"...for the money you cannot afford to lose."

[buddtholomew]

What does this mantra mean to you? I'm curious to know how others have internalized this often quoted statement.

[Dozha]

It means "all my money."

[l82start]

all except for about  $180.00 right now, and no sign that will be changing any time soon.

[RuralEngineer]

Pretty much everything for now.  Maybe when I'm in my 40's I'll have accumulated enough that I'll feel like I can start a VP.  Actually I do have $500 in Intel that I bought on a whim that might be considered a micro-VP...an experiment with dividends.

[WhiteDesert]

What does this mantra mean to you? I'm curious to know how others have internalized this often quoted statement.

I guess not very much at this point. :/

I started running a PP just two years ago (1 July 2011) and it is currently 100% contained within my Roth. Looking at my tracking spreadsheet this morning, the PP represents just 16.6% of my investments (and this is not including the cash in a high yield savings account that serves as an emergency fund). The balance, my variable portfolio, is spread across three TIAA-CREF contracts.

It seemed much simpler to adjust the asset allocations within the T-C contracts and turn those into a VP, build the PP within the Roth, and then use the PP as part of "the anchor" or "the breaks" for the overall portfolio (as opposed to tying myself into knots trying to create a hybrid PP that crossed all four accounts).  So that's where I headed--get the equity choices in the three T-C accounts to approximate total stock market as closely as I could with as low an overall ER as possible and use the PP to act in concert with the "bond" funds available in the T-C accounts (TIAA Traditional; TIAA Real Estate; PTTRX).

I'm actively contributing to the Roth with every paycheck and so that 16.6% is slowly growing, but I admittedly wasn't too worried about Harry's "cannot afford to lose" directive when I jumped into this particular body of water. I don't look at my VP as being particularly speculative, but those three T-C accounts represented my entire portfolio when I ran across this forum and the PP two and half years ago or whatever. I didn't see another solution that was simple enough to be attractive. I designed the overall strategy to guard against loss as much as possible. And it is working well enough so far--since I started tracking in July of 2011, when the equity markets (represented by the S&P500*) have a "bad" day (defined as the S&P500 being negative), my overall portfolio (VP+PP) usually  looses ~50% or less than what the S&P500 looses (~90% of the time). I can live with that for now, as I grow the PP to a larger % of the total over time.

*an arguably meaningless indicator to compare against when you're comparing it to an entire portfolio of assets, but I haven't had the energy to try and craft or find something else (I spend too much time watching the data as it is).

[GT]

I will go with money I can afford to lose:

Fun money such as vacations-

I budget a certain amount each month for vacation planning.  We can use the money on any vacation trip we want as long as we only use the amount we have saved up. If we use less by taking just a mini vacation, the left over amount rolls over into next year’s vacation budget. This helps me feel that I earned the vacation by saving up for it.

[sophie]

I've defined that as less than 5% of my investments outside of tax-deferred accounts.  The nice thing about the VP is that you don't have to worry about protecting the money - go ahead and shoot for the stars.  No big deal if you miss.

WhiteDesert, interested to know how you've allocated your TIAA accounts?  I also decided not to try to integrate those accounts with the PP.  Being annuities, they are a fundamentally different beast.

[dualstow]

What does this mantra mean to you? I'm curious to know how others have internalized this often quoted statement.

I'm fairly sure I can afford to lose it all, but I do think of the pp as money that I really don't want to lose.
And "lose" means it will go down and stay down for more than 3 years. It's ok for the vp to do that, but not for the pp.
The pp doesn't have to go up every day or even every year, but hopefully it'll be as stable as it's historically been. In exchange for the temporary down periods, I don't have to sit and watch my savings get eaten away by cotton weevils of inflation, which is what would happen if I put "money I can't afford to lose" in cash only.

The pp is currently one third of all that I have.

[iwealth]

Since losing some big market bets in 2010-2011, I don't consider any money to be money that I "can afford to lose". It changed my perspective on investing for good.

If I was investing on the premise that I literally could not afford to lose a sum of money, it'd probably be in CD's, short term nominal bonds, or short term TIPS. Regardless of the past 35 years of solid returns, putting 75% of such money into a portfolio of stocks, gold, and long bonds still seems a bit risky. Too hard to predict how the correlations between those assets will hold up in the future.

That's not to say it isn't an excellent investment choice, but to trust it with money you literally can't afford to lose is another story.

[Pointedstick]

One think I think it's important to keep in mind is that Harry Browne was a speculator. The PP was envisioned as a less-risky alternative to speculation, or a place to safely store your speculative gains. It was NOT envisioned as an investment portfolio that would never experience a paper loss from week to week or month to month.

You'll avoid having unrealistic expectations as you long as you understand that when the PP is described as a conservative portfolio, that's compared to stock picking, or speculation in currencies or precious metals. Because it's not all that conservative compared to CDs, savings accounts, TIPS, or short-term nominal bonds. If that's your frame of reference for safety, the PP may well be too volatile for you, but by putting your money in those instruments instead, you'll need to become comfortable with the notion that you will probably lose to inflation most of the time.

[iwealth]

Budd's question is interesting, because clearly the phrase "money I can not afford to lose" means different things to different people. I've heard the phrase used when describing money one would invest in the PP.

For me personally, it's money whose value I need to preserve or it will be very bad, hence I can not afford to lose it. It's hard for me to look at any speculative portfolio as a place to store such money whether it be a risk-parity portfolio like the PP or Dalio's All-Weather, or something more cash-flow oriented like a Boglehead 60/40. But again, the phrase means different things to different people.

If we were talking about money I'd hate to see significantly drawn down, which admittedly is all of my money besides the stuff I absolutely can't afford to lose, historically at least so far, the PP is perfect.

[flyingpylon]

Budd's question is interesting, because clearly the phrase "money I can not afford to lose" means different things to different people. I've heard the phrase used when describing money one would invest in the PP.

I asked the same question a while back, and don't recall getting a real good answer.  My interest was in the definition of "can't afford to lose".  The amount, or percentage, or whatever will vary from person to person, but I wanted to know what criteria they used to separate the pile of "can't afford to lose" vs "can afford to lose".

Perhaps the question is just too broad and involves too many variables.  But I do feel that the phrase "money you can't afford to lose" gets thrown around an awful lot when it reality it means very different things to different people.

[Libertarian666]

One think I think it's important to keep in mind is that Harry Browne was a speculator. The PP was envisioned as a less-risky alternative to speculation, or a place to safely store your speculative gains. It was NOT envisioned as an investment portfolio that would never experience a paper loss from week to week or month to month.

You'll avoid having unrealistic expectations as you long as you understand that when the PP is described as a conservative portfolio, that's compared to stock picking, or speculation in currencies or precious metals. Because it's not all that conservative compared to CDs, savings accounts, TIPS, or short-term nominal bonds. If that's your frame of reference for safety, the PP may well be too volatile for you, but by putting your money in those instruments instead, you'll need to become comfortable with the notion that you will probably lose to inflation most of the time.

I guess that depends on what type of risk you are comfortable with. As far as I'm concerned, any money you cannot afford to lose should not be in any paper investments, as all of them have severe counter-party risk of one type or another.

[Tyler]

It depends on your investing goal and timeframe.

I'm actively saving towards early retirement in the next 1-2 years. With that goal in mind, "money I can't afford to lose" is that which would drastically change my plans if the funds vaporized tomorrow. If I was still 20 years out from my retirement goal, the "can't afford to lose" number would be a lot lower than it is only 2 years out and I'd be more willing to speculate. As it stands, my stomach for substantial investing losses is quite weak with my goal within sight.

That doesn't mean I want to put all my cash under the mattress, as that also wouldn't support my goal. It just is an indicator of how volatility directly affects my plans and happiness.

I'm glad I discovered the PP at the right time for me.

[WhiteDesert]

I will go with money I can afford to lose:

Fun money such as vacations-

I budget a certain amount each month for vacation planning.  We can use the money on any vacation trip we want as long as we only use the amount we have saved up. If we use less by taking just a mini vacation, the left over amount rolls over into next year’s vacation budget. This helps me feel that I earned the vacation by saving up for it.

Ha--that's funny. I do the exact same thing. This practice, combined with hotel reward points and frequent flyer miles, works really well.

[WhiteDesert]

WhiteDesert, interested to know how you've allocated your TIAA accounts?  I also decided not to try to integrate those accounts with the PP.  Being annuities, they are a fundamentally different beast.

Hey Sophie--
My T-C contracts include a few negotiated non-T-C funds, so my VP asset allocation is:

Viewed as the "bonds" side of the VP--
15% - PTTRX (Pimco Total Return Bond)
15% - Cref Inflation-Protected Bond
10% - TIAA Real Estate Fund
10% - TIAA Traditional

Equities
20% - RFNFX (American Funds Fundamental Investors large blend)
10% - VSISX (Vanguard small cap index)
10% - TCIEX (TIAA-CREF International Index)
5%  - IGLIX (ING Global REIT)
5%  - TIMVX (TIAA-CREF mid-cap value)

I'm pretty happy with the performance overall in the two years that I've been tracking it, but my portfolio ER (VP + PP) is currently .38%, which is higher than super I'm excited about. I'm currently researching how to use the available funds to better approximate total world stock market at an acceptable cost, and I'm also wondering if my two "indulgence" funds (IGLIX and TIMVX) are more expensive than they're worth. They both spin off tasty dividends, but they're pretty pricey...

-WD

[sophie]

WhiteDesert, interested to know how you've allocated your TIAA accounts?  I also decided not to try to integrate those accounts with the PP.  Being annuities, they are a fundamentally different beast.

Hey Sophie--
My T-C contracts include a few negotiated non-T-C funds, so my VP asset allocation is:

Viewed as the "bonds" side of the VP--
15% - PTTRX (Pimco Total Return Bond)
15% - Cref Inflation-Protected Bond
10% - TIAA Real Estate Fund
10% - TIAA Traditional

Equities
20% - RFNFX (American Funds Fundamental Investors large blend)
10% - VSISX (Vanguard small cap index)
10% - TCIEX (TIAA-CREF International Index)
5%  - IGLIX (ING Global REIT)
5%  - TIMVX (TIAA-CREF mid-cap value)

I'm pretty happy with the performance overall in the two years that I've been tracking it, but my portfolio ER (VP + PP) is currently .38%, which is higher than super I'm excited about. I'm currently researching how to use the available funds to better approximate total world stock market at an acceptable cost, and I'm also wondering if my two "indulgence" funds (IGLIX and TIMVX) are more expensive than they're worth. They both spin off tasty dividends, but they're pretty pricey...

-WD

Not bad for T-C.  The ERs for the variable annuity funds are all 0.4+.  It looks like you've managed to shave off a bit of expenses with your frankenfund stock collection, compared to the standard CREF choices.

Bonds are a bit of a conundrum in the T-C world.  I settled on dividing equally between inflation-linked bond, tiaa traditional, and cref bond (total bond fund).  And hoping for the best :-).  I wouldn't class Real Estate as a bond fund though.  Given the potential volatility I decided to count it as equities, though splitting the difference is reasonable too.

[WhiteDesert]

Not bad for T-C.  The ERs for the variable annuity funds are all 0.4+.  It looks like you've managed to shave off a bit of expenses with your frankenfund stock collection, compared to the standard CREF choices.

Bonds are a bit of a conundrum in the T-C world.  I settled on dividing equally between inflation-linked bond, tiaa traditional, and cref bond (total bond fund).  And hoping for the best :-).  I wouldn't class Real Estate as a bond fund though.  Given the potential volatility I decided to count it as equities, though splitting the difference is reasonable too.

No--you're right--TREA is definitely not a bond fund. But it seems to me that, even with it's potential volatility, it's lack of day-to-day correlation to both equities and bonds tends to make it a good choice for the "safety" or "anchor" side of the portfolio (especially now since T-C has said that they intend to keep the overall % of REIT stocks held in the account at less than or equal to 10% (my hope is for less than 10%, as that should reduce its correlation even further)).

Have you thought about ditching the bond funds entirely, throwing all of that allocation toward traditional, and being done with it? I keep pondering that. Ignoring TREA for a second, the notion of the safety side never having a negative day remains powerfully attractive, even though returns would suffer.

-WD

[sophie]

Have you thought about ditching the bond funds entirely, throwing all of that allocation toward traditional, and being done with it? I keep pondering that. Ignoring TREA for a second, the notion of the safety side never having a negative day remains powerfully attractive, even though returns would suffer.

Yes, but consider this:  you cannot rebalance out of traditional.  It's a portfolio anchor that dampens volatility, but it is not a diversifier.  CREF bond is a solid fund, but it has a lot of corporate bonds and would likely fall during stock market corrections.  You could argue that it behaves enough like a mix of stocks and cash that there's no point in holding it.  Inflation-Linked Bond is the only fund that is almost pure Treasuries, even though it's TIPS, so I figured it would be the best diversifier.

Good points about TREA.  It was useless as diversification in 2008, but in other situations it could be very helpful.  I could be convinced to simplify down to CREF stock, TREA, Inflation linked bond, and a good (and gradually increasing) slug of Traditional.

[AgAuMoney]

when the PP is described as a conservative portfolio, that's compared to stock picking, or speculation in currencies or precious metals. Because it's not all that conservative compared to CDs, savings accounts, TIPS, or short-term nominal bonds. If that's your frame of reference for safety, the PP may well be too volatile for you, but by putting your money in those instruments instead, you'll need to become comfortable with the notion that you will probably lose to inflation most of the time.

I think to think of it as a dichotomy but in reality it is a spectrum or sliding scale...  Invisible loss vs. visible loss/gain potential.


On one extreme you can figuratively (or literally) put your money in a jar and watch that jar.  Your risk of visible loss over a given time period is small, but your risk of invisible loss of purchasing power is large (almost guaranteed) and growing the longer the time period.

On the other extreme you can put your money to work by becoming a business owner (either directly or indirectly via the stock market).  Your risk of visible loss over a given time period is significant but unknowable, but your risk of invisible loss of purchasing power is small and historically you would have gained purchasing power over large amounts of time.


There is no place to "store" money that is not at or between those extremes.

CDs and other government guaranteed monetary vehicles are pretty close to money in a jar.  Very conservative (safe) bonds are almost CD-like while speculative or junk bonds are much closer to the risk of common stock.  Common stock is very much like owning a business -- less risk in that you can own parts of several businesses so less chance of total failure, but more risky in that you have no ability to affect the outcome of any business so no opportunity to "do whatever it takes to succeed."

Since the PP takes from each end of the invisible loss <=> visible loss/gain scale, it tends to float somewhere in the middle of the scale.  Less or no invisible loss, but some visible loss/gain.

[Pointedstick]

Well said, AgAuMoney. I think the takeaway lesson is, "there's no reward without risk." The PP is not a free lunch that promises you riskless reward; it's just a well-diversified portfolio that aims to reduce risk more than it reduces reward.

[ozzy]

I second Dozha's comment.  I don't want to lose sleep worrying about a Variable Portfolio so I don’t have one.

I have two Permanent Portfolios: a RothIRA and Brokerage account.  My 401k is a 50/50 stock/bond.  It works for me.