Starting questions, cash and mortgage

[nikao]

I've been interested in passive investing in general and the PP in specific for quite a while now, but only just recently started really going into it. I had bonds, stocks and cash, but no gold (or silver) yet and started buying that as well.
However, I do have a few questions starting out;

- (extra) payments to the mortgage
should I view this as part of the portfolio? and if so, how? Could either be viewed as cash (repaying a loan) or investing in real estate (the net worth part comes from the value of the house)

-emergency cash
PP talks specificly about your net worth, this would make is seem as the emergency cash is part of the portfolio. Is this correct? Or should I view the PP only for the 'real investment' money? (which also would solve question #1 )
If I need to take this into account of the PP, it would skew the balance for now since I have much more cash than other investments. I don't want to spent this emergency cash (for rebalancing), so I'm left wondering how to view this in terms of PP

- starting and rebalancing
Since I had a different portfolio and didn't take emergency cash into account, I have quite some rebalancing to do. I'm just wondering if it would be better to do this over the course of months by means of the additional investments each month, or if I should really rebalance everything at once?  Especially for the gold it would seem nice to be able to cost average that over the coming months instead of just stepping in.

- gold and silver
Does silver in general has a place in the PP? I sometimes see people doing 20% gold 5% silver for instance, but especially with the current ratio's it seems better to buy silver than gold. I'm wondering what the general view is on this?

[Pointedstick]

Welcome, nikao! Let me try to address your questions.

Your mortgage payment and house are not part of your permanent portfolio. Mortgage payments should be treated as simply another monthly expense. The value of your house is irrelevant to your investments unless it is in some way an actual investment (i.e. it is a multi-family home, you plan to flip it, or you have a whole portfolio of real estate).

As for cash, it's integrated into the portfolio in the 25% cash quarter. If integrating your cash gives you a lot more than 25% cash in total, that's a sign that you're too cash heavy. The PP is a very low-risk portfolio. Putting some of that cash to good use via stocks, bonds, or gold will probably not keep you up at night unless you're the kind of person who frets about 3% yearly losses.

The general consensus here is to average into the PP. Several people recently have gone all-in during bad times and felt bad about the timing. Averaging in reduces the potential for outsized returns but also the chance for distasteful losses as soon as you get in.

Silver does not have a place in the PP. Its price is substantially affected by its uses in industry, unlike gold.

[barrett]

Welcome to the forum, nikao. I'll only slightly disagree with Pointedstick on one point. I look at owning your own home as a tilt toward both prosperity and, to a certain extent, inflation. A home is a hard asset that tends to hold its value when general prices are going up. It can also appreciate when the economy is good (prosperity). Of course prosperity is not always evenly spread geographically so that home prices don't rise uniformly as inflation or prosperity take hold. Still, as part of your "net worth", that's where some of your $ is.

When I think this is really important to consider is if you are in a situation where you might be downsizing, say, for example, because the kids are going to soon be out on their own. Or maybe you want to do what Pointedstick did and just get the heck out of a high-cost area.

When you arrive at the PP (or any other asset allocation for that matter), there are almost certainly assets you have accumulated that can't neatly fit into the four quadrants of a PP. For example, I came to the PP two years ago with a bunch of US savings bonds. They're kind of cash but not really because there are tax implications if I decide to redeem them. And they are certainly not long bonds. What they do offer is some deflation protection, not in the same way as long bonds do, but deflation protection nonetheless.

I guess I am just making the argument that all your assets together are your "portfolio". And there are definitely two school of thought about this here.

I agree with Pointedstick's advice about averaging into the portfolio. It holds three really volatile assets and it's tough to buy a lot of one of them all at once and then see its value plunge. Good luck!

[nikao]

Thank you for the replies and answers!

What I find difficult to accept is to have the emergency cash being part of the portfolio, for now that is. I like keeping (liquid) cash available for covering something around 6 months living expenses. If I now would treat it as part of the portfolio, I'd have to spent some of that cash on buying other assets, reducing it to <6 months.

But following your advice, I now plan to see this as the 25% part of the portfolio, and just average in on the rest of the items over the following months, while not adding more to cash. That would mean that I have to spend over a year probably into averaging into the 25% for the other items, but this way the emergency cash is at least save
Guess that makes sense?

I guess I'll leave the mortgage/house out of the portfolio calculations for now, but keep putting money there as well since it is lowering my cost of living in the long run.

[Tyler]

I personally look at my home equity as an asset (with associated holding costs) and the PP as my investments.  They are separate items, even if both fall under the larger umbrella of "net worth".  I prefer not to get cute with straining to classify mortgage payments as an "investment", but totally agree that paying off the mortgage is a great idea.

The PP cash absolutely doubles as emergency/utility cash for me.  Having that chunk of money available when needed is a great benefit of the portfolio.  BTW, cash does not need to be homogeneous.  I like to keep 1 year of expenses in a checking account, and the rest in SCHO.  I add both together for my PP "cash". 

I personally went all-in to start, and kept things balanced by buying the lagging asset along the way.  I was fine with that, but lots of people find that DCAing into new portfolios to be easier emotionally.  I think both methods are fine. It largely depends on your personality and the investments you're coming from.

Silver isn't really a PP asset, but it's fine to have some in addition to your PP if you like.  I would look at all of my investments a whole when describing my "portfolio", but would still consider the subset of assets comprising the PP as a package deal.  Even if it's four separate assets, there's a reason you added the PP "fund" to your larger portfolio.  Let it do its thing. 

[Jack Jones]

In addition to what Tyler said, here's an old quote from Tyler that I like:

FWIW -- 66% of people take the standard deduction, making the mortgage interest deduction irrelevant.  A lot of those calculators are deceiving, so make sure it applies you you.  The results may look even better than that.

Personally, my general rule of thumb that I wish I would have come up with when I was younger is to maintain your home equity (based on the mortgage amount, not subsequent price changes) at about 20% of your net worth.  So assuming you put 20% down, don't buy a house you couldn't afford to buy in cash if you wanted to. And when the original mortgage is less than 20% of your net worth, go ahead and pay it off.  You can sorta think of it as a 5th equal leg of your personal Permanent Portfolio.

This system allows you to stay well-invested and your wealth diversified away from your home.  But once your remaining principal is small relative to your other investments, the marginal benefit of keeping the mortgage becomes pretty small as well. 

You're pretty close to that line as-is, so it's your call.  A lot of it comes down to your personal goals.  Having no debt mitigates natural financial uncertainty, which can be a great aid in planning for things like college for the kids or early retirement.

[nikao]

In addition to what Tyler said, here's an old quote from Tyler that I like:

FWIW -- 66% of people take the standard deduction, making the mortgage interest deduction irrelevant.  A lot of those calculators are deceiving, so make sure it applies you you.  The results may look even better than that.

Personally, my general rule of thumb that I wish I would have come up with when I was younger is to maintain your home equity (based on the mortgage amount, not subsequent price changes) at about 20% of your net worth.  So assuming you put 20% down, don't buy a house you couldn't afford to buy in cash if you wanted to. And when the original mortgage is less than 20% of your net worth, go ahead and pay it off.  You can sorta think of it as a 5th equal leg of your personal Permanent Portfolio.

This system allows you to stay well-invested and your wealth diversified away from your home.  But once your remaining principal is small relative to your other investments, the marginal benefit of keeping the mortgage becomes pretty small as well. 

You're pretty close to that line as-is, so it's your call.  A lot of it comes down to your personal goals.  Having no debt mitigates natural financial uncertainty, which can be a great aid in planning for things like college for the kids or early retirement.

That's quite interesting, since I was considering a 20% part for the mortgage payments/house in the portfolio...

As for the cost averaging vs all in; all in wouldn't be possible for me, but would mean either diminishing the emergency cash or selling stock. I'd prefer to do neither and just contribute to the other assets thus cost averaging into 25% parts..

[Pointedstick]

To clarify on the house/mortgage issue, it's undoubtedly true that a house is part of your all-in portfolio, and one of your assets. It's certainly a big freestanding chunk of wealth and capital.

But how would you integrate such a thing into your investment portfolio?

Generally speaking your investment assets have rules attached to them. Rules like, "Rebalance the assets under X condition" "Sell under Y condition" buy under Z condition" and so on and so forth. You can also safely take profits with these assets. You can sell stocks and put the money into cash, bonds, whatever. You can buy and sell assets without significantly disrupting your life, even gold; driving to the gold dealer or the bank that holds your safe deposit box is not much effort.

However, none of this is generally the case for houses that you live in. You cannot divide your house up into salable fractions and then sell those fractions to take profits or buy more fractions to "rebalance" your house allocation. If the house you live in appreciates in value, you can't sell it without significantly disrupting your life, and if you buy a new house in the same market, you're not reaping much if any profit since you're buying right back into the same market that gave you your gain. Additionally, you may need to sell your house even when you don't want to; for example due to a mandatory job relocation. You can even lose everything on a leveraged play (i.e. a mortgage) if you have to walk away.

Because of all these factors, I don't think it makes sense to consider the house you live in a part of your investment portfolio, and certainly not a part of your PP. A house is a thing you live in, not a part of your investment portfolio--unless you are explicitly treating it as an investment, but if you're doing that, you're probably not living in it full-time.

[nikao]

To clarify on the house/mortgage issue, it's undoubtedly true that a house is part of your all-in portfolio, and one of your assets. It's certainly a big freestanding chunk of wealth and capital.

But how would you integrate such a thing into your investment portfolio?

Generally speaking your investment assets have rules attached to them. Rules like, "Rebalance the assets under X condition" "Sell under Y condition" buy under Z condition" and so on and so forth. You can also safely take profits with these assets. You can sell stocks and put the money into cash, bonds, whatever. You can buy and sell assets without significantly disrupting your life, even gold; driving to the gold dealer or the bank that holds your safe deposit box is not much effort.

However, none of this is generally the case for houses that you live in. You cannot divide your house up into salable fractions and then sell those fractions to take profits or buy more fractions to "rebalance" your house allocation. If the house you live in appreciates in value, you can't sell it without significantly disrupting your life, and if you buy a new house in the same market, you're not reaping much if any profit since you're buying right back into the same market that gave you your gain. Additionally, you may need to sell your house even when you don't want to; for example due to a mandatory job relocation. You can even lose everything on a leveraged play (i.e. a mortgage) if you have to walk away.

Because of all these factors, I don't think it makes sense to consider the house you live in a part of your investment portfolio, and certainly not a part of your PP. A house is a thing you live in, not a part of your investment portfolio--unless you are explicitly treating it as an investment, but if you're doing that, you're probably not living in it full-time.

This might be true if you are talking bigger numbers and $$ I guess, for me however it seems just as easy to balance this as any of the other assets by just balancing through the monthly contributions to the assets..
That's why I figured it might be good to make it part of the portfolio, but I see and agree how this can be quite challenging to do further down the road

[Jack Jones]

If you want to consider it part of the portfolio, Harry devotes a chapter about doing so in Why the best-laid investment...

[barrett]

To clarify on the house/mortgage issue, it's undoubtedly true that a house is part of your all-in portfolio, and one of your assets. It's certainly a big freestanding chunk of wealth and capital.

But how would you integrate such a thing into your investment portfolio?

Generally speaking your investment assets have rules attached to them. Rules like, "Rebalance the assets under X condition" "Sell under Y condition" buy under Z condition" and so on and so forth. You can also safely take profits with these assets. You can sell stocks and put the money into cash, bonds, whatever. You can buy and sell assets without significantly disrupting your life, even gold; driving to the gold dealer or the bank that holds your safe deposit box is not much effort.

However, none of this is generally the case for houses that you live in. You cannot divide your house up into salable fractions and then sell those fractions to take profits or buy more fractions to "rebalance" your house allocation. If the house you live in appreciates in value, you can't sell it without significantly disrupting your life, and if you buy a new house in the same market, you're not reaping much if any profit since you're buying right back into the same market that gave you your gain. Additionally, you may need to sell your house even when you don't want to; for example due to a mandatory job relocation. You can even lose everything on a leveraged play (i.e. a mortgage) if you have to walk away.

Because of all these factors, I don't think it makes sense to consider the house you live in a part of your investment portfolio, and certainly not a part of your PP. A house is a thing you live in, not a part of your investment portfolio--unless you are explicitly treating it as an investment, but if you're doing that, you're probably not living in it full-time.

Yeah, my own perspective is colored by the fact that we are hoping to soon unwind an exposure to residential real estate that is too large relative to our assets. In this position it just makes sense to mentally throw at least some of real estate equity in the prosperity & inflation protection buckets.

FWIW -- 66% of people take the standard deduction, making the mortgage interest deduction irrelevant.  A lot of those calculators are deceiving, so make sure it applies you you.  The results may look even better than that.

Personally, my general rule of thumb that I wish I would have come up with when I was younger is to maintain your home equity (based on the mortgage amount, not subsequent price changes) at about 20% of your net worth.  So assuming you put 20% down, don't buy a house you couldn't afford to buy in cash if you wanted to. And when the original mortgage is less than 20% of your net worth, go ahead and pay it off.  You can sorta think of it as a 5th equal leg of your personal Permanent Portfolio.

This system allows you to stay well-invested and your wealth diversified away from your home.  But once your remaining principal is small relative to your other investments, the marginal benefit of keeping the mortgage becomes pretty small as well. 

You're pretty close to that line as-is, so it's your call.  A lot of it comes down to your personal goals.  Having no debt mitigates natural financial uncertainty, which can be a great aid in planning for things like college for the kids or early retirement.

I remember when Tyler posted this and it is one of the best things I have read on here.

[nikao]

If you want to consider it part of the portfolio, Harry devotes a chapter about doing so in Why the best-laid investment...

Good to know, care to share what this chapter was about/what Harry has to say on this?

[sophie]

Harry Browne advised against considering your house as an investment.  Rather, it's a consumption item.  It's also not very liquid so you really can't compare it to the PP investments.  He devoted one of his radio shows to this topic, although it's also discussed in his books (forget exactly which though).  So you will have to balance paying off the mortgage early and growing your investments.  Both are good things, but one may be a priority depending on your situation.  If you can't decide between them you can always split your savings 50/50.  Or go with the Tyler rule.

Regarding cash & e-funds:  Until your Permanent Portfolio is at least 6-8x the size of what you'd like to have as an emergency fund, you might want to keep some extra cash separate from the PP.  Eventually you can integrate it into the PP.  Certainly it makes no sense to be reducing your cash holdings below what you are comfortable with in order to satisfy the 25x4 allocation.

Also, if your PP is spread among taxable and tax-advantaged accounts, you'll need to arrange things so that the cash is accessible to you.  For example, my cash allocation is distributed between a bank savings account, US savings bonds, and 1 year treasuries in a Roth IRA.  When the savings account gets too overstuffed, the plan is to open a Treasury money market account with checkwriting privileges.  Or you can buy T-bills with auto-rollover at Treasury Direct or at a brokerage.

[Fred]

I think if you were lucky enough to acquire a mortgage in this low-interest rate environment with rates set to rise, paying it off would be foolish.

Just my 2 cents but I recommend the book "Liar's Poker" to see what I'm talking about. You pay off your low-interest rate mortgage and it's a gift to whoever owns the mortgage because they can take the money you just gave them and invest it at a higher rate. So why not just open an account as your own "pay-off mortgage" fund and put the extra payments in it?

[nikao]

Normally I would agree, however, this is a 'special case' where I got the mortgage not from the bank but someone close to me.
Interest is low, and repayments go directly to this person who can indeed benefit from it, but in this case that's a good thing

[Libertarian666]

I think if you were lucky enough to acquire a mortgage in this low-interest rate environment with rates set to rise, paying it off would be foolish.

Just my 2 cents but I recommend the book "Liar's Poker" to see what I'm talking about. You pay off your low-interest rate mortgage and it's a gift to whoever owns the mortgage because they can take the money you just gave them and invest it at a higher rate. So why not just open an account as your own "pay-off mortgage" fund and put the extra payments in it?

My mortgage is at 2.625 fixed, no recourse.

I doubt I will pay it off early. 

[nikao]

I get that, but still hesitating; Isn't one of the 'rules' of PP to never invest with borrowed money? Isn't a mortgage just that?
And thus; putting cash away instead of repaying the mortgage is kinda investing with leverage?
Even with interest at 2%, repaying is still better than holding cash isn't it?

[Libertarian666]

I get that, but still hesitating; Isn't one of the 'rules' of PP to never invest with borrowed money? Isn't a mortgage just that?
And thus; putting cash away instead of repaying the mortgage is kinda investing with leverage?
Even with interest at 2%, repaying is still better than holding cash isn't it?

The reason never to invest with borrowed money is that it magnifies losses as well as gains, allowing you to lose more money than you put in.

However, with a mortgage that I am morally certain I can repay, and which is non-recourse in the ultimate extremity, I feel safer rather than less safe when holding cash. This is because a hyperinflation that wipes out the value of my cash also wipes out the value of my mortgage.

[Fred]

My mortgage is at 2.625 fixed, no recourse.

I doubt I will pay it off early. 

For those who don't know what "no recourse" means, if deflation gets so bad that his mortgage is underwater, even at 2.625% interest Libertarian666 can  send his keys to the bank and tell them they can have the house. They have "no recourse" to come after him for the loss they will incur. The deflation risk was all on the bank for a 2.625% return.

(Tax write-offs make it not quite as simple).

The reason I know this is because I bought a house at the height of the housing bubble in 2006 and I don't live in a "no-recourse" state.  If I did, I  might very well have walked away from my mortgage.

[Libertarian666]

My mortgage is at 2.625 fixed, no recourse.

I doubt I will pay it off early. 

For those who don't know what "no recourse" means, if deflation gets so bad that his mortgage is underwater, even at 2.625% interest Libertarian666 can  send his keys to the bank and tell them they can have the house. They have "no recourse" to come after him for the loss they will incur. The deflation risk was all on the bank for a 2.625% return.

(Tax write-offs make it not quite as simple).

The reason I know this is because I bought a house at the height of the housing bubble in 2006 and I don't live in a "no-recourse" state.  If I did, I  might very well have walked away from my mortgage.

Yep. I didn't know (until I refinanced) that in Texas, any refinance that results in even $1 in new cash out is considered a "home equity loan", which under Texas law is always non-recourse.

I was going to take out considerably more than $1 in new cash anyway, so that was a nice bonus!