PP in Australia

[Hal]

Hello All,
Wish I had found this site years ago!

A few questions you may be able to help me with.

1. In Australia the longest term government bonds you can purchase are only 10 years. When would you consider that the bonds should be sold and new ones purchased?

2. There are no Treasury Cash Management Trusts down under. Would short dated, say 1 year, bonds in conjunction with a general Cash Trust (eg General CMT  = bank securities + gov't securities) be suitable for the cash component.

3. And finally, Harry advised to keep the cash in something such as a 401K for tax advantages. Down here it is called superannuation. The thing that concerns me is that they can change the law. The age at which the funds can be accessed had been increased by 5 years, plus there was a proposal to increase the access age by "another" 7 years. Any thoughts on this? Do you have any of these issues in the US?

This PP approach makes so much sense I am surprised that it is not more widely followed.

Looking forward to hearing from you,
Hal

[AdamA]

Hal--

I unfortunately don't have the answers to any of your questions, but just wanted to say that I'm glad you posted.

I think it's very educational for US investors to get an idea of how the PP works in other countries.  

I'm sure others will have some advice for you.  

Keep us updated.

Adam

[MediumTex]

Hal,

You may want to think about doing 50% of the portfolio in 10 year bonds.  Others have found that this provides similar returns to the 30 year/12 month approach for the bond/cash piece.

Welcome to the site.  I'm glad you found us.

[Lone Wolf]

Welcome Hal!

You've already gotten some good advice.  I agree with the base suggestion of considering 25% total Australian stock market, 25% gold bullion, and 50% 10-year bonds.  Cash would be raised as needed and live more or less outside of the Australian PP.

The fact that it's troublesome to create a PP in some countries made me wonder whether it might in some cases be better to simply construct the US dollar version.  It turns out, though, that currency risk is significant.  Marc de Mesel looked at this for the European version and adding the currency fluctuations creates a lot more volatility.  It turns out that Harry Browne was right about this as well.  (Color me unsurprised that Browne was right yet again.)

I don't have any great ideas for your concerns about access age increases for your "superannuation" accounts.  What was the public's reaction to these changes?  In the United States, I feel like this would be greeted with a lot of anger.  People generally consider these accounts to be their property.  That's not to say that it can't happen (as anything could.)  What was the reason given for the increase?

If you're still waiting to decide whether to get in, you might consider setting up a sample "play" portfolio on smartmoney.com or one of the other portfolio-tracking sites to get a day-to-day feel for how your Australian PP will look over time.  If and when you do decide to adopt the PP, though, I would of course advise to stop checking quite so often.    (I cap myself at once per month.)

[fnord123]

Does something like strips or zero-coupon bonds exist in Australia?  Those should offer more volatility, allowing keeping more like 25% than 50% of them as well as being more PP-like.

[Lone Wolf]

The PP holds 25% in 20 year and 25% in 3 month T's, which averages out to 10 years.

Strictly speaking, the PP calls for holding 30-year bonds and selling them when they get down to 20 years left in duration.  So 20 years would be more like a bare minimum.

I know it's a little pedantic but I just want to make sure it's very clear for anyone that might be new to the PP concepts.

[Hal]

Thanks for the information everyone,

I shall follow the advice of a 50% holding in 10 Year Bonds and keep a small float of cash outside the PP.
The shares and gold will be 25% each.

Does anyone know Harry's preference for 25% Cash, 25% 30 year Bonds rather than 50% in a midrange timespan (10-15 yrs) ?

To answer a few other comments;

The only other Government Bonds for public sale are the Inflation Indexed Bonds, no Zero coupon bonds etc.  The way the inflation is calculated down here for indexing the bonds is a bit suspect though....

On raising the access age to the retirement funds.  That government got voted out, and then the next government floated the idea of increasing it even higher.  Guess politicians are the same all over the world!!  Are there any similar proposals in the USA?

Hal

[AdamA]

Does anyone know Harry's preference for 25% Cash, 25% 30 year Bonds rather than 50% in a midrange timespan (10-15 yrs) ?

I think you might lose some of the volatility associated with the LTT's, and thus some of the yield (haven't checked any data, just a hunch).  However, if the US ever stops issuing 30 year treasuries again, this might be something to think about...although I think HB said that when this happens, it's best just to buy the longest term government bonds available.  

[Lone Wolf]

Does anyone know Harry's preference for 25% Cash, 25% 30 year Bonds rather than 50% in a midrange timespan (10-15 yrs) ?

Browne definitely recommended 25% cash (Treasury Bills) and 25% long-term US government bonds.  The 50% midrange bonds alternative was invented (IIRC) some time after Browne's death as a "workaround" for those who simply have no access to long-term government bonds.  (I believe that this was figured out on the old Bogleheads thread.)

Clive's description is exactly right: in the long run this appears to perform similarly in most circumstances.  My biggest concern, however, is that you do wind up with less protection in the face of a deflationary contraction, especially one that lasts for a long time.

Japan is a pretty good example.  A Japanese "Permanent Portfolio" has to be constructed out of 50% 10-year bonds. While this portfolio did a reasonably good job of protecting purchasing power in an awful stock market, it didn't get to take full advantage of collapsing interest rates.  But since the Japanese government only offered 10 year bonds or shorter, you'd have no choice but to make do with what you have.  I postulate that a Japanese PP that held true LT bonds would have done better.  (I of course have no real proof of this, as these securities don't exist.)

On raising the access age to the retirement funds.  That government got voted out, and then the next government floated the idea of increasing it even higher.  Guess politicians are the same all over the world!!  Are there any similar proposals in the USA?

There are a few politicians on the farthest reaches of the far left that have talked about repurposing these retirement accounts and putting everyone into Treasuries.  Fortunately this kind of talk is still considered quite Marxist and outside of the mainstream at this time.  You never know what future holds.

Do you know what the purpose of this was?  What did the government gain by delaying when people could begin making distributions from their retirement accounts?  The first thing it would make me want to do is stop contributing.  I think that the citizenry would be completely enraged by this idea, so why do it?

[dualstow]

Does anyone know Harry's preference for 25% Cash, 25% 30 year Bonds rather than 50% in a midrange timespan (10-15 yrs) ?

I think you might lose some of the volatility associated with the LTT's, and thus some of the yield (haven't checked any data, just a hunch).  However, if the US ever stops issuing 30 year treasuries again, this might be something to think about...although I think HB said that when this happens, it's best just to buy the longest term government bonds available.  

He sure did. In fact, the 30-year treasury bonds had stopped issuing during the radio show when he talked about this, and he said the longest at the time had something like 27 years left. Eventually, a listener alerted him when the government resumed issuing 30-year instruments.

[Hal]

Thanks for explaining Harry's reasoning.
I shall go ahead and allocate 50% to 10 year bonds using Clives ladder method.

As for the reasoning for the government increasing the access age for your retirement benefits, here is the rough story.

Originally you were taxed and once you hit 65 you were eligible for an old age pension, then...
they made superannuation, (a compulsory self funded retirement scheme) law. So now you were paying for your retirement twice!

Then...because people were able to access their self funded scheme at 55, they retired early, used up their funds and went on the pension. So first the government increased the age for the old age pension, then increased the access age for your self funded scheme.
The latest proposal is to have both the old age pension and self funded retirement funds access age at 67.

You would have to be a trusting person to put more than the mandated minimum into the self funded scheme!!

Its interesting to compare this with how your US system works.

Once again, thanks for your advice.

Hal

[MediumTex]

Hal,

Bloomberg shows a 15 year Australian bond.  Can you purchase this bond?

That would help.

[Storm]

In the US, there are really two types of retirement income that most people have access to.  The first is self-funded, such as IRA, 401k, which is sometimes company matched (you put in a dollar, company puts in 50 cents, up to a certain percentage).  A few lucky souls still have corporate pension where if you work at the same company enough years, you qualify for a monthly stipend.  Because these accounts are always either self or employer funded, they are generally considered to be your personal property.  Even though you may not access them until retirement without paying a steep tax penalty, they are still considered by most people to be our own property.  If the government were to raise the age of accessibility, it would most likely harm the economy because it would discourage spending.  To my knowledge, there have been no attempts by the government to raise the age of accessibility or limit the accessibility of IRA or 401k accounts.

The second type of retirement income that most people have access to is Social Security, which is automatically withdrawn from everyone's paycheck.  Both employer and employee pay into SS, and if you pay enough in, you are entitled to benefits upon retirement or disability.  Up until recently, this Social Security trust fund actually ran in the black, that is, more payments were coming in than were going out.  Just this year, in 2011, the fund is starting to run into the red as more people retire, and there are fewer employed paying in.  Because it is basically a ponzi scheme and requires ever larger numbers of young workers to fund increasing lifespan of older retirees, there has been some mutterings about increasing the age of eligibility from 65 to something like 67 or 68.  The real problem is that the government has been spending the extra money coming into the SS trust fund over the years on all kinds of unrelated things, and now that it's not running a profit any more, all of a sudden they don't want to pay the liabilities.

I still think in the US, any politician that seriously proposes increasing the retirement age for Social Security is committing political suicide.  Retirees are some of the highest represented voting population, and nobody wants their checks to get cut or not pay out on time.