If I go PP, do I still need a Cash Emergency Fund?

General Discussion on the Permanent Portfolio Strategy

Moderator: Global Moderator

MiniB

If I go PP, do I still need a Cash Emergency Fund?

Post by MiniB » Fri Sep 10, 2010 3:44 pm

The purpose of the PP is to provide a stable source of money with low standard deviation.  So far it's been true over the last 30 years.  Does this mean I can forgo having a 6 months cash emergency fund and instead invest that money into the PP?

Right now, my 6 months emergency fund is about 10% of my overall net worth.  If I keep that in cash and go PP with the other 90% then I feel like am holding a lot of cash for a young person.

If I put my 6 months emergency fund along with all of my holdings into PP, then if I have an emergency, I can withdraw from the 25% cash portion, and if that causes me to drop below 15% cash then I rebalance.  Or it may push another allocation beyond 35% because of reducing overall assets (the denominator of the % calculation gets smaller so even with the same numerator it becomes a bigger ratio).

The downside of putting your emergency fund into your 60/40 or 80/20 stock/bonds traditional portfolio is that you may be forced to sell when both stocks and bonds are down.  With the PP, there is rarely times where the whole thing is down, and if so, it's not down by much.

Does anyone else feel comfortable merging their emergency cash fund with their PP?

Does this provide an added advantage to younger and lower net worth investors to use the PP, because it allows them to better grow their money?  For these people, a 6 month emergency fund may be 50% or more of their total assets. Having that large percentage of your assets sitting in cash for emergencies will severely reduce growth.  If the PP is safe enough to encompass your emergency fund, then you should be able to increase growth.
User avatar
melveyr
Executive Member
Executive Member
Posts: 971
Joined: Mon Jun 28, 2010 3:30 pm
Location: Seattle, WA
Contact:

Re: If I go PP, do I still need a Cash Emergency Fund?

Post by melveyr » Fri Sep 10, 2010 3:55 pm

I am quite young, 19 in fact. I have 90% of my money in the PP. I am very comfortable with this because it has proven itself to me. I don't think it would be crazy for you to put your emergency money in the Permanent Portfolio. The reason I use the PP is because I am so comfortable putting a lot of money into it. I'm sure many advisors would tell me I'm too conservative for my age, but I enjoy having flexibility, especially when the economy is doing poorly. If I were you I would go for it. I think the PP is low risk enough to pull off use as an emergency fund. Why not let your emergency fund grow?
everything comes from somewhere and everything goes somewhere
User avatar
KevinW
Executive Member
Executive Member
Posts: 945
Joined: Sun May 02, 2010 11:01 pm

Re: If I go PP, do I still need a Cash Emergency Fund?

Post by KevinW » Fri Sep 10, 2010 4:16 pm

MiniB wrote: Does anyone else feel comfortable merging their emergency cash fund with their PP?
Yes.  I asked a similar question in this thread: http://crawlingroad.com/forum/index.php?topic=152.0

I don't think you need a separate emergency fund when you're using the PP.  One proviso is that, if you're using tax deferred accounts such as 401(k)s, you need to carve out 6-12 months' expenses in a taxable account that you can liquidate at any time.  My plan is to keep that much in a taxable cash account, and count the balance toward the 25% cash allocation.
MiniB wrote: Does this provide an added advantage to younger and lower net worth investors to use the PP, because it allows them to better grow their money?  For these people, a 6 month emergency fund may be 50% or more of their total assets. Having that large percentage of your assets sitting in cash for emergencies will severely reduce growth.  If the PP is safe enough to encompass your emergency fund, then you should be able to increase growth.
I think it does.  If someone starts from scratch, saves 2 months of expenses per year (to make for round numbers), and follows the advice to save a 6 month emergency fund before investing in a 80/20 portfolio, then for ~3 years they are 100% in cash.  After ~4 years they are 87.5% cash, 10% stock, and 2.5% bond.  Cash is the majority position for many years, and the PP will likely provide greater returns during this ramp-up period.

IMO this is an important counterargument to the complaint that the PP is too conservative for a young investor.  Actually, when you consider the emergency fund as part of the portfolio, which it is, the PP has a beginner invested in productive assets and earning healthy returns from day one.  The conventional advice amounts to saving cash for several years before investing to any significant degree.
User avatar
ochotona
Executive Member
Executive Member
Posts: 3353
Joined: Fri Jan 30, 2015 5:54 am

Re: If I go PP, do I still need a Cash Emergency Fund?

Post by ochotona » Thu May 28, 2015 12:21 pm

Hey, why not resurrect a really old thread? It's relevant  ;)

I have been through a hairball of a year, and I have tons of cash lying around. I'm going to push it into a taxable account PP, therefore spendable but I want to keep more than like 36% in cash, rest divided evenly equity / gold / bonds. And ETFs, in case I have to sell it quickly for any reason.

An over-cashed PP backtests great, very smooth, like 1 down year in the past 40.
LC475
Executive Member
Executive Member
Posts: 427
Joined: Tue Oct 08, 2013 4:23 pm

Re: If I go PP, do I still need a Cash Emergency Fund?

Post by LC475 » Thu May 28, 2015 12:51 pm

It's a great resurrect, and to the question "If I go PP, do I still need a Cash Emergency Fund?", I say No.  KevinW put it well.  The cash portion of the portfolio is, as long as you keep it liquid and accessible, well, cash.  There is no need to have even more cash.  Just make sure that you have enough of it not locked up in a 401k or IRA, giving you ready access to enough of a slush fund to make you comfortable.

The one downside is complexity.  It's a lot easier to just maintain a checking account and keep adding funds to it as your savings plan than it is to set up a HBPP, especially when you're young and not talking about tons of money, just a few thousand, and the returns you're missing out on are also relatively small.  Now if someone were to set up an extremely easy way to have a HBPP account with a debit card that worked like a checking account..... 8)  That would be the bees knees.
User avatar
ochotona
Executive Member
Executive Member
Posts: 3353
Joined: Fri Jan 30, 2015 5:54 am

Re: If I go PP, do I still need a Cash Emergency Fund?

Post by ochotona » Thu May 28, 2015 1:14 pm

LC475 wrote: Now if someone were to set up an extremely easy way to have a HBPP account with a debit card that worked like a checking account..... 8)  That would be the bees knees.
Schwab Bank. And the four ETFs trade fee-free.
User avatar
dualstow
Executive Member
Executive Member
Posts: 14231
Joined: Wed Oct 27, 2010 10:18 am
Location: synagogue of Satan
Contact:

Re: If I go PP, do I still need a Cash Emergency Fund?

Post by dualstow » Thu May 28, 2015 7:02 pm

ochotona wrote: Hey, why not resurrect a really old thread? It's relevant  ;)
And who can resist a title like "If I go pp"
Sam Bankman-Fried sentenced to 25 years
User avatar
ochotona
Executive Member
Executive Member
Posts: 3353
Joined: Fri Jan 30, 2015 5:54 am

Re: If I go PP, do I still need a Cash Emergency Fund?

Post by ochotona » Sat May 30, 2015 6:57 am

How about this ETF for the "Emergency Pee-Pee"  ;D ?

Schwab U.S. Dividend Equity ETF™ SCHD
atrus138
Junior Member
Junior Member
Posts: 19
Joined: Tue Jun 16, 2015 1:05 pm

Re: If I go PP, do I still need a Cash Emergency Fund?

Post by atrus138 » Fri Jun 26, 2015 12:26 pm

I keep mine separate. The emergency fund for me is for unforeseen events now. My Permanent Portfolio is for my future. Personally, I don't want to use my emergency fund money to rebalance if the other pieces drop. I feel that that would add risk in an area intended for security.
User avatar
mathjak107
Executive Member
Executive Member
Posts: 4456
Joined: Fri Jun 19, 2015 2:54 am
Location: bayside queens ny
Contact:

Re: If I go PP, do I still need a Cash Emergency Fund?

Post by mathjak107 » Fri Jun 26, 2015 12:48 pm

we are retiring. we keep the permanent portfolio cash seperate from our spending down money and our emergency stash.

i treat the pp cash like owning call options for lower asset prices down the road.

it will be a fully ear from now when we will pull equally from all 4 parts and refill the following years spending money.

it took some thinking to get this all under some plan.
Last edited by mathjak107 on Fri Jun 26, 2015 12:50 pm, edited 1 time in total.
User avatar
sophie
Executive Member
Executive Member
Posts: 1959
Joined: Mon Apr 23, 2012 7:15 pm

Re: If I go PP, do I still need a Cash Emergency Fund?

Post by sophie » Fri Jun 26, 2015 3:43 pm

Agree with Kevin - the PP functions as your cash reserve as well as investment strategy.  It's amazing how comprehensive a financial management plan it is.  But yes, don't be in too much of a hurry to jump into the PP before you've got enough cash saved up.
"Democracy is two wolves and a lamb voting on what to have for lunch." -- Benjamin Franklin
User avatar
mathjak107
Executive Member
Executive Member
Posts: 4456
Joined: Fri Jun 19, 2015 2:54 am
Location: bayside queens ny
Contact:

Re: If I go PP, do I still need a Cash Emergency Fund?

Post by mathjak107 » Fri Jun 26, 2015 4:13 pm

i agree with the don't jump in to the pp to quickly in time. it  is more for preserving assets rather than making them.  the fact it did both for a while was out of the ordinary.
fishdrzig
Associate Member
Associate Member
Posts: 46
Joined: Sun Nov 17, 2013 10:25 am

Re: If I go PP, do I still need a Cash Emergency Fund?

Post by fishdrzig » Fri Jul 03, 2015 7:29 pm

What ETF would you recommend as CASH for the taxable account/emergency fund?
I am presently using VMLTX which is liquid and pays off dividends tax deferred.  All my other CASH is in BIL in tax advantaged accounts presently.
Any thoughts on this?
User avatar
KevinW
Executive Member
Executive Member
Posts: 945
Joined: Sun May 02, 2010 11:01 pm

Re: If I go PP, do I still need a Cash Emergency Fund?

Post by KevinW » Sat Jul 04, 2015 7:29 pm

fishdrzig wrote: What ETF would you recommend as CASH for the taxable account/emergency fund?
I am presently using VMLTX which is liquid and pays off dividends tax deferred.  All my other CASH is in BIL in tax advantaged accounts presently.
Any thoughts on this?
This has been discussed a lot already, so you may want to try some searches.

The standard advice is that PP cash must be T-bills, not munis. An ETF may be inconvenient in taxable since its NAV fluctuates slightly, so trades will generate small capital gains and losses that are taxable events. An old fashioned stable-dollar Treasury money market would be more convenient and what I'd use in taxable. Most of these are closed but IIRC, Fidelity, Schwab, and T. Rowe Price still have open funds (probably a few others too). If you really do want an ETF, BIL and SHV are obvious choices. Some people prefer 1-3 year treasury ETFs, and SHY, VGSH, and SHO are popular choices.
fishdrzig
Associate Member
Associate Member
Posts: 46
Joined: Sun Nov 17, 2013 10:25 am

Re: If I go PP, do I still need a Cash Emergency Fund?

Post by fishdrzig » Sun Jul 05, 2015 9:17 am

So for the emergency fund, it is best to just have it all in a MM fund or T-bills ETF BUT in a taxable account, correct?  The reason for the taxable account is because of liquidity, correct?
User avatar
Pointedstick
Executive Member
Executive Member
Posts: 8864
Joined: Tue Apr 17, 2012 9:21 pm
Contact:

Re: If I go PP, do I still need a Cash Emergency Fund?

Post by Pointedstick » Sun Jul 05, 2015 3:37 pm

This is a great topic, and key I think for understanding the benefit of the PP. Many other portfolios cheat on returns by not having any cash, but in real life nobody holds no cash; they simply don't count it as part of their investment portfolio. As a result, their investment portfolios are a smaller percentage of their net worth than a PP investor would have. So an apples-to-apples comparison of two people with identical net worths, one in the PP, and the other not, would show that the PP person should have a higher amount of their money in the portfolio, or that the other portfolio should include all that cash off to the side.

If you include that cash that all investors actually hold, the returns on the cash-included total portfolio value of many common ones become much worse compared to the PP. For example, here's a standard 60/40 portfolio that's been modified to be 25% cash 75% 60/40. In other words, 25% cash, 45% stocks, 30% total bond market. PP in blue, other portfolio in red:

[img width=600]http://i.imgur.com/9mNlCGa.png[/img]

The PP wins!

So no, you don't need a separate cash emergency fund.
Human behavior is economic behavior. The particulars may vary, but competition for limited resources remains a constant.
- CEO Nwabudike Morgan
User avatar
mathjak107
Executive Member
Executive Member
Posts: 4456
Joined: Fri Jun 19, 2015 2:54 am
Location: bayside queens ny
Contact:

Re: If I go PP, do I still need a Cash Emergency Fund?

Post by mathjak107 » Sun Jul 05, 2015 3:56 pm

i like those on forums who brag about their market returns . but then they only have  10 or 15% of their money in markets and the rest is in cd ladders.
User avatar
Pointedstick
Executive Member
Executive Member
Posts: 8864
Joined: Tue Apr 17, 2012 9:21 pm
Contact:

Re: If I go PP, do I still need a Cash Emergency Fund?

Post by Pointedstick » Sun Jul 05, 2015 4:11 pm

I already did, but decided not to post that chart, for obvious reasons. :) This realization that the portfolio more or less consists of only the 75% non-cash components has been a revelation to me. I don't want that portfolio to be 1/3 each in stocks, long treasuries, and gold. At the moment I am furiously trying to decide how I will alter my portfolio. Probably not much, but I don't think I'll be able to resist throwing in SCV and international stocks.
Human behavior is economic behavior. The particulars may vary, but competition for limited resources remains a constant.
- CEO Nwabudike Morgan
User avatar
MachineGhost
Executive Member
Executive Member
Posts: 10054
Joined: Sat Nov 12, 2011 9:31 am

Re: If I go PP, do I still need a Cash Emergency Fund?

Post by MachineGhost » Mon Jul 06, 2015 12:50 am

Funds, ETF or mutual funds, for cash are a very bad idea.  The management fees are higher than the interest earned.  It's a negative proposition you must refuse!
"All generous minds have a horror of what are commonly called 'Facts'. They are the brute beasts of the intellectual domain." -- Thomas Hobbes

Disclaimer: I am not a broker, dealer, investment advisor, physician, theologian or prophet.  I should not be considered as legally permitted to render such advice!
User avatar
Tyler
Executive Member
Executive Member
Posts: 2066
Joined: Sat Nov 12, 2011 3:23 pm
Contact:

Re: If I go PP, do I still need a Cash Emergency Fund?

Post by Tyler » Mon Jul 06, 2015 1:06 am

Desert wrote: I do dare you to do one thing though:  Post the above chart once more, but start it in 1975, the year it became legal to own gold in the U.S.  It'll be interesting, I promise. 
I'd still take the PP.

[img width=300]http://s16.postimg.org/9ml43bkxh/60_40_cash.jpg[/img]
Last edited by Tyler on Mon Jul 06, 2015 1:14 am, edited 1 time in total.
User avatar
Dieter
Executive Member
Executive Member
Posts: 655
Joined: Sat Sep 01, 2012 10:51 am

Re: If I go PP, do I still need a Cash Emergency Fund?

Post by Dieter » Mon Jul 06, 2015 1:09 am

Cash for taxable - I think "official" is to use T-Bills, but Many (most?) keep at least part in savings accounts (online & local), CDs, - rates are better, almost as safe - just keep the account at a given bank under $250,000 to be insured (Would love to have that problem.... :)

Also I-Bonds and E-Bonds.
User avatar
Pointedstick
Executive Member
Executive Member
Posts: 8864
Joined: Tue Apr 17, 2012 9:21 pm
Contact:

Re: If I go PP, do I still need a Cash Emergency Fund?

Post by Pointedstick » Mon Jul 06, 2015 4:33 pm

MachineGhost wrote: Funds, ETF or mutual funds, for cash are a very bad idea.  The management fees are higher than the interest earned.  It's a negative proposition you must refuse!
Right; if you want to do that, you need to use a very low-expense fund and go out on the yield curve a few years, which I think most of us are doing at this point. SHY is net-positive, for example, and IMHO offers negligibly more risk than something like BIL.
Human behavior is economic behavior. The particulars may vary, but competition for limited resources remains a constant.
- CEO Nwabudike Morgan
LC475
Executive Member
Executive Member
Posts: 427
Joined: Tue Oct 08, 2013 4:23 pm

Re: If I go PP, do I still need a Cash Emergency Fund?

Post by LC475 » Mon Jul 06, 2015 4:36 pm

Pointedstick wrote: I don't want that portfolio to be 1/3 each in stocks, long treasuries, and gold.
Why not?
User avatar
Pointedstick
Executive Member
Executive Member
Posts: 8864
Joined: Tue Apr 17, 2012 9:21 pm
Contact:

Re: If I go PP, do I still need a Cash Emergency Fund?

Post by Pointedstick » Mon Jul 06, 2015 4:40 pm

Tyler, when are you going to get a website set up for that backtester you've made? Those visualizations are just outstanding! At least make it public somehow. :)
Human behavior is economic behavior. The particulars may vary, but competition for limited resources remains a constant.
- CEO Nwabudike Morgan
User avatar
Tyler
Executive Member
Executive Member
Posts: 2066
Joined: Sat Nov 12, 2011 3:23 pm
Contact:

Re: If I go PP, do I still need a Cash Emergency Fund?

Post by Tyler » Mon Jul 06, 2015 4:45 pm

Pointedstick wrote: Tyler, when are you going to get a website set up for that backtester you've made? Those visualizations are just outstanding! At least make it public somehow. :)
Just a lowly ME with some Excel skills.  It's on my radar, though.  Patience!  :D
Post Reply