Gyroscopic Investing

Before I got into my actual question I'd like to say, I feel blessed to have found this wonderful community.

It's not everyday of the week you stumble upon sensible investing advice 

Ok, here goes my question.

If your bank gives you 2% interest per year, why should I buy short term bonds in an ETF that will most likely bring only 0,15% - 0,96% in dividends per year?

--  I followed the rest of the Permanent Portfolio to the letter.  --

The money is under the limit of what would be covered in case the bank went bankrupt.

Any advice here?

Thanks!!
  -ILM

Welcome to the forum!  +1 on the username!

Short answer: Cyprus type default on FDIC.

However, Cyprus' banks were essentially a money laundering system for Russian mobsters, so that case doesn't fully translate to developed countries, IMO.  And from what I have read they first wanted to default on Cyprus' government debt, but it was dwarfed by the size of the countries banking assets, so they didn't bother defaulting on the government debt.

There is also the case of Greek government bonds receiving a ~50% haircut while Greek checking/savings accounts were unaffected.

If the US defaults on FDIC or it's bonds then it is likely the TEOTWAWKI.

FDIC can easily handle a few banks going bankrupt, it might have more trouble if we see another 2008 or worse.  In this case it would require congress to approve a bailout of FDIC.  Would this pass?  I think so, but it likely depends on where the headless chicken falls.

You could hedge your bets and go 50/50 between a savings account and bond ETF.

Another thought, FDIC is primarily designed for the little guy, while government bonds are more for businesses and countries.  IMO this is the main reason why we see a difference in yield between the two.

Gosso wrote: You could hedge your bets and go 50/50 between a savings account and bond ETF.

I don't think bond ETFs are necessarily safer than a savings account.  First you have to sell your shares, then the money settles into the brokerage core account, then you transfer to your bank account.  During a 2008 or worse scenario, any one of those links could break.  Not to mention that the ETF might be doing all sorts of interesting things with the funds that you aren't aware of.

My "gold standard" is T-bills held directly (meaning at Treasury Direct) or a 100% Treasury money market fund that allows checkwriting directly from the fund.  It's probably a good idea to keep at least some money parked in one of these.  The Treasury fund options are limited though.  Fidelity's is open but has a $25,000 minimum.

sophie wrote:

Gosso wrote: You could hedge your bets and go 50/50 between a savings account and bond ETF.

I don't think bond ETFs are necessarily safer than a savings account.  First you have to sell your shares, then the money settles into the brokerage core account, then you transfer to your bank account.  During a 2008 or worse scenario, any one of those links could break.  Not to mention that the ETF might be doing all sorts of interesting things with the funds that you aren't aware of.

My "gold standard" is T-bills held directly (meaning at Treasury Direct) or a 100% Treasury money market fund that allows checkwriting directly from the fund.  It's probably a good idea to keep at least some money parked in one of these.  The Treasury fund options are limited though.  Fidelity's is open but has a $25,000 minimum.

Good points, Sophie.  I was looking at it more from a default perspective.  In terms of liquidity I fully agree.

It also wouldn't hurt to have a small amount of hard cash tucked away, the loss of interest would be minuscule, and it could be more valuable than gold during a temporary crisis.

Ah! Fantastic! Your replies got my mind clear.

I must have forgotten the benefit of holding, short term bonds directly. I promise I won't forget again because, boy oh boy, the promise of that kind of security makes my heart feel tender. 

I have only been working for 2.5 years now and wanted to deposit 10% of salary for each year I worked in the PP.

Since my investment is relatively small it's not really worth the effort, to do that right now though.

When originally selecting an ETF my thinking was flawed as I can miss the money for more then a year.

The book recommend a fund (I am in Europe, Belgium ) named, "iShares Euro Government Bond 1-3yr UCITS ETF"

The performance of the fund is better than the interest rate I get now by my bank.

1-Year +2.55%
3-Year +3.40%
5-Year +2.87%

http://www.bloomberg.com/quote/IBCA:GR
http://de.ishares.com/en/rc/products/IBCA

If I am not directly holding short term bonds I think this is a good pick over keeping it on the bank.

Thanks again for your helpful replies!

I'm not sure about bond funds, especially for a EU investor. After all, iShares could very well fail (or fraud) and take your money with them, at least as much as an FDIC insured bank could, but without that insurance (it is worth what it is worth, but a weak insurance is better than no insurance at all). I'd rather buy bonds directly (in your case, bonds from Belgium, Germany and maybe France, to hedge against sovereign defaults) or keep the money in savings accounts, especially if the money involved is quite limited.

Furthermore, since you already use (I guess) ETF vendors for the stocks part of the PP and there is a limited # of vendors on the market (at least in EU), having ETFs for the cash & bonds portion of your PP makes you very vulnerable to counterparty risk, I guess.

Hmn... I was planning on using ETFs for all the parts of the PP.

It might be wise however to hold the bonds & cash parts directly.

I'd rather not keep it on the bank as I just want to form the habit and feel for doing it.

As this is money I can miss for a couple of years I had hoped I could emulate some of the performance of the ishares fund mentioned earlier. Is it possible to do this myself?

I am not sure what they are doing exactly. What I gathered from the spec sheet.

The "Maturity (years)" is 1.83 years.      I assume they just buy them with 3 more years to go? 
Under "Yield to Maturity (%)" they mention they don't keep the bonds until they mature.      Any idea when they sell them of? 
Also they hold 7 different assets but I'll obviously focus on 1 only.

Not really sure what other secret ingredient they have for getting that performance.

Thanks again for all your help and advice!

ILoveMoney wrote: Hmn... I was planning on using ETFs for all the parts of the PP.

It might be wise however to hold the bonds & cash parts directly.

I'd rather not keep it on the bank as I just want to form the habit and feel for doing it.

I think most of us here would recommend the first asset you keep directly should be gold.  Gold you can hold in your hands is quite unlike any other asset.  It's portable, durable, universally valuable, and reasonably dense in value while still being divisible into manageable quantities (unlike, say, diamonds).  Others, including governments, might steal it from you but it will never turn into a worthless pile of paper.

And then before you know it, you'll want to hold everything as directly as you can.  You'll really enjoy the feeling of keeping other people's paws off your money.

ETFs are a good thing if it gets you started with a sound, sustainable investing plan, but do realize it is the polar opposite of the Harry Browne philosophy.

sophie wrote: And then before you know it, you'll want to hold everything as directly as you can.  You'll really enjoy the feeling of keeping other people's paws off your money.

ETFs are a good thing if it gets you started with a sound, sustainable investing plan, but do realize it is the polar opposite of the Harry Browne philosophy.

I agree that holding everything as directly as possible (especially gold, LT Treasuries and some amount of actual cash) is the ideal way to go.  That has been my philosophy since I first started reading HB's books in the 1970s.  You need to learn as much as you can about all the direct physical "safe deposit" options available to you, both inside and outside the banking sector. 

But as you get deeper into your life and career with IRAs and 401K-type investments you'll find there is a definite practical limit to that approach.  In order to take advantage of these options (as HB also endorsed) you have to start choosing between mutual funds, ETFs, and a plethora of other decent but not perfect options. 

Years ago, I came to the conclusion that diversifying my holding methods (maybe two to four in each assets class), and paying close attention to the legal obligations of the various parties especially in cases where I was the furthest removed from direct ownership, was the most practical way to approach the problem.  I try to keep ownership of each asset as close as I can to "direct", but ultimately you can't let perfection be the enemy of the good enough.

I found adjusting to how my investments grew in various "buckets" during my life and career and the continual evolution of financial products and electronic holding options was actually the most difficult practical problem I had following the PP strategy.  Not knowing how long you'll stay in a particular job, or when or if you you'll get married, what your health situation will be in ten years, etc. are also obviously variables as unpredictable as the markets. 

Having said that, I do think most people should probably anticipate that retirement accounts of various types and government pensions (like Social Security) will probably be significant parts of their future and should definitely devote some consideration and thought about how to incorporate these sometimes less than ideal arrangements in their long term planning.  Just discount "promises" of most kinds somewhat and be pleasantly surprised if they are fully kept.   

 

   

 

agree with the advise above. However you have to be pratical in Europa. We don't have € Bonds. And most Bonds are traded "over the counter". So buying Bonds directly is difficult.
I think the "iShares Euro Government Bond 1-3yr UCITS ETF" are the best choise.
If you want to be more secure, take 12,5 % cashdeposit, 12,5 % IShares
Or 10 % cashdeposit, 10% Ishares, and 10 % Belgium Gov bonds, maturity 3 years from now (yielding 2 - 3 %).
for the Bonds you build a ladder, this year the 2017 bonds, next year the 2018 bonds and so on. In 2017 the first trade wil finish, so you buy the 2020 Bonds. I didn't know about the belgium bonds, but most Gov bonds you have to buy in volume of 100, so with a small portfolio that is even more difficult.

ILoveMoney wrote: (I am in Europe, Belgium )

Been researching European options for cash and bonds recently, it can be complicated to do direct purchases and still diversify to protect against sovereign states at a different level of economic stability, using the same currency.
These options might interest you (Thanks to tips found on Marc de Mesels blogpost ):

If you're Belgian, a possible option for short term and long term bonds is Service des Grands-Livres/Dienst van de Grootboeken, it's a government service that handles direct Belgium government bond holding ( regular bonds/staatsbon and OLO ), they even allow you to buy 1 unit(=200euros).
You can subscribe to new bond issues or ask them to buy any existing Belgium gov. bond available on the open market (euronext), and register it for you.

If you know some german:

An option for direct cash/bond holding is the government savings account backed by Austria: http://www.bundesschatz.at/ allowing you to hold debt issues with different maturities (1 month to 10 years) and you can have it automatically reinvest principle + interest after maturity.

Finanzagentur used to be a good option to hold German bonds, but is winding down its activity since 2012 and no longer allows you to buy newer issues (limiting you to holding bonds issued before  August, 22nd 2012)

If anyone has any experiences with these or other services please share.