Help With Setting Up PP

[l2jperry]

Hello All,

Continuously reading this board for advice on how to set up a PP. I am a new investor with no experience, other than buying gold coins about 3 months ago.

Here is what I am considering doing and I wanted your opinions/expertise:

Open a Roth IRA at Vanguard and maxing out my 5,500 contribution with...

1.) 2,500 in VT (which will be free through Vanguard)
2.) 3,000 30 Year treasuries (which should also be free through Vanguard)

Next, either open a C.D. through Ally at a little over 1% for a 2 year deal, or purchase t-bills in a brokerage account. I am leaning towards the C.D. - but I am undecided here. The amount would be $2,500.

Lastly, I would move a gold coin out of my previous investment into the PP, at a value of approximately $2,300.

This should leave me at 24.27% Stocks, 29% Bonds, 24.27% Cash, and 22.3% Gold... is this a good allocation to start with? Seems to be the closest I can get with restrictions in buying bonds and gold.

Furthermore, since gold is my lagging asset, I have more gold in my VP that I will transfer over to my PP when needed so that I can avoid having to get into an ETF for re-balancing purposes.

Does this sound good? Am I missing something?

Thank-you for your help.

[LC475]

I am no expert, but I am assuming that the $5,500 limit is a monthly limit, right?  So you will be contributing $5,500 every month to the IRA.  And I guess the bond purchases have to be in round thousands.

Maybe you could switch off periodically and have a month where you buy $2,000 in bonds and 3,500 in VT.  Just to keep it closer to balanced, you understand.  That might make it more complicated; I don't know if they can do something like that (multiple month cycles) automatically for you.

[l2jperry]

I believe you are limited to $5,500 in a Roth yearly. Once I need to rebalance I will have to start a taxable account if I do not have enough space left in my Roth.

[hoost]

Hello All,

Continuously reading this board for advice on how to set up a PP. I am a new investor with no experience, other than buying gold coins about 3 months ago.

Here is what I am considering doing and I wanted your opinions/expertise:

Open a Roth IRA at Vanguard and maxing out my 5,500 contribution with...

1.) 2,500 in VT (which will be free through Vanguard)
2.) 3,000 30 Year treasuries (which should also be free through Vanguard)

Next, either open a C.D. through Ally at a little over 1% for a 2 year deal, or purchase t-bills in a brokerage account. I am leaning towards the C.D. - but I am undecided here. The amount would be $2,500.

Lastly, I would move a gold coin out of my previous investment into the PP, at a value of approximately $2,300.

This should leave me at 24.27% Stocks, 29% Bonds, 24.27% Cash, and 22.3% Gold... is this a good allocation to start with? Seems to be the closest I can get with restrictions in buying bonds and gold.

Furthermore, since gold is my lagging asset, I have more gold in my VP that I will transfer over to my PP when needed so that I can avoid having to get into an ETF for re-balancing purposes.

Does this sound good? Am I missing something?

Thank-you for your help.

Seems reasonable. 

For cash, I prefer to keep it accessible so that it can be used for emergencies, so I would avoid the CD.  I would keep it in a savings account, or in a TMM or short-term bond fund, or a regular money market, any of which would have check writing privileges.  Personally I use VFIRX in taxable with check-writing privileges.

On gold, I'm not sure what the current spot price is (joys of the PP, I guess), but is one gold coin really worth $2300?  Seems high.

The Roth IRA is a $5500 annual limit.

I think the allocation should be fine to start; with small numbers starting out, you won't hit the 25% exactly and it isn't worth the hassle trying in my opinion.  As you grow your accounts, you will just rebalance new contributions to maintain your allocation.

Transferring the gold from VP into PP makes sense to me...just don't go the other way.

[LC475]

I believe you are limited to $5,500 in a Roth yearly. Once I need to rebalance I will have to start a taxable account if I do not have enough space left in my Roth.

There you go; just goes to show how little I know!  That seems so low -- even if you faithfully contribute the max for 20 years you'd only have 110,000 contributed (and then plus or minus for return), and it seems like it would be hard to retire on that.

Anyway, since this just once a year, I think the plan sounds good.  Movement in the asset values will throw the portfolio more out of balance than the initial contribution imprecision.  And you can combine the once-a-year check for rebalancing with the once-a-year contribution and divvy the contribution out accordingly.  Sounds very simple and nice.

[LC475]

On gold, I'm not sure what the current spot price is (joys of the PP, I guess), but is one gold coin really worth $2300?  Seems high.

Maybe it's a two-ounce coin?  Either that or it has numismatic value.

[l2jperry]

For cash, I prefer to keep it accessible so that it can be used for emergencies, so I would avoid the CD.  I would keep it in a savings account, or in a TMM or short-term bond fund, or a regular money market, any of which would have check writing privileges.  Personally I use VFIRX in taxable with check-writing privileges.

I will still have savings outside of the PP for emergency funds, also I am 22, no expenses other than car/health insurance, and no debt. So even though you're not making much off of cash anyway, i'd like to put it in something for 1-2 years that will give me the best return, I don't mind a little extra risk. So with that being said, what do you think?

On gold, I'm not sure what the current spot price is (joys of the PP, I guess), but is one gold coin really worth $2300?  Seems high.

You are absolutely correct, my mistake . It is more like $1,300... so i'll put two gold coins in. Which actually brings me closer to 25% all around. They are American Eagles, 1 oz.

[l2jperry]

There you go; just goes to show how little I know!  That seems so low -- even if you faithfully contribute the max for 20 years you'd only have 110,000 contributed (and then plus or minus for return), and it seems like it would be hard to retire on that.

Anyway, since this just once a year, I think the plan sounds good.  Movement in the asset values will throw the portfolio more out of balance than the initial contribution imprecision.  And you can combine the once-a-year check for rebalancing with the once-a-year contribution and divvy the contribution out accordingly.  Sounds very simple and nice.

I agree, def. not enough to retire off of, but I am just using up tax-free growth space, as my earnings and savings increase I will no doubt have to open up to either a taxable account or continue saving in a traditional IRA.

[Pointedstick]

The contribution limits on Roth IRAs is just silly. If you take them at face value and even dutifully max one out over your entire career, the amount you'll wind up with is just laughably low compared to what you need to retire. The only way you can really make it work is if you do clever things like transferring tax-deferred IRA or 401k balances into your Roth IRA a little bit at a time or during a year of unemployment or when you're living in a no income tax state or something.

[AdamA]

Does this sound good? Am I missing something?

It sounds like a great plan to me.

The one thing I would say is that, if it were me, I would purchase Treasuries for the cash portion.  This is what Harry Browne initially recommended b/c there is no default risk.  I don't think it's worth adding additional risk for a little bit of yield.

However, if you're aware of this risk and are comfortable with it the CDs are probably fine.

[stuper1]

Consider using Treasury Direct for buying non-IRA T-bills.  And also consider buying I-bonds with cash that is not part of your emergency fund ("deep cash").  I-bond interest is tax-deferred, so it's kind of like a traditional IRA except using post-tax money.  I-bonds will pay as much interest as the CD, but with the tax deferred interest.  You just can't withdraw the I-bond money for one year.

[l2jperry]

Consider using Treasury Direct for buying non-IRA T-bills.  And also consider buying I-bonds with cash that is not part of your emergency fund ("deep cash").  I-bond interest is tax-deferred, so it's kind of like a traditional IRA except using post-tax money.  I-bonds will pay as much interest as the CD, but with the tax deferred interest.  You just can't withdraw the I-bond money for one year.

Thank-you for that, I do not know anything about i-bonds, but that seems like a better way to go. I will look into that. Appreciate it.

[hoost]

For cash, I prefer to keep it accessible so that it can be used for emergencies, so I would avoid the CD.  I would keep it in a savings account, or in a TMM or short-term bond fund, or a regular money market, any of which would have check writing privileges.  Personally I use VFIRX in taxable with check-writing privileges.

I will still have savings outside of the PP for emergency funds, also I am 22, no expenses other than car/health insurance, and no debt. So even though you're not making much off of cash anyway, i'd like to put it in something for 1-2 years that will give me the best return, I don't mind a little extra risk. So with that being said, what do you think?

It's good to hear that your expenses are low and you have no debt. Try to keep it that way as much as possible.  That being said, I still don't like the idea of having cash locked up in a CD.  To me, it sort of defeats the purpose of having cash if you have to pay a penalty to use it, whether you're using it to rebalance or cover an emergency.  Like some of the others have said, I'd look at treasuries, or perhaps I-bonds if you want a little more yield. They are more accessible.  As you grow your portfolio, I would encourage you to look at your e-fund as part of the cash allocation; to me, that's one of the best features of the PP.

Best of luck; it's good that you're thinking about this kind of stuff now.  Keep in mind that at some point you may get married and want to buy a house, etc., all of which will require cash, so don't be afraid of being cash-heavy at this point in life.

[smurff]

This looks like a great plan.  The 2-coin version.

If you put the cash in a CD and keep rolling the CD over, you might have to pay a penalty when the time comes to rebalance.  I would do that only after you've been running the portfolio a few years, and only put "deep cash" into a CD (same as with I-bonds).  A savings account is better.

Ally, American Express, and other online banks have high-yield savings accounts with rates around 0.85%, which is only a few basis points lower than a 1-2 year CD.

[l2jperry]

Thanks Smurff for your reply. That is good advice, I hadn't considered the cash portion would be tied up for at least a year with the i-bonds or C.D. which could be a problem if I need to re-balance. I appreciate it.