Slowly bleeding

[dutchtraffic]

I need to invest a rather substantial (for me) amount of money, I am partially invested in a euro PP, but just cannot get myself to fully invest in it, not when the german 20year etf is yielding 0.35%, that's just insanity, almost zero upside left, not to speak about stocks which are also at valuations reaching total insanity.

I am totally not convinced the PP can work whatsoever in an environment where "the market" has effectively been killed by central banks, there is no market. Nor has HB ever taken this into account. No european bonds are priced properly, none at all.

The prob is that i'm bleeding 1.2% each year in taxes, regardless of what profits or losses i make, the capital tax that needs to be paid is 1.2% of the total sum (even more next year, hooray for socialism).

I'm looking for alternative portfolios that are less risky than the PP (yes i consider the PP to be a serious risk in this situation).
Any ideas? Short term bonds are not even an option as it will cause me to bleed 1.2% in taxes and an additional -0.63% (https://www.ishares.com/nl/particuliere ... tf-de-fund).

[Xan]

I need to invest a rather substantial (for me) amount of money, I am partially invested in a euro PP, but just cannot get myself to fully invest in it, not when the german 20year etf is yielding 0.35%, that's just insanity, almost zero upside left, not to speak about stocks which are also at valuations reaching total insanity.

I am totally not convinced the PP can work whatsoever in an environment where "the market" has effectively been killed by central banks, there is no market. Nor has HB ever taken this into account. No european bonds are priced properly, none at all.

The prob is that i'm bleeding 1.2% each year in taxes, regardless of what profits or losses i make, the capital tax that needs to be paid is 1.2% of the total sum (even more next year, hooray for socialism).

I'm looking for alternative portfolios that are less risky than the PP (yes i consider the PP to be a serious risk in this situation).
Any ideas? Short term bonds are not even an option as it will cause me to bleed 1.2% in taxes and an additional -0.63% (https://www.ishares.com/nl/particuliere ... tf-de-fund).

Yikes. Can you move?

[dutchtraffic]

I need to invest a rather substantial (for me) amount of money, I am partially invested in a euro PP, but just cannot get myself to fully invest in it, not when the german 20year etf is yielding 0.35%, that's just insanity, almost zero upside left, not to speak about stocks which are also at valuations reaching total insanity.

I am totally not convinced the PP can work whatsoever in an environment where "the market" has effectively been killed by central banks, there is no market. Nor has HB ever taken this into account. No european bonds are priced properly, none at all.

The prob is that i'm bleeding 1.2% each year in taxes, regardless of what profits or losses i make, the capital tax that needs to be paid is 1.2% of the total sum (even more next year, hooray for socialism).

I'm looking for alternative portfolios that are less risky than the PP (yes i consider the PP to be a serious risk in this situation).
Any ideas? Short term bonds are not even an option as it will cause me to bleed 1.2% in taxes and an additional -0.63% (https://www.ishares.com/nl/particuliere ... tf-de-fund).

Yikes. Can you move?

Is always possible, but i prefer not to.

[stuper1]

There was a controversial guy who used to post on here whose portfolio was basically 50% stocks and 50% gold. He claimed it was less volatile than one might imagine. If you have a fairly long time horizon to ride out some volatility, you might consider that portfolio, since you seem to want to avoid long bonds and short bonds.

Another idea is a foreign currency ETF as a separate asset class. Would that have the same tax problems for you?

[koekebakker]

Dutch wealth tax is pretty bad, but you can get some 5 year cd's which yield about 0.8% real, so -0.4 after tax which is not too bad I guess in this environment. Net taxes are probably slightly lower as the first 20/40k are not taxed.
Eurozone 30y bonds yield less than 5y cd's so they should probably be avoided. Short/int term fixed income and stocks seem to be the only options in the eurozone at the moment.

[MachineGhost]

You must avoid stocks and invest in other Prosperity assets or the PP is effectively broken.

[boglerdude]

"the german 20year etf is yielding 0.35%"

Is the US rate higher because of expected inflation? ie the real rates for safe 1st world countries should be the same? (equilibrate)

[ochotona]

other Prosperity assets

We here all think MG means narco-trafficking

[MachineGhost]

other Prosperity assets

We here all think MG means narco-trafficking

Not sure where you got that ridiculous idea, but I assume its a joke.

[dutchtraffic]

I might just collar some dividend stocks for a super low risk approach to capture at least some yield, untill things normalize...if they ever will.
(http://www.investireoggi.it/forums/atta ... pdf.86895/)
This paper describes using a collar with put spreads, though I wouldn't use spreads but just normal collars.

[dutchtraffic]

Dutch wealth tax is pretty bad, but you can get some 5 year cd's which yield about 0.8% real, so -0.4 after tax which is not too bad I guess in this environment. Net taxes are probably slightly lower as the first 20/40k are not taxed.
Eurozone 30y bonds yield less than 5y cd's so they should probably be avoided. Short/int term fixed income and stocks seem to be the only options in the eurozone at the moment.

A 5yr CD, locking up your money in a currency that's almost certain to disappear or at least severely depreciate for NEGATIVE returns, you have some big balls

[dutchtraffic]

You must avoid stocks and invest in other Prosperity assets or the PP is effectively broken.

I'm not sure what you mean?
I'm not avoiding stocks, i have a fully normal (EU) PP.

[dutchtraffic]

"the german 20year etf is yielding 0.35%"

Is the US rate higher because of expected inflation? ie the real rates for safe 1st world countries should be the same? (equilibrate)

None of the bond rates make any sense right now, as they are effectively set by the government (yeah yeah..), and a government which sets the rates that they can borrow for, is not a market.

[craigr]

I need to invest a rather substantial (for me) amount of money, I am partially invested in a euro PP, but just cannot get myself to fully invest in it, not when the german 20year etf is yielding 0.35%, that's just insanity, almost zero upside left, not to speak about stocks which are also at valuations reaching total insanity.

I am totally not convinced the PP can work whatsoever in an environment where "the market" has effectively been killed by central banks, there is no market. Nor has HB ever taken this into account. No european bonds are priced properly, none at all.

The Euro has always been in jeopardy of going away. Generally I would focus on the country's bonds where I lived. But as you said, once they get so low in yield I wouldn't buy them either. You need to hold cash or divest from the Eurozone to some degree.

I have said in other threads that if the U.S. bonds get under 1% I'm selling them due to horrible risk profile. And of course I say that as one of the authors on the updated Permanent Portfolio book so take that for what it's worth. Sometimes dogma needs to yield to reality and the reality of long bonds under 1% is not good. Better to be in cash in that case.

I'm looking for alternative portfolios that are less risky than the PP (yes i consider the PP to be a serious risk in this situation).
Any ideas? Short term bonds are not even an option as it will cause me to bleed 1.2% in taxes and an additional -0.63% (https://www.ishares.com/nl/particuliere ... tf-de-fund).

Since Browne's death and the publication of our updated book, the political landscape has shifted radically due to phenomenally bad government policies. I believe that the situation in Europe and the U.S. will correct itself, but it's likely to be pretty bumpy. My advice today would be to look into a diversified global portfolio that lowers your exposure to the Eurozone to have it represent the worldwide percentage in the global economy.

Basically, think of a Permanent Portfolio, but using globally diversified assets for the cash, bonds, and stocks. Gold should remain and should have geographic diversification outside the continent where you live for emergencies.

I can't provide specific advice other than the above as each person's situation is different. In fact, the advice above is just a market commentary as I'm not a financial advisor and you should do your own due diligence before making any kind of decision with your savings.

[ochotona]

dutchtraffic, maybe you could adopt a global market portfolio in the process of trying to eliminate home zone risk. Here is Meb Faber's version of the global market portfolio (GMP). You could implement with eight ETFs

Actually, you only have to buy one US ETF... "GAA".

US stocks 20%
Foreign developed economy stocks 15%
Foreign emerging economy stocks 5%
Corporate bonds 22%
US long bonds 15% {governments}
Ex-US 10-year bonds 16% {governments}
US TIPS bonds 2% {US government inflation adjusted bond, or maybe gold is better}
REITs 5% {the book doesn't say, but I presume global REITs}

1973-2013 performance US Dollars
CAGR 9.90%
Volatility 8.45%
Sharpe ratio 0.55
Maximum drawdown -26.87%

Compare to the Permanent Portfolio 1973-2013 performance US Dollars
CAGR 8.53%
Volatility 7.29%
Sharpe ratio 0.45
Maximum drawdown -12.74%

Faber, Mebane (2015), Global Asset Allocation: A Survey of the World's Top Investment Strategies, The Idea Farm LP

[MachineGhost]

You must avoid stocks and invest in other Prosperity assets or the PP is effectively broken.

I'm not sure what you mean?
I'm not avoiding stocks, i have a fully normal (EU) PP.

Means if you're going to invest in assets that aren't priced to deliver long-term returns during Prosperity conditions because they're overvalued, you must find other assets to invest in (in the same currency).

[MachineGhost]

I have said in other threads that if the U.S. bonds get under 1% I'm selling them due to horrible risk profile. And of course I say that as one of the authors on the updated Permanent Portfolio book so take that for what it's worth. Sometimes dogma needs to yield to reality and the reality of long bonds under 1% is not good. Better to be in cash in that case.

You're indirectly worryng about "Tight Money" and that's market timing. There's nothing magical about 1% being a barrier and we don't hold bonds in the PP for yield, but for the capital gains.

That being said, 1% is a heuristic for bond valuation. But again, valuation only really matters if you're buying bonds for the cash flow and not Deflation protection.

What you can do if you don't like the duration risk that 1% or less represents is reduce your Deflation weighting to a maximum of 12 years duration as it was in 1945 before the bear market commenced.

People forgot all too easily that the driver of the PP is Prosperity... everything else are HEDGES.

[craigr]

People forgot all too easily that the driver of the PP is Prosperity... everything else are HEDGES.

I understand this immensely. But at 1% or lower long bonds provide little insurance. It would be better to greatly reduce duration as you suggest, or go to cash and look to just ride things out with the other assets.

[boglerdude]

There's a real barrier, folks will pull cash if rates get low enough and banks need to charge fees.

Unless the fed pays banks more IOER...

[ILoveMoney]

People forgot all too easily that the driver of the PP is Prosperity... everything else are HEDGES.

Got a lot out of this. Thanks!

[ILoveMoney]

I have said in other threads that if the U.S. bonds get under 1% I'm selling them due to horrible risk profile.

Craig, could you please talk a bit more about the risk profile of long bonds when they go under 1%?

Also, it's not entirely clear to me, why the long bonds would provide little insurance when they go below that threshold.

Thanks in advance.

[dutchtraffic]

Again I am starting to think more and more about a global portfolio to try and get through this total madness.

The percentage figures are pretty much pulled out of my *** so they would probably change.

10% Short term govt. bonds/cash in local currency - iShares Euro Government Bond 0-1yr UCITS ETF / IEGE (or better yet, german short term bonds)
20% Gold - ETFS Physical gold / PHAU
20% Global AAA-AA Govt bonds - iShares Global AAA-AA Government Bond / IS0Z
10% Global inv. grade Corporate bonds - iShares Global Corporate Bond / IS0X
25% Global high dividend stocks - Vanguard FTSE All-World High Dividend Yield / VHYL
10% Global real estate - Think Global Real Estate / TRET
5% Global Private equity - iShares Listed Private Equity / IPRV

This translates to:
10% local cash
20% gold
20% global AAA govt. bonds
10% global corp. bonds
30% global stocks
10% global real estate

Backtesting drawdowns against the euro PP is pointless because I cannot backtest one of many euro breakup scenarios, I cannot backtest Germany deciding to give the middle finger to foreign creditors and not converting their euro nominated bonds into marks, and 50 other scenarios that are increasinly realistic, etc etc etc.

This package appears to be much safer especially compared to a euro based PP.
We are absolutely in unchartered waters, so we simply cannot backtest the permanent portfolio and assume it's normal behaviour will continue, especially not the euro PP. This has simply never happened before.

[AnotherSwede]

What if they continue lowering yield by .2-.3% each year? More and more negative.

Stock valuations will continue becoming more and more insane.

Cash banned, if deemed necessary, but probably not.

[dutchtraffic]

What if they continue lowering yield by .2-.3% each year? More and more negative.

Stock valuations will continue becoming more and more insane.

Cash banned, if deemed necessary, but probably not.

Then you would be totally crazy to stay invested in euro paper.

[AnotherSwede]

We are a couple of years into relying on bigger fools with a printing press.

No, I don't have any bonds myself