Permanent Portfolio for Canadians

[davidns]

I'm turning 18 in a few weeks and have a bit of money to invest. I've decided to use the permanent portfolio strategy. One issue I have is with the equities section. I'm Canadian and gold mining companies make up a significant portion of the TSX. Our equity markets did relatively well during the financial crisis because of our economy's heavy emphasis on natural resources. It seems imprudent to make the  equities section completely Canadian  because it would be "double-counting" my gold investment. I'm planning on dividing the equities section between Canadian, US, and International equities. Could anyone give me some suggestions as to what would be a good split?

[Gosso]

I'm turning 18 in a few weeks and have a bit of money to invest. I've decided to use the permanent portfolio strategy. One issue I have is with the equities section. I'm Canadian and gold mining companies make up a significant portion of the TSX. Our equity markets did relatively well during the financial crisis because of our economy's heavy emphasis on natural resources. It seems imprudent to make the  equities section completely Canadian  because it would be "double-counting" my gold investment. I'm planning on dividing the equities section between Canadian, US, and International equities. Could anyone give me some suggestions as to what would be a good split?

Welcome to the forum!  And congrats on deciding on the PermPort at a young age!

I understand what you're thinking since I used to think this as well.  But you need to realize that Gold Miners and Gold are not the same thing.  Have a look at this chart, Gold vs XGD vs TSX.  Gold Miners have costs to worry about as well, so during an inflationary event, both gold prices and costs will be increasing, meaning the stock price and profits will not match the increasing gold price.

The Canadian PermPort has worked during the gold bull market in the 70's and when gold tanked in the 80's and 90's.  That's good enough evidence for me.  See the post below and all the links at the bottom of that post for backtesting data of the Canadian PermPort.

http://gyroscopicinvesting.com/forum/ht ... 153#p30153

Let me know if this helps or not.

[davidns]

Hi Gosso, thanks for the advice. I think I will implement the "Canadian Permanent Portfolio" as suggested in the ink you provided.

[mapleleaf]

This is my first post to the forum, so please bear with me. I've been reading a lot on this site, and now it's time to take the plunge and start parceling out my investments. I'm aware there's a PP book coming out, but unfortunately not until October. I'm a Canadian as you can guess from the username.

Gosso, I've followed your Canadian Permanent Portfolio suggestions, and those look good. I've also seen christina and metta2006 report that their CA PP is flat or underwater so far, and definitely not tracking as well as the US PP.

So it looks like the Canadian PP has some unique challenges. You can see it even today with the S&P and Dow down about .5%, while the TSX XIC is down 1.3%. Gosso I saw your suggestion for a small percentage of international stock XWD and a small percentage of US long-term bond TLT.

My question is should I consider a small portion in a fund that tracks the US stock market? And if so, which fund? A hedged CAD fund or directly in a US ETF?

I appreciate any suggestions you can give.

[Gosso]

This is my first post to the forum, so please bear with me. I've been reading a lot on this site, and now it's time to take the plunge and start parceling out my investments. I'm aware there's a PP book coming out, but unfortunately not until October. I'm a Canadian as you can guess from the username.

Gosso, I've followed your Canadian Permanent Portfolio suggestions, and those look good. I've also seen christina and metta2006 report that their CA PP is flat or underwater so far, and definitely not tracking as well as the US PP.

So it looks like the Canadian PP has some unique challenges. You can see it even today with the S&P and Dow down about .5%, while the TSX XIC is down 1.3%. Gosso I saw your suggestion for a small percentage of international stock XWD and a small percentage of US long-term bond TLT.

Welcome to the forum!

First off, the CA PP and the US PP are somewhat different animals, so they will not exactly follow each other.  There are different dynamics affecting each economy.  But backtesting has shown that the CA PP generally produces similar results as the US PP over the period of a few years.

Check out this thread on the Canadian PP, it lays out the options, at least the way I see it.  Also the links at the bottom of that post contains lots of backtesting info.

The CA PP has been flat for about 9 months.  IMO, now is a good time to buy in, although it still may have further to fall.

My question is should I consider a small portion in a fund that tracks the US stock market? And if so, which fund? A hedged CAD fund or directly in a US ETF?

Do NOT buy a hedged CAD ETF.  The tracking error runs at approximately 0.80% a year, due to the inefficiencies of hedging a currency.  Plus currency fluctuations can add diversity and help reduce volatility.  If you have USD or are willing to pay the forex fees then you can buy US ETF's directly.  I prefer XWD since its not currency hedged, yet I can still use CAD to buy it.  At some point in the future I'll buy the US ETF's directly (lower MER) -- although I was hoping Vanguard Canada would offer something decent, but I think all they have are hedged ETF's 

Make sure you do your own research and understand what you're doing.

[mapleleaf]

Thank you for the feedback. I do my best to research the field, but there is so much to learn.

For example, I saw an analysis today that indicated that Canadian equities have been weak lately (compared to US) in the face of the European debt issues. The suggestion is that it is due to our large exposure to commodity-intensive areas, such as energy and materials. Other areas of the Canadian equity market have grown, namely consumer staples, utilities, and health care, but have gone unnoticed and are under-represented in most market-cap weighted indexes. So a fund that concentrates on non-commodity areas might be a good complement to a TSX index ETF. One suggested fund is ZLB. MER .35%.

What are your thoughts on a blend of XIC (15%), XWD (5%), and something like ZLB (5%) to balance out the CA stock quadrant?

[Gosso]

For example, I saw an analysis today that indicated that Canadian equities have been weak lately (compared to US) in the face of the European debt issues. The suggestion is that it is due to our large exposure to commodity-intensive areas, such as energy and materials. Other areas of the Canadian equity market have grown, namely consumer staples, utilities, and health care, but have gone unnoticed and are under-represented in most market-cap weighted indexes. So a fund that concentrates on non-commodity areas might be a good complement to a TSX index ETF. One suggested fund is ZLB. MER .35%.

What are your thoughts on a blend of XIC (15%), XWD (5%), and something like ZLB (5%) to balance out the CA stock quadrant?

The problem with ZLB is that it is low volatility.  That is the exact opposite of what you want for your equity, since this will need to drive the PP during times of prosperity.  Remember that the PP thrives on volatility in gold/stocks/LLT.

The purpose of XIC is to own the best representation of the Canadian economy.  It doesn't matter what is driving the economy, just as long as you own something that best captures prosperity.  So whether it is from technology companies during the 90's or energy/resource companies currently, it doesn't really matter.  I am sure that the energy/resource companies will crash at some point, the only problem is I don't know if that will be next week, next year, or after I'm dead.

Also realize that the CAD is tied to our economy.  If the economy tanks then so will the CAD, which increases the value of gold in CAD's.  This also increases the competitiveness of our exporters, and attracts US/foreign companies to Canada.

Having said that, I don't think you would hurt yourself too badly with 5% ZLB.  If it helps you sleep at night, then it might be worth the lower returns during prosperity.  Or simply throw it in your VP and keep the PP as pure as possible.

[mapleleaf]

Do you think XWD falls into that same category of diluting the Canadian stock quadrant? If ZLB is put into a VP, should XWD go there as well?

[Gosso]

Do you think XWD falls into that same category of diluting the Canadian stock quadrant?

No.  XWD holds a standard cap weighting of global stocks.  I think it nicely complements XIC since it has higher sector weightings for info tech, industry, consumer staples, and health care.  Although currency fluctuation will likely play a larger role in its valuation.

Keep in mind that the plain vanilla Canadian Permanent Portfolio is perfectly fine.  The addition of XWD (and TLT) is completely optional.

If ZLB is put into a VP, should XWD go there as well?

Completely up to the individual investor.  Some people stick to the simple version of the PP, some like to spice it up (or dull it down with ZLB ).

[christina]

The other thing about doing a plain vanilla Canadian PP  is that you have lower transaction fees, because you hold fewer ETFs.
Another thing to consider if you're just starting out: For bonds, I'm pretty sure you have to buy a minimum of 5K-worth. If you want to hold smaller amounts, you can use the ZLF ETF.

I'm doing a plain vanilla Canadian PP because it's just easier and it appears to perform well in backtests.

[Shadow]

FWIW,
I'm 12.5% XIC
      12.5% XWD
      25% IGT
      25% ZFL
      12.5% HISA
      12.5% CFL

I've split my equity portion and cash portion for more diversification, simple. I will rebalance in the New Year and will look to add some REIT exposure through ZRE as I don't get this part of the Cdn market through XIC. I feel very comfortable with this allocation and remember HB had no problem diversifying his holdings within the asset class. He used 3 funds for his equity exposure.
"Tear apart the package and you tear apart the safety" - Harry Browne

[mapleleaf]

Thank you all. I implemented the PP in a portion of my funds at the end of May and so far so good. Tracking consistently with a slight increase, although that was not the case for the first week. I got in just before gold started to rise, so I was lucky at this time. Soon I will stop looking every day. It's almost down to every other day.

I got some 2045 Govt of Canada Bonds, but I must say they're hard to understand as they go negative more often than not, even more so than ZFL.

Christina, did you mean ZFL not ZLF?

Shadow, tell us about CFL. Why did you pick that for the cash portion? When I look it up it says CERF INC, a company that does equipment rental and waste management.

[Greg]

I'm turning 18 in a few weeks and have a bit of money to invest. I've decided to use the permanent portfolio strategy. One issue I have is with the equities section. I'm Canadian and gold mining companies make up a significant portion of the TSX. Our equity markets did relatively well during the financial crisis because of our economy's heavy emphasis on natural resources. It seems imprudent to make the  equities section completely Canadian  because it would be "double-counting" my gold investment. I'm planning on dividing the equities section between Canadian, US, and International equities. Could anyone give me some suggestions as to what would be a good split?

Out of curiosity davidns, how did you hear about the PP? When I was your age (which makes me sound terribly old to say that) I just had all of my money in a Certificate of Deposit (Time Deposit) and thought stocks were for adults and slowly getting prepared to buy a sports car. Apparently you must have been much more mature than I was about my money at that age hah.