How liquid should the cash component of the PP be?

[SwedishPP]

Hello, and firstly thanks for all the good advice that is already posted in this forum.

I live in Sweden and am planning to start a Permanent Portfolio for my savings (excluding emergency money, which I keep in a savings account).

I have a question about the cash part of the asset allocation in particular. Harry Browne's recommendation of a Treasury bill money market fund doesn't work in Sweden as we don't have any (there are plenty of money market funds but they all hold large amounts of commercial paper and so their par value is not guaranteed).

I have a number of options, including a savings account with the Swedish National Debt Office - see https://en.riksgalden.se/savings/National-debt-savings/, a savings account with a safe bank, CDs at a safe bank or buying Swedish Treasury bills on the market (unfortunately that would require paying commission)*. The Swedish deposit guarantee scheme is run by the National Debt Office, which is required to pay out within 20 days of a bank bankruptcy (or instruction from the bank regulator).

My question is how liquid should the cash allocation be?

Is it worth putting some of the cash allocation in CDs or savings accounts with notice periods or a restricted number of withdrawals to get higher interest? If so, how much should be kept in demand deposits in case it's needed (e.g. for rebalancing)?


*This cost together with very low Treasury bill interest rates at the moment actually makes the National Debt Savings account a much better deal without taking on any credit risk.

[Lone Wolf]

I have a number of options, including a savings account with the Swedish National Debt Office - see https://en.riksgalden.se/savings/National-debt-savings/, a savings account with a safe bank, CDs at a safe bank or buying Swedish Treasury bills on the market (unfortunately that would require paying commission)*. The Swedish deposit guarantee scheme is run by the National Debt Office, which is required to pay out within 20 days of a bank bankruptcy (or instruction from the bank regulator).

Does this mean that your bank accounts are backed by the "full faith and credit" of the Swedish government?  (Whether this is true in the United States is somewhat hazy and untested.)

[SwedishPP]

Yes, the Swedish government guarantees up to €100,000 per person and bank (the amount is in Euros because it is an amount that all EU members have to guarantee - Sweden still has its own currency). There is no separate deposit insurance fund (e.g. FDIC) and other banks are not required to pay for bailing out a competitor's depositors as they are in the UK, so the "full faith and credit" phrase is probably right. And even before deposit insurance was introduced in 1996 the Swedish government has nationalised banks that fall below minimum capital requirements to protect savers and punish shareholders.

[Storm]

I think for PP purposes, money market funds, CDs, and other not immediately liquid products are fine.  What might be important to you is to keep enough of your cash allocation in a liquid account for rebalancing purposes.

So, you might keep 75% of your cash allocation in a 1 year CD ladder with maturities every month, and the remaining 25% in an insured savings account for rebalancing purposes.

A lot of us in the US use Series I Savings Bonds from the US Treasury, which have a 1 year minimum holding period, but pay interest at the rate of inflation.  The general idea is that if we had to rebalance, we'd do so from our other cash accounts, so as to not have to liquidate the more preferred (higher yield) savings vehicles.

[Storm]

With regards to bank insurance, in the US, the FDIC insures for each person up to 3 types of accounts: single accounts, retirement accounts, and revokable trusts, up to $250,000 each.  So, if you have a lot of cash at one institution and you want to make sure it is insured, you can setup accounts of each different type:

For example, let's say I have $750,000 at one bank:

• $250,000 in one savings account.
• $250,000 in a self-employed pension or other retirement account.
• $250,000 in a revokable trust account with myself as the sole beneficiary.

All of the above are insured for a total of $750,000 insured value.

Revokable trusts have a $250,000 insured amount per person, so if you have 2 or more people as beneficiaries to a revokable trust the amount goes up.

I still think there is a huge benefit to be had from diversification among multiple financial institutions.  I mean, even though the FDIC insurance is there, you don't want to have to use it...

But, if you do have a lot of cash to manage (I wish I had that problem ) this can be an effective way of maintaining insurance while banking with your preferred bank.

More info here:  http://www.fdic.gov/deposit/deposits/in ... rship.html

[SwedishPP]

With regards to bank insurance, in the US, the FDIC insures for each person up to 3 types of accounts: single accounts, retirement accounts, and revokable trusts, up to $250,000 each.  So, if you have a lot of cash at one institution and you want to make sure it is insured, you can setup accounts of each different type:

That's interesting. Ironically, the only type of account not insured in the Swedish system is a retirement savings account.

I absolutely agree that it's preferable never to have to use deposit insurance - I had a high-interest savings account with Kaupthing Bank (remember them?). It turned out that the Swedish central bank lent the Icelandic government the money needed to pay back Swedish depositors but it was still a nasty shock.

With that in mind I've been reading the annual reports of banks I'm considering saving with and will be choosing safe ones with cautious lending and plenty of capital.

[Tortoise]

But, if you do have a lot of cash to manage (I wish I had that problem ) this can be an effective way of maintaining insurance while banking with your preferred bank.

You mean your ATM receipts don't look like this?

[Storm]

Nice, Tortoise!  I take it that is not one of your personal savings accounts...  How many people with $100K actually take cash out of ATMs?

[Tortoise]

Nice, Tortoise!  I take it that is not one of your personal savings accounts...  How many people with $100K actually take cash out of ATMs?

You mean $100M? Take another gander at the receipt

I wonder if CapitalOne dings that person with a low-balance fee whenever the balance dips below $100M...

[Lone Wolf]

You mean your ATM receipts don't look like this?

It looks like you or one of your minions has been going through my garbage.  Your posting of an ATM receipt from one of my $100 million "petty cash" accounts is a gross violation of my privacy.

This so upset me that I had to board my private WolfJet to New York City and order a few Golden Opulence Sundaes from Serendipity to make myself feel better.

[Ad Orientem]

But, if you do have a lot of cash to manage (I wish I had that problem ) this can be an effective way of maintaining insurance while banking with your preferred bank.

You mean your ATM receipts don't look like this?

Holy crap!  Who in their right mind keeps a cool $100 M in a bank account?

[Gumby]

But, if you do have a lot of cash to manage (I wish I had that problem ) this can be an effective way of maintaining insurance while banking with your preferred bank.

You mean your ATM receipts don't look like this?

Holy crap!  Who in their right mind keeps a cool $100 M in a bank account?

Probably a lottery winner not knowing what to do next.

[Ad Orientem]

Probably a lottery winner not knowing what to do next.

That is a problem I wouldn't mind having.

[Tortoise]

Holy crap!  Who in their right mind keeps a cool $100 M in a bank account?

Probably a lottery winner not knowing what to do next.

Could be, but the address on the slip says East Hampton, NY. Some of the richest and most powerful people in the world have vacation homes in the Hamptons.

[MachineGhost]

I am very curious how the HBPP would have performed during the Swedish banking crisis in the early 1990's where short term interest rates shot up to as high as 500% as a run on the krona occured.  Do you have any historical data to be able to state with certainty what happened with the HBPP?

MG

Hello, and firstly thanks for all the good advice that is already posted in this forum.

I live in Sweden and am planning to start a Permanent Portfolio for my savings (excluding emergency money, which I keep in a savings account).

I have a question about the cash part of the asset allocation in particular. Harry Browne's recommendation of a Treasury bill money market fund doesn't work in Sweden as we don't have any (there are plenty of money market funds but they all hold large amounts of commercial paper and so their par value is not guaranteed).

I have a number of options, including a savings account with the Swedish National Debt Office - see https://en.riksgalden.se/savings/National-debt-savings/, a savings account with a safe bank, CDs at a safe bank or buying Swedish Treasury bills on the market (unfortunately that would require paying commission)*. The Swedish deposit guarantee scheme is run by the National Debt Office, which is required to pay out within 20 days of a bank bankruptcy (or instruction from the bank regulator).

My question is how liquid should the cash allocation be?

Is it worth putting some of the cash allocation in CDs or savings accounts with notice periods or a restricted number of withdrawals to get higher interest? If so, how much should be kept in demand deposits in case it's needed (e.g. for rebalancing)?


*This cost together with very low Treasury bill interest rates at the moment actually makes the National Debt Savings account a much better deal without taking on any credit risk.

[SwedishPP]

I am very curious how the HBPP would have performed during the Swedish banking crisis in the early 1990's where short term interest rates shot up to as high as 500% as a run on the krona occured.  Do you have any historical data to be able to state with certainty what happened with the HBPP?

MG

An interesting question. I haven't run any numbers but the data should be fairly easy to find.

From what I remember off the top of my head (from my economics textbook, I was too young to know what was going on in 1992!) shares fell but not catastrophically, and recovered quite fast.

Government bond yields were high throughout the 1980s because of inflation, which entered double figures towards the end of the decade and had also been in the teens in 1980. Yields did rise somewhat (i.e. the market value of the bonds fell) during the crisis IIRC, but sovereign solvency was never in question, it was the banks' bad loans and the government's stubborn refusal to unpeg the krona from the Ecu (the forerunner of the Euro) that caused the grief.

Cash would have been safe unless you panicked and sold treasury bills when they were yielding 40% or more (market interest rates never got much higher than that - the central bank's policy rate became a bit of a fantasy as they desperately tried to hold the peg). Bust banks were nationalised so as far as I know no savers lost so much as an öre (penny). Whether it returned a positive real interest rate after inflation is another matter, but inflation subsided quite quickly once the currency floated and the central bank began targeting inflation.

Gold would presumably have generated a substantial one-off gain when the krona crashed out of its peg and devalued by about 20% against the Ecu.

So, working from memory I think the total portfolio would have more or less held its value, with falls in shares and bonds compensated by the gold. Rebalancing would then have led to strong performance over the next decade as bond yields fell sharply and the stockmarket began its pre-IT crash boom.

If I have some spare time I might well dig out the numbers and see what happened - it would be interesting and instructive.

[MachineGhost]

Indeed.  The more I learn, the more I'm coming to the conclusion that the majority of all financial blowups are always due to pegging the currency to something else, i.e. no outlet valve for unproductive inflation.  Even in the EU where there are no member's national currencies anymore, the member's bonds take up the slack that a free floating currency would have.  Hence, the woes with the PIIGS.

It will be interesting to see if the Renimbi will eventually collapse also.
MG

If I have some spare time I might well dig out the numbers and see what happened - it would be interesting and instructive.