# Long term gov bonds



## The_Dalio_Hill

Hi everyone,

Hoping to get some clarification/recommendations on long term government bonds.

I'm currently setting up an "All Seasons" portfolio as recommended by Ray Dalio. 30% stocks, 15% Intermediate government 7-10 year bonds, 40% government long term 15-20 year, 7.5% gold, 7.5% commodities.

His recommendations refer to USA investing, so they talk a lot about Treasury Inflation-Protected Securities (T.I.P.S). 

I assume the Canadian equivalent is Canada Real Returns Bonds? Since I don't need income from them until retirement which is 29+ years away, maybe Canadian Real Returns Stripped bonds are more appropriate? 

I'm hoping you guys might have some recommendations on exactly what bonds I should be looking for to fill my intermediate and long term bond positions. Also where to buy them? Is it more appropriate/secure to TIPS?

I currently have a LIRA Questrade account and am hoping to buy from there, but will transfer money elsewhere if needed to properly allocate assets... as long as fees are minimal.

Thanks for any help provided!

Take care,


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## james4beach

I use the permanent portfolio, which is similar. I know that the portfolio descriptions call for long term government bonds (15-20 year maturity) and I have seriously considered going that route. I don't know anything about real return bonds as I've never considered those. So I'll share what I know about regular bonds vs long term bonds.

To start with, for these portfolios you'll want a bond index ETF because it's simply the best way to do this. If you want to see why piecing together your own bond portfolio with individual holdings isn't so great, see this thread of mine which describes the challenges I've faced trying to run my own "bond fund". I try pretty hard, have a big portfolio, and still am under-performing the ETFs.
http://canadianmoneyforum.com/showthread.php/103945-Running-my-own-bond-fund-comparing-to-VAB

So you want a good bond ETF. For "regular" bonds, you're looking at XBB and VAB. Both have been excellent vehicles for passive bond exposure. XBB for example has been around for 18 years, performed like a champ during the 2008 crisis, and both XBB and VAB have a rock bottom low MER of around 0.10%. XBB has 40% in AAA credit rating. It's _really_ hard to do better than XBB in terms of quality and performance.

For long term bonds, the only game in town (with any long term track record) is XLB. The performance has been good, however it's not a pure government bond fund. I think it's 25% corporate, and it's overall credit ratings are only 27% AAA. The MER is 0.20%, still pretty good.

ZFL is another potential option. This really is long term government bonds and it is the correct "ideal" composition, by the book. However, this ETF has only been around since 2010 so there isn't much track record. It's a small fund, with relatively few holdings -- that's because the _Canadian market for long term bonds is relatively small_. And in the history that it has, it's actually underperformed XBB according to Morningstar data up to yesterday. ZFL is one option though.

So those are the options for things like the All Seasons or Permanent portfolios. Regular generic bonds (XBB, VAB), long term generic bonds (XLB), or long term government (ZFL).

I think you could defend any of those selections. However, I'm not convinced that XLB or ZFL are worth it. Maybe with more history of ZFL, we can see how it's performing longer term. So far, it's a bad sign that it's underperforming XBB. The XLB option has certainly performed better but I just don't think it's a safe enough holding for the purpose of "ultimate safety" in these portfolios. It has a lot of corporate and lower grade paper, and that's more dangerous at those long maturities than in the relative shorter maturities of XBB. Rising interest rates and degrading corporate credit could really hit XLB hard.

My take on it is that XBB appears to give the best tradeoff. I'm also interested in ZFL, but I want to see more years of performance.


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## james4beach

There is also some discussion of which bond ETF to choose in this thread:
http://canadianmoneyforum.com/showthread.php/86673-Permanent-portfolio-and-asset-allocation

An additional concern is the type of account for holding bond ETFs. Generally, bond funds should be held in tax shelters because they are very inefficient in non-registered taxable accounts. You already mentioned this is a LIRA account, but I wanted to point this out anyway.


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## stantistic

*Maturity - RR bonds -income tax*

I hold GOC 4.25% RR 2021 Dec 01 bonds. My broker’s statement shows it to be worth considerably more than what I paid for it. Is it to my advantage to sell now and take a capital gain, or to wait and let it mature? I do not understand what happens to the market price of a real return as maturity approaches.


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## james4beach

As the bond market rallies, long bonds and ZFL have done great. But when I look at a longer term picture they still look disappointing. Here's a 4 year chart of total return, ratio between ZFL and XBB
http://schrts.co/wWZymVqR

This chart shows that both had the same total return over the last 4 years. ZFL is more volatile, sometimes increasing a lot versus XBB, other times falling a lot, but they've actually tracked about the same on average.

With such a flat yield curve, another shocking fact is that XBB actually has a higher yield to maturity today than ZFL. This is probably due to the corporate bonds in XBB which bring a higher yield.

I still think XBB is a better holding, and I don't have any plans to go to long bonds any time soon.



stantistic said:


> I hold GOC 4.25% RR 2021 Dec 01 bonds. My broker’s statement shows it to be worth considerably more than what I paid for it. Is it to my advantage to sell now and take a capital gain, or to wait and let it mature? I do not understand what happens to the market price of a real return as maturity approaches.


Oops... I had written a reply before I realized you're asking about a real return bond. I have no idea how they work, and I don't know their math. Sorry.


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## lonewolf :)

Dalio how are you planing to play the 7.5% commodity since future contracts are probably involved trying to eliminate price slippage would present a problem ?


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## hfp75

With the economy looking like its gonna need some stimulus, I think rates will drop 50 basis pts this yr and as such, I think that swapping my CLF for XLB is in order.... looks like I'm a bit behind already but the rate cut is inevitable at this stage.


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## OhGreatGuru

stantistic said:


> I hold GOC 4.25% RR 2021 Dec 01 bonds. My broker’s statement shows it to be worth considerably more than what I paid for it. Is it to my advantage to sell now and take a capital gain, or to wait and let it mature? ...


What fixed income product would you replace it with that had as a good a return? Because if you don't you are making a decision to change your asset allocation.

PS. The very fact that your bonds are selling at a premium suggests that they are paying more than any/most other bonds you could replace them with. If I understand how interest rates and tradeable bonds work.


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## james4beach

hfp75 said:


> With the economy looking like its gonna need some stimulus, I think rates will drop 50 basis pts this yr and as such, I think that swapping my CLF for XLB is in order.... looks like I'm a bit behind already but the rate cut is inevitable at this stage.


So you're trying to time the bond market. You're both speculating on the direction of the bond market, on the shape of the yield curve, and on corporate spread versus government bonds, as CLF is government and XLB has a large corporate element.

Think about how complex this speculation is... you're making a bet that has 3 dimensions to it. You have to get 3 things correct simultaneously for your trade to be successful. Additionally, all the information you're trading on is already out there and well known. You are being reactive and trading on events and knowledge that's already out there.

I think this kind of bond market timing is likely to underperform over the long term. I think the best thing to do is stick to your asset allocation. First you need to decide what kind of bonds you're holding in your portfolio, which will influenced by your time horizon and risk tolerance. (For me, it's the benchmark XBB meaning average 10 year term).

And then you need to stick with it in the long term, no matter what news comes out about interest rates, inflation, etc. The bond market and yield curve cannot be predicted.


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## like_to_retire

hfp75 said:


> With the economy looking like its gonna need some stimulus, I think rates will drop 50 basis pts this yr and as such, I think that swapping my CLF for XLB is in order.... looks like I'm a bit behind already but the rate cut is inevitable at this stage.


Yeah, so you're timing the interest rate market? That doesn't usually work out that great.

I remember when all the smart people bought into "low reset spread, preferred shares" because we'd make a fortune when the interest rates rose, and these shares reset at much higher rate. It was a slam dunk. An idiot knew rates were about to rise! What could go wrong..... woops.

Asset Allocation is the only free ride you'll ever get. Stick to that plan.

ltr


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## james4beach

Very hard to predict interest rates. Here's an alternative way this could pay out: central bank stimulus might finally, after 10 years, start causing actual inflation, such as the rising wages now seen in both US & Canada. We already know central banks _don't fear_ inflation and in fact want it. So perhaps inflation starts creeping past 2%, then 3%, the central banks fail to tighten and then the bond market starts panicking. Yields go way up, long term bonds get clobbered.


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## fireseeker

Here is a remarkably telling graphic about the ability to predict the future of interest rates:
https://www.financialwisdomforum.org/forum/viewtopic.php?f=31&t=121517&start=225#p637392

h/t to Park at FWF


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## hfp75

Thanks for the slap on the back/reminder... I kept my CLF 'as is', I had a small allocation to HYI (High Yield) and I did sell that and rotate that small portion into XLB. I have been uneasy with High Yield for a while and was unsure of my true commitment to the Junk Bond market. My HYI allocation was 3% of assets in the brokerage (not total assets). 

My FI allocation sits at :
XQB 20%
CLF 3%
XLB 3%
12.8% sits within MAW104/MAW130/VGRO

currently at 38.8% overall (in the brokerage).... 

Like I said HYI has been on my short list for a while... I wasn't confident with it and (I think) XLB will be safer over the long term... I do look at the above numbers and wonder if I should just dump the CLF/XLB and add that 6% into XQB... simpler and I'm not trying to outsmart anyone/anything....

FYI - In this life - I have always tried to be clever with the approaches to things in this life - despite how much time or effort things take I'll try it - usually to realize in the end that the way everyone does stuff, works fine and is easier than trying to constantly re-engineer the faster wheel.... One thing that I am doing is learning - it just sucks that its the hard way a good portion of the time....



Thanks for being a listening ear and sounding board / conscience.


As I read articles re: Low Volatility US/Can ETFs - I also pondered swapping to them vs the SP500/TSX60 that I currently reside in... but after looking at charts - over time there isn't much difference as I can see. I don't say that to digress this thread from its LT bond focus but more to acknowledge that I appreciate the feedback.... Dont turn the ship on a whim....


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## james4beach

hfp75 said:


> As I read articles re: Low Volatility US/Can ETFs - I also pondered swapping to them vs the SP500/TSX60 that I currently reside in... but after looking at charts - over time there isn't much difference as I can see. I don't say that to digress this thread from its LT bond focus but more to acknowledge that I appreciate the feedback.... Dont turn the ship on a whim....


If you're talking about ZLB for low volatility Canadian stocks versus XIU, I think either one is fine and I don't see any strong reason to switch from one to the other. ZLB outperformed XIU from 2012-2015 but since 2016, they have about the same performance.


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## james4beach

fireseeker said:


> Here is a remarkably telling graphic about the ability to predict the future of interest rates:
> https://www.financialwisdomforum.org/forum/viewtopic.php?f=31&t=121517&start=225#p637392
> 
> h/t to Park at FWF


Yup, we just don't know how things will play out.

Today, I bought some of the 30 year government bond for my fixed income portfolio. Why would I buy such a crazy thing? Purely because I don't know what will happen with interest rates. I maintain a constant average maturity in my bond portfolio, and this requires a mix of short term and long term bonds. As bonds and GICs mature, I buy new long dated ones.

Currently with the flat yield curve, it feels like a silly thing to do, but this "passive" approach acknowledges that one cannot time interest rates or time the bond market. Just keep rolling the bonds over and buying new ones.

Same thing happens inside XBB or the bond portfolio within everyone's Mawer Balanced Fund.


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## like_to_retire

james4beach said:


> Today, I bought some of the 30 year government bond for my fixed income portfolio. Why would I buy such a crazy thing?


Yeah, that's what I thought!

Provincials are just as safe and just as liquid, yet they offer in the range of 50-100 points higher. Why would you not accept their offer? 

I look at your 2048 GOC at 1.59% and then I see a Ontario 2045 at 2.36% and a Quebec 2048 at 2.30%. That's 77 and 71 basis points sitting on the table that you passed by. James?

ltr


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## james4beach

I understand the yields are poor but I only buy federal government bonds (excellent liquidity... incredibly good bid/ask spreads) and I get additional yield in my GICs.

My bond portfolio holds government bonds for liquidity, and GICs for yield. All of them are spread out in time to cover different maturities, with an average around 8 years.

So far, the net effect of all of this has been performance similar to a bond ETF, which is what I'm after. The GICs appear to do a good job boosting the yields. You've got to look at the total picture.


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## like_to_retire

james4beach said:


> My bond portfolio holds government bonds for liquidity, and GICs for yield. All of them are spread out in time to cover different maturities, with an average around 8 years.


Yep, I get it. But you'll see in my post that I was referring to government bonds. They are provincial bonds that offer liquidity and stellar ratings with higher return. Do you feel an Ontario bond that offers 77 basic points higher has any less liquidity or actual risk than the GOC?

What do other people think?

ltr


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## james4beach

I have occasionally bought provincial bonds but not anything that far out in time. For 30 years, I don't think I'd want anything other than federal govt. I do realize that XBB holds long dated provincial bonds but they are much more diversified than I am.

And yes I do think a 30 year Ontario bond is riskier than federal.


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## Topo

Zvi Bodie advocates using Inflation-protected bonds as a core holding for retirees. At current yields, there is not much of a real return to be had, particularly on an after-tax basis.

Nominal long term bonds, on the other hand, are very vulnerable to inflation, but at least in the past 30 years, they have been a good counterbalance to stock volatility.


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## james4beach

Imagine if the fund manager of VAB made a blog post every time he bought something: "hey guys today I bought the Canadian Government Bond maturing in 2064 [that's 45 years] at 1.6% yield" (or whatever it is), an *actual* holding of VAB. Just imagine the tweets he'd get!

Yes these holdings are extremely volatile and also vulnerable to inflation.

My strategy in this mostly passive portfolio is to find discount bonds, or low coupon bonds for tax efficiency, and diversify across the yield curve. The hope is to get a portfolio that performs like VAB.


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## lonewolf :)

fireseeker said:


> Here is a remarkably telling graphic about the ability to predict the future of interest rates:
> https://www.financialwisdomforum.org/forum/viewtopic.php?f=31&t=121517&start=225#p637392
> 
> h/t to Park at FWF


 They are economists what do you expect ? Even if they were not economists & studied the markets are they going to tell the truth when they want you on the other side of the trade ?


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## Hbrowne

james4beach said:


> Imagine if the fund manager of VAB made a blog post every time he bought something: "hey guys today I bought the Canadian Government Bond maturing in 2064 [that's 45 years] at 1.6% yield" (or whatever it is), an *actual* holding of VAB. Just imagine the tweets he'd get!
> 
> Yes these holdings are extremely volatile and also vulnerable to inflation.
> 
> My strategy in this mostly passive portfolio is to find discount bonds, or low coupon bonds for tax efficiency, and diversify across the yield curve. The hope is to get a portfolio that performs like
> Greetings, I see Ray Dalio is saying these days that cash is trash. I just checked his 13F filing for june 30,2020 and he has almost (maybe none) no long term bonds in his portfolio for Brigewater associates, under his top 50 holdings, which equal 88% of Bridgewater portfolio. I realize this is probably not his All Weather Portfolio where he has 40% in TLT and 15% in IEF. He is saying on you tube etc. that the US is printing money and this will make government bonds less attractive. Also the interest rate is near zero so bonds will see an exodus as capital appreciation wont be there for the bonds. He seems to be taking that large allotment which he had in Government bonds and buying China, International and Emerging market ETF's. So he has about 20% in gold bullion now and almost all the rest in stocks.. This is a very radical change. Somebody has moved my Cheese. What do others think. His logic seems to apply to Canada because of our connection.


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## james4beach

Hbrowne said:


> Greetings, I see Ray Dalio is saying these days that cash is trash. I just checked his 13F filing for june 30,2020 and he has almost (maybe none) no long term bonds in his portfolio for Brigewater associates, under his top 50 holdings, which equal 88% of Bridgewater portfolio. I realize this is probably not his All Weather Portfolio where he has 40% in TLT and 15% in IEF. He is saying on you tube etc. that the US is printing money and this will make government bonds less attractive. Also the interest rate is near zero so bonds will see an exodus as capital appreciation wont be there for the bonds. He seems to be taking that large allotment which he had in Government bonds and buying China, International and Emerging market ETF's. So he has about 20% in gold bullion now and almost all the rest in stocks.. This is a very radical change. Somebody has moved my Cheese. What do others think. His logic seems to apply to Canada because of our connection.


Yes recently I noticed Dalio has publicly been quite negative on bonds. My interpretation of this is that there are two Dalios.

Dalio #1 is the passive long term investor (All Weather) and even he says it's hard to outsmart and outwit the market. This part of him still exists, because in some interviews he still emphasizes how important it is to diversify; he even says "bonds" in those interviews and repeatedly says you have to diversify across everything: many countries, many asset classes.

Dalio #2 is the active hedge fund manager who makes tactical bets and forecasts for specific asset classes. This tends to interest people more, since everyone is always looking for a market guru or fortune teller who is going to tell them what happens next (the media loves this).

I don't know how much money is invested in which strategy, but Dalio #2 has had horrible results in 2020 so far. Some are criticizing the active management at Bridgewater lately. But also remember that the media always emphasizes Dalio #2 and probably plays those segments, more, because this kind of thing is the bread & butter of the financial media (fortune telling and market gurus). So I suspect that Dalio #1 gets much less airtime; it's just not as interesting.

Also I wouldn't read too much into company filings from hedge funds since they can take positions in futures and other derivatives, and the notional values you see by dollar amount may not match up to effective (leveraged) value.


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## Hbrowne

james4beach said:


> Yes recently I noticed Dalio has publicly been quite negative on bonds. My interpretation of this is that there are two Dalios.
> 
> Dalio #1 is the passive long term investor (All Weather) and even he says it's hard to outsmart and outwit the market. This part of him still exists, because in some interviews he still emphasizes how important it is to diversify; he even says "bonds" in those interviews and repeatedly says you have to diversify across everything: many countries, many asset classes.
> 
> Dalio #2 is the active hedge fund manager who makes tactical bets and forecasts for specific asset classes. This tends to interest people more, since everyone is always looking for a market guru or fortune teller who is going to tell them what happens next (the media loves this).
> 
> I don't know how much money is invested in which strategy, but Dalio #2 has had horrible results in 2020 so far. Some are criticizing the active management at Bridgewater lately. But also remember that the media always emphasizes Dalio #2 and probably plays those segments, more, because this kind of thing is the bread & butter of the financial media (fortune telling and market gurus). So I suspect that Dalio #1 gets much less airtime; it's just not as interesting.
> 
> Also I wouldn't read too much into company filings from hedge funds since they can take positions in futures and other derivatives, and the notional values you see by dollar amount may not match up to effective (leveraged) value.


Yes the media likes to stir things up. To put it politely. Following Harry Browne, because of the large allocation to gold, even if Government bonds take a hit, the money would flow to gold I suppose. Also nobody can predict the future, if I forget that I get extra nervous when I hear someone I respect . As well I really don't know exactly what Ray Dalio would of meant . Are you tempted to change your allocation when you hear these comment? Do you still have about the Harry Browne allocations, with your cash set aside? I still maintain the 1/3 XIC , 1/3 ZFL , and 1/3 MNT with cash out of the portfolio.


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## james4beach

Hbrowne said:


> Yes the media likes to stir things up. To put it politely. Following Harry Browne, because of the large allocation to gold, even if Government bonds take a hit, the money would flow to gold I suppose. Also nobody can predict the future, if I forget that I get extra nervous when I hear someone I respect . As well I really don't know exactly what Ray Dalio would of meant . Are you tempted to change your allocation when you hear these comment? Do you still have about the Harry Browne allocations, with your cash set aside? I still maintain the 1/3 XIC , 1/3 ZFL , and 1/3 MNT with cash out of the portfolio.


I think the one thirds approach is quite strong. These allocations are kind of arbitrary anyway... the important part is sticking with it and rebalancing during market turmoil. My allocations are the following (targets). Here I'm doing some simplification, because for example I own various US ETFs which are effectively like ZSP, and various Canadian equities + XIU, but at the end of the day all the Canadian equities are effectively like XIC.

30% stocks as 15% XIC, 15% ZSP
50% XBB
20% CGL.C

Based on historical performance, our two allocations have similar behaviour so I think they are about the same. You have less bonds, but _longer term_ bonds than me, which due to their leveraged kind of performance works out similarly. The only notable difference between ours is probably the amount exposed to gold.


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## Hbrowne

james4beach said:


> I think the one thirds approach is quite strong. These allocations are kind of arbitrary anyway... the important part is sticking with it and rebalancing during market turmoil. My allocations are the following (targets). Here I'm doing some simplification, because for example I own various US ETFs which are effectively like ZSP, and various Canadian equities + XIU, but at the end of the day all the Canadian equities are effectively like XIC.
> 
> 30% stocks as 15% XIC, 15% ZSP
> 50% XBB
> 20% CGL.C
> 
> Based on historical performance, our two allocations have similar behaviour so I think they are about the same. You have less bonds, but _longer term_ bonds than me, which due to their leveraged kind of performance works out similarly. The only notable difference between ours is probably the amount exposed to gold.


When things are going well it is easy for me to have confidence in my Harry Browne Portfolio. As soon as the market starts to vary from my mental story, the emotions kick in, on the nervous side. With my previous portfolio of about 20 individual stocks, with basically little consideration to proper asset allocation , the anxiety was way more acute. This feels so much more holistic. Thanks for your insights.


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## Hbrowne

Hbrowne said:


> When things are going well it is easy for me to have confidence in my Harry Browne Portfolio. As soon as the market starts to vary from my mental story, the emotions kick in, on the nervous side. With my previous portfolio of about 20 individual stocks, with basically little consideration to proper asset allocation , the anxiety was way more acute. This feels so much more holistic. Thanks for your insights.





Hbrowne said:


> When things are going well it is easy for me to have confidence in my Harry Browne Portfolio. As soon as the market starts to vary from my mental story, the emotions kick in, on the nervous side. With my previous portfolio of about 20 individual stocks, with basically little consideration to proper asset allocation , the anxiety was way more acute. This feels so much more holistic. Thanks for your insights.





Hbrowne said:


> When things are going well it is easy for me to have confidence in my Harry Browne Portfolio. As soon as the market starts to vary from my mental story, the emotions kick in, on the nervous side. With my previous portfolio of about 20 individual stocks, with basically little consideration to proper asset allocation , the anxiety was way more acute. This feels so much more holistic. Thanks for your insights.


Following the line of thought which has followed Ray Dalio's comment that one should be aware of coming inflation. The long bonds , ZFL etc, , will be hit the hardest with rising inflation. Have you any thoughts regarding moving over more to inflation protected bonds, or , going more to shorter bonds such as XBB. Would this be added protection? The Permanent Portfolio is set up to handle just this sort of event, inflation, with gold rising in inflation, so maybe just leave it as is , let it do its job, and not overthink it. My main concern is that interest rates are already so low there does not seem to be much upside for capital appreciation for ZFL. So they have nowhere to go but down with any rise in interest rates. I suppose I am saying I can predict the future, which of course I can't. thanks for your thoughts.


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## james4beach

Hbrowne said:


> Following the line of thought which has followed Ray Dalio's comment that one should be aware of coming inflation. The long bonds , ZFL etc, , will be hit the hardest with rising inflation. Have you any thoughts regarding moving over more to inflation protected bonds, or , going more to shorter bonds such as XBB. Would this be added protection? The Permanent Portfolio is set up to handle just this sort of event, inflation, with gold rising in inflation, so maybe just leave it as is , let it do its job, and not overthink it. My main concern is that interest rates are already so low there does not seem to be much upside for capital appreciation for ZFL. So they have nowhere to go but down with any rise in interest rates. I suppose I am saying I can predict the future, which of course I can't. thanks for your thoughts.


Inflation is always a risk, and higher interest rates can come too. Long bonds (ZFL & friends) would indeed be hit very hard if rates rise sharply. I think the important part is to design your portfolio in a way that you can live with all possibilities. We could get high inflation, we could get low inflation, we could get deflation... run through the scenarios, maybe look at historical data and see if you're comfortable with your choices. When I did this I tried to focus on making choices that I could stick with "permanently" without having to reposition myself later.

The behaviour of bond funds depends a lot on their average term to maturity. XBB/ZAG/VAB/ZDB is 10 years and ZFL is 24 years. For time spans *less* than the average term, the performance is sensitive to interest rate fluctuations. But for time spans greater than the average term, the return is more or less guaranteed to be positive assuming interest rates stay positive, because the entire portfolio matures by that time.

Or perhaps more simply: expect volatility and losses when you are at less than the portfolio's term.

Let's suppose interest rates hit a bottom today and just keep going up for the next 40 years. If invested in XBB, you would initially see some bad losses and might even be negative after a few years. However, I think that as you surpass 10 years and get towards 15 or 20 years, you'd be seeing reasonably good (positive) returns in XBB. Personally I am not too scared about rising interest rates because I think can handle volatility and losses for this ~ 10 year horizon.

With ZFL it's much worse as there is again some sharp losses, and you might still have a negative return in 20 years. After 30 years you're probably in the clear no matter what happens to rates but that's a really really long time.

But that's only one scenario. You could also have interest rates go nowhere for decades (like Japan), or go negative (like Europe), or gradually creep upwards, or the yield curve could steepen significantly. You could also see rates rise for a few years and then stabilize or fall again. In these situations, ZFL should do quite well.

What I'm trying to emphasize is that yes, there is one situation in which long bonds get absolutely destroyed. There are many other situations in which they do well.

////

Back tracking a bit, the Permanent Portfolio's advice was: 25% cash/short term bonds + 25% long term bonds. These then perform differently in the horror scenario. The ST bonds are pretty steady and have good returns while LT bonds suffer tremendously for the next 25 years. Rebalancing the PP smooths that out somewhat but you could still see LT bonds be the perpetual losers.

That won't be fun.

My version is 50% XBB which I believe works out similarly. Internally, XBB holds both ST and LT bonds. In the horror scenario described above, the LT bonds are still perpetual losers while the ST part of the portfolio does fine.

I suspect the *net effect* is the same but I think it will be easier using XBB


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## james4beach

Hbrowne said:


> Have you any thoughts regarding moving over more to inflation protected bonds, or , going more to shorter bonds such as XBB. Would this be added protection?


As I recall you were 1/3 XIC, 1/3 ZFL, 1/3 MNT right?

Yes I do think it would be an improvement to switch from ZFL to ZAG or XBB, which shortens your bond maturity. Here's how that portfolio would have performed over the last few years.

The more important thing though is to make sure you have a mix that you are comfortable with. If you were in ZAG, and interest rates kept declining, would you be comfortable sitting in ZAG? It's not good to keep changing the portfolio.

You might also consider diversifying the gold component between MNT and CGL.C because in the last year, MNT has shown a premium to NAV and isn't exactly tracking gold. CGL.C has actually tracked gold much better.


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## Hbrowne

james4beach said:


> Inflation is always a risk, and higher interest rates can come too. Long bonds (ZFL & friends) would indeed be hit very hard if rates rise sharply. I think the important part is to design your portfolio in a way that you can live with all possibilities. We could get high inflation, we could get low inflation, we could get deflation... run through the scenarios, maybe look at historical data and see if you're comfortable with your choices. When I did this I tried to focus on making choices that I could stick with "permanently" without having to reposition myself later.
> 
> The behaviour of bond funds depends a lot on their average term to maturity. XBB/ZAG/VAB/ZDB is 10 years and ZFL is 24 years. For time spans *less* than the average term, the performance is sensitive to interest rate fluctuations. But for time spans greater than the average term, the return is more or less guaranteed to be positive assuming interest rates stay positive, because the entire portfolio matures by that time.
> 
> Or perhaps more simply: expect volatility and losses when you are at less than the portfolio's term.
> 
> Let's suppose interest rates hit a bottom today and just keep going up for the next 40 years. If invested in XBB, you would initially see some bad losses and might even be negative after a few years. However, I think that as you surpass 10 years and get towards 15 or 20 years, you'd be seeing reasonably good (positive) returns in XBB. Personally I am not too scared about rising interest rates because I think can handle volatility and losses for this ~ 10 year horizon.
> 
> With ZFL it's much worse as there is again some sharp losses, and you might still have a negative return in 20 years. After 30 years you're probably in the clear no matter what happens to rates but that's a really really long time.
> 
> But that's only one scenario. You could also have interest rates go nowhere for decades (like Japan), or go negative (like Europe), or gradually creep upwards, or the yield curve could steepen significantly. You could also see rates rise for a few years and then stabilize or fall again. In these situations, ZFL should do quite well.
> 
> What I'm trying to emphasize is that yes, there is one situation in which long bonds get absolutely destroyed. There are many other situations in which they do well.
> 
> ////
> 
> Back tracking a bit, the Permanent Portfolio's advice was: 25% cash/short term bonds + 25% long term bonds. These then perform differently in the horror scenario. The ST bonds are pretty steady and have good returns while LT bonds suffer tremendously for the next 25 years. Rebalancing the PP smooths that out somewhat but you could still see LT bonds be the perpetual losers.
> 
> That won't be fun.
> 
> My version is 50% XBB which I believe works out similarly. Internally, XBB holds both ST and LT bonds. In the horror scenario described above, the LT bonds are still perpetual losers while the ST part of the portfolio does fine.
> 
> I suspect the *net effect* is the same but I think it will be easier using XBB





james4beach said:


> Inflation is always a risk, and higher interest rates can come too. Long bonds (ZFL & friends) would indeed be hit very hard if rates rise sharply. I think the important part is to design your portfolio in a way that you can live with all possibilities. We could get high inflation, we could get low inflation, we could get deflation... run through the scenarios, maybe look at historical data and see if you're comfortable with your choices. When I did this I tried to focus on making choices that I could stick with "permanently" without having to reposition myself later.
> 
> The behaviour of bond funds depends a lot on their average term to maturity. XBB/ZAG/VAB/ZDB is 10 years and ZFL is 24 years. For time spans *less* than the average term, the performance is sensitive to interest rate fluctuations. But for time spans greater than the average term, the return is more or less guaranteed to be positive assuming interest rates stay positive, because the entire portfolio matures by that time.
> 
> Or perhaps more simply: expect volatility and losses when you are at less than the portfolio's term.
> 
> Let's suppose interest rates hit a bottom today and just keep going up for the next 40 years. If invested in XBB, you would initially see some bad losses and might even be negative after a few years. However, I think that as you surpass 10 years and get towards 15 or 20 years, you'd be seeing reasonably good (positive) returns in XBB. Personally I am not too scared about rising interest rates because I think can handle volatility and losses for this ~ 10 year horizon.
> 
> With ZFL it's much worse as there is again some sharp losses, and you might still have a negative return in 20 years. After 30 years you're probably in the clear no matter what happens to rates but that's a really really long time.
> 
> But that's only one scenario. You could also have interest rates go nowhere for decades (like Japan), or go negative (like Europe), or gradually creep upwards, or the yield curve could steepen significantly. You could also see rates rise for a few years and then stabilize or fall again. In these situations, ZFL should do quite well.
> 
> What I'm trying to emphasize is that yes, there is one situation in which long bonds get absolutely destroyed. There are many other situations in which they do well.
> 
> ////
> 
> Back tracking a bit, the Permanent Portfolio's advice was: 25% cash/short term bonds + 25% long term bonds. These then perform differently in the horror scenario. The ST bonds are pretty steady and have good returns while LT bonds suffer tremendously for the next 25 years. Rebalancing the PP smooths that out somewhat but you could still see LT bonds be the perpetual losers.
> 
> That won't be fun.
> 
> My version is 50% XBB which I believe works out similarly. Internally, XBB holds both ST and LT bonds. In the horror scenario described above, the LT bonds are still perpetual losers while the ST part of the portfolio does fine.
> 
> I suspect the *net effect* is the same but I think it will be easier using XBB


Thanks James and all, I am retired so I have time on my hands. I have spent the last 2 weeks studying a lot on bond funds and their effects on a portfolio. Reading the posts here as well as the internet. So far I have learned that I cannot predict the future. Maybe if I study harder and longer I can. Kidding. After awhile my brain got overheated, literally, by the array of possibilities, none of which I can know. I like your info on the 10 year bond funds, XBB, VAB, ZAG, their effects over time, vs., the long bonds ZFL.
I have just moved over to VAB 80%, and about 20 % in VGAB. I like the idea of having a sense of ownership in a Global Fund. I had to resist the urge to market time as VAB and similar funds are at one year lows. I chose VAB as it went down about 8% in the Feb-March crash of 2020 , while XBB went down 14% and ZAG went down 16% during this crash. So this will keep the Harry Browne Permanent portfolio I follow in balance. Can you point me to some posts or comment on how ZFL or long term bonds would perform where interest rises from where it is now to say 6% or more? I never found a good answer and as I said my brain told me to take a break. Also when you mention, "I suspect the net effect is the same but I think it will be easier using XBB" , could you explain that a bit. Thanks will be interesting to see the future as we come out of the pandemic.


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## james4beach

Hbrowne said:


> Can you point me to some posts or comment on how ZFL or long term bonds would perform where interest rises from where it is now to say 6% or more? I never found a good answer and as I said my brain told me to take a break.


There's two things, the immediate/short term reaction, and then the longer term effect.

(a) immediate reaction

The "duration" of the fund gives an idea of interest rate sensitivity and ZFL has a *very* long duration, so the price really would drop very significantly if interest rates went from the current 1% up to 6%. But it depends a lot on how rapidly that interest rate changes. If interest rates change super fast, then the price drop will be very sharp. On the other hand if rates gradually creep upwards over the span of many years, the decline will be less dramatic.

One way I can think of to estimate this is to look at historical examples where we got rates rising somewhat from very low levels, and then try to scale it up / amplify it.

One example is July 2016 - November 2018, when the US 30 year treasury yield increased from 2.1% to 3.4%. The yields increased by 130 basis points and TLT, which is similar to ZFL, responded with a 17% drop in total return. That's a really huge drop, and that was only 130 basis points.

Your scenario is an increase of 500 basis points, so my very very rough estimate by scaling this would be ... maybe 65% drop in ZFL's price.

There's another example from Dec 2008 - June 2009, again a very sharp move in interest rates. Trying to "scale" that example to your 500 basis point scenario gives me ... roughly 70% drop in ZFL price, about the same.

This is the kind of "horror scenario" that many people are worried about in bonds. If interest rates return to historical norms, and if they move there quickly, then long duration bonds like ZFL would probably crash in value.

(b) longer term performance

Bond prices fluctuate all the time, but the longer term performance of the bond ETF is really based on the yield to maturity of the portfolio. For ZFL that yield is around 1%. Bond funds return roughly the yield, when the time span equals the average term-to-maturity of the fund.

With ZFL that means that over about 25 years, even if interest rates rise, you can expect to get roughly 1% annual return or about about 28% cumulative increase (total return), even though the price might crash severely in the shorter term.


*Overall answer for ZFL*

You can see why people worry about long term bonds. Over shorter time periods, the price of ZFL could crash if rates go up significantly. This will be insanely volatile if rates go up.

Over longer periods, around 25 years, the effect of such crashes fade away as the entire portfolio matures and gives a guaranteed yield. But you can see the problem here: 25 years is a very long time to wait.

(I should also point out that if interest rates rise like that, stocks are going to crash too since it will completely end the viability of many large corporations, and drive most consumers into bankruptcy.)

Which is why VAB (a 10 year fund) is more desirable. The price is less volatile and you get the expected yield in about 10 years, which is a more reasonable time horizon.



Hbrowne said:


> Also when you mention, "I suspect the net effect is the same but I think it will be easier using XBB" , could you explain that a bit. Thanks will be interesting to see the future as we come out of the pandemic.


I was talking about two alternate ways to handle the cash & bond portion of the PP. Let's just focus on this part of the PP. Some people interpret "cash" as literally cash, others use short term bonds.

Method 1: hold half in short term bonds (say XSB) and half in long term bonds (ZFL)
Method 2: hold just XBB/VAB as a single "fixed income" holding... only 1 holding

I believe that these two are equivalent to each other. XBB/VAB hold both short term and long term bonds. I've pasted the iShares XBB portfolio maturities below and VAB is about the same.

Whether interest rates are rising or falling, I think that Method 2 (just VAB) would respond the same as Method 1 (half in short term bonds, half in long term bonds)


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## james4beach

@Hbrowne adding to my notes above. What I mean is that instead of holding 25% each in cash, long-term bonds, stocks, gold, an equivalent PP is:

50% broad bonds like XBB or VAB
25% stocks
25% gold

This is equivalent because, as shown in the image pasted above, XBB or VAB holds both short and long term bonds inside it. This is not identical of course to the "25% cash, 25% long bonds" but I think it's pretty close.

So I only hold XBB. *Inside that one ETF*, I do actually hold long-term bonds as shown in my pasted image.


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## Covariance

“Can you point me to some posts or comment on how ZFL or long term bonds would perform where interest rises from where it is now to say 6% or more?”

if you look at ZFL information on BMOs website you will find a duration statistic. This statistic tells you the percent change in value of the fund for a 1% change in the yield to maturity (interest rate) of the fund. You will also find the weighted average yield to maturity in the same place.


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## james4beach

Covariance said:


> if you look at ZFL information on BMOs website you will find a duration statistic. This statistic tells you the percent change in value of the fund for a 1% change in the yield to maturity (interest rate) of the fund.


True, the 'duration' is a measure of price sensitivity to rates, for very sharp changes in interest rates (such as a rate hike).

@Hbrowne asked about the situation where the yield at the long end of the curve goes up by 5%. That would likely not happen quickly. There's a huge difference between rates going up 5% in a day, or over the span of many years.

So although the duration is the right measure for a bond fund's sensitivity to abrupt rate changes, I don't think it applies to interest rate changes over long periods.


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## Covariance

James: I agree. Duration is a measure of price impact from a one time change in rates. Also only valid for small changes in the rate. Nothing huge like that. I will look at their information later and see if there is more I can share in regard to his concern. 

As an aside, the duration statistic we see on BMOs site is not effective duration. Therefore the rate the duration statistic is calculated from is the yield to maturity of the portfolio. Not the yield curve. They are related of course but different.


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## robfordlives

Most of my bonds are in either a work bond fund through McLean Budden and personally via PH&N Total Return Bond Fund. Of course in the past decade these have done great due to declining interest rates. In both cases they have average duration of around 8 years. This is abit concerning given that "rates can only go up" in the next few years. I do trust the PH&N team as they are consistently in the first quartile of the rankings.....but I wonder would I be better off switching to VSB, or another short term bond fund like that. I would have no need for this cash in the next 8 years. I am leaning towards leaving things as is


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## james4beach

robfordlives said:


> This is abit concerning given that "rates can only go up" in the next few years


Rates may go up or down. Or they may stay similar to today's for a long time -- like Japan. Also, if interest rates gradually increase over the coming years, your generic bond fund may still do better than VSB. Bond funds don't necessarily do poorly in a rising rate environment.

Though I sympathize with your concern, there's another practical issue. If you jump out of your existing generic bond fund into VSB, you're actively trading and timing the bond market / interest rates. You *might* get that timing right. But what next? How will you know when it's time to get out of VSB and back into generic bonds?

In the long term, VSB will underperform generic bonds, so if you're a long term investor, you'll have to trade back at some point. Timing all of that is very tricky.


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## Hbrowne

james4beach said:


> Rates may go up or down. Or they may stay similar to today's for a long time -- like Japan. Also, if interest rates gradually increase over the coming years, your generic bond fund may still do better than VSB. Bond funds don't necessarily do poorly in a rising rate environment.
> 
> Though I sympathize with your concern, there's another practical issue. If you jump out of your existing generic bond fund into VSB, you're actively trading and timing the bond market / interest rates. You *might* get that timing right. But what next? How will you know when it's time to get out of VSB and back into generic bonds?
> 
> In the long term, VSB will underperform generic bonds, so if you're a long term investor, you'll have to trade back at some point. Timing all of that is very tricky.
> 
> I have moved to VAB from ZFL. Whew. My question is do VAB and similar bond ETF'S get oversold like stocks? I would think these intermediate bonds would not have the great emotional component that equities do. They would just follow in a mathematical way the yield as it changes up and down. How much are they subject to fluctuating emotions?


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## james4beach

Hbrowne said:


> I have moved to VAB from ZFL. Whew. My question is do VAB and similar bond ETF'S get oversold like stocks? I would think these intermediate bonds would not have the great emotional component that equities do. They would just follow in a mathematical way the yield as it changes up and down. How much are they subject to fluctuating emotions?


I was worried for you... glad to hear you're not in ZFL 

The bond ETFs just track the bond market. Can bonds get oversold, driven by emotion? Yes I think so ... it's a market, just like stocks or commodities. I think there is sentiment, fear and greed which affects prices somewhat.


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## Hbrowne

james4beach said:


> I was worried for you... glad to hear you're not in ZFL
> 
> The bond ETFs just track the bond market. Can bonds get oversold, driven by emotion? Yes I think so ... it's a market, just like stocks or commodities. I think there is sentiment, fear and greed which affects prices somewhat.


Thanks, yes, that was very good advice. ZFL has not been a peach. Another question, yesterday I looked at the returns of the Canadian gold ETF's compared to the US gold ETF's. from March 10th,2019 to March 10th, 2021. The gold index GC=F went from $1288.00 to $1721.00, a gain of 33.5%. The American gold ETF's, GLD, SGOL ,and IAU all rose about 33%, but the Canadian ETF's ,MNT, CGL.C, PHYS.TO and HUG all rose only about 22%. KILO actually went down13%. What would cause this discrepancy of 11% ? Does the market know who holds the different ETF's and dole out everyone's karma.


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## Jimmy

Headline in the Globe today. *"the 40-year bull market in bonds in over"*
B of A Analysts bearish on bonds now too along w everyone else. Time to dump them.

"“2020 marked the secular low point for inflation and interest rates; new central bank mandates, excess fiscal stimulus including UBI, less globalization, fading deflation from disruption, demographics, debt…we believe inflation rises in the 2020s and *the 40-year bull market in bonds in over*… BofA Global Research’s Inflation Survey shows 61% of analysts saw their companies raise prices in recent months . AA *[asset allocation] implications bullish real assets, commodities, volatility, small cap value, and bearish bonds, US$, large cap growth*.”


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## MrBlackhill

Hbrowne said:


> from March 10th,2019 to March 10th, 2021. The gold index GC=F went from $1288.00 to $1721.00, a gain of 33.5%. The American gold ETF's, GLD, SGOL ,and IAU all rose about 33%, but the Canadian ETF's ,MNT, CGL.C, PHYS.TO and HUG all rose only about 22%.


USD$1288 back in March 10th, 2019 = CAD$1726
USD$1721 in March 10th, 2021 = CAD$2168

USD$1288 to USD$1721 = +33%
CAD$1726 to CAD$2168 = +25%



Hbrowne said:


> Does the market know who holds the different ETF's


It's the effect of the different currencies.


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## james4beach

Jimmy said:


> Headline in the Globe today. *"the 40-year bull market in bonds in over"*
> B of A Analysts bearish on bonds now too along w everyone else. Time to dump them.


Jimmy here is an easy trade for you. Since it is obvious that the bull market is over, you might as well _go short_ bonds.

You can make a lot of money by betting on rising interest rates. As you point out, it's obvious because this is what the news headlines say. I pointed out in this other thread that you can buy TBT. This is already up 7% since I posted this.









Bet on rising inflation with TBT


Many people seem certain that inflation will rise, causing treasury bond yields to rise. If it's so certain, wouldn't it be a no-brainer to buy an inverse treasury fund such as TBT? This tracks the yield of the long treasury bond (the long end of the curve). If inflation fears keep causing the...




www.canadianmoneyforum.com





Myself though, there is no way I'd make that trade, because I don't think anyone can forecast interest rates or inflation accurately.

You're saying you know where interest rates are going. Although I would never do this, why not go long TBT and profit from your knowledge of the future?


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## Jimmy

james4beach said:


> Jimmy here is an easy trade for you. Since it is obvious that the bull market is over, you might as well _go short_ bonds.
> 
> You can make a lot of money by betting on rising interest rates. As you point out, it's obvious because this is what the news headlines say. I pointed out in this other thread that you can buy TBT. This is already up 7% since I posted this.
> 
> 
> 
> 
> 
> 
> 
> 
> 
> Bet on rising inflation with TBT
> 
> 
> Many people seem certain that inflation will rise, causing treasury bond yields to rise. If it's so certain, wouldn't it be a no-brainer to buy an inverse treasury fund such as TBT? This tracks the yield of the long treasury bond (the long end of the curve). If inflation fears keep causing the...
> 
> 
> 
> 
> www.canadianmoneyforum.com
> 
> 
> 
> 
> 
> Myself though, there is no way I'd make that trade, because I don't think anyone can forecast interest rates or inflation accurately.
> 
> You're saying you know where interest rates are going. Although I would never do this, why not go long TBT and profit from your knowledge of the future?


Don't get upset because every investment analyst out there is telling people to dump bonds. maybe you should heed their advise instead of sitting w a large position in a losing asset.


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## james4beach

Jimmy said:


> Don't get upset because every investment analyst out there is telling people to dump bonds


They are not, actually. You've only found a few analysts and liked their opinion, so you're posting them here. You also misrepresented what Buffett said. This is not only a poor way to invest, but it's also called "confirmation bias", seeking opinions that align with your own.


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## Jimmy

james4beach said:


> They are not, actually. You've only found a few analysts and liked their opinion, so you're posting them here. You also misrepresented what Buffett said. This is not only a poor way to invest, but it's also called "confirmation bias", seeking opinions that align with your own.


You know that is exactly the gist of what Buffet said The only poor way to invest is being closed minded,not listening to experts and blindly following obscure methodologies.


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## james4beach

Jimmy said:


> You know that is exactly the gist of what Buffet said


Incorrect. You have not represented Buffett's position correctly. You are reading more into it than what he said.


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## james4beach

Hbrowne said:


> Thanks, yes, that was very good advice. ZFL has not been a peach. Another question, yesterday I looked at the returns of the Canadian gold ETF's compared to the US gold ETF's. from March 10th,2019 to March 10th, 2021. The gold index GC=F went from $1288.00 to $1721.00, a gain of 33.5%. The American gold ETF's, GLD, SGOL ,and IAU all rose about 33%, but the Canadian ETF's ,MNT, CGL.C, PHYS.TO and HUG all rose only about 22%. KILO actually went down13%. What would cause this discrepancy of 11% ? Does the market know who holds the different ETF's and dole out everyone's karma.


It's the currency. Gold is natively priced in US dollars, but the USD is down over this period. I'll check the numbers using stockcharts for this date range.

$GOLD itself shows +32.5% which is about what you showed there. That's in USD.
IAU is also up +32.0% which is tracking $GOLD perfectly. This is also USD.

But you have to convert those to CAD to set expectations for what we should get in the Canadian ETFs.

Gold in CAD is +24.7% and this is the number you have to compare to the CAD ETFs.
MNT is +25.0% which is slightly better than pure gold, due to the premium increasing.
CGL.C is +22.9% which is also good, lagging a bit
PHYS is +21.8% which lags even more

Here's another way I can show this. The golden line shows pure/ideal gold valued in CAD. The black lines show MNT and CGL.C

You can see that they generally track gold quite well. The one exception is mid 2020, when MNT had a large premium. This went away eventually. At the top left corner you can see the overall 3 year performances of these things

26.52% for pure gold in CAD
26.78% for MNT
24.19% for CGL.C


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## Jimmy

james4beach said:


> Incorrect. You have not represented Buffett's position correctly. You are reading more into it than what he said.


You are just in denial. As well If you like doing analysis, you should be spending time analyzing and finding undervalued stocks which at least will generate some real returns for the time spent. Not studying which lousy bond assets will lose less in real terms after inflation.


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## gingymarathoner

I think this discussion is worthwhile. Is there a "true" reason that bonds and thus bond etfs like xbb, zag, zdb etc. are no longer a valuable component of a permanent passive portfolio. I do see a point of view that argues that just because bonds have been a stable and useful part of a portfolio in the past does not mean they will be in the future. I will admit to much more ignorance when it comes to bonds (as compared to equities). They are more complex IMHO. I have approximately 20% of my portfolio invested in bond ETFs. As everyone knows, they have taken a significant hit over the last 40-60 days or so. Is this a buying opportunity or is there concern that having bonds as a major component of a passive portfolio is no longer wise. I understand that we don't know for sure at this point. I'm curious as to how folks perceive this?


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## james4beach

gingymarathoner said:


> I'm curious as to how folks perceive this?


Just to clarify, I never endorsed long term bonds. In fact I always said that things like the Permanent Portfolio should use standard (generic) bond funds which have about 8 years duration. The reason is that the whole portfolio is turned over in ~ 8 yrs, so with a 10+ year time horizon, any rising rates are not really a concern.

I don't think anything has changed. Potentially higher inflation that make bonds unattractive? Yeah sure, that was always possible. That's why I own stocks too.

The other big danger of bonds was that yields would stay near zero forever. Well now we know that's not happening. Yields are going up, which is great for bond investors in the long term. The higher yields we're seeing are making an even stronger case for having bonds in your portfolio.


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## MrBlackhill

james4beach said:


> The other big danger of bonds was that yields would stay near zero forever. Well now we know that's not happening. Yields are going up, which is great for bond investors in the long term.


Yields are going up on the short term trend, until they are going back down on the long term trend and then goes negative as in many other countries.

@james4beach I thought you were passive and all weather so you don't have to make predictions. We don't know if yields will stay near zero forever (well, if "forever" means at least for a decade) as they can go negative. It's certainly not the first time we see yield rebound before taking a deeper dive. Switzerland for instance is now at 7 years having 10Y bonds yield at zero or below. Same for many other European countries. And same for Japan, also.


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## james4beach

MrBlackhill said:


> Yields are going up on the short term trend, until they are going back down on the long term trend and then goes negative as in many other countries.


This would be unfortunate. But if this is true, it means bond funds are a screaming buy right now.



MrBlackhill said:


> @james4beach I thought you were passive and all weather so you don't have to make predictions. We don't know if yields will stay near zero forever (well, if "forever" means at least for a decade) as they can go negative.


Yes that's right. A passive asset allocation investor (that could be 60/40 or Permanent Portfolio) does not have to make predictions, or try to reposition their portfolio. There is an underlying philosophy here, which is that we can't predict markets -- including interest rates and the bond market -- and therefore we should just passively hold the bond ETFs.

When I said "yields are going up" I was just observing what happened in the last few months. I have no idea what happens next.

People very frequently post at CMF about how rates are going to soar. Each time, I point out the other possibility: maybe they won't. Rates might go up, they might soar, or we could end up with European-style negative rates.

When one holds a long-term position like VAB, there is no point to trying to guess/predict what's going to happen in the market. The roughly 8-10 year horizon of VAB means that even if bonds are disappointing in the next few years, it becomes ancient history soon enough, and absolutely nobody on the planet can predict the market conditions 10 years from now.

Let's also remember that in the long term, the average term bond funds like VAB are *guaranteed to outperform* short term bond funds like XSB.


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