Long-Term Bond Selection for an International Permanent Portfolio (EU Investor)

[Mayday_I]

Hi everyone,

I'm new to this forum but have been a long-time admirer of the PP. I've read Craig Rowlands book and find the PP's core idea incredibly elegant. I'm fascinated by the portfolio's simplicity and how the individual asset classes interact.

I'm based in Germany and have had a good portion (appr. 50%) of my savings invested in a PP for several years now. Diverging from the original concept, I have given the equity portion an international focus (MCW). This raises an interesting question for me: Which LT Bonds make the most sense in this context to optimally fulfill their role in an international PP?

I am limited to the following UCITS ETFs:

- An ETF with diversified EU bonds (LU1686832194, approx. 20-year duration). This offers the highest "leverage".

- An ETF on German government bonds (DE000ETFL219, approx. 16-year duration). This Option ist probably closest to the original thought of the PP. On top, it is the only AAA-rated Option.

- The classic Browne approach: A US long-term bond ETF (IE00BFM6TC58, approx. 16-year duration). These have the highest interest rate level and thus the most potential for future rate drops, and they serve as the traditional safe haven.

As far as I kbow, there are noch truly international LT-bond ETFs available in Germany. Therefore, I'm currently using the EU ETF with the longest duration (LU1686832194), but given my PP's international focus and the resulting overweight of US stocks in the equity segment, I'm leaning toward switching to US LT bonds.

I'm even considering using the unhedged Version of the US LT Bond ETF. While this introduces additional currency risk, the US Dollar somewhat tends to appreciate during crises—at least for now. For an EU-based investor, this could potentially amplify the dampening effect of the long-term bonds during turbulent times.

I'd be interested in your thoughts here, especially in the context of rising political uncertainty and the US's escalating national debt.

What are your thoughts on using (unhedged) US LT Bonds vs. the higher the EU bonds in this specific international context?

Thanks,
Mayday

[dualstow]

Bump. I know I should bump it on a weekday, but…Bump.

You’ve probably already seen Grinch’s thread.
viewtopic.php?t=12867&hilit=Grinch

[whatchamacallit]

Any insurance coverage for deposits in banks?

Rates are not worth long bonds in USA


Something like this might be better?


https://www.how-to-germany.com/bank-accounts/savings/

Just do three assets instead of four?

Stocks, gold, and fiat?

[Mayday_I]

@dualstow: Thanks for the bump, much appreciated! I already checked out the mentioned thread. Very interesting and great to see that I'm not the first non-US investor with a Permanent Portfolio (PP) in this forum!

@whatchamacallit: Yes, up to €100k in cash per bank is covered by the state deposit guarantee, so that would definitely be an option.

I have also considered removing the Long-Term Bonds (LT) in this context. However, LTs fulfil a specific role in the PP – beyond fixed income. Removing LTs from the portfolio means no longer being hedged against the specific scenario (deflation) for which they are intended.

Alternatively, I have been thinking about replacing the LT and Cash components with a 50% allocation to global government bonds (7–10 year maturity) – a suitable UCITS solution exists. Although this would eliminate the upside potential from rebalancing the asset classes, and the cash buffer for times of crisis would no longer be fully available. I am unsure whether these disadvantages are offset by the benefits of global diversification.

[Hal]

Alternatively, I have been thinking about replacing the LT and Cash components with a 50% allocation to global government bonds (7–10 year maturity) – a suitable UCITS solution exists.

I do similar in Australia. Use a 30/70 Vanguard Share/Bond ETF called VDCO. So the total portfolio is 25%Gold 75%VDCO. https://www.morningstar.com/etfs/xasx/vdco/portfolio

One thing to be aware of with the Cash Bank Failure Guarantee. We have Bail In legislation here. If the Bank is failing, funds are bailed in hence the Bank is saved and the Guarantee is not activated. Sneaky...

Hope your research finds something viable.

[Mayday_I]

Hi Hal,

interesting – personally, I'm a big fan of the KISS principle! I'm convinced that the biggest threat to returns is one's own behavior during difficult market phases. In my view, the main weakness of the Permanent Portfolio is the discipline of the investor to rebalance into underperforming assets consistently and unemotionally. When I read the posts in this forum about LTTs, I quickly realize that I'm not alone in facing this challenge.

If I were to set up the PP from scratch today, I would structure it similarly to your idea. In Europe, Vanguard recently launched a comparable product – although with an 80/20 or 60/40 allocation. One minor drawback is that the bond portion includes corporate bonds. In practice, however, this should only result in a few percentage points difference in maximum drawdown. Since I pay 25% tax on capital gains, switching to the Vanguard product no longer makes financial sense for me. One major advantage, though, is that mixed funds are treated favorably under German tax law – which would actually give me a small tax benefit in the low triple-digit range per year.

What has always left a bit of a bitter taste for me with mixed funds is the fact that, in the withdrawal phase, you have to sell the entire product – including the asset class that might be underperforming at the time. Even though this probably isn't a dealbreaker and the advantages clearly outweigh it, I've always found that mentally challenging. Does that not bother you?

Cheers,
Mayday

[frugal]

Hello

i think you should stick to EU-PP or US-PP first...



Why don't you follow the book?

Regards

[Hal]

Since I pay 25% tax on capital gains, switching to the Vanguard product no longer makes financial sense for me. One major advantage, though, is that mixed funds are treated favorably under German tax law – which would actually give me a small tax benefit in the low triple-digit range per year.

What has always left a bit of a bitter taste for me with mixed funds is the fact that, in the withdrawal phase, you have to sell the entire product – including the asset class that might be underperforming at the time. Even though this probably isn't a dealbreaker and the advantages clearly outweigh it, I've always found that mentally challenging. Does that not bother you?

Hi Mayday,

Since the Australian economy is commodity based and only about 3% of the Worlds GDP, international diversification is preferable. So personally I value simplicity in managing a broadly diversified portfolio over selling down a mixed fund, which may involve sale of some components at a loss. The following link provides details on the fund holdings -> https://www.morningstar.com/etfs/xasx/vdco/portfolio

With a 25% tax on capital gains, is it possible to put new contributions of your existing ETF's into a self managed retirement fund, and use that tax sheltered space to rebalance your entire permanent portfolio more tax efficiently?

Edit: This link may be useful -> https://www.vanguard.com.au/personal/le ... -give-edge