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Thread: Permanent portfolio and asset allocation

  1. #11
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    In their comparison, Dan and Justin used the 30 day t-bills for the cash component which is as literal as you can get with cash.

    Personally I'd hold something like XSB as a short term bond fund (Americans use SHY which is similar to XSB). This is a common adjustment to the permanent portfolio, and you'd get some increase in performance. Quite a bit actually. XSB since inception returned 4.5%

    Assuming that this XSB performance since inception is indicative, you gain another 1.1% performance in the permanent portfolio. Which, surprise surprise, now makes the Permanent Portfolio have equal performance to the Global Couch Potato portfolio. (let's call that the optimistic result)

    I really don't think the PP performance is bad at all, and the XSB substitution is a pretty reasonable implementation of it. I'm not convinced that you sacrifice much performance with PP.

    Even if I'm wrong on the XSB performance projected back to 1979, let's say that 1-3 year bonds definitely yield around 100 basis points more than 30 day bills (pessimistically) which closes the gap in the comparison by 0.25%. In any case, the message is that the performance gap is narrower than the 1.32% figure in their analysis and the long term annual PP performance is probably within 1% of the 60/40 couch potato.

    Last edited by james4beach; 2016-03-21 at 10:35 PM.

  2. #12
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    Quote Originally Posted by jargey3000 View Post
    Spudd: what would you go with for the global stock allocation?
    Probably something like XWD. It holds the entire world in a single ETF, in Canadian currency. VT is the other option I can think of, but you have to buy that in USD.

  3. #13
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    Quote Originally Posted by james4beach View Post
    My Own Advisor, I understand how one can optimize or geographically diversify the stock part of the holdings, but I'm curious why you don't like the idea of the broader diversification outside of stocks?

    You said earlier,


    But analyses on diversified portfolios like the Permanent Portfolio have gone back many decades, on US data, it definitely shows strong performance with undeniably less volatility and milder down years. Isn't that very compelling? It covers a number of periods including high inflation/low inflation, high interest rates, low interest rates, and the permanent portfolio had steady performance and low volatility throughout all of this.

    Pure stock allocation just can't do that. Bonds & stocks together do it to some degree -- and I often endorse balanced funds -- but why not add more diversification since it reduces volatility further?
    I don't hold bonds because while bonds cushion the blow from bad equity markets, my investing time horizon is 10+ years. I feel over that time, equities will far outperform bonds. I could be wrong.

    I also feel bond yields have nowhere to go but up over time, which means of course, prices will fall over time. There is little capital appreciation to be had in the decades to come from bonds. I could be wrong.

    Lastly, I don't hold any bonds because I have a workplace pension plan (not gold-plated) and I consider that a big bond. This bond will provide me with, hopefully, a decent amount of fixed income in retirement.

    For those key reasons, I diversify my equities for sure, but I don't hold any fixed income or bonds. I do hold some cash for as my emergency fund and we some cash for savings (i.e., house improvements, trips, etc.)

    Volatility is a short-term headache.
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  5. #14
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    Quote Originally Posted by My Own Advisor View Post
    I also feel bond yields have nowhere to go but up over time, which means of course, prices will fall over time. There is little capital appreciation to be had in the decades to come from bonds. I could be wrong.

    Lastly, I don't hold any bonds because I have a workplace pension plan (not gold-plated) and I consider that a big bond. This bond will provide me with, hopefully, a decent amount of fixed income in retirement.
    Regarding first paragraph above, if you buy actual short term bonds and hold them to maturity, their value is of no consequence. You buy them knowing the yield to maturity. If you buy bond etfs or funds, you do need to know and understand duration. Personally, I only buy actual bonds or in some cases, convertible debentures and being in retirement have 40-50% in fixed income and working on increasing that.

    Having a pension, does make a difference. Even CPP/OAS and that is why we don't have a higher % fixed income.

  6. #15
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    My job is my bond allocation. Young people sitting on hoards of cash and bonds is sad.

  7. #16
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    CPA, you might call it sad, but short term bonds (XSB) have almost outperformed the TSX in the last decade. So if you think bond holdings are sad, then I'm sure you'll agree that stock holdings are even sadder.

    The point really is that you don't know which asset will perform. If we enter a period of negative yields, and increasingly negative yields, then the bonds will continue to perform well. Nobody knows.

  8. #17
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    I think folks who are into their 60s, 70s and 80s probably want some form of fixed income, but that depends, it depends on their risk tolerance and estate planning. Bonds are not for everyone.

    Nobody knows the future but if I was a betting man, and I am with my portfolio apparently, the long-term returns of stocks will outpace bonds, and bonds in turn should outpace idle cash. Again, I could be wrong!

    If an investor feels better owning cash, owning more bonds than stocks - that's fine. Every investor is different. The perfect portfolio only exists in hindsight.
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  9. #18
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    Quote Originally Posted by My Own Advisor View Post
    Nobody knows the future but if I was a betting man, and I am with my portfolio apparently, the long-term returns of stocks will outpace bonds, and bonds in turn should outpace idle cash. Again, I could be wrong.
    That has been my thinking. I have not owned anything fixed income in over a quarter century. With my wife due to retire on a teacher's pension soonish, my concession to FI will be to wind down the leverage a bit.

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  10. #19
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    It will be interesting to see the permanent portfolio reaction to what looks like insane market volatility brewing right now. I've made a Canadian permanent portfolio index computed from equal parts (MNT,HBB,HXT,cash) so I can track it over time. I wouldn't actually invest using those, but they're useful to compute total returns.

    My P.P index was 100 on 2016-03-22
    June 23 at the close it was 101.240

    The theory is that this construction with uncorrelated assets will dampen volatility.

  11. #20
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    Yup this was great on a volatile day! June 24 (on the Brexit outcome and global market turmoil), my P.P closed up 102.42 or +1.2% today.

    But really the question is how it does over much longer time frames. And from what I can see, the answer is: it does quite well over the decades.

    I think GICs can be used as the "cash" allocation of the permanent portfolio. The reasoning is that for diversification, the cash allocation must be something that can't decline. GICs can't decline. Also, with a ladder where amounts mature ever 6 or 12 months, you have liquidity. My current plan is to follow PP using 5 year GICs as the cash component.

    Looking at Dan and Justin's 32 year comparison, substituting GICs for t-bills should completely bridge the gap. The resulting long-term performance would be the same for Permanent Portfolio and Global Couch Potato Portfolio.

    Last edited by james4beach; 2016-06-26 at 04:08 PM.

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