How do you invest the Cash portion?

Discussion of the Cash portion of the Permanent Portfolio

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vnatale
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Re: How do you invest the Cash portion?

Post by vnatale » Wed Dec 04, 2019 8:46 pm

jhogue wrote:
Mon Nov 25, 2019 2:36 pm

dualstow,

Looking in the rear view mirror, your ten year ladder of CDs must seem like a sure-fire-no-brainer-strategy for any amount of cash up to the $250,000 FDIC limit. Low inflation and Trump’s tax cut didn’t hurt either.

Here’s the problem as I see it:

Domestic STTs and ITTs are now stuck in a lower-bound range of 1.5 - 1.8%, and trillions in negative yielding euro and Swiss franc bonds are piling ever higher in Europe. There is no way that you can build a new ladder of of ten year CDs going forward that will bring you the after-inflation and after-tax yield your old CD ladder did. Interest rates can stay the same or they can rise, but they cannot continue to fall at the rate they did over the last decade for the next decade.
You bringing up FDIC limit brings up something I'd like clarification. SPIC limit.

I find the following: "SIPC coverage, however, has a limit. It’s capped at $500,000 per customer, with an exception of cash holdings, for which the limit is $250,000."

I'm assuming that the $500,000 limit would apply to all one would hold at, say, Vanguard? And, a money market fund would NOT be considered a cash holding? How does buying Treasury Bills via Vanguard brokerage get covered? Just part of that $500,000?

Vinny
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Re: How do you invest the Cash portion?

Post by vnatale » Wed Dec 04, 2019 8:52 pm

drumminj wrote:
Wed Nov 27, 2019 1:07 pm
jhogue wrote:
Wed Nov 27, 2019 10:10 am
Why do you want to buy a 5 year FDIC-backed CD, which is illiquid (as you yourself described it) and not as safe as a T-bill?
I buy both, to be honest. For "deep cash", as folks tend to call it, I have some 5-yr CDs fetching > 3%. Yes, I'm chasing yield, but I can withdraw the money immediately (for a small penalty). It's a bit less accessible than cash in an FDIC-insured account, but for some of my cash, the difference in yield is worth it.

I also have a bunch of 13-week treasuries, cash in a bank account, and cash on hand. There's some risk with FDIC, but there's also risk with SIPC (possibly more?) if you're holding STTs with Fidelity, and there's risk with TreasuryDirect (as discussed on this forum).

Pick your poison!
I JUST asked a question seeking clarification regarding SPIC. I assume you see the same risk holding them with Vanguard (or, anyone else)? Outside of TreasuryDirect, how else can you buy / hold them? I assume you can mitigate the SPIC risk by holding them in more than one brokerage (as advised by Craig and Tex's book). Please elaborate on any other SPIC risks you see.

Thanks

Vinny
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Re: How do you invest the Cash portion?

Post by vnatale » Wed Dec 04, 2019 8:55 pm

drumminj wrote:
Wed Nov 27, 2019 9:08 pm
jhogue wrote:
Wed Nov 27, 2019 2:48 pm
11/27/19
drumminj,

I am not picking your poison because I agree with Harry Browne and craigr that all financial risks are not created equal:
That's fair, and to be clear I'm not trying to convince anyone.

I disagree though that there are no "FDIC limits to worry about". Your MM funds are held by a financial institution (in "street name", possibly even?) which may become insolvent, halt withdrawls, etc. You have insurance issues there, no? Asking sincerely, is this less risky than FDIC?

Treasuries held directly? Sure. Treasuries held on your behalf? Less so. Treasury MM? Also has risks.

Again, not trying to convince anyone to do what I do -- just trying to be clear about the risks here in the margins.
Sorry to keep hounding about this but I've never yet directly owned any bond outside of a fund and never really thought about SPIC until just recently.

Does buying Treasury bills via Vanguard brokerage constitute "Treasuries held directly"?

Vinny
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Re: How do you invest the Cash portion?

Post by vnatale » Wed Dec 04, 2019 9:02 pm

dualstow wrote:
Fri Nov 29, 2019 3:29 am
Pet Hog wrote:
Fri Nov 29, 2019 1:57 am

I have no problem with cash being defined as up to five-year treasuries/CDs, but I am in the accumulation phase. I can understand someone in the withdrawal phase having a different opinion.
I’m accumulating, too. But, imagine you suddenly need to use cash at the same time that five-year treasuries sharply decrease in value. How mature is that ladder? How many of those treasuries can you really sell in a pinch without much of a loss?

It’s not the same as a treasury mm, from which you can withdraw what you need and a share = $1. If you’re really going to go five years out, maybe you had better go with those CDs with low penalties.
Totally understand what you are saying regarding the potential loss. Does anyone know the sharpest drop in Treasury Bills? Just went here: https://www.treasury.gov/resource-cente ... &year=2008 to look at what happened in 2008.

HUGE drop for 1 YR Treasury Bills

01/02/08 started at 3.17%. 12/31/08 ended at 0.37%. A drop of 2.7%! Of course, an EXTREME. But NO guarantees we don't experience the same (or WORSE!) again.

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Re: How do you invest the Cash portion?

Post by dualstow » Thu Dec 05, 2019 4:28 am

That’s a drop in yield, isn’t it? Meaning the value of those bills went up.
Even when the yield goes up and the t-bill price goes down, I’ll take the minimal loss vs that in other holdings.
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Re: How do you invest the Cash portion?

Post by jhogue » Thu Dec 05, 2019 9:00 am

Vinny,

Remember that if you held your short term T-bill to maturity, you got your full principal back plus your original stated interest.

Note too in the 2008 example you cited that when US interest rates fell, the principal value of the 30 year T-bonds in the HBPP rose dramatically. You always have to consider how the whole portfolio as a whole reacts, not just one asset.
“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: How do you invest the Cash portion?

Post by mathjak107 » Fri Dec 06, 2019 3:48 am

for 2019 one of the worst places to keep cash was the permanent portfolio's own treasury bond fund


'Permanent Portfolio Treasury (PRTBX): Expense ratio: 0.66%. Management fee: 1.19%. After expenses, the 5 year return is 0.33%, meaning your fees are far higher than the fund's returns."

https://finance.yahoo.com/news/mutual-f ... 01586.html
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Re: How do you invest the Cash portion?

Post by dualstow » Fri Dec 06, 2019 6:22 am

jhogue wrote:
Thu Dec 05, 2019 9:00 am
Vinny,

Remember that if you held your short term T-bill to maturity, you got your full principal back plus your original stated interest.
...
Right, and the same goes for those 5-year notes. But, if you have to sell suddenly, one could do worse than t-bills, or VUSXX (treasury money market).
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Re: How do you invest the Cash portion?

Post by sophie » Fri Dec 06, 2019 9:52 am

vnatale wrote:
Wed Dec 04, 2019 8:55 pm
drumminj wrote:
Wed Nov 27, 2019 9:08 pm
jhogue wrote:
Wed Nov 27, 2019 2:48 pm
11/27/19
drumminj,

I am not picking your poison because I agree with Harry Browne and craigr that all financial risks are not created equal:
That's fair, and to be clear I'm not trying to convince anyone.

I disagree though that there are no "FDIC limits to worry about". Your MM funds are held by a financial institution (in "street name", possibly even?) which may become insolvent, halt withdrawls, etc. You have insurance issues there, no? Asking sincerely, is this less risky than FDIC?

Treasuries held directly? Sure. Treasuries held on your behalf? Less so. Treasury MM? Also has risks.

Again, not trying to convince anyone to do what I do -- just trying to be clear about the risks here in the margins.
Sorry to keep hounding about this but I've never yet directly owned any bond outside of a fund and never really thought about SPIC until just recently.

Does buying Treasury bills via Vanguard brokerage constitute "Treasuries held directly"?

Vinny
This is actually a really good question.

A treasury bill or bond should be very safe, so there should be no problem selling it or collecting the promised bond amount + interest on maturity. However, in order to get that cash to your checking account so you can use it to pay bills, it has to go by way of the brokerage core fund. I have no idea how safe those are...presumably pretty safe, but if there were ever a panic in the money markets I assume those core funds could be affected. A frozen core fund would be a disaster, as it would effectively freeze your entire account.

Harry Browne advocated getting a Treasury MM with direct checkwriting privileges, and that's how his own finances were set up. He would write a check from the treasury MM once a month to fund his living expenses, because he distrusted banks to the extent that he wouldn't keep more than one month expenses in one. Unfortunately, neither Vanguard nor Fidelity provide checkwriting from an individual fund - only from an account. I don't know where you'd go to find such a beast.
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Re: How do you invest the Cash portion?

Post by dualstow » Fri Dec 06, 2019 2:04 pm

sophie wrote:
Fri Dec 06, 2019 9:52 am
Unfortunately, neither Vanguard nor Fidelity provide checkwriting from an individual fund - only from an account. I don't know where you'd go to find such a beast.
Sophie, I have checkwriting from many of my Vanguard funds, even a long-term muni bond fund.
There was a hiccup during some reshuffling- consolidation of the indy stocks and the mutual funds, which they used to keep in separate sections -- but I merely had to reapply for checks and they came in the mail.
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Re: How do you invest the Cash portion?

Post by jhogue » Fri Dec 06, 2019 3:27 pm

Vinny,

Financial safety is reinforced through diversity and liquidity. T-bills held in a brokerage account at Vanguard are safe enough for “normal” times because Vanguard is a big active player in the enormous world-wide secondary market for Treasurys. Unless there is a terrific disruption in this market your money will always be completely liquid. Nevertheless, you might eventually consider diversifying your holdings of Treasury –issued securities as follows:

1. Federal Reserve notes (ie., greenbacks yielding 0% interest) kept in a safe place in your home.

2. A TreasuryDirect account in your name.

3. Paper I-bonds with registered serial numbers purchased with your annual tax refund.

Any of these will diversify your holdings away from a 100% T-bill position in a brokerage account. But understand that each of these methods poses different risks from T-bills held in a brokerage account. That is the way risk works.
“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: How do you invest the Cash portion?

Post by drumminj » Fri Dec 06, 2019 9:56 pm

jhogue wrote:
Fri Dec 06, 2019 3:27 pm
T-bills held in a brokerage account at Vanguard are safe enough for “normal” times because Vanguard is a big active player in the enormous world-wide secondary market for Treasurys. Unless there is a terrific disruption in this market your money will always be completely liquid.
I don't mean to keep harping on the same thing, but it seems you're overlooking the aspect of relying on a third party here. Sure, the treasury market is liquid, but that doesn't mean that vanguard will be solvent. Presumably these treasuries are held in "street name", like all other instruments at a brokerage, and thus aren't in your direct possession and are at risk if there's an issue with the institution itself, which is where SIPC comes in. Is this not the case treasuries (vs stocks)?

"In normal times", sure, but if you're talking about FDIC and liquidity with a bank/MM account/CD, it seems you should be considering similar scenarios with your brokerage -- Vanguard or Fidelity or Schwab or wherever else. (I'll admit that bank receiverships are far more frequent than brokerage houses).

I agree with you on the tiers of possession and liquidity, and my intent here is just to suggest that bank accounts and CDs fall upon this same continuum, and in normal times where banks remain solvent, don't have drastically different characteristics from treasuries, aside from often paying a better rate. If I need liquidity in "normal" times, I can liquidate a treasury through my broker just as easily as I can break a CD (which I've done a few times, and takes no more than a day or two).

In "abnormal" times like the 2008 "crisis", I agree treasuries are the safer play.
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