Using PRPFX vs. buying separately. Plus when to pay yourself.

[barmstrong]

Hi All,

I'm relatively new to the idea of the permanent portfolio.  After reading Fail Safe Investing - I had a few questions:

1. Using the pre-packaged fund (PRPFX) seems simpler but I suppose carries the risk of putting all your money behind one fund manager.  Is it recommended to diversify on your own and buy the four classes separately?  Is this how most people use it in practice?

2. If you are using the fund to pay yourself (either as retirement money, or a annuity), when do you pull funds out and from which class?  If you were to do it monthly from the cash portion, this may unbalance your cash account quickly.  Or do you try to do it as part of your rebalancing once a year?  Just curious how people do this in practice.

Thanks!
Brian

[SmallPotatoes]

Hi, Brian. I'm relatively new to the PP (and investing in general) also. Here are my $0.02:

PRPFX is easy and I use it as my core investment fund (including 10% EDV for a little added kick a la Medium Tex). I recommend it when starting out. As the months roll by you can consider buying a GOLD Eagle, a LT Bond from Treasury Direct, and maybe some VFINX to see if you'd like to micromanage the whole package yourself. I can't recommend ETFs (other than a little EDV) as they continue to mystify me. Not to mention the ongoing saga about GLDs legitimacy.

Personally, I only manage a fraction of my PP (e.g. bullion & bonds in a wall safe, cash at the local credit union, and a sliver of FTSE-exUS with a discount broker).  If risk is a factor in how you hold your PP (no pun intended) realize there's risk in everything you do--Harry Browne said so himself--and no one can say if PRPFX is definitively riskier than having a closet filled with cash and gold, or even 4 ETFs with four different brokers in four different states, etc

Forgive me, but this is for all you hardcore PPers out there:

When Wall Street crubmles and natural disaster ravages the Earth I'd rather have 25% water purification, 25% warm clothes, 25% hunting rifles, and 25% remote woodland Canadian cabin; you can't eat gold.

Harry Browne, eat your heart out.



Haha! Sorry for the Doomsday rant, but it's something all PPers (admit it or not) like to think about.    

[barmstrong]

I looked up EDV:
http://www.google.com/finance?q=EDV

Which asset class is it primarily?

[SmallPotatoes]

I looked up EDV:
http://www.google.com/finance?q=EDV

Which asset class is it primarily?

Extended Duration Zero Coupon Treasury Bonds.

[barmstrong]

Gotcha, thanks!

[KevinW]

1. Using the pre-packaged fund (PRPFX) seems simpler but I suppose carries the risk of putting all your money behind one fund manager.  Is it recommended to diversify on your own and buy the four classes separately?  Is this how most people use it in practice?

You are correct that there is some counterparty risk with any mutual fund.  You depend on the fund's management to do what you expect, and there's a chance they won't.  I haven't seen any evidence that PRPFX has been mismanaged, but the overall Permanent Portfolio mindset is to be cognizant of all potential risks, so you should give this some thought.

My biggest problem with PRPFX is its relatively high expense ratio of .82%.  The standard ETFs have an average expense ratio around .20%, and you can drive this lower by buying bonds and coins directly.  The spread between those figures really adds up when compounded over years.  Also be aware that the fund's strategy diverges from the "pure" 4x25 approach in several ways: it uses a different and more complex asset allocation, buys specific stock sectors instead of the total market, overweights inflation assets over the other three categories, uses active stock picking, holds some cash in Swiss francs, etc.

Overall I think the 4x25 portfolio is more elegant, and I am willing to rebalance manually to avoid the fund's higher expense ratio.  However the fund is an effective PP-style investment, and in the grand scheme of things works pretty much the same as doing it yourself.

2. If you are using the fund to pay yourself (either as retirement money, or a annuity), when do you pull funds out and from which class?  If you were to do it monthly from the cash portion, this may unbalance your cash account quickly.  Or do you try to do it as part of your rebalancing once a year?  Just curious how people do this in practice.

Browne's advice is to make all withdrawals from the cash portion, and only rebalance when an asset is outside the 15-35 band.  This may not unbalance things as quickly as you think.  If cash is 25% of your portfolio and you withdraw 4% of the entire portfolio, then after the withdrawal cash will be (25*.84)/96 = 22.5% of your portfolio.  Cash earns interest, so it will take several years to get down to the 15% threshold.