Gyroscopic Investing

Hello.  I've been reading about the PP for about 6 months now and think I'm ready to make the jump starting with my 401-K.  The bond offerings are Pimco Total Return, Franklin Strategic Income and Thornburg Limited Term Income.  They also offer a cash holding that returns a guaranteed 3%.  Of these offering, what's my best option for the 25% cash/ST bond holding?  Any feedback that you can provide would be greatly appreciated!

3% guarantee on cash seems unusual. If it is a fund you should worry about total return and expenses. Considering that you can get a HELOC for 2.75% there appears to be an arbitrage opportunity that is too good to be true.

My 401K provider is an insurance company and the 3% return is through a stable value fund. 

I currently have my 401K allocated to a small cap value, mid cap value and Int'l value funds which seem to have the best LT performance.  They offer a S&P Index fund but on a 5 yr return basis, the average on my allocation to the 3 funds have done better than the index fund.

To keep with the PP portfolio, should I be moving my current stock allocation to the index fund or can I keep as is?

I have investments outside the 401-K and will use that for the LT Bond (TLT) and gold holdings (IAU).

GAP - Do you care to elaborate how I can take advantage of the HELOC arbitrage since the stable value fund is a 401K holding?

I don't think it would be the worst thing in the world to use some Pimpco Total Return for your LTT, if you supplement it with some EDV which will give you some additional deflationary protection that PTTRX won't give you

clacy wrote: I don't think it would be the worst thing in the world to use some Pimpco Total Return for your LTT

Now I'm imagining Bill Gross dressed like this:

Your 3% guaranteed stable value fund sounds a lot like the one I recently was moved to (The Hartford) with my company ...  We were told the 3% was fixed for the life of our account and that there were no fees involved...  Thinking of keeping a large chunk of this as my "cash" portion (except it is not liquid)...May roll the rest out to an IRA for a 3x33% GLD/VTI/TLT setup...

Pointedstick wrote:

clacy wrote: I don't think it would be the worst thing in the world to use some Pimpco Total Return for your LTT

Now I'm imagining Bill Gross dressed like this:

LOL

badbally wrote: My 401K provider is an insurance company and the 3% return is through a stable value fund.  ...

GAP - Do you care to elaborate how I can take advantage of the HELOC arbitrage since the stable value fund is a 401K holding?

Nothing ingenious-if you can borrow at a lower rate and get a guaranteed higher rate, it is worth borrowing. I overlooked the fact that you were only using PP for your 401k. There may be rules about HELOC or 401(k) that prevent you. Worth investigating, however. What is the stable value fund. I doubt if it is available outside the insurance company?

gap wrote: Nothing ingenious-if you can borrow at a lower rate and get a guaranteed higher rate, it is worth borrowing. I overlooked the fact that you were only using PP for your 401k. There may be rules about HELOC or 401(k) that prevent you. Worth investigating, however. What is the stable value fund. I doubt if it is available outside the insurance company?

I considered doing that with a Discover loan for P2P lending.  The problem is I didn't want to wait 8 years only to be earning a net $400 a month.

Sometimes in life the dice just don't roll your way. My last 401k was almost completely unsuitable for a PP. The only component that was workable was a grossly overpriced S&P 500 index fund (.60% expense ratio!). If it were not for the matching funds I would never have touched the 401k even for the tax breaks.

In the end I just said F*** it and went with a Jack Bogle special using an intermediate term bond fund and the index fund for stocks on a 50/50 basis.

Just started implementing PP strategy.  Thanks for the feedback.

Instead of plunking a huge amount of $ into TLT and IAU at one time, wouldn't it make sense to buy on dips or dollar avg cost into each investment?

Welcome to the forum.  Harry Browne suggests going all in at once and get it over with.  If you feel buying dips and dollar cost averaging is more suitable, that is okay too.  However, the reason for the PP is that we cannot predict the future so beware of buying what you think are dips.

badbally wrote: Just started implementing PP strategy.  Thanks for the feedback.

Instead of plunking a huge amount of $ into TLT and IAU at one time, wouldn't it make sense to buy on dips or dollar avg cost into each investment?

I would strongly recommend against this.  The reason is that you're trying to market time, and you can't predict the future.  This is what will most likely happen:

"Gold is down today, let's buy some!"  Gold proceeds to drop further while TLT rises 2%...

"Ok, gold is really down now, let's buy some more!"  Gold proceeds to drop further while TLT rises 1%...

"Ok, finally gold is flat today, but TLT dropped a couple %!"  Gold proceeds to rise a bit while TLT continues it's decline...

In the end you probably ended up buying at a peak and taking a greater loss than you would have done if you just went all in.

The strength of the PP is not the individual parts, but how they move inversely from each other.  You need to buy in with equal amounts to make that work for you.  It doesn't matter if you average in, but make damn sure you are buying in equal parts all 4 asset classes when you do.  Otherwise you're just trying to market time and you might as well be stock picking.

badbally wrote: Just started implementing PP strategy.  Thanks for the feedback.

Instead of plunking a huge amount of $ into TLT and IAU at one time, wouldn't it make sense to buy on dips or dollar avg cost into each investment?

Since the stocks and bonds hedge each other, it doesn't make sense to leg into each separately.  Gold, however, is hedged by the cash which doesn't flunctuate, so it can pay to be a bit more judicious.  But you have to assess your ability to clearly identify oversold levels while avoiding downtrends.  As you're asking this now just as gold has broken out of a year long sideways-down trend, your ability is already already suspect.

badbally wrote: Just started implementing PP strategy.  Thanks for the feedback.

Instead of plunking a huge amount of $ into TLT and IAU at one time, wouldn't it make sense to buy on dips or dollar avg cost into each investment?

I felt the same way when I started.  Everything that I read said that gold was just about to lose 50% of its value.  So why go all in and lose big.  I bought half of the gold I needed and the following year I bought the other half.  Unfortunately for me gold went from $1,200 an ounce to $1,700 an ounce during that year.  So much for market timing.

Also, following the advice here, I made sure all of my gold ETF's were in taxable accounts since that is supposed to be the most efficient.  My strategy was to start with all ETF's and transition into physical when I was more comfortable with the PP.  Since gold went up significantly I have to pay a high tax bill just to reallocate from ETF to physical gold.  My current thinking is to set up mini PP's in each type of account to provide greater flexibility for the future.  It's just tough to give back 28% of my gains just to move from one form of gold to another.

Live and learn.

kobe1 wrote: Also, following the advice here, I made sure all of my gold ETF's were in taxable accounts since that is supposed to be the most efficient.  My strategy was to start with all ETF's and transition into physical when I was more comfortable with the PP.  Since gold went up significantly I have to pay a high tax bill just to reallocate from ETF to physical gold.  My current thinking is to set up mini PP's in each type of account to provide greater flexibility for the future.  It's just tough to give back 28% of my gains just to move from one form of gold to another.

You should read the thread where you can learn about doing tax-free 1031 exchanges for like property to like property.  It works for ETF to gold too.

I currently own shares of TIP, would that be acceptable to keep as part of PP? 

badbally wrote: I currently own shares of TIP, would that be acceptable to keep as part of PP?  

Not really. TIPS are not recommended for either the long term bond portion or the cash portion. You should use normal Long Term Treasury Bonds (20-30 yrs) for the former and either a Treasury Money Market Fund or T Bills for the cash portion. Some of us cheat a little on the cash and use short dated T Notes (1-3 yrs) for that extra little zip in yield. There are a number of ETF's which while not ideal, are generally acceptable substitutes for convenience sake (TLT, EDV, SHY, SCHO, SHV).

The reason TIPS are not good are...

* They don't do what cash and or LTTs are expected to do. Cash protects you in a tight money situation and is a great emergency reserve. LTTs protect you in a deflationary environment. TIPS do neither of these things.
* Gold is your hedge against inflation. If you are using TIPS as well as Gold you are over-weighting your portfolio against inflation and leaving yourself exposed to other possible scenarios.
* TIPS are untested. No one knows how they will react in a rising inflationary environment. They haven't been around very long.
* TIPS are inflation insurance that is being marketed by the same entity that creates inflation, i.e. the government. To trudge out the often repeated analogy; it's like buying fire insurance from the same person you think may try to burn down your house. There is a conflict of interest.
* Governments lie. They lie all the time. And their preferred method of lying is the manipulation of statistics. Since 1981 the government has on several occasions adjusted the methodology used to calculate inflation. And (purely coincidentally I am sure) it always ended with a lower official inflation rate. In short the government that is insuring you against the inflation they are creating gets to decide how high that inflation is and what they will pay you on your insurance claim.
* TIPS are currently giving negative real yields and that is with (official) inflation at historic lows!

Bottom line: TIPS are high risk and they don't adequately substitute for any of the elements in a PP. Stay away from them.

P.S. Welcome to the forum.

badbally wrote: I currently own shares of TIP, would that be acceptable to keep as part of PP? 

No. 

Not even close.

Gold protects you from counterparty risk and inflation, while TIPS involve turning your money over to the counterparty who is creating the inflation in the first place.

Thanks for the info.  Does it make sense to hold a small % (~ 5%) in REITS and natural resource ETF's for PP?  I had studied the Ivy portfolio previously and that was a part of their holdings.

REIT's and natural resource ETF's as a part of the stock portion wouldn't be too far out of line, IMO.

If you held say 15% VTI, 5%- REIT ETF, 5% natural resource ETF or stock, you would be more or less within the confines of the PP, IMO but I'm not as much of a purist as many here.

badbally wrote: Thanks for the info.  Does it make sense to hold a small % (~ 5%) in REITS and natural resource ETF's for PP?  I had studied the Ivy portfolio previously and that was a part of their holdings.

For your VP, sure. For your core PP, I'd probably stick to a total stock index fund.

badbally wrote: Thanks for the info.  Does it make sense to hold a small % (~ 5%) in REITS and natural resource ETF's for PP?  I had studied the Ivy portfolio previously and that was a part of their holdings.

Again one should confine oneself to the four asset classes in a PP (Gold, Cash, LTTs and Equities). I have nothing against REIT's and purely as a matter of personal opinion I think real estate has gotten kinda cheap if you have a long term investment horizon. If you said you wanted to put some money in an REIT or an REIT index fund/ETF as part of your speculative Variable Portfolio I would not have any problem with that at all. But it doesn't really fit well in a PP where each asset class is specifically geared to one of the four possible economic conditions (inflation, deflation, tight money, prosperity). Also a 5% allocation is enough that it could detract performance from whichever asset class you are going to trim, while not being enough to give you any returns worth the speculative risks.

All of that said I note that the Permanent Portfolio mutual fund (PRPFX) does hold some real estate assets along with other things. It's a bit more diversified than the 4x25% PP and is weighted more with inflation in mind. Most of us on the forum see PRPFX as an acceptable second choice for a PP that is essentially one stop shopping. But there are downsides. The volatility is somewhat higher and it under-weights Treasuries. So you could be exposed in a bad deflationary situation.  Also it's an actively managed fund so you are going to pay higher fees and expenses. Still if I were strongly convinced that inflation is the main threat in the coming years but wasn't quite ready to bet the farm on it, I would give serious thought to going with PRPFX.

badbally wrote: Thanks for the info.  Does it make sense to hold a small % (~ 5%) in REITS and natural resource ETF's for PP?  I had studied the Ivy portfolio previously and that was a part of their holdings.

I believe REIT's are included in a total market index fund, so separating them out serves no useful purpose.  They will not act like a commodity or a real asset.  Raw land, farmland or actual real estate certainly would.  It's too bad though, because real assets are generally a pain in the ass, but that is why they act as they do.

What % should your VP be?