# Harry Browne's Permanent Portfolio



## Hbrowne (Jan 20, 2019)

Hi, I am new to the site, first post. I am retired and wish to buy a Canadian Government long term bond etf. As long as possible in terms of date to maturity, as recommended by Harry Browne in his Permanent Portfolio. I have bought the etf, XBB which I believe has an average maturity of about 6.5 years. Anyone know what other Canadian Government Long Term bond ETF's I could look at . My understanding is that ZAG or VAB are in this same class. Thanks


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## fatcat (Nov 11, 2009)

why do you want a second bond etf ? xbb is a standout bond etf


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## OnlyMyOpinion (Sep 1, 2013)

Hbrowne, welcome to CMF.
XLB avg duration is 14.7yrs, VLB is 14.9yrs.


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## Hbrowne (Jan 20, 2019)

*Hbrowne Permanent Portfolio*



fatcat said:


> why do you want a second bond etf ? xbb is a standout bond etf


Thanks for your reply, the Harry Browne Permanent Portfolio calls for long term maturity, like the 20+ year maturity of the USA bond TLT. My understanding is XBB is about average maturity of 6.5 years. Is this your understanding? The longer the average maturity the move volatility, then you rebalance once per year.


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## Hbrowne (Jan 20, 2019)

*Hbrowne*



OnlyMyOpinion said:


> Hbrowne, welcome to CMF.
> XLB avg duration is 14.7yrs, VLB is 14.9yrs.


Thanks for your reply, I will look at these. Take care.


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## fatcat (Nov 11, 2009)

Hbrowne said:


> Thanks for your reply, the Harry Browne Permanent Portfolio calls for long term maturity, like the 20+ year maturity of the USA bond TLT. My understanding is XBB is about average maturity of 6.5 years. Is this your understanding? The longer the average maturity the move volatility, then you rebalance once per year.


XBB is 10 years ... ZFL from BMO is a long term government bond fund that has an average maturity of just over 20 years

i don't get his theory of buying and selling to rebalance every year since you expose yourself to interest rate risk, you should be prepared to hold a bond fund for as long as the duration in terms of your asset allocation

except his theory as i recall is that the bonds will protect against deflation when the gold portion of the portfolio will do badly, right ?

so long bonds will do well in a deflationary interest rate declining environment

yeah, i guess you want ZFL, 20 years and all government debt

i used to own a mix of bmo bond etfs: ZCL, ZCS and ZCM which did very well for me but won't work for you

you need to talk to james4beach who is a fan of a modified version of the the pp


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## james4beach (Nov 15, 2012)

ZFL (not XLB) is a potentially viable candidate for the PP. However, I examined ZFL versus XBB and was not convinced that ZFL was better for the portfolio. There aren't many years of history on ZFL so it doesn't provide a convincing story versus XBB, which actually has been around since 2000 and has worked well for the PP. Even in the years it's been around, I'm not convinced ZFL improves the PP.

Myself, I use XBB plus GICs for the fixed income component of my (modified) PP. The GICs generally give a slight performance boost without adding any risk. I also hold some individual government bonds, and think the whole mix performs about the same as XBB.

By the way, a permanent portfolio consisting of (25% XIU+ZSP, 25% XBB, 25% MNT, 25% HISA) returned +1.5% in 2018 which was better than practically every 60/40 balanced fund out there. You might want to see also see:
https://www.canadianmoneyforum.com/showthread.php/86673-Permanent-portfolio-and-asset-allocation

Myself, I shifted my thinking on this last year and ended up with the allocation: 30% stocks, 50% fixed income, 20% gold described in this post. From my study of past performance, I believe this results in a slightly higher performance than PP while retaining all the advantages of diversifying across stocks/bonds/gold.

According to the data I have going back to 1997, this 30/50/20 asset allocation returned 6.0% annualized in CAD which is a really healthy 4% real return... with only a bit more volatility than the original PP.


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## fatcat (Nov 11, 2009)

james4beach said:


> ZFL (not XLB) is a potentially viable candidate for the PP. However, I examined ZFL versus XBB and was not convinced that ZFL was better for the portfolio. There aren't many years of history on ZFL so it doesn't provide a convincing story versus XBB, which actually has been around since 2000 and has worked well for the PP. Even in the years it's been around, I'm not convinced ZFL improves the PP.
> 
> Myself, I use XBB plus GICs for the fixed income component of my (modified) PP. The GICs generally give a slight performance boost without adding any risk. I also hold some individual government bonds, and think the whole mix performs about the same as XBB.
> 
> ...


right, you have your own modified pp but this guy is starting out and wants to follow browne's template

the bond portion needs to be rock solid (government and non-callable) but moreover it needs to protect against deflation to offset gold's anticipated fall

in falling interest rate environment ZFL will do better than XBB which is why the op is buying it


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## james4beach (Nov 15, 2012)

I agree that ZFL is the best fit for the original Browne template and I think it's an OK holding. However, beware that in Canada, implementing a "long term bond" allocation may not work as well as in the US. There are technical reasons for it:

Canada doesn't have many federal bonds towards 20-30 year maturity. Because of this, ZFL only has a handful of holdings. It's not a great analogue to the American TLT, which has 35 govt bond holdings that are evenly spread across many different issues, meaning they are not concentrated in any particular security.

In contrast ZFL has 10 federal bond holdings, with half of the entire fund highly concentrated in two particular bond issues (2037 and 2041). This is not particularly well diversified. Sure, they're government-backed bonds, but having such a large % of NAV in just a couple specific bonds is bad news. It means that the market price of just two securities pretty much drives the entire ZFL value.

These are the reasons I opted for XBB instead of ZFL. The long term government bond concept is just difficult to implement in Canada. The US market is far more mature in this space.


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## fatcat (Nov 11, 2009)

james4beach said:


> I agree that ZFL is the best fit for the original Browne template and I think it's an OK holding. However, beware that in Canada, implementing a "long term bond" allocation may not work as well as in the US. There are technical reasons for it:
> 
> Canada doesn't have many federal bonds towards 20-30 year maturity. Because of this, ZFL only has a handful of holdings. It's not a great analogue to the American TLT, which has 35 govt bond holdings that are evenly spread across many different issues, meaning they are not concentrated in any particular security.
> 
> ...


i just bought LQD down in the states, certainly the USA has much better options but i don't think the op wants to do US dollars and XBB won't work so he is stuck with ZFL, i think it will work well enough for him, like you i would own XBB (if i wanted to do the damn paperwork )


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## james4beach (Nov 15, 2012)

ZFL is not terrible, it will more or less do its job in the PP. However, I recommend that the OP continues to track results using XBB as well. Evaluate in 5 years and look back at how the portfolio played out with XBB vs ZFL.


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## Hbrowne (Jan 20, 2019)

Hello fatcat, thanks for your reply. I did not know of ZFL, I have looked at it today and am very interested in this. I just moved over to the Harry Browne portfolio after a summer and fall of owning only stocks. I never really looked at asset allocation. Nothing like getting a good scare to help one see the value of owning several asset classes. Why do you say"be prepared to hold a bond fund for as long as the duration in terms of your asset allocation" Do you mean until your bond fund hits its asset allocation target of say 30 percent or 35 percent of your total portfolio, when you started off with a 25 percent allocation . Yes Harry's premise is that Government bonds gain very well in capital appreciation when interest rates fall. Thanks again.


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## Hbrowne (Jan 20, 2019)

Thanks James, right now I own 25percent XIC , 25 percent MNT and 25percent XBB . I don't own any short term bond ETF yet. Fatcat says the XBB etc is a 10 year average maturity , so in order to achieve the Harry Browne recomendation of a 20 plus year average maturity for the Governmet bond ETF , I should put 50 percent into XBB and nothing into cash or short term bond etc. What do you think? Or maybe a watered down version of this? I must say after moving over to this asset allocation model my nerves are 100 percent better. I guess you realize how peaceful it is after you learn to quit beating your head against the wall. Adding some GIC is for diversification for you? Also you have bought CDN Government bonds directly? How much do you feel the 30/50/20 change added to your return ? Thanks for your help, it is well received.


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## james4beach (Nov 15, 2012)

Hbrowne said:


> Thanks James, right now I own 25percent XIC , 25 percent MNT and 25percent XBB . I don't own any short term bond ETF yet. Fatcat says the XBB etc is a 10 year average maturity , so in order to achieve the Harry Browne recomendation of a 20 plus year average maturity for the Governmet bond ETF , I should put 50 percent into XBB and nothing into cash or short term bond etc. What do you think?


Yes this was exactly my thought process too, mostly because I found it not very practical keeping 25% in cash on its own.

Instead, as you describe, I've merged my 25% cash and 25% long bonds ---> 50% fixed income, basically XBB. I have eliminated cash from the picture.



> I must say after moving over to this asset allocation model my nerves are 100 percent better. I guess you realize how peaceful it is after you learn to quit beating your head against the wall. Adding some GIC is for diversification for you? Also you have bought CDN Government bonds directly? How much do you feel the 30/50/20 change added to your return ? Thanks for your help, it is well received.


Yes it absolutely is peaceful and I felt no stress during that 2018 drop. For me, getting a positive real return without those sharp drops is a huge win... nobody's going to convince me to go heavy into stocks when I know this is possible instead.

So just going back over my thought process, I started with:
25% stocks, 25% long bond, 25% cash, 25% gold
then merging bonds and cash and preserving Browne's average maturity across them:
25% stocks, 50% bonds (XBB), 25% gold

At this point I think this allocation is easier to maintain in practice. Under the hood, XBB actually includes both long bonds and short term bonds. So using that mix shown in blue, you'd actually still be following Browne's original portfolio because XBB itself handles both. You're just grouping them together.

From there, I started departing a bit from official PP. I took it to 30% stocks, 50% bonds, 20% gold with that slight shift in allocation towards stocks. My motivation for this is that I'm a bit skeptical of the gold ETFs. Stock index vehicles are very mature and reliable structures, but gold ETFs are newer on the scene and there are some doubts around them. I wrote some details in this post. In other words I am a bit more confident about stock indexing rather than gold through electronic shares so I rounded the stock allocation up and gold down.

Regarding GICs, this is "splitting hairs" on the 50% fixed income allocation. Keeping 5 year GICs along with XBB will not hurt the returns at all. In fact if you pick up 5 year GICs at competitive rates you will probably boost the fixed income return. I do this partially for tax reasons as XBB can be a pain non-registered, so I keep XBB inside my tax shelter and GICs non registered.

The direct govt bond ownership is again something I do for tax reasons so I don't recommend trying to do that. Either 50% all in XBB or some mix of XBB plus 5 year GIC ladder are totally sensible approaches to the PP.


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## james4beach (Nov 15, 2012)

When I say eliminated cash, I should clarify that I still keep cash on hand for annual spending, but I separate it from my asset allocation. My intention is to be fully invested in stocks & bonds & GICs & gold, with zero cash.

Here's a chart which tracks my model (ideal) portfolio. Notice there was a 4% drop during the worst of 2018. This was milder than typical balanced funds like VBAL which fell 8% at their worst. My allocation is also reaching new highs already whereas typical balanced funds still haven't regained their old highs.


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## Rusty O'Toole (Feb 1, 2012)

I miss Harry Browne. I like to think of his followers as the Harry Browne people, it makes them sound like a bunch of Rastafarians.


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## james4beach (Nov 15, 2012)

Rusty O'Toole said:


> I miss Harry Browne. I like to think of his followers as the Harry Browne people, it makes them sound like a bunch of Rastafarians.


He certainly made a good case. But Rusty what is interesting to me is that other motivations for portfolio design actually get you something similar to Browne's portfolio. Not the exact same result of course, but (from my studies) there are multiple methods which "converge" at the same style of portfolio. The "risk parity" concept, once you strip it down to fundamentals, leads to a portfolio very similar to the PP. And "risk parity" is based on fundamentals of capital allocation and diversification... nothing to do with libertarianism or being distrustful of central banks. Even if you follow the math-based "risk parity" argument, you end up with something like PP.

For me, once I see multiple techniques and approaches which converge to the same answer, I increasingly think the answer is solid.

The hardest part of following non-mainstream investing approaches is having the bravery and persistence to stick with it. Humans are creatures which are highly susceptible to social influences; we are social animals that follow herd behaviour. And the herd behaviour is to all follow a traditional 60/40 allocation. Why? Many reasons... but a big one is that by following the same technique as the mainstream, you can't go "wrong" versus everyone else. There is comfort in doing what everyone else does. Grantham wrote this very insightful investment letter years ago describing the herd phenomenon and career risk. Simply, advisors of funds generally don't dare to diverge from the mainstream advice because it is bad for their careers: if they follow an alternate technique and their performance lags, people will pull their money out. Then they get fired. Money managers naturally flock to the same technique out of fear.

As independent investors who manage our own portfolios, we have real freedom here. We can choose to follow techniques that may result in years of lagging performance. I've certainly done this. But this again is where PP and any nonstandard portfolio gets difficult. Can you really stick with the technique long term? Or are you going to get scared out of it after a series of bad years?

I'm barely 3 years into my (modified) PP allocation and I really hope I can stick to the plan long term. But so far, these have been good years. The calendar year returns are approx +6%, +6%, +1%. I haven't yet experience the string of bad years. I'm hoping that when it happens, I look at the big picture and realize it's expected and is no reason to abandon the method.


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## Hbrowne (Jan 20, 2019)

*asset allocation for permanent portfolio*

Hello James, Thanks for your reply, much appreciated. As Jethro Bodine would say , I have been 'cipherin' (thinking), that is why my reply has taken so long. Harry Browne's Permanent Port. has done well since I moved over 5 months ago, about 7% rate of return. The greatest benefit is almost no stress and it just feels holistic, all economic scenarios are covered. No matter what the news says, that eventuality is covered in the PP. However the mind is always looking to improve things. I have moved some of my XBB etf over to ZFL as Fatcat suggested. XBB is 14 years to maturity government bonds and ZFL is 20+ years to maturity government bonds. With their being 25% in a cash/money market fund the best you can get is 1.5% to 2% per year on this cash. I have never understood why so large an allocation should be made to cash. You said in a previous post James, that you keep your cash separate and just do 1/3 stocks, 1/3 bonds and 1/3 gold. think this is where I am heading.
Do you see any reason to keep 25% in cash? The Talmud says 1/3 in business, 1/3 in land and 1/3 in reserves, as William Bernstein says . He says this could be looked at as stocks, bonds and silver/gold( I am paraphrasing him). Are you still doing the 1/3, 1/3 , 1/3? Has it worked better that the 25/25/25/25/? Thanks for your help.


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## Eder (Feb 16, 2011)

If you're looking for a longer term fixed, IPL just put out a new issue ...6.875% fixed-to-floating rate subordinated notes due March 26, 2079. Should do till most of us are dead. Blows away annuities as well imo. 
No risk no reward.


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## AltaRed (Jun 8, 2009)

That is expensive capital. And why a subordinated issue?


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## james4beach (Nov 15, 2012)

Hbrowne said:


> However the mind is always looking to improve things. I have moved some of my XBB etf over to ZFL as Fatcat suggested. XBB is 14 years to maturity government bonds and ZFL is 20+ years to maturity government bonds.


Nothing wrong with that, seems like a reasonable choice.



> I have never understood why so large an allocation should be made to cash. You said in a previous post James, that you keep your cash separate and just do 1/3 stocks, 1/3 bonds and 1/3 gold. think this is where I am heading.
> Do you see any reason to keep 25% in cash? The Talmud says 1/3 in business, 1/3 in land and 1/3 in reserves, as William Bernstein says . He says this could be looked at as stocks, bonds and silver/gold( I am paraphrasing him). Are you still doing the 1/3, 1/3 , 1/3? Has it worked better that the 25/25/25/25/? Thanks for your help.


Funny that we both started posting on this topic today. I just wrote a lengthy post in this other thread that describes what I currently do. I shifted from 'permanent portfolio' to the portfolio shown in my posts at the bottom of this page. I think it's pretty similar to the permanent portfolio:
https://www.canadianmoneyforum.com/showthread.php/134504-Ray-Dalio-s-All-Weather-Portfolio/page4

Yes I keep cash separate from my asset allocation (a change in the last few months). I found that managing all of this became simpler once I did that.

There are endless small modifications one can make to these portfolios and strategies. Whatever you decide on, I think it's important to commit to it and stick with it. For example, you wouldn't want to jump back and forth repeatedly between XBB <> ZFL because that becomes a form of market timing.

I think any of these approaches discussed above can be perfectly good. There are no hard answers for any of this and no way to tell which would perform best long term. However it's important to choose a strategy you are comfortable with and that you can stick with long term.


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## Eder (Feb 16, 2011)

AltaRed said:


> That is expensive capital. And why a subordinated issue?


Can you elaborate?


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## james4beach (Nov 15, 2012)

Jumping here from another thread



Topo said:


> The permanent portfolio is a great idea for protecting against financial crises, without sacrificing returns. I hadn't looked at it from this perspective before.


It's the main thing that attracted me to it. Assuming that someone considers a 50/50 kind of return good enough (which I do).

The permanent portfolio was stated by Browne as equal weights cash, long term treasuries, stocks, gold. However, I think the easiest implementation is to group the fixed income amounts into a single 50% bond weighting, since the average maturities of "cash and long term treasuries" works out to around 10 years, and all standard bond funds have the same 10 year average maturity. So the permanent portfolio becomes:

25% stocks
25% gold
50% bonds at 10 years

Here's a comparison showing Portfolio 1 (standard 50/50) and Portfolio 2 (permanent portfolio) since 1972
https://www.portfoliovisualizer.com...=ShortTreasury&total1=100&total2=100&total3=0

The 47 year CAGR is virtually identical. The permanent portfolio is far less volatile, with a substantially better maximum drawdown. But what's even more interesting is the difference in behaviour during that high inflation period of the 70s. If you look at the chart at that link and click *Inflation adjusted*, you'll see that the 50/50 allocation did pretty badly for 12 years.

During those years the permanent portfolio did much better (obviously due to gold) giving superior capital preservation. If that situation had spiraled out of control into a fiat collapse, for example if Volcker had not aggressively raised rates, that standard balanced fund 50/50 allocation could have been a disaster for _many_ decades.

Sometimes people dismiss this amazing result as a one-off thing due to the unusually high inflation of the 70s/80s, seemingly the only time gold was very useful. People have often told me that other than this brief period, gold has performed poorly long term. I have two responses to that:

1. gold is insurance. I expect that it will very frequently disappoint, but then save the day in circumstances like fiat currency deterioration, high inflation, systemic collapse. If we never get those horror scenarios, and if gold performs poorly for the rest of my life... fine with me!

2. the permanent portfolio asset allocation shows nice characteristics even ignoring the 70s/80s. For example, using the linked visualizer tool, try positioning the start date in 1997. It still shows smoother annual performance and more reliable capital preservation than 50/50


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## Topo (Aug 31, 2019)

james4beach said:


> Jumping here from another thread
> 
> 
> 
> ...


Gold and bonds should do well in a credit crisis scenario. Stocks will have a mixed performance. Some stocks such as commodities would do fine. But cyclicals, for example, would get hammered.


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## hfp75 (Mar 15, 2018)

I'm using a modified version of the PP also. For funds that I have total control over at the discount broker I have: Fixed Income 35% / Gold 33% / Equities 32%

VAB is 80% of my FI the other 20% is XLB
Gold is MNT
Equities vary... I am using Mawer / VGRO / HXS / HXT

I know the criticisms of XLB but I feel that it has a longer track record and more AUM then some of the others. The corporate portion is 24% which is more than I might like but the average rating is AA and the BBB is only 9% (nothing < BBB) so the credit quality seems high - I know bad things happen to good people....

For a long time I was using an index strategy and was very happy with the results. After some reading about the problems with some of the companies in the S&P/TSX I decided that leaning more on active management was a good idea - right now where companies are struggling and there is a recession coming, Mawer will choose based on strict criteria companies that dont look to have problems. I'm still carrying some indexes but 70% active and 30% indexes. I still have good N.American exposure and some international. 

aside from that we have a real estate investment, and some money locked away where balanced is really the only option - so it sits there.... not much I can do about that.

I was using XSB but decided that PSA was a better option.

I think that interest rates will continue over time to drop - and as such, being a bit longer in the bond duration seems to make sense to me. I could get burnt though if there is inflation and rates start rising..... our society is just to addicted to more cheaper money.... If rates were to really start rising can you just imagine the housing market, or the destruction of wealth that would follow. It could happen but I dont think this year or next.


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## james4beach (Nov 15, 2012)

Did your broker allow you to buy PSA?

I understand your reasoning for XLB. By combining it with VAB you are pushing up the average maturity & duration of your fixed income segment and I understand the potential benefit of that.

Have you considered using ZFL instead of XLB for the same long bond purpose? The credit quality of ZFL is better. The tradeoff there is that XLB (more corporate) will perform better during good economic conditions when corporate risk is low. In bad economic conditions, such as recession or depression, corporate exposure can get hit pretty hard and ZFL would likely perform better. This hasn't been a concern yet in these current years.

I think this is a reason Browne recommended treasury bonds in his fixed income segment.



fatcat said:


> the bond portion needs to be rock solid (government and non-callable) but moreover it needs to protect against deflation to offset gold's anticipated fall


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## Hbrowne (Jan 20, 2019)

Hello everyone, nothing to startling to share, just an observation. This past week has been the worst week since 2008 for stocks they say. I have 1/3 in XIC and 1/3 in ZFL and 1/3 in MNT; with cash held outside the portfolio. 
Very close to the original Harry Browne portfolio. So gold and government bonds are a hedge against stocks. Still there has been a significant loss to the portfolio this past week. Which has caused stress and an agitated mind. They say 'Knowledge has organizing power', I found by reading these posts and books by people i like, gives one the reassurance, history and insights to stick to the portfolio one has chosen, chosen based on research. This week has erased much of last weeks losses. Ben Franklin said "by failing to prepare, you are preparing to fail". So keep those gems of wisdom coming.


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## Hbrowne (Jan 20, 2019)

Hbrowne said:


> Hello everyone, nothing to startling to share, just an observation. This past week has been the worst week since 2008 for stocks they say. I have 1/3 in XIC and 1/3 in ZFL and 1/3 in MNT; with cash held outside the portfolio.
> Very close to the original Harry Browne portfolio. So gold and government bonds are a hedge against stocks. Still there has been a significant loss to the portfolio this past week. Which has caused stress and an agitated mind. They say 'Knowledge has organizing power', I found by reading these posts and books by people i like, gives one the reassurance, history and insights to stick to the portfolio one has chosen, chosen based on research. This week has erased much of last weeks losses. Ben Franklin said "by failing to prepare, you are preparing to fail". So keep those gems of wisdom coming.


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## Hbrowne (Jan 20, 2019)

Hello, a perplexing question. The ETF ; MNT.TO has had a rate of return of 44% over the past 12 months. The other ETF's that I track, that track gold bullion have all had a rate of return of about 26%. This includes GLD,PHYS, IAU and SGOL . So for some reason MNT.TO has a rate of rate of return of 44% while their comparative ETF's are returning 19% less for the year. During this time period gold bullion has risen from $1396 to $1787, ie,28%. Why would MNT rise 19% more ? MNT is the only Canadian ETF mentioned here. If you look at the last three years the discrepancy is even greater .MNT.TO rises 70% while the others rise about 45%. Does anyone have an answer to this discrepancy?


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## james4beach (Nov 15, 2012)

I think I missed that post of yours from March because I was in the Caribbean at the time (when markets were crashing)

1/3 each in XIC, ZFL, MNT sounds pretty good to me.

Notice during the March drama how badly XLB crashed (due to corporate bonds imploding). ZFL held up much better due to the superior credit quality which I talked about earlier in this thread. The permanent portfolio still got hit pretty hard during that market crash, but everything is relative.

In my own PP variant, I saw a 10% to 15% "draw down". This was scary, but for context: the draw down in VBAL and other balanced funds was 20% to 25%. Both of these drawdown numbers, both for PP and balanced funds, are right on par with historical precedent and previous crashes.

In other words the PP does not wipe out volatility and certainly can still crash (and has in the past as well) but it does not crash as hard as 60/40.

Now take a look at performance figures...

Year-to-date, your XIC/ZFL/MNT mix is up about 14%. Balanced funds have returned about 0% YTD.

For the last 1 year, your mix is up about 18%. Not exactly a bad return for one of the craziest periods in modern times.



Hbrowne said:


> Hello, a perplexing question. The ETF ; MNT.TO has had a rate of return of 44% over the past 12 months. The other ETF's that I track, that track gold bullion have all had a rate of return of about 26%.


MNT has had a higher return than it should have due to a premium to NAV. We've been discussing it in this thread, take a look at









MNT: Royal Can. Mint Gold ETR


talk to any advisor and they will remind you that gold has no place in a portfolio. I wouldn't have a portfolio without Gold in it.... I liken Gold to a balancing beam or something that provides stability..... In fact, if I could find another asset class that I liked I would consider adding...




www.canadianmoneyforum.com





In my own RRSP, I've sold some MNT (at the premium) and bought CGL.C so now I hold both. To the best of my knowledge, MNT and CGL.C are expected to perform about the same.


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## james4beach (Nov 15, 2012)

PS, the permanent portfolio really proved itself during this recent crash. What a great illustration of the benefit of the stock/bond/gold mix.

It acted exactly as it was supposed to. Bonds and gold counteracted the sharp crash in stocks.


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## Hbrowne (Jan 20, 2019)

james4beach said:


> PS, the permanent portfolio really proved itself during this recent crash. What a great illustration of the benefit of the stock/bond/gold mix.
> 
> It acted exactly as it was supposed to. Bonds and gold counteracted the sharp crash in stocks.


I just did a calculation on the Harry Browne Permanent Portfolio from April 8, 2016 to April 8 ,2021 . I used XIC for stocks (25%); CGL for gold (25%) and ZAG for bonds (50%). The rate of return was 7.8% per year for that 5 year period (providing my math is correct). Pretty good. My question is the gold component and why the discrepancy between the Canadian gold ETF's . Looking at MNT, CGL-C, PHYS and CGL. There is also HUG and KILO but they are very thinly traded it seems. Why does PHYS often seem to lag the rest? MNT is often not in-step with the other Canadian ETF's . Is there an opportunity for arbitrage ? Say CGL-C is up 1.0% for the day and PHYS is down .15% . I know there are other factors at play, but say they have both been tracking gold bullion the same, if you are holding CGL-C can you sell that and buy PHYS and profit the difference? Are there to many variables , differences to consider, to make this a good thing trading in the Canadian gold ETF's. Maybe get stuck with a lack of volume? Am I comparing apples to apples? Just a thought, I don't want to go looking for stress. Usually I don't have to look.


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## james4beach (Nov 15, 2012)

Hbrowne said:


> The rate of return was 7.8% per year for that 5 year period (providing my math is correct). Pretty good


That sounds right. I started using the strategy about 5 years ago myself, and I've measured performance of 7.1% though with a slightly different asset mix.



Hbrowne said:


> Pretty good. My question is the gold component and why the discrepancy between the Canadian gold ETF's . Looking at MNT, CGL-C, PHYS and CGL


There are slight differences. CGL is a hedged gold and CGL.C is unhedged. You should use *unhedged* to get proper protection in case of a CAD crash. Some of these funds like MNT and PHYS too can trade at a premium or discount. So they are all slightly different with pros and cons.

I think CGL.C tracks the best, and is likely the best choice. I also buy MNT when I can get it at a discount. In the last 5 years, CGL.C is up 35% and MNT is up 36% so you can see that despite premium/discount fluctuations, they both end up tracking gold quite well. MNT and CGL.C are my favourites.

If you have very deep pockets, there theoretically is a way to arbitrage MNT to get free money. Currently MNT trades at a discount of as much as 2% or 3%. You could buy a minimum of 10,000 units (about a quarter million $ of gold) at a discount, and then invoke the Mint's redemption feature. You can also ask the Mint to sell the gold for you, which is probably more useful than receiving a Brinks armoured car full of gold bars (which is actually what happens). With a quarter million $ capital, I believe that pockets you only about $7500 profit. But if you get assistance from the Mint to sell the gold, I think you also pay a $5000 fee. There might be other fees as well.

This example with 250K shows why MNT can easily trade at a 3% discount with nobody stepping in. Even though you can redeem it for physical, it won't give you a profit after fees are considered. However if it was a 10% discount, then I think you can easily make 20K of free money.

Another problem is the liquidity, as you pointed out. If you really did step in and buy 10,000 units, you will quickly drive the price back up to fair value. I have frequently placed MNT trades of as much as 2,000 units and I can easily move the market when I do that.

So that's the problem with arbitrage. On paper it looks like it's possible, but due to redemption fees, and the fact you will move the market, it really can't be done in practice, unless the discount is much larger.

These seem like nuisance kind of things but I want to emphasize something quite important about all of this. MNT actually holds real gold, physical bars. A few months ago, a MNT unit holder decided to redeem over 60,000 ounces of physical gold. I contacted someone I know at the Mint to inquire and they sent me the response I posted here.

So yeah... liquidity is poor and ideal tracking is kind of rough. On the other hand, the gold really is there. The Royal Canadian Mint absolutely does have the gold in the vaults, so MNT is the real deal: units you can hold electronically which directly represent physical gold, that can even be redeemed (if you are crazy enough to request it).


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