Moving into the PP

General Discussion on the Permanent Portfolio Strategy

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jhogue
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Re: Moving into the PP

Post by jhogue » Tue May 07, 2019 8:21 am

ppnewbie:

Your residential real estate is a business, not an investment. The market for your business is highly localized and relatively ill-liquid—which means your principal is not guaranteed and cannot be converted into cash overnight. Also, the income stream from your rental is not guaranteed. It carries the risks that your tenants don’t pay or the property sits vacant while you continue to pay taxes and upkeep. Those kinds of risks explain why you are presently making 10% in rent, versus about 3% for Treasury bonds.

Long term Treasury bonds (LTTs) are an investment, not a business. The market for LTT’s is global and highly liquid—you could sell any amount you hold and convert its value to cash in 24-48 hours. The principal and the income stream from interest payments is guaranteed by the full faith and credit of the U.S. Treasury—which, unlike some tenants, has never defaulted on its scheduled payments.

Converting the value of your business into an investment will probably be a complicated process. Harry Browne did not specifically recommend putting businesses in your VP, but it sounds as though your are confident about the future prospects of your cash flow. If you are concerned about the tax liability from an immediate sale, you could offer to negotiate a lease-to-own arrangement spread over several years or more. My parents sold their house in a small town that way to a trustworthy young couple who did not have enough in savings for a traditional 20% down payment and mortgage. I have wondered why such arrangements have not been more common.
“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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jhogue
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Re: Moving into the PP

Post by jhogue » Tue May 07, 2019 8:46 am

boglerdude wrote:
Mon May 06, 2019 9:27 pm
If the US issued 100 year bonds, do you still do 25% weighting? whats the math
If the Treasury sold 100 year bonds, I would buy them according to a 35/15 rebalance band strategy. The advantage of 100 yr. T bonds would be twofold:

1. The math is simple, since we know 100 yr. T-bonds would be more volatile than 30 yr. T-bonds: Buy low / Sell high.
2. Lower transaction costs: Sell and replace after 30 years, instead of the current 10 years.


Trump's Secretary of Treasury Mnuchin actually floated the idea of 100 yr. T-bonds to finance infrastructure. Wall Street bankers opposed the idea, perhaps out of legitimate concerns about the structure and liquidity of a new 100 year market; more likely out of self-interest (in my view).
“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!"
pmward
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Re: Moving into the PP

Post by pmward » Tue May 07, 2019 9:57 am

jhogue wrote:
Tue May 07, 2019 8:46 am
boglerdude wrote:
Mon May 06, 2019 9:27 pm
If the US issued 100 year bonds, do you still do 25% weighting? whats the math
If the Treasury sold 100 year bonds, I would buy them according to a 35/15 rebalance band strategy. The advantage of 100 yr. T bonds would be twofold:

1. The math is simple, since we know 100 yr. T-bonds would be more volatile than 30 yr. T-bonds: Buy low / Sell high.
2. Lower transaction costs: Sell and replace after 30 years, instead of the current 10 years.


Trump's Secretary of Treasury Mnuchin actually floated the idea of 100 yr. T-bonds to finance infrastructure. Wall Street bankers opposed the idea, perhaps out of legitimate concerns about the structure and liquidity of a new 100 year market; more likely out of self-interest (in my view).
That would sure put them closer to risk parity with stocks and gold. Probably a bit more volatile than stocks and about even with gold, as a rough guesstimation.
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jhogue
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Re: Moving into the PP

Post by jhogue » Tue May 07, 2019 12:45 pm

Longer maturity bonds should certainly have greater volatility at the far end of the yield curve, though it would hard to pinpoint just how much it would be.

Should the U.S. continue down a deflationary track, longer term bonds might some day be the only way to avoid negative interest rate bonds, like some European governments are currently experiencing.
“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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dualstow
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Re: Moving into the PP

Post by dualstow » Tue May 07, 2019 12:57 pm

ppnewbie wrote:
Fri May 03, 2019 10:39 pm
I have a decent sized investment portfolio that is pretty much all stocks. I am in the process of allocating some of the portfolio into gold with new cash.
Interesting. Usually, people seek out the PP after stocks crash, not before, which is unfortunate. We won't know until a long time from now, but this seems like a fortuitous time to have some non-stock allocation, with the pp being a good example*. I think you might be wiser than the average bear.I mean it.
Best of luck.

*Of course I've been thinking that since 2013.

Ransomware Keeps Baltimore Locked Up 🔒
pmward
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Re: Moving into the PP

Post by pmward » Tue May 07, 2019 1:00 pm

dualstow wrote:
Tue May 07, 2019 12:57 pm
ppnewbie wrote:
Fri May 03, 2019 10:39 pm
I have a decent sized investment portfolio that is pretty much all stocks. I am in the process of allocating some of the portfolio into gold with new cash.
Interesting. Usually, people seek out the PP after stocks crash, not before, which is unfortunate. We won't know until a long time from now, but this seems like a fortuitous time to have some non-stock allocation, with the pp being a good example*. I think you might be wiser than the average bear.I mean it.
Best of luck.

*Of course I've been thinking that since 2013.
I agree. The best time to invest in a PP is during a long run of prosperity.
ppnewbie
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Re: Moving into the PP

Post by ppnewbie » Tue May 07, 2019 1:16 pm

jhogue wrote:
Tue May 07, 2019 8:21 am
ppnewbie:

Your residential real estate is a business, not an investment. The market for your business is highly localized and relatively ill-liquid—which means your principal is not guaranteed and cannot be converted into cash overnight. Also, the income stream from your rental is not guaranteed. It carries the risks that your tenants don’t pay or the property sits vacant while you continue to pay taxes and upkeep. Those kinds of risks explain why you are presently making 10% in rent, versus about 3% for Treasury bonds.

Long term Treasury bonds (LTTs) are an investment, not a business. The market for LTT’s is global and highly liquid—you could sell any amount you hold and convert its value to cash in 24-48 hours. The principal and the income stream from interest payments is guaranteed by the full faith and credit of the U.S. Treasury—which, unlike some tenants, has never defaulted on its scheduled payments.

Converting the value of your business into an investment will probably be a complicated process. Harry Browne did not specifically recommend putting businesses in your VP, but it sounds as though your are confident about the future prospects of your cash flow. If you are concerned about the tax liability from an immediate sale, you could offer to negotiate a lease-to-own arrangement spread over several years or more. My parents sold their house in a small town that way to a trustworthy young couple who did not have enough in savings for a traditional 20% down payment and mortgage. I have wondered why such arrangements have not been more common.
I am coming to the same conclusion - I need to view the cash flow real estate investments as either part of a variable portfolio or as a seperate business. Thanks!
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ochotona
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Re: Moving into the PP

Post by ochotona » Tue May 07, 2019 1:17 pm

pmward wrote:
Tue May 07, 2019 1:00 pm
dualstow wrote:
Tue May 07, 2019 12:57 pm
ppnewbie wrote:
Fri May 03, 2019 10:39 pm
I have a decent sized investment portfolio that is pretty much all stocks. I am in the process of allocating some of the portfolio into gold with new cash.
Interesting. Usually, people seek out the PP after stocks crash, not before, which is unfortunate. We won't know until a long time from now, but this seems like a fortuitous time to have some non-stock allocation, with the pp being a good example*. I think you might be wiser than the average bear.I mean it.
Best of luck.

*Of course I've been thinking that since 2013.
I agree. The best time to invest in a PP is during a long run of prosperity.
At the very top! Maybe like right now. Good move if you're within 5 years of retirement. The 60/40 took 3.5 years to get back to even after the Tech Crash.
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Re: Moving into the PP

Post by ppnewbie » Tue May 07, 2019 1:20 pm

sophie wrote:
Mon May 06, 2019 8:26 pm
pmward, you're right about EDV having more oomph than TLT, but...beware holding it in a taxable account. It's had some giant December payouts in the past. If you instead buy a zero coupon Treasury directly, realize that you owe taxes on the interest as it accrues, but can't access said interest until you sell.

ppnewbie, if you're nearing retirement maybe you can also consider how complex vs simple you want your portfolio to be? That's a consideration too, that may eventually be more important than optimizing CAGR. Also, all the more reason to avoid selling appreciated stock shares, if you expect your tax bracket to go down to 12%-land in the near future.
Quick question about TLT (of possibly EDV). Do you just buy one of those and just rebalance as the PP prescribes. How does TLT replicate my buying 30 year treasury bonds and selling after 10 years (hope I have that correct) during the periodic rebalance.
ppnewbie
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Re: Moving into the PP

Post by ppnewbie » Tue May 07, 2019 1:25 pm

ochotona wrote:
Tue May 07, 2019 1:17 pm
pmward wrote:
Tue May 07, 2019 1:00 pm
dualstow wrote:
Tue May 07, 2019 12:57 pm


Interesting. Usually, people seek out the PP after stocks crash, not before, which is unfortunate. We won't know until a long time from now, but this seems like a fortuitous time to have some non-stock allocation, with the pp being a good example*. I think you might be wiser than the average bear.I mean it.
Best of luck.

*Of course I've been thinking that since 2013.
I agree. The best time to invest in a PP is during a long run of prosperity.
At the very top! Maybe like right now. Good move if you're within 5 years of retirement. The 60/40 took 3.5 years to get back to even after the Tech Crash.
The Shiller CAPE is at 30. Money printing, Record debt levels, etc, etc....Definitely has me freaked out.
ppnewbie
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Re: Moving into the PP

Post by ppnewbie » Tue May 07, 2019 1:27 pm

ppnewbie wrote:
Tue May 07, 2019 1:25 pm
ochotona wrote:
Tue May 07, 2019 1:17 pm
pmward wrote:
Tue May 07, 2019 1:00 pm


I agree. The best time to invest in a PP is during a long run of prosperity.
At the very top! Maybe like right now. Good move if you're within 5 years of retirement. The 60/40 took 3.5 years to get back to even after the Tech Crash.
The Shiller CAPE is at 30. Money printing, Record debt levels, etc, etc....Definitely has me freaked out. I am also just ready to "set it and forget it" (other than rebalancing ofcourse).
pmward
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Re: Moving into the PP

Post by pmward » Tue May 07, 2019 1:31 pm

ppnewbie wrote:
Tue May 07, 2019 1:20 pm
sophie wrote:
Mon May 06, 2019 8:26 pm
pmward, you're right about EDV having more oomph than TLT, but...beware holding it in a taxable account. It's had some giant December payouts in the past. If you instead buy a zero coupon Treasury directly, realize that you owe taxes on the interest as it accrues, but can't access said interest until you sell.

ppnewbie, if you're nearing retirement maybe you can also consider how complex vs simple you want your portfolio to be? That's a consideration too, that may eventually be more important than optimizing CAGR. Also, all the more reason to avoid selling appreciated stock shares, if you expect your tax bracket to go down to 12%-land in the near future.
Quick question about TLT (of possibly EDV). Do you just buy one of those and just rebalance as the PP prescribes. How does TLT replicate my buying 30 year treasury bonds and selling after 10 years (hope I have that correct) during the periodic rebalance.
You could. I buy the treasuries myself to save on fees, since it's easy enough to do. If you went into the open market and split your proceeds evenly between bonds issued every year from 2009-today you would have a pretty close approximation of TLT. But that was a bit too complicated for me, so I just buy all new at auction. It really all evens out in the end, as you would pay more/less for the past bonds based upon the changes in yield from date of issue to today. But if you want to simplify and don't mind a small ER then TLT or EDV are fine instruments.
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