Gyroscopic Investing

Hello,

After listening to a few of Harry Browne's radio shows and reading Fail-Safe Investing, as well as various posts at bogleheads.org, at crawlingroad.com and marcdemesel.be (THANK YOU for all the info), my husband and I have decided to set up a permanent portfolio.

Unfortunately, we can't use Harry Browne's investment recommendations (S&P 500 index funds etc.) since we don't live in the US. And unfortunately, it's hard to find an investment advisor who can help us with a permanent portfolio where we live.

So I hope you don't mind if I ask for help here.

Info about us

Location: Germany. We're not yet sure where we will retire though but most probably in one of the Euro countries. (We're EU citizens.)

Emergency funds: Since 25% of our portfolio will be in cash, we're wondering whether we'd still need to set aside 3-6 months of expenses as an emergency fund. In any case, we're prepared to do so, if it's advisable.

Debt: None

Tax Filing Status: Married filing jointly

Tax Rate: We don't know yet. We just moved to Germany and just started an online business.

Age: Late 20s

Desired Asset allocation:
95% Permanent Porfolio (25% stocks, 25% bonds, 25% gold, 25% cash)
5% Variable Portfolio (100% emerging markets)

Intl allocation: 0% of stocks in Permanent Portfolio. 100% of Variable Portfolio.

Current portfolio: Right now, everything is in a savings account.

Our plan

Permanent Portfolio

25% Stocks

1. db x-trackers EURO STOXX® 50 ETF 1C [12.5%]
http://www.etf.db.com/DE/ENG/ETF/LU0380 ... TF_1C.html
TER: 0.00%
Capitalizing

2. iShares EURO STOXX 50 (Acc) [12.5%]
http://de.ishares.com/funds/SEUA
TER: 0.35%
Reinvesting
Domicile: Ireland

OR:

iShares DJ EURO STOXX 50 (DE) [12.5%]
http://de.ishares.com/funds/EXW1
TER: 0.17%
Distributing
Domicile: Germany

Note: We picked ETFs because Vanguard's Eurozone index fund's minimum investment is too high for us.

25% Bonds

German 30-Year Federal Bonds
http://www.deutsche-finanzagentur.de/en ... ecurities/
Held at: German Finanzagentur
isin DE0001135366

25% Gold

Bullion coins (Krugerrand, Philharmonic)
Storage: German bank [12.5%], Austrian bank [12.5%]

25% Cash

1. German Day Bonds (Tagesanleihen) [12.5%]
http://www.deutsche-finanzagentur.de/en ... ecurities/
Held at: German Finanzagentur
isin DE0001030070
Interest: 0.17%

2. Savings account [12.5%]
Held at: Rabobank
Interest: 2.35%

Variable Portfolio

1. iShares MSCI Emerging Markets (Acc) [2.5%]
http://de.ishares.com/en/rc/funds/SEMA
TER: 0.75%
Reinvesting

2. db x-trackers MSCI EMERGING MARKETS TRN INDEX ETF [2.5%]
http://www.etf.db.com/DE/ENG/ETF/LU0292 ... X_ETF.html
TER: 0.65%
Capitalizing

Questions

1. What do you think of our permanent portfolio and/or variable portfolio plan? Are there things missing that we should take into account?

2. Is the db x-trackers EURO STOXX 50 with a TER of 0% too good to be true? Is there anything we need to watch out for?

3. Which of the funds below would be better for our situation? Since capital gains tax is 25% in Germany, would the reinvesting fund be better even though its TER is higher?

iShares EURO STOXX 50 (Acc) [12.5%]
http://de.ishares.com/funds/SEUA
TER: 0.35%
Reinvesting
Domicile: Ireland

OR:

iShares DJ EURO STOXX 50 (DE) [12.5%]
http://de.ishares.com/funds/EXW1
TER: 0.17%
Distributing
Domicile: Germany

4. Would it be better for us to take an all-Europe fund, that is, including non-euro countries? Or stick to euro countries?

5. Is it ok to put half of the cash portion into a savings account (because interest on German day bonds is only 0.17%)? Or do you know of any German or Eurozone equivalents to the money market funds recommended by Harry Browne?

6. Would we still need an emergency fund (3-6 months of expenses) if 25% of our portfolio will already be in cash?

7. Any other advice, reminders or suggestions for investment newbies like us?

We would really appreciate any advice, comments or suggestions. Thank you.

Peace wrote: Hello,

After listening to a few of Harry Browne's radio shows and reading Fail-Safe Investing, as well as various posts at bogleheads.org, at crawlingroad.com and marcdemesel.be (THANK YOU for all the info), my husband and I have decided to set up a permanent portfolio.

Glad the information was helpful.

Info about us

Location: Germany. We're not yet sure where we will retire though but most probably in one of the Euro countries. (We're EU citizens.)

Emergency funds: Since 25% of our portfolio will be in cash, we're wondering whether we'd still need to set aside 3-6 months of expenses as an emergency fund. In any case, we're prepared to do so, if it's advisable.

The 25% cash can be used for emergency reserves.

Our plan

Permanent Portfolio

25% Stocks

1. db x-trackers EURO STOXX® 50 ETF 1C [12.5%]
http://www.etf.db.com/DE/ENG/ETF/LU0380 ... TF_1C.html
TER: 0.00%
Capitalizing

2. iShares EURO STOXX 50 (Acc) [12.5%]
http://de.ishares.com/funds/SEUA
TER: 0.35%
Reinvesting
Domicile: Ireland

OR:

iShares DJ EURO STOXX 50 (DE) [12.5%]
http://de.ishares.com/funds/EXW1
TER: 0.17%
Distributing
Domicile: Germany

The goal with the stocks is to capture the returns of the market more or less in the area where you live. Any stock fund that is a broad index that diversifies across Europe would be acceptable. The Stoxx 50 does hold the 50 largest companies from Europe that I can see and would probably work OK for diversification across many market sectors. Have you also considered the S&P 350 Europe fund from iShares for wider diversification?

http://us.ishares.com/product_info/fund ... ew/IEV.htm


Also for your international holdings you may want to consider some exposure to the US Total Stock Market.

25% Bonds

German 30-Year Federal Bonds
http://www.deutsche-finanzagentur.de/en ... ecurities/
Held at: German Finanzagentur
isin DE0001135366

If you are in Germany this would be a good choice. If you are in Greece this may also be a good choice!  ;)

25% Gold

Bullion coins (Krugerrand, Philharmonic)
Storage: German bank [12.5%], Austrian bank [12.5%]

Is a bank in Switzerland also an option? Banks that offer secure custody metal accounts will want to use their own bullion. So you may find you hold some coins yourself, and the rest is stored by the bank in their preferred method.

25% Cash

1. German Day Bonds (Tagesanleihen) [12.5%]
http://www.deutsche-finanzagentur.de/en ... ecurities/
Held at: German Finanzagentur
isin DE0001030070
Interest: 0.17%

Unfortunately I am not familiar with the offerings from the German government to comment on this. However I will say that if these bonds function similarly to the US Treasury Bills (Very short term maturity around a year or less and issued by the government of Germany) then you will be OK.

2. Savings account [12.5%]
Held at: Rabobank
Interest: 2.35%

Generally I would try to keep cash in the safest government securities I can find. This would preclude heavy investments in CDs or other bank savings accounts.

If you just have to stretch for the higher yield (which entails more risk) I would caution you to be sure you are below the insurance limits if Germany offers their own FDIC equivalent. Bank insurance can be much lower than it is in the US depending on the country.

Variable Portfolio

1. iShares MSCI Emerging Markets (Acc) [2.5%]
http://de.ishares.com/en/rc/funds/SEMA
TER: 0.75%
Reinvesting

2. db x-trackers MSCI EMERGING MARKETS TRN INDEX ETF [2.5%]
http://www.etf.db.com/DE/ENG/ETF/LU0292 ... X_ETF.html
TER: 0.65%
Capitalizing

For a variable portfolio the door is open to do what you want. If you want to do Emerging Markets these index funds will probably be fine. I would also consider some exposure to the US Market.

1. What do you think of our permanent portfolio and/or variable portfolio plan? Are there things missing that we should take into account?

See my comments above. I think you have a solid plan overall.

2. Is the db x-trackers EURO STOXX 50 with a TER of 0% too good to be true? Is there anything we need to watch out for?

I don't know this fund to say. I would look for an index fund that has wider diversification if you can find one. If a fund is really 0% expense ratio then that means they are a charity. Since investment houses are not known for their charitable nature, I'd be suspicious.

3. Which of the funds below would be better for our situation? Since capital gains tax is 25% in Germany, would the reinvesting fund be better even though its TER is higher?

In the US, even reinvested proceeds from funds are taxed. I don't know German laws, but I suspect they are the same so you may want to look into this closer.

Generally I don't recommend reinvesting the income. Instead I prefer just having it sweep into the cash allocation. Then once a year or so you can use the excess cash to buy your losing assets. This way you have easier bookkeeping for tax purposes and it also allows you to rebalance more efficiently and possibly pay less in taxes because you are reducing transactions.

4. Would it be better for us to take an all-Europe fund, that is, including non-euro countries? Or stick to euro countries?

When you include non-Euro countries you have some currency risk. I don't know how big of an issue that is for you if the stocks are mostly Eurozone. By excluding non-Euro countries you are potentially locking out Switzerland and the UK and this I would think is a negative as they are productive economies.

5. Is it ok to put half of the cash portion into a savings account (because interest on German day bonds is only 0.17%)? Or do you know of any German or Eurozone equivalents to the money market funds recommended by Harry Browne?

Just remember that if you are getting higher interest you are taking higher risk. In 2008 many higher yielding investments got really hurt when the markets fell and credit risk showed up. So it may work out OK, or may not. We just don't know. Generally though I stick to the safest investment for my cash and just accept it's going to get low interest. You don't want your 25% cash allocation being put at risk for what is in essence a pittance extra return. You want it to be stable and very safe in case the markets do something crazy.

If you really think you want to go for higher returns, then I'd just suggest you bump up your variable portfolio and add more stocks and take the risks there. Otherwise, I'd just stick to the safest cash and be content knowing that that stocks, bonds and gold can work to offset the drag the cash may have on the portfolio.

7. Any other advice, reminders or suggestions for investment newbies like us?

Keep it simple!

Thanks a lot for the very informative and helpful responses, craigr and Clive! Will write a longer post in a few days, also taking into account other responses to my questions at:

http://www.marcdemesel.be/2009/01/mijn-achtergrond.html (in Dutch)

And:

http://www.bogleheads.org/forum/viewtopic.php?t=56308

Have a great weekend!

Great post, Peace. I'm always very interested in seeing what a non-US Permanent Portfolio would look like.

Personally, I would not go for the eurostoxx 50 in the stocks-part. It contains only 50 companies for entire europe
I'd either choose the Stoxx 600 or the Dax 30.
The Stoxx 600 is a broad european index and fits perfectly into the PP vision. However the Dax is the german index, and makes sense since germany is considered to be the economic engine of europe. It makes even more sense when you're living in germany and already have bonds and cash there to choose the Dax and thus create a german PP.

It would also be profitable. I've backtested the stoxx 600 and the dax 30 for the last 20 years and while having greater volatility the dax outperformed the stoxx 600.
I don't about the stoxx 50 but this year it performs really lousy.
YTD the stoxx 50 is at -3% while the stoxx 600 is at +9% and the dax at +11%, making the dax the winner again this year so far.

Allthough I'm not in germany I've choosen the Dax myself for my own PP.

EuroPP