Need a little guidance

[Gebo]

I'm 55 and I've got about 200K to reinvest in IRA.  Leaving Fairholme and going to Vanguard with everything.  Gonna do at least 50% in PP with 50% in Wellesley.  I got the Stock part with VISAX and the Gold with IAU.  It looks to me TLT and SHY will take care of my bonds and cash. From reading and listening to Craig's Podcast and waiting on his book in October, I want to do more with my cash and bonds but from reading here everyone (?) seems to have all these different strategies....Treasure Direct, i-bonds, T bills direct, free trades through Vanguard, and on and on.

To you all it may seem simple but the bonds and cash which seems should be the simplest is the most difficult to me.  Am I overthinking?  Listen, at 55 this is not a time for me to making mistakes 

Should I just go with TLT and SHY? I'm not stupid, I'm merely ignorant which (thank God) can be changed.

[EdwardjK]

With interest rates at near zero, I can understand your reluctance to have any portion of your portfolio sitting idle.  You might consider putting that cash in preferred stock.

Many high-quality companies are issuing preferred stock that pay 5-7% annually.  I believe that if you focus on the better companies, you will mitigate the additional risk, compared to keeping your cash in a money market account.

I refer you to quantumonline.com for a list of companies with existing preferred stock and a list of new issuances.

Also, look up author Doug K. Le Du on seekingalpha.com.  He focuses on preferred stock and offers sound advice on selection criteria.

Good luck!

[WildAboutHarry]

As you note, there are several issues in using funds for long-term bonds and cash.  Many so-called treasury funds typically do not invest in 100% treasury bonds but may include mortgages, corporates, asset-backed bonds, foreign  bonds, etc.  In addition, while TLT and SHY are pretty pure holdings of treasury bonds/notes/bills, they do lend the securities out, so you have counter-party risk added to the mix.

If you have access to a Vanguard brokerage account you can buy treasury issues at auction or in the secondary market for no or low cost for the "purest" treasury play.  You will likely want to bite the bullet on funds/etfs and at least keep some funds there for rebalancing purposes.

The Vanguard Treasury mutual funds are not bad, you just have to be aware of what (and how much) of the various kinds of assets they can hold.  Note that Vanguard's treasury ETFs are a bit different than the retail mutual funds, so you might want to do a comparison.  The comparison tool on the Vanguard web site is fairly useful for this.

Good luck.

[craigr]

If you are going to vanguard, just park it in their short term treasury fund. It is low risk for your cash even if not 100% ideal. Their funds have been moving more towards 100% treasuries the past many months as well.Their treasury money market would also be OK but it's closed to new investors. Sometimes doing more isn't worth the trouble.

Currently 94% Treasuries or govt. backed issues:

https://personal.vanguard.com/us/funds/ ... st=tab%3A2

[Gebo]

With interest rates at near zero, I can understand your reluctance to have any portion of your portfolio sitting idle.  You might consider putting that cash in preferred stock.

Many high-quality companies are issuing preferred stock that pay 5-7% annually.  I believe that if you focus on the better companies, you will mitigate the additional risk, compared to keeping your cash in a money market account.

I refer you to quantumonline.com for a list of companies with existing preferred stock and a list of new issuances.

Also, look up author Doug K. Le Du on seekingalpha.com.  He focuses on preferred stock and offers sound advice on selection criteria.

Good luck!

It's not a reluctance to getting little return.  If I'm gonna work this system, I'm gonna work this system.  It just seems there were/are lots of choices for cash and bonds.

[Gebo]

If you are going to vanguard, just park it in their short term treasury fund. It is low risk for your cash even if not 100% ideal. Their funds have been moving more towards 100% treasuries the past many months as well.Their treasury money market would also be OK but it's closed to new investors. Sometimes doing more isn't worth the trouble.

Currently 94% Treasuries or govt. backed issues:

https://personal.vanguard.com/us/funds/ ... st=tab%3A2

Thanks,  after researching from what you and Wild..BIll said, I'm gonna go with the VFISX for the cash portion of my PP. Do you think the TLT is the "best" choice for my LT Bond
portion?  I can't find anything in Vanguard that seems to match up to it.

[craigr]

If you are going to vanguard, just park it in their short term treasury fund. It is low risk for your cash even if not 100% ideal. Their funds have been moving more towards 100% treasuries the past many months as well.Their treasury money market would also be OK but it's closed to new investors. Sometimes doing more isn't worth the trouble.

Currently 94% Treasuries or govt. backed issues:

https://personal.vanguard.com/us/funds/ ... st=tab%3A2

.
Thanks,  after researching from what you and Wild..BIll said, I'm gonna go with the VFISX for the cash portion of my PP. Do you think the TLT is the "best" choice for my LT Bond
portion?  I can't find anything in Vanguard that seems to match up to it.

It depends on your comfort level. The best is to just buy the bonds through vanguard's bond desk. Vanguard's long term treasury is ok as well if you want simplicity. TLT is also an easy option and is more pure of the two. But if you attach a vanguard brokerage account to your main account you can access the bond desk easily. Once you purchase the bonds they just sit there and pay you interest to your sweep account that you can move to your treasury fund from time to time. After 5-10 years you sell the bonds and buy new ones so it is pretty low maintenance.

[Gebo]

I have a brokerage acct at Vanguard from years ago that is still active.  I'm confused as in your podcast you said to buy 25-30 year bonds and sell at 20 years.  Now you are saying sell at 5-10 years.  


Exactly what do I purchase through Vanguard Brokerage for my LT bond portion of the PP?

[craigr]

I have a brokerage acct at Vanguard from years ago that is still active.  I'm confused as in your podcast you said to buy 25-30 year bonds and sell at 20 years.  Now you are saying sell at 10-15 years. 


Exactly what do I purchase through Vanguard Brokerage for my LT bond portion of the PP?

I mean if you buy a 25-30 year bond you would hold for 5-10 years and then sell when it is 20 years to maturity.

You want to purchase 25-30 year us treasury nominal bonds. You can call the bond desk and they can help with the online tool to do it or do it for you. It is a pretty straightforward process.

[Gebo]

Gotcha

[Ad Orientem]

FWIW I think TLT or EDV both work well for your long term bonds. TLT is a bit more pure, whereas EDV gives you a bit more zip on your returns coupled with slightly higher volatility. For cash I like SCHO since it it gives me added institutional diversification. But SHY and SHV also work well. VFISX goes a tad longer in duration than what I am comfortable with for cash (up to 4 yrs). But again its a gut check. Go with whatever will help you sleep at night.

Craig is correct that the optimum safety move is to own the bonds directly. But I am terribly lazy and an LTT bond fund serves me quite well and you can automatically reinvest the dividends. The only part of the PP where my paranoid button gets pushed is with the gold. I really do encourage owning at least some of your gold in physical form... just in case. But IAU is fine if you choose to go with an ETF for convenience. It is also the cheapest bullion backed fund that I am aware of right now.

Don't get obsessive about minor details though. Any combination of the above mentioned funds that ends with a 4x25% asset allocation will provide you with a level of security that 99% of investors don't have.

[EdwardjK]

Gebo,

I understand your comment.  If you intend to implement the PP as defined, you will likely have 25% of your PP portfolio earning little or nothing.  What you do earn will not even cover inflation.

I was simply offering an alternative to this situation. 

[Gebo]

Understood. No problem 

[stone]

As I see it, cash perhaps is best thought of as a bridge through time rather than as being an asset that gives a lift on its own. Some years, stocks and gold might plummet and then a couple of months later, LTT might spike up. Cash bridges that gap in time. Having cash means that when you topped up your stocks and gold by rebalancing, you didn't deplete your LTT ahead of LTT spiking in price. Even with no yield and no volatility, cash can improve total returns for a portfolio by providing something to rebalance against to better capture the volatility of stocks, gold and LTT whenever those three dip as a mix.

[Gebo]

As I see it, cash perhaps is best thought of as a bridge through time rather than as being an asset that gives a lift on its own. Some years, stocks and gold might plummet and then a couple of months later, LTT might spike up. Cash bridges that gap in time. Having cash means that when you topped up your stocks and gold by rebalancing, you didn't deplete your LTT ahead of LTT spiking in price. Even with no yield and no volatility, cash can improve total returns for a portfolio by providing something to rebalance against to better capture the volatility of stocks, gold and LTT whenever those three dip as a mix.

Stone, you have given me the greatest understanding of why the cash position is needed.  Thank you so much!  The light just came on!

[gap]

As I see it, cash perhaps is best thought of as a bridge through time rather than as being an asset that gives a lift on its own. Some years, stocks and gold might plummet and then a couple of months later, LTT might spike up. Cash bridges that gap in time. Having cash means that when you topped up your stocks and gold by rebalancing, you didn't deplete your LTT ahead of LTT spiking in price. Even with no yield and no volatility, cash can improve total returns for a portfolio by providing something to rebalance against to better capture the volatility of stocks, gold and LTT whenever those three dip as a mix.

I agree with the need and value of the cash allocation. However, it seems not having to deplete the other assets will only happen when all the other assets are below the 25% allocation, e.g. perhaps Cash at 35% and  all the others below the 25% but totaling 65%. I am curious how often Stocks, Gold and LTT have all been simultaneously below 25% since the '70s, for which we have good data

[WildAboutHarry]

As a substitute for TLT, Vanguard's VGLT (Long-Term Government Bond ETF) has an avg. maturity of 24 years and is roughly 93% Treasury and 6% Agency bonds.

[stone]

As I see it, cash perhaps is best thought of as a bridge through time rather than as being an asset that gives a lift on its own. Some years, stocks and gold might plummet and then a couple of months later, LTT might spike up. Cash bridges that gap in time. Having cash means that when you topped up your stocks and gold by rebalancing, you didn't deplete your LTT ahead of LTT spiking in price. Even with no yield and no volatility, cash can improve total returns for a portfolio by providing something to rebalance against to better capture the volatility of stocks, gold and LTT whenever those three dip as a mix.

I agree with the need and value of the cash allocation. However, it seems not having to deplete the other assets will only happen when all the other assets are below the 25% allocation, e.g. perhaps Cash at 35% and  all the others below the 25% but totaling 65%. I am curious how often Stocks, Gold and LTT have all been simultaneously below 25% since the '70s, for which we have good data

Sorry, I should have said not need to deplete as much as would have been the case without cash in the mix. If you look at a plot of a gold:LTT:stocks 33%:33%:33% portfolio over time then it does have some draw down points. When you have cash in the mix, it smooths those peaks and troughs and gives more of a buy low sell high effect at each rebalance. I think Clive showed data before showing that varying the cash portion from 0% to 50% made suprisingly little difference to long term returns because the "lower performance" of cash as a stand alone asset class was offset by its property of never falling in price and so boosting the rebalancing benefit effect.

Isn't Japan 2008 a classic example of how cash can save the day for a permanent portfolio even when cash yields are zero. Japan 2008 is hard to describe as a "tight money recession". I think the Japanese economy was entirely flooded with Yen.

[BearBones]

Indeed, cash and bonds can be the most difficult, as has been said here before. Many of us like to keep at least 2 vehicles for each asset class, one for convenient trading and the other for more pure protection. For example, I intend to hold:

Cash: Vanguard Treasury MM and SHY/SHV along with Treasury Direct short term ladder with automatic renewal
LTT: TLT along with direct holdings via Vanguard or Fidelity bond desks
Gold: GTU (taxable act) and IAU (tax deferred) along with physical bullion

Hope this helps.

[Pointedstick]

Clive, if real returns were negative, wouldn't you expect gold to be carrying the day?

[dualstow]

The major concern I have with the conventional PP is that of inflation. Historically there have been periods when treasury yields were kept low, whilst inflation raged. What should be a priority is retention of purchase power, not just nominal value.

Back in 2010, in a thread called "Why 'improve' PRPFX?", Craig wrote:

The three primary issues with the fund vs. the 4x25 split approach for me:

1) It biases towards inflation assets (precious metals and Swiss Francs) and holds less in deflation and prosperity assets (bonds and stocks).
...

[Ad Orientem]

The major concern I have with the conventional PP is that of inflation. Historically there have been periods when treasury yields were kept low, whilst inflation raged. What should be a priority is retention of purchase power, not just nominal value.

Many investors baseline to cash (nominal) instead of inflation (purchase power/real). An alternative might hold inflation bonds for both the STT and LTT 50%. That however exposes you to inflation figure rigging, so even that's not foolproof.

Over shorter periods inflation vs conventionals might see some drift



but overall that tends to wash. If, as I believe to be the case, there is little overall difference between conventional vs linkers, then perhaps its wiser to hold linkers for the periodic 'defaults' that occur. Whilst smaller economies might default openly, larger economies tend to default via stealthier means. Either a partial default, or by inflation (and holding treasury yields low). We saw one occurrence of such across 1918/1919 (default), and another across the mid 1930's to early 1950's (inflation). I have a suspicion that we are entering yet another similar phase where largescale defaults will occur. Overall I suspect that holding 25% in each of short term inflation bonds, long term inflation bonds, gold and stocks is potentially the more protective compared to the conventional PP.

JMHO

I agree with Clive's take on the likely danger of inflation. We have fairly accurate records for Global and US Financial Markets going back to 1802 and they reveal some interesting things.

* In both the 19th and 20th centuries stocks outperformed bonds in real returns, but the margin was much narrower in the 19th century.
* In the 20th century the performance gap between equities and bonds widened dramatically. This became most pronounced post World War I.
* The performance gap in the post World War I era (up to the present day) was less about increased returns on stocks than decreased real returns on bonds.
* This trend was reflected in almost every major country for which there are available and accurate records, though often the performance gap in real returns of stocks vs bonds was even more dramatic in non-US markets.
* US Financial Markets generally outperformed the markets of most other countries over the period 1900-2011. Again this became much more pronounced after the First World War.

See here...
https://www.credit-suisse.com/investmen ... arbook.pdf

And here...
http://210.34.5.45/cn/fm/The%20Equity%2 ... 201802.pdf

...for data.

* The dramatic difference in the real returns of bonds post World War I vs 1802-1914 can be almost entirely attributed to the abandonment of sound money and inflation.
* The First World War effectively bankrupted every major country with the exception of the United States.
* American fiscal health can be attributed to two main factors... The US entered the war late and we were on paper a creditor nation, having lent staggering sums to Great Britain and France.
* This however was illusory since the so called victors were as bankrupt as the so called losers. Further the Allies foolishly attempted to recoup their war expenses from their defeated enemies who were just as bankrupt.
* Almost from the outbreak of hostilities every belligerent power abandoned the gold standard. With the exception of the United States none would return to a real gold standard although some efforts to link European currencies to the gold backed dollar were implemented in the 1920's.
* During the Great Depression of the 1930's all major nations, including the US, definitively abandoned gold as money and went to a fiat paper money system.
* The Second World War left the United States and most of the world deeply in debt.
* This was addressed by a concerted policy of currency debasement and government manipulation of bond markets (as Clive correctly notes) which resulted in high inflation coupled with extremely low bond yields.
* The so called Bretton-Woods System which attempted to restore some stability to global currencies was a failure since most nations brazenly cheated and printed money as needed. The system collapsed in 1971 and the world has been on a pure fiat currency system since then.
* The US and many other nations are currently running levels of debt as a percentage of GDP not seen since the Second World War.
* All of the major industrialized nations post World War I have a history of manipulating currency supplies and bond markets via their central banks.
* Over the last thirty years the United States and other nations have repeatedly altered the methodology by which they calculate inflation. Coincidentally this has always resulted in lower official rates of inflation.

Conclusions:
Based on historical data and a basic knowledge of history one can draw some reasonable conclusions from the available data.

Clive is probably right. With the world running staggering levels of debt and little political appetite for the kind of austerity and or tax increases that would be needed to reign in the debt, it seems increasingly likely that major nations like the United States will employ the age old method of a "soft" default on their debts via currency debasement and other forms of financial repression. This begs the question, what can be done?

The HBPP would likely hold up reasonably well in all but an especially severe inflation. But there are risks. A severe or catastrophic inflation could produce negative real returns especially if the value of the cash and LTT portion were severely degraded or even destroyed. The 25% gold allocation might not provide sufficient protection since long term gold is mainly a store of value. How then could one add "inflation insurance" without betting the farm on that scenario (bearing in mind that the future cannot be predicted with certainty)?

One of the main attractions of the HBPP for me is its simplicity. So I would want to keep any solution as simple as possible. And as noted above, I don't want to bet the farm on inflation even though I do suspect that long term, that's probably going to be a more serious problem. With those two conditions in mind I have come up with a few ideas.

First just go 80-90% in a standard HBPP and dedicate the remaining 10-20% to an inflation oriented VP. I don't think I would add gold there, but I might go with 10% in foreign stocks (VEU) and another 10% in real estate (VNQ). Both of those generate income (downside protection) while adding to currency diversification and hard assets.

A second option is to take the HBPP and modify it slightly by splitting your 25% stock portion between US and foreign equities (VTI and VEU). Another even simpler option is to just go with a global stock index fund or ETF (VTWSX or VT). While this would add slightly to the volatility level I don't see it as especially extreme. On the upside it gives you an instant increase in currency diversification. And unlike gold, stocks historically have risen in real value over the long term. One added argument for global stock holdings is that while the US sharply outperformed most of the rest of the world's financial markets in the last century, there were a lot of unique circumstances that contributed to this. Again conceding that anything is possible, I question if it is reasonable to bank on that happening in the future.

A third option is PRPFX. The fund is weighted with inflation in mind but is still sufficiently diversified that you aren't putting all of your eggs in the inflation basket. If inflation turns out to be a major theme of the coming decade I would expect PRPFX to beat the HBPP in real returns. The major downside is that it's a managed fund so you are somewhat dependent on the fund manager especially with the stock picking. And also it's considerably more expensive than a passively managed portfolio. To be honest the only thing holding me back is its expense ratio. I also note that some people have created a passive version of PRPFX using ETFs. I am not a fan of this since it involves too many moving parts and you don't have a simple rebalancing formula like the HBPP.

[AgAuMoney]

it looks like in more recent times (if last 80 years can be called recent) that governments have latched onto the idea that they can confiscate via either partial defaults or inflation whilst suppressing treasury yields.

It is hard to suppress lending rates if loans must be repaid in gold (or gold equivalent) or silver (or silver equivalent).  It is only the latter part of the 20th century that it was possible for governments to pay back debt in pure scrip.  Prior to that governments were forced to default explicitly or implicitly rather than print money to lend or pay back.

My inflation protection is to increase the stock and precious metal portions.  If treated as a whole (instead of PP + VP) I am about 10% Treasuries, 18% cash, 42% stock, 30% gold and silver roughly evenly split.  (Stock portion has been increasing lately...  my Treasuries were up to 12% a few months ago and I didn't sell any.)  I am a bit under 50% in PP, and that is my Treasuries.

[stone]

I think it is sensible to at least entertain the possibility that we could be following Japan into a state of zero interest rate/ zero inflation/ zero growth economic stasis.

[BearBones]

I think it is sensible to at least entertain the possibility that we could be following Japan into a state of zero interest rate/ zero inflation/ zero growth economic stasis.

I'm warming to this (being fundamentally an inflationist), so I appreciate the counterpoint. In your scenario, do you expect LTTs at <3% sufficient to carry the portfolio, or are have you tweaked your PP?