any compelling reason why Canadians should not use PP?

[metta2006]

Harry browne's pp was based on US investors. Is there a reason why a Canadian should not adopt it with some modification to Canadian version of each asset class? Just to be reassured before taking the plunge into pp...Thanks!

[KevinW]

IMO no reason, go ahead and build a PP out of Canadian stocks, Canadian sovereign long-term bonds, CAD-denominated cash, and gold.  The only scenario where I'd deviate from my home country's stock, bonds, and cash would be if one of those were completely unavailable or if my country's domestic stock market were too small to be reasonably diversified.  Neither of those is the case with Canada so I'd go for it.

(I do anticipate some dissent on the stock part, we'll see.)

[metta2006]

TLT went up almost 3% wiping out the loss of VTI (about -3%). So pp worked as it is supposed to.

However, ZFL (Canadian federal long bond ETF) only went up 0.65% while the Canadian stock index XIU plunged 2.6%. Would you say that Canadian long bonds do not reduce volatility of the market as effectively as TLT? So it needs modification of PP? Or is it just a bad day for canadian pp? Thanks.

[MediumTex]

TLT went up almost 3% wiping out the loss of VTI (about -3%). So pp worked as it is supposed to.

However, ZFL (Canadian federal long bond ETF) only went up 0.65% while the Canadian stock index XIU plunged 2.6%. Would you say that Canadian long bonds do not reduce volatility of the market as effectively as TLT? So it needs modification of PP? Or is it just a bad day for canadian pp? Thanks.

Canada is heavily dependent upon the natural resource sector, and that bias is going to appear throughout the economy.  When this sector suffers I would expect Canadian stock markets to slump, along with the Canadian dollar.  Given how closely the U.S. and Canada line up on many economic issues, I would be tempted to include some U.S. treasury exposure in a Canadian PP. 

You would probably want to think a long time about what made the most sense to you, though.

[metta2006]

Also Canadian dollar tanked today. I think it is important to note that Canadian dollar is not the reserved currency so in times of crisis, money will not flock into Canadian dollars. If I had used High interest savings account for cash portion, as Canadian couch potato suggested, it would not have helped to reduce the volatility of the market. If I had purchased all 3 assets yesterday (except cash), I would be in the red.

In Canadian pp, would it be prudent to have some US currency in cash and US gov't bonds, and US stocks as well?

[MediumTex]

Also Canadian dollar tanked today. I think it is important to note that Canadian dollar is not the reserved currency so in times of crisis, money will not flock into Canadian dollars. If I had used High interest savings account for cash portion, as Canadian couch potato suggested, it would not have helped to reduce the volatility of the market. If I had purchased all 3 assets yesterday (except cash), I would be in the red.

In Canadian pp, would it be prudent to have some US currency in cash and US gov't bonds, and US stocks as well?

If it was me, I would be tempted to do a U.S. PP except for the cash, which I would hold in short term Canadian government debt.

I would think about it a lot before I did anything, though.  Canada is sort of a hard case. 

[Jimbo]

I would NOT presume the asset allocation using Cdn equivalents will do the same thing for a Cdn as for an American.
The reason it works for Americans is because
(eg) gold is priced in US dollars.  If the rise in value is 100% due to currency moves then the Canadian sees zero profit.
(eg) panics in stocks give rise to repatriation of US dollars.  This has no effect on Americans, but has big impact on Cdns facing FX changes.
(eg) panics in debt markets give rise to US treasuries increasing, not Cdn treasuries (to most extents)
The dynamics of the system do not work for Canadians.

[KevinW]

I would NOT presume the asset allocation using Cdn equivalents will do the same thing for a Cdn as for an American.
The reason it works for Americans is because
...

I think a non-US investor ought to ask these kinds of questions and make sure they're comfortable with the answers before proceeding.  That said, I quibble with

(eg) gold is priced in US dollars.  If the rise in value is 100% due to currency moves then the Canadian sees zero profit.

Gold is bought and sold in all major currencies including CAD.  At any given time there is a price of gold relative to CAD, it's just not as widely known as the price in USD, especially in USA.

And,

The dynamics of the system do not work for Canadians.

Browne's advice to non-US investors was to build a local PP out of local components, and I'm sure he gave the issue some thought before making that recommendation.  I'm skeptical his analysis could be so wrong given how well the rest of his PP plan works.

Canada is sort of a hard case. 

What makes Canada a special case?  I'm not being contrary, rather I'm curious why you think Canada would work fundamentally differently than some of the other developed economies we've discussed here (UK, Japan, Germany).

[AdamA]

I would NOT presume the asset allocation using Cdn equivalents will do the same thing for a Cdn as for an American.

To me, this turns out to be largely a guess.

It's true that US investors are fortunate in that we hold our bonds in the world's reserve currency.

However, keep the big picture in mind.  The idea is diversification through asset classes that lack strong correlation and that respond a specific way to the four economic classes.  

You're going to be doing a lot better than most people simply because you hold gold.  Even better because you hold government bonds.

My gut would be to use a purely Canadian 25% x 4, and then maybe take a small percentage and use a 90/10% PRPFX/EDV or TLT combo, just in case...

[MediumTex]

Canada is sort of a hard case. 

What makes Canada a special case?  I'm not being contrary, rather I'm curious why you think Canada would work fundamentally differently than some of the other developed economies we've discussed here (UK, Japan, Germany).

Because it is tied so tightly to the U.S., but its bond market doesn't provide the kind of protection that the U.S. bond market does.

I'm just saying it would be a hard decision for me, primarily because of the long term treasury issue.  I don't think that Canadian long term debt would provide the protection in deflationary and flight to safety scenarios that the U.S. treasury market would, though I might be wrong about that.

I think that the PP would clearly be fine for use with home country components for someone in the U.K., Japan, Germany or the U.S.

When you start talking about Italy, Brazil, and South Korea (just to name a few) I think that the investor needs to do a little more thinking (though I don't know what the right answer is).  I am aware that Harry Browne said to use home country components, but each investor still needs to satisfy himself of the soundness of his approach.

[metta2006]

Clive, thanks for the excell sheet. What is nominal vs real gain? Real return is minus inflation?
Which numbers am I supposed to compare with US PP's return?

[D1984]

Clive,

Thanks for the Excel spreadsheet but I noticed something about the Canadian LTT performance in 2008. The Excel file you provided a link to has LTT's providing a 2.7% total return in 2008. Bloomberg indicates that the Canadian Federal government 30-year bond yield was around 4.10% in the beginning of January 2008 and in the low 3.40% range (3.42% or 3.43% IIRC) at the end of December 2008. The Bank of Canada's own website that lets you search yields up to 10 years prior to the current date also has a similar yield decline shown for Government of Canada long-term bonds in 2008. Is the "total return" in USD (if CAD declined against USD in 2008 then that possibly could negate most of the falling-yield  price gains of a CAD-denominated bond when converted to USD)? If the total return for Canadian LTTs for 2008 was in CAD I would expect it to be 10%+ at least and probably more than that.

[Indices]

The Canadian PP seems to do better than the US PP (higher CAGR). Not that past performance means anything. But Clive's results show that it would work there even without exposure to US stocks. I've been thinking about immigrating to Canada as well...

[D1984]

Clive,

I'm not sure XLB is a reasonable proxy for Canadian LTTs. When I went to the iShares website for Canada, looked up this ETF, and clicked on the "holdings" section I was rather unpleasantly surprised. You can see its holdings on an end-of-month basis for every month from November 2006 to the present. As far as I can tell, at no time in 2008 did this fund have any more than 20% of its holdings in long-term Government of Canada bonds (I define "long-term" as 20 years or more since Harry Browne said to buy 30-year bonds and sell them when they reach 20 years until maturity). Even if you include the "almost long-term" (i.e. slightly under 20 years left until maturity as of 2008) bonds like the 8% due in June 2027 and the 9% due in June 2025, the percent of bonds that are issued by the Government of Canada doesn't ever exceed 25 or 26%

What is in XLB, then? Well, a bunch of long-term bonds from provincial, municipal, agency, infrastructure, hydro, pipeline, energy, utility, industrial, telecom, and for good measure (since this is 2008 we're talking about) banking and financial issuers. If this portfolio actually had a capital value decline of -4.75% I think I can understand why.

Is it not possible for Canadians to own long-term Government of Canada federal bonds directly ala TreasuryDirect here in the States...or doesn't someone like TD or BMO at least offer a platform for individual Canadians to buy (relatively) small amounts of these bonds at a time (certain brokerages in the United States offer free or low-cost buying/selling of US Treasury securities as a "loss leader" )

[Indices]

BMO's Long term bond ETF:

http://www.etfs.bmo.com/bmo-etfs/glance?fundId=80004

[MBarber]

I am currently running a 4x25 Canadian PP (with the small tweaks of 2.5% silver and 5% International/US Stocks).

MediumTex got me thinking about the possibility of the Canadian LTT's not doing their part during a long term deflation.  The only real test we have is during 2008; however, during this time we also had a flight to safety (to USD), which may or may not occur during a deflation.  I would argue that in 2008 the US LTT gained mainly from the flight to safety and not from the fears of sustained deflation.  So in this case the "value" of the Canadian and US LTT stayed constant, while the "price" was influenced by mainly the increasing USD.  Of course gold will nicely compensate the Canadian PP for the decreasing CAD.  Below are the returns for 2008, for the US (CAD) I had to use a medium term US Bond priced in Canadian dollars.

2008               Stock ST LTT Gold  Return
Canada (CAD)    -33.0 8.6 2.7    28.2   2.0            (http://www.ndir.com/cgi-bin/downside_adv.cgi)
US (USD)       -37.0 6.6 22.5 4.9   1.9            (from Craig's returns)
US (CAD)          -22.6    27.1        28.2    14.9       (http://www.ndir.com/cgi-bin/downside_adv.cgi)

So, during a garden variety deflation I would assume that the Canadian and US LTT would perform similarly, while gold would adjust for any changes to the value of the currency.

I think this is what Clive has argued as well, but I just wanted to make sure my logic was sound.

Having said all that I am still leaning towards taking 5% from Long bonds and buying TLT, just to play it safe.

[metta2006]

Hi MBarber, thanks for your analysis. What is ST in your chart? Is it short term bonds? What else would you consider as cash? 

[MBarber]

Hey Metta,

You're right ST stands for Short Treasuries, or Short Term Bonds (anything between 1-5 years).

As for cash, with my PP i include my savings account with CIBC (30% of cash).  I then have 2 and 4 year Canadian Bonds, which i bought from iTrade.  iTrade charges $20 to buy and sell bonds, plus you have to purchase at least 50 bonds (~$5000) per transaction, but they have virtually no spread on the bond price.

[CA PP]

I would agree that XLB is not a perfect substitute to LTT for a CA PP. 
I feel the best option for a CA PP is direct ownership of LTT. 
The latest available is ISIN: CA135087ZS68  2045.12.01  3.5%

[MBarber]

I agree that it is better to directly own the Long Term Bonds, especially in Canada, since we don't have great options with mutual funds or ETF's.

ZFL is not bad, but has very low trading volume, although the spread is reasonable. It also has only $13 million under management, so if BMO ever fell on hard times it might be tempting for them to close this ETF...

XLB is not great either, but can be used as a place to hold money until you have enough to buy the long term bonds directly.

I started my PP back in April and my 30 year bonds are up 20%, while XLB is up only 10%, and ZFL is up 15%.

[metta2006]

Mbarber, itrade is a better place to buy bonds than CIBC for example? Thanks.

[MBarber]

Metta,

(Note: I don't work for Scotia iTrade, just a customer)
I have never purchased bonds directly from a bank, but I imagine they charge a decent spread on the price of the bond (ie, they sell the bond to you at $105/bond, when the real price is $103).  You can buy bonds from any Canadian Bank, here's a link to TD's info http://www.tdcanadatrust.com/products-s ... rcipcb.jsp

Scotia iTrade keeps the spread close to zero, but charge at least $20 per transaction, and require that you sell or purchase at least a face value of $5000. See the link for more info https://www.scotiaitrade.com/splash/fixed_income.shtml

I'm not aware of a Canadian version of the US Treasury Direct.

Also, if you need more info regarding Canadian investing I'd recommend the following site...they have far more experience than I do:

http://www.financialwebring.org/forum/   (Canadian version of Bogleheads)
http://www.shakesprimer.com/
www.Bylo.org

Just a warning, these guys will strongly dislike or not understand the PP so you may want to stay in the PP closet if you want them to help you.