Hello all.
I am a silent reader for the most part. I really want to thank all for all the great posts and replies.
I remember reading that one of the strengths of the PP is that it never had a losing 3 year (rolling) track record. Should this apply to a non US PP?
It just recently occurred to me that the Canadian PP is approaching a zero-return 3-year rolling record. Since Jan 2011 (total 32 months), the return has been almost zero. I am using ZFS, ZFL, XIC and CGL on the TSX.
Thanks
Canadian PP 3-year rolling return
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Re: Canadian PP 3-year rolling return
In theory, it should apply to a non-U.S. PP, but in practice there are a zillion things that could lead to a different result.
I'm assuming that Canada's stock market is more natural resource-oriented and that whole sector has lagged in recent years.
The Canadian dollar has also been pretty strong, which isn't great for the PP.
Are you using a Canadian 30 year bond fund? I don't know anything about the Canadian bond market.
In fact, I don't know much of anything about Canada.
This is the only image that pops into my head when I think of Canada:
I'm assuming that Canada's stock market is more natural resource-oriented and that whole sector has lagged in recent years.
The Canadian dollar has also been pretty strong, which isn't great for the PP.
Are you using a Canadian 30 year bond fund? I don't know anything about the Canadian bond market.
In fact, I don't know much of anything about Canada.
This is the only image that pops into my head when I think of Canada:
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Ad Orientem
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Re: Canadian PP 3-year rolling return
Hi Jay and welcome to the forum. Non-US PPs are a bit tricky because our (US) stock market and economy have been so hugely dominant in the world. By and large if you are attempting to construct a Permanent Portfolio for another country you need to take that into consideration. One of the standard recommendations is to use a global stock market index fund / ETF vice one exclusively in your own country's stocks. In some cases you may need to be even more diversified. What is the duration on your long bond fund? If it's less than 20 years you may again need to make some adjustments.jay wrote: Hello all.
I am a silent reader for the most part. I really want to thank all for all the great posts and replies.
I remember reading that one of the strengths of the PP is that it never had a losing 3 year (rolling) track record. Should this apply to a non US PP?
It just recently occurred to me that the Canadian PP is approaching a zero-return 3-year rolling record. Since Jan 2011 (total 32 months), the return has been almost zero. I am using ZFS, ZFL, XIC and CGL on the TSX.
Thanks
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Re: Canadian PP 3-year rolling return
thanks for your replies.
Tex: LOL.
For the long bong, I am using an ETF by the bank of Montreal, ZFL. Its weighted average maturity is ~22 years and duration 14 years. I think it is fairly comparable to TLT whose weighted maturity is ~27 and effective duration is ~16 years. I suppose I should look into buying the Canada 2045 bond, but last I checked, its ask/bid spread was disgusting. I use Royal Bank DI.
For the equity portion, ya, the Canadian equity market is completely not diversified. I am actually considering using a different index (like RAFI) or building my own equal weighted index using ETFs.
Tex: LOL.
For the long bong, I am using an ETF by the bank of Montreal, ZFL. Its weighted average maturity is ~22 years and duration 14 years. I think it is fairly comparable to TLT whose weighted maturity is ~27 and effective duration is ~16 years. I suppose I should look into buying the Canada 2045 bond, but last I checked, its ask/bid spread was disgusting. I use Royal Bank DI.
For the equity portion, ya, the Canadian equity market is completely not diversified. I am actually considering using a different index (like RAFI) or building my own equal weighted index using ETFs.
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Ad Orientem
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Re: Canadian PP 3-year rolling return
I didn't know that was legal in Canada. But I'd probably call that VP material.For the long bong...
For stocks, I'd just keep it simple and use VT or a Canadian equivalent. But if you want to keep an all Canadian index fund then I would limit that to maybe half of the equities (i.e. 12.5% of the total PP). And then use a foreign index fund for the rest.
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Re: Canadian PP 3-year rolling return
As a fellow Canadian I thought I would share my thoughts. I agree with Ad Orientem regarding the stock allocation as I split my stock allocation into 50% Canadian 50% World.
My theoretical Canadian PP is comprised of the following:
12.5% CRQ - Canadian Fundamental Index
12.5% XWD - World Index (comprised of 54% IVV, 41% EFA, 4% EWC)
25% ZFL - Canadian Long Term Federal Bond
25% CLF - Canadian 1-5 year Federal Bond
25% CGL.C - Gold Bullion Fund (unhedged)
According to www.stockcharts.com this portfolio would've had an annualized return of around 5% over the past three years (whereas it has ZFS, ZFL, XIC, CGL coming in at 3.6%). A lot of this comes from XWD which performed very well over the period. Also CRQ which follows the RAFI fundamental index performed about 1.5% better annualized than XIC. (Note: for backtesting I used IGT as the gold component since CGL.C wasn't available then, they are essentially the same)
I say theoretical because I am actually employing a 33/33/33 approach (no CLF) given that I am at the start of my investing life and my total allocation is under $30K and I find that I am roughly saving the cash allocation through paycheques.
Jay I had a few questions and thoughts regarding your portfolio.
1) Was there a specific reason for ZFS instead of CLF? CLF has outperformed ZFS by 1.69% over the last 3 years (which is not insubstantial considering it was 7.12 vs 5.43 according to www.stockcharts.com). I remember comparing ZFS to CLF and deciding that CLF was superior but can't recall the details off the top of my head. Something about the holdings I believe.
2) CRQ vs XIC. I find the evidence behind fundamental indexing compelling, and certainly in Canada CRQ has proved to be the better performer since its inception (outperforming XIC by 21% total in the past 5 years). While in the US PRF has consistently, albeit marginally, outperformed VTI.
3) Do you hold CGL or CGL.C? I hold the unhedged version as there is a lot of evidence showing that hedged index funds like CGL perform worse over time and do not, in fact, reduce volatility (see: http://canadiancouchpotato.com/2010/05/ ... or-part-3/)
Hope that provides some food for thought, but generally agree that we can not expect a Canadian PP to behave exactly like a US one would. That being said I recall seeing backtesting here on the site demonstrating that a Canadian PP would have performed similarly to a US PP over the past 30-40 years (in fact I think the CAGR was over 10%).
My theoretical Canadian PP is comprised of the following:
12.5% CRQ - Canadian Fundamental Index
12.5% XWD - World Index (comprised of 54% IVV, 41% EFA, 4% EWC)
25% ZFL - Canadian Long Term Federal Bond
25% CLF - Canadian 1-5 year Federal Bond
25% CGL.C - Gold Bullion Fund (unhedged)
According to www.stockcharts.com this portfolio would've had an annualized return of around 5% over the past three years (whereas it has ZFS, ZFL, XIC, CGL coming in at 3.6%). A lot of this comes from XWD which performed very well over the period. Also CRQ which follows the RAFI fundamental index performed about 1.5% better annualized than XIC. (Note: for backtesting I used IGT as the gold component since CGL.C wasn't available then, they are essentially the same)
I say theoretical because I am actually employing a 33/33/33 approach (no CLF) given that I am at the start of my investing life and my total allocation is under $30K and I find that I am roughly saving the cash allocation through paycheques.
Jay I had a few questions and thoughts regarding your portfolio.
1) Was there a specific reason for ZFS instead of CLF? CLF has outperformed ZFS by 1.69% over the last 3 years (which is not insubstantial considering it was 7.12 vs 5.43 according to www.stockcharts.com). I remember comparing ZFS to CLF and deciding that CLF was superior but can't recall the details off the top of my head. Something about the holdings I believe.
2) CRQ vs XIC. I find the evidence behind fundamental indexing compelling, and certainly in Canada CRQ has proved to be the better performer since its inception (outperforming XIC by 21% total in the past 5 years). While in the US PRF has consistently, albeit marginally, outperformed VTI.
3) Do you hold CGL or CGL.C? I hold the unhedged version as there is a lot of evidence showing that hedged index funds like CGL perform worse over time and do not, in fact, reduce volatility (see: http://canadiancouchpotato.com/2010/05/ ... or-part-3/)
Hope that provides some food for thought, but generally agree that we can not expect a Canadian PP to behave exactly like a US one would. That being said I recall seeing backtesting here on the site demonstrating that a Canadian PP would have performed similarly to a US PP over the past 30-40 years (in fact I think the CAGR was over 10%).
Re: Canadian PP 3-year rolling return
Thanks NewPP.
I think you are right about the last 36 months; I am also showing similar results when back-testing ZFS/ZFL/XIC/CGL. The point I was trying to make is that we are 'nearing' a zero-return for a rolling 3-year period. The 31-month period starting Jan 2011 shows a total return of 4.4% (including distributions). Annualized, this is roughly 1.5% per year. Note that am using the hedged version in the calculations above.
I also back-tested your theoretical portfolio and I get very similar results to yours. I like your approach, esp. using the RAFI index for Canadian equities.
To answer your questions:
1. ZFS vs. CLF: ZFS is all federal, hence safer, and is more suitable for a PP. CLF uses provincial bonds. It is understandable that CLF has beaten ZFS by 0.5% per year. Its effect on the portfolio over the last 3 years is next to nothing.
2. CRQ vs. XIC: I've been meaning to read more about the RAFI index, and you might be right. Canadianfinancialdiy.blogspot.ca provides a compelling argument. I am also considering the HEW ETF from Horizons, which uses the S&P/TSX 60 Equal Weight Index. It provides even better diversification towards the consumer and utilities sectors.
3. I actually hold CGL and never thought of the hedging part. Thanks for pointing it out. I have been thinking about switching to the central trust fund (GTU.UN), but now I am thinking I might just split my gold holdings between GTU.UN and CGL.C.
Thanks again.
1.
I think you are right about the last 36 months; I am also showing similar results when back-testing ZFS/ZFL/XIC/CGL. The point I was trying to make is that we are 'nearing' a zero-return for a rolling 3-year period. The 31-month period starting Jan 2011 shows a total return of 4.4% (including distributions). Annualized, this is roughly 1.5% per year. Note that am using the hedged version in the calculations above.
I also back-tested your theoretical portfolio and I get very similar results to yours. I like your approach, esp. using the RAFI index for Canadian equities.
To answer your questions:
1. ZFS vs. CLF: ZFS is all federal, hence safer, and is more suitable for a PP. CLF uses provincial bonds. It is understandable that CLF has beaten ZFS by 0.5% per year. Its effect on the portfolio over the last 3 years is next to nothing.
2. CRQ vs. XIC: I've been meaning to read more about the RAFI index, and you might be right. Canadianfinancialdiy.blogspot.ca provides a compelling argument. I am also considering the HEW ETF from Horizons, which uses the S&P/TSX 60 Equal Weight Index. It provides even better diversification towards the consumer and utilities sectors.
3. I actually hold CGL and never thought of the hedging part. Thanks for pointing it out. I have been thinking about switching to the central trust fund (GTU.UN), but now I am thinking I might just split my gold holdings between GTU.UN and CGL.C.
Thanks again.
1.
Re: Canadian PP 3-year rolling return
Glad I could help in a small way. I think it's always useful when the Canadians on this board share their experiences (Gossi is another who has helped my thinking).
Interesting about ZFS re: all federal. It's somewhat of an useful thought experiment because, presumably, Ontario, BC or any province would raise taxes before defaulting, but they don't have the federal government's ability to print money so, as you said, ZFS would be the HB choice (although personally I'd be less worried about Canadian provincial debt than American state debt). You are right though that the difference in the overall picture is negligible. I am using Scotiaitrade right now for the Commission free ETFs and CLF is one of them but ZFS is not. However next year I'll be switching over to Questrade which has introduced commission free purchases on all ETFs (but not sales). Since I plan to do a lot of ETF buying and not a lot of selling Questrade seems the best option.
Regarding fundamental indexing I did a lot of reading before investing in it. In fact my first investment was a 100% stock allocation of 40% Canadian, 30% US, 20% International, and 10% Emerging Markets. Given that I started the portfolio in January 2009 it did very well for the 2 years I kept it. I switched to the PP because I will likely be buying a home in the next 5-10 years and realized that while, as a young guy, the 100% stock would likely get the best returns over the long term (with the caveat of switching into something like the PP over time), I would be in trouble if another 2008 happened when I wanted to put a downpayment on a house.
So I switched to the PP and have been generally happy with the performance. I still track (using January 2011 as a start point) my old Fundamental Index Portfolio. As of today the 25x4 is up 9.6% since January 2011, while the Fundamental is up 15.9% (not annualized). However almost all of the Fundamental gains have been made in 2013 and between 2011 and 2013 it was flat with most canyons as opposed to peaks. So if you had asked me in December 2012 I would have been even more enthusiastic about my decision to switch over to the PP (I'm still happy with it of course). In contrast the 25x4 had a nice upward trajectory only dropping recently due to the plunge in gold (It was up 14% as of March). Taking out CLF the 33/33/33 portfolio is up 10.4%.
One thing I am considering, although I'm weighing whether the marginal potential gains are worth the additional effort is replacing XWD with 50% CLU.C and 50% CIE (US and International Fundamental Indexes). Although given that this only makes up 12.5% (or 17%) of the total portfolio it makes a very small difference over the short term.
On the topic of the Gold plunge I think that hasn't to be taken into account when you're looking at the 3 year returns. If you had posted at the end of May for example the situation would have been very different. So while I know that the HBPP is supposed to be a portfolio for all times, I do remind myself that Craig and MediumTex and others caution that sometimes it takes time to let things work themselves out.
I hope and trust you're still comfortable and confident with your CA PP.
Interesting about ZFS re: all federal. It's somewhat of an useful thought experiment because, presumably, Ontario, BC or any province would raise taxes before defaulting, but they don't have the federal government's ability to print money so, as you said, ZFS would be the HB choice (although personally I'd be less worried about Canadian provincial debt than American state debt). You are right though that the difference in the overall picture is negligible. I am using Scotiaitrade right now for the Commission free ETFs and CLF is one of them but ZFS is not. However next year I'll be switching over to Questrade which has introduced commission free purchases on all ETFs (but not sales). Since I plan to do a lot of ETF buying and not a lot of selling Questrade seems the best option.
Regarding fundamental indexing I did a lot of reading before investing in it. In fact my first investment was a 100% stock allocation of 40% Canadian, 30% US, 20% International, and 10% Emerging Markets. Given that I started the portfolio in January 2009 it did very well for the 2 years I kept it. I switched to the PP because I will likely be buying a home in the next 5-10 years and realized that while, as a young guy, the 100% stock would likely get the best returns over the long term (with the caveat of switching into something like the PP over time), I would be in trouble if another 2008 happened when I wanted to put a downpayment on a house.
So I switched to the PP and have been generally happy with the performance. I still track (using January 2011 as a start point) my old Fundamental Index Portfolio. As of today the 25x4 is up 9.6% since January 2011, while the Fundamental is up 15.9% (not annualized). However almost all of the Fundamental gains have been made in 2013 and between 2011 and 2013 it was flat with most canyons as opposed to peaks. So if you had asked me in December 2012 I would have been even more enthusiastic about my decision to switch over to the PP (I'm still happy with it of course). In contrast the 25x4 had a nice upward trajectory only dropping recently due to the plunge in gold (It was up 14% as of March). Taking out CLF the 33/33/33 portfolio is up 10.4%.
One thing I am considering, although I'm weighing whether the marginal potential gains are worth the additional effort is replacing XWD with 50% CLU.C and 50% CIE (US and International Fundamental Indexes). Although given that this only makes up 12.5% (or 17%) of the total portfolio it makes a very small difference over the short term.
On the topic of the Gold plunge I think that hasn't to be taken into account when you're looking at the 3 year returns. If you had posted at the end of May for example the situation would have been very different. So while I know that the HBPP is supposed to be a portfolio for all times, I do remind myself that Craig and MediumTex and others caution that sometimes it takes time to let things work themselves out.
I hope and trust you're still comfortable and confident with your CA PP.
Re: Canadian PP 3-year rolling return
Did your backtest include rebalancing? If the portfolio hit a rebalancing band during the 3 year period, returns may well be higher.
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Re: Canadian PP 3-year rolling return
Unfortunately I'm not savvy enough with Excel and whatnought to incorporate rebalancing. I just plugged the ETFs into stockcharts.com and crunched the numbers myself.
But looking at August 2011 it seems like gold might have hit a rebalancing band there as it was up 45% from just May 2010 (ZFL was only created in May 2010 and there are no appropriate other federal long bonds available, so that's the earliest you can backtest a true ETF version of a Canadian HB PP).
Even with the recent gold drop I wasn't even close to a rebalance band in my 33/33/33 portfolio.
But looking at August 2011 it seems like gold might have hit a rebalancing band there as it was up 45% from just May 2010 (ZFL was only created in May 2010 and there are no appropriate other federal long bonds available, so that's the earliest you can backtest a true ETF version of a Canadian HB PP).
Even with the recent gold drop I wasn't even close to a rebalance band in my 33/33/33 portfolio.
Re: Canadian PP 3-year rolling return
sophie,
using a pure ETF Canadian PP ZFS/ZFL/XIC/IGT (I am now using IGT as it goes back further than CGL.C), and if you start exactly 36 months ago, i.e. on 23/08/2010, we did not hit a 15/35 rebalancing band yet. Total return is 10.8%, annualized at 3.5%
Rebalancing Results:
using a pure ETF Canadian PP ZFS/ZFL/XIC/IGT (I am now using IGT as it goes back further than CGL.C), and if you start exactly 36 months ago, i.e. on 23/08/2010, we did not hit a 15/35 rebalancing band yet. Total return is 10.8%, annualized at 3.5%
Rebalancing Results:
- 20/30 triggered two rebalancing points, one in Aug 2011 and another in April this year. Total return is 12.8%, annualized at 4.1%.
Rebalancing quarterly shows a total return of 12.4%, annualized at 4.0%
Rebalancing yearly shows a total return of 12.1%, annualized at 3.9%.
Re: Canadian PP 3-year rolling return
Those are interesting results Jay as most of what I have read on this forum indicates that waiting for the rebalancing bands normally leads to higher gains due to momentum effects. Although 3 years is a relatively small sample size.
Re: Canadian PP 3-year rolling return
I like the PP in principle but have adjusted the portfolio to accommodate some weaknesses that I see without deviating too far from its core values.
I have stocks/bonds/gold/cash in the ratio of 30/30/30/10 since I have a long time horizon (I'm 30 - will move to more cash as I get closer to retirement)
Stocks are tsx/S&P/emerging markets in the ratio of 33/33/33 since canada is far too weighted to resources, financials. S&P exposes me to tech and mature businesses with good market position and global growth. Emerging markets benefits from growing manufacturing, growing population and improving standard of living on a long term horizon.
Bonds are LTT/xbb/corp high yield in the ratio of 33/33/33 since I feel gains on LTT are incremental at best with big downside risk but have a role to play. Xbb is total bond universe with some long, some short but average 10year. Corporate bonds adds to the yield and allows for some global diversification.
Gold is 100pct physical for no counter party risk and prevent paper gold risks.
Cash is self explanatory - savings acct - tbills yield to low to justify locking in at this point.
I have stocks/bonds/gold/cash in the ratio of 30/30/30/10 since I have a long time horizon (I'm 30 - will move to more cash as I get closer to retirement)
Stocks are tsx/S&P/emerging markets in the ratio of 33/33/33 since canada is far too weighted to resources, financials. S&P exposes me to tech and mature businesses with good market position and global growth. Emerging markets benefits from growing manufacturing, growing population and improving standard of living on a long term horizon.
Bonds are LTT/xbb/corp high yield in the ratio of 33/33/33 since I feel gains on LTT are incremental at best with big downside risk but have a role to play. Xbb is total bond universe with some long, some short but average 10year. Corporate bonds adds to the yield and allows for some global diversification.
Gold is 100pct physical for no counter party risk and prevent paper gold risks.
Cash is self explanatory - savings acct - tbills yield to low to justify locking in at this point.