Going 100% PRPFX

[MiniB]

PRPFX has been discussed as being short of LT Bonds as per Harrys 25x4 method.  I've already listened to all of Harrys investment radio archive 2 years ago, and am halfway through relistening.  One way Harry described the PRPFX is that it's similar to his PP but with slightly different weightings.

In that light, it doesn't seem "bad" to consider going 100% PRPFX.  Here are some things it has going for it:

1) One single fund that does everything, makes life simple.
2) Some people won't want to split into multiple funds, or own physical gold.  So those people will never experience anything like the PP.
3) I've noticed at all of my brokerages, PRPFX is a No Transaction Fee fund.

Downsides:

1) Relatively high ER.
2) Inability to split assets into more tax efficient ways.
3) Doesn't exactly follow the 25x4 split.

Let's look at these downsides one at a time.  One justification for the ER being high, is that it autobalances things for you.  It sounds ridiculous, but I've always worried about going into a coma, or to prison, or being kidnapped, or some other ridiculous scenario.  I dont have anyone to rebalance things for me.  I like the idea of balanced mutual funds, and something like the PRPFX that does it for you.

In my case, I am holding 100% tax-sheltered accounts.  I think anyone growing up, from age 20, with a good understanding of investing will likely be able to do this as well.  Between I-Bonds, $21k in an IRA and 401k combined, paying down inevitable student loans for high paying jobs, building a downpayment for a house, accelerating mortgage payments on your house, etc, there doesn't seem to be much left over after the $30k you can sock away in tax-shelters, at least until you hit mid to late 30s and have the house and student loans all paid off.  It may seem like a unique position to be 100% tax-sheltered but I think it's becoming a reality for many younger investors, due to higher contribution limits on tax-shelters, higher tuition costs, higher student loan interest rates, and higher down-payment requirements on mortgages.

As for PRPFX not exactly being the 25x4 split, as Harry said on his show, it's just a slightly different weighting.  There's nothing magical about the 4 way even split.  I believe it was created for simplicity.  If all numbers were actually run, it's like a more ideal weighting would be something like 21.25% Cash, 26.37% Gold, 22.19% Stocks, etc.  Of course no one would actually do that in practice, because it's too complicated.

For all we know, the slightly different weighting of PRPFX will out perform the 4 way split going forward.  I understand PRPFX underperformed PP4x25 in the last couple years, due to underweighing LT Bonds.  Perhaps all the deflation protection we really need is in PRPFXs bond holdings?

The real thing that scares me of PRPFX is how much it has grown in the last year.  I think something around $7B of new assets in the last year flowed in by performance chasers.  If I did start using PRPFX, I would use it forever as my PP.  I am concerned what may happen to the fund when it loses $7B in a few years if it underperforms a traditional stock portfolio fund.

Then again, the ability to just have ONE mutual fund in my brokerage, where I do dividend reinvestment, send all new contributions for the next 10 years, dont have to worry about thinking really and know things will be reasonably safe.

I've heard the comments on 90% PRPFX 10% EDV.  To me, that destroys the benefits of using PRPFX, and if EDV is going to be used as well, one might as well use 4 funds and do the 4x25.

Technically I've beat the market substantially, by luck, because during the 2008 stock crash, I was 50% stocks, 50% cash, expecting to use the cash for a home purchase.  Then I changed my mind, the stock market was at the bottom (I didnt know it, but I bought within 1% of the bottom), and I went 100% stocks, so during the recovery, I wound up re-couping all my losses halfway back up.  So if I flow into PRPFX now, I wont be performance chasing, because I've beaten PRPFX (by luck) over the last 2 years.  

Does anyone feel PRPFX as 100% of their portfolio would be a good idea?  The biggest detractor for this to me is the ER.  Even though it's simple, I could be juicing my returns by 0.5% a year by rebalancing myself, and holding the bonds myself individually.  I guess if I do go PRPFX, I just have to concede that I am paying a 0.5% cost for the luxury of it being done for me, and doing it for me if I get kidnapped

[KevinW]

IMO PRPFX is for all intents and purposes the same beast as the 4x25, but the expense ratio is too high for the service of automatic rebalancing.  That assessment is of course based on the value I personally attach to time and energy spent rebalancing vs. the capital lost to expenses.  YMMV.

An interesting third alternative is FolioInvesting:
http://www.folioinvesting.com
Their hook is that you can create your own index and then buy and sell the securities as a basket along the lines of a mutual fund or ETF.  It's marketed toward stock screeners but there's no reason you couldn't create a 4x25 "Folio" out of ETFs.  You can buy, sell, and rebalance as one action, although it's unclear whether you can schedule a recurring rebalance event.

Their fees are a bit high at $290/year, although one fee covers as many accounts as you want.  The PRPFX expense ratio is cheaper up to a portfolio of about $50k; a "Folio" of four ETFs would be cheaper over $50k.  It might be reasonable to hold PRPFX in portfolios < $50k and a Folio above that threshold.

I haven't used FolioInvesting and they are fairly new, so of course due your due diligence.

[bdahl01]

I would just do it.  You will probrably underperform a 60/40 stock bond mix in the long run....  but taking all that
market noise and risk out of your portfolio and getting a decent return is more important than beating the index every
year.  Simplify and enjoy life.  Read Harry Browne book.  Plus you are getting a very diversified fund. 
I am running my own PP's with 5 funds.  And I run the Paul B one as well.  But I enjoy some hands on
stuff.  I added VNQ to GLD, EDV, VT and BSV..  I call it the Permanant with Reit..    20% each one.
I just figure that real estate is another asset class that does not always correlate with stocks
and other assets,  so far it has added well to the portfolio.

[EuroPP]

Personally, I would never go 100% in a single position.
There is always a risk at bankruptcy, fraud or mismanagement... this could also happen to PRPFX.

A good rule of thumb is never to allocate more than 10% in a single position. If things go really wrong, you only lose 10%.

Give it a thought.

EuroPP

[Storm]

Regarding tax shelter - kudos to you for being 100% tax sheltered in your accounts.  Does anyone have advice for someone like me that can't take advantage of Roth or Traditional IRAs because of income restrictions?  My wife and I both work and make more than the combined AGI limit, so while we are contributing max. $16,500 each to our 401k and $10,000 each to I Savings Bonds, the rest of our savings has to go to a non tax-deferred account.

I've heard HSA offers another form of tax deferment, but unfortunately my work doesn't offer one.

Any advice is appreciated.

[Pkg Man]

Someone can correct me if I am wrong, but I think you can still contribute to a traditional IRA regardless of income, you just can't take the tax deduction, but your investments are still growing tax-deferred.  Also, where I work we have an after-tax 401k option (separate from the Roth 401k), which serves the same function -- a place to grow after-tax dollars while deferring the taxes on any gains or distributions/dividends.  This is great for rebalancing purposes.

[smurff]

Yes, anyone with "earnings" can contribute to a Nondeductible IRA, up to the usual annual limits for IRAs ($5000/$6000 over 50).  Just be sure to file the form for nondeductible IRAs every year to report it to the IRS. There are calculators online to tell you when it would be to your advantage to contribute to a Roth, traditional, or nondeductible IRA, as they all have somewhat different features and benefits.  You plug in details, like income, age, marital status, etc., and it will tell you which is your best bet.

Also, if you have self-employment/freelance/consultant income of any type, you can contribute a percentage of that income to a SEP-IRA.

[Storm]

Thanks for that advice.  Do you have any idea if it is possible to transfer securities into a non-deductible IRA?  Most of my investment goes first into an ESPP, since I can purchase company stock at a 15% discount.  Then, I have been selling the shares that are over 1 year old and putting that into cash to purchase PP quarterly, whichever asset class is lower than the others.

If I could transfer the company shares directly to an IRA then I wouldn't have to pay capital gains taxes on the stocks I sell to buy PP assets.

[foglifter]

Regarding tax shelter - kudos to you for being 100% tax sheltered in your accounts.  Does anyone have advice for someone like me that can't take advantage of Roth or Traditional IRAs because of income restrictions?  My wife and I both work and make more than the combined AGI limit, so while we are contributing max. $16,500 each to our 401k and $10,000 each to I Savings Bonds, the rest of our savings has to go to a non tax-deferred account.

I've heard HSA offers another form of tax deferment, but unfortunately my work doesn't offer one.

Any advice is appreciated.

Storm,

HSA is completely separate from your employer - unless your employer offers to make contributions, in which case you need to open HSA through your employer. But, as with IRAs, you can have more than one account. For example, you can open one HSA with your employer and contribute from your paycheck just enough to get the employer match and open a separate HSA wherever you want and contribute into it from your bank account. I'm using Adirondack Trust for my HSA - 5% tax-deferred doesn't sound bad these days. As with IRA you can transfer your HSA from one bank to another. My understanding is since HSA annual contribution limits are low ($6150 for family plan) banks can offer higher rates to attract new money without a risk of excessive interest payouts.

Another important but often overlooked feature of HSA accounts - after the age of 65 you can use the funds for ANY purposes without penalty, essentially your HSA turns into a traditional IRA.

Of course, you need to be covered by a qualified high-deductible insurance plan to be able to contribute into your HSA.

[smurff]

Storm, I don't think you can transfer securities from a personal account (a non-qualified account) to an IRA.  You would have to sell them first, contribute the cash to the Nondeductible IRA, then buy the securities from within the IRA. 

The reason is that the IRS considers the IRA to be held in trust as separate from you, and has put into place rules about unqualified persons (which you would be relative to your IRA) and prohibited transactions (which the direct transfer of your personally held securities into any IRA might be considered).  If you engage in a prohibited transaction with your IRA, the IRS can declare (at some future date, when you're least expecting it) that the account is no longer an IRA, but a personal account, and it loses all of its tax deferral advantages.

Also, the annual limit for contributing to an IRA is $5000 if you're under 50 years old, $6000 if you're 50 or over, and your securities are probably worth much more than that. 

[Storm]

Thanks again for all your advice - so it looks like I can use an IRA, although I still need to pay income tax on my contributions before I contribute them - I only have one other question:  could I do a Roth IRA?  As I understand it, you pay tax on a Roth before you put your money in, and then your withdrawals at retirement are income tax free.  Since I'm already paying tax on this money anyway, would it make sense to do a Roth IRA?

Or would my AGI (income) disqualify me for a Roth as well?

[foglifter]

Since I'm already paying tax on this money anyway, would it make sense to do a Roth IRA?

Or would my AGI (income) disqualify me for a Roth as well?

Fidelity has a nice eligibility check tool you might want to use:
http://personal.fidelity.com/products/r ... fpr=ret016

[Storm]

Traditional IRA it is then... 

Just to summarize the breadth of tax-advantaged offerings out there, it looks like we have:

$16,500 annually to 401k (we are not yet old enough to do "catch-up" contributions) each (x2) = $33,000 total
$10,000 annually to I Savings Bonds ($5K each paper/electronic) x2 = $20,000 total
$5,000 annually to IRA = $10,000 total

So, a married, dual-income couple can contribute a total of $63,000 annually to tax-advantaged accounts.  Unfortunately only $33,000 of this comes out pre-tax and 100% must be taxed as new income at retirement.  I'll tell you this double and triple taxation stuff really sucks sometimes, but what are you gonna do? 

[Storm]

To illustrate the importance of taking advantage of an IRA - Fidelity's calculator shows that $5,000 invested in an IRA now by a 35 year old will grow to $53,383 in 35 years by age 70 (assuming 7% annual return, which is conservative but realistic for PP).  I'm sure the returns would be almost cut by at least a third if this was taxable.

I love this board, I think you guys just saved me over $20,000 for 2010 alone, not to mention I found out I'm eligible to stick money from 2009 in there as well (another $53K)!

[foglifter]

Traditional IRA it is then... 

Just to summarize the breadth of tax-advantaged offerings out there, it looks like we have:

$16,500 annually to 401k (we are not yet old enough to do "catch-up" contributions) each (x2) = $33,000 total
$10,000 annually to I Savings Bonds ($5K each paper/electronic) x2 = $20,000 total
$5,000 annually to IRA = $10,000 total

So, a married, dual-income couple can contribute a total of $63,000 annually to tax-advantaged accounts.  Unfortunately only $33,000 of this comes out pre-tax and 100% must be taxed as new income at retirement.  I'll tell you this double and triple taxation stuff really sucks sometimes, but what are you gonna do?   ::)

I'm not an expert in non-deductible IRAs but are you saying you contribute after-tax into an IRA and then you are taxed on the whole distribution in retirement? Or will only the earnings part be taxed? If it truly is a double taxation then maybe a regular taxable account is better as you pay capital gain tax rather than income tax.

I'm almost sure I got it wrong  :D

[Storm]

Traditional IRA it is then... 

Just to summarize the breadth of tax-advantaged offerings out there, it looks like we have:

$16,500 annually to 401k (we are not yet old enough to do "catch-up" contributions) each (x2) = $33,000 total
$10,000 annually to I Savings Bonds ($5K each paper/electronic) x2 = $20,000 total
$5,000 annually to IRA = $10,000 total

So, a married, dual-income couple can contribute a total of $63,000 annually to tax-advantaged accounts.  Unfortunately only $33,000 of this comes out pre-tax and 100% must be taxed as new income at retirement.  I'll tell you this double and triple taxation stuff really sucks sometimes, but what are you gonna do?   ::)

I'm not an expert in non-deductible IRAs but are you saying you contribute after-tax into an IRA and then you are taxed on the whole distribution in retirement? Or will only the earnings part be taxed? If it truly is a double taxation then maybe a regular taxable account is better as you pay capital gain tax rather than income tax.

I'm almost sure I got it wrong  :D

I get confused on this stuff too, but I just looked it up:

Taxing of deductible and non-deductible contributions

Withdrawals are taxed if the original contribution was deductible in the first place. If the contributions were not deductible, then the withdrawals will not be taxed.

So, you either pay now, or pay later.  I wonder if you have to pay tax on the earnings though?  Answer one question, and it only leaves me asking another... 

[foglifter]

I get confused on this stuff too, but I just looked it up:

Taxing of deductible and non-deductible contributions

Withdrawals are taxed if the original contribution was deductible in the first place. If the contributions were not deductible, then the withdrawals will not be taxed.

So, you either pay now, or pay later.  I wonder if you have to pay tax on the earnings though?  Answer one question, and it only leaves me asking another...   :-\

If the earnings won't be taxed at withdrawal then it looks like a Roth IRA - which it can't be. 

[Storm]

Ok, just goes to show me, don't believe everything you read on the Internet - here is what looks like a more reliable article:  http://www.essortment.com/articles/taxa ... 102703.htm

The most important distinction between a nondeductible IRA and Roth is what happens to your contribution earnings. Nondeductible IRA contributions compounds tax-free while contributions remain in the account. However, earnings withdrawals are taxed at ordinary income rates, which run as high as 35 percent--which is considerably high when you compare long-term earnings in taxable accounts being taxed at 15 percent. Roth IRA earnings grow and are withdrawn tax-free. The Roth clearly has the advantage here versus a nondeductible traditional IRA.

So, given that I pay tax once on my income, contribute to a traditional IRA, then pay tax again on withdrawal, is it worth it to do this over a taxable account?

I wonder how I would back-test this with data - basically if not being taxed from growth and rebalancing would be worth taking up to a 35% (or probably more depending on tax rate hikes) hit at retirement.

[Storm]

To reply to myself - it seems like a better strategy than traditional IRA if you are non-deductible is to simply use PRPFX in your taxable account and pay capital gains when you start to sell it.  This would in almost all cases be better than paying a 25-35% tax rate.