Best Allocation: Living off just the interest

General Discussion on the Permanent Portfolio Strategy

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ahhrunforthehills
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Best Allocation: Living off just the interest

Post by ahhrunforthehills » Thu May 31, 2018 4:04 pm

Hello Everyone,

I am curious on opinions of what the proper allocation would be for someone's goal of living off of JUST THE INTEREST of their investments (i.e. not touching the principle) with $10 or $20 million.

Surely, in that situation having access cash would not be as important since you would not need 25% to pay your monthly bills if the market took a dump. I also would think you would want to be heavier in equities because of the capital gains treatment (as opposed to regular income tax rates).

I would think something like a modified golden butterfly would be ideal (with the only real change being in the size of the cash component):

22.5% Total Stock
22.5% Small Cap Value
22.5% LT Bonds
22.5% GLD
10% ST Bonds/Cash

Thoughts?
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Xan
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Re: Best Allocation: Living off just the interest

Post by Xan » Thu May 31, 2018 4:13 pm

What are T-bills paying? 1.7%? That's $340K a year on $20 mil.
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Re: Best Allocation: Living off just the interest

Post by pugchief » Thu May 31, 2018 4:39 pm

Congrats if this is your own problem.

The answer depends on what you want to do with the $10M. Die with $10M? Die with $40M? Cuz if you don't care about additional growth, why take any risk at all? I agree with Xan, 100% T-bills if $340k/year is enough to live on. If you want growth, a GB is a good plan.
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Re: Best Allocation: Living off just the interest

Post by ahhrunforthehills » Thu May 31, 2018 5:11 pm

pugchief wrote:
Thu May 31, 2018 4:39 pm
Congrats if this is your own problem.

The answer depends on what you want to do with the $10M. Die with $10M? Die with $40M? Cuz if you don't care about additional growth, why take any risk at all? I agree with Xan, 100% T-bills if $340k/year is enough to live on. If you want growth, a GB is a good plan.
Sorry, I should have been more clear. I meant in terms of general risk profile for someone posting on a HBPP forum. Ain't nobody goin' all-in on some TBills in real life ;)

The question is more like how would someone with a HBPP or GB mindset approach the allocation if the goal was to only live off of the interest. The principle should be retained forever on an inflation adjusted basis (so the amount actually increases, but the value stays the same). So really, after tax/inflation you would really only talking about squeaking out a 2-3% annual return with a HBPP or GB (obviously going for maximum growth while prescribing to the PP/GB philosophy).

It just seems that the portfolio allocation would need to change as the portfolio scales (especially the cash component).

For example, it would seem to me that a regular GB allocation of 20% cash would be excessive since in a $10 mil portfolio you wouldn't need $2 Mil to sustain you to make ends meet during a recession, no?
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Re: Best Allocation: Living off just the interest

Post by Xan » Thu May 31, 2018 8:11 pm

If there are $20 million in the bank, I think you're past the point where it makes all that much difference.

Put it all in stocks - you'll be fine through every downturn. Put it all in T-bills - you can live handsomely forever, guaranteed.

I think you're way too quick to write off the 100% T-bill plan. In fact, historically, 100% T-bills is not a bad return. What's that Groucho quote that jhogue has about T-bills? "You can't make much money on T-bills. You can if you have a lot of them!"
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Re: Best Allocation: Living off just the interest

Post by dualstow » Thu May 31, 2018 9:01 pm

If it’s for you, any allocation would be fine. If it’s for many generations down the line, look into investing in art.
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Re: Best Allocation: Living off just the interest

Post by jhogue » Thu May 31, 2018 9:25 pm

Xan wrote:
Thu May 31, 2018 8:11 pm
If there are $20 million in the bank, I think you're past the point where it makes all that much difference.

Put it all in stocks - you'll be fine through every downturn. Put it all in T-bills - you can live handsomely forever, guaranteed.

I think you're way too quick to write off the 100% T-bill plan. In fact, historically, 100% T-bills is not a bad return. What's that Groucho quote that jhogue has about T-bills? "You can't make much money on T-bills. You can if you have a lot of them!"
Xan,

You are welcome.

Lots of stock bugs-- including Warren Buffett-- like to say that cash is trash. If that is true, why is Berkshire Hathaway hanging on to $98 billion (give or take a few billion) in cash?
“Groucho Marx wrote:
A stock trader asked him, "Groucho, where do you put all your money?" Groucho was said to have replied, "In Treasury bonds", and the trader said, "You can't make much money on those." Groucho said, "You can if you have enough of them!"
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Re: Best Allocation: Living off just the interest

Post by ahhrunforthehills » Thu May 31, 2018 10:55 pm

Xan wrote:
Thu May 31, 2018 4:13 pm
What are T-bills paying? 1.7%? That's $340K a year on $20 mil.
1.7% before inflation or tax (at the highest bracket) IMHO seems pretty weak (no offense).

Respectfully, it appears that everyone is just throwing in their 2 cents on what they would do with a large portfoilio... but that wasn’t at all my question.

The question was whether or not a HBPP or GB should theoretically have a different weighting (primarily in its cash component) as it scales due to its underlying principles since a very wealthy person would be at less risk of liquidating lagging assets to make ends meet during a recession.

Again, I am only interested in a theoretical discussion based on the HBPP or GB underlying principles of economic cycles.

Anybody have any thoughts?
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Re: Best Allocation: Living off just the interest

Post by Xan » Thu May 31, 2018 11:18 pm

My suggestion did have a different weighting, primarily in its cash component.

It seems to me like people are answering your question, but you just don't like the answers.
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Re: Best Allocation: Living off just the interest

Post by Dieter » Fri Jun 01, 2018 1:04 am

Hmm -- not a problem I'm likely to face, but quick thought:

14% TSM (Dividend focused if want "income"?)
14% SCV
14% Intl
20% LTT
10% Gold
10% Cash (I'd include Cash, I-Bonds, E-Bonds, STT, T-Bills,....)
18% Land / ??? (Rental Property, ..)
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Re: Best Allocation: Living off just the interest

Post by jhogue » Fri Jun 01, 2018 1:22 pm

ahhrunforthehills wrote:
Thu May 31, 2018 10:55 pm
Xan wrote:
Thu May 31, 2018 4:13 pm
What are T-bills paying? 1.7%? That's $340K a year on $20 mil.
1.7% before inflation or tax (at the highest bracket) IMHO seems pretty weak (no offense).

Respectfully, it appears that everyone is just throwing in their 2 cents on what they would do with a large portfoilio... but that wasn’t at all my question.

The question was whether or not a HBPP or GB should theoretically have a different weighting (primarily in its cash component) as it scales due to its underlying principles since a very wealthy person would be at less risk of liquidating lagging assets to make ends meet during a recession.

Again, I am only interested in a theoretical discussion based on the HBPP or GB underlying principles of economic cycles.

Anybody have any thoughts?
To return to first principles, you should want to keep cash in the Cash quadrant of the HBPP because it gives you safety, stability, and liquidity at all times. If you start lowering that Cash %, you will invariably increase the volatility of the portfolio as a whole. That is true regardless of the size of the portfolio.

In practice, investors exhibit a wide range of liquidity preferences based upon their own individual circumstances. Certainly, one of those circumstances affecting liquidity preference is the size of the portfolio. Your liquidity preference may lag your portfolio size, but I would not count on it.

In fact, a recent (2014) survey by Cap Gemeni and RBC Wealth Management found that high net worth individuals held cash and deposits equal to about 28 % of their assets. Studies by Legg Mason and Wells Fargo wealth managers came to similar conclusions.

So there you have it: the rich love cash—maybe you should too.


Source:
https://news.fidelity.com/news/news.jht ... EI_1&IMG=Y Page 1 of
“Groucho Marx wrote:
A stock trader asked him, "Groucho, where do you put all your money?" Groucho was said to have replied, "In Treasury bonds", and the trader said, "You can't make much money on those." Groucho said, "You can if you have enough of them!"
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Re: Best Allocation: Living off just the interest

Post by Dieter » Sat Jun 02, 2018 1:45 am

Interesting. Thanks JHogue.
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