options for cash

Discussion of the Cash portion of the Permanent Portfolio

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upside
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options for cash

Post by upside » Wed May 05, 2010 11:20 am

Cash is the only component of the PP that I'm having a hard time with. Are there any treasury money market funds that are still open? Is an ETF just as good/safe for the cash component? How about setting up a t-bill ladder at treasury direct?
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Re: options for cash

Post by craigr » Wed May 05, 2010 11:24 am

T-bill ladder is fine. An ETF that purchases t-bills like SHV is fine.

Some people (like me) have mixed in short term treasuries funds along with treasury money markets to bolster the cash not needed for immediate living expenses/emergencies. There is slightly more interest rate doing this, but it's not over the top and generally has better overall performance vs. treasury money markets.
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Re: options for cash

Post by upside » Wed May 05, 2010 12:14 pm

Thanks, Craig. I like the idea of having immediate living expenses/emergencies in a treasury money market. Can anyone point me in the direction of treasury money markets that have low expenses and are still open?
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Re: options for cash

Post by Roy » Wed May 05, 2010 12:20 pm

upside wrote: Thanks, Craig. I like the idea of having immediate living expenses/emergencies in a treasury money market. Can anyone point me in the direction of treasury money markets that have low expenses and are still open?
Vanguard Prime MM is still open.  I don't see much risk in it.  Not as cheap as I'd like but fine for CASH and you can marry it up with ST Treasuries, unless you are wholly inflation adverse. In fact, I am currently sitting in ST Treasuries but may shorten further to MM (all tax deferred).

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Re: options for cash

Post by upside » Wed May 05, 2010 12:29 pm

Roy, I see Vanguard Prime MM has only 18.5% in T-bills. Are there other funds that have 100% in T-bills (or close) that are still open?
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Re: options for cash

Post by doug6zj9 » Wed May 05, 2010 12:48 pm

American Century has the only pure treasury MM I have found that is still open.  Fidelity has one that also includes federal agency debt.  This is not technically the same as treasury bills, but is the next best I think.

upside wrote: Roy, I see Vanguard Prime MM has only 18.5% in T-bills. Are there other funds that have 100% in T-bills (or close) that are still open?
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Re: options for cash

Post by Roy » Wed May 05, 2010 12:54 pm

upside wrote: Roy, I see Vanguard Prime MM has only 18.5% in T-bills. Are there other funds that have 100% in T-bills (or close) that are still open?
No, I think that's the only one left open there, as it has to be for sweep accounts.  I personally would not worry too much on this fund as the credit rating is fine and do not see that particular fund "breaking the buck".  And you can access it without brokerage trading fees, unlike SHV.

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Re: options for cash

Post by craigr » Wed May 05, 2010 1:35 pm

MediumTex has also floated the idea of using I-Bonds for the cash which is another option if you can work within their limits. They would be as safe as t-bills. They are not however a substitute for the LT bonds in the portfolio, nor the gold. FYI.
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Re: options for cash

Post by MediumTex » Wed May 05, 2010 1:57 pm

craigr wrote: MediumTex has also floated the idea of using I-Bonds for the cash which is another option if you can work within their limits. They would be as safe as t-bills. They are not however a substitute for the LT bonds in the portfolio, nor the gold. FYI.
Series EE savings bonds are also fine for a portion of the cash holding.  They are paying a little more than a treasury MM would. 

There are lots of interesting options for the cash piece right now.
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Re: options for cash

Post by MediumTex » Wed May 05, 2010 4:59 pm

Clive wrote: Do you think a 1 to 5 year treasuries (Gilts) ladder would be too excessive for PP's 'cash'?

I ask because in the UK you can ISA (tax free account) gilts with 5 years or more to maturity at the time of purchase, so gross income is retained.  You can't however ISA Gilts with less than 5 years to maturity at the time of purchase.

My thoughts are that you could start with taxable 1 to 4 year steps and ISA the 5th year step, and then buy a 5 year duration Gilt every year in an ISA so that after 5 years all gross income would be non-taxable.

Or would that add too much additional risk?

My guess is that over the longer term the overall up's and down's would cancel each other out and it might therefore be acceptable.
If you know you will hold until maturity and are not otherwise troubled by the extra risk of the longer duration, that seems like a reasonable approach to me.  It's probably about the same as going with VFISX as far as the average maturity goes and it sounds like you have some nice tax benefits as well.
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Re: options for cash

Post by fnord123 » Fri May 07, 2010 7:01 pm

Roy wrote:Vanguard Prime MM is still open.  I don't see much risk in it.  Not as cheap as I'd like but fine for CASH and you can marry it up with ST Treasuries, unless you are wholly inflation adverse. In fact, I am currently sitting in ST Treasuries but may shorten further to MM (all tax deferred).
If one is considering vehicles like Prime MM, then I'd argue CDs are just as safe if not safer as long as one stays under the FDIC insurance limits per institution.  Furthermore, CDs pay significantly higher rates.
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Re: options for cash

Post by Quasimodo » Sun May 16, 2010 10:34 am

American Century's Capital Preservation Fund is open. It is the original T-Bill MMF.

The other suggestions were great.

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Re: options for cash

Post by Pkg Man » Sun May 16, 2010 11:40 am

I know HB recommended only Treasury MM funds, but I just can't bring myself to put a quarter of the portfolio in a fund that is earning 0% nominal and negative 1-2% in real terms.  If short-term interest rates rise a bit I would be more agreeable to use the recommended approach.

With an expense ratio of 0.49% in the American Century Fund, I wonder if it might be better to hold some of the cash portion in Short Term (1-3 year) Treasury bonds, or a fund like SHY, and the rest in the MM fund, I or EE bonds, or buried in the back yard ;D.  The weighted average maturity of the AC MMF is 48 days.  Some combination of AC MMF and SHY would still provide an average maturity of less than 52 weeks.

I have access to a fund in my 401K that is very similar to SHY and has ultra low expenses (something like 3 basis points), which is one reason I use it for part of the cash allocation. 
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Re: options for cash

Post by MediumTex » Sun May 16, 2010 1:46 pm

Pkg Man wrote: I have access to a fund in my 401K that is very similar to SHY and has ultra low expenses (something like 3 basis points), which is one reason I use it for part of the cash allocation. 
As a practical matter, that is probably your best bet.

In general, "Stable Value" funds in 401(k) plans are a great deal that people often overlook.  You can get 3-4% return with virtually no principal risk.  Stable value funds are essentially a creature of the 401(k) plan world and retail investors usually do not have access to these products except through a 401(k) plan fund lineup.
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Re: options for cash

Post by simata » Sun May 16, 2010 3:57 pm

Let say I have cash for 1-3 years of my life expenses. Why would I need to hold more cash (25% of PP)? I can't find good argument. Rest of assets stay the same (33%gold,33%LT,33%stocks).
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Re: options for cash

Post by pplooker » Sun May 16, 2010 4:44 pm

simata wrote: Let say I have cash for 1-3 years of my life expenses. Why would I need to hold more cash (25% of PP)? I can't find good argument. Rest of assets stay the same (33%gold,33%LT,33%stocks).
The reason you hold that much cash is for periods where cash carries the portfolio.  It also gives you buying power to rebalance when prices might dip radically.

The huge cash slice used to bug me too, but when I really started thinking about it, cash can also be short term bonds and even commercial products.

The term "cash" is a bit misleading as a lot of people deviate from the treasury money market fund rule.  Harry Browne was very concerned about safety so his recommendation does make a lot of sense, but I'm more risk tolerant than that myself.  I'm quite happy to put some of the cash in commercial savings which I view as being safe enough.  Browne worried a lot about counterparty risk, I don't, but I do worry about credit risk and I view FDIC insurance as suitable protection against any credit risk.  Some may disagree with me and that's fine, we're all different in our risk tolerance.  Another thing to consider is that most if not all Treasury MMFs are now closed to new members.

The cash portion might be:

- Interest bearing savings accounts
- CDs
- 1 to 3 year treasuries bought directly
- I bonds
- SHY

The thing is, all of these options do produce some degree of income.  I tend toward part I bonds part cash in a savings account myself.  I feel this is the optimal combination for yield, convenience, low cost, liquidity and ease for me.

Effectively what the 25% cash becomes though isn't so much cash, as short term bonds.
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Re: options for cash

Post by Gumby » Wed Jun 23, 2010 12:21 pm

As far as I can tell, PRTXX (T. Rowe Price's Treasury MM Fund) is open.

http://www3.troweprice.com/fb2/fbkweb/s ... cker=PRTXX

If the 0.46% and the return is 0.01%, I suppose that means you're losing money to be in the money market fund, no?
Last edited by Gumby on Wed Jun 23, 2010 1:40 pm, edited 1 time in total.
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Re: options for cash

Post by MarySB » Wed Jun 23, 2010 6:20 pm

OK.  Here is another option, not for everyone, but have to figure out what to do with an annuity  :o I bought twenty years ago.  (Obviously, I was not as smart then as I am now :D)

This annuity matures in six years, at which time I'm not sure what I will do with it.  I have a guaranteed 4% each year until then.  It seems like it might qualify for the cash portion since I can withdraw and deposit any amount until then.

Is there any reason why I should opt for a treasury MM, liquidating this annuity?  Should this be in the cash portion or the long term bond portion of the PP?
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Re: options for cash

Post by MediumTex » Wed Jun 23, 2010 10:47 pm

MarySB wrote: OK.  Here is another option, not for everyone, but have to figure out what to do with an annuity  :o I bought twenty years ago.  (Obviously, I was not as smart then as I am now :D)

This annuity matures in six years, at which time I'm not sure what I will do with it.  I have a guaranteed 4% each year until then.  It seems like it might qualify for the cash portion since I can withdraw and deposit any amount until then.

Is there any reason why I should opt for a treasury MM, liquidating this annuity?  Should this be in the cash portion or the long term bond portion of the PP?
I would hold the annuity to maturity and treat it as cash for PP purposes.
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Re: options for cash

Post by craigr » Wed Jun 23, 2010 11:01 pm

MediumTex wrote:
MarySB wrote: OK.  Here is another option, not for everyone, but have to figure out what to do with an annuity  :o I bought twenty years ago.  (Obviously, I was not as smart then as I am now :D)

This annuity matures in six years, at which time I'm not sure what I will do with it.  I have a guaranteed 4% each year until then.  It seems like it might qualify for the cash portion since I can withdraw and deposit any amount until then.

Is there any reason why I should opt for a treasury MM, liquidating this annuity?  Should this be in the cash portion or the long term bond portion of the PP?
I would hold the annuity to maturity and treat it as cash for PP purposes.
Seconded.
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Re: options for cash

Post by herbgoat » Tue Jun 29, 2010 9:09 pm

simata wrote: Let say I have cash for 1-3 years of my life expenses. Why would I need to hold more cash (25% of PP)? I can't find good argument. Rest of assets stay the same (33%gold,33%LT,33%stocks).
Somebody correct me if I'm wrong, but I think Harry Browne considered that your cash for your 1 - 3 years of life expenses would be considered as part of your Permanent Portfolio. So reduce the amount in your Permanent Portfolio by that amount. In my personal application of the PP, I reduced the cash to 20% to account for the cash I have outside the PP and I upped the stock portion to 30% to make up the difference. I chose to up the stock portion because I figure it would reduce the tracking error and help me live with the thing during times of prosperity. Also, 5% is a pretty small change so I hope I'm still within the spirit of the original.
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Re: options for cash

Post by pumpkin » Mon Jul 19, 2010 7:56 pm

In general, "Stable Value" funds in 401(k) plans are a great deal that people often overlook.
Tex, would you mind please developing this thought a bit?  I want this to be true, because it would make more of my 401K useful for setting up a PP.  However, I have some reservations; perhaps you could address them, or why in general a Stable Value fund is acceptable?

My employer just switched 401K custodians.  The Stable Value fund offered has this advertised allocation:

US Gov't/Agency    17.6%
Int'l Gov't/Agency  4.0
Other US Gov't      8.9
Taxable Muni        2.7
Corporates            23.8
Asset Backed          4.6
Mortgage Backed    30.9
Cash                    7.6

Quality Distribution
US Gov/Agency    47.2
AAA                  26.7
AA                      9.6
A                      10.8
BBB                    4.7
<BBB                  1.0

HB wanted cash to be (if I recall) in T-Bills or MM funds that invest only in T-Bills.  This has gov agency (not solely treasury), corporate, muni, MORTGAGE BACKED securities  :o and additional credit risk (going by the quality dist).

Is it really a good idea to use this fund as the cash portion of PP?  Again, I want it to work, because it would be very convenient, but I also want the cash to do it's job when called upon, without nasty surprises.
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Re: options for cash

Post by MediumTex » Tue Jul 20, 2010 8:37 am

pumpkin wrote:
In general, "Stable Value" funds in 401(k) plans are a great deal that people often overlook.
Tex, would you mind please developing this thought a bit?  I want this to be true, because it would make more of my 401K useful for setting up a PP.  However, I have some reservations; perhaps you could address them, or why in general a Stable Value fund is acceptable?
A 401(k) plan stable value fund is not as good as t-bills, but it is a good option for cash.  In order to even out the returns and make sure that the fund never has a negative return, stable value funds use insurance contracts in which an insurer will guarantee the fund doesn't fall in price.  Stable value funds are a unique investment product, and they only exist in 401(k) plans.  Right now, most of these funds are paying 3-4%, which is hard to find anywhere else with no principal risk.

With respect to holding mortgages, there is nothing wrong with holding mortgages, so long as they are not interest-only option ARMs from Florida and California.  A bundle of traditional 15 and 30 year mortgages in areas with stable property values is still a pretty safe investment.

Read the prospectus for more information, but I think that most stable value funds are suitable for the cash piece of the PP if t-bills are not otherwise available for whatever reason.

In my own case, my 401(k) plan account consists of TLT, IAU (both through a brokerage window) and the rest in the plan's stable value fund.  My stock holdings and the rest of my PP are held in other accounts.  It's funny, but I have often thought that someone looking at just my 401(k) account allocation might say I was crazy, but ironically the three investments I have in my 401(k) account have been some of the best performing assets for many years (i.e., gold, LT treasuries and cash).
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Re: options for cash

Post by LNGTERMER » Tue Aug 17, 2010 2:28 pm

In periods when currency is loosing value wouldn't that make the cash portion an extra drag on the PP?
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Re: options for cash

Post by MediumTex » Tue Aug 17, 2010 4:53 pm

Lngtermer wrote: In periods when currency is loosing value wouldn't that make the cash portion an extra drag on the PP?
It might, but we aren't interested in how the individual PP components are performing--what we are interested in is how the portfolio performs as a whole.

In reality, t-bills are going to track inflation (more or less), so if the dollar is losing value and this is manifested in rising prices, t-bill rates should reflect this dynamic.

Remember, too, that the dollar is the world's reserve currency, so there are many built-in checks against dramatic dollar devaluation (i.e., the dollar may decline 30% relative to other currencies during some periods, but it's unlikely to decline 60%).  Important among these checks is the fact that the rest of the world isn't going to watch as the dollar declines in value and the U.S.'s exports begin to get much cheaper in foreign markets.  There are way too many holders of dollars around the world for devaluation to get too much traction today, IMHO.  Also note that the pertrodollar regime puts a hard floor under the value of the dollar and this arrangement is very unlikely to end any time soon (notwithstanding some high profile defections which will get media attention but won't undermine the arrangement in any structural way).

Even in what is remembered as the disastrous inflation/devaluation in the 1970s, if you actually look at the CPI figures, there were only a few quarters in which the CPI was even in the high single digits.  In other words, what we remember as a high inflation period wasn't THAT high, certainly not anything resembling "hyperinflation."  Hyperinflation is when prices are rising in an accelerating manner over an extended period (e.g., 10% this month, 12% the next, 19% the next, 24% the next, etc.).

Finally, note that there is no precedent for any world currency EVER experiencing anything remotely resembling hyperinflation.  What is more likely to occur is a generational decline in the value of the dollar at some point, more or less coinciding with its orderly "decommissioning" as a reserve currency (this process unfolded in the UK over many decades).

There are many moving parts to this issue (many more than most pundits bother to cover).
Last edited by MediumTex on Tue Aug 17, 2010 4:56 pm, edited 1 time in total.
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