Gyroscopic Investing

So, here's my situation.  I am now in charge of my elderly mother's finances after the passing of my dad back in 2007.  Prior to his passing and immediately before the 2008 debacle, their money was being handled by their investment advisor/accountant with ties to Raymond James. 

My major problem is that I have zero investment knowledge and/or experience other than buying CD's which is where we decided to park her money after nearly bleeding to death on that wonderful September day back '08.  She lost just over 300K from her 750K.  Her accountant tells me she won't have any tax issues for many years to come based on her (barely) 10% tax bracket.  Gee, thanks!

Now, all but one of her CD's have come due and we just could NOT roll them over because she just can't live on the interest (between 1 - 2%) she would now get combined with her paltry S.S. income (18K). 

I've been reading this forum, as well as the Bogleheads, for over a year.  I bought and read cover to cover, Craig and J.M.'s book.  I've re-read sections of the book.  I've listened to a few of Harry's radio shows.  I've read tons of financial websites which all seemed too risky and, frankly, full of crap.

So, I've decided that I either want to go with the 4 x 25 or the PRPFX.  I just don't know which one.  I know the DIY is best to save on fees and have more control over the situation.  But, even after reading Rowland and Lawson's excellent book, I'm still nervous about implementing the HBPP myself.  Yes, I've read and re-read the chapter on implementing it.

It's just scary even though it's probably easy enough to do.  The re-balancing ... I get.

You guys are investment/financial savvy.  "I", OTOH, am a female who has suddenly and very unexpectedly been thrown into the water without a life jacket on, and I am now just trying to make it to the shore.  I am trying to play catch up, investment, football, as a major rookie. 

I've read that many here started with the PRPFX and then graduated to the 4 x 25 after they became more comfortable (knowledgeable?).  Maybe that's what I should do, too, but I'm bothered by the fund's Swiss France allocation in particular.  Why the heck are they still in that?

I'm also bothered by the fund's over-weighting toward inflation, which hasn't, still doesn't, seem to be a problem and may not be one for awhile.  Doesn't it seem like we are more in a deflationary situation now?  I don't know.

Also, it sure doesn't seem like Yellen is going to raise rates anytime soon, even though she and the rest of them are trying to dangle that carrot ever so slightly.  Besides, I read that Bernanke said he doesn't expect rates to rise in his lifetime!  So, no relief for struggling savers, like my mom, who have relied on CD interest to survive.

Any thoughts would be greatly appreciated. 

Neo, Don't sell yourself short. It sounds like you are doing your homework and that you have a decent handle on the PP. Can you just clarify... Is it about $450,000 you are looking to invest? And how old is your mom at this point? Also, any idea what her annual expenses are? Any other income like SS or a pension? Is the money in a taxable account, IRA or some mix of the two? No need to answer if you don't feel comfortable doing so.

I just implemented the PP this year for me and my wife. The DIY version is easy to set up and is to my way of thinking superior to PRPFX. I won't be taking withdrawals from my PP for a few more years but there are others on here that are in that phase and who will be happy to give their two cents worth. Good luck!

Welcome to the forum!

I think you're making it out to be more complicated than it is.  A DIY PP is just three more trades than buying PRPFX, and it gives you more options in the future.

I'd start putting 25% in each of TLT, VOO, SHV, and IAU.  Real easy.  From there, as you get more comfortable, you can start getting fancier, if you want.  And you don't have to: you're already a lot better off than most folks that way.

I missed the SS income on my first read through. Sorry about that. FWIW I am counting on a safe withdrawal rate of 4%. That is based on some charts Tyler posted a while back. We don't really know how the PP will do going forward but that seems to be a reasonable starting point, especially if you are dealing with a shorter time frame.

I think a DIY PP is perfectly suited here for the following reason: cash withdrawals. IIRC we had a bunch of big threads where we found that cash withdrawals are the safest especially at higher real withdrawal rates like 4 or 5%. Since your mother is in the 10% bracket, that means that her long-term capital gains tax rate is zero! That's great, and it gives you a built-in bonus since you'll rebalance tax-free. Tax-free rebalancing and cash withdrawals are things you can't do if you buy PRPFX. PRPFX is also fairly expensive at almost 0.8% if memory serves. A DIY 4x25 portfolio consisting of VTI, TLT, IAU, and SHY has a total expense ratio of about 0.15%, which is really low!

$450k in a PP should generate about $18k a year at a 4% withdrawal rate. That plus the $18k from social security, and your mother should comfortably have about $36k a year to work with.

Welcome to the forum!

I suspect the scariest part for most new-to-investing folks is setting up a brokerage account, which is necessary since not all of the PP components are available as mutual funds.  Have you set up a brokerage account before?  My guess is no based on the things you seem to be worrying about.  As it turns out, doing this is actually fairly easy.  Many folks here use Vanguard or Fidelity.  It's really no harder than setting up a bank account or a mutual fund account. 

If this is one of the things you're worried about, here's a basic description.  To get started you put money (from a bank) into the brokerage cash account, which is essentially like a checking account at a bank.  From there you use the online interface to buy and sell mutual funds, ETFs (another kind of fund), and even individual stocks and bonds if you want (you don't want stocks - but you might want individual bonds).  When you buy, you use the money in the cash account.  And when you sell, the proceeds go back into the cash account.  The online interface will show you how much you have in your cash account and how much each of the funds/bonds/stocks you've bought are currently worth.

If you haven't done it before, I'd recommend you set up a brokerage account with a relatively small amount of money to get comfortable with the mechanics before going whole hog.  Having the money in CDs is safe enough, so there's no big hurry.  Transfer some money from a bank into the brokerage cash account.  Buy some shares of an ETF or mutual fund.  Look at the online interface and figure out what percentage of your allocation is where.  Sell some shares.  Transfer money out of the brokerage cash account back into a bank.  These are the basic things you need to be able to do to be able to run a DIY portfolio and although they might be unfamiliar none of them are very difficult.  After you've done them even once or twice, I'm sure your confidence level will increase tremendously.

Hi everyone and thanks for the replies.

To answer Barrett's earlier questions, my mom is a very healthy 85 years young.  She swims long laps in her pool several times a week and is probably ten years younger than her actual age.  Good genes, I guess.

So, this financial guru that her well-meaning neighbor suggested told me to do an expense/income report last summer.  This was a great idea and really clarified things, though this was the only great idea coming from him.  He was chomping at the bit to get us to sign him up as her new investment guy.

Anyway, I found out that she had about 25K in living expenses from the previous year, before any major needs for house repairs, dental work, which she had during that time. 

To clarify, she has about 400k to invest, not 450K which was a typo. 

I was thinking of keeping some money, maybe 25K, in her local bank money market account for emergency access.  So, the remaining 375K could be split like this:

300K: either the HBPP or PRPFX
75K:  laddering long term CD's (5 year) earning 2.3%

Right now, the HBPP is doing well.  I follow someone who runs the HBPP on MyPlanIQ with this mix:

VFINX Vanguard 500 Index
VUSTX Vanguard LTT
GLD SPDR
CASH

Returns:

YTD:  7.4%
1YR AR:  6.9%
3YR:  3.5%
5YR:  7.6%
10YR:  7.5%

Returns MyPlanIQ for PRPFX:

YTD:  4.9%
1YR:  5.1%
3YR:  1.5%  (Ouch!)
5YR:  7.7%  (much better)
10YR:  8.1%  (even better)

PointedStick, yep, that .15% ER is way better than the .72 PRPFX ER.  Also, with regard to the 4% withdrawal rate, I am still not clear on that.  Wouldn't it be better to try to withdraw less in order to maintain her principal? 

Also, thanks for pointing out the tax-free re-balancing and withdrawal problem with the PRPFX.  Seems like the HBPP is better suited to her situation.

rickb, thanks for the detailed steps to take to set up a brokerage account and, no, I have not done this before.  Your suggestion to start smallish is a good one but since all of her money is now parked in her money market account at her bank earning .65% interest a month, well, I don't think we can afford to do a trial run, so to speak.

Her money is FDIC insured because it's split evenly between the four of us, my mom, myself and my two sisters.  So, none of us exceed the 250K maximum.

Xan, thanks for your recommendation.  Not familiar with the VOO? 

Lots to think about.

How about placing half in a PP and half in the low-cost, well managed Vanguard Wellesley fund which provides even more diversification for mom?

I pretty much agree with all the previous replies.

While you might feel overwhelmed, I venture that, based on the fact that you have read books about investing, thought critically about it, and know how expense ratios and capital gains taxes work, you are in at least the 90th percentile of retail investors. Most people seem to either bury their heads in the sand or go in half-cocked.

As others have said, running a 4x25 ETF portfolio is really not that hard. My wife hasn't read any investing books, and she can do it no problem. Just set up an account with any of the highly-regarded discount brokers, execute 4 buy orders, and check on it annually. I would go with VTI, TLT, IAU, BIL, but the alternatives mentioned in this thread are fine too.

Neo,

Regarding SWR (Safe Withdrawal Rates), read through the thread entitled "Is the successful salaried retail investor a myth?" Some people on here really came at the issue from a number of angles.

If you are OK with 4%, then a $400,000 PP would generate a SWR of $16,000 a year. Couple that with your mom's $18,000 in SS and you have $34,000 a year. That's great that you have an idea of yearly expenses. $34,000 minus the $25,000 you gave for living expense gives you about $9,000 a year to cover any surprise or one-time expenses.

Just thinking out loud on all of this so take it with a grain of salt.

My thought it that with these numbers, you don't really need the $75,000 in CDs. If you have a PP in the $375,000 to $400,000 range, you'd have $90,000+ in cash and that gives you plenty to withdraw from while the LTTs, gold and stocks are doing their thing.

Everyone please feel free to rip this thinking to pieces if you like.

VOO is the Vanguard S&P 500 index.  It's one of the options for your stock portion.

If I were you, I would probably consider the $25K you're keeping in the bank for emergencies to be part of your PP's cash portion.

Avoid looking at historical returns as a gauge of a portfolio's future performance and be aware of analysis paralysis (too much data clouding the decision making process). Also, who decided to sell holdings in September 2008 at market lows? If you anticipate repeating this behavior in the event of another equity decline, then either of these two options should suffice as their draw-downs (peak to trough and not annual-which are substantially better) are less significant than a traditional 60/40 allocation. PRPFX masks the individual asset volatility in a single fund, whereas daily movements in VTI, GLD or TLT can shake even the most seasoned investor when looking at their volatility independently. 

I wish you all the best.
Budd

TennPaGa,

I am assuming that neo16 is talking about taxable funds for all of this. At Fidelity having most of the cash in FDLXX would work well. FDRXX is the money market fund and she could keep just enough cash in there for whatever bills are coming due. I am fairly certain that FDRXX has a check writing feature (but make sure to ask what the limitations are). It's a piece of cake to move $ from one fund to the other. I also hold IAU, individual LTTs, and FUSVX (their S&P 500 fund) at Fidelity. It's a quick set up (ditto for Vanguard from that I have heard).

neo16, just remember to think about taxes in this whole scenario. That goes for any strategy but nobody has mentioned it on this thread yet. With short-term rates at zero there are no tax implications for the time being when taking $ out of either FDRXX or FDLXX, so your mom would only have to consider gains (and losses) in the other three assets. I just bring it up because you need to consider any taxes on the "expense" side of the ledger.

One other thing... you can get the individual LTTs without talking to a rep if you you know where to go on your brokerage site. If you DO speak with a rep, they will likely try to talk you out of the LTTs as "rates have nowhere to go but up." I ran into that when setting an account up for my wife at TD Ameritrade earlier this year.

Ah, right. My bad. Low tax bracket AND she swims several times a week. That adds up to low stress and a long life expectancy!

Barrett, ya know, you're talking to a beginner here and when you start talking taxes, well, my eyes just glazed over. 

Yes, her money will be taxable but according to her accountant, this will not be an issue for a long time due to her severe losses and limited income.  I did lay out the basics of the PP and the PRPFX to him and he told me that the fund would realize more capital gains due to it's nature and with dividend income.  He also said that the roughly HB 25% stock allocation would have regular gains while the t-bills and bond funds would be less likely to generate capital gains ...just income and dividends.

I read that gold can be taxed up to 28%? 

See, this is what scares me.  It's the fact that I don't know about any of this stuff.  I'm sure that's why many people go with managed funds because they're willing to trust those people and because they are scared to death to try to deal with any of this themselves ... even though they know they're leaving money on the table.

TennPaGa, I am considering the VTI, TLT, IAU, SHV.  I think I read somewhere that CraigR listed those.  But, I read what CraigR wrote about the safety of using different funds, so I'm considering doing VTI, TLT, BIL, SGOL.  Or, some other mix using different funds.

So, it seems that Barrett and Xan believe it's not necessary to hold any cash in her local bank or to hold any CD's.  I understand the idea about the cash portion of the HB fund and to use that to pay expenses.  I also understand the idea behind funneling all gains into the cash portion upon re-balancing.

Buying treasuries from TreasuryDirect and/or directly at auction or on the secondary market, as CraigR recommends, is not something I'm comfortable with at this time.  This would mean selling them myself!

As for physical gold, well, I know that's the best.  I do have access to people, whom we've known for many years, who sell wholesale to many jewelry stores and sell gold coins like American Eagles ... not numismatic coins which I would never do.  So, I might use 5% of her money to buy some coins from them and keep them securely in her bank safety deposit box.

Budd, I did panic sell in 2008 but I just didn't know any better.  All I could think of was saving what she had.  We were so shell shocked that we vowed NOT to go back into the market.  Our trust was completely obliterated that day.  I know we could have re-cooped much of her losses if we had stayed put but the fear factor was powerful.  Of course, who knows when the next market downturn will happen.

Also, I do understand what you mean about the easy to spot ups and downs of the HB as opposed to the PRPFX.  And, yes, I have noted the draw-downs of both of these in relation to a Boglehead-type 60/40 split ... bonds/equities.   

I think it's a real testimony to Harry Browne that his final creation did so well during the market collapse in '08.  The PRPFX didn't do that badly either.  What a wise man he was...

neophyte16 wrote: Barrett, ya know, you're talking to a beginner here and when you start talking taxes, well, my eyes just glazed over. 

Yes, her money will be taxable but according to her accountant, this will not be an issue for a long time due to her severe losses and limited income.  I did lay out the basics of the PP and the PRPFX to him and he told me that the fund would realize more capital gains due to it's nature and with dividend income.  He also said that the roughly HB 25% stock allocation would have regular gains while the t-bills and bond funds would be less likely to generate capital gains ...just income and dividends.

I read that gold can be taxed up to 28%? 

Take a deep breath.

.

Relax.

.

You're doing great.  Better than at least 95% of the people who invest.  The money is in CDs right now, so the principal value won't decrease.  There's really no hurry.  Sure, the CDs aren't earning anything, but if you want a risk-less investment that's what's available in today's market.  You're basically saying you're not happy taking no risk and you want to take some risk.

Is this correct?

If so, why?  Your Mom is 85.  She has $400K.  She spends $25K/year and gets a $18K/year SS payment.  At $7K per year the $400K will last nearly 60 years if you cash it out into dollar bills and stuff the money in your mattress.

.

Once again, relax.

neo16,

Agree with rickb that you just need to slow down and relax. I researched the PP pretty thoroughly before jumping into it. And I had questions even after I committed to it but they were all tweaking around the edges.

ALSO, we're not trying to sell you on anything here (well, maybe a little because that's human nature when you think you know something about something). If in doubt, remember Harry Browne's rule #16 which reads:

"Whenever you're in doubt about a course of action, it is always better to err on the side of safety.

If you pass up an opportunity to increase your fortune, another one will be along soon enough. But if you lose your life savings just once, you might never get a chance to replace it."

You may ultimately decided that the PP is not what you are looking for which is fine. If you've spent time on this forum, you'll know by now that not everyone on here follows it, at least not to the letter.

With that said, there is nothing very difficult about opening a brokerage account at Fidelity, Vanguard or elsewhere (I also have one with TD Ameritrade). Once you have money there, buying and selling assets is not really more complicated than online banking. For example, you specifically mentioned the difficulty of selling treasuries yourself, but I can tell you with Fidelity, it's a piece of cake. If you own any, there is a little button next to your position that is labeled "Action.' If you click that, it asks if you want to buy, sell or view lots. If you have questions, call up Fidelity (or Vanguard or whomever) and ask them to walk you through something.

Didn't mean to make your eyes glaze over by mentioning taxes. That's why you have an accountant... so that your eyes can remain unglazed.

Just one other thing I wanted to mention at this point and that is that rickb was just giving an easy-to-visualize example when he was talking about stuffing dollar bills in your mattress. In the real world, you want to try to preserve as much of your mom's wealth as possible because end-of-life expenses (hopefully far in the future for her!) can be really high.

BTW - specifically on taxes.

neophyte16 wrote: I read that gold can be taxed up to 28%? 

Yes, but this is a maximum tax rate.  If you make money by buying and selling physical gold (and some "physical gold" funds, specifically GLD, IAU, and SGOL) you pay a "collectibles" tax - not income tax (like you do on CD interest) and not capital gains tax (like you do on the profit from buying and selling stocks or bonds).  The collectibles tax rate is (currently*) the same as the income tax rate, except it tops out at 28%.

To complete the tax picture - there are 4 (!) different taxes that might apply.

1) regular income tax

This is what you pay on your salary, CD interest, and regular dividends from stocks and bonds.  The rate varies with your income, (currently*) from 10% to 39.6%.

2) short term capital gains tax

This is what you pay if you sell stocks or bonds at a profit less than 12 months after you bought them.  This rate is (currently*) the same as the regular income tax rate.

3) long term capital gains tax

This is what you pay on profit from selling stocks or bonds more than 12 months after you bought them.  This rate varies with your income and is (currently*) either 0%, 15%, or 20% - less than the regular income tax rate (this is how billionaires like Romney and Buffett end up paying a smaller percentage tax on their "income" than their secretaries).

4) collectibles tax

As above, this is what you pay if you sell physical gold (and certain gold funds) at a profit - (currently*) the same as regular income tax but doesn't exceed 28%.

I suspect this does not apply to you, but just to be completely thorough - taxes on IRAs and 401Ks are different as well.  Any trading in these kinds of accounts is not taxed when you sell (whether you sell at a profit or not).  For regular (not ROTH) accounts of this kind, what happens is you pay regular income tax when you withdraw money from these accounts.  ROTH accounts are funded with money that is already taxed, and you (currently*) never pay any more tax - neither when you trade within the account or when you withdraw the money.

This all probably sounds very complicated, and it is (I mean, we have to keep all those accountants employed, don't we?).  The bottom line is if you buy anything and later sell it at a profit you're going to pay some tax - but it's (currently*) never more than how much tax you'd pay on the same amount of income.

* Congress can and does change tax laws and tax rates frequently (like every year).

neo16,

rickb's post is quite thorough. BEFORE your eyes glaze over, this is what he has to say at the end:

"The bottom line is if you buy anything and later sell it at a profit you're going to pay some tax - but it's (currently*) never more than how much tax you'd pay on the same amount of income."

In other words, don't worry about making money. It's always a good thing and it can be done with stocks, gold, treasuries or pork belly futures.

rickb, I might print that post out and leave it for my heirs as they try to figure out what the hell I am trying to do with our investments.

I keep a couple of PP charts from Tyler in with my important papers. Also included is a treasure map where I have hidden "The Precious."

My 2-cents for Neo16:

You're in a good place. 

Obviously, we all are fans of the Permanent Portfolio.  If you choose to go that way with your mother's investments, I'd personally recommend the 4-ETF version like others here.  It's pretty simple, and only requires minimal management.

If you'd like an even simpler option, in your situation I might consider holding 1 year in cash and putting the rest in VWINX.  It's another very popular conservative fund with a good reputation and a low expense ratio (0.25%).  It focuses on income and currently pays a 3% yield.  Just set that to pay into cash (and not re-invest) and combined with the SS checks it looks like your mother's expenses will be covered.

Finally, at 85 I wouldn't be overly concerned with touching the investment principal in small chunks when needed for emergencies or care.  Your mom has reached the admirable age where smartly drawing down on her savings could be a perfectly reasonable thing to do. 

Neo 16
Just wanted to comment on your situation and the other posters. Your mother is in a very good place right now and I understand your concerns with wanting to be conservative with her portfolio.  I went through a similar experience during the 2008 crash and fired my financial planner and educated myself on investing and portfolio construction. After reading many books, blogs, articles, etc. , I learned that I was very naïve and didn't understand investing all that well. In the end I decided to follow the advice of Harry Browne and Jack Bogle. Both philosophys are similar. Both agree on indexing, diversifying, keeping costs low and simplicity. HB likes gold, JB does not. One other thing I learned on this forum and bogleheads is that you can dial up or dial down the volatility of your portfolio with cash. With that said, I can tell you what was implemented for my girlfriends portfolio 1 year ago and mine 3+ years ago. We are both retired and not wanting to put all of our eggs in one portfolio basket, I mixed it up a little but not too much.

Girlfriends portfolio: 40% HBPP; 40% Wellesley, 20% VTI (total stock market), BND (total bond market) and extra cash. This comes out to approximately 28% stocks, 42% bonds, 10% gold and 20%cash.

My portfolio: 75% HBPP; 20% Wellesley, 5% variable portfolio (just to play with).

Both portfolios combined are approximately 30% stock, 35% bonds, 17% gold, 18% cash.
We always try to keep 4 years of living expenses in cash.

This may be more complicated than you need, but I could see your Mother's portfolio constructed as follows: 50% HBPP, 30% Wellesley, and 20% cash. This would give you a total cash allocation of 32.5% keeping the portfolio conservative and the volatility low.

Just my 2 cents worth. Good luck on your investing endeavors. Remember indexing, diversifying and simplicity.

Thanks everyone.  I guess you guys really picked up on my fear and insecurity factor here.  Yes, I know that I'm making this more difficult that it actually is but it's scary because it's ME that had to pick up where my dad left off. 

I was hoping that CD rates would rise back to where they were before the '08 crash, so that my mom could just (comfortably) live off them for the rest of her life.  Looks like that's not going to happen anytime soon and that we've entered into the new normal which is low CD rates. 

Tyler and AlanW, I'll check out the VWINX but I'm kinda leery about putting 3/4's of her money into that, although I like the idea of holding one year's worth of cash and the simplicity of it is also appealing.

rickb, at this point, I'm not going to worry about taxes but it's important to understand how they affect earnings, so thank you for help.

Barrett, yep, the bottom line is to make money and worry about the other stuff later.  This is also what mom's accountant said.

TennPaGa, I guess I could start small and see how that goes but I also think that once I get over the fear factor, well, setting up the portfolio shouldn't be any harder using all of her money than just a small amount. 

You guys are great!

neophyte16 wrote: ...it's scary because it's ME that had to pick up where my dad left off. 

I think think it's scary for everyone at first.  After you get it setup and watch it work for a few months you'll start to gain some confidence.

neophyte16 wrote: So, it seems that Barrett and Xan believe it's not necessary to hold any cash in her local bank or to hold any CD's.  I understand the idea about the cash portion of the HB fund and to use that to pay expenses.  I also understand the idea behind funneling all gains into the cash portion upon re-balancing.

I think the point is to consider CDs / money in the bank as part of the 25% Cash allocation. Items such as CDs, online bank accounts, and I-Bonds do return more than Short Term Treasuries

Dieter wrote:

neophyte16 wrote: So, it seems that Barrett and Xan believe it's not necessary to hold any cash in her local bank or to hold any CD's.  I understand the idea about the cash portion of the HB fund and to use that to pay expenses.  I also understand the idea behind funneling all gains into the cash portion upon re-balancing.

I think the point is to consider CDs / money in the bank as part of the 25% Cash allocation. Items such as CDs, online bank accounts, and I-Bonds do return more than Short Term Treasuries

Right.  Keep $20K in a checking account if you want, in order to keep it accessible.  But if you do that, then keep $20K LESS in SHV.  That's what I mean by "consider the 'cash' in the bank to be part of your PP".