Building a Permanent Portfolio

by Jeff C. Johnson

Three buckets of money

(Use three distinct accounts, or buckets, to build your financial foundation: IRA, long-term holdings, and cash accounts.)
In my previous post, I shared some reasons why my IRA is my largest bucket of financial investments.

Why the retirement account grew to be a substantial amount is noted in the post. The other reason it is a large account; however, is because I was less than disciplined with keeping other money invested for the long term (certain non-IRA holdings have no penalty if sold and spent).

To be clear, I am not whining, but I am sharing something I wish I could get a second shot at doing correctly. My recommendation to you is to build what I call a “Permanent Portfolio.”

If you invest early in life in tax-efficient equity investments, such as a tax-advantaged mutual fund portfolio, you can build large, rarely sold positions that appreciate and so benefit from untaxed, unrealized capital gains and compounding. Plus, dividends and the capital gains from sales normally are taxed at a much lower rate than ordinary earned income or taxable interest.

This is an opportunity that I didn’t fully take advantage of during my accumulation years.

As you consider your investment money, here are three distinct accounts or portfolios for you to consider building and implementing.

  1. Your long-term investment inside a tax-deferred retirement account (the topic of the aforementioned previous post) is where most workers pile up their biggest pool of money.
  2. The so-called “Permanent Portfolio” involves long-term holdings that you’re going to leave invested for the long haul, just like the retirement account. Resist the temptation to tap into this growing chunk of money.
  3. Your cash for expenses, liquidity for emergencies, and your spending money. This should be in low-risk vehicles and readily available accounts. It should be large enough in size that it meets your spending needs. This way, you can avoid tapping the Permanent Portfolio and the Retirement Money.

The second of the Five Financial Foundations is to “have some wood in the shed” (a cash reserve) to meet immediate needs. Most people have inadequate cash on hand and as a result never get a Permanent Portfolio on track.

In the words of my dad, “Do as I say, not as I do.” Learn from my mistakes, build a cash reserve, build a Permanent Portfolio, and continually fund your retirement account during your working career.

Don’t forget to order or pick up a copy of The Five Financial Foundations. Even if you don’t need it, someone you care about probably does. The cost of the book is less than a burger, fries, and shake.