Making new PP. Have questions on buying Treasury Bills/Notes

[mukramesh]

Hi All,

This is my first post on this forum. I have enjoyed reading Craig's blog and the forum posts and I will likely create my own PP in the next few weeks. I have a few questions regarding the cash portion. Here is my current plan:

401k- Fidelity
Bonds: Buy long term treasuries in my 401k brokerage window. Avoid fees by holding treasuries directly instead of using ETFs.
Stocks: Use the S&P500 tracking fund in my 401k which has an expense ratio of 0.023%.

Taxable Investing-
Gold: Buy physical gold bullion and store in safe deposit box.
Cash: Purchase 50% T-Bills and 50% Treasury Notes (slighly higher returns than going pure T-Bills). Do you recommend going 100% Treasury Notes since this historically shows higher returns? What are the considerations?

Roth IRA- Currently Interactive Brokers. Considering moving to Merrill Edge/Bank of America
Variable Portfolio. Speculation, market timing, fun stuff.

My second question is this. I am currently a Bank of America customer (checking, savings) and I also have their BankAmericard Cash Rewards Credit Card. Apparently if you invest using Merrill Edge and are a BoA customer, there are a number of perks for having a total account value above certain thresholds. I can get increased rewards for the credit card and no fees for the checking/savings accounts and other services. They also offer 30+ free trades per month. Also, buying and selling Treasuries in Merrill Edge is commission free. Would I be better off handling the Cash portion through Merrill Edge or should I be using Treasury Direct? Another issue is that you cannot sell your treasuries in Treasury Direct; I would have to transfer them to an outside broker to sell anyways.  I'm starting to think that to avoid the hassle and to receive the other perks, I might be better off using Merrill Edge. Is there a significant downside to using Merrill Edge vs. Treasury Direct?

I am also considering moving my IRA (Variable Portfolio) to Merrill Edge to take advantage of the 30 free trades per month, no account minimums, etc. Would this be considered too little institutional diversification? I would be entirely concentrated in BoA/Merrill Edge and Fidelity.

FYI, my Taxable investing account and 401k are almost the same size, but in future years (as I get raises from work, etc.) I expect my taxable investment account to grow faster than the 401k. I will have to figure out how to rebalance everything to get the appropriate 25% allocations while maximizing tax efficiency. Also if I decide that my Variable Portfolio is a waste of time, I might convert it into part of my PP. But that may be a separate forum post when the time comes. Unless you guys have some quick thoughts you think would help 

I appreciate any advice you can give!

[mukramesh]

I just spoke with a Merrill Edge rep and found out that they do not have an auto-rollover feature to automatically purchase new treasuries when an old one matures (Fidelity has this). So I guess using Merrill Edge is only feasible when using Short Term Notes (1-3 yr) since I'd have to manually purchase new ones. I wouldn't want to deal with this several times a year for the T-Bills.

[goodasgold]

Gold: Buy physical gold bullion and store in safe deposit box.

For peace of mind, I would insure the bullion kept in the safe deposit box. Thefts from safe deposit boxes are rare, but they do happen. And for rebalancing purposes, it is helpful to hold part of your gold in an ETF.

[barrett]

mukramesh, welcome to the PP forum.

Your post has a couple of explicit questions and few others that are implied but I'll throw out a couple of ideas.

Lots of people try to juice cash returns in different ways. You want to have at least some of your cash as "dry powder" meaning that it is liquid enough that you can buy depressed assets without tax or loss considerations. T-Bills are probably best for that though they yield next to nothing currently.

Also, for both the taxable account and the 401k, I would recommend having some cash & some gold in an ETF, just because it makes rebalancing way easier. The general thought is that you don't want to use up too much of your tax-favored accounts with gold and cash, but having a bit in each account gives you more options.

Here's a simple scenario when your proposed set up would not be ideal. Let's say gold rises considerably and you want to sell some to get back to a 4X25 allocation. You would owe tax on that transaction. You would also not be able to buy stocks and LTTs with the profits because your positions in them are over in the 401k. Make sense?

I guess, just leave yourself easy rebalancing options and also keep open the possibility of tax-loss harvesting in the taxable account. I'm no expert in that area but this might help:

http://www.investopedia.com/articles/ta ... esting.asp

Good luck!

[Pointedstick]

There's a lot to be said for keeping it simple. mukramesh, you're doing a great job thinking about all of these details, but when you're first setting it up, they might be doing more to get in the way. And with cash yields so low, the difference between notes and bills is pretty paltry. Just go with whichever option is more convenient.

You've mentioned that you're planning to split your PP across a taxable account and a 401k. While that's certainly possible, it complicates rebalancing and especially portfolio contributions if, as you've said, you expect your taxable account to grow faster than your 401k. I'm in exactly the same situation, and it's for that reason that I set up two separate PPs; one in my taxable account and one in my 401k. Each one is very simple. the 401k is a 100% ETF portfolio and the taxable one has physical gold and individual bonds with the rest ETFs.

You also mentioned that your 401k has a brokerage window. That's fantastic! It's a perfect opportunity to set up a whole PP in there if you're so inclined.

[barrett]

[quote="barrett"]
mukramesh, welcome to the PP forum.

Your post has a couple of explicit questions and few others that are implied but I'll throw out a couple of ideas.

Lots of people try to juice cash returns in different ways. You want to have at least some of your cash as "dry powder" meaning that it is liquid enough that you can buy depressed assets without tax or loss considerations. T-Bills are probably best for that though they yield next to nothing currently.

Also, for both accounts, I would recommend having some of each asset including some gold in an ETF for your 401k, just because it makes rebalancing way easier. The general thought is that you don't want to use up too much of your tax-favored accounts with gold and cash, but having a bit in each account gives you more options.

Here's a simple scenario when your proposed set up would not be ideal. Let's say gold rises considerably and you want to sell some to get back to a 4X25 allocation. You would owe tax on that transaction. You would also not be able to buy stocks and LTTs with the profits because your positions in them are over in the 401k. Make sense?

I guess, just leave yourself easy rebalancing options and also keep open the possibility of tax-loss harvesting in the taxable account. I'm no expert in that area but this might help:

http://www.investopedia.com/articles/ta ... esting.asp

Good luck!

Just made an edit on this post for clarification. Pointedstick likes a PP in every account and I am essential advocating a modified PP in every account. I just can't justify a 25% zero-yielding cash position in a tax-advantaged account.

[mukramesh]

Thanks for the input everyone. Let me explain my current plan in more detail and maybe you can explain why a separate PP in each account would be better.

I am currently planning on treating my entire portfolio (taxable brokerage and 401k) as a single PP. Since both accounts are approximately the same size right now, I will start out with the bond and stock portion in the 401k since these are the least tax efficient. I do not consider cash tax inefficient since yields are so low. Future contributions to the 401k will go into Fidelity's Income fund which is their stable value/cash equivalent fund. As this account grows, the cash portion will grow as well. Once I hit a rebalancing band, I can use this cash portion for rebalancing purposes. I wouldn't want to sacrifice valuable tax advantaged space for more cash and definitely not for gold (no dividends).

My taxable savings will be used to buy physical gold bullion and short term treasuries (bills and/or notes). As I get future paychecks, these will just sit in my savings account and count towards the cash portion. This cash can be used for future rebalancing.

In time, my taxable investing/savings will outgrow the 401k. When this happens, I would start purchasing stock ETFs. since these are more tax efficient than bonds.

Hypothetically, if gold goes up and hits a rebalancing band, I would sell it to purchase the other assets. Rebalancing in my 401k between funds is commission free, as is purchasing and selling treasuries. If there isn't enough room in the 401k, I would just purchase some of the stock portion in a taxable brokerage.

Summary:
Initially-
401k holds bonds and stock. Future contributions in cash.
Taxable holds gold and cash. Future contributions in cash.

In time-
401k holds primarily bonds, some stock. Future contributions in cash.
Taxable holds gold, cash, rest of stock that won't fit in 401k. Future contributions in cash.

Why would it be better to do a separate PP in each account? I would not be taking full advantage of tax advantaged space and I would increase commissions/expenses in all accounts.

Additionally, what is the advantage of having some gold ETFs over only holding physical gold? I'm sure everyone is already aware of the disadvantages/risks of gold ETFs as documented in Craig's book. The only advantage I can think of is that we can buy a gold ETF at smaller increments than $1300 per coin so it's easier to get close to exactly 25%. I don't think it's a huge deal to get the coins and be closer to 24.5-25.5%. I mean, the moment right after I make the purchase, the prices will change and I won't be at exact 25% chunks anyway.

I agree that my would be a little complicated to set up initially, but once it's done it should be on autopilot except for rebalancing and periodically dealing with the accumulated contributions as I keep getting paid (slightly more frequent rebalancing). This plan seems like it would have the lowest possible fees, much lower than multiple PPs.

I am planning on insuring the gold in the safe deposit box, but I haven't looked into the specifics if that just yet. Anyone have any recommendations on companies I should look at?

[mukramesh]

Also, the more I read on the cash section of the forum, the less sure I am about what to so with my own cash portion. I don't like the idea of getting an ETFS with an expense ratio comparable to/higher than it's yield. 1-3yr treasury ladders seem good yield/expense wise, but have some interest rate risk. A T-bill ladder is okay but more complicated to set up. A higher yielding savings account seems okay as well but had some potential risk related to collapsing institutions, FDIC failing, etc. Why is cash so complicated! 

Maybe a simple 3 month bill automatically rolling over into new bills in Treasury Direct might be the way to go?

Also TennPaGa, I guess I don't mind the increased complexity if it helps me save in fees. Once I set up the PP plan, I am not planning on rebalancing too often.

[mukramesh]

Also in Harry Browne's book, he recommends the Dreyfus 100% US Treasury Money Market Fund in the index. It currently invests in treasuries with an average effective duration of 7.5 years. Does that mean it's safer to to ladder longer term treasuries?

[barrett]

mukramesh,

In my view, the only goal of having some gold in an ETF in your 401k is to be able to sell some of it with no tax consequences in the event the asset spikes upward. Having all physical gold would be great were it not for the potential tax consequences. I think you are right to want to fill up your tax-advantaged space with LTTs and stocks because those are the income-generating assets (cash will be again at some point, we think). I would just have some gold and a bit of cash in there.

This is all only my personal preference. I would bet that if everyone on this forum compared their PPs, we would all be really interested to see how much variation there is in just how individual portfolios are set up.

There's also no reason you can't change your mind and tweak things over time.

[rickb]

Also, the more I read on the cash section of the forum, the less sure I am about what to so with my own cash portion. I don't like the idea of getting an ETFS with an expense ratio comparable to/higher than it's yield. 1-3yr treasury ladders seem good yield/expense wise, but have some interest rate risk. A T-bill ladder is okay but more complicated to set up. A higher yielding savings account seems okay as well but had some potential risk related to collapsing institutions, FDIC failing, etc. Why is cash so complicated! 

Maybe a simple 3 month bill automatically rolling over into new bills in Treasury Direct might be the way to go?

I think many folks here share the sentiment that cash is the most complicated asset.  A 3-month bill automatically rolling over at TD is fine.  You could also do a ladder of 1-3yr notes that automatically rollover at TD.  You can do either of these at Fidelity as well.  Many folks here put a portion of their cash in I-bonds.  If you live in a high tax state, you might consider Sophie's trick involving buying high coupon aftermarket bonds to manufacture a capital loss. 

Also in Harry Browne's book, he recommends the Dreyfus 100% US Treasury Money Market Fund in the index. It currently invests in treasuries with an average effective duration of 7.5 years. Does that mean it's safer to to ladder longer term treasuries?

I strongly suspect this fund has stretched their duration to increase their effective yield, and Harry would no longer recommend them.  Calling themselves a "Money Market" fund with an average duration of 7.5 years seems kind of disingenuous.

I am planning on insuring the gold in the safe deposit box, but I haven't looked into the specifics if that just yet. Anyone have any recommendations on companies I should look at?

See this thread.

[LC475]

mukramesh,

I think your plan sounds beautiful.  You are in the accumulation stage, and because of that it's less likely that you're going to have to sell any gold, ever.  You can rebalance by simply not buying more for a while if you look at it at your annual rebalancing check and see it's getting high.

You want at least some cash outside of the tax shelter, because a big benefit and key characteristic of cash is that it is liquid.  If it's all locked up in the tax shelter, you do not have that advantage.  It is no longer liquid.  You can't use it as a floating emergency/whatever-comes-up fund.  And so your plan to have all or most of the cash outside the 401k seems perfect to me.  Especially, as you say, with the current interest rate situation, it only makes good sense.  If down the road things were to change and cash were earning 4, 6, 10% interest, you can easily reshuffle things so the stocks are outside the 401k and the cash is inside.

I would move the Variable Portfolio out of the Roth and into taxable instead, because chances are that your gains in it will be less than in the PP, and thus it benefits less from protection from taxes on those gains, because they are lower.

I would also scrap the Variable Portfolio altogether for the same reason: because chances are that your gains in it will be less than in the PP.

For the cash, what makes sense to do depends on your spending habits and future plans and also how big this total investment pie is.  Maybe it would make sense to have a few thousand dollars at in a treasury money market fund with a debit card or check-writing capability to be your checking account and main financial hub for all your expenses into which your paycheck gets ACHed, and then a ladder of 3-month T-Bills with the rest of the cash.

[sophie]

Mukramesh,

50% T bills and 50% 1-3 year notes is too heavily weighted toward the notes.  The increased yield isn't enough to be worth the interest rate risk, or to merit your time spent.

Unless you have a large pile of cash (e.g. $25K), Treasury money market accounts are not available to you.  There's a thread somewhere (that may be worth unearthing and sticky-ing) on what cash instruments people on the forum are using.  Here's a reasonably simple list of options for you:

"Shallow" cash, or what Craig calls "dry powder":
1. Bank savings account - not HB-recommended but convenient & easy to access.  Just limit what you put in there.
2. T bills in Treasury Direct or a brokerage with auto-rollover.  Essentially a DIY money market account.  3 month is a good suggestion and it's what I use.
3. Short term treasuries purchased on the secondary market that will mature in one year or less (if you're playing the high state tax game)

"Deep" cash, should be no more than 1/3 of total cash allocation.
1. Series I or EE bonds.  The tax deferral makes them a de facto nondeductible IRA, if you're less than 30 years from retirement.  Return is better than CDs.
2. 1-3 year Treasury notes, or bonds bought on the secondary market.

Good luck and enjoy setting up your PP!

[barrett]

Sophie,

You have been missed around here.

Nice post as always.

[sophie]

Thanks...was mainly just busy.  Two new graduate students, multiple grant applications and an upcoming study section will do that to you...

[mukramesh]

Thanks for the replies everyone.

Rickb, I actually live in Texas so there is no state income tax to worry about. And thanks for the info on insuring gold. I will definitely be looking into that.


LC475, yes I was thinking the same thing about it being very unlikely that I will need to sell gold since I'm currently in the accumulation phase. And yes, if the rate on cash ever goes up, I shouldn't have much trouble rebalancing things within the 401k.

I also totally get what you're saying about the VP likely performing worse than the PP. I wouldn't be surprised if you are correct. But since I am so early in my career, I don't mind taking on the extra risk and really convincing myself that the PP is the way to go. I'd rather learn that lesson now than consider speculating in the future when I have a lot more to lose.


Barrett, if I end up deciding that my VP is a waste of time, I might stick a portion of the gold in an IRA in the future. That's a big maybe, though, since I'm still not convinced that gold in a tax-advantaged vehicle is the way to go. But you're right, I may change my mind someday.


Sophie, I am actually approaching that $25k for the cash portion, and should be over that pretty soon. But, I would rather stay away from the Money Market Funds though since the expense ratio is likely to be higher than the return. I'm fine with the 'DIY money market account' using auto-rolling over t-bills at Treasury Direct.

I've actually been reading up on I-bonds. I am probably going to buy up to the $10k limit for this year and stick the rest of my cash portion (except emergency funds in a savings account) in auto-repurchasing bills at treasury direct.


I think I am very close to having my entire PP plan figured out! The only thing that is left is to find a reputable gold dealer. Does anyone have an online dealer they recommend, or would I be better off finding a local dealer? Should I get one of those devices to test for fake coins?

[dualstow]

LC475 <snip>
I also totally get what you're saying about the VP likely performing worse than the PP. I wouldn't be surprised if you are correct. But since I am so early in my career, I don't mind taking on the extra risk and really convincing myself that the PP is the way to go. I'd rather learn that lesson now than consider speculating in the future when I have a lot more to lose.

Smart.

I think I am very close to having my entire PP plan figured out! The only thing that is left is to find a reputable gold dealer. Does anyone have an online dealer they recommend, or would I be better off finding a local dealer?

It's up to you, but since I was nervous about buying physical gold in general and about using the mail, I started out buying a small amount in person, if I remember right. That removes one "nerve agent" from the equation, and it was convenient because there are dealers that are walking distance from me. Even if that walk presents its own scare, it's different from depending on the post office.

After my first purchase, I calmed down somewhat. I started using a dealer on the other side of the country that I heard about here but have since moved to my father's dealer. Wife and I are temporarily in an apartment with a good guard and package receiving system, better than dealing with the post office at my house.

I guess it boils down to whether you would feel more comfortable walking/driving your gold home and then to a safety deposit box, or receiving packages.

[mukramesh]

I'm not really worried about buying online and having it shipped to my home from a reputable dealer. I make most of my purchases online anyway. For most purchases, I shop around for the best price and best reviewed dealers. I assume the same thing would apply to gold?

Also another gold question. I noticed that American Eagles have a .91% gold purity whereas Canadian Maple Leafs have .9999% purity, and are cheaper. Wouldn't that make Maple Leafs the better buy?

Maybe I should have posted this thread in the general PP discussion board rather than Cash. 

[Pointedstick]

Also another gold question. I noticed that American Eagles have a .91% gold purity whereas Canadian Maple Leafs have .9999% purity, and are cheaper. Wouldn't that make Maple Leafs the better buy?

You get the same one ounce of gold with both coins. But the eagle has more of other metals in it that the gold is alloyed to, so the coin is a tad heavier than the maple.

[dualstow]

I'm not really worried about buying online and having it shipped to my home from a reputable dealer. I make most of my purchases online anyway. For most purchases, I shop around for the best price and best reviewed dealers. I assume the same thing would apply to gold?

I can't relate. I buy a lot of things online, but mainly via Amazon. For me it's just a faceless corporation, unless they use a third party vendor, in which case I look for 97%+ positive reviews. In the case of gold dealers, I started with an apparently family run business with a good reputation, but my experience was not as described by older customers. It turned out that the business had been sold to new owners. Everything still went alright, just not as expected.

For what it's worth, I now use Paul at Rare Coins of New Hampshire. (I don't get kickbacks.  )

Also another gold question. I noticed that American Eagles have a .91% gold purity whereas Canadian Maple Leafs have .9999% purity, and are cheaper. Wouldn't that make Maple Leafs the better buy?

Maybe I should have posted this thread in the general PP discussion board rather than Cash. 

We won't tell if you won't. Maybe this can be the omnibus Mukramesh thread.

To add to what PS said, Maple Leaf coins are more easily scratched because they lack the metals that make krugerrands and eagles harder (copper and copper/silver). They are yellower and prettier to some, though. Do check out previous threads in the gold section. Good luck!

[mukramesh]

Okay you still get the full 1 ounce of gold. I may split my gold 50/50 between American Eagles and Canadian Maple Leafs even if it doesn't really get me anything.
I might also get the coin balance to check for fakes, just in case.

We won't tell if you won't. Maybe this can be the omnibus Mukramesh thread.

Thanks!

[Pointedstick]

Personally, I really like Philharmonics. Absolutely beautiful! I find Maples a bit dull, though. Perhaps others agree and that's why they tend to be a little cheaper.

With well-traded coins such as these, it's really all about the shiny factor. Just buy what you find pretty! And then maybe diversity a bit so you have at least a few Krugs and Eagles.

[mukramesh]

Thanks for your help everybody! I have (pretty much) built my PP. I have ordered half of the gold portion and will wait to receive it before ordering the second half. Cash is in an I-Bond; I will put the rest in short-term treasuries once I'm done with my gold purchases. Stock portion is invested in my 401k's Equity Fund and 30 Yr Treasury Bonds have been purchased in my 401k as well.

Here's hoping for a not-too-bumpy ride

[stuper1]

Congratulations!  I'm guessing from some of your posts that you are relatively youngish.  I only wish I had discovered the PP when I was in my 20s, rather than spending 20 years of floundering.

Now, the best thing that you can do is not check the portfolio very often.  Maybe every 3 to 6 months, or even just once a year.  Otherwise, it starts to look like a bumpy ride, even though it's really not any bumpier than it's always been.  If you do have to look more often, make sure to look at it in comparison to previous ups and downs to keep things in context.

[LC475]

LC475, yes I was thinking the same thing about it being very unlikely that I will need to sell gold since I'm currently in the accumulation phase. And yes, if the rate on cash ever goes up, I shouldn't have much trouble rebalancing things within the 401k.

I also totally get what you're saying about the VP likely performing worse than the PP. I wouldn't be surprised if you are correct. But since I am so early in my career, I don't mind taking on the extra risk and really convincing myself that the PP is the way to go. I'd rather learn that lesson now than consider speculating in the future when I have a lot more to lose.. Does anyone have an online dealer they recommend, or would I be better off finding a local dealer? Should I get one of those devices to test for fake coins?

Yeah, I was mostly just joking anyway.  Mostly!   

Hope you found a good price on the gold.  Happy sailing!