Best Allocation: Living off just the interest

General Discussion on the Permanent Portfolio Strategy

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jhogue
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Re: Best Allocation: Living off just the interest

Post by jhogue » Mon Jun 04, 2018 8:46 am

Dieter wrote:
Sat Jun 02, 2018 1:45 am
Interesting. Thanks JHogue.
Dieter,
I see you proposed a nicely diversified position within Cash, but I wonder if you will really be happy with only 10% Cash overall. Where will the $ come for a new car? big vacation?? unexpected medical bills or repairs???

And that is too say nothing about keeping your powder dry. What will you do if LTTs drop below your rebalancing band? Sell stocks??
“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 » Mon Jun 04, 2018 11:45 pm

It all depends....And remember, this is hypothetical -- 10% of $20M is more than my total retirement accounts are going to be when I retire..... At my levels, probably 20% cash (roughly where my retirement accounts are at now as I'm market timing a bit and shortened my duration / increased credit quality (reduced TBM) / actually have ok options in 401k as of late for "cash" / MM / Stable Value Fund.....)

What is target income? Expect to sell some as bands breached or only live off of income? How much spending flexibility?

If really shooting for income:
3% Yield from Vanguard Dividend Yield Idx Inv
1.99% from VG SCV (or go Mid-Cao Val for 2.21%)
(No idea of VG Intl fund yields -- not listed where I checked....)
2.99% LTT
0% Gold (no gold if want to optimize for income?)
2+%? cash. Not going to do the math.... VG Fed MM yields 1.7%; VG STT yields 2.45%. Creative use of IBonds (2.5%), CDs, diff durations, etc, can probably bump up
Land -- no clue....

2%ish yield on low end ($10M) kicks off 200k/yr.

If need more, sell winner / keep in balance....

If LTT drops below rebalance band (nice yield bump), from winning asset. Which yeah, might be cash if LTT, Gold, Stocks tank all at once. Which might be why the rich per info JHogue posted have more in cash just in case....
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Re: Best Allocation: Living off just the interest

Post by Dieter » Tue Jun 05, 2018 3:39 pm

For cash ideas (not all PP pure I'm sure) -- http://www.mymoneyblog.com/best-interes ... -2018.html

(Not MY money blog :)

And at $20M total portfolio, might also look at Muni Money Market -- don't remember if they included that). Federal / Prime MM from VG better fory at my bracket even in a high tax state.
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Re: Best Allocation: Living off just the interest

Post by jhogue » Tue Jun 05, 2018 4:44 pm

Dieter wrote:
Tue Jun 05, 2018 3:39 pm
For cash ideas (not all PP pure I'm sure) -- http://www.mymoneyblog.com/best-interes ... -2018.html

(Not MY money blog :)

And at $20M total portfolio, might also look at Muni Money Market -- don't remember if they included that). Federal / Prime MM from VG better fory at my bracket even in a high tax state.
1. mymoneyblog can't be all bad- at least it mentions I bonds as a possible option for Cash.

2. PP investors need to stay away from municipal bonds and their funds and stick with U.S. Treasury debt only. When the market goes south and you really need your cash, that is when the Treasury debt holders will be standing ahead of all the FDIC-insured CD and municipal bond holders. It isn't some doomsday fantasy that Harry Browne made up. Anyone who studies it will realize that the history of banking is a repetitive tale of boom and bust. For more about the perils and illiquidity of municipal bonds, see Puerto Rico.
“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 banker22 » Mon Jun 18, 2018 12:32 pm

Why wouldn't you just go 100% global equity index fund with a 2-3% dividend yield?
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Re: Best Allocation: Living off just the interest

Post by KevinW » Tue Jul 17, 2018 12:08 am

ahhrunforthehills wrote:
Thu May 31, 2018 10:55 pm
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.
No, according to PP principles the 4x25 weights stay the same regardless of the size of the portfolio. The four assets are weighted equally so that any one asset can buffer losses in up to three other classes.

The cash component, coupled with the rebalance band policy, ensures that the portfolio will "buy low" when volatile assets crash. A PP that is underweight in cash has less ability to buy-low, hurting long term growth, and that is true regardless of the size of the portfolio.

(One exception might be a new 401k saver who is contributing >10% to the portfolio each year in cash wages. They might be able to get away with underweighting cash since their cash contributions do the "buy low" part. But that's not true for the $20M scenario.)

I have daydreamed about how I would live off the interest of a multimillion windfall, and what I settled on is:

(1) Conventional 4x25 PP for "money I can't afford to lose," meaning more than enough to buy a sensible house and support a bourgeois lifestyle indefinitely, in the event of strife. Let's say $4 million so each asset is an even $1 million. Barring some kind of cataclysm this is never actually drawn down.

(2) The remainder in a Variable Portfolio of a tax-efficient, dividend-paying, global stock index such as VT. In the $20M scenario this is $16 million, which at VT's current 2.26% yield, pays $362k/year of qualified dividends. That's more than I can envision spending, but if it's not enough for you, blend in a high-dividend fund.

(1) is there so you can sleep at night through downturns, or to bail you out in a black swan scenario. Sitting on $1M each of gold bullion and T-bills should be plenty of sleep-at-night insurance. (2) provides sustainable and tax-efficient income and most likely will grow to a substantial legacy.
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Re: Best Allocation: Living off just the interest

Post by banker22 » Tue Jul 17, 2018 4:07 am

KevinW wrote:
Tue Jul 17, 2018 12:08 am
ahhrunforthehills wrote:
Thu May 31, 2018 10:55 pm
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.
No, according to PP principles the 4x25 weights stay the same regardless of the size of the portfolio. The four assets are weighted equally so that any one asset can buffer losses in up to three other classes.

The cash component, coupled with the rebalance band policy, ensures that the portfolio will "buy low" when volatile assets crash. A PP that is underweight in cash has less ability to buy-low, hurting long term growth, and that is true regardless of the size of the portfolio.

(One exception might be a new 401k saver who is contributing >10% to the portfolio each year in cash wages. They might be able to get away with underweighting cash since their cash contributions do the "buy low" part. But that's not true for the $20M scenario.)

I have daydreamed about how I would live off the interest of a multimillion windfall, and what I settled on is:

(1) Conventional 4x25 PP for "money I can't afford to lose," meaning more than enough to buy a sensible house and support a bourgeois lifestyle indefinitely, in the event of strife. Let's say $4 million so each asset is an even $1 million. Barring some kind of cataclysm this is never actually drawn down.

(2) The remainder in a Variable Portfolio of a tax-efficient, dividend-paying, global stock index such as VT. In the $20M scenario this is $16 million, which at VT's current 2.26% yield, pays $362k/year of qualified dividends. That's more than I can envision spending, but if it's not enough for you, blend in a high-dividend fund.

(1) is there so you can sleep at night through downturns, or to bail you out in a black swan scenario. Sitting on $1M each of gold bullion and T-bills should be plenty of sleep-at-night insurance. (2) provides sustainable and tax-efficient income and most likely will grow to a substantial legacy.
My thoughts exactly. Can you be my financial advisor?!
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Re: Best Allocation: Living off just the interest

Post by Kbg » Tue Jul 17, 2018 9:16 am

KevinW wrote:
Tue Jul 17, 2018 12:08 am
(1) Conventional 4x25 PP for "money I can't afford to lose," meaning more than enough to buy a sensible house and support a bourgeois lifestyle indefinitely, in the event of strife.

All Power to the Soviets! Beware peasants with pitchforks. :-)
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Re: Best Allocation: Living off just the interest

Post by KevinW » Wed Jul 18, 2018 3:25 pm

Ha, glad you guys appreciated that.
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Re: Best Allocation: Living off just the interest

Post by Kbg » Wed Jul 18, 2018 3:54 pm

Actually, I just finished reading an 800 pg book on the Russian revolution (A People’s Tragedy). Pretty depressing...and perhaps we are fooling ourselves here. If civil war breaks out you have some major decisions to make and you don’t have the option to fence sit. Heaven help you if you pick the wrong side. Even if you pick the right side bad luck may be terminal.

Financially, you have to flee early, have a bunch of money located elsewhere and be able to land safely there or in another safe place where you can access your money.
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Re: Best Allocation: Living off just the interest

Post by Mark Leavy » Wed Jul 18, 2018 11:16 pm

Kbg wrote:
Wed Jul 18, 2018 3:54 pm
Actually, I just finished reading an 800 pg book on the Russian revolution (A People’s Tragedy). Pretty depressing...and perhaps we are fooling ourselves here. If civil war breaks out you have some major decisions to make and you don’t have the option to fence sit. Heaven help you if you pick the wrong side. Even if you pick the right side bad luck may be terminal.

Financially, you have to flee early, have a bunch of money located elsewhere and be able to land safely there or in another safe place where you can access your money.
Outstanding Reference - thank you Kbg. I can't seem to get a digital version, so I put a reminder in to have a paperback sent to an Amazon Locker I will be near in a couple of weeks.
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Re: Best Allocation: Living off just the interest

Post by Kbg » Thu Jul 19, 2018 8:51 am

Mark,

The book is widely recommended as one of the best on the subject, but it was a heavy read more in the academic style(ish) so be prepared for that. The title is excellent for his general thesis...I won't be a spoiler so I'll stop there. I'm not sure of the author's politics but he pretty much debunks any idea of Lenin and Trotsky being the "good communists" whose program was derailed by Stalin.
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