Canadian Long Bonds (30yr) ... convince me

[mgtow]

Firstly I am in Canada, so the usual Permanent Portfolio logic doesn't necessarily translate.... bear with me...

Okay, I KNOW it is 1 of the 4 main legs of the Permanent Portfolio, but my poor Spock brain is having a lot of difficulty with putting 25 % into Long Canadian Bonds.  Just last week I read that our rates in Canada are at 30 year lows.

More importantly, when a crisis like 2008 occurs, the Canadian Bonds did not behave like TLT because Canadian dollars are not a reserve currency, so no one flocks to our dollar except maybe some Canada Geese.

If instead I replace cash and LT bonds with a short-term bond ETF, what am I really missing out on?  If there is deflation,  cash and bonds still go up in value.  If my currency goes down, my gold and EAFE stock ETF will go up.  Inflation is covered by gold (and perhaps stocks).

I welcome everyone's views as this is my major stumbling block now in accepting and implementing Permanent Portfolio.

PS:
My proposed mix would be
25% EAFE stock ETF (unhedged)
25% GOLD
50% Short term bond ETF (perhaps laddered 1-5yr)

[Gosso]

I agree with most of your post.  Keep in mind that there is little difference between a barbell (short and long) and bullet (intermediate) bond allocations as long as the overall bond duration is roughly the same.  I personally think most PPers would be less stressed with intermediate bonds, but I don't push the idea since it doesn't seem to get much traction.

Although, I don't like your Canadian PP.  Why only European and Japanese stocks?  What about the US"Eh"?  Remember that it is the USD that gains in a crisis.  I'd go with the following for a Canadian PP:

- 50% = Canadian bonds with an average duration between 5-10 years.  A 1-15 year bond ladder would do the trick.  You could lower it to a 1-10 year bond ladder if you really wanted to.  Another option is to use a 1-5 year GIC ladder for 75% of bonds (CDIC only covers GICs up to 5 years), and then 25% in long bonds to boost the overall bond duration.
- 10% = Canadian stocks
- 10% = US stocks (unhedged)
- 5% = EAFE (unhedged)
- 5% = Emerging Markets (unhedged)
- 20% = Gold (unhedged)

It is important to have a decent amount of duration on your Canadian bonds since during "normal" markets they will zig when stocks or gold zag (although not as much as TLT during a severe crisis like 2008). This helps lower the overall volatility of your portfolio.  Plus you receive a higher yield on the long bonds.

Canadian bonds follow US bonds pretty closely unless there is significant stress in the forex markets like during 2008, in which case a falling loonie will boost gold and foreign assets in CADs.

[mgtow]

Why EAFE? I'm not married to the idea, but... I read somewhere that it has similar performance to US stocks. My main reason is that I think the US is in a longterm decline. At some point the debt is going to catch up to the US and they are going to have to devalue their dollar.  I guess I take some comfort in the foreign stocks being a basket of currencies rather than just the US buck.  The only drawback I see currently is that any dividends will be taxed and not sheltered like US dividends would be in an RSP...

Thanks for the info about CDIC only covering GICs up to 5 year. Didn't know that.

Curious... is the 20% Gold allocation due to the exposure to gold stocks in the resource heavy Canadian Stock index??

When I look at your stock mix it appears as diversified as one can get but I can see how it might become difficult to rebalance.  On a 150K account, 5% would be $7500 and if it went up 20%, is it worth at $10 brokerage fee to sell $1500 worth  (assuming of course the total stock portion hit some uppper band, which would incur another $10 to sell one other stock ETF). 

Perhaps I'll make my stock allocation 50%Canada + 50%EAFE in case the Canadian stocks do well while the canadian dollar is doing well.

p.s.   EAFE = Australia France Israel Norway Switzerland
Austria Germany Italy Portugal United Kingdom
Belgium Greece Japan Singapore
Denmark Hong Kong Netherlands Spain
Finland Ireland New Zealand Sweden

[Pointedstick]

p.s.   EAFE = Australia France Israel Norway Switzerland
Austria Germany Italy Portugal United Kingdom
Belgium Greece Japan Singapore
Denmark Hong Kong Netherlands Spain
Finland Ireland New Zealand Sweden

There are a lot of countries in that list that I would also characterize as experiencing a longterm decline. I personally would not tilt my investments toward such countries if I was very worried about a U.S. decline. And of course, the U.S. and Canada are so joined at the hip that we'll probably take you down with us if that's to be our fate.

To really hedge your bets against the decline of the western world, you need to add a lot more China, India, Russia, Africa, and South America. Think about who's going to be gaining if we're losing.

[Gosso]

mgtow,

The US still has some of the most important and powerful companies in the world, and the companies in the S&P500 derive roughly 50% of the revenue from outside the US.  And lets not forget that holding the S&P500 gives you exposure to the USD, which is still the reserve currency of the world and is where money flows during a crisis.  Remember that the PP is about not predicting the future, we have no idea if the US will collapse in our lifetime.

As for 5% in emerging markets, you could skip that for now.

Perhaps I'll make my stock allocation 50%Canada + 50%EAFE in case the Canadian stocks do well while the canadian dollar is doing well.

Not a bad option.  You could do the following:

50% Canadian Bonds
25% Gold
12.5% Canadian Stocks
12.5% US/EAFE stocks (look at XWD)

[mgtow]

p.s.   EAFE = Australia France Israel Norway Switzerland
Austria Germany Italy Portugal United Kingdom
Belgium Greece Japan Singapore
Denmark Hong Kong Netherlands Spain
Finland Ireland New Zealand Sweden

There are a lot of countries in that list that I would also characterize as experiencing a longterm decline.

That's a great point. I looked more closely at the index, and 20% is in Japan alone.  I've read that if the US ever defaults, it will only be after Japan does since their debt-to-GDP ratio is double that of the US (something like 200%).

[mgtow]

You could do the following:

50% Canadian Bonds
25% Gold
12.5% Canadian Stocks
12.5% US/EAFE stocks (look at XWD)

Sounds good.  Thanks for you help and insights.