How do you invest the Cash portion?

Discussion of the Cash portion of the Permanent Portfolio

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vnatale
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Re: How do you invest the Cash portion?

Post by vnatale » Wed Dec 04, 2019 9:02 pm

dualstow wrote:
Fri Nov 29, 2019 3:29 am
Pet Hog wrote:
Fri Nov 29, 2019 1:57 am

I have no problem with cash being defined as up to five-year treasuries/CDs, but I am in the accumulation phase. I can understand someone in the withdrawal phase having a different opinion.
I’m accumulating, too. But, 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?

It’s not the same as a treasury mm, from which you can withdraw what you need and a share = $1. If you’re really going to go five years out, maybe you had better go with those CDs with low penalties.
Totally understand what you are saying regarding the potential loss. Does anyone know the sharpest drop in Treasury Bills? Just went here: https://www.treasury.gov/resource-cente ... &year=2008 to look at what happened in 2008.

HUGE drop for 1 YR Treasury Bills

01/02/08 started at 3.17%. 12/31/08 ended at 0.37%. A drop of 2.7%! Of course, an EXTREME. But NO guarantees we don't experience the same (or WORSE!) again.

Vinny
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Re: How do you invest the Cash portion?

Post by dualstow » Thu Dec 05, 2019 4:28 am

That’s a drop in yield, isn’t it? Meaning the value of those bills went up.
Even when the yield goes up and the t-bill price goes down, I’ll take the minimal loss vs that in other holdings.
RIP Marcello Gandini
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Re: How do you invest the Cash portion?

Post by jhogue » Thu Dec 05, 2019 9:00 am

Vinny,

Remember that if you held your short term T-bill to maturity, you got your full principal back plus your original stated interest.

Note too in the 2008 example you cited that when US interest rates fell, the principal value of the 30 year T-bonds in the HBPP rose dramatically. You always have to consider how the whole portfolio as a whole reacts, not just one asset.
“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 mathjak107 » Fri Dec 06, 2019 3:48 am

for 2019 one of the worst places to keep cash was the permanent portfolio's own treasury bond fund


'Permanent Portfolio Treasury (PRTBX): Expense ratio: 0.66%. Management fee: 1.19%. After expenses, the 5 year return is 0.33%, meaning your fees are far higher than the fund's returns."

https://finance.yahoo.com/news/mutual-f ... 01586.html
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Re: How do you invest the Cash portion?

Post by dualstow » Fri Dec 06, 2019 6:22 am

jhogue wrote:
Thu Dec 05, 2019 9:00 am
Vinny,

Remember that if you held your short term T-bill to maturity, you got your full principal back plus your original stated interest.
...
Right, and the same goes for those 5-year notes. But, if you have to sell suddenly, one could do worse than t-bills, or VUSXX (treasury money market).
RIP Marcello Gandini
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Re: How do you invest the Cash portion?

Post by sophie » Fri Dec 06, 2019 9:52 am

vnatale wrote:
Wed Dec 04, 2019 8:55 pm
drumminj wrote:
Wed Nov 27, 2019 9:08 pm
jhogue wrote:
Wed Nov 27, 2019 2:48 pm
11/27/19
drumminj,

I am not picking your poison because I agree with Harry Browne and craigr that all financial risks are not created equal:
That's fair, and to be clear I'm not trying to convince anyone.

I disagree though that there are no "FDIC limits to worry about". Your MM funds are held by a financial institution (in "street name", possibly even?) which may become insolvent, halt withdrawls, etc. You have insurance issues there, no? Asking sincerely, is this less risky than FDIC?

Treasuries held directly? Sure. Treasuries held on your behalf? Less so. Treasury MM? Also has risks.

Again, not trying to convince anyone to do what I do -- just trying to be clear about the risks here in the margins.
Sorry to keep hounding about this but I've never yet directly owned any bond outside of a fund and never really thought about SPIC until just recently.

Does buying Treasury bills via Vanguard brokerage constitute "Treasuries held directly"?

Vinny
This is actually a really good question.

A treasury bill or bond should be very safe, so there should be no problem selling it or collecting the promised bond amount + interest on maturity. However, in order to get that cash to your checking account so you can use it to pay bills, it has to go by way of the brokerage core fund. I have no idea how safe those are...presumably pretty safe, but if there were ever a panic in the money markets I assume those core funds could be affected. A frozen core fund would be a disaster, as it would effectively freeze your entire account.

Harry Browne advocated getting a Treasury MM with direct checkwriting privileges, and that's how his own finances were set up. He would write a check from the treasury MM once a month to fund his living expenses, because he distrusted banks to the extent that he wouldn't keep more than one month expenses in one. Unfortunately, neither Vanguard nor Fidelity provide checkwriting from an individual fund - only from an account. I don't know where you'd go to find such a beast.
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Re: How do you invest the Cash portion?

Post by dualstow » Fri Dec 06, 2019 2:04 pm

sophie wrote:
Fri Dec 06, 2019 9:52 am
Unfortunately, neither Vanguard nor Fidelity provide checkwriting from an individual fund - only from an account. I don't know where you'd go to find such a beast.
Sophie, I have checkwriting from many of my Vanguard funds, even a long-term muni bond fund.
There was a hiccup during some reshuffling- consolidation of the indy stocks and the mutual funds, which they used to keep in separate sections -- but I merely had to reapply for checks and they came in the mail.
RIP Marcello Gandini
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Re: How do you invest the Cash portion?

Post by jhogue » Fri Dec 06, 2019 3:27 pm

Vinny,

Financial safety is reinforced through diversity and liquidity. T-bills held in a brokerage account at Vanguard are safe enough for “normal” times because Vanguard is a big active player in the enormous world-wide secondary market for Treasurys. Unless there is a terrific disruption in this market your money will always be completely liquid. Nevertheless, you might eventually consider diversifying your holdings of Treasury –issued securities as follows:

1. Federal Reserve notes (ie., greenbacks yielding 0% interest) kept in a safe place in your home.

2. A TreasuryDirect account in your name.

3. Paper I-bonds with registered serial numbers purchased with your annual tax refund.

Any of these will diversify your holdings away from a 100% T-bill position in a brokerage account. But understand that each of these methods poses different risks from T-bills held in a brokerage account. That is the way risk works.
“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 drumminj » Fri Dec 06, 2019 9:56 pm

jhogue wrote:
Fri Dec 06, 2019 3:27 pm
T-bills held in a brokerage account at Vanguard are safe enough for “normal” times because Vanguard is a big active player in the enormous world-wide secondary market for Treasurys. Unless there is a terrific disruption in this market your money will always be completely liquid.
I don't mean to keep harping on the same thing, but it seems you're overlooking the aspect of relying on a third party here. Sure, the treasury market is liquid, but that doesn't mean that vanguard will be solvent. Presumably these treasuries are held in "street name", like all other instruments at a brokerage, and thus aren't in your direct possession and are at risk if there's an issue with the institution itself, which is where SIPC comes in. Is this not the case treasuries (vs stocks)?

"In normal times", sure, but if you're talking about FDIC and liquidity with a bank/MM account/CD, it seems you should be considering similar scenarios with your brokerage -- Vanguard or Fidelity or Schwab or wherever else. (I'll admit that bank receiverships are far more frequent than brokerage houses).

I agree with you on the tiers of possession and liquidity, and my intent here is just to suggest that bank accounts and CDs fall upon this same continuum, and in normal times where banks remain solvent, don't have drastically different characteristics from treasuries, aside from often paying a better rate. If I need liquidity in "normal" times, I can liquidate a treasury through my broker just as easily as I can break a CD (which I've done a few times, and takes no more than a day or two).

In "abnormal" times like the 2008 "crisis", I agree treasuries are the safer play.
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Re: How do you invest the Cash portion?

Post by mathjak107 » Sat Dec 07, 2019 3:12 am

FEW REALIZE THIS :

if you ever check your vanguard statement or fidelity they read :
--------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
" SIPC insurance provides protection for assets held by you in a Vanguard Brokerage account. Vanguard Brokerage Services is a division of Vanguard Marketing Corporation, which is a member of SIPC...

Vanguard mutual funds, including any Vanguard money market fund linked to your Vanguard Brokerage account, are not covered by SIPC insurance."
-------------------------------------------------------------------------------------------------------------------------------------------------
"If you buy mutual funds through a brokerage account, those funds are protected against theft by SIPC.

However, if you buy mutual funds directly from a mutual fund company, they are not protected by SIPC, "because no protection is necessary : . Each mutual fund is set up as a separate entity, apart from the company that manages the fund. "The employees at a mutual fund don't have direct access to the assets,All mutual fund assets by law must be held in a trust account at a custodian bank.

That is a special account, not part of the bank's assets. The bank can fail, but the trust accounts are not involved in any way shape or form in that failure ...

https://www.bogleheads.org/wiki/SIPC_pr ... tual_funds
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Re: How do you invest the Cash portion?

Post by vnatale » Sat Dec 07, 2019 6:44 pm

jhogue wrote:
Fri Dec 06, 2019 3:27 pm
Vinny,

Financial safety is reinforced through diversity and liquidity. T-bills held in a brokerage account at Vanguard are safe enough for “normal” times because Vanguard is a big active player in the enormous world-wide secondary market for Treasurys. Unless there is a terrific disruption in this market your money will always be completely liquid. Nevertheless, you might eventually consider diversifying your holdings of Treasury –issued securities as follows:

1. Federal Reserve notes (ie., greenbacks yielding 0% interest) kept in a safe place in your home.

2. A TreasuryDirect account in your name.

3. Paper I-bonds with registered serial numbers purchased with your annual tax refund.

Any of these will diversify your holdings away from a 100% T-bill position in a brokerage account. But understand that each of these methods poses different risks from T-bills held in a brokerage account. That is the way risk works.
If I did think there was not a possibility of there being NOT "normal" times I would never invest in Treasury Bills as there are higher paying options that also have risk during "normal" times. I want the Treasury Bills for protection in those times which are not "normal" and, therefore, expect them to be ultra safe.

The risk / downsides to the other three options you listed:

1. Subject to theft or fire. I do have a little safe but have never used it as isn't that advertising to someone where the "valuables" are?
2. Cannot do that for retirement investments.
3. Also cannot do for retirement investments plus the amounts are tiny for a single person.

Vinny
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Re: How do you invest the Cash portion?

Post by Kbg » Sat Dec 07, 2019 9:03 pm

I bonds are basically the same tax wise as a tax deferred account, Regular IRA/401K etc. The only difference is taxes are due on maturity vs RMDs. If are say 50 then I Bonds would be tax free until 80 vs 70.5. As you noted, size is limited.
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Re: How do you invest the Cash portion?

Post by mathjak107 » Sun Dec 08, 2019 1:24 pm

You have to be careful with anything that has to be sold and then gets sweeper in to a money market ..shy ,bil, shv , etc all get sold then sweeper .

But like I had happen when my money market broke the buck it was locked and nothing could come out for a few months
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Re: How do you invest the Cash portion?

Post by ochotona » Mon Dec 09, 2019 9:16 am

I have bunch of T-Bills maturing, so now my Emergency Fund is going to slosh back over to Ally, because they pay more than the T-Bill I'd be buying to replace the maturing one. This is a game that happens from time-to-time. My Fidelity "bank substitute is going to get emptied out.
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Re: How do you invest the Cash portion?

Post by jhogue » Mon Dec 09, 2019 11:08 am

(Sigh)
1. Does anyone examine the creditworthiness of the banks that are peddling these supposedly “red hot” CD rates?
Ally Bank, its predecessor , and its subsidiaries were up to their eyeballs in subprime mortgages. It had to be bailed out with $17 billion in TARP funds or it would have failed.
Why would anybody want to give their hard-earned money to this outfit?
(Source: https://en.wikipedia.org/wiki/Ally_Financial)


2. I just checked with bankrate.com. Ally bank’s current 5 year CD rate is 2.15%-- which is LOWER than the current US Treasury-issued I bond at 2.20%!
Last edited by jhogue on Mon Dec 09, 2019 12:09 pm, edited 1 time in total.
“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 dualstow » Mon Dec 09, 2019 11:49 am

O0 Poor J Hogue. If Hank Hill ('King of the Hill') is a good man in a world gone bad, than J Hogue is definitely the Hank Hill of cash. (My highest compliment).
RIP Marcello Gandini
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Re: How do you invest the Cash portion?

Post by ochotona » Mon Dec 09, 2019 12:47 pm

I'm not getting Ally CDs, using their Savings. Pays more than 30-day T-Bill. Yeah, I know about Ally... it use to be GMAC.
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Re: How do you invest the Cash portion?

Post by mathjak107 » Mon Dec 09, 2019 1:07 pm

It all gets paid by the same people in the end ...
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Re: How do you invest the Cash portion?

Post by vnatale » Mon Dec 09, 2019 6:13 pm

MangoMan wrote:
Mon Dec 09, 2019 1:05 pm
And it is FDIC insured. Do you really think the Feds are going to renege on FDIC promises differently than Tbill promises?
In 2008-2009 it did end up backing up everything, including going past FDIC limits and money market funds.

But NEXT time CAN be different!

Vinny
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Re: How do you invest the Cash portion?

Post by jhogue » Tue Dec 10, 2019 8:38 am

ochotona wrote:
Mon Dec 09, 2019 12:47 pm
I'm not getting Ally CDs, using their Savings. Pays more than 30-day T-Bill. Yeah, I know about Ally... it use to be GMAC.
Ally savings account interest rate is currently 1.70%.
3 month T-bill interest rate is currently 1.59%. Simple to ladder and put on auto-roll.
The difference is 0.11% ( further reduced by state and local taxes).

So why pick FDIC insurance coverage (which had to be bailed out by Congress in 2008) on a bank that effectively defaulted and had to be bailed out by TARP funds, instead of US Treasury bills, which were then and remain today the global reserve currency?

In the next banking crisis in the US (and there will be one) you want to hold Cash in the highest quality assets you can get. Every FDIC-insured account holder will be standing in line behind every US Treasury holder.
Last edited by jhogue on Tue Dec 10, 2019 2:23 pm, edited 1 time in total.
“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 Kbg » Tue Dec 10, 2019 4:34 pm

Don’t forget, the govt can print money. So getting your money back is not really the issue. Far more likely problems are legal delays and in the ZA (new acronym for Zombie Apocalypse) inflationary devaluation.

To me for the first and most likely problem, treasury direct is a no brainer. Just you and your government, no middlemen of any kind.
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Re: How do you invest the Cash portion?

Post by vnatale » Tue Dec 10, 2019 9:43 pm

Kbg wrote:
Tue Dec 10, 2019 4:34 pm
Don’t forget, the govt can print money. So getting your money back is not really the issue. Far more likely problems are legal delays and in the ZA (new acronym for Zombie Apocalypse) inflationary devaluation.

To me for the first and most likely problem, treasury direct is a no brainer. Just you and your government, no middlemen of any kind.
Except, from what I now know, one cannot use Treasury Direct for any retirement accounts? And, are not bonds at the top of the list to be put in retirement accounts due to all the income from them being ordinary income? Certainly true for Treasury Bills. I guess one could argue the long-term bonds should not be in a retirement account you believe most of the return from them is going to come in the form of capital gains.

Vinny
Above provided by: Vinny, who always says: "I only regret that I have but one lap to give to my cats." AND "I'm a more-is-more person."
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Re: How do you invest the Cash portion?

Post by mathjak107 » Wed Dec 11, 2019 2:26 am

old school thinking used to say that bonds should go in retirement accounts . the fact is taking up valuable space in tax advantaged accounts at these low yields is a waste . michael kitces found that as little as a 2% dividend over the long term wipes out any tax advantage in a taxable account. fund turnover makes it worse .

as kitces points out

"Executive Summary
In an environment where generating portfolio alpha is difficult, strategies like managing assets on a household basis to take advantage of asset location opportunities to generate “tax alpha” are becoming more and more popular. The caveat, however, is that making effective asset location decisions is not easy, either.
For instance, while the traditional asset location strategy “rule of thumb” is that tax-inefficient bonds go into an IRA, while equities eligible for preferential tax rates go into a brokerage account, the reality is that for investors with long time horizons the optimal solution may be the opposite. Once stock dividends and portfolio turnover are considered, the ongoing “tax drag” of the portfolio can be so damaging to long-term returns that placing equities into an IRA may be more efficient, even though they are ultimately taxed at higher rates!
In fact, it turns out that almost any level of portfolio turnover will eventually tilt equities towards being held in IRAs given a long enough time horizon (and especially while today’s low interest rates result in almost no benefit for bonds to gain tax-deferred growth inside of retirement accounts). Which means in the end, good asset location decisions depend not only on returns and tax efficiency, but an investor’s time horizon as well!

https://www.kitces.com/blog/asset-locat ... e-horizon/
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Re: How do you invest the Cash portion?

Post by jhogue » Wed Dec 11, 2019 9:08 am

MangoMan wrote:
Tue Dec 10, 2019 7:47 pm
Kbg wrote:
Tue Dec 10, 2019 4:34 pm
Don’t forget, the govt can print money. So getting your money back is not really the issue. Far more likely problems are legal delays and in the ZA (new acronym for Zombie Apocalypse) inflationary devaluation.

To me for the first and most likely problem, treasury direct is a no brainer. Just you and your government, no middlemen of any kind.
Ha. Customer service on that site is notoriously awful. Imagine what it will be like with millions of people calling and emailing during the ZA. Good luck getting your money out. Cash in hand is the only thing that will be of value. And guns. And barter-able items.
I am not predicting a Zombie Apocalypse.
I am predicting another banking liquidity crisis.
“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 dualstow » Wed Dec 11, 2019 9:08 am

Yeah, I regret that I took the bogleheads' advice to put bonds in tax deferred.
I changed course some years ago.
RIP Marcello Gandini
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