options for cash

Discussion of the Cash portion of the Permanent Portfolio

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Pkg Man
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Re: options for cash

Post by Pkg Man » Sun May 16, 2010 11:40 am

I know HB recommended only Treasury MM funds, but I just can't bring myself to put a quarter of the portfolio in a fund that is earning 0% nominal and negative 1-2% in real terms.  If short-term interest rates rise a bit I would be more agreeable to use the recommended approach.

With an expense ratio of 0.49% in the American Century Fund, I wonder if it might be better to hold some of the cash portion in Short Term (1-3 year) Treasury bonds, or a fund like SHY, and the rest in the MM fund, I or EE bonds, or buried in the back yard ;D.  The weighted average maturity of the AC MMF is 48 days.  Some combination of AC MMF and SHY would still provide an average maturity of less than 52 weeks.

I have access to a fund in my 401K that is very similar to SHY and has ultra low expenses (something like 3 basis points), which is one reason I use it for part of the cash allocation. 
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Re: options for cash

Post by MediumTex » Sun May 16, 2010 1:46 pm

Pkg Man wrote: I have access to a fund in my 401K that is very similar to SHY and has ultra low expenses (something like 3 basis points), which is one reason I use it for part of the cash allocation. 
As a practical matter, that is probably your best bet.

In general, "Stable Value" funds in 401(k) plans are a great deal that people often overlook.  You can get 3-4% return with virtually no principal risk.  Stable value funds are essentially a creature of the 401(k) plan world and retail investors usually do not have access to these products except through a 401(k) plan fund lineup.
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Re: options for cash

Post by simata » Sun May 16, 2010 3:57 pm

Let say I have cash for 1-3 years of my life expenses. Why would I need to hold more cash (25% of PP)? I can't find good argument. Rest of assets stay the same (33%gold,33%LT,33%stocks).
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Re: options for cash

Post by pplooker » Sun May 16, 2010 4:44 pm

simata wrote: Let say I have cash for 1-3 years of my life expenses. Why would I need to hold more cash (25% of PP)? I can't find good argument. Rest of assets stay the same (33%gold,33%LT,33%stocks).
The reason you hold that much cash is for periods where cash carries the portfolio.  It also gives you buying power to rebalance when prices might dip radically.

The huge cash slice used to bug me too, but when I really started thinking about it, cash can also be short term bonds and even commercial products.

The term "cash" is a bit misleading as a lot of people deviate from the treasury money market fund rule.  Harry Browne was very concerned about safety so his recommendation does make a lot of sense, but I'm more risk tolerant than that myself.  I'm quite happy to put some of the cash in commercial savings which I view as being safe enough.  Browne worried a lot about counterparty risk, I don't, but I do worry about credit risk and I view FDIC insurance as suitable protection against any credit risk.  Some may disagree with me and that's fine, we're all different in our risk tolerance.  Another thing to consider is that most if not all Treasury MMFs are now closed to new members.

The cash portion might be:

- Interest bearing savings accounts
- CDs
- 1 to 3 year treasuries bought directly
- I bonds
- SHY

The thing is, all of these options do produce some degree of income.  I tend toward part I bonds part cash in a savings account myself.  I feel this is the optimal combination for yield, convenience, low cost, liquidity and ease for me.

Effectively what the 25% cash becomes though isn't so much cash, as short term bonds.
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Re: options for cash

Post by Gumby » Wed Jun 23, 2010 12:21 pm

As far as I can tell, PRTXX (T. Rowe Price's Treasury MM Fund) is open.

http://www3.troweprice.com/fb2/fbkweb/s ... cker=PRTXX

If the 0.46% and the return is 0.01%, I suppose that means you're losing money to be in the money market fund, no?
Last edited by Gumby on Wed Jun 23, 2010 1:40 pm, edited 1 time in total.
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Re: options for cash

Post by MarySB » Wed Jun 23, 2010 6:20 pm

OK.  Here is another option, not for everyone, but have to figure out what to do with an annuity  :o I bought twenty years ago.  (Obviously, I was not as smart then as I am now :D)

This annuity matures in six years, at which time I'm not sure what I will do with it.  I have a guaranteed 4% each year until then.  It seems like it might qualify for the cash portion since I can withdraw and deposit any amount until then.

Is there any reason why I should opt for a treasury MM, liquidating this annuity?  Should this be in the cash portion or the long term bond portion of the PP?
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Re: options for cash

Post by MediumTex » Wed Jun 23, 2010 10:47 pm

MarySB wrote: OK.  Here is another option, not for everyone, but have to figure out what to do with an annuity  :o I bought twenty years ago.  (Obviously, I was not as smart then as I am now :D)

This annuity matures in six years, at which time I'm not sure what I will do with it.  I have a guaranteed 4% each year until then.  It seems like it might qualify for the cash portion since I can withdraw and deposit any amount until then.

Is there any reason why I should opt for a treasury MM, liquidating this annuity?  Should this be in the cash portion or the long term bond portion of the PP?
I would hold the annuity to maturity and treat it as cash for PP purposes.
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Re: options for cash

Post by craigr » Wed Jun 23, 2010 11:01 pm

MediumTex wrote:
MarySB wrote: OK.  Here is another option, not for everyone, but have to figure out what to do with an annuity  :o I bought twenty years ago.  (Obviously, I was not as smart then as I am now :D)

This annuity matures in six years, at which time I'm not sure what I will do with it.  I have a guaranteed 4% each year until then.  It seems like it might qualify for the cash portion since I can withdraw and deposit any amount until then.

Is there any reason why I should opt for a treasury MM, liquidating this annuity?  Should this be in the cash portion or the long term bond portion of the PP?
I would hold the annuity to maturity and treat it as cash for PP purposes.
Seconded.
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Re: options for cash

Post by herbgoat » Tue Jun 29, 2010 9:09 pm

simata wrote: Let say I have cash for 1-3 years of my life expenses. Why would I need to hold more cash (25% of PP)? I can't find good argument. Rest of assets stay the same (33%gold,33%LT,33%stocks).
Somebody correct me if I'm wrong, but I think Harry Browne considered that your cash for your 1 - 3 years of life expenses would be considered as part of your Permanent Portfolio. So reduce the amount in your Permanent Portfolio by that amount. In my personal application of the PP, I reduced the cash to 20% to account for the cash I have outside the PP and I upped the stock portion to 30% to make up the difference. I chose to up the stock portion because I figure it would reduce the tracking error and help me live with the thing during times of prosperity. Also, 5% is a pretty small change so I hope I'm still within the spirit of the original.
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Re: options for cash

Post by pumpkin » Mon Jul 19, 2010 7:56 pm

In general, "Stable Value" funds in 401(k) plans are a great deal that people often overlook.
Tex, would you mind please developing this thought a bit?  I want this to be true, because it would make more of my 401K useful for setting up a PP.  However, I have some reservations; perhaps you could address them, or why in general a Stable Value fund is acceptable?

My employer just switched 401K custodians.  The Stable Value fund offered has this advertised allocation:

US Gov't/Agency    17.6%
Int'l Gov't/Agency  4.0
Other US Gov't      8.9
Taxable Muni        2.7
Corporates            23.8
Asset Backed          4.6
Mortgage Backed    30.9
Cash                    7.6

Quality Distribution
US Gov/Agency    47.2
AAA                  26.7
AA                      9.6
A                      10.8
BBB                    4.7
<BBB                  1.0

HB wanted cash to be (if I recall) in T-Bills or MM funds that invest only in T-Bills.  This has gov agency (not solely treasury), corporate, muni, MORTGAGE BACKED securities  :o and additional credit risk (going by the quality dist).

Is it really a good idea to use this fund as the cash portion of PP?  Again, I want it to work, because it would be very convenient, but I also want the cash to do it's job when called upon, without nasty surprises.
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Re: options for cash

Post by MediumTex » Tue Jul 20, 2010 8:37 am

pumpkin wrote:
In general, "Stable Value" funds in 401(k) plans are a great deal that people often overlook.
Tex, would you mind please developing this thought a bit?  I want this to be true, because it would make more of my 401K useful for setting up a PP.  However, I have some reservations; perhaps you could address them, or why in general a Stable Value fund is acceptable?
A 401(k) plan stable value fund is not as good as t-bills, but it is a good option for cash.  In order to even out the returns and make sure that the fund never has a negative return, stable value funds use insurance contracts in which an insurer will guarantee the fund doesn't fall in price.  Stable value funds are a unique investment product, and they only exist in 401(k) plans.  Right now, most of these funds are paying 3-4%, which is hard to find anywhere else with no principal risk.

With respect to holding mortgages, there is nothing wrong with holding mortgages, so long as they are not interest-only option ARMs from Florida and California.  A bundle of traditional 15 and 30 year mortgages in areas with stable property values is still a pretty safe investment.

Read the prospectus for more information, but I think that most stable value funds are suitable for the cash piece of the PP if t-bills are not otherwise available for whatever reason.

In my own case, my 401(k) plan account consists of TLT, IAU (both through a brokerage window) and the rest in the plan's stable value fund.  My stock holdings and the rest of my PP are held in other accounts.  It's funny, but I have often thought that someone looking at just my 401(k) account allocation might say I was crazy, but ironically the three investments I have in my 401(k) account have been some of the best performing assets for many years (i.e., gold, LT treasuries and cash).
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Re: options for cash

Post by LNGTERMER » Tue Aug 17, 2010 2:28 pm

In periods when currency is loosing value wouldn't that make the cash portion an extra drag on the PP?
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Re: options for cash

Post by MediumTex » Tue Aug 17, 2010 4:53 pm

Lngtermer wrote: In periods when currency is loosing value wouldn't that make the cash portion an extra drag on the PP?
It might, but we aren't interested in how the individual PP components are performing--what we are interested in is how the portfolio performs as a whole.

In reality, t-bills are going to track inflation (more or less), so if the dollar is losing value and this is manifested in rising prices, t-bill rates should reflect this dynamic.

Remember, too, that the dollar is the world's reserve currency, so there are many built-in checks against dramatic dollar devaluation (i.e., the dollar may decline 30% relative to other currencies during some periods, but it's unlikely to decline 60%).  Important among these checks is the fact that the rest of the world isn't going to watch as the dollar declines in value and the U.S.'s exports begin to get much cheaper in foreign markets.  There are way too many holders of dollars around the world for devaluation to get too much traction today, IMHO.  Also note that the pertrodollar regime puts a hard floor under the value of the dollar and this arrangement is very unlikely to end any time soon (notwithstanding some high profile defections which will get media attention but won't undermine the arrangement in any structural way).

Even in what is remembered as the disastrous inflation/devaluation in the 1970s, if you actually look at the CPI figures, there were only a few quarters in which the CPI was even in the high single digits.  In other words, what we remember as a high inflation period wasn't THAT high, certainly not anything resembling "hyperinflation."  Hyperinflation is when prices are rising in an accelerating manner over an extended period (e.g., 10% this month, 12% the next, 19% the next, 24% the next, etc.).

Finally, note that there is no precedent for any world currency EVER experiencing anything remotely resembling hyperinflation.  What is more likely to occur is a generational decline in the value of the dollar at some point, more or less coinciding with its orderly "decommissioning" as a reserve currency (this process unfolded in the UK over many decades).

There are many moving parts to this issue (many more than most pundits bother to cover).
Last edited by MediumTex on Tue Aug 17, 2010 4:56 pm, edited 1 time in total.
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Re: options for cash

Post by LNGTERMER » Tue Aug 17, 2010 5:30 pm

Remember, too, that the dollar is the world's reserve currency, so there are many built-in checks against dramatic dollar devaluation (i.e., the dollar may decline 30% relative to other currencies during some periods, but it's unlikely to decline 60%).
MT thanks for your insightful answer. The one thing that makes me nervous with regards to the dollar is that the Fed has been busy printing dollars to the point the curve is now- to me- seems approaching its exponential limits. Don you think there is going to be some equilibrium reached between the rate of creation and rate of destruction of dollars, if not what checks will prevent newly printed dollars from accelerated dilution of value of old ones. Do you still think the T-bills in worst case will still keep up with this dilution?
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Re: options for cash

Post by MediumTex » Tue Aug 17, 2010 9:54 pm

Lngtermer wrote:
Remember, too, that the dollar is the world's reserve currency, so there are many built-in checks against dramatic dollar devaluation (i.e., the dollar may decline 30% relative to other currencies during some periods, but it's unlikely to decline 60%).
MT thanks for your insightful answer. The one thing that makes me nervous with regards to the dollar is that the Fed has been busy printing dollars to the point the curve is now- to me- seems approaching its exponential limits.
In a credit-based monetary system, credit can contract faster than a central bank can print.  That's what's been happening since 2008 (more or less).

Although T-bill rates can't go much lower (they have to stop at zero), the curve can get a lot flatter.  30 year rates at 2.5% isn't crazy.  As I recall, they touched 2.7% at the end of 2008.  That could easily happen again.  Rates could, of course, also go up very quickly (in which case T-bills would provide nice gains, as they did in the late 1970s and gold would probably also be doing well in such a scenario).
Don't you think there is going to be some equilibrium reached between the rate of creation and rate of destruction of dollars, if not what checks will prevent newly printed dollars from accelerated dilution of value of old ones.
There is clearly some equilibrium point somewhere, but who knows where it is?  Where we are today is so far from where people thought we would be in early 2008 that I think it illustrates how anything is possible.  People have been saying interest rates have nowhere to go but up for as long as I can remember.

Inflation is mostly about future expectations about prices.  It seems to me like the secular trend with respect to price expectations is that they will fall, not rise.  Anyone think house prices are about to start rising?  How about apartment rents?  Automobile prices?  There will always be pockets of inflation here and there (e.g., wheat and cotton right now), but the overall trend seems to be toward lower prices, not higher.
Do you still think the T-bills in worst case will still keep up with this dilution?
I don't see any dilution.  I see a credit-based economy with less credit, which makes the existing supply of money worth more, not less.

If the government sent every person in the country a check for $10,000, I'll bet a lot of people would just pay down debt, which would have zero effect on prices and would result in no net increase in the money supply.

Much of this is just a parlor game, though, because I don't have any more idea than anyone else about what the future holds.  I can make a pretty good case for many different scenarios, but I like the PP because it doesn't matter whether I'm right about one scenario vs. another.

With the PP I just take whatever the market gives me and re-balance as needed.  It's so much less stressful than always trying to guess correctly.
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Re: options for cash

Post by LNGTERMER » Wed Aug 18, 2010 10:56 am

...pay down debt, which would have zero effect on prices and would result in no net increase in the money supply.
I thought that would have a net reduction in money supply since money is debt. For now though debts are not being repaid quick enough instead new ones are being issues hence new money. Yes, individuals are not borrowing in the last a few years rate but governments are. So, net effect is still increase of money supply and dilution of our existing dollars. I could be wrong in my analysis though, this is a subject I am educating myself in. Still not sure how we should protect the PP cash portion from this, unless t-bills are going to keep up with that we might have a problem.
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Re: options for cash

Post by MediumTex » Wed Aug 18, 2010 12:07 pm

Lngtermer wrote:
...pay down debt, which would have zero effect on prices and would result in no net increase in the money supply.
I thought that would have a net reduction in money supply since money is debt.
Right, but in my example I am suggesting that the government just printed up $10,000 for every person in the country.  If they use it to pay down debt, it wouldn't be inflationary, though some people would say that printing up $10,000 for every person in the country would be VERY inflationary.  It might be, but it would depend on what they used the money for.
For now though debts are not being repaid quick enough instead new ones are being issues hence new money. Yes, individuals are not borrowing in the last a few years rate but governments are. So, net effect is still increase of money supply and dilution of our existing dollars. I could be wrong in my analysis though, this is a subject I am educating myself in. Still not sure how we should protect the PP cash portion from this, unless t-bills are going to keep up with that we might have a problem.
Take a look at the broad money supply figures and you will see that the overall money supply has been contracting.  The Fed is really just mitigating this process, not reversing it.

See the following money supply data from the Fed (which is hot off the press) and you will see what I mean:

http://research.stlouisfed.org/publicat ... /page4.pdf
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Re: options for cash

Post by LNGTERMER » Wed Aug 18, 2010 2:04 pm

Thanks for the link, here one for consumption, in some ways it's a kind of endorsement for the PP.

http://www.minyanville.com/businessmark ... 0/id/29664
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Re: options for cash

Post by LNGTERMER » Thu Aug 19, 2010 6:16 pm

Lets assume a hypothetical PP was create around 1900s, lets say initial value of 100k and no more contributions. Wouldn't you say the 25% cash has been a drag on the folio?

Yes, the cash is benefiting from continuous replenishment from re-balancing but the dollars in it have only been loosing value. That lose of value seems to be counter balanced by the interest from t-bills but that does not seem enough. What am I missing here?
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Re: options for cash

Post by MediumTex » Thu Aug 19, 2010 6:33 pm

Lngtermer wrote: Lets assume a hypothetical PP was create around 1900s, lets say initial value of 100k and no more contributions. Wouldn't you say the 25% cash has been a drag on the folio?

Yes, the cash is benefiting from continuous replenishment from re-balancing but the dollars in it have only been loosing value. That lose of value seems to be counter balanced by the interest from t-bills but that does not seem enough. What am I missing here?
The PP was designed to be used in a fiat money world.  What you are suggesting is to apply the PP to a gold standard world.  I suspect it would have done okay, but that's not really what it was designed for.  In many ways, the PP was a response to going off the gold standard.  I imagine HB would have come up with another model portfolio for use in a gold standard world.

When you say cash would be a drag on the portfolio, I assume you mean as a result of inflation.  During inflationary periods, though, t-bill rates are going to track inflation pretty closely.  Look at t-bill rates from the 1970s and early 1980s and you will see what I mean.

Remember, too, that the cash is just one part of the portfolio, and if it is a drag on performance during some periods, it is likely to be a buoy to performance in others.

People have modeled the PP with 33% in each of the three volatile asset classes, and it did perform slightly better than the 25%x4 allocation, but it was also more volatile.
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Re: options for cash

Post by Pkg Man » Fri Aug 27, 2010 8:57 pm

Any thoughts on the suitability of the SSgA short-term government/credit fund for the cash piece of the PP?  It is an option in my 401K and I have about half the cash portion in it.  It is a new fund (at least in my 401K) and they only recently got around to posting the fact sheet on the fund. 

Here are some details-

Investment Objective:
The SSgA U.S. Short-Term Government/Credit Bond Index Fund (the "Fund") seeks an investment return that approximates as closely as practicable, before expenses, the performance of the Barclays Capital U.S. 1-3 Year Government/Credit Bond Index (the "Index") over the long term.

Key Facts:
Is passively managed; will not short sell securities
May use other derivatives
Is not a leveraged strategy
May invest in other investment funds, including those managed by SSgA and its affiliates
What surprised me was that not all the cash is invested in US Treasuries, about 9% is in foreign bonds and even has corporates.

Sector Allocation:
TREASURY 55.20%
AGENCY    21.20
CORPORATE - INDUSTRIAL 7.95
CORPORATE - FINANCE 7.93
NON CORPORATES 6.24
CORPORATE - UTILITY 1.38
CASH 0.10

Credit Quality Breakdown:
Aaa  81.35%
Aa    5.89
A      8.39
Baa    4.37

My initial view is that HB would not approve, but that it is close enough.  Any thoughts?
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Re: options for cash

Post by MediumTex » Sat Aug 28, 2010 12:25 am

I would say that's fine if that's what is available.
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Re: options for cash

Post by Pkg Man » Sat Aug 28, 2010 6:33 pm

Thanks MT.  Based on the limited info they provided when the fund was first available in my plan, I thought it was a carbon-copy of SHY.  It is obviously inferior to that (from a PP perspective, at least) but it does have an extremely low expense ratio of 0.03% - unless of course I was wrong about that too.
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Re: options for cash

Post by gonetowindsurf » Sun Oct 24, 2010 9:11 am

How important is the price appreciation in the short term component?
Like a possible share price increase in SHY?
The reason for the ?,
I am getting a 3.6% yield currently in a fully liquid fund through my 457plan. I have immediate access to it and could reinvest in the other components when re-balancing dictates.
There is no share price appreciation(or losing value) however, and the yield is adjusted every quarter and has hovered between 3% and 5% over the last 5 years. It is backed by commercial paper however not Treasuries, average maturity is 8 years, with about $1 Billion in assets. Basically I think the company that offers the fund, pockets some spread and any appreciation a bond might have.
Would this be a suitable alternative for the short term component?
Thanks for your thoughts.
Mike
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