Gyroscopic Investing

Hello,

HB said that since treasuries are guaranteed to earn taxable income every year, people who have taxable and non-taxable accounts should put treasuries in the non-taxable account.  But given how the value of treasuries have been inflated by QE, I'm afraid that my IRA could get decimated if I put 100% treasuries in it, and then QE stops and bonds crash.  I know HB said we should never try to predict the future, but this seems like it is very likely to happen, eventually.  We all saw what happened when Bernanke first announced that QE may be ending soon - big bond crash. 

I am still putting 25% of my overall assets in treasuries, but it really spooks me to make my IRA 100% treasuries.  Does anyone have any advice?  Should I just totally put my fears aside and put 100% treasuries in my IRA?  The vast majority of my assets are in taxable accounts, so my IRA makes up much less than 25% off my assets.  So, even if I put 100% treasuries in my IRA, I will need to hold additional treasuries in a taxable account.  I just want to do the right thing, even if it feels wrong.

Thanks!

You could consider making two separate 4x25 PPs, one in the IRA and the other in taxable. That way you will have no reason to second-guess your asset placement. And if the IRA is a small percentage of your assets, the difference in tax efficiency will be small.

jason wrote: HB said that since treasuries are guaranteed to earn taxable income every year, people who have taxable and non-taxable accounts should put treasuries in the non-taxable account.

HB recommended putting bonds into IRAs when interest rates were MUCH higher.  To play devil's advocate, you could say that the long-term treasuries are yielding historically low amounts of interest, and that interest from treasuries is exempt from state taxes - both reasons to keep them outside of your IRA.  Also, IF rates go up, then its better to have those LT bonds outside of your IRA, where you can claim the capital losses.

Personally, among the 3 risky PP assets, I would prefer to have gold protected inside the IRA at this point - lots more upside potential there, which I would like to shield from taxation.

Austen Heller wrote:

jason wrote: HB said that since treasuries are guaranteed to earn taxable income every year, people who have taxable and non-taxable accounts should put treasuries in the non-taxable account.

HB recommended putting bonds into IRAs when interest rates were MUCH higher.  To play devil's advocate, you could say that the long-term treasuries are yielding historically low amounts of interest, and that interest from treasuries is exempt from state taxes - both reasons to keep them outside of your IRA.  Also, IF rates go up, then its better to have those LT bonds outside of your IRA, where you can claim the capital losses.

+1.  It makes good sense to put at least some bonds in taxable, where you can harvest losses.  If and when rates go up to, say, 6% or higher, shifting more of them into retirement accounts would be reasonable since the returns will be high enough to soften potential losses.  If there are losses, that means the new bonds you buy will have still higher yields, with yields increasing a LOT more per % loss on the face value.  For example, a yield increase from 3 to 3.5% results in about a 5-6% loss in the face value of the bond.  A yield increase from 6% to 7% will have the same impact on the face value, but instead of a half percent increase on annual return, you get a 1% increase.

It makes good sense to have some of each asset in each type of retirement account (non-taxable vs tax-deferred), although there's no need to complicate things by tracking two separate PPs.  It would be really annoying to have one type of account concentrated on 1 or 2 assets that end up plummeting at the wrong time.  In my PP spreadsheet, I have a little auto-calculation for each asset of the % in each type of account.

I think I'd go with Kevin's suggestion. In the current environment I would not want 100% anything in my IRA, much less super low yielding bonds. Just make a separate 4x25 Permanent Portfolio.

Are you talking about a Roth IRA or one that is tax-deferred? If the latter I don't see why you would be so worried about its value relative to your taxable accounts. The IRA could very well end up costing you more in taxes than the taxable account.

notsheigetz wrote: Are you talking about a Roth IRA or one that is tax-deferred? If the latter I don't see why you would be so worried about its value relative to your taxable accounts. The IRA could very well end up costing you more in taxes than the taxable account.

It's a traditional IRA right now, although I am considering changing it to a Roth IRA, although I am a bit skeptical as to whether or not Roth IRAs won't be taxed again down the road.  A traditional IRA is still a "tax advantaged" account in that it can grow for the next 20 plus years tax-free, and only be taxed when I take the funds out gradually.  The treasuries and cash are the only assets that anyone can know, for sure, will incur taxable gains/income.  Gold and stocks may not go up. 

I just re-read that portion of Browne's book Fail-Safe Investing, and I think I confused what HB and CraigR said.  HB actually said people should keep cash in their IRA, and add bonds if your cash portion doesn't fill your IRA.  Putting cash in my IRA , currently making 0.01%, sounds counter-intuitive.  Browne's exact words were:

"Treasury bills (or a money market fund) produce interest income each year, which is fully taxable. So if you have an IRA, Keogh, 401(k), or other pension plan, that would be the best place to keep the cash portion. This allows the
interest to compound tax-free for many years.  Bonds also pay interest twice yearly, in addition to offering potential price
gains. So if the cash portion doesn’t fill your pension plan entirely, use the remaining space for the bonds."

CraigR has a different take at https://web.archive.org/web/20160324133 ... ling-ride/
Craig seems to say that bonds should be the first thing you fill you IRA with, and cash is second, which is the reverse of what HB said.  Craig wrote:

"4 January, 2010 at 6:23 pm
Brianh,

If you can, try to put the bonds into your tax shelter first before putting in things like stocks or gold. Bonds and cash are by far the worst tax offenders and can benefit the most from tax deferral. So perhaps sell down your stocks in the IRA and replace them with bonds through your custodian could be an option. If you run out of room after to hold the stocks, then you can own them in taxable if you use a very low cost low turnover broad index fund. The tax impacts in that case are not severe as they are with bonds. Gold can also be stored outside of the tax-deferred as it generates no interest/dividends and only capital gains when sold. So it’s also not as bad as the bonds/cash holdings."

Does CraigR still feel the same way?  When placing cash versus bonds in an IRA, don't bonds typically yield more over the long term than cash?  What Craig said makes more sense to me than what HB said, intuitively.  Does anyone have any ideas what HB might have been thinking when he said IRAs should first be filled with cash, and then bonds, second?  Maybe HB was thinking that bonds can go either up or down, but cash can never go down, so cash is more of a sure thing as far as taxes are concerned.

Ad Orientem wrote: In the current environment I would not want 100% anything in my IRA, much less super low yielding bonds. Just make a separate 4x25 Permanent Portfolio.

This is the best way to go...let me tell you why I think so.  Up until this week, I had my entire IRA stuffed full of GLD (I know, paper gold ain't the real thing).  This week GLD took a big dive, and the losses to my account balance made me realize that it is just too risky to have any one single asset make up the majority of your IRA.  The IRA is money that is "precious to me"; it cannot be easily recreated, unlike money in taxable accounts.  So I will rearrange my accounts so that EACH account type is more balanced.