# Ray Dalio's All Weather Portfolio



## MarcoE (May 3, 2018)

Ray Dalio's "All Weather Portfolio" is meant to weather any economic season.

According to Dalio, there are only four economic seasons:

1. Higher than expected inflation (rising prices)
2. Lower than expected inflation (or deflation)
3. Higher than expected economic growth
4. Lower than expected economic growth

The "All Weather Portfolio" is meant to perform well in all of these "seasons." It looks like this:

7.5% Gold
7.5% Commodities
30% Stocks
40% Long Term US Bonds
15% Intermediate US Bonds

What do you think of Dalio's portfolio? What surprises me personally is how conservative it is. Only 30% in stocks.


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## james4beach (Nov 15, 2012)

It's a very similar concept to the Permanent Portfolio, which is 25% stocks, 25% bonds, 25% gold, 25% cash. I think the concept is solid, and I use the permanent portfolio myself. Generally with these methods you are giving up a little bit in returns, for added stability and lower volatility. That tradeoff is more useful to certain investors than others, but for me, it's an excellent tradeoff.

I personally think the Permanent Portfolio is easier to implement than this All Weather Portfolio. With all weather, you're going to have a tough time with 7.5% "commodities". What does that mean, the CRB index? You won't find a good ETF that tracks that. It also requires very high exposure to long term US bonds, which is a bad move as a Canadian investor where CAD is your base currency. There is no good Canadian equivalent, because we don't have a big market for long term government bonds, so you really can't achieve the same effect in Canada.

If the All Weather concept appeals to you, take a look at this simple portfolio as an alternative, which is very easy to implement for a Canadian investor with just 4 ETFs:

34% stocks (half Canadian index XIC, half US index ZSP unhedged)
33% bonds (XBB)
33% gold (MNT)

For the 21 years I have data for, 1997-2017, this simple portfolio -- with annual rebalancing -- returned 6.6% annually with a positive return *every* year. Compare that to the traditional 60/40 portfolio which returned 6.8% annually (yes a higher return) but with much more volatility, including some very negative years.

This graph shows the annual returns of the above stock/bond/gold portfolio. Look how amazingly steady this pattern is, and the annualized return is nearly the same as a 60/40 fund.


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## scorpion_ca (Nov 3, 2014)

Why do you suggest XBB instead of ZAG that has a lower MER?


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## MarcoE (May 3, 2018)

I often see the "100 minus your age" rule for stock allocation. E.g. if you're 40, then have 60% of your money in stocks.

But I also hear from people who have a much smaller percentage in stocks. Dalio's All Weather is 30%. The Permanent Portfolio is 25%.

Sometimes, it seems that more seasoned, experienced, and wealthy investors have less money in stocks than the "100 minus age" recommendation.

What are your thoughts on stock allocation? Do most investors put too much of their portfolio in stocks?


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## james4beach (Nov 15, 2012)

scorpion_ca said:


> Why do you suggest XBB instead of ZAG that has a lower MER?


You could go with either one. They actually have the same fee: XBB and ZAG both have 0.09% management fee and 0.10% MER. About a year ago, iShares slashed the fees on XBB.


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## scorpion_ca (Nov 3, 2014)

james4beach said:


> You could go with either one. They actually have the same fee: XBB and ZAG both have 0.09% management fee and 0.10% MER. About a year ago, iShares slashed the fees on XBB.


I checked the MER of XBB with TDDI before posting that comment and it was shown 0.19%. Where do you check the MER info? I also checked the XBB fund fact but it doesn't provide MER info.


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## james4beach (Nov 15, 2012)

MarcoE said:


> What are your thoughts on stock allocation? Do most investors put too much of their portfolio in stocks?


Everyone has different risk tolerance so I wouldn't generalize and say investors put too much in stocks. There are many people who are absolutely OK with the risk that comes with say a 90% stock allocation.

However, it's now been nearly 40 years of strong equity performance, and I think that has made people forget about how risky stocks are. Events like the 2008 crash followed by a stimulus-induced recovery have trained people to think that stocks not only go up, but when they decline, they only decline briefly. I believe that many investors have forgotten how risky stocks are. By risky I mean, the reality is: stocks can decline, and then stay depressed for 10 or even 20 years... potentially with zero real return for two decades. If something like this happens on the cusp of your retirement, you are screwed and ruined. A situation like this hasn't happened in a long time and most people seem to think they won't ever see it happen. (I think it will happen).

That risk is compounded by another effect, which people generally don't think of: the conditions that lead to such bad stock performance also stress your personal finances, and you end up having to withdraw money out of your stock portfolio at the worst time ever.

But again you can't generalize... an investor may be fully aware of stock risk, and decide it's worth it, perhaps because such declines won't distress them. My experience though, talking with many friends and coworkers through two bear markets (2001 and 2008) is that most people really can't handle stock volatility. People might handle a -20% decline but once you get into -40% or -50% losses, the pain just gets too intense. People give up, abandon stocks, and never come back. Or they might need the money due to job loss and have no choice but to "capitulate" their investments.

Luckily during those past bear markets, I was heavy in fixed income. Therefore, I survived, didn't capitulate, and am still investing. That experience taught me that there is a lot of value in lower risk approaches. It's really valuable to have a portfolio that fares well during bear markets, both for the psychological comfort, and also the real benefit of having your capital intact in case you're forced to withdraw from it.

I really like investing in a lower risk way, even if it means lower returns. Sticking to these methods should let me handle bear markets relatively well, meaning I can stay invested, consistently, sticking with the plan -- which leads to the best outcome.

I'm currently 25% stocks, 25% bonds, 25% gold, 25% cash. I'll admit this is too heavy in cash, and my current idea is to wait for any one of those asset classes to crash, eliminate the cash component, and re-allocate to equal weight: stocks, bonds, gold. That would take me all the way up to 33% or 34% stocks, a record high for me.

This is the chart I posted earlier in the thread.


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## james4beach (Nov 15, 2012)

scorpion_ca said:


> I checked the MER of XBB with TDDI before posting that comment and it was shown 0.19%. Where do you check the MER info? I also checked the XBB fund fact but it doesn't provide MER info.


0.19% is the most recently published MER for XBB, but that's based on calendar year 2017. In that year, the fund had high expenses in the first half of the year, but the fees were slashed mid year. So MER going forward is much less.

It's on the iShares web page
https://www.blackrock.com/ca/individual/en/products/239493/ishares-canadian-universe-bond-index-etf

This shows the management fee of 0.09%. You'll see on the ZAG page that they have the same mgmt fee. The MER includes a few extra costs plus taxes and generally is about 10% to 20% higher than the management fee.

Given that XBB and ZAG both have 0.09% management fee and are structurally very similar, if the ZAG MER is 0.10% then the XBB MER is also probably the same.

The XBB fees were dropped in May 2017. Therefore you won't have an official number for the true MER until the full 2018 calendar year is over. It's going to be either 0.10% or 0.11%.


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## lonewolf :) (Sep 13, 2016)

I like it though would replace high risk government bonds with lower risk corporate bonds. The rating agencies are wrong US government bonds are not as safe long term as corporate bonds. Would use silver for 7.5 for commodities. Depending on age would maybe consider using 5 year GICs for intermediate bonds & perhaps some deferred annuities for longer term bonds. Probably best not to use bond fund instead individual bonds. Only 30% stocks as they are more volatile then bonds, commodities more volatile then stocks so lower percentage held then stocks


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## james4beach (Nov 15, 2012)

I agree lonewolf that a 30 year US Treasury bond has risk, isn't pristine credit quality. Especially not with the political dysfunction going on down south.

I'd still prefer an approach that uses high quality Canadian bonds. You also don't need to go as far out as 30 year treasuries to get safety... as I showed above, even XBB in combination with stocks and gold gives quite a safe portfolio. And XBB is hardly a wacky investment.

These US-centric approaches like All Weather should be carefully evaluated against a CAD basis. The ideal positioning for a Canadian investor may be different than for an American. Note that gold does a better job at protecting Canadian investors than Americans.


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## james4beach (Nov 15, 2012)

Adding to my Saturday night complaints about stock investment... another reason I'm not such a fan of stock investing is that people (including myself) tend to do things in stock investment that just hurt our results, and make our outcomes worse than index investing. So while stocks may offer an attractive risk-vs-reward in the ideal sense, people usually don't invest the ideal (index) way. Instead they will do some ad hoc stock picking, which inevitably leads to portfolios heavy in things like NT, RIM, GE, C, and countless other losers. Or people latch onto ETF ideas, like loading up on XEG for the energy sector.

Stocks are always marketed as fun and exciting. We're given a million ropes to hang ourselves with. New stock investors usually enter the market with wildly unrealistic, over-optimistic estimates of the returns they will get. *Greed* is there from day one.

Many of those problems don't exist in fixed income investing. I have known countless people who have blown away huge amounts of money in stocks, and ultimately done far worse than a GIC ladder.

To some degree, I limit my stock exposure to both protect me from myself, and to protect myself from Wall Street / Bay Street and their endless scams.

There's a big difference between the "ideal" stock investment experience, and what actually happens with real people. But you won't read about it here, because people don't tend to brag about their failures and losses on the internet.


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## MarcoE (May 3, 2018)

James, I agree that 25% cash is a bit high. I'm in a similar situation. Do you keep your cash in very short term (2-3 month) GICs so at least it's earning something? Similar to T-Bills?

There's a good chance that the bank of Canada will raise interest rates later this year, which might give you a good opportunity to buy bonds with higher interest, or bond funds at a cheaper price.

As for moving more cash into equity: I have no idea where the stock market is moving. I have no idea if we're on the cusp of a bear market, or whether the bull still has a long run ahead of him. Absolutely no idea. I don't think anyone knows. We can see the DOW roaring into the 30,000s, or falling under 20,000. I don't know. All I can do is try to have different asset classes and prepare for different eventualities.


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## fatcat (Nov 11, 2009)

both the permanent portfolio (which i prefer to the all-weather portfolio if i have to pick one) have significant drawbacks by virtue of the fact that they will only "work" over long periods of time so that all of the phases of each asset have a chance to dominate and prove their worth

gold and commodities go through long dead periods as do bonds to a lesser extent (gold has been dead money for 5 years and is a consumptive asset rather than a productive asset ... it actually costs you money to hold it, it isn't even neutral money) thus you need to hold the permanent portfolio for a long, long time for it to pay off ... anyone over the age of about 40 may not get much benefit from it where equities will be more predictable

equities typically don't have long periods of negative years as the others do

buffet is proof of this as he avoids both gold and commodities

http://pages.stern.nyu.edu/~adamodar/New_Home_Page/datafile/histretSP.html


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## fatcat (Nov 11, 2009)

one more thing ... the returns for the sp500 understate the use of sector allocation

the sp500 currently has 7 major and 3 minor sectors

judicious use of sector allocation would improve sp500 returns considerably ....

you can't do this with gold or silver at all

you can certainly do it with commodities but it requires expert skill

anticipating and using sectors in the sp500 is much easier to do

found a bloomberg chart that shows variations by sector over the last 10 years for the sp500 and you can see that performance varies widely

http://www.sectorspdr.com/sectorspdr/Pdf/All Funds Documents/Document Resources/10 Year Sector Returns


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## lonewolf :) (Sep 13, 2016)

There is a video Nov 2014of Tony Robbins talking about the all weather portfolio most likely I saw it on you tube.

Over last 75 yrs yearly returns
largest loss 3.95% 
average loss 1.6% 
win ratio 86%
Averaged almost +10%

The portfolio is based on balancing risk the higher the risk the less of that asset is held in the portfolio


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## james4beach (Nov 15, 2012)

fatcat said:


> gold and commodities go through long dead periods as do bonds to a lesser extent (gold has been dead money for 5 years


fatcat I understand those criticisms, but gold has not been dead money valued in CAD. If you look at MNT, the 5 year annualized return of MNT has been 2.7% after fees, actually the same as bonds (XBB) over 5 years according to Morningstar.

Both gold and bonds have outperformed cash in the last 5 years.

And yes, the permanent portfolio is very much a long term strategy. But I'd turn your argument on its head: going forward, we don't know which asset class will be strong for the next 20 years. You and virtually everyone else in the mainstream assumes it will be stocks, with bonds and gold being weak. But nobody knows how this will really play out.

In fact, it could turn out that stocks are weak for the next 20 years and perhaps gold is strong. Or some other permutation. The permanent portfolio or all weather put you in a good spot no matter what it turns out to be.

At the core of these all weather approaches is a key idea that's an extension of the couch potato methodology: *we have no idea* which assets will be strong in the next decade or two. So we maintain constant allocations to several of them, maximizing our chances of performing well. And yes of course, in doing so, there will be some part of the portfolio that's dead money for 10 or even 20 years. That's _intentional_.

The point is _you don't know_ which asset class will be the dud, and which will be the champ. If you're certain stocks will continue being the champ already 35 years into their bull market, then I can see why you'd see no value in bonds or gold. I guess most investors think stocks are going to have a 50 or 60 year bull market streak. Wacky, but sure, anything is possible.


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## james4beach (Nov 15, 2012)

MarcoE said:


> James, I agree that 25% cash is a bit high. I'm in a similar situation. Do you keep your cash in very short term (2-3 month) GICs so at least it's earning something? Similar to T-Bills?


I keep it in high interest savings plus a few GICs, but it's mostly high interest savings.



> There's a good chance that the bank of Canada will raise interest rates later this year, which might give you a good opportunity to buy bonds with higher interest, or bond funds at a cheaper price.


Very hard to predict. If it was such a certainty, then it's already priced into bonds. Timing the bond market is just as difficult as timing the stock market.


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## fatcat (Nov 11, 2009)

james4beach said:


> fatcat I understand those criticisms, but gold has not been dead money valued in CAD. If you look at MNT, the 5 year annualized return of MNT has been 2.7% after fees, actually the same as bonds (XBB) over 5 years according to Morningstar.
> 
> Both gold and bonds have outperformed cash in the last 5 years.
> 
> ...


i take your meaning james, going forward, we don't know at all ... but historical data tells us that the chances are simply not equal that gold, bonds, stocks and cash will perform equally

there is a better than 25% chance that equities will outperform ... especially if we look at sector allocation ... than there is that gold will outperform

here is a chart that shows what i mean









gold and commodities are much more erratic and the holding period for the permanent portfolio will have to be very long for these assets to play their part ... at least 50 years

if you look at the chart i linked up thread you see that though stocks have bad years, they never have had more than 3 negative years in a row and mostly they have a mix of good and bad years

stocks are like riding up and down the low mountains of kansas where gold is like the swiss alps high jagged peaks and low valleys

get caught in a bad gold cycle ... like the last 5 years and you have dead and consumptive money

so yeah, if you are 20 years old the permanent portfolio is probably an ok model but anyone else, you can get caught in a bad downdraft


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## james4beach (Nov 15, 2012)

fatcat said:


> if you look at the chart i linked up thread you see that though stocks have bad years, they never have had more than 3 negative years in a row and mostly they have a mix of good and bad years


Maybe not in a row, but what's more important are the bull and bear phases over multiple years. Here is a 15 year period with about zero return in stocks, 1965 to 1980: http://schrts.co/xfZeij

That isn't ancient history either. Stocks were hated by the time 1980 rolled around. Fifteen years of dead money and 40% declines along the way... just brutal.


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## fatcat (Nov 11, 2009)

james4beach said:


> Maybe not in a row, but what's more important are the bull and bear phases over multiple years. Here is a 15 year period with about zero return in stocks, 1965 to 1980: http://schrts.co/xfZeij
> 
> That isn't ancient history either. Stocks were hated by the time 1980 rolled around. Fifteen years of dead money and 40% declines along the way... just brutal.


good and fair point (though you have switched to the dow instead of the 500, close enough though) ... 

this is why ronald reagan got elected ...

i tend to think that during that period one could have done well enough by using sector allocation wisely and reaping dividends along the way ..

with gold, you have merely a binary set of choices ... gold good or gold bad ... as we know, gold doesn't pay dividends and even costs money to own ... 

there will be times when you will be glad to own gold ... and i do love the stuff, it is beautiful ... but i just think that 25% is way too much ...

you don't and it's your portfolio and that's what matters


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## lonewolf :) (Sep 13, 2016)

Would have to check the chart to make certain of the exact numbers though the Dow transports I think was lower something like 70 years after a major high. The DJI took something like 25 years to reach the 1929 level. Gold has been lower from a major high in US dollars 100 years latter though if history is a guide gold will outlast the Canadian dollar or the US dollar


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## OnlyMyOpinion (Sep 1, 2013)

James, you are distinguishing gold and equities. I know you are doing this considering gold the metal, but of course an etf like XIC or VCN holds 11% basic materials which includes the major Canadian gold mining companies. 
I know that is not the same as owning 25% gold the metal, but it does provide indirect exposure to rising gold prices should that occur.
There was a time when Canada's resource sector was worth owning. Maybe that will occur again, but I'll continue to stay diversified in my etf equity exposure, including its Cdn gold company exposure.

Graph - 20Yr - Goldcorp, XIC, S&P/TSXcapped materials index:


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## Benting (Dec 21, 2016)

james4beach said:


> Maybe not in a row, but what's more important are the bull and bear phases over multiple years. Here is a 15 year period with about zero return in stocks, 1965 to 1980: http://schrts.co/xfZeij
> 
> That isn't ancient history either. *Stocks were hated by the time 1980 rolled around*. Fifteen years of dead money and 40% declines along the way... just brutal.


You forget one important fact ! The interest rate at that time was 8+% ? Would you think twice before you put money into stocks ?

Retired more than 12 yrs ago with mortgage free house and cottage. Right now I have 2 yrs expense in cash. The rest are all in stocks. If interest rate is 5% and up, I probably would put some money to GIC.


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## GalacticPineapple (Feb 28, 2013)

james4beach said:


> 34% stocks (half Canadian index XIC, half US index ZSP unhedged)
> 33% bonds (XBB)
> 33% gold (MNT)


Thoughts on adding more asset classes to spread risk/reduce volatility? REITs, prefs, etc. Maybe HXT, ZAG, MNT, VRE, CPD?


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## james4beach (Nov 15, 2012)

GalacticPineapple said:


> Thoughts on adding more asset classes to spread risk/reduce volatility? REITs, prefs, etc. Maybe HXT, ZAG, MNT, VRE, CPD?


I don't consider those to be separate asset classes. Preferred equities correlate strongly with equities, as do REITs. So you probably won't gain any diversification by adding preferreds and REITs (just as you wouldn't by, say, adding small cap stocks). Just plot XRE against XIU long term and you will see that they are highly correlated in direction and inflection points.

Stocks/bonds/gold are all clearly distinct asset classes. That makes them very attractive in portfolio construction.

I was actually thinking about the All Weather portfolio recently. I believe that the closest duplication of the simple All Weather portfolio, for a Canadian investor is slightly different than what I posted earlier. I believe it should be more like:

30% stocks
55% bonds (XBB)
15% gold (MNT)

The risk parity idea is quite interesting. Gold, being most volatile, gets a lower share. Stocks are a little less volatile so they get a higher weight. Bonds, the least volatile asset class by far, get the highest weight.

20 year performance for the above formula, using half Canada half US for stocks, with annual rebalancing, works out to 6.1% annual return. The worst year is 2008 at -0.46% (barely negative). In other words it performs as well as balanced funds, but with dramatically less volatility, and barely any loss in 2008... miraculous.

The only real question in my mind is if this is just a "hindsight" fluke of playing with numbers, or if there are fundamental reasons to think these kinds of portfolios can still work going forward. And the big challenge is psychological... once you're convinced, actually sticking with it, even for those long years when (e.g.) gold, or bonds do badly, since the media will constantly tell you that investors should avoid gold and bonds.


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## james4beach (Nov 15, 2012)

OnlyMyOpinion said:


> James, you are distinguishing gold and equities. I know you are doing this considering gold the metal, but of course an etf like XIC or VCN holds 11% basic materials which includes the major Canadian gold mining companies.
> I know that is not the same as owning 25% gold the metal, but it does provide indirect exposure to rising gold prices should that occur.


I just don't think it works. XGD has been a destroyer of wealth, and has not even gone up along with a rising gold price. What good are mining stocks if they don't rise even while bullion prices rise? Useless in my opinion. Gold miners (XGD) outperformed bullion for a few years, but since 2008 they have done worse than gold, even though gold is actually up!

This chart shows it. Gold metal is in gold colour, and philly miners index is in black. The picture is very similar for gold in CAD vs XGD... additionally, both Permanent Portfolio and All Weather have called for gold bullion or commodity tracking, not mining stocks -- http://schrts.co/25Pjrw

With these asset allocation approaches I think it's best to get as pure exposure to the asset class as possible. Index ETFs for the stocks, a solid bond index for bonds, and as close as you can get to pure gold. After all the main point is to benefit from *distinct* asset classes.


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## Eclectic12 (Oct 20, 2010)

james4beach said:


> ... Stocks were hated by the time 1980 rolled around. Fifteen years of dead money and 40% declines along the way... just brutal.


Hated by who? Are you sure you aren't adding your POV to the charts?

What I recall from the 1980's were concerns about the $200 commissions with only a full service broker, the risks as well as the difficulty to DIY manage one's investments.
Keep in mind that this is when the local credit union tellers were regularly suggesting my dad shift some money out of GICs/deposits into equity.

How much of the "hate" is really the shift from high commissions from a broker that was a significant barrier that many could not afford versus shortly later being able to buy online for $40 with MFs and later ETFs available?




Benting said:


> You forget one important fact !


IMO more than just one fact is being overlooked.




Benting said:


> The interest rate at that time was 8+% ? Would you think twice before you put money into stocks?


The spread is larger than you are thinking. The 1979 Gov't of Canada CSB paid 12%, the 1980 one paid 11.5%, due to bad forecasting by the gov't *the 1981 CSB paid 19.5%* and the 1982 CSB paid 12%.

It was a no brainer to put as much as I had plus any I could borrow in the 1981 CSB.


Cheers


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## GalacticPineapple (Feb 28, 2013)

james4beach said:


> I don't consider those to be separate asset classes. Preferred equities correlate strongly with equities, as do REITs. So you probably won't gain any diversification by adding preferreds and REITs (just as you wouldn't by, say, adding small cap stocks). Just plot XRE against XIU long term and you will see that they are highly correlated in direction and inflection points.


You've got a point with REITs. What about prefs though? For example XIU or XAW vs CPD.


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## fireseeker (Jul 24, 2017)

james4beach said:


> 30% stocks
> 55% bonds (XBB)
> 15% gold (MNT)
> ...
> ...


The portfolio rationale and simple construction are compelling. However, the last 20-30 years have coincided with a remarkable run of strength for bonds. Rates fell steadily from 20%+ to 0. Given that, a portfolio with a 55% weighting in bonds should have done well. 
The question is, as you acknowledge, whether this was a fluke, albeit a long-running one.
The fact that bonds have very little room to decline from here makes me doubt that past returns can be replicated with such a bond weighting.


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## james4beach (Nov 15, 2012)

fireseeker said:


> The portfolio rationale and simple construction are compelling. However, the last 20-30 years have coincided with a remarkable run of strength for bonds. Rates fell steadily from 20%+ to 0. Given that, a portfolio with a 55% weighting in bonds should have done well.
> The question is, as you acknowledge, whether this was a fluke, albeit a long-running one.
> The fact that bonds have very little room to decline from here makes me doubt that past returns can be replicated with such a bond weighting.


That same argument applies even more strongly to stocks. 30 years ago, stocks started with very low valuations and have been on an incredibly strong run. They are the key reason a 60/40 portfolio has done so well in these 20-30 years:
http://www.multpl.com/shiller-pe/

I frequently read this criticism you mentioned about how bonds can't do as well going forward, but the same people seem to support higher stock allocations. That doesn't make sense to me. As stocks are the key driver of portfolio performance, a weakening of stocks going forward is a much bigger deal:

IF the bond component weakens as projected, that means a 5% CAGR (XBB historical) weakening to 3 - 4% CAGR. That's hardly a transformative change, and bonds continue to be low risk, low volatility. Heck, XBB's yield to maturity _today_ is around 3%. So let's say "weaker bonds" has shaved a couple percent off forward returns. It's a minor effect.

IF the stock component weakens as projected, that means a 9% CAGR weakening to 0 - 4% CAGR, along with sharper volatility, worse drawdowns, and sequence of return risk. That's a *big* deal to the overall portfolio and has a greater impact. It's a major effect.

In fact, this is what the _risk parity_ concept gets at: they're weighting stocks more lightly because the effect of stocks (whether positive or negative) is far greater on the portfolio. By weighting bonds at 55% and stocks at 30%, they are adjusting the relative impact of both (whether positive or negative) to be equal.

The high bond allocation is a reflection that the outcome from bonds can't change that much. On the other hand, the outcome from stocks can change hugely. If you're 80/20 or 60/40 for example, your portfolio lives or dies by the performance of stocks. If we get a persistent bear market/depression going forward, you're toast.


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## Speculator (May 9, 2018)

james4beach said:


> If we get a persistent bear market/depression going forward, you're toast.


Only if you sell. Why would anyone do that? A 60/40 balanced portfolio only took 9 months to gain back losses after the financial crisis. An all stock portfolio took somewhere close to 3 years to gain back it's losses. Market correction sure, depression? not with all the policies and protections put in place +low unemployment + good corporate earnings + global growth at 4% + deflation has turned to inflation + technology has advanced so much since 2008 that has helped cut costs and boosted productivity. There are always risks out there but I don't see more than a mild recession in the future. I don't own bonds, ETFs or pref shares. I'll just stay invested and ride it out. Not advice for anyone else to do the same.


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## AltaRed (Jun 8, 2009)

A bit dated (Sept 2017) but this outlook paper https://www.vanguardcanada.ca/documents/literature/vemo-2018-white-paper.pdf suggests much subdued returns going forward (2018 and beyond). I agree directionally with James that equity returns will be disproportionately weaker going forward than fixed income returns. 2018 is a good example of 'subdued' returns already (bonds and high debt ratio stocks). I wouldn't expect any better in 2019 due to anticipated US Fed Reserve rate hikes.


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## james4beach (Nov 15, 2012)

I think the consensus thinking (even people like Buffett) is that stocks and bonds will both provide lower returns going forward. It's something to consider when doing your retirement planning or other projections.

I agree with the point that All Weather, being bond-heavy, will show reduced returns if bonds consistently do badly going forward. Still, the bonds are there for stability and they will still serve their purpose. Perhaps this is the point we see differently: the portfolio does not make a directional bet on interest rates. The high bond allocation is not due to expecting high returns in bonds; it's due to the relative stability of bonds versus stocks.

The big picture is diversification. Any diversified portfolio (mixing asset classes) will provide good returns on a long time horizon as long as the investor sticks with the plan. That includes 50/50, 60/40, Permanent Portfolio, All Weather... all variations on the diversification theme. Some give more emphasis to stocks, some give more emphasis to stability, but it's all the same idea.


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## james4beach (Nov 15, 2012)

james4beach said:


> I believe that the closest duplication of the simple All Weather portfolio, for a Canadian investor is slightly different than what I posted earlier. I believe it should be more like:
> 
> 30% stocks
> 55% bonds (XBB)
> 15% gold (MNT)


I know that one day doesn't mean much, but just a little illustration how a diversified portfolio smooths things out. Today so far:

100% stocks (half Canada, half US) : *-0.72%*
* 60% stocks, 40% bonds : *-0.49%*
* All weather 30/55/15 : *-0.22%*
Permanent portfolio : *-0.06%*

All portfolios have negative returns today so far, and the severity matches up pretty well with expected long term returns. That is, 100% stocks should provide the highest long term return, permanent portfolio the lowest.

But notice (marked with *) that 60/40 and All Weather provide about the same long term return, but the latter is better diversified and less volatile. The two with * are probably the sweet spot for most investors ... moderate volatility and strong long term returns. It's no accident that the 60/40 balanced fund is the world standard.

I am currently invested in the permanent portfolio allocation but am continuing to investigate All Weather, and might shift towards that. It's not a big change from the permanent portfolio and largely means I will account for my cash differently.


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## james4beach (Nov 15, 2012)

Today again illustrates diversification reducing pain:

100% stocks: -2.3%
60/40 balanced: -1.4%
30/55/15 all weather: -0.6%
Permanent portfolio: -0.4%


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## MarcoE (May 3, 2018)

My gold ETF (which comprises a good chunk of my portfolio) is up about 3% so far this week. Great example of how gold can give you a cushion when stocks decline.


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## james4beach (Nov 15, 2012)

I'm fighting the tendency to feel overconfident based on recent outcomes. I transitioned from the Permanent Portfolio to All Weather (pretty similar actually) in Q4. These allocations performed great during the ugly last months of 2018, but are also performing great in 2019 year-to-date. Almost too good.

Using a model ETF benchmark, the 2018 result was +1.2% along with minimal volatility in December... beautiful. Few investors on the planet had such a good year.

2019 year to date is +6.9% in a ridiculous rally across all asset classes. Astounding.

I'm not sure what my actual result was, since my bonds and GICs aren't the same as XBB. Now I just have to stick with the plan _no matter what_. I still think that's the hardest part.


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## like_to_retire (Oct 9, 2016)

james4beach said:


> I transitioned from the Permanent Portfolio to All Weather (pretty similar actually) in Q4.


I follow all your portfolio machinations with interest, but this is a surprise. 

I remember you weren't so hot on the All Weather Portfolio originally. 

You said:
_"I personally think the Permanent Portfolio is easier to implement than this All Weather Portfolio. With all weather, you're going to have a tough time with 7.5% "commodities". What does that mean, the CRB index? You won't find a good ETF that tracks that. It also requires very high exposure to long term US bonds, which is a bad move as a Canadian investor where CAD is your base currency. There is no good Canadian equivalent, because we don't have a big market for long term government bonds, so you really can't achieve the same effect in Canada"._

So what has changed your mind and have you now changed to the values shown below? What about the commodities?

BTW, my simple 50/50 all Canadian portfolio is up 7.93% YTD. Actually 49/49/2 allocation to accommodate cash.

_______________________________________________
The "All Weather Portfolio":

30% Stocks
40% Long Term US Bonds
15% Intermediate US Bonds
7.5% Gold
7.5% Commodities



"Permanent Portfolio":

25% stocks
25% bonds
25% gold
25% cash
_______________________________________________

ltr


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## james4beach (Nov 15, 2012)

like_to_retire said:


> I remember you weren't so hot on the All Weather Portfolio originally. . . .
> So what has changed your mind and have you now changed to the values shown below? What about the commodities?


I stand by those comments. I'll quote each one separately to show my reasoning and how I tackled the problems. I'm using the portfolio name loosely when I say that I've adopted All Weather. Here's my actual model, which is no longer All Weather:

30% stocks
50% bonds (10 yr avg maturity, XBB)
20% gold

As you can see, I tried to simplify. Here's how it addresses my earlier concerns:



> With all weather, you're going to have a tough time with 7.5% "commodities". What does that mean, the CRB index? You won't find a good ETF that tracks that


I'm sticking with gold because of this. I never liked that commodity weighting because it's very awkward to implement in practice. Notice the All Weather ends up being 15% commodities/hard assets. PP would be 25%, and I'm in the middle at 20%.



> It also requires very high exposure to long term US bonds ... There is no good Canadian equivalent, because we don't have a big market for long term government bonds, so you really can't achieve the same effect in Canada


All Weather uses a mix of of long term + intermediate = 55%. Considering that cash is also a spot on the bond yield curve, PP uses a mix of long term + cash = 50%. So both those formulations have about 50% weight in bonds of some kind.

PP is supposed to hold long term bonds using TLT (in the US) which has 25 years average maturity. Notice that with 25% TLT and 25% cash, you actually end up with 12 years average weighted maturity. That means that PP contains a bond portfolio with some at the very short end, some at the very long end, and 12 year avg.

All Weather's mix of long term and intermediate also gives an effective bond portfolio with an average maturity somewhere near 10 years.

A broad bond fund like XBB, VAB, ZAG covers the entire spectrum from short term to long term bonds with weighted average maturity at 10 years. It's very similar to PP. And I believe the resulting bond portfolio is also pretty similar to All Weather's.

I think the only notable difference in my mix versus AW and PP is:
- slight nudge in an allocation by 5% one way or the other... inconsequential
- using all gold instead of commodities, in a compromise between AW and PP

~~~~

If this all sounds awkward or unconvincing, consider this alternate path. Let's start with the PP: 25% stocks, 25% long term bonds, 25% ultra short bonds, 25% gold.

First, recognizing that we can simplify the bond weight while preserve the same components across the yield curve, you get: 25% stocks, 50% broad bonds, 25% gold.

Next, some minor changes to allocations by taking cues from All Weather (increase stocks a bit, reduce commodities a bit). I think these are in fact good directions to trim given the expectation of long term outperformance of stocks. Now you get:

30% stocks
50% broad bonds
20% gold

^ similar to the official PP and AW, somewhere in between them.


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## james4beach (Nov 15, 2012)

And yes these are my new asset allocation targets: 30% stocks, 50% fixed income, 20% gold. I'm currently exactly on my allocation targets.

After asking around here to learn how others do this, I decided to separate cash from the asset allocation. So I do have a "liquidity" component of cash/high interest savings, only for immediate living needs. Everything else is in the asset allocation above.


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## lonewolf :) (Sep 13, 2016)

The all weather portfolio to track commodities I would probably just go with silver for the 7.5% other wise the roll over slippage would be to great. Since the volatility of silver is higher then gold & the all weather portfolio is based on risk could allocate more to gold then silver based on the difference in the volatility between gold & silver.


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## lonewolf :) (Sep 13, 2016)

There are times when it is prudent to walk away from the all weather portfolio or permanent portfolio i.e., Something like 10 trillion worth of bonds that pay negative interest rates. To diversify into bonds of different countries investors buy bond funds that hold bonds that pay negative interest. @ some point in the hunt for taxes there could be a wealth tax on holding stocks.


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## like_to_retire (Oct 9, 2016)

james4beach said:


> 30% stocks
> 50% broad bonds
> 20% gold
> 
> ^ similar to the official PP and AW, somewhere in between them.


Thanks for the update James. Always interesting to get other opinions.

ltr


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## hfp75 (Mar 15, 2018)

Not to hijack, but I’m running:

(roughly averaged across accounts)

Equities 50%
Gold 10%
Bonds 40%

If gold drops, I’ll consider heading to 15%

My growth for the year is 6.72% Y2D. This puts me back where I should be, re: last falls drop +/-, and I’m hoping for a few % more until the end of the year.... then this year will average last year out as a bad year, and in itself be an ok yr. I’m hoping that equities continue to perform....


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## like_to_retire (Oct 9, 2016)

hfp75 said:


> Not to hijack, but I’m running:
> 
> (roughly averaged across accounts)
> 
> ...


What's your reason to buy gold - saving for a rainy day or insurance or something else?

If I'm trying to preserve my capital, couldn't that be done with a simple GIC?

If I want growth, don't equities do a better job?

ltr


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## lonewolf :) (Sep 13, 2016)

like_to_retire said:


> What's your reason to buy gold - saving for a rainy day or insurance or something else?
> 
> If I'm trying to preserve my capital, couldn't that be done with a simple GIC?
> 
> ...


 Gold has the longest track record as money. The Canadian dollar will not always be with us


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## like_to_retire (Oct 9, 2016)

lonewolf :) said:


> The Canadian dollar will not always be with us


Really - where is it going?

ltr


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## lonewolf :) (Sep 13, 2016)

like_to_retire said:


> Really - where is it going?
> 
> ltr


 Might not go any where in our life time though it might. @ some point in time the cad will not be accepted as money. The value of it will vibrate higher & lower as it goes from ashes to ashes too dust to dust


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## like_to_retire (Oct 9, 2016)

lonewolf :) said:


> Might not go any where in our life time though it might. @ some point in time the cad will not be accepted as money. The value of it will vibrate higher & lower as it goes from ashes to ashes too dust to dust


Huh, I thought Canada's dollar was fairly safe as a form of currency. In fact, the Canadian dollar is the fifth most held reserve currency in the world, behind the U.S. dollar, the euro, the yen and the pound sterling. I understand that the Canadian dollar is popular with central banks because of Canada's relative economic soundness, the Canadian government's strong sovereign position, and the stability of the country's legal and political systems. It's certainly one of the most solid currencies in the world, and no evidence that this will ever change..

Now, if lonewolf is to be believed, it won't be accepted as money any more - ashes to ashes too dust to dust.

I better buy gold I guess. Now I see why everyone is doing it.

ltr


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## scorpion_ca (Nov 3, 2014)

Well, we are better investors than Warren Buffett then....


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## hfp75 (Mar 15, 2018)

like_to_retire said:


> What's your reason to buy gold - saving for a rainy day or insurance or something else?
> 
> ltr




Well,

Gold and me go way back. Probably back to when I was a kid. I was told of the value of gold many times from my mother. You see in the very end of the 1930’s my grandfather (her dad) saw all the changes that were unfolding in Europe and decided it was time to leave. He and my grandmother and a few other family members left, and they used gold to leave. They landed in New York and eventually settled in Western Canada. If they didn’t have Gold and Silver they would not have been successful at leaving Europe. Gold will always have value to people….

I like gold now, because if there is EVER a currency problem (which will also be a societal problem), my bullion will help me. I will have the bargaining power my grandfather had – if I need it.

However, as an investment, I guess I was just attracted to the shiny stuff. I originally held the RBC PM MF and some bullion. Since I have become a more astute investor, I have realized that MFs are not the way to hold the metal. Plus the RBC MF is half bullion and half miners. In the long run ETFs that have bullion are the ticket for owning large sums of gold. When we saw TARP, QE1, QE2, and QE3 gold really had value. I know that was also value from fear, but value none the less. Gold has inflationary properties and as a currency/commodity it behaves differently during the different phases the of the business cycle.

Lastly, Global debt levels are crazy!!! The current levels of spending to maintain order in our society are not sustainable IMHO. I fear that at some point in my lifetime I will see governments try something drastic to try and solve the debt/spending problem. I don’t see it succeeding and thus they will try new strategies again and again, but really only proving how fragile things are getting. Our current monetary system will eventually fail…. And when that happens I want Gold/Silver bullion at home !!! 

Across all my accounts I have 10% in PM. 9% is RCM Gold ETR (MNT.TO) and the other 1% is bullion (66% Gold and 33% Silver).

I do agree that generally gold won’t pay a dividend and that I have to pay overhead to own it, but I am fine with that. If gold drops and has little value – Ill just keep to my target and will own a ton of it. If the currencies start to unravel, I will rotate from paper gold to more bullion. If I see lots of fear and a gold spike, I might sell all of the paper gold and by equities/bonds – but I assure you I will repurchase my gold allocation over time. 

Hope that answers your question.


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## like_to_retire (Oct 9, 2016)

hfp75 said:


> I do agree that generally gold won’t pay a dividend and that I have to pay overhead to own it, but I am fine with that. If gold drops and has little value – Ill just keep to my target and will own a ton of it. If the currencies start to unravel, I will rotate from paper gold to more bullion. If I see lots of fear and a gold spike, I might sell all of the paper gold and by equities/bonds – but I assure you I will repurchase my gold allocation over time.
> 
> Hope that answers your question.


Yeah, thanks for the detailed explanation hfp75. 

So I guess catastrophe insurance would be your overall reason to own it. I would think that for those with small portfolios, a 10%-15% allocation wouldn't do much good with respect to a huge currency collapse.

ltr


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## hfp75 (Mar 15, 2018)

like_to_retire said:


> I would think that for those with small portfolios, a 10%-15% allocation wouldn't do much good with respect to a huge currency collapse.


Yes and No, We saw many of the states south of us starting to use gold and silver at spot prices for buying and selling when the 2009-2010 years were in full swing. For a small portfolio I would still allocate a small amount BUT it would be bullion and I would start with tubes of silver maple leafs.... then forget about them - just leave them in a closet. Once your assets grow, I would add a piece of gold, 1 oz or a few 1/2 oz and just park them with your silver. Thing is, it will cost you some money to do this, BUT it one day could pay off 10x fold, I also keep $500 at home in a wall safe. When you hit 65 you can look at selling them... you will still get your money back... its not like you are buying something that will become useless. Most investors that dont want PM, still agree that there is value in the PMs. Yes the growth dynamics on PMs are different than equities, BUT also again different with Bonds - and most people own some bonds.....

In '13 Calgary had some heavy flooding along with southern AB. I went to the store to get some water and food. There was NONE - on the day it was announced. Now, this is just a local state of emergency and not a complete failure of society. Everyone knows that once floods are over everything will resume as normal. People were still desperate and there were some inappropriate actions by people to try and get water and food. I would bet that my fellow Canadians out East right now with the flooding happening have some crazy stories about people and desperation.... 

If debt destroys CAD/USD/ect there will just be a new currency. That process will be VERY unpleasant... I am not saying the sky will fall in... or that California will crash into the ocean. PMs are an insurance policy and in the end you get your money back.... along the way it will go up and down and you might get some profits on them too...

Its easier to say here it is vs where is it ?


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## like_to_retire (Oct 9, 2016)

hfp75 said:


> I would start with tubes of silver maple leafs.... then forget about them - just leave them in a closet. Once your assets grow, I would add a piece of gold, 1 oz or a few 1/2 oz and just park them with your silver. Thing is, it will cost you some money to do this, BUT it one day could pay off 10x fold, I also keep $500 at home in a wall safe. When you hit 65 you can look at selling them... you will still get your money back... its not like you are buying something that will become useless.


Interesting. This seems quite different from including a percentage of gold in your portfolio that was represented by a gold stock or ETF. 

You're recommending socking away some _actual_ physical gold so that in an apocalypse you have something to use as bargaining chips when paper is worthless, and you need to buy food. That seems a lot more reasonable than the standard 10% allocation in these portfolios where a gold ETF replicates the movements of the underlying commodity, supposedly giving investors direct exposure. That method seems foolish to me. You can do a lot better with other vehicles. In those cases I feel gold as an allocation is somewhat silly.

But I think your method of holding physical gold has merit. In fact it doesn't even need to be included in an investor's portfolio allocation. It's something like insurance against an apocalypse that everyone could do if so inclined, just like building a bunker or keeping a store of canned goods or maybe a generator to power your home. Why not have some physical gold in a safe to buy food. Seems smart.

Interesting comment about selling this physical gold at age 65? Is this because there isn't much time to the end, or what's that about?

ltr


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## lonewolf :) (Sep 13, 2016)

Recently read that happiness for a family of 4 peaks out @ 130,000 U.S a year of income. Any more money does not increase happiness. The moral thing to do is once investments are producing max happiness is to put any additional money into gold & silver in case the monetary system falls apart then gold & silver can then be used to buy happiness. The standard I use for that which is moral is that which produces that most long term happiness. There can only be one best of anything I.e., one best standard for gauging that which is moral & based on my experience & knowledge I think the standard I m using is the best. If possible Switzerland I think is a good place to hold some of your gold if your wealth makes it practical. Ones ability to think & be productive will probably be more valuable then holding gold & silver in a monetary crisis


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## Borat (Apr 28, 2017)

hfp75 how do you buy your bullion?


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## hfp75 (Mar 15, 2018)

LTR:

I'll put it like this:

Currency Failure - you will want Gold if things are bad/your in a bind AND Silver if you want some bread and water. Who can make change properly for an Oz of Gold ? You need some Silver Leafs for normal bartering and gold if you need to get on a boat ahead of 10,000 other people....

Currency Stress - much like '08/09 - the financial markets were stressed. People began moving towards Gold and Silver out of fear of Currency Failure. If the currency is re-established (post failure) Gold and Silver might hold your net worth up during that transition - hence 'paper gold'. If its just lots of currency stress - look to capitalize at a peak and buy the SP500 or whatever you choose - to make gains off investor fear. 

If you have physical Gold/Silver and some 'paper Gold' you have options. I say sell at 65 as life at that point statistically has 10-15 yrs left (maybe not all your PM but what you will truly never need).... your old and vulnerable - at that point you just need a rifle / handgun AND just hope you never need them.

Just google global debt and you will get the idea very clearly.... its crazy....

Borat:

I have purchased most of my bullion from Albern Coin in Calgary (RCM dealer)... I did some private sales of silver off a guy, but that was a one off and the silver was good.


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## james4beach (Nov 15, 2012)

I hold gold for a variety of reasons:

1. asset class diversification, with low correlations to stocks & bonds
2. protection against high inflation, currency devaluation or failure
3. hard asset that isn't electronic (obviously only relevant for physical metal holdings, not ETFs)

At the 20% weight that I use, it's enough to offer a very notable diversification. The low correlations with other major asset classes cause less volatility for the portfolio overall. I've read different mathematical works on this topic and it looks like anywhere between 10% to 30% gold achieves this diversification and volatility reduction. For me, this alone is enough of a reason to hold some amount in gold.

Protection against inflation & currency trouble is something you may or not take seriously. Gold provides protection for this, but so do foreign stocks. However given that stock portfolios tend to have heavy weights in US & Canada, and a severe currency event could affect both (tightly coupled) countries, I feel better having gold since it's independent of both CAD and USD.

I think this video from the National Bank does a good job illustrating the contribution of a gold component during turmoil. Note the Iceland and Argentina examples
https://www.youtube.com/watch?v=SIPf6Anuch0


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## lonewolf :) (Sep 13, 2016)

hfp75 said:


> LTR:
> 
> I'll put it like this:
> 
> Currency Failure - you will want Gold if things are bad/your in a bind AND Silver if you want some bread and water. Who can make change properly for an Oz of Gold ? You need some Silver Leafs for normal bartering and gold if you need to get on a boat ahead of 10,000 other people...


 Junk silver coins are good for barter. Gold money offers a debt card that is backed by the gold or silver that can be held in various vaults around the world. There is a number of different currencies that can be used. Fees are cheaper then holding gld etf


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## james4beach (Nov 15, 2012)

hfp75 said:


> When we saw TARP, QE1, QE2, and QE3 gold really had value. I know that was also value from fear, but value none the less. Gold has inflationary properties and as a currency/commodity it behaves differently during the different phases the of the business cycle.


I wanted to add some charts. My broad investment thesis is that we entered a new kind of monetary regime starting this millennium: ultra low interest rates and perpetual stimulus, and central bank commitment to inflating asset prices. This is visible in the federal funds overnight rate. If you look at the 1% level for the cash rate, this occurred for the first time in 46 years in the year 2004 as shown here: http://schrts.co/UNPZHJPj

So I'm operating under the belief that we entered this new kind of regime starting 2004 (ish). We're now about 15 years into that regime. How has gold been responding? In this chart, gold in CAD is shown in the colour gold. For comparison purposes, the TSX 60 total return (XIU with dividends included) is shown in black: http://schrts.co/vHaxPAKC

This shows that gold has not only performed on par with Canadian stocks, but that it's actually risen more consistently than stocks have. _During this regime._ Yes, I know the relationship is different at other times but I'm operating with a belief that we are living in a distinct era of monetary stimulus. If you adjust the second symbol in that chart, you'll also see that gold has outperformed bonds and international stocks. It's performed similarly to US stocks as well.

Gold has simply been a fantastic investment in the current stimulus era. Personally I believe that central banks are committed to the stimulus, so I think it's reasonable to expect gold to keep performing well.

Yes it's also possible that the era ends. Perhaps we enter a tightening phase, and central banks end their 15 year adventure in stimulus.


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## fireseeker (Jul 24, 2017)

james4beach said:


> I wanted to add some charts.


Excellent post, James. Thanks for sharing.


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## hfp75 (Mar 15, 2018)

Think about this... if interest rates in Canada hit 4% - which is 2.25% higher than now, would the Govt(s) struggle with budgets ? and what would happen to taxes ?

IMHO - Everyone should have some Silver and Gold bullion at home.... 

As debts just get higher, interest rates need to just go lower to allow the debt bubble to bloom !!! The Bank of Canada and US Fed are allowing this to happen for some economic stress that will allow a currency change. Yes that is a conspiracy theory.

In the end, like J4B has pointed out - Gold will smooth out the ups and downs in your portfolio and as global debt continues to clime, the intrinsic natural value of gold will become more recognized.


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## james4beach (Nov 15, 2012)

Personally I think everyone should have at least 10% bullion via something like MNT, IAU (US) or physical bars and coins.

I also recognize that I could be wrong with my thesis. Another way this could play out is: countries might decide that they've had too much easy credit, and genuinely commit to deflating credit and ending stimulus. Perhaps we get some controlled defaults (corporate and some governments) causing a deflationary scenario, but maybe it happens in an orderly fashion with good planning and good government policy. In a situation like that, gold might do very badly and could become the worst performing asset in the portfolio.

That would also be OK. Since I can't predict the future, I'm using static weightings of different assets to try and cover the various scenarios that could unfold. I think the above deflationary scenario is possible, though I consider it unlikely.


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## james4beach (Nov 15, 2012)

PP/all weather once again saving the day for me. Portfolio just down -0.2% today while stocks are brutalized, thanks to strength in bonds & gold.

This is exactly what I want as I approach the end of my current job, about to enter a drawdown phase where I live off capital. The last thing I want is wild swings in a stock-heavy portfolio. Same concern as people about to retire.

The 50/50 portfolio also generally does pretty well (see VCNS) and I've always liked 50/50 too. A good option for someone who refuses to own gold.


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## lonewolf :) (Sep 13, 2016)

What is being over looked is that there is a major shift going on where assets are moving in high degree of positive correlation. This creates the risk of liquid contagion where the loss in one asset class causes liquidation in all the other asset classes to cover the losses in the other asset classes. 

Debt has gone parabolic, parabolic arcs always end in crashes


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## james4beach (Nov 15, 2012)

lonewolf :) said:


> What is being over looked is that there is a major shift going on where assets are moving in high degree of positive correlation. This creates the risk of liquid contagion where the loss in one asset class causes liquidation in all the other asset classes to cover the losses in the other asset classes.


I understand that concern and I used to think the same way, so I know what you're thinking. But here's why I see it differently now. Yes in short time periods assets can have high correlations. This has happened before, a period such as a year where stocks/bonds/commodities all move the same way.

However over longer periods, those correlations don't continue because the assets have major fundamental differences. Being overly concerned with the short term high correlation might cause you to miss out on the opportunity for diversification (and therefore miss the opportunity for investment in general).

I've seen some articles that play up this idea of a horror scenario where interest rates go sky high and both stocks and bonds fall sharply together. The authors suggest that the supposed benefit of stock/bond diversification disappears and the two assets correlate. In the very short term, that's true and both the stock and bond sides of the portfolio would have losses. However, they don't have the same magnitude of losses, and with soaring interest rates, bond bounce back quickly due to the higher yields on rolled amounts.

Just look at historical data to see for yourself. Even in years where stocks and bonds both plummeted together, the losses were very different, as was the pattern in the following years. The diversification benefit doesn't end just because stocks and bonds happen to share a bad year.
http://pages.stern.nyu.edu/~adamodar/New_Home_Page/datafile/histretSP.html

The danger of higher interest rates and even the potential collapse of a credit bubble does not mean you should give up on diversification between stocks & bonds & gold. If anything, diversification will become even more important in such market turmoil.


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## hfp75 (Mar 15, 2018)

SP500 and TSX60 did poorly today but my Gold did well..... my bonds are slightly up too..... did a good job balancing things... 

I could not imagine being all equity anymore.... once upon a time when there was stimulus galore I was 90 (Eq) / 10 (FI), I did that for 8+ yrs. It worked well, I felt with free money coming from every direction is was foolproof.....

Money in my discount brokerage (db) is 40/20/40 and money where my options are limited is 60/40..... This brings my total exposure to gold down from 20% to 10% (I find gold is not an option in most pension or preplanned investment companies). Yes about half my investments are in the db and the other half are trapped in pensions and other institutions/accounts.....

Over the next few weeks I'll be bringing my 20% allocation (@ db) up to 25%... which will be about 12.5% total exposure - wish I could bring it up to 30% for a total exposure of 15%..... it'll eventually happen and I would like a total of 20% (so really 40% at my db) but just getting there isn't gonna happen quite yet....


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## james4beach (Nov 15, 2012)

My version of the all weather portfolio is doing great lately. The trailing 1 year performance is +6.6% which is pretty similar (but a bit higher) than its long term average return.

For comparison, here is 1 year performance of two other diversified portfolios: VBAL +3.6% and MAW104 +6.2%

But all weather would only diverge significantly when we enter a period with weak stocks, since its stock exposure is the key difference versus the conventional balanced funds.


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## hfp75 (Mar 15, 2018)

So as I said above, 1/2 my investments are in a brokerage 37.5/25/37.5 (+/-) (Eq/Gd/FI). The other half is locked into plans with limited options, here I stick to balanced (60/40) (+/-).

My Y2D return is 7.57% (no RE) - (If we add the RE its 5.84%)


Here is my (total blended) current allocation:

Eq - 39.4% | Gd - 12.7% | FI - 32.8% | RE - 15%

We have a piece of raw land that comprises 15%. IF... I remove that from my holdings, it looks like this:

Eq - 46.4% | Gd - 15% | FI - 38.6%

I know that a 7.6% return this year is not amazing (but its still good) there are lots of people that will be ahead of that, but I feel that my diversification will add value when it comes to any potential swings in markets, we are approaching the end of the business cycle and the recession is looming. I think I will sleep better being diversified..... theoretically I still have risk built in but the diversification should moderate some of the turbulence....

I still plan to add some allocation to my MNT.TO, I just dont know when..... I would also like to add another 1-2 oz of physical.

I have noticed recently with all the movement in the SP500 my final numbers are not really being impacted. Mostly due to a lower exposure to Equities but also the FI and Gold are doing their job....


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## james4beach (Nov 15, 2012)

hfp75, sounds like you have solid diversification. Real estate is a good asset too... helps to have it in the mix, I think.

Absolutely true that a well diversified portfolio will have less intense movements, so it's natural for a portfolio like yours to underperform a stock-heavy portfolio during a strong period for stocks. The more important thing -- and what you're getting -- is decent performance under a wide variety of market scenarios.

Just make sure that you stick to your allocation targets and rebalance annually. This will become more important once we get some extreme price movements in any of the asset classes. We haven't had that for at least 5 years, but I'm looking forward to some big volatility. That's when things get more interesting.

I keep wondering how many more years of stock euphoria there will be. 10 years is a long bull run, and long enough for many people to forget what a bear market is like.


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## lonewolf :) (Sep 13, 2016)

james4beach said:


> I keep wondering how many more years of stock euphoria there will be. 10 years is a long bull run, and long enough for many people to forget what a bear market is like.


 I think the market will top out in 2021. Aug 29/30 2019 I think will complete wave D of an expanding triangle. The DJI & S&P should make an all time high going into end of Aug 2019 then break below last Dec lows then rally to a new high in 2021 is the pattern I m looking @

Us constitution ratified 1788 + fib 233 = 2021 ( 1788 + fib 144 = 1932 low, 1932 + 89 = 2021) ( 1788 + fib 55-1 = 1842 low + 89 + 1 = 1932 low)

1932 low + fib 89 = 2021

1966 high + fib 55 = 2021

1987 crash + fib 34 = 2021

2000 high + fib 21 = 2021

2007 high 2009 low + fib 13 + 2020- 2022


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## like_to_retire (Oct 9, 2016)

lonewolf :) said:


> I think the market will top out in 2021. Aug 29/30 2019 I think will complete wave D of an expanding triangle. The DJI & S&P should make an all time high going into end of Aug 2019 then break below last Dec lows then rally to a new high in 2021 is the pattern I m looking @
> 
> Us constitution ratified 1788 + fib 233 = 2021 ( 1788 + fib 144 = 1932 low, 1932 + 89 = 2021) ( 1788 + fib 55-1 = 1842 low + 89 + 1 = 1932 low)
> 
> ...


Oh for sure, this is exactly what I was thinking. 

That darn "wave D of an expanding triangle" will get you every time.

I just wish I had called it first.

ltr


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## hfp75 (Mar 15, 2018)

Ok, I’ll ask, what is fib ### ?


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## yyz (Aug 11, 2013)

hfp75 said:


> Ok, I’ll ask, what is fib ### ?


noun
1.
a lie, typically an unimportant one.


verb
1.
tell an unimportant lie.


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## SixesAndSevens (Dec 4, 2009)

Fibonacci level


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## like_to_retire (Oct 9, 2016)

SixesAndSevens said:


> Fibonacci level


Oh yeah, I base all my market trades on the Fibonacci level. It's the best.

ltr


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## like_to_retire (Oct 9, 2016)

SixesAndSevens said:


> Fibonacci level


Oh yeah, I base all my market trades on the Fibonacci level. It's totally the best.

ltr


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## hfp75 (Mar 15, 2018)

Well it looks like the Fibonacci level will dominate....

FYI - Gold is really lifting my portfolio as of late !!! I am at 25% for assets I control and 13% of total assets....


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## james4beach (Nov 15, 2012)

hfp75 said:


> FYI - Gold is really lifting my portfolio as of late !!! I am at 25% for assets I control and 13% of total assets....


Gold is getting a boost from the central banks (Federal Reserve and ECB) showing this shocking behaviour of still accommodating, perhaps even lowering rates further. These idiots look like they will cut rates even while there's inflation and economic growth. This also strongly implies that they're going to stimulate and print like mad once there actually is a slowdown.

For the trailing 1 year, we now have

Canadian stocks (XIU) +5.3%
S&P 500 in CAD (ZSP) +7.2%
Generic bonds (XBB) +7.3%
*Gold in CAD (MNT) +9.1%*


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## like_to_retire (Oct 9, 2016)

hfp75 said:


> Well it looks like the Fibonacci level will dominate....
> 
> FYI - Gold is really lifting my portfolio as of late !!! I am at 25% for assets I control and 13% of total assets....


Yeah, gold has basically done nothing but gone sideways for the last five years. 

This short term momentum caused by the uncertainly about the fate of U.S-China trade, it's a great time to sell and get out of this loser. 

Other than protection against a calamity, gold is really considered a hedge against inflation, but inflation just isn't a problem now or likely to be in the near future.

So when you get a run up like this, the rally isn't really sustainable, so good time to sell.

ltr


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## james4beach (Nov 15, 2012)

like_to_retire said:


> Yeah, gold has basically done nothing but gone sideways for the last five years.


Absolutely not true. In fact, the 5 year performance of gold is identical to the TSX Composite index! Here's a chart overlaying gold bullion (in gold) versus XIC in black: http://schrts.co/MqfUFqPw

Both have returned 5% per year annualized (more precisely XIC 5.2% and MNT 5.0%). A portfolio that *combined* the two would have had the same return, but with far less volatility along the way because, as you can see from the chart, they meander along different paths.


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## like_to_retire (Oct 9, 2016)

james4beach said:


> In fact, the 5 year performance of gold is identical to the TSX Composite index!


Yeah, I think you have to look at where the CDN dollar is in relation to the US dollar, and make a decision. Good time to sell.

ltr


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## james4beach (Nov 15, 2012)

like_to_retire said:


> Yeah, I think you have to look at where the CDN dollar is in relation to the US dollar, and make a decision. Good time to sell.


So by that logic, should an investor also dispose of their Canadian equities? On a USD frame of reference, both gold and the TSX Composite have about nil 5 year return.

Personally I think the CAD frame of reference is the only one that matters for a Canadian investor who has expenses in CAD.


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## like_to_retire (Oct 9, 2016)

james4beach said:


> On a USD frame of reference, both gold and the TSX Composite have about nil 5 year return.


Yeah, I know.

Here's a graph of your GOLD price in US dollars over the last 5 years. Not much happening in 5 years - pretty flat - a dog. 

Lots happening in the CDN dollar though providing opportunities elsewhere.

Presently, there's a nice run up in gold - good time to sell.









ltr


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## james4beach (Nov 15, 2012)

like_to_retire said:


> Presently, there's a nice run up in gold - good time to sell.


The asset allocation approaches actually take care of this (sell high). By doing annual rebalancing back to target weights, you would sell gold if it's had an amazingly strong year versus other assets.

If at the end of this year I find I'm above my 20% target in gold, yes, I would sell back to targets. But I am not selling currently because I'm still close to target weights for all assets. The most important thing is to stick to the plan, don't overthink it, don't try to get too fancy by doing ad hoc trades that "feel" right.

Asset allocation with a diversified portfolio and annual rebalancing automatically achieves "buy low, sell high". What more could one want?


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## lonewolf :) (Sep 13, 2016)

MarcoE said:


> Ray Dalio's "All Weather Portfolio" is meant to weather any economic season.
> 
> According to Dalio, there are only four economic seasons:
> 
> ...


 Probably best not to tie the bond portion of the portfolio into the US dollar but instead to gold.

15% 5 year gold bonds that pay interest & principle in gold.

40% gold (deferred) annuities through a Swiss insurance company.

7.5 % gold held through gold money cheaper then the ETF GLD plus can use debt card for transactions gold.

For commodities to avoid roll over slippage would go with silver through gold money

for stocks would split 4 ways equally to hold stock in the dominate currency in the 4 quadrants of the earth.

When gold gets to the 2008 lows something like the above portfolio I will strongly consider


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## hfp75 (Mar 15, 2018)

To all the Nay Sayers.... my Gold position is holding everything up ...... its been on fire.... 


MNT - how I am holding gold..... I do allocate 1% to actual bullion.....


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## MarcoE (May 3, 2018)

I'm 7.5% in gold and it's been doing nicely for me this year.


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## OnlyMyOpinion (Sep 1, 2013)

Good to hear that your diversification is working well for you.
I'm not sure it is about naysayers as such. The all weather is just one investing portfolio style. 
Depending on your investing horizon and volatility tolerance, direct gold does not have to be a prerequisite holding.


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## james4beach (Nov 15, 2012)

The key thing is diversification and sticking with a plan. Gold does turn out to be a nice diversifying asset with low correlations to both stocks & bonds.

I'm loving my 20% gold allocation these days. The overall, diversified portfolio is up 12.9% from a year ago with gold & bonds being the biggest contributors. If things keep going this way, I will be selling gold at my December rebalancing to get back down to target weight.

Gold is hitting new all time historic highs in CAD, now 10% higher than its 2011 high as shown here: http://schrts.co/EpsjGPfI


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## OnlyMyOpinion (Sep 1, 2013)

James, I can't recall if your portfolio is in a non-reg acc. 
If so, and if you are in accumulation mode, hopefully you can contribute new money to do your rebalancing and not have to crystalize your capital gains on gold.


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## james4beach (Nov 15, 2012)

OnlyMyOpinion said:


> James, I can't recall if your portfolio is in a non-reg acc.
> If so, and if you are in accumulation mode, hopefully you can contribute new money to do your rebalancing and not have to crystalize your capital gains on gold.


I currently do my asset allocation aggregated across a mix of non-reg & reg. The rebalancing immediately ahead can be done entirely within my RRSP, so there will be no cap gain tax. A bit of a fluke. I actually want to re-organize all this so that I duplicate my asset allocation in each. The aggregate-across-everything view is getting awkward to work with.

More broadly, I am currently on sabbatical and living off capital. So I will have to do some explicit rebalancing in non-reg at some point. Here's my theory on how this can work:

a) in years I earn strong employment income, I can rebalance through contributions -- no cap gains
b) in years without employment income, I can sell & rebalance, and I'll pay very low (or no) tax in any case

Does that seem reasonable? This is actually my first attempt at living off capital for a stretch of time. I'd like to get good at this pattern, dealing with highly volatile consulting income. My current wild ride on employment income was 40K up to 200K, down to 80K (now), and probably as low as 15K next year


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## OnlyMyOpinion (Sep 1, 2013)

^Yes, seems reasonable to me. 
I suppose you face those damned installment taxes too (Sept is coming).


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## james4beach (Nov 15, 2012)

OnlyMyOpinion said:


> ^Yes, seems reasonable to me.
> I suppose you face those damned installment taxes too (Sept is coming).


Thanks. Hasn't happened yet. I have more questions about this, moving to thread
https://www.canadianmoneyforum.com/showthread.php/48402-CRA-instalment-payment-questions


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## depassp (Mar 22, 2020)

I like this portfolio for many reasons: reasonable returns, low volatility, high Sharpe Ratio.

I understand implementing this as a Canadian presents some challenges:

Gold: Is MNT really the best way to get exposure to physical gold? Why not CGL?
Commodities: Water (CWW)? Silver (SVR)? Use US-listed funds (DBC)? Real-estate (XRE)? Utilities (XUT)?
Tax-efficiency: Allocation among registered and non-registered accounts seems like a good idea. So RRSP gets first priority for commodities/gold/bonds, TFSA gets remaining priority for bonds/stocks, non-reg gets the remainder. What would one do about re-balancing? When stocks are down and gold/bonds are up, withdraw from RRSP and buy stocks in TFSA/non-reg? Take the tax hit?
Stock diversification: Any thoughts about using the new asset-allocation ETFs VEQT and XEQT?
Home-country bias: This is really hard for me to fight. VEQT and XEQT are allocated so much in Canadian stocks. With the rest of the portfolio being Canadian bonds and presumably other Canadian assets, it's very easy to end up over-allocated in Canada. How do you fight that?


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## james4beach (Nov 15, 2012)

depassp said:


> I understand implementing this as a Canadian presents some challenges:
> 
> Gold: Is MNT really the best way to get exposure to physical gold? Why not CGL?


You can use any bullion fund that's unhedged. Both MNT and CGL.C trade in Canada. I wouldn't use CGL, because that's a hedged version. The goal is to track gold valued in CAD... if the CAD crashes (devaluation) then MNT and CGL.C will skyrocket. But CGL will not.

You can also hold any of the US traded ones such as IAU or GLD. The end result is that you get the price movement vs CAD including the benefit if CAD crashes. Myself, I hold some IAU, CGL.C, MNT

Here's a chart showing those 3 ETFs, with IAU converted to CAD. You can see that they track each other pretty closely. The only weird thing is that MNT recently got a premium to NAV, so it's gone higher than the rest since COVID-19.

You shouldn't buy MNT at the moment due to its premium to NAV. I would buy CGL.C, IAU, or GLD instead. Here's a chart showing just CGL.C and IAU which demonstrates they give the same result.



depassp said:


> Commodities: Water (CWW)? Silver (SVR)? Use US-listed funds (DBC)? Real-estate (XRE)? Utilities (XUT)?


This is actually the part of All Weather that I don't like (whether it's a US or Canadian version). People often say DBC goes into All Weather, but DBC contains nearly half energy (oil & gas) so I'm not sure it's a great idea. But it's probably still the best option, if you want to use the All Weather methodology. And at least you are buying it low 

Myself, I only hold gold for my commodity allocation, more like Permanent Portfolio than All Weather.

My logic here is that "gold" is a well established asset class that is easy to get access to. But "commodities" are impractical to invest in. They are dependent on which commodity index you use, and can only be invested in indirectly via derivatives and futures. In recent weeks, we saw a failure in this methodology based on front month futures rolling... a total disaster in tracking oil. This makes me even more skeptical about DBC, which is based on futures as well.

In comparison, the gold ETFs represent more direct holdings of gold. GLD, IAU, CGL.C all represent stakes in physical bars held by custodians. MNT represents a stake in gold within the Mint's vaults.

CGL.C's gold bars are held at Scotiabank.

I just don't think investing in "commodities" in a broad sense is feasible.



depassp said:


> Tax-efficiency: Allocation among registered and non-registered accounts seems like a good idea. So RRSP gets first priority for commodities/gold/bonds, TFSA gets remaining priority for bonds/stocks, non-reg gets the remainder. What would one do about re-balancing? When stocks are down and gold/bonds are up, withdraw from RRSP and buy stocks in TFSA/non-reg? Take the tax hit?


I find this tax optimization overcomplicated, so I just duplicate the whole portfolio. My RRSP is a fully self contained version of the Permanent Portfolio / All Weather. My TFSA contains the same ETFs as my RRSP.



depassp said:


> Stock diversification: Any thoughts about using the new asset-allocation ETFs VEQT and XEQT?


I haven't looked into them in great detail and I generally am cautious about brand new things that have no track record.



depassp said:


> Home-country bias: This is really hard for me to fight. VEQT and XEQT are allocated so much in Canadian stocks. With the rest of the portfolio being Canadian bonds and presumably other Canadian assets, it's very easy to end up over-allocated in Canada. How do you fight that?


I don't see any problem with a high allocation to Canada as long as you mix the world into there.


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## depassp (Mar 22, 2020)

james4beach said:


> I don't see any problem with a high allocation to Canada as long as you mix the world into there.


The problem I see is that Canada only makes up about 2-4% of the world's GDP (source: World Bank)

Don't you want your money working where it's most productive?

My gut says that if it were possible, I'd split my stock allocation to countries by % of world GDP. USA would take the lion's share at about 24%.

The lack of availability of appropriate investment vehicles make this hard to implement but it seems possible to get close with XAW, XEF, XEM, XUU, VIU, ... or simplified with the new asset-allocation ETFs VEQT XEQT.

The problem I see is if Canada's stock market/economy tanks (relative to the world) while most of your stock allocation is in Canada


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## james4beach (Nov 15, 2012)

The closest you can get to that is to internationally diversify by market size / market cap of various countries. And that would lead you to having 50% or more in the USA, which is not a great idea.

I don't agree with the logic that one should concentrate equity exposure into the highest GDPs or largest markets. You seem to be thinking that this is a good way to 'put money to work' but I'm not so sure. Here's a counter-example:

Consider the world in 1989. It was radically different than today. It's not the US which would have been the preferred favourite (heavy weight) but rather Japan at 45% weight. US at 33%. UK at 9%.

Today, the US stock market is everyone's favourite, because performance has been great due to a recent economic boom. Everyone likes concentrating into the US and chasing that performance. In 1989, the same was true for Japan... that's where everyone was chasing performance, and it was the largest market in the world by far!


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## Spudd (Oct 11, 2011)

depassp said:


> My gut says that if it were possible, I'd split my stock allocation to countries by % of world GDP. USA would take the lion's share at about 24%.
> 
> The lack of availability of appropriate investment vehicles make this hard to implement but it seems possible to get close with XAW, XEF, XEM, XUU, VIU, ... or simplified with the new asset-allocation ETFs VEQT XEQT.


VT is a US-listed total world stock ETF that holds everything at market cap. I don't think anything is available by GDP but market cap is probably close enough. I think USA is about 50% and Canada is about 4%.


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## depassp (Mar 22, 2020)

james4beach said:


> The closest you can get to that is to internationally diversify by market size / market cap of various countries. And that would lead you to having 50% or more in the USA, which is not a great idea.


Why is >50% weigh to USA not a great idea? USA is presently the world economic leader.

Your example about Japan in the 80's is interesting but I'm not sure what to make of it. The world's economy changes and we can't predict the future. Why do you think investing 80% or more in Canada is better than investing according to an index that tracks "the world"? As the global economy changes I expect that index to also change accordingly.



Spudd said:


> VT is a US-listed total world stock ETF that holds everything at market cap. I don't think anything is available by GDP but market cap is probably close enough. I think USA is about 50% and Canada is about 4%.


Ahh I missed this one, thanks!

VT tracks the FTSE Global All Cap Index.

Vanguard also has VVO Global Minimum Volatility ETF on TSX that tracks the same index. I wonder why it's named differently on the TSX.

As of March 2020, it looks like this index gives 2.78% weight to Canada and 55.80% weight to USA (source)


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## Spudd (Oct 11, 2011)

depassp said:


> VT tracks the FTSE Global All Cap Index.
> 
> Vanguard also has VVO Global Minimum Volatility ETF on TSX that tracks the same index. I wonder why it's named differently on the TSX.
> 
> As of March 2020, it looks like this index gives 2.78% weight to Canada and 55.80% weight to USA (source)


VVO actually uses that index as its benchmark, but it does not track it. It is a minimum volatility fund which means it seeks to invest in stocks that have lower volatility (daily ups & downs) compared to the overall market. 

The benchmark means it compares its returns against that index. So you'd say "hey, my portfolio returned 5% this year, but the index returned 7%". Or vice versa.


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## james4beach (Nov 15, 2012)

The goal of these hedged portfolios (Permanent & All Weather) is to balance out different economic conditions. For example, economic stagnation and high inflation / devaluation boosts gold and commodities. Or a normal, robust economy benefits stocks while bonds are weak.

I think that a strong home country bias is necessary for these kinds of portfolios to work as intended. You don't really get the ideal relationships between the different assets if you mix foreign & domestic, based on how I interpret the intention behind these portfolios.

I think it's best to use all domestic bonds, and at least a large component of domestic stocks. Doesn't have to be all in Canadian stocks, but I use half Canada, half foreign.


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## hfp75 (Mar 15, 2018)

I think right now you might want some usd exposure as our dollar is prob gonna drop in value.....

gold will be valued using usd, bonds for most will be in cad, and equities would benefit if they were unhedged for the next bit IMHO.....

gold and equities in USD will make you money over the next yr....


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## depassp (Mar 22, 2020)

james4beach said:


> The goal of these hedged portfolios (Permanent & All Weather) is to balance out different economic conditions. For example, economic stagnation and high inflation / devaluation boosts gold and commodities. Or a normal, robust economy benefits stocks while bonds are weak.
> 
> I think that a strong home country bias is necessary for these kinds of portfolios to work as intended. You don't really get the ideal relationships between the different assets if you mix foreign & domestic, based on how I interpret the intention behind these portfolios.
> 
> I think it's best to use all domestic bonds, and at least a large component of domestic stocks. Doesn't have to be all in Canadian stocks, but I use half Canada, half foreign.


Ok, I think I get it. Your idea is to focus on the "weather" of one particular country's economy. I have a desire to apply this to the global economy but that may be too complex. The "weather" effect may not even apply globally

Attempting to do this for the global economy will likely introduce bias for one or more countries. So might as well go all in with the bias.

Canada's economy is very closely tied to the US so mixing the 2 doesn't change the goal.

Thanks!

Any thoughts on using cryptocurrency (Bitcoin and variants) as a commodity or in concert with gold?


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## james4beach (Nov 15, 2012)

depassp said:


> Ok, I think I get it. Your idea is to focus on the "weather" of one particular country's economy. I have a desire to apply this to the global economy but that may be too complex. The "weather" effect may not even apply globally


The global view could work as well, I just haven't been able to figure out how to implement that myself. It's not at all clear to me how the base currency (CAD in my case) works with that kind of arrangement. There are enough differences between countries that the individual currencies can move rather dramatically.



depassp said:


> Any thoughts on using cryptocurrency (Bitcoin and variants) as a commodity or in concert with gold?


I don't think there's enough history on crypto coins to even call them a legitimate asset class, and there's also the problem of how to include them in a liquid investment portfolio. I have a little bit ... my crypto currencies are 0.03% of my investments


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## londoncalling (Sep 17, 2011)

depassp said:


> The problem I see is that Canada only makes up about 2-4% of the world's GDP (source: World Bank)
> 
> Don't you want your money working where it's most productive?
> 
> ...


Here is some information regarding market returns in as it correlates to GDP. 









Is there a Correlation between GDP Growth and Stock Market Returns?


The correlation between economic growth and stock market returns is a recurring question amongst analysts. The complexity of this issue is high, however we will address some of the most common assumptions.




www.wise-owl.com


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## james4beach (Nov 15, 2012)

This chart is from an investment letter discussing Shiller's research on this topic. It shows that over the _very long term_, stocks roughly track fair value and GDP growth.

But notice that under 30 or 40 years, stocks can do just about anything. They are wild and volatile and can totally depart from GDP. And most of our horizons are shorter than this!

I think this is why one shouldn't think of stocks as a proxy for GDP growth. First of all, you really can't predict which part of the world will have the best GDP growth. But even if you could, stocks really don't track it anyway 

Stocks should be seen as a total crapshoot over a horizon like 10-20 years. Kind of like gold.


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## james4beach (Nov 15, 2012)

Extending that thought that both stocks & gold are a crapshoot over 20 years. One of the theories behind Dalio's All Weather is that *there are* *only so many places people store wealth*.

People store money in well established asset classes: stocks, bonds, real estate, gold, commodities.

Dalio's concept is that if you hold all of these, no matter how people decide to slosh their money around (chasing the latest hot trend in stocks, or gold, or bonds) it shouldn't matter much. These are pretty much the only places to store wealth, so what $ comes out of one, simply goes into the other. Different economic conditions will shift $ one way or the other. You hold all of the assets in any case.

Notice how different this is from typical, mainstream stock investment. The typical stock bull / analyst will try to convince you of the great economic story of some country or industry, and talk about fundamental metrics and why great returns are coming.

Dalio, instead, takes an almost "technical" view. I don't think he cares what stock returns will be over 20 years, and he probably knows it's just unpredictable and random. But he knows that there are only so many places you can store money... and he's holding all of them.


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## depassp (Mar 22, 2020)

james4beach said:


> People store money in well established asset classes: stocks, bonds, real estate, gold, commodities.


Real estate isn't specifically identified in Dalio's AW portfolio.

Are you suggesting that real estate is included in the stock allocation (by holding REITs) or splitting the allocation up into a separate real estate category? ZRE XRE VRE come to mind.


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## james4beach (Nov 15, 2012)

depassp said:


> Real estate isn't specifically identified in Dalio's AW portfolio.
> 
> Are you suggesting that real estate is included in the stock allocation (by holding REITs) or splitting the allocation up into a separate real estate category? ZRE XRE VRE come to mind.


You're right, real estate isn't one of the allocations. I was just talking about the general idea that there are only so many places to store wealth.

I don't hold any REITs and I don't see the need for them. At least in Canada, REITs correlate very strongly with the TSX Composite as shown in this 5 year chart. I don't see any diversification benefit from holding both XRE and XIC. Just look at that correlation... they rise and fall exactly in lock step.


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## depassp (Mar 22, 2020)

james4beach said:


> REITs correlate very strongly with the TSX Composite as shown in this 5 year chart. I don't see any diversification benefit from holding both XRE and XIC. Just look at that correlation... they rise and fall exactly in lock step.


I find "moderate" correlation b/w XRE and XIC... Rolling 36-month correlation of 0.66 from Nov2002-Mar2020 (Can't link the results but I can link the tool)

Maybe not worth adding complexity to the portfolio to separate it out but who knows maybe the future will be different. Past success being different from future returns and all that jazz...

What's up with that strange crossover then large premium starting August 2018?


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## GreatLaker (Mar 23, 2014)

Broad market ETFs like XIC, ZCN and VCN have a market cap allocation to REITs. Large cap ETFs like XIU and VCE probably don't hold any REITs. So by holding say, VCN and VRE you are overweighting REITs. Not saying that would be bad, just FYI.


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## james4beach (Nov 15, 2012)

depassp said:


> I find "moderate" correlation b/w XRE and XIC... Rolling 36-month correlation of 0.66 from Nov2002-Mar2020 (Can't link the results but I can link the tool)
> 
> Maybe not worth adding complexity to the portfolio to separate it out but who knows maybe the future will be different. Past success being different from future returns and all that jazz...


Sometimes these correlation measures/coefficients don't capture the whole story. I like to look at the charts too. I look at whether the bull/bear phases align.

But the tool you linked to is also giving useful info. Using the same parameters you mention, some correlations for pairs

XIC, XSP: 0.77
XIC, XRE: 0.67
XIC, MNT: -0.03 (nil)
XIC, XBB: 0.06 (nil)

Those are some very different results! Clearly stocks & stocks (though different countries) have a pretty high correlation at 0.77. Notice that REITs aren't far behind; they are still a lot like stocks.

Gold and bonds are both showing nil correlation; they are very unlike stocks.



depassp said:


> What's up with that strange crossover then large premium starting August 2018?


I don't know what's going on there


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## depassp (Mar 22, 2020)

So I got to thinking... James is right that people have limited places to store their wealth.

The % allocation of AW seems to me to have the biggest room for modification.

Inspired by therichmoose's analysis of the Dual Momentum strategy, why not combine these ideas and just slosh around to where everyone's money is going?

I ran this idea through portfolio visualizer using VFV, XIC, MNT and used XSB (short-term bonds) as the out of market asset (cash-equivalent) on a 9-month performance window.

Unfortunately the time period is constrained by VFV since it was introduced only in Dec 2012.

It results in a CAGR of 14.98%, max drawdown of -10.61% (Sep2018~Jan2019, recovery by July2019) and a Sharpe Ratio of 1.14.

It beats both the Vanguard 500 Index Investor and Vanguard Balanced Index Inv mutual funds.

Too good to be true? Is the time window is too short for this analysis to make sense?


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## james4beach (Nov 15, 2012)

depassp said:


> Inspired by therichmoose's analysis of the Dual Momentum strategy, why not combine these ideas and just slosh around to where everyone's money is going?


I think what you describe is feasible and has been written about before. It certainly isn't All Weather but yes, momentum can work! I think the difficulty with it is theory vs practice (more below).

Now for an admission of guilt. I roll a bit of momentum strategy into my asset allocation, and it's even written into my investor policy statement. My allocations are 50% bonds, 20% gold, and 30% stocks (so far, a lot like AW). But more specifically for stocks, half is Canada and half is momentum-based foreign index.

So 15% of my investments are momentum / foreign index selection between ZSP, ZEA, ZEM and I expect this method to boost my returns. But... I think there are practical issues with momentum methods, even though I use it a bit.

Criticism #1

There's hindsight bias in these techniques. People publish these methods with parameters (sequence of steps, length of time, sampling interval, etc) but these are _tuned to what happened to work well before_... that's hindsight bias. For example, from that web site you linked, the first paper was published 2011, then a book in 2014.

That means this particular method has only been _forward-tested_ for 6 to 9 years. It's easy to find a method which worked in the past. It's much harder to find one that works in the future, and 6-9 years really isn't much track record. *Sometimes it is kind of a random accident that the method works *which is why it can be dangerous to put too much faith in these things. Sometimes you change just one numerical parameter, and the behaviour changes completely.

Criticism #2

These are active techniques, which adds many complications. For one, a person has to stick with it! And I think sticking to strategies becomes more difficult when (a) the strategy is more complex and (b) there are reasons to second-guess the method.

There's also the issue of stamina to keep doing the technical trades for many decades to come. When you have other concerns in life, it may be difficult to make those transactions. In that method you linked, he's talking about monthly evaluation. That is VERY frequent and takes a lot of commitment and dedication. Also think of what happens when you enter a period where the momentum method starts to go funky. The market can whipsaw you and you will start shifting constantly from one asset to another, back and forth. It's bound to happen eventually... that will not be fun. And your results could look very bad for a while. You will need the commitment, dedication, and stamina to get through that, dutifully making your trades EVERY month, even though it looks like a really stupid thing to do.

When you get into such a period, your technique _might feel very stupid_. You might also become more aware of Criticism #1 and start asking yourself the (very legitimate) question: wait a second, was this all a dumb idea? Did I prematurely jump on board with a hindsight strategy?

But... I think momentum is a real thing, and can be taken advantage of. I'm doing it in a rather unambitious way, with 15% of my portfolio.




depassp said:


> I ran this idea through portfolio visualizer using VFV, XIC, MNT and used XSB (short-term bonds) as the out of market asset (cash-equivalent) on a 9-month performance window.


A way to do a more thorough back-test is to use US ETFs. Try using SPY, EWC, GLD and maybe estimate cash or use SHY perhaps. That will give you 15 years of data.


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## hfp75 (Mar 15, 2018)

J4B are you actually momentum investing with ZSP, ZEA, ZEM or are you index investing ? I think there is a difference. I do understand the position that index investing seems like momentum investing. Practically though despite the inadvertent momentum that indexes can have it is not (IMHO) 'momentum investing' as I think true momentum investing is active managed, based on rules around momentum........ 

Theoretically active momentum investing shouldnt hold falling stocks.... XMTM, VMO to name a few operate very differently than what you are using...


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## james4beach (Nov 15, 2012)

hfp75 said:


> J4B are you actually momentum investing with ZSP, ZEA, ZEM or are you index investing ? I think there is a difference. I do understand the position that index investing seems like momentum investing.


I have some active trading rules for my 15% foreign allocation. Once a year, I evaluate the trailing 3 year and 4 year return of each of ZSP, ZEA, ZEM and choose whichever is strongest. ZSP has been the winner for several years, resulting in no trades (so far).

For example, today's portfolio holds: 50% bonds, 20% gold, 15% Canada, 15% ZSP
But some day it could change to: 50% bonds, 20% gold, 15% Canada, *15% ZEM*

Historically, this method would have kept me in ZEM continuously from 2003-2012 and then switched to ZSP for 2013-today. I like that it results in very few trades, involves minimal effort, and lets me abandon the US when they lose global leadership.

More info and numbers in this other thread which shows the backtest. And here is a post showing the ETF trades over 20 years. I think it's a mild form of momentum investing that's pretty close to passive. It averages 1 trade every 5 years.


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## ConfusedOne (Sep 3, 2017)

I've been reading as much as I can on the All-Weather Portfolio and was thinking about using XWD for the equity portion for global exposure in one fund.

As for the bond component, I'm wondering why the suggestion for XBB/VAB (~8.2 year duration) instead of something like 40% ZFL (24.5 year duration) and 15% ZFM (7.67 year duration). I think this more accurately targets the original intention of long/intermediate bond holdings.

I've been toying of adding 5% of real-return bonds (XRB) and maybe 5% in global real-estate (CGR) but while my "gut" says this is a good idea, the numbers don't bear it out.


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## james4beach (Nov 15, 2012)

ConfusedOne said:


> As for the bond component, I'm wondering why the suggestion for XBB/VAB (~8.2 year duration) instead of something like 40% ZFL (24.5 year duration) and 15% ZFM (7.67 year duration). I think this more accurately targets the original intention of long/intermediate bond holdings.


Yes, Dalio's suggested portfolio is 15% intermediate and 40% long term.

My own argument is that to make All Weather as practical as possible, it's best to go with major, well established ETFs which are reliable and have proven histories. For long term bonds, we do have ZFL, but it's relatively new. The long term bond market in Canada is pretty small too, so it really only contains a small number of bond issues. It's nothing like the US bond market, which is what All Weather is based on.

If you decide to go with ZFM and ZFL, you also pay higher MERs at 0.22% instead of the rock-bottom 0.10%.

When I look at All Weather, I think the most practical way to implement is to put the 55% bonds into one of the tried-and-true ETFs such as XBB or ZAG. Going with the standard bond ETFs also lets us get a good idea of what the historical (back-tested) performance is.

Yes, it's not exactly the same as what Dalio wrote. And if you want you could hold a mix of ZFM and ZFL, and it would work out fine. Keep in mind however that by choosing to separate these two, you're now dealing directly with ZFL which can be awfully volatile. Rebalancing can become more emotionally challenging, especially when it becomes time to buy bonds after sharp declines. In a situation like very high inflation, it will become absolutely terrifying to rebalance and buy ZFL.

When I simplify these portfolios and ETF selections, I'm trying to make things easier on myself. Dealing with just XBB for rebalancing is, in my opinion, easier to handle than dealing with both ZFM and ZFL. It's less work, and there will be less emotion and stress from it.

In fact by doing this, you're "outsourcing" the rebalancing work to iShares. Internally, they will rebalance between short and long term bonds to maintain the constant average maturity of the fund.


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## hfp75 (Mar 15, 2018)

ZGB would be more accurate as a one stop shop. It’s all govt (mixed fedd/prov) with a duration of 11 yrs, I think. xbb & zag, while I appreciate both for their simplicity, have 20% Corp bond which, I don’t think is part of Dalio or Brown’s plan.

Right now the true risks in Corp debt are not surfacing because the US Fed is buying Corp debt and thus has put a floor under it. Otherwise corp debt would have already hit the skids this year - this action alone would have negated most (if not all) of the long (govt) bonds benefits for your portfolio. Your bond portion (govt) is designed to do well in times of prosperity and deflation....

We happen to be in a period of deflation right now.... which is hard on companies and their debt.

corp bonds give a better yield but the offsets need to be weighed out, and there is no way to know if the Fed will continue to buy up Corp debt, in this cycle or the next.


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## depassp (Mar 22, 2020)

hfp75 said:


> ZGB would be more accurate as a one stop shop. It’s all govt (mixed fedd/prov) with a duration of 11 yrs, I think. xbb & zag, while I appreciate both for their simplicity, have 20% Corp bond which, I don’t think is part of Dalio or Brown’s plan.
> 
> Right now the true risks in Corp debt are not surfacing because the US Fed is buying Corp debt and thus has put a floor under it. Otherwise corp debt would have already hit the skids this year - this action alone would have negated most (if not all) of the long (govt) bonds benefits for your portfolio. Your bond portion (govt) is designed to do well in times of prosperity and deflation....
> 
> ...


MER on ZGB is 0.17%. Backtesting since the fund's inception in Jan 2010 shows no real performance gain over XBB in james4beach's AW portfolio (20% gold, 30% stock split US/Canada, 50% bond)

I'd still choose XBB with a MER of 0.10%


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## ConfusedOne (Sep 3, 2017)

Thanks for the feedback, guys. I'd prefer to avoid corporate bonds in the bond component as well. Just personal preference.


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## hfp75 (Mar 15, 2018)

I am not trying to poo-poo Corp Bonds, they do have their place, but right now in a deflationary time when debt levels are this high, there are some inherent risks with corp bonds. Trust me I am not saying not to buy them, I am just saying use caution and know what you are buying and how it will function vs the markets as the economy fluctuates. There is no way to predict any part of this rubric, let alone what the Fed will do in different settings...

I can envision a day when govts will have over printed debt and people will no longer want govt bonds, people will prefer corp bonds as the company (if it is sound) can generate money and the govts might be truly be broke, IE: the shoe is on the other foot.

Under normal market conditions Corp bonds are closer to equities than govt bonds... remember these assets are different...


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## james4beach (Nov 15, 2012)

hfp75 said:


> Under normal market conditions Corp bonds are closer to equities than govt bonds... remember these assents are different...


I agree, and corporates do act a bit more like equities.

In my RRSP, my bond allocation is entirely in XBB. This does contain some corporates, but very high grade ones and I am not overly concerned.

My non registered bond portfolio on the other hand is entirely in government bonds... no corps there. This held up much better during the recent bond market crash.


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## Topo (Aug 31, 2019)

Gov bonds are best for rebalancing, but corporates are likely to provide a slightly higher return in the long run. With interest rates so low, that incremental return may mean the difference between a decade of zero return vs a decade of negative returns. Personally, I don't own corporates, but see them as a valid choice. If the spread widens, I would consider diving in.


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## hfp75 (Mar 15, 2018)

Topo said:


> Gov bonds are best for rebalancing, but corporates are likely to provide a slightly higher return in the long run. With interest rates so low, that incremental return may mean the difference between a decade of zero return vs a decade of negative returns. Personally, I don't own corporates, but see them as a valid choice. If the spread widens, I would consider diving in.



The yield difference from Govt to Corps is IMHO not worth the inherent risk right now....


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## Topo (Aug 31, 2019)

hfp75 said:


> The yield difference from Govt to Corps is IMHO not worth the inherent risk right now....


The risk is definitely higher, but historically it has paid off. I believe the default rate for US investment grade corporates has been close to 0.2% per year. Canada is probably similar to that. Currently the spread is about 1 percentage point in Canada. This is not a lot in absolute terms, but in relative terms it means corporates are yielding roughly 100% more, so their return over a long time period would be roughly double the govs.


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## james4beach (Nov 15, 2012)

Topo said:


> The risk is definitely higher, but historically it has paid off. I believe the default rate for US investment grade corporates has been close to 0.2% per year. Canada is probably similar to that. Currently the spread is about 1 percentage point in Canada. This is not a lot in absolute terms, but in relative terms it means corporates are yielding roughly 100% more, so their return over a long time period would be roughly double the govs.


Comparing IEF to LQD, over 17 years I'm seeing 0.6% CAGR more performance in LQD but with significantly more volatility. Advantage shrinks to 0.4% over 15 years. That's a lot of real world data, for real (not theoretical) bond portfolios.

And looking at that, you must also consider that IEF has lower average maturity than LQD. So despite the corporate risk and the greater maturity, LQD only returned about 0.5% more.... that's pretty disappointing.

Maybe this shows that the theoretical advantage of corporates doesn't really play out once you consider practical concerns like fees and spreads. For me, 0.5% CAGR more performance isn't worth the greater volatility and drawdowns. And when you chart LQD versus IEF, you'll see that corporate total returns aren't regularly beating government, even over 17 years.

XCB has also returned about the same as XBB since inception, but with more downside/volatility.

I don't see the big appeal of corporates. Theory says that they should boost returns, but I'm just not seeing that boost in past results.


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## Topo (Aug 31, 2019)

james4beach said:


> Comparing IEF to LQD, over 17 years I'm seeing 0.6% CAGR more performance in LQD but with significantly more volatility. Advantage shrinks to 0.4% over 15 years. That's a lot of real world data, for real (not theoretical) bond portfolios.
> 
> And looking at that, you must also consider that IEF has lower average maturity than LQD. So despite the corporate risk and the greater maturity, LQD only returned about 0.5% more.... that's pretty disappointing.
> 
> ...


I agree with you that the difference may not be worth the risk, at least on the fixed income side of the portfolio. 



Currently, IEF has a YTM of 0.57%. LQD has a YTM of 2.15%. So in theory LQD could outperform by 1.5 percentage point going forward, but with more volatility.


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## hfp75 (Mar 15, 2018)

lets all be honest.... it’s hard to look in the mirror at times, but a loss is a loss. Lipstick on a pig ? It’s still a pig, yields right now are below inflation, FI is losing. Spreads are tight and risk does get a better return, but is the risk worth it ?? 

I’ll eat an effective loss vs tax and then inflation and it is what it is.... 

The sad part is that you need to ask yourself why we are here, zero bound.....

DEBT, Social Programs, Automation, Globalization, the American Dream being enjoyed by lots of people that really don’t qualify, but’s it’s hard to say, hey not you in our world.

Regretably this will get worse over time but we just might be at a point when it accelerates....

When yields on govt hit zero, I’m contemplating selling and just sitting in cash.... BUT I want to see if the Fed goes neg.... cause if I can make CG on neg rates I might hold a bit....


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## ConfusedOne (Sep 3, 2017)

Here is an article from Bridgewater about how they developed the All Weather portfolio:








The All Weather Story


January 2012




www.bridgewater.com





Nowhere do they actually mention gold or asset allocation percentages. That seems to have been developed by Tony Robbins after his interview with Dalio.

As for gold, here is an interesting video from Ben Felix of PWL Capital about why gold does not deserve a place in your portfolio. Of course, this runs counter to gold advocates but somewhere in the comments he mentions that he'd just allocate more to bonds if he wanted to counter volatility.





Interesting stuff.


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## james4beach (Nov 15, 2012)

ConfusedOne said:


> Nowhere do they actually mention gold or asset allocation percentages. That seems to have been developed by Tony Robbins after his interview with Dalio.


Robbins spoke with Dalio directly, and the percentages in his book are from Dalio. That includes the % gold weight... this is all Dalio's guidance. Robbins did not design the portfolio.

As for PWL's advice, I admire Ben Felix and usually agree with him. But you have to remember that he is a product of a financial education system that heavily values stocks and bonds. The financial knowledge that Ben is trained in is based heavily on the 1980s and 1990s and there is a bias towards stocks and bonds (which performed great in this period) and against gold (which was in a chronic bear market).

Think of all the people in that field writing books and giving university lectures. It's all based on what they experienced during their prime years, when gold was out of favour.

Finance/investing is NOT a science. It is not based on fundamental laws of nature (physical laws), but is rather a pseudoscience -- just like economics in general. There is a weak basis for everything in this field. Therefore, the field is heavily influenced by human beliefs and stories.

Today, the official position is that gold is not a worthwhile asset class to invest in. Later, you'll hear something different, and there will be some story to explain why.

By the way, gold has outperformed stocks over the last 23 years. Pretty good for a crummy, pointless asset to invest in.

23 year chart of gold vs S&P 500 total return


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## hfp75 (Mar 15, 2018)

Plus remember that gold prices used to be openly contrived which means backtesting is useless.....


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## james4beach (Nov 15, 2012)

hfp75 said:


> Plus remember that gold prices used to be openly contrived which means backtesting is useless.....


Well not quite useless, but countries went long periods with one gold price until they were forced to update and reset the price.

We have about 150 years of gold price history. Gold has provided about 1% real return (keeping up with inflation) making it, in my view, a reasonable place to store money.


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