Help with portfolio

[D]

This forum is awesome! I'm possibly interested in shifting towards PP. I'm a Canadian in my mid-thirties. I don't live in Canada for quite some time, and right now I live in Middle East. I used to work in Europe and States so I have brokerages in both regions.

My current portfolio is:

50% Cash in high yield savings accounts

50% in following ETFS:
- 30% in IWRD (MSCI World) bought in Euros through Euro brokerage and it's paying dividends in USD

and following bought through my US brokerage
- 8% in SCHX (Schwab large cap)
- 7% in SCHF (Schwab int large cap)
- 26% in IJS (iShares small value)
- 19% in VSS (Vanguard int small)
- 10% in VWO (Vanguard EM)

So overall, my stock portion should be
25% US large cap
25% US small value
15% International large cap
25% International small
10% EM

I would like to stick with 50% stock allocation. I was thinking to divide my cash part into

20% Cash in USD in high yield savings accounts
15% some gold ETF bought in Euros on a Euro exchange
15% US long term treasuries

and keep on buying stocks as per above with keeping 30% in IWRD in Europe and rest in US.

I'm thinking about this stock allocation as PP stock portion of 15% and 35% variable portfolio invested in stocks. Each 5-10 years I'd reduce variable portfolio by corresponding number of years so that at age of 70 I'm in a pure PP. I'm not planning to have emergency fund as I'll have 20% in cash that I can tap into.

Is this all reasonable, or is it smarter to just go 50% cash to intermediate term treasuries minus emergency fund as per Bogleheads?

Thanks,
D

[Pkg Man]

I would like to stick with 50% stock allocation

I would respectfully say you are interested in a different VP, not a PP.

I had the same thoughts when I saw the PP allocations with only 25% to stock.  Seemed awful low for someone my age.  I had heard the saying "own you age in bonds", and thought that was conservative enough and attempted to modify the PP to take that into account.  But after listening to the Harry Browne radio show, reading through the Bogelhead thread, and doing my own backtesting I decided to go with a pure PP.  The slightly reduced return compared to equities is, IMHO, more than made up for by the much lower standard deviation.

You can still have other investments (the VP).  But remember HB's admonition that you should only put money in the VP that you can afford to lose.

[Roy]

I would like to stick with 50% stock allocation

I would respectfully say you are interested in a different VP, not a PP.

I had the same thoughts when I saw the PP allocations with only 25% to stock. 

Several experts and many posters on the other board have said the 25% stock allocation is to low.  It is true that higher Beta portfolios outperform—but then get crushed in downturns.  Personally, I think they do more harm than good—to all age groups.  Nobody seems to learn this because emotions shift through market cycles.

The 25% allocation is criticized most in bull markets when it lags and looks like a bad idea.  But though it lags, you may still be making money. That is very different than losing lots of it in downturns;  I think fear seems stronger than greed as months and years of returns can be erased in a few bad weeks, or with a fat finger, apparently. 

One must remember the impact of entire market cycles—peaks to troughs.  If you rely on your career for wealth, then protect the wealth with conservative portfolios, (especially fully diversified ones like the PP), then you are doing best as you can.  The PP can not be perfect, but I see no evidence that the 4x25 approach can be improved upon, and any tinkerings there for added returns can unravel the protective nature of it in declines.

Roy

[Pkg Man]

I think what converted me to the idea of the PP was the possibility of another 10 years of a zero CAGR in the stock market.  Most of my 401K contributions were made in the last 10 years, which have basically seen no return, even in nominal terms. 

While in many respects I am more inclined to take risk, this was one area that I felt I needed to pull back.  This doesn't mean there is no risk with the PP, but the historical track record and firm theoretical foundations give me comfort.

[craigr]

I would like to stick with 50% stock allocation. I was thinking to divide my cash part into

20% Cash in USD in high yield savings accounts
15% some gold ETF bought in Euros on a Euro exchange
15% US long term treasuries

There is no problem if you want to keep 50% in stocks. Just count 15% or so of it as part of the permanent portfolio core and the other 35% as your variable portfolio as you suggest.

As for this split you are heavier on the cash, but if you think you need it for your personal reasons that would be OK. Although I hate the words "high yield" in front of anything. It usually translates to "higher risk." So without knowing what your savings account type is, I'll give the standard advice that the cash should be in a high quality US Treasury Money Market fund or possibly a US Treasury Short Term Treasury fund if you can't get into any money market fund due to restrictions.

The gold fund in Euros doesn't matter as long as you trust that it is holding gold and not gold mining stocks or other non-bullion things.

I will say though that you have this mix of Euros/Dollars and that could cause problems with currency issues. But I'm not sure of your current arrangements in terms of Canadian/US/Europe living.

Also keep in mind that I know many authorities advocate stock heavier allocations that reduce as you age. But I think there are many problems with this theory. The first problem being that it can be volatile and cause investors to panic. The second problem though is that it doesn't always work better compared to more conservative approaches.

[craigr]

There is no problem if you want to keep 50% in stocks. Just count 15% or so of it as part of the permanent portfolio core and the other 35% as your variable portfolio as you suggest.

That's what I was thinking, but I'm curious does it matter if I rebalance between PP and VP is such a setup? I think HB did not assume that you'll rebalance between PP and VP.

The basic rule with the VP is that you can't take money from the Permanent Portfolio to replenish losses in the Variable Portfolio.

I add another rule which is the VP can't invest in anything that can allow you to lose more money than you put into it. So that eliminates shorting stocks for instance or getting wound up in business deals where you are liable for expenses and losses personally.

The Permanent Portfolio is the core money you want to protect. The Variable Portfolio is optional play money. If you lose the play money at the casino, you can't go and raid the Permanent Portfolio to make up the losses.

I'm considering getting ZGLD. I just checked and there are both hedged and unhedged options for CHF, EUR, GBP. What would you suggest?

I only know enough about that ETF to mention it in my Gold FAQ. I don't own it and can't comment. If it is holding gold then I wouldn't want it hedged against anything. Gold should be allowed to float against all currencies or you lose the reason why you'd want it. You want gold to be currency neutral.

I'm not sure where I'll work next and where I'll retire. I presume I'll be moving often between North America and Europe and who knows maybe even spending some time both places in retirement. Should I just bet on one currency (USD) or keep it half-half maybe? Intuition says half-half  :)

Go with your gut on your own situation. Nobody can make that call for you.

As you said above, I see this as a VP that is shrinking with the age. Shouldn't be that risky?

It depends. Let's say you were overweighting stocks the past 10 years thinking you'd start reducing it in 2010. Well, you'd have taken a loss most likely vs. a balanced portfolio over that time. So the whole "reduce your stock by age" idea has this big proviso in that it really is time dependent on when the ratcheting down begins. Also, stocks are not less risky the longer you hold them. The risk of hitting a big drop can occur at any time. Nobody knows how long it will take for the price to recover so you have that risk, too.

Which is why I just like a balanced portfolio because these risks are mitigated through the rebalancing.