More or Less Risky?

[buddtholomew]

Which of the following portfolios do you consider more risky over a 20 year timeframe?

100% 4x25 HBPP
75% HBPP, 25% savings account

Best-
Budd

[melveyr]

I would consider the one with extra cash to be less risky.

Historically the PP has not fared too well during episodes of "tight money" so adding a little bit of extra cash makes the portfolio more balanced. This probably will lower the long-term return as well, but who knows.

[AdamA]

I agree, although I think you could lessen the risk even more by using a treasury only money market fund as your savings account.

[MediumTex]

It depends on what you need the money for.

If you are trying to match today's assets with a future liability, then inflation-adjusted real returns are critical and I would say that the 100% HBPP makes more sense.  20 years is plenty of time for any tight money episodes during that 20 year period to work themselves out.

If you are simply trying to minimize volatility, then the greater allocation to cash makes more sense.

[buddtholomew]

If the PP achilles heal is underperformance during a tight money recession, why don't we account for this limitation in portfolio design? I recall HB commenting on recessions and their short duration. Is this the reason?

[craigr]

If the PP achilles heal is underperformance during a tight money recession, why don't we account for this limitation in portfolio design? I recall HB commenting on recessions and their short duration. Is this the reason?

Virtually all asset allocations are going to suffer under that situation unless you are 100% cash in a very short term treasury money market. Even then, there could be collateral damage as things adjust.

Overall, I actually feel a widely diversified portfolio like the Permanent Portfolio in stocks, bonds, cash and gold (hard assets) is much safer than concentrating everything into a single asset (even cash). This is counter to what a lot of the investment industry may recommend, but this is based on my own experience and observations of various economic problems I've witnessed both in the U.S. and abroad.

[melveyr]

If the PP achilles heal is underperformance during a tight money recession, why don't we account for this limitation in portfolio design? I recall HB commenting on recessions and their short duration. Is this the reason?

Basically a tight money recession is one that is purely Fed induced. Loose monetary policy can easily cure these recessions, and usually central banks respond with the appropriate medicine promptly. There is no reason for it to last very long unless the central bank is extremely incompetent. Lot's of times the Fed brings the recessions on purpose with the intent of slowing down inflation.

Historically, almost every other asset class has outperformed cash. So the combination of the relatively short lived nature of tight money episodes and cash's relatively poor performance prompt that scenario to be underweighted in the PP framework. TBH if you are comfortable riding out tight money recessions and are confident that the central bank is not run by someone completely incompetent than you could probably get away with skipping cash. On the flip side if your goal is to have smoother real returns than you should probably hold more than 25%.

[frugal]

Today during my running I listened the second episode of HB archive, and he said as you that recession is +-1,5 years.

I think here recession can be much more years in Europe...

[JMoyle]

Everytime and in every scenario when backtesting the performance of the Permanent Porfolio Philosophy... a reduction in the percentage of cash in the mix with equal weighting for the rest of the portfolio increases long-term return and increases volitivity.

Therefore, the conclusion is consistently clear; cash reduces return and volitivity in the Permanent Porfolio. 

Having said that... Is additional return worth additional volitivity?

My answer mirrors Harry Browne's writings... "No", for the money I cannot afford to lose; and "Yes", for the money I can afford to lose!

With the Federal Reserve now printing 85 Billion per month to prop up the economy, our country operating without a spending plan for the past three years, and leaders on both sides of the political spectrum unable to agree on a path forward for our country, I do not think Harry would be recommending [today] more volitivity for the funds you cannot afford to lose!

For the money you can afford to lose, swing for the bleachers!

[Kshartle]

The portfolio with the savings account is far far riskier over a 20 year time frame. To hope that cash will keep pace with inflation for 20 vs the HBPP which has proven itself fairly capable of keeping pace and even beating inflation for long stretches is taking a big risk in my opinion. The risk is not what the investments will do over the next year or handful of years but meeting your goals over 20 years.

ST rates are basically zero so why bother with the savings account? That's just an additional risk of bank failure and the loss of the money. If the FDIC sticker program rides forth as the savior to bail out depositors and the failures are widespread then it's a loss through inflation.

Now if instead of a savings account you bought nickels (worth $0.051 melt value right now I think) you'd get about the same interest rate plus inflation protection and you don't have to count on the FDIC "sticker program" as Browne called it. You just have to find a place to store them. Maybe a hole in the backyard or the basement?

Budd, why do you want to hold that much cash? What are you expecting/fearing economicially?

The book is pretty much closed on 2012. Understanding that we've got 2 more days left.....if we go from 2000 to 2012 (to capture the two stock crashes) cash has averaged 4.2% vs. about 9.3% for the other three assets. They've promised to keep rates low for years to come so the disparity is likely to grow. 

[Kshartle]

And if interest rates go up then you just dig up those nickels and cash them in. You will have to account for the risk of your neighbors though and if you have a sceptic tank..........

[buddtholomew]

Budd, why do you want to hold that much cash? What are you expecting/fearing economically?

I am debating whether to renew a CD ladder as the individual CD's mature or contribute the cash equally among the PP assets.

[frugal]

Budd, why do you want to hold that much cash? What are you expecting/fearing economically?

I am debating whether to renew a CD ladder as the individual CD's mature or contribute the cash equally among the PP assets.

Where do you live?

Do you already have a VP?

Regards

[buddtholomew]

Budd, why do you want to hold that much cash? What are you expecting/fearing economically?

I am debating whether to renew a CD ladder as the individual CD's mature or contribute the cash equally among the PP assets.

Where do you live?

Do you already have a VP?

Regards

United States, California. I have a VP invested 60/40 inspired by Bogle.

[frugal]

I am debating whether to renew a CD ladder as the individual CD's mature or contribute the cash equally among the PP assets.

Where do you live?

Do you already have a VP?

Regards

United States, California. I have a VP invested 60/40 inspired by Bogle.

Surfin' USA ...


well I'm thinking to make one VP at Bogle style also.

How much your VP represents? %

and, what it contains?

For me in europe I understand difficults to leave CD's, but for you CD's are interesting?

REgards

[hoost]

Budd, why do you want to hold that much cash? What are you expecting/fearing economically?

I am debating whether to renew a CD ladder as the individual CD's mature or contribute the cash equally among the PP assets.

Budd,

I think if I were you, based on previous conversations, I'd considering rolling the money from your CD ladder into a Treasury Money Market fund with check writing privileges and increasing your target cash percentage for your PP to allow for more stability and peace of mind.  This will allow you to access the funds without penalty if you need them and should create a larger buffer for the PP.  It seems that you may value the peace of mind vs. the extra risk/return of allocating the cash into the other three asset classes.

Just my 2 cents.

[buddtholomew]

Budd, why do you want to hold that much cash? What are you expecting/fearing economically?

I am debating whether to renew a CD ladder as the individual CD's mature or contribute the cash equally among the PP assets.

Budd,

I think if I were you, based on previous conversations, I'd considering rolling the money from your CD ladder into a Treasury Money Market fund with check writing privileges and increasing your target cash percentage for your PP to allow for more stability and peace of mind.  This will allow you to access the funds without penalty if you need them and should create a larger buffer for the PP.  It seems that you may value the peace of mind vs. the extra risk/return of allocating the cash into the other three asset classes.

Just my 2 cents.

Thanks and I agree with the recommendation.