Starting a Permanent Portfolio

[jimbojones]

I'm new to the forum and to the concept of the Permanent Portfolio.  I currently follow the Bogle-ish principles of stock/bond diversification and low expense ratios.  I have ~$24K in a Roth IRA.  Those would be the funds I'd use to implement the PP if I decide to.  Roughly, I'd make this initial investment:

VGSH - $6K
VGLT - $6K
VTI - $6K
IAU - $6K

I plan on contributing the max to the Roth IRA each year, meaning ~$100/mth contributions to each fund.  I only pay commissions ($10) on the contributions to IAU.  I have two questions:

1. How often should I contribute to IAU?  $1,250/year total contribution, but $10 per trade.
2. When, and how often, should I move assets from IAU to gold bullion?  The transaction costs seem very high for physical gold, especially when considering the per-unit cost on small orders.  When I looked a few days ago, on coloradogold .com, the price (including shipping, commission, etc) was $1,785 for one American Eagle coin.  The market price for 1oz of gold was $1695.  That's a $90 fee, or 5.3% of the gold value.

Thanks for your help.  Any other suggestions would be very much appreciated too!

[MediumTex]

I'm new to the forum and to the concept of the Permanent Portfolio.  I currently follow the Bogle-ish principles of stock/bond diversification and low expense ratios.  I have ~$24K in a Roth IRA.  Those would be the funds I'd use to implement the PP if I decide to.  Roughly, I'd make this initial investment:

VGSH - $6K
VGLT - $6K
VTI - $6K
IAU - $6K

I plan on contributing the max to the Roth IRA each year, meaning ~$100/mth contributions to each fund.  I only pay commissions ($10) on the contributions to IAU.  I have two questions:

1. How often should I contribute to IAU?  $1,250/year total contribution, but $10 per trade.
2. When, and how often, should I move assets from IAU to gold bullion?  The transaction costs seem very high for physical gold, especially when considering the per-unit cost on small orders.  When I looked a few days ago, on coloradogold .com, the price (including shipping, commission, etc) was $1,785 for one American Eagle coin.  The market price for 1oz of gold was $1695.  That's a $90 fee, or 5.3% of the gold value.

Thanks for your help.  Any other suggestions would be very much appreciated too!

I would shop local coin shops and maybe pick up a couple of one ounce coins to start off and put the rest in IAU.  You will find coins for less than a 5.3% markup.

If you haven't owned physical gold before, it's fun.

[Lone Wolf]

1. How often should I contribute to IAU?  $1,250/year total contribution, but $10 per trade.

How about convert everything now in one shot and then simply rebalance once per year?  This would mean buying IAU no more than once per year, which would keep your transaction costs under 1%.  If in the future you find yourself able to contribute more per year, you could consider increasing the frequency or moving to the 35%/15% bands that Harry Browne also recommended.

2. When, and how often, should I move assets from IAU to gold bullion?  The transaction costs seem very high for physical gold, especially when considering the per-unit cost on small orders.  When I looked a few days ago, on coloradogold .com, the price (including shipping, commission, etc) was $1,785 for one American Eagle coin.  The market price for 1oz of gold was $1695.  That's a $90 fee, or 5.3% of the gold value.

One thing to keep in mind is that the American Gold Eagle is a very, very nice coin and comes with a higher markup than most other coins.  You should be able to sell it back for more than spot if you look for a good deal.  Just as an example, Tulving pays a little over spot + $40 to buy Gold Eagles.  (Note that they buy/sell only in fairly large quantities, so this may not be representative of what you can get on smaller transactions.)

If you would like to pay a little less of a premium over spot, Krugerrands generally have some of the lowest premiums.  However, you will also generally receive less of a premium over spot when selling these coins.

[jimbojones]

I would shop local coin shops and maybe pick up a couple of one ounce coins to start off and put the rest in IAU.  You will find coins for less than a 5.3% markup.

If you haven't owned physical gold before, it's fun.

I've never owned physical gold before, but I can see the appeal.

What about the storage costs of gold?  I don't have a safe or box at a bank.  Or an international gold storage location, for that matter.  Would you pay for a bank safe deposit box if you only had 1 or 2 coins?  Doesn't that eat into the returns on such a small scale?

[jimbojones]

How about convert everything now in one shot and then simply rebalance once per year?  This would mean buying IAU no more than once per year, which would keep your transaction costs under 1%.  If in the future you find yourself able to contribute more per year, you could consider increasing the frequency or moving to the 35%/15% bands that Harry Browne also recommended.

One thing to keep in mind is that the American Gold Eagle is a very, very nice coin and comes with a higher markup than most other coins.  You should be able to sell it back for more than spot if you look for a good deal.  Just as an example, Tulving pays a little over spot + $40 to buy Gold Eagles.  (Note that they buy/sell only in fairly large quantities, so this may not be representative of what you can get on smaller transactions.)

If you would like to pay a little less of a premium over spot, Krugerrands generally have some of the lowest premiums.  However, you will also generally receive less of a premium over spot when selling these coins.

My plan would be to convert my existing funds (~$24K) into the 4/25 portfolio immediately.  Going forward, I'd set aside ~$400/mth for the portfolio.  Unfortunately I don't have $5K to plop down at the beginning of every year.  I can contribute to the stock and bond funds without a commission, but I'd pay $10 every time to buy IAU.  Do you think I should only make that purchase once per year?  Maybe twice?  I definitely plan on using the 35/15 bands when necessary, but DCA is my contribution strategy.  And how often would you sell IAU to buy gold coins?

Thanks for the info about the gold coins.  I'm new at this.  The acquisition costs make me a little uneasy, not to mention the storage costs.  

[craigr]

Do you think I should only make that purchase once per year?  Maybe twice?

I would not wait for once a year, but twice may be OK. Quarterly is probably better if the costs are reasonable.

I definitely plan on using the 35/15 bands when necessary, but DCA is my contribution strategy.  And how often would you sell IAU to buy gold coins?

Maybe going forward you buy IAU with what you have and then save up to buy the one ounce gold coin as your next gold purchase to build up your physical gold allocation?

[Lone Wolf]

I would not wait for once a year, but twice may be OK. Quarterly is probably better if the costs are reasonable.

Would perhaps just doing everything once per year (a la old school annual rebalancing) also maybe be okay?

My plan would be to convert my existing funds (~$24K) into the 4/25 portfolio immediately.  Going forward, I'd set aside ~$400/mth for the portfolio.  Unfortunately I don't have $5K to plop down at the beginning of every year.  I can contribute to the stock and bond funds without a commission, but I'd pay $10 every time to buy IAU.  Do you think I should only make that purchase once per year?  Maybe twice?  I definitely plan on using the 35/15 bands when necessary, but DCA is my contribution strategy.  And how often would you sell IAU to buy gold coins?

Thanks for the info about the gold coins.  I'm new at this.  The acquisition costs make me a little uneasy, not to mention the storage costs.  

As for when to sell IAU to buy gold coins, I'm not clear on how that would work for you.  Your IAU is held in a Roth IRA so the cash such a sale would generate wouldn't be on hand for you, would it?  It's probably simpler to just buy physical gold with money that you have held outside of an IRA.  Craig's advice of starting with IAU and doing physical going forward seems good.

And it's perfectly normal to be nervous about the first bullion coin purchase.  Take your time, look around, and keep asking questions until you feel comfortable.  For storage, I like the simplicity of the safe deposit box option.  Check with your bank to see what they have available.  They may have a discount for those with a savings account.  If you have other items such as birth certificates, social security cards, marriage license, titles, wills, keepsakes, etc. you can probably find other benefits to the safe deposit box.

[craigr]

I would not wait for once a year, but twice may be OK. Quarterly is probably better if the costs are reasonable.

Would perhaps just doing everything once per year (a la old school annual rebalancing) also maybe be okay?

I think doing the purchases annually has its own risks if gold should spike during the year and is way out of balance to the other assets because you haven't bought enough of it yet.

[Lone Wolf]

Would perhaps just doing everything once per year (a la old school annual rebalancing) also maybe be okay?

I think doing the purchases annually has its own risks if gold should spike during the year and is way out of balance to the other assets because you haven't bought enough of it yet.

Yeah, I actually meant abandoning DCA entirely, placing all new contributions into cash, and then just rebalancing eveything once per year.  Old school Harry Browne PP style.  Sorry for not being clear.

Or is this an approach that you're not as crazy about these days?

[craigr]

Would perhaps just doing everything once per year (a la old school annual rebalancing) also maybe be okay?

I think doing the purchases annually has its own risks if gold should spike during the year and is way out of balance to the other assets because you haven't bought enough of it yet.

Yeah, I actually meant abandoning DCA entirely, placing all new contributions into cash, and then just rebalancing eveything once per year.  Old school Harry Browne PP style.  Sorry for not being clear.

Or is this an approach that you're not as crazy about these days?

No rebalancing once a year is fine and if you pay a lot in commissions it may be worth doing to control costs. So sure you can spool up money into the cash and deploy it as you see fit.

[jimbojones]

I think doing the purchases annually has its own risks if gold should spike during the year and is way out of balance to the other assets because you haven't bought enough of it yet.

Yeah, I actually meant abandoning DCA entirely, placing all new contributions into cash, and then just rebalancing eveything once per year.  Old school Harry Browne PP style.  Sorry for not being clear.

Or is this an approach that you're not as crazy about these days?

No rebalancing once a year is fine and if you pay a lot in commissions it may be worth doing to control costs. So sure you can spool up money into the cash and deploy it as you see fit.

The physical purchase of the gold makes things more difficult since it's outside of the Roth IRA.  I like the idea of leaving the IAU alone after the $6K initial purchase, and then buying physical gold in the future.  At current prices, I could probably buy one coin every 12-18 months.  Is this frequent enough to work properly?  In the meantime, I'd be DCA'ing into VGLT, VGSH, and VTI (technically, the equivalent amount for gold would be growing in my normal cash accounts).

With stable relative prices, I make the coin purchase and my allocations are close to 25%.
If gold rises relative to everything else (and exceeds the 35% band), I make the coin purchase, sell IAU, and buy the other funds as necessary.
If gold falls relative to everything else (and drops below the 15% band), I make the coin purchase(s), sell the other funds as necessary, and buy IAU.

Does that seem like a reasonable approach?  My remaining concern is the timing of the physical gold purchase, which I suppose could be annual.

[craigr]

The physical purchase of the gold makes things more difficult since it's outside of the Roth IRA. 

The main reason I mention having physical is because if there were some kind of very bad emergency, the IRA custodian will have the gold but you won't. So it's just kind of a margin of safety issue. Also the gold doesn't have interest/dividends so the need to shelter it becomes less.

I like the idea of leaving the IAU alone after the $6K initial purchase, and then buying physical gold in the future.  At current prices, I could probably buy one coin every 12-18 months.  Is this frequent enough to work properly?  In the meantime, I'd be DCA'ing into VGLT, VGSH, and VTI (technically, the equivalent amount for gold would be growing in my normal cash accounts).

I think that is fine because you still have exposure to gold in the ETF but just don't want to take money out of the IRA and pay penalties just to buy the physical gold now. Alternatively you could consider not DCA into the other components if they are outpacing the gold and put the money instead towards the gold coin so you can get it faster to get started.

With stable relative prices, I make the coin purchase and my allocations are close to 25%.
If gold rises relative to everything else (and exceeds the 35% band), I make the coin purchase, sell IAU, and buy the other funds as necessary.
If gold falls relative to everything else (and drops below the 15% band), I make the coin purchase(s), sell the other funds as necessary, and buy IAU.

Does that seem like a reasonable approach?  My remaining concern is the timing of the physical gold purchase, which I suppose could be annual.

Yes that looks reasonable for your situation. It will avoid a lot of transactions, but still you can get the physical gold as your funds permit or market conditions permit.

[AgAuMoney]

Would you pay for a bank safe deposit box if you only had 1 or 2 coins?

No.

Do you have anything in your home worth $1500-$2000?

If so and you buy a gold coin or two you'll have two things, or three.  And I'd expect the gold coin(s) to be much easier to hide.  Just don't put it in your underwear drawer.  And please remember where you hide it. 

[AdamA]

JimboJones:

Can you please make this your avatar?



I don't think you should be allowed to post any more until you've accomplished this.  Moderators?  

[jimbojones]

JimboJones:

Can you please make this your avatar?


I don't think you should be allowed to post any more until you've accomplished this.  Moderators?  

Done.  What was He-Man's last name?  Or did he just go by Prince Adam...

[MediumTex]

JimboJones:

Can you please make this your avatar?


I don't think you should be allowed to post any more until you've accomplished this.  Moderators?  

Done.  What was He-Man's last name?  Or did he just go by Prince Adam...

jimbojones is off to a very strong start.

[sophie]

With stable relative prices, I make the coin purchase and my allocations are close to 25%.
If gold rises relative to everything else (and exceeds the 35% band), I make the coin purchase, sell IAU, and buy the other funds as necessary.
If gold falls relative to everything else (and drops below the 15% band), I make the coin purchase(s), sell the other funds as necessary, and buy IAU.

Does that seem like a reasonable approach?  My remaining concern is the timing of the physical gold purchase, which I suppose could be annual.

If you have some taxable cash to add to your Roth PP, I'd suggest buying around 75% of your gold allocation in coins right off the bat.  I like your modified buy-the-lagging-asset plan going forward - it's more intuitive and performs better than the rebalancing out of cash approach.  I'd make your contributions quarterly, though, rather than yearly.

DCA does outperform both the lagging asset strategy but, not when there is such a high commission relative to the value of the investments.

P.S.  Nice avatar.