International PP / theory

[witchcraft]

Hey !

First time post - PP/GB investment noob with a (maybe convoluted) "international" PP question.

I understand the concepts of the PP within the US economy and for US residents but I just can't wrap my head around the "internationalization" theory/recommendations - hopefully someone will be able to point me to the right resources...

For international investors, Craig Rowland recommends in his PP book a total world equities ETF (the currency of which can be USD) and bonds/treasuries in the currency of the country of residence. Yet:

• while this recommendation seems to be accepted by most people, there are dissenting opinions (but then there's not much justification).
• it's aimed at people who have a long-term country of residency, not "itinerant" people.
• given the assumption that the PP was originally devised for the US economy with its asset classes' volatilities "working" alongside, having stocks covering a given region (eg. the whole world) while limiting treasuries/bonds to a smaller region (eg. Germany) doesn't seem to be in accordance with the PP's assumption, except if said bonds are highly correlated to the stock's region (in that case, "total world"). But if I'm not mistaken, comparing charts like BNDW or US 10Y vs Germany 10Y shows it's definitely not the case (also, given the US' overweight, comparing US and DE 10Y confirms this - eg. [1] or [2])
• a better fit for the PP's theory would thus seem to be to have a total world bonds ETF instead (that approach is sometimes advocated).
• Craig's recommendation seemed to be given to avoid currency fluctuation/risk; however the currency risk of having bonds and stocks in different currencies is unclear (to me), vs. the currency risk of having both bonds and stocks in a same currency (eg. USD) different than the current country of residence's currency.
• wouldn't separate portfolios, each targeting a single economy and each held in the target economy's currency, make more sense ? Ie. if following each country's % of global stocks, 40% of the total assets on a US portfolio containing only US stocks/treasuries/cash held in USD, 8% of a "Japan" portfolio held in JPY, etc. (gold would be global). Of course this would be impractical to implement for all countries but the point here is theoretical. (One could also pick the first n world economies and build n portfolios).

Side notes:

• I've spent a significant amount of time combing the forum for "international PP" posts (up to year 2017) ; there were a few interesting posts but none really addressed my question (and/or there were only fragments of info here and there). I can post a list of relevant posts I found in case someone's interested.
• I also began reading boglehead forum posts but it's really all over the place (with many "I think", "If I were you", "I don't like gold", ...). There are probably revelant posts though, just couldn't find them.
• I posted a similar question on Tyler's new discord forum but it didn't attract much interest.
• I know I could backtest scenarios (and I've done so) but again I'm more interested in the theory.
• the root of my question/post comes down to my personal status, which is a a bit exotic: Swiss national, living in SE-Asia (remote worker), with family/business ties to EU/Switzerland, considering relocation (not necessarily in Europe but I would still have some EU/CHF expenses). But at that stage I'm only interested in understanding the PP's theory so to avoid making a complex subject even more complex I'm ignoring any tax implication for now.

Hopefully I haven't bored you guys too much

Cheers !


[1] https://economic-research.bnpparibas.co ... 2021,40683
[2] https://www.investing.com/rates-bonds/de-10y-vs-us-10y

[Hal]

Good evening Witchcraft,

Congratulations on your first post. It's late here in Australia so I will be brief.

For my purposes I use Smithys GoldSmith portfolio (see footnote) and a retirement fund consisting of 2:1 International Fixed Interest (Hedged to AUD) to International Equities and 25% Gold outside of the fund
<snip>
Single asset class options
As a member you also have the ability to tailor your investments through single asset class options:

Australian Equities
Australian Equities Socially Responsible Investment (SRI)
International Equities
Property
Australian Fixed Interest
International Fixed Interest
Cash  
<snip>

Since the Bonds are hedged, that eliminates currency risk. It won't help of course if the AUD goes the way of the Zimbabwe dollar!
So basically you have an all world PP. I would suggest hedging your Bonds to whichever currency you use to pay your expenses.
The Aussie retirement fund uses VBND and VGS.

Limited options make for an easy choice

[yankees60]

[*]I posted a similar question on Tyler's new discord forum but it didn't attract much interest.

1. This has to be the most impressive, substantial first post by anyone here ever?

2. Where is Tyler new forum?

Thanks

[witchcraft]

1. This has to be the most impressive, substantial first post by anyone here ever?
2. Where is Tyler new forum?

Thanks mate. I always try to do some research before posting in any forum, I find it quite annoying when people just want answers and aren't ready to spend time beforehand...
Here's Tyler's article on creating his discord forum.

Congratulations on your first post. It's late here in Australia so I will be brief. [...]

Thanks ! I came across many of your posts, along with @Smith1776, @blue_ruin17, @yankees60, @europeanwizard, ...

The "My Permanent Portfolio Variant" post (from which I assume you replicated the 75% conservative fund / 25% gold?) was indeed one of the informative/detailed posts in my list.

In my case the issue is really that unlike you guys I'm not physically "bound" to a country so I have to find an acceptable (err, "least worst") solution to deal with the currency risk. FWIW those were the options I had initially considered:

• keep things simple, have the whole portfolio in USD (which could be with a "simple" allocation like yours, 25% gold and 75% conservative fund). Currency fluctuation between USD and where I live at any moment might be acceptable if expenses in the country of residence are kept low (it's usually the case as I have a very down-to-earth lifestyle and don't need to buy cars/property/...). However the US/USD has lost a bit of its luster those past years (IMHO), which adds another element of complexity. A full USD PP would also go against diversification (ie. "don't put all your eggs in the same basket").
• split the bonds allocation of the portfolio into various currencty, eg. USD, EUR, JPY?, CNY?, + potentially the currency of the country of residence (or a nearby country that is “stable”). That would allow to eg. draw cash from the "Euro account" if that's where I live by that time. But this adds complexity and relies on currencies not diverging much in the long-term (the theoretical implication of the latter isn’t clear to me in respect to how other assets classes in the portfolio would behave if there was a large swing - eg. between EUR and USD).
• or, own a global bond ETF (with the general advice that it's hedged - eg. Vanguard or Boglehead wiki); but that means choosing a single currency - so back to square one.

Those in turn lead me to try to understand what would be an optimal PP (or GB *) for a "countryless", itinerant person (a bit like me) but the more I research that topic, the more it's becoming intractable (I'm probably overthinking it but I'm really interested in understanding the theory).

(*: I'm currently leaning towards Tyler's golden portfolio although I've become a bit of a permabear because of bad investment decisions (a waking call which made me research portfolio theory / find the PP and GB portfolio); given the state of our world today I'm not sure we'll end up with more prosperity like it's been the case until now so I'm still unsure what of the PP or GB portfolio best suits me; but that's another topic altogether!).

By the way, here's a redacted list of posts I found (without order of importance), along with quotes I found interesting - it might save other people quite a bit of time It also shows diverging opinion/advice... (sorry, the formatting is quite compact, I couldn't find a way to make it look better).

• Gave up on "pure" Permanent Portfolio in EU (@europeanwizard ditching the bonds portion of the PP):
  quote: "it would be good to use US Treasuries no matter where in the world one resides"
• What would happen to a Russian PP ?.
  quote: "Will repeat myself, but some local HBPP and GB implementations don't have any resemblance to their USA/USD counterparties, the same concepts cannot be just applied - I mean the fact you can live on Earth, does not mean you can live on Mars, even though both are planets in the Solar system"
• A Chinese PP implementation:.
  Quote (by OP): "If an investor were a believer in the Permanent Portfolio, why not diversify by having one based on each country/government/economy?".
  Unfortunately, not much info in the post.
• PP for smaller economies: hedged, targetting long-term residency.
• USD exposure in the PP
  quote: "As a US citizen I'm thinking of potentially hedging into other currencies. I am having serious doubts about the viability of my country right now and with that it's currency"
• Concerns Assets Are More Correlated.
  quote 1: "My proposal to ameliorate these very legitimate concerns [correlated assets] has pretty much always been the same on this board: diversify by geography and by factors. [...] Hold Treasury bonds from many sovereigns"
  quote 2, going against this argument: "IMHO, this could be diworsefication instead of diversification" (the whole reply is worth reading).
• Global PP or UK PP?.
  Quote (OP): "Given the importance of the US economy on a global scale, gold would react as intended to any US monetary shock. Not so much, however, to a UK shock."
  Quote (in the single reply): "my modest opinion is that pure PP works for US only".
• Backtesting the PP in other economies (more about testing Tyler's charts than about theory).
• PP Europe (Germany)
  quote (OP): "Taking into account the fact that the EU as a whole is still in frail economic health and the situtation in certain EU countries could go t*ts up anytime, are there any options for EU investors on the bond/cash front?" (despite quite a few replies to the OP I didn't find much that helped me).
• European PP.
  quote (last reply in thread): "If it is possible I would try to do some research on gold vs. the Euro/Pound/old DMark and see how they historically performed. If historical performance reasonably matches what gold is supposed to do in a US portfolio then go with gold. In the US, gold tends to also be negatively correlated with equity bear markets and has high volatility, both are helpful when equities are doing poorly. All this assumes you want to stay true to the method and rationale of a PP..."
• Help Diversifying the PP for Global World.
  Quote (OP): "I wonder if a global PP is better than doing a US or any other country specific one". Quote (reply): "I have a regular vanilla PP that I rebalance within itself, and a VP with roughly half US stocks, and half international stocks".
• Swedish PP: had similar questions but in the end the OP didn't choose a PP.
• Starting EU PP, doubts about the bonds part
  quote: "Because of the peculiar relationship between USD and gold that is in the very core design of PP, I feel good only about US PP. For non-US people, I'd go with a Bogleheads portfolio"
  quote 2: "the gold and bond parts of the eurozone-PP don't offer the same protection as in a US-PP."
  quote 3: "It seems to me that a Europe-resident investor should invest primarily in Euros to avoid exchange-rate risk".
  Note: @europeanwizard eventually implemented something a bit different (see first link in the list).
• Is the Permanent Portfolio useful for itinerant people?: Both replies recommend USD.

[Hal]

Those in turn lead me to try to understand what would be an optimal PP (or GB *) for a "countryless", itinerant person (a bit like me) but the more I research that topic, the more it's becoming intractable (I'm probably overthinking it but I'm really interested in understanding the theory).

Well, 50% of an unhedged Global Bond Fund, 25% of a Global Share ETF and 25% Gold does pretty well regardless of the country you are in. Try heading over to Portfolio Charts, select the allocations as per the attachment, select Ulcer Index and vary the countries. You will find it is always in the top 1/4 of options.

You could then pay your expenses from the asset class that has grown the most, regardless of what country you are currently working in.

[witchcraft]

Well, 50% of an unhedged Global Bond Fund, 25% of a Global Share ETF and 25% Gold does pretty well regardless of the country you are in. Try heading over to Portfolio Charts, select the allocations as per the attachment, select Ulcer Index and vary the countries. You will find it is always in the top 1/4 of options.

You could then pay your expenses from the asset class that has grown the most, regardless of what country you are currently working in.

Thank you.

This allocation has a great ulcer index - but it's at the bottom of the table for almost all other metrics?

I've spent quite some time playing with the charts and backtesting ideas - they're great and addictive but in the end they're tools. Given my rookie level of understanding I'd really like to first grasp the theory/rationale behind an allocation, and then backtest it, rather than tweak the figures until I find acceptable results, and then try to understand why they "work" (obviously I'm not implying that's what you did! I'd like to be able to understand the theory - I'm stubborn ).

For instance someone wrote the following in one of the threads I've mentioned:

"do some research on gold vs. the Euro/Pound/old DMark and see how they historically performed. If historical performance reasonably matches what gold is supposed to do in a US portfolio then go with gold."

That's something on my-ever growing list that I need to research...

I'm well aware that in the end the "solution" to my problem might be very simple (eg. I could end up with your 25/75 allocation), and that I'm probably overthinking, but given the diverging opinions that I've quoted + recent bad investments that cost me a fortune, I really need to do that research so that I make an informed decision.

By the way Tyler pointed me at his SWR article, which I had overlooked. The article is enlightening, although depressing (in my case) as inflation + exchange rate could destroy an otherwise well-performing portfolio. Oh well.

[Hal]

This allocation has a great ulcer index - but it's at the bottom of the table for almost all other metrics?

I've spent quite some time playing with the charts and backtesting ideas - they're great and addictive but in the end they're tools. Given my rookie level of understanding I'd really like to first grasp the theory/rationale behind an allocation, and then backtest it, rather than tweak the figures until I find acceptable results, and then try to understand why they "work" (obviously I'm not implying that's what you did! I'd like to be able to understand the theory - I'm stubborn ).

Hi Witchcraft,

Think of the PP as a high yield savings account. It is most definitely not an allocation to get rich quick.

To start off, have a listen to "The Harry Browne Archives" https://www.youtube.com/channel/UCzu55W ... QIQ/videos.
Maybe some other forum members can suggest other good resources.

It took me close to a decade to really understand and be satisfied with the PP. And I still wonder about BelangP's approach! Take your time.

With the Developed World PP mentioned earlier, it is really just an approximation of multiple PP's by market cap. Exact, no, good-enough, I think so....

[witchcraft]

Think of the PP as a high yield savings account. It is most definitely not an allocation to get rich quick.

To start off, have a listen to "The Harry Browne Archives" https://www.youtube.com/channel/UCzu55W ... QIQ/videos.
Maybe some other forum members can suggest other good resources.

It took me close to a decade to really understand and be satisfied with the PP. And I still wonder about BelangP's approach! Take your time.

With the Developed World PP mentioned earlier, it is really just an approximation of multiple PP's by market cap. Exact, no, good-enough, I think so....

Thank you - I'll check those resources...

(the illustration was funny!).

[joypog]

Exact, no, good-enough, I think so....

Bravo! This encapsulates the Risk Parity style mentality. Get approximately close enough, then KISS.

Beyond that you're optimizing for a future that may not happen.

[seajay]

The PP is a collective engine containing multiple parts, stocks, bonds, gold, cash need to be matched/partnered. Mixing stocks from X, bonds from Y different countries that are going through different stages of economic cycles ... breaks that engine. Mismatched parts. Might run, but likely to be lumpy.

Where domestic stock/bond markets aren't as regulated/stable, not really viable, then I'd suggest shifting the bond risk over to the stock/gold side. Thirds each US stock, gold, domestic cash. Thirds each in US$, global currency (gold) and domestic currency. Three assets (stocks, commodity, bonds).

The broad concept still works, just less diluted. Generally any in-demand asset price will tend to broadly negate inflation, stock prices, gold, iron ...etc. But individually they tend to do so in a volatile manner. What the PP does is combine equal amounts of different assets, that helps smooth down the volatility as a collective set. The PP does so using four assets, the Golden Butterfly opts for five assets, the above uses just three assets.

The capitalist world used to pay for international trade in gold, from the early 1930's however that transitioned over to using the US dollar instead, to pay for grain, oil, whatever. Holding equal amounts of domestic currency, US$ fiat currency and global commodity currency (gold), avoids being heavily weighted into the worst case. As does holding stocks, commodity, bonds. With that risk reduction sorted the rest occurs naturally. If gold is down -50% one year, up +100% the next year then gold alone compounds to 0% whilst equalizing exposure yields a +25% positive bias, and where the other assets facilitate that equalization.

[witchcraft]

Where domestic stock/bond markets aren't as regulated/stable, not really viable, then I'd suggest shifting the bond risk over to the stock/gold side. Thirds each US stock, gold, domestic cash. Thirds each in US$, global currency (gold) and domestic currency. Three assets (stocks, commodity, bonds).

I'm a bit lost - if shifting the bond risk over to stock/gold, how are the 3 assets "stocks, commodity, bonds" ? Did you mean:
- 1/3 US (or world?) stocks in USD
- 1/3 gold
- 1/3 "domestic" cash in the form of commodities ? and/or short-term bonds ?

The PP is a collective engine containing multiple parts, stocks, bonds, gold, cash need to be matched/partnered. Mixing stocks from X, bonds from Y different countries that are going through different stages of economic cycles ... breaks that engine. Mismatched parts. Might run, but likely to be lumpy.

Get approximately close enough, then KISS.
Beyond that you're optimizing for a future that may not happen.

Well, I was pointed to this boglehead blog post, which shows that in general the "best" historical ratios are 80/20% world/domestic equities + 100% domestic bonds. For a non-US investor applying this finding to a PP means allocating assets in different economies, which as Seejay summed up above kind of goes against the PP's theory (which is also probably the reason why there are mixed - even opposite - opinions on that topic). So yes, mixing stuff works (probably because said economies are/were correlated), but it isn't optimal. A "lumpy" PP portfolio is probably better than a dumb 100% stocks portfolio but getting "close enough then KISS" is the problem (/threshold) I'm currently researching. I'll keep on digging the topic - maybe there are better alternatives than a "tweaked" PP for my situation.

(side note - the above might sound like I'm not taking your advice: that's not the case, I really appreciate you guys helping me; just trying to figure things out...)

[joypog]

Thanks for the link. It might be just be confirmation but I agree with the Bogleheads article’s sentiment that a global-with-home-tilt equities portion coupled with an all domestic bond portion is an ideal setup.

That said, if you look on Portfolio Visualizer you’ll see that into stocks are highly correlated to US stocks so the bigger question is what portions you devote to Bonds and Gold.