Gyroscopic Investing

I have 20% of assets in PRPFX. Was thinking of putting the next 30% in a pp 4x25 that I run and rebalance. What do you do?  All in or part? Thanks

BRESLOW wrote: I have 20% of assets in PRPFX. Was thinking of putting the next 30% in a pp 4x25 that I run and rebalance. What do you do?  All in or part? Thanks

Why do you want a combination of PRPFX and the HB PP?

I'm all in.  Why split it?

the only reason i can imagine for splitting would be tax related, but i will leave it to our tax professionals to try to explain why (if there really is such a reason)..

I've decided to run a HB 4x25 portfolio in my IRA and use PRPFX outside of it. Yes, tax considerations are the reason.  I'm also new to this whole concept, so I want to compare the experience (and results) with each approach.

I think it could be argued that for someone in retirement who plans to make systematic withdrawals periodically for income PRPFX is the easier vehicle.

If you are using the PP in retirement, consider keeping up to 5 years of total living expenses in cash/money market outside of your PP.  This will ensure that you can live through any significant market downturn and not have to withdraw assets of the PP while the economy recovers.  You can just rebalance as necessary.

How many years of living expenses you have set aside is up to your comfort level. 

EdwardjK,

While more conservatism is hardly a dangerous thing, with the purpose of the PP being money you can't afford to lose, why would one also need a heaping 5 years worth of cash?

I consider any cash I have as part of my PP.

I run everything in the classic 4x25 Harry Browne Permanent Portfolio.  I haven't discovered any real reason to use PRPFX although I think it's just fine.  I just don't need to pay out the relatively high expenses of PRPFX when I can run a 4x25 with extremely low expenses.

A good reason to use PRPFX that Medium Tex pointed out a while back is that it's good for a Coverdell education savings account.  That's a situation where PRPFX would be great to have handy.

If you are considering using PRPFX to help you with tax sheltering, another option to consider is simply arranging your assets in the most tax-efficient way possible.  This would mean first and foremost making sure that your long-term bonds stay in your tax-deferred accounts.  Using savings bonds for cash is another helpful idea.

Moda always has excellent thoughts on tax issues.  This thread contains lots of good information on handling tax issues.

I would only recommend PRPFX for someone if it helped them get a PP in something they normally couldn't (529?)... or if they don't like messing around with much.  I'd simply tell them, "I could bore you with hours of conversation about diversifaction, tax efficiency, timing the market, etc, but you're not interested in that... you just want to keep and grow your money.  Invest in this fund and you're 90% of the way there."

For most people with enough interest to post on here, I'd think a real PP, or one close to it, is a better choice.  A lot of people tend to tune out really fast.  We are obviously not those people.

0% in PRPFX.  Reason being is that it is substantially more expensive than a 4x25 using cost effective components.  See http://gyroscopicinvesting.com/forum/in ... opic=622.0.

That being said, if the extra simplicity of PRPFX is worth the extra expense to you, I think PRPFX is a decent choice.

moda0306,

I just knew my comment was going to cause a reaction.

Yes, the PP has a great track record.  As it turns out, I am currently reading Harry Browne's book, "Why the Best Laid Investment Plans Usually Go Wrong" wherein he explains why he believes all/most investment strategies are wrong.  It is a powerful book that I recommend to all.

Harry explains that some strategies appear to work but usually only over the short-term, and then typically fail once you start to use them as part of your investment strategy.

Having said that, the PP is just that - an investment strategy.  Although it has a great track record, there are no guarantees that the results are repeatable, nor that the relationships between the four asset classes will remain intact over time.

For that reason, if you are in retirement, I think it prudent to retain several years of spending money outside the PP "just in case".  It doesn't have to be 5-years worth - could be less depending upon your preferences.

Aside from protecting yourself for the immediate future, keeping several years of living expenses outside the PP reduces transaction costs.  I'd rather sell assets for living expenses once every 5 years rather than every year. 

That's my opinion.  Would like to hear what others think.

EdwardjK wrote: For that reason, if you are in retirement, I think it prudent to retain several years of spending money outside the PP "just in case".

Where would you keep this spending money?

moda0306 wrote: I would only recommend PRPFX for someone if it helped them get a PP in something they normally couldn't (529?)

If you find a 529 that lets you invest in PRPFX please let me know about it (seriously!)  I've heard of using PRPFX in a Coverdell but don't know of a good way to do it in a 529.  Having that available for a 529 would be fantastic.

EdwardjK wrote: Having said that, the PP is just that - an investment strategy.  Although it has a great track record, there are no guarantees that the results are repeatable, nor that the relationships between the four asset classes will remain intact over time.

For that reason, if you are in retirement, I think it prudent to retain several years of spending money outside the PP "just in case".  It doesn't have to be 5-years worth - could be less depending upon your preferences.

Aside from protecting yourself for the immediate future, keeping several years of living expenses outside the PP reduces transaction costs.  I'd rather sell assets for living expenses once every 5 years rather than every year. 

Hi Edward, first and foremost, do what makes you comfortable.  That's of paramount importance and supersedes everything that I say after this.

Remember that the Permanent Portfolio allows you to keep a very large portion (25%) of your portfolio in cash.  In this case, "cash" means Treasury bills.  These are extremely liquid and at least via Fidelity can be purchased and sold with absolutely no transaction costs.  I buy and sell individual Treasury bills and notes all the time and there are no costs associated with this.  This is the mechanism by which you can safely draw down your Permanent Portfolio without having to sell any assets, market time, or otherwise bear any unnecessary expenses.

Only when this cash portion has been depleted to 15% or lower do you need to sell any other assets.  If you are drawing down no more than 4% of your portfolio per year (a standard "sustainable" rate), you would probably be selling securities no more than every 3 years or so (assuming your cash is earning interest.)  Say that you sell at $8 a pop.  That would be $24 every 3 years to rebalance stocks, bonds, and gold.

I also feel that cash itself comes with risks, particularly the risk of inflation.  Bad inflation harms the purchasing power of cash pretty substantially.

Again, though, I want to emphasize that whatever helps you feel most relaxed is probably what you are best off sticking with.  But do consider the above points and see whether you might be able to feel equally comfortable just doing a 4x25.  Best of luck to you in whatever you decide.

Adam,

I would keep the living expense money in a savings account/money market account within a stable bank.

The idea is to protect this money at all costs - albeit at the cost of earning a better return.

EdwardjK wrote:
I would keep the living expense money in a savings account/money market account within a stable bank.

This is the equivalent of increasing the cash portion of your PP while at the same time adding risk (the credit risk of the bank you keep the savings or money market with). 

So, even though you view the money as separate from the PP, in theory, it isn't.  You're just increasing the cash allocation, and probably increasing your risk. 

EdwardjK wrote:
The idea is to protect this money at all costs - albeit at the cost of earning a better return.

You would actually probably earn a better return keeping your money in a money market or savings account, but would be introducing credit risk to this portion of the portfolio.

I think Adam has it right... you're kind of getting a double negative here.  You are taking 5 years of living expenses, and taking what could be 75% made up of gold/LT/stocks (the big-return trifecta) and adding that, along with your 25% cash to something that could go poof if the FDIC sees problems.

If your MAIN priority is balance retention, then go with a treasury MM fund or even 1-3 year treasuries (you can lose a bit on these, but that's just the sliver of interest rate risk creeping in by owning duration bonds.

moda0306,

I would agree if I subscribed to the notion that all banks will fail.  Although the economy is bad, it is not that bad.

Anyway, keeping 5-years worth of living expenses outside the PP would be the extreme case.  Like I said, "...up to 5-years" depending on preference.  For myself, I would probably keep 3 years worth, depending on how the economy was doing.

Thanks to all for the commentary.  I think we killed this issue.

Edward... just to shoot a dead horse, if you haven't seen it already, and you're comfortable w/ the FDIC risk (as I tend to be), you should do a 5-year Ally CD... only 60-day penalty and are currently going for 2.4%.

EdwardjK wrote: I think we killed this issue.

Yes, but that won't stop me 

EdwardjK wrote:
I would agree if I subscribed to the notion that all banks will fail.

All banks don't have to fail for you to run into trouble.  What if there was a bank holiday?  Your bank could be the best in the Country, and you wouldn't be able to get your money. 

If you have U.S. Treasuries, the government has gone to extreme measures in the past to make sure that holders of short term paper had access to their cash (ie, designated bank offices that cash Treasuries). 

It may or may not matter, if your money is still intact when the banks open, but if you need the money for daily living, it might be a problem.   

(By the way, I think your money would likely be fine with a good bank, but I think it can be educational to discuss extreme circumstances...)

I keep all of my PP in PRPFX. This gives me greater tax efficiency, reduces my risk of having assets stolen or lost, and increases the liquidity of my assets. It will also allow me to draw down in a systematic way upon entering retirement in another year without having to rebalance any bands.

Reub,

Could you enlighten me on the tax-efficiency?  Without a rebalance, assuming 2% on cash, 4.6% on bonds, and 1.75% of dividends, your 2010 taxable income from a 4x25 PP would be about 2.09%  Assuming an average of 25% tax, that's .5% of your PP being sucked off to taxes.  Of course, that's with no rebalance, so I'd be interested to see a comparison of PRPFX.

As one example, the sale of GLD or SLV is considered the same as the sale of fine wine or art. It is a "collectible" subject to ordinary income tax. This can be a heavy hit on one's taxes when drawing down or rebalancing. PRPFX avoids this.

That may be, but I'd like to see the whole picture, not just one example.  How does it avoid the collectibles gain treatment? 

BTW, GTU is an option for that.

Reub wrote: I keep all of my PP in PRPFX. This gives me greater tax efficiency, reduces my risk of having assets stolen or lost, and increases the liquidity of my assets. It will also allow me to draw down in a systematic way upon entering retirement in another year without having to rebalance any bands.

The tax efficiency of PRPFX is far outweighed by its ridiculously high expense ratio.  See http://gyroscopicinvesting.com/forum/in ... opic=622.0.

Edit: I'm not saying that means it's a bad fund.  I'm just saying... don't be deceived into thinking it's cheap just because it's tax efficient.

chrikenn wrote: The tax efficiency of PRPFX is far outweighed by its ridiculously high expense ratio.  See http://gyroscopicinvesting.com/forum/in ... opic=622.0.

Edit: I'm not saying that means it's a bad fund.  I'm just saying... don't be deceived into thinking it's cheap just because it's tax efficient.

i thought it was a closer call than that,  and that in some cases the tax advantage of PRPFX overwhelmed its cost disadvantage compared to the cost of having some assets from the 4x25% getting taxed....  interesting