HB suggest 15-30% as a rebalancing band. I'm just trying to start a pp. Can I start with 28/29/28 of stocks/gold/bonds and 15% cash? What about using GIC as cash portion? How about short term bonds as cash portion? If short term bonds are acceptable, what duration should I get? Can I get a 1-5 laddered bond etf? I'm in Canada.
Thank you!
15% cash acceptable?
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Re: 15% cash acceptable?
You could do a 33%x3 PP.
This approach wouldn't need any cash at all, though it is more volatile than the 25%x4 approach while providing similar returns.
This approach wouldn't need any cash at all, though it is more volatile than the 25%x4 approach while providing similar returns.
Q: “Do you have funny shaped balloons?”
A: “Not unless round is funny.”
A: “Not unless round is funny.”
Re: 15% cash acceptable?
I am using a 33% PP for gld/vti/tlt after I take out enough cash I feel I need(including emergency and projected future expenses).
The cash component usually comes between 20-25%. Seems to work out well
The cash component usually comes between 20-25%. Seems to work out well
Re: 15% cash acceptable?
gap,
I'm the first person to think cash could be a reduced asset within the PP, but if you look at the last two years of PP performance, and that rarely has a 3x33 PP been able to pull off strong year after strong year... there's definitely a tendency to revert to a mean.
I am always tempted to tinker, but I don't see the 3x33 PP being worth the risk/reward in 2012.
Just my 2 cents.
I'm the first person to think cash could be a reduced asset within the PP, but if you look at the last two years of PP performance, and that rarely has a 3x33 PP been able to pull off strong year after strong year... there's definitely a tendency to revert to a mean.
I am always tempted to tinker, but I don't see the 3x33 PP being worth the risk/reward in 2012.
Just my 2 cents.
"Men did not make the earth. It is the value of the improvements only, and not the earth itself, that is individual property. Every proprietor owes to the community a ground rent for the land which he holds."
- Thomas Paine
- Thomas Paine
Re: 15% cash acceptable?
I think it's fine.metta2006 wrote: HB suggest 15-30% as a rebalancing band. I'm just trying to start a pp. Can I start with 28/29/28 of stocks/gold/bonds and 15% cash? What about using GIC as cash portion? How about short term bonds as cash portion? If short term bonds are acceptable, what duration should I get? Can I get a 1-5 laddered bond etf? I'm in Canada.
Thank you!
The most important thing is to hold all 4 assets at all times. Start as close to 25% as you can get. 15% is close enough. Just add to the cash position going forward.
"All men's miseries derive from not being able to sit in a quiet room alone."
Pascal
Pascal
Re: 15% cash acceptable?
Every month I save about 1500-2000 dollars so I will be adding that to cash portion and buy other securities quarterly. So I don't feel need to have so much cash doing nothing. Maybe I should do 33%x 3.
Can any one of you answer my other question? Is short term bond etf okay for cash portion? Something like a 1-5 year government bond ETF (CLF) is very liquid so I can sell it quickly and buy something when an opportunity rises. Right now my cash is in a high interest savings account and it takes time to transfer the money to a brokerage account. So although I'm earning high interest 2-3%, but I'm looking on an opportunity. I guess one option would be a high interest savings mutual fund (MIP 510) in a brokerage account to park cash. It earns 1.25% interest. Thanks for your opinion.
Can any one of you answer my other question? Is short term bond etf okay for cash portion? Something like a 1-5 year government bond ETF (CLF) is very liquid so I can sell it quickly and buy something when an opportunity rises. Right now my cash is in a high interest savings account and it takes time to transfer the money to a brokerage account. So although I'm earning high interest 2-3%, but I'm looking on an opportunity. I guess one option would be a high interest savings mutual fund (MIP 510) in a brokerage account to park cash. It earns 1.25% interest. Thanks for your opinion.
Re: 15% cash acceptable?
It appears I am the minority with my affinity for T-Bills!
In fact, if there was any tweak I would make to the PP it would be to bump up the amount held in cash. All of the PP asset classes have returns with low correlations to one another. Even cash has a low correlation, which is often forgotten.
The problem with cash is that it lacks the volatility of returns that the other components offer. Therefore to remove it entirely is kind of the opposite direction one should take IMO. I think overweighting cash could make sense to make up for the lack of volatility.
Note: I don't do this. But the logic behind it makes me totally comfortable with holding 25% in cash.
In fact, if there was any tweak I would make to the PP it would be to bump up the amount held in cash. All of the PP asset classes have returns with low correlations to one another. Even cash has a low correlation, which is often forgotten.
The problem with cash is that it lacks the volatility of returns that the other components offer. Therefore to remove it entirely is kind of the opposite direction one should take IMO. I think overweighting cash could make sense to make up for the lack of volatility.
Note: I don't do this. But the logic behind it makes me totally comfortable with holding 25% in cash.
everything comes from somewhere and everything goes somewhere
Re: 15% cash acceptable?
Hi moda0306:I'm the first person to think cash could be a reduced asset within the PP, but if you look at the last two years of PP performance, and that rarely has a 3x33 PP been able to pull off strong year after strong year... there's definitely a tendency to revert to a mean.
I am always tempted to tinker, but I don't see the 3x33 PP being worth the risk/reward in 2012.
Just my 2 cents. --moda0306
Thanks for your comments. Before further discussion I want to make sure my comments were understood properly and I also wanted to elaborate on my approach.
1. My approach is as follows. If my total assets were worth $100K and I need 25K for projected needs/emergencies and to cater to my risk profile. I would invest 25K in Cash, BIL, SHY, Ibonds. Barring sudden and major inflation I consider this a proxy for risk free money because I can re-invest at least the short term bonds and bills. Given the above I would invest 33% of the remaining in Gold/LTBonds/Stocks as advocated by HB. In this case this is equivalent to the 4 x 25 HB portfolio. However since I start by assessing my needs and risk tolerance I may invest a higher or lower percentage. For example if I need to keep 40% in cash then I would only put 20% in the remaining assets.
2. My belief is that doing a 4 x 25 HB portfolio first and then putting some additional portion into cash distorts your allocation. One has to always take one's total wealth and allocate it appropriately.
.3. Whether this portfolio did better in the last 2 years( I have not checked) or whether it will do better in 2012 is irrelevant to me(up to a pint!). I hope it does better but I am afraid I am a very poor forecaster as to what asset class will do best. If I did I would discard HB and put 100% in that asset class.
4. There is actually some theoretical backing for my kind of approach. That is always nice to know. Tobin was an economist who got the Nobel Prize and has a famous theorem associted with him, called the "Separation Theorem" which essentially advocates a similar approach. Unfortunately most brokers/financial planners I talk to have never heard of him. Of course there is big difference between the theoretical world and practice so I am always open to renewed thinking on the subject though having a conceptual framework to lean on is useful when times get tough and one's faith falters
Re: 15% cash acceptable?
I've been looking at PP asset correlations and it's surprised me how much they can and do change over time. For example, over the past ~7 years TLT and GLD have a 0.86 correlation (approximately, don't have the data in front of me), but for the past 6 months or so it's been -0.14.melveyr wrote: All of the PP asset classes have returns with low correlations to one another.
Re: 15% cash acceptable?
The workings of the PP are sort of like the avionics of an alien spacecraft. We can understand a lot of what is happening, but there is a level of overall intelligence to the design that is hard to fully comprehend.amp wrote:I've been looking at PP asset correlations and it's surprised me how much they can and do change over time. For example, over the past ~7 years TLT and GLD have a 0.86 correlation (approximately, don't have the data in front of me), but for the past 6 months or so it's been -0.14.melveyr wrote: All of the PP asset classes have returns with low correlations to one another.
The key measure of the soundness of the design is the results that it produces, which have been impressive.
Q: “Do you have funny shaped balloons?”
A: “Not unless round is funny.”
A: “Not unless round is funny.”
Re: 15% cash acceptable?
I have no idea about the avionics of alien spacecraft, but the overall point is spot on. You sort of have to remind yourself to maintain discipline and not tinker too much with the HBPP. It is the 4 cornerstone asset classes covering the four main economic scenarios that produced the results/volatility that attracted us to the strategy.MediumTex wrote:The workings of the PP are sort of like the avionics of an alien spacecraft. We can understand a lot of what is happening, but there is a level of overall intelligence to the design that is hard to fully comprehend.amp wrote:I've been looking at PP asset correlations and it's surprised me how much they can and do change over time. For example, over the past ~7 years TLT and GLD have a 0.86 correlation (approximately, don't have the data in front of me), but for the past 6 months or so it's been -0.14.melveyr wrote: All of the PP asset classes have returns with low correlations to one another.
The key measure of the soundness of the design is the results that it produces, which have been impressive.
Re: 15% cash acceptable?
MT's been kind of short on amazing analogies lately.
Looks like he's not out yet.
Looks like he's not out yet.
"Men did not make the earth. It is the value of the improvements only, and not the earth itself, that is individual property. Every proprietor owes to the community a ground rent for the land which he holds."
- Thomas Paine
- Thomas Paine
Re: 15% cash acceptable?
When I was first researching the PP I did quite a bit of backtesting. Probably too much. One of my conclusions was that the backbone of the PP is the presence of the four assets in substantial allocations. This is consistent with the asset allocation literature from modern portfolio theory. Surprisingly, you get similar results for any allocation strategy whatsoever provided it keeps all four assets in meaningful quantities at all times. I.e. if you take 10% as the lower bound for "substantial," and backtest constant 70/10/10/10 or 10/10/40/40 allocations, rebalancing at varying time intervals, rebalancing based on bands, etc., all the CAGR graphs look more alike than different.
The power of the portfolio comes from the choice of the four assets and the policy of holding them in meaningful proportions at all times. The exact mechanics of that are implementation details.
I think there are strong economic and behavioral arguments for 1/N allocations. In our case, targeting 25% in each of the 4 assets. So IMO the boring 4x25 allocation is ideal. But, based on the logic above, a PP with 15% cash should basically work. Likewise PRPFX's allocation gets the basics right, so it's OK, if not ideal.
The power of the portfolio comes from the choice of the four assets and the policy of holding them in meaningful proportions at all times. The exact mechanics of that are implementation details.
I think there are strong economic and behavioral arguments for 1/N allocations. In our case, targeting 25% in each of the 4 assets. So IMO the boring 4x25 allocation is ideal. But, based on the logic above, a PP with 15% cash should basically work. Likewise PRPFX's allocation gets the basics right, so it's OK, if not ideal.