Should I include cash and bonds?

General Discussion on the Permanent Portfolio Strategy

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ahhrunforthehills
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Re: Should I include cash and bonds?

Post by ahhrunforthehills » Wed Jul 01, 2020 6:35 pm

Hal wrote:
Wed Jul 01, 2020 5:13 pm
ahhrunforthehills wrote:
Wed Jul 01, 2020 3:08 pm
@ volcker

I have been wondering this recently as well (in fact, I had a very similar post the same day as you in a different thread).

Someone else pointed out that this guy did an analysis and found that adding bonds to a stock/gold mix reduced your overall risk very little, but at the expense of massive performance: https://www.youtube.com/watch?v=LA2Yr6NoZyA (around 5:05 is where he gives his opinion).

His ideal allocation is 65% stock and 35% gold. In other videos he commented that anything more than 35% and your risk adjusted reward starts to really go down the crapper.

People may say "... but treasuries can go negative!" This MIGHT be true, but in that environment many investors will begin pouring into gold as an alternative store of wealth.

Also, are we talking about taxable accounts or non-taxable accounts? It might be true that the magic of the PP is rebalancing, but I recently started thinking that magic becomes a curse in a taxable account.

I ran the comparisons through portfoliocharts, the simba spreadsheet, portfoliovisualizer, etc. 62.% stock, 32.5% gold, and 5% t-bills seems to be pretty hard to argue against (especially if you are talking about After Tax/After Inflation returns).

If we are talking about Physical Gold, your tax rate will be fully dependent on your income. Your income will be determined by how many fixed income investments you have (i.e. Bonds). If you only owned stocks and gold, you would not have any income. Therefore, your tax rate for selling gold would be insanely low.

Edit: Your previous post (saying that you were not from the US) came as I was typing mine, so the tax benefit I mentioned might not apply to you. However, depending on your country, holding gold would obviously come with other benefits that paper assets do not have.
Have a look at Belangp's video on taxation and rebalancing....

https://www.youtube.com/watch?v=MhszdAX9Leg&t=4s
Yes, I watched that one too :) That video is what originally sent me down the rabbit hole.

@ 10:45: "All of this is the benefit of the negative correlation between stock and gold becoming more strongly negative over longer holding times [based on the last 5 decades worth of data]"

This is what I noticed on portfoliocharts as well. It seems to even outperform the PP in a Japan environment with just a little more volatility in the earlier years.

For those looking for a Perpetual Withdrawal Rate it seems like a really good allocation.
volcker
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Re: Should I include cash and bonds?

Post by volcker » Wed Jul 01, 2020 7:29 pm

ahhrunforthehills wrote:
Wed Jul 01, 2020 3:08 pm
Someone else pointed out that this guy did an analysis and found that adding bonds to a stock/gold mix reduced your overall risk very little, but at the expense of massive performance: https://www.youtube.com/watch?v=LA2Yr6NoZyA (around 5:05 is where he gives his opinion).

His ideal allocation is 65% stock and 35% gold. In other videos he commented that anything more than 35% and your risk adjusted reward starts to really go down the crapper.

People may say "... but treasuries can go negative!" This MIGHT be true, but in that environment many investors will begin pouring into gold as an alternative store of wealth.

Also, are we talking about taxable accounts or non-taxable accounts? It might be true that the magic of the PP is rebalancing, but I recently started thinking that magic becomes a curse in a taxable account.

I ran the comparisons through portfoliocharts, the simba spreadsheet, portfoliovisualizer, etc. 62.% stock, 32.5% gold, and 5% t-bills seems to be pretty hard to argue against (especially if you are talking about After Tax/After Inflation returns).

If we are talking about Physical Gold, your tax rate will be fully dependent on your income. Your income will be determined by how many fixed income investments you have (i.e. Bonds). If you only owned stocks and gold, you would not have any income. Therefore, your tax rate for selling gold would be insanely low.

Edit: Your previous post (saying that you were not from the US) came as I was typing mine, so the tax benefit I mentioned might not apply to you. However, depending on your country, holding gold would obviously come with other benefits that paper assets do not have.
I don't pay capital gains taxes on anything, so I'm basically what would be a tax-free account in the US. I hold vaulted physical precious metals, so bid-ask spreads and commissions are extremely low. They are also my physical property outright, as opposed to a paper financial asset.

The video is interesting. I'm somewhat suspicious about his choice of metric. I've never seen anyone use "deviation around trendline return" instead of SD.
I expected him to have a caveat regarding the fact that efficient frontier analyses of that type must be taken with a big sprinkling of salt because they are extremely sensitive to the choice of time period (try the same exercise in 1980-2000 and see what you get), and must not be used to predict the winning allocation of the future, since the winning allocation changes radically with the time period. He seems to imply that we should go 65/35 going forward.
He says he chose 1971 to start because that's when the dollar's link to gold was broken, but the fact is that he chose the very start of a great bull market in gold and a rocky decade for stocks with the benefit of hindsight, so we should not be surprised that the result is that the "optimal" portfolio contains a big chunk of gold.

He's basically endorsing something similar to my portfolio, but I think his reasoning is on shaky ground.
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Hal
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Re: Should I include cash and bonds?

Post by Hal » Wed Jul 01, 2020 10:38 pm

volcker wrote:
Wed Jul 01, 2020 7:29 pm
I don't pay capital gains taxes on anything, so I'm basically what would be a tax-free account in the US. I hold vaulted physical precious metals, so bid-ask spreads and commissions are extremely low. They are also my physical property outright, as opposed to a paper financial asset.

The video is interesting. I'm somewhat suspicious about his choice of metric. I've never seen anyone use "deviation around trendline return" instead of SD.
I expected him to have a caveat regarding the fact that efficient frontier analyses of that type must be taken with a big sprinkling of salt because they are extremely sensitive to the choice of time period (try the same exercise in 1980-2000 and see what you get), and must not be used to predict the winning allocation of the future, since the winning allocation changes radically with the time period. He seems to imply that we should go 65/35 going forward.
He says he chose 1971 to start because that's when the dollar's link to gold was broken, but the fact is that he chose the very start of a great bull market in gold and a rocky decade for stocks with the benefit of hindsight, so we should not be surprised that the result is that the "optimal" portfolio contains a big chunk of gold.

He's basically endorsing something similar to my portfolio, but I think his reasoning is on shaky ground.
For different reasoning that led to nearly the same allocation have look at
https://www.youtube.com/watch?v=a4_U6bS-cU4
https://edelweissjournal.com

There was a thread about this a while ago elsewhere on the site
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Hal
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Re: Should I include cash and bonds?

Post by Hal » Thu Jul 02, 2020 4:49 am

ahhrunforthehills wrote:
Wed Jul 01, 2020 6:35 pm
[Yes, I watched that one too :) That video is what originally sent me down the rabbit hole.

@ 10:45: "All of this is the benefit of the negative correlation between stock and gold becoming more strongly negative over longer holding times [based on the last 5 decades worth of data]"

This is what I noticed on portfoliocharts as well. It seems to even outperform the PP in a Japan environment with just a little more volatility in the earlier years.

For those looking for a Perpetual Withdrawal Rate it seems like a really good allocation.
Certainly for longer timeframes, it has a greater return than even 100% shares due to the negative correlation.
Potentially good for younger investors, but think I would use the PP if I was elderly...
Note: VGS=Vanguard Global Shares
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