UK Cash questions (basic...)

Discussion of the Cash portion of the Permanent Portfolio

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UK Cash questions (basic...)

Post by brookter » Sun Dec 05, 2010 9:35 am

(Warning: may contain naivety and ignorance...)

I've recently started using the PP style and I think I'm coming to terms with the basics. I now have a portfolio which is broadly speaking 25% gold, 25% 30yr gilts, 25% stocks and 200% cash (I have a large cash element as an emergency fund - how and when, or even if, I migrate some of that 'surplus' over to the PP is a question for another day...)

What I'm not sure about is how to hold the cash element, particularly as most of the discussion I've read is US-centric and I'm not sure how it translates into UK terms.

The cash holdings are at the moment mainly in Cash ISAs (tax-free 2.75%), Premium Bonds (tax-free, never won anything  :() and 'ordinary' immediate access savings accounts (taxable 2.8%). All the cash accounts are under the savings guarantee limit.

Frankly, I don't really understand what a money-market fund is (and what the UK equivalent for the Treasury Money Market fund is).  I found a couple of funds called 'Money Market Funds' = eg. the Fidelity or the LV=, both of which seem to have earnt about 0.14% over the last year and have a TER of 0.60%.  I understand that you can use Treasury short term gilts as a substitute, but again the yields are much lower than the 2.75% I'm already earning. (The rates aren't above inflation, of course, but they're not far off the best you can get at the moment for immediate access.)

Given the woeful state of my ignorance displayed above, I'd be very grateful if anyone who understands these things better could help me out...
  • What is the UKequivalent, if any, of the US Treasury Money Market Fund?
  • There is an iShares 0-5 year Gilts ETF (IGLS). Would this be an acceptable substitute?
  • What advantages does a MMF (or the ETF) have over the savings situation I have now, given that I appear getting a better return, have a guarantee of safety, and the savings accounts don't cost me anything in commission?
Many thanks

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Re: UK Cash questions (basic...)

Post by Pkg Man » Sun Dec 05, 2010 9:52 pm

Looks like I hit the wrong button again and lost my original post.  Oh well.

Perhaps Clive can give you better info, but what HB wanted folks to do with the cash piece is invest in one-year Treasury Bills (T-bills) and/or a money market account that invests only in T-bills.  Some modify that considerably, the most common change is going out a bit farther on the yield curve, i.e., investing in longer term (say 1-3 year) Treasuries through a fund like SHY.  This gives you somewhat more interest rate risk than a one-year T-bill would.  The money market account is solely for convenience since you can write checks on it.  It is not a requirement as it is only a vehicle for how to invest, not what you are investing in.

The fund you mentioned is a bit longer out on the yield curve than the pure PP design, but not too different from what PP folks use here (SHY).  The iShares UK fund has an avg maturity of around 2.7 while the US variant has an avg maturity of 1.9.  I would think it is acceptable although not ideal.

Personally I have the cash piece scattered amongst a few different vehicles, a less-than-ideal government bond fund in my 401K, some T-bills and T-bill-like securities purchased directly from the Treasury, bank certificates of deposit (a small portion) and emergency cash in a non-bank location. 

Note that you don't want to chase higher yields with this portion of the PP (although I am guilty of doing a bit of that).  A bank CD or money market account that invests in other debt does not have the same level of guarantee as a government bond, which is why is pays slightly more interest (look up "breaking the buck" on wikipedia).  I am not familiar with an ISA so i can't comment on that.  The main thing is to try to use short term (little interest rate risk) government bonds (no default risk). 

Hope that helped.
"Machines are gonna fail...and the system's gonna fail"

Re: UK Cash questions (basic...)

Post by brookter » Mon Dec 06, 2010 7:19 am

Thank you both for such comprehensive replies - I'm going to need to read them carefully to get everything out of them, I think, but I wanted to say thank you straightaway!

A couple of thoughts first though while I ponder...

I already have my gold (PHAU and BullionVault), long term gilts (4.25% 2042) and stocks (FTSE All-share, 250 and ex-UK developed market trackers). I've used up all our ISA allowances this year - but I'll definitely look to put some gilts into next years allowance (I'm probably going to feed more money into the PP next year anyway). So, I think I'm broadly speaking following the basic theory in a reasonable(ish) way. I've read many of your posts Clive about ways to improve the basic setup, and I think I see what you're aiming for, but I'm very new at this and for the time being I feel more comfortable with the 4x25% standard setup. As I learn more, that may change of course - and I do find your posts very interesting!

It was the cash element that I was unsure about, but if I've understood the main point of both your posts, the reason for having the cash element in a money market fund (or gilts ladder) is to have the absolute security that this is backed by government - the actual return is a secondary consideration. All my cash element is in accounts that have the guarantee (and none of the banks overlap in their licences), and as a bonus, the return is higher than the gilts would give me. 

So, for the time being, unless I've missed something, I think leaving the cash in those accounts appears to offer the security I need and is a simpler solution.

As a final comment, it's been really interesting following the portfolio for the last couple of months... particularly watching the plummeting gilts (down 5% in six weeks - pre-coupon payment) vs the increase in gold (up just under 5%) plus marginal gains in the cash and stocks element. I keep on having to tell myself that it's a good thing when one of the classes goes down - if they all went up at the same time, then they can all come down at the same time. I'm still checking them once a day, but getting less dependent....

I really do appreciate the time you've taken to answer my questions - many thanks!


Re: UK Cash questions (basic...)

Post by brookter » Mon Dec 06, 2010 10:06 am

Clive wrote: Another link to add to your bookmarks ... -gold.aspx (but bear in mind that some of the data in the table is wrong (corrections are highlighted in the comments)).
That was actually the article which first told me there was something called the Permanent Portfolio!
Be aware that even the PP's volatility at times can be high, and might lose -15% or more in value over some periods.  I think Paul Boyer (madmoneymachine) indicated a -24% drawdown has historically occurred.  BUT (and a big but), is that such variance has generally realigned back again over relatively short periods of time.  So if you monitor daily you're more likely to endure the frights that others who check perhaps just once yearly might totally miss.
Actually, I'm not tempted at all to change anything (which I think is the reason people are warned not check too often): I think in the first couple of months it's probably a good thing (for me) to check as it shows how the four assets fluctuate constantly against each other - effectively showing theory in action. It won't be long before I'll be leaving it months between checks...

Many thanks again

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