Gyroscopic Investing

I have a hard time putting 25% of my money in cash.  Instead, last year I put my cash allocation like this:  80% Wellesley Income and 20% gold.  I know it's not as robust from a counterparty risk standpoint but it should be slow steady grower, sort of like a PP within a PP. 

I just played around with Simba's spreadsheet to see how this portfolio performed historically and what I found surprised me. 

                  HBPP            80/20
CAGR            9.22%          10.49%
St Dev          7.95                7.55

Perhaps the 80/20 should be looked at as an alternative to PRPFX or Perm?

VWINX is a nice fund, but it's not cash.  It's just a 40/60 stock/bond mix.  Your new portfolio is really just 33% stocks, 37% bonds (with a few corporate bonds in the mix) and 30% gold.  You could probably get substantially the same results just by dialing back the PP cash and avoiding the additional fund.

Your choice doesn't give me any heartache, though.  I like VWINX.  I just personally like my cash even better. 

 

FarmerD wrote: I have a hard time putting 25% of my money in cash.  Instead, last year I put my cash allocation like this:  80% Wellesley Income and 20% gold.  I know it's not as robust from a counterparty risk standpoint but it should be slow steady grower, sort of like a PP within a PP. 

I just played around with Simba's spreadsheet to see how this portfolio performed historically and what I found surprised me. 

                  HBPP            80/20
CAGR            9.22%          10.49%
St Dev          7.95                7.55

Perhaps the 80/20 should be looked at as an alternative to PRPFX or Perm?

What if you need cash for something?

Not sure how adding a fund to the HBPP and increasing the gold allocation makes the portfolio more simple. Holding less cash increases FI duration but allows you to invest more in the remaining 3 asset classes. You chose to invest in more stocks, bonds and gold instead.

Tyler's comment is dead on.

You now have two PP's with 0%s cash.

Your first PP is 33/33/33 stocks/bonds/gold.
Your second PP is 33/37/30 stocks/bonds/gold

Nothing wrong with that if your intent is to juice up your PP.  (re: Melvyr)  But you are trading away some outstanding benefits of cash (re: Sophie)

AdamA wrote:

FarmerD wrote: I have a hard time putting 25% of my money in cash.  Instead, last year I put my cash allocation like this:  80% Wellesley Income and 20% gold.  I know it's not as robust from a counterparty risk standpoint but it should be slow steady grower, sort of like a PP within a PP. 

I just played around with Simba's spreadsheet to see how this portfolio performed historically and what I found surprised me. 

                  HBPP            80/20
CAGR            9.22%          10.49%
St Dev          7.95                7.55

Perhaps the 80/20 should be looked at as an alternative to PRPFX or Perm?

What if you need cash for something?

I'll just sell them.  I only plan on holding this for a year or two then I'll need the money for something else. 

FarmerD wrote: I only plan on holding this for a year or two then I'll need the money for something else.

For any money that I know I will need within a year or two - I hold strictly in cash (i.e. upcoming tax payments, college funds for kids I'm sponsoring, etc.)

Any investment scenario that purports to average higher than inflation can't be relied upon to deliver year over year.  You have to calc the averages over 5 to 10 years.  So... if you KNOW you will need the money soon - I strongly suggest you keep it in cash.

Tyler wrote: VWINX is a nice fund, but it's not cash.  It's just a 40/60 stock/bond mix.  Your new portfolio is really just 33% stocks, 37% bonds (with a few corporate bonds in the mix) and 30% gold.  You could probably get substantially the same results just by dialing back the PP cash and avoiding the additional fund.

I did this analyis for Reub last year.  Wellesley was only a net 12.30% in government bonds.  The rest is all Prosperity exposure so it will overweight the PP like a traditional portfolio.  So if you can handle a -50% maximum drawdown or what not, this is one way to guarantee it.

If you want more juice AND more cash, they use a leveraged PP.

FarmerD wrote: I have a hard time putting 25% of my money in cash.  Instead, last year I put my cash allocation like this:  80% Wellesley Income and 20% gold.  I know it's not as robust from a counterparty risk standpoint but it should be slow steady grower, sort of like a PP within a PP. 

I just played around with Simba's spreadsheet to see how this portfolio performed historically and what I found surprised me. 

                  HBPP            80/20
CAGR            9.22%          10.49%
St Dev          7.95                7.55

Perhaps the 80/20 should be looked at as an alternative to PRPFX or Perm?

 

I'm not very familiar with the Simba spreadsheet.  What were the years that you calculated this over?

How clear is the rebalancing strategy? The problem here is that you might sell gold (or need to dump into gold) and you have to contribute/draw to/from both stocks and bonds together. What if stocks and bonds start going in opposite direction, you'd be relying on the portfolio manager to balance between bonds/stocks independent of your gold allocation.

It seems much easier to me to have a 25% x 4 and I have more confidence in higher amounts of cash and  gold to withstand some market conditions.

As you mentioned as well the counterparty risk of having everything in one place is not to be underestimated.

A while back I allocated some of my cash position to preferred stocks.  At present I am earning 6.1% on my investment through quarterly dividends.

CraigR cautioned me on preferred stocks, so I limited myself to big-name preferreds with cumulative dividends.  Sure, the price fluctuates as interest rates change, but I do not see cash earning 6.1% anytime soon.

Quantumonline.com provides a list of outstanding preferred stock.  And Doug Le Du provides nice commentary on SeekingAlpha.com.  I also recommend his book, "Preferred Stock Investing", to better understand their dynamics.

If you go this route, I recommend that you hold the preferreds in an IRA or other tax-deferred account.  Remember that interest and dividends are taxable and subject to the Obamacare tax if held outside a tax-deferred account.

Dividend stocks are a great investment, but again...they're not cash.  (6.1% is impressive btw...how did you manage that??)

The problem is that something like your losing your job and needing your e-fund might happen at times when the sky is falling and your stocks are down.  Also this is a big reason why PP cash is supposed to be held in Treasuries.  Money market accounts froze or "broke the buck" in 2009.  Hopefully those account owners weren't relying on that money :-)

I panicked when I read your line about dividend taxes...then I remembered that AGI has to be pretty high before they kick in.  But they're not THAT high, it's hardly a "millionaire's tax".  Eventually it'll be like the AMT, hitting people with just average salaries.  Sigh.  I don't give Obamacare a very good prognosis though, so maybe you can quit worrying.

sophie wrote: The problem is that something like your losing your job and needing your e-fund might happen at times when the sky is falling and your stocks are down.  Also this is a big reason why PP cash is supposed to be held in Treasuries.  Money market accounts froze or "broke the buck" in 2009.  Hopefully those account owners weren't relying on that money :-)

Just to elucidate that more clearly, money market mutual funds broke the buck, not money market savings accounts.  The latter is typically offered by banks and credit unions; brokerages offer the former but it is typically opt-in/optional to be swept into.  So avoid the former.