 2012 3:27 pm

PERM has been benefiting in it's investments in REITs which are outperforming the market.
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Re: Short to medium long term PP investment

Post by Tortoise » Sat Oct 20, 2012 4:08 pm

Omsa wrote: So I'm now split between just buying PERM and sell it in 2/3 years (only one fee for one fund) and hope I get more back then the broker fee + fund costs,
OR
just leave it sitting in my savings account.

Any advice?
If you invest in PERM and hold it for at least 2 years, you'll almost certainly get back more than the broker fees and fund costs. Since 1972, the nominal 2-year returns from the HB PP have varied between about 4% and 60% (median 18%). For a $15,000 portfolio, that's a return of between $600 and $9,000 (median $2,700) over 2 years.

Unless you're buying/selling PERM a lot, I suspect it would be pretty hard for broker fees and fund costs to eat up anywhere close to $600, let alone the more typical $2,700.
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stone
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Re: Short to medium long term PP investment

Post by stone » Sat Oct 20, 2012 4:16 pm

In principle isn't "short term" cash supposed to be part of the "cash 25%" of the HBPP ? So someone could put a dollop of cash into the HBPP, and if that didn't trigger a rebalance, then it would just sit there until a rebalance was triggered. Similarly with taking out cash to spend. Possibly putting cash into a HBPP and then taking it out two years later wouldn't cause any extra trades and yet could contribute to portfolio growth in the mean time if a rebalance did occur that would have occured anyway ???
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Re: Short to medium long term PP investment

Post by Omsa » Sat Oct 20, 2012 4:24 pm

stone wrote: Possibly putting cash into a HBPP and then taking it out two years later wouldn't cause any extra trades and yet could contribute to portfolio growth in the mean time if a rebalance did occur that would have occured anyway ???
I get what you're saying, but $15.000 cash would for sure trigger a rebalance, one what I would have to undo when I pull it back out in 2 years. I want to keep my 'real' PP as a permanent thing where I want to avoid pulling large sums out of until real long term. But I thought with PERM I get best of both, the protection of the PP strategy and avoid costs in my real PP, and be able to get it back with one sell order.
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Re: Short to medium long term PP investment

Post by Pointedstick » Sat Oct 20, 2012 4:52 pm

Omsa, that was exactly my thinking as well. It's very much a personal thing, but I really like having multiple PPs. Back before I had even heard about any of this I set up 14 separate savings accounts (through ING, where this sort of thing is really easy), each earmarked for different expected expenditures. I still like the idea of breaking up my money into different separate logical chunks rather than have everything aggregated together with "virtual" parts of it earmarked for different uses. Maybe it's an OCD thing.
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Re: Short to medium long term PP investment

Post by clacy » Sat Oct 20, 2012 8:54 pm

As Dieter pointed out, I-bonds might be a good option.  Or you could go half I-Bonds, half PRPFX.

If you are limitted to etf's and mutual funds, I would go with something like.....

30% PRPFX
30% IEI (3-7 yr US treasury etf)
40% SHY

That would give you a decent real return in all likelihood, but very little possibility of a significant draw down.
Omsa

Re: Short to medium long term PP investment

Post by Omsa » Sun Oct 21, 2012 2:47 am

The only issue I didn't think about, is that the $15.000 figure was just a dollar estimate of my purchasing budget, since PERM/PRPFX is sold in dollars, but I have it on my savings account in EURO since I'm european, so I totally forgot if I decide to go for PERM I introduce some exchange rate risk. Or are there good ways to hedge my dollars holdings for that?

For most bond related suggestions there is a european alternative but unfortunately no euro PERM.
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Re: Short to medium long term PP investment

Post by stone » Sun Oct 21, 2012 3:24 am

Are the trading costs of putting $15000 in and out of a HBPP really so prohibitive? The fee I'm charged in the UK is £5.95 per trade. That doesn't seem so much in the context of $15000. I guess the bid-ask spread adds a bit to that but if there is a rebalance every couple of years anyway, then you would be suffering that anyway ???
"Good judgment comes from experience. Experience comes from bad judgment." - Mulla Nasrudin
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Re: Short to medium long term PP investment

Post by Omsa » Sun Oct 21, 2012 5:29 am

stone wrote: Are the trading costs of putting $15000 in and out of a HBPP really so prohibitive? The fee I'm charged in the UK is £5.95 per trade. That doesn't seem so much in the context of $15000. I guess the bid-ask spread adds a bit to that but if there is a rebalance every couple of years anyway, then you would be suffering that anyway ???
As Pointedstick also says, its not just about the costs of putting it in my regular PP, it partly about creating compartments of money earmarked for different purposes. My regular PP to me is permanent, so unless there is a real financial emergency that depletes all other assets I only want to take money out of it in the far future (I'm only around 30yrs old now) when I no longer have regular working income and retire.

I'll will calculate a more precise estimate of cost of putting it my regular PP and rebalance and the reverse in 2 years, to get a better idea. But its not only the costs but the time spend moving around the money when needed, versus just 1 sell order and I'm done. Only think right now that makes me somewhat hesitant for going the PERM way is, as I wrote above, the exchange rate risk of USD/EUR.
Last edited by Omsa on Sun Oct 21, 2012 5:32 am, edited 1 time in total.
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Re: Short to medium long term PP investment

Post by stone » Sun Oct 21, 2012 6:16 am

Omsa, I totally understand the point about not wanting to dip into your HBPP account from a purely "personal behaviour management" point of view- a bit like not wanting to have lots of chocolate in the house for chocoholics or whatever. I guess sometimes the wisest thing is for each of us to spot our own frailties and guard against them :) .
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Re: Short to medium long term PP investment

Post by sophie » Sun Oct 21, 2012 9:18 am

Ah.  I didn't realize your money was in Euros.  That changes things.

It's probably not a good idea to use PERM or PRPFX in that case, since you'd be adding currency risk (USD falling against the Euro) to the equation.  Could you instead create a separate mini-PP using ETFs different from the ones in your main PP, directly purchasing the bonds, and keeping cash in a separate savings account?

This would be a bit of work to set up, but the trading costs both buying & selling shouldn't be prohibitive.  If it's too annoying, maybe the best thing would be to find the highest yielding savings account you can and call it a day.
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Re: Short to medium long term PP investment

Post by hoost » Wed Oct 24, 2012 3:21 pm

I recently was holding money with a similar short time horizon and opted to place it in a short term govt bond fund (VFIRX).  I cashed out the money a couple of months ago with a small gain and all of my principal, and did not lose any sleep over the money while it was in there.  I think if you know you'll need the money, peace of mind is a premium that may be worth giving up a bit of return.
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Re: Short to medium long term PP investment

Post by Ad Orientem » Wed Oct 24, 2012 4:49 pm

hoost wrote: I recently was holding money with a similar short time horizon and opted to place it in a short term govt bond fund (VFIRX).  I cashed out the money a couple of months ago with a small gain and all of my principal, and did not lose any sleep over the money while it was in there.  I think if you know you'll need the money, peace of mind is a premium that may be worth giving up a bit of return.
I concur with that option. A short term government bond fund would be my choice here. I don't know what options are available in Europe but I'd look for something comparable to SHY/SCHO or maybe SHV if you are really more concerned with capital preservation than appreciation.
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