Gyroscopic Investing

Funds are ready and about to cast the dice now. Not convinced that why we need to have cash in portfoilo while we know it would hardly generate any material return if looking back its performance during the past decades. Or take it this way, I would do a 33%,33%,33% portfolio like this and virtually imagine I have another 33% of cash in the porfolio to function as the calculation of rebalance with 15/35 band. While in reality, rather than invest the cash in low return SHY, I can do some other very low risk investment aiming at 4%-5% return every year. This then combined with the 33/33/33% porfolio could deliver a higher CAGR as compared to classic PP.

Could anybody tell me if I have any flaw here?
Meanwhile, I am using a broker called internaxx to position this portfolio, what would be the annual cost of purchasing and maintaining such a portfoilo?

zleiupc wrote: Funds are ready and about to cast the dice now. Not convinced that why we need to have cash in portfoilo while we know it would hardly generate any material return if looking back its performance during the past decades. Or take it this way, I would do a 33%,33%,33% portfolio like this and virtually imagine I have another 33% of cash in the porfolio to function as the calculation of rebalance with 15/35 band. While in reality, rather than invest the cash in low return SHY, I can do some other very low risk investment aiming at 4%-5% return every year. This then combined with the 33/33/33% porfolio could deliver a higher CAGR as compared to classic PP.

Could anybody tell me if I have any flaw here?
Meanwhile, I am using a broker called internaxx to position this portfolio, what would be the annual cost of purchasing and maintaining such a portfoilo?

Removing cash from the PP gives you a higher CAGR, but also a higher volatility and max drawdown.  You might consider "juicing" the return on your cash positions by investing in Series I Savings bonds, or a 1-3 year short-term Treasury ladder, or a combination of the two.  These are considered much safer in that there is not much chance of principal loss.  If done properly, you should still be able to get a 2-3% return on your cash positions, without risking as much volatility.  Good luck to you!

Thanks a lot, Storm for your comments. That is what I am planning to do, even put the cash in a fixed deposit with 4% annual return for say, 5 years. Of course, at the same time, as I am working I would have relatively good liquidity position in terms of emergency fund or living expensese, etc.

In terms of implementation, if I purchase TLT, GLD, SPY once off in a large quantity of money, would that be okay? What is the cost of in and out plus holding these ETFs? Excuse for my ignorance, I am a new fish. Thanks!

zleiupc wrote: Thanks a lot, Storm for your comments. That is what I am planning to do, even put the cash in a fixed deposit with 4% annual return for say, 5 years. Of course, at the same time, as I am working I would have relatively good liquidity position in terms of emergency fund or living expensese, etc.

In terms of implementation, if I purchase TLT, GLD, SPY once off in a large quantity of money, would that be okay? What is the cost of in and out plus holding these ETFs? Excuse for my ignorance, I am a new fish. Thanks!

The main costs to trading in and out of the ETFs frequently are going to be trading costs and taxable events (if you made a profit).  A lot of us try to minimize these costs by only contributing new money to cash, and then rebalancing when cash is 35% of the portfolio.  However you choose to do it, it's usually best to avoid trading frequently.

zleiupc wrote: Funds are ready and about to cast the dice now. Not convinced that why we need to have cash in portfoilo while we know it would hardly generate any material return if looking back its performance during the past decades. Or take it this way, I would do a 33%,33%,33% portfolio like this and virtually imagine I have another 33% of cash in the porfolio to function as the calculation of rebalance with 15/35 band. While in reality, rather than invest the cash in low return SHY, I can do some other very low risk investment aiming at 4%-5% return every year. This then combined with the 33/33/33% porfolio could deliver a higher CAGR as compared to classic PP.

Could anybody tell me if I have any flaw here?
Meanwhile, I am using a broker called internaxx to position this portfolio, what would be the annual cost of purchasing and maintaining such a portfoilo?

The thing is, you're going to have some cash set aside for an emergency anyway.  So even if you make your portfolio 1/3 1/3 1/3,  the reality is that most people still have (or should have IMO) a large sum of cash set aside.  Whether you figure it in to your return or not is just mathematical semantics. 

zleiupc wrote: Thanks a lot, Storm for your comments. That is what I am planning to do, even put the cash in a fixed deposit with 4% annual return for say, 5 years. Of course, at the same time, as I am working I would have relatively good liquidity position in terms of emergency fund or living expensese, etc.

Would the five year cash be a fixed term lock in?  If so does not qualify as true cash which IMHO should be fully liquid to be available for emergencies, rebalancing, etc.

True, technically it won't be cash. It is actually outside of the perimeter of PP. What I meant is instead of sinking the low performing 25%, I can put it somewhere else such as fix deposit which virtually offer 0% voltatility and around 3-5% interest rate depending on where you are. The premise of this is you would then have enough confidence of somehow holding a portion of very liquid asset (may it be ongoing income or cash equivalent). As I recognize the fact even if I put the 25% cash in pp, I would anyway have some other form of liquid cash equivalent parking here and there inevitably. Henceforce, I would rather keep a 33%*3 in pp and consider my other elements of cash equivalent as the cash lag.

zleiupc wrote: True, technically it won't be cash. It is actually outside of the perimeter of PP. What I meant is instead of sinking the low performing 25%, I can put it somewhere else such as fix deposit which virtually offer 0% voltatility and around 3-5% interest rate depending on where you are. The premise of this is you would then have enough confidence of somehow holding a portion of very liquid asset (may it be ongoing income or cash equivalent). As I recognize the fact even if I put the 25% cash in pp, I would anyway have some other form of liquid cash equivalent parking here and there inevitably. Henceforce, I would rather keep a 33%*3 in pp and consider my other elements of cash equivalent as the cash lag.

Can you describe that strategy is simpler terms?  I'm not following your exact rationale for not just rolling all of your assets into one investment strategy, and including your cash as part of the overall strategy.

Bear in mind, too, that the PP is a long term strategy, and my own experience has been that people seem to have a hard time actually making a long term commitment to most "long term" investment strategies.

Cash performs many functions within the PP.  Sometimes it dampens portfolio volatility.  Sometimes it leads the portfolio (as in the early 1980s).  Sometimes it just provide dry powder to buy lagging assets when all of the other assets are struggling.

Whatever you decide to do, good luck.  The PP is a lot like planting a tree, where the key to success is often just being able to leave it alone and let it do its thing.  Many investors have a tendency to dig up the seed and inspect its progress, which of course makes it much harder for roots to grow.

Count all the cash you keep outside of your monthly normal flow as part of the permanent portfolio.

Now what percentage of your portfolio is cash?

If you are still saying "0%" I think you are being foolish.

Everyone should have some cash available for emergencies and lumpy needs (car/home repair, live in a hotel if forced to evacuate, doing your own escrow for insurance and tax payments, etc.).  And if you are living off your portfolio, you need the cash cushion to avoid having to sell assets at inopportune times.  Ideally replenishing that cushion via regular dividends or interest or rebalancing.

I find that my 'static' (no in or out) PP needs between 5% and 10% cash to handle rebalancing so I would keep that much available to the PP for that purpose.  The rest of the cash can be 'invested' in other liquid forms.

For example, U.S. I-Bonds are not liquid the first year, so don't tie up too much all at once into them.  Every year you could put more aside that way as the previous year's bonds become liquid.  Eventually you could get up to 15% of your portfolio in I-Bonds if you like.  (Saving aside the other 10% for rebalancing the PP.)

Example 2, I have a chunk of cash in laddered 5 yr CDs.  I'm not sure what I'll do when those start maturing if interest rates are still so low.  Might plow it back into SHY or might lock it into even longer-term if the penalties for early withdrawal aren't too onerous.  Might decide to pay off my HELOC.

(My 25% 'cash' is still within FDIC insurance limits even if I were to have it all at one bank.  If yours is beyond that you are in a situation I have not considered.  I Bonds still work, as do CDs if you distribute between banks and perhaps have joint accounts to double your coverage.)