# Permanent portfolio and asset allocation



## james4beach

I thought I'd start a new thread because it looks like we had hijacked another thread but had some material that would be good to discuss in more detail.

I've always been interested in diversification, and had wandered on my own towards a strategy that turned out to be a lot like Browne's Permanent Portfolio which is equal weights of stocks, government bonds, gold, cash. I'm also interested in reading about other diversification approaches.

Here's some data I have for a permanent portfolio, Jan 2006 to today (10+ years) using 25% XIC, 25% XGB, 25% MNT, 25% XSB. Some of the numbers are imperfect because data wasn't available for the full range.

*Performance for the full 10+ years: 5.8%*, worst year -2.9%
Benchmark: 50/50 XIU and XBB: 4.3%, worst year -12.6%
Annual returns:
2006: 11.5%
2007: 6.6%
2008: 2.9%
2009: 11.7%
2010: 12.3%
2011: 4.4%
2012: 3.8%
2013: -2.9%
2014: 7.5%
2015: 0.8%
2016: 3.0%

This looks pretty appealing to me. Not only is the long term performance greater, but the volatility and risk is less.

Others had the following comments to this:



Nerd Investor said:


> I would highly recommend you read Global Asset Allocation by Meb Faber. It's pretty cheap as an e-book and he regularly has promotions on his website where you can get it for free or even cheaper.
> 
> He compares various 'famous' portfolios with different asset allocations including Browne's permanent portfolio. From what I recall, the permanent portfolio is actually the worst performing of the bunch but the ultimate conclusion is that they all beat the index over long periods and many end up actually having similar exposure once you simplify the asset classes.





agent99 said:


> Why compare what is essentially a balanced portfolio containing mix of fixed income and equity with XIU (an all equity etf)?? The comparison should be with a balanced fund or etf.
> 
> 10 yrs is not really a long enough period to use to make a decision. But sometimes longer term data may be harder to find.
> 
> I don't think there is any magic allocation that will work for all times. Those are just for those who do not have time or inclination to adjust portfolios for changing times.





My Own Advisor said:


> "I don't think there is any magic allocation that will work for all times."
> 
> Yup - depending upon the timeframe you pick, to measure that allocation performance, you could look like a hero or a goat.
> 
> You need to compare apples to apples as much as possible. I'm not a huge fan of Browne's Permanent Portfolio but that's because my approach is different. Doesn't make it right or wrong, just is


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## james4beach

I should add that in the permanent portfolio, it's perfectly feasible to have US exposure within that 25% stock allocation too and realistically you'd probably do 12.5% TSX, 12.5% S&P 500. To simplify the comparison I just used the Canadian stock index in this comparison.


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## Spudd

If holding entirely in registered accounts, I'd go 100% global for the stock allocation. Why limit yourself to North America?

In non-registered there's a tax advantage to Canadian dividends so I would probably go a little heavier on Canadian in that situation.


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## james4beach

When an ultra-bear like me is suddenly excited about increasing his stock allocation, does that signify a market top?  I'm a guy with 4% in stocks and talking here about increasing it to 25%


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## jargey3000

Spudd said:


> If holding entirely in registered accounts, I'd go 100% global for the stock allocation. Why limit yourself to North America?
> 
> In non-registered there's a tax advantage to Canadian dividends so I would probably go a little heavier on Canadian in that situation.


Spudd: what would you go with for the global stock allocation?


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## My Own Advisor

Yes, I am worried james 

Kidding aside, in terms of diversification I believe you can own the top sector holdings across our Canadian market and avoid using the Canadian index as part of your portfolio. I just wrote about this actually since I've been thinking about this stuff of late....
http://www.myownadvisor.ca/canadian-stocks-to-buy-and-hold/

Then, after you own your "top-stocks" you supplement the Canadian portfolio using VTI and VXUS in your RRSP. 

No bonds here but that's because I have a small pension and I consider that a big bond. So, my asset allocation is 100% stocks.


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## james4beach

My Own Advisor, I understand how one can optimize or geographically diversify the stock part of the holdings, but I'm curious why you don't like the idea of the broader diversification outside of stocks?

You said earlier,


> depending upon the timeframe you pick, to measure that allocation performance, you could look like a hero or a goat.


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

Pure stock allocation just can't do that. Bonds & stocks together do it to some degree -- and I often endorse balanced funds -- but why not add more diversification since it reduces volatility further?


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## Video_Frank

james4beach said:


> ... a strategy that turned out to be a lot like Browne's Permanent Portfolio which is equal weights of stocks, government bonds, gold, cash.
> 
> Not only is the long term performance greater, but the volatility and risk is less.


Dan and Justin did an analysis of the PP vs the GCP here. Here's a quick summary:



> December 1979 to August 2011:
> 
> Global Couch Potato Portfolio:
> Annualized Return: 10.13%
> Annualized Standard Deviation: 8.83%
> Sharpe Ratio: 0.40
> 
> Permanent Portfolio:
> Annualized Return: 8.81%
> Annualized Standard Deviation: 6.73%
> Sharpe Ratio: 0.32



GCP has a better return but with a greater ASD. I can't think of a single reason why someone in the accumulation phase, years out from retirement, would put 25% of their portfolio in cash. It's sure to get killed vs inflation. In order to get market returns you need to accept market risk, not cower in cash. My two cents, anyway.

Edit to add: Why are you only looking at Canadian funds when Canada is ~8% of the world's markets. Too much home bias IMO.


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## james4beach

Thanks, that's a neat comparison with the Global Couch Potato Portfolio.

The comparison gives volatility measures but stated that way, it doesn't make intuitive sense to people. To get a better sense look at rough periods and max declines. For example in 2008, the GCP fell -20% vs +3% for the PP. That's a huge difference and I think it shows the value of the PP.

I agree that GCP gave higher returns than PP (an advantage of 1.32% per year in the very long term). We all talk about how you should just accept market risk and sit through volatile periods to achieve the best returns in the long term -- that's the theory. In practice, volatile periods cause a lot of difficulty.

When you see your life savings drop by 20% in one year, it's scary. You start to ask legitimate questions like, am I really willing to experience another 20% drop like that? What if this is the start of a prolonged bear market and it's ten years before the value recovers? What if you lose your job during a depression/bear market... e.g. 2008... and suddenly need to tap into the cash. There are certainly people who post on these forums who had to abandon the stock investments for various reasons. Job loss, illness, emergency, etc.

PP reduces the volatility substantially and eliminates many of these concerns. I guess it becomes a question of how much performance you're willing to sacrifice for that.


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## Video_Frank

True enough. I've been through a few healthy drops now so it doesn't phase me at all. I'd still rather be in bonds than cash though - a GIC ladder gives you 0% risk but still outperforms cash.


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## james4beach

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

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

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

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

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


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## Spudd

jargey3000 said:


> Spudd: what would you go with for the global stock allocation?


Probably something like XWD. It holds the entire world in a single ETF, in Canadian currency. VT is the other option I can think of, but you have to buy that in USD.


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## My Own Advisor

james4beach said:


> My Own Advisor, I understand how one can optimize or geographically diversify the stock part of the holdings, but I'm curious why you don't like the idea of the broader diversification outside of stocks?
> 
> You said earlier,
> 
> 
> But analyses on diversified portfolios like the Permanent Portfolio have gone back many decades, on US data, it definitely shows strong performance with undeniably less volatility and milder down years. Isn't that very compelling? It covers a number of periods including high inflation/low inflation, high interest rates, low interest rates, and the permanent portfolio had steady performance and low volatility throughout all of this.
> 
> Pure stock allocation just can't do that. Bonds & stocks together do it to some degree -- and I often endorse balanced funds -- but why not add more diversification since it reduces volatility further?


I don't hold bonds because while bonds cushion the blow from bad equity markets, my investing time horizon is 10+ years. I feel over that time, equities will far outperform bonds. I could be wrong.

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

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

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

Volatility is a short-term headache.


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## agent99

My Own Advisor said:


> I also feel bond yields have nowhere to go but up over time, which means of course, prices will fall over time. There is little capital appreciation to be had in the decades to come from bonds. I could be wrong.
> 
> Lastly, I don't hold any bonds because I have a workplace pension plan (not gold-plated) and I consider that a big bond. This bond will provide me with, hopefully, a decent amount of fixed income in retirement.


Regarding first paragraph above, if you buy actual short term bonds and hold them to maturity, their value is of no consequence. You buy them knowing the yield to maturity. If you buy bond etfs or funds, you do need to know and understand duration. Personally, I only buy actual bonds or in some cases, convertible debentures and being in retirement have 40-50% in fixed income and working on increasing that.

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


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## CPA Candidate

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


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## james4beach

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

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


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## My Own Advisor

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

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

If an investor feels better owning cash, owning more bonds than stocks - that's fine. Every investor is different. The perfect portfolio only exists in hindsight.


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## hboy43

My Own Advisor said:


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


That has been my thinking. I have not owned anything fixed income in over a quarter century. With my wife due to retire on a teacher's pension soonish, my concession to FI will be to wind down the leverage a bit.

hboy43


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## james4beach

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

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

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


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## james4beach

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

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

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

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


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## My Own Advisor

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

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

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


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## Argonaut

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


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## james4beach

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

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

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


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## JohnnyFactor

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

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

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

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


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## andrewf

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


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## JohnnyFactor

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


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## andrewf

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


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## JohnnyFactor

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


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## My Own Advisor

Very extreme. That said, I'm holding more cash as time goes on. You never know....


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## james4beach

You're right, Harry Browne was a libertarian, but I see this portfolio construction as being appealing due to the uncorrelated assets that have different characteristics in different economic environments. I like JohnnyFactor's ETF picks.

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

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

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

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

*Other alternatives for cash*

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

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


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## james4beach

Argonaut said:


> Not in a rush to setup that allocation just yet with poor interest rates and metals not going anywhere for a few years


I challenge this assertion  In the last 15 years, gold's performance is approx 275% cumulative (using CEF.A as approximator). Compare that to XIU's total return of 165%.

Wear the "permanent portfolio hat" for a second. The point of it was to gain exposure to assets that thrive under different economic conditions. Looking at that 15 year performance, there is a good chance we currently are in the environment where gold really thrives.

As low as interest rates are, there is also the possibility that we're heaving for a negative interest rate environment. Many European countries already have negative yields, and the US treasuries just hit all time historic low yields yesterday.

Looking at today's market conditions, I like the PP a lot. All of these are plausible -- stock bull market, gold bull market, treasuries bull market.


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## andrewf

XFR would be another option for cash, it is 90% government bonds with very short duration.


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## Argonaut

Yeah I had gold during the run-up and like it alot long term, but it will muddle along for another several years in my eyes. It needs time to blow off the steam of the parabolic rise in 2011. See: 1980.


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## JohnnyFactor

My cash component is still very much up in the air. I used to have it in PSA (HISA ETF) but I saw in the fine print that it doesn't even have CDIC coverage so I dumped it. For now, it's in the broker sweep fund. I actually really prefer it there as it's instantly deploy-able, shows up in the brokers breakdown reports and is covered by CIPF in case the broker goes under.


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## JohnnyFactor

james4beach said:


> All of these are plausible -- stock bull market, gold bull market, treasuries bull market.


This was the key for me. When I saw the PP was based on economic seasons and not pseudo-random allocations, I knew it was the one I could live with for a long time. Harry Browne said the assets may change over time but I'll cross that bridge when I get to it.


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## james4beach

JohnnyFactor said:


> For now, it's in the broker sweep fund. I actually really prefer it there as it's instantly deploy-able, shows up in the brokers breakdown reports and is covered by CIPF in case the broker goes under.


I advise caution about cash in the brokerage/sweep as you're doing. CIPF is not government-backed insurance. One veteran trader (an old guy I know who's lived through multiple broker collapses including Refco) says that cash is much safer when it's stored in some kind of security, instead of "cash" -- which after all is just an obligation of the broker. Putting it into a security form (like XSB or ZFS) changes it from a broker liability to something safer, and backed by assets!

This guy is an American and convinced me long ago that excess cash amounts should be stored in SHY or t-bills purchased directly; and not left as cash balances. I think you're risk averse, as I am. In my opinion your cash will be safer in something like XSB, ZFS, or a CDIC-insured savings account. You could also use the high interest savings account vehicles available at discount brokerages, like TDB8150 which is also CDIC insured.

Consider the scenario of a brokerage collapse. When you own securities, they can quickly be transferred to the ledger of another institution. Your PP holdings (including ZFS) just show up, untouched. However cash that is lost in a brokerage collapse is another matter. The value is gone... CIPF actually has to find it from somewhere. This is a very important distinction. A security like ZFS or MNT is *not lost when the broker collapses*, unless there's severe fraud. However, cash is actually lost, gone, and must be repaid by someone.

Securities in a brokerage collapse don't cost CIPF anything. But cash amounts owed to people is a much slower process and means CIPF has to dip into an insurance fund, or possibly wait for the results of bankruptcy proceedings.


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## JohnnyFactor

Thanks for the heads-up on the CIPF scenarios. I've read up on it but never really played it out in my head. Losing the cash component would be pretty awful.

Here's a couple other funds I've been considering:
- CLF (iShares 1-5 Year Laddered Government Bond Index ETF)
- ZST (BMO Ultra Short-Term Bond ETF)

The problem with all of these funds is the mix of corporate, reit, and provincial assets. Having something like SHY in Canada would be perfect. I was hoping to hold out until Blackrock created one but who knows how long that could be.


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## james4beach

JohnnyFactor said:


> The problem with all of these funds is the mix of corporate, reit, and provincial assets. Having something like SHY in Canada would be perfect.


I think ZFS is awfully close, just a bit longer maturity. See portfolio disclosure and last annual report


 100% federal AAA rated (govt bonds + agency bonds)
 No provincial or corporate exposure according to those links
 2.9 year duration (SHY is 1.8 yrs)
 2.0% annual performance in last 5 years isn't bad


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## Nerd Investor

I'm in the process of reading a book called "Adaptive Asset Allocation". It's by the guys who run the blog at Gestaltu.com
Here is a basic primer/summary of the concept: http://gestaltu.com/2012/05/adaptiv...true-revolution-in-portfolio-management.html/

Basically "adapts" weightings between assets classes based on estimated volatility, correlation and returns rather than using long-term averages for everything which can fluctuate wildly over time.


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## Pluto

Article bonds crushing S&P over past 10 years. 

http://www.cnbc.com/2016/07/06/bonds-for-the-long-run-super-safe-treasurys-are-crushing-the-sp.html


I guess the permanent portfolio is OK, only I don't like the word "permanent" and it leaves out the concept of value: Price is what you pay, and value is what you get. If you take the word permanent out of it, and have a plan to go 100% stocks when great value appears you will do much better.


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## JohnnyFactor

Nerd Investor said:


> http://gestaltu.com/2012/05/adaptiv...true-revolution-in-portfolio-management.html/


Nice link. So basically what I'm looking at is a few quant guys, who are fans of the Permanent Portfolio, applying momentum and sharpe ratios to dynamically adjust asset weightings. I've seen this discussed elsewhere and I think it's a good refinement to the original PP setup. If Harry Browne had access to live spreadsheets and real-time data mining, he probably would have explored this concept.

The 25% equal weighting was ultimately chosen to get people onboard a simple plan that they could stick with, even if it meant slightly reduced performance. In todays world of automatic portfolio adjustments, it's just as easy to apply complex math and capture the resultant gains.


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## mordko

This is active management, which is fundamentally against the grain of the whole concept of PP. The fact that one is using a spreadsheet does not change anything.


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## JohnnyFactor

The early versions of the PP did not have equally weighted assets because the creators knew that the assets did not have equal risk ratios. Over time, the allocations drifted to 25% because Harry felt the extra effort involved in calculating risk did not warrant the small amount of extra returns. This is no longer the case. We all have access to complex algorithms and data with virtually no extra effort. I'm a big believer in simplicity, but I don't believe in towing the party line for the sake of dogma. If the portfolio can be improved without changing the fundamental properties, then I'm willing to consider it.


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## mordko

JohnnyFactor said:


> The early versions of the PP did not have equally weighted assets because the creators knew that the assets did not have equal risk ratios.


Right, as the concept developed things changed here and there as one would expect. The question is: were floating asset allocation ratios part of his concept?


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## james4beach

As mordko says, do you really want to get into active management?

Fixed weightings appeal to me, and back testing is showing beautiful results with the equal-weight mix. Perhaps one can tweak the weightings to their taste but I wouldn't want to be actively adjusting those on a year by year basis.


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## JohnnyFactor

Active management implies increasing risk for a chance at increasing returns. These adjustments do not increase risk but actually decrease it. In my mind, I still consider that a passive approach. As passive as it gets anyways, what with all the software involved.

Like most investors I have a spreadsheet that tells me how many shares to buy or sell, based on allocation math. changing that math to a dynamic equation that accounts for risk-adjusted returns does not add end-result complexity. Unless I've drastically misunderstood how this all works, it seems like a reasonable approach.

Harry Browne never addressed floating allocations, but the original percentages were based on the inherent volatility of each asset. The stock portion was actually made up of a basket of stocks that were picked for their higher-than-average volatility. By the time indexing came in vogue, he decided to just go with the SP500 index fund, even though it didn't have the volatility he wanted. The evolution of the PP involved a lot of compromise for the sake of simplicity. This was a good decision, as it meant investors who were sick of complex portfolios would give it a chance. Today, we have enormous amounts of data that can be instantly reduced down to a single line that says how much to buy or sell.


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## mordko

JohnnyFactor said:


> Active management implies increasing risk for a chance at increasing returns. .


Nope. Passive = indexing. Active management = trying to beat the index. Active management does not imply increasing risk. As long as you are diversified, the risk will be similar. It's just that most of the time those who try to beat the index end up losing to the index.


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## JohnnyFactor

In other news, thanks to james4beach, I took the plunge and put the brokerage sweep account into ZFS. You may have saved me a future world of hurt there.


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## JohnnyFactor

mordko said:


> Active management does not imply increasing risk


I disagree. Active management means taking more risk than what's already inherent in the market. Whether it's timing orders, weighting towards small cap, or reducing bonds because it 'feels right', you are still increasing risk beyond what the average market returns call for. If you weren't taking on extra risk, you wouldn't lose to the index either, because you didn't do anything different.



mordko said:


> Passive = indexing.


Agreed, passive = indexing. I used the word 'passive' incorrectly. I'm not sure what I really mean, but it's certainly not active management. Resizing allocation percentages based on volatility is just a mathematical function that accounts for the behavior of that asset. I put it in the same class as rebalancing.


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## mordko

You are trying to remove day-to-day human decision making input while actively managing your money via a bunch of clever and fashionable techniques. 

It's kinda similar to what robo-advisors can do.


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## JohnnyFactor

Ha! This is going to sound ridiculous, but even the GestaltU quant guys called this active management. From http://gestaltu.com/2012/08/permanent-portfolio-shakedown-part-ii.html/

_"The long-term ex-post observed volatility of the basic simple permanent portfolio is 7%, so we will use this target to actively manage the portfolio volatility using the exact same 25% capital allocation to each of the four asset classes."_

So now I'm just confused. Is it actually active management if it requires no extra attention and reduces risk? Is this just semantics? Perhaps passive management is well-defined and everything else is considered active.


----------



## james4beach

JohnnyFactor said:


> In other news, thanks to james4beach, I took the plunge and put the brokerage sweep account into ZFS. You may have saved me a future world of hurt there.


Great! I will likely use it too, though I'm still debating between XSB (higher yield, more liquid, mostly safe) and ZFS (purely federal and safer but lower trading volume). Early I gave a wrong link. Here is the the latest annual financial report for ZFS. I always recommend reading these for ETFs because they are audited by an external party. In particular look at the exact holdings, and the notes from section 8 onward (page 16+). The BMO ETF financial statements are easier to read and understand than iShares, which is really nice:
https://www.bmo.com/assets/pdfs/gam/etf/a-fs/en/A_FS_ZFS_E.pdf


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## james4beach

Let me add a note here about the "Housing Trust" mortgage bonds you'll see show up in the holdings of ZFS, XSB, CLF, etc. Basically, all bond funds in Canada are full of these things. These are bonds under this program: https://www.cmhc-schl.gc.ca/en/hofi...Introduction-to-the-CMB-Borrowing-Program.pdf

From that government document: "The timely payment of interest and principal to investors is guaranteed by CMHC and backed by the Government of Canada." So yes, the federal government has guaranteed payment of them. They should be as safe as all other Government of Canada bonds, and all are rated AAA.


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## james4beach

Back in March, I created an automatic daily computation of the permanent portfolio so that I have an 'index' to work with. This is a Canadian-only version of it with TSX exposure, computed using HXT, HBB, MNT and linear cash. These aren't ETFs that I would actually use to implement it, but they're convenient to calculate daily values of a hypothetical portfolio.

I thought I'd share the maximum drawdown figures as it's kind of interesting and shows the volatility smoothing effect.

My P.P index hit a peak of 105.50 in September, followed by a low of 103.00 yesterday. *That's -2.4% drawdown for the permanent portfolio.*

Compare that to worst drawdown (also since March) of each individual asset class:
Stocks (HXT): -5.8%
Bonds (HBB): -3.2% or as bad as -3.7% with XBB
Gold (MNT): -8.5%

I think that's a nice illustration of the benefit of this diversification. They're uncorrelated assets so by combining them, you get less volatility and a milder maximum drawdown.


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## Argonaut

It really is the silver bullet asset allocation for low volatility and risk-adjusted returns. I think your version is a bit too Canadian, but it's okay for tracking purposes.


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## mordko

The one thing that bothers me about this Canadian version is that TSX is already full of miners, and there are lots of gold companies among the miners. Obviously their share price isn't 100% correlated to the price of gold, but there is still a strong correlation. So, by going permanent you are heavily overweight in one particular commodity and you could be exposing yourself to excessive risks - depending on what gold prices do.


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## Argonaut

Yeah, this is why my Golden Fleece portfolio is nice, because the stock portion has no gold exposure. Except the minuscule amount for like 2 companies in the S&P 500.

25% Canadian Stocks (6 or 12 Pack)
25% US Stocks (S&P 500)
25% Gold (GLD)
25% Bonds and/or Cash

Incorporates elements of the Permanent Portfolio, dividend investing, and indexing. Probably will stick with this one forever.


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## lonewolf :)

Argonaut said:


> Yeah, this is why my Golden Fleece portfolio is nice, because the stock portion has no gold exposure. Except the minuscule amount for like 2 companies in the S&P 500.
> 
> 25% Canadian Stocks (6 or 12 Pack)
> 25% US Stocks (S&P 500)
> 25% Gold (GLD)
> 25% Bonds and/or Cash
> 
> Incorporates elements of the Permanent Portfolio, dividend investing, and indexing. Probably will stick with this one forever.


 Argo like it though would go with James Turk gold money instead of GLD


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## Argonaut

lonewolf :) said:


> Argo like it though would go with James Turk gold money instead of GLD


Not sure what James Turk gold is. But ya, I like physical gold too and will buy more of that someday. It's nice to look at and the gubmint can't get their greedy hands on it.


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## james4beach

mordko said:


> The one thing that bothers me about this Canadian version is that TSX is already full of miners, and there are lots of gold companies among the miners.


I agree with these criticisms. The permanent portfolio should have global stocks, and by only using the TSX, you're right about this particular flaw with respect to gold. I actually like Argo's construction quite a bit and I agree that this is well-suited to one of those TSX un-bundling approaches, because it probably is good to avoid miners and materials for the reason mordko raises.

My variation on it looks like this, trying to stick with the 25s of the original permanent portfolio. I am actively working toward this allocation,

25% stocks (TSX portfolios_[1]_ plus S&P 500)
25% bonds (10 yr govt, self-managed, or VAB, ZDB)
25% gold (physical, MNT, CEF.A)
25% cash and GICs

_[1] Due to my tax situation I can't buy a TSX ETF so I'm trying different kinds of stock picking. I'm experimenting both with a small cap methodology and XIU unbundling similar to Argo's 6 pack. Overall my "stock" allocation will have virtually no miners or materials stocks, and I'll let the "gold" part of the permanent portfolio handle that exposure_


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## lonewolf :)

Argonaut said:


> Not sure what James Turk gold is. But ya, I like physical gold too and will buy more of that someday. It's nice to look at and the gubmint can't get their greedy hands on it.


www.goldmoney.com


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## thepitchedlinkagain

Interesting ...I've not heard of GoldMoney.....I just hold mine in physical form .....


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## james4beach

I noticed that I under-performed since the summer. You'll see in my msg #54 I showed that with the permanent portfolio, the worst decline seen since summer is -2.4%. Mine was worse and I was trying to figure out why.

I thought I'd share why I am under-performing, because it might help others pursuing this strategy

*A* - Biggest reason, my allocations are not at their ideal 25/25/25/25. I am under-weight stocks (the best performer) and over-weight bonds (one of the worst performers). Oops.

*B* - My gold component is under-performing ideal gold because of my CEF.A holding. This is due to its silver exposure and varying premium/discount; lately it is under-performing. Note however that year-to-date, CEF.A has outperformed gold, so this one can go either way.

Pretty obvious how I can fix this. I have to push my allocations towards the equal weight targets, and I'm going to be careful that CEF.A doesn't dominate my gold exposure. More ideal gold price movement can be obtained via MNT in Canada or GLD in US. My approach is to combine physical gold, MNT, CEF.A


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## mordko

I am wondering if gold is losing steam not just because of the strong dollar but also because of Modis banknote reform in India. A purely hypothetical question, I got out of CEF.A just before the election. Thinking this through, I decided there is enough exposure to gold prices via XIC.


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## mordko

Worth noting that stocks are doing ok, but it very much depends which ones. The best performers are financials and small value US. And it is beginning to feel like we are due a correction.


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## Argonaut

Gold isn't picking up steam because it still has to unwind from the bull run that ended in 2011. I think that the total wind-down will take at least a decade. Meanwhile gold will go up and down and muddle around like it did in the 80's and 90's. I like gold and the permanent portfolio, but am not in a big hurry to hit that 25% mark yet. I wager there's lots of time to wait for the next bull run, but could be wrong.


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## james4beach

Interesting to note that this year we've actually seen an unusually rough period for the permanent portfolio.

Using that synthetic reference index I came with (for tracking purposes), I'm seeing peak-to-trough decline of 2.8% in a steady fall since August. See graphic pasted below

Obviously that's still a pretty minor decline in the big scheme of things, but it's still a rough period for the PP. I interpret this as a reasonably good time to "buy the PP", *which is why I'm adding to my stock, bond, and gold positions this quarter.*


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## JohnnyFactor

I'm adding as much as I can too, but I've been looking at the Golden Butterfly all year and it's quite tempting to weight towards equities. It's the main profit driver of the PP and adds only a bit more volatility. Have you considered that variation for your own portfolio?


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## lonewolf :)

Stocks are going to be the last bull market standing, commodities, real estate & bonds are in bear markets. Confidence in government peaked with many bonds paying negative rates. US dollar is rallying as money leaves Europe DJI could see a phase transition before it crashes & burns.


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## james4beach

JohnnyFactor said:


> I'm adding as much as I can too, but I've been looking at the Golden Butterfly all year and it's quite tempting to weight towards equities. It's the main profit driver of the PP and adds only a bit more volatility. Have you considered that variation for your own portfolio?


I'm starting with the basics myself but I'm open to variations. One variation I like is Argonaut's



Argonaut said:


> 25% Canadian Stocks (6 or 12 Pack)
> 25% US Stocks (S&P 500)
> 25% Gold (GLD)
> 25% Bonds and/or Cash
> 
> Incorporates elements of the Permanent Portfolio, dividend investing, and indexing. Probably will stick with this one forever.


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## james4beach

I revised the PP index that I calculate for my benchmarking purpose. I'm computing this daily so that I can watch the behaviour of the PP methodology for a Canadian investor. My updated index is:

25% MNT - gold
25% HBB - bonds
12.5% HXT - Canada stocks
12.5% HXS - US stocks
25% cash at HISA yield

Not that I'd use these to invest in the strategy, but they're convenient as total return vehicles and let me easily compute an ongoing total return index value.


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## Killer Z

james4beach said:


> I revised the PP index that I calculate for my benchmarking purpose. I'm computing this daily so that I can watch the behaviour of the PP methodology for a Canadian investor. My updated index is:
> 
> 25% MNT - gold
> 25% HBB - bonds
> 12.5% HXT - Canada stocks
> 12.5% HXS - US stocks
> 25% cash at HISA yield
> 
> Not that I'd use these to invest in the strategy, but they're convenient as total return vehicles and let me easily compute an ongoing total return index value.


James, just curious as to what type of yield you are receiving in your HISA?


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## james4beach

For this calculation I'm using a conservative number, the interest rate on TDB8150 which is currently 0.75%.

But I'm getting higher than that in Outlook Financial (1.70%) plus new deposits special at PC Financial


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## james4beach

lonewolf :) said:


> www.goldmoney.com


Apparently the Royal Canadian Mint has an agreement with Goldmoney for purchase and transfers of gold amounts.
https://www.finextra.com/newsarticle/29933/royal-canadian-mint-joins-goldmoney-blockchain-platform

I personally would cut out the middle man and buy MNT shares, since these represent gold ownership in the Mint's vault. The fee is also lower as a result.


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## Benting

james4beach said:


> I revised the PP index that I calculate for my benchmarking purpose. I'm computing this daily so that I can watch the behaviour of the PP methodology for a Canadian investor. My updated index is:
> 
> 25% MNT - gold
> 25% HBB - bonds
> 12.5% HXT - Canada stocks
> 12.5% HXS - US stocks
> 25% cash at HISA yield
> 
> J4, you are quite young. 25% bond and 25% cash is kind of way too conservative.


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## james4beach

Benting said:


> J4, you are quite young. 25% bond and 25% cash is kind of way too conservative.


The point of the permanent portfolio is not that those are conservative, but rather the result from mixing of different asset classes with very different economic responsiveness and the combined return of the four together.


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## welsh-investor

In addition to the gold, you might want to consider introducing some other hard assets to your portfolio.


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## JohnnyFactor

Gold is in the Permanent Portfolio for it's response to inflation/interest rates, and it's currency qualities for SHTF scenarios. Other hard assets do not respond in the same way.


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## james4beach

This is a good video from National Bank (wealth management division) on the permanent portfolio, its history and fundamental motivation. There are some nice charts in the video.

https://www.youtube.com/watch?v=SIPf6Anuch0


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## JohnnyFactor

That was a great video. I was somewhat surprised they reduce gold to 20% and add 5% to the equities in the form of preferreds. I've been considering preferreds but I don't know enough about them. I understand they're not the best choice in a rising rate environment so of course I'm reluctant to jump in now.

The video lead me to another of Kevin O'Leary talking about gold. Turns out he holds 5% of his (sizable) portfolio in gold, and half of that in physical.


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## james4beach

The allocation in the video isn't a significant departure and 5% isn't a big shift. I ran a quick calculation on the last few years and their allocation does slightly worse than the equally weighted one.


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## james4beach

The first post I made showed performance of an example Canadian-centric permanent portfolio. A few of my numbers were wrong, and now I'm using more accurate total returns from iShares and Morningstar. I also forgot to rebalance the portfolios when computing the annual returns.

Here are returns for a Canadian-based PP using XIU, XBB, MNT, XSB with annual rebalancing

2006: 11.54%
2007: 7.38%
2008: 2.75%
2009: 11.93%
2010: 11.50%
2011: 4.22%
2012: 3.49%
2013: -2.93%
2014: 7.56%
2015: 0.98%
2016: 7.04%

Over these 11 years, the annual return of the permanent portfolio is 5.85% (worst year -2.9%)
In comparison, 60% XIU and 40% XBB had annual return 5.60% (worst year -16.2%)
In comparison, 100% XIU had annual return 5.75% (worst year -31.1%)

Between those different portfolio options, the permanent portfolio had the best outcome in Sequence of Return. That is, if you were a retiree living off capital, the PP gave you the best outcome over these years and left you with the most capital.

The previous criticism raised still applies to these numbers: the stock exposure here is purely Canadian. For example if you add US exposure in place of XIU here, all the numbers would go up.


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## james4beach

Here's also a simulation of portfolio withdrawals / sequence of return. Say you retired at the start of 2006 with 500 K and withdraw a constant 30 K each year. This period has seen a market crash and big recovery, so I think this is an interesting period. Here's what happens with the different portfolio types, to end of 2016:

517K - Permanent portfolio
464K - Balanced (60/40)
458K - Pure stocks (100% XIU)
392K - Pure bonds (100% XBB)

These ending values aren't just due to average performance but also sequence of return. The low volatility of the PP provides a big benefit in capital preservation during the rough years, and the portfolio doesn't dip as low as the Balanced fund.


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## JohnnyFactor

Thanks for doing up those numbers. I'm convinced more and more that the PP is an excellent portfolio. I'm re-listening to the Harry Browne Money Show. There's a lot of info on there I missed the first time around. http://www.harrybrowne.org/Archives/Archives-investment.htm


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## agent99

James,
I have good records from 2003/4 when we retired, but thought I would compare my actual numbers with your theoretical portfolios.

We have almost nothing in gold or cash. Overall portfolio is about 40% fixed income (corporate bonds/debentures and split preferreds). Equity - Very little in ETFs or Mutual funds. Mostly in Canadian stocks paying 3.5-5+% in dividends. Very little foreign or USA exposure. Only one REIT plus some exposure in one closed end fund. (Not recommending - just the way, I did it)

$500k at beginning of 2006 grew to $640k by end of 2016. Roughly maintained real value (~2.3% inflation)

Withdrawals were not constant but varied with value of portfolio and in some case special needs, like home renos. Average was $20k/$500k over that 10 year period. By withdrawals, I mean funds spent to live off and pay taxes.

Portfolio is about 1/3 unregistered (no fixed income) and 2/3 registered. 

What retirees may be interested in, is how much of the $30k withdrawal figure they have to spend after tax. This is affected by how much of portfolio is registered as well as how tax efficient their investments are. For example, holding bonds in unregistered account is not too tax efficient. Holding gold, government bonds, more growth stocks would likely have hurt our portfolio's performance. Withdrawing $30k/$500k may work but at 6% withdrawal rate is in my mind, too high. $20k/$500 would be safer. 

A more interesting 10 year period might have been 1999-2009!


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## My Own Advisor

James to me:

"My Own Advisor, I understand how one can optimize or geographically diversify the stock part of the holdings, but I'm curious why you don't like the idea of the broader diversification outside of stocks?"

I guess I don't see the big issue if a) you're willing to live with short-term volatility and b) given historically stocks beat bonds and bonds beat cash, why not have a cash wedge/buffer and keep a higher proportion of stocks?

I would be curious to see what a 50/50 split of XIU and VTI would have provided vs. the permanent portfolio over the last 10 years. 

That said, it is somewhat compelling the perm. portfolio has been able to live through a number of periods managing risk well throughout. I guess for those that do not subscribe to stocks very well long-term and just want a recipe of asset allocation - this is the best they could hope for and it will likely serve them very well. 


@agent99
You have real life experience which is invaluable when compared to theory. No doubt withdrawing measly/just $20k from a $500k equity portfolio would have only a very small chance of running out of money for an investor. $20k per year is still a lot of money!


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## agent99

My Own Advisor said:


> @agent99
> You have real life experience which is invaluable when compared to theory. No doubt withdrawing just a measly $20k from a $500k equity portfolio would have only a very small chance of running out of money for an investor.


It might be measly, but that $20k is what the 4% rule dictates. And in other threads more recent studies quoted have said that 4% is likely too much in our current low interest environment. I think a figure of 3.5% was suggested. This would mean $17,500 withdrawal per $500k. And even then, the SWR studies indicate there is still some chance of running out of money.

If investors consider $20k 'measly', then they need to aim at saving a lot more than $500k. Maybe 2-4X if they have no pension other than CPP/OAS, depending on their lifestyle, location and living expenses.


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## My Own Advisor

Sorry, $20k per year is a lot of money. I didn't mean it was insignificant. I meant it from the perspective that it seems rather "safe". 

I agree with you, people need more if no pension assuming lifestyle, location, living expenses, other factors like health.


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## james4beach

Thanks agent99 and My Own Advisor for your comments on this.



agent99 said:


> $500k at beginning of 2006 grew to $640k by end of 2016. Roughly maintained real value (~2.3% inflation)
> 
> Withdrawals were not constant but varied with value of portfolio and in some case special needs, like home renos. Average was $20k/$500k over that 10 year period.


Very nice! This is great that you have this data, and we can compare. I set up my simulation to use your parameters, 500k initial and 20k withdrawal (I realize yours wasn't constant), I get these values at the end of 2016:

60/40 portfolio: $613k
PP (all Canada): $656k

This is close to your $640k result. It appears that you outperformed XIU and preserved more capital


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## james4beach

My Own Advisor said:


> I would be curious to see what a 50/50 split of XIU and VTI would have provided vs. the permanent portfolio over the last 10 years.


Let's do it! I'm using 500k at end of 2006 (different period than the comparison with agent99), with 20k withdrawals, and adding VTI valued in CAD.

(A) all stock [ 50% XIU, 50% VTI ]
(B) balanced 60/40 [ 30% XIU, 30% VTI, 40% XBB ]
(C) permanent portfolio [ 12.5% XIU, 12.5% VTI, 25% XBB, 25% MNT, 25% XSB ]

The construction in C is very similar to my personal benchmark that I use for PP tracking, details in this post.

*10 year Results*

I attached a chart below. All portfolios end up at nearly the same final balance, but the PP has far less volatility, and _every_ year is positive. In fact the PP maintains a higher balance the whole time except in the last year.

(A) final balance $626,870
(B) final balance $617,540
(C) final balance $621,876

Articles popped up in the last couple years declaring that the permanent portfolio is dead, but I still really like what I see in this graph:


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## My Own Advisor

Great. Very interesting results. I would have guessed XIU and VTI would be higher but I would take that in another 10 years 

Thanks for that James.


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## james4beach

No problem, I'm surprised too actually. You'd think that with the tremendous performance of US stocks, that the stock portfolio must outperform the PP which is dragged down with cash.

The reason this happens is because of the presence of withdrawals. You're seeing "sequence of return risk"... when you draw money out of a portfolio (even if it's dividends) you are vulnerable to volatility, and it really hurts the portfolio balance.

Formulations like the balanced fund and permanent portfolio are greater than the sum of their parts. Adding more asset classes gets you more diversification -> reduces volatility -> creates advantages, like immunity to sequence of return risk. There is more going on than just CAGR.


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## mordko

Anything with over 30% Canadian stocks makes little sense to me. We are 3% of the world market and heavily skewed in terms of industries, so wildly uncharacteristic results are to be expected.

In particular, if you start with a high oil price point and end with a low oil price point you are just cherry picking high and low points in the cycle.

Mel Faber compares a whole range of diversified strategies in his Global Asset Allocation. Starting in 1973 and finishing in 2013 the best out of 8 strategies returned 5.67% per year in real terms. The lowest return was 4.12% per year. Remarkably close. 

Permanent Portfolio had the lowest return out of 8 diversified asset strategies over that period. In 1970s it was second best. And it did have the lowest volatility overall. 

1970s was a rather special set of conditions which is unlikely to be repeated but still... interesting experiment.


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## james4beach

The PP can really feel good at times like this -- it's rising while stocks fall! Here's a plot of total returns in 2017 so far. I'm using this PP index, with equal weight US & Canadian stock indexes.

YTD performance of both stocks and PP is identical. But look at that volatility difference!


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## james4beach

My Own Advisor said:


> Great. Very interesting results. I would have guessed XIU and VTI would be higher but I would take that in another 10 years
> 
> Thanks for that James.


It's not a bad result actually, for any of those portfolios in my graph. Starting at 500k, and withdrawing a total of 200k out of the portfolio, you still end up with about 620k in each case. Remember that if there had been NO withdrawals, the stock performance would have been the highest. The amount you withdraw from a portfolio makes a huge difference.

View attachment 14402


For very volatile portfolios (high stock exposure), large withdrawals can be very detrimental under some market conditions. When withdrawals/dividends (doesn't matter) are large-ish, _More volatility = more sequence of return risk = more likely to deplete your portfolio_

The balanced and permanent portfolios are more suitable when your intention is to draw any significant money out of the portfolio. From the simulations I've run, I'd say that above 2.5% withdrawal is the point at which you need a more diversified, lower volatility portfolio. One size does not fit all!

That's why I mentioned in the other retirement thread that someone who only needs to withdraw 2.3% might as well just put the whole thing in XIU. But it's not the same answer if you need to withdraw 4.0% -- in that case you need a less volatile portfolio.

It's also why, every few days, I say that it isn't as simple as "living off the dividends". In an all stock portfolio, if your dividends bring you 2.3% ... fine, it will last forever without depleting capital. But if your dividends are forcing 4.0% extraction from your portfolio, then there is significant risk your capital will run out. Here I'm talking about 4% initial withdrawal and increasing with inflation each year.


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## mordko

I suspect that almost any portfolio feels great so far in 2017. A diversified all stock "world" portfolio delivered 5% YTD.


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## GreatLaker

*Permanent Portfolio Discussion Forum*

Some good discussion on how to best implement it, in case you have not seen this forum.

Permanent Portfolio Discussion Forum


----------



## JohnnyFactor

Just a heads up, Questrade has started charging commission for MNT.TO trades, as of this month. Looks like I'll have to move to CGL.C.


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## james4beach

Thanks, GreatLaker!

Johnny -- you shouldn't have to trade MNT much, isn't this just one or two purchases a year? CGL.C is a far inferior fund. It only has $80 million in assets and charges 0.56% MER. There is strength in numbers... bigger funds are more likely to operate smoothly when large amounts of money flow in or out, so I always prefer larger funds.

In comparison, MNT has $500 million in assets and 0.35% fee. From my calculations it has also tracked pure gold much better. Even if it means paying a trade commission, I would prefer MNT over CGL.C.

For pure gold exposure with accurate tracking traded in CAD, the best option I see by far is MNT. Otherwise, CGL.C is a distant second, and CEF.A is a third (even though it's another favourite of mine) because of silver and premium/discount swings as mordko pointed out


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## JohnnyFactor

I purchase every two weeks from savings. Maybe it's time to rethink my contribution methods. It's just so difficult watching cash sitting there doing nothing.


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## james4beach

I have seen studies that looked at different approaches for deploying money, like accumulating for 6 months or even 1 year before purchasing/rebalancing. From what I remember, it's fine to wait 6 months before deploying money. I generally do everything at 6 month intervals.

At the very least, consider the expense difference between MNT at 0.35% and CGL.C at 0.56%. Assuming a 50K position, MNT saves you $105 in fees a year.


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## JohnnyFactor

I would rather hold on to MNT if I can. The irony is that I just opened an account with the Perth Mint. It has 7% transaction costs and 1% annual fee. Talk about the price of buying safety!


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## CPA Candidate

Back testing portfolios may be interesting diversion, but I wouldn't regard it as terribly helpful for making forward looking decisions. First, people don't actually invest like they do in back testing. All the knowledge of portfolio allocation goes out the window when you take action on "sell everything" news articles. Or when you buy stocks because....Trump. Emotions have a way of screwing up the best laid plans.

We know that actual mutual fund investors do much worse than the mutual funds themselves because investors make terrible decisions on when to buy and sell. I'd suggest reading on behavioural economic topics and come to grips with your own cognitive biases. Good investing is not in any way technical or mathematic. Excel will not help you deal with stressful situations.


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## james4beach

Very interesting CPA, thanks. I have read about this effect (how a mutual fund investor does _worse_ than the mutual fund) -- so how does one counter act these human tendencies.

Is it all about stressful situations, as you mentioned? Training oneself to not get stressed by market movements... is that the answer?

Let's say that I have a great strategy on paper, like a 60/40 globally diversified balanced fund. This is a really, really good idea on paper. How do I make sure I reap the maximum theoretical benefit from this?


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## lonewolf :)

J4B Emotions are automated value responses to ones perceptions as to ones reality as being good or bad. The first step so mind & emotions are in harmony is learn how to think to be able to judge truth from falsehood & remove that which is not true & replace it with that which is true to make the mind a powerful weapon. In order to survive man must have a way to make instant appraisals from situations he encounters. For instance if a truck is traveling @ breakneck speeds about to run over a pedestrian. Fear causes the pedestrian to lung to safety bypassing any lengthy thought process. (every emotions as a kenetic element as an imputes to act in relation to the emotion involved) If the pedestrians perception was not committed to reason & thought the truck would not threaten that which they valued they would have not have lunged to safety. Playing the market must take emotion into account you can not play the market without emotion (Energy in motion) i.e., to much money on the table can threaten that which one values if it one values their life style & losing money on table threatens it. If ones perception of the method of playing the market does not threaten that which they value, fear will not take over to play a different way.


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## james4beach

Earlier I posted historical returns for the PP with only TSX exposure. Here are yearly returns with equal weight Canadian and US stock exposure, all with TSX traded vehicles (no currency hedging). For ETFs that didn't exist back to 2006, I use theoretical values including MER, or equivalents (XBB instead of VAB). I think the yearly returns are all realistic and might even be pessimistic.

*Permanent portfolio*: 25% stock (half XIU and ZSP), 25% VAB, 25% MNT, 25% XSB
2006: 11.63%
2007: 4.83%
2008: 3.81%
2009: 9.11%
2010: 10.83%
2011: 5.90%
2012: 4.67%
2013: 0.63%
2014: 9.09%
2015: 4.59%
2016: 5.42%

CAGR 6.36% and standard deviation 3.3%


*Balanced Fund*: 60% stock (half XIU and ZSP), 40% VAB
2006: 11.30%
2007: 1.64%
2008: -13.72%
2009: 14.24%
2010: 9.35%
2011: 2.17%
2012: 7.44%
2013: 15.81%
2014: 14.22%
2015: 5.11%
2016: 9.35%

CAGR 6.67% and standard deviation 8.3%


*Graphs of annual returns*

These are both very attractive portfolios! For this 11 year period, the 60/40 balanced fund had slightly better performance by 0.31% per year. However this came with significantly higher volatility and therefore sequence of return risk. So even though the P.P had a slightly lower return, it came with much less volatility, not a single negative year, and poses much lower sequence of return risk -- it is undeniably superior if you are going to withdraw money out of the portfolio.


----------



## Belka

*Bond ETF Choices in Permanent Portfolio*

Are there any thoughts about bond choices in the permanent portfolio? Rowland and Lawson (2012) recommend ZFL or XLB in the Canadian context. In the forum, I see XGB and XBB mentioned as well.


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## OnlyMyOpinion

You might want to check out Jonathan Chevreau's article in MoneySense last month:
http://www.moneysense.ca/save/investing/best-fixed-income-etf-2017/
They discuss five FI funds: ZAG, VSB,ZDB, BXF and ZPR.


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## james4beach

Belka said:


> Are there any thoughts about bond choices in the permanent portfolio? Rowland and Lawson (2012) recommend ZFL or XLB in the Canadian context. In the forum, I see XGB and XBB mentioned as well.


I've been debating this myself. In the US version, people use long term government bonds (i.e. pure treasury bonds with over 20 years average maturity).

ZFL looks interesting and may be suitable, but I don't think XLB is a good choice because it's only 24% federal government bonds.

I'm not convinced that long maturity bonds are a requirement for the PP. In the data I posted above, I used VAB & XBB for the bond component -- those are avg 10 year exposure instead of 20+ year exposure. The results look nice to me. If you go with ZFL instead for longer maturity bonds then you will get more volatility in bad years for bonds, and only a bit more performance.

I also like that with the 10 year (VAB) exposure, you get much lower MERs.


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## Belka

It says in Rowland and Lawson that if you select an intermediate maturity bond fund (7-10 years), then you should allocate 35% to the bond fund and 15% to cash to compensate the ratio.


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## Belka

james4beach said:


> I've been debating this myself. In the US version, people use long term government bonds (i.e. pure treasury bonds with over 20 years average maturity).
> 
> ZFL looks interesting and may be suitable, but I don't think XLB is a good choice because it's only 24% federal government bonds.
> 
> I'm not convinced that long maturity bonds are a requirement for the PP. In the data I posted above, I used VAB & XBB for the bond component -- those are avg 10 year exposure instead of 20+ year exposure. The results look nice to me. If you go with ZFL instead for longer maturity bonds then you will get more volatility in bad years for bonds, and only a bit more performance.
> 
> I also like that with the 10 year (VAB) exposure, you get much lower MERs.


I would appreciate any feedback/comments on the following asset allocation:
12% XIU, 13% ZCN (Stocks)
20% MNT, 5% Physical Gold (Gold)
15% ZFL, 10% VAB (Bonds)
25% (5 yr GIC Ladder) (Cash)


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## mordko

- XIU/ZCN - same kinda thing. Chose one (or XIC/VCN). 
- You are limiting yourself to Canadian stocks. Therefore, you are missing out on the 97% of the world market. 

You are very conservative but I guess you know that.


----------



## Belka

mordko said:


> - XIU/ZCN - same kinda thing. Chose one (or XIC/VCN).
> - You are limiting yourself to Canadian stocks. Therefore, you are missing out on the 97% of the world market.
> 
> You are very conservative but I guess you know that.


Thanks for the feedback. You have me figured out.

Here is an alternate asset allocation for the stock component: 12% ZCN, 6% VTI, 7% XEF


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## james4beach

As mordko says, XIU and ZCN are redundant, just choose one. You should also widen it beyond Canada. I would add either ZSP for US exposure or XAW for US&world (pick only one of these). So you'd end up with something like XIU & XAW for your stock exposure.

The rest of it seems fine to me. It's very similar to how I'm invested. Remember to rebalance every year because part of the benefit of the PP comes from rebalancing the volatile assets.

For the GIC ladder portion, you might want to stagger them so that a GIC matures every 6 months. This will make it easier for you to rebalance.


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## mordko

Better. Now you are just missing out on Emerging Markets. Also your Canadian allocation is half of your stock portfolio. Still too high. Canada is very focused on 2-3 industries. Not enough diversification.


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## Eder

mordko said:


> you are missing out on the 97% of the world market.


In my opinion 60% of the world market is worth missing out on...


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## james4beach

The permanent portfolio is getting hit right now with simultaneous declines in stocks, bonds and gold - ouch.

I mentioned earlier that I created my own benchmark to track a PP priced in CAD. My PP index peaked at 108.57 in June, and is currently at 104.21. That's a rapid 4% decline. I'm interested to see how severe this "drawdown" gets.


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## JohnnyFactor

Yeah it's been painful. I can handle declines but everything dropping at once means there's no rebalance opportunity. On the other hand, _everything_ is on sale!


----------



## lonewolf :)

I kinda like permanent portfolio though would rather hold triple A corporate then government bonds. Also think best to set up ratios so money flow comes in for living off investments then once high enough for happy life style money should go 100% into metals maybe major currencies of each continent in case paper market crashes then when dust settles buy assets that provide income to live off of by selling off some metals.


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## james4beach

JohnnyFactor said:


> Yeah it's been painful. I can handle declines but everything dropping at once means there's no rebalance opportunity. On the other hand, _everything_ is on sale!


Well, not _everything_ is dropping. The 25% cash (or GIC) component isn't affected.

Let's see how the year ends. In 20 years here are all the years when gold was negative, and these were the PP returns in CAD. This assumes equal weight US & Canadian stocks for the stock component, XSB for the cash component, and rebalancing at the end of every year.

1997: +4.9%
1999: +3.9%
2000: +3.2%
2003: +6.1%
2004: +4.8%
2013: +0.6%

If the pattern holds, then the PP should have a positive return at year end (I hope!)


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## JohnnyFactor

I hold ZFS so my cash component has been plummeting with the interest rate activity. Last week, I saw a -1.2% drop in a single day. It's usually -0.07% or so.


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## james4beach

JohnnyFactor said:


> I hold ZFS so my cash component has been plummeting with the interest rate activity. Last week, I saw a -1.2% drop in a single day. It's usually -0.07% or so.


I would not sell any though, ZFS seems fine. As you grow your portfolio, you might also want to hold GICs as part of your cash component.

For "cash", mine is mostly in high interest savings accounts and a lesser amount in GICs.


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## james4beach

I've set up a spreadsheet to track my global asset allocation, looking across all accounts I have (chequing, savings, safe deposit box, investment accounts, RRSP, American 401k). I just found that due to tax and international reasons I need to keep things in different places.

I'm finding great clarity from this "global asset allocation" view, for which I'm using the PP allocation. For example chequing accounts and cash on hand becomes part of the PP's "cash" allocation. Ever since I started the "global asset allocation" approach, I've gotten pretty serious about implementing the PP.

I think I've gotten as close as I can get to ideal PP allocations for now. *I'm 26% stocks, 24% bonds, 23% gold, 27% cash/GIC*. That's as % of entire net worth.

I'd like to increase the gold allocation but have run out of places to put the bullion ETFs. If I end up in Toronto in the next few months, I'll buy 3-5 ounces of gold bars or coins from Scotia or TD on King St.

_- James, converting paycheques to physical gold since 2007_


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## james4beach

Maybe I should clarify, when I say "global" that's in terms of looking across everything I have, not using the word to mean international. In terms of international diversification, my cash and bonds are nearly all Canada. Stocks are split between Canada & US only (this is an approach Argonaut uses as well I think) with no currency hedging. Gold is intrinsically borderless, part of the appeal of that exposure.

For those who are curious, here are more details on investments that make up my exposures:
http://canadianmoneyforum.com/showt...pproach-quot?p=1662434&viewfull=1#post1662434


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## fplan

james4beach said:


> Earlier I posted historical returns for the PP with only TSX exposure. Here are yearly returns with equal weight Canadian and US stock exposure, all with TSX traded vehicles (no currency hedging). For ETFs that didn't exist back to 2006, I use theoretical values including MER, or equivalents (XBB instead of VAB). I think the yearly returns are all realistic and might even be pessimistic.
> 
> *Permanent portfolio*: 25% stock (half XIU and ZSP), 25% VAB, 25% MNT, 25% XSB


only issue here is *XSB* and *VAB* 

last 30 years interest rates went downwards .. bonds gave very good returns.. now interest rates are all time low .. what are the chances to get very good return from bonds?. I highly doubt in the next market crash, bonds will limit the damage like they used to , as there is only so much room for interest rate reduction.. right now BOC rate is 1%... half of the people are already feeling the pinch for just 0.5% rate increase.. so there is not much upside there.. may be another 0.5%.. so thats 1.5%.. next correction will be very interesting.. as most people in western world are getting old and govts are short on revenue and need to support these people... high RE debt will create lot of troubles in canada in next correction..


----------



## james4beach

fplan said:


> last 30 years interest rates went downwards .. bonds gave very good returns.. now interest rates are all time low .. what are the chances to get very good return from bonds?


See this page of an earlier thread:
http://canadianmoneyforum.com/showthread.php/118522-Buying-individual-bonds/page8

In addition to that, bonds offer diversification. When designing a portfolio, there is a benefit to using different asset classes which are loosely correlated (or even inversely correlated). One thing the permanent portfolio does very well is smoothing out volatility, and that effect happens because of mixing several different asset classes.



> I highly doubt in the next market crash, bonds will limit the damage like they used to


Highly rated bonds always limit damage because they simply don't fall as far as stocks. Stocks can easily fall 50%. However the maximum decline from high rated bonds (like XBB = govt and top grade corporates) is only about 16%.

Just do a quick calculation for a worst case scenario where stocks and bonds both crash to their maximum extent. Your all-stock portfolio would fall 50%. Your half stock half bond portfolio would fall 33%. Did bonds limit the damage to your capital?

And that's an overly pessimistic treatment of bonds. In such serious stock declines, some money is sure to flow into bonds. And gold. Stocks may be down sharply, but gold and bonds will not be. This is the whole idea of the permanent portfolio.


----------



## kenshin

james4beach said:


> I would not sell any though, ZFS seems fine. As you grow your portfolio, you might also want to hold GICs as part of your cash component.
> 
> For "cash", mine is mostly in high interest savings accounts and a lesser amount in GICs.


Personally i hate holding high interest savings/ GIC, mainly because i don't really care about the 1-2% return a year, it does pretty much nothing for me. Rather have it in liquid cash if its not invested in stocks. That way if i see a opportunity i can deploy it as quickly as possible to take advantage of it.


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## james4beach

Approaching the end of the year, the permanent portfolio return is looking quite solid. I described my benchmark in this earlier post, which covers US & Canadian exposure. I'm using PSA (which is a HISA fund) to benchmark the cash portion of the return, but in real life you can get higher with credit unions, XSB, or GICs.

My benchmark value a year ago was 101.88 and today it's 108.11 for a one year gain of 6.1%

That's pretty average for the permanent portfolio, since the 20 year average return is around 6%. One of the remarkable things about the PP is how steady the annual returns are, unlike other common portfolios. This year is another average and boring PP outcome... it just steadily gains value.


----------



## james4beach

Using my benchmark, the permanent portfolio's 2017 return was 5.1%

Stocks had the strongest returns this year. The rebalancing involves reducing stocks and increasing bonds and cash, while gold remains about the same.


----------



## hlpme

james4beach said:


> the permanent portfolio's 2017 return was 5.1%
> 
> Stocks had the strongest returns this year. The rebalancing involves reducing stocks and increasing bonds and cash, while gold remains about the same.


2017 is a mighty bullish year for stocks everywhere. Not surprising permanent portfolio was beaten. How did the permanent portfolio perform over a longer-term period, say, 5 to 10 years?


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## james4beach

hlpme said:


> How did the permanent portfolio perform over a longer-term period, say, 5 to 10 years?


I've calculated 20 years, using the same Canada & US stock mix and including ETF fees as well.

*PP annual return over 20 years was 5.9% per year*, standard deviation 3%
*60/40 balanced portfolio return was 6.8% per year*, standard deviation 8%
*100% stock index return was 7.3% per year*, standard deviation 15%

The big tradeoff is return vs risk/volatility. The PP returns the lowest among these but with very steady annual returns, usually within +/- 3% of that 5.9% average. This year's 5.1% return for example is very close to the long term average, just as is expected with the PP.

The 60/40 portfolio (which I usually recommend to friends & family) does well too, but annual returns are less certain or predictable. The 100% stock portfolio has the highest long term return but with very high deviations. You could even get a string of -8% returns and that's still totally normal.

... One might ask why I would go with the PP, knowing it has the lowest returns among these. Personally I really like the steadiness of annual returns and low volatility. Because I don't have job or income stability, I might start drawing down my money at any time, so I really need low volatility. Additionally the PP has enough of a cash component that I can really apply it to my entire net worth to provide the cash/liquidity I need. If I went with 60/40, I'd still have to separately keep cash around which (when you think about it) means you don't really have a 60/40 allocation.

For example say I had 400K net worth, used a 60/40 allocation, and also kept 50K cash/savings which is about what I'd need given my lack of job security. Although I might say I'm invested in 60/40, the allocation would actually be: 13% cash, 52% stocks, 35% bonds. The 20 year return of this allocation declines to 6.0%, about the same as the permanent portfolio.

In other words the PP lets me apply a total asset allocation to all my assets, which I like for its simplicity and elegance. I know my true overall asset allocation and it automatically satisfies my liquidity and cash needs at the same time.


----------



## fplan

james4beach said:


> *I'm 26% stocks, 24% bonds, 23% gold, 27% cash/GIC*. That's as % of entire net worth.
> 
> 
> _- James, converting paycheques to physical gold since 2007_


you keep all cash and physical gold will be outside of TFSA/RRSP.. stocks in TFSA and bonds in RRSP/401K .. is this correct? when you sell physical gold, how will you report/pay taxes on the gains?


----------



## hlpme

Thanks for the reply. I don't use permanent portfolio personally but I can see its attraction for retirees despite the lower returns. If I have to recommend an investment strategy to my retired parents, PP would be at the top of the list.

Retirees should be enjoying the last years of their lives and should not deal with too much stress. So, the lower volatility is a big positive. Furthermore, as you mention, the cash component is certainly relevant for them since they no longer have an income. Drawing down cash is inevitable due to living expenses. High returns are not so relevant since the main priority should be to have enough to live and not generate lots of returns since ... who knows, when a person is old, he can drop dead pretty abruptly.

One concern I have about PP is that bonds and stocks have been correlated in past years. When the downturn comes, both may have big falls at the same time. 



james4beach said:


> I've calculated 20 years, using the same Canada & US stock mix and including ETF fees as well.
> 
> *PP annual return over 20 years was 5.9% per year*, standard deviation 3%
> *60/40 balanced portfolio return was 6.8% per year*, standard deviation 8%
> *100% stock index return was 7.3% per year*, standard deviation 15%
> 
> The big tradeoff is return vs risk/volatility. The PP returns the lowest among these but with very steady annual returns, usually within +/- 3% of that 5.9% average. This year's 5.1% return for example is very close to the long term average, just as is expected with the PP.
> 
> The 60/40 portfolio (which I usually recommend to friends & family) does well too, but annual returns are less certain or predictable. The 100% stock portfolio has the highest long term return but with very high deviations. You could even get a string of -8% returns and that's still totally normal.
> 
> ... One might ask why I would go with the PP, knowing it has the lowest returns among these. Personally I really like the steadiness of annual returns and low volatility. Because I don't have job or income stability, I might start drawing down my money at any time, so I really need low volatility. Additionally the PP has enough of a cash component that I can really apply it to my entire net worth to provide the cash/liquidity I need. If I went with 60/40, I'd still have to separately keep cash around which (when you think about it) means you don't really have a 60/40 allocation.
> 
> For example say I had 400K net worth, used a 60/40 allocation, and also kept 50K cash/savings which is about what I'd need given my lack of job security. Although I might say I'm invested in 60/40, the allocation would actually be: 13% cash, 52% stocks, 35% bonds. The 20 year return of this allocation declines to 6.0%, about the same as the permanent portfolio.
> 
> In other words the PP lets me apply a total asset allocation to all my assets, which I like for its simplicity and elegance. I know my true overall asset allocation and it automatically satisfies my liquidity and cash needs at the same time.


----------



## james4beach

fplan said:


> you keep all cash and physical gold will be outside of TFSA/RRSP.. stocks in TFSA and bonds in RRSP/401K .. is this correct? when you sell physical gold, how will you report/pay taxes on the gains?


My storage places aren't ideal because of US tax complications and a small RRSP. My bonds are non-registered, but I've made this a bit more tax efficient by using low coupon discount bonds. If you have to do something similar, take a look at ZDB which is a discount bond ETF appropriate for non registered.

I'm currently gaining more 401(k) space and am putting more bonds into that, though.


----------



## james4beach

hlpme said:


> One concern I have about PP is that bonds and stocks have been correlated in past years. When the downturn comes, both may have big falls at the same time.


I share that concern, but the PP will still do better than 60/40 in that scenario. If there are simultaneous bear markets in stocks and bonds, the balanced funds will do very badly.


----------



## DavidW

I often see messages to drawdown a portfolio in retirement, not just here as this message is provided in many places on the internet. As an individual who won't be around forever it always seemed like planning to fail to me. Many companies live far longer than a person, how old is the Hudson Bay Company? It seems like planning to reach a point where portfolio returns can provide a budget one could live on would be a better plan. Pension plans try to invest this way. Knowing you can drawdown if necessary doesn't mean you should plan that way. What are your thoughts are on this perspective?

I think encouraging or enforcing drawdown of a portfolio, which should be an emergency measure, by design is not good risk management. Unplanned expenses do arise and having some rainy day savings set aside from the plan seems reasonable to me.


----------



## james4beach

DavidW said:


> It seems like planning to reach a point where portfolio returns can provide a budget one could live on would be a better plan.


It sounds like you're saying, one should plan a portfolio that has sufficiently high returns to fund all the retirement spending. In other words a larger stock allocation, with higher returns, can pay for the anticipated expenses without having to deplete savings.

Yes it's true that pension plans and sovereign wealth funds invest like this, but they have much longer time horizons. Pension plans can take 100 year horizons, which is very different from us mere mortals. Over 100 years they are virtually guaranteed to get high real returns with heavy stock allocations.

But that's very different from one of us. We could easily see 15 years of poor stock returns, followed by 15 years of strong rebound. Due to "sequence of return risk", your stock portfolio can be destroyed by a string of poor returns as you take money out of it during chronic lows. Pension plans have time to recover, and new inflows from participants. We mortals do not have this.

There's no question that 100 year stock returns, or 30 year stock returns, are probably going to be great. But that doesn't do a retiree any good if they are living off their portfolio when a 10 or 20 year weak period hits (e.g. 1930-1942, or 1965-1982). *A stock portfolio will do very badly, and rapidly deplete, if the retiree has the misfortune of hitting a 10-20 year stretch like that.*

Here's a numerical demonstration using the Portfolio Visualizer tool linked here.

If you do a portfolio simulation from 1982-2017, with 1M, in 100% US stocks, withdrawing 50K a year with inflation adjustment, you end up with an impressive 25M today. This is the way people usually think of stock returns and conclude that high stock allocations are a good idea because the return is greater than what's extracted.

But it's deceptive. Do the same simulation from 1972-2017. *Instead of growing to 25M, the portfolio depletes to $0 by 1995.*

Why such different outcomes? The returns before 1982 were poor and caused irreparable harm to the portfolio. The average long term return was great, but this didn't help the retiree. This is an illustration of sequence of return risk, which is a very significant danger for anyone who is living off a portfolio.

Now adjust the same simulation to use the permanent portfolio: 25% US stocks, 25% 10-year treasury bonds, 25% cash, 25% gold. Now you'll see that this retiree's money lasts the full 45 years without depleting. The counter intuitive thing here is that "living off a portfolio" worked out much better with the permanent portfolio, despite its significantly lower long term return.

This is a great illustration of sequence of return risk and the real danger of volatility when living off capital. Stock market returns are high, but they are very volatile. This volatility is much more dangerous than commonly believed.

A less volatile portfolio that has a lower return can actually make your capital last longer. That's the key message. It's a very surprising result, but all you have to do is run some historical simulations to convince yourself. Planners recommend 60/40 balanced allocations for the same reason. *You don't hold bonds/gold for their high returns*. You hold them to dampen volatility because less volatility --> less sequence of return risk --> less danger of total portfolio collapse during a bad stretch --> happier retiree.


----------



## hlpme

Hi james4beach,

I have a suggestion to tweak the permanent portfolio. Hoping to have your input on my suggestion. Replace gold component with an inflation-linked security like TIPS (Treasury Inflation Protected Securities) to at least earn an income. The purpose of gold is to have something that protects against inflation. TIPS serves this purpose as well with the advantage that it provides an income which gold does not. Furthermore, there is storage cost associated with gold. I do not see any fundamental reason why gold has to go up with inflation. I believe gold went up during the inflationary 1970s because gold was currency before President Nixon removed U.S from the gold standard. People trusted gold then. Today, the sentiment with gold is no longer as strong and the correlation of gold with inflation may not be as strong as 1970s should gold rear its ugly head again. TIPs is directly pegged to inflation. On that count, the correlation with inflation is more certain.


----------



## DavidW

james4beach said:


> It sounds like you're saying, one should plan a portfolio that has sufficiently high returns to fund all the retirement spending. In other words a larger stock allocation, with higher returns, can pay for the anticipated expenses without having to deplete savings.
> 
> Yes it's true that pension plans and sovereign wealth funds invest like this, but they have much longer time horizons. Pension plans can take 100 year horizons, which is very different from us mere mortals. Over 100 years they are virtually guaranteed to get high real returns with heavy stock allocations.
> 
> But that's very different from one of us. We could easily see 15 years of poor stock returns, followed by 15 years of strong rebound. Due to "sequence of return risk", your stock portfolio can be destroyed by a string of poor returns as you take money out of it during chronic lows. Pension plans have time to recover, and new inflows from participants. We mortals do not have this.
> 
> There's no question that 100 year stock returns, or 30 year stock returns, are probably going to be great. But that doesn't do a retiree any good if they are living off their portfolio when a 10 or 20 year weak period hits (e.g. 1930-1942, or 1965-1982). *A stock portfolio will do very badly, and rapidly deplete, if the retiree has the misfortune of hitting a 10-20 year stretch like that.*
> 
> Here's a numerical demonstration using the Portfolio Visualizer tool linked here.
> 
> If you do a portfolio simulation from 1982-2017, with 1M, in 100% US stocks, withdrawing 50K a year with inflation adjustment, you end up with an impressive 25M today. This is the way people usually think of stock returns and conclude that high stock allocations are a good idea because the return is greater than what's extracted.
> 
> But it's deceptive. Do the same simulation from 1972-2017. *Instead of growing to 25M, the portfolio depletes to $0 by 1995.*
> 
> Why such different outcomes? The returns before 1982 were poor and caused irreparable harm to the portfolio. The average long term return was great, but this didn't help the retiree. This is an illustration of sequence of return risk, which is a very significant danger for anyone who is living off a portfolio.
> 
> Now adjust the same simulation to use the permanent portfolio: 25% US stocks, 25% 10-year treasury bonds, 25% cash, 25% gold. Now you'll see that this retiree's money lasts the full 45 years without depleting. The counter intuitive thing here is that "living off a portfolio" worked out much better with the permanent portfolio, despite its significantly lower long term return.
> 
> This is a great illustration of sequence of return risk and the real danger of volatility when living off capital. Stock market returns are high, but they are very volatile. This volatility is much more dangerous than commonly believed.
> 
> A less volatile portfolio that has a lower return can actually make your capital last longer. That's the key message. It's a very surprising result, but all you have to do is run some historical simulations to convince yourself. Planners recommend 60/40 balanced allocations for the same reason. *You don't hold bonds/gold for their high returns*. You hold them to dampen volatility because less volatility --> less sequence of return risk --> less danger of total portfolio collapse during a bad stretch --> happier retiree.


It sounds like you are saying the only way to get returns is to sell your assets. And that sounds like a recipe for encouraging emotional trading. Yes the '30s were not a good period for stock prices or dividends, I do not have any references for prices themselves in that period. Both the periods you reference had a period of rising interest rates, who benefits from rising interest rates? A bank stock that goes down 10% in a year does not become a bad investment because its current value has a recent price drop. When relying on trading for total return less attention can be paid to earnings quality and multiples but involves more volatility in emotions and prices.

During the second period you mentioned there were a number of companies that continued to increase dividends yearly, Coca-Cola being but one example. I put more emphasis and focus on obtaining returns through dividends. It helps remove the emotions from managing the portfolio, so I sell an investment when I think it is time to sell or to improve portfolio strength when I find a better investment. I don't have the same total return expectations for a high yielding or fixed investment that I do for a company paying 30% of consistent and growing earnings as a dividends. 

I haven't read any books on behavioral econonomics but just from how the classification sounds one could say it has been around since at least the '30s. As we are not on a gold standard we need to have some planning for dealing with inflation and I see few options for this available to the average person, especially those without a pension from the government which is still most people. I'm not an advocate for returning to the gold standard and think the current money system has a legitimate reason to exist, I just see unhelpful utilization and infrastructure development of the system. Gold equities did not do well during the financial crisis, I had some, though physical gold did continue its existence during that time and was still available to provide something to trade for goods with if the system had disappeared - so I view it as insurance. I don't think this insurance will be need in my lifetime though I still have a little. I also have a little fixed income via selected preferred shares, they aren't the flavor of the day or the main interest for my portfolio construction but thought it was good to have some.

If one of those extended periods of economic weakness you mention happens I think I would prefer to have a method of return generation, portfolio assets, that meets my expense requirements. Not having to sell those assets to accommodate such a period reduces the emotion over how long the period will last or the current value - I don't think that emotion should ever completely disappear as the environment is always changing.


----------



## james4beach

DavidW said:


> During the second period you mentioned there were a number of companies that continued to increase dividends yearly, Coca-Cola being but one example. I put more emphasis and focus on obtaining returns through dividends.


Dividends do not save the day, according to historical simulations. Dividends are just part of the total return and the total return was weak.


----------



## james4beach

hlpme said:


> I have a suggestion to tweak the permanent portfolio. Hoping to have your input on my suggestion. Replace gold component with an inflation-linked security like TIPS (Treasury Inflation Protected Securities) to at least earn an income.


The Canadian equivalent would be real return bonds, I think. The idea doesn't appeal to me. The problem I see is that RRBs are bonds, which means a heavier concentration in the same asset class. Gold is unambiguously a different asset class, with different characteristics.

A key appeal of the PP for me is the diversification between dissimilar asset classes.


----------



## hlpme

I have always wondered why doesn't the permanent portfolio include real estate in the portfolio. This asset class is probably the most popular among the rich. Quite strange that real estate is excluded from the permanent portfolio while gold which yields zero income is.


----------



## My Own Advisor

I suspect no RE because of the real returns it provides long-term. I could be wrong of course, since over the last decade RE has been flying in some CDN and U.S. cities.


----------



## james4beach

Well and RE isn't exactly liquid. Certainly a great holding to have, great asset diversification, but I think the permanent portfolio (as I understand it) is meant to be a strategy for managing a portfolio of $ using liquid instruments.

If you mean REITs however, these correlate strongly with stocks so I don't think they offer diversification vs stocks. The point of the 4 asset classes in the PP is to bring diverse assets into a mix

By the way, since the inception of my PP index for tracking purposes (about 2 years ago) I'm seeing 5.0% annualized return in PP.


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## james4beach

Criticize it for its gold component... but the permanent portfolio really does smooth over volatility. At the moment (today)

100% stocks: down -1.6%
60/40 balanced: -1.0%
Permanent portfolio: 0.0%

I never lose sleep over it.


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## GoldStone

james4beach said:


> Criticize it for its gold component... but the permanent portfolio really does smooth over volatility. At the moment (today)
> 
> 100% stocks: down -1.6%
> 60/40 balanced: -1.0%
> Permanent portfolio: 0.0%
> 
> I never lose sleep over it.


You piqued my interest so I decided to take another look at this magic permanent portfolio.

I ran the numbers through Norman Rothery's asset mixer:

http://www.ndir.com/cgi-bin/downside_adv.cgi

I used this asset mix for Permanent Portfolio:

25% Short Canadian Bonds
25% Long Canadian Bonds
25% Stocks (12.5% TSX Composite, 12.5% S&P 500)
25% Gold

I used this asset mix for 60/40 Portfolio:

40% All Canadian Bonds
15% TSX Composite
30% S&P 500
15% EAFE

I used this asset mix for 75/25 Portfolio:

25% All Canadian Bonds
25% TSX Composite
25% S&P 500
25% EAFE

Here's the comparison going back to 1980 (38 years).

*CAGRs*



Code:


          Permanent    60/40     75/25

 5 years      5.55%   11.16%    11.91%
10 years      6.71%    7.11%     6.82%
15 years      7.13%    7.28%     7.74%
20 years      6.78%    6.43%     6.49%
25 years      7.61%    8.34%     8.47%
30 years      7.50%    8.72%     8.50%
35 years      8.07%   10.05%    10.15%
38 years      8.24%   10.34%    10.32%

*Growth of $1,000 investment*



Code:


          Permanent    60/40     75/25

 5 years     $1,310   $1,697    $1,756
10 years     $1,915   $1,988    $1,933
15 years     $2,813   $2,871    $3,057
20 years     $3,717   $3,478    $3,513
25 years     $6,254   $7,414    $7,631
30 years     $8,760  $12,283   $11,547
35 years    $15,110  $28,549   $29,499
38 years    $20,296  $42,107   $41,809

20 years is the only period where PP is ahead of the pack. The period starts in 1998, near the top of a major stock market bubble. Even then, 60/40 and 75/25 are not far behind.

The longer the period, the less attractive PP looks. Note the dollar differences in the last row. 60/40 investor ended up twice as rich as PP investor ($42K vs $20K). 

My conclusion: you pay DEARLY for your aversion to volatility.


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## james4beach

I agree that this reduced volatility comes at the cost of returns. However, for people who are vulnerable to sequence risk in the case of withdrawals (as I am) it's not purely about returns. There's a big benefit from reducing volatility and achieving steady returns.

Peace of mind is one benefit. Another is the knowledge that my returns are not tied to bull/bear phases in the stock market. I absolutely hate the idea of curtailing my spending or activities once we enter bear phases. For example, I'm trying to book a vacation right now. It's going to cost a few grand. If the stock market is weakening and entering a bearish phase now, a stock-heavy investor would rally wonder if now is the time to blow a few grand. But for me, it makes no difference. My investment returns are detached from the stock phases.

I'm also not terribly impressed by the fact that 60/40 and 75/25 did radically better in the time periods that include 1982-2000, when North American markets had probably the greatest bull market in history. It was simultaneously a strong bull market for stocks and bonds, the optimal conditions for 60/40 and 75/25.

I view 1982-2000 as a historical anomaly, not the norm. Trying to forecast into the future, I would rather spread my bet across a wider asset allocation -- the PP -- than assuming that conditions like 1982-2000 will continue for the next 30 years.


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## GoldStone

james4beach said:


> I agree that this reduced volatility comes at the cost of returns. However, for people who are vulnerable to sequence risk in the case of withdrawals (as I am) it's not purely about returns. There's a big benefit from reducing volatility and achieving steady returns.


I thought you were in your thirties and gainfully employed? So I'm not sure why you are vulnerable to sequence of returns risk. But fair point in general.




james4beach said:


> Peace of mind is one benefit. Another is the knowledge that my returns are not tied to bull/bear phases in the stock market.


PP returns are tied to bull/bear phases in long bonds and gold.

Gold had a major bull market from 2001 to 2011. But gold bull doesn't hold a candle to the bull market in long bonds. Long bonds are at the tail end of a 40-year never-to-be-seen-again bull. 30 year treasury rates peaked at 15% in 1981. They have been falling ever since. As you know, that's a major tailwind for long bonds. Long Canadian bonds compounded at a rate of 10.22% since 1980. Do you think you are going to see that kind of compounding in the next few decades? I think you will be very lucky to get half of that.




james4beach said:


> I'm also not terribly impressed by the fact that 60/40 and 75/25 did radically better in the time periods that include 1982-2000, when North American markets had probably the greatest bull market in history. It was simultaneously a strong bull market for stocks and bonds, the optimal conditions for 60/40 and 75/25.


See what I just wrote about long bonds. PP had a strong allocation to long bonds, unlike 60/40 and especially unlike 75/25. Yet PP couldn't stay competitive.




james4beach said:


> I view 1982-2000 as a historical anomaly, not the norm. Trying to forecast into the future, I would rather spread my bet across a wider asset allocation -- the PP -- than assuming that conditions like 1982-2000 will continue for the next 30 years.


Long bond performance in the last 40 years is also a major anomaly. More so than the stock market, in my opinion.


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## james4beach

GoldStone said:


> I thought you were in your thirties and gainfully employed? So I'm not sure why you are vulnerable to sequence of returns risk. But fair point in general.


One reason is that I don't have job security; I'm more like a consultant. I am gainfully employed at the moment but in my employment history, there have been several periods where my income suddenly stopped and I had to live off savings.

The second reason is that I foresee several large expenses in the near future, within 10 years. One or more of the following: taking courses for additional training/degrees, having a child, buying a house, starting my own business.

With my "under 10 year time horizon" I don't feel that high stock allocations are suitable for me. I wish I was in the kind of situation where I could just leave my investments alone for the next 30 years, but that's just not my life.

These are the reasons I seek the low volatility and steady returns of the PP. It still gives me some return, and reduces the chance of very unfortunate market returns before I suddenly need to withdraw huge amounts from my investments for one of the above needs.


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## RBull

Pretty interesting comparison Goldstone. Good research and some vauable points. I agree there is a huge loss for volatility aversion.


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## james4beach

RBull said:


> Pretty interesting comparison Goldstone. Good research and some vauable points. I agree there is a huge loss for volatility aversion.


There's definitely some performance loss for volatility aversion, but I'm not sure how much overall. I crunched the numbers for the last 20 years and based on index ETFs with a Canadian focus, the underperformance of the PP vs a 60/40 fund was pretty mild, something around <1% annualized.

And 60/40 has benefitted just as much from the simultaneous bull market in stocks and bonds. If we presume that bonds enter a multi-decade bear market, the PP (25% bonds) still has less exposure to bonds than a 60/40 portfolio.

By the way as much as I like the PP, I still think that 50/50 or 60/40 are also great allocations. I would happily use any of these.


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## james4beach

While I'm sticking with the original permanent portfolio for now (25% stocks, 25% bonds, 25% gold, 25% cash) I'm thinking of shifting it in the coming years. Partly it's a concern about the cash component. My current 25% cash works fine but as my net worth grows, this is just too much cash. After asking around CMF to learn how others do this, I've decided to switch, eventually, to a "cash + asset allocation" scheme where immediate living expenses or emergency cash is kept separate from the asset allocation.

For example, the typical investor would have: cash + 60/40/0

Besides moving the cash out of the asset allocation, I'm also considering some other changes. I like the risk parity concepts from Ray Dalio. This line of thought has brought me to think that instead of using equal weights, the highly volatile classes (stocks & gold) should be a smaller proportion than bonds. Currently I am experimenting on paper with 30% stocks, 50% bonds, 20% gold. These proportions reflect the asset class volatilities, in that gold is the most volatile, stocks a little less volatile, and bonds significantly less volatile. This allocation is also similar in principle to a 50/50 allocation.

I have data for Canadian ETFs including estimated performance in previous years taking into account MERs. For "stocks" I use XIU + ZSP which provides a mix of Canada and unhedged S&P 500 that includes significant international/multinational exposure. Bonds are XBB. Gold is MNT or CGL.C, all in CAD.

For the 21 years of data I have, 1997-2017, here is the compound annual growth rate (cagr) for various allocations, along with standard deviation (stdev) and the largest annual difference between best and worst year (min-max).


Stocks, Bonds, GoldCAGRStdevMin-Max80 / 20 / 07.2%11.0%42.9%60 / 40 / 06.8%8.0%32.7%50 / 50 / 06.6%6.6%27.6%30 / 50 / 206.3%3.3%10.5%

However, keep in mind that we've had incredibly strong stock performance in the last few years. The 80/20/0 allocation has the best return when stocks do well, but the return drops significantly in bad years. The volatility is extremely high, with an incredible 43% spread between best and worst years.

Once I consider more moderate periods for stocks such as 1997-2012 (that's 15 years), the two allocations I like the most are *50/50/0 and 30/50/20* which have about the same annual return. These provide the steadiest annual returns across all 21 years. Steady returns and low volatility are important for anyone living off their capital, as I do at times.

Note as well that 30/50/20 is the only one of these allocations where the standard deviation keeps the annual return above zero. Statistically this means that it's the _most likely to produce positive returns most years_. This isn't a topic that comes up too often in investing, but I think this is very useful for investor's psychology. Personally I would rather see consistent positive returns year to year, even if it means a lower CAGR, within reason.


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## james4beach

I keep doing more research on this so I wanted to share. What's fascinating about this 30/50/20 allocation, which I derived based on Canadian performance data, is that it's extremely similar to the All Weather portfolio. It's kind of encouraging that I used a different country's performance figures and my own line of reasoning, but ended up at identical allocations to Ray Dalio's.

I also think my way, using XIU ZSP XBB MNT, is a better diversified and more straightforward implementation than the All Weather.


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## james4beach

These alternative asset allocations shined yet again in 2018. Here is how two variants performed using some ETFs for the calculations

*Permanent Portfolio* (25% XIU+ZSP, 25% XBB, 25% MNT, 25% PSA)
2018 return: +1.6%
Yet another positive year. While stocks did poorly, gold did great (up 5.9%), and bonds/cash were positive too.

*Canadian All Weather* (30% XIU+ZSP, 50% XBB, 20% MNT)
2018 return: +1.1%
Also positive. Same concept.

It's true that these allocations are expected to have lower returns than 60/40 over the long term, but I still prefer these for their superior diversification and steadier returns. It was so nice seeing my wealth remain steady during the turmoil of the last few months. I've now separated "cash" from my investment allocations and I pretty much use the All Weather formula.

Have I convinced anyone to add some gold to their asset allocation?


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## fireseeker

james4beach said:


> Have I convinced anyone to add some gold to their asset allocation?


Yes. I dropped my cash allocation from 10% to 5%, replacing it with gold. As a contrarian, I was partly motivated by its beaten-down status. But I have been intrigued and informed by your postings about Permanent and All-weather.
Thanks!


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## hfp75

james4beach said:


> Have I convinced anyone to add some gold to their asset allocation?


I've been at 15% for a while now....


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## GalacticPineapple

james4beach said:


> Have I convinced anyone to add some gold to their asset allocation?


Yes. My TFSA is 1/3 XAW, 1/3 VAB and 1/3 MNT. You are actually the sole reason I started investing in physical gold (don't let your head get too big now). Overall MNT is about 5 percent of my net worth.


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## james4beach

Oh, neat! Don't worry it won't go to my head and I don't want to be blamed either when gold (eventually) tanks!

I'm just endorsing expanding the asset allocation to a mix of stocks+bonds+gold. There will certainly be periods where one of these assets does terribly.


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## james4beach

The flip side of all this is that when the stock market does very strongly, you'll underperform -- which is the natural consequence of making a diversified bet across several assets instead of a focused bet solely on stocks.

For example, yesterday stocks cratered and the all weather mix was about NIL change (much better than stocks). Today stocks are soaring and the all weather mix is again nil change (much worse than stocks).

Now imagine that stocks rallied all year... the more diversified portfolio will, of course, do poorly in comparison.


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## humble_pie

james4beach said:


> These alternative asset allocations shined yet again in 2018. Here is how two variants performed using some ETFs for the calculations
> 
> *Permanent Portfolio* (25% XIU+ZSP, 25% XBB, 25% MNT, 25% PSA)
> 2018 return: +1.6%
> Yet another positive year. While stocks did poorly, gold did great (up 5.9%), and bonds/cash were positive too.



wondering where & how you managed to buy PSA?

rob carrick had an article last summer about how all the brokers are blocking purchases of PSA (it's a high-payout HISA) because they want to force their clients to buy the in-house HISA product

also wondering why so much PSA? were you not the cmffer who posted grave doubts about possible insolvent scenarios for this ETF when i first mentioned it a few monhs ago, as best i can recall?

.


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## james4beach

humble_pie said:


> wondering where & how you managed to buy PSA?


I'm not using PSA myself, just used it to get a benchmark for "cash" in the permanent portfolio.

Here's what I actually hold in my 50% fixed income portfolio (All Weather): individually held government bonds, GICs, HISAs, and XBB.


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## humble_pie

james4beach said:


> I'm not using PSA myself, just used it to get a benchmark for "cash" in the permanent portfolio.
> 
> Here's what I actually hold in my 50% fixed income portfolio (All Weather): individually held government bonds, GICs, HISAs, and XBB.




what, you mean the PP perm portf is only an imaginary thing? not even a synthetic derivative thing?

how is it fair to readers to diss PSA as too risky, then load it into 25% of a fictitious portfolio in order to claim a higher fictitious result as achieved by Yours Truly

after all, once we cross the line into pure fiction, even the poor old pie could probably cook up a glittering portfolio

.


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## james4beach

humble_pie said:


> what, you mean the PP perm portf is only an imaginary thing? not even a synthetic derivative thing?
> 
> how is it fair to readers to diss PSA as too risky, then load it into 25% of a fictitious portfolio in order to claim a higher fictitious result as achieved by Yours Truly
> 
> after all, once we cross the line into pure fiction, even the poor old pie could probably cook up a glittering portfolio
> 
> .


It's a model portfolio (like a couch potato portfolio). I just chose something convenient to calculate the cash return, but you're right, PSA gives a higher return than the ISA instruments and could over-state the overall return. Because interest rates changed during the year I don't know how to measure the resulting cash % return.

I don't hold the permanent portfolio myself. A few months ago I separated out the cash component and no longer call that part of my investment allocation. But that doesn't mean someone can't hold the "permanent portfolio".

Viable options for their cash component would be ISAs such as TDB8150, the PSA fund (if they can buy it), or BMO's ZST


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## james4beach

Revising the following. humble_pie points out it may not be fair to use PSA for the cash component, so let's assume TDB8150 or similar ISA instead. Using one of the threads at CMF, I calculated an average interest rate of 1.23% for the ISAs over the year.

*Permanent Portfolio* (25% XIU+ZSP, 25% XBB, 25% MNT, 25% TDB8150)
2018 return: +1.5%

That brings the return down by 0.1%


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## humble_pie

high-yielding PSA itself may not be quite fair since we don't know of any broker that will allow its purchase (there may be some; we just haven't heard of em)

but on the other hand an enterprising HISA hound dawgger could easily navigate his cash/HISA funds around selected online financial institutions to obtain a CDIC insured rate of return that would be higher than the big green's 8150. IMHO it all depends on how big that wedge of cash is. A party with more than $100k should be willing to e-sprint.

jas4 you have so many portfolios i can't keep up! originally there were the bond & the 10-pack portfs, IIRC. Next you added a low-div portf. Now there's a permanent portf plus an all-weather portf, although they resemble each other. 

Are you saying that these latter are virtual portfs only, which you maintain for reference purposes?

of them all, i believe i like the 10-pack best. Isn't it just an elaboration of the original 5-pack, in which you select the 10 biggest positions in XIU & re-balance every quarter (sorry i may not have all the micro-details quite right but i think i've got the drift) 

did you not recently post that your 10-pack is performing slightly better than XIU, which is exactly what i would have expected. As argo used to say with the 5-pack, when it comes to the TSX, an excellent long-term strategy is to just hold the most successful stocks while sidestepping the shakier small stuff.

IIRC you've also recently mentioned that your low-div portf has been underperforming the TSX. Again, that could have been expected. An issue here is likely to be not so much your choices as portf manager but rather the tiny number of small cap holdings - only 5 or 6 IIRC. These are far more volatile than core TSX seniors; so if one out of the 5 goes wonky then the whole portfolio suffers badly. Conversely if one out of the 5 rises like a comet, the whole portf will soar faster & farther than a big-10 or XIU type of cluster could ever go.

my tentative conclusion is that, when working with small & micro caps, a significant amount of diversification works better. Possibly one should have at least 20-25 micros. Whew! that's one aitch of a lot of work. Easier, probably, to buy a top-performing managed small cap fund.

.


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## james4beach

humble_pie, yes I track many things. The Permanent and All Weather I posted here (combination of ETFs) is for reference and benchmarking purposes so they are virtual in that respect. But the allocations are the important part. I use the latter to benchmark myself. Here's how my real life investments break down.

Cash is aside from everything else. This is high interest savings & ISA. _Before_ I separated these out, I was using the permanent portfolio. Since separating the cash out, I transitioned to all-weather.

I don't use the permanent portfolio any more. Just sharing it because it was how I got here.

Everything else, all my investments, are allocated according to what I'm calling all-weather: 30% stocks, 50% fixed income, 20% gold. These are the overall target allocations.

Stock component is _mostly_ my 5 pack , my lowdiv portfolio, US index funds, and then a little market timing element that I don't talk much about because I'm a bit embarrassed about trying to time the market.

Fixed income component is a big bond portfolio consisting of GICs + govt bonds, all non-registered, plus some XBB in my RRSP. I'm just thrilled with all of these.

Gold is some IAU in my US accounts, MNT in Cdn accounts, and some shiny pieces of gold.


So yes I realize it all looks pretty complicated, but it satisfies my tax needs in both US & Canada (and I file in both) and is pretty tax efficient, no small feat considering the dual-country optimization neeeded. It's not that much work either. The 5 pack is passive and barely involves any trades. Lowdiv involves some work every 6 months. The market timing is computerized and informs me at its leisure. The bond portfolio isn't much work as every instrument is held to maturity.

I do not literally hold these ETFs that I posted in my suggested benchmarks, but I do exactly follow the % allocation for each asset class. I also track myself against the benchmark and so I can say that what I'm doing is more or less "equivalent" to the ETF benchmark that I suggested.

humble, as per modern portfolio theory, I operate on the basis that the key decision, and most of the return, is due to the asset allocation. The fact I swap out XIU for (5 pack + lowdiv) shouldn't be a big deal, assuming I do things properly. I would just as happily hold XIU instead. Of course I am hoping that I can outperform this with my choices but I realize I may not... _most likely I'll have some fun along the way and probably end up with a return very similar_ to the all-weather virtual model portfolio I posted here.

The asset allocation targets also provide all the guidance I need. December rolled around, so looking (ex cash) at my allocations, I saw that I'm low on stocks and high on gold. So I sold some gold and added more stocks.


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## james4beach

Thought I should reply more directly to your questions,



humble_pie said:


> Are you saying that these latter are virtual portfs only, which you maintain for reference purposes?


Yes. Nothing to maintain here really, just a mix of ETFs for reference and benchmarking. A condensed asset allocation view of my broader mix of investments.



> of them all, i believe i like the 10-pack best. Isn't it just an elaboration of the original 5-pack, in which you select the 10 biggest positions in XIU & re-balance every quarter


Thanks. That's about right yes. For 5 chosen sectors, the 2 biggest positions in XIU from each, rebalanced annually to equal weights.



> did you not recently post that your 10-pack is performing slightly better than XIU, which is exactly what i would have expected. As argo used to say with the 5-pack, when it comes to the TSX, an excellent long-term strategy is to just hold the most successful stocks while sidestepping the shakier small stuff.


I calculated with the 5 pack (1 biggest XIU position in each of 5 sectors) and yes, it was outperforming.



> IIRC you've also recently mentioned that your low-div portf has been underperforming the TSX. Again, that could have been expected. An issue here is likely to be not so much your choices as portf manager but rather the tiny number of small cap holdings - only 5 or 6 IIRC. These are far more volatile than core TSX seniors; so if one out of the 5 goes wonky then the whole portfolio suffers badly. Conversely if one out of the 5 rises like a comet, the whole portf will soar faster & farther than a big-10 or XIU type of cluster could ever go.


Sounds right to me, lowdiv is more volatile and like you say, just one blowup has a significant effect.



> my tentative conclusion is that, when working with small & micro caps, a significant amount of diversification works better. Possibly one should have at least 20-25 micros. Whew! that's one aitch of a lot of work. Easier, probably, to buy a top-performing managed small cap fund.


You make a good point. But for the entire 2 year time span of this experiment, Lowdiv still has outperformed the TSX as shown here. So I'm not giving up on it yet. But the reason I separate out these strategies and track each individually is to see which ideas are worth it.

So far, the XIU-unbundling (top weights) strategy looks like a winner, and Lowdiv also looks promising. If 5 years tick by and it doesn't look promising, I'll abandon it.


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## james4beach

The (model) permanent portfolio and all weather, which I track, reached new highs today. This is notable because these conservative portfolios have surpassed their June 2018 highs, despite market weakness in the last few months.

In comparison, balanced funds (using VBAL for a measurement) are still 3% below its June 2018 high. VCNS is a bit better, 2% below its high.


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## james4beach

Adding some statistics: since I started using the permanent portfolio (and now the all-weather) about 3 years ago, I'm seeing a 3.9% annual return. This is indeed less than a Canadian balanced fund morningstar average of 4.9% CAGR in the same time period. However, I've also had milder losses and far less volatility during the rough period in late 2018.

I think that's pretty representative of "the deal" with these things: more stability, better handling of rough periods, but a performance hit _if_ stocks happen to do well.


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## Onagoth

humble_pie said:


> wondering where & how you managed to buy PSA?
> 
> rob carrick had an article last summer about how all the brokers are blocking purchases of PSA (it's a high-payout HISA) because they want to force their clients to buy the in-house HISA product
> 
> also wondering why so much PSA? were you not the cmffer who posted grave doubts about possible insolvent scenarios for this ETF when i first mentioned it a few monhs ago, as best i can recall?
> 
> .


Questrade allows the purchase of PSA


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## hfp75

Onagoth said:


> Questrade allows the purchase of PSA



So does Q-Trade


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## like_to_retire

hfp75 said:


> So does Q-Trade


It's looks like a standard ETF. Purpose High Interest Savings ETF is listed at TDDI when I do a search. When I hit BUY, it asks how much, so if I clicked further are you saying I would be blocked?

It doesn't seem that great a vehicle. It only has a 1.7% yield, and I guess you would pay trading fees with every transaction. 

The standard TDDI HISA (TDB8150) has a yield of 1.6% with no trading fees.

What are the advantages of PSA?

ltr


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## james4beach

PSA provides a slightly higher yield than TDB8150 but I agree, not a significant advantage (it also lacked CDIC insurance). I think it's mainly useful for people at brokerages that don't have access to ISAs.


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## Onagoth

like_to_retire said:


> It's looks like a standard ETF. Purpose High Interest Savings ETF is listed at TDDI when I do a search. When I hit BUY, it asks how much, so if I clicked further are you saying I would be blocked?
> 
> It doesn't seem that great a vehicle. It only has a 1.7% yield, and I guess you would pay trading fees with every transaction.
> 
> The standard TDDI HISA (TDB8150) has a yield of 1.6% with no trading fees.
> 
> What are the advantages of PSA?
> 
> ltr


Current yield of PSA is 2.15%, net 2.0% after the MER.

There is no real advantage to it for me....it's just that Questrade doesn't offer any type of HISA so this ETF get's me as close to HISA as I can get without transferring to another institution. 

Buying is free, sell is 4.95...so it's not so bad for idle money.


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## like_to_retire

Onagoth said:


> Current yield of PSA is 2.15%, net 2.0% after the MER.
> 
> There is no real advantage to it for me....it's just that Questrade doesn't offer any type of HISA so this ETF get's me as close to HISA as I can get without transferring to another institution.
> 
> Buying is free, sell is 4.95...so it's not so bad for idle money.


Yeah, as a spot yield for one month it looks like it's 2.15%, and that's pretty darn good, although its one year yield is 1.68% and 2 year is 1.38%, so I don't know how long that higher rate will last. Interesting though.

I guess for the brokers that offer free trading or very cheap trading this is the way to go. I still have no confirmation (that I can find) that TDDI doesn't allow people to purchase this ETF. It might be a useful alternative for those who want a place to store emergency cash that pays more than an HISA.

ltr


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## james4beach

I tried placing a buy order for PSA through TDDI and got a note saying that I must phone an agent. So their platform disallows the orders.

ZST is another option, ultra short term bonds. This one has a higher yield than TDB8150 but there is more risk since it's lower grade commercial paper. Not much duration risk, but the price still fluctuates and there's more credit risk.


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## james4beach

james4beach said:


> Canadian All Weather (30% XIU+ZSP, 50% XBB, 20% MNT)


The permanent (ish) portfolio is doing well recently. Trailing 1 year performance is +4.2% which you might compare to VCNS +3.3% since they have similar risk levels.

One must dedicate themselves to an asset allocation and stick with it, to avoid chasing returns. It's easy when the returns are good. The hard part is sticking to the plan when rough conditions arrive.


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## lonewolf :)

james4beach said:


> The permanent (ish) portfolio is doing well recently. Trailing 1 year performance is +4.2% which you might compare to VCNS +3.3% since they have similar risk levels.
> 
> One must dedicate themselves to an asset allocation and stick with it, to avoid chasing returns. It's easy when the returns are good. The hard part is sticking to the plan when rough conditions arrive.


 The trend has always been for the retail investor to be long term buy & hold @ important market highs & become [email protected] the start of bull cycles which results in the retail investor losing money through the cycle. The markets are fractal the degree that everyone has become buy & hold for ever is a strong indication to the degree of top that is being put in.


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## james4beach

lonewolf :) said:


> The trend has always been for the retail investor to be long term buy & hold @ important market highs & become [email protected] the start of bull cycles which results in the retail investor losing money through the cycle


Yes I think you're absolutely right lonewolf.


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## hfp75

rereading this page - earler discussion - I was using PFC2200 in my cash account so that the distributions were ROC vs Interest Income - basically becomes capital gains vs Interest Income - but when you sell...


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## james4beach

This portfolio design is working its magic again today. Stock markets down sharply, about 2% in US and a bit milder in Canada, but still the worst selling in months.

The permanent / all weather portfolio is about flat on the day, mildly positive actually. I acknowledge that long term, one sacrifices some performance by going this route, but the advantage is also very clear.


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## agent99

james4beach said:


> The permanent / all weather portfolio is about flat on the day, mildly positive actually. I acknowledge that long term, one sacrifices some performance by going this route, but the advantage is also very clear.


Unless you are about to collapse your portfolio, what difference does it make what the day to day value is? Next week there could be good news and equities will surge. And dividends are paid regardless.


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## james4beach

agent99 said:


> Unless you are about to collapse your portfolio, what difference does it make what the day to day value is? Next week there could be good news and equities will surge. And dividends are paid regardless.


My portfolio was actually +0.3% today. I agree that day-to-day value isn't too important, but it demonstrates the diversification benefit of things like the Permanent Portfolio. The annual results are even more impressive, but the same effect shows up even on a daily basis.

For me, lower volatility and more predictable returns gives me more comfort and confidence to stick to my approach no matter what. A good example of this was Q4 of last year. While stocks plummeted, my portfolio remained stable. When it came time to rebalancing, I happily bought a bunch of stocks without a second thought. No reason to feel any concern at all, and no stress.

Additionally, at that time I was starting to change my work arrangement to work fewer hours and earn less income. I had the freedom to do this partly because my investments were stable. What if I was 100% in stocks and was seeing my portfolio plummet? Would I have been able to follow through with my plan to reduce income? Probably not! My lifestyle would have been dictated by the stock market -- that's not _freedom to do what I want_.

"No stress", and freedom, is worth a lot to me. I can't imagine what it's like having a 2M portfolio and watching it drop 30% in a year, seeing yourself suddenly $600,000 poorer! Or having to change your work plans, possibly stay longer in a job you don't like, due to stock market volatility. I think that would upset me.

(I don't have 2M, numbers are hypothetical)


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## john.cray

james4beach said:


> I acknowledge that long term, one sacrifices some performance by going this route, but the advantage is also very clear.


Just curious what your estimate is regarding the "some" performance being sacrificed ?


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## james4beach

john.cray said:


> Just curious what your estimate is regarding the "some" performance being sacrificed ?


Sure. I'm using the asset allocation described in this post.

Based on my historical data over a couple decades, I expect performance to be 0.3% - 0.5% worse than a balanced fund and I personally think it's going to be on the lower end of that.

There are long stretches, like 15 years, when the performance was the same or even where this method _outperformed_ balanced funds. The years since 2013, with stocks being insanely strong, are the main factor which made balanced funds outperform again.

Generally I think I will probably do about 0.3% worse than a balanced allocation long term, but I also expect periods of a decade or longer where there is no performance sacrifice at all.


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## james4beach

Let me backtrack to Browne's Permanent Portfolio, because I want to point out an interesting implementation detail. The PP was supposed to be:
25% stocks
25% long term treasury bonds
25% cash or short-term treasuries
25% gold

This is how PP is usually stated. I mentioned my criticism earlier about how this is difficult to implement in practice. First of all you've got a whole bunch of cash (imagine a 500K portfolio) so how are you going to hold that? Then there are long term treasury bonds. These are both very volatile, but there also isn't a good market for them in Canada because we don't have as large a govt bond market as the USA.

Within the last year I discovered that the following allocation is identical. Here's my alternate PP:

*25% stocks
50% bond fund with avg maturity of 10 years
25% gold*

The reason this is equivalent is that a broad bond fund such as XBB actually holds both short & long term bonds. XBB (or another generic, high quality "10 year" bond fund) holds everything with an average maturity at 10 years. But it does hold long term treasuries and short term bonds too.

To see proof of this, look at the portfolio visualizer web site. Portfolio 1 is the PP using a single 50% weight in 10 year bonds. Portfolio 2 is the bonds separated into short term + long term treasuries.

https://www.portfoliovisualizer.com...n4_2=25&asset5=ShortTreasury&allocation5_2=25

The historical results are identical!

Therefore, an easy and practical way to implement the PP in Canada is to hold:

25% in XIC / XAW / etc
50% in XBB or VAB, or maybe XGB
25% in MNT or CGL.C

I think this is a better realization of the PP and it's equivalent to the original. You've gotten rid of the awkward stuff (cash and long term bonds) and replaced it with a standard, generic bond fund. The backtest linked above also shows that it really is equivalent to the original PP, except that here I'm using the industry-standard XBB or VAB. This isn't exactly a 10 year government bond fund, but it's close. XBB has a much lower MER than XGB, but I suppose you could use XGB as well.


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## james4beach

And even more direct proof of equivalence for Canada. I'm using just XIC for the stock component but you'd obviously put a mix of stock indices into a real one.

https://www.portfoliovisualizer.com...ocation4_2=25&symbol5=XBB.TO&allocation5_2=50

This visualization shows two portfolios: first, the "ideal" PP broken into 4 pieces including ZFL (long term bonds) and XSB (short term bonds). This is compared to my simplified PP which groups the bonds into plain old XBB.

The overall performance, and year to year behaviour, is virtually identical. Combined with the long term US backtest above I think this proves that the PP can be easily implemented using a single 50% XBB component.

This also addresses one of the biggest criticisms raised about the PP, which was mentioned back on page 1 of this thread



Video_Frank said:


> I can't think of a single reason why someone in the accumulation phase, years out from retirement, would put 25% of their portfolio in cash. It's sure to get killed vs inflation. In order to get market returns you need to accept market risk, *not cower in cash*.


Solved 

Now you can invest in the PP without any cash component, and we've shown it still matches the original/literal PP. The big trick here... which I'm _really_ proud of ... is simultaneously solving the reluctance to hold cash and the reluctance to hold the long term treasuries.

It took me 3 years to "solve" the above problem and I don't think many others have figured this out.

PP =
25% in XIC / XAW / etc
50% in XBB or VAB, or maybe XGB
25% in MNT or CGL.C​


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## Topo

I don't doubt your findings, but doesn't it question Harry Browne's reasoning for the asset classes in the permanent portfolio? His reasoning was that long term bonds do well in deflation and cash does okay in contractions. I would expect a rebalancing bonus to be present between these two categories, just as there is between stock and bonds or stocks and gold.


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## james4beach

Topo said:


> I don't doubt your findings, but doesn't it question Harry Browne's reasoning for the asset classes in the permanent portfolio? His reasoning was that long term bonds do well in deflation and cash does okay in contractions. I would expect a rebalancing bonus to be present between these two categories, just as there is between stock and bonds or stocks and gold.


I wondered about that issue as well, with different performance (especially long term bonds) presenting the rebalancing opportunity. So are we losing that?

A curt answer would be: the back tests don't show any loss of that benefit. The empirical data shows awfully similar results even with Canadian ETF data in #187 which by the way includes years where ZFL crashed 9% and then rallied 17%. That's exactly the kind of effect we want to leverage. And yet the equivalence held.

Here's my explanation: I think we're simply outsourcing the entire fixed income component to the good people at Blackrock. *They still manage the XBB portfolio*. The mandate of XBB is to maintain constant average maturity in the bond portfolio. In that year where long bonds rallied 17%, suddenly they were too heavily weighted (avg maturity > 10). Therefore, they rebalanced or rolled back to avg maturity = 10.

I think the rebalancing is still happening between the cash & long bond sections, _within_ XBB.


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## Topo

james4beach said:


> I wondered about that issue as well, with different performance (especially long term bonds) presenting the rebalancing opportunity. So are we losing that?
> 
> A curt answer would be: the back tests don't show any loss of that benefit. The empirical data shows awfully similar results even with Canadian ETF data in #187 which by the way includes years where ZFL crashed 9% and then rallied 17%. That's exactly the kind of effect we want to leverage. And yet the equivalence held.
> 
> Here's my explanation: I think we're simply outsourcing the entire fixed income component to the good people at Blackrock. *They still manage the XBB portfolio*. The mandate of XBB is to maintain constant average maturity in the bond portfolio. In that year where long bonds rallied 17%, suddenly they were too heavily weighted (avg maturity > 10). Therefore, they rebalanced or rolled back to avg maturity = 10.
> 
> I think the rebalancing is still happening between the cash & long bond sections, _within_ XBB.


I think you make good points. I just checked the holdings of XBB. Looks like it has about 23% long term bonds and about the same amount of bonds maturing less than 3 years (which could be considered equivalent to cash). I don't know if or how they rebalance, but even without rebalancing, the prices will rise when equities crash, so rebalancing can happen between XBB and equities. 

XBB seems to have 30% corporates in its portfolio, so a purist should consider XGV instead, which only has federal and provincial bonds. Canada bonds, being equivalent to treasuries, would be most in keeping with what Harry Browne advocated.


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## james4beach

Thanks. And yes it has pretty substantial long bonds. I do agree with you that the corporate part is a notable divergence from Browne's PP.

Want to know something else cool? I derived a 'risk parity' portfolio from scratch (solved the equations using raw data) and out popped the version of the PP stated above. In other words, Browne's PP satisfies risk parity, even though he created it 9 years before Bridgewater made the first risk parity fund. If details interest you, message me and I can send you my equations and derivation.


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## Topo

HBPP certainly has some uniquely good characteristics when it comes to risk vs. return. In many ways it is a great portfolio for a retiree who would like to minimize volatility.


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## Topo

It is interesting that the main advantage of the PP may be its low allocation to stocks. I just compared the PP to a 25/75 portfolio. The CAGR (calculated since Jan 1978) is about the same, but the latter has a lower SD and max draw down. Sharpe and Sortino are slightly higher with the latter too.


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## james4beach

Topo said:


> It is interesting that the main advantage of the PP may be its low allocation to stocks. I just compared the PP to a 25/75 portfolio. The CAGR (calculated since Jan 1978) is about the same, but the latter has a lower SD and max draw down. Sharpe and Sortino are slightly higher with the latter too.


Ah, but you just skipped over some really bad years in stocks by starting in 1978. If you start it earlier, in 1972, you get different results
https://www.portfoliovisualizer.com...allocation2_2=75&asset3=Gold&allocation3_1=25

PP (using 50% of 10 year treasury): 9.04% CAGR, 8.02% stdev, max dd -14.34%, sharpe 0.56, sortino 0.90
25% stock 75% of 10 year treasury: 8.32% CAGR, 7.34% stdev, max dd -12.12%, sharpe 0.51 sortino 0.82

What's not immediately visible is that maximum drawdown is in nominal dollars, not real dollars. If you view the inflation-adjusted chart, I would call that a much more desirable outcome from PP because it's actually preserving purchasing power. The 25/75 allocation eats inflation very badly -- it's actually a very bad maximum drawdown in real dollars, but PP protects against that.

The 25/75 allocation loses a ton of purchasing power in the first 9 years. Even 12 years in, it's zero real return.

Once real returns are considered, I think it's a clear win for the PP vs 25/75.

(I do realize these results can be thrown away by saying "the first few years that gold traded are wacky and unreliable" but if we're not going to rely on this historical data, then we probably shouldn't be doing back-tests at all)


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## Topo

I get your point. Gold will save the day in an inflationary environment. Just as HB had said.

I used cash and long term bonds separately, so it defaulted to 1978. It missed the earlier run up in inflation.


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## james4beach

Topo said:


> I get your point. Gold will save the day in an inflationary environment. Just as HB had said.
> 
> I used cash and long term bonds separately, so it defaulted to 1978. It missed the earlier run up in inflation.


I still would agree with you that something like 25/75 is a pretty good allocation (see end of this post)

These issues of sketchy datasets and sensitivity to start dates has always bothered me. This is why I ultimately decided my allocations using the risk parity design. You would of course have to decide whether you agree with the fundamental thesis of risk parity (and I do). But the nice thing is that the inputs all become data which is not particularly sensitive to time frames. So you're effectively distilling down a key trait of the asset classes, and then using that to compute allocation %s.

It's just a happy coincidence that the answer happens to be (more or less) the PP. Even if this was not the case, I would have still gone with the risk parity design because it's based on fundamentals and isn't just a back-fitting exercise.

Fun fact: if you run the risk parity calculation using only stocks and bonds, you get 26% stocks 74% bonds. Isn't that _bloody_ amazing?
See page 4 of this paper

If you add gold, then you get (more or less) the PP.

So yes, 25/75 is a good allocation. It's actually *the ideal MPT allocation* for those two asset classes. But when you extend it to include gold, you get PP. Isn't it amazing how all these concepts converge?


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## Topo

Investing in stocks and bonds seem very intuitive to me. But gold is a bit different. Looking at the PV chart of gold, it shows that if one bought gold at the peaks in 1980, it would have taken about 30 years to break even in real terms. The trough was in 2002. So one would have been essentially rebalancing into gold for more than 20 years, before seeing a return on this component of the portfolio. One has to have a strong conviction in the strategy to rebalance for decades before seeing a profit. It isn't easy. However, gold does seem to do a good job inside the HBPP. 

https://www.portfoliovisualizer.com...sset3=Gold&allocation3_1=25&allocation3_2=100


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## james4beach

That's a fair argument. To go with this, you'd have to have the conviction to keep rebalancing even if one asset chronically does poorly for decades.

I would argue that stocks face a similar possibility. For example, Japanese stocks (down for 20 to 30 years) or even US stocks for 13 years after 2000. That's a very long period too... how many people gave up on their stock allocation (capitulation) after 13 years of poor US returns?

How many people in 60/40 allocations actually kept repeatedly buying more US stocks throughout this horrible 13 years: http://schrts.co/THzNiZar

I think this is a problem with any volatile asset, whether it's stocks or gold. It's not easy for anyone.


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## james4beach

I would also say that someone who isn't comfortable with gold (for whatever reason) may be better off in 25/75

That 25% stock allocation stil gives some impressive results


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## Topo

I agree with you that stocks pose a similar problem. The difference is that I am an optimist when it comes to stocks, so I would not have a problem rebalancing into stocks during a bear market, at least as long as I am a saver (once retired I will be more cautious). I have been tested before on this, so I am pretty sure about it. But when it comes to gold, I am somewhere in the middle, not very optimistic nor very pessimistic. Not being a true believer will cause problems in bear markets, which are inevitable in the long term.

Another factor is the presence or absence of an alternative. I do not know of any asset class that could function as an alternative to stocks (RE is not for me). But for gold, there may be alternatives. For example foreign stocks and short term bonds are okay hedges for inflation. Bonds in general have been good hedges for deflation. So gold seems replaceable, while stocks are not.


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## james4beach

Topo said:


> I agree with you that stocks pose a similar problem. The difference is that I am an optimist when it comes to stocks, so I would not have a problem rebalancing into stocks during a bear market, at least as long as I am a saver (once retired I will be more cautious).


Good points. I have some doubts about both stocks and gold. With stocks, I worry that PE multiples are just a figment of the human imagination and mood (or index-based money flows), and that we could see 20 years of reducing multiples -- destroying all returns, even when there is fundamental corporate growth.

With gold, I worry that it's just a speculative trading vehicle that's also just a function of the human imagination and mood.

But at least I have similar feelings on both stocks & gold in my allocation. I don't feel compelled to pour money into one over the other; I'm neutral on them relative to each other. I am confident that I can rebalance between them just fine. I'm a bit more worried about taking money out of bonds (which I trust) and putting them into either stocks or gold.

But 60/40 doesn't save me from that problem either. The benefit of this allocation is that I believe in the fundamentals of risk parity and asset class diversification. It also will help to see steady annual returns, which should help keep me calm and know that it's working as planned.


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## james4beach

Isn't it amazing how much of investing is psychological?

Over the years, I have warmed up to the idea of just buying a well run balanced fund -- this is what I recommend to friends and family now. If you buy for example MAW104 or GGF31148 (two excellent balanced funds that I've researched in detail), and you just leave the money invested, you are likely going to do well.

Similarly, anyone in a couch potato or permanent portfolio strategy is also going to do well, _if they can stick with the plan over the decades_.


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## Topo

I have come to the same conclusion over the years. The more passive approach one takes, the better the results.


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## james4beach

james4beach said:


> Within the last year I discovered that the following allocation is identical. Here's my alternate PP:
> 
> *25% stocks
> 50% bond fund with avg maturity of 10 years
> 25% gold*
> 
> The reason this is equivalent is that a broad bond fund such as XBB actually holds both short & long term bonds. XBB (or another generic, high quality "10 year" bond fund) holds everything with an average maturity at 10 years. But it does hold long term treasuries and short term bonds too.
> 
> To see proof of this, look at the portfolio visualizer web site. Portfolio 1 is the PP using a single 50% weight in 10 year bonds. Portfolio 2 is the bonds separated into short term + long term treasuries.
> 
> https://www.portfoliovisualizer.com...n4_2=25&asset5=ShortTreasury&allocation5_2=25
> 
> The historical results are identical!
> 
> Therefore, an easy and practical way to implement the PP in Canada is to hold:
> 
> 25% in XIC / XAW / etc
> 50% in XBB or VAB, or maybe XGB
> 25% in MNT or CGL.C
> 
> I think this is a better realization of the PP and it's equivalent to the original. You've gotten rid of the awkward stuff (cash and long term bonds) and replaced it with a standard, generic bond fund. The backtest linked above also shows that it really is equivalent to the original PP, except that here I'm using the industry-standard XBB or VAB. This isn't exactly a 10 year government bond fund, but it's close. XBB has a much lower MER than XGB, but I suppose you could use XGB as well.


Thanks to Topo for helping me look this over. Then we went off on some tangents, which might confuse others following the thread.

Curious if anyone else has any thoughts on my "simpler" PP allocation described here?


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## fireseeker

It was an informative pleasure eavesdropping on the dialogue between you and Topo.

Last year, I adjusted my IPS to include 5% gold (plus opportunistic holdings of two miners). This was largely because a) gold appeared attractively priced, and b) I had become persuaded by the PP arguments about the value of gold’s non-correlation.

I have been contemplating increasing that amount. However, I am taking my time. 

The simpler version of the PP you have described is interesting. Its ease, lack of volatility and impressive back testing are compelling.


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## agent99

james4beach said:


> If you buy for example MAW104 or GGF31148 (two excellent balanced funds that I've researched in detail), and you just leave the money invested, you are likely going to do well.


If you are young and in accumulation stage, that might work. Especially if like many, you are busy working and earning an income. May be true for your 25/50/25 portfolio too. 

However, for those who are about to, or already in retirement, how would it work for them? _"and you just leave the money invested, you are likely going to do well."_ wouldn't work for them. And those portfolios have next to no yield meaning no cash flow to live off. (Less that $20k pa if they have a million saved). And if they draw down another $20k from portfolio, how long will the portfolio last?

I know we have had this type of discussion before, but there is no portfolio where "one size fits all"


----------



## james4beach

fireseeker said:


> It was an informative pleasure eavesdropping on the dialogue between you and Topo.
> 
> Last year, I adjusted my IPS to include 5% gold (plus opportunistic holdings of two miners). This was largely because a) gold appeared attractively priced, and b) I had become persuaded by the PP arguments about the value of gold’s non-correlation.
> 
> I have been contemplating increasing that amount. However, I am taking my time.
> 
> The simpler version of the PP you have described is interesting. Its ease, lack of volatility and impressive back testing are compelling.


Thanks! Happy to hear the discussion has been useful. I agree that one should not make hasty changes to an allocation. Over the span of several years, I gradually adjusted my 25% gold down to 20% and finally got to a mix I like.


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## james4beach

agent99 said:


> However, for those who are about to, or already in retirement, how would it work for them? _"and you just leave the money invested, you are likely going to do well."_ wouldn't work for them. And those portfolios have next to no yield meaning no cash flow to live off. (Less that $20k pa if they have a million saved). And if they draw down another $20k from portfolio, how long will the portfolio last?


These are good points. But remember that balanced funds are suitable for ongoing withdrawals, and yes are suitable for retirees. A more conservative allocation would be even better, but there is no problem whatsoever leaving the money invested and selling off shares to get cashflow... possibly for the rest of one's life.

The problem are big bear markets; when stocks drop and stay low for say 10 or 15 years as described here. This causes 'sequence of return' harm to the capital. The only way around it is a higher fixed income allocation, or reducing your withdrawals during bad times.



> I know we have had this type of discussion before, but there is no portfolio where "one size fits all"


True, and I agree, but a balanced fund or 50/50 is pretty close. It really can withstand withdrawals even during bear markets, up to a point. Take a look at this historical study I did, withdrawing from 60/40 in bear markets. What happens is that money actually comes out of the bonds, not the depressed stocks: https://www.canadianmoneyforum.com/showthread.php/138014-Withdrawing-from-60-40-in-down-years

Up to a point of course! The % fixed income in the asset allocation is a big factor in all of this. Higher % fixed income is better positioned for bear markets and withdrawals.

So while I agree that there are no "one size fits all" answers, the balanced fund is not a bad attempt, and it can be suitable for ongoing withdrawals for a retiree.


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## agent99

james4beach said:


> So while I agree that there are no "one size fits all" answers, the balanced fund is not a bad attempt, and it can be suitable for ongoing withdrawals for a retiree.


Should work OK if retiree has $2Million


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## AltaRed

It works with any size of balanced portfolio. Withdrawal rates for RIFs have been engineered with appropriate drawdowns in mind, albeit most of us would still want some reserve in mind for longevity risk beyond age 95 or 100.


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## james4beach

AltaRed said:


> It works with any size of balanced portfolio. Withdrawal rates for RIFs have been engineered with appropriate drawdowns in mind, albeit most of us would still want some reserve in mind for longevity risk beyond age 95 or 100.


To clarify AltaRed, do you mean that ongoing withdrawals (for a retiree) from a balanced fund should be OK?

e.g. my parents are nearly entirely in MAW104 with some GICs as well. Their plan is to keep drawing down MAW104 for the rest of their lives. From what I can tell, it's a solid plan. The GICs add additional cushion in case of horrendous market performance.

They've been selling off the units as they need cash, well under 3% withdrawal rate currently.


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## AltaRed

Seems perfectly fine to me, and especially so at 3% withdrawal rate, which is less than RRIF (or VPW) percentages. 

Added: The GIC reserve is a good thing. My spouse is doing something similar.


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## james4beach

Thanks. Yes I think as long as the withdrawal rate is kept low, there shouldn't be a problem. Of course it's easy to say now with MAW104 up 15% YTD. It probably feels very different doing the withdrawals in a really bad year, but still should be sustainable.


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## AltaRed

james4beach said:


> Thanks. Yes I think as long as the withdrawal rate is kept low, there shouldn't be a problem. Of course it's easy to say now with MAW104 up 15% YTD. It probably feels very different doing the withdrawals in a really bad year, but still should be sustainable.


It will indeed feel different in a series of multiple down years. One or two years won't (shouldn't) affect the psyche, but a string of them probably will.


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## james4beach

AltaRed said:


> It will indeed feel different in a series of multiple down years. One or two years won't (shouldn't) affect the psyche, but a string of them probably will.


This was one of my primary motivations for choosing the permanent portfolio. I wanted the freedom to be able to withdraw funds at any time and not feel like I'm under the thumb of the equity market. From past history, the PP has provided a much steadier pattern of positive returns over the years, compared to 60/40.

I have debated this a bit with CFA and CFPs. The strongest counter argument they gave me to the PP is that these correlations between asset classes are unreliable, especially gold's correlation. We might expect stocks and bonds to continue having low correlation based on fundamentals, but gold's correlation is a bigger question.

Therefore, while 60/40 can reasonably be expected to be a smoother experience due to stocks & bonds having fundamentally different behaviours, the addition of gold may or may not create a benefit. *The past history, in which gold had low correlation and nice balancing behaviour, might have been a total fluke / random*.

I think it's an important criticism for PP investors to remember. Adding gold is _not guaranteed_ to improve the portfolio, not even guaranteed to reduce volatility. You could potentially still have a deeply negative year, or a few, and the PP going forward may look nothing like the amazing PP of the past.

From a capital allocation standpoint, the question is: do you add this weird asset (gold) in the hopes of diversification benefit, even when there is absolutely no guarantee that it will smooth over bad years and reduce volatility?

(My answer is yes. I know there are no guarantees, and this is a somewhat random game. However I think there are economic fundamentals which cause gold to behave differently than stocks and bonds, notably the inflation and fiat devaluation response)


----------



## agent99

AltaRed said:


> It works with any size of balanced portfolio. Withdrawal rates for RIFs have been engineered with appropriate drawdowns in mind, albeit most of us would still want some reserve in mind for longevity risk beyond age 95 or 100.


Sorry, you lost me there. I didn't think we were talking about RRIFs. Not sure RRIFs were "engineered" in any way. GOC made a big step change not that long ago, mostly because of lobbying by retirement groups. I wouldn't use those draw down rates as a guide for anything. They just determine how much has to be moved from RRIF to Taxable account (less the tax the govmnt takes off). You spend whatever you want.

I joked that $2Million would be needed, because a 1Million portfolio with less than 2% yield wouldn't provide much of a retirement life. If drawn down to boost cash flow, as J4B said, it has serious SofR risk.


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## AltaRed

I've refrained from discussing PP or gold in general, since I have no belief in gold myself. To each their own.

FWIW, my spouse's investable assets (RIF) are somewhat like your parents, except primarily VBAL (at RBC DI), with her TFSA as the fixed income reserve. If there are multiple down years in equity markets, I'd recommend she not spend* all of her RIF withdrawal in such years and put some of it back in her TFSA.

* Not that she will necessarily do so anyway.....


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## AltaRed

agent99 said:


> I joked that $2Million would be needed, because a 1Million portfolio with less than 2% yield wouldn't provide much of a retirement life. If drawn down to boost cash flow, as J4B said, it has serious SofR risk.


I purposely refrained from calling your earlier "joke" bullshite to be polite. Draw down of principal, not just investment income, should ALWAYS be part of the withdrawal plan and does NOT cause irreparable SoR risk if done prudently with VPW methodology (which is akin to RIF withdrawal methodology and thus my reference). J4B's parents are already conservative with 3% withdrawals. Their plan is solid.

Not drawing down a portion of principal, at least the capital appreciation, is akin to cocooning oneself from life. It's conservatism run amok. I will now refrain from going around in circles yet again.


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## james4beach

My own research over the years agrees with what AltaRed says. With a 60/40, 50/50, or 40/60 portfolio, you should be able to draw cash out of it for many decades, including in down years, provided that you're withdrawing at a reasonable withdrawal rate. The flexibility to be variable (VPW) helps extend the capital longer. The withdrawals are a combination of interest + dividends + liquidation. The mix does not matter.

An income / dividend approach does offer important psychological advantages (comfort and less focus on price volatility) but does not fundamentally make the capital last longer, nor does it give a higher cashflow in a sustainable way.


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## AltaRed

There is no financial theory/mathematical analysis that supports withdrawal methodologies that do not tap into principal as part of a withdrawal methodology for Joe Q Public. I consider it a disservice to the CMF community for the more senior members of CMF to be promoting such materials as anything more than a personal objective....for whatever reasons they may personally have.


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## agent99

AltaRed said:


> I purposely refrained from calling your earlier "joke" bullshite to be polite. d.
> 
> Not drawing down a portion of principal, at least the capital appreciation, is akin to cocooning oneself from life. It's conservatism run amok. I will now refrain from going around in circles yet again.


I will be polite too and not call that BS. Even if it is


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## james4beach

That's a bit harsh AltaRed. Income oriented retirement portfolios are very common and, if done properly (diversified with sensible withdrawal rates) perfectly good options.

This idea of "tapping into principal" is a fuzzy term anyway, since people can mean very different things when they say it. Do they mean preserving the original dollar amount? Preserving the inflation adjusted original amount? Only taking dividends and interest? Only taking dividends that are less than corporate net income? Or maybe something simpler, such as: never entering a sell order on shares.

I acknowledge that people have reasons for wanting what they want. However, I am perfectly fine with liquidating shares as a way to generate cashflow from my capital.


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## AltaRed

Agreed income oriented retirement portfolios are very common but they are based on a total return concept, such as income funds, which do involve taking capital appreciation into the equation. 

To me, 'tapping into principal' is a very transparent and clear concept, i.e. principal means Cost Basis or Book Value, i.e. invested amount. Some go further to suggest it is 'invested amount adjusted for inflation' which can take on more importance obviously with high inflation. With inflation at 2%, it would take 36 years to 'half the original value'. I am agnostic as to which one is chosen, albeit the latter does make more sense to me.

Added: Most retail investors assume it means selling no units/shares which, in my opinion, is a travesty. They are leaving opportunity, i.e. capital appreciation, underutilized.


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## agent99

james4beach said:


> Thanks. Yes I think as long as the withdrawal rate is kept low, there shouldn't be a problem. Of course it's easy to say now with MAW104 up 15% YTD. It probably feels very different doing the withdrawals in a really bad year, but still should be sustainable.


James, 
As I tried to say earlier, this should be fine so long as that low % withdrawal is from a large enough portfolio that it provides your parents with enough to live on. 

Percentages are of course misleading. If market value of MAW104 drops by 30% as it did in 2008, then for same income, % withdrawal would have had to be correspondingly higher. MAW104 didn't recover fully from 2007 levels until mid 2012. Longer if inflation is considered.

Personally, I wouldn't like to bet my retirement income on the performance of the markets and especially just one or two low distribution funds. However, I do hope my concerns are unfounded and that things work out well for your parents.


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## james4beach

But you're invested in equities right? Your retirement income IS dependent on the markets. If the markets tank (say a depression) and corporate income is slashed, those dividends you're getting will be slashed too. Dividends generally track the broad equity market as shown here. When stocks are strong, dividends are strong.

The only way you keep getting your dividends uninterrupted is if business conditions / the economy remains relatively strong.

You're talking as if your investments are disconnected from stock market movements. This is true if you're entirely in fixed income, but I thought you had a significant equity allocation.


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## james4beach

agent99 said:


> Personally, I wouldn't like to bet my retirement income on the performance of the markets and especially just one or two low distribution funds.


You are an income/dividend investor, and I am a diversified total return investor. I would bet that we both have similar vulnerability to stock market weakness.

You: keep getting your dividends if the market weakens, but only to a point. You have elasticity from reserves of the companies you invest in (retained earnings and their capital positions). That elasticity protects your dividends in the early stages of a slowdown.

Me: with 50% in bonds, I have a big cushion. Cash comes out of my bond portion when the stock market is weak. For a sharp but limited duration slowdown, bonds provide the cash. I don't dig into equity and I don't sell depressed equities.

But, in _prolonged stock market weakness_ such as a serious recession or depression, we're both going to feel it, brother. There is no escaping equity market weakness.


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## AltaRed

agent99 said:


> Percentages are of course misleading. If market value of MAW104 drops by 30% as it did in 2008, then for same income, % withdrawal would have had to be correspondingly higher. MAW104 didn't recover fully from 2007 levels until mid 2012. Longer if inflation is considered.


Using VPW, one follows it down. Percentages don't change, the amount one spends goes down. 

That being said, that is the case using full VPW percentages, e.g. 5% or more. If James' parents are at 3% withdrawal rate, they can decide to perhaps go to as high as the VPW percentage says they can, e.g. 5%, or if they can, track somewhere between 3% and 5%. Indeed, with a 30% drop in MAW104 in your example, they need to only go to a withdrawal percentage of about 4.3% to maintain their constant spend and be well within VPW allowance. The math works beautifully.


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## agent99

james4beach said:


> You are an income/dividend investor, and I am a diversified total return investor. I would bet that we both have similar vulnerability to stock market weakness.


I do invest mainly in dividend payers, but we also have a few low/no yield stocks that I am slowly weeding out. We also have at least 40% in fixed income. So overall, a fairly balanced portfolio. The overall yield from the portfolio has slowly increased over past 16 years. Just about matched the inflation rate. No reductions, just a brief slowdown in growth during recession. At one time the portfolio total value dropped by 27%, but that was not too much of a concern, because the cash kept flowing in.

It may depend on just which markets, but most blue chip Canadian stocks almost never cut their dividends and in fact many have a history of always increasing them. I know you are aware of all this, but the great thing about dividend income, is that it usually keeps coming in regardless of what the market does to the stock price. No need to cut your spending until markets recover. I am sure Total Return approach can work, but perhaps a longer horizon is needed than most retirees have.

Funnily, an hour or so ago, I had a glass of wine before dinner and watched BNN. David Driscoll was on at 6pm. He seemed to be on same page as me and funnily enough so were some of his past picks! I don't watch BNN much, but he seems like one of their better guests.


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## james4beach

We haven't had a prolonged slowdown since you started. There's a reason dividend investing is very popular today; it's perceived to be immune to slowdowns and stock market volatility. I'm saying that dividends are vulnerable to slowdowns, just look back at the 1970s. Or look at that S&P 500 dividend chart I posted.

Look at the historical behaviour in dividends, not just the last 20 years.



> but the great thing about dividend income, is that it usually keeps coming in regardless of what the market does to the stock price


That's only true in mild corrections and short lived bear markets. In long bear markets, your dividends will be reduced -- they are connected to stock prices, not independent.


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## agent99

james4beach said:


> Look at the historical behaviour in dividends, not just the last 20 years.


The available data is mostly US based. But even so, almost everything I have ever read or heard says that dividend payers outperformed non-payers. Not to say dividends were not affected, but they still helped get through the bad times. The S&P500 bluechips have a stellar record of increasing their dividends. These 90 or so, have done it for 25-64 years https://www.dividend.com/dividend-stocks/25-year-dividend-increasing-stocks/

Some light reading for your sabattical. https://www.dividend.com/dividend-i...nce-of-dividend-paying-stocks-over-long-term/



> When it comes to effective portfolio-building, history is the best teacher. By looking back through time, we can clearly see that dividend-paying stocks are the bedrock of any well-diversified portfolio. What’s more, they’re proven to outperform during periods of increased volatility and uncertainty.


Anyway, that's enough for now. As they say - different strokes for different folks.


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## GreatLaker

james4beach said:


> That's a fair argument. To go with this, you'd have to have the conviction to keep rebalancing even if one asset chronically does poorly for decades.
> 
> I would argue that stocks face a similar possibility. For example, Japanese stocks (down for 20 to 30 years) or even US stocks for 13 years after 2000. That's a very long period too... how many people gave up on their stock allocation (capitulation) after 13 years of poor US returns?
> 
> How many people in 60/40 allocations actually kept repeatedly buying more US stocks throughout this horrible 13 years: http://schrts.co/THzNiZar
> 
> I think this is a problem with any volatile asset, whether it's stocks or gold. It's not easy for anyone.


Here is blog post from Ben Carlson of A Wealth of Common Sense on the difficulty of market timing in bear markets and crashes.
https://awealthofcommonsense.com/2019/11/what-would-you-have-done-in-2009/

One tactic for managing your portfolio in crashes is to never rebalance into risk assets. So in bull markets, as equities continue to grow over time, you rebalance from stocks to fixed income to sustain your target asset allocation and portfolio volatility & risk.

But in market crashes, you don't rebalance from fixed income to equities. Just wait for stocks to eventually recover and continue giving the good returns they historically have. This eliminates the stress of buying at distressed prices, and avoids the risk that stocks may never recover. You would miss out on the "rebalancing bonus" and it would take longer for your portfolio to recover to its pre-crash levels. but it would take away the possible regret of buying stocks and watching them fall further, like often happens as crashes are a process that takes time, rather than a quick event.


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## agent99

GreatLaker said:


> But in market crashes, you don't rebalance from fixed income to equities.


That makes a lot of sense.

One of the problems with rebalancing, is that percentages or ratios are used. 
If you have a 60/40 Eq/FI portfolio and equities crash, you could soon end up with 50/50. Yet, you may very well still have exactly the same amount in FI. 
It may be better to forget about those arbitrary percentages and ratios. They vary as markets change without any investor input. 
Better to choose a fixed income dollar amount that you would be happy with if the markets totally crashed. As time goes by, re-visit this number to account for inflation and lifestyle. 
That is more or less what we do. We have much lower % in FI than some "financial experts" might suggest. However, the amount in $$ is something we are comfortable with.


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## james4beach

I agree that one can skip rebalancing but beware that this will result in larger maximum drawdowns -- larger declines from peak to trough.

I am still dedicating myself to annual rebalancing because I like the concept, and I want to minimize drawdowns.


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## james4beach

Quick example from portfolio visualizer. Using 60/40 with US since 1972.

With annual rebalancing, 9.59% CAGR, worst year -15.07%, max drawdown -28.54% (ouch that hurts right?)
With no rebalancing, 9.56% CAGR, worst year -24.94%, max drawdown -37.47%

So it's the same performance but look what happens on the risk side of the picture. This has become a significantly more painful investment without rebalancing!


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## Topo

james4beach said:


> Quick example from portfolio visualizer. Using 60/40 with US since 1972.
> 
> With annual rebalancing, 9.59% CAGR, worst year -15.07%, max drawdown -28.54% (ouch that hurts right?)
> With no rebalancing, 9.56% CAGR, worst year -24.94%, max drawdown -37.47%
> 
> So it's the same performance but look what happens on the risk side of the picture. This has become a significantly more painful investment without rebalancing!


If you don't rebalance at all, your asset allocation will drift overtime, likely making it more stock heavy, so there is a reverse SoR risk in that a large bear market in the latter years will cause much bigger drawdowns. That should not be a problem if one rebalances one way from stocks to bonds. Actually at the depth of bear markets, the investor has less risk in equities.


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## agent99

james4beach said:


> So it's the same performance but look what happens on the risk side of the picture. This has become a significantly more painful investment without rebalancing!


It depends on how you perceive risk. Some investors have no fixed income at all. I just want a sufficient amount of FI to act as a cushion. And, as I said earlier, I would look at this cushion from time to time and see it meets current needs. 

Of course fluctuations in portfolio value will be higher. I can't see that as being a problem if you have limited the downside to meet your needs. 

Forget about those percentages!


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## GreatLaker

agent99 said:


> That makes a lot of sense.
> It may be better to forget about those arbitrary percentages and ratios. They vary as markets change without any investor input.
> Better to choose a fixed income dollar amount that you would be happy with if the markets totally crashed. As time goes by, re-visit this number to account for inflation and lifestyle.


Yes that makes sense too. I have seen people advocate for it. It's something I have been pondering but not done yet. Especially being retired I can look ahead and forecast my spending to estimate the fixed income dollars I may need. 

I currently have a 60/40 portfolio, and I settled on the 40% FI based roughly on 4% withdrawal rate through a 10 year bear market = 40% fixed income needed. Not a particularly sophisticated analysis, but given the unpredictability of the market there's no point in getting too precise. I used to have a university prof that talked about "implied accuracy through casual precision".

Some investors talk about having a 2 year "cash wedge" to get them through a bear market without having to sell equities at depressed prices. I think those investors have not been investing long enough and have not studied investing history. Two years of cash would not get even close to through a looooonnnng bear market. A dollar in the S&P500 at the start of 2000 did not stay above it's starting value until 2013. The Dow peaked some time in the late 1960s, drifted sideways for years, crashed big-time in 73 & 74 and it did not get back up to its 1960s highs until the early 1980s. A dollar invested in the S&P500 at the start of 1973 was worth less than 63 cents by the end of 1974, and did not stay above its initial value until 1978. Data from the Stingy Investor Asset Mixer. This is why I and some other investors maintain conservative portfolios. 


Also some posts have commented on not rebalancing. If that is in response to my post #231 above, my suggestion was to keep rebalancing into fixed income during bull markets, but not rebalance into equities during bear markets.


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## AltaRed

I am one of those that also hold a defined amount of fixed income and cash equivalents. Along with annuity income and investment income, it is easily enough to carry me 2 years at current rates of spend, and if I chose to cut back on a number of luxury expenses, could go at least 5 years and beyond. 

That all said, not all equities go into the tank to the same degree, and not all global markets go into the tank for lengthy periods to the same degree. In a prolonged bear, there will be opportunities to pick off an equity or two that may actually be up, rather than down 30%. It is not a case of never selling an equity when it is down. It is a case of picking and choosing. Some consumer staple stocks can hold their own and so can selected residential REITs for example. Even a stock like BCE...if it was in the $55 range, I'd not have an aversion to selling it if I needed too. The fact it may have been $65 at one time is not terribly relevant.

It is a matter of being rational about choices one can make, rather than getting caught up in academic 'rules'.


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## james4beach

GreatLaker said:


> Also some posts have commented on not rebalancing. If that is in response to my post #231 above, my suggestion was to keep rebalancing into fixed income during bull markets, but not rebalance into equities during bear markets.


I still don't quite understand this part. Is it to make sure you still have lots of fixed income, so you don't risk depleting it during a long bear market?

A strategy like annual rebalancing at a fixed date is the only method I'm aware of to reliably "buy low" without market timing pitfalls.


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## AltaRed

I think it is situational, i.e. it depends on how much fixed income one holds and why, and whether one is in accumulation or withdrawal. During withdrawal, it would most likely be risky to take more of one's safety net and allocate it to equities...not knowing now long that bear market will last. One would be preferentially drawing down fixed income any way to fund living expenses.

During accumulation, a standard re-balancing methodology makes sense, but I don't necessarily agree with fixed date annual re-balancing either. Do it when one's allocation gets out of whack by, for example , +/- 10%. It may never happen if one is adding new money to the under performing class, or it might happen in addition to new money because of large moves in the market.


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## james4beach

I see what you mean. Yes I can see how it all depends on how much fixed income and how much withdrawal is happening.

I would want to try simulating through some bear market scenarios before I'm convinced on which strategy is best.


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## Topo

GreatLaker said:


> Also some posts have commented on not rebalancing. If that is in response to my post #231 above, my suggestion was to keep rebalancing into fixed income during bull markets, but not rebalance into equities during bear markets.


That would be a divergence from the "asset allocation" portfolios. In classical asset allocation, rebalancing is done on schedule (or based on bands), from stocks to bonds and vice versa without exception. If one only rebalances from risk assets to safe assets, the portfolio will have different characteristics. The closest that I could think of is McClung's Prime Harvesting, which only rebalances one way.

I think what AltaRed does is having a good safe reserve that is only deployed when needed. That probably will be closer to the bucket strategy that has been described by Christine Benz et al. So for example at retirement one puts 1m into dividend paying stocks that pay say 50k in dividends per year. If that 50k covers the needs of the retiree, he will make a determination that a cash or safe bond cushion of 250k is needed to cover the shortfall of a 50% dividend cut for 10 years. There is no rebalancing unless the reserves get substantially depleted. In essence it is an 80/20 portfolio with no rebalancing, with a reasonabe SWR of 4%. If equities do well and the dividends double to 100k, theoretically there is no need for the cash cushion anymore.


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## james4beach

Topo said:


> That would be a divergence from the "asset allocation" portfolios.


I think so too.

Keep in mind, there's also the "rising equity glidepath" idea. The idea there is: the most dangerous times for a retiree are the early years, the first ~ 10 years which includes the lead-up to retirement.

At that early point it makes sense to be very heavy in fixed income. So one could start retirement with a high % fixed income allocation. However once you're past that 10 year danger period, you can safely start increasing equity allocations and can even keep increasing equities into old age.

Perhaps that's something to consider for rebalancing. In the early stages of retirement one can be very conservative and only rebalance equity-to-bonds but not the reverse direction (which will increase % bonds). However once you're past the first decade, then you could resume regular rebalancing.

But again I'd want to simulate to be sure. Of course IMO the easiest answer is simply to increase your fixed income allocation when in doubt. Especially today, after we'd had such spectacular equity performance, there is nothing lost by increasing fixed income/GICs.


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## james4beach

I'll describe my own approach to this. I'm living off capital, but not quite retired.

I find this idea of maintaining multiple buckets rather awkward. Instead, I've rolled all my fixed income needs into a big fixed income allocation (50% FI). I know others have other allocations like 70/30 and then do a separate mental accounting for things like GICs, which in reality means they are nowhere close to 70% stocks. My reasoning is: keep it simple and roll it all into your FI allocation.

I think this also helps me be more honest about my overall risk position. It's harder to know where you stand if you have 70% stocks in one place, but extra fixed income buckets elsewhere. What's the net positioning after all that?

Within that fixed income allocation, I have a mix of liquid bonds (XBB and government) and many GICs. Since there's a healthy amount of illiquid GICs, there's no danger that I will rebalance during a bear market and deplete my fixed income. What it means in practice is that the liquid side gets used for rebalancing whereas the GIC ladder is there forever. Plenty to live off, if I ever need to.


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## AltaRed

james4beach said:


> Keep in mind, there's also the "rising equity glidepath" idea. The idea there is: the most dangerous times for a retiree are the early years, the first ~ 10 years which includes the lead-up to retirement.
> 
> At that early point it makes sense to be very heavy in fixed income. So one could start retirement with a high % fixed income allocation. However once you're past that 10 year danger period, you can safely start increasing equity allocations and can even keep increasing equities into old age.


Intuitively, this is about where I was at retirement in 2006. About 40% fixed income and it coincidentally served me well in 08/09 to be at circa that number. More than 13 years later, I am now about 15% fixed income BUT that is an outcome (consequence) of what I have chosen to hold in my 'cash equivalents' reserve, not because I want it to be 15%. If equity markets go up significantly again in 2020, then my fixed income percentage would drop. 

That all said, managing my fixed income cushion is an ongoing dynamic process depending on what near term plans may be, e.g. a $35k holiday or vehicle replacement. As an example, I will most likely be buying a new vehicle in 2020 or 2021. As soon as 2020 arrives, I will be selling an equity at substantial capital gains as part of the plan to build that reserve in preparation for that transaction whenever it may occur.


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## Topo

james4beach said:


> I'll describe my own approach to this. I'm living off capital, but not quite retired.
> 
> I find this idea of maintaining multiple buckets rather awkward. Instead, I've rolled all my fixed income needs into a big fixed income allocation (50% FI). I know others have other allocations like 70/30 and then do a separate mental accounting for things like GICs, which in reality means they are nowhere close to 70% stocks. My reasoning is: keep it simple and roll it all into your FI allocation.
> 
> I think this also helps me be more honest about my overall risk position. It's harder to know where you stand if you have 70% stocks in one place, but extra fixed income buckets elsewhere. What's the net positioning after all that?
> 
> Within that fixed income allocation, I have a mix of liquid bonds (XBB and government) and many GICs. Since there's a healthy amount of illiquid GICs, there's no danger that I will rebalance during a bear market and deplete my fixed income. What it means in practice is that the liquid side gets used for rebalancing whereas the GIC ladder is there forever. Plenty to live off, if I ever need to.


I think that is close to an asset allocation portfolio, although your GICs could be considered a separate bucket/emergency fund. In most studies on SWRs using asset allocation portfolios there is no limit on how much can be rebalanced.


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## james4beach

Topo said:


> I think that is close to an asset allocation portfolio, although your GICs could be considered a separate bucket/emergency fund. In most studies on SWRs using asset allocation portfolios there is no limit on how much can be rebalanced.


Right, and it has occurred to me that I might not have enough bond liquidity for some really huge rebalancing. I want to calculate what the most extreme rebalancing transfer would be from bonds to stocks, say in a Great Depression kind of scenario. Here's a quick calculation covering 1929-1932 which was an extremely bad period

Starting with 500k each in stocks and bonds (50/50 allocation) in 1929 and assuming no withdrawals,

end of 1929: sell 31.2k in bonds (6% of bond portfolio), buy stocks
end of 1930: sell 72.6k in bonds (14% of bond portfolio), buy stocks
end of 1931: sell 90.7k in bonds (21% of bond portfolio), buy stocks
end of 1932: sell 29.4k in bonds (8% of bond portfolio), buy stocks

Totals: 223.9k of bonds sold, 223.9k of stocks bought. How's that for "buy low"?

Look at that insanity! Would anyone do this in real life? Sell a cumulative 223.9k in bonds out of an original 500k while the stock market crashes over 4 years? That's what's required for rebalancing.

That 1930 year also requires 21% of the bond portfolio to be sold. Again, would anyone do that? Liquidate the one asset which just saved your neck, pour the money into a black hole?

I think this illustrates how difficult rebalancing can be in a big stock market crash. If you did this, the result is of course excellent because you've bought a cumulative 223.9k in stocks during the crash... but can anyone do that in real life?

Seeing this result makes me feel better about my GICs. I am happy limiting the rebalancing by holding illiquid, super safe fixed income.


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## AltaRed

One might do some of that if in a secure job accumulating assets, but few were feeling secure during that period. Like everything else, a little common sense needs to be applied to conventional wisdom.


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## Topo

It is very difficult and that is why one needs to be committed and do this very mechanically. Let's not forget that the market crashed again a few years later.

One could also rebalance once or twice and then just watch and wait so as to preserve capital.


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## james4beach

AltaRed said:


> One might do some of that if in a secure job accumulating assets, but few were feeling secure during that period. Like everything else, a little common sense needs to be applied to conventional wisdom.


Right. For example I can imagine that a government worker, or a wealthy young person with a trust fund, or perhaps someone with a solid pension could still rebalance the ideal way during that stock crash.

I'm also sure some pensions were less "solid" after 1929.


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## james4beach

Topo said:


> It is very difficult and that is why one needs to be committed and do this very mechanically. Let's not forget that the market crashed again a few years later.
> 
> One could also rebalance once or twice and then just watch and wait so as to preserve capital.


Yup. In fact a more thorough back test is needed because as you say, the stock market remained weak for a very long time... this wasn't just a 4 year thing.

I still have no idea how I would react mysef, to rebalancing within wild movements. All the basic asset allocation stuff we talk about is great over a period like 1980-2019 but I'm not so sure about other, worse periods.


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## GreatLaker

james4beach said:


> I still don't quite understand this part. Is it to make sure you still have lots of fixed income, so you don't risk depleting it during a long bear market?


Yes, you do understand. You explained it in post #247. It is to avoid the situation you described here:



james4beach said:


> Right, and it has occurred to me that I might not have enough bond liquidity for some really huge rebalancing. I want to calculate what the most extreme rebalancing transfer would be from bonds to stocks, say in a Great Depression kind of scenario. Here's a quick calculation covering 1929-1932 which was an extremely bad period
> 
> Starting with 500k each in stocks and bonds (50/50 allocation) in 1929 and assuming no withdrawals
> 
> end of 1929: sell 31.2k in bonds (6% of bond portfolio), buy stocks
> end of 1930: sell 72.6k in bonds (14% of bond portfolio), buy stocks
> end of 1931: sell 90.7k in bonds (21% of bond portfolio), buy stocks
> end of 1932: sell 29.4k in bonds (8% of bond portfolio), buy stocks
> 
> Totals: 223.9k of bonds sold, 223.9k of stocks bought. How's that for "buy low"?
> 
> *Look at that insanity! Would anyone do this in real life?* Sell a cumulative 223.9k in bonds out of an original 500k while the stock market crashes over 4 years? That's what's required for rebalancing.
> 
> That 1930 year also requires 21% of the bond portfolio to be sold. Again, would anyone do that? Liquidate the one asset which just saved your neck, pour the money into a black hole?
> 
> I think this illustrates how difficult rebalancing can be in a big stock market crash. If you did this, the result is of course excellent because you've bought a cumulative 223.9k in stocks during the crash... but can anyone do that in real life?
> 
> Seeing this result makes me feel better about my GICs. I am happy limiting the rebalancing by holding illiquid, super safe fixed income.


In most market conditions, if you never rebalance, equities will grow faster, resulting in your asset allocation being heavier in equities than you want, and your portfolio volatility and risk will gradually increase. So over a long enough time you will need to eventually rebalance from equities to FI if you want to maintain your target asset allocation.

But in a long, deep bear market, equities will crash but should eventually recover and continue up. So in a bear market you don't need to sell fixed income and buy equities to maintain your asset allocation. Just sit tight and time will rebalance automatically for you.

It avoids the gut clench you would get in times like 2008, 2000, 1987, 1973, or worst case 1929 when you would watch stocks continue to fall by 85% over 4 years. As you said "Look at that insanity! Would anyone do this in real life? " Instead you just sit tight and wait for stocks to recover on their own. It also avoids the apocalypse situation that would happen if you sold bonds to buy stocks that never recover (say for exaple they are a big Ponzi scheme).


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## agent99

Topo said:


> In classical asset allocation, .


I don't know what Classical asset allocation is. 

I do recall financial advisers and pundits recommending that investors hold 100-age in equity. This link suggests even 110 or 120 - age in equity. So the experts have changed their allocation recommendations in a relatively short time frame. Why? Can't they make up their minds? If we had followed that advice, portfolio would have yielded much less and we would have had to sell off assets to cover living expenses. In other words, portfolio would have depleted and we would be worse off.

It just makes no sense to me to look at allocation on a percentage of portfolio basis. 

As an example, when we retired in 2003, we had 43% of portfolio in FI. 
12 months later, the percentage had dropped to 38%. (dollar amount in FI was unchanged.) 
At end of 2008, FI was 55% of our portfolio. (dollar amount in FI down a bit)
Now FI is just 35% (dollar amount in FI higher)

I have only increased FI dollar amount marginally. (@ a bit less than inflation rate). The amount is our safety cushion and is, with CPP/OAS, more than enough to carry us through for a decade or more.

My advice - Just put enough in a safe place to live on frugally for protracted period. Add a little from time to time as living costs go up. If still working, aim at a FI number that you would like at retirement and build your portfolio that way.


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## Topo

agent99 said:


> I don't know what Classical asset allocation is.


It is what is used in studies to determine the sustainable withdrawal rate, for example a 60/40 portfolio that rebalances once a year in December.


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## james4beach

GreatLaker said:


> Yes, you do understand. You explained it in post #247. It is to avoid the situation you described here:
> ...
> 
> In most market conditions, if you never rebalance, equities will grow faster, resulting in your asset allocation being heavier in equities than you want, and your portfolio volatility and risk will gradually increase. So over a long enough time you will need to eventually rebalance from equities to FI if you want to maintain your target asset allocation.
> 
> But in a long, deep bear market, equities will crash but should eventually recover and continue up. So in a bear market you don't need to sell fixed income and buy equities to maintain your asset allocation. Just sit tight and time will rebalance automatically for you.
> 
> It avoids the gut clench you would get in times like 2008, 2000, 1987, 1973, or worst case 1929 when you would watch stocks continue to fall by 85% over 4 years. As you said "Look at that insanity! Would anyone do this in real life? " Instead you just sit tight and wait for stocks to recover on their own. It also avoids the apocalypse situation that would happen if you sold bonds to buy stocks that never recover (say for exaple they are a big Ponzi scheme).


Thanks. You make a very strong argument here.


----------



## Eclectic12

james4beach said:


> ... I'm also sure some pensions were less "solid" after 1929.


It would take some digging to get a full picture but a new points from US based articles are that the number of pension plans *grew* from 1929 to 1932, by fifteen percent. In contrast, three percent are reported as the number of pensions that were discontinued.

Keep in mind that the pensions are described as being a lot different than the more recent ones. To apply one had to have twenty years of service, be aged sixty and be recommended by one's manager. If the board of directors plus the pension committee approved the application then one would get half of one's salary *to a maximum of five hundred dollars a year*. 

Lots of room for pension costs to be dealt with by rejecting newer pension applications, with AFACIT no federal gov't pension legislation to protect the worker.


The first US pension is reported to have been setup in 1875, where until 1921, pension contributions were taxed by the IRS. 

It seems to be about fifteen percent of the US workforce that had pensions in the early '20's, though it is unclear if this includes both public and private pensions. It wasn't until the 1940's that labour became interested in pensions where it took until the 1950's for twenty five percent of the private sector workforce to have a pension.


It looks like the US gov't passed pension legislation as a response to failing pensions in 1974 so there's lots of possibilities for how the '20's pensions were funded. 


Cheers


----------



## agent99

Topo said:


> It is what is used in studies to determine the sustainable withdrawal rate, for example a 60/40 portfolio that rebalances once a year in December.


To be honest, I don't see what was a "Classical Allocation" in those studies. 

I read that they chose a series of arbitrary Equity/FI ratios from 0-100% and back tested them from 1925 to 1995 and later to 2009 to determine what withdrawal rate could be sustained. I haven't read this in detail recently, but ISTR that they figured 50-75% stocks at start of retirement was optimal. 

OK, here is the original report: http://www.retailinvestor.org/pdf/Bengen1.pdf

As already pointed out. I think those FI/Eq ratios are of little value anyway, except in accumulation stage as a guide.


----------



## james4beach

I see more value than you're suggesting, agent99.

First of all, those studies have also been done with monte carlo simulations. These are more powerful than simple back tests because they simulate potential paths (the range of possible outcomes) based on statistical properties of stocks & bonds. It has repeatedly been shown that asset allocations within a certain range ... generally anywhere from 30% to 70% equities ... provide the best outcome for withdrawals.

These are not arbitrary ratios. The researchers have figured out what mixes work well. For example something like 50/50 or 60/40 is not accidental and isn't pulled out of thin air. It's believed to provide quite good outcomes in most possible stock & bond future scenarios.

And all of these assume the classic AA, meaning rebalancing to hold a steady allocation.


----------



## Topo

agent99 said:


> OK, here is the original report: http://www.retailinvestor.org/pdf/Bengen1.pdf


The Bengen study is the gold standard for retirement SWRs. If we change one variable (such as the frequency of rebalancing), we have to be cognizant of the fact that the SWR could change too.


----------



## james4beach

Topo said:


> The Bengen study is the gold standard for retirement SWRs. If we change one variable (such as the frequency of rebalancing), we have to be cognizant of the fact that the SWR could change too.


Right. These are the parameters of the problem as it has been studied so far.

This isn't to say that other methods cannot work. Maybe different rebalancing strategies, or living off dividends, are completely viable alternate solutions. However, these studied did not consider them.

Similarly, the kind of things I do (permanent portfolio / risk parity) have not been thorough studied either for withdrawal and capital depletion. I can't say conclusively that it's a good idea, or that it's any better than classic asset allocation for living off capital.

And if I was a professional, I would absolutely not be able to advise anyone to use these methods on just a hunch and my amateur analysis.


----------



## agent99

james4beach said:


> And all of these assume the classic AA, meaning rebalancing to hold a steady allocation.


James, In those studies, they had to make a lot of assumptions. One of them was to rebalance annually. Not because it was the right thing to do. But just because they had to assume something. As you know, computer demand that sort of thing! In the real world, rebalancing might have been completely the wrong thing to do. At end of each year investors would have decided. 

In the original study, you are right - the AAs used were nor arbitrary. They were specific - 0%, 25%,50%, 75% and 100%. 50% equity worked best, but then they found that 75% was just as good. But really, what do those numbers really mean? The exact same portfolio could change, for example, from 60% to 40% or vice versa if you just started the study a year earlier or later.

I had some trouble with the term "Classic". I have a couple of Classic cars. There is a definition of Classic for cars. I know financial industry people use the term classic, but does it really mean anything at all? Maybe just sounds good when selling a product?

Anyway, snowy day/night here. Time to go read a book


----------



## Topo

james4beach said:


> Similarly, the kind of things I do (permanent portfolio / risk parity) have not been thorough studied either for withdrawal and capital depletion. I can't say conclusively that it's a good idea, or that it's any better than classic asset allocation for living off capital.


I don't know what the studies show on the withdrawal phase of the PP, but given it has had comparable returns with less volatility, my guess is that the SWR should be similar to a 50/50.


----------



## james4beach

Topo said:


> I don't know what the studies show on the withdrawal phase of the PP, but given it has had comparable returns with less volatility, my guess is that the SWR should be similar to a 50/50.


That's where I landed too. I think PP can be a substitute for 50/50 including for living off capital.

If for some reason I suddenly saw a huge flaw in gold, I'd happily fall back to 50/50.


----------



## james4beach

Another example of the low volatility of the PP... I'm using a slight variation: 30% stocks, 50% bonds, 20% gold

On today's market panic, various things plunged. Even some conservative funds are down, mainly driven by sharp international losses

VBAL -0.7%
VCNS -0.4% ... certainly milder

I logged in to see what happened to my RRSP, since it's invested precisely at my asset allocation targets. The result: *+0.2%*

Surely there is some value in that? I am still happy "sacrificing" 0.4% CAGR long term performance for this kind of stability. By the way, long term return stats of my allocation can be found in this other thread which also compares to 60/40.


----------



## john.cray

james4beach said:


> Another example of the low volatility of the PP... I'm using a slight variation: 30% stocks, 50% bonds, 20% gol
> 
> On today's market panic, various things plunged. Even some conservative funds are down, mainly driven by sharp international losses
> 
> VBAL -0.7%
> VCNS -0.4% ... certainly milder
> 
> I logged in to see what happened to my RRSP, since it's invested precisely at my asset allocation targets. The result: *+0.2%*
> 
> Surely there is some value in that? I am still happy "sacrificing" 0.4% CAGR long term performance for this kind of stability. By the way, long term return stats of my allocation can be found in this other thread which also compares to 60/40.



How did it end the day?


----------



## hfp75

I have a 15+% Gold allocation and I will tell you that YTD I am up.... 

I don't have the ability from this computer to do a bunch of easy math BUT I am guessing that I am up 2.5% overall..... not bad with 1 month of growth and a 'topsy turvy' stock market....

Last year my growth was 10.3% !!! It was actually higher, but we have a piece of land that just sits, and doesn't show growth - so it just drags down the numbers.

I'm still happy with 10.3% though....


----------



## james4beach

john.cray said:


> How did it end the day?


Ended the day +0.2% and in fact, new all time high value. Some others for comparison

VCNS -0.2%
VBAL -0.7%
XBAL-0.5%

Of course one can't read too much into one day but from this brief sample, the permanent portfolio and VCNS both look like pretty mild reactions on a bad day.


----------



## james4beach

Just one quick post before I stop posting today. Today's market crash really shows the value of the permanent portfolio as a method to preserve capital.

The theory of the permanent portfolio / all weather was that it can smooth volatility by diversifying between different assets so that you aren't overly concentrated in stocks. Today I logged in to look at my RRSP, which precisely follows my variation of PP. Before the TSX quote feeds kicked the bucket and stopped working (around 09:45), I saw that my account value is basically flat. Yes, during the market crash, my value is unchanged.

How is this possible? Stocks are down 7%, bonds are up 2.5%, gold is up 3%

Using my own allocation, overall PP move = (0.30 * -7.0%) + (0.50 * +2.5%) + (0.20 * +3.0%)
= -0.25% ... virtually unchanged

Q.E.D.


----------



## james4beach

This early morning post ^ was over optimistic, but my losses by end of day were more significant. Can't believe the TSX ended down 10% in a single day.

Looks like my PP was down 2.1% today

Certainly did not prevent losses in a crash, but I think it's fair to say that it softened the blow. Compare this result to similar portfolios
VCNS -3.1%
XBAL -4.1%
VBAL -4.5%


----------



## cainvest

MAW104 is still up 9% today from when I bought last Feb. Likely will drop some more after todays value gets updated.


----------



## hfp75

Well despite lots of volatility and equities being down and bonds taking a beating, Gold today turned out almost 10% - WOW...... Good thing its 20% of my portfolio !

Looks like when govts decide to start the printing press the currency value drops and the limited supply / scarcity of gold really shines through.

Our economy is in a death spiral and our govts are effectively buying the debt and equity markets with fake cash.... nice.... (yes the nice is sarcasm).

Oh yah with govts about to quarantine everyone and not let them go to work - govts will have to supplement the populace with free cash until they can get back to work.... it will only get better for gold given the current climate !


----------



## hfp75

Looks like gold is up today too, almost 5%. Thats almost 15% in 2 days ! Nice results for us gold owners....

Honk, Honk (tooting a horn here)


----------



## fireseeker

hfp75 said:


> Looks like gold is up today too, almost 5%.


So, it under-performed equities ...

 (also holding gold)


----------



## hfp75

Well Gold ironically has outperformed the TSX60 and SP500 for the last week, month, 3 months, 6 months, 1 year and even 5 years right now. It doesnt beat the sp500 for the 10 year but it does beat the TSX60 on the 10 year. Nothing to complain about.

I am happy that equities did well today, I hope they can hold the momentum !


----------



## librahall

james4beach said:


> Right. These are the parameters of the problem as it has been studied so far.
> 
> This isn't to say that other methods cannot work. Maybe different rebalancing strategies, or living off dividends, are completely viable alternate solutions. However, these studied did not consider them.
> 
> Similarly, the kind of things I do (permanent portfolio / risk parity) have not been thorough studied either for withdrawal and capital depletion. I can't say conclusively that it's a good idea, or that it's any better than classic asset allocation for living off capital.
> 
> And if I was a professional, I would absolutely not be able to advise anyone to use these methods on just a hunch and my amateur analysis.


You can find a thorough study of PP together with other popular portfolios at Permanent Portfolio. According to the author of this website, the SWR(safe withdraw rate) is as high as 5.3% for 30-yrs retirement.


----------



## librahall

@J4B, I just spent two days reading this whole PP thread. I found them very helpful and practical. Thank you for writing up all the good thoughts and sharing it with us over the years.

Could you please comment on the following implementation of the PP in Canada? I have done some comparison and backtest in the past months. It seems US PP has outperformed CA PP for >1% CGAR in the past 20 years.


XUS.TO (CAD unhedged) 25%ZTL.F (CAD hedged) 25%ZFS.TO and GIC/CD ladder 25%MNT.TO and Physical Gold 25%

My main questions are:
1) Currency hedge. After reading many articles, I tend to believe that I should not hedge S&P 500 ETF but should hedge US Long Term Bonds. Do you think so and why?
2) ZTL.F is newly released by BMO in Feb. this year, right at the start of the Covid-19 market crash. It's the first CAD hedged TLT in Canada. I was excited the first but when I looked at its performance in the past month, actually it behaved quite differently with TLT. I also found its trading volume is very low. I am hesitating to buy it for the bond part of PP now. Any alternative bond ETFs you would suggest?

Thank you in advance.


----------



## hfp75

For Bond ETFs I'm using ZFL and ZPL... I was using VAB and XLB, BUT with their Corp exposure they were in a real BOG when the markets were stressed and thus I was not impressed. I will stick with ZFL for security and ZPL for a bit better yield. I am ~60% ZFL and ~40% ZPL (for my bonds - at this time). I know this is CAD and not US exposure but I don't feel that matters as much. Your MNT will basically work as USD exposure in my mind since the gold market operates on USD.


----------



## librahall

hfp75 said:


> For Bond ETFs I'm using ZFL and ZPL... I was using VAB and XLB, BUT with their Corp exposure they were in a real BOG when the markets were stressed and thus I was not impressed. I will stick with ZFL for security and ZPL for a bit better yield. I am ~60% ZFL and ~40% ZPL (for my bonds - at this time). I know this is CAD and not US exposure but I don't feel that matters as much. Your MNT will basically work as USD exposure in my mind since the gold market operates on USD.


I just compared the return of these bond ind ETFs. It seems that TLT(US) is much better than its canadian alternatives. US long term gov bonds(>20 yrs) is much more sensitive to interest rate cut and has better hedge to US stock crash. Thoughts?


----------



## andrewf

I wonder whether the PP makes sense when you have debt (mortgage etc). I always struggle with the idea of holding bonds/cash while having a mortgage.


----------



## librahall

andrewf said:


> I wonder whether the PP makes sense when you have debt (mortgage etc). I always struggle with the idea of holding bonds/cash while having a mortgage.


That depends. Given the historically low-interest rate, the PP has a good chance to outperform the mortgage interest rate. My mortgage rate is 1.55% variable. The PP's CGAR is >6%. In addition, if the mortgage is for your investment(rental) properties, the interest is income tax-deductible.


----------



## james4beach

librahall said:


> You can find a thorough study of PP together with other popular portfolios at Permanent Portfolio. According to the author of this website, the SWR(safe withdraw rate) is as high as 5.3% for 30-yrs retirement.


librahall, I'm happy to hear you found this thread (and concept) interesting.

Interesting source for the SWR. I agree that it looks like PP is able to sustain higher withdrawals due to the added stability. However I think we should consider that gold has only traded freely since the 1970s, so there is limited pricing history for it. There is a much longer history of data for stocks and bonds, so SWR on things like 50/50 or 60/40 can probably be stated with higher certainty.

Since the historical SWR analysis with gold is only based on 48 years of gold prices, there may not be enough history to be very confident.


----------



## andrewf

But does it make sense to be long cash and short a mortgage?


----------



## james4beach

librahall said:


> Could you please comment on the following implementation of the PP in Canada? I have done some comparison and backtest in the past months. It seems US PP has outperformed CA PP for >1% CGAR in the past 20 years.


There will certainly be differences in outcomes due to performance of assets in the specific countries (this will always fluctuate over time) and even the currency.



librahall said:


> XUS.TO (CAD unhedged) 25%ZTL.F (CAD hedged) 25%ZFS.TO and GIC/CD ladder 25%MNT.TO and Physical Gold 25%


Some comments and first impressions. XUS is a good one for S&P 500 but I don't think it's a great idea to concentrate all your stock exposure into a single country. To some degree, this is chasing the recent performance of the S&P 500. It's probably a better idea to diversify the stocks somewhat. In mine, I mix Canada & US. Another method would be to split between Canada & XAW to get world exposure. At first glance, yes, this would drop the performance because the S&P 500 has performed the best, but you have to think of what might happen going forward.

And you really need some *domestic* stocks for the PP. The idea after all is to bring together assets which respond differently, counter-balancing economic conditions in YOUR country. If you mix up countries and currencies then you are losing that effect.

Next comment is on bonds. I don't think ZTL is a great idea, because (1) it's brand new with no track record (2) you should probably stick with bonds in your home country and (3) currency hedging has typically added performance drag on other ETFs. I think going with "TLT" or equivalent is also a form of chasing the recent performance of the US. American long term treasuries happen to have done well, but that doesn't make them inherently a better PP choice than, say, Canadian treasuries.

So I would be more inclined to go with 25% ZFL and that fund is very respectable; $1.6 billion assets under management and about 10 years of history.

I like MNT for gold but in recent times I have started diversifying some of that into CGL.C which serves the same purpose. I split mine between MNT & CGL.C for safety, because gold-tracking funds are a very new invention and I don't have full confidence in any of them. The bid/ask spreads on MNT have also been extremely wide lately, which makes it tricky to trade.

But overall, if I may suggest a slightly different take on what you posted, perhaps something like:

Stocks: 12.5% XUS, 12.5% XIC
Long bonds: 25% ZFL
Short bonds: 25% ZFS and GIC/CD ladder
Gold: 25% MNT, CGL.C, physical



> 1) Currency hedge. After reading many articles, I tend to believe that I should not hedge S&P 500 ETF but should hedge US Long Term Bonds. Do you think so and why?


It's true that foreign stocks should be unhedged. But the idea of holding foreign bonds and hedging them is quite a new concept, and I am not sold on the idea. As stated above, I think the PP idea would be to hold domestic (Canadian) fixed income. Consider for example, if there is runaway inflation in the US, but not in Canada. If you held this 25% TLT (US), currency hedged, you would see your "long bonds" part of PP crash in value as TLT would crash as interest rates soar in the US. Now, if you were in the US, you would have also seen your GOLD gain in value versus the USD. But notice that in your portfolio construction, *you would suffer the US treasuries price crash without the balancing effect from gold*, because if the same high inflation isn't happening in Canada, "gold in CAD" would not soar.

In my view, all the assets should be domestic in CAD. The only exception I have made in mine is some foreign stock component.



> 2) ZTL.F is newly released by BMO in Feb. this year, right at the start of the Covid-19 market crash. It's the first CAD hedged TLT in Canada.


As mentioned above I think going the ZFL & ZFS route is superior.


----------



## james4beach

andrewf said:


> But does it make sense to be long cash and short a mortgage?


Well by this logic, anyone with a mortgage shouldn't hold a 60/40 balanced fund either. They are both long and short the same fixed income market.

I'm sure many balanced fund investors do have mortgages, though. I would argue that it's probably just best to aggressively pay off all debts, including mortgages, before investing too heavily into anything.


----------



## james4beach

I'll also add the comment that one of the challenges with the PP (and it's entirely psychological) is that it does hold some very volatile asset classes. Gold and long term treasuries will be very volatile over the years, and swing around by huge amounts.

So although the PP overall behaves very nicely, those segments like long term treasuries will swing around a lot. You have to remember to do annual rebalancing and also stick with your portfolio. For example if interest rates go up significantly, ZFL would plummet in value. As it should. At that point you will likely feel the temptation to get out of ZFL and instead go into another bond fund, maybe entirely into ZFS. *You have to withstand that temptation and stick with your annual rebalancing*, meaning you would sell other things and *buy ZFL* and get back to your target % allocations.

That kind of thing could be extremely difficult to do, when the time comes. It's the same problem in 50/50 and 60/40, but I think it's actually a bit more difficult with PP because both long term bonds and gold are quite volatile.


----------



## librahall

andrewf said:


> But does it make sense to be long cash and short a mortgage?





james4beach said:


> librahall, I'm happy to hear you found this thread (and concept) interesting.
> 
> Interesting source for the SWR. I agree that it looks like PP is able to sustain higher withdrawals due to the added stability. However I think we should consider that gold has only traded freely since the 1970s, so there is limited pricing history for it. There is a much longer history of data for stocks and bonds, so SWR on things like 50/50 or 60/40 can probably be stated with higher certainty.
> 
> Since the historical SWR analysis with gold is only based on 48 years of gold prices, there may not be enough history to be very confident.


But gold as a good method of preserving value has been there for a few thousand years, longer than any fiat money.


----------



## librahall

andrewf said:


> But does it make sense to be long cash and short a mortgage?


I won't view holding cash as a pure way of "long". You can find the following explanation in the book of <The Permanent Portfolio> by Craig Rowland; J. M. Lawson.

"Most financial advisors recommend that investors keep some cash reserves on hand, but almost no investment strategies work these cash holdings into an overall investment strategy. However, the Permanent Portfolio is unique in that it calls for a 25 percent allocation to cash and these cash holdings are a fundamental building block of the overall strategy. Unlike the other Permanent Portfolio assets, which are designed to be volatile, cash is designed to act as a stabilizer to the portfolio during market volatility. The cash allocation also provides an investor with a place to store interest, dividends, and capital gains from the other assets, and provides “dry powder” for rebalancing purposes during market declines. Cash also occasionally serves as the leading asset in the portfolio when the stocks, bonds, and gold are all having a bad year. In addition to the functions described above, cash also acts as an emergency reserve for life's unexpected events, such as periods of unemployment or health emergencies. For those in retirement, the cash portion of the portfolio can be tapped for living expenses. Overall, the cash allocation in the Permanent Portfolio performs several important functions."


----------



## librahall

james4beach said:


> There will certainly be differences in outcomes due to performance of assets in the specific countries (this will always fluctuate over time) and even the currency.
> 
> 
> 
> Some comments and first impressions. XUS is a good one for S&P 500 but I don't think it's a great idea to concentrate all your stock exposure into a single country. To some degree, this is chasing the recent performance of the S&P 500. It's probably a better idea to diversify the stocks somewhat. In mine, I mix Canada & US. Another method would be to split between Canada & XAW to get world exposure. At first glance, yes, this would drop the performance because the S&P 500 has performed the best, but you have to think of what might happen going forward.
> 
> And you really need some *domestic* stocks for the PP. The idea after all is to bring together assets which respond differently, counter-balancing economic conditions in YOUR country. If you mix up countries and currencies then you are losing that effect.
> 
> Next comment is on bonds. I don't think ZTL is a great idea, because (1) it's brand new with no track record (2) you should probably stick with bonds in your home country and (3) currency hedging has typically added performance drag on other ETFs. I think going with "TLT" or equivalent is also a form of chasing the recent performance of the US. American long term treasuries happen to have done well, but that doesn't make them inherently a better PP choice than, say, Canadian treasuries.
> 
> So I would be more inclined to go with 25% ZFL and that fund is very respectable; $1.6 billion assets under management and about 10 years of history.
> 
> I like MNT for gold but in recent times I have started diversifying some of that into CGL.C which serves the same purpose. I split mine between MNT & CGL.C for safety, because gold-tracking funds are a very new invention and I don't have full confidence in any of them. The bid/ask spreads on MNT have also been extremely wide lately, which makes it tricky to trade.
> 
> But overall, if I may suggest a slightly different take on what you posted, perhaps something like:
> 
> Stocks: 12.5% XUS, 12.5% XIC
> Long bonds: 25% ZFL
> Short bonds: 25% ZFS and GIC/CD ladder
> Gold: 25% MNT, CGL.C, physical
> 
> 
> 
> It's true that foreign stocks should be unhedged. But the idea of holding foreign bonds and hedging them is quite a new concept, and I am not sold on the idea. As stated above, I think the PP idea would be to hold domestic (Canadian) fixed income. Consider for example, if there is runaway inflation in the US, but not in Canada. If you held this 25% TLT (US), currency hedged, you would see your "long bonds" part of PP crash in value as TLT would crash as interest rates soar in the US. Now, if you were in the US, you would have also seen your GOLD gain in value versus the USD. But notice that in your portfolio construction, *you would suffer the US treasuries price crash without the balancing effect from gold*, because if the same high inflation isn't happening in Canada, "gold in CAD" would not soar.
> 
> In my view, all the assets should be domestic in CAD. The only exception I have made in mine is some foreign stock component.
> 
> 
> 
> As mentioned above I think going the ZFL & ZFS route is superior.


First of all, thank you for writing back to me during the weekend. Happy Easter Day!

The reasons why I concentrate on the US stocks are:
1) US stock market accounts for *42% of the global market* in size while TSX only accounts for 2.5%. Owning 50% CAD stocks seems a home-country bias IMO;
2) US stock market has a good *intrinsic diversification* across different industries and even different countries already;

Many U.S. corporations have a global presence, with assets and revenues in *foreign* markets. ... At the country level, nearly 71% of *S&P 500* revenue comes from the U.S., with the remaining 29% coming from *foreign* markets.
S&P 500 contains companies from *11 different sectors*, while TSX 60 is weighted heavily on Finance and Natural Resource.
3) US stock market outperforms other markets with a reason, because of its overall strength in technologies, innovations, attractions to talents, capital and so on. I think this momentum may not change in my lifetime. Of course, there will be fluctuations and value recorrections along the way.

To your comments on bonds, I agree that ZTL may not be a good choice. However, I am still not quite convinced that Canadian bonds are superior to TLT(US) to hedge the US stock market. At least no historical data support this. Maybe because investors tend to buy US treasures as safe haven during the US market crash, or because US treasures have a better structure? I don't know. I need more time to think it through.

Thank you again.


----------



## andrewf

librahall said:


> I won't view holding cash as a pure way of "long". You can find the following explanation in the book of <The Permanent Portfolio> by Craig Rowland; J. M. Lawson.
> 
> "Most financial advisors recommend that investors keep some cash reserves on hand, but almost no investment strategies work these cash holdings into an overall investment strategy. However, the Permanent Portfolio is unique in that it calls for a 25 percent allocation to cash and these cash holdings are a fundamental building block of the overall strategy. Unlike the other Permanent Portfolio assets, which are designed to be volatile, cash is designed to act as a stabilizer to the portfolio during market volatility. The cash allocation also provides an investor with a place to store interest, dividends, and capital gains from the other assets, and provides “dry powder” for rebalancing purposes during market declines. Cash also occasionally serves as the leading asset in the portfolio when the stocks, bonds, and gold are all having a bad year. In addition to the functions described above, cash also acts as an emergency reserve for life's unexpected events, such as periods of unemployment or health emergencies. For those in retirement, the cash portion of the portfolio can be tapped for living expenses. Overall, the cash allocation in the Permanent Portfolio performs several important functions."


So, if doing PP while having debt, maybe it makes sense to hold gold and equities along with capacity to borrow for rebalancing purposes. So a notional cash/fixed income position.


----------



## james4beach

librahall said:


> To your comments on bonds, I agree that ZTL may not be a good choice. However, I am still not quite convinced that Canadian bonds are superior to TLT(US) to hedge the US stock market. At least no historical data support this. Maybe because investors tend to buy US treasures as safe haven during the US market crash, or because US treasures have a better structure? I don't know. I need more time to think it through.


Happy Easter to you as well

You're right that TLT is the best hedge for the US stock market, but remember, the permanent portfolio's goal is to hedge more broadly than this. The intention is to create a hedge/balance between different economic conditions including currency devaluation. It's not just about the stock/bond pairing. For example there is also an important bond/gold pairing.

So yes I agree that TLT(US) and XUS go together just fine, but, there are other assets in the portfolio that need to be appropriately matched too.

Imagine that while the CAD is strong (low inflation), the US experiences high inflation, the USD weakens and treasuries fall sharply. Here's a possible response:

XUS falls due to USD falling [stocks down or weak]
TLT falls in reaction to high US inflation [bonds down]
Gold falls, since CAD is strong [gold down or flat]

In this scenario, the PP wouldn't work as desired because you've lost the ideal inflation or currency devaluation hedge. In particular, look at the *bonds & gold* relationship. Here, your US bonds suffered due to inflation but gold will not compensate.

To get the ideal response on the bond/gold pairing, they have to be against the same currency, which is why I'm arguing that the PP works best with domestic assets.


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## librahall

james4beach said:


> Happy Easter to you as well
> 
> You're right that TLT is the best hedge for the US stock market, but remember, the permanent portfolio's goal is to hedge more broadly than this. The intention is to create a hedge/balance between different economic conditions including currency devaluation. It's not just about the stock/bond pairing. For example there is also an important bond/gold pairing.
> 
> So yes I agree that TLT(US) and XUS go together just fine, but, there are other assets in the portfolio that need to be appropriately matched too.
> 
> Imagine that while the CAD is strong (low inflation), the US experiences high inflation, the USD weakens and treasuries fall sharply. Here's a possible response:
> 
> XUS falls due to USD falling [stocks down or weak]
> TLT falls in reaction to high US inflation [bonds down]
> Gold falls, since CAD is strong [gold down or flat]
> 
> In this scenario, the PP wouldn't work as desired because you've lost the ideal inflation or currency devaluation hedge. In particular, look at the *bonds & gold* relationship. Here, your US bonds suffered due to inflation but gold will not compensate.
> 
> To get the ideal response on the bond/gold pairing, they have to be against the same currency, which is why I'm arguing that the PP works best with domestic assets.


Interesting discussion. 

I doubted that Canda and US will behave very differently in terms of inflation. Just found a historical chart as below. 

It presents the inflation rates of Canada and the United States (using the CPI measure) for the period 1958 through 2008. These data are monthly and measure the inflation rate for each month as the percentage increase from the same month of the previous year. Note the remarkable similarity of the inflation rates of the two countries although they differ by as much as 2 percentage points on a few occasions for very short periods.


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## james4beach

librahall said:


> I doubted that Canda and US will behave very differently in terms of inflation. Just found a historical chart as below.


They look pretty similar on the historical chart, but there have still been pretty big differences on smaller time scales. If you look closely at the 2003 - 2006 data, you'll find a 3 year period where the USD fell significantly against CAD. At that time, US Treasuries also weakened versus Canadian ones and there was a big performance difference in the bond markets.

So yes, the chart shows that inflation is similar, but I don't think it really captures the significant performance differences that can occur when there is divergence in our markets.

Earlier tonight I estimated the PP performance for those 3 years based on using US securities (XUS, TLT etc) vs domestic (XIU, XBB for broad bond mkt). I calculated roughly 5% CAGR using US stocks and treasuries... not horrible... but it would have been closer to 10% CAGR using domestic.

So let's call that "moderate" trouble in US dollar & treasuries, and it resulted in 5% CAGR performance loss over 3 years! That's pretty significant.

What if something like that happens again, but even more severely? I think it's a plausible scenario.


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## librahall

james4beach said:


> Earlier tonight I estimated the PP performance for those 3 years based on using US securities (XUS, TLT etc) vs domestic (XIU, XBB for broad bond mkt). I calculated roughly 5% CAGR using US stocks and treasuries... not horrible... but it would have been closer to 10% CAGR using domestic.
> 
> So let's call that "moderate" trouble in US dollar & treasuries, and it resulted in 5% CAGR performance loss over 3 years! That's pretty significant.
> 
> What if something like that happens again, but even more severely? I think it's a plausible scenario.


May I know which tickers you were using for the backtest? I tried to replicate the comparison but found XUS only has data available since May 2013.


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## james4beach

librahall said:


> May I know which tickers you were using for the backtest? I tried to replicate the comparison but found XUS only has data available since May 2013.


I'm using stockcharts.com with some tricks. Here's that 3 year time period.

SPY:$CADUSD shows SPY valued in CAD, same as XUS performance
... 12.99% return = 4.2% CAGR for US stocks
Then I looked at TLT. I assumed perfect hedging, pretend we get same in CAD
... 2.48% return = 0.8% CAGR for US treasuries
$GOLD:$CADUSD for gold in CAD, same as MNT but ignoring ETF fees
... 39.9% return = 11.8% CAGR for gold
XSB for cash/short term bonds, the only ETF that existed back then
... 12.12% return = 3.9% CAGR for short term bonds

Domestic alternatives
XIU = 19.8% CAGR
XBB = 4.9% CAGR (the only data I have for Cdn bonds)

Average of above, the PP using American stocks and bonds = 5.2% CAGR
If you swap to domestic you get [19.8%, 4.9%, 11.8%, 3.9%] = 10.1% CAGR

I think this is a good warning of what can happen when USD & US Treasuries are weak. It's easy to forget this, because both have been strong for about a decade now.

Some people may comment that this TSX return seems outlandishly high. Not at all. All global stocks, such as MSCI EAFE, had similar performance. America's performance was far below average, while the US dollar plummeted.


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## hfp75

james4beach said:


> What if something like that happens again, but even more severely? I think it's a plausible scenario.


expecially when you stop and look at what the us fed is doing right now with the money supply !!!


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## james4beach

Here's a chart of my version of the permanent portfolio versus VCNS and VBAL for this year so far, as of April 16. These are daily values, total return.

The 'Permanent Portfolio' shown here is what I use. It's 15% XIU, 15% ZSP, 50% XBB, 20% MNT ... my version of it, based on various ETFs that I've been using for a long time. There is one bond fund which combines short term & long term bonds.

Some observations:

PP is doing the best in 2020. It's actually positive YTD!
As expected, the higher % stocks, the worse the crash & volatility
The minimum points were: PP -9%, VCNS -15%, VBAL -18%


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## cainvest

james4beach said:


> Here's a chart of my version of the permanent portfolio versus VCNS and VBAL for this year so far, as of April 16. These are daily values, total return.
> 
> The 'Permanent Portfolio' shown here is what I use. It's 15% XIU, 15% ZSP, 50% XBB, 20% MNT ... my version of it, based on various ETFs that I've been using for a long time. There is one bond fund which combines short term & long term bonds.
> 
> Some observations:
> 
> PP is doing the best in 2020. It's actually positive YTD!


The run up on MNT this year is definitely giving a positive result. Question though ... since the allocations are so spread out (MNT vs others) do you plan to rebalance at all?


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## james4beach

cainvest said:


> The run up on MNT this year is definitely giving a positive result. Question though ... since the allocations are so spread out (MNT vs others) do you plan to rebalance at all?


My approach is to rebalance only once a year, at year end. This is to make sure that the way I'm investing is consistent with the historical backtests, since all of those were based on annual rebalancing as well.

There are certainly other ways a person can rebalance, but I saw good historical results from the annual rebalance method, including during Great Depression years, dot com crash, etc.

I also think it's best to touch the portfolio as little as possible. We saw a good example of this in February and March; the bid/ask spreads on ETFs, especially bond ETFs, became extremely wide and corporate bonds became illiquid. Anyone who rebalanced from bonds to stocks suffered a (big) loss due to this; there was quite a large "fee" to rebalance. Was it worth it?

Optimal Rebalancing – Time Horizons Vs Tolerance Bands



> As a result, a study from Vanguard, by Jaconetti, Kinniry and Zilbering, basically found no material differences in outcomes for rebalancing frequencies varying from monthly to annual, once measured on a rolling period basis. When analyzed using a 60/40 portfolio going back to 1926, the researchers found that rebalancing quarterly or monthly produced no improvement in long-term risk or returns; it simply drove up the turnover rate and the number of rebalancing events (and potential transaction costs!).


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## cainvest

james4beach said:


> My approach is to rebalance only once a year, at year end. This is to make sure that the way I'm investing is consistent with the historical backtests, since all of those were based on annual rebalancing as well.


Just wondering .... one of the powers to rebalancing is selling high to buy the low and combine that with a large divergence between assets (MNT vs other) I wasn't sure if you'd consider it. I mean under normal gains and dips it's not a consideration (as the studies show) but with a large (say over 30%) difference I often wonder what I'd do. And of course this could be considered a market timing mistake that only history will prove right or wrong later.


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## james4beach

cainvest said:


> Just wondering .... one of the powers to rebalancing is selling high to buy the low and combine that with a large divergence between assets (MNT vs other) I wasn't sure if you'd consider it.


It's true that rebalancing works great when there is a big divergence between the assets. So the question is, how big is the current divergence in historical context?

First I constructed a "divergence from target" value for each year... the sum of the magnitude of each asset's divergence from target weight. This does a reasonable job capturing the rebalancing opportunity. The higher the value, the greater the divergences. To clean up the picture I removed bars below 6%, since that's the majority of them.

Example: with my 30/50/20 targets, in 2008 the weights ended the year at 21.7 / 52.8 / 25.5 which are divergences of 8.3%, 2.8%, 5.5%, which sum to 16.6%... biggest bar










Your intuition seems correct, that 2020 (so far) is a reasonably big year for rebalancing opportunity. But I look at this and think: it's an OK rebalancing situation, but the reading isn't as high as 1997, 1999, 2002, 2008, 2013.

So I don't think it's an *extreme* enough situation to warrant taking action now, as opposed to year end. Sticking with the year end schedule gives me the comfort of being consistent with historical backtests. From a psychological standpoint, I also suspect that sticking with an annual routine will be easier to follow through with because "there is no choice". It's a neat idea in passive indexing... deliberately removing discretion from the picture.

Currently my only fear with the Permanent Portfolio is that I will be too scared or timid, in a year like 2002 or 2008, to execute the rebalancing. Sticking with annual rebalancing (no choice, no discretion) may be the optimal strategy from a behavioural standpoint.


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## cainvest

You're probably right on sticking with the once a year rebalance plan and, my guess, it'll probably work out well at the end of 2020.

When I was comparing for rebalance points I just charted VCNS and MNT, to keep it simple. Currently there is a 33% difference in price YTD. There could be many percentage or math based rules one could come up with to remove the psychological impact, maybe even a simple rule like ... 

you get one "extra" relabance per year is the difference is greater than "x".
do it quarterly (kind of a DCA approach) if the difference is remains above "x".

I'm not sure what the backtesting results would be from this even though is "looks good" on the surface.


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## james4beach

I had another thought on this. Rebalancing is mostly about controlling risk, not increasing return. It makes sense to rebalance more frequently if you're concerned about risk, but since the Permanent Portfolio is already low risk by design, maybe there's less need to rebalance.

In case anyone is curious about a real-life result, here are screen shots [with $ removed] from my RRSP, which has held my modified PP since last summer. I use a single 50% bond allocation to simplify short term & long term bonds, with DRIP on everything.

It's up 14% from a year ago, and hitting new all time highs. My RRSP holds MNT, but CGL.C should work just as well.



















The target weights are: 15% XIU, 15% ZSP, 20% MNT, 50% XBB


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## librahall

I have a question about the bond part of PP. Is it still wise to hold bonds given the treasury rate is so low? In a recent discussion, I got the following argument from a popular stock YouTuber. 

"Any NAV appreciation on TLT will come from lower treasury rates. The bondholders with TLT benefited from the hedge in Feb-March, but now that we are at much lower rates there is less possibility for NAV appreciation going forward (unless rates go negative), and you have the possibility of a decreasing NAV in TLT if rates rise. You can certainly own them, I just don't personally think the risk/reward (even as a hedge) is very favorable here. "

My response to him was "The future is unpredictable. I would not be surprised if one day the Fed decided to cut the interest rate to negative." But I'd love to hear your thoughts.


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## james4beach

At any point in time, you'll always find someone making an argument for why one particular asset is a good buy, or not. The idea behind Browne's PP is that we have no idea what the future will bring, and trying to anticipate market direction is futile. We can't predict price direction or inflation. It's the same idea as couch potato investing and passive asset allocation in general: one does not adjust the formula (like 60/40) based on where we think bonds may be headed.

Is it wise to hold bonds? Once you decide on an asset allocation, it's wise to stick with whatever the weights are.

The return in bond funds does not come purely from interest rates dropping. It also comes from sources such as a yield curve steepness, and from reinvesting maturing bonds. In fact, if interest rates were to gradually rise over the years, bond funds will perform well. So it's incorrect, and overly simplistic, to say that bond funds need yields to drop, to produce a return. That's not how bond funds work.

Japan had treasury bond rates near 0% for many years, even lower than we have now. Bond funds in Japan have actually done quite well over the decades.

But I don't advocate investing in long term bonds. As you can see in my portfolio, I use XBB because ~ 10 years is a more reasonable maturity. TLT are US long term bonds and are much more volatile (and risky).


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## librahall

james4beach said:


> At any point in time, you'll always find someone making an argument for why one particular asset is a good buy, or not. The idea behind Browne's PP is that we have no idea what the future will bring, and trying to anticipate market direction is futile. We can't predict price direction or inflation. It's the same idea as couch potato investing and passive asset allocation in general: one does not adjust the formula (like 60/40) based on where we think bonds may be headed.
> 
> Is it wise to hold bonds? Once you decide on an asset allocation, it's wise to stick with whatever the weights are.
> 
> The return in bond funds does not come purely from interest rates dropping. It also comes from sources such as a yield curve steepness, and from reinvesting maturing bonds. In fact, if interest rates were to gradually rise over the years, bond funds will perform well. So it's incorrect, and overly simplistic, to say that bond funds need yields to drop, to produce a return. That's not how bond funds work.
> 
> Japan had treasury bond rates near 0% for many years, even lower than we have now. Bond funds in Japan have actually done quite well over the decades.
> 
> But I don't advocate investing in long term bonds. As you can see in my portfolio, I use XBB because ~ 10 years is a more reasonable maturity. TLT are US long term bonds and are much more volatile (and risky).


Hi James - Thanks for sharing your thoughts. Really learned a lot from your writings so far.


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## james4beach

librahall said:


> Hi James - Thanks for sharing your thoughts. Really learned a lot from your writings so far.


Glad I could help. Here's an article that may interest you. It talks about a little-known fact, which is that bond investments in Japan performed quite well even with their rates chronically near zero. Note the chart of their Total Return invested and rolled in 9-year JGBs (about the same avg maturity as XBB)

How Bond Bears (Especially In Japan) Lost So Much Money Since 2000

I don't mean to give the wrong idea here: our domestic bonds could potentially be very bad investments right now. But they can also do well, as they did in Japan.


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## james4beach

For more on Japan, here's a real Japanese bond fund which also shows performance. Just about the whole time this has existed, the Bank of Japan rate was around 0%. The return in this bond fund was about 1.8% CAGR with quite good returns each year. Japanese inflation has hovered around zero.

So what does that mean? Japanese bond funds gave close to *2% real return*. That's pretty darn good.


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## hfp75

Librahall, I also think there is a high chance rates will go neg....


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## james4beach

I should have posted this into the current thread
Deflation - revamping my portfolio....

Here is inflation adjusted performance of the Permanent Portfolio vs stocks and bonds, for 1972-1982. This was a period of high inflation and poor economic growth.

Bonds did poorly in this decade, at -4.70% CAGR real return. However, keep in mind that bonds did great after 1982.


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## hfp75

J4B - It would be good if that chart would show Gold, Interest Rates and Inflation....... The real depth behind it would become more visible....


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## librahall

I have a practical question. How do you buy your PP through ETF trades? 

Let's say if someone has $100K to invest and wants to use 3 ETFs (ZFL 25%, CGL.C 25%, XIU 25%) + Cash 25% to form his PP. Harry Browne once mentioned that only the portfolio as a whole can really protect your money. However, the price of XIU, ZFL, and CGL.C could be very volatile on a specific trading day. Unless you buy at a (close to) market price, you could easily miss some orders and your portfolio is then unbalanced as 25% for each part. Sometimes, I try to split the money into 3-4 orders at different prices. 

Maybe it seems a kind of perfectionism. Always glad to hear your advice. Have a good day!


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## james4beach

It's true that one must look at the portfolio as a whole, and think you're fine as long as you trades fill within the span of an hour. I always place limit orders, and start with the least liquid one in a group (whichever has the widest bid/ask spread, likely CGL.C) since this will be the most difficult one to fill.

What I'd do (edited, revised)

1. place one limit buy order on each ETF
2. wait 15 mins (or longer I suppose) but consider this a hard deadline
3. if something hasn't filled, modify the order and meet the asking price

In step 1, choosing a good limit price, with a high probability of being filled, is a bit of an art. For CGL.C and MNT, I would probably place my bid at the mid point between the bid & ask (half way). XIU is liquid and very active, so I might bid one or two cents below the current asking price. Bond ETFs have low volume and don't move much. I wouldn't get more ambitious than one cent below the asking price on a normal day.

After the 15 minutes are up, I would revisit any unfilled orders and change them so they are guaranteed to fill. At that point I would do a limit buy at the asking price or perhaps one or two cents _above_ the asking price. There is no risk of overpaying when you do this, since you'll still get the lowest ask for the number of shares you want. Note that if you're buying a lot of shares, it may take more than the current asking price to fill all shares.

That's effectively a market order, but it's always safer to place limit orders.

In step 3, I think it's important to give up on trying to get bargains, and just buy. This prevents you from falling into the trap of "chasing the market" as prices move against you. My view is that you already took a stab at getting a bargain (step 1) and now it's time to complete the trade.


_Aside 1_: here's that portfolio in the Visualizer using ZFS for the cash component. That picture is nice because it starts in a bad year (where gold & long bonds fell hard) so you're getting a pessimistic view.

_Aside 2_: I'll backtrack on something I said earlier, and I think it's fine to have foreign diversification in the stocks. If you look at my own RRSP portfolio in #302 you'll see that I mix XIU & ZSP


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## james4beach

@librahall at the risk of complicating things, I'll mention that the PP is basically at an all time high value, again. You would be buying it pretty high. The same could be said on just about any day in 2019 or 2020, except for March.

This is one of those frustrations that can never be solved. There is no way to time a lower entry. Instead, I find it helpful to look at the historical record. Then, I remind myself: the PP routinely falls 5%. Even a 15% drawdown would be normal, and OK.

I most recently added to my RRSP on February 19. Practically the high. Then, I saw my portfolio immediately drop 11%. It's been a wild ride... but still milder than other portfolios.


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## librahall

james4beach said:


> It's true that one must look at the portfolio as a whole, and think you're fine as long as you trades fill within the span of an hour. I always place limit orders, and start with the least liquid one in a group (whichever has the widest bid/ask spread, likely CGL.C) since this will be the most difficult one to fill.
> 
> What I'd do (edited, revised)
> 
> 1. place one limit buy order on each ETF
> 2. wait 15 mins (or longer I suppose) but consider this a hard deadline
> 3. if something hasn't filled, modify the order and meet the asking price
> 
> In step 1, choosing a good limit price, with a high probability of being filled, is a bit of an art. For CGL.C and MNT, I would probably place my bid at the mid point between the bid & ask (half way). XIU is liquid and very active, so I might bid one or two cents below the current asking price. Bond ETFs have low volume and don't move much. I wouldn't get more ambitious than one cent below the asking price on a normal day.
> 
> After the 15 minutes are up, I would revisit any unfilled orders and change them so they are guaranteed to fill. At that point I would do a limit buy at the asking price or perhaps one or two cents _above_ the asking price. There is no risk of overpaying when you do this, since you'll still get the lowest ask for the number of shares you want. Note that if you're buying a lot of shares, it may take more than the current asking price to fill all shares.
> 
> That's effectively a market order, but it's always safer to place limit orders.
> 
> In step 3, I think it's important to give up on trying to get bargains, and just buy. This prevents you from falling into the trap of "chasing the market" as prices move against you. My view is that you already took a stab at getting a bargain (step 1) and now it's time to complete the trade.
> 
> 
> _Aside 1_: here's that portfolio in the Visualizer using ZFS for the cash component. That picture is nice because it starts in a bad year (where gold & long bonds fell hard) so you're getting a pessimistic view.
> 
> _Aside 2_: I'll backtrack on something I said earlier, and I think it's fine to have foreign diversification in the stocks. If you look at my own RRSP portfolio in #302 you'll see that I mix XIU & ZSP


Thanks for the step-by-step description. The idea of "start with the least liquid one" is very inspiring. The only thing I may want to add is to avoid placing orders in the first and last half hour of each trading day when the price could be very volatile. 



> _Aside 2_: I'll backtrack on something I said earlier, and I think it's fine to have foreign diversification in the stocks. If you look at my own RRSP portfolio in #302 you'll see that I mix XIU & ZSP


Thanks for the reminder. Yes, actually I am using a mix of XIU & ZSP for my stock part. Just wanted to simplify the question.


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## james4beach

librahall said:


> Thanks for the step-by-step description. The idea of "start with the least liquid one" is very inspiring. The only thing I may want to add is to avoid placing orders in the first and last half hour of each trading day when the price could be very volatile.


I agree with you about avoiding the first and last half hour of the day. Actually, I avoid the entire first hour.


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## librahall

james4beach said:


> @librahall at the risk of complicating things, I'll mention that the PP is basically at an all time high value, again. You would be buying it pretty high. The same could be said on just about any day in 2019 or 2020, except for March.
> 
> This is one of those frustrations that can never be solved. There is no way to time a lower entry. Instead, I find it helpful to look at the historical record. Then, I remind myself: the PP routinely falls 5%. Even a 15% drawdown would be normal, and OK.
> 
> I most recently added to my RRSP on February 19. Practically the high. Then, I saw my portfolio immediately drop 11%. It's been a wild ride... but still milder than other portfolios.


Good point mentioned. I am also concerned about this all time high valuation of PP. That's why I decided to slowly buy into PP since this March. More dollar-cost-average than a lump sum. However, I never expected the market can bounce back so quickly. I still have 60% sitting in cash now. But I don't want to spend too much time watching the market every day, I may just add half of them into PP next week. I have studied and backtested PP for quite a while. I would just let PP take care of itself and look at the long term.


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## james4beach

librahall said:


> I still have 60% sitting in cash now. But I don't want to spend too much time watching the market every day, I may just add half of them into PP next week. I have studied and backtested PP for quite a while. I would just let PP take care of itself and look at the long term.


One approach may be to schedule some arbitrary dates, and just go with it. I did this last year when I had some excess cash; I invested half immediately. Then I locked the other half into a short term GIC, with a promise to myself to invest the rest at maturity.

There's always the risk of buying a portfolio at a local maximum. But the theory is that the PP is somewhat resistant to this. Historically, it recovered quickly and gave pretty consistent returns when varying the start date.

I looked at my portfolio data for my modified-PP. In the last few years, there were a couple times that the portfolio took 7 months to recover back to a previous peak.


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## james4beach

I guess it's possible we're starting another down phase or even another crash, so I thought I'd check up on my overall allocations to see if I'm still well positioned. As of today I'm 28% stocks, 21% gold, 51% bonds/GICs. This is very close to my targets of 30/20/50 so all is good.

It's amazing how "hands off" this portfolio has been in 2020, despite all the craziness.


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## andrewf

Maybe this is the other shoe dropping. The seeming enthusiasm shown by the market has been extremely puzzling to me. Even if COVID blows over (and not much reason to think it won't be a medium-term problem), the economy has been dealt a significant shock and there has been a lot of labour market dislocation. Demand is only going to recover gradually in many industries.


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## bgc_fan

andrewf said:


> Maybe this is the other shoe dropping. The seeming enthusiasm shown by the market has been extremely puzzling to me. Even if COVID blows over (and not much reason to think it won't be a medium-term problem), the economy has been dealt a significant shock and there has been a lot of labour market dislocation. Demand is only going to recover gradually in many industries.


You'd think that the market would be more negative given that current financial data can't be good, aside from Amazon, Wal-mart, Loblaw, etc. the types of retailers that do well regardless of economic activity. I recall hearing some analyst saying that people are pricing stocks based on expectations next year as opposed to current... while I can understand to some degree, the fact of the matter is that a lot of balance sheets are not good and I'm sure a number of companies are on the knife's edge of bankruptcy.


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## james4beach

This could also be just a one or two day correction before stocks rocket to new all time highs.


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## MrBlackhill

james4beach said:


> This could also be just a one or two day correction before stocks rocket to new all time highs.


The market has opened all in the green. Let's see if it's just a small bounce back before another sharp decline. At the moment, I just feel stupid I bought stocks on Monday and instantly lost 12%. During this week, my best stock was CJT who doesn't want to go down. I also have SCL which is a funny stock to watch at the moment. I did +200% in the first week, then -50% during the week and now currently at +30% today for an overall +100% since I bought it.


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## librahall

bgc_fan said:


> You'd think that the market would be more negative given that current financial data can't be good, aside from Amazon, Wal-mart, Loblaw, etc. the types of retailers that do well regardless of economic activity. I recall hearing some analyst saying that people are pricing stocks based on expectations next year as opposed to current... while I can understand to some degree, the fact of the matter is that a lot of balance sheets are not good and I'm sure a number of companies are on the knife's edge of bankruptcy.


Everyone knows that the stock market rallies mainly because the FED is printing money and buying everything. But, I still have a mixed feelings when I see most of my PP valuation growth offsetted by long term bond and gold recently. I know this is by design of PP, it will do the same when the market drops. Just can't stop thinking of it...


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## bgc_fan

librahall said:


> Everyone knows that the stock market rallies mainly because the FED is printing money and buying everything. But, I still have a mixed feelings when I see most of my PP valuation growth offsetted by long term bond and gold recently. I know this is by design of PP, it will do the same when the market drops. Just can't stop thinking of it...


Sure there is some stock manipulation, but eventually it'll catch up. 

That is pretty much the point of a PP. It tends to smoothen out the waves.


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## librahall

This pandemic is a kind of accelator for online adoption i.e. SaaS(Shopify, Square), online education(Zoom), streaming, ecommerce(including offline to online) and Cloud services(CDN, Security and etc). Although someone may argue that the PE ratio is as high as the Internet bubble in 2000, the penetration/influence of technodege to our life has changed quite a bit. My Variable Portfolio is mainly focusing in these sectors plus some geo diversifications. It has been doing pretty good this year.


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## james4beach

librahall said:


> Everyone knows that the stock market rallies mainly because the FED is printing money and buying everything. But, I still have a mixed feelings when I see most of my PP valuation growth offsetted by long term bond and gold recently. I know this is by design of PP, it will do the same when the market drops. Just can't stop thinking of it...


I have mixed feelings about every asset within the PP. The way I think about this is: yes, each asset in the PP has its own unique problems, but that's OK. I'm aware of their dangers and shortcomings and am fine with them.

The main difficulty with the PP is that, eventually, there will be some stretch of years when one of the assets performs terribly. For example gold 1980-2000, or stocks 2000-2014. In these periods, people tend to give up on those assets. They look like chronic money-losers!

Bond funds have been amazing for the last 35 years, but at some point, yields could march higher and bond funds may show terrible performance. *But I must still hold them in the PP even while they underperform.*

To mentally prepare myself for that, I'm acknowledging up front that all the asset classes have problems and I could see one of the portfolio's assets perform terribly for a decade or more.


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## hfp75

But you could just run a hybrid PP with a decreased exposure while that is going on.....


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## james4beach

hfp75 said:


> But you could just run a hybrid PP with a decreased exposure while that is going on.....


Myself, I would not try that, because I don't have a good history of timing these different asset classes. Look at US stocks, for example. They did terribly from 2000-2014 and by 2010 most investors were pretty soured on them. But in fact their performance turned around very sharply right around then.

I was bearish, and kept a very low allocation to US stocks. The problem is that I was still doing that in 2017. So my timing was all wrong... by trying to be "tactical" I missed most of the bull market. And then you have the problem where, when late to the party, you're more likely to join near another peak.

So I've tried this tactical asset exposure thing, and I couldn't do it. It only hurt my returns. Now, I'm sticking to constant % asset weights.

Constant asset weights with occasional rebalancing will automatically "buy low".


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## librahall

Anyone here has the experience of buying Canadian Long-term Bonds? I use ZFL for my previous PP with Questrade. Recently, I have a relative bigger amount of money to deal with. Therefore, I am trying to buy Canadian Long-term Bonds(25-30 year-to-maturity) for the bonds part of my new PP implementation. I checked RBC and found the price/100 CAD for $50k CAD PAR value of purchase is about $145 CAD, including an estimated commission of $250. See the screenshot below.










It seems that RBC is selling 2% higher than its public price. 










What is the best way to buy Canada Long-term Bonds in Canada? Thanks in advance.


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## hfp75

I am using ZFL and ZPL..... a 50/50 split for my PP allocation to LTB...


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## james4beach

librahall said:


> What is the best way to buy Canada Long-term Bonds in Canada? Thanks in advance.


Sadly, bonds aren't quoted and priced through an exchange, so brokers can really nail retail investors on this stuff. RBC is giving you some very high fees here, they are ripping you off. Unfortunately it's also hard to calculate whether brokers are ripping you off on bonds because of the complicated way they embed fees into the quotes. It's really dirty stuff. They will bake some of their fees into the bid/ask spread and then under state their "commission".

Here is the pricing on that same bond through Scotia iTrade a couple hours after you posted, but long bonds had a stable price today (looking at ZFL) so this should be nearly directly comparable to your quote.

Canada maturing 2048/12/01, coupon 2.7500
For 50,000 principal
Price is 143.851
Principal value = 71,925.50
Commission = 50.00
Accrued interest = 184.59

The great thing about iTrade is that (as far as I can tell) they provide good prices that are pretty close to dealer prices, and they charge a low commission on bonds, as you can see above.

From your screen shot, I'm guessing that quote excludes the accrued interest. Including fees but excluding accrued interest, you would pay 72,759. Through iTrade, including fees but also excluding accrued interest, I would pay 71,975.50.

*RBC is charging you $783.50 more in fees and spreads. *Even if they actually include accrued interest, the overall fees are still dramatically higher than iTrade.

You could either switch to iTrade (which is what I did for all my fixed income) or use ZFL, which is a good way to do all this.

I need to buy the same 2048 soon, to bring my average maturity higher.


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## james4beach

Here's another iTrade example that I think illustrates why iTrade is amazing for government bonds.

Government of Canada, 2051/12/01 with 2.00 coupon. Marketwatch quotes this at a price of 127.03125 but it's hard to find actual quotes from a reliable third party and I'm not sure how accurate that quote is. Instead I want to show you the *bid/ask* spread.

25,000 face value
Buy price 127.103
principal = 31,775.75
commission = 25.00
accrued int = 67.12
total purchase cost = 31,867.87

If I sell this, the price is 126.954
principal = 31,738.50
commission = 25.00
accrued int = 67.12
total proceeds of sale = 31,780.62

The difference between buying and selling tells us everything, because a broker absolutely will not pay me more for a bond than it's worth in the open market.

Notice here the spread between the buy and sell price is only 0.1% so this is an incredibly tight spread. And in fact the mid point of the two iTrade prices is the Marketwatch quote, so I think we can believe here that iTrade really is giving us an honest market quote with minimal bid/ask spread.

What would happen if you bought this and then immediately sold it back? Looking at the total purchase and selling costs, you would lose only $87 in the round trip transactions. This is truly incredible! Look at how liquid this bond is. If you want to sell it to get access to cash ... that costs you an effective 87/2 = $44 fees.

I have spot checked iTrade quotes a few times over the last few years and have generally found their pricing, and bid/ask spreads, to be very good. Sadly it is still difficult to calculate and verify how good the prices are, but iTrade has earned my confidence for fixed income.


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## librahall

james4beach said:


> Here's another iTrade example that I think illustrates why iTrade is amazing for government bonds.
> 
> Government of Canada, 2051/12/01 with 2.00 coupon. Marketwatch quotes this at a price of 127.03125 but it's hard to find actual quotes from a reliable third party and I'm not sure how accurate that quote is. Instead I want to show you the *bid/ask* spread.
> 
> 25,000 face value
> Buy price 127.103
> principal = 31,775.75
> commission = 25.00
> accrued int = 67.12
> total purchase cost = 31,867.87
> 
> If I sell this, the price is 126.954
> principal = 31,738.50
> commission = 25.00
> accrued int = 67.12
> total proceeds of sale = 31,780.62
> 
> The difference between buying and selling tells us everything, because a broker absolutely will not pay me more for a bond than it's worth in the open market.
> 
> Notice here the spread between the buy and sell price is only 0.1% so this is an incredibly tight spread. And in fact the mid point of the two iTrade prices is the Marketwatch quote, so I think we can believe here that iTrade really is giving us an honest market quote with minimal bid/ask spread.
> 
> What would happen if you bought this and then immediately sold it back? Looking at the total purchase and selling costs, you would lose only $87 in the round trip transactions. This is truly incredible! Look at how liquid this bond is. If you want to sell it to get access to cash ... that costs you an effective 87/2 = $44 fees.
> 
> I have spot checked iTrade quotes a few times over the last few years and have generally found their pricing, and bid/ask spreads, to be very good. Sadly it is still difficult to calculate and verify how good the prices are, but iTrade has earned my confidence for fixed income.


Thank you, James4beach. Your response is always so clear and comprehensive. I am glad that I asked before buying those bonds with RBC. I'll definitely look into iTrade. 

One more question. In the US, people can buy gov bonds directly from the government at treasurydirect.gov. Is there a similar approach in Canada?


----------



## james4beach

librahall said:


> Thank you, James4beach. Your response is always so clear and comprehensive. I am glad that I asked before buying those bonds with RBC. I'll definitely look into iTrade.


Glad it was useful



librahall said:


> One more question. In the US, people can buy gov bonds directly from the government at treasurydirect.gov. Is there a similar approach in Canada?


The US system is pretty nice. I wish we could do the same, but I don't think there's a way to do this in Canada. It seems that we're stuck going through the brokers.

I hold individual bonds myself (non registered) and I like that I have direct control over the portfolio. But sometimes I ask myself if it's worth all the trouble, considering how flexible and easy the ETFs are.

In my registered accounts, I hold ETFs and it makes rebalancing much easier.


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## librahall

Yes, this is what I thought. I checked with RBC client manager just now and he also told me that any bond purchase has to go through the brokers in Canada. 

ETFs are more flexible. However, I am willing to take a little more efforts to avoid the risks. The banks are more vulnerable than they look. The pandemic, very low interest rate, geo-political conflicts and so on, they all have negative impact to banks. My plan is to use my bond ETFs for rebalancing and keep my direct owned bonds intact.


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## librahall

james4beach said:


> *RBC is charging you $783.50 more in fees and spreads. *Even if they actually include accrued interest, the overall fees are still dramatically higher than iTrade.


Sorry, it seems that I misunderstood. RBC didn't charge higher as I thought but just added ~2% for the "approximate price/100 CAD" when I place the order. The actual transaction price was a market price. 

I placed multiple buy and sell orders using RBC's practice account on Thursday and Friday. (Unlike stocks, the bond trading order status won't show until the next day. ) As you can see in the below screenshot, the actual order price on July 16 was 142.155 per 100 CAD face value for 10,000 principal, including $100 CAD commission. 

However, RBC does charge higher commission than Scotia iTrade for orders < 25,000 CAD. Commission applies for both buy and sell. 

RBC: 
Commission is included in the quoted price:

$100 CAD for 10,000 principal
$250 CAD for 50,000 principal
Minimum commission: $25 per transaction 
Maximum commission: $250 per transaction
iTrade:
Commission-style pricing at $1 a bond ($1 per $1,000 FACE VALUE, $24.99 min/$250 max)**


Figure-1 When I placed the order, it shows 145.1485 CAD for "Approximate Price/100". 










Figure-2 The actual order price was 142.155 CAD for the order above.


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## james4beach

librahall said:


> Sorry, it seems that I misunderstood. RBC didn't charge higher as I thought but just added ~2% for the "approximate price/100 CAD" when I place the order. The actual transaction price was a market price.
> 
> I placed multiple buy and sell orders using RBC's practice account on Thursday and Friday.
> . . .
> Figure-2 The actual order price was 142.155 CAD for the order above.


I would still be cautious here. It's a practice account, and I've tried their practice account as well. I know that back when I tried it out, it was not accurately reflecting the bid/ask spreads on stocks. If the same is true for bonds, it's possible that the practice account isn't showing you what an actual fill price would be.

Though the fill price in the practice account is encouraging, I'm not sure I fully believe it. I suggest phoning RBC again and digging into this more.

There surely is a difference between bid and ask. You could ask questions like, ok, if I immediately sold this back, what price would I get? Does the practice account accurately reflect the spread?

Remember that bond trading is very different than stock trading. With stocks, the brokerage mostly acts as an "agent" for you, meaning they assist you in going out to the market to get what you need.

Even in circumstances where the brokerage is the other side of your stock/ETF trade (when they are market maker) there are strict regulatory guidelines that ensure you get the best price. So whether the broker is an agent or principal, you get a fair price... this is entirely thanks to regulations.

With bond purchases, the broker is a principal, so they are a counterparty to you. There is no regulation to guarantee you a good price. The broker is *our direct competitor*, they aren't our friend in this game. They're making money using the spread, and taking advantage of the fact that we have poor data.


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## librahall

james4beach said:


> I suggest phoning RBC again and digging into this more.
> 
> There surely is a difference between bid and ask. You could ask questions like, ok, if I immediately sold this back, what price would I get? Does the practice account accurately reflect the spread?


I did phone RBC client service but the guy was not clear about the pricing and spread either. He basically just read what it say on the web page to me... That's why I tried with the practices account by myself. 



james4beach said:


> if I immediately sold this back, what price would I get?


I also did buy and sell this bond on Friday. See the orders top in my screenshot. It's strange that there's no difference between those two orders. That is strange to me. I was thinking maybe it's because I sell 20,000 bonds but only buy 5,000 bonds. RBC's approximate price ranges for different amount of purchase. 

Your warning is well received. I will dig deep next Monday. And, I have applied an iTrade account on Friday.


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## james4beach

librahall said:


> Your warning is well received. I will dig deep next Monday. And, I have applied an iTrade account on Friday.


This is just a feeling, but knowing how brokers work and considering their history in ripping off people in bonds, my gut tells me that the practice account quotes don't have the spread. At the end of the day you might have to place a real bond trade with say 10K and see what happens with real money.

It took me several actual trades at both TDDI and iTrade before I could really see what was happening. Even if it costs you $100 in fees to explore this, the savings would be worth it in the long term.


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## librahall

james4beach said:


> This is just a feeling, but knowing how brokers work and considering their history in ripping off people in bonds, my gut tells me that the practice account quotes don't have the spread. At the end of the day you might have to place a real bond trade with say 10K and see what happens with real money.
> 
> It took me several actual trades at both TDDI and iTrade before I could really see what was happening. Even if it costs you $100 in fees to explore this, the savings would be worth it in the long term.


Yes, you are right. I will try some actual trades if needed.


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## librahall

james4beach said:


> This is just a feeling, but knowing how brokers work and considering their history in ripping off people in bonds, my gut tells me that the practice account quotes don't have the spread. At the end of the day you might have to place a real bond trade with say 10K and see what happens with real money.


I placed a real order early today and it's filled now. You are right, RBC did charge as high as 1.79% spread/mark-up in bonds!!! I was cheated by their practice account. I called the client service today and was told that the practice account is just for "DEMO" purpose. I would say this is not demo but cheating!!! I'll never ever believe RBC. So pissed off. 

My order in RBC DirectInvesting: 









Bond Price 









iTrade Bond Price


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## james4beach

librahall said:


> I placed a real order early today and it's filled now. You are right, RBC did charge as high as 1.79% spread/mark-up in bonds!!! I was cheated by their practice account. I called the client service today and was told that the practice account is just for "DEMO" purpose. I would say this is not demo but cheating!!! I'll never ever believe RBC. So pissed off.


Thanks for sharing what you found, this is very helpful. I hope others can find this thread, in fact, I added some keywords at the end of this post to help search engines find this later.

Don't feel bad. Those practice or simulation accounts really can't account for realism, and bid/ask spreads are hard to simulate. I doubt that RBC made the practice account deliberately misleading. I've found bugs in their practice account over the years and had to stop using it because it just wasn't realistic.

It's possible that RBC will tell you that the spread would have been lower for a larger face value, but I'm not sure I would believe them.

I'll add this caveat. Even though I really like iTrade, I have sometimes place bond orders and it has filled (very slightly) higher than the price shown. So the quote iTrade shows you is not exactly what you will get a fill at. All bond trades become "market" orders, which means they wiggle around slightly. I can't recall the exact numbers but I think the last time I placed a buy, it was pretty close to the quoted number.

Canadian fixed income
Discount brokers for bond trades
Government bonds at discount brokerages
Buying bonds at RBC Direct Investing
Individual bond prices and fees for RBC DI
Fees for bonds at RBC DI


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## librahall

james4beach said:


> Thanks for sharing what you found, this is very helpful. I hope others can find this thread, in fact, I added some keywords at the end of this post to help search engines find this later.
> 
> Don't feel bad. Those practice or simulation accounts really can't account for realism, and bid/ask spreads are hard to simulate. I doubt that RBC made the practice account deliberately misleading. I've found bugs in their practice account over the years and had to stop using it because it just wasn't realistic.
> 
> It's possible that RBC will tell you that the spread would have been lower for a larger face value, but I'm not sure I would believe them.
> 
> I'll add this caveat. Even though I really like iTrade, I have sometimes place bond orders and it has filled (very slightly) higher than the price shown. So the quote iTrade shows you is not exactly what you will get a fill at. All bond trades become "market" orders, which means they wiggle around slightly. I can't recall the exact numbers but I think the last time I placed a buy, it was pretty close to the quoted number.
> 
> Canadian fixed income
> Discount brokers for bond trades
> Government bonds at discount brokerages
> Buying bonds at RBC Direct Investing
> Individual bond prices and fees for RBC DI
> Fees for bonds at RBC DI


Thank you again for warning me in previous post. This is not the first time that I am disappointed by RBC. Anyway, it's worth spending $100 to find out the truth.


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## james4beach

librahall said:


> Thank you again for warning me in previous post. This is not the first time that I am disappointed by RBC. Anyway, it's worth spending $100 to find out the truth.


Depending on how much time you have, you might want to send them a sternly worded letter saying that the practice account clearly did not show a bid/ask spread, and whatever the agent told you before -- if it was misleading.

You could ask for the fee to be refunded, or a credit, considering you have been a long term customer etc. Maybe at least it will scare them a bit... my cynical side suspects they just keep increasing the spreads until they either get complaints or lawsuits. That's probably how they know they went too far.

*Edit*: when contacting RBC Direct Investing Client Care Centre, also show the iTrade quote and ask RBC to explain what the same bond costs 1.79% more through them, and say that if you can't get a satisfactory explanation then you could also ask the RBC Office of the Ombudsman to explain it.

Sadly, it's probably not worth the effort. They have taken much larger fees from much wealthier people than you, and gotten away with it. They milk large clients like pension funds the same way.


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## librahall

james4beach said:


> Depending on how much time you have, you might want to send them a sternly worded letter saying that the practice account clearly did not show a bid/ask spread, and whatever the agent told you before -- if it was misleading.
> 
> You could ask for the fee to be refunded, or a credit, considering you have been a long term customer etc. Maybe at least it will scare them a bit... my cynical side suspects they just keep increasing the spreads until they either get complaints or lawsuits. That's probably how they know they went too far.
> 
> *Edit*: when contacting RBC Direct Investing Client Care Centre, also show the iTrade quote and ask RBC to explain what the same bond costs 1.79% more through them, and say that if you can't get a satisfactory explanation then you could also ask the RBC Office of the Ombudsman to explain it.
> 
> Sadly, it's probably not worth the effort. They have taken much larger fees from much wealthier people than you, and gotten away with it. They milk large clients like pension funds the same way.


Good idea. I have plenty of time these days since I am in a period of early-retirement(aka. out-of-work). I will send a complaint email to RBC next week. Someone has to scare them a bit for the interests of all the investors. They can't just jeopardize the trust and rip off clients like that.


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## james4beach

librahall said:


> Good idea. I have plenty of time these days since I am in a period of early-retirement(aka. out-of-work). I will send a complaint email to RBC next week. Someone has to scare them a bit for the interests of all the investors. They can't just jeopardize the trust and rip off clients like that.


Great, if you have the time it's good to scare them a bit. Personally I find that I'm taken more seriously when I send postal mail so if the emails don't work, follow up with a paper letter.


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## james4beach

cainvest said:


> You're probably right on sticking with the once a year rebalance plan and, my guess, it'll probably work out well at the end of 2020.


Going back to this question about rebalancing strategy. Rebalance right away? Or do it only periodically?

I thought I'd calculate the two methods for this year, just curious if there's much of a difference. Using the portfolio: 15% XIU, 15% ZSP, 50% XBB, 20% MNT which is my stock/bond/gold allocation.

Option (A) Year to date with no rebalancing, just passive holding: *+11.9%*

Option (B) Rebalance on April 20. At this point gold was much stronger than stocks, so rebalancing back to targets would have meant selling gold and buying stocks. Net result: *+11.9%*

Interesting! I didn't expect (A) and (B) to be so similar despite the crazy movements and swings in the constituent assets.

Myself... I've ended up doing some rebalancing by adding new money. I haven't touched my gold or bond allocations, but I added new money into stocks, getting me back near the 30/50/20 allocation targets as of today. I love these asset allocation plans... so simple.


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## librahall

The past July was one of the best months for PP. I am very glad that I chose this portfolio. The only regret is I still have a big portion of money sitting in GIC. I was trying to time the market...gold and stock are so high recently!

The below chart is the return of US PP(See the full chart here: Allocation - Lazy Portfolio ETF). The Canadian PP's performance is quite similar. Just by now today, it's daily %P&L has reached 0.86%! Crazy~ When many government central banks are printing money and stimulus their economy, too much money is chasing too little value perserve assets. 

From the below chart, it seems that best perform months were usually followed by recorrection months though.


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## james4beach

librahall said:


> The past July was one of the best months for PP. I am very glad that I chose this portfolio. The only regret is I still have a big portion of money sitting in GIC. I was trying to time the market...gold and stock are so high recently!


I agree, it's been just a crazy time. We are now seeing the advantage of diversifying into the gold asset class. As you can see, it only takes a small weight (and I'm only 20% gold) to get a benefit of being in a bull market. The whole idea of the PP is to maximize your chances of at least having a toe in the "winning" bull market. Pure stock investors live or die by a single market: stocks. In a stock bull they do great. In a stock bear, they're ruined.

Going stocks + bonds improves things as you are not solely dependent on a stock bull market. You benefit from bull periods in bonds too.

But the PP, including gold, improves things even more. If gold happens to be in a bull market, we benefit from it. So what we're seeing play out now is exactly the theory of the PP in action. You spread your bets across the primary asset classes (stocks, bonds, gold) and hope that one of your asset classes is in bull mode.

The numbers on my variation of the PP are ridiculous. I'm up 15% year to date and up 19% for the trailing 1 year. Even more crazy is that the trailing 4.4 year return (since I started this) is now 8.5% CAGR.

With 8.5% CAGR and barely any drops, even during this latest crash, my risk adjusted return is through the roof. People should love this kind of portfolio. It really does not get better than this, in financial markets. My maximum drawdown during the March crash was only about 14%.



librahall said:


> When many government central banks are printing money and stimulus their economy, too much money is chasing too little value perserve assets.


It's possible that's what's going on, but I try to not get too wrapped up in the story of the day. I think the PP is a great investment whether we're in an inflation or deflation mode, and I still think either one (including deflation and depression) could happen.


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## librahall

PP tops the best ETF portfolio of the year 2020. Yeah! 





__





Best ETF Portfolio of the year


Which is the lazy portfolio that is having the best perfomance this year? Check our ETF portfolios, choose your strategy and replicate them with ETFs




www.lazyportfolioetf.com


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## james4beach

It should also be noted that diversified balanced funds are doing reasonably well over the last 5 years, including through this recent crash.

Mawer Balanced fund: 6.5% CAGR
Tangerine Balanced: 4.9% CAGR
BMO Monthly Income D: 5.1% CAGR

Most of these good balanced funds are around 5% to 6% CAGR for the last 5 years. The permanent portfolio is doing a little bit better, and with less volatility (smoother experience).


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## james4beach

Here are some visualizations of the Permanent Portfolio up to now. In Portfolio Visualizer, I entered: 25% XWD, 25% CGL.C, 50% XBB. The equity component can be done many different ways, just thought I would keep the number of ETFs small here (only 3). Short+long term bonds are rolled into the generic XBB.

Link to the Portfolio Visualizer. Since 2013, the performance of the above is 7.22% CAGR. These years have been a very good stretch of time for the PP.

The chart of annual returns is also pretty amazing. In fact 2020 year to date is the strongest year in recent history... imagine that.


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## Jimmy

The PP has done well but part of that has been the 50% weighting in bonds and the bond bull market for the past nearly 3 decades. I don't know about the PP going forward or bonds for that matter given that we are now in a rock bottom low interest rate environment. Most advisors accordingly are recommending a lower wt for bonds - 30% vs 40% and other assets to fill the balance.

Not sure gold is going to hold up that well either once all these crisis times pass. People flee there only during a crisis and gold is at record highs. Once the crisis passes people will shift more back to equities and could dump their gold which looks like a hockey stick.


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## like_to_retire

Yeah, in addition to what Jimmy says, the returns aren't that great James. It all hinges on 2020 gold, and even then it doesn't appear to me at first glance to beat the XIC over the same period.

ltr


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## Topo

The rationale behind the bond part of PP, in my opinion, is sound. The function of fixed income is to stabilize the portfolio and provide opportunities for rebalancing. If a 50/50 portfolio was appropriate last year or 10 years ago, it would still be appropriate today using these same premises. The only reason to deviate would be if one believes stock volatility would be lower. With stocks close to all time highs, it is unlikely that is the case. 

The issue of gold is a bit more nuanced depending on how you look at it. Nevertheless, gold prices could fall, but so could stocks. Those who are in the PP should be committed to rebalancing from whatever goes up to whatever goes down.


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## james4beach

First off I just want to say that I really LOVE the negative reactions this strategy gets. There are very few ways to invest today that are still contrarian, and the PP seems to be one of them. I would be very nervous if everyone agreed with me.

I love that this is considered a strange way to invest. I love that people have a million complaints about it. I love that the actual track record is amazing, but people with equity biases can still find things wrong with it.



Jimmy said:


> The PP has done well but part of that has been the 50% weighting in bonds and the bond bull market for the past nearly 3 decades. I don't know about the PP going forward or bonds for that matter given that we are now in a rock bottom low interest rate environment.


Bond funds are very misunderstood. If interest rates go up, bond funds will continue to do well going forward -- after some short term volatility. The bond portfolio performs at whatever the yields of the day are. Today yields are around 1% so the bond funds perform at around 1% for the next few years. *That is just one snapshot in time*. If a few years from now we're seeing 5% yields, then XBB will be doing quite well going forward.

Try visualizing it this way: the forward 10 year performance of XBB is roughly today's yield. Now draw a chart of what happens if rates rise, and keep rising. What happens? The answer is that the performance of XBB increases over time in terms of "10 year" time steps. Shorter term, there will be volatility.

But we're not short term investors. I thought we were all long term investors?

Rising interest rates are a good scenario for bond investors in the long term. The fact we have rock bottom interest rates today is not a reason to avoid bond funds.



Jimmy said:


> Not sure gold is going to hold up that well either once all these crisis times pass.


Gold has been in a 20 year bull market, and much of those were 'good times' or 'OK times'. I don't see any particular reason it would end now, unless we get some severe deflation. And by the way, in that deflation scenario, the bonds will do great.

Oops but I forgot. You don't like bonds either.



like_to_retire said:


> Yeah, in addition to what Jimmy says, the returns aren't that great James. It all hinges on 2020 gold, and even then it doesn't appear to me at first glance to beat the XIC over the same period.


The PP does not require gold to be strong; all it needs is a bull market _somewhere_ (stocks, bonds, gold). That's the whole idea of PP and 'risk parity' in general: you don't make a concentrated bet in a single asset class. Instead you spread your bets evenly across several asset classes, so that you are not dependent on any single one.

I started using the PP strategy in 2016. Gold was a huge disappointment in 2016, 2017, 2018... the first 3 years of my investment in PP.

The performance of PP was fine through all of that. The performance has always been fine, since I started. Low volatility, mild response during crashes, and a solid real return.


----------



## james4beach

Topo said:


> The issue of gold is a bit more nuanced depending on how you look at it. Nevertheless, gold prices could fall, but so could stocks. Those who are in the PP *should be committed to rebalancing* from whatever goes up to whatever goes down.


This part is very important. The portfolio should be rebalanced at least annually. I just rebalanced (on my recent withdrawal) back to target weights. As a result, I sold some gold (sell high).


----------



## like_to_retire

james4beach said:


> Since 2013, the performance of the above is 7.22% CAGR. These years have been a very good stretch of time for the PP.


Gold depends on bad times to do well. These bad times usually occur about once a decade I suppose.

If we weren't in bad times your year-to-date might not look so good and your 7.22% CAGR since 2013 might not be so high.

Why take such risk when I can simply invest in the index of XIU and enjoy a 7.59% CAGR since 2013. I used today's date, but if I used Jan 1/2013 I would have made more, but I want to align with your assertion - and no re-balancing required.

ltr


----------



## Jimmy

james4beach said:


> Bond funds are very misunderstood. If interest rates go up, bond funds will continue to do well going forward -- after some short term volatility. The bond portfolio performs at whatever the yields of the day are. Today yields are around 1% so the bond funds perform at around 1% for the next few years. *That is just one snapshot in time*. If a few years from now we're seeing 5% yields, then XBB will be doing quite well going forward.
> 
> Try visualizing it this way: the forward 10 year performance of XBB is roughly today's yield. Now draw a chart of what happens if rates rise, and keep rising. What happens? The answer is that the performance of XBB increases over time in terms of "10 year" time steps. Shorter term, there will be volatility.
> 
> But we're not short term investors. I thought we were all long term investors?
> 
> Rising interest rates are a good scenario for bond investors in the long term. The fact we have rock bottom interest rates today is not a reason to avoid bond funds.


Not really. XBB has returned 5.16% /yr over the past 20 yrs as interest rates fell from 6% to .25%. If interest rates rose 2%, XBB loses 14% in price right away and wipes out 7 yrs of gains. Who needs that in their portfolio? We are in a different market now that you haven't seen before in fact. MT bonds are simply a bad investment period. Not even worth looking at until yields get back above 2%. Just forewarning you too the PP has much higher interest rate risk than before.



james4beach said:


> Gold has been in a 20 year bull market, and much of those were 'good times' or 'OK times'. I don't see any particular reason it would end now, unless we get some severe deflation. And by the way, in that deflation scenario, the bonds will do great.
> 
> Oops but I forgot. You don't like bonds either.


Gold looks like a bubble and you can't be calm looking at its hockey stick rise. It peaks when there is a crisis in the world or expectations of high inflation and the $ falling. Again once the crisis passes gold will tank. look at after the crisis of 2008 when gold peaked in 2011 and crashed. I do hold some though maybe 5% in ETFs . Just be wary of buying anything at the absolute top.

I can see how rebalancing will help before though as you would have been dumping gold and buying equities in the crash. Now it just seems why own 2 risky categories in a recovery?


----------



## james4beach

like_to_retire said:


> Why take such risk when I can simply invest in the index of XIU and enjoy a 7.59% CAGR since 2013. I used today's date, but if I used Jan 1/2013 I would have made more, but I want to align with your assertion - and no re-balancing required.


There is much more risk in what you suggest (just investing in XIU). This way, you are concentrated entirely in a single asset class. If stocks decide to go down for the next 10 or 20 years, you will get a horrendous return.

The PP diversifies across multiple asset classes, so it's less risky. It doesn't depend entirely on the fortunes of a *single* asset class. It has given pretty good returns in most years, whether or not stocks are strong.

Think of the first decade of this century. Global stocks returned something like 2% CAGR. Adding _ANY_ other asset, whether bonds or gold, improved returns. People who were fully concentrated in equities (especially US) suffered big time, that decade. And 10 years is not a short time.


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## james4beach

Jimmy said:


> Gold looks like a bubble and you can't be calm looking at its hockey stick rise.


The charts don't show anything unusual happening in gold that isn't also happening in stocks. Here is a 5 year chart of gold and the S&P 500. You can see that they have the _same_ return (and yes this is total return including dividends).

If we're looking for differences between stocks and gold, the only big difference I see is that they rise and fall at different times, except for the last few months when they have rallied together. The different behaviours of the two are excellent for the PP because it results in lower volatility and a smoother ride.

But I find it funny that people think gold is rising like a crazy bubble, while having no problem with stocks rising to the same degree. And if you do think both are a bubble... then you'll want to hold plenty of bonds. Which is exactly what the PP does, by the way.


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## MrBlackhill

This website about "lazy portfolios" provides lots of information about different types of strategies and the PP is at the top of the best medium-risk portfolios. (For portfolios with a very long history for analysis >30 years)

The data is based on US ETF, but still. The CAGR from 1978 up to today is about +8.54%. Seems pretty good to me for a fixed strategy over more than 40 years with medium risk (worst drawdown of only -12.62%).






Allocation - Lazy Portfolio ETF


Build the Harry Browne Permanent Portfolio with 4 ETFs. Follow its asset allocation and find out the historical returns of the portfolio.




www.lazyportfolioetf.com





Less exposure to bonds (and removing gold) will get us to a high-risk portfolio like the "Simply Path to Wealth" with a CAGR of +9.51% from 1987 and a worst drawdown of... -38.54%.






Allocation - Lazy Portfolio ETF


Build the JL Collins Simple Path to Wealth Portfolio with 2 ETFs. Follow its asset allocation and find out the historical returns of the portfolio.




www.lazyportfolioetf.com





Even less exposure to bonds will get us to a very-high-risk portfolio like what the website calls the "Warren Buffet" portfolio with a CAGR of +10.73% from 1977 and a worst drawdown of... -45.53%






Allocation - Lazy Portfolio ETF


Build the Warren Buffett Portfolio with 2 ETFs. Follow its asset allocation and find out the historical returns of the portfolio.




www.lazyportfolioetf.com


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## james4beach

The PP is simply the best (or nearly the best) tradeoff between risk and reward. It provides a solid and consistent return, and a smooth ride with minimal crashes. Preservation and growth of capital with minimal stress. Preservation of retirement money. Minimal drama during crashes such as 2008 and COVID -- proved yet again, just recently.

Of course higher returns are possible. Heck, you can go leveraged long equities to get as much performance as possible. Some people do! Just be aware that you're going to have a rough time if stocks decide to go down for 10 or 20 years.


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## Jimmy

james4beach said:


> The charts don't show anything unusual happening in gold that isn't also happening in stocks. Here is a 5 year chart of gold and the S&P 500. You can see that they have the _same_ return (and yes this is total return including dividends).
> 
> If we're looking for differences between stocks and gold, the only big difference I see is that they rise and fall at different times, except for the last few months when they have rallied together. The different behaviours of the two are excellent for the PP because it results in lower volatility and a smoother ride.
> 
> But I find it funny that people think gold is rising like a crazy bubble, while having no problem with stocks rising to the same degree. And if you do think both are a bubble... then you'll want to hold plenty of bonds. Which is exactly what the PP does, by the way.
> 
> View attachment 20496


5 years is too ST a look. Gold has had a higher standard deviation than the US mkt. It doesn't rise steadily over time either necessarily either.










And again it rises when bond yields fall and we have record low yields. So when yields rise again both of these assets will get hammered. Your PP is really very risky now.


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## MrBlackhill

Yes, we may keep talking about what happened to the stock market during the dot-com bubble when NASDAQ crashed and took 14 years to recover from its peak, but in 1980 gold price crashed and took 26 years to recover from its peak.

In fact, we could just replace gold with either more bonds or more stock market and we'd get historically a better outcome.

I did an analysis with data from Portfolio Visualizer using asset class allocation instead of what's found on Lazy Portfolios ETF website which is based on a selection of ETFs.

Replace gold with bonds and get about the same performance with even less drawdown.
Replace gold with bonds and higher stock market allocation and get a better performance with a comparable drawdown.

Note how the 40/60 stocks/bonds allocation outperforms the PP in the rolling return stats.
Note how an allocation without gold outperforms in the rolling returns stats.

In the end, it simply sums up to the basics of a "lazy portfolio", you just have to do an allocation between stocks and bonds that fits your risk tolerance, as what one can see on Couch Potato Portfolio models. https://cdn.canadiancouchpotato.com...01/CCP-Model-Portfolios-iShares-ETFs-2019.pdf


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## librahall

MrBlackhill said:


> Yes, we may keep talking about what happened to the stock market during the dot-com bubble when NASDAQ crashed and took 14 years to recover from its peak, but in 1980 gold price crashed and took 26 years to recover from its peak.
> 
> In fact, we could just replace gold with either more bonds or more stock market and we'd get historically a better outcome.
> 
> I did an analysis with data from Portfolio Visualizer using asset class allocation instead of what's found on Lazy Portfolios ETF website which is based on a selection of ETFs.
> 
> Replace gold with bonds and get about the same performance with even less drawdown.
> Replace gold with bonds and higher stock market allocation and get a better performance with a comparable drawdown.
> 
> Note how the 40/60 stocks/bonds allocation outperforms the PP in the rolling return stats.
> Note how an allocation without gold outperforms in the rolling returns stats.
> 
> In the end, it simply sums up to the basics of a "lazy portfolio", you just have to do an allocation between stocks and bonds that fits your risk tolerance, as what one can see on Couch Potato Portfolio models. https://cdn.canadiancouchpotato.com...01/CCP-Model-Portfolios-iShares-ETFs-2019.pdf
> 
> View attachment 20499
> 
> View attachment 20500


Interesting. I am a bit doubt about the accuracy of these charts. Could you please share the Portfolio Visualizer Link with your configurations as James4beach did in his previous post?

When an economy is locked in a cycle of rising prices and falling currency value(most likely we are facing now), gold is the only asset that can be relied upon to perform well. Gold performs this function most effectively when an economy is experiencing high inflation (more than 5 percent a year) and/or expectations of higher inflation in the future. In these cases, gold can experience explosive increases in value.

I don't see how the only stock/bonds combination could possibly yield higher return with lower volatility than PP in long term.

Below is a comparison between PP and your Portfolio 2(US Total Stock 25%, LT 25%, IT 25%, ST 25%) by using MY PORTFOLIO. You can simply duplicate the results by changing the different asset percentage on the top.

PP Performance









Portfolio 2 Performance


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## MrBlackhill

librahall said:


> Interesting. I am a bit doubt about the accuracy of these charts. Could you please share the Portfolio Visualizer Link with your configurations as James4beach did in his previous post?


Here's the configuration. It assumes reinvestment of dividends and distributions and rebalancing annually. I think the tool you used does not consider the total return of reinvestment. For example, in Portfolio Visualizer, "Long Term Treasury" from 2003 to 2020 is at 7% CAGR, which fits with iShares TLT which is 7% since inception in 2003 while Portfolio Charts shows 3.73% CAGR for a 100% LT portfolio invested in 2003. I may be wrong, I don't know that tool, but that 3.73% fits perfectly the ETF price increase only.










Portfolio 1

25% US Stock Market
25% Short Term Treasury
25% Long Term Treasury
25% Gold
Portfolio 2

25% US Stock Market
25% Short Term Treasury
25% Intermediate Term Treasury
25% Long Term Treasury
Portfolio 3

40% US Stock Market
20% Short Term Treasury
20% Intermediate Term Treasury
20% Long Term Treasury
Here's the link.






Backtest Portfolio Asset Class Allocation


Analyze and view portfolio returns, sharpe ratio, standard deviation and rolling returns based on historical asset class returns and the given asset allocation



www.portfoliovisualizer.com


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## james4beach

Anyone who dislikes the PP due to its high fixed income weight will probably have an even bigger problem with the 75% bond allocation in the above.

But I have posted before that something like 30% equity 70% fixed income is a reasonable allocation as well. In fact I have looked at iShares AOK (which is 30/70) as a potential alternative to the PP and have suggested it to friends, because it's a simple all-in-one holding.

I still think the PP is better due to more diversification between multiple asset classes. But if I could not bring myself to hold gold, my next choice would be an allocation like AOK.

(I still think it's hard to hate something that's in a 20 year bull market)


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## MrBlackhill

james4beach said:


> (I still think it's hard to hate something that's in a 20 year bull market)


I'm not sure about your 20-year bull market. Well, the PP is, but not gold.

As for me, I'm not hating anything, I'm comparing and talking about my observations. I think PP did awesomely well. I'm challenging the performance of gold from a risk-return perspective in that portfolio.

I recall you hate NASDAQ (or tech) for its -81% drop from its peak in 2000 which took 14-15 years to recover. Though, people could make money with NASDAQ from 2003 to 2008 and then from 2009 to 2014+.

But in 1980, gold went into a -62% drawdown which took 26-27 years to recover. During that period, people could not even make money with gold from 1981 to 2004, it was barely moving up.
And then in 2011 gold went again into a -43% drawdown which took 9 years to recover. During that period, people could not even make money with gold from 2011 to 2019, it was barely moving up. The recent 1-year bull run on gold saved it from its 9-year drawdown.

Maybe you are hating NASDAQ (or tech) because you've seen the dot-com crash, but I'm pretty sure you'd be hating gold if you had lived its 1980 crash and drawdown after its huge 4-year bull run and you would not be into a portfolio which includes gold, even if in this present day the PP did well in the last 40 years.

This is just a data comparison, I'm not saying that gold is bad.


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## librahall

I choose PP because of its good overall performance, low volatility and simplicity. This strategy is based on my personal financial situation. Other people may differ. I don't mind one of its asset performs poorly during a certain time of period. I think this is by design if you read Harry Brown's book. I also don't think I have the capability to predict which asset performs better at a time.


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## james4beach

librahall said:


> I don't mind one of its asset performs poorly during a certain time of period. I think this is by design if you read Harry Brown's book. I also don't think I have the capability to predict which asset performs better at a time.


Thanks for bringing that up. This is an important philosophy which underpins the PP. We don't know what economic environment we are heading into. We have no idea if the next few years will bring inflation, deflation, depression, boom times... who knows (and this is always the case, COVID or not).

As PP investors, we say: "I don't know which asset will do best... so I'll diversify into several promising assets"

And we do this knowing that something will outperform. Something else in the portfolio will do terribly. Maybe gold will fall for the next decade. It doesn't matter... this is part of the strategy. We know (and expect) that some asset is going to perform poorly.


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## MrBlackhill

I must admit that I find gold pretty fascinating.

We are talking about asset classes. From what I've read, there are many categorisations about asset classes, but here's what I find :


Stocks / Equities
Fixed income / Bonds
Cash
Foreign currencies & cryptocurrencies
Real estate
Commodities
Sometimes, we split precious metals out of commodities. And then we split gold out of precious metals. Therefore, gold seems to be an asset class by itself. I know that gold has many uses, it's tangible and it has a long history of fascination for human beings. But to me, it's as if in 50 years from now we'd be talking about AAPL as an asset class by itself and people would make portfolios being 25% stocks, 25% LT bonds, 25% ST bonds and 25% AAPL... How investing in gold is diversification? The stocks part is an aggregation of stocks, the bonds part is an aggregation of bonds, but the gold part is... gold, not an aggregation of precious metals, nor commodities. Just - gold. Gold is on its own.

In the PP, replace gold by precious metals and you'll get a worse performance. Replace it by commodities and it's even worse.


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## MrBlackhill

MrBlackhill said:


> But to me, it's as if in 50 years from now we'd be talking about AAPL as an asset class by itself and people would make portfolios being 25% stocks, 25% LT bonds, 25% ST bonds and 25% AAPL...


(I gave this example referring to BRK portfolio which has 44% AAPL and is the only stock in the IT sector)


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## james4beach

It's true @MrBlackhill that there are some arbitrary choices made about what is an asset class. Foreign currencies, definitely (and gold is a currency so I really consider gold as an FX holding). Real estate, definitely -- except it's illiquid and comes in huge units, so most of us (except the extremely wealthy) have to rule it out.

Apple is not an asset class. It's stock in a public corporation. But yeah, some of these choices are arbitrary. To succeed in investing, you're going to have to make some choices and then stick with it for many decades. Investing requires persistence and consistency. Therefore it would be wise to choose "asset classes" that will continue to exist for a long time and still be viable investments, which is why a lot of people (including me) would disqualify crypto currencies.

There are many arbitrary decisions to be made when investing. One portfolio mix and weighting is not inherently better than another. But the choices, even though they are arbitrary, provide an important framework and guideline for the _long term investing activity_. They should be based on solid fundamental ideas, but beyond that, the details don't really matter too much... as long as you have a plan you can stick with no matter what.

I find that the PP is a good plan, based on solid fundamental ideas and a solid philosophy. I find this easy to stick with.


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## MrBlackhill

james4beach said:


> Apple is not an asset class. It's stock in a public corporation. But yeah, some of these choices are arbitrary.


It was an example to highlight the fact that gold is not an asset class either. It's a specific choice out of an asset class, whatever you call it - precious metals, commodities, currencies, etc.

25% stocks is an aggregate of hundreds of stocks
25% LT bonds is an aggregate of hundreds of LT bonds
25% ST bonds is an aggregate of hundreds of ST bonds
25% gold is... 1 specific precious metal or 1 specific commodity or 1 specific currency

Which is why gold is fascinating. As fascinating as BRK holding only 1 specific IT stock, AAPL at 44% of the portfolio value.


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## Topo

MrBlackhill said:


> In the PP, replace gold by precious metals and you'll get a worse performance. Replace it by commodities and it's even worse.


I think you make a good point here. If I recall correctly, the original HBPP had silver and Swiss Franks as part of the inflation hedge. When those two didn't perform well, they were dropped, leaving gold. I don't know if it should be considered "evolution" of the portfolio or a type of curve-fitting/optimization.


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## james4beach

Topo said:


> I think you make a good point here. If I recall correctly, the original HBPP had silver and Swiss Franks as part of the inflation hedge. When those two didn't perform well, they were dropped, leaving gold. I don't know if it should be considered "evolution" of the portfolio or a type of curve-fitting/optimization.


As I understand it, the CHF was his choice for the mutual fund version (maybe because CHF were backed by gold until the 90s, and these FX positions were more practical to manage back then).

Introducing the Permanent Portfolio | MoneySense

According to resources I found, including this one at Moneysense, his 1980 book said gold. So I believe that the _forward_ performance of the stated allocation mix has been quite solid.

Are you saying he originally had a different allocation before 1980? It's possible, but it seems that the current allocation has been in place for 40 years.


----------



## Topo

james4beach said:


> As I understand it, the CHF was his choice for the mutual fund version (maybe because CHF were backed by gold until the 90s, and these FX positions were more practical to manage back then).
> 
> Introducing the Permanent Portfolio | MoneySense
> 
> According to resources I found, including this one at Moneysense, his 1980 book said gold. So I believe that the _forward_ performance of the stated allocation mix has been quite solid.
> 
> Are you saying he originally had a different allocation before 1980? It's possible, but it seems that the current allocation has been in place for 40 years.


I don't know the exact timeline, but Craig Rowland alludes to silver, CHF and natural resources originally being advocated, but then dropped:



> Browne's new strategy would be called the Permanent Portfolio. The original strategy held the following: Stocks Bonds Cash Gold Silver Swiss francs Natural resources.
> 
> Rowland, Craig. The Permanent Portfolio (p. 4). Wiley. Kindle Edition.





> Over time, Browne simplified the Permanent Portfolio to make it easier to implement and more balanced. This effort culminated in Harry Browne's 1987 book Why the Best Laid Investment Plans Usually Go Wrong. This book, which is probably one of the best ever written on the flaws in many popular investment strategies, reduced the portfolio down to the core components that are still in use today.
> 
> Rowland, Craig. The Permanent Portfolio (p. 4). Wiley. Kindle Edition.


I'm not sure that commodities are considered in back-tests done in recent times, but it could affect the results since investors would have invested in other commodities if they followed his advice before the change.


----------



## james4beach

Topo said:


> I'm not sure that commodities are considered in back-tests done in recent times, but it could affect the results since investors would have invested in other commodities if they followed his advice before the change.


Doing some more digging into this, it appears that 1998 was the start of the modern version (the equal weight asset classes) which gives this a 22 year track record. Browne published the allocations in Fail-Safe Investing, likely written 1998 and published 1999.

That's still a far better track record than the 'couch potato' since this certainly has been backtested and the allocations are based on hindsight. The PWL couch potato only goes back to 2010. And in fact the start date is really more like 2011 because the original couch potato suggests XSP which is currency hedged. Later PWL revised the couch potato (more hindsight adjustments) to non currency hedged, so you can see how they are optimizing performance (in hindsight).

Portfolio performance should only be taken seriously going forward from the date of creation. That's the only way we know whether it succeeds in unknown/surprise market environments.

What this means is that Browne's PP has 22 years of real track record, whereas Canadian Couch Potato has 9 years track record, at present allocations. Call me crazy but I have more faith in PP, as it's clearly less of a back tested / optimization game. In addition to that, PP is old enough that it preceded both the 2000 and 2008 bear markets, and sailed through both.


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## librahall

How do you handle the cash portion of the Permanent Portfolio? Is there a way to earn a little interest without taking on risk and be able to cash out at any time? I keep some of my cash in a GIC, but transferring from the bank's GIC to an online broker often takes days, and there is a risk of missing out on buying shares.


----------



## james4beach

librahall said:


> How do you handle the cash portion of the Permanent Portfolio? Is there a way to earn a little interest without taking on risk and be able to cash out at any time? I keep some of my cash in a GIC, but transferring from the bank's GIC to an online broker often takes days, and there is a risk of missing out on buying shares.


I do this differently than other people. I have my cash buffer (pure HISA) separated, and don't count it as an investment at all. Not part of PP.

Then, inside the PP, I lump together cash + long term bonds into a single XBB holding. This actually doesn't modify the PP much because the average maturity between cash (0 years) and long term bonds (20 years) is in fact 10 years, which is XBB.

Stated another way, XBB = ZFS + ZFL [ignoring the difference in credit quality]

One implementation is
25% ZFS, the BMO short term bonds
25% ZFL
25% stocks
25% gold

And an equivalent implementation (ignoring the addition of corp bonds) is
50% XBB
25% stocks
25% gold

For me, the second form has been easier. In my RRSP, then I can hold just that big XBB position. This does, however, add credit risk due to the corporate exposure and my portfolio crashed a bit in March, whereas the ZFS/ZFL version would not have crashed.


----------



## MrBlackhill

james4beach said:


> For me, the second form has been easier. In my RRSP, then I can hold just that big XBB position. This does, however, add credit risk due to the corporate exposure and my portfolio crashed a bit in March, whereas the ZFS/ZFL version would not have crashed.


Bah, XBB just dipped a bit in March... Look at a 50/50 ZFS/ZFL against 100% XBB and you'll see that ZFS/ZFL went underwater around -5% to -6% from 2017 to 2019 while XBB was underwater around -2% to -3% during the same period. Meanwhile, you've also had a better performance with XBB. It's also more liquid and very inexpensive.

I'd prefer an investment going underwater by -15% for 2 weeks than an investment going underwater by -5% for 2 years. But that's me.


----------



## librahall

james4beach said:


> I do this differently than other people. I have my cash buffer (pure HISA) separated, and don't count it as an investment at all. Not part of PP.
> 
> Then, inside the PP, I lump together cash + long term bonds into a single XBB holding. This actually doesn't modify the PP much because the average maturity between cash (0 years) and long term bonds (20 years) is in fact 10 years, which is XBB.
> 
> Stated another way, XBB = ZFS + ZFL [ignoring the difference in credit quality]
> 
> One implementation is
> 25% ZFS, the BMO short term bonds
> 25% ZFL
> 25% stocks
> 25% gold
> 
> And an equivalent implementation (ignoring the addition of corp bonds) is
> 50% XBB
> 25% stocks
> 25% gold
> 
> For me, the second form has been easier. In my RRSP, then I can hold just that big XBB position. This does, however, add credit risk due to the corporate exposure and my portfolio crashed a bit in March, whereas the ZFS/ZFL version would not have crashed.


To my understanding, the cash acts 3 functions in a HBPP:
1) a stablizer of the portfolio especially during certain economic conditions e.g. tight money recession(IMO, not very likely in near future);
2) a buffer during peroid of uncertainty (may or may not including emergency living expenses);
3) to buy other assets that have fallen in value.

The goal is to make sure it is always there when you need it. Therefore, it has to be absolutely safe and stable.

I think your XBB approach may serve 1) & 2) since you have cash buffer separated. But how about 3)? Would you put extra money from cash buffer to buy dip of other assets or have to sell some assets within PP first?

In terms of Cash Risks, below is a table from the book <Permanent Portfolio> by Craig Rowland. Currently, I put my cash in Bank CD/GIC and split them in different banks to avoid default risk beyond FDIC insurance limit.










In this book, the author suggested T-Bills as the best way to put cash. But, the interest rate and T-Bill yields are as low as zero now. I am not sure if this is a wise decision. Putting it in GIC, I can still earn ~2% per year.


----------



## hfp75

For my cash portion I am using CLF. It’s a 1-5 ladder govt bonds, maturity/duration is 3+, so not much rate risk, credit rating is AA (govt), so not much for default risk, and 12mo yield is 2.2%

It took a small loss during the implosion, but bounced back right away.

lots of brokers let you buy/sell this fund for free.....


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## james4beach

librahall said:


> To my understanding, the cash acts 3 functions in a HBPP:
> 1) a stablizer of the portfolio especially during certain economic conditions e.g. tight money recession(IMO, not very likely in near future);
> 2) a buffer during peroid of uncertainty (may or may not including emergency living expenses);
> 3) to buy other assets that have fallen in value.
> . . .
> I think your XBB approach may serve 1) & 2) since you have cash buffer separated. But how about 3)? Would you put extra money from cash buffer to buy dip of other assets or have to sell some assets within PP first?


I think the single 50% weight bond weight (like XBB) does satisfy these. The way (3) works is by periodic rebalancing. One sells whatever is overweight in the portfolio and buys whatever is underweight. Here, you'd have to sell something within the PP.

If stocks crashed, XBB or gold would end up above the target allocation weight. At rebalancing time (once or twice a year) you would sell some XBB or gold and buy stocks. This is what happens in traditional asset allocation with a bond fund as well, for example 50/50 or 60/40. You sell bonds, buy stocks.

I can show that the two versions I gave in #381 have given equivalent results. I'll use US data because it goes back much further. Link to the back-test in Portfolio Visualizer

Portfolio 1 is the 'proper' PP which separates cash and long term treasuries. Explicit cash, as you are currently doing. Portfolio 2 applies the simplification I discussed, collapsing cash and bonds into a single generic bond fund of a medium term. Here I used IEF which is similar to XGB (pure govt). As noted before, XBB adds corporate exposure, but I like it because of the super low MER and incredibly long track record.

You can see that over 15 years, those two portfolios had virtually the same behaviour. The stats and chart are about the same. That means that although Portfolio 1 was able to use cash to buy depressed assets, and Portfolio 2 sold bonds to buy depressed assets, the result was about the same.

Yes you would think that explicitly having cash separated out would be an advantage, but apparently lumping them together works about as well.

*Hmm... but we could have a scenario where stocks crash and bonds are simultaneously very weak*. If that were to happen, then the explicit cash version could give superior results instead.

This happened in the 1970s, and here's a link to that backtest for the two PP versions. You can now see that the Portfolio 1 (using cash) has a superior return, outperforming from 1978-1981. But add a few more years and they bounce back to equal performance.

In summary: strictly speaking, the separated cash version is safer and does better during periods of bond market turmoil. However, over the longer term (for the 42 years of data available) they give similar performance.

Faced with ^ that tradeoff, I decided that the benefit of dealing with fewer holdings was worth it. I previously struggled with doing the "cash" part, and this 50% XBB solved that for me. Fewer ETFs, fewer rebalancing trades, and less work overall. I guess the one problem of this method is those bad years in bonds like the 1970s so I might experience worse drawdowns than the ideal PP.


----------



## librahall

james4beach said:


> I think the single 50% weight bond weight (like XBB) does satisfy these. The way (3) works is by periodic rebalancing. One sells whatever is overweight in the portfolio and buys whatever is underweight. Here, you'd have to sell something within the PP.
> 
> If stocks crashed, XBB or gold would end up above the target allocation weight. At rebalancing time (once or twice a year) you would sell some XBB or gold and buy stocks. This is what happens in traditional asset allocation with a bond fund as well, for example 50/50 or 60/40. You sell bonds, buy stocks.
> 
> I can show that the two versions I gave in #381 have given equivalent results. I'll use US data because it goes back much further. Link to the back-test in Portfolio Visualizer
> 
> Portfolio 1 is the 'proper' PP which separates cash and long term treasuries. Explicit cash, as you are currently doing. Portfolio 2 applies the simplification I discussed, collapsing cash and bonds into a single generic bond fund of a medium term. Here I used IEF which is similar to XGB (pure govt). As noted before, XBB adds corporate exposure, but I like it because of the super low MER and incredibly long track record.
> 
> You can see that over 15 years, those two portfolios had virtually the same behaviour. The stats and chart are about the same. That means that although Portfolio 1 was able to use cash to buy depressed assets, and Portfolio 2 sold bonds to buy depressed assets, the result was about the same.
> 
> Yes you would think that explicitly having cash separated out would be an advantage, but apparently lumping them together works about as well.
> 
> *Hmm... but we could have a scenario where stocks crash and bonds are simultaneously very weak*. If that were to happen, then the explicit cash version could give superior results instead.
> 
> This happened in the 1970s, and here's a link to that backtest for the two PP versions. You can now see that the Portfolio 1 (using cash) has a superior return, outperforming from 1978-1981. But add a few more years and they bounce back to equal performance.
> 
> In summary: strictly speaking, the separated cash version is safer and does better during periods of bond market turmoil. However, over the longer term (for the 42 years of data available) they give similar performance.
> 
> Faced with ^ that tradeoff, I decided that the benefit of dealing with fewer holdings was worth it. I previously struggled with doing the "cash" part, and this 50% XBB solved that for me. Fewer ETFs, fewer rebalancing trades, and less work overall. I guess the one problem of this method is those bad years in bonds like the 1970s so I might experience worse drawdowns than the ideal PP.


What if I put Cash in a redeemable GIC and earn 2% annualized interest? Will that lift the return of Portfolio 1 a little bit?

The other thing is tax implication. Maybe it's unique to people like me, I have a very limited TFSA account and no RRSP yet. All my investments are in non-registered accounts now. I am paying taxes for all the interests/dividends already. If I have to sell bonds/gold to buy depressed stock, high capital gain tax may apply.


----------



## james4beach

librahall said:


> What if I put Cash in a redeemable GIC and earn 2% annualized interest? Will that lift the return of Portfolio 1 a little bit?


But then you lose the ability to rebalance when needed by using liquid cash to buy whatever asset has dropped.


----------



## james4beach

librahall said:


> What if I put Cash in a redeemable GIC and earn 2% annualized interest?


I missed the word "redeemable". That's an interesting idea. So then you'd have, in most circumstances, the GIC yield. But in the rare occasion where some asset crashes and you could benefit from cash, I suppose you would do an early redemption and get the cash out? Is that what you're thinking?

You should look into the penalty for early redemption but I think I saw a credit union where the penalty just retroactively cancels the 2% rate and applies a near zero rate instead, which would be fine. So if you really need cash, it retroactively becomes cash. If you go the whole term (perhaps 1 or 2 years) without needing cash, then it's a GIC.

This is an interesting idea


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## librahall

Yes, that's what I am thinking. I managed to get a 1-year redeemable GIC with RBC which I can do early & partial redemption without any penalty.


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## librahall

The past 3 months were not good for PP with a drop for >3%. While I continued to convert my high portion of Cash(from 50% at the end of July to 39% now) into PP, I only bought bunch of CGL.C and ZFL along the way because I thought the stock market is at very high valuation and risky. Until recently, I realized that I made mistakes.

1) It's a kind of time-the-market to think CGL.C or ZFL will go up;
2) It's a personal bias to think Stock is more over-valued/risky than Gold and Bonds;

This reminds me of one of the quotes from the PP book saying "Only buying the whole PP provides maximum protection". There're things that can't be taught but can only be learned, at a price.


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## james4beach

librahall said:


> The past 3 months were not good for PP with a drop for >3%.


No portfolio goes straight up. The permanent portfolio has rallied nearly without pause from November 2018 to July 2020 and I kept waiting for some hiccup. That was a really crazy period of gains.

In a moment, I'm about to make new purchases as I add more to my RRSP (which follows a PP-like allocation).


----------



## librahall

james4beach said:


> No portfolio goes straight up. The permanent portfolio has rallied nearly without pause from November 2018 to July 2020 and I kept waiting for some hiccup. That was a really crazy period of gains.
> 
> In a moment, I'm about to make new purchases as I add more to my RRSP (which follows a PP-like allocation).


Yes, a certain period of recorrection should not be a surprise after this long rally. I am planning to finish my PP allocation in the following 1-2 months. This time, I'll buy each part equally.


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## james4beach

librahall said:


> Yes, a certain period of recorrection should not be a surprise after this long rally. I am planning to finish my PP allocation in the following 1-2 months. This time, I'll buy each part equally.


My strategy both as I add and remove money has been to buy/sell whatever is needed to get as close to my target allocations as possible. I find this helps me avoid making predictions on the direction and removes all "discretion". It also automatically achieves 'buy low'.

I added a chunk of money today (link), but I was already overweight on gold since it has performed so well. When I calculated the necessary purchases to get to my allocation targets, I found that I was not supposed to buy any gold. Instead, I only ended buying stocks and bonds, and a larger purchase of Canadian stocks because they have been relatively weak.

When I add money like this, I don't sell any existing positions because that would be inefficient. The goal is to figure out what I have to buy to get as close as possible to my asset allocation target allocations.


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## OneSeat

[QUOTE="james4beach, post: 2108052, member: 5391
When I add money like this, I don't sell any existing positions because that would be inefficient. The goal is to figure out what I have to buy to get as close as possible to my asset allocation target allocations.
[/QUOTE]

1 - so this mean that you increase the overall size of your PP, since you don't sell anything when you rebalance?
2 - and if you are adding to your RRSP funds this means you do not automatically maximise them every year?
Lots of good things you suggest - just want to make sure I understand correctly.


----------



## james4beach

OneSeat said:


> 1 - so this mean that you increase the overall size of your PP, since you don't sell anything when you rebalance?
> 2 - and if you are adding to your RRSP funds this means you do not automatically maximise them every year?
> Lots of good things you suggest - just want to make sure I understand correctly.


Happy to clarify...

1. Yes so far I have only added to my RRSP money over the years and have never withdrawn, so it keeps increasing the overall size of my portfolio. I'm basically using the new money (additions) to accomplish rebalancing. Sometimes this means it's kind of approximate.

If I stopped adding new money, then I would do some selling to rebalance. I just don't see the need as long as new money comes in.

2. That's right, I don't automatically maximize my RRSP. My income changes a lot from year to year, and I also moved between countries, which added special complications

Perhaps I should also mention that I have other accounts, also following the PP, and have withdrawn money from those. When I make those withdrawals I follow the same strategy and sell whatever is needed to get [closer] to my target allocation weights.


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## OneSeat

Thx for your clear reply. If you are still adding to your RRSP (which most people do!) then what you describe makes sense.



james4beach said:


> - - - and I also moved between countries, which added special complications


Don't remind me - and not just investing.


----------



## james4beach

OneSeat said:


> Thx for your clear reply. If you are still adding to your RRSP (which most people do!) then what you describe makes sense.


Yup, I'm about 40 years away from retirement.

Nothing wrong with selling to rebalance though. If I didn't have any money entering or leaving the account, I would rebalance by selling & buying as needed.

Historically speaking the PP has picked up a performance boost through annual rebalancing.


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## librahall

@james4beach I can't stop thinking that most of the assets are all at relative high valuation now. Therefore, I tend to invest gradually, sort of moving with caution. Do you think "dollar-cost-average" investing into PP is also a kind of time-the-market?


----------



## james4beach

librahall said:


> @james4beach I can't stop thinking that most of the assets are all at relative high valuation now. Therefore, I tend to invest gradually, sort of moving with caution. Do you think "dollar-cost-average" investing into PP is also a kind of time-the-market?


No harm deploying funds slowly and dollar cost averaging seems fine to me. I didn't make all my RRSP contributions today. I plan to make another large contribution a few months from now.

By the way, I've thought everything is overvalued since the late 1990s. So I've been saying "everything is really expensive" since the day I started investing. Maybe it really has been though


----------



## librahall

james4beach said:


> No harm deploying funds slowly and dollar cost averaging seems fine to me. I didn't make all my RRSP contributions today. I plan to make another large contribution a few months from now.
> 
> By the way, I've thought everything is overvalued since the late 1990s. So I've been saying "everything is really expensive" since the day I started investing. Maybe it really has been though


Yes, indeed. Maybe the expected return of most assets will be lower in the upcoming years. At least it's better than holding on to cash and waiting for it to depreciate.


----------



## OneSeat

james4beach said:


> Yup, I'm about 40 years away from retirement.


Ah - well - investing is easy for you - you've got about 70 years to achieve what you want.
Except the next 70 will not be the same as the last 70 

My life horizon is only about 10 years and even though your 50-25-25 PP plan makes sense I wonder if it is appropriate for me with respect to Gold. I'd need to buy quite a lot more and I'm have difficulty accepting that at its current price. I last bought gold in the 1990s. Maybe I'm better off taking my profit and buying some more sedate investments like VOO/XIU, AGG/XBB and some more single malts..


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## james4beach

OneSeat said:


> Ah - well - investing is easy for you - you've got about 70 years to achieve what you want.
> Except the next 70 will not be the same as the last 70


Well not quite that long. I see myself working intermittently until I'm perhaps 75 or 80 years old, if I'm lucky. But yeah, I have a few decades to go (hopefully).



OneSeat said:


> My life horizon is only about 10 years and even though your 50-25-25 PP plan makes sense I wonder if it is appropriate for me with respect to Gold. I'd need to buy quite a lot more and I'm have difficulty accepting that at its current price. I last bought gold in the 1990s. Maybe I'm better off taking my profit and buying some more sedate investments like VOO/XIU, AGG/XBB and some more single malts..


You have to go with a plan that's comfortable for you... that's the most important thing. Markets will always do scary things so you need to commit to holdings that you are very comfortable with.

It's possible to make a pretty great portfolio using just VOO/XIU and AGG/XBB, perhaps some VT/XAW too.


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## librahall

MNT.TO's premium to net asset value is close to 1% today. I am planning to sell some CGL.C(under-valued in my taxable account) and buy the same amount of MNT.TO. Two benefits: 1) MNT.TO has a lower management fee; 2) a kind of tax loss harvesting approaching the year end.


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## james4beach

librahall said:


> MNT.TO's premium to net asset value is close to 1% today. I am planning to sell some CGL.C(under-valued in my taxable account) and buy the same amount of MNT.TO. Two benefits: 1) MNT.TO has a lower management fee; 2) a kind of tax loss harvesting approaching the year end.


Currently it's trading at 0.5% premium to NAV. Nice to see it falling back in line.


----------



## librahall

james4beach said:


> Currently it's trading at 0.5% premium to NAV. Nice to see it falling back in line.


I have finished this job today. Because the gold price was dropping, I was able to sell CGL.C high and bought MNT low. I was so lucky to buy MNT at ~$25.80(0.19% Premium to NAV).


----------



## fireseeker

librahall said:


> I have finished this job today. Because the gold price was dropping, I was able to sell CGL.C high and bought MNT low. I was so lucky to buy MNT at ~$25.80(0.19% Premium to NAV).


I did the same over the last two days, for the reasons you articulated.
One more reason: In case the premium reappears.

I pocketed between 10% and almost 20% (depending the tranche) flipping between the two this year. Which is incredible given that my exposure to the underlying asset remained static.


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## fireseeker

at this writing, MNT is available at a discount to NAV!


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## james4beach

fireseeker said:


> at this writing, MNT is available at a discount to NAV!


Wow, neat! Hopefully gold remains out of favour for a while ... I think I might also rotate from CGL.C back into MNT.

It would be pretty amazing if we can harvest this on both sides, repeatedly. I do expect MNT to diverge from NAV just like CEF was doing, because MNT has a static bullion amount and is a lot like a closed-end fund.

I really love it when gold plummets and scares everyone away. This is the kind of volatility that keeps it unpopular and away from mainstream portfolios. Hope it falls a lot more.


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## librahall

james4beach said:


> Wow, neat! Hopefully gold remains out of favour for a while ... I think I might also rotate from CGL.C back into MNT.
> 
> It would be pretty amazing if we can harvest this on both sides, repeatedly. I do expect MNT to diverge from NAV just like CEF was doing, because MNT has a static bullion amount and is a lot like a closed-end fund.
> 
> I really love it when gold plummets and scares everyone away. This is the kind of volatility that keeps it unpopular and away from mainstream portfolios. Hope it falls a lot more.


RCM announced an amendments to MNT redemption procedure on Nov. 2nd, which allows RCM to use substitue gold bullion from 3rd parties in certain circumstances. I am not sure if this contributed the significant price drop of MNT the past two weeks. Here is the link of the original article. https://www.newswire.ca/news-releas...change-traded-receipt-programs-894625369.html


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## hfp75

Doubt it, gold is dropping, not just mnt...


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## librahall

hfp75 said:


> Doubt it, gold is dropping, not just mnt...


But MNT has dropped 14.5% since early Nov. while CGL.C only dropped 4.5%.


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## james4beach

librahall said:


> But MNT has dropped 14.5% since early Nov. while CGL.C only dropped 4.5%.


The Mint can now suspend redemptions at their discretion which seems like it could be significant. On the other hand, after that news went public, the MNT premium did not come off until two weeks later. Mr. Market doesn't tend to sit on information for two weeks and then suddenly get upset, so I really doubt the market cared about that news.

I suspect the cause of the premium was always investor enthusiasm about gold in general, and the effect that sentiment has on a closed-end-fund type of structure. When there's a fixed amount of the asset, as MNT has, the amount of gold is not dynamically rising and falling. The Mint very rarely changes the amount of bullion in the program, and when I emailed them, they said that they have other priorities -- basically they won't be changing the amount of gold.

With a fixed amount of assets, investor sentiment will then drive a premium/discount to fair value. The same thing happened for many decades with Central Fund of Canada (CEF) which is a similar structure. In fact I used to watch the CEF premium as an indicator of gold's popularity.

There's even more proof. CEF still trades and there's even a ticker !CEFPREM for it's premium/discount. In this chart, I'm showing the CEF premium in black and the MNT premium in dotted pink. That dotted pink line is the ratio of MNT to CGL.C.

I played tricks with the scales so they line up, but the point is: they appear to be moving in tandem.











This shows that throughout November, the premium on both (CEF and MNT) steadily came off, with a sharp decrease on Nov 18 and Nov 19.

I think it's sentiment.


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## librahall

fireseeker said:


> I did the same over the last two days, for the reasons you articulated.
> One more reason: In case the premium reappears.
> 
> I pocketed between 10% and almost 20% (depending the tranche) flipping between the two this year. Which is incredible given that my exposure to the underlying asset remained static.


MNT's premium does reappear. +2% now.


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## james4beach

librahall said:


> MNT's premium does reappear. +2% now.


Darn. Saw the same, premium is back. Wonder if I missed my trading opportunity.


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## OneSeat

Never mind gold for a moment. BMO's chief strategist is now projecting the TSX will rise more than 15% in the next 13 months and the S&P more than 17% -way more than bonds etc. Are our permanent portfolio enthusiasts still recommending \twice as much in bonds (etc) than equities? 

That's not a challenge - just a question


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## hfp75

Well, its speculation. I could find someone to say buy bonds / gold or a specific Fx. So its kinda like hot air.

The point of the PP is that with diversity you always have an asset doing well, and one that is presumably not.

Timing the market is difficult to do, if not impossible.

Let the good times roll - covid numbers are exploding....

J4B - I may have missed my swap back to MNT optimal time too.. I'll revisit this on Monday....


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## james4beach

OneSeat said:


> Never mind gold for a moment. BMO's chief strategist is now projecting the TSX will rise more than 15% in the next 13 months and the S&P more than 17% -way more than bonds etc. Are our permanent portfolio enthusiasts still recommending \twice as much in bonds (etc) than equities?


Wow what an accurate prediction. Does he think the TSX will go up 15.3% or 15.8%? Funny stuff.

And yes I'm sticking with the same passive strategy, because the whole idea of passive asset allocation is that you stick to your allocations without trying to make short or medium term forecasts. As passive investors, we acknowledge that we cannot predict markets in the short/medium term.

If you really know what's going to happen with stocks, that the TSX is going up 15% in the next 13 months, and that bonds will be weaker-- you shouldn't be following *any* passive strategy at all. You should be actively trading the market or consulting your crystal ball to tell you what's hot for the next few months.

With that BMO crystal ball for example, you should leverage long the S&P 500 and short bonds. Now go ahead and try that, continue actively trading for a decade or two, and report back on how you do... maybe you'll end up being the 1 in 1,000,000 who succeeds at it


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## MrBlackhill

You guys know Ray Dalio's All Weather portfolio.

Now he's saying "don't own bonds, don't own cash".


----------



## Franko

Sounds like many of you have been riding with gold for some time - I'm new to gold as an investment and would appreciate some help!

I've been looking into bullion as a complement to bonds in my portfolio (will play more of a defensive role in my portfolio, hence why I'm not picking gold producer companies). I've been reading up on Canadian gold bullion ETFs and wanted to ask about the pros/cons of CGL, MNT and KILO:

I see a lot of chatter about MNT - is there a reason you guys prefer this to, say KILO, which seems to have a lower MER (0.26% to 0.35%)?

Also, a few more questions, if I may:


Do you prefer hedged or unhedged gold funds, and why?
Do these funds pay any distributions? I presume not and couldn't find any mention of distributions on their respective websites, but wanted to confirm.

Thanks in advance for any assistance.

Franko


----------



## james4beach

MrBlackhill said:


> You guys know Ray Dalio's All Weather portfolio.
> 
> Now he's saying "don't own bonds, don't own cash".


I've followed a lot of what Dalio says publicly and my interpretation of this is that he's wearing an "active manager" hat when he says this. With a short term horizon, and speaking as someone who believes they can actively trade the market, Dalio is bearish on bonds. Bridgewater, like all hedge funds, sells active management.

At the same time, his All Weather strategy is a long term passive approach, and I don't think there is any change to his advice to be heavily diversified, including a bond component. I've read material from others at his firm (Bridgewater) as well. When talking about All Weather, they have spelled out that it requires a bond allocation and that short term outlook for bonds does not change anything.

Really I think this comes down to whether you consider yourself a short term active manager, or long term passive investor.


----------



## james4beach

Franko said:


> I've been looking into bullion as a complement to bonds in my portfolio (will play more of a defensive role in my portfolio, hence why I'm not picking gold producer companies). I've been reading up on Canadian gold bullion ETFs and wanted to ask about the pros/cons of CGL, MNT and KILO:
> 
> I see a lot of chatter about MNT - is there a reason you guys prefer this to, say KILO, which seems to have a lower MER (0.26% to 0.35%)?


I was not aware of KILO. The bars are held at the Royal Canadian Mint (so this is in fact the same storage as MNT gold). The problem I see though is that KILO is currency hedged. You will really want a non-hedged gold fund, because that's the only thing that can protect you from a CAD collapse scenario.

KILO might have a non hedged version KILO.B but I can't seem to pull up a ticker for it, so I don't know what to make of it. This might be a promising fund though. They are a relatively new asset manager. I'd be interested in hearing others thoughts on KILO if they know anything about it.

There are no distributions from bullion funds since there are no dividends or interest.

You definitely want un hedged. Imagine the scenario where gold priced in USD is flat (not really rising or falling) but the CAD implodes and loses half of its value. A hedged bullion fund will return 0%. An unhedged bullion fund would return 100% and this is the effect you want.

I see my gold holding as insurance against the domestic currency (CAD) imploding. For the same reason, you should use foreign stock ETFs that are unhedged, such as ZSP or XAW.


----------



## Franko

james4beach said:


> I was not aware of KILO. The bars are held at the Royal Canadian Mint (so this is in fact the same storage as MNT gold). The problem I see though is that KILO is currency hedged. You will really want a non-hedged gold fund, because that's the only thing that can protect you from a CAD collapse scenario.
> 
> KILO might have a non hedged version KILO.B but I can't seem to pull up a ticker for it, so I don't know what to make of it. This might be a promising fund though. They are a relatively new asset manager. I'd be interested in hearing others thoughts on KILO if they know anything about it.
> 
> There are no distributions from bullion funds since there are no dividends or interest.
> 
> You definitely want un hedged. Imagine the scenario where gold priced in USD is flat (not really rising or falling) but the CAD implodes and loses half of its value. A hedged bullion fund will return 0%. An unhedged bullion fund would return 100% and this is the effect you want.
> 
> I see my gold holding as insurance against the domestic currency (CAD) imploding. For the same reason, you should use foreign stock ETFs that are unhedged, such as ZSP or XAW.


Thanks for the insights. I was able to find the KILO.B ticker on my brokerage site, so can confirm that this non-hedged version does exist. 

I don't hedge any of my international ETF holdings because I like the currency diversification, but was unsure of the benefit with gold in particular, as all of the gold ETFs seem to have both a non-hedged and hedged version, so I thought maybe things are different in gold-land. Thanks for confirming that non-hedged remains the better pick!

In regards to CGL vs. MNT, it seems MNT is favoured because of the option to allow investors to cash in their shares for the actual bullion (CGL doesn't seem to allow this) - is this why MNT was trading at a premium, as mentioned in earlier posts? Beyond this though, does MNT offer any benefit over KILO that I'm not aware of? (KILO offers redemption of shares into bullion as well).


----------



## james4beach

Franko said:


> I don't hedge any of my international ETF holdings because I like the currency diversification, but was unsure of the benefit with gold in particular, as all of the gold ETFs seem to have both a non-hedged and hedged version, so I thought maybe things are different in gold-land. Thanks for confirming that non-hedged remains the better pick!


Well this is just how I understand it but I hope everyone else weighs in on this one too... I hope I'm not missing anything. Any thoughts from others around here?




Franko said:


> In regards to CGL vs. MNT, it seems MNT is favoured because of the option to allow investors to cash in their shares for the actual bullion (CGL doesn't seem to allow this) - is this why MNT was trading at a premium, as mentioned in earlier posts? Beyond this though, does MNT offer any benefit over KILO that I'm not aware of? (KILO offers redemption of shares into bullion as well).


For a long time, CGL.C (unhedged) was a very small fund and MNT was much larger. MNT has been around $500 million in assets for many years and CGL.C was tiny in comparison, so initially, I didn't take CGL.C very seriously. As a rule of thumb I go with funds that have larger asset bases.

Today CGL.C has grown to $349 million and also shows pretty good daily volume and liquidity. I also watched CGL.C very closely through the COVID-19 crash and it behaved very well... it continued perfectly tracking gold even during market turmoil, and trading with very tight bid/ask spreads, so that really earned my respect.

Currently I hold more CGL.C than MNT, actually. I should mention that I also hold IAU which trades in USD.

One thing I continue to like about MNT is that it's a more "direct" ownership of bullion. Each share is explicitly a claim on some ounces of gold, under a Crown corporation. There is basically no middleman and I really like that. You're directly trusting the Royal Canadian Mint and the Government of Canada.

KILO involves more middle men. You've got the asset manager, maybe an intermediate custodian, and the Royal Canadian Mint. That's not necessarily a bad thing but there are more entities in the chain of trust. You asked if MNT has any benefit, and I would say yes: it cuts out the middle men.


----------



## Franko

james4beach said:


> One thing I continue to like about MNT is that it's a more "direct" ownership of bullion. Each share is explicitly a claim on some ounces of gold, under a Crown corporation. There is basically no middleman and I really like that. You're directly trusting the Royal Canadian Mint and the Government of Canada.
> 
> KILO involves more middle men. You've got the asset manager, maybe an intermediate custodian, and the Royal Canadian Mint. That's not necessarily a bad thing but there are more entities in the chain of trust. You asked if MNT has any benefit, and I would say yes: it cuts out the middle men.


That's good to know - I wasn't aware that MNT was a Crown corporation. Indeed, if the difference in fee between KILO and MNT is 10 basis points or less, I'd be inclined to choose the Crown corporation for the added security.


----------



## james4beach

Franko said:


> That's good to know - I wasn't aware that MNT was a Crown corporation. Indeed, if the difference in fee between KILO and MNT is 10 basis points or less, I'd be inclined to choose the Crown corporation for the added security.


Yup, MNT is backed by the Crown corp. There is the risk of something happening to the Mint's vaults, like for example, an attack, natural disaster, or theft. Then again, when another fund like KILO.B or CGL.C hold gold through some bullion vault, they take on similar risks as well so I don't think there is anyway around those fundamental dangers.

Note however that the units _can_ trade at a discount to fair value (NAV) just as they can trade at a premium. Realistically, this is the biggest danger I can see ... the share price will not necessarily track the price of gold. The units legally represent gold bullion, but that does not mean their price on the market will track gold perfectly.

Excerpts from the MNT prospectus:

Subject to the terms of the ETRs, each ETR will constitute a direct unconditional obligation of the Mint, an agent of Her Majesty in right of Canada and as such will constitute a direct unconditional obligation of Her Majesty in right of Canada.​. . .​As the direct legal and beneficial owners of the gold bullion held by the Mint, ETR Holders bear the risk of loss, damage or destruction of the gold bullion owned by ETR Holders as the result of an Excluded Event. In all other circumstances, if there is a loss, damage or destruction of the gold bullion held by the Mint, ETR Holders must rely on the Mint's ability to satisfy any claims against it (*the Mint's obligations under the ETRs are backed by the full faith and credit of the Government of Canada*).​​


----------



## hfp75

Right now according to my math, MNT is at a -.48 discount... to actual Gold Value....

J4B what did you say with CEF you got for discount to NAV ? -1% max ?


----------



## james4beach

hfp75 said:


> Right now according to my math, MNT is at a -.48 discount... to actual Gold Value....
> 
> J4B what did you say with CEF you got for discount to NAV ? -1% max ?


In the past, CEF at times had huge discounts to NAV. As much as -10% discount, also as much as +12% premium. It's possible MNT could do something like that as well.

In most of its years of trading, MNT had a slight discount to NAV. Based on my samples over time, between 2016-2019, here's what I measured:
Average -0.64% discount to NAV
Worst I saw was -1.5% discount to NAV


----------



## james4beach

Also it may be good to discuss things specific to MNT in another thread about gold ETFs, perhaps









MNT: Royal Can. Mint Gold ETR


The MNT premium has dropped down to 4.7% at the moment, almost back to normal.




www.canadianmoneyforum.com




or








Investing in Gold


I was able to closely monitor the price premium of MNT last week and bought some at 1.46% premium. It has bounced back almost 10% till now. So happy:giggle: I was watching the premium slide down to normal but missed the rebuy. It was 2.5% and then I got caught working for a few days and ect...




www.canadianmoneyforum.com


----------



## james4beach

Here's a chart of the last 2 years of the Permanent Portfolio, using my CAD-based version with this allocation. Other variations of the PP, and All Weather as well, will have a very similar shape.










This looks like a reasonable entry point to buy. I plan to buy quite a bit in 2 weeks and hoping the market doesn't rally before then. Asset allocation requires me to buy whichever asset is below its target weight, automatically getting me to "buy low".

Currently, bonds and gold are both somewhat weak and that's reflected in this chart. Gold is down 13% from its summer high and bonds have been pretty flat.


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## james4beach

james4beach said:


> This looks like a reasonable entry point to buy. I plan to buy quite a bit in 2 weeks and hoping the market doesn't rally before then.


Putting my money where my mouth is, I'm in the process of buying more of this allocation. Loaded up on bonds & gold today, more stocks tomorrow.

Will be about 60K of new purchases when all's said and done. I still think it's a pretty good entry point, especially on bonds & gold.


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## james4beach

Here's where I now stand after buying more stocks, bonds, and gold ... annual rebalancing (through new buys).

This puts me back at my targets: 20% gold, 30% stocks, 50% bonds


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## MrBlackhill

I'm wondering, as the goal of that strategy is to diversify as much as possible, why don't you use All World ETFs (XWD or XAW) for the equity part? Your equity part is only exposed to US and Canada. And I recall how you've told about the Japan market collapse. From that point of view, it could also happen to the US. Dalio is pretty bearish about the US and pretty bullish about the EM, especially China. An All World ETF has only about 60%-65% US exposure. Your equity part may be only 50% US but that's because you have 50% Canadian exposure from home-country bias.


----------



## MrBlackhill

I recall that you've simplified the bonds allocation by buying XBB instead of splitting into long-term and short-term bonds. Why not simplicity the XIU+ZSP with just one ETF like XWD or XAW. 100% XWD had the same performance as 50% XIU + 50% ZSP, while being more diversified.


----------



## james4beach

MrBlackhill said:


> I recall that you've simplified the bonds allocation by buying XBB instead of splitting into long-term and short-term bonds. Why not simplicity the XIU+ZSP with just one ETF like XWD or XAW. 100% XWD had the same performance as 50% XIU + 50% ZSP, while being more diversified.


Yes that's a valid point. Although this is a passive allocation, I am trying a slightly technical approach for my "foreign" component. The half in Canada (XIU) is forever but I plan to vary the other half (currently ZSP) according to foreign market strength. I think I posted the trend-chasing idea somewhere but it's basically the same as Portfolio Visualizer's simple momentum model based on a trailing 1 or 2 period test. I will switch between the CAD equivalents for SPY/EFA/EEM based on which is strongest. Since about 2013, the strongest has been SPY (ZSP) so I'm sticking with that for now.

For the foreseeable future, this means XIU + ZSP as the S&P 500 remains very strong today, with no other foreign market coming close. But at some point when leadership switches to other foreign markets, I do plan to adapt and hop over to that ETF. This is a technical approach, but should be quite passive as I expect these changes to be very rare. In my back tests of this idea I found very good results and the ability to keep up with regime changes (US, emerging, etc) with minimal trades.

If that idea turns out to be problematic, then I'm open to just using XAW. That's obviously simpler, but as you know, I like to sprinkle a bit of active stuff into my mostly passive strategies 



MrBlackhill said:


> I'm wondering, as the goal of that strategy is to diversify as much as possible


I also think that the primary diversification is across asset classes, so in the big picture, I think I gain the most diversification value (efficient frontier etc) through the asset class mix. The details of the stock mix still matter but I think it's a lesser concern overall. For example when stocks crash, they all crash. When global stocks have a good year, they all typically have a good year.

In any case I'm going to keep a mix of Canada + foreign. It may not make a big difference whether that's XIU+ZSP or XIU+XAW ... which is why I'm willing to make a bit of a gamble on the technical approach mentioned above, since it only applies to 15% weight


----------



## MrBlackhill

james4beach said:


> Although this is a passive allocation, I am trying a slightly technical approach for my "foreign" component.


I was wondering because my interpretation of the goal of such a strategy is to be very passive. To me, that includes not to having to think of which geographic is performing the best.



james4beach said:


> I also think that the primary diversification is across asset classes


It's also a portfolio meant to be no-brainer and to reduce drawdowns. I agree though that it's achieving it from diversification through asset classes. But you decided to diversify & simplify the bond part, but not the equity part. The big Canadian exposure adds volatility and bigger drawdowns. The US exposure has to be watched as other countries _may_ rise or if US _may _collapse. Imagine a Japanese investing in such a portfolio with 15% exposure to his home country and then seeing 15% of his portfolio disappear when their market collapsed.



james4beach said:


> If that idea turns out to be problematic, then I'm open to just using XAW. That's obviously simpler, but as you know, I like to sprinkle a bit of active stuff into my mostly passive strategies


All that being staid, I don't think any of that is going to happen in the next decade and with a portfolio as safe as that one, you can certainly afford to play with some parameters as you wish and add a bit of yours.


----------



## OneSeat

Why is the S&P500 so popular? It's brand image is obviously one of the reasons - but anything else?
I've nothing against it, has been my mainstay in the US for years, but I just changed accounts and went with ITOT (total US market) instead - mainly because it has been outperforming the SP in recent years.



james4beach said:


> - - - the S&P 500 remains very strong today - - -


----------



## MrBlackhill

OneSeat said:


> Why is the S&P500 so popular? It's brand image is obviously one of the reasons - but anything else?
> I've nothing against it, has been my mainstay in the US for years, but I just changed accounts and went with ITOT (total US market) instead - mainly because it has been outperforming the SP in recent years.


If you chose ITOT over SPY, then you should also look at VTI, which is slightly outperforming ITOT.


----------



## OneSeat

MrBlackhill said:


> VTI is slightly outperforming ITOT.


I owe you 22 cents.


----------



## librahall

I don't think international exposure is a big problem. U.S stock market includes not only the best-performing companies from other countries(e.g. China, Japan, EU) but also those large American companies already responsible for about half of the world's economic output(e.g. FAANG, Microsoft, McDonald, Starbucks...).

But I do feel 50% XIU is a little bit Canadian home bias. My PP is like 25% MNT, 18% ZSP, 7% XIU, 25% ZFL and 25% Cash.

In addition to that, I have ~10% of my total assets in a Variable Portfolio of individual US stocks and bitcoins.


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## james4beach

librahall said:


> I don't think international exposure is a big problem. U.S stock market includes not only the best-performing companies from other countries(e.g. China, Japan, EU) but also those large American companies already responsible for about half of the world's economic output(e.g. FAANG, Microsoft, McDonald, Starbucks...).
> 
> But I do feel 50% XIU is a little bit Canadian home bias. My PP is like 25% MNT, 18% ZSP, 7% XIU, 25% ZFL and 25% Cash.


Yeah, many of these US giants are really global companies. Your allocation looks good as well.

And to demonstrate that we are "splitting hairs" on this foreign component, take a look at the back-test of @librahall 's allocation versus a 25% XWD weight (more data available than XAW). The result over several years differs by only 0.31% CAGR which isn't much. The chart also shows that they are virtually identical results.

It makes very little difference and ANY of these geographies can outperform the other. Canada (XIU) actually outperformed the S&P 500 from 2000-2018, so when you make an arbitrary weighting change like this, you can't tell if it's going to work out better or worse. In other words it's an arbitrary decision of very little consequence.

The choice also had no impact on max drawdown or the risk-adjusted return.


----------



## james4beach

MrBlackhill said:


> I was wondering because my interpretation of the goal of such a strategy is to be very passive. To me, that includes not to having to think of which geographic is performing the best.


You do have a good point here. At some point, when I make a decision, I might make the wrong decision and that could hurt my performance.

On the other hand, look at VBAL, VGRO & friends. These are considered passive, index-based asset allocation. But when you look at the prospectus you will see that the manager actually has discretion to adjust the specific geographical weightings. They don't commit to specific geographical weightings, nor have they defined a benchmark to compare to. In the 3 years since inception, their geographical weights haven't changed but they may change them at some point in the future if the fund manager sees fit.

Does that mean they aren't passive and index-based? Everyone calls these passive indexing.

What I'm doing is the same thing. I'm mostly keeping the same exposures, for many years. I haven't ever changed my weightings, but *I might* change them as conditions evolve. It's exact same story with VBAL & friends, and everyone calls that passive indexing.

The VBAL & friends situation demonstrates that passive indexing doesn't mean you stick with the exact same index forever. It [likely] means that over the span of several years, you adhere to indexes but are still allowed to make portfolio adjustments, maybe swapping one index for another, over the very long term.

So mine still qualifies as passive indexing. If it doesn't, then VBAL, VGRO & friends are not passive indexing either.

In fact I would argue that mine is a more solid approach than VBAL/VGRO. I have defined technical criteria (systematic approach) for changing my index. VBAL/VGRO on the other, leaves it entirely to human discretion and judgement. My approach is systematic, which is usually better.



MrBlackhill said:


> It's also a portfolio meant to be no-brainer and to reduce drawdowns. I agree though that it's achieving it from diversification through asset classes. But you decided to diversify & simplify the bond part, but not the equity part. The big Canadian exposure adds volatility and bigger drawdowns.


I did diversify the equity part. It's not just one index. These two indices respond differently much of the time, so while it's not as well diversified as XAW, the XIU+ZSP mix does offer some diversification benefit.

Between Canada and US, one is not inherently better/safer/less volatile than the other. Here is proof that they *do* respond differently to market events [ I am using SPY and converting to CAD in lieu of ZSP, for historical data ]. Canada is in red.

The COVID crash, showing a worse drop in Canada
2000-2015, showing significantly worse US -- it's a huge difference!
2016, showing the US had a worse drop than Canada

The point is: the indices act differently (as shown in those charts), and they take turns doing better. That's precisely why the mix of the two gives a diversification benefit. _For my tastes,_ it's enough diversification in the context of this portfolio. Others may disagree and want more equity diversification, like XAW.


----------



## MrBlackhill

librahall said:


> U.S stock market includes not only the best-performing companies from other countries


It does, but that's not enough and I feel like it's messing up the currency exposure.

Look at the performance of FTS vs FTS.TO from 2013 to end of 2015.

FTS : -4.68% CAGR (yes, that's a minus)
FTS.TO : +6.98% CAGR

And you can end up messing even more with your currency exposure if you've bought that S&P500 through XSP.TO (CAD hedged) instead of ZSP.TO (unhedged).

XSP.TO : 14.91%
ZSP.TO : 28.32%

This article argues about the myths of "international diversification" through S&P500 foreign listed companies and multinationals vs true foreign exposure.









Five Myths of International Investing


The reality behind some common misconceptions that may be keeping investors out of international stocks.




www.theatlantic.com







james4beach said:


> And to demonstrate that we are "splitting hairs" on this foreign component


A graph from 2013 to 2020 is not a demonstration in the case of such a portfolio meant to perform well in all economic conditions. Nothing particular happened from 2013 to 2020. It's missing the part where the US starts lagging over other rising countries.

The portfolio is meant to have an answer to all what-if scenarios:

What if stocks crash? It has bonds and gold
What if inflation rise? It has gold
What if we're repeating 2002-2007 with the US underperforming? Ok, Canadian exposure saved it *but not as much as Global ex-US*
US vs ex-US from 2002-2007 (US SP500: 5.95% CAGR, ex-US: 15.99% CAGR)




__





Backtest Portfolio Asset Class Allocation


Analyze and view portfolio returns, sharpe ratio, standard deviation and rolling returns based on historical asset class returns and the given asset allocation



www.portfoliovisualizer.com







james4beach said:


> The point is: the indices act differently (as shown in those charts), and they take turns doing better.


Yes, I was showing the same thing from 2002-2007 because Canada was part of the ex-US that performed well. But that's still only two countries. What if US starts lagging... while Canada underperforms other ex-US countries? *That's exactly what happened.*

In the graph of Global ex-US, I'm showing how it outperformed the US from 2002-2007, the same way you've shown how Canada outperformed the US in your graph. But notice how Global ex-US had 15.99% CAGR from 2002-2007 while XIU.TO had 12.54% CAGR. *See how the home-country bias has led to underperformance during times where the US was underperforming. *During those years, both your 50/50 US/CND and @librahall 72/28 US/CDN has led to underperformance compared to global diversification due to home-country bias





__





Backtest Portfolio Asset Allocation


Analyze and view backtested portfolio returns, risk characteristics, standard deviation, annual returns and rolling returns



www.portfoliovisualizer.com





I will agree though that Canada has outperformed Global ex-US over the past 19 years, but that's not the goal of this portfolio, its goal is to perform well in all situations and to mitigate risk through diversification.


----------



## MrBlackhill

james4beach said:


> So mine still qualifies as passive indexing. If it doesn't, then VBAL, VGRO & friends are not passive indexing either.


Yes, well, it's passive indexing because its constituents are passive indexing ETFs, but they state that country exposure is managed because each of those passive indexing ETFs represents a geographic exposure and they've decided to overweight Canadian exposure because it's good marketing to have more home-country bias in ETFs sold to Canadians.

Look at AOR vs VBAL.TO. Oops, where's that 20% Canadian exposure in AOR?

It's just marketing.


----------



## james4beach

MrBlackhill said:


> Yes, I was showing the same thing from 2002-2007 because Canada was part of the ex-US that performed well. But that's still only two countries. What if US starts lagging... while Canada underperforms other ex-US countries? That's exactly what happened.


Good points and yes of course this is a risk. Canada + US together could both do worse than other countries. Absolutely true. Big picture, this is just a question of how much diversification one wants (in this segment of the portfolio). They're on a scale:

XIU: alone, the least diversified
ZSP: alone, a wee bit better diversified
XIU + ZSP: more diversified than above <-- I am here
XIU + ZSP + XEF: more diversified
XIU + XAW: slightly more diversified

No question that going further towards the bottom of that scale improves diversification


----------



## fireseeker

MrBlackhill said:


> This article argues about the myths of "international diversification" through S&P500 foreign listed companies and multinationals vs true foreign exposure.
> 
> 
> 
> 
> 
> 
> 
> 
> 
> Five Myths of International Investing
> 
> 
> The reality behind some common misconceptions that may be keeping investors out of international stocks.
> 
> 
> 
> 
> www.theatlantic.com


You should note this is not an article (independent journalism). 
It's sponsored content -- i.e. advertising -- from Fidelity.


----------



## MrBlackhill

fireseeker said:


> You should note this is not an article (independent journalism).
> It's sponsored content -- i.e. advertising -- from Fidelity.


Some companies make studies and articles for education purpose, credibility and marketing presence. Doesn't mean it's biased. Could be, but in my opinion the information provided makes sense and it referenced other sources (Bloomberg, MSCI, Morningstar).


----------



## librahall

I have been trying to have my Google sheets automatically find MNS and MNT from the TSX exchange... the ticker do exist, but I am not having luck with google finance acquiring the data associated with the tickers. I have also tried to enter the ticker as follows, with no luck, TSE:MNS and TSE:MNT. Does anyone know how to fix it? Thank you for your help.

How to track your stock portfolio with Google Sheets








Holy sheet: How to track your stock portfolio with Google Sheets


You don't need a fancy app for everything.




thenextweb.com


----------



## MrBlackhill

librahall said:


> I have been trying to have my Google sheets automatically find MNS and MNT from the TSX exchange... the ticker do exist, but I am not having luck with google finance acquiring the data associated with the tickers. I have also tried to enter the ticker as follows, with no luck, TSE:MNS and TSE:MNT. Does anyone know how to fix it? Thank you for your help.
> 
> How to track your stock portfolio with Google Sheets
> 
> 
> 
> 
> 
> 
> 
> 
> Holy sheet: How to track your stock portfolio with Google Sheets
> 
> 
> You don't need a fancy app for everything.
> 
> 
> 
> 
> thenextweb.com


I have no other answer to give you other than : Google doesn't have it in its database, unfortunately. I guess there's a way to report it. I also track my portfolio using Google and I have a few tickers without any data.


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## librahall

MrBlackhill said:


> I have no other answer to give you other than : Google doesn't have it in its database, unfortunately. I guess there's a way to report it. I also track my portfolio using Google and I have a few tickers without any data.


Yes, it is possible that Google's data is incomplete. Maybe it's because MNT is a ETR. Thanks for letting me know. I am entering the price of MNT.TO manually for now.


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## hfp75

librahall said:


> . I am entering the price of MNT.TO manually for now.


That is a PITA....


----------



## hfp75

I use Office 2019 on the computer and this: (its FREEWARE & simple to use)



Gaier Software - Excel Quotes Add-In



I am more than happy...

not trying to derail....


----------



## leoc2

librahall said:


> I have been trying to have my Google sheets automatically find MNS and MNT from the TSX exchange... the ticker do exist, but I am not having luck with google finance acquiring the data associated with the tickers. I have also tried to enter the ticker as follows, with no luck, TSE:MNS and TSE:MNT. Does anyone know how to fix it? Thank you for your help.
> 
> How to track your stock portfolio with Google Sheets
> 
> 
> 
> 
> 
> 
> 
> 
> Holy sheet: How to track your stock portfolio with Google Sheets
> 
> 
> You don't need a fancy app for everything.
> 
> 
> 
> 
> thenextweb.com


@hfp75 , @librahall , @MrBlackhill


You can use this yahoo quote for MNT in your google sheets:



> =IFNA(VALUE(IMPORTXML("Symbol Lookup from Yahoo Finance" & "MNT.TO", "//*[@class=""D(ib) Mend(20px)""]/span[1]")))


See post below #453 to use this formula....Thanks Spud!


----------



## Spudd

leoc2 said:


> @hfp75 , @librahall , @MrBlackhill
> 
> 
> You can use this yahoo quote for MNT in your google sheets:
> 
> 
> 
> Copy and paste that formula into a cell.


FYI, that formula doesn't work to just copy/paste as the link has been converted to text in your pasting. Here's the right formula (thanks, BTW, this fixed a long-standing issue for me):



Code:


=IFNA(VALUE(IMPORTXML("https://finance.yahoo.com/quote/" & "MNT.TO", "//*[@class=""D(ib) Mend(20px)""]/span[1]")))


----------



## leoc2

Spudd said:


> FYI, that formula doesn't work to just copy/paste as the link has been converted to text in your pasting. Here's the right formula (thanks, BTW, this fixed a long-standing issue for me):
> 
> 
> 
> Code:
> 
> 
> =IFNA(VALUE(IMPORTXML("https://finance.yahoo.com/quote/" & "MNT.TO", "//*[@class=""D(ib) Mend(20px)""]/span[1]")))


Thanks in return for fixing my link!


----------



## librahall

leoc2 said:


> Thanks in return for fixing my link!


@leoc2 @Spudd This is awesome! Thank both of you!


----------



## Argonaut

The concept of the Permanent Portfolio got me excited about investing when I was a teenager, and obviously I've been hooked since.
I'm using a modified version I've dubbed the Advanced Asset Allocation (AAA) for my kids' RESP. It's not as Bond/Cash heavy given today's interest rates.

Weights:
30% Canadian Stocks - XIC, or TD Canadian Index e-Series
30% ex-Canada Stocks - XAW, or TD USA Index e-Series
20% Precious Metals - CEF, or BMG130 Mutual Fund
20% Bonds & Cash - 10% VAB or TD Bond Index e-Series, 10% Investment Savings Account

When the RESP was small I used TD e-Series so I could put smaller amounts in without commission. Now that it's grown a bit I'm mostly using ETFs. But if I need to invest smaller amounts I can go into the mutual funds to save on commission. Every 2 or 3 years I can sell accumulated mutual funds and buy the ETFs if I want.

Honestly I think this is a killer asset allocation and I've been happy with it so far. When I wrote my book a few years ago, I recommended USA alone for ex-Canada exposure. With the huge outperformance of the USA equity markets since then, I'm warming up to ex-North American equity. And XAW is a great fund that's more than half USA anyways.
I still use 6-Pack/12-Pack concept for my wife and I's accounts, but don't mind the XIC option for the smaller RESP. Easier to manage and saves commissions for a smaller account.


----------



## james4beach

Argonaut said:


> I'm using a modified version I've dubbed the Advanced Asset Allocation (AAA)


I think your AAA is excellent. Though, I'm surprised to see that you are still using the CEF fund. After aggressively attacking the original management with lawsuits and ruining the company (very hostile IMO), Sprott then took ownership, but has mismanged this fund. It has a chronic discount to NAV. You might want to consider whether you want to entrust your precious metals to Sprott -- I certainly wouldn't, myself.

I sold all my CEF and replaced it with CGL.C and MNT. I don't feel like I can trust Sprott, period. Not after their shenanigans with Central Fund of Canada.


----------



## Argonaut

james4beach said:


> Though, I'm surprised to see that you are still using the CEF fund.


I agree CEF is not ideal, and I'm not a big fan of Sprott either. On the plus side it is a one-stop shop for gold and silver.
But it's held by the Royal Canadian Mint, so the same as MNT in that respect. And it's a heck of a lot more liquid than MNT.
Not sure about the chronic discount to NAV. It's redeemable for physical so there may be some arbitrage opportunity for big money?
I always like GLD and SLV in $USD. With $CAD perhaps it's better to have a combination of CGL.C and SVR.C?
Always open to arguments to tweak portfolio holdings.


----------



## MrBlackhill

Argonaut said:


> Always open to arguments to tweak portfolio holdings.


In this thread here I tried to suggest some optimal allocation which is inspired by a mix of Gyroscopic Investing Desert Portfolio, Permanent Portfolio and All Weather Portfolio. The goal is to maximize diversification to provide an optimal portfolio with high return, low volatility, low drawdown in all circumstances.


----------



## james4beach

Argonaut said:


> I agree CEF is not ideal, and I'm not a big fan of Sprott either. On the plus side it is a one-stop shop for gold and silver.
> But it's held by the Royal Canadian Mint, so the same as MNT in that respect. And it's a heck of a lot more liquid than MNT.
> Not sure about the chronic discount to NAV. It's redeemable for physical so there may be some arbitrage opportunity for big money?


Good point, the Mint does hold a lot of these assets at the end of the day and as you say, CEF is more liquid than MNT.

I do my part to add to MNT liquidity and there's a reasonable share volume per day. It's just that the bid/ask spread is insanely wide. If you're placing orders for people, make sure you at least split the bid/ask and go half way. I am sure that many of us retail guys are going to the mid point and can match on trades.



Argonaut said:


> I always like GLD and SLV in $USD. With $CAD perhaps it's better to have a combination of CGL.C and SVR.C?
> Always open to arguments to tweak portfolio holdings.


In the US, I use IAU as it has a lower expense ratio. That's one of my core holdings.

In Canada, I use both MNT and CGL.C. The tracking of CGL.C is perfect and the bid/ask spread is pretty tight as well.


----------



## james4beach

For anyone interested in this portfolio I wanted to mention that two of the PP assets (bonds and gold) are on the "low" side at the moment. By low I mean that they are currently the underperformers.

This is one thing I like about having a diverse spread of assets. If adding money, you aren't forced to buy stocks at all time highs. If adding new money to the PP today, you'd have to buy bonds & gold right now.

If you were removing money from the PP today, you'd have to sell stocks. You don't have a choice... this is to obey the weightings.

Isn't that beautiful? Asset allocation automatically makes you 'buy low' and 'sell high'.


----------



## librahall

Instead of beautiful, I have to say that PP has been performing poorly since last September. With near-to-zero interest rate, unlimited QE(printing money) and credit tightening, bonds and gold may stay low in the near future. I feel fortunite that I allocated 10% to stocks(up 70% YoY) and 4% to BTC&BNB(up 500% YoY).


----------



## james4beach

librahall said:


> Instead of beautiful, I have to say that PP has been performing poorly since last September. With near-to-zero interest rate, unlimited QE(printing money) and credit tightening, bonds and gold may stay low in the near future. I feel fortunite that I allocated 10% to stocks(up 70% YoY) and 4% to BTC&BNB(up 500% YoY).


Well it's not going to go straight up all the time. Nothing does. Whatever investment portfolio you choose will sometimes have bad periods.

My brokerage's performance tool shows me:
Last 6 months: -1.98% (ouch)
Last 12 months: +6.33%
Last 3 years: +7.32% annualized

Nothing out of the ordinary here, showing good returns and in fact, still higher than the PP historical average.


----------



## james4beach

Here's where my portfolio stands at the moment. I have other investments like GICs elsewhere but this is my single largest account:












librahall said:


> bonds and gold may stay low in the near future


There's no way to predict what will happen with bonds and gold, any more than we can predict what will happen with stocks.


----------



## MrBlackhill

@james4beach

There's something I'm very curious about. You said you were happy because you sell high and buy low. Am I understanding that when you add money to your portfolio, you are actually trying to move it towards your target weighting instead of just waiting to rebalance it at the end of the year?

There's a debate about the frequency of the rebalancing, but I think my point is another question. Say you rebalance your portfolio annually. Though, you add money to your portfolio every month. When you add that money, you have two options :

Split that money accordingly to your target portfolio weighting, or
Add money to the asset with the lowest weighting compared to its target
Though, if we take an extreme example where you would target a portfolio of 50% XQQ and 50% XSB, the #2 would mean all of the cashflow would go into the low performing XSB until you rebalance at the end of the year, while the #1 would mean you put 50% of that cashflow into XQQ and 50% into XSB no matter the current weighting and then you rebalance at the end of the year. Option #1 will certainly be the better performer unless there's a market crash. Option #1 will have higher commission cost though. And if you have lots of holdings, then option #2 makes more sense.

But option #2 seems like messing up with the strategy to rebalance only annually, no?

I'm wondering how Portfolio Visualizer distributes the money contributions.


----------



## james4beach

MrBlackhill said:


> There's something I'm very curious about. You said you were happy because you sell high and buy low. Am I understanding that when you add money to your portfolio, you are actually trying to move it towards your target weighting instead of just waiting to rebalance it at the end of the year?


Yes, every time I add money to my portfolio, I've been nudging my assets towards their target weights. I like how it ends up making me buy things that are low and out of favour.



MrBlackhill said:


> There's a debate about the frequency of the rebalancing, but I think my point is another question. Say you rebalance your portfolio annually. Though, you add money to your portfolio every month. When you add that money, you have two options :
> 
> Split that money accordingly to your target portfolio weighting, or
> Add money to the asset with the lowest weighting compared to its target
> . . .
> But option #2 seems like messing up with the strategy to rebalance only annually, no?


You raise good questions and I have not back-tested this so thoroughly to know which is the best strategy. Perhaps I am being too aggressive in trying to stick close to my allocation targets. It just felt efficient to me, to take care of some rebalancing while I buy.

I don't think #2 messes up my annual rebalancing, because the amounts I add mid-year are pretty small compared to my total. It's true that my recent purchases did bring me back to perfect balance (screen shot in above post) but that usually doesn't happen.

I expect that in most years, I will have to rebalance annually in any case, which is why I'm not too concerned about any of this.


----------



## james4beach

I should add @MrBlackhill that I did previously simulate withdrawals (with rebalancing at the same time) during distressed market periods like bear markets and found that this worked out beautifully. So rebalancing withdrawals seem to work out great.

Somewhat based on that, I assumed that it also works out well when buying. But I'll admit that I made a leap there.


----------



## librahall

james4beach said:


> Here's where my portfolio stands at the moment. I have other investments like GICs elsewhere but this is my single largest account:
> 
> View attachment 21334
> 
> 
> 
> 
> There's no way to predict what will happen with bonds and gold, any more than we can predict what will happen with stocks.


While it is unreliable to try to predict the market, it is also lazy to completely ignore the economic environment and fundamentals.


----------



## james4beach

librahall said:


> While it is unreliable to try to predict the market, it is also lazy to completely ignore the economic environment and fundamentals.


But these things can't be predicted accurately. Economists and pundits have a horrible track record. Their guesses are worthless.

So yes, economics are important, but what are you going to do (what action will you take) when the forecasts are so inaccurate?


----------



## hfp75

With the PP and time, you dont need to try to outsmart mr. market, i mean powell....

i rebalance by buying low hanging fruit when i add cash or accumulate some.


----------



## james4beach

hfp75 said:


> With the PP and time, you dont need to try to outsmart mr. market, i mean powell....
> 
> i rebalance by buying low hanging fruit when i add cash or accumulate some.


Have you guys heard of Jacob Fugger, from 500 years ago, who was incredibly wealthy at the time









What We Can Learn from a 500-Year-Old Investing Style


German financier Jacob Fugger amassed a fortune in his day. Here are a few takeaways for investors.



www6.royalbank.com





The Fugger approach was something like 25% each in stocks, bonds, gold, real estate. That's awfully similar to the Permanent Portfolio.



> Fugger is said to have divided his vast wealth into four equal parts: stocks, bonds, real estate and gold coins


----------



## hfp75

I have actually contemplated dumping the cash portion for some re/reit, but regular indexes have a bunch of re already....


----------



## james4beach

If anyone is curious, I posted some long term (40 year) performance history for the portfolio I use, which is like the PP: see this post in another thread

An observation based on this. The last two years of the PP-like portfolios have been *very* strong, above the historical average due to very strong years in gold & bonds. A 'reversion to the mean' can be expected at this point.

In that history you can see relatively low returns in 2017 and 2018.
Followed by very high returns in 2019 and 2020 ... ridiculously strong years

There would be nothing unusual about a year or two of low returns at this point. It would fit the "reversion to the mean" pattern shown in that 40 year history.


----------



## hfp75

I know opinions are like a dirty shirt....









‘This bond market is so radically oversold,' economist David Rosenberg says


David Rosenberg of Rosenberg Research predicts inflation fears are temporary, and the 10-year Treasury Note yield will return to 1%.




www.cnbc.com


----------



## Jimmy

Warren Buffet's view on bonds in his annual letter.



> * And bonds are not the place to be these days*. Can you believe that the income recently available from a
> 10-year U.S. Treasury bond – the yield was 0.93% at yearend – had fallen 94% from the 15.8% yield available in
> September 1981? In certain large and important countries, such as Germany and Japan, investors earn a negative return
> on trillions of dollars of sovereign debt. *Fixed-income investors* worldwide – whether pension funds, insurance
> companies or retirees – *face a bleak future. *


----------



## james4beach

hfp75 said:


> I know opinions are like a dirty shirt....


Yup, if you keep reading analysts, you will find all possible opinions. Nobody really has any clue what's going to happen.

@Jimmy notice that Buffett says "not the place to be *these days*". He's not writing off bonds entirely and in fact, Berkshire Hathaway fluctuates between 30% to 50% in t-bills & bonds themselves, among their liquid securities.

Just because bonds may not look like the place to be "these days" doesn't mean they will be a bad deal forever. There are only two options in this game:
1. maintain a constant bond allocation (which is what the PP does), or
2. strategically shift out of bonds, then back in again at a better time


----------



## MrBlackhill

james4beach said:


> Buffett says "not the place to be *these days*". He's not writing off bonds entirely


Depends how long "these days" are. For a 90-year-old man, 5-10 years is short and can be considered as "these days".

The rolling returns of bonds over the past 40 years keeps falling. And as we see in countries with negative interest rates, they can continue falling. So "these days" could mean a whole decade.

25-35 years ago, bonds were competing with stocks as an investment product to growth your wealth. Now, bonds are only a tool to reduce risk and volatility of the portfolio.

From 1995-2020, the S&P500 had two major crashes, but it returned 11% CAGR compared to 
5% for bonds.

I guess that's why the usual 60/40 portfolio is slowly drifting towards a 70/30 portfolio.


----------



## james4beach

MrBlackhill said:


> Depends how long "these days" are. For a 90-year-old man, 5-10 years is short and can be considered as "these days".
> 
> The rolling returns of bonds over the past 40 years keeps falling. And as we see in countries with negative interest rates, they can continue falling. So "these days" could mean a whole decade.


Yes "these days" could mean a whole decade. Bonds might have very disappointing performance for another few years. But so what? An investor in equities also needs a time horizon of at least 10 years. Whether you invest in 100% equities, 60/40, or PP, you need a 10+ year horizon.

These anti-bond arguments just don't make sense to me. It sounds like people are saying: "bonds might do badly in the next few years, therefore you should cut them out of your portfolio."

Would you agree @MrBlackhill that this is the argument you're making?

I don't understand why people are so committed to the idea of timing the bond market while, at the some time, insisting on buy & hold for stocks. It's illogical. If we are market-timing geniuses, then we obviously should be hopping in and out of stocks and bonds all the time. *On the other hand, if we believe we can't time markets*, then we should stay passive long the asset class... even if we think we might be in for a few rough years.


----------



## Jimmy

james4beach said:


> Yup, if you keep reading analysts, you will find all possible opinions. Nobody really has any clue what's going to happen.
> 
> @Jimmy notice that Buffett says "not the place to be *these days*". He's not writing off bonds entirely and in fact, Berkshire Hathaway fluctuates between 30% to 50% in t-bills & bonds themselves, among their liquid securities.
> 
> Just because bonds may not look like the place to be "these days" doesn't mean they will be a bad deal forever. There are only two options in this game:
> 1. maintain a constant bond allocation (which is what the PP does), or
> 2. strategically shift out of bonds, then back in again at a better time


I think Warren Buffet has a clue and you need to listen to him and dump your holdings in bonds and adapt to modern times properly. His advice before to new investors was 10% in ST bonds and 90% in an S&P ETF. That sounds more sensible even in he modern age vs the dinosaur pp that is 50 yrs out of date.

BRK is a deflection. BRK has to hold cash and low risk securities only to meet its LT insurance liabilities where preservation is a factor vs and not because he would choose to personally as he indicated

Buffet also unloaded tanking gold ABX too recently More advice to follow.


----------



## james4beach

Jimmy said:


> I think Warren Buffet has a clue and you need to listen to him and dump your holdings in bonds


In other words: "bonds might do badly in the next few years, therefore you should cut them out of your portfolio."

(And my response is obviously no. That violates passive long term investing.)


----------



## Jimmy

This from Gordon Pape at the Globe



> The Long Term Bond Index ETF ( XLB-T +0.16%increase) has taken a bigger hit, with a loss of 9.4 per cent ytd. The longer a bond’s term to maturity, the more exposed it is to rising interest rates.
> 
> In times like these, the best strategy with fixed income securities is to stay short term, although even the iShares Core Canadian Short Term Bond Index ETF ( XSB-T +0.18%increase ) is down 0.8 per cent year-to-date. The Corporate Bond version ( XSH-T +0.15%increase ) has lost 0.6 per cent.


----------



## MrBlackhill

james4beach said:


> These anti-bond arguments just don't make sense to me. It sounds like people are saying: "bonds might do badly in the next few years, therefore you should cut them out of your portfolio."
> 
> Would you agree @MrBlackhill that this is the argument you're making


No. Bonds have their place but can be reduced unless it's used as a tool against volatility and risk.

I'm just saying that bonds aren't performers at the moment, but they are great tools to reduce risk and volatility.

When looking at the US 10Y history over 100 years, when looking at 10Y of other countries, I think the most bullish scenario for the 10Y would be to see it increase to 5% in 10 years from now.

There will be more inflation, but due to the high debt level, I don't think we can afford to let interests rate rise too fast, so as the inflation rises faster than interests, the real return will stay low and the best bet will be the gold safe heaven. Gold may drop to $1600 throughout this year, but it'll certainly be above $2000 within 1-3 years and that will provide a better performance than bonds even in the scenario where rates start increasing slowly.


----------



## MrBlackhill

MrBlackhill said:


> the best bet will be the gold safe heaven


Seems like Mr. Market keeps listening to me. I called NASDAQ's correction at 14,000 and yesterday I just wrote about gold for the first time and now XGD is up almost +4%. Not sure if it's just a random day or an indication of what I'm predicting for gold for 2021-2022. Anyways, gold-related stocks have been down -25% for the past 6 months so this +4% may just be volatility and my confirmation bias. (EDIT: It was just volatility, ha!)


----------



## james4beach

MrBlackhill said:


> No. Bonds have their place but can be reduced unless it's used as a tool against volatility and risk.
> 
> I'm just saying that bonds aren't performers at the moment, but they are great tools to reduce risk and volatility.


It's true that the bonds are helping with risk/volatility but they are doing more than that. Bonds are in the PP to protect against deflation and very weak economic conditions.

What happens if we get a deflationary collapse (say a true depression) within the next couple of years? Suddenly the inflation rate drops to -0.5% perhaps. Want to guess what happens to a bond fund that now has a guaranteed yield to maturity of 1.5% over the next decade?

Answer: it becomes the best investment on earth

I think many people are still kind of missing the point that the PP tries to address "many possible futures". We don't know *which future* will happen, and that's the underlying philosophy here. As of today, we have no idea if we are going to get:

inflation
deflation / depression
stagflation
normal economy
etc
The philosophy underlying the PP says that we don't know which of these will happen, so we are hedged across all scenarios ('all weather') fully aware that some of these scenarios will make certain assets look pretty bad. If we get (1) then bonds turn out to suck. If we get (2) then stocks turn out to suck. If we get (3) then stocks and bonds both kind of suck.

If you believe in the philosophy underlying all of this, then you need a passive portfolio. Choose whatever asset weights you want but don't adjust them on the fly.

But if you don't agree with the underlying philosophy, and are waiting to get newsletters from Buffett and the Motley Fool telling you what to do, then by all means, actively trade the stock & bond markets.


----------



## MrBlackhill

I agree with the Permanent Portfolio. If you go passive and go for the Permanent Portfolio strategy, stick to the plan.

But I guess I should've posted in the "Are you buying bonds?" thread, as I was debating for those who like to do small corrections in their allocations to adapt to the current context.


----------



## james4beach

Here's a chart of (my version of) the Permanent Portfolio since January 2020. It's now been slightly negative over the last 6 months.

I think this offers a pretty good entry. People often say they are hesitant to invest because everything is at all time highs. But as you can see, this asset mix is not at its peak.

The funny thing about markets is that people always say "you should buy low" but don't actually want to do it, when presented with the opportunity. If you want to buy low, *you should buy bonds & gold right now*. But look around this forum and you'll see that most people are trying to sell bonds. That's just human nature.


----------



## james4beach

The recent poor performance of bonds made me wonder: what if I was retired and had to extract cash from my portfolio. How would I take money out of the PP at the moment, if I really had to? I took a look at my asset allocation and found that I am a few % overweight stocks, a few % underweight gold, and slightly underweight bonds.

Therefore, if I was going to take a withdrawal today, it would mean selling stocks, especially the TSX which has outperformed lately. That looks good to me ... it's neat how asset allocation works. Withdrawals will hardly ever come out of the weak asset class.

The strategy automatically makes you sell high!


----------



## MrBlackhill

I was thinking about the Permanent Portfolio, the Desert Portfolio and such which I guess are currently doing poorly because YTD gold is down, bonds are down and stocks are near-flat (except for TSX due to energy). But commodities are up. And then I thought about the All Weather portfolio which has an allocation to commodities, not only gold.

Wouldn't you like to allocate a small portion to commodities? (All Weather portfolio says 7.5%)


----------



## james4beach

MrBlackhill said:


> Wouldn't you like to allocate a small portion to commodities? (All Weather portfolio says 7.5%)


Nope, not me. Can't go around changing allocations like that based on disappointment with recent performance. This is *exactly* how people end up hurting their long term returns; performance-chasing. No matter which assets you choose, you will encounter disappointment at some point.

If someone is starting new today though, sure you could allocate some to "commodities". The problem I have found with this idea though, is there is no good ETF that efficiently and accurately gives exposure to a broad range of commodities. DBC is energy-heavy, but that area is economically sensitive.

I don't have sufficient long term data to convince me that DBC improves the portfolio, anyway.


----------



## MrBlackhill

james4beach said:


> If someone is starting new today though, sure you could allocate some to "commodities".


Yes, that's what I meant.




james4beach said:


> I don't have sufficient long term data to convince me that DBC improves the portfolio, anyway.


That's also my conclusion.

-----

I was simply wondering if there was some asset class moving up recently as most stocks are down, gold is down and bonds are down. I was expecting at least one asset class to be up. And that's commodities, but in the long run it seems to do more harm than good.

COW.TO is doing great.


----------



## andrewf

Not sure how you can invest in commodities effectively. Most are not really investible. There are funds that hold futures, but usually they suffer pretty badly from roll yield and sequence of returns risk. You can buy gold, or you can buy companies that produce commodities, but not really commodities directly.


----------



## librahall

Why in the World Would You Own Bonds When… by Ray Dalio









Why in the World Would You Own Bonds When…


…Bond markets offer ridiculously low yields. Real yields of reserve currency sovereign bonds are negative and the lowest ever.




www.linkedin.com


----------



## james4beach

librahall said:


> Why in the World Would You Own Bonds When… by Ray Dalio


Interesting thoughts for sure (@MarcoE might be interested), but these are active market timing efforts. Dalio says to have no bonds, go long emerging stocks and short the dollar. He's saying to go leveraged long risk assets. These are *very* specific and aggressive tactical bets. Basically he thinks we're in for a repeat of 2003-2008.

And a few months ago his hedge fund went heavy into TIPS, a segment of the bond market. It has not performed well. So he's giving up on it now? Is he going to change his mind again in 2 months?

Before taking Dalio's market timing too seriously, beware that his active strategies had a very bad 2019-2020. Back in the early 1980s, he also lost all his money on some bad gambles (bad active bets) along these lines and had to be bailed out. Active trading is dangerous.

His thoughts are interesting, sure, but I think Dalio's passive strategy (which does include bonds) is a lot more solid than his active gambles. I'm not like Dalio... I don't have a rich daddy who can lend me money if I gamble & screw up.

My guess is that he's experiencing some FOMO under current market conditions. And because his hedge fund is being left in the dust after two bad years, Bridgewater likely feels pressure to improve returns. I think he's amping things up in the hopes of a big win for the sake of Bridgewater.

That's his problem... not my problem 

My suggestion is: don't gamble. Decide on your passive strategy and then stick with it. Making changes on the fly, and trading based on themes you forecast, is gambling.


----------



## Jimmy

> For these reasons I believe a well-diversified portfolio of non-debt and non-dollar assets along with a short cash position is preferable to a traditional stock/bond mix that is heavily skewed to US dollars.


----------



## james4beach

Jimmy said:


> For these reasons I believe a well-diversified portfolio of non-debt and non-dollar assets along with a short cash position is preferable to a traditional stock/bond mix *that is heavily skewed to US dollars*.


Well then good news. Dalio is saying to avoid USD based cash / bond assets. Canadian investors don't have this problem. Even our bonds are non-dollar assets (which Dalio endorses). Dalio is bearish on the USD and bullish everything non-USD.

But none of this really matters anyway, since the Permanent Portfolio is a passive technique. You're not supposed to trade around it based on market predictions.


----------



## Jimmy

james4beach said:


> Well then good news. Dalio is saying to avoid USD based cash / bond assets. Canadian investors don't have this problem. Even our bonds are non-dollar assets (which Dalio endorses). Dalio is bearish on the USD and bullish everything non-USD.
> 
> But none of this really matters anyway, since the Permanent Portfolio is a passive technique. You're not supposed to trade around it based on market predictions.


No. He said 'non debt' assets. No bonds of any kind. Nice try. Be passive and buy some indexes. No bonds though.


----------



## james4beach

Jimmy said:


> No. He said 'non debt' assets. No bonds of any kind. Nice try. Be passive and buy some indexes. No bonds though.


Nice try Jimmy but just like Buffett's text, you are misrepresenting this one as well.

Why do you care if others invest in bonds, anyway? You seem awfully committed to this agenda. And you really have no idea how diversified investing works.


----------



## Jimmy

james4beach said:


> Nice try Jimmy but just like Buffett's text, you are misrepresenting this one as well.
> 
> Why do you care if others invest in bonds, anyway? You seem awfully committed to this agenda. And you really have no idea how diversified investing works.


You are deluding yourself only as both are quite clear. I just posted another leading investors opinion about bonds for your benefit and education.
I know how diversfication works. It should still make $ though. Even Dalio makes this clear. no bonds You should be more open minded.


----------



## james4beach

Jimmy said:


> You are deluding yourself only as both are quite clear. I just posted another leading investors opinion about bonds for your benefit and education.
> I know how diversfication works. It should still make $ though. Even Dalio makes this clear. no bonds You should be more open minded.


Jimmy, there's also a recent speech from Munger saying the stock market is in a bubble, stocks are overvalued, and you can't get rich buying stocks at these valuations. So are you going to stop investing in stocks because Charlie Munger says stocks are overvalued and "this must end badly"?


----------



## Jimmy

james4beach said:


> Jimmy, there's also a recent speech from Munger saying the stock market is in a bubble, stocks are overvalued, and you can't get rich buying stocks at these valuations. So are you going to stop investing in stocks because Charlie Munger says stocks are overvalued and "this must end badly"?


That is just deflecting. You have to be concerned when even the creator of the allweather portfolio is advising against it is all.

Munger is only talking about SPACs and a few speculative stock areas like GME too btw.


----------



## james4beach

Jimmy said:


> Munger is only talking about SPACs and a few speculative stock areas like GME too btw.


No, Munger says US stocks are overvalued and calls the market a bubble. So why are you still investing in stocks?

My point is ... many "experts" and personalities have opinions, on all kinds of things. So what? This isn't how to make investment decisions.


----------



## Jimmy

james4beach said:


> No, Munger says US stocks are overvalued and calls the market a bubble. So why are you still investing in stocks?
> 
> My point is ... many "experts" and personalities have opinions, on all kinds of things. So what? This isn't how to make investment decisions.


No he is talking about traders on Robinhood and SPACs.



> Munger said inexperienced investors are being lured into the market by newer brokerages like Robinhood that offer commission-free trading. Robinhood has defended its practices but critics say some features on its trading platform make investing seem like a game, such as showering a user’s screen with virtual confetti every time they make a trade.
> 
> “The frenzy is fed by people who are getting commissions and other revenues out of this new bunch of gamblers,” Munger said.
> Munger also took aim at the special purpose acquisition companies, or SPACs, that have exploded in popularity on Wall Street. Last year, the investment vehicles designed to invest in young businesses that don’t yet have shares trading in the public market raised $76 billion from investors, up from $13 billion the year before.
> 
> “I think this kind of crazy speculation in enterprises not even found or picked out yet is a sign of an irritating bubble,” Munger said.


There are 100s who say it isn't in a bubble so why do you cite one odd ball opinion?

The pt is the author who designed the half baked allweather portfolio in 1995 you follow now realizes it makes no sense 25 yrs later w the bonds portion after a 20 yr bull run bond bubble.

And is trying to advise people as such.

If even he has no conviction in it anymore, then neither should you. or you could just look at those awful charts which tell you as much.


----------



## james4beach

With some cash available to deploy, I bought more gold today (using CGL.C) as required by the asset allocation plan. In the last few months, gold has fallen the most and is relatively underweight in my portfolio.

If anyone is considering starting the Permanent Portfolio, I think the current environment is a good entry due to the attractive prices for bonds & gold. Surely it's better to buy things which are currently out of favour, than chasing stocks and buying them at all time highs?

That's what the Permanent Portfolio lets you do, with its broader diversification in multiple assets.


----------



## hfp75

Its after hours right now so my numbers are not 100% accurate but I think MNT is trading at a discount to NAV.... I wont be sure till markets open next week but just something to watch if you are thinking of buying some at some point.

A few months ago it had a double digit premium. 

Ill update next week.....

Things to ponder for sure.

Opportunity knocks once.... temptation always knocks.....


----------



## Gallop

Intrigued by PP. Currently consolidated to 100% in VEQT between RRSPs and TFSAs. Has served me well but being 33% VEQT and 66% principle residence, my net worth feels rather “bubbly” to me at this 2021 moment... 
If you woke up in my shoes how would you rebalance into PP? Just “sell one day, but the next” 100% of the VEQT?


----------



## james4beach

Gallop said:


> Intrigued by PP. Currently consolidated to 100% in VEQT between RRSPs and TFSAs. Has served me well but being 33% VEQT and 66% principle residence, my net worth feels rather “bubbly” to me at this 2021 moment...
> If you woke up in my shoes how would you rebalance into PP? Just “sell one day, but the next” 100% of the VEQT?


If it was me, I'd start by taking 1/2 or 1/3 of the VEQT position and turning it into a PP mix (with bonds & gold). Keep the "stock" segment of the PP in VEQT.

Then maybe every two months, convert more of VEQT into the PP... that will gradually shift you over.

In the end, you'll still have some VEQT for the stock segment of course.


----------



## james4beach

I was reviewing my allocation weights as I try to decide how to invest new money.

At this point, I have to buy bonds, since that part of the portfolio has become the most underweight.

"Buy low" as the saying goes!


----------



## librahall

james4beach said:


> I was reviewing my allocation weights as I try to decide how to invest new money.
> 
> At this point, I have to buy bonds, since that part of the portfolio has become the most underweight.
> 
> "Buy low" as the saying goes!


Does your backtest support "buying low" brings better performance? In history, bonds could drawdown 49% and gold could drawdown 59%. Therefore, buying at -20% could still be kind of buying high? I understand the concept of rebalance but am not sure how to execute this strategy appropriately.


----------



## MrBlackhill

librahall said:


> Does your backtest support "buying low" brings better performance? In history, bonds could drawdown 49% and gold could drawdown 59%. Therefore, buying at -20% could still be kind of buying high? I understand the concept of rebalance but am not sure how to execute this strategy appropriately.


I was wondering the same thing. Imagine "buying low" for 20 years. Each year, you buy lower and lower because... well... you are buying low and it's for rebalancing. But actually you just end up buying something which makes you lose money every year.


----------



## Jimmy

Agree . Bonds just had a 30 yr bull run as interest rates fell to near zero and rates are now rising. ZAG has already fallen ~ 8% this year and will lose another 8% for every 1% rise in interest rates.

Buying low is still based on future prospects for growth and earnings and bonds offer nether.


----------



## like_to_retire

MrBlackhill said:


> I was wondering the same thing. Imagine "buying low" for 20 years. Each year, you buy lower and lower because... well... you are buying low and it's for rebalancing. But actually you just end up buying something which makes you lose money every year.


But if you buy a bond or GIC to rebalance and keep it to maturity, you receive your face value with interest that results in a yield that you calculated when it was purchased. Now maybe that yield does or doesn't keep up with inflation, but the capital protection is still there and presumably the purchase of that bond came from profits of equities that were sold high.

I'm a believer in rebalancing. I guess the only argument I might have is at what limits you set to make the decision as a trigger point.

ltr


----------



## james4beach

librahall said:


> Does your backtest support "buying low" brings better performance? In history, bonds could drawdown 49% and gold could drawdown 59%. Therefore, buying at -20% could still be kind of buying high? I understand the concept of rebalance but am not sure how to execute this strategy appropriately.


My own research absolutely supports rebalancing and buying the low, underweight asset. At the same time this is a large behavioural challenge, so this is where the psychology of portfolio management becomes the bigger issue. Not the technique itself, but human psychology and fear of loss.

Bonds at the 10 year maturity mark cannot have a 49% drawdown. The worst in history was more like 12% to 15%, so you might be thinking of long term bonds. As I wrote before, I don't like long term bonds.

There are a couple ways to do this rebalancing. One is explicitly doing some selling and buying (rebalance the portfolio) on an annual basis. The way I'm trying to do it at the moment is by using my new purchases to help rebalance, which means buying the underweight asset.

Think about VBAL, the 60/40 balanced fund. The web site shows they are currently 39.8% in bonds. How do you think that happened, when stocks are very strong and bonds are very weak? *Vanguard is buying bonds, and likely is not buying stocks*. That's the only way they can end up at 39.8% bonds under current market conditions.



MrBlackhill said:


> I was wondering the same thing. Imagine "buying low" for 20 years. Each year, you buy lower and lower because... well... you are buying low and it's for rebalancing. But actually you just end up buying something which makes you lose money every year.


Same problem with stocks. How do you think stock investors would feel while buying low during a poor 10 or 15 year stretch in stocks? This is the nature of investing in financial markets. Any of these assets MIGHT do badly for a long time.

You either commit to a rebalancing strategy, or you don't. Both are valid so you just have to figure out your methodology. In my case I have committed to it and I already have experience doing this. I already understand that of the various assets I hold, they won't always all be going up.

Bonds *might* do very badly for a decade. Stocks *might* do very badly for a decade. The point of the Permanent Portfolio is that we can't predict the future, so we roll with all this without trying to predict which asset is going to do well.


----------



## james4beach

Jimmy said:


> Agree . Bonds just had a 30 yr bull run as interest rates fell to near zero and rates are now rising. ZAG has already fallen ~ 8% this year and will lose another 8% for every 1% rise in interest rates.


Jimmy, this is not how bond funds work. The duration response (the 8% decline per percent yield change) you are thinking of only refers to a short term or immediate change, to a sharp change in interest rates. It is just an estimate for how the price moves in response to say, sudden central bank policy changes.

In more gradual interest rate changes, like movements over several years, the result is much less predictable and not at all like how you write. In fact if interest rates gradually creep up in the coming years, and the yield curve is steep, ZAG may not fall at all.

If interest rates keep rising over the coming years, indeed the bond funds *would* perform badly for several years (maybe worse than cash), but simultaneously get a boost in their performance due to the higher yields inside their portfolios. In ZAG, over the "long term" meaning 10+ year time frame, the return will be approximately the yield-to-maturity of the portfolio.

In the next 10 years, the return on ZAG will be positive. It will be roughly 1.8% CAGR. Yes, even if interest rates go up.

Of course, if you really think interest rates are going to go up something like 3% in the coming years, you should be much more worried about your stock investments as they would likely get crushed. Stocks have been riding a wave of "free money" and low interest rates ever since 2009.


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## james4beach

like_to_retire said:


> But if you buy a bond or GIC to rebalance and keep it to maturity, you receive your face value with interest that results in a yield that you calculated when it was purchased. Now maybe that yield does or doesn't keep up with inflation, but the capital protection is still there and presumably the purchase of that bond came from profits of equities that were sold high.


Right. This is the detail of the fixed income portfolio (whether it's a GIC ladder or bond fund) that many people don't get. The fixed income portfolio has a guaranteed positive return over time. Every instrument inside the bond fund (VAB for example) has a guaranteed positive return... and so in aggregate, that bond fund will have a guaranteed positive return.

There isn't really any difference between a GIC ladder and the VAB bond fund.

Both hold instruments with guaranteed positive returns. Both roll over and keep reinvesting into new instruments. There is only one difference between these two: the prices on bonds are visible, but are invisible for GICs.

Fact is, VAB offers capital protection and cannot have negative returns over the long term (10+ year time horizon) because everything inside the portfolio has a positive return.

In fact my suggestion is that anyone who feels nervous about a bond fund, or doesn't believe my argument, should simply use a GIC ladder, always buying 5 year GICs of course. For many people this is going to be the easier way to deal with fixed income, because it _hides_ the volatility of bonds.


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## librahall

james4beach said:


> Bonds at the 10 year maturity mark cannot have a 49% drawdown. The worst in history was more like 12% to 15%, so you might be thinking of long term bonds. As I wrote before, I don't like long term bonds.


Yes, I meant long term bonds. I tend to agree with Harry Browne's original idea of using long term bonds and cash.

I just went ahead and backtested your PP performance with or without annual rebalance. However, I show better CAGR for the non rebalance version. Did I miss anything here?

In my opinion, buying low is also a kind of timing the market because you think it's low now?


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## Jimmy

james4beach said:


> Jimmy, this is not how bond funds work. The duration response (the 8% decline per percent yield change) you are thinking of only refers to a short term or immediate change, to a sharp change in interest rates. It is just an estimate for how the price moves in response to say, sudden central bank policy changes.


Yes it is. ZAG is down ~ 8% in price since August. The ytm is ~ 1.5% now. you will be lucky to just beat inflation. This is not a good investment. You can make 7% even in a CDN index fund in comparison.



james4beach said:


> Fact is, VAB offers capital protection and cannot have negative returns over the long term (10+ year time horizon) because everything inside the portfolio has a positive return.


Not if interest rates rise over 10 yrs. You are young too and should be 80% in equities anyway and investing properly w a goal like you are trying to make $. Not investing in these half baked rhetorical contrarian academic outdated schemes just as some sort of academic exercise . They have had their day in the bond bull run and make no sense now when 1/2 the portfolio in bonds wont even cover inflation. IMO

If you want an academic exercise w rewards study making 20%/yr over 20 yrs w Amazon, Google or other stocks and not quibbling about which bond returns may be lucky enough to just cover inflation.


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## like_to_retire

Jimmy said:


> You can make 7% even in a CDN index fund in comparison.


Or you might make -50% in a CDN Index Fund. Surely you're not predicting the future now?

ltr


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## Jimmy

like_to_retire said:


> Or you might make -50% in a CDN Index Fund. Surely you're not predicting the future now?
> 
> ltr


Not over 20 yrs the period we were discsussing


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## james4beach

librahall said:


> I just went ahead and backtested your PP performance with or without annual rebalance. However, I show better CAGR for the non rebalance version. Did I miss anything here?


Indeed a topic of debate with some friends of mine. Rebalancing helps with risk control, but maybe not performance. If you look at those two results you will see the superior Sortino ratio (a good measure of risk adjusted return) and less declines in the rebalanced one -- as we'd expect.

So from a risk adjusted return perspective (a smoother ride), rebalancing helps. This is why rebalancing is advised on 60/40 funds as well, and why Vanguard is clearly rebalancing VBAL.

On the other hand, try the longest time frame back-test you can find, at this link. Here you will see

With rebalancing: 9.09% CAGR, max drawdown -14.34%, Sortino ratio 0.91 <-- dramatically better!
No rebalancing: 8.77% CAGR, max drawdown -39.42%, Sortino ratio 0.62
This longer time series, where both stocks and gold were extremely volatile, *shows a significant improvement with annual rebalancing*. Both in performance and in risk simultaneously, resulting in a far superior Sortino ratio (risk adjusted return).

Here's my own logic. Both your shorter time frame result, and this longer time frame result, shows SUPERIOR STABILITY when there's annual rebalancing. In particular, there's a huge improvement in max drawdown, and that means a lot to me. So I think annual rebalancing is the smartest strategy.


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## james4beach

The Permanent Portfolio is doing very well, mine is now hitting new all time highs. Mostly driven by stocks, but gold and bonds are also rebounding off their recent lows.


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## zinfit

Repositioning. Yesterday my portfolio was 22% Canadian dividend stocks , 28% laddered corporate bonds along with some preferreds and the balance was in VTI the Vanguard USA total market ETFs. Today my VTI is 25% of my portfolio and the 25% has been replaced with the I Share gold bullion ETF and the Vanguard inflation protected treasuries. My rational is as follows. Covid isn't going away therefore government spending continues at a runaway pace and productivity and production will decline. At some point central banks will quit buying government debt and will be adopting tight money policies. The current free lunch cycle will end because there isn't such a thing as a free lunch. The stocks markets are in bubble state and that will end as well. This circus will end and I want diversification and better protection of my capital. The markets have been extraordinarly generous to me over the past 10 years so I believe it is time for a fair bit of caution.


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## james4beach

zinfit said:


> The stocks markets are in bubble state and that will end as well. This circus will end and I want diversification and better protection of my capital. The markets have been extraordinarly generous to me over the past 10 years so I believe it is time for a fair bit of caution.


I think that's very sensible. This has been an incredibly good stretch of performance (stocks are doing great) and it makes sense to be more cautious, when the goal is to protect your capital.


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## Parkgavsop

I have been geeking out on asset allocation mixes. I find it so interesting how places like Yale, and the Canada Pension board allocate assets. Of course they have more invesment options than us average investors but in many cases there is an ETF that will work as a substitute.

A few resources about asset allocation I find interesting are:

For CPPs mix


https://cdn4.cppinvestments.com/wp-content/uploads/2020/05/cpp-invesetments-corporate-overview-2020-en-v2.pdf



Tiger 21 high net worth asset report
Asset Allocation Archives 

Yales’ David Swenson wrote a book that translates what endowments do into something retail investors can use:


https://www.amazon.ca/Unconventional-Success-Fundamental-Approach-Investment/dp/0743228383/ref=asc_df_0743228383/?tag=googleshopc0c-20&linkCode=df0&hvadid=292914274695&hvpos=&hvnetw=g&hvrand=7153133440720590379&hvpone=&hvptwo=&hvqmt=&hvdev=c&hvdvcmdl=&hvlocint=&hvlocphy=9001462&hvtargid=pla-493441902610&psc=1


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## james4beach

Parkgavsop said:


> For CPPs mix


Yeah I agree, it's pretty interesting. I've also seen some analysis that says that "private equity" can be replicated with standard market instruments. The only real different with private equity is that it's not liquid so the pricing is only partially visible (private shares are priced a different way).

Anyway, I agree, asset allocation mixes are very interesting. I think the hard part is choosing one that you like and sticking with it -- long term!


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## MrBlackhill

james4beach said:


> Yeah I agree, it's pretty interesting. I've also seen some analysis that says that "private equity" can be replicated with standard market instruments. The only real different with private equity is that it's not liquid so the pricing is only partially visible (private shares are priced a different way).
> 
> Anyway, I agree, asset allocation mixes are very interesting. I think the hard part is choosing one that you like and sticking with it -- long term!


Hmm, can you explain me why they are doing active management instead of going passive since we can't beat the market? Why they are so low in fixed income as I thought they had to do some great risk management to keep the returns positive and keep the volatility low? And how come they don't have too much Canadian exposure as opposed to all those XBAL, XGRO, etc?

I'm confused, because every time I mention active management, risk management with very low fixed income (bonds), home-bias of XBAL, etc., well, you know how I get responded.


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## hfp75

Currently my portfolio is:

Equities: (25% total)
MAW120 - Mawer Global (active managed)
ZGQ - BMO Global High Quality (high in tech, which is OK....)
XWD - iShares World Index (dont like the MER, but like the 1,400+ corps it holds - wide diversity)
HXS - SP500 (swap, trade for free)
* Canadian 5-Pack (RY, FTS, CNR, ENB, T - 1% each)

Commodities/Gold: (25% total)
MNT - RCM Gold Reserve (20% - Like the Crown Corp and Prem/Discnt)
MNS - RCM Silver Reserve (2.5% - a bit of diversity)
BTCX.B - CI Galaxy BTC Fund (2.5% - a bit of diversity)

Cash and Bonds: (50% total - This should be 1/2 long bond and 1/2 cash)
VAB - Vanguard Agg Bond (20% - should be 50% & let it coast)
CLF - iShares 1-5 Govt Bond (10% - just to lower duration)
CBO - iShares 1-5 Corp Bond (10% - just to lower duration)
ZPR - BMO Laddered Perf Share (+/-5-10% - add yeild - almost equity - capital structure)
HYI - Horizons High Yeild (+/-5-10% - add yeild - almost eqity - capital structure)

* The ZPR/HYI were added in a while back to boost yield, in reality its not needed. Looking back they have worked well, as long as Powell is buying HY I am fine with it. I have balanced these 2 funds for tax efficiency from registered to non-registered accts.
** My average duration from VAB/CLF/CBO is a bit less (than just VAB), given the concern of inflation. It should all just be VAB and it was for a while but given the inflation concerns I felt it would be prudent to shorten maturity by just a few years.... I'd use VSB (ect) but I trade CBO/CLF for free, so no fees makes me carry the 2 for the split. Yes you can argue that I should have more govt than corp but we are starting to split hairs just a bit.
*** In my Margin and Cash accts I am using HBB for the Tax efficiency. If there was a VSB/ZSB/ect that was swap based from Horizons I would use that but alas there is not.


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## james4beach

MrBlackhill said:


> I'm confused, because every time I mention active management, risk management with very low fixed income (bonds), home-bias of XBAL, etc., well, you know how I get responded.


If you're talking about the Canada Pension Plan, I think that when you get that large, you inevitably end up with a management team of people. They can -- and should -- be doing as much passive investing as they can. Really when you have a large enough, diversified enough equity portfolio, you effectively are back to index-like returns in any case.

But there is something about pensions which always attracts the active managers. It's just what happens in that business. And no, they usually do NOT add value. In fact there are countless stories of pensions which have had horrible experiences because of some hot-shot active manager or hedge fund guy. It usually harms pensions.

I know a guy at a large Canadian bank who works in a team, provides services to pensions. Over the years I have learned what his team does, and *they basically spend all day ripping off pensions*. It's pretty disgusting actually, but it's pretty normal in the industry. Everyone... the whole banking and hedge fund industry... prays on pensions and constantly rips them off.

Hedge funds send salespeople to visit all the pensions in the country. They pitch them bizarre, high fee products, derivatives trading, all kinds of nonsense.

@MrBlackhill it may surprise you to learn that when people become very wealthy, or if there's a huge account like a pension, they don't automatically become more efficient or more optimal investors. Often they are actually preyed on even more than you or I, because there's so much money one can take from them.

Very wealthy people, and large institutional players, are just as vulnerable to all the investor fallacies, and faulty beliefs in the power of active management, or fall for stupid strategies. A good recent example is Alberta's huge AIMCo pension manager, which made noob mistakes in derivatives and lost huge amounts of money, because they made stupid decisions and suck at trading.

Compared to how badly pensions tend to do, the CPP has actually done quite well. So it's a good news story, that they are managing our money reasonably well.

But that does not mean they are an optimal investor, and it doesn't mean the CPP strategy is better than couch potato indexing.


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## Parkgavsop

Most agree that Indexing in public markets is often best. 

Where CPP is active is in determining asset allocation and private maker deals. Because of their size and connections they get into direct and indirect investments globally that most cannot. This is where being active helps.

if you check out their annual reports they go into some interesting details.


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## librahall

It is approaching the end of year 2021. I am planning to do some tax harvesting by selling ZFL(-14% loss by now) in my PP to offset my capital gains from stocks and cryptos. Is there any alternative long term bond ETF to ZFL that I can swap immediately? Otherwise, I plan to buy it back after 30 days to avoid wash sale. The risk is ZFL price may rise at that time but compared to 20%+ average tax rate, it's nothing. Would like to hear your opinion. Thanks.


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## Spudd

librahall said:


> It is approaching the end of year 2021. I am planning to do some tax harvesting by selling ZFL(-14% loss by now) in my PP to offset my capital gains from stocks and cryptos. Is there any alternative long term bond ETF to ZFL that I can swap immediately? Otherwise, I plan to buy it back after 30 days to avoid wash sale. The risk is ZFL price may rise at that time but compared to 20%+ average tax rate, it's nothing. Would like to hear your opinion. Thanks.


James might be better to answer this but I have a spreadsheet of most Canadian ETF's (manually maintained so I don't know for sure if I have everything). I found the following:

ZTL BMO Long-Term US Treasury Bond Index ETF 
PGL PowerShares Ultra Liquid Long Term Government Bond Index ETF 
TULB TD U.S. Long Term Treasury Bond ETF 
VLB Vanguard Canadian Long-Term Bond Index ETF 
XLB iShares Core Canadian Long Term Bond Index ETF 
ZPL BMO Long Provincial Bond Index ETF 
TCLB TD Canadian Long Term Federal Bond ETF


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## james4beach

librahall said:


> Is there any alternative long term bond ETF to ZFL that I can swap immediately?


That's a tough one since ZFL was kind of unique. I think XLB is the closest match, and performs most similarly. The dangerous part of doing this though is XLB has a ton of corporate credit exposure (more risk) so during a crisis, XLB could do much worse than ZFL.

Here's a chart showing that XLB and ZFL have reasonably similar performance. However, look at what happened during the covid crash, when one of them crashed.

But yes I believe you could do tax loss selling by selling ZFL and immediately buying XLB. *They are not identical*. And you're taking risk by doing so... tax-wise it's legitimate. However you'd probably want to get back into ZFL at some point.


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## james4beach

Spudd said:


> ZPL BMO Long Provincial Bond Index ETF


I had not seen this one before. @librahall this might be another acceptable substitute since it also performs similarly to ZFL

And if you swap ZFL <> ZPL there's probably less risk involved since provincial bonds are safer than corporate bonds.

Just double check that the name of the index they follow is different. To do this kind of tax loss selling, they must track distinct indexes, otherwise they may be considered identical properties.


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## librahall

james4beach said:


> I had not seen this one before. @librahall this might be another acceptable substitute since it also performs similarly to ZFL
> 
> And if you swap ZFL <> ZPL there's probably less risk involved since provincial bonds are safer than corporate bonds.
> 
> Just double check that the name of the index they follow is different. To do this kind of tax loss selling, they must track distinct indexes, otherwise they may be considered identical properties.


Hi James, Thank you for sharing the info and data. After consideration, I may swap part of my ZFL with ZTL(BMO Long-Term US Treasury Bond Index ETF). For the stock part(25%) of my PP, I am using 18% ZSP and 7% XIU. It seems that ZTL can do a better job to hedge the risk of ZSP since they are both US market focused.


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## Spudd

I think TULB or TCLB looks like a good substitute:


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## hfp75

ZPL…..


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## librahall

librahall said:


> I may swap part of my ZFL with ZTL(BMO Long-Term US Treasury Bond Index ETF). For the stock part(25%) of my PP, I am using 18% ZSP and 7% XIU. It seems that ZTL can do a better job to hedge the risk of ZSP since they are both US market focused.


I have two further questions regarding this plan:
1) ZTL is listed on NEO, a new and smaller exchange than TSX. NEO is said to be acquired by the Chicargo Cboe in first half of 2022. And ZTL's total market cap is only $61.8M with 11,837 market volumn. I am a bit concerned about the uncertainty and low liquidity...
2) BMO offered another cad-hedged ETF ZTL.F. Shall I use CAD-hedged or non-hedged for US long term bond ETF?

Looking forward to your advices. Thanks!


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## librahall

librahall said:


> I have two further questions regarding this plan:
> 1) ZTL is listed on NEO, a new and smaller exchange than TSX. NEO is said to be acquired by the Chicargo Cboe in first half of 2022. And ZTL's total market cap is only $61.8M with 11,837 market volumn. I am a bit concerned about the uncertainty and low liquidity...
> 2) BMO offered another cad-hedged ETF ZTL.F. Shall I use CAD-hedged or non-hedged for US long term bond ETF?
> 
> Looking forward to your advices. Thanks!


I did some research today and found the follow paper from Vanguard Canada quite helpful. It concludes -
"Fixed income provides the portfolio “ballast” that diversifies and counters equity volatility. To maintain this ability to control portfolio risk, it’s prudent to hedge international fixed income currency exposure (Philips et al., 2012). "
《The portfolio currency-hedging decision, by objective and block by block》by Vanguard

ZTL.F(CAD-hedged) seems a better choice than ZTL. However, ZTL.F's market cap and trading volumn is even smaller than ZTL. Take today for example, its trading volumn is "0".

As mentioned in my previous post, I have 18% ZSP(S&P 500 ETF in CAD) out of my 25% PP stock allocation. Therefore, I want to put some US long term gov bonds in PP to effectively counter the volatility of S&P 500.

Is there any better alternative CAD-hedged ETF to ZTL.F? TULB seems a close one but it's not CAD-hedged and its holdings are 10-year US gov bonds. I'd like to have 20-year maturaty.


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## fireseeker

librahall said:


> ZTL.F(CAD-hedged) seems a better choice than ZTL. However, ZTL.F's market cap and trading volumn is even smaller than ZTL. Take today for example, its trading volumn is "0".


The low volume and market cap are concerning. But it may not be a problem.

First, the market maker is active. I can see it is maintaining an 8 cent spread on units bid/asked at $52.13/$52.21. This seems reasonably tight -- it's only about 8 basis points from the midpoint. If you have to sell, this is peanuts as trade friction.

Second, BMO is one of the biggest ETF sponsors. I doubt they will close this fund recklessly.

If the ETF meets your needs, I wouldn't necessarily disregard it.


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## GreatLaker

This is posted in today`s Globe & Mail. I only skimmed it but though it would be of interest here.

If stocks crashed, what portfolio would you want? - The Globe and Mail
How to build the Permanent Portfolio with ETFs trading on the Toronto Stock Exchange



Andrew Hallam said:


> Consider how $10,000 would have performed in a global stock market index, beginning in January 2000. Measured in Canadian dollars, it would have dropped 9.5 per cent that year. It would have plunged a further 9.5 per cent in 2001. And it would have fallen a whopping 18.4 per cent in 2002. After three years, that $10,000 would have shrivelled to $6,684.
> 
> Meanwhile, a Canadian version of the Permanent Portfolio would have gained 4.4 per cent in 2000, just under 3 per cent in 2001 and 6.6 per cent in 2002. Over the same three years, $10,000 would have grown to $11,454.





Andrew Hallam said:


> The Canadian version of the Permanent Portfolio averaged about 7.5 per cent per year from 1988 to 2021. That would have seen $10,000 grow to about $109,000.
> 
> And its worst year (2013) saw a drop of just 0.5 per cent


Meanwhile a Couch Potato portfolio of 25% each Can, US and global equity, and 25% Canadian bonds would have had an average geometric gain of 8.4% from 1998 to 2020, and had a worst 1-year drop of 19.8% in 2008. And $10,000 would have grown to over $145k. Source Note: this source only has data up to the end of 2020, not to 2021 as reported for the permanent portfolio. This would give a greater advantage to the Couch portfolio on this year's strong gains.

And bit of my own personal rant: I like Andrew Hallam's writing, especially as a resource for rookie investors that want an easy way to learn investing and a simple market portfolio. I don't know why he and other authors say young investors should hope for a market crash. Yeah it helps them buy cheap, but wishin' and hopin' is not a plan. A better approach is to help investors understand market volatility and how to mentally prepare themselves for it.


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## james4beach

GreatLaker said:


> A better approach is to help investors understand market volatility and how to mentally prepare themselves for it.


It's true that people have to get used to volatility, if they're going to invest. But it can still be very hard to tolerate beyond a certain point, even for people who think they are brave enough.

I've tried investing in different ways over the years. Initially (back around 1999) I was purely in equity index funds. It wasn't fun seeing these get wiped out, and yes I actually held them through the 2000 crash. But I really *would not* want to go through that experience if I actually had significant amounts invested. Say (for example) my life savings from a quarter century of hard work.

So I've pretty much ruled out 100% equity investing. I think a middle of the road asset allocation like 60/40 and 50/50 is pretty doable. If I didn't like the Permanent Portfolio, I'd probably go with XBAL or VBAL or another solid balanced fund like Mawer Balanced or PH&N Balanced.

But I really do enjoy the lower volatility of the Permanent Portfolio. I'm about 6 years into this and have had over 7% annual return. Events like the COVID crash really show the benefits of this, as the portfolio was more stable than 60/40.

That being said, if a person can't get on board with investing in gold (as an asset class) they definitely should not pursue the Permanent Portfolio.


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## james4beach

The Permanent Portfolio is looking pretty good this year so far. In the following charts I'm using this asset allocation I posted earlier, a modified Permanent Portfolio. I'm comparing to VBAL and both have a similar mix of equities, including Canadian.

Performance of P.P. and VBAL are both starting at $100 this year.

Notice that P.P. has much less volatility and is more stable. To highlight this reduced volatility, I also charted the daily absolute % movement to show the *magnitude* of daily changes in the portfolios. The P.P. really reduces volatility significantly, appears to be about about 40% less volatility.











Performance really isn't the main point though. Look at the difference in volatility. The magnitude of daily % changes, below, shows *40% less volatility in the P.P.*

Now keep in mind that both portfolios have similar long-term performance expectations, though VBAL may return a bit higher. The P.P. gets you virtually the same long-term performance with significantly less volatility, more stability.


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## Covariance

james4beach said:


> The Permanent Portfolio is looking pretty good this year so far. In the following charts I'm using this asset allocation I posted earlier, a modified Permanent Portfolio. I'm comparing to VBAL and both have a similar mix of equities, including Canadian.
> 
> Performance of P.P. and VBAL are both starting at $100 this year.
> 
> Notice that P.P. has much less volatility and is more stable. To highlight this reduced volatility, I also charted the daily absolute % movement to show the *magnitude* of daily changes in the portfolios. The P.P. really reduces volatility significantly, appears to be about about 40% less volatility.
> 
> View attachment 22817
> 
> 
> 
> Performance really isn't the main point though. Look at the difference in volatility. The magnitude of daily % changes, below, shows *40% less volatility in the P.P.*
> 
> Now keep in mind that both portfolios have similar long-term performance expectations, though VBAL may return a bit higher. The P.P. gets you virtually the same long-term performance with significantly less volatility, more stability.
> 
> 
> View attachment 22818


Quite interesting. Can you run the historical returns for the period Dec 2015 through Dec 2018? And show up/down vol separately? The above data series is quite short and it would interesting to see how these portfolios did in the last tightening cycle. Also whether the daily returns show skew over a longer time series.


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## james4beach

Covariance said:


> Quite interesting. Can you run the historical returns for the period Dec 2015 through Dec 2018? And show up/down vol separately? The above data series is quite short and it would interesting to see how these portfolios did in the last tightening cycle. Also whether the daily returns show skew over a longer time series.


I can't easily pull up data like that, but given your user name, you are probably familiar with why this works: the covariance between these assets (stocks, bonds, gold) shows low correlations. So the portfolio of stocks + bonds + gold is quite well diversified. The theory says, this should have lower portfolio volatility.

*Edited:*_ add a longer back-test_

I was able to extend this back-test to 2013 by using XWD for world equities, which isn't as good a fund but it should get the idea across.

Unfortunately it doesn't have the daily granularity, but this uses monthly calculations of volatility - standard deviation. Compared to a benchmark 60/40 portfolio using XBAL, the P.P. has 14% less volatility. That's not as huge an advantage as I expected. But if you look at the Sortino ratio, which does a good job at evaluating risk-adjusted returns, you'll see that P.P. does give quite a boost over XBAL.

You can also look at drawdowns of both portfolios, under the Drawdowns tab. That also illustrates the improved safety of the P.P.

But risk-adjusted returns of both the balanced fund and P.P. are quite good. So a person can't go wrong with a good 60/40 portfolio, I think I'd be perfectly happy in XBAL or VBAL too. They have similar long term performance with the P.P. although it seems like the P.P. may be a wee bit safer.


----------



## Covariance

james4beach said:


> I can't easily pull up data like that, but given your user name, you are probably familiar with why this works: the covariance between these assets (stocks, bonds, gold) shows low correlations. So the portfolio of stocks + bonds + gold is quite well diversified. The theory says, this should have lower portfolio volatility.
> 
> *Edited:*_ add a longer back-test_
> 
> I was able to extend this back-test to 2013 by using XWD for world equities, which isn't as good a fund but it should get the idea across.
> 
> Unfortunately it doesn't have the daily granularity, but this uses monthly calculations of volatility - standard deviation. Compared to a benchmark 60/40 portfolio using XBAL, the P.P. has 14% less volatility. That's not as huge an advantage as I expected. But if you look at the Sortino ratio, which does a good job at evaluating risk-adjusted returns, you'll see that P.P. does give quite a boost over XBAL.
> 
> You can also look at drawdowns of both portfolios, under the Drawdowns tab. That also illustrates the improved safety of the P.P.
> 
> But risk-adjusted returns of both the balanced fund and P.P. are quite good. So a person can't go wrong with a good 60/40 portfolio, I think I'd be perfectly happy in XBAL or VBAL too. They have similar long term performance with the P.P. although it seems like the P.P. may be a wee bit safer.
> 
> View attachment 22829


Thanks. Wasn’t meant to be a challenge. Just thought you had the tool to easily perform the analysis. Your portfolio is quite interesting. Gold as a store of wealth or hedge in particular. I’m intrigued as to whether the correlation is symmetrical in both directions. Will dig into this when able.


----------



## james4beach

Covariance said:


> Thanks. Wasn’t meant to be a challenge. Just thought you had the tool to easily perform the analysis. Your portfolio is quite interesting. Gold as a store of wealth or hedge in particular. I’m intrigued as to whether the correlation is symmetrical in both directions. Will dig into this when able.


Oh I didn't take any offence, I would happily produce those stats if I could. I actually had to mine Yahoo Finance for daily securities prices, not very easy. It's a good question about the symmetry. I wonder too.


----------



## james4beach

Covariance said:


> And show up/down vol separately? The above data series is quite short and it would interesting to see how these portfolios did in the last tightening cycle


What do you think is a good way to illustrate this? What kind of chart can I use?

I could make one pair of histograms for up movements, and then another pair for down movements. That would let us see the difference in the portfolios on "good days" and separately on "bad days".

Is that what you're thinking? Then I could say there was X% reduction in vol on good days, but Y% reduction in vol on bad days.

Or who knows, maybe I will find that it's asymmetric and it doesn't help me much on the bad days. I'm really curious now!


----------



## Covariance

james4beach said:


> What do you think is a good way to illustrate this? What kind of chart can I use?
> 
> I could make one pair of histograms for up movements, and then another pair for down movements. That would let us see the difference in the portfolios on "good days" and separately on "bad days".
> 
> Is that what you're thinking? Then I could say there was X% reduction in vol on good days, but Y% reduction in vol on bad days.
> 
> Or who knows, maybe I will find that it's asymmetric and it doesn't help me much on the bad days. I'm really curious now!


I don’t think I would use a chart. Rather I would just determine the correlation coefficients to start. Specifically, if we split the time series into up days for the equity index (asset) and down days. For the data series made up of “up days” what is the correlation coefficient with the price movement of each of the other assets. Repeat the same exercise for the down days of the equity asset.

Generally data is not normal as most assume for simplicity and there is skew, kertosis. There is value in knowing if the correlations provide increased/decreased protection in down markets. Or alternatively protection in down markets but also upside in up markets. Hope this makes sense.


----------



## james4beach

The Permanent Portfolio continues to hold up very well this year even as the war breaks out.

The PP is only down 2% year to date. In comparison, XBAL is down 5% and VCNS down 4%

Any of these portfolios should be reasonably safe if turmoil continues.


----------



## hfp75

I am following a close version of the PP and I can tell you that Y2D I am -1.27% from my Dec 31, 2021 closing value. This year I have been down most of the time, my deviations are sometimes swingy but that is not due to the PP/PP+ but due to my holding +/- 4% Crypto. Crypto is very volatile and has an easy 2x + variance to any other asset class. Initially (last year) these large moves were stressful to me but now I am accepting that Crypto is like a yo-yo. 

I am a believer in the concept with Crypto/digital currencies (defi), but am not convinced in 5-10+ years there wont be something more popular (in defo/crypto) than BTC (a new coin) that will render everything of today as valueless. Its a definite possibility. I see the rational in defi. One thing to consider is that digital currencies have no buisness fundamentals to really establish values, and are really just driven by popularity, just like High School kids being popular. Its all just a bit fickle.

The PP was designed well before this stuff existed and thus what, if at all is an appropriate allocation ? 0-4% ? seems to be what I am reading most of the time. The real question to me is should it be considered as part of the Cash/Short duration allocation, or a Commodity/Gold ? Right now I have my allocation in with the Gold, I have debated splitting it as half cash and half gold.... we are talking about a small deviation in target allocations here, so this debate in my head is not a deal breaker, or game changer. 

To truly answer this we need to debate and find a consensus on weather Crypto is a commodity or currency.... Hmmm not meaning to stir the pot... there is a thread on this I should post a link but dont have time to search and read to make sure I linked the right one.

Either way I am happy with the PP+ that I am running. If the world turmoil increases and financial stress intensifies, I should easily outperform most other investors - even if my return this year is neg.

Yes I am coining the PP+ as a modified version of the PP. If you write PP your following Mr. Browns proper recommendations/allocations, I however am a bit different and thus the +.


----------



## james4beach

hfp75 said:


> The PP was designed well before this stuff existed and thus what, if at all is an appropriate allocation ? 0-4% ? seems to be what I am reading most of the time. The real question to me is should it be considered as part of the Cash/Short duration allocation, or a Commodity/Gold


I don't know which coin(s) you're holding but I think for classification purposes, it's most useful to look at correlations with the other asset classes. Then you can include it with whichever it resembles the most.

Crypto coins are very volatile so it's going to be either "gold" or "stocks" as far as classification.

Here is a 1 year comparison of BTC versus gold. I would say this is not a very good match











And here is BTC versus stocks (VT). To me this looks like a stronger correlation.

So I suggest categorizing your crypto coins as part of the stock allocation of the PP.


----------



## m3s

hfp75 said:


> To truly answer this we need to debate and find a consensus on weather Crypto is a commodity or currency.... Hmmm not meaning to stir the pot... there is a thread on this I should post a link but dont have time to search and read to make sure I linked the right one.
> 
> Either way I am happy with the PP+ that I am running. If the world turmoil increases and financial stress intensifies, I should easily outperform most other investors - even if my return this year is neg.



Many consider BTC to be like gold (hard backed money like pre 1971 gold standard) It's the only one with a fully decentralized network and a preprogrammed mathematical monetary policy

The rest of crypto are very different beasts that can be everything and anything. DeFi is basically automatized money markets with very inflationary promo "yield" tokens. Ethereum doesn't have a hard limit to its supply or a set inflation policy. A lot of it is more like venture capital tech stocks before they went public. Stablecoins are more like cash because they are pegged to fiat and often backed by T-bills or other crypto assets like BTC. There are already derivatives, options and everything else you can imagine.

BTC could decouple based on its scarcity. Just like gold though if people don't hold it themselves, central exchanges rehypothecate it. Everything else is more like private equity or cash


----------



## MrBlackhill

hfp75 said:


> The PP was designed well before this stuff existed and thus what, if at all is an appropriate allocation ? 0-4% ? seems to be what I am reading most of the time.


Lazy Portfolio tracks stats about many different portfolios and recently they decided to make a few versions of the most popular portfolios but "with Bitcoin" and they basically add 2% Bitcoin.

They decided to treat it as a commodity so instead of PP with 25% gold, it's PP with 23% gold and 2% Bitcoin.






Allocation - Lazy Portfolio ETF


Build the Harry Browne Permanent Portfolio with Bitcoin with 5 ETFs. Follow its asset allocation and find out the historical returns of the portfolio.




www.lazyportfolioetf.com





They've also made the Golden Butterfly with Bitcoin, the All Weather with Bitcoin and the 60/40 with Bitcoin.


----------



## hfp75

Well,

I'll add that my investing portfolio is -1.5% Y2D and I am pleased - its mostly PP+. If I quickly compare to :

MAW104 -7.41 (a fund that I respect for its management and performance - albeit this year its behind, I think they have a lower exposure to energy, so understandable and explainable)
RBF460 -5.55 (my proxy for the major banks balanced funds where 50+% of Canada has its money)
RBF1350 -5.52 (the discount performance version of the big banks balanced funds)
VBAL -4.72 (the DIY, couch potato version with nothing active and all basic indexes - a must have comparison)
(from Morningstar - as of 03.22.22)

All of the above funds I like to use for comparisons (I have used all in the past & might use again except the RBF460). Here's the thing, I am 3.22-5.91% ahead of this group. So, despite sitting on a small loss so far, I am happy cause I see lots of others are down 4.57% (average from the spread) more than me. 

Long and short, a loss can still be good/acceptable performance. 

I'll say that the PP also changes the day to day performance and this year gold (CGL.C) is up 4.54% - cant seem to find a quick # for MNT but it wont be that much different than CGL.C.


----------



## james4beach

hfp75 said:


> I'll add that my investing portfolio is -1.5% Y2D and I am pleased - its mostly PP+.


That's pretty amazing, hardly any change while just about everything has been tanking or at least swinging around like crazy.

That's the whole reason I wanted to use this portfolio. It just creates a smoother experience, and personally I don't like seeing my net worth on a crazy roller coaster ride.

Also keep in mind that the PP still gets drawdowns so it's completely normal to see a period of losses. I was just looking at some historical stats yesterday, and 5% drawdowns are pretty frequent. However over a period like 24 months it's highly unusual to see a negative result.


----------



## hfp75

I'll add that this year we have been adding cash into our accounts and have erased the -1.5%. So, there is a loss that is floating there but due to our contributions we are roughly holding at our Jan 1 starting point - 'losses' are expected with investing and the PP is shining. We have more investing to do still and should add another 1.5-2% this year so our Y2Y (at close) should still be up even though there is a loss.

Plus, we are buying more of the cheaper (down market) items.

PP = diversify, diversify, diversify....


----------



## librahall

Hello everyone. Hope you all doing well. I'd like to hear your advice on the following:

1) Long term bonds ETFs(ZFL/ZTL) have down 15-20% YTD. Is it a good time to rebalance my PP by selling stocks for bonds now?

2) I switched half of my ZFL to ZTL for better hedging to my large portion of US stock ETFs and tax loss harvesting in last December. But now only find a higher loss than ZFL. I am a little regret doing that trade.

3) How to easily track YTD performance if a) I have investment across multiple platforms and b) some tickers(like ZTL.TO) can't be found in Google Finance/Spreadsheet.

Thanks a lot in advance.


----------



## hfp75

As gold is in many portfolios, and there is a following in this forum for sure, there are options CLG.C, MNT, ect,ect.... Today MNT is trading at a -4.25% relative to underlying value, or what we call a discount. A 4.25% discount is a descent time to buy this product..... just a heads up. 

Current NAV on MNT is $24.39 but the actual value of a unit is $25.47


----------



## hfp75

Well,

I'll add that with markets in flux, I am now -4.25%, this is a lot.... however just to compare, RBF460 is -9.2%. Looks like vs most Canadians my volatility is < 1/2.


----------



## james4beach

hfp75 said:


> I'll add that with markets in flux, I am now -4.25%, this is a lot.... however just to compare, RBF460 is -9.2%. Looks like vs most Canadians my volatility is < 1/2.


Yeah I'm also seeing a reasonably good year (relatively speaking) in my allocation which is similar to the Permanent Portfolio.

Looks like I'm down 5.5% so far YTD. In comparison,
VCNS is down 9.0%
VBAL is down 9.1%
XAW is down 11.7%
Even the Mawer Balanced fund is down 10.8%

In reality I'm doing even better than -5.5% because I hold some GICs along with my bonds, which takes away the bond volatility.


----------



## james4beach

The historical maximum drawdown (worst case seen) in the Permanent Portfolio is in the 15% - 20% zone.

5% drawdowns are very frequent. But this is from monthly historical data, which hides the intramonth volatility.

My ROUGH estimate, (adjusting for the monthly vs daily figures), I think that a *10% drawdown* is pretty routine and will be seen once in a while. It should not surprise any of us to see a 10% decline this year even in this conservative portfolio.


----------



## hfp75

james4beach said:


> 5% drawdowns are very frequent. ...
> 
> ... I think that a *10% drawdown* is pretty routine and will be seen once in a while. It should not surprise any of us to see a 10% decline this year even in this conservative portfolio.


I would agree & note 2 key factors.

First, my purchases this year will likely be at the lower prices - which is good. 

Second, If the PP/PP+ is up to a -10% loss consider that most other balanced funds could be double that.... 

By the nature of the PP/PP+ my volatility is controlled. Yet, my opportunity to buy low is the same as all the other types of portfolios. Plus, over a 20+ year average my performance is basically the same as the Balanced Port without the pitfalls.


----------



## james4beach

hfp75 said:


> First, my purchases this year will likely be at the lower prices - which is good.
> 
> *Second, If the PP/PP+ is up to a -10% loss consider that most other balanced funds could be double that....*
> 
> By the nature of the PP/PP+ my volatility is controlled. Yet, my opportunity to buy low is the same as all the other types of portfolios. Plus, over a 20+ year average my performance is basically the same as the Balanced Port without the pitfalls.


I wholeheartedly agree! Very good points. I am eager to buy some more this year at depressed levels.

The losses and volatility will happen, but it's all relative as you point out. I did a quick check yesterday and it now looks like my PP's performance over multiple years has matched Mawer Balanced Fund, which you'll recall is the star 60/40's. It seems the PP is doing as well over 5 yrs, but with *half* the drawdown this year so far.

And that is what I've always hoped the PP can do. Long term results similar to 60/40 but with milder volatility.


[ The numbers, if you're curious.]
Mawer Balanced, 5 years @ 4.7% CAGR, and YTD loss -11.9%
My PP+ formula, 5 years @ 5.2% CAGR, and YTD loss -6.0%


----------



## james4beach

What a crazy time. The PP/AW is losing money just like everyone else is. Still, there is a slight improvement over balanced funds.

PP variant #1, equal weights XAW, ZFL, CGL.C, cash/GIC
PP variant #2, my own formula

Year to date performance is

-17.5% in Mawer Balanced
-15.2% in VGRO
-14.7% in VBAL
*-10.7% in PP variant #1, closest to Harry Browne's formula*
*-10.7% in PP variant #2, obviously quite similar to the original*

That's an improvement over 60/40 and it's been less volatile as well. I'm not happy about losing money, but I'd still call this a win during market turmoil.

Additionally, -10% is still in the ballpark of a pretty typical and routine drawdown for the PP.


----------



## librahall

james4beach said:


> -10% is still in the ballpark of a pretty typical and routine drawdown for the PP.


According to lazyportfolio.com, -10% is quite extreme since 1973? I am buying PP every week. 






Allocation - Lazy Portfolio ETF


Build the Harry Browne Permanent Portfolio with 4 ETFs. Follow its asset allocation and find out the historical returns of the portfolio.




www.lazyportfolioetf.com


----------



## james4beach

librahall said:


> According to lazyportfolio.com, -10% is quite extreme since 1973? I am buying PP every week.


I'm continuously buying as well. I do some rebalancing when I add new money. These days that means buying bonds.


----------



## hfp75

My Net Worth Y2D which is mostly PP+, is -9.91%. I am saddened by this, yet I am content when compared to most Balanced Funds. I am still ahead of a lot of deployed money and buying the depressed items.... it makes sense to me ! So far to date, we have added 2.51% back in as new cash and thus are really only 'down' 7.4%. Accepting that there are down years this really doesnt bother me, as I said, sad that I am not up 10%, yet happy I have 92.5% of my Investable Net worth in tact. I'll probably deploy another 2.5% and likely be down +/-5% by year end. This IMHO is not a bad year despite the major losses and problems for many. This year is a great example of the importance in diversify & diversify.....

One of the girls at my work is into investing and she is 100% equities and her thought is that over time 'I will win despite the large losses'. While she might be right over a 50+yr timeline, I don't like the massive volatility '100% equities' gives or the chance that there could be a lost decade if inflation/interest rates/war/ect ect ect dont pan out well. I'm happy, contributing, and watching. I have been pretty hands off most of this spring/summer with investing stuff - very busy.


----------



## Gator13

My dividend portfolio (heavy Canadian weighting) is down 4.2% ytd. I was up 6.2% earlier in the year.


----------



## Jimmy

We are in times of high inflation and rising int rates . So TLT bonds is down ~18%, QSP is down 20%. Gold is supposed to do well in times of high inflation now to offset but it hasn't and is down -5.5% this year. Gold is supposed to do well in time of war too. Seems there is no diversification w the PP any longer now if all the classes move down together.


----------



## m3s

Jimmy said:


> We are in times of high inflation and rising int rates . So TLT bonds is down ~18%, QSP is down 20%. Gold is supposed to do well in times of high inflation now to offset but it hasn't and is down -5.5% this year. Gold is supposed to do well in time of war too. Seems there is no diversification w the PP any longer now if all the classes move down together.


I think everything can move together but as things settle they can separate

For example look at how everything including gold crashed together in 2020 and then recovered very differently

Putin could demand gold instead of fiat and then we know why gold is supposed to do well in times of war


----------



## james4beach

m3s said:


> For example look at how everything including gold crashed together in 2020 and then recovered very differently


Gold didn't exactly crash in 2020, unless you're talking about the span of about 3 weeks when both stocks & gold declined at the same time. It held up very well as an alternative / flight to safety asset that year as you can see in the chart below.

But in any case, there's no assurance about how gold moves. The main idea with gold is that it "dances to its own tune" and trades differently than stocks and bonds. That helps diversify the portfolio and reduce volatility, generally.

There will be times when gold moves the same way as stocks or bonds, but history has shown that it often moves differently.


----------



## m3s

james4beach said:


> Gold didn't exactly crash in 2020, unless you're talking about the span of about 3 weeks when both stocks & gold declined at the same time. It held up very well as an alternative / flight to safety asset that year as you can see in the chart below.


That's what I mean

Things can crash together when there's an unexpected black swan or a period of uncertainty and then recover very differently. Doesn't have to be the exact same every time. We're in a period now where many things are uncertain, unstable and eventually things will settle into some kind of new norm

I think people get way to wrapped up in thinking things will behave exactly like the last time. This also creates massive opportunities.


----------



## Gator13

Gator13 said:


> My dividend portfolio (heavy Canadian weighting) is down 4.2% ytd. I was up 6.2% earlier in the year.


My dividend portfolio YTD low point was mid July. Down ~ 6.5%. Now up ~0.7% as of today.


----------



## james4beach

In case this helps anyone, remember that you can mix GICs into your "bond" allocation. They're all fixed income after all and GICs are really just like short term bonds. In my asset allocation, what I call "bonds" is a mix of XBB + some individual government bonds + GICs

The GICs will reduce the volatility of your bond segment. There is also a flip side to this, though. I was tracking my portfolio in detail since July 8, and the bond benchmark (using XBB) is up +1.8% whereas my own "bond" allocation is only up +1.1%

But I think there is some appeal in reducing the volatility of the bond component, at least for me. I guess you just have to remember that volatility can be both down, and up.


----------



## MrMatt

james4beach said:


> In case this helps anyone, remember that you can mix GICs into your "bond" allocation. They're all fixed income after all and GICs are really just like short term bonds. In my asset allocation, what I call "bonds" is a mix of XBB + some individual government bonds + GICs
> 
> The GICs will reduce the volatility of your bond segment. There is also a flip side to this, though. I was tracking my portfolio in detail since July 8, and the bond benchmark (using XBB) is up +1.8% whereas my own "bond" allocation is only up +1.1%
> 
> But I think there is some appeal in reducing the volatility of the bond component, at least for me. I guess you just have to remember that volatility can be both down, and up.


GICs are insured and IMO are at the credit rating of the insuring institution, so they are more of a retail government bond, as such they should pay slighlty less than corporates.
Also an individual bond/GIC is not the same as a bond fund. I think for most purposes they can be considered interchangage, and often a bond fund is appropriate, they actually behave in slighlty different ways.


----------



## james4beach

Here is Year-to-Date performance of the various asset classes in the Permanent Portfolio, ranked from best performance to worst.
The best performers this year have been cash-like things and gold.









Useless old gold being useless again


----------



## hfp75

Well, a quick update from Excel, we are down 9.88% this year. We have purchased 2.81%, which is a net change of 7.07%. We still have some more to contribute, so our net change should be less than 7% - likely 5 or 6% providing that Chicken Little doesn't fall from a tree.

I have been using CLF and CBO as my cash proxy - simpler to use for me vs shopping rates on GICs. I do understand and value the differences but I just dont think the market will collapse and thus the short term bond funds will suffice over time. If I was within 5 Yrs of retiring I would be using GICs... we just are not there yet. 

I am helping my older mother with her finances and will be buying her a large GIC in the next month after the BoC raises rates next week. I hope to find 5.5% or 5.75% for a 5 yr for a quarter million. Thats a good guarantee for income for a retiree. @ 5.5% thats 69,000 for the 5 yrs and @ 5.75% thats $72,000 !!! You cant get better for a pensioner. Remember the last 10 years where we were scavenging for 1.5 % ?


----------



## james4beach

hfp75 said:


> I am helping my older mother with her finances and will be buying her a large GIC in the next month after the BoC raises rates next week. I hope to find 5.5% or 5.75% for a 5 yr for a quarter million. Thats a good guarantee for income for a retiree. @ 5.5% thats 69,000 for the 5 yrs and @ 5.75% thats $72,000 !!! You cant get better for a pensioner. Remember the last 10 years where we were scavenging for 1.5 % ?


Boy how times have changed since those awful low rates!

Keep in mind though, that GIC rates are related to the 5 year government bond and may not respond directly to the BoC raise. Like you, I'm hoping for higher yields but there's no guarantee that yields will go up, even if the BoC raises.

I'd also suggest making sure that your GIC deposits have full deposit insurance.


----------



## hfp75

james4beach said:


> I'd also suggest making sure that your GIC deposits have full deposit insurance.


I've been using Hubert Financial and it is 100% insured by Manitoba. I know that provincial insurance commitments are not as good as federal, but I seriously dont think Manitoba will default. Also, since most of these credit unions lend within their home province, and real estate in Manitoba doesnt have a current large overvaluation I feel that it is pretty safe since most of this cash will probably be within MBS.


----------



## fireseeker

hfp75 said:


> I've been using Hubert Financial and it is 100% insured by Manitoba. I know that provincial insurance commitments are not as good as federal, but I seriously dont think Manitoba will default.


It is not clear what you mean by "Manitoba." If you mean the province, that is not correct. 
The deposit insurance is provided by the Deposit Guarantee Corporation of Manitoba, which assesses credit unions quarterly to make sure its guarantee fund is sound.



> *Does the Government of Manitoba also cover deposits?*
> No. There is no legislated requirement for the Manitoba government to guarantee deposits.


Now, the DGCM is a Manitoba government agency. Some might feel like the distinction between "Manitoba" and "Manitoba government agency" is splitting hairs. Personally, I am comfortable with the Manitoba insurance. But I accept that it is not fully backed by the provincial government.


----------



## hfp75

Correct


----------



## librahall

Bonds have performed poorly this year. I'd like to purchase some long term bonds to rebalance my PP. Because a big portion of my stocks are US S&P500, I am thinking of US long term bond ETFs e.g. ZTL and ZTL.F from BMO. ZTL.F is hedged back to Canadian dollars.

My questions are -
1) Is it wise to buy bonds now given the gov is very likely to continue raising rates to fight inflation?
2) Is US long term bonds(ZTL) better than CA long term bonds(ZFL) to stablize a PP with large exposure to US S&P 500?
3) USD/CAD currency hedged or non-hedged for US long term bonds?

I found two related articles on this topic. 

https://www.purposeinvest.com/thoughtful/stock-bond-correlation 
The case for investing in global bonds


Thanks


----------



## james4beach

librahall said:


> Bonds have performed poorly this year. I'd like to purchase some long term bonds to rebalance my PP.


Just a question about your allocation. How did you decide to allocate the 25% of "cash"? I can't remember if you used ZST or something else, like a savings account.



librahall said:


> 1) Is it wise to buy bonds now given the gov is very likely to continue raising rates to fight inflation?


I think it's best to stick with your rebalancing strategy, according to your plan, and obeying your allocation targets. While it's true that the central bank is expected to keep raising rates, there's a lot of uncertainty about that. I have been "rebalancing" this whole year by buying more bonds along the way, as I invest new money.

But how and when you rebalance is up to you.



librahall said:


> 2) Is US long term bonds(ZTL) better than CA long term bonds(ZFL) to stablize a PP with large exposure to US S&P 500?
> 3) USD/CAD currency hedged or non-hedged for US long term bonds?


That's a really interesting question. I can see the argument for using US long term bonds if the equity portion is also mainly US. But as a practical guy (I like to consider trading feasibility) the ZTL fund doesn't look so great to me. It's really tiny, only $51 million in assets. My concern would be the reliability and daily liquidity in that fund and how well it would hold up under extreme market stress. Many days, ZTL only trades a couple thousand shares.

On currency hedging, I think it's best to skip that because it introduces extra costs and performance drag. Using another bond fund as an example, there is VBU which holds the US BND fund plus USD/CAD hedging. Compared to its ideal performance, VBU is consistently underperforming by 0.64% a year which is a pretty huge performance loss. In my view, hedging currencies isn't worth such a big performance drag.

Sorry that I don't have any great answers here. I can see the theoretical argument for matching the S&P 500 with US long term bonds but ZTL is just a tiny ETF.

My own portfolio uses only Canadian bonds, and my stock allocation holds some S&P 500. I don't have any currency hedging anywhere.


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## hfp75

My sp500 is not hedged back to cad…. Few of my other equity allocations are also not hedged back, my gold (mnt) is also not hedged back to cad. So, I feel I have a good fx exposure. All these funds are cad denominated for transactions.


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## james4beach

hfp75 said:


> My sp500 is not hedged back to cad…. Few of my other equity allocations are also not hedged back, my gold (mnt) is also not hedged back to cad. So, I feel I have a good fx exposure. All these funds are cad denominated for transactions.


Yup I think that's the way to go. Imagine that we get a currency crisis like what's happening with Britain, perhaps the CAD tanks. That's when non hedged positions save your skin, as pretty much every asset price goes "sky high" in relation to the crashing currency.

With a mix of gold + global stocks you have lots of foreign FX exposure, which I think is good

For example over the last 12 months, gold is up 15% in GBP terms!


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## librahall

james4beach said:


> Just a question about your allocation. How did you decide to allocate the 25% of "cash"? I can't remember if you used ZST or something else, like a savings account.


I use half cash and half 3-year GIC ladder for the 25% cash part of PP.


james4beach said:


> the ZTL fund doesn't look so great to me. It's really tiny, only $51 million in assets.


Yes, this is also my concern although this fund is doing pretty good so far to match the performance of TLT. 


hfp75 said:


> My sp500 is not hedged back to cad


According to some of the researches from Vangurard, it's recommended to do currency hedge for bonds but non-hedge for stock ETFs. When stock market performs poorly, USD and bonds normally is strong which offsets the loss.


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## librahall

PP is experiencing the worst drawdown since 1973 by all periods. Good time to buy low.


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## james4beach

librahall said:


> I use half cash and half 3-year GIC ladder for the 25% cash part of PP.


That's awesome! I'll bet you're happy about that. I know the PP is doing badly but this is still "part of the plan".

We're now in one of those scenarios where cash/GIC is doing best. That was one of the quadrants of the hedged portfolio. It's a very rare scenario, but it's happening right now.


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## james4beach

librahall said:


> According to some of the researches from Vangurard, it's recommended to do currency hedge for bonds but non-hedge for stock ETFs. When stock market performs poorly, USD and bonds normally is strong which offsets the loss.


That makes sense, I don't think you can go wrong either way as long as you keep your fees low. I would again just caution about the performance drag on currency hedged bonds. International bonds are good for diversification but there's a question of how much in fees are worth paying for the privilege.



librahall said:


> PP is experiencing the worst drawdown since 1973 by all periods. Good time to buy low.


Yeah, this is a huge drawdown for sure. We're making history!

My allocation is now down -11% this year. This is based on CAD currency. However I think it can get worse, and I think the "maximum drawdown" for my allocation could get as bad as -20%.

By the way there's nothing wrong with your choice of cash + ZFL. Since cash is about zero and ZFL is -24.2%, the sum of these allocations is an average -12% decline. Maybe -11% if you count the cash interest. In comparison my approach of combining them into XBB is down -13%. So you can see that even though ZFL is in a huge drawdown, the combination of *cash + ZFL* is actually outperforming my own approach to bonds in the PP.

I still like having some GICs in the fixed income allocation though. It's reduced my declines a bit, so I'm going to stick with XBB + GICs + some individual bonds.


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## hfp75

I would argue that while this information is not flawed, it only highlights a piece of information.

Often when I examine my investing performance / results, I just like many look at the raw numbers, whats my growth/return? But in reality, a comparison is very important. I have mentioned this before, but I compare my portfolios growth to 3-4 specific Canadian Balanced funds. If I am close to those funds I am happy. We often see a negative number and feel bad, that weighs on us. How about if a negative number is actually good ??? IF, your portfolio is down -8% and the major balanced portfolios are -12, you are actually winning !!!!!! I think its perspective based.

So, while this is definately a hard time for the PP, it is also a very hard time for all investors, and while the information below is 'informative' it is not a full representation.

A good chart would be a comparison of the PP vs a few Balanced Funds (where most Canadians are generally dumping cash). If the PPs losses are less its still winning, despite the numbers below. The PP is hallmarked by performance that trails balanced funds, yet has less draw-downs in times of market stress.

Its perspective....



librahall said:


> PP is experiencing the worst drawdown since 1973 by all periods. Good time to buy low.
> 
> View attachment 23719


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## james4beach

hfp75 said:


> I compare my portfolios growth to 3-4 specific Canadian Balanced funds. If I am close to those funds I am happy. We often see a negative number and feel bad, that weighs on us. How about if a negative number is actually good ???


I totally agree. It's all relative.

As of today, my version of the PP over 1 year is -8.3% which I like to compare to XBAL, -12.3%. Meanwhile my long term performance has been very similar. That's a good picture overall!


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## hfp75

My PP+ is -9.9% as of today. 

Maw104 -15.8% @ 5.3 Billion - Hallmarked as a steady good performer.
XBAL -13.75% @ 0.8 Billion - The Index version.
RBF460 -15.5% @ 45 Billion - a Flagship of investing.
RBF1350 -13.5% @ 1.4 Billion - The RBC 'discount' Balanced Portfolio/fund.
* As reported by Morningstar for quick data....

I will add that if I had never bought BTC, I would be -7% as of today. So, BTC has hurt me, but I am still sleeping fine.

If you average the above commercial products you get* -14.64*%, so I am +4.74% ahead of a single one stop solution. Just as a point of reference, that would be another 48% down from where I am at right now (-9.9).

So, I am content and still buying.


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## librahall

Harvesting the Fall: Why I Sold All My Bonds – Portfolio Charts

Maybe it's a good time to switch ETFs of PP? I am currently using XIU(10%), XUS(15%), ZFL(25%), MNT/CGL.C(25%) and GIC/Saving(25%). I am thinking of changing XUS(Fees: 0.10%) to VFV(Fees: 0.09%), XIU(0.18%) to VCE(0.06%). I don't find an alternative to ZFL though. Any thoughts?


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## james4beach

librahall said:


> Maybe it's a good time to switch ETFs of PP? I am currently using XIU(10%), XUS(15%), ZFL(25%), MNT/CGL.C(25%) and GIC/Saving(25%). I am thinking of changing XUS(Fees: 0.10%) to VFV(Fees: 0.09%), XIU(0.18%) to VCE(0.06%). I don't find an alternative to ZFL though. Any thoughts?


Great idea and thanks for reminding me. It's time that I start looking at my portfolio for tax loss harvesting too.

XUS and VFV both track the same index, so tax loss harvesting is not possible (superficial loss rule). If you want to change it though, I think ZSP is better, with about 2x the daily volume and better liquidity than either of those other two.

XIU to VCE does allow tax loss harvesting since they track different indexes. So you might want to do that switch at a point you have a capital loss on XIU.

@librahall ... a new idea regarding XUS. You *can* harvest the capital losses in two steps. First switch to XUU which is very similar (total market index), but it's a different index, which makes the capital loss allowed. Then wait 30 days, and once you're safely past the time window, sell XUU and buy ZSP. Maybe you'll even get lucky and get a second loss!

By going XUS --> XUU --> ZSP, you can harvest the capital loss and stay exposed to virtually the same market for the whole period.


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## Spudd

librahall said:


> Harvesting the Fall: Why I Sold All My Bonds – Portfolio Charts
> 
> Maybe it's a good time to switch ETFs of PP? I am currently using XIU(10%), XUS(15%), ZFL(25%), MNT/CGL.C(25%) and GIC/Saving(25%). I am thinking of changing XUS(Fees: 0.10%) to VFV(Fees: 0.09%), XIU(0.18%) to VCE(0.06%). I don't find an alternative to ZFL though. Any thoughts?


I don't know much about them but TCLB and PGL are also long fed bonds.


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## librahall

james4beach said:


> So you might want to do that switch at a point you have a capital loss on XIU.


 I'll just use the massive capital loss on ZFL to offset the gains on XIU. Thanks for the other great advice.


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## librahall

Spudd said:


> I don't know much about them but TCLB and PGL are also long fed bonds.


Thanks for sharing this info. For tax harvesting, let me find out if any one of them is not tracking the same index as ZFL.


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## Faramir

Yeah right now just playing the volatility without any commitment to any asset class. Was mildly bullish on gold but not am neutral on it. Slightly bullish on oil.


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## james4beach

librahall said:


> I'll just use the massive capital loss on ZFL to offset the gains on XIU. Thanks for the other great advice.


Were you able to harvest these losses?

I had harvested some bond losses mid year, but was waiting for further declines to do more. A lot of those losses disappeared on me, so I might have missed my chance to do my latest round of tax harvesting.


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## librahall

james4beach said:


> Were you able to harvest these losses?
> 
> I had harvested some bond losses mid year, but was waiting for further declines to do more. A lot of those losses disappeared on me, so I might have missed my chance to do my latest round of tax harvesting.


Same here. Only harvested half of them. I didn't find a perfect alternative to ZFL so hesitated to swap them all. Bonds has bounced back quite a few in the past two months. I may just leave them as they are.


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## james4beach

librahall said:


> Same here. Only harvested half of them. I didn't find a perfect alternative to ZFL so hesitated to swap them all. Bonds has bounced back quite a few in the past two months. I may just leave them as they are.


Maybe if we get lucky, they'll plummet in December. Did I mention that I temporarily hold a small amount of ZFL? I hold a few individual bonds. Originally I held some long dated ones, and then realized I could sell those for capital losses and replace them with ZFL. I just had to "scale" ZFL accordingly, a bit of a hack to replicate my original bond exposure.

I don't really intend to hold ZFL so ideally, I would like to sell it and buy back the individual government bond. I never thought I'd end up with a gain on the ZFL position while doing this shuffling.

(Inside my RRSP, I only have XBB, but these individual bonds and GICs are in my taxable account)


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## Faramir

Nothing long term. I'm not a day trader but I also just see that markets are pleasantly inefficient. I can't remember who came up with the idea that markets are efficient but they have been shown to be blessedly wrong about that. Everything carries a certain risk. For example I like MFC.TO as one to buy on lows of around 20, selling around 24. My concern with Manulife is it has lots of East Asia exposure, and with China no longer doing well, I'm not comfortable holding it long term.


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## hfp75

Ironically, I have been keeping my Bond/Cash 'duration' a bit below average to assist my bond/cash portion as we have been in the rising rate time frame. Now that it looks like rates might be on pause - to see what the effects over 6 months actually are, I am toying with the idea of bringing out my average duration just a bit. I have not and am just evaluating, I am not ready to pull a trigger. Just like the time it takes the economy to react to Central Bank changes, its gonna take me a bit to commit on such a change.

It all depends on your thought process on the overall direction of inflation/deflation. I generally am a deflationist due to globalism, but with Russia at war and China being difficult, I am just not sure I am interested in pulling any triggers. Global deflationism might be waning. Global inflation might have actually gotten a bit of traction in this setting. With global turmoil and the power of global deflation disrupted, with all the cash injected since '08 & '20, I just cant help but think we have forces moving now from different angles, and if so, we might be in for a sustained low level inflation (2-4%) for a few years. If that is the case I want to stay shorter than longer on the 'Bond Duration' front, for my portfolio.


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## james4beach

Just wanted to show a 5 year chart that shows the diversification benefit of gold in the portfolio. Here's MNT (gold) versus XAW (world stocks, the black line).

5 years is a reasonably long time, and gold has performed well. It actually has a higher return than stocks, but even more importantly, it didn't crash in 2020.

My point here is that *gold can be useful in the portfolio*. Over the long term I expect stocks to do better than gold, so I'm not trying to say that gold is the better investment. There are times gold will do worse than stocks as well.


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## james4beach

My portfolio now appears to be only down about 6% this year. I'm approaching "flat" for 2022 ... within a noise margin this is already pretty flat.

I shouldn't jinx it before the year ends, but it appears to be the Permanent Portfolio working its magic yet again.


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## Faramir

Imagine how much one made buying at the bottom of the pandemic. I dipped my toes and made some money but did not go all in. Enerplus is a great example. Could have made 10 times but walked away at 50%. Dumb. On paper I am down slightly this year assuming I can't recoup some gains on my holdings.


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## londoncalling

james4beach said:


> My portfolio now appears to be only down about 6% this year. I'm approaching "flat" for 2022 ... within a noise margin this is already pretty flat.
> 
> I shouldn't jinx it before the year ends, but it appears to be the Permanent Portfolio working its magic yet again.


So this post is the reason the market was down today.  🤣

All kidding aside the PP has backtested well in down markets. It may not do as well in bull markets compared to other portfolios but it never claims to shoot out the lights in any given year.


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## james4beach

londoncalling said:


> So this post is the reason the market was down today.


Yeah, the famous market curse. Celebrate the portfolio and get knocked down the next day!

Well at least I'm not a Tesla investor.


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## james4beach

Here's an old post with my version of the permanent portfolio, which is still what I hold in my single largest account. I made some rebalancing trades in December to get positions back to these target weights. The mix of CGL.C and MNT is somewhat arbitrary because they're both gold bullion.









My 2022 return was *-7.3%* which I think was pretty good for a conservative portfolio. That figure is just looking at the big account which holds the pure ETF portfolio. In other places, I also have my 5-pack and some GICs.

In comparison, VBAL was down -11.4% and VCNS was down -11.7%.
The Mawer Balanced Fund was down -12.5% for the year.


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## james4beach

Here's a 3 year return comparison (2020-01-06 to 2023-01-05). This starts right before the pandemic so it might be a useful period to look at. Again I used the above ETF portfolio, after fees.

PP allocation: 3.1% CAGR
VBAL: 2.6% CAGR
Mawer: 1.9% CAGR
VCNS: 0.8% CAGR

Those returns are pretty similar, but the PP did the best among these in the last 3 years. Anyway this kind of thing is going to be sensitive to the start & end dates.


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