I agree the spending is alarming, but a country like Japan has a much larger debt to GDP ratio than anyone else and the Yen is still a strong currency.

http://en.wikipedia.org/wiki/List_of_countries_by_public_debt

Ultimately we just don’t know how this will play out. The death of the dollar has been predicted now for decades. It could happen tomorrow, or it could happen in 50 years. So the best plan is to diversify so in case these scenarios do play out you’re protected, but if they don’t you’re still protected.

Gold is going to react to the perceived or anticipated inflation in the dollar. Right now the markets are anticipating the dollar is going to lose purchasing power. In 2008 they were wrong and the dollar recovered strongly in the last quarter unexpectedly. In 2009 the dollar continued to fall again but it is still above the lows in early 2008 as you can see in this chart:

http://quotes.ino.com/chart/?s=NYBOT_DX&v=dmax

So is 50% in Treasuries too much? Honestly the Cash/ST Bonds are going to tread water under high inflation as their interest rates will adjust quickly and the short duration will not cause big losses to those that hold those assets. The biggest worry is LT bonds which would be severely punished under high inflation. At that point we just have to hope that the gold markets reacts strongly enough to offset those losses. It has in the past and I expect it will in the future. The gold market is MUCH smaller than the total number of dollars in the world. If people wanted to dump dollars quickly due to high inflation the price of gold would go orbital and losses in LT bonds will not be a problem in my opinion.

But then again you have this wealth destruction in the real estate market still happening in the US and that could be very good for the dollar and it could gain strength. LT bonds could go up quickly in price and gold could suffer in the long run if this continues.

In the final analysis we just don’t know what is going to happen. Clearly 25% of the portfolio in LT bonds are extremely exposed to inflation. But the other 25% in gold is highly allergic to inflation. We just have to trust that the markets are going to figure out what direction things will go as it always does. When this occurs the LT bonds or the gold will take care of the portfolio.

Transaction fees will add up for the size and frequency of your contributions. You should consider using mutual funds for the stocks and Treasury Money Market Fund. For the bonds what you can do is pool the money up over several months that you store in your cash allocation and then go buy them in larger blocks to lower costs or use the TLT ETF. If that is too much to do, then the Vanguard Long Term Treasury Bond fund is an alternative for a pure mutual fund to keep transaction costs down but it’s not as good as owning directly or with TLT. Gold can be purchased physically and stored securely or again you may want to consider the ETF and doing purchases only a few times a year once you save up enough money from your cash allocation.

Mutual funds would be something like:

Stocks – Mutual fund VTSMX or ETFs VTI, IWV
Bonds – TLT or VUSTX if you just have to use an open ended mutual fund. Best though to buy the bonds directly from the Treasury or on the secondary market and just set them in your account until their maturity is less than 20 years.
Cash – SHV, SHY, or Vanguard Treasury Money Market (VMPXX) or Vanguard Short Term Treasury (VFISX)
Gold – Physical gold stored securely or if not possible logistically, then one of the gold ETFs. But don’t use Gold mining stocks as a substitute.

1. Strategy will be used in a retirement account (401k), and retirement is 30+ years away;
2. Current funds are only $10,000 but will add about $500 to $1000 per month from here on out (call it forced dollar cost averaging because the lump sum is not yet there);
3. Concerned that the transaction fee for constant monthly purchases of ETFs would be too high, and mutual funds may be better in this situation (no load, no transaction fee)(?)
4. Besides the professionally run PRPFX, is there a way to put this strategy together with mutual funds (and if so, which ones mirror each 25% allocation)?

Thank you for any comments you have.

I’ve already chosen for st bonds, but started doubting about it. I’m in europe and the problem of the european PP is that it’s return’s are much lower the last decade than the american version. The reason? Mainly bonds, european treasury funds consists of treasury bonds of all european country, which are not all rated as high as the uS’s, thus european PP lags back mainly in bonds. However over 2009 there’s was a result of about +13,4% which is very good.

My reasobn for the choice is thus revenue, since the bonds inside are refreshed quite regularly it made sense to me to choose st-bonds over cash, in 2009 my st bonds wtill were around +4%, where cash was around +0,5%. Big difference.

However your answer strengthened my faith to stick with st bonds. Also, far from everything is invested. Also a savingsaccount can help for the cash you need.

KInd regards

JDB

I divide so that near-term one year or less cash on hand is in the Treasury MMF and whatever you have left after that can then (optionally) go into ST Treasuries. But again this is optional if you want to take slightly more risk for a likely better return over the long run.

In the 1970s interest rates went through the roof, yet ST Treasury notes (2 years or so) basically broke even with inflation whereas Treasury bills (shorter than one year or so) lost to inflation by about -1% a year. Now the spread isn’t huge, but just goes to show that the markets are very efficient at pricing in interest rate risk and in the case of the 1970s the market priced ST bonds effectively beating out the safer “cash” in the shorter issues. Nothing is certain, but it’s at least one data point to consider.

The biggest risk in inflation is to LT bonds. In the 1970s they did comparatively worse coming in about -5-6% below inflation each year on average for the entire decade. However if this should happen again, the gold stands a good chance of going up enough to offset these losses and still turn a profit.

I can’t comment on what Browne would say one way or another. I have spoken with his former business partner and publisher though about these tweaks. His only caution is the same one I mention and that is you are taking on some interest rate risk in the cash. I don’t personally feel it’s enough to worry about, but if it is to you then by all means just stick to the cash in Treasury Money Market fund as it is a safe bet.

By far the biggest thing to take away from Browne on the issue of fixed income/bonds/cash is to stay the heck away from credit risk and only buy Treasuries. (For US-Based investors – otherwise bonds from your own country) If you ignored everything Browne has to say on the subject of bonds/cash/fixed income except for this one piece of advice it would be worth it to you. The potential extra return you get on riskier corporate, junk, munis, mortgage and foreign bonds does not offset the other risks compared to Treasuries. IMO. 2008 was a prime example of what happens when you take on credit and call risks with bonds and you need them to perform. Everything in the market tanked except for Treasuries. The last thing investors want are their bonds behaving like their stocks in a bad market. Treasuries can help make the chances of that happening a lot less.

Also let’s just assume that your ST bonds fell by -10%. They’re no more than 25% or so of the portfolio so that would be a net loss to the portfolio of only -2.5% which is chicken scratch in a market that is making ST bonds go down -10% in a year. In that market LT bonds will be doing a lot worse and chances are inflation is raging really out of control. Stocks may also be doing quite poorly. At that point the only asset worth owning is going to be gold because everything else is going be in the tank due to the inflation.

But again I mention the ST Treasury/Cash split as an option and something I do. I never want people to do anything they don’t understand or feel comfortable doing. Remember Rule #16 of Harry Browne’s 16 Golden Rules of Financial Safety:

Rule #16: Whenever you’re in doubt about a course of action, it is always better to err on the side of safety.

Also, there’s nothing wrong with just doing the cash in the Treasury MMF for the time being and if you feel like it later just move some over into ST bonds or not.