How do you invest the Cash portion?

Discussion of the Cash portion of the Permanent Portfolio

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sophie
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Re: How do you invest the Cash portion?

Post by sophie » Mon Dec 16, 2019 8:01 am

dualstow wrote:
Mon Dec 16, 2019 7:51 am
sophie wrote:
Mon Dec 16, 2019 7:47 am
Off the initial topic though...I'm genuinely interested in what people think about distributing assets among different types of account. The Bogleheads forum has a lot of posts about keeping bonds in tax-deferred, and loading up Roth and taxable with stocks. Same idea.
When Harry wrote ‘Best Laid Plans” and even “Fail-Safe Investing”, cash was actually earning something. These days I’m happy to hold it in taxable.
Same here.

It just occurred to me that low interest rates are actually a boon for investors, in a way, because of the difference in tax treatment between capital gains & dividends vs interest. Because interest rates are low, investors are saving less in cash and putting relativey more into the stock market, especially dividend payers - at least that's my personal opinion. As I remember, when interest rates dropped below the average dividend return, there was suddenly a ton of interest in dividend stock portfolios.

Which btw is another reason why I was attracted to the idea of building up a collection of individual stocks: stock funds spin off capital gains and dividends every year, and the dividends mostly aren't qualified so they get taxed like interest. With individual stocks, I have total control of the capital gains, and all dividends are qualified.
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Re: How do you invest the Cash portion?

Post by mathjak107 » Mon Dec 16, 2019 8:17 am

dividends are never a proxy for interest ..... they both serve different purposes and work differently and one should never be used to replace the other
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Re: How do you invest the Cash portion?

Post by Kbg » Mon Dec 16, 2019 10:04 pm

On Sophie’s question.

This is a question that is logically answered objectively through basic math. Mathematically everyone should know that a taxed deposit and a taxed withdrawal at the same tax rate ends up being exactly the same. If one can defer taxes and know the withdrawal is going to be at a lower tax rate then the calculus is a no brainer.

The problem is things get very complex when you get to RMDs, Medicare premiums and passing things on to the next generation. Thus, in reality one needs to make a significant amount of assumptions. Given the complexity, I decided to make a very basic assumption which is assets that are likely to compound at a higher rate historically will continue to do so. Thus, my ROTH gets priority for growth assets and I will pay the taxes on lower growth assets as needed. For me personally, I’m blessed that my before and after tax rate could end up not changing that much. I’m literally on the edge and have no idea if I will drop or not to a lower rate (when RMDs start).

As was noted elsewhere...if you end up trading almost at all in a taxable the strategy of putting dividends and interest investments in tax deferred accounts loses luster quickly. So for me, I manage portfolios at the account level rather than trying to manage at a “macro portfolio mix” level. In other words I have a mix in taxable and deferred and lean heavy on growth in the ROTH accounts.

However, to be clear there is a mathematically “correct” answer on this question according to the assumptions one makes. If your finances are complex you probably need a financial planner to help you through it all though. I’ve been a DIYer my whole investing life but I think I’m getting to the point I need the professional planning part. (But not the investment mngt)
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Re: How do you invest the Cash portion?

Post by sophie » Tue Dec 17, 2019 8:21 am

Kbg, I suspect we all have access to the information we need to optimize tax strategy. I wouldn't expect that a financial planner would be any better at that than you are. Professionals are not incentivized to spend lots of time figuring out complexities, they'll tend to use simple one size fits all rules.

Developing a spreadsheet simulator to estimate taxes AFTER retirement would be dead useful. iORP is the closest thing to an online source, but it seems to make some simplistic assumptions. It always wants you to spend every taxable penny and Roth convert your entire 401K before taking SS.

In addition to dealing with marginal tax brackets in retirement, here's the fiscal parameters I know about (in part thanks to this board):

top of 12% tax bracket - limit for avoiding taxes on qualified dividends and capital gains
Saver's credit (< age 65)
Obamacare (< age 65) - 4x poverty level.
Medicare premiums - (> age 65) - don't remember what the threshold is.
(if you live in NY) - $85,000 income for enhanced STAR rebate, $50,000 income for SCHE (rebate of 50% of property taxes) (> age 65)

Any to add to this?
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Re: How do you invest the Cash portion?

Post by vnatale » Tue Dec 17, 2019 10:55 am

sophie wrote:
Tue Dec 17, 2019 8:21 am
Kbg, I suspect we all have access to the information we need to optimize tax strategy. I wouldn't expect that a financial planner would be any better at that than you are. Professionals are not incentivized to spend lots of time figuring out complexities, they'll tend to use simple one size fits all rules.

Developing a spreadsheet simulator to estimate taxes AFTER retirement would be dead useful. iORP is the closest thing to an online source, but it seems to make some simplistic assumptions. It always wants you to spend every taxable penny and Roth convert your entire 401K before taking SS.

In addition to dealing with marginal tax brackets in retirement, here's the fiscal parameters I know about (in part thanks to this board):

top of 12% tax bracket - limit for avoiding taxes on qualified dividends and capital gains
Saver's credit (< age 65)
Obamacare (< age 65) - 4x poverty level.
Medicare premiums - (> age 65) - don't remember what the threshold is.
(if you live in NY) - $85,000 income for enhanced STAR rebate, $50,000 income for SCHE (rebate of 50% of property taxes) (> age 65)

Any to add to this?
I always use the annual Forbes article regarding Medicare for the premium thresholds. And, I actively manage my end of year self-employment receipts so as to not have to pay any additional amounts.

https://www.forbes.com/sites/ashleaebel ... 690a912d73

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Re: How do you invest the Cash portion?

Post by vnatale » Sun Dec 22, 2019 8:26 pm

anato wrote:
Wed Sep 11, 2019 2:14 pm
vnatale wrote:
Tue Sep 10, 2019 7:20 pm
1) I Bonds. The limit is $10,000? Plus, if you overpay your taxes by $5,000 you can purchase another $5,000 with your tax refund? Is that what you do?
Yep, I try to overpay taxes. Then $10k for each one of me, my wife and 2 kids... so plenty of room there. It would mean my additional contributions for the year are north of $200k (never happened :-\)

Therefore as a single person this is what I can do for 2019 and 2020?

1) For 2019 meet any deadlines to outright purchase $10,000 of iBonds by December 31, 2019?

2) Between now and April 15, 2020 (or, October 15, 2020, if extending tax return to that date?) overpay my 2019 estimated taxes by $5,000 so that it generates a refund to purchases an additional $5,000 of iBonds in 2020?

Vinny
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Re: How do you invest the Cash portion?

Post by vnatale » Sun Dec 22, 2019 9:35 pm

jhogue wrote:
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.
If something is important to me I always want to be as close as possible to first in line. Therefore, I'm in agreement with your above statement and will only buy only U.S. Treasuries and AVOID any bank / FDIC product.

Vinny
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Re: How do you invest the Cash portion?

Post by vnatale » Mon Mar 16, 2020 5:45 pm

jacksonM wrote:
Sun Jul 07, 2019 6:57 pm
T bills for me too. Some of it is in various money market accounts at Fidelity and Vanguard for convenience sake but basically if I have a big bunch of cash it goes into T-Bills.

As for why I do this, it's because that was what HB suggested in his book and also the authors of the newer book by the folks who originally started this forum. They seemed to have spent more time thinking about these kinds of things than me and showed facts and figures for why it worked in the overall scheme of things so I didn't see any reason to delve any further to come up with my own plans.

Especially true nowadays when the best you can hope for with cash beyond what they recommended is is a minuscule improvement that doesn't really justify the risk of doing something else.
Finally getting around to thanking you for this, which is somewhat of an affirmation of how I tend to go about things. Your second paragraph describes how I prefer to find someone who has already invented the wheel rather than trying to invent that wheel on my own.

Vinny
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Re: How do you invest the Cash portion?

Post by vnatale » Mon Mar 16, 2020 5:52 pm

dualstow wrote:
Mon Jul 29, 2019 6:06 pm
Maddy wrote:
Mon Jul 29, 2019 3:25 pm
What is the critical difference between Vanguard's treasury money market fund and a short-term treasury fund?
Is one more suitable for the PP than another?
Being both a money market fund and one that holds just treasurys, VUSXX is the ultimate cash vehicle for the pp, in my opinion. As a money market, each unit is a dollar. Put in $10,000, and know that you're going to be able to take out $10,000 (plus interest earned) when you need it- Well, you should be able to get it within a day if you sell shares to your sweep account, the Federal Money Market thing.

Prime money market fund also maintains a $1 share price, but even that fell victim to "breaking the buck" in 2008 or '09, losing money with most money market funds. It's not a terrible choice most of the time.

A short-term treasury fund has the *quality* of VUSXX, but not being a money market fund, I would think it could fluctuate in value, especially if it holds some 2-year notes. You can sell shares when you want to, but they may not always be equal to what you put in. (They might be worth *more*, and the dividends might be better than VUSXX).

So, aim for something *very* short term and even then, you might want to have your core cash in either VUSXX or just t-bills held directly by you, a fine 3rd choice.

The expense ratio (ER) between the two funds may be different. VUSXX's ER is $0.09, ie a $9 annual fee if you maintain a balance of $10,000.

And finally, you need US$50,000 to get started in VUSXX, although you don't have to maintain that balance.


And, here was Dualstow prior eloquently doing what I had just done a short while ago....extolling the virtues of a treasury money fund over a treasury mututal fund.

Vinny
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Re: How do you invest the Cash portion?

Post by dualstow » Mon Mar 16, 2020 6:11 pm

Hm, I have no memory of that post. July seems like a lifetime away.
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Re: How do you invest the Cash portion?

Post by vnatale » Mon Mar 16, 2020 6:29 pm

dualstow wrote:
Mon Mar 16, 2020 6:11 pm
Hm, I have no memory of that post. July seems like a lifetime away.
July? From my perspective last Wednesday seems like a lifetime ago! Everything seemed to really start cascading exponentially starting last Thursday, a mere four days ago! The dominos started falling over at warp speed!

Vinny
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Re: How do you invest the Cash portion?

Post by vnatale » Mon Mar 16, 2020 7:24 pm

jhogue wrote:
Wed Nov 27, 2019 2:48 pm
11/27/19
drumminj,

I am not picking your poison because I agree with Harry Browne and craigr that all financial risks are not created equal:

From CraigR’s FAQ:

"Q: Why a Treasury Money Market Fund and not something else with better yield?

A: Because you are not looking to take risk with your cash. Treasury Money Market Funds that are properly run are one of the most liquid investments you can own. There are no FDIC limits to worry about, no bank credit worthiness to worry about, and you will always be paid barring some extremely catastrophic event in the country. Chasing yield with your cash means you are taking on more risk and those risks can show up when you least expect (or want) them to."

The FDIC ran short of cash during the 2008-2009 financial crisis and had to be bailed out by Congress to the tune of $100 billion. That is a fact, not an opinion or a theory.

During that same time period, there was no interruption in the secondary market in T-bills.

Happy Thanksgiving to one and all.
A reminder to those who oftentimes will say that they consider FDIC protection equivalent to holding US Treasuries. I've now reached the pointed where I've been sufficiently (good) "brainwashed" that US Treasuries are the safer investment.

Whether it will ever comes to it is another question. However, if the cash quadrant's purpose is to just be there and act as ballast then I'm going to favor safety over yield.

Vinny
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Re: How do you invest the Cash portion?

Post by vnatale » Mon Mar 16, 2020 7:50 pm

mathjak107 wrote:
Sun Dec 01, 2019 5:42 am
today pretty much a good prime money market from any of the major brokerages is fine .with the restrictions on them today the issues of the past are gone .

i put this about on par with buying gld , iau , etc for the gold portion . in the end they will likely be just fine ....

i already owned a money market that broke the buck and was closed back in 2008 .. but the stuff they were allowed to buy back then is no longer the case .

the same money printers that guarantee treasuries will be the same printers that guarantee other gov't bonds and also fdic payments to banks .
Seems that in the last few days you've amended the above to ONLY being Fidelity and Vanguard?

Vinny
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Re: How do you invest the Cash portion?

Post by vnatale » Mon Mar 16, 2020 8:21 pm

drumminj wrote:
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.


In 2020 have we yet achieved the status of "abnormal" times?

Vinny
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Re: How do you invest the Cash portion?

Post by vnatale » Mon Mar 16, 2020 8:41 pm

jhogue wrote:
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.
That is the assumption I will making...

Vinny
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Re: How do you invest the Cash portion?

Post by jalanlong » Thu Mar 19, 2020 8:51 pm

vnatale wrote:
Mon Mar 16, 2020 8:41 pm
jhogue wrote:
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.
That is the assumption I will making...

Vinny
So does an ETF like SHV or BIL count as being safer than $$ in a bank?
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Re: How do you invest the Cash portion?

Post by pmward » Thu Mar 19, 2020 9:33 pm

jalanlong wrote:
Thu Mar 19, 2020 8:51 pm

So does an ETF like SHV or BIL count as being safer than $$ in a bank?
Absolutely. Remember that ETF's are less liquid than cash though. It's still worth keeping any short term liquidity you need in a bank or money market somewhere, where you do not have to wait for a clearing window to get access to the cash if you need it.
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Re: How do you invest the Cash portion?

Post by Smith1776 » Thu Mar 19, 2020 9:59 pm

I invest the cash portion of the PP using an ETF with the ticker ZFS.

I pronounce the letters in ZFS the same way you would chant "ONE OF US. ONE OF US. ONE OF US."
I act as if God exists.

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Re: How do you invest the Cash portion?

Post by mathjak107 » Fri Mar 20, 2020 5:05 am

as long as the same owners who own the printing machines are responsible for seeing to it that fdic and treasuries are paid i would think both are as good .. i can see a bit of delay though in restocking fdic.

i moved more than i would typically keep in local banks over to chase and cit .... the rest is now in fdlxx and bil .....i show the most cash i can remember ever holding ,,

stocks are still unsold and i actually added 100k to get back to 25% , but i cut the total bond funds and high yield by half . so cash levels are crazy .....

i took advantage of all the local promos like getting 1100 bucks from citibank
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Re: How do you invest the Cash portion?

Post by mathjak107 » Sat Mar 21, 2020 6:02 am

i am starting to think that with these short term bond funds like bil , one may be better in a treasury money market than a treasury etf ..... if rates flip negative i would think yields on bil will go negative ... money markets that at least conform to the standards will not break the buck .....

i really have no idea here what would happen with the etf's as bonds come due
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Re: How do you invest the Cash portion?

Post by jhogue » Sat Mar 21, 2020 3:42 pm

I just saw this notice on Fidelity's fixed income web page:

icon-exclamation-yellowtriangle-1x Recent extreme market conditions have resulted in a lack of liquidity, wide spreads (the difference between the price a customer can buy and sell a bond), large swings in prices, and substantial increases in pressure on trading systems. This can make it very difficult to determine fair and reasonable pricing on bonds. Fidelity continues to monitor the market environment and make every effort to ensure a fair and reasonable market for our customers.

In addition, the recent drop in interest rates has caused some Treasury securities to have negative yields. While active markets do exist for these securities, pricing may not be currently available on Fidelity.com. If you are interested in buying or selling Treasury securities and cannot locate an active market on Fidelity.com, please contact a Fixed Income Specialist at 800-544-5372.
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Re: How do you invest the Cash portion?

Post by ochotona » Thu Apr 02, 2020 9:51 am

Across my entire portfolio, I have $350 in non-Treasury Money Market.
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Re: How do you invest the Cash portion?

Post by barrett » Fri Apr 03, 2020 8:17 am

ochotona wrote:
Thu Apr 02, 2020 9:51 am
Across my entire portfolio, I have $350 in non-Treasury Money Market.
I checked our accounts yesterday and we are at $242 in non-Treasury cash positions!
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Re: How do you invest the Cash portion?

Post by Genious Moran » Fri Apr 03, 2020 11:32 am

jhogue wrote:
Sat Mar 21, 2020 3:42 pm
I just saw this notice on Fidelity's fixed income web page:

icon-exclamation-yellowtriangle-1x Recent extreme market conditions have resulted in a lack of liquidity, wide spreads (the difference between the price a customer can buy and sell a bond), large swings in prices, and substantial increases in pressure on trading systems. This can make it very difficult to determine fair and reasonable pricing on bonds. Fidelity continues to monitor the market environment and make every effort to ensure a fair and reasonable market for our customers.

In addition, the recent drop in interest rates has caused some Treasury securities to have negative yields. While active markets do exist for these securities, pricing may not be currently available on Fidelity.com. If you are interested in buying or selling Treasury securities and cannot locate an active market on Fidelity.com, please contact a Fixed Income Specialist at 800-544-5372.
In addition to this, Fidelity closed FDLXX to new investors on Tuesday, I think.
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Re: How do you invest the Cash portion?

Post by foglifter » Fri Apr 03, 2020 1:56 pm

Genious Moran wrote:
Fri Apr 03, 2020 11:32 am
jhogue wrote:
Sat Mar 21, 2020 3:42 pm
I just saw this notice on Fidelity's fixed income web page:

icon-exclamation-yellowtriangle-1x Recent extreme market conditions have resulted in a lack of liquidity, wide spreads (the difference between the price a customer can buy and sell a bond), large swings in prices, and substantial increases in pressure on trading systems. This can make it very difficult to determine fair and reasonable pricing on bonds. Fidelity continues to monitor the market environment and make every effort to ensure a fair and reasonable market for our customers.

In addition, the recent drop in interest rates has caused some Treasury securities to have negative yields. While active markets do exist for these securities, pricing may not be currently available on Fidelity.com. If you are interested in buying or selling Treasury securities and cannot locate an active market on Fidelity.com, please contact a Fixed Income Specialist at 800-544-5372.
In addition to this, Fidelity closed FDLXX to new investors on Tuesday, I think.
Yes, I got an email alert about FDLXX. Apparently too many investors learned to appreciate the safety of a Treasury-only MMF. Thankfully I have it in my taxable and HSAs. 8)
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