Riding the yield curve in the cash portion?

[kev_in_tw]

Now the usual way to do the cash portion is this

http://boards.fool.co.uk/MessagePrint.aspx?mid=12716852

Stocks (FT All Share)
Long Dated Treasury (20 year+ Gilt (Tr 4.25% 2040 current holding))
Cash (5 year Gilt ladder)
Gold

Gilts is the British way of describing government bonds. Still the same could apply to T bills. In fact like most financial stuff this technique was invented for T bills.

Now as I understand it a five year bond ladder means

http://wiki.fool.com/Ladder

A typical five year bond ladder would consist of 5 bonds with one maturing each year for five years. A ten year ladder consisting of 5 bonds maturing at two year intervals is also possible. Or multiple bonds can be included maturing more frequently. The bonds may also cover a range of investment grades. As most bonds pay interest at 6 mo. intervals, the bonds can be selected to pay interest at convenient intervals, at least quarterly, or with six or more bonds, every month.

I.e. you buy bonds of 5,4,3,2,1 and hold them to maturity. So each year you buy another five year bond with the money from the one that matures.

However it seems there is another option - a ride the yield curve ladder

http://boards.fool.co.uk/are-gilts-a-go ... e#12303664

An alternative approach is to create a Ride the Yield Curve Ladder (RtYCL). If current 5 year Gilts are priced to a 2.5% yield and you buy a Gilt with a 2.5% coupon yield then typically you'll buy that Gilt close to its face value. When held for the 5 years you'll get your money back. Repeatedly buy a 5 year gilt each year, and after 4 years you'll have a Gilt ladder with one 1 year from maturity, another 2 years from maturity ....etc. Thereafter each year you can use the proceeds of the most recent maturing gilt to buy another 5 year gilt.

That's a conventional 5 year Gilt ladder. A Riding the Yield Curve Version of that instead looks to use maturing gilt proceeds to buy into whatever is currently yielding the most out of 1 to 5 year gilts. This link is an image of such a RtYCL http://alturl.com/gkcki which between 1983 and 2010 inclusive would have generated nearly a 4% real (after inflation) reward.

Unfortunately the links are broken. But it seems like a RtYCL means that you buy the best yielding short term bond rather than the longest yielding one.

And it seems like you get a better return.

But I guess the philosophical question is whether this fits into the Permanent Portfolio strategy.