How do you invest the Cash portion?

Discussion of the Cash portion of the Permanent Portfolio

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jhogue
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Re: How do you invest the Cash portion?

Post by jhogue » Fri Dec 06, 2019 3:27 pm

Vinny,

Financial safety is reinforced through diversity and liquidity. T-bills held in a brokerage account at Vanguard are safe enough for “normal” times because Vanguard is a big active player in the enormous world-wide secondary market for Treasurys. Unless there is a terrific disruption in this market your money will always be completely liquid. Nevertheless, you might eventually consider diversifying your holdings of Treasury –issued securities as follows:

1. Federal Reserve notes (ie., greenbacks yielding 0% interest) kept in a safe place in your home.

2. A TreasuryDirect account in your name.

3. Paper I-bonds with registered serial numbers purchased with your annual tax refund.

Any of these will diversify your holdings away from a 100% T-bill position in a brokerage account. But understand that each of these methods poses different risks from T-bills held in a brokerage account. That is the way risk works.
“Groucho Marx wrote:
A stock trader asked him, "Groucho, where do you put all your money?" Groucho was said to have replied, "In Treasury bonds", and the trader said, "You can't make much money on those." Groucho said, "You can if you have enough of them!"
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Re: How do you invest the Cash portion?

Post by drumminj » Fri Dec 06, 2019 9:56 pm

jhogue wrote:
Fri Dec 06, 2019 3:27 pm
T-bills held in a brokerage account at Vanguard are safe enough for “normal” times because Vanguard is a big active player in the enormous world-wide secondary market for Treasurys. Unless there is a terrific disruption in this market your money will always be completely liquid.
I don't mean to keep harping on the same thing, but it seems you're overlooking the aspect of relying on a third party here. Sure, the treasury market is liquid, but that doesn't mean that vanguard will be solvent. Presumably these treasuries are held in "street name", like all other instruments at a brokerage, and thus aren't in your direct possession and are at risk if there's an issue with the institution itself, which is where SIPC comes in. Is this not the case treasuries (vs stocks)?

"In normal times", sure, but if you're talking about FDIC and liquidity with a bank/MM account/CD, it seems you should be considering similar scenarios with your brokerage -- Vanguard or Fidelity or Schwab or wherever else. (I'll admit that bank receiverships are far more frequent than brokerage houses).

I agree with you on the tiers of possession and liquidity, and my intent here is just to suggest that bank accounts and CDs fall upon this same continuum, and in normal times where banks remain solvent, don't have drastically different characteristics from treasuries, aside from often paying a better rate. If I need liquidity in "normal" times, I can liquidate a treasury through my broker just as easily as I can break a CD (which I've done a few times, and takes no more than a day or two).

In "abnormal" times like the 2008 "crisis", I agree treasuries are the safer play.
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Re: How do you invest the Cash portion?

Post by mathjak107 » Sat Dec 07, 2019 3:12 am

FEW REALIZE THIS :

if you ever check your vanguard statement or fidelity they read :
--------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
" SIPC insurance provides protection for assets held by you in a Vanguard Brokerage account. Vanguard Brokerage Services is a division of Vanguard Marketing Corporation, which is a member of SIPC...

Vanguard mutual funds, including any Vanguard money market fund linked to your Vanguard Brokerage account, are not covered by SIPC insurance."
-------------------------------------------------------------------------------------------------------------------------------------------------
"If you buy mutual funds through a brokerage account, those funds are protected against theft by SIPC.

However, if you buy mutual funds directly from a mutual fund company, they are not protected by SIPC, "because no protection is necessary : . Each mutual fund is set up as a separate entity, apart from the company that manages the fund. "The employees at a mutual fund don't have direct access to the assets,All mutual fund assets by law must be held in a trust account at a custodian bank.

That is a special account, not part of the bank's assets. The bank can fail, but the trust accounts are not involved in any way shape or form in that failure ...

https://www.bogleheads.org/wiki/SIPC_pr ... tual_funds
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Re: How do you invest the Cash portion?

Post by vnatale » Sat Dec 07, 2019 6:44 pm

jhogue wrote:
Fri Dec 06, 2019 3:27 pm
Vinny,

Financial safety is reinforced through diversity and liquidity. T-bills held in a brokerage account at Vanguard are safe enough for “normal” times because Vanguard is a big active player in the enormous world-wide secondary market for Treasurys. Unless there is a terrific disruption in this market your money will always be completely liquid. Nevertheless, you might eventually consider diversifying your holdings of Treasury –issued securities as follows:

1. Federal Reserve notes (ie., greenbacks yielding 0% interest) kept in a safe place in your home.

2. A TreasuryDirect account in your name.

3. Paper I-bonds with registered serial numbers purchased with your annual tax refund.

Any of these will diversify your holdings away from a 100% T-bill position in a brokerage account. But understand that each of these methods poses different risks from T-bills held in a brokerage account. That is the way risk works.
If I did think there was not a possibility of there being NOT "normal" times I would never invest in Treasury Bills as there are higher paying options that also have risk during "normal" times. I want the Treasury Bills for protection in those times which are not "normal" and, therefore, expect them to be ultra safe.

The risk / downsides to the other three options you listed:

1. Subject to theft or fire. I do have a little safe but have never used it as isn't that advertising to someone where the "valuables" are?
2. Cannot do that for retirement investments.
3. Also cannot do for retirement investments plus the amounts are tiny for a single person.

Vinny
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Re: How do you invest the Cash portion?

Post by Kbg » Sat Dec 07, 2019 9:03 pm

I bonds are basically the same tax wise as a tax deferred account, Regular IRA/401K etc. The only difference is taxes are due on maturity vs RMDs. If are say 50 then I Bonds would be tax free until 80 vs 70.5. As you noted, size is limited.
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Re: How do you invest the Cash portion?

Post by mathjak107 » Sun Dec 08, 2019 1:24 pm

You have to be careful with anything that has to be sold and then gets sweeper in to a money market ..shy ,bil, shv , etc all get sold then sweeper .

But like I had happen when my money market broke the buck it was locked and nothing could come out for a few months
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Re: How do you invest the Cash portion?

Post by ochotona » Mon Dec 09, 2019 9:16 am

I have bunch of T-Bills maturing, so now my Emergency Fund is going to slosh back over to Ally, because they pay more than the T-Bill I'd be buying to replace the maturing one. This is a game that happens from time-to-time. My Fidelity "bank substitute is going to get emptied out.
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Re: How do you invest the Cash portion?

Post by jhogue » Mon Dec 09, 2019 11:08 am

(Sigh)
1. Does anyone examine the creditworthiness of the banks that are peddling these supposedly “red hot” CD rates?
Ally Bank, its predecessor , and its subsidiaries were up to their eyeballs in subprime mortgages. It had to be bailed out with $17 billion in TARP funds or it would have failed.
Why would anybody want to give their hard-earned money to this outfit?
(Source: https://en.wikipedia.org/wiki/Ally_Financial)


2. I just checked with bankrate.com. Ally bank’s current 5 year CD rate is 2.15%-- which is LOWER than the current US Treasury-issued I bond at 2.20%!
Last edited by jhogue on Mon Dec 09, 2019 12:09 pm, edited 1 time in total.
“Groucho Marx wrote:
A stock trader asked him, "Groucho, where do you put all your money?" Groucho was said to have replied, "In Treasury bonds", and the trader said, "You can't make much money on those." Groucho said, "You can if you have enough of them!"
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Re: How do you invest the Cash portion?

Post by dualstow » Mon Dec 09, 2019 11:49 am

O0 Poor J Hogue. If Hank Hill ('King of the Hill') is a good man in a world gone bad, than J Hogue is definitely the Hank Hill of cash. (My highest compliment).
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Re: How do you invest the Cash portion?

Post by ochotona » Mon Dec 09, 2019 12:47 pm

I'm not getting Ally CDs, using their Savings. Pays more than 30-day T-Bill. Yeah, I know about Ally... it use to be GMAC.
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Re: How do you invest the Cash portion?

Post by mathjak107 » Mon Dec 09, 2019 1:07 pm

It all gets paid by the same people in the end ...
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Re: How do you invest the Cash portion?

Post by vnatale » Mon Dec 09, 2019 6:13 pm

MangoMan wrote:
Mon Dec 09, 2019 1:05 pm
And it is FDIC insured. Do you really think the Feds are going to renege on FDIC promises differently than Tbill promises?
In 2008-2009 it did end up backing up everything, including going past FDIC limits and money market funds.

But NEXT time CAN be different!

Vinny
Above provided by: Vinny, who always says: "I only regret that I have but one lap to give to my cats." AND "I'm a more-is-more person."
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Re: How do you invest the Cash portion?

Post by jhogue » Tue Dec 10, 2019 8:38 am

ochotona wrote:
Mon Dec 09, 2019 12:47 pm
I'm not getting Ally CDs, using their Savings. Pays more than 30-day T-Bill. Yeah, I know about Ally... it use to be GMAC.
Ally savings account interest rate is currently 1.70%.
3 month T-bill interest rate is currently 1.59%. Simple to ladder and put on auto-roll.
The difference is 0.11% ( further reduced by state and local taxes).

So why pick FDIC insurance coverage (which had to be bailed out by Congress in 2008) on a bank that effectively defaulted and had to be bailed out by TARP funds, instead of US Treasury bills, which were then and remain today the global reserve currency?

In the next banking crisis in the US (and there will be one) you want to hold Cash in the highest quality assets you can get. Every FDIC-insured account holder will be standing in line behind every US Treasury holder.
Last edited by jhogue on Tue Dec 10, 2019 2:23 pm, edited 1 time in total.
“Groucho Marx wrote:
A stock trader asked him, "Groucho, where do you put all your money?" Groucho was said to have replied, "In Treasury bonds", and the trader said, "You can't make much money on those." Groucho said, "You can if you have enough of them!"
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Re: How do you invest the Cash portion?

Post by Kbg » Tue Dec 10, 2019 4:34 pm

Don’t forget, the govt can print money. So getting your money back is not really the issue. Far more likely problems are legal delays and in the ZA (new acronym for Zombie Apocalypse) inflationary devaluation.

To me for the first and most likely problem, treasury direct is a no brainer. Just you and your government, no middlemen of any kind.
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Re: How do you invest the Cash portion?

Post by vnatale » Tue Dec 10, 2019 9:43 pm

Kbg wrote:
Tue Dec 10, 2019 4:34 pm
Don’t forget, the govt can print money. So getting your money back is not really the issue. Far more likely problems are legal delays and in the ZA (new acronym for Zombie Apocalypse) inflationary devaluation.

To me for the first and most likely problem, treasury direct is a no brainer. Just you and your government, no middlemen of any kind.
Except, from what I now know, one cannot use Treasury Direct for any retirement accounts? And, are not bonds at the top of the list to be put in retirement accounts due to all the income from them being ordinary income? Certainly true for Treasury Bills. I guess one could argue the long-term bonds should not be in a retirement account you believe most of the return from them is going to come in the form of capital gains.

Vinny
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Re: How do you invest the Cash portion?

Post by mathjak107 » Wed Dec 11, 2019 2:26 am

old school thinking used to say that bonds should go in retirement accounts . the fact is taking up valuable space in tax advantaged accounts at these low yields is a waste . michael kitces found that as little as a 2% dividend over the long term wipes out any tax advantage in a taxable account. fund turnover makes it worse .

as kitces points out

"Executive Summary
In an environment where generating portfolio alpha is difficult, strategies like managing assets on a household basis to take advantage of asset location opportunities to generate “tax alpha” are becoming more and more popular. The caveat, however, is that making effective asset location decisions is not easy, either.
For instance, while the traditional asset location strategy “rule of thumb” is that tax-inefficient bonds go into an IRA, while equities eligible for preferential tax rates go into a brokerage account, the reality is that for investors with long time horizons the optimal solution may be the opposite. Once stock dividends and portfolio turnover are considered, the ongoing “tax drag” of the portfolio can be so damaging to long-term returns that placing equities into an IRA may be more efficient, even though they are ultimately taxed at higher rates!
In fact, it turns out that almost any level of portfolio turnover will eventually tilt equities towards being held in IRAs given a long enough time horizon (and especially while today’s low interest rates result in almost no benefit for bonds to gain tax-deferred growth inside of retirement accounts). Which means in the end, good asset location decisions depend not only on returns and tax efficiency, but an investor’s time horizon as well!

https://www.kitces.com/blog/asset-locat ... e-horizon/
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Re: How do you invest the Cash portion?

Post by jhogue » Wed Dec 11, 2019 9:08 am

MangoMan wrote:
Tue Dec 10, 2019 7:47 pm
Kbg wrote:
Tue Dec 10, 2019 4:34 pm
Don’t forget, the govt can print money. So getting your money back is not really the issue. Far more likely problems are legal delays and in the ZA (new acronym for Zombie Apocalypse) inflationary devaluation.

To me for the first and most likely problem, treasury direct is a no brainer. Just you and your government, no middlemen of any kind.
Ha. Customer service on that site is notoriously awful. Imagine what it will be like with millions of people calling and emailing during the ZA. Good luck getting your money out. Cash in hand is the only thing that will be of value. And guns. And barter-able items.
I am not predicting a Zombie Apocalypse.
I am predicting another banking liquidity crisis.
“Groucho Marx wrote:
A stock trader asked him, "Groucho, where do you put all your money?" Groucho was said to have replied, "In Treasury bonds", and the trader said, "You can't make much money on those." Groucho said, "You can if you have enough of them!"
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Re: How do you invest the Cash portion?

Post by dualstow » Wed Dec 11, 2019 9:08 am

Yeah, I regret that I took the bogleheads' advice to put bonds in tax deferred.
I changed course some years ago.
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Re: How do you invest the Cash portion?

Post by mathjak107 » Thu Dec 12, 2019 3:24 am

i moved away from boglehead advice a long time ago ... the problem is they see things only one way and only support and high five those who think like they do . in fact as a company i think vanguard is terrible in both company policies and customer service based on my experiences .

the biggest obstacle most people have is believing their own bull sh*t ...


they never sleep with the enemy so they never learn there may be better ways of doing things and what they believe may be wrong , outdated or just old school thinking .

when you can argue for or against something equally well , then you likely have enough information to make an informed decision . but most people don't do this . they only learn and hang with others with the same views and that can end up being short sighted
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Re: How do you invest the Cash portion?

Post by sophie » Thu Dec 12, 2019 8:36 am

dualstow wrote:
Fri Dec 06, 2019 2:04 pm
sophie wrote:
Fri Dec 06, 2019 9:52 am
Unfortunately, neither Vanguard nor Fidelity provide checkwriting from an individual fund - only from an account. I don't know where you'd go to find such a beast.
Sophie, I have checkwriting from many of my Vanguard funds, even a long-term muni bond fund.
I think they used to provide this, in fact I know for a fact that Fidelity did - but no longer. You probably will be able to keep your checkwriting arrangement going, but if you want to apply for them now the websites make it clear that it only applies to an account.

No idea why that is...might be a new rule that came down the pike, since it seems to be universal. I couldn't find any Treasury MM with checkwriting directly to the fund, anywhere. If anyone knows of one I'd like to hear about it.
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Re: How do you invest the Cash portion?

Post by dualstow » Thu Dec 12, 2019 10:25 am

sophie wrote:
Thu Dec 12, 2019 8:36 am
No idea why that is...might be a new rule that came down the pike, since it seems to be universal. I couldn't find any Treasury MM with checkwriting directly to the fund, anywhere. If anyone knows of one I'd like to hear about it.
Are you just going by the second bullet point on this page?
https://personal.vanguard.com/us/whatwe ... eckwriting

It's not that I don't believe you, but I don't see it. Maybe you're right that it's just grandfathered in. That would be weird, though.
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Re: How do you invest the Cash portion?

Post by Kbg » Sat Dec 14, 2019 11:49 pm

I never understood the bonds in tax advantaged accounts thing and particularly Roths. I’d much rather shelter higher growth rates and pay taxes on lower growth items unless one is going to buy and hold for a really long time on something that doesn’t pay a dividend like BRK stock.

Side note, apparently in Europe they have ETFs that auto reinvest dividends in the underlying and do not distribute them which ends up sheltering (and growing) your initial investment. Wonder if that is illegal in the states...what an awesome approach.
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Re: How do you invest the Cash portion?

Post by Kbg » Sun Dec 15, 2019 12:02 am

MangoMan wrote:
Tue Dec 10, 2019 7:47 pm
Kbg wrote:
Tue Dec 10, 2019 4:34 pm
Don’t forget, the govt can print money. So getting your money back is not really the issue. Far more likely problems are legal delays and in the ZA (new acronym for Zombie Apocalypse) inflationary devaluation.

To me for the first and most likely problem, treasury direct is a no brainer. Just you and your government, no middlemen of any kind.
Ha. Customer service on that site is notoriously awful. Imagine what it will be like with millions of people calling and emailing during the ZA. Good luck getting your money out. Cash in hand is the only thing that will be of value. And guns. And barter-able items.
I think we mix bad scenarios by degrees here. In a true ZA I’m planning on 50 acres of land I own and my ability to produce food on it and hope in my 70s I’m not following a plow horse but get to sit in my a/c cooled tractor cabin. I’m pretty sure any government entity will outgun me if they are serious about confiscating my stuff and I hope my neighbors of many years are just working their land.

Short of that, I’d much rather have the USG doing the electronic accounting with my name as the owner vs. a brokerage intermediary. Perhaps I’m too sanguine but I chose not to live my life in fear and be an optimist. My biggest financial worry is how do I set my wife up to deal with our assets when I’m gone if I pass before her.

On TD...why would I need customer service? I assume you figured out it was a self service site for buying and holding govt bonds for their duration before you purchased any right? If that wasn’t obvious you should be more deliberate before doing something like TD in the future.
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Re: How do you invest the Cash portion?

Post by Kriegsspiel » Sun Dec 15, 2019 6:46 am

Do you mean you already own 50 acres that you farm, or that you want to in the future?
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Re: How do you invest the Cash portion?

Post by sophie » Sun Dec 15, 2019 9:35 am

Kbg wrote:
Sat Dec 14, 2019 11:49 pm
I never understood the bonds in tax advantaged accounts thing and particularly Roths. I’d much rather shelter higher growth rates and pay taxes on lower growth items unless one is going to buy and hold for a really long time on something that doesn’t pay a dividend like BRK stock.
I've flipped around quite a bit on this and would love to trigger a discussion. My favorite investment for tax-deferred accounts is cash, followed closely by bonds, then gold. "Deep" gold is best in taxable, followed by stocks. I try to maximize stocks in the Roth and HSA.

I made these choices with 2 goals in mind. First, tax-deferred accounts will eventually get slammed by ordinary income tax rates, so you want to make sure you're not trading that for a preferred tax rate (i.e. the capital gains rate). Second, a dollar's growth in a Roth IRA is worth a lot more than a dollar of growth in a tax deferred account. While I can't predict which asset will increase the most in the short term, over time spans of 10-15 years or more I am pretty confident that cash and bonds will underperform stocks. Basically, I want my tax-deferred accounts to shrivel up and die while my Roth skyrockets.
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