401 K Lemonade

Discussion of the Bond portion of the Permanent Portfolio

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cowboyhat
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401 K Lemonade

Post by cowboyhat » Tue Nov 16, 2010 9:40 pm

About 1/2 my money is in my 401K account, so even with dedicating 100% of my IRA to long term bonds I'm not able to buy enough long term bonds for a classical PP. However the 401K plan offers an Aggregate Bond Index Fund, which has a duration of 5.5 years.

For now, my choice is either to underweight long term bonds or to figure out how to make lemonade out of the aggregate bond index. One recipe that occurred to me was to combine long term duration I can't get with cash duration I can get in my 401K anyway and substitute the aggregate bond fund.

For example, say I'm looking for $10,000 of 25 year bond duration.

Hypothetically if an investor bought $10,000 of 25 year duration and $40,000 of 1 year duration, would that give the investor $50,000 of 5.8 year duration?

If so, could I therefore invest $50,000 that I would normally hold as cash in my 401k in the 5.5 year duration Aggregate Bond Index to generate a virtual equivalent of $10,000 of 25 year duration and $40,000 of 1 year duration?
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MediumTex
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Re: 401 K Lemonade

Post by MediumTex » Tue Nov 16, 2010 9:44 pm

Why not put half the 401(k) money in the "stable value" fund and the other half in an S&P 500 fund?

Wouldn't that work?

BTW, does the plan have a "brokerage window"?  Normally, it is not well-publicized.
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Re: 401 K Lemonade

Post by foglifter » Tue Nov 16, 2010 11:13 pm

Long-term Treasuries can not be "imitated" by a bigger amount of intermediate bonds because unlike shorter-duration bonds they also serve as a safe haven - 2008 was a remarkable example. Also, aggregate bond index contains all kinds of bonds including corporates and junk bonds, which may sometimes behave like equities. :

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Thanks to MediumTex's advice I split my LTT portion 50/50 between EDV in IRA and a total bond fund in my 401(k). This might be something feasible for you. Not an ideal allocation, but EDV significantly cushions the volatility of non-Treasury components of the aggregate bond fund and makes up for shorter duration of the overall index.
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cowboyhat
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Re: 401 K Lemonade

Post by cowboyhat » Wed Nov 17, 2010 5:25 am

The bond choices are Pimco Total Return, the Aggregate Index Fund, and a money market fund that holds a variety of instruments. Unfortunately, there's no stable value fund.

I'll ask about a brokerage window, although I'm pretty sure that is not an option. And I'll check out EDV.

The matching fund program provided by my employer makes contributions to the 401k too good to pass up, but unfortunately it is designed for people who want to be heavily invested in stocks.

Thanks.
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Re: 401 K Lemonade

Post by MediumTex » Wed Nov 17, 2010 7:11 am

cowboyhat wrote: The bond choices are Pimco Total Return, the Aggregate Index Fund, and a money market fund that holds a variety of instruments. Unfortunately, there's no stable value fund.
The money market fund would work fine for the cash piece.
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Re: 401 K Lemonade

Post by foglifter » Wed Nov 17, 2010 11:50 am

cowboyhat wrote: The matching fund program provided by my employer makes contributions to the 401k too good to pass up, but unfortunately it is designed for people who want to be heavily invested in stocks.
If you can't do maximum contributions, then you need to contribute at least enough to capture a full employer match. Are you contributing to an IRA also? Your choices are almost unlimited in IRA.

PIMCO Total Return is a great fund, although I wish the ER were lower.
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Re: 401 K Lemonade

Post by cowboyhat » Thu Nov 18, 2010 7:23 pm

Ultimately the problem I have is that my 401k savings are growing faster than my savings outside my 401k account, and there are only two investment options that fit a PP in the 401k plan, one of which is cash. Plus I want to keep some of my savings outside my 401k in cash where I can get to it on rainy days.

I guess that means holding lots of cash, or starting a VP inside my 401k.
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Re: 401 K Lemonade

Post by foglifter » Thu Nov 18, 2010 8:44 pm

cowboyhat wrote: Ultimately the problem I have is that my 401k savings are growing faster than my savings outside my 401k account, and there are only two investment options that fit a PP in the 401k plan, one of which is cash. Plus I want to keep some of my savings outside my 401k in cash where I can get to it on rainy days.
This is unfortunately a common problem since employer-sponsored plans have much higher contribution limits than IRAs. It would be fair to give investors a freedom of spreading their contributions among employer-based, business-based and personal accounts and only specify the total limit of annual contributions. As you can guess this won't happen anytime soon. ;D

BTW, in case you don't know - you can treat your rainy day cash as part of your PP.
cowboyhat wrote: I guess that means holding lots of cash, or starting a VP inside my 401k.
There is a third option - taxable brokerage account. TSM is very tax-efficient, so you might consider having a part of your equity bucket in the taxable account. You can also keep a part of your gold bucket in a closed-end fund (e.g. GTU or PHYS), therefore getting the same capital gain tax treatment as mutual funds. Unfortunately Gold ETFs don't work that way - you'd be hit with a collectibles tax when you sell.

Using some 401(k) space for VP is fine, I would just make sure that using this space is not what makes me start VP. You should start VP if you are inclined so, you have some free money left after you contribute enough to your PP and you understand risks of VP.
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Re: 401 K Lemonade

Post by Storm » Fri Nov 19, 2010 1:49 pm

I have a taxable brokerage account, which is actually larger than my 401k.  The reason is that my employer lets me buy up to $25K a year in company stock at 15% discount, which I look at as free money and max it out.  Unfortunately, it does sit in a non-tax-advantaged account.

But, I end up with the same issue, just on the opposite side - I have bonds in my 401k and some cash, but I can't fit all my cash in the 401k.  For the part that doesn't fit outside I am able to buy I Savings Bonds from the Treasury and that takes care of some of it.  The rest is just FDIC insured savings accounts for rainy-day funds and other emergencies.
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Re: 401 K Lemonade

Post by moda0306 » Fri Nov 19, 2010 2:14 pm

Storm,

While that's quite the deal (15% off), there are some risks involved, which I'm sure you know.

You ever think of trading options of that stock to limit your exposure to sharp downside?  I'm not sure how well this works, but I'm just thinking you're maybe leaving yourself with a little too much exposure to one stock, even at a 15% discount.

Also, when can you sell the stock?
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Re: 401 K Lemonade

Post by foglifter » Fri Nov 19, 2010 2:52 pm

Usually ESPP allows you to sell the stock right after it was purchased at the end of a 6-months accumulation period. A friend of mine does just that - never waits even a day.
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Re: 401 K Lemonade

Post by Storm » Tue Nov 23, 2010 8:31 pm

Interesting, I haven't thought of buying options to protect downside risk.  Foglifter is correct - I am able to sell the stocks right after I buy them at an immediate profit, if I so desire.  I avoid this because of the short-term capital gains tax.  What I do instead is sell the stocks that are over 1 year old so it qualifies for long-term capital gains.  So, I'm basically holding the stock for 1 year.  Right now I think the value of that stock in my portfolio is around $29K or so - it's not a huge percentage of my portfolio.

It does seem to provide a function of forcing me to save more money, which is always a good thing!  ;D
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