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Thread: Permanent portfolio and asset allocation

  1. #21
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    "I think GICs can be used as the "cash" allocation of the permanent portfolio."

    I think most investors would be better off with a cash wedge - so largely agree.

    Cash can decline however, as can GICs over time, in terms of purchasing power (inflation).

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  2. #22
    Senior Member Argonaut's Avatar
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    Permanent portfolio was first thing I learned in investing, definitely a good allocation. Though I would modify it to 50% stocks, 25% gold, and 25% cash/bonds. Not in a rush to setup that allocation just yet with poor interest rates and metals not going anywhere for a few years, but something to work towards in the future.

  3. #23
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    I think modifications are fine ... fundamentally it's the exposure to all 4 classes that I like. Basically I think PP is one of the only schemes that actually handles the matrix of all possible bull/bear scenarios -- e.g. our traditional balanced fund / buy and hold is really great when either stocks or bonds are in a bull, and is terrific when both stocks & bonds are a bull (as they've been since 1981), but falls on its face when stocks & bonds are both in bear markets.

    By the way the P.P has done just amazingly in June despite the market turmoil. You can't even see the Brexit in the daily data, look how it smooths volatility in June:

    2016-06-01 100.64
    2016-06-02 100.91
    2016-06-03 101.61
    2016-06-08 101.47
    2016-06-09 101.51
    2016-06-10 101.36
    2016-06-13 101.72
    2016-06-14 101.61
    2016-06-15 101.92
    2016-06-16 101.69
    2016-06-17 101.90
    2016-06-20 101.72
    2016-06-21 101.18
    2016-06-22 101.18
    2016-06-23 101.24
    2016-06-24 102.42
    2016-06-27 102.63
    2016-06-28 102.44
    2016-06-29 102.74
    2016-06-30 102.81

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  5. #24
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    Harry Browne was a Libertarian and the original intent of the Permanent Portfolio was to protect your money, not to grow it. This should be the number one criteria for choosing this portfolio. The growth that does occur is a by-product of the volatility of the four assets.

    Modifications are fine but keep in mind, they will change the purpose of the PP. Weighting towards equities means it behaves more like a stock portfolio (bigger gains during bulls, bigger drawdowns during bears and crashes, longer recovery times.)

    - Index funds were chosen to capture the returns of the market.
    - Long term Federal government bonds were chosen for the magnified volatility and protection from defaults.
    - Gold was chosen because it's the 2nd most popular currency in the world. When the USD has trouble, people pile into gold the most.
    - One-year duration Treasury Bills were chosen for zero volatility, to keep up with inflation, and offer complete default protection. If the federal government ever defaults, Treasury bills are the first thing that's paid off. They also offer liquidity for emergency funds or buying opportunities.

    These are the ETFs I chose for my own portfolio. I believe they are the best choices available in Canada for now.
    - VCN / XAW
    - ZFL
    - MNT
    - cash (no T-Bill ETF exists in Canada. I will hold pure cash until interest rates rise, or someone creates this fund.)

  6. #25
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    The US government cannot run out of dollars because it controls the printing press.

  7. #26
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    It can print more dollars, but the money already in existence loses value equal to the amount printed. It's a zero-sum game. Actual value is created from the productivity of a nation.

  8. #27
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    Agreed, but the point is that US government default is very unlikely. They may inflate their debt away.

  9. #28
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    True, government default is very unlikely. I have difficulty justifying that scenario with my portfolio. Harry Browne was very distrustful of government and those with lots of power-- and rightly so. History is filled with events that no one thought could happen, but did. The point of the PP is to protect your worth under any scenario, even the collapse of a country. Keeping 25% of your wealth offshore in the form of physical gold is one of the ways he advocated. It may seem extreme today, but such things have happened before.

  10. #29
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    Very extreme. That said, I'm holding more cash as time goes on. You never know....
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  11. #30
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    You're right, Harry Browne was a libertarian, but I see this portfolio construction as being appealing due to the uncorrelated assets that have different characteristics in different economic environments. I like JohnnyFactor's ETF picks.

    For the cash component, I agree that t-bills are ideal and the safest, but I think some alternatives are OK within the spirit of PP. (For end-of-the-world resilience though, I agree you'd want to hold physical gold and either t-bills or physical cash).

    Johnny, consider that pure "cash", if you're holding it in a bank account, is only as safe as CDIC insurance. So if you're holding it at a bank you might as well use GICs with CDIC insurance. Of course t-bills are safer and more liquid. I feel that GICs are an acceptable tradeoff as I don't seek liquidity in the PP; what I want is to ensure that the cash bucket can't possibly decline.

    I suggested XSB because it is government-heavy, has high credit quality and demonstrated even at the worst of 2008 that it was extremely durable. Unlike corporate-heavy short term bond funds, XSB never even hiccuped at the worst of the crisis. In fact XSB's behaviour was identical to an actual US t-bill fund, SHY, which is often used in American PP. Take a look at the charts from 2008,

    BSV, a US corp short-term bond fund that semi-crashed (don't want this in PP)
    SHY, a US t-bill fund (used in American PP)
    XSB, which I think is good enough for PP

    Other alternatives for cash

    BMO's ZFS appears to be the safest of any option, with 100% federal paper, short term maturity. JohnnyFactor, this is probably the best option for a Canadian t-bill fund.

    iShares CLF is all federal & provincial, but lower credit grade than ZFS due to provincial exposure.

    Last edited by james4beach; 2016-07-05 at 10:30 PM.

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