Newbie Q on setting up all-ETF PP

[ToSimplify]

I'm preparing to convert my portfolio to a PP in the very near future, and in the interest of keeping things simple initially, I'm going to go with an all-ETF setup, and then gradually get into physical gold and buying bonds directly. My question -- My current portfolio is spread across a Roth IRA, a traditional IRA, and a retail account. Which is wiser -- setting up three different PPs (one for each account)? Or trying to span a single PP across all three? It seems to me that the first option would be a lot more straightforward, particularly when it comes time to rebalance, but maybe there's some caveat to doing it this way that I'm not aware of. Thoughts?

[KevinW]

IMO: both approaches are OK. The single-spread approach is useful when you have a large 401k that does not allow PP-compatible funds, but is more complex, and can lead to regrets if the assets that you put in the most tax-advantaged accounts happen to perform the worst. The one-PP-per-account approach is conceptually simpler and protects against those regrets, since each individual account performs essentially identically. My 401k has a brokerage window so I use the one-PP-per-account method.

[Pointedstick]

I do one-PP-per-account as well. Even if I'm sacrificing a smidgen of possible tax efficiency, to me, it's worth it for the far greater simplicity. Given your username, I Imagine this is important to you as well. And welcome to the forum!

[barrett]

I, like PS & KevinW, like to have something close to a PP in each account, if possible.

As PS says, you may sacrifice some tax efficiency doing it that way (meaning that you have some gold and some cash in tax-advantaged space), but I think you give yourself tons of options down the road when you start to withdraw from those accounts. Some years it might serve you best to withdraw from a taxable account, other years it might be more favorable to withdraw from the tax-deferred IRA or the tax-free Roth. If each of your accounts is performing more or less the same, you don't have to worry about what asset is up or down in value at any point in time.

That all being said, I think there is no one solution that is absolutely right because we all come from different starting places when we set up a PP. Good luck!

[Tortoise]

If you don't want your taxable and tax-advantaged account balances fluctuating quite a bit relative to each other, separate PPs is probably what you want. It's what I do.

[sophie]

There's definitely a lot to be said for separate PPs, but one sprawling PP gives you a lot more flexibility and is in fact what Harry Browne recommended.  Being able to pick and choose what to shelter from taxes is in fact a major advantage.  You also get more flexibility to use the cash portion as an emergency fund. 

But the biggest reason to consider the 1 PP solution is the ability to put as much of your gold allocation into physical as you wish.  The more I think about gold ETFs the more nervous I am about them, as you are giving up a great deal of the safety aspect of physical gold.  The whole point of it is to have a big chunk of your wealth outside the banking system in a form that will always be recognized as money, available to you in an emergency, and protected from seizure (at least far more protected than your online accounts).

My goal is to keep no more than 1/3 of the gold allocation in an ETF in a tax-sheltered account for rebalancing purposes.  I want everything else to be physical.

[moda0306]

Gold, however desirable, is certainly NOT recognized as money .

[barrett]

Gold, however desirable, is certainly NOT recognized as money .

Moda, Please explain yourself. Are you saying that you can't exchange a gold coin for something you want? I really don't know the answer to this... I sometimes imagine a SHTF scenario where the whole financial system has melted down and I am attempting to pay someone for something with an Eagle. And the outcome is? Not sure, really.

As to Sophie's post, I am aiming to do what PS has advocated and that is holding physical gold in my taxable account and sticking with the ETFs in retirement accounts for ease and tax efficiency of rebalancing. Obviously, the tax efficiency can work both ways. If you are selling some gold because the price has gone up, you can do so in an IRA ETF and not pay on the gains. When the price has gone down you can tax-loss harvest by selling some actual coins, no?

Not sure what percentage of physical gold I'll end up with. I'll let you guys know in a few years! My hope is to be overweighted (relative to 4X25) in physical gold in taxable and underweighted in the tax favored accounts. That's why I posted earlier that I'd like "something close to a PP in each account." I'd like to see all my accounts performing more or less the same. Not trying to have them be identical.

As for using the cash portion as an emergency fund, Sophie is right but you have to consider that portfolios vary in size, right? Someone who is retiring, or close to it, would hopefully have a bunch of cash - in addition to gold, stock and bonds - in a taxable account.

Sophie, when and where did HB recommend the "sprawling portfolio?"

One last note... I'd love to see more of these PP strategy discussions on this forum. I feel like much of our brain power is over in the "other" section while some of us poor souls are trying to figure out what the heck to do with our money!

[sophie]

Tax loss harvesting is the main reason why I still keep some bonds in a taxable account.  And yes you can tax loss harvest physical gold!  I did it through APMEX and they made it very easy.  It took just a simple phone call and a trip to the post office.  I recommend not taking a boat to get there :-)

And yes, the "collectibles" tax on gold is irritating enough that it's worth the ETF in a tax-advantaged account.  I think.  No right answers on that one.  It depends how often you think rebalancing out of gold is going to happen.  It has certainly not been a common event.

I forget which of Harry Browne's books recommended spreading the PP across multiple accounts.  Possibly it was multiple books but try "Why the best-laid plans usually go wrong."  He also discussed this on the radio show.  You might argue that it made a lot more sense at that time to protect cash and bonds in a tax-advantaged account due to the higher returns than we have now, but still - interest on long bonds has been a not insignificant chunk of the PP's gains in the past couple of years, and it makes sense to protect it if you can.

I agree about discussing the PP more!  For such a simple investment scheme the nuances are endless.  It's worth revisiting old topics, and new ones are sure to come up.

So speaking of which, here's a question for you that I don't think has been beaten to death already:  If you do spread the PP across multiple accounts, should you consider the higher tax cost of withdrawing from a tax-deferred investment?  One issue with keeping physical gold outside of tax-advantaged accounts is that the value of your gold holding may be relatively much higher than the stocks and bonds in your IRA (collectibles tax on gains vs ordinary income tax on entire withdrawal amount).

[KevinW]

Browne advises a "sprawl" in Fail-Safe Investing, p. 90:

A pension plan can reinvest 100% of its earnings without losing anything to
taxes. It’s important not to waste this benefit by using the plan for Permanent
Portfolio investments (such as gold) that generate little or no current income,
while paying tax each year on income-producing investments sitting outside the
plan.
To make the best use of a pension plan, fill it with investments for the
Permanent Portfolio in the following order:
1. Treasury bills or money market funds
2. Treasury bonds
3. Stock-market mutual funds
4. Gold

There is some further elaboration in that section.

As you probably know the PP had an abnormally good run from 2009-2012 (give or take) and then an abnormally bad year in 2013. I think the people that set up their portfolios before 2013 have everything pretty well sorted out by now and don't have much left to discuss. I fall into that category. The PP was appealing to performance-chasing sheeple until 2013 and then they all lost interest, so all the newbie questions from them died off suddenly. I will note that it's now looking like 2014 will be a strong year, and the PP will outperform the stock market and Boglehead portfolios. Buy and hold, baby.

[Libertarian666]

And yes, the "collectibles" tax on gold is irritating enough that it's worth the ETF in a tax-advantaged account.  I think.  No right answers on that one.  It depends how often you think rebalancing out of gold is going to happen.  It has certainly not been a common event.

Or you could use GTU in a taxable account, as I believe it gets normal cap gains tax treatment.

Note: I am not a lawyer, tax or otherwise, or an expert on this. This is just my understanding, check with your tax adviser, etc.

[barrett]

Thanks for posting that, Kevin. I have a copy of Fail-Safe on order.

I totally get that you PP vets find the minutiae of the PP repetitive, but it takes us newcomers a while to internalize the whole package. We need you guys as our support group from time to time. I make a lot of wisecracks on this forum but I really mean that.

[dualstow]

But the biggest reason to consider the 1 PP solution is the ability to put as much of your gold allocation into physical as you wish.

Bingo. My tax-deferred accounts are small, but I am working towards mostly physical gold and like having one pp spread over multiple accounts. Perhaps in the future when those accounts are larger, I might change my mind.

I could start buying IAU again just to trade instead of driving or mailing gold to a dealer. (I haven't sold yet).

[sophie]

I could start buying IAU again just to trade instead of driving or mailing gold to a dealer. (I haven't sold yet).

“You may think you understood what you thought I said but what you don't know is that what you heard is not what I meant to say.”?

I forget the source of that quote but it's been around a long time.

Which is to say...Dualstow what did you mean exactly??

[dualstow]

Sophie, sorry for the clumsy wording. 
Medium Tex used to talk about the pairing the safety and integrity of physical gold with the  convenience  of etf's (my paraphrasing). Hold mostly coins, keep some ETFs for transactions.

With gold so low (it's relative), I only want to accumulate more coins, because selling seems so far into the future.  Also, they are taxable and not in any account, freeing up space for bonds or VP holdings in tax deferred.

Still, it doesn't hurt to have #some# IAU that I can sell with a mouse click. No nervous trips with a box of gold coins to the dealer or post office when I do have to sell.

Finally, if my tax deferred accounts get sufficiently large, maybe I won't care about sacrificing space from those interest-earning treasury instruments and giving it to IAU. In that case, I might go in the direction of one pp per account.

I hope that makes more sense, but I'm exhausted so let me know if I'm talking out of my springbok.

[KevinW]

Thanks for posting that, Kevin. I have a copy of Fail-Safe on order.

Glad to help!

[moda0306]

Gold, however desirable, is certainly NOT recognized as money .

Moda, Please explain yourself. Are you saying that you can't exchange a gold coin for something you want? I really don't know the answer to this... I sometimes imagine a SHTF scenario where the whole financial system has melted down and I am attempting to pay someone for something with an Eagle. And the outcome is? Not sure, really.

As to Sophie's post, I am aiming to do what PS has advocated and that is holding physical gold in my taxable account and sticking with the ETFs in retirement accounts for ease and tax efficiency of rebalancing. Obviously, the tax efficiency can work both ways. If you are selling some gold because the price has gone up, you can do so in an IRA ETF and not pay on the gains. When the price has gone down you can tax-loss harvest by selling some actual coins, no?

Not sure what percentage of physical gold I'll end up with. I'll let you guys know in a few years! My hope is to be overweighted (relative to 4X25) in physical gold in taxable and underweighted in the tax favored accounts. That's why I posted earlier that I'd like "something close to a PP in each account." I'd like to see all my accounts performing more or less the same. Not trying to have them be identical.

As for using the cash portion as an emergency fund, Sophie is right but you have to consider that portfolios vary in size, right? Someone who is retiring, or close to it, would hopefully have a bunch of cash - in addition to gold, stock and bonds - in a taxable account.

Sophie, when and where did HB recommend the "sprawling portfolio?"

One last note... I'd love to see more of these PP strategy discussions on this forum. I feel like much of our brain power is over in the "other" section while some of us poor souls are trying to figure out what the heck to do with our money!

I'm not arguing against owning gold here.  But money's main function is that of a medium of exchange. Very few economic players would take gold coins as payment for their production.

[Pointedstick]

I'm not arguing against owning gold here.  But money's main function is that of a medium of exchange. Very few economic players would take gold coins as payment for their production.

Yeah, that. Gold is more like a stock or a bond. It holds value, and it can be easily exchanged for a means of payment, but being able to be exchanged for a means of payment doesn't make it a means of payment. And "means of payment" is basically a synonym for "money."

If you think about it, money is really not all that useful. Its only function is to be traded away for something you want more. It rarely holds its value long-term; it's easily stolen; it doesn't reward you in any way for holding it; etc. There are a lot of people--and I would wager many on this forum--who keep the vast majority of their wealth in the form of investment assets like stocks, bonds, and gold, and who only exchange some of their assets for money when they actually need to buy something.

[dualstow]

If you think about it, money is really not all that useful. Its only function is to be traded away for something you want more.

But since that is its sole purpose, and it serves that purpose well...

Maybe I'm missing something, but I think money is fantastically useful. Sure, if you take away the financial system in which it lives, it is about as useful as a cell phone with no electricity nor any cell towers. It doesn't have the intrinsic value of salmon or wood-axes. As the wise Indian chief said, you can't eat money.

But compare it to that which it replaced: barter.

It rarely holds its value long-term; it's easily stolen; it doesn't reward you in any way for holding it; etc.

Livestock can get sick and die. It is much more easily stolen than money. Crops can be ravaged by drought, disease, insects. Anything valuable and or attractive is stealable, and unlike money it cannot be held invisibly and digitally. The more non-monetary wealth you have, the more space you need to secure it.

Need to transfer it? Even the slowest ACH transfers are speedier and less cumbersome than moving physical things around. The animal that wins the genetic lottery gets robust health, nice muscle, teeth and claws, but at some point that wealth has a limit, and a lion or a wolf can only drag so much meat with it. And that meat will spoil. Money has virtually no limit, and it can be passed on to one's descendants (which is why talent, ability and monetary wealth, unlike fine claws is said to often skip a generation  )

Of course I'm stating the obvious here; you know all that.
These are low-interest times, but money normally does reward you for holding it, sometimes as much as 5%. Inflation eats into that, but along with low interest rates, we have 1.7% inflation (http://www.usinflationcalculator.com/in ... ion-rates/).

And finally there's fungibility. You don't need to worry how someone will appraise your money like they would your precious painting or animal skins. A dollar is a dollar.

There are a lot of people--and I would wager many on this forum--who keep the vast majority of their wealth in the form of investment assets like stocks, bonds, and gold, and who only exchange some of their assets for money when they actually need to buy something.

What about the arguments that have been made against a 3-fund permanent portfolio, ie one without cash. You can't have a pp without money, since it is both a volatility dampener and a means to easily convert gold into stocks and vice versa.

Right?

[Pointedstick]

Yah, I agree with all that. And don't get me wrong: I like having money! In many ways money's biggest virtue is convenience. As you've said, it's easily tradeable, it doesn't spoil, it can be concealed, it's easily subdivided, yadda yadda yadda. All that good stuff.

I was just trying to point out how different money is from an investment asset like gold... which, unlike salmon or a wood axe, doesn't even have all that much intrinsic value.

[dualstow]

...
I was just trying to point out how different money is from an investment asset like gold... which, unlike salmon or a wood axe, doesn't even have all that much intrinsic value.

I swear I'm not being argumentative for the sake of it : - ) but what about gold's malleability, the way it can be fashioned into art? It doesn't corrode, and even if it just sits around as money and not art, it doesn't have to be sprayed for silverfish like Walter White's stash. It can conduct electricity and in nanoform, fight cancer...
Oh wait, you mean cash and not gold.

[Pointedstick]

Well if you really want to get really pedantic, cash has intrinsic value as well. Being useful for exchange is intrinsically valuable in an exchange-based economic system. And in paper form, it can always be burned as a fuel!

But this gets into the definition of "intrinsic" which is not really a very fun discussion.

[sophie]

“You may think you understood what you thought I said but what you don't know is that what you heard is not what I meant to say.”?

-- Robert McCloskey, children's book author (most famously, Make Way for Ducklings)

Thanks, I never knew about that!  I'd heard that it's somewhere on the wall in the U.S. Capitol so I thought it was from someone in Congress.

[dualstow]

Well if you really want to get really pedantic, cash has intrinsic value as well. Being useful for exchange is intrinsically valuable in an exchange-based economic system. And in paper form, it can always be burned as a fuel!

But this gets into the definition of "intrinsic" which is not really a very fun discussion.

Yes, I remember a belabored discussion of intrinsic that went nowhere. I was just thinking about the cash-burning, too. :-) Mental image of Weimar.

[sophie]

BTW...this IS a very fun discussion.  First off, you're all correct and I was wrong, gold is not money in the usual sense.  It's is a store of value that is recognized world-wide and is independent of the U.S. dollar.  What I meant was that if the U.S. dollar went kaput, admittedly an extreme situation, your gold would suddenly become your major store of wealth.  I'm concerned that ETFs won't serve that function, because their value depends also on the financial solvency of the managing company & brokers.  Presumably, in the aforementioned extreme situation, that would become a problem.

I do own some ETFs for exactly the same reasons as dualstow...but I'm starting to talk myself into eventually converting them all into physical.  Rebalancing out of gold doesn't happen that often, and it really wasn't at all difficult to arrange the sale online when I did the tax loss harvest.  Note that the ETF fees probably add up enough over time to wipe out the benefit of avoiding the collectibles tax.

As far as money's various virtues as a medium of exchange...there's a reason why money appeared almost at the same time as the earliest permanent human settlements (look up ancient Sumer for example).  In many ways it is fundamental to our existence.