My PP/ VP strategy - feedback please!

[rocketdog]

Forgive the lengthy post, but I wanted to throw the details of my situation out there to see what all you PP gurus think. 

I've been lurking here for a while and posting occasionally here and there.  I recently read "Failsafe Investing", then listened to all the "Money Show" podcasts, and now I'm reading "The Permanent Portfolio" (love it so far - nice job!)  Just last year (before learning about the PP) I had spent many months researching the best investments for my wife & my retirement accounts (we each have a 401K, IRA, and Roth IRA, meaning I have to diversify 6 different accounts!)  I incurred hundreds of dollars in commission fees to buy dozens of no-load index funds I wanted for our IRA and Roth accounts, so I'm not eager to start rejiggering things just yet.  We had decent performance last year, averaging around 13% gains overall with tolerable volatility. 

Now that I'm on the PP bandwagon, I want to start migrating our retirement accounts towards the PP strategy slowly over time.  I was thinking I'd get us to 40% PP within the next 3 years, then each year thereafter rebalance another 4% into the PP until it reaches 80%, which is about when we'll be ready to retire (15-20 years).  The remaining 20% would be a VP, and during retirement I'll probably shift another 1%-2% each year into the PP side until we're eventually 100% PP (in 25-35 years).

I realize the PP is a "package" as HB would say, but with a 15-20 year timeline I'm in no rush to get my PP up and running all at once.  We already have 10% in broad-based stock index funds (VTI and SCHB), so we're good there.  We have about 5% cash, maybe 2% gold, and our only long-term bonds are mostly corporate bond funds.  So I have some work to do in those areas.

My plan was to get us to 10% in each of the cash, gold, and bond sections over the next 3 years, targeting one holding each year.  I would make my best prediction as to which of those was undervalued and put 10% into it.  Or if I can't decide between 2 of them, I'll split it 5% between them.  In 3 years time we'll then have 40% of our retirement funds in the PP.  Each year thereafter I'll repeat the process, shifting 4% into the PP.  So this is sort of a "dollar cost averaging" approach. 

Again, I realize the risks inherent in this approach, but we have a long(ish) timeline before needing these funds, and we are very widely diversified already, so barring a world-wide calamity of epic proportions I'm not terribly concerned about the safety of our retirement funds at this point. 

Any thoughts?  Suggestions?  Dire warnings?  Wisdom from experience?

Thanks for your feedback!

[rocketdog]

Thanks MangoMan.  I failed to mention that our IRA and Roth accounts are all at Schwab, and I've invested in many of their ETFs in my own accounts, but I've invested my wife mainly in the Vanguard funds in her accounts.  I felt it was best to diversify even between funds that track the same benchmark or sector, so I have SCHB where she has VTI, and so on. 

I've thought about transferring our accounts to a different custodian (possibly Vanguard or TDAmeritrade), but my wife's 401K is also at Schwab (mine's at Fidelity), so 5 of our 6 accounts are at Schwab, which does help simplify things for me.  Perhaps when we retire I can consolidate all our accounts at a single low-cost custodian that waives commissions on many of the PP funds.  I didn't mind the commission fees to get ourselves properly diversified, and I only intend to rebalance once a year, and even then only if necessary, so I look at it as a one-time hit that will benefit us in the long run. 

[rhymenocerous]

What percent of your retirement assets do you want in the PP vs the VP?  Not what you currently have, but what your end goal is.  It sounds like you want a 100% PP.  If you've decided that that asset allocation meets your needs and risk tolerance, why would you wait 35 years to implement it?  Over that time period, you'll have some different allocation that does not meet your needs.  I can understand maybe taking 1 year to migrate over, but not 35 years.  Personally, since all of these funds seem to be in IRAs and 401k, I wouldn't hesitate to implement my desired AA immediately.  If your new contributions are large relative to the size of your total portfolio, I would just direct new money to the underweight asset classes until you achieve a proper balance.

Any commission fees you've already paid are a sunk cost.  The money is already gone, and you shouldn't let the fact that you've spent that money keep you from implementing your plan.  Also, why are you paying commission fees?  I don't use Schwab, but they should have an appropriate stock and cash fund you can trade for free.  I'm not sure if you can buy treasuries for free there, but you might have to pay a fee to buy a gold fund.  I'm at Vanguard, and I pay $7 to buy and sell GTU.  I only really need to buy once a year, so I pay a total of $7 per year.

[rocketdog]

I just typed out a detailed response and then the forum experienced an error posting it so I lost the whole thing.  I'll try to summarize my thoughts again.

I incurred commissions amounting to around $400 because I purchased 31 non-Schwab funds across 4 different accounts (average of 8 non-Schwab funds per account).  Plus I had to sell some funds that didn't fit in with my diversification plan, which of course incurred additional commissions. 

Our IRA and Roth accounts are currently diversified among the following Morningstar fund categories (as you can see, we have a little bit of everything):

FOREIGN FUNDS
World Bond (ex-US)
Emerging Markets Bond
World Stock (ex-US)
Foreign Large Value
Foreign Small/Mid Value
Diversified Emerging Mkts
Europe Stock
Global Real Estate (ex-US)

US FUNDS
Inflation-Protected Bond (TIPS)
Short-Term Bond
Intermediate-Term Bond
Total Stock Market
High Dividend Equity
Large Value
Mid-Cap Blend
Mid-Cap Value
Small Blend
Small Value
REITs
Commodities Broad Basket

As to why I'm not shifting everything to a PP right away, I consider the PP to be a "Conservative Allocation" portfolio, and we're far enough away from retirement that I don't want to get too conservative too soon.  I'll get us to 40% in the PP over the next 3 years or so, then gradually shift us a little more towards PP each year thereafter, with a target of 80% in the PP upon retirement. 

Everything else will of course be a VP, where I will take greater risks.  Most people make their retirement portfolios more conservative as retirement approaches by shifting more towards bonds and cash, whereas I will shift more towards the PP instead.

I hope that makes sense?

[rickb]

Reading between the lines a bit, it sounds like your overall allocation is currently predominantly stock, perhaps as high as 90% (you say you're 5% cash, 2% gold, and have some long term corporate bonds).  If this is the case, I think most folks here would strongly encourage you to significantly reduce your stock exposure.  Another time like the end of 2008, when ALL stock heavy portfolios (regardless of how "diversified" they were) got hit by 30% or more could happen with little or no warning at any time.

Beyond that, your notion of easing into your (40%) PP over the next 3 years one asset class per year based on your guess as to which asset is most undervalued sounds an awful lot like a violation of Rule #4:

No one can predict the future

I'd recommend biting the bullet and doing this all right now (which would help your stock exposure situation as well - assuming you are indeed as stock heavy as it seems).  I think the sooner you rid yourself of the belief that you can predict where markets are going, the better off you'll be.  If you're as stock heavy as it seems like you might be, I'd think going all-in (to 40%) now would be considerably safer than the approach you're apparently thinking about.

Then, your plan to go from 40% PP / 60% VP to 80% PP over the next 10 years sounds OK - but again this is presumably based on a belief that stocks will significantly outperform the PP over this time period.  Historically (over the last 40 years) the CAGR from the PP and stocks has been essentially the same.  If your actual target is 80% PP, I don't think there's any particular reason to ease into it so slowly.  If you don't trust it, you could build it up over a few years (maybe something like 40% now, 60% in a year, 80% in two years), but trickling 4% a year into it over 10 years would leave you exposed to a significant decline in the stock portion of your portfolio for a long time.

"Use the force, Luke.  Let go."

[sophie]

Just a few thoughts to add to rickb's excellent post:

You can only get the safety & stability of the PP by having all 4 assets in approximately equal proportions.  By buying each asset one at a time over several years, you may be exposing yourself to more risk than you bargained for, with little added upside for that risk.

I suggest going through your list of investments and pick out the ones you'd like to keep for now.  Then, liquidate the funds that didn't make your A list, hold your nose/close your eyes, and buy the PP assets all at once. 

If you're not comfortable with converting 40% right away, then go with 10%, 20%, or whatever makes sense to you right now.  Then watch what happens.  You might find yourself putting more than 40% into your PP next year.  It's not necessarily true that stocks will outperform the PP over the next 10 years.  It happened this year, but take a look at the last 10 years and then consider where we are in the economic cycle right now.  We might be just at the beginning of another bull market in stocks, but I rather doubt it.

[rocketdog]

Reading between the lines a bit, it sounds like your overall allocation is currently predominantly stock, perhaps as high as 90% (you say you're 5% cash, 2% gold, and have some long term corporate bonds).

Sorry if I gave that impression.  We are 60% stocks, 24% bonds, 10% REITs, and 6% commodities. 

Beyond that, your notion of easing into your (40%) PP over the next 3 years one asset class per year based on your guess as to which asset is most undervalued sounds an awful lot like a violation of Rule #4:

No one can predict the future

Guilty as charged.  I can only depend on past performance and my own gut instinct, which are both (admittedly) unreliable.

"Use the force, Luke.  Let go."

Good one.  I'm a huge Star Wars geek from the 70s.  My Star Wars collection is part of my retirement plan (just kidding, but I do have a lot of Star Wars sh*t taking up space in our basement ;-)

[Pointedstick]

"Use the force, Luke.  Let go."

Good one.  I'm a huge Star Wars geek from the 70s.  My Star Wars collection is part of my retirement plan (just kidding, but I do have a lot of Star Wars sh*t taking up space in our basement ;-)

I know what you want.

https://www.saberforge.com/hero-sabers/redeemer-saber

[rocketdog]

I know what you want.

https://www.saberforge.com/hero-sabers/redeemer-saber

Dude, those are sick! 

[melveyr]

The most radical part about going PP is foregoing any predictions about asset class returns. Easing into it through predictions will not set you up emotionally to handle an agnostic portfolio IMO. If you finally reached the PP you would likely not stick with it because you will have trained yourself to try to outguess the market.

[rocketdog]

The most radical part about going PP is foregoing any predictions about asset class returns. Easing into it through predictions will not set you up emotionally to handle an agnostic portfolio IMO. If you finally reached the PP you would likely not stick with it because you will have trained yourself to try to outguess the market.

I hear where you're coming from, but I don't think I'll fall into that trap.  I'm fairly cool-headed as far as these things go.  Even during life-threatening tragedies I tend to be kind of easy going.  I have no recollection of this story, but my roommate in L.A. back in the 90s likes to tell of the time we lived through the Northridge earthquake (the epicenter of which was a scant 7 miles from our apartment).  After the shaking stopped and our apartment was plunged into darkness and everything had toppled to the floor, she screamed out my name in terror from her bedroom down the hall. 

According to her, I shouted back nonchalantly, "What?"