Five Year's Living Expenses

Discussion of the Cash portion of the Permanent Portfolio

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Mark Leavy
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Five Year's Living Expenses

Post by Mark Leavy » Thu Feb 23, 2017 10:39 pm

I've always loved Harry's 25% rule for cash. Somehow it just works. For all kinds of reasons beyond just investment returns. Sophie and Tyler and PS and Tech and others have demonstrated this multiple times over.

But if you are going to play around with different portfolio concepts - it sort of gets in the way. How do you backtest, project, pontificate, surmise and fill out the number on your spreadsheet if you don't have a "reason" for the 25% in cash.

I decided to cheat. I've declared that all of those cool things about cash will not be in my model.

Those great things about cash all boil down to 5 years of spending money - cash in the bank - separate and apart from any model.

Given that precondition, I put a minimum of 5% cash into any model for the collection of dividends and for general rebalancing lubrication.

Conveniently, if you assume Harry's portfolio returns about 4 percent over inflation - then you end up with about 25% in cash. Fancy that :)

For all of you back-testers and forecasters and economic/political worry warts out there - I just throw this out as another alternative to your model making. Don't forget the 5 years in the bank.
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Re: Five Year's Living Expenses

Post by mathjak107 » Fri Feb 24, 2017 2:33 am

the cash has a very important job . it acts as the other side of the barbell to give the long term treasury's a duration of an intermediate term bond fund , the cash also acts as an option on stocks so you can buy them at lower prices with no expiration date . it is a very integral part of the strategy in both the pp and gb portfolio's .

i am a believer in both the pp and gb that the cash is separate from any spending cash you want to hold . the same way if my portfolio uses short term bonds as a component for that strategy i would not count that as cash for spending .

we are retired and live off our portfolio and we keep 2 years cash in the bank . we live off one year and the other acts as an emergency fund . eventually that year rolls over in to a current spending buffer and we refill a 2nd year so it is always refilling . .

but that cash in the portfolio is not part of anything else but the portfolio . when this portfolio runs it's course and the big picture shifts again that cash may no longer be cash anymore . since the election the golden butterfly has been the place to be as the prosperity weighting and small caps has been excellent as well as gold .

but eventually as the bigger picture clears up and if we see substantial rate increases it would not be my first choice anymore . so cash always stays as cash if the strategy calls for it
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Re: Five Year's Living Expenses

Post by Jack Jones » Fri Feb 24, 2017 12:44 pm

Mark Leavy wrote: Given that precondition, I put a minimum of 5% cash into any model for the collection of dividends and for general rebalancing lubrication.

Conveniently, if you assume Harry's portfolio returns about 4 percent over inflation - then you end up with about 25% in cash. Fancy that :)
Hmm, I'm not following. Would you (or anyone else who understands) please elaborate?
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Re: Five Year's Living Expenses

Post by mathjak107 » Sun Feb 26, 2017 5:30 am

basically he is not including cash in the pp but instead tucked away 5 years spending cash .

kind of like the juicy portfolio and then electing to hold 5 years cash outside the portfolio .. nothing new here .
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Re: Five Year's Living Expenses

Post by dualstow » Sun Feb 26, 2017 8:44 am

Jack Jones wrote:
Mark Leavy wrote: Given that precondition, I put a minimum of 5% cash into any model for the collection of dividends and for general rebalancing lubrication.
Hmm, I'm not following. Would you (or anyone else who understands) please elaborate?
I don't get it either. 5% for the collection of dividends....is that supposed to be 'from'?
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Re: Five Year's Living Expenses

Post by blue_ruin17 » Tue Feb 28, 2017 4:55 pm

Based on the OP, I'm going to speculate that Mark Leavy does not appear to understand the role that 'cash' plays in the HBPP.

'Cash' in the HBPP isn't just "spending money" that sits around and looks pretty.

By removing it, your portfolio is suddenly subject to a range of risks and vulnerabilities that cash previously protected against. Which is fine, as long as you recognize those risks.

The danger is in making such a radical change and then expecting the portfolio to basically behave like the HBPP. It won't.
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Re: Five Year's Living Expenses

Post by Pointedstick » Tue Feb 28, 2017 5:28 pm

blue_ruin17 wrote:Based on the OP, I'm going to speculate that Mark Leavy does not appear to understand the role that 'cash' plays in the HBPP.
Pretty sure he does. :) He's been here a long time.
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Re: Five Year's Living Expenses

Post by LC475 » Wed Mar 01, 2017 9:23 am

Mark Leavy wrote:If you are going to play around with different portfolio concepts - it sort of gets in the way.

I put a minimum of 5% cash into any model

I just throw this out as another alternative to your model making.

Mark is not announcing any change to his actual portfolio, he is simply explaining a useful trick to make HBPP and PP-type portfolios more model-able and comparable to other less cash-heavy portfolios when playing with back-testing, etc.
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Re: Five Year's Living Expenses

Post by mathjak107 » Wed Mar 01, 2017 9:53 am

in my opinion it is just silly to try to make the performance better than the strategy calls for by manipulating components of it in or out ..

the gb and pp are what they are and that cash is an integral part of the strategy and should not be general spending cash . i can make the gb so much better if i eliminate the short term bonds . but i won't do that since it is part of the plan .
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Re: Five Year's Living Expenses

Post by dualstow » Wed Mar 01, 2017 10:19 am

I think LC475 has it right. Mark was just talking about modeling, not manipulating.

Earlier, mathjak, you said he's not including cash in the pp, and I don't think that's right either.
He starts out by saying that he loves the cash portion.

Let's keep debating until he answers.
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Re: Five Year's Living Expenses

Post by mathjak107 » Wed Mar 01, 2017 10:28 am

he is trying to pull the cash out and not make it part of the model so the returns look better against models that don't use cash .

hypothetically if i had 1 million bucks in total and i wanted 100k in cash to live off of i would put 100k in the bank 900k in the portfolio. the fact that part of that portfolio holds cash is irrelevant as that cash serves a purpose in the portfolio.

if my model i was using did not need cash as part of it than 100k still goes in the bank and 900k in the model .
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Re: Five Year's Living Expenses

Post by dualstow » Wed Mar 01, 2017 10:32 am

So, he's rebalancing like those here who have 1/3 each in the other assets?
The nearly cashless portfolio?
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