Cash level and the accumulation phase

Discussion of the Cash portion of the Permanent Portfolio

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6 Iron
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Cash level and the accumulation phase

Post by 6 Iron » Sat Jun 26, 2010 1:15 am

When I add to my permanent portfolio, it goes into the cash component initially, regardless of the account (retirement, taxable, etc). When my cash component exceeds 25%, I use the surplus to buy the most lagging component, but do not allow my cash component to drop much below 25%, allowing for minor fluctuations in cash flow for living expenses. HB would have us accumulate cash to a rebalancing band, and then rebalance the whole portfolio as a means of minimizing effort and transaction costs. Given that transaction costs are so low (or zero) with Vanguard, do others follow this pattern?

Are any of you that are in the accumulation phase more aggressive with the cash component, drawing from it down to the lower limits of your rebalancing band, and effectively more heavily weighting gold/stocks/bonds ?
herbgoat
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Re: Cash level and the accumulation phase

Post by herbgoat » Tue Jun 29, 2010 2:01 pm

I'm in the accumulation phase too. The way I did it was to reduce the Cash portion to 20% and increase the Stock portion to 30%. I then sliced the stock portion 4 ways and added some international into the mix. I did this to help a small bit with tracking error and because I wanted to be slightly more aggressive since I've got a long way to go to retirement.

I'm satisfied with my decision. I worry that I've got too much international exposure (50% of the stocks) but I think I'll stick with what I've got. For the 20% cash portion, I don't count what's in my savings/checking accounts. It makes keeping track of everything a bit easier because it's all in my brokerage account. If you count what's in checking and savings accounts then it might be closer to 25% in cash. I find that keeping track of ALL your assets with the Permanent Portfolio method becomes a bit too much. It's easier for me to think of it as a separate entity sitting in my brokerage account.

I left the gold and LT bonds at 25% each. When I get closer to retiring I will probably bring the cash and stocks to 25%.
PP4me

Re: Cash level and the accumulation phase

Post by PP4me » Fri Aug 27, 2010 5:29 pm

I helped my children set up PPs in early accumulation.  We put 33.3% in SPY, TLT, and IAU and deposit the new money in cash.  Annually, we will rebalance so that the end of year cash balance with the new money additions will equal the beginning of the year 33.3% allocation.  This is more aggressive early in the accumulation when you build cash quickly and becomes less aggressive as the portfolio grows. 

For example, up to an $18,000 portfolio, put 1/3 in SPY, TLT, IAU and zero in cash. Then each month put $500 of your $6,000 annual IRA contribution into cash.  At the end of the year starting with an $18,000 portfolio, assuming $2,000 gain for ease of example, you have $26,000.  Take the $26,000 and put $8,000 each in SPY, TLT and IAU and $2,000 in SHY.  Deposit new money in cash.  At the end of this next year, your SHY/cash balance will be $8000 which is equal to the beginning investments.  Rebalance the same way again until the cash additions become an insignificant % of your portfolo.

This method minimizes transaction fees in a brokerage account.
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