Permanent Portfolio

[lokar]

Okay, I'm tired of constantly wondering what's going to happen in the financial markets. I'm tired of listening to a buncha blowhard "experts" blathering on about what they think will happen, and always wondering when they're done spouting opinions that are 180 degrees out from each other what I'm supposed to do. The Permanent Portfolio is my new route.

Harry Browne proposed it many years ago, but I had never heard of it until about a month ago. There's a lot online about it, so I won't go into it all here, but the best analysis and most information I can find about it is at crawlingroad dot com and on the bogleheads site.

My main problem here is, since a lot of my funds are in the TSP, how to use the TSP to help structure my portfolio as detailed in the Permanent Portfolio. If anyone here decides to look into it, and finds it as interesting as I do, drop your ideas in on how you think it can be achieved using the TSP. Don't want to go on and on myself in this first post, but I will answer this post myself with what I think can be done to set up a Permanent Portfolio using the TSP as part of it.

There's plenty of help setting it up with funds outside of tax deferred retirement plans... I guess I'm trying to get some other folks tied to the TSP working on the same thing I am, so we can use each others' ideas and hopefully get something going. To get ya started, here's a link to a comparison of the Permanent Portfolio 2008 results and some other investment methods: http://crawlingroad.com/blog/2009/01/01/permanent-portfolio-results-2008-a-disaster-averted/

Thanks...

Lokar

 

[lokar]

Okay, some brief thoughts on the PP and TSP...

PP says invest 25% of your funds in each of the following...
Long Term Treasury Bonds
Short Term Treasury Bills (cash)
some Whole Stock Market Fund
Gold (preferably gold you can hold yourself, like American Gold Eagle coins)

These are to counter the four possible prevalent financial situations:
Prosperity
Deflation
Inflation
Times of falling interest rates

History has shown that, almost always, when one or two of the categories are falling, two or three of the others are improving at a higher rate than the losers' values are dropping.

This is oversimplified, of course, but it really doesn't get too much more complicated that that. So, the best I can figure, in the TSP we can cover two of the four PP goals:
Stock portion: I'd use 20% C fund, 3% I fund, and 2% S fund
Cash portion: I think we can use the G fund instead of Short Term Tbills

Here's the tough part: Gold is preferably held as "gold", not in a fund, and the Long Term Tbonds do not have an equivalent investment in the TSP, as far as I can tell. I suppose the best situation would be if you had enough cash on hand to be able to match your TSP funds and buy Gold coins and Tbonds on the outside of the TSP, thereby equaling 25% in each of the four categories. If you don't have the cash, I suppose you could maybe go with a Gold ETF fund, some of those are evaluated for their potential on the CrawlingRoad site. And I don't know what you can do, if you don't have funds outside the TSP, to subsitute for the Long Term Tbonds... I've been told on another forum that our F fund doesn't really provide the balancing of the PP that it requires to help it offset losses in other areas.

I am pretty lucky that I believe I can set up my PP as required using the TSP and outside funds. It would be nice if it could all be done from with the TSP, though, so maybe some folks could put in their two cents to show me how it's done. I certainly don't know, I'm just askin'....

So, it looks like a Popeil kinda portfolio, set it and forget it for a year, and rebalance when it gets more than 10% or so out of balance. And look at the historical returns on CrawlingRoad, too, it's not exciting, but over the long haul, looks pretty good. And it's recommended you do this PP with the funds you feel you have to protect... if you have some play around money, then you go ahead, if you want, and do some dabbling in the market or wherever. Just do what you can to protect your "have to" cash.

Lokar

 

[Bullitt]

TSP Permanent Portfolio: 30%C, 20%S, 20%I, 30%F. An allocation like that is more effective than probably 90% of the non tsp 401K's out there today. I always read these permanent buy and hold for life portfolio strategies with a grain of salt.

A huge criticism I have of so called buy and hold permanent set it and forget it portfolios is: If this is truly a long term portfolio, then who cares what the portfolio did in 2008? If you horizon is 40 years, do you care how something worked the past two years?

Buy and hold works, but bottom line: You have to buy in at a good price. A certain buy and hold group (gulp) says to plop the money down right now if you have it. Yeah, ask anyone who plopped it all down at Dow 14K or Nasdaq 5K how they're doing now in inflation adjusted returns.

Good luck. There are many debates on buy and hold buried in various graves on this MB.

 

[lokar]

TSP Permanent Portfolio: 30%C, 20%S, 20%I, 30%F. An allocation like that is more effective than probably 90% of the non tsp 401K's out there today. I always read these permanent buy and hold for life portfolio strategies with a grain of salt.

A huge criticism I have of so called buy and hold permanent set it and forget it portfolios is: If this is truly a long term portfolio, then who cares what the portfolio did in 2008? If you horizon is 40 years, do you care how something worked the past two years?

Buy and hold works, but bottom line: You have to buy in at a good price. A certain buy and hold group (gulp) says to plop the money down right now if you have it. Yeah, ask anyone who plopped it all down at Dow 14K or Nasdaq 5K how they're doing now in inflation adjusted returns.

Good luck. There are many debates on buy and hold buried in various graves on this MB.

You've changed the PP completely... you've got 70% stock, and 30% bonds... yes, this allocation is probably going to drop a good amount of some portfolios in a grave. With your example, you're not using gold or cash investments to counter the situations that will drop your stock and bond holdings down to levels that will give you a heart attack. The only reason I mention the 2008 performance was to show how in that particular climate, the PP went up about 2% when a lot of stock/bond portfolios dropped something in the 20-50% range. Just one scenario. With a little research you will see that the PP returns have only dropped into the negative range twice since 1972. Granted, some years it got killed by stocks or whatever, but you weren't pulling your hair out, and your exposure to massive losses was cut to almost nil... and you still end up at about a 10% gain over this time period.

Not your standard buy and hold setup, and shouldn't be brushed into the same dustpan as the others either, I don't believe.

As far as buying in at the "right price", yeah, it'd be great to get it all at a discount, but I think that theoretically, if you buy in at 4 x 25%, when one goes down, the others will still bulk up the portfolio. Saying that, I'd probably be one who would still try to time it a bit and get in some of the different areas at a better rate, like gold at a better price... technically I think it's not necessary, but for my mind, I'd probably want to feel like I got a better price.

 

[James48843]

...My main problem here is, since a lot of my funds are in the TSP, how to use the TSP to help structure my portfolio as detailed in the Permanent Portfolio. If anyone here decides to look into it, and finds it as interesting as I do, drop your ideas in on how you think it can be achieved using the TSP.
Lokar

The problem within the TSP is that it basically can't be done today, because you have no way to access things like precious metal funds. If you look at your "Permanent Portfolio", about the closest thing you can do is load up in the L Income fund with perhaps 70% of your TSP, then load up on 30% "F" fund as well, so that you are sitting roughly 35-40% bonds, a little bit of stocks, and then you'd have to add some kind of precious metal fund outside the TSP to balance it off.

By the way- LEGALLY, the TSP COULD now do this. Congress authorized the FTRIB to develop a "Mutual Fund Window", whereby you could buy and trade shares of mutual funds with part of your TSP.

But the Employee Thrift Advisory Council (ETAC) has said they don't endorse it, so it's dead in the water until and unless someone can convince the Employee Thrift Advisory Council members to change their minds. Many of the ETAC members say they just want G fund. Figures. No experience in investing from the ETAC, and we get stuck their their stupid decisions, having no input into the program.

oh well.

A "window" would be a good thing. But ETAC wants to save us from ourselves, I guess.

 

[Bullitt]

You've changed the PP completely... you've got 70% stock, and 30% bonds... yes, this allocation is probably going to drop a good amount of some portfolios in a grave.

OK. In TSP, 33%C, 33%F, 33%G. In a Roth IRA, invest 100% in the ETF: GLD.

Done. Set it and forget it, rebalance yearly with your new cash and sleep like you drank Nyquil.

Re: TLT. I'm going to make the prediction that the 30 year is about to crest and will soon (if not already) embark on a many year bear market. That's why I say invest in F, you can have a basket of bond durations for a very low fee.

James: Probably for a separate thread, but doesn't congress realize how much more money they could make with a mutual fund option? More money would flow into TSP and away from other investing accounts with the options available. Then, maybe congress can get their hands on some of those 12b-1 fees.

 

[lokar]

OK. In TSP, 33%C, 33%F, 33%G. In a Roth IRA, invest 100% in the ETF: GLD.

Done. Set it and forget it, rebalance yearly with your new cash and sleep like you drank Nyquil.

Re: TLT. I'm going to make the prediction that the 30 year is about to crest and will soon (if not already) embark on a many year bear market. That's why I say invest in F, you can have a basket of bond durations for a very low fee.

James: Probably for a separate thread, but doesn't congress realize how much more money they could make with a mutual fund option? More money would flow into TSP and away from other investing accounts with the options available. Then, maybe congress can get their hands on some of those 12b-1 fees.

I kinda like that, thanks, Bullitt... gotta look into the F fund versus Tbonds, though, as I don't know enough about how one behaves as opposed to the other in different markets, so if I were to go your way, would I really be as "protected" as the suggested basic allocations of the PP should do. And for me, I'd use outside cash for my gold coin purchases and use the Vanguard Roth for my speculative variable portfolio, the money that I feel I could lose and it wouldn't hurt me but would only **** me off.

Do you think the G fund is a comparable/adequate trade off for Tbills as the cash portion of the PP?

Thanks again.....

 

[Bullitt]

I'm not too sure about the correlation between G Fund and T-bills. I figure G fund is comprised of short term gov't debt.

As far as your plan, you may encounter a problem when it comes to rebalancing though because of two separate accounts equaling one portfolio. If you contribute 15K to TSP, that would be 5K to each of the three TSP funds. You would then have to contribute 5K to GLD in your roth. When you rebalance you might be constricted by Roth contribution limits and also you won't be able to sell C fund, for example, and buy GLD.

If you'd like to read more on indexing, I recommend this list of books as a starter.

Good luck. It's nice to see an investment plan that is going to be long term.

 

[OBGibby]

...If you'd like to read more on indexing, I recommend this list of books as a starter...

Bogle's book is great!

 

[Boghie]

Lokar,

I think Bullitt's second allocation is good to go.
33% C - gives you large cap and some international exposure
33% F - gives you mid term bonds
33% G - gives you a cash equivalent
and, you can use an external equivalent to cover gold

But, investing post tax money into Gold will cost you:

• Your Federal Income Tax Rate
• Your State Income Tax Rate
• And, high Commissions

That would not let me sleep at night. For me, the taxes equate to losing 35% the minute I buy them. I don't know about the commissions on a gold ETF. But, since it was mentioned by Bullitt I am certain they are reasonable. I know gold coins can job you hard on the purchase and sale.

Since your point is to reduce the trading 'requirement' have you perhaps looked at folks on the AutoTraker who make a minimal number of trades. They may have taken a bit of a dump last year - but, last year was a once in a lifetime event.

For example the following allocate and do not trade much:

• Bullitt
• CallMe_CO
• Pill

Finally, stream of thought - I love using Gigs of disk space on servers...

You can use the Tot_Global_Mkt and Total_US_Market allocations showing in the AutoTracker for the 25% that is the 'Whole Stock Market Fund'. I don't know if that is the whole US Market or an Advanced World Market. In your overall allocation:

• Total_US_Market:
  
  [*]64% C = 16% C in your total allocation
  [*]36% S = 9% D in your allocation​
• Tot_Global_Mkt:
  
  [*]32% C = 8% of your total allocation
  [*]18% S = 4.5% of your total allocation
  [*]50% I = 12.5% of your total allocation​

 

[lokar]

"but, last year was a once in a lifetime event."

Here's the whole point of the Permanent Portfolio... neither you, nor anyone else, know that statement is fact! And I can virtually guarantee, eventually, it will be proven wrong. Harry Browne's number one rule: "Almost nothing in investing turns out as expected."

So, if you're going to be a PP investor and advocate, and I have decided to become both, you automatically take the bad with the good, and are backed up by historical returns in your thinking that your "goods" will outpace your "bads" for an overall satisfactory gain.

Tax-wise, it would be nice if all our invested money was in some sort of tax-exempt or tax-deferred accounts, but it's just not so, at least not for me.

I've tried to avoid numbers, I don't know why, it feels like I'm "sharing too much", I guess, but without it, it's becoming obvious from the other thoughtful posts that it would be easier to examine this with the actual situation, so here goes....

I'm 53, wife is 55.

No bills, no kids, house is paid.

Fed retirement income is 90k, no state income tax. (don't need investment income to live, just want to make a safe but fair profit)

165k in TSP

My roth in Vanguard is 35k

Wife roth in Vanguard is 49k

125k cash in bank, waiting to be dispersed into something

I'd like to:

put 83k of the TSP in the G

Put 82k of the TSP in a combo of the C,S,I

put 84k of both our roth's into something similar to Long term Tbonds...(have to look into it, but can I buy them inside my roth from Vanguard? )

Buy 83k in gold coins, stuff 'em in a safe deposit box

That's pretty close to 25% in each of the four PP categories, and leaves me with about 40k cash to mess around with when I think I know how to make a killin'..... which I don't, but I think we all have those urges to beat the market. At least this way it limits my stupidity to a pre-determined amount. I won't touch the PP except to rebalance, or if for some reason I need the cash.

So that's my idea, hope it's more clear now with numbers and seeing how I'm restricted because of where it's invested. I tried to avoid clogging up the posts with all that but it seemed necessary at this point.

Thanks for looking at it and any suggestions... I like the PP and will be going with it, I guess I'm just posting here to make sure others know about what I think is a safe but profitable portfolio, and also to get some other eyes looking at my situation and to get their allocation opinions. I only stumbled upon it a month or so ago. But after much reading, it seems the right thing for me, just have to figure my allocations within my restricted accounts.

Lokar

 

[Bullitt]

Vanguard IRA, that's easy.

VBLTX: Vanguard Long Term Bond Fund Index

Seeks to track the performance of the Barclays Capital U.S. Long Government/Credit Bond Index, a market-weighted bond index that includes investment-grade bonds with a dollar-weighted average maturity of 15 to 30 years.

https://personal.vanguard.com/us/FundsSnapshot?FundId=0522&FundIntExt=INT

 

[Boghie]

Lokar,

I am one who definitely does not know where the market is going. I am not even certain where it has been:nuts:

Although this may be a sacrilege on this site - have you looked at the possibility of a rollover of your TSP assets to a Traditional IRA? This option assumes you are retired – which I think is clear from your most recent comment.

Maybe into a Traditional IRA using your Vanguard account. Your management fees using the Vanguard funds (maybe ETFs) will be minimal. And, you can set your IRA account to absolutely equate to your goals. Also, rebalancing within an IRA is not a taxable event.

On gold coins, watch out for commissions. You get them coming and going. For example to purchase a Gold Eagle (40 – 99 count) you are looking at $1,162 per ounce coin. Gold is (apparently – using Bloomberg) selling for 1,096 per oz. That is a commission of $66 per coin – that is, ~6%. That is probably close to the selling commission – thus, a 12% commission. I am certain someone else who buys/sells gold coins on this site can give you the absolute scoop and maybe some good vendors.

 

[lokar]

Yowza! That's a pretty stiff fee for buying a gold coin, ain't it? Haven't done it yet, obviously... been out of the country for a couple years, but will be home for good in about two months, will perform due diligence finding the least expensive way to get into the gold biz.... I will look for a good section on the forum here to get some gold recommendations from the experienced, as you suggest. Thanks for your time....

Also, Bullitt, will look into the Vanguard fund you mentioned, thanks for you input, as well.

 

[lokar]

Oh, and your suggestion to possibly move from the TSP to an IRA at Vanguard... both subject to taxes, so that's a wash, just the difference in fund fees, it looks like... I'll look at what the differences in real money would be if I did that... I know Vanguard's fees are low, but they've got to be at least double what the TSP is... if it's $40 instead of $20, no sweat... if it's $800 instead of $400, would have to do some more math on that one.