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MCSquared
Joined: 02 Aug 2009
Posts: 97
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 Posted: Mon Aug 10, 2009 4:08 pm Post subject: |
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I am sure this question has been asked, but I have not been able to find it with the search engine. What is the general consensus on utilizing FDIC insured CD's/MMA for the cash portion of Browne PP?
Thanks in advance for your time,
Mike |
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MCSquared
Joined: 02 Aug 2009
Posts: 97
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| Posted: Mon Aug 10, 2009 4:25 pm Post subject: Bullion |
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| MediumTex wrote: | | Ariel wrote: | | Do you PPers use GLD? Or real gold? If real, what form - old coins, bullion coins, bars or what? Seems like this would be the trickiest asset to manage. |
Not really.
Use GLD and IAU for the top 10%-25% of the gold holdings. Use this "paper gold" for rebalancing purposes. Hold the rest in real gold.
Best bets IMO for real gold are South African, Canadian and U.S. one ounce coins. There is plenty out there on this topic. If a rookie had to pick one, I would say just buy one ounce U.S. eagles. I'm not a fan of bullion bars, since you don't have to pay much more for the more liquid (and attractive) coins.
Don't buy numismatic coins. Lots of reasons, but the bottom line is that they do not fulfill the goals of the PP.
For someone who wanted to do just paper gold, splitting between GLD and IAU is one way of reducing any perceived counterparty risk. |
MedTex:
I know this post is a few months old but I am curious on your choice of bullion. I found I was able to get better pricing on 50 Mexican Peso and 100 Corona. Any thoughts on these two? Also, insuring the bullion is next to impossible so I had to go the safety deposit box route. |
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craigr
Joined: 13 Mar 2007
Posts: 1973
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| Posted: Mon Aug 10, 2009 5:23 pm Post subject: |
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| MCSquared wrote: | I am sure this question has been asked, but I have not been able to find it with the search engine. What is the general consensus on utilizing FDIC insured CD's/MMA for the cash portion of Browne PP?
Thanks in advance for your time,
Mike |
Browne preferred T-Bills for the safety. FDIC contains only a small fraction of the amount of insured funds it is supposed to cover. While it is likely that a serious run on FDIC funds would be backed by Congress with new money, there is always a chance that a problem could develop that causes FDIC to perhaps renege on their promises or make it hard to get your money out in a timely fashion. Again, this is an extreme situation but anything is possible. T-Bills will always be paid unless there is an absolute calamity with the Federal Government. For some people it may also matter that there is no FDIC limit for T-Bills.
Ultimately this is an argument about chasing higher yield. Yes, you can try to get higher interest by owning other assets, but you need to remember that when you do this you are taking on more risk. |
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MCSquared
Joined: 02 Aug 2009
Posts: 97
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| Posted: Mon Aug 10, 2009 5:51 pm Post subject: |
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| craigr wrote: | | MCSquared wrote: | I am sure this question has been asked, but I have not been able to find it with the search engine. What is the general consensus on utilizing FDIC insured CD's/MMA for the cash portion of Browne PP?
Thanks in advance for your time,
Mike |
Browne preferred T-Bills for the safety. FDIC contains only a small fraction of the amount of insured funds it is supposed to cover. While it is likely that a serious run on FDIC funds would be backed by Congress with new money, there is always a chance that a problem could develop that causes FDIC to perhaps renege on their promises or make it hard to get your money out in a timely fashion. Again, this is an extreme situation but anything is possible. T-Bills will always be paid unless there is an absolute calamity with the Federal Government. For some people it may also matter that there is no FDIC limit for T-Bills.
Ultimately this is an argument about chasing higher yield. Yes, you can try to get higher interest by owning other assets, but you need to remember that when you do this you are taking on more risk. |
Good points all. I was looking at this within the context of some folks utilizing 1-3 year treasuries as the "cash" portion of the portfolio. Would you rather have the interest rate risk or the "FDIC" risk? |
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craigr
Joined: 13 Mar 2007
Posts: 1973
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| Posted: Mon Aug 10, 2009 6:04 pm Post subject: |
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| MCSquared wrote: | | Good points all. I was looking at this within the context of some folks utilizing 1-3 year treasuries as the "cash" portion of the portfolio. Would you rather have the interest rate risk or the "FDIC" risk? |
I usually advise that people have enough in T-Bill MMF to wait out the 1-2 years duration of a ST bond fund in case rates go up and the fund NAV goes down. If you are working and contributing new money constantly the duration of a typical ST Treasury bond fund is probably not going to be a problem over the MMF. There will be money coming in so you can just wait out the small fluctuations.
...or you can just ignore using ST bonds with the MMF and just use the T-Bill MMF only as Browne originally advised. |
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MCSquared
Joined: 02 Aug 2009
Posts: 97
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| Posted: Mon Aug 10, 2009 6:30 pm Post subject: |
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| craigr wrote: | | MCSquared wrote: | | Good points all. I was looking at this within the context of some folks utilizing 1-3 year treasuries as the "cash" portion of the portfolio. Would you rather have the interest rate risk or the "FDIC" risk? |
I usually advise that people have enough in T-Bill MMF to wait out the 1-2 years duration of a ST bond fund in case rates go up and the fund NAV goes down. If you are working and contributing new money constantly the duration of a typical ST Treasury bond fund is probably not going to be a problem over the MMF. There will be money coming in so you can just wait out the small fluctuations.
...or you can just ignore using ST bonds with the MMF and just use the T-Bill MMF only as Browne originally advised. |
I have a Treasury Direct account (buying the 30 year at auction this week) so I am leaning toward just buying the 52 week bills and being done with it. Thanks for your comments. As an aside, when I informed my wife of this asset allocation program, I directed her to the Crawling Road site for further education!
Mike |
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MediumTex
Joined: 01 Mar 2009
Posts: 447
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| Posted: Mon Aug 10, 2009 8:11 pm Post subject: |
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RE gold coins, if you want the most bang for the buck, go with South African krugerrands.
Stay away from the Mexican, Swiss and other less common gold coins, simply because there is less demand for them and dealers are normally not as excited about buying them as they are krugerrands.
To me, a prudent person might split their physical gold holdings equally between U.S. eagles, Canadian maple leafs, and South African krugerrands.
These are just my opinions, though. Ultimately, gold is gold.
If you use a safe deposit box, consider using two or three boxes at different banks. This is a simple thing to do that doesn't cost much more than one box and there may be a day when it will make you very happy.
_________________
"A Permanent Portfolio should let you watch the evening news or read investment publications in total serenity."
-Harry Browne
Last edited by MediumTex on Mon Aug 10, 2009 8:19 pm; edited 1 time in total |
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MediumTex
Joined: 01 Mar 2009
Posts: 447
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| Posted: Mon Aug 10, 2009 8:13 pm Post subject: |
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RE FDIC insured deposits vs. treasuries, think about U.S. savings bonds or perhaps I-bonds as one way to hold the cash portion.
I am a big fan of these instruments for the cash holding, since you have short term t-bills liquidity, but normally interest rates that would correspond to longer dated treasuries.
You also have complete tax deferral until redemption, which is a great plus.
_________________
"A Permanent Portfolio should let you watch the evening news or read investment publications in total serenity."
-Harry Browne |
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MCSquared
Joined: 02 Aug 2009
Posts: 97
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| Posted: Mon Aug 10, 2009 8:54 pm Post subject: |
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| MediumTex wrote: | RE gold coins, if you want the most bang for the buck, go with South African krugerrands.
Stay away from the Mexican, Swiss and other less common gold coins, simply because there is less demand for them and dealers are normally not as excited about buying them as they are krugerrands.
To me, a prudent person might split their physical gold holdings equally between U.S. eagles, Canadian maple leafs, and South African krugerrands.
These are just my opinions, though. Ultimately, gold is gold.
If you use a safe deposit box, consider using two or three boxes at different banks. This is a simple thing to do that doesn't cost much more than one box and there may be a day when it will make you very happy. |
So that is why I got them for a better price! Buying bullion is new for me so I appreciate your advice. Relative to safety deposit boxes, the unfortunate thing is that there is a waiting list at most branches in my vicinity. I have one that my bank provides at no cost so I am using it for now. FYI, I am buying the bullion is stages sort of like DCA. It just seemed to be the prudent thing to do as I did not want to "load up" with one dealer. |
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MCSquared
Joined: 02 Aug 2009
Posts: 97
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| Posted: Mon Aug 10, 2009 8:59 pm Post subject: |
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| MediumTex wrote: | RE FDIC insured deposits vs. treasuries, think about U.S. savings bonds or perhaps I-bonds as one way to hold the cash portion.
I am a big fan of these instruments for the cash holding, since you have short term t-bills liquidity, but normally interest rates that would correspond to longer dated treasuries.
You also have complete tax deferral until redemption, which is a great plus. |
I looked at savings bonds (we have some for the kids that go back 6-7 years) but the $5,000 annual limitation complicates things. Tis hard to swallow a .46 yield on 52 week paper but I think it might be the easiest thing to do. The short term treasury bonds have some interest rate volatility but that seems to be the second choice. |
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DualCitizen
Joined: 27 Sep 2008
Posts: 169
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| Posted: Mon Aug 10, 2009 9:14 pm Post subject: Re: Updated Modification of Harry Browne Permanent Portfolio |
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I have a typical 50/50 stocks/bonds asset allocation, but I was sufficiently interested in the Permanent Portfolio that I asked my Vanguard adviser to run some time paths (i.e. testing all previous market scenarios) on my portfolio vs. the Permanent Portfolio. I copied his response below:
| Quote: |
A couple things that come to mind looking at the PP:
+ I'm not sure how much science went into the 25% allocations - it seems somewhat arbitrary
+ I'm not sure I agree with the decision to use only gold as the real asset exposure - rather than a broader commodity investment and/or real estate. It seems to me a more diversified approach makes sense. Buying a lot of physical gold could be problematic as well.
+ One quarter in cash is pretty defensive and would likely impair returns over the long haul. Short term bonds might be a reasonable substitution.
I asked our analyst to work up some data to compare the PP with a standard stock/bond allocation. The period used was the farthest back the data for the gold index is available, and we used our Prime Money Market as a proxy for cash. I also added an foreign stock component to the stock allocation, so the stats are different from what Mr. Browne shows, but the concept is very similar. The results are not surprising to me - lower risk and lower return. If we could use the PP to create time paths, I think we would see lower asset growth on average and less dispersion of possible scenarios.
At the end of the day, I think we all agree that a portfolio that includes more asset classes will have a favorable risk profile but may sacrifice some long term return or at least go through periods of underperformance. I also think the way we have approached adding diversification to your portfolio is a little more scientific although we are ultimately keeping the focus on stocks and bonds because of the favorable return characteristics.
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MCSquared
Joined: 02 Aug 2009
Posts: 97
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| Posted: Mon Aug 10, 2009 9:54 pm Post subject: Re: Updated Modification of Harry Browne Permanent Portfolio |
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| DualCitizen wrote: | I have a typical 50/50 stocks/bonds asset allocation, but I was sufficiently interested in the Permanent Portfolio that I asked my Vanguard adviser to run some time paths (i.e. testing all previous market scenarios) on my portfolio vs. the Permanent Portfolio. I copied his response below:
| Quote: |
A couple things that come to mind looking at the PP:
+ I'm not sure how much science went into the 25% allocations - it seems somewhat arbitrary
+ I'm not sure I agree with the decision to use only gold as the real asset exposure - rather than a broader commodity investment and/or real estate. It seems to me a more diversified approach makes sense. Buying a lot of physical gold could be problematic as well.
+ One quarter in cash is pretty defensive and would likely impair returns over the long haul. Short term bonds might be a reasonable substitution.
I asked our analyst to work up some data to compare the PP with a standard stock/bond allocation. The period used was the farthest back the data for the gold index is available, and we used our Prime Money Market as a proxy for cash. I also added an foreign stock component to the stock allocation, so the stats are different from what Mr. Browne shows, but the concept is very similar. The results are not surprising to me - lower risk and lower return. If we could use the PP to create time paths, I think we would see lower asset growth on average and less dispersion of possible scenarios.
At the end of the day, I think we all agree that a portfolio that includes more asset classes will have a favorable risk profile but may sacrifice some long term return or at least go through periods of underperformance. I also think the way we have approached adding diversification to your portfolio is a little more scientific although we are ultimately keeping the focus on stocks and bonds because of the favorable return characteristics.
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While Tex or CraigR are much better versed on PP than I am (recent convert), I thought I would add my two cents. I am not sure what numbers your advisor utilized for analysis, but the numbers I have seen show PP outperforming from 1972 through 2008 (gold went off price control in 1971):
1972-2008 CAGR Growth of 10K
Permanent Portfolio 9.79% $317,220
100% Total Stock Market 9.28% $266,885
100% Total Bond Market 7.71% $155,907
50%Total Stock Market/ 50% Total Bond Market 8.90% $234,371
It would appear that PP not only outperformed, but did so with less volatility. I am sure Craig or Tex can do a better job of explaining why than I can. |
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DualCitizen
Joined: 27 Sep 2008
Posts: 169
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| Posted: Mon Aug 10, 2009 10:01 pm Post subject: Re: Updated Modification of Harry Browne Permanent Portfolio |
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| MCSquared wrote: |
1972-2008 CAGR Growth of 10K
Permanent Portfolio 9.79% $317,220
100% Total Stock Market 9.28% $266,885
100% Total Bond Market 7.71% $155,907
50%Total Stock Market/ 50% Total Bond Market 8.90% $234,371
It would appear that PP not only outperformed, but did so with less volatility. I am sure Craig or Tex can do a better job of explaining why than I can. |
Here are the numbers the Vanguard adviser provided:
Period: 01/1979 to 06/2009 Frequency: M
Benchmark: S&P 500 - Total Return Currency: USD
Description Anlzd Return Anlzd StdDev Return/Risk Return/Risk (Infl Adjstd)
STANDARD_PORTFOLIO_50_50* 9.93 8.73 1.14 0.70
PERMANENT_PORTFOLIO** 8.10 6.72 1.21 0.63
S&P 500 - Total Return 10.92 15.45 0.71 0.46
*40% Russell 3000, 10% MSCI EAFE, 50% Barclays US Bond Aggregate
**20% Russell 3000, 5% MSCI EAFE, 25% Barclays US Bond Agg, 25% Vanguard Prime Money Market, 25% GSCI Gold
CPI Inflation: 12/31/1978 - 5/31/2009=3.85%
Data source: FactSet
Last edited by DualCitizen on Tue Aug 11, 2009 10:47 am; edited 1 time in total |
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MCSquared
Joined: 02 Aug 2009
Posts: 97
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| Posted: Mon Aug 10, 2009 10:16 pm Post subject: Re: Updated Modification of Harry Browne Permanent Portfolio |
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| DualCitizen wrote: | | MCSquared wrote: |
1972-2008 CAGR Growth of 10K
Permanent Portfolio 9.79% $317,220
100% Total Stock Market 9.28% $266,885
100% Total Bond Market 7.71% $155,907
50%Total Stock Market/ 50% Total Bond Market 8.90% $234,371
It would appear that PP not only outperformed, but did so with less volatility. I am sure Craig or Tex can do a better job of explaining why than I can. |
Here are the numbers the Vanguard adviser provided:
Period: 01/1979 to 06/2009 Frequency: M
Benchmark: S&P 500 - Total Return Currency: USD
Description Anlzd Return Anlzd StdDev Return/Risk Return/Risk
STANDARD_PORTFOLIO_50_50* 9.93 8.73 1.14 0.70
PERMANENT_PORTFOLIO** 8.10 6.72 1.21 0.63
S&P 500 - Total Return 10.92 15.45 0.71 0.46
*40% Russell 3000, 10% MSCI EAFE, 50% Barclays US Bond Aggregate
**20% Russell 3000, 5% MSCI EAFE, 25% Barclays US Bond Agg, 25% Vanguard Prime Money Market, 25% GSCI Gold
CPI Inflation: 12/31/1978 - 5/31/2009=3.85%
Data source: FactSet
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So it would appear we have different dates for comparison. Ask him/her to run the numbers from 1972 and see how they stack up. Using data prior to that time would be problematic due to gold pricing. |
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dtrainer
Joined: 16 Dec 2008
Posts: 33
Location: San Antonio
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| Posted: Mon Aug 10, 2009 10:38 pm Post subject: |
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Asking someone to use different dates to get the result you want smacks of data mining. The huge run-up in gold during the first two years it was taken off a fixed exchanged rate accounts for much of the excess return. I think the PP performs well considering how conservative it is but I think it is unreasonable to expect it to perform equally to a traditional stock/bond mix during times that lack major economic upheavals (and I don't think anything we have experienced since the 70s meets that standard.) I view the PP as a form of insurance that will cost me in the form of reduced return. To compensate for that I will increase my rate of savings.
_________________
Donald R. Trainer, MSPH
UTHSCSA SOM 2012 |
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ClubberLang
Joined: 12 Apr 2009
Posts: 65
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| Posted: Mon Aug 10, 2009 11:11 pm Post subject: |
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I am a believer of the PP but I chose to enter at a bad time (earlier this year). Instead of being up 40% since March, I am only up 10%. It's really not a bad gain at all in just under 6 months, but I am a little bit disappointed that I failed to recover much of what I lost last year. I hate the thought of permanently (no pun intended) losing most of the 40% that I lost last year but perhaps it's better to just write it off and learn from my mistakes since I'm still a few decades away from retirement. Any attempt to speculate and time the market will probably just cause me to lose more than I already have.
I've thought about taking take half of my portfolio and putting it in a Boglehead-type 70% stock-30% bond allocation, and take the other half and do the Permanent Portfolio. It might be interesting to see which one comes out ahead over the next few years. |
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MCSquared
Joined: 02 Aug 2009
Posts: 97
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| Posted: Mon Aug 10, 2009 11:21 pm Post subject: |
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| dtrainer wrote: | | Asking someone to use different dates to get the result you want smacks of data mining. The huge run-up in gold during the first two years it was taken off a fixed exchanged rate accounts for much of the excess return. I think the PP performs well considering how conservative it is but I think it is unreasonable to expect it to perform equally to a traditional stock/bond mix during times that lack major economic upheavals (and I don't think anything we have experienced since the 70s meets that standard.) I view the PP as a form of insurance that will cost me in the form of reduced return. To compensate for that I will increase my rate of savings. |
I am not "looking" for any results so I am sorry you misunderstood. I was merely pointing out that the dates that were chosen for analysis did not coincide. What dates would you suggest be utilized for comparison purposes? Do you also want to eliminate those time periods wherein the traditional stock/bond mix outperformed?
I am not trying to convince you or anyone else what allocation is best for them. I have previously reviewed the data and reached a conclusion that I was comfortable with the PP. Since you would like to eliminate the first few years of gold performance, here are the numbers from craigr from 1974-2008:
1974-2008 CAGR Growth of 10K
Permanent Portfolio 9.38% $230,853
100% Total Stock Market 9.97% $278,757
100% Total Bond Market 7.89% $142,649
50% Total Stock Market/50% Total Bond Market 9.33% $227,281
Appears as if the PP slightly outperforms a 50/50 traditional mix after eliminating the first two years of gold. Further, the worse loss in any one year of the PP was -4% in 1981. |
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MediumTex
Joined: 01 Mar 2009
Posts: 447
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| Posted: Mon Aug 10, 2009 11:27 pm Post subject: |
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| Quote: | | I asked my Vanguard adviser to run some time paths (i.e. testing all previous market scenarios) on my portfolio vs. the Permanent Portfolio. I copied his response below... |
The thing to be cautious about as well when asking financial advisors about something like the PP is that they don't get paid unless you buy a financial product.
It's a bit like asking a barber if you need a haircut.
The question that people should be asking financial advisors is how the traditional 50/50 allocation will fare under a period of prolonged deflation (10 or more year, a la Japan). The answer is not very well, though I would be interested to hear it from them, along with the house spin.
What I observe in the financial services industry is simply a failure to see beyond a certain paradigm in which financial instruments (and the transaction fees thereon) are the standard.
This bias toward paper promises reminds me of a professor I had in college who asked the class what would happen to a copy of the Constitution if you held it up to parry a bayonet thrust. He said he had never seen it happen, and couldn't say for sure, but he suspected that the bayonet would go right through the Constitution.
There is a lot more to the PP than most financial advisors are capable of understanding. IMHO, it really takes a philosopher to appreciate the elegance of the PP. For much of the Wall Street prankster set, talking to them about the PP is mostly casting pearls before swine.
_________________
"A Permanent Portfolio should let you watch the evening news or read investment publications in total serenity."
-Harry Browne |
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james22
Joined: 21 Aug 2007
Posts: 526
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| Posted: Tue Aug 11, 2009 12:37 am Post subject: |
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| MediumTex wrote: | | IMHO, it really takes a philosopher to appreciate the elegance of the PP. |
_________________
Please assume my post refers to my Bogle-approved 15% Tactical Asset Allocation or 5% Funny Money. |
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grayfox
Joined: 15 Sep 2007
Posts: 1455
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| Posted: Tue Aug 11, 2009 12:55 am Post subject: Re: Updated Modification of Harry Browne Permanent Portfolio |
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| DualCitizen wrote: |
Here are the numbers the Vanguard adviser provided:
Period: 01/1979 to 06/2009 Frequency: M
Benchmark: S&P 500 - Total Return Currency: USD
Description Anlzd Return Anlzd StdDev Return/Risk Return/Risk
STANDARD_PORTFOLIO_50_50* 9.93 8.73 1.14 0.70
PERMANENT_PORTFOLIO** 8.10 6.72 1.21 0.63
S&P 500 - Total Return 10.92 15.45 0.71 0.46
*40% Russell 3000, 10% MSCI EAFE, 50% Barclays US Bond Aggregate
**20% Russell 3000, 5% MSCI EAFE, 25% Barclays US Bond Agg, 25% Vanguard Prime Money Market, 25% GSCI Gold
CPI Inflation: 12/31/1978 - 5/31/2009=3.85%
Data source: FactSet
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So according to Vanguard analysis, the PP had better risk-adjusted return than a standard 50/50. Return/Risk 1.21 vs. 1.14. Harry Browne beats Bogle even when Vanguard is keeping score. |
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MediumTex
Joined: 01 Mar 2009
Posts: 447
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| Posted: Tue Aug 11, 2009 8:25 am Post subject: |
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| james22 wrote: | | MediumTex wrote: | | IMHO, it really takes a philosopher to appreciate the elegance of the PP. |
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One of the things that initially drew me to Harry Browne was not his investment ideas, but rather his ideas about libertarianism and the individual's role in society. I found these ideas to be transcendent in their ability to pinpoint the unspoken desire of the modern state to make the individual dependent upon it for everything (including freedom). His thinking about how to avoid falling into the trap of what is essentially worship of secular institutions was impressive to me.
It was only after digesting the larger themes of his thinking that I began to read and think about the PP. It was coming at it from that angle that allowed me to see how this asset allocation rolls up into a much broader and coherent view of the world.
I encourage anyone who is interested to read Harry Browne's non-investment related writings. He was one of the most original and independent thinkers I have come across, certainly in modern times.
_________________
"A Permanent Portfolio should let you watch the evening news or read investment publications in total serenity."
-Harry Browne |
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Swivelguy
Joined: 18 Jan 2009
Posts: 266
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| Posted: Tue Aug 11, 2009 9:55 am Post subject: |
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| craigr wrote: | | MCSquared wrote: | I am sure this question has been asked, but I have not been able to find it with the search engine. What is the general consensus on utilizing FDIC insured CD's/MMA for the cash portion of Browne PP?
Thanks in advance for your time,
Mike |
Browne preferred T-Bills for the safety. FDIC contains only a small fraction of the amount of insured funds it is supposed to cover. While it is likely that a serious run on FDIC funds would be backed by Congress with new money, there is always a chance that a problem could develop that causes FDIC to perhaps renege on their promises or make it hard to get your money out in a timely fashion. Again, this is an extreme situation but anything is possible. T-Bills will always be paid unless there is an absolute calamity with the Federal Government. For some people it may also matter that there is no FDIC limit for T-Bills.
Ultimately this is an argument about chasing higher yield. Yes, you can try to get higher interest by owning other assets, but you need to remember that when you do this you are taking on more risk. |
Why is this thread the only one on the Bogleheads forums where FDIC-insured instruments are considered to be risky? |
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MediumTex
Joined: 01 Mar 2009
Posts: 447
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| Posted: Tue Aug 11, 2009 10:12 am Post subject: |
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| Swivelguy wrote: | | craigr wrote: | | MCSquared wrote: | I am sure this question has been asked, but I have not been able to find it with the search engine. What is the general consensus on utilizing FDIC insured CD's/MMA for the cash portion of Browne PP?
Thanks in advance for your time,
Mike |
Browne preferred T-Bills for the safety. FDIC contains only a small fraction of the amount of insured funds it is supposed to cover. While it is likely that a serious run on FDIC funds would be backed by Congress with new money, there is always a chance that a problem could develop that causes FDIC to perhaps renege on their promises or make it hard to get your money out in a timely fashion. Again, this is an extreme situation but anything is possible. T-Bills will always be paid unless there is an absolute calamity with the Federal Government. For some people it may also matter that there is no FDIC limit for T-Bills.
Ultimately this is an argument about chasing higher yield. Yes, you can try to get higher interest by owning other assets, but you need to remember that when you do this you are taking on more risk. |
Why is this thread the only one on the Bogleheads forums where FDIC-insured instruments are considered to be risky? |
Because most people simply believe what the television tells them.
For those whose search for truth takes them beyond the mainstream media, they discover that a government promise is only as good as the government's ability to tax, borrow or print the money to pay for it. In a situation where an economy is contracting and government spending on everything is exploding, the viability of a promise such as the FDIC's to somehow make good on all deposits in a financial system that is insolvent on a massive scale begins to look a little silly.
The parasite is only as strong as the host's ability to provide it with nourishment.
I am certain that many people will be protected by FDIC insurance, but I am equally certain that there is no pocket deep enough to insure all of the eventual losses on a Ponzi scheme such as global fractional reserve lending.
Today's banking system is just a confidence game, and cheerleaders like the FDIC are just there to provide a little jolt of confidence. Think of the FDIC as the banking system equivalent of the weather man on TV--as much as he would like you to believe that he CONTROLS the weather, at best what he does is control your perception of the weather.
The next time you see Sheila Bair patiently explaining how all is well, think about Baghdad Bob and how disconnected from reality he really was.
Don't mistake a jester for a wise man.
_________________
"A Permanent Portfolio should let you watch the evening news or read investment publications in total serenity."
-Harry Browne
Last edited by MediumTex on Tue Aug 11, 2009 10:29 am; edited 1 time in total |
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eurowizard
Joined: 10 May 2008
Posts: 844
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| Posted: Tue Aug 11, 2009 10:22 am Post subject: |
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| Swivelguy wrote: |
Why is this thread the only one on the Bogleheads forums where FDIC-insured instruments are considered to be risky? |
Because this thread is about Harry Browne's PP and Harry Browne was a strong libertarian with strong distrust in the government and who has gone on record stating his distrust with the FDIC. It would be an incomplete discussion of the PP not to describe the thoughts and intentions of the creator. |
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DualCitizen
Joined: 27 Sep 2008
Posts: 169
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| Posted: Tue Aug 11, 2009 10:49 am Post subject: Re: Updated Modification of Harry Browne Permanent Portfolio |
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No. I didn't label the last column correctly. That's Return/Risk (Infl Adjstd), whereas the column you references does not take into account inflation. So the 50/50 portfolio had a better return/risk ratio. Scroll up to see my corrected chart.
| grayfox wrote: | | DualCitizen wrote: |
Here are the numbers the Vanguard adviser provided:
Period: 01/1979 to 06/2009 Frequency: M
Benchmark: S&P 500 - Total Return Currency: USD
Description Anlzd Return Anlzd StdDev Return/Risk Return/Risk
STANDARD_PORTFOLIO_50_50* 9.93 8.73 1.14 0.70
PERMANENT_PORTFOLIO** 8.10 6.72 1.21 0.63
S&P 500 - Total Return 10.92 15.45 0.71 0.46
*40% Russell 3000, 10% MSCI EAFE, 50% Barclays US Bond Aggregate
**20% Russell 3000, 5% MSCI EAFE, 25% Barclays US Bond Agg, 25% Vanguard Prime Money Market, 25% GSCI Gold
CPI Inflation: 12/31/1978 - 5/31/2009=3.85%
Data source: FactSet
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So according to Vanguard analysis, the PP had better risk-adjusted return than a standard 50/50. Return/Risk 1.21 vs. 1.14. Harry Browne beats Bogle even when Vanguard is keeping score. |
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craigr
Joined: 13 Mar 2007
Posts: 1973
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| Posted: Tue Aug 11, 2009 11:20 am Post subject: Re: Updated Modification of Harry Browne Permanent Portfolio |
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| DualCitizen wrote: | I have a typical 50/50 stocks/bonds asset allocation, but I was sufficiently interested in the Permanent Portfolio that I asked my Vanguard adviser to run some time paths (i.e. testing all previous market scenarios) on my portfolio vs. the Permanent Portfolio. I copied his response below:
| Quote: |
A couple things that come to mind looking at the PP:
+ I'm not sure how much science went into the 25% allocations - it seems somewhat arbitrary |
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All asset allocations are a bit arbitrary because this isn't an exact science. Most asset allocations are built using historical data which assumes the past essentially predicts the future to some degree. The 25% split Browne admitted wasn't derived at by some scientific method (which is impossible to do in economics anyway), rather it just seemed to work well based on what he saw in the past in the markets and was simple to implement.
| Quote: | | + I'm not sure I agree with the decision to use only gold as the real asset exposure - rather than a broader commodity investment and/or real estate. It seems to me a more diversified approach makes sense. Buying a lot of physical gold could be problematic as well. |
Browne discusses why he uses gold and not a commodity index here:
http://www.crawlingroad.com/fi....-10-24.mp3
The basic jist of it is that gold is directly tied to high inflation as a monetary issue. Commodities can have bull and bear markets for reasons completely outside the issue of high inflation in the dollar.
Browne discusses here (and other shows) why he doesn't consider real estate and investment for the Permanent Portfolio (he considers it a speculation). This was in 2005 when everyone thought that real estate only goes up in value and Browne sets the record straight that this is in fact not true:
http://www.crawlingroad.com/fi....-04-10.mp3
| Quote: | | + One quarter in cash is pretty defensive and would likely impair returns over the long haul. Short term bonds might be a reasonable substitution. |
The only improvement I found with the portfolio that didn't radically disturb the risk/returns was using ST Treasury bonds in combination with the Treasury MMF. If you have enough in Treasury MMF as an emergency fund, it may make sense to take the slight extra risk to purchase ST Treasury bonds for the potentially better returns it has shown in the past.
| Quote: | | If we could use the PP to create time paths, I think we would see lower asset growth on average and less dispersion of possible scenarios. |
I think that this has been said many times. The portfolio will not achieve the theoretical 11-15% that heavy stock portfolios may achieve. Then again, I've yet to meet a single person who has really achieved these results over the time periods analyzed. There is an element to investing that requires a balance between the highest possible returns and the reality that most humans can't stomach the volatility or years of significant underperformance that may go along with it. The Permanent Portfolio is a more conservative allocation that has attributes that may (but not guaranteed) make it more resistant to extreme market events while providing reasonable growth. |
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craigr
Joined: 13 Mar 2007
Posts: 1973
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| Posted: Tue Aug 11, 2009 11:26 am Post subject: |
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| ClubberLang wrote: | | I've thought about taking take half of my portfolio and putting it in a Boglehead-type 70% stock-30% bond allocation, and take the other half and do the Permanent Portfolio. It might be interesting to see which one comes out ahead over the next few years. |
At any one time you're going to have asset class envy with the PP. Something is usually doing pretty well and something else is usually doing lousy. That's just how it works but usually the well performing asset is doing good enough to offset the lousy one.
Now there is nothing set in stone that you need to be 100% in the portfolio and not have a variable portfolio to lay your bets. The only thing advocated is to do it only with money you can afford to lose. So if you think stocks are going to outperform from here forward there is nothing wrong with overweighting stocks with money in your variable portfolio. When you think stocks are too high you can just move it back into the permanent portfolio allocation. But keep the Permanent Portfolio allocation as your safe core for money that is important to you. |
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palladin
Joined: 17 Jul 2009
Posts: 3
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| Posted: Tue Aug 11, 2009 1:06 pm Post subject: |
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First I want to thank everyone here for the great discussion of the PP. The discussion motivated me to read Fail-safe Investing, Why the Best-laid Investment Plans Go Wrong and Inflation-proofing Your Investments.
Reading the three books led me to one strategic question: Should your personal situation impact the investment mix or should everyone hold the same 25% each portfolio?
The books prior to Fail-safe Investing clearly take into account the investor's personal situation. In fact, the books spend a substantial amount of time talking through different situations, i.e., holding real estate, having a business and having an annuity/pension. So I guess the question I am asking is: Was Harry Browne intentionally simplifying the portfolio by having everyone hold the same allocation or was he assuming people would read the other books and understand they should adapt the portfolio to their situation?
This is my first post so I am limited in how I can respond.
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"The path you are on looks different when you turn around" -- Cynthia Copeland Lewis |
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MediumTex
Joined: 01 Mar 2009
Posts: 447
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| Posted: Tue Aug 11, 2009 1:37 pm Post subject: |
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The PP allocation is not age-dependent.
I think that this conclusion was the culmination of HB's lifetime of analysis and observation.
_________________
"A Permanent Portfolio should let you watch the evening news or read investment publications in total serenity."
-Harry Browne |
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craigr
Joined: 13 Mar 2007
Posts: 1973
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| Posted: Tue Aug 11, 2009 1:48 pm Post subject: |
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| palladin wrote: | | Was Harry Browne intentionally simplifying the portfolio by having everyone hold the same allocation or was he assuming people would read the other books and understand they should adapt the portfolio to their situation? |
I can't answer for him, but my impression on listening to him and talking with his old business partner is he just felt that the one portfolio would probably serve most people well enough to keep them out of trouble. He discussed in the past the necessity not only for growth of your money but to also have an allocation that can keep it safe. Also remember that he was very cautious about relying on pensions, social security, etc. for your retirement and felt that everyone should save their own money "just in case" that pension or guaranteed retirement you were relying on wasn't there when you needed it.
In this context, (I'm paraphrasing from memory) he found that one of the biggest impediments for investors are their own emotions so he felt that a stable growing portfolio that you can stick with no matter what was better than one that offered a wild ride that could cause you to bail out at the worst possible time. In other words, he wanted diversification that would allow an investor to "Stay the course" to use a well-known phrase.
When I read his older books my take away is there was an evolution in thinking as Browne was a pretty well known speaker on investing. I suspect (largely again from listening to his shows) that after talking to so many people and seeing so many different markets over the years he just felt that a simple easy to implement portfolio would likely be the best choice.
I mainly used his older books (especially "The best laid plans") to understand the thought process on the asset class selection. I found it useful to hear the reasoning behind the decisions so I could go and analyze it myself to see if it held up to scrutiny. It was also useful to read his criticisms of other assets and methods to ensure I was weighing the risks correctly (because all investments have risks and I don't care what it is).
EDIT: MediumTex beat me with the short-simple answer. |
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palladin
Joined: 17 Jul 2009
Posts: 3
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| Posted: Tue Aug 11, 2009 1:51 pm Post subject: |
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MediumTex, thanks for the quick reply.
I wasn't particularly thinking about age related, as I am not a believer in time diversification, that is holding less stock as you age. It is one of the reasons I am comfortable with the PP concept.
I was looking at it from an economic standpoint, specifically looking your business as part of your stock allocation.
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"The path you are on looks different when you turn around" -- Cynthia Copeland Lewis |
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palladin
Joined: 17 Jul 2009
Posts: 3
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| Posted: Tue Aug 11, 2009 1:54 pm Post subject: |
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Again, thanks to both of you, MediumTex and Craigr -- that really help clarify it for me.
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"The path you are on looks different when you turn around" -- Cynthia Copeland Lewis |
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Orion
Joined: 19 Feb 2007
Posts: 335
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| Posted: Tue Aug 11, 2009 1:59 pm Post subject: |
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| palladin wrote: | | The books prior to Fail-safe Investing clearly take into account the investor's personal situation. In fact, the books spend a substantial amount of time talking through different situations, i.e., holding real estate, having a business and having an annuity/pension. |
As I recall much of what he said about these in earlier books were that they were not ideal elements for the permanent portfolio. eg: real estate may be an inflation hedge but tends to only barely move ahead of inflation so it wouldn't make up for losses in other parts of the portfolio. Also small businesses and RE are usually local and it's hard to predict how they will play with other elements of the PP. My impression is that even back in the 80's his view was essentially to keep these if you must and work around them as necessary but lean towards the other four investments. |
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craigr
Joined: 13 Mar 2007
Posts: 1973
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| Posted: Tue Aug 11, 2009 2:02 pm Post subject: |
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| palladin wrote: | | I wasn't particularly thinking about age related, as I am not a believer in time diversification, that is holding less stock as you age. |
Yes. I fell away from that idea several years ago myself.
| Quote: | | I was looking at it from an economic standpoint, specifically looking your business as part of your stock allocation. |
Running a business is risky as you know. If anything, it makes it more important for you to have savings in the Permanent Portfolio that is independent from your business. I wouldn't count a business I owned as part of the stock allocation in the portfolio. A personal business may be wildly successful or wildly fail for reasons completely independent of the stock market in general. |
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ClubberLang
Joined: 12 Apr 2009
Posts: 65
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| Posted: Tue Aug 11, 2009 10:47 pm Post subject: |
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| craigr wrote: | | ClubberLang wrote: | | I've thought about taking take half of my portfolio and putting it in a Boglehead-type 70% stock-30% bond allocation, and take the other half and do the Permanent Portfolio. It might be interesting to see which one comes out ahead over the next few years. |
At any one time you're going to have asset class envy with the PP. Something is usually doing pretty well and something else is usually doing lousy. That's just how it works but usually the well performing asset is doing good enough to offset the lousy one.
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Good point. When the people who are heavy in equities begin to struggle, this portfolio will not go down as much so I guess it would balance itself out in the long run. I just need to get into more of a long term mindset and forget about instant gratification.
| craigr wrote: |
Now there is nothing set in stone that you need to be 100% in the portfolio and not have a variable portfolio to lay your bets. The only thing advocated is to do it only with money you can afford to lose. So if you think stocks are going to outperform from here forward there is nothing wrong with overweighting stocks with money in your variable portfolio. When you think stocks are too high you can just move it back into the permanent portfolio allocation. But keep the Permanent Portfolio allocation as your safe core for money that is important to you. |
Did Harry ever recommend a percentage that should be kept in the Permanent Portfolio as opposed to a variable portfolio? I've been struggling with this and thought 75-25 might be a good ratio. It's somewhat difficult to determine how much I can afford to lose since I still have a long way from retirement. |
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craigr
Joined: 13 Mar 2007
Posts: 1973
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| Posted: Tue Aug 11, 2009 11:26 pm Post subject: |
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| ClubberLang wrote: | | Did Harry ever recommend a percentage that should be kept in the Permanent Portfolio as opposed to a variable portfolio? I've been struggling with this and thought 75-25 might be a good ratio. It's somewhat difficult to determine how much I can afford to lose since I still have a long way from retirement. |
The only guidance is to use the variable portfolio only for money you can afford to lose. If you don't feel like taking on the risk then you probably shouldn't run a variable portfolio.
If you do decide to run a variable portfolio, I'd stick to indexing/buy-and-hold strategies and not turn it into a stock picking/market timing endeavor. IMO. |
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MediumTex
Joined: 01 Mar 2009
Posts: 447
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| Posted: Wed Aug 12, 2009 8:21 am Post subject: |
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| ClubberLang wrote: | | I just need to get into more of a long term mindset and forget about instant gratification. |
The PP is sort of like watching an oak tree grow. On a day to day basis it's not very exciting, but over time you get an impressive result.
To help strengthen your waiting skills, you might experiment with watching a glacier move for a while. After this experience you may find that watching an oak tree grow is downright exciting and the PP will look like a hummingbird on speed.
_________________
"A Permanent Portfolio should let you watch the evening news or read investment publications in total serenity."
-Harry Browne |
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grayfox
Joined: 15 Sep 2007
Posts: 1455
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| Posted: Thu Aug 13, 2009 12:54 am Post subject: Re: Updated Modification of Harry Browne Permanent Portfolio |
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| DualCitizen wrote: | No. I didn't label the last column correctly. That's Return/Risk (Infl Adjstd), whereas the column you references does not take into account inflation. So the 50/50 portfolio had a better return/risk ratio. Scroll up to see my corrected chart.
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That doesn't sound right to me. The relationship won't change for nominal vs. inflation-adjusted. The magnitude changes but not which is larger. Inflation just scales down the numbers.
It looks to me like for the inflation-adjusted risk/return (last column) they adjusted only the annualized return for inflation but still used the nominal standard deviation.
That is wrong because they divided an inflation adjusted number by a nominal number. The standard deviation of the inflation-adjusted returns will be less than the nominal standard deviation. If you used the SD of the inflation adjusted returns, the relationship will be preserved. |
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MediumTex
Joined: 01 Mar 2009
Posts: 447
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| Posted: Thu Aug 13, 2009 8:00 am Post subject: |
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| eurowizard wrote: | | Swivelguy wrote: |
Why is this thread the only one on the Bogleheads forums where FDIC-insured instruments are considered to be risky? |
Because this thread is about Harry Browne's PP and Harry Browne was a strong libertarian with strong distrust in the government and who has gone on record stating his distrust with the FDIC. It would be an incomplete discussion of the PP not to describe the thoughts and intentions of the creator. |
I don't disagree with the comment above, but I want to slice it a little more finely.
I think that Harry Browne had more skepticism than distrust when it came to public institutions. Distrust, to me, suggests bad intention, whereas skepticism is a much less judgmental sense that something that is being attempted may simply not be feasible (though governments are normally in an endless process of re-learning this lesson).
_________________
"A Permanent Portfolio should let you watch the evening news or read investment publications in total serenity."
-Harry Browne |
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Rose21
Joined: 27 Jul 2007
Posts: 469
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| Posted: Sat Aug 15, 2009 9:09 am Post subject: |
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| Has anyone done an analysis of how returns would be affected if an intermediate-term international treasury fund such as PSAFX were substituted for the long-term treasury portion of the PP? I'm not suggesting that the results would be equal or superior to the PP. What I AM suggesting is that a backing off from the long end, coupled with some international diversification, might still produce an acceptable return while mitigating the rather unusual risks presented by long-term U.S. treasuries today. I'd be curious to know what the trade-off would be in terms of expected returns. |
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MediumTex
Joined: 01 Mar 2009
Posts: 447
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| Posted: Sat Aug 15, 2009 10:42 am Post subject: |
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| Rose21 wrote: | | Has anyone done an analysis of how returns would be affected if an intermediate-term international treasury fund such as PSAFX were substituted for the long-term treasury portion of the PP? I'm not suggesting that the results would be equal or superior to the PP. What I AM suggesting is that a backing off from the long end, coupled with some international diversification, might still produce an acceptable return while mitigating the rather unusual risks presented by long-term U.S. treasuries today. I'd be curious to know what the trade-off would be in terms of expected returns. |
There is no unusual risk with long-dated U.S. treasuries today. Long dated treasuries are currently experiencing the normal amount of tension with the other two volatile asset classes in the PP. It is this asset class tension that makes the PP so safe.
By abandoning the long end of the yield curve, you lose the safety that the PP offers. While it might seem like swapping intermediates for long dated treasuries would make the PP safer, people have been saying this for years, and, to date, they have been wrong.
One of the most important things to remember about the PP is that it is a package. If you break the package, you lose the safety and security that it offers. HB made this point on many occasions.
You can certainly do what you are suggesting, but be aware that by doing so you are actually significantly increasing the amount of risk in your portfolio.
Good luck.
_________________
"A Permanent Portfolio should let you watch the evening news or read investment publications in total serenity."
-Harry Browne |
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Clive
Joined: 13 Jun 2009
Posts: 82
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| Posted: Sat Aug 15, 2009 4:21 pm Post subject: |
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-- deleted --
Last edited by Clive on Fri Sep 25, 2009 3:38 pm; edited 1 time in total |
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ClubberLang
Joined: 12 Apr 2009
Posts: 65
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| Posted: Sun Aug 16, 2009 11:24 am Post subject: |
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| craigr wrote: | | ClubberLang wrote: | | Did Harry ever recommend a percentage that should be kept in the Permanent Portfolio as opposed to a variable portfolio? I've been struggling with this and thought 75-25 might be a good ratio. It's somewhat difficult to determine how much I can afford to lose since I still have a long way from retirement. |
The only guidance is to use the variable portfolio only for money you can afford to lose. If you don't feel like taking on the risk then you probably shouldn't run a variable portfolio.
If you do decide to run a variable portfolio, I'd stick to indexing/buy-and-hold strategies and not turn it into a stock picking/market timing endeavor. IMO. |
Thanks for the tip.
What would be your suggestions as far as tax deferred vs. non-tax deferred vs. taxable accounts? $1000 in a 401K is worth less than $1000 in a Roth, but since it is impossible to determine tax rates in the future, it's difficult to tell how much more it is worth. Would each account need its own separate Permanent Portfolio? Or could they be combined? I listened to most of Harry's radio shows but didn't hear say much about IRAs. |
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craigr
Joined: 13 Mar 2007
Posts: 1973
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| Posted: Sun Aug 16, 2009 12:35 pm Post subject: |
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| ClubberLang wrote: | | craigr wrote: | | ClubberLang wrote: | | Did Harry ever recommend a percentage that should be kept in the Permanent Portfolio as opposed to a variable portfolio? I've been struggling with this and thought 75-25 might be a good ratio. It's somewhat difficult to determine how much I can afford to lose since I still have a long way from retirement. |
The only guidance is to use the variable portfolio only for money you can afford to lose. If you don't feel like taking on the risk then you probably shouldn't run a variable portfolio.
If you do decide to run a variable portfolio, I'd stick to indexing/buy-and-hold strategies and not turn it into a stock picking/market timing endeavor. IMO. |
Thanks for the tip.
What would be your suggestions as far as tax deferred vs. non-tax deferred vs. taxable accounts? $1000 in a 401K is worth less than $1000 in a Roth, but since it is impossible to determine tax rates in the future, it's difficult to tell how much more it is worth. Would each account need its own separate Permanent Portfolio? Or could they be combined? I listened to most of Harry's radio shows but didn't hear say much about IRAs. |
It's always best to hold tax-inefficient assets in your tax-deferred first. The general rating of tax efficiency is:
Worst - Cash and Bonds
Middle - Stocks in an tax efficient broad based index fund like TSM
Best - Gold (does not produce any taxable events until sold)
However, you'll probably want some cash or equivalents outside of your tax-deferred for emergency purposes so you don't incur a penalty if you need to access it. I view all accounts as just one combined portfolio. |
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ClubberLang
Joined: 12 Apr 2009
Posts: 65
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| Posted: Sun Aug 16, 2009 8:46 pm Post subject: |
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| craigr wrote: | It's always best to hold tax-inefficient assets in your tax-deferred first. The general rating of tax efficiency is:
Worst - Cash and Bonds
Middle - Stocks in an tax efficient broad based index fund like TSM
Best - Gold (does not produce any taxable events until sold)
However, you'll probably want some cash or equivalents outside of your tax-deferred for emergency purposes so you don't incur a penalty if you need to access it. I view all accounts as just one combined portfolio. |
So an emergency fund could be included in a Permanent Portfolio?
Let's say you do the 4-way split and you place funds in both taxable and tax-deferred accounts. Wouldn't the amount in the taxable account be worth more than the amount in the tax deferred account? For example, you have $10 K in a tax deferred money market account and $10K in a TAXABLE mutual fund. When you go to withdraw, the funds in your tax deferred account will be taxed more than your taxable account. Is this difference in taxes taken into consideration when investing in the Permanent Portfolio?
Would raw land (let's say it's paid off) be a good substitute for some of the gold portion of the portfolio? Like gold, it's been said that land can be an inflation hedge. |
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craigr
Joined: 13 Mar 2007
Posts: 1973
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| Posted: Sun Aug 16, 2009 8:59 pm Post subject: |
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| ClubberLang wrote: | | craigr wrote: | It's always best to hold tax-inefficient assets in your tax-deferred first. The general rating of tax efficiency is:
Worst - Cash and Bonds
Middle - Stocks in an tax efficient broad based index fund like TSM
Best - Gold (does not produce any taxable events until sold)
However, you'll probably want some cash or equivalents outside of your tax-deferred for emergency purposes so you don't incur a penalty if you need to access it. I view all accounts as just one combined portfolio. |
So an emergency fund could be included in a Permanent Portfolio?
Let's say you do the 4-way split and you place funds in both taxable and tax-deferred accounts. Wouldn't the amount in the taxable account be worth more than the amount in the tax deferred account? For example, you have $10 K in a tax deferred money market account and $10K in a TAXABLE mutual fund. When you go to withdraw, the funds in your tax deferred account will be taxed more than your taxable account. Is this difference in taxes taken into consideration when investing in the Permanent Portfolio? |
I count my emergency funds as part of my cash allocation.
I understand what you're saying with respect to taxable/tax-deferred but I don't have a good answer for you. There are too many possibilities for tax impacts into the future. If you use a taxable account you're going to have capital gains and tax-deferred you're going to have taxes during withdrawal. You'll just have to keep these constantly evolving tax considerations in view.
| Quote: | | Would raw land (let's say it's paid off) be a good substitute for some of the gold portion of the portfolio? Like gold, it's been said that land can be an inflation hedge. |
No, because land is not a liquid investment. You can't sell it off easily nor know how much it is really worth until it is sold. Also real estate can be region specific in terms of performance and has its own costs of upkeep such as property taxes, insurance, maintenance, etc. which can impact overall returns.
Browne considered real estate a speculation and not an investment. This is not to say it can't be a good money maker if you choose wisely, just that real estate is not the sure-fire investment commonly thought (as 2008 proved).
Browne discussed the roll of real estate and other assets for inflation protection and his feelings on it in this radio show archive:
http://www.crawlingroad.com/fi....-04-10.mp3 |
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ClubberLang
Joined: 12 Apr 2009
Posts: 65
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| Posted: Sun Aug 16, 2009 9:15 pm Post subject: |
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| craigr wrote: |
I count my emergency funds as part of my cash allocation.
I understand what you're saying with respect to taxable/tax-deferred but I don't have a good answer for you. There are too many possibilities for tax impacts into the future. If you use a taxable account you're going to have capital gains and tax-deferred you're going to have taxes during withdrawal. You'll just have to keep these constantly evolving tax considerations in view.
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Ok..I thought you might have heard or read something that Harry wrote that I missed. I listen to most of his archived shows and did not hear much about taxable vs. tax-deferred accounts. I guess this is more of an individual item since everybody's portfolio will be different.
| Quote: | No, because land is not a liquid investment. You can't sell it off easily nor know how much it is really worth until it is sold. Also real estate can be region specific in terms of performance and has its own costs of upkeep such as property taxes, insurance, maintenance, etc. which can impact overall returns.
Browne considered real estate a speculation and not an investment. This is not to say it can't be a good money maker if you choose wisely, just that real estate is not the sure-fire investment commonly thought (as 2008 proved).
Browne discussed the roll of real estate and other assets for inflation protection and his feelings on it in this radio show archive:
http://www.crawlingroad.com/fi....-04-10.mp3 |
Thanks for the link, I will check it out.
Doesn't gold have similar fees that can affect overall returns? It's easier to sell than land. However, when you buy it, you have to pay a dealer a commission since they mark up the price. When you sell it, the dealer will pay less than what it is worth. And you might have to pay storage fees (i.e. safety deposit box). |
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Swivelguy
Joined: 18 Jan 2009
Posts: 266
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| Posted: Sun Aug 16, 2009 10:09 pm Post subject: |
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| craigr wrote: | The general rating of tax efficiency is:
Worst - Cash and Bonds
Middle - Stocks in an tax efficient broad based index fund like TSM
Best - Gold (does not produce any taxable events until sold) |
Gold is best in tax-efficiency? It feels like the worst to me, as the flat 28% collectibles tax is higher than my marginal tax bracket. Even if you don't have to pay those taxes until you sell, you will eventually have to, so gold held in taxable is still only worth it's cost basis plus 72% of its appreciation when you have to rebalance or once you retire and start spending it.
If inflation flares up in the next decade or two, as many are suspecting that it will, gold held in taxable is going to get hammered, even under current legislation. |
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craigr
Joined: 13 Mar 2007
Posts: 1973
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| Posted: Sun Aug 16, 2009 10:31 pm Post subject: |
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| ClubberLang wrote: | | Doesn't gold have similar fees that can affect overall returns? It's easier to sell than land. However, when you buy it, you have to pay a dealer a commission since they mark up the price. When you sell it, the dealer will pay less than what it is worth. And you might have to pay storage fees (i.e. safety deposit box). |
There are some fees that are similar, but the biggest deal by far is liquidity of the investment. It's quite easy for me to sell down a gold holding when it gets too high. It's much harder to sell off a slice of land. |
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craigr
Joined: 13 Mar 2007
Posts: 1973
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| Posted: Sun Aug 16, 2009 10:34 pm Post subject: |
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| Swivelguy wrote: | Gold is best in tax-efficiency? It feels like the worst to me, as the flat 28% collectibles tax is higher than my marginal tax bracket. Even if you don't have to pay those taxes until you sell, you will eventually have to, so gold held in taxable is still only worth it's cost basis plus 72% of its appreciation when you have to rebalance or once you retire and start spending it.
If inflation flares up in the next decade or two, as many are suspecting that it will, gold held in taxable is going to get hammered, even under current legislation. |
It's all relative. You can't escape the tax consequences of any investment. However bond interest is going to be taxed each year no matter what. The dividends from a mutual fund is completely wasted on taxable investors (you're just moving money from one pocket to another and paying a tax). With the gold you aren't taking gains until you are ready to take them. This is not optimal (we'd all love to pay zero taxes). However, given the assets in the portfolio, it's the best of several choices.
Also keep in mind that the recently low capital gains and other taxes we've had are going to expire soon. The average long term capital gains tax rate the past several decades was about 25% and could easily return there (or higher) again. Dividend taxes are likely to return back to income tax levels, too. So there is even more reason to shelter some of these assets vs. gold. |
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