IRA vs. Taxable for each PP asset class

[FF9000]

I have settled on using the Golden Butterfly as my long-term portfolio, with a variable portfolio of speculative tech stock investments that I believe in (<10% of total investable assets).

The GB is:

• 40% equities (1/2 large-cap blend, 1/2 small-cap value)
• 20% Gold
• 20 LTT
• 20% Cash

Easy ones first:

• LTT in IRA due to coupons payable as income tax
• Equities in taxable to avoid capital gains being taxed as income

Okay, that leaves cash and gold. In his podcasts, HB advocates cash in the IRA. Not sure I totally get the logic. Cash at least for the time being is throwing off minimal interest, so the income tax issues should be small. Whereas gold is taxed as a collectible at 28% which is substantially higher than long-term capital gains.

So, please let me know if I am right in thinking that the following makes the most sense in order of MOST IRA-APPROPRIATE to LEAST:
1) LTT
2) Gold
3) Cash
4) Dividend-paying equities
5) Non dividend-paying equities.

Thanks. Just want to dot my i's and cross my t's before pulling the trigger and re-balancing my whole portfolio.

[Xan]

Just to clarify gold's taxation: IIRC, it's taxed at your marginal rate for income up to a maximum of 28%.

[goodasgold]

Hello FF

For your cash component, please don't overlook I-Bonds. When inflation comes back in the future, as it inevitably will, a lot of folks will regret not loading up on I-Bonds during the low-inflation years.

[FF9000]

Just to clarify gold's taxation: IIRC, it's taxed at your marginal rate for income up to a maximum of 28%.

Fair point. I would be paying 28%+, so for me it is not ideal for a taxable account.

Hello FF

For your cash component, please don't overlook I-Bonds. When inflation comes back in the future, as it inevitably will, a lot of folks will regret not loading up on I-Bonds during the low-inflation years.

Never really understood treasuries very well. What is the difference between TIPS and I-Bonds?

[Xan]

Just to clarify gold's taxation: IIRC, it's taxed at your marginal rate for income up to a maximum of 28%.

Fair point. I would be paying 28%+, so for me it is not ideal for a taxable account.

Even in retirement? Potentially you could put your "deep gold" (that is, the gold that most likely won't ever need to be sold for rebalancing purposes) in taxable.

Also I believe that closed-end funds like PHYS are taxed at capital gains rates, not as collectibles.

[MachineGhost]

Never really understood treasuries very well. What is the difference between TIPS and I-Bonds?

I-Bonds are non-marketable, tax deferred savings bonds with a fixed rate of interest set at time of issue and an inflation kicker from CPI added every 6 months. TIPS are makretable securities and don't have any protection against principal loss risk in a deflation as I-Bonds do; you also have to pay income taxes each year on the phantom yield despite it not being paid out. TIP funds have solved that problem by making quarterly distributions in the exact amount that will be due. I-Bonds are great for Deep Cash. TIPS don't really have any valid role to play. EE savings bonds can also be good because they guarantee a 3%/year yield if held for 20 years (step up).

[goodasgold]

Excellent and concise explanation of I-Bonds and TIPS, MG. IIRC, the various Boglehead books go into more detail.

How do you feel about owning TIPS bonds outright vs. a TIPS fund? I try to benefit from both worlds by owning some TIPS funds in a Roth IRA.

[Dieter]

Other points:
* Dividend yielding securities yield more than cash nowadays (check after tax returns)

* Cash outside of most retirement accounts (often/generally) yields more than within (online savings, CDs, I-Bonds, ...)

* I-Bonds interest tax free until sold; tax free if do qualified things with the money
(but do have to hold for a year; only get paid partial interest if sell within 5 years. $10k limit per year per SSN.
Why deep holding, but a nice deep holding if have a cash cushion...

* Keep taxes in mind, but not the be-all end-all (funds for rebalancing, for example)

[sophie]

Just a few points to add to the already excellent discussion above.

Gold ETFs are best held in a retirement account, unless your marginal tax rate is < 28% and state taxes aren't an issue. The reason for gold in taxable is to hold it in the form of physical coins. It would be useful to get at least 2/3 of your gold in physical form, with the gold ETFs for convenience during rebalancing.

The reason that Harry Browne recommended cash as top priority for tax-sheltered accounts is that 100% of its growth is interest, which is taxed at the ordinary income rates. That's not so relevant right now. The main point is that the cash serves as your emergency fund, so you'll want it in places and forms that are accessible to you: bank savings account, treasury bills/short term bonds in a brokerage or Treasury Direct, a Treasury money market fund, and cash in your Roth IRA (last resort).

Savings bonds are important too but be aware of the 1 year initial period when you can't sell for any reason. Savings bonds are, otherwise, the bomb. It's like getting an extra non-deductible IRA. Note that you never, ever want to be in a position of having to sell them to rebalance, since you'll owe the taxes on all interest accumulated to date. Also, if you are more than 30 years away from retirement you may want to consider that the tax bill on the interest will come due at maturity, whether you cash in the bond or not. Limit to ~1/3 of your cash allocation. Ditto for short term bonds > 1 year from maturity.

Finally - you might want some bonds in taxable for tax-loss harvesting purposes. Stocks are good for that too. Note that you can, in fact, tax loss harvest physical gold. I did it with a phone call to APMEX and a single trip to the post office.

[barrett]

Darn, you guys grabbed all the low hanging fruit while I was still sleeping! Just a note on cash in a tIRA that Sophie already alluded to... Harry Browne passed away in 2006 IIRC and, up to that point, cash had had a pretty decent yield. I believe as late as 2007 I was getting 5% to 5.5% on my Fidelity money market fund. If that were the case now, I would definitely have a big chunk of it in my tIRA. As things stand now, I hold about 10% cash in both my tIRA and Roth accounts. I like the idea of being able to pounce if something craters. Remember, for example, that when stocks dropped in 2008, it took LTTs about six weeks to respond. I should also add that I am much closer to retirement than you, FF9000, so take my IRA cash opinion with a grain of salt.

[FF9000]

Even though I don't want to derail this into a cash discussion since there is a forum for that, it seems like that is the most contentious asset class in terms of where to hold it. Really, we need to get down to the bottom of "Why are we even holding cash in this portfolio"?

If it is because cash will hold value in a recession, then any form of cash works and you may as well get the cash with the highest returns. Whether this is locking in a high-rate CD (betting against rates rising much or inflation accelerating), or TIPS/I-Bonds (betting on inflation increasing beyond today's levels in the short to medium-term), or short-term treasury ETFs/MM Funds (betting on rates rising and riding that wave). And yet for even another group of investors, cash is about a "emergency fund", a view that I personally do not hold but many do.

So it seems to me that really, we need to step back away from the 25/25/25/25 dogma and ask, why do we want cash as a part of a balanced portfolio, and not ask how to optimize cash in a non-diversified vacuum. What property of cash are we banking on to save the portfolio when the other 75% is underperforming? If we can answer that, we can more clearly identify what cash instrument to hold, and once we figure that out, we can figure out in which account it is best to hold the selected instrument. For example, it is not clear to me the point of cash in HB's portfolio is protect against inflation since that's he intended gold for, but there is a lot of discussion of TIPS and I-Bonds. Just seems inconsistent with HB principals.

[Kbg]

So it seems to me that really, we need to step back away from the 25/25/25/25 dogma and ask, why do we want cash as a part of a balanced portfolio, and not ask how to optimize cash in a non-diversified vacuum. What property of cash are we banking on to save the portfolio when the other 75% is underperforming?

Great question...so we are now back to philosophy and personal preferences. Right now it is almost inconceivable but in the earlier days of the portfolio cash was often in the top two slots for performance. PP theory says it is the best and only ok asset in a tight money scenario. Normally in an investment portfolio cash (as juxtaposed from emergency savings etc.) is the only unfailing volatility dampening mechanism and that is its main purpose.

If you compare a 4x25 with a 3x33.33 the Sharpe, Sortino and market correlation are exactly the same. You get about 1.1% additional CAGR and double the MaxDD, but at only 11% (portfoliovisualizer) the double MaxDD is pretty amazing. If you use a start date of 1982 to take out the early gold weirdness then the you get to keep the additional CAGR and it's 3 vs. 4% MaxDD.

40/40/20...even better in my view.

[Tyler]

Also, don't forget that cash has a lot of practical utility outside of simple portfolio theory. It's a sizable emergency fund. In retirement, you can draw down the cash first and never sell a volatile asset, or use cash to carefully manage your capital gains to stay in a preferable tax bracket. Last year I decided to pay off the mortgage, and was able to do that by pulling money out of cash rather than selling stocks. I rebalanced later when it was more advantageous from a tax perspective.

Personally, I really love cash. It's the most underrated PP asset.

[barrett]

Also, don't forget that cash has a lot of practical utility outside of simple portfolio theory. It's a sizable emergency fund. In retirement, you can draw down the cash first and never sell a volatile asset, or use cash to carefully manage your capital gains to stay in a preferable tax bracket. Last year I decided to pay off the mortgage, and was able to do that by pulling money out of cash rather than selling stocks. I rebalanced later when it was more advantageous from a tax perspective.

Personally, I really love cash. It's the most underrated PP asset.

Agree with all of the above. I wonder if those in retirement (like Tyler), and those that are getting closer (like me) might have more of an appreciation for cash. My personal lens is one which I am looking through in these few years to clarify how I should be configuring assets to position me and my wife for the long haul.

Perhaps investors who are looking to retire X or more years from now have less of a need for cash. For example, FF9000 has recently outlined his plan to go with 10% cash. That amount could be plenty for someone with both enough assets AND a high level of job security.

A source of recency bias for me is almost definitely that my IRA accounts, which are about 30/30/30/10 have performed great so far this year as gold, LTTs and stocks are all up pretty strongly YTD. If we were going through 1981 again, I'd probably be trumpeting the merits of 25% in cash. Hmm.

[sophie]

It seems like every time a new person comes into the forum, along with the very welcome injection of new ideas/perspectives, we somehow always have to go through the Great Cash Debate again. This has to be about the 50th time we've had this discussion.

We need a stickied thread entitled "Why the PP includes a Cash Allocation" summarizing the arguments for and against. (Mostly for.). I'm happy to start it if one of the admins will do the sticky honors.

If Craig and MT ever release an updated edition of their book, I hope they devote a chapter to the topic. I agree that cash is a highly underrated asset in all portfolios, not just the PP. Did you know, for example, that Ben Bernanke's personal portfolio at TIAA-CREF is about 1/3 stocks and the rest in TIAA Guaranteed, which is basically cash? What do you think the chair of the Federal Reserve might know that you don't?

[ochotona]

Did you know, for example, that Ben Bernanke's personal portfolio at TIAA-CREF is about 1/3 stocks and the rest in TIAA Guaranteed, which is basically cash? What do you think the chair of the Federal Reserve might know that you don't?

If you count the gold buried under the foundation of his house, he's probably got a Desert Portfolio

My tax thoughts, sorry if these have been treated already:
- cash not earning much, keep it taxable
- stocks, keep it taxable, don't go for high dividend stocks, keep it in taxable account
- bonds, tax-deferred account
- gold - physical, not in tax-deferred account

[barrett]

It seems like every time a new person comes into the forum, along with the very welcome injection of new ideas/perspectives, we somehow always have to go through the Great Cash Debate again. This has to be about the 50th time we've had this discussion.

We need a stickied thread entitled "Why the PP includes a Cash Allocation" summarizing the arguments for and against. (Mostly for.). I'm happy to start it if one of the admins will do the sticky honors.

The stickied thread is a good idea but there will still be those like me who like to rehash. It's kinda like Figuring Out religion, only with cash!