Gyroscopic Investing

Can some one explain the difference and which is best in a permanent portfolio

Have you read the Permanent Portfolio FAQ?

https://web.archive.org/web/20160324133 ... folio/faq/

All of your questions about the Permanent Portfolio are answered there.

In a 4x25 Permanent Portfolio, you purchase 30 year Treasury Bonds and you sell them when their maturity reaches 20 years — replacing your 20 year bonds with new 30 year Treasury Bonds. TLT is an ETF that does the same exact thing. Harry Browne actually endorsed this ETF on one of his radio show episodes. Even those of us who buy our Treasury bonds directly will often use TLT as an easy way to track the approximate value of our bond allocation.

EDV (Vanguard's Extended Duration Treasury Bond ETF) is like TLT on steroids. It's extremely volatile. EDV is often used as a stabilizer to PRPFX. PRPFX doesn't hold Long Term Treasuries, so a 90%PRPFX and 10% EDV allocation is necessary to mimic the performance of a 4x25 Permanent Portfolio. It prevents PRPFX from falling off a cliff when the market tanks or deflationary pressures mount. I believe MediumTex discovered this hack and many people use it with excellent results.

PRPFX was Harry Browne's first attempt at conceptualizing the Permanent Portfolio (think of PRPFX as version 1 of the Permanent Portfolio). PRPFX was originally designed to protect one's money against inflation — and it still does exactly that. By 1987, Harry Browne simplified the Permanent Portfolio concept into the 4x25 Permanent Portfolio (version 2, if you will) so that anyone could build a Permanent Portfolio on their own with very little money and very little cost.

I'm not familiar with ZROZ. But, I can tell you that it's not something that should be used in a standard Permanent Portfolio.

But, again, you'll find a ton of information like this in the FAQ as well.

EDV question:

Two-thirds of our retirement money is stuck in a restricted Fidelity account. We can move up to 50% of that into BrokerageLink, but even there, we cannot buy ETFs or individual stocks, only funds. (My husband is a programmer at a big law firm.)

With lots of help here, I chose FLBAX (Fidelity Spartan Long-Term Treasury Bond Index Fund) as our best LTT option in this account.

Now I'm ready to juice that with a touch of EDV (which we can get in our Vanguard brokerage account).

What percentage of EDV to FLBAX would equal having TLT in the first place, and be most perfectly PP-ish?

mandynshane wrote: Can some one explain the difference and which is best in a permanent portfolio

Here's my take on it, given my non-expert understanding of BOND (30 yr Treasury Bonds)

Quick version: Use TLT if possible.  Use EDV if you're a Vanguard custodian tax-advantaged account customer & you want to lower your investment costs.
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TLT is a solid, default choice for the BOND asset in an orthodox Harry Brown Permanent Portfolio (HBPP).  TLT is solid it implements to an index of 20-30 yr US Treasury bonds "Barclays Capital U.S. 20+ Year Treasury Bond Index".  It is ~100% T-Bonds, & has no garbage from other non-US Treasury issuers like Freddie Mac.  TLT has a track record of performing in roughly the same manner as directly buying T-Bonds in a manner Harry Browne described: buying a 30 yr T-Bond & selling it 10 yrs later when it had 20 yrs left to maturity.

A 30 yr Treasury Bond, like any general non-callable bond pays "semi annual coupons", & returns the principal at the date the bond matures.

Example, Lisa buys a 30 yr T-Bond on Jan 1 2011, that matures in Jan 1, 2041, & plans to hold it to maturity. The bond has a face amount of $100, & pays a coupon rate of 4%.  What this means, is that twice a year, the bond will make a payment to Lisa, $2 each 6 months. (note: example is fake, with simple numbers used to illustrate the idea)

Cash Flows, US Treasury to Lisa
Jan 2011 -$100 Lisa pays the US Treasury to buy the bond)
July 2011 $2 UST coupon payment (aka a dividend) paid to Lisa
Jan 2012 $2 UST coupon payment
...
July 2040 $2 UST coupon payment
Jan 2041 $2 UST coupon payment AND repayment of the $100 principal/face amount

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EDV, per an astute MediumTex observation, has 3/2X the volatility of TLT.  If it used exclusively in place of TLT, it should be held in a 2/3X proportion to other assets (stock, gold, cash).  In a orthodox HBPP, you hold 3/12 ~25% of each asset, including TLT for your bonds.  With EDV, your target is 2/11 ~18.1% for EDV, & 3/11 ~27.3% for each of the other assets (stock, gold, cash).  Personally, I have been using exclusively EDV for my bond allocation & have been happy with the decision.  EDV performed as expected in the recent debt ceiling crisis, rising very strongly.  My original reason for using EDV, is that a Vanguard custodian customer, trading costs are minimized via using EDV (as opposed to the non-Vanguard fund TLT.)

EDV, similar to TLT, has 100% UST bonds/cash flows, with out any non-UST garbage like Fannie Mae.

EDV (0.13%) is similar to TLT (0.15%) in that it has a low expense ratio.

EDV is different than TLT, in that EDV is thinly traded relative to the heavy traded TLT, & has a significant bid ask spread of ~0.33%.  Although from personal experience with EDV, this spread is not so burdensome as to not use EDV.
https://advisors.vanguard.com/VGApp/iip ... daskspread

Although you will always want to shield your BOND investment in your tax-advantaged account (IRA, 401k, etc), outside of taxation of the dividends, there is no "penalty" for holding TLT in a taxable.  OTOH, there is a bizarre tax rule(s) associated with EDV, such that EDV should NOT be used in a taxable - EDV should only be held in tax-advantaged.  If you don't have enough tax-adv space to fit in all your EDV - avoid EDV entirely & use TLT.

EDV is different than TLT in that it implements the "Barclays Capital U.S. Treasury STRIPS 20–30 Year Equal Par Bond Index".
http://en.wikipedia.org/wiki/Treasury_bonds#STRIPS
EDV afaict repackages the interest & principal payments from 20-30 yrs in the future, from several UST-Bonds.

Here's the prior example, applied to EDV:

Cash Flows, Vanguard (repackager of coupon & principal payments from various T-Bonds into EDV) to Lisa
Jan 2011 -$100 (Lisa pays $100 to Vanguard)
Jan 2031 $X payment (coupon or principal)
Jul 2031 $Y payment
...
Jan 2041 $Z payment

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I am not familiar with ZROZ, but it appears to be similar to EDV.  It appears to track a similar "STRIPS index", a graph of its & EDV non-dividend included performance on Google Finance looks very similar.  Its dividend-reinvested return correlation is 0.93, on assetcorrelation.com.

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Hope this post was somewhat useful

Liz L. wrote: EDV question:

Two-thirds of our retirement money is stuck in a restricted Fidelity account. We can move up to 50% of that into BrokerageLink, but even there, we cannot buy ETFs or individual stocks, only funds. (My husband is a programmer at a big law firm.)

With lots of help here, I chose FLBAX (Fidelity Spartan Long-Term Treasury Bond Index Fund) as our best LTT option in this account.

Now I'm ready to juice that with a touch of EDV (which we can get in our Vanguard brokerage account).

What percentage of EDV to FLBAX would equal having TLT in the first place, and be most perfectly PP-ish?

It looks as if FLBAX performs similarly to TLT.

Personally, I would not be a fan of combining FLBAX & EDV.

It sounds as if your "asset allocation pie" has 67% of the funds at the restricted work Fidelity account, & 33% at Vanguard IRA?

If you have enough space, you hold your entire BOND using EDV in your Vanguard account as I described in the prior post. (Per MediumTex EDV's volatility idea, allocate 18.1% to EDV, 27.3% each to stock, gold, cash).

Otherwise, your existing situation of holding your entire BOND using FLBAX in your restricted work Fidelity might be the best plan.

Liz L. wrote: EDV question:

Two-thirds of our retirement money is stuck in a restricted Fidelity account. We can move up to 50% of that into BrokerageLink, but even there, we cannot buy ETFs or individual stocks, only funds. (My husband is a programmer at a big law firm.)

With lots of help here, I chose FLBAX (Fidelity Spartan Long-Term Treasury Bond Index Fund) as our best LTT option in this account.

Now I'm ready to juice that with a touch of EDV (which we can get in our Vanguard brokerage account).

What percentage of EDV to FLBAX would equal having TLT in the first place, and be most perfectly PP-ish?

The duration of the treasury bond fund in question is the key factor.  Duration will give you a good approximation of what happens to your bond fund value if rates rise/fall.  By way of example, if rates rise/fall by 1%, one could expect a fund with a 5 year weighted duration to have it's value rise/fall by roughly 5%; hence the reason for longer duration treasuries as protection in a deflationary environment.

If you were to buy a nominal 30 year treasury bond today, the effective duration of that bond is roughly 17.6 years.  The best case scenario (other than buying the 30 year direct) would be to find the treasury only bond fund with an effective duration that is as close to 17.6 years as possible.  FLBAX is a good option as it is a Treasury only fund with a current duration of 14.7 years.  While not ideal, it is close enough so I would not lose any sleep over using it for your long bond allocation.  TLT is another nominal Treasury fund and it's current duration is 15.5 years so it would be considered slightly superior to FLBAX.  ZROZ and EDV are both zero coupon Treasury Strip funds.  They would have the most sensitivity to interest rate movements as they both are long term treasury zero coupon bond funds.  Zero coupon's do not pay interest during their life so their duration is equal to their stated maturity.  Instead, interest "accrues" during the term and is paid at maturity so they are bought at a steep discount from their face value.  These two funds both have a duration of over 28 years.  There have been a number of discussions on their suitability for the PP and I think HB may have considered them ok at one time.  I think he ultimately decided they were an "imperfect" solution for certain folks who needed the extra "bang" they could provide but the best solution was the nominal 30 year that one would sell as it approaches 20 years remaining.

If you don't mind fiddling around a little, you could use an 80% FLBAX mix with 20% EDV.  That would give you a weighted average duration of 17.4 years which is very close to the current 30 year treasury bond duration of 17.6 years.

What are  the  bizarre tax rule(s) associated with EDV, such that EDV should NOT be used in a taxable account that you mention?

steve wrote: What are  the  bizarre tax rule(s) associated with EDV, such that EDV should NOT be used in a taxable account that you mention?

iirc from reading about it on this board (iirc read this in a MediumTex comment), it has something to do with possibly having to pay tax in some years, when all you did was hold the ETF.

In other words, if you owned 100 shares in Jan 1 2010, have div reinvist turned OFF, & own the same 100 shares on Jan 1 2011, you might have had to pay taxes in tax yr 2010 (in addition to any taxes on dividends).

steve wrote: What are  the  bizarre tax rule(s) associated with EDV, such that EDV should NOT be used in a taxable account that you mention?

With zeroes generally, you have the issue of having to pay tax on accrued interest that you haven't actually received.

With EDV, it actually pays out the accrued interest quarterly, so that's not a problem.  The problem with EDV is that it is such a small and volatile fund that if rates went up and money flowed out of the fund, it could trigger large capital gains distributions at the end of the year.  This is what happened at the end of 2009, when the fund made something like a $12 year end distribution.  That would not have been a happy experience for someone who assumed the fund would only be distributing accrued interest.

Like you said the phantom intererst does not apply to edv as dividends are payed out quarterly. The large capital gain distribution is something to be aware of. I suppose it could be sold before the ex dividend date and the gain be taken as a regular long term capital gain if edv was held for more then one year or if the price went down and was close to even or underwater it could be sold for a loss. Hopefully if interest rates went up and the price of edv dropped I would also be one of the people that exited the fund, I would be happy to switch back to tlt. It's funny because I never thought that I would hold edv long, a while back I sold my taxable tlt for a nice tax loss harvest and bought the split of vglt and edv with the proceeds. At the time the market sentiment was so negative for long term bonds I thought for sure I would be selling the vglt and edv for another loss and buying back tlt after 31 days, what happened was the long term bond just shot up from that point foward. My long term bond allocation now is approx 1/3 edv 1/3 vglt and 1/3 tlt in a tax advantaged account. I wish I could have all my bond holdings in a tax advantaged account.