Mixed Europe/US Permanent Portfolio

[Pfanni]

Hi
after years of timing markets without avail, moving in and out of individual stocks, commodities, gold, emerging market funds, CFDs & options I decided to give up and go for the Permanent Portfolio / passive investment approach.
What has sunk in so far is that diversification has always saved me - I managed never to blow all my savings on one trade.

Since I live in Germany, I have some difficulty implementing PP.
We all know that Europe's a mess - politically, economically, bad demographics. That's why I want to have some US exposure, too. I don't have too much faith in the Euro, too. I can still remember when it went below USD parity.

Here's what I am about to setup:

25% Cash
2yr German government bonds yield -0.11% (negative yield!), plus transaction costs - this makes no sense.
I want to head for a EUR savings account (call money), available daily, 0.5% interest, government-guaranteed up to a certain amount (similar to FDIC).

25% Gold
Physical only, American Eagle and Krugerrand, 1oz each.

25% Stocks
50% DAX (30 German large caps) ETF, payed out
50% S&P500 ETF, payed out

25% Long-term Bovernment Bonds
50% 30yr German Bunds EUR
50% 30yr US Treasury bond USD


I understand that the permanent portfolio is somewhat designed around the idea to protect one's assets in regards to fluctuations of the money supply, be it deflation or inflation.
Therefore I wonder if the portfolio's on a slippery slope when I lean towards USD bonds, if there's deflation in the Eurozone.
When looking at gold as a currency, the portfolio as shown would have 50% EUR, 25% gold and 25% USD exposure.

Getting started with this portfolio gives me a hard time on so many levels:
-30yr German Bunds at 1.38% yield, I really have to close my eyes to buy
-US stock markets at record highs, not very encouraging to buy at the top, really though actually
(Now I find myself out market-timing  )

Anyways, I'd appreciate thoughts on this!

[LC475]

Pfanni,

It looks like you've really thought this out.  I generally recommend just the standard, orthodox PP.  And I think that many times even for foreigners it can make sense and be the best option.  However, your total amount you're investing, assuming it represents all or most of your savings, is low enough that I think you do want the cash in a form that will be very easily accessible to you, as well as stable in your home country, since that will then be able to double as your emergency fund.  US cash could do that, but not as well as German cash.

You bring up two reasonable concerns. 

First, that German 30 long-term bond yields are so low.  I think there is a simple solution: but only US long-term bonds.  Remember these are long-term bonds, and this is a portfolio for the long term.  You don't need easy access to the bond portion at a moment's notice -- that's what the cash portion is for.  And US bonds will serve the purpose of a counterweight to gold better than German bonds.  This way you will get a higher return, and you also will have a portfolio that will function better as a Permanent Portfolio.  You will have both your gold, and your anti-gold, just as designed. 

The situation in which this would turn out to be a bad decision is if Germany enters a long deflationary depression, but at the same time the US experiences inflation.  The German deflationary depression would make that 1.38% look very attractive by becoming a much higher percentage yield in real terms.  Deflation of 4% annually, for instance, (same as -4% inflation), would mean you'd be earning 5.38%.  At the same time, the US dollar would be falling against the Euro, because its currency is becoming less valuable (experiencing inflation), while the Euro is becoming more valuable (experiencing deflation).  Your US bonds would be giving the same nominal yield, but that yield would be worth less in terms of purchasing power in Germany.  Their capital value would also go down, since higher yield US bonds would now be available.

Second, that the US stock markets are at record highs, and you do not want to make the mistake of buying at the top.  This problem has an easy solution also: just buy only the German stock market.  That would solve your concern quite nicely.  However, I do not recommend doing that.  Why?  Because this would leave you too vulnerable to a German deflationary depression.  Your stocks would do poorly in one, and if you do as I recommend above your bonds would probably do well, but if the US were not in a deflation too, then they wouldn't.  I recommend instead rethinking your concern, whether it is really valid.  Stock markets are very volatile.  You yourself already are questioning your concern's validity ("Now I find myself out market-timing  "), and you should.  The US market may very well keep going up.  And if it doesn't, is it really likely that the German market will do well as the US market is crashing?  The US market is 50% of the world market.  It affects everybody.

Also, do you really want to bet everything on Germany?  Do you think Germany is going to be growing much better and faster than the rest of the world?

I would just think this through, think through what the various possible futures would mean to your stock portion.  If after this going through this thought, this systematic metal effort, it still makes sense to you to split it 50-50 between German stocks and US stocks, then I would recommend you do that.  We just have to base our investment decisions on careful, rational thinking.  If you do, then you will be all right.

[stpeter]

As someone who bought in at the top (early 2000) and sold at the bottom (early 2009), I have vowed never to do that again. I went all-cash in 2009 (then did years of research, then last year discovered PP) and I'm not about to put 25% of that into a stock index fund at these levels. Yes, I realize that the broad US stock market might go up from here, but every sign I'm seeing (investor bullishness, P/E ratios, P/GDP ratios, yield spreads, increasing risk aversion, etc.) indicates that stock prices are going to decline significantly sometime in the next 2 years. Sure, I might be wrong, but I won't be wrong in the same way I was before. ;-)

"Rule No. 1: Never lose money. Rule No. 2: Never forget rule No. 1."

However, I do plan to implement the rest of the PP in the very near future - I'll just DCA into the equities portion over time once stocks go on sale.

[Pfanni]

Thanks for the ideas. I am considering a minor change to the equity quarter:

50% MSCI USA Large Caps, payed out ETF (TER 0.3% available in Germany)
50% MSCI Europe Large Caps, payed out ETF (TER 0.3% available in Germany)
Both ETFs -full replication, not Swap-based- are setup by a behemoth, partially federal-states owned TBTF bank.

The USA MSCI ETF has a lower TER than the S&P 500-based ETF, but it's more or less the same.
The Europe ETF does not focus on Germany, this offers way more diversification (DAX would be 1/3rd German carmakers!).

EUR yield curve is so damn flat. I can get 3 year term money savings account, fully insured, at 1.5% yield. It makes one feel brain-dead to buy a 30yr bond at 1.38%.

Another idea would be to buy an EUR sovereigns bond +15 years ETF (German, Italian, French, Netherlands, Belgium, Spanish bonds mixed), where some kind of decent yield actually does exist. On the other hand Italy is flat-out broke as can be...really though to wrap my head around all of this!

I guess I should buy the German stocks, the US bonds and stay in cash / wait for better times when it comes to buying the German bonds / US stocks portion of the portfolio. That's market timing, I know..

[Kike Moreno]

Have you considered the currency risk from including USD in your portfolio?  It could go up with respect to the euro, but also down...

I really prefer a more canonical EUR permanent portfolio composed by:

25% in an ETF following MSCI EMU to have the maximum diversification without leaving the euro
25% in 30yr German bonds (I know this looks risky now, but it also did at the end of 2013, and last year it has grown 27%, and no one knows about the future, that's the point of the PP...)
25% cash in government-guaranteed deposits in EUR
25% gold

[LC475]

I really prefer a more canonical EUR permanent portfolio

Canonical?  I don't think there is such a thing (not from Harry Browne, at least).  The problem with a European ~"PP" is that it will not provide you as strong of protection from inflation.

Not a bad portfolio, but not bulletproof, IMO.

[Kike Moreno]

I said "more canonical" because AFAIK Browne recommended having the portfolio in your own currency if you were in a large enough currency area (or use USD if you were in a small country) to avoid currency exchange risks.

With regard to the inflation protection, if there is both inflation in the US and in the Eurozone this portfolio is protected because the gold will skyrocket.  If there is only inflation in the eurozone then the protection will be smaller but gold will still appreciate with respect to the euro.

[LC475]

With regard to the inflation protection, if there is both inflation in the US and in the Eurozone this portfolio is protected because the gold will skyrocket.  If there is only inflation in the eurozone then the protection will be smaller but gold will still appreciate with respect to the euro.

Right.  And the Euro is a big enough currency that there would probably be some good movement upward in real terms in the worldwide gold market if it has inflation problems.  But not as much as the dollar.  So, as I said, you will have some protection, just not as much as a USD PP.

Other advantages may outweigh that disadvantage.  Investors should be aware of it, though.

[lordmetroid]

I reason as such that some asset will always be on "top" so it doesn't matter when I purchase.

[buddtholomew]

As someone who bought in at the top (early 2000) and sold at the bottom (early 2009), I have vowed never to do that again. I went all-cash in 2009 (then did years of research, then last year discovered PP) and I'm not about to put 25% of that into a stock index fund at these levels. Yes, I realize that the broad US stock market might go up from here, but every sign I'm seeing (investor bullishness, P/E ratios, P/GDP ratios, yield spreads, increasing risk aversion, etc.) indicates that stock prices are going to decline significantly sometime in the next 2 years. Sure, I might be wrong, but I won't be wrong in the same way I was before. ;-)

"Rule No. 1: Never lose money. Rule No. 2: Never forget rule No. 1."

However, I do plan to implement the rest of the PP in the very near future - I'll just DCA into the equities portion over time once stocks go on sale.

As PP investors, we expect one or more asset/s to counter-balance any under performers, with the portfolio producing a steady 3%+ inflation adjusted return. Timing entry into the portfolio is futile (LTT's up 25% YTD, who knew?) and also strongly discouraged. I too have my favorite (SPY, TLT, CASH) and least favorite asset/s (GLD), but also realize the future is unknown and my biases are irrelevant.

[Kike Moreno]

Other advantages may outweigh that disadvantage.  Investors should be aware of it, though.

Yes, I agree.  You are lucky in the US to have this strong link between your currency inflation and the gold price.  Being in Europe I prefer a pure EUR PP and assuming a smaller protection for inflation rather than going for a USD PP and being exposed to USD variations with respect to the euro.

[Pfanni]

Hi
I simplified my portfolio a bit more in regards to the stock section, to make the rebalancing easier & more cost-effective.

25% cash EUR - retail bank savings account, government-guaranteed, 0.5% interest, TER 0.0%

25% Gold - physical coins

25% stocks - MSCI World ETF (industrialized countries only, 1/2 being US stocks plus a mix of UK, Europe, Canada, Japan....), TER 0.35%, payed out

25% bonds
1/2 German government 30yr bond, EUR, 1.38% yield
1/2 Treasury 30yr bond, USD, 2.76% yield

--------
Gold, cash, stocks - these seem well settled to me now, in line with the Permanent Portfolio spirit. I assume Harry Browne would have approved these sections, me being in kind of a special situation (home country Germany being too small to concentrate on it, not even having its own central bank, being subject to this folly Utopia currency called EUR).

The bond section is a tough one. There are EUR long term government bond ETFs, but they sample bonds from Germany, France, Spain, Italy and even Greece! No sane person shall buy that ETF.

Now I would have to bonds to balance.. there a multiple scenarios how they could move against each other (exchange rates, interest rates..). What a pity there's no ETF, or I haven't found one, for EUR & USD long term government bonds rated AA or better...

The German bond is easy to buy and to sell in Germany, transaction costs are low. The US government bond however, one has to take into account about 1.2% fees for each trade...rebalancing shouldn't happen more often than say every three years...

[Thomas Hoog]

25% bonds
1/2 German government 30yr bond, EUR, 1.38% yield
1/2 Treasury 30yr bond, USD, 2.76% yield

The bond section is a tough one. There are EUR long term government bond ETFs, but they sample bonds from Germany, France, Spain, Italy and even Greece! No sane person shall buy that ETF.

Well, I am quite sane and it served me well the last decade. iShares Euro Government Bond 15-30yr UCITS ETF.
Current allocation:
Italië: ~ 30%, Germany ~ 28 %, France ~22 %, Spain ~ 10 %, Netherlands ~ 8 %. Cost 0,2 %. And it is very easy to buy/sell.

[lordmetroid]

Everyone but the americans will be exposed to the USD currency risk because gold is valued on the global market in the world currency of USD.

[Kike Moreno]

Everyone but the americans will be exposed to the USD currency risk because gold is valued on the global market in the world currency of USD.

I don't agree with that.  It does not matter in which currency the gold price is expressed.  Everyone could be talking about gold prices in EUR and nothing would change with respect to the effect of gold in our portfolios.

The thing is that when you are based in an euro country and use USD bonds or USD stocks you are taking a currency risk that you don't have when using a pure Euro PP.

Pfanni, with regard to the ETFs, there are a couple that only buy long-term German bonds:

Deka Deutsche Boerse EUROGOV Germany 10+ UCITS ETF (DE000ETFL219)
iShares eb.rexx Government Germany 10.5+yr UCITS ETF (DE000A0D8Q31)

But I don't see why you should prefer those to directly buying the 30-year bond.

[Pfanni]

I understand, but that's the conundrum.
How to implent PP without tying all assets except gold to the Eurozone.
My premise was that USD exposure does not translate to FX risk, quite the contrary, FX hedge. Of course that might be called speculating, but I cannot see any other asset in the monetary plane safer than US government bonds.

The iShares bond ETF mentioned is worth a closer look, I'll need to have a look in regards to taxation (it's based in Ireland, that can have weird tax implications, even years after I might have sold it completely ~ welcome to dysfunctional Europe).

[Mouro]

Well, I am quite sane and it served me well the last decade. iShares Euro Government Bond 15-30yr UCITS ETF.
Current allocation:
Italië: ~ 30%, Germany ~ 28 %, France ~22 %, Spain ~ 10 %, Netherlands ~ 8 %. Cost 0,2 %. And it is very easy to buy/sell.

I also like the Lyxor UCITS ETF (FCP) EuroMTS 15+Y Inv. Grade (DR) EUR (FR0010481093), since it does not distribute dividends (that is a big no-no for me, considering that I must pay 28% over the dividends ).

[Kike Moreno]

Hi Mouro.

The problem with this ETF is that it holds bonds from France and Italy for example which are not top quality.  For a PP in euros I think that it is better to stay with German bonds (or alternatively Finland or the Netherlands, whose risk premium is very low).  You need the asset with the top performance for deflations which is the lower risk bond in your currency.

[Pfanni]

Yeah, but with the US 30yr bond at 2.78% there's at least a minor chance of some kind of positive (real) return.

With EUR in turmoil -I'm not sure it's gonna exist 30 years from now- one's guaranteed to lose money at 1.38% yield for a 30yr bond.
FX aside, what's the upside to that bond anyways? Let's say at a 2.5% coupon, now yielding 1.4%, bond price is roughly 122. Let's assume yield collapses to 0.5% tomorrow, I'm looking at a bond price of 166 (if I didn't mess up with the bond price calculator). Not worth taking on that huge duration risk IMO.

For a real return one would have to rely on (CPI) deflation (that's what the government bond section of PP is about, I know).

I guess I'll head for the USD bond:
-decent nominal return
-USD still is the pillar of the financial system
-diversification away from EUR

I cannot seem to find valid arguments for owning EUR bonds.
Stated differently, there are lots of borrowers who will go down in a deflation before the US government goes down.

[Mouro]

The problem for an European in holding a US LT bond is:

a) They will have to buy them in the secondary market (no idea of the tax implications)
b) They will have to buy a ETF in America

Be careful with the 2nd alternative, since Capital Gains Tax may be triggered in the USA above $ 60k upon your death (for example, AFAIK the Double Tax Agreement (DTA) between Portugal and the US say nothing about this tax, so one should be careful in analyzing its own country DTA with the US...).

EDIT: I forgot to mention that I was talking about US LT bonds...

[Kike Moreno]

I cannot seem to find valid arguments for owning EUR bonds.

For me the point is to avoid the currency risk.  What if the EUR/USD exchange rate raises again to 1.59?  Or what if, as you are worrying, the euro collapses and your "New Mark" appreciates a lot with respect to the USD?

[koekebakker]

I cannot seem to find valid arguments for owning EUR bonds.

Same here. You're not guaranteed to lose money on them though.

It's very hard to create a 'real' PP in the eurozone, maybe it's impossible...
It's uncertain how gold will react during eurozone troubles, the same can be said for LT-bonds. It's just a mess.

In the end I gave up trying and created a more traditional portfolio, while still trying to incorporate some PP ideas.
My portfolio consists mainly of global stocks and savings-accounts/cd-ladders.
Global stocks give me foreign exposure and savings-accounts are basically a free lunch for the small investor in my country (netherlands). They are government-insured, might be even safer than government-bonds and the rate is higher than 30-year treasuries. The same is true for most CD's.
To give it a bit off HB-flavour I hold 10% gold as well, and 10% Dutch LT-bonds. I believe they will smoothen the ride.

So it's 40% global stocks, 40% local cash/CD's, 10% gold, 10% local LT's.

I know I'm not as protected as an American with a US-PP but I believe it's the best I can do in my circumstances.
It's somewhere in between a conservative Boglehead-portfolio and a EU-PP.
Most important of all: I feel pretty good about it, and that's not easy as a EU-investor 

[frugal]

I cannot seem to find valid arguments for owning EUR bonds.

Same here. You're not guaranteed to lose money on them though.

It's very hard to create a 'real' PP in the eurozone, maybe it's impossible...
It's uncertain how gold will react during eurozone troubles, the same can be said for LT-bonds. It's just a mess.

In the end I gave up trying and created a more traditional portfolio, while still trying to incorporate some PP ideas.
My portfolio consists mainly of global stocks and savings-accounts/cd-ladders.
Global stocks give me foreign exposure and savings-accounts are basically a free lunch for the small investor in my country (netherlands). They are government-insured, might be even safer than government-bonds and the rate is higher than 30-year treasuries. The same is true for most CD's.
To give it a bit off HB-flavour I hold 10% gold as well, and 10% Dutch LT-bonds. I believe they will smoothen the ride.

So it's 40% global stocks, 40% local cash/CD's, 10% gold, 10% local LT's.

I know I'm not as protected as an American with a US-PP but I believe it's the best I can do in my circumstances.
It's somewhere in between a conservative Boglehead-portfolio and a EU-PP.
Most important of all: I feel pretty good about it, and that's not easy as a EU-investor 

Hi,

what about:

25% Total world Bond Market Index Fund
25% Total World Stock Index Fund
25% Gold
25% Cash

is it better?

[Pfanni]

US government bonds.
As a German resident I sign IRS form W8-BEN, mail it to my brokerage firm, pay 0% US taxes on interest collected and then my brokerage firm withholds and deducts the German tax on financial income automatically (26.xx %).

I have to find out what happens when I sell the bond itself, though. Not sure if that triggers US capital gain tax (for me as a non-resident).

[I Shrugged]

I'm American.  My PP is a lot like what frugal posted above.  I decided a few years ago to mix international exposure into the stocks and bonds.  Some years I think it helped, but mostly lately it has hurt.  But, that's to be expected.  I don't know if my way is better than Harry Browne's way, but I am comfortable with it.  Lately I've begun to realize that it probably doesn't matter as much as I thought.  Just look at the names and cap weightings of a non-US index fund.  The big companies in both US and non-US are all worldwide companies.

I would be very hesitant to recommend a German put his stock exposure all into German stocks or bonds, or a Japanese into Japan, etc.  Those are way too concentrated of positions, IMO.    I can see the cash being put into Euros for a Euro person though. 

I'm not sure Harry Browne would have agreed with my reasoning about the positions being too concentrated.  It is easy to talk oneself into variations that do significant harm to the PP concept.