Gyroscopic Investing

Hello there. Just wanted to say what a great resource this blog is. Also, most of what I know about the permanent portfolio is what I've read of it on the boglehead forum (that famous 60 page plus thread!), but I have now just started reading the e-book version of Harry Browne's "Failsafe Investing."

I was interested if there are any Canadians here who have tried to compile a permanent portfolio?

Cash and Stocks aren't typically a problem. There are several options available for cash (t-bill money markets, GICs -canadian version of a CD, they are called "guaranteed interest certificates" here). For stocks, I've found several index funds that should fit the bill.

For gold, we can use various ETF's like GTU or GLD. However, they may introduce a currency risk that I don't quite understand.

The one problem I've come across is finding a convenient way to buy Long Term Canadian Treasuries. Anyone here know of a low expense fund that holds mostly long term Canadian Treasuries? There are a few funds that track the Canadian Dex Universe (a mix of maturities across corporate and government bonds) but none that I can see that hold mainly long-term treasuries.

Its starting to look like that the best bet for a Canadian may be to purchase the treasuries themselves rather than a fund...

I haven't quite decided if this is the type of portfolio I would like to amass, but I'm currently doing research to explore options.

Welcome to the forum!

I can't answer your Canadian specific questions, but I will say that if you can buy the bonds directly and bypass a fund that is the best choice.

As for gold and currency risk. 75% of the portfolio is mostly in the currency where you live (stocks, bonds and cash). The 25% gold is diversifying against your home country's currency for inflation protection.

craigr wrote: Welcome to the forum!

I can't answer your Canadian specific questions, but I will say that if you can buy the bonds directly and bypass a fund that is the best choice.

As for gold and currency risk. 75% of the portfolio is mostly in the currency where you live (stocks, bonds and cash). The 25% gold is diversifying against your home country's currency for inflation protection.

Ah! Thanks. I hadn't put that together in my head.

Now, if I understand this correctly, I would buy an ETF like GLD or GTU with my Canadian dollars and it doesn't really matter if the ETF is valued by the U.S. dollar? I'm kind of dense when it comes to this kind of thing...what would happen if the US dollar would rise in value over the CDN dollar and vice-versa? Would that have an affect on my holdings of GLD or GTU?

If possible, it would also be better to purchase physical gold rather than an ETF - one less piece of paper between you and the asset, as Harry Browne would say.  A bit in an ETF would be ok, but I would prefer to have most in physical form.

But your question, or least the one that comes to my mind, is an interesting one.  Since gold is viewed as the second most popular form of currency, after the US dollar, is it possible for Canada to suffer severe inflation while the US does not, and would gold be an effective hedge for a Canadian PPer in that scenario?  I am afraid I don't know the answer, but I am sure someone else here does.

Pkg Man wrote: If possible, it would also be better to purchase physical gold rather than an ETF - one less piece of paper between you and the asset, as Harry Browne would say.  A bit in an ETF would be ok, but I would prefer to have most in physical form.

But your question, or least the one that comes to my mind, is an interesting one.  Since gold is viewed as the second most popular form of currency, after the US dollar, is it possible for Canada to suffer severe inflation while the US does not, and would gold be an effective hedge for a Canadian PPer in that scenario?  I am afraid I don't know the answer, but I am sure someone else here does.

Yeah, in the scenario you describe I'm guessing that my best bet would be to have physical gold. I'm just not sure if I really want to do that. I'll have to think about this.

One alternative I was thinking of was splitting the inflation protection piece between our Real Return Bonds (TIPS in US) and an GLD type ETF. So, it would be like 25% cash, 25% stock, 25% ltt, 15% RRB and 10% GLD...

The currency exchange and commodity exchange are very efficient markets, so I would expect the currency risk on a foreign-denominated gold ETF to be negligible under normal circumstances.  If it were possible to profit by buying Canadian gold with currency A, selling the gold for currency B, and exchanging the B for A, then speculators will arbitrage that opportunity until the price spread disappears.  So in theory it shouldn't matter very much whether a gold ETF is denominated in your home currency.

That being said, foreign-denominated ETFs add one more moving part to the system and hence one more point of potential failure.  Gold is in the portfolio to protect you in case your native currency goes completely haywire.  If that happens then some of these theoretical "shoulds" may not hold.

Thanks KevinW. I'm starting to understand how simplicity (i.e., holding: physical gold, treasuries directly, and cash through term deposits) reduces the amount of instances where things can go wrong.

Gold is really going just going to float up in price if your local currency dives just as any commodity would. The commodity isn't changing, it's the purchasing power of the paper money that is.

As an extreme, in Iceland in 2008 they had a severe currency problem. Marc DeMesel looked at how a Permanent Portfolio would have worked in that country during that time. Here are his results:

http://europeanpermanentportfolio.blogs ... eland.html

25% Long Term Government bonds = 0%
25% Short-term government bonds = +12%
25% Stocks = -88%
25% Gold = +259%

Now in this case the bonds would have crashed as well, but the IMF moved in to save things. Otherwise, gold would have been the only thing in the portfolio that was providing any kind of protection.

Realize of course that the Permanent Portfolio is not magical and can't always erase 100% of any loss. But I'd say a person in Iceland would have had far better protection than one that was just stocks and bonds. The gold in this case diversified their home currency risk.

I see craigr answered the question on gold while I was searching.  Thanks craigr.

I consulted my copy of "The Best Laid Plans", which has a short section on modifications of the PP for non-Americans.  HB said there was no reason to alter the suggestions for gold.  But he did say you may want to consider splitting the stock market portion between your country and the US, depending on how well you can cover yourself with domestic stock investments.

Hi InvestNoob!

Welcome aboard. I'm a big fan of our great Neighbor to the North. Fantastic country for sure!!

I know you didn't specifically ask this, but I know one option for the Equity part of the PP in Canada that may work is EWC. At least it would work for us Yankees to the south

Happy investing!

-b

investnoob wrote: Thanks KevinW. I'm starting to understand how simplicity (i.e., holding: physical gold, treasuries directly, and cash through term deposits) reduces the amount of instances where things can go wrong.

Yeah.  I'm coming to realize that this bulletproofing is helpful in two ways.  First, there is the face-value benefit that you are protected against horror stories such as Bernie Madoff, Iceland, communist revolution, etc.  Second, you are protected from being so scared about these scenarios that you don't hit your capitulation point and rashly abandon your whole plan.

In the last two years I've heard many stories of investors getting so scared by various chicken-little stories that they went to cash near the bottom, locking in a huge loss.  Statistically speaking it is very unlikely that something like counterparty risk will ruin you, but it is quite possible that worry about counterparty risk will cause you to shoot yourself in the foot.

Thanks everyone for all the great info.

Well, in my research I've found the following:

Cash

There aren't any Canadian t-bill ETF's that I can find. I did find two T-bill Mutual Funds. They are the CIBC Canadian T-Bill Fund (MER of 0.48% last year) and the TD Canadian T-Bill Fund (MER of 0.37%). Tickers are  CIB581 and TDB167 respectively.

Long Term Bonds

I've found that you cannot buy these directly from the Bank of Canada. You must buy them from a dealer. A list of dealers can be found here: http://www.bankofcanada.ca/en/markets/markets_auct.html (they are found under the heading "Primary Dealers" on the right banner).

I've consulted a few of the websites available and have found that many of them require a minimum investment of 5 $1,000 (face value) long term bonds. Subsequent investments can be limited to 1, I believe. Many online brokers do not advertise this kind of info, so you usually have to call their 1-800 number to obtain it (which I have not done).

If you don't have enough for the initial investment, your options are limited. During my research I've found no Canadian Long Term Federal Bond mutual funds. Lots of long term funds that hold a mishmash of provincial, federal and corporate bonds. These typically have very high MERs.

The same pretty much applies to ETFs...except for one. I found one that is pretty new, from the Bank of Montreal. It is the BMO Long Federal Bond Index ETF (ZFL), with an MER of .20%. It is so new that it only has 3M under assets, though. So, this is an option until you have enough for the 5k minimum for buying bonds from a dealer.

Stock

There are many mutual funds and etfs available for Canadian, U.S. or European indexes. The trick is to find the ones that have a low MER. This is not easy in Canada. This page has a great list of low MER index mutual funds that Canadians can buy:

http://www.bylo.org/idxfunds.html

For ETFs, I'll link you to morningstar's etf screener:

http://cart.morningstar.ca/tools/screen ... ture=en-CA

Gold

This is the tough part. Gold bullion is subject to sales tax in Canada. Sales tax on gold bullion can range from 5 to 13% depending on the province you live in. In my province of Ontario, the sales tax is 13%.

There is now an online discount broker that offers a "gold rsp." A retirement savings plan is a tax-deferred plan availalbe to Canadians. You can buy gold from this broker, in your rsp, and it will be allocated to you by the Royal Canadian Mint. The RCM physically holds the gold. The deal, somehow, involves Kitco. I don't know all the ins and outs and would have to call the broker for more info. One thing their advertising did not explain was wether or not sales tax applies to this gold. If it didn't, it would be one of the best bets for Canadians to "hold" gold.

Another option is a gold etf. From what I can tell, there is only one Canadian gold bullion ETF. It is the Claymore Gold Bullion ETF (CGL) with an MER of 0.5%. I guess a Canadian could also buy the popular american ETFS as well (i.e., GLD).

Mechanics of purchasing and holding all of the 4 cores, in Canada.

Well, that is the research I have done. I'm still trying to figure out all the ins and outs of how I could do a PP in Canada. If I were to do this I would probably do the following.

Open a brokerage account with TD Waterhouse and buy units of their TD T-Bill fund (cash) and their TD Canadian Index fund. They have "e-series" funds that are online only. If you have a TD Waterhouse self-directed account you can purchase these funds for no fee. I would make bi-weekly purchases after pay-day.

You may be able to find stock index etf's that are cheaper, but you would incur transaction costs by buying them using an online discount broker. The most popular one, from what I can tell, is Questrade. They have trades for 4.95.

With that in mind, I would probably open a quest trade account and purchase units of the BMO long federal bond index etf and the Claymore bullion etf. I would probably only make these purchases quarterly, due to transaction costs.

Summary

So, in summary, a "Canadian Permanent Portfolio" could look something like this:

Cash: 25% TD Canadian T-Bill Fund (MER of 0.37%) held in a TD Waterhouse brokerage account.

Long Term Bonds: 25% BMO Long Federal Bonds Index ETF (MER 0.20%) through a questrade brokerage account.

Stock: 25% TD Canadian Index-e (MER of 0.31%) held in a TD Waterhouse brokerage account.

Gold: 25% Claymore Gold Bullion ETF (MER of 0.5%) through a questrade brokerage account.

craigr wrote: Gold is really going just going to float up in price if your local currency dives just as any commodity would. The commodity isn't changing, it's the purchasing power of the paper money that is.

As an extreme, in Iceland in 2008 they had a severe currency problem. Marc DeMesel looked at how a Permanent Portfolio would have worked in that country during that time. Here are his results:

http://europeanpermanentportfolio.blogs ... eland.html

25% Long Term Government bonds = 0%
25% Short-term government bonds = +12%
25% Stocks = -88%
25% Gold = +259%

Now in this case the bonds would have crashed as well, but the IMF moved in to save things. Otherwise, gold would have been the only thing in the portfolio that was providing any kind of protection.

Realize of course that the Permanent Portfolio is not magical and can't always erase 100% of any loss. But I'd say a person in Iceland would have had far better protection than one that was just stocks and bonds. The gold in this case diversified their home currency risk.

Thanks, craigr, for linking that story. I'm fascinated by the PP as I find it follows a very conservative philosophy that also manages to enjoy the fruits of a prosperous economy. Harry Browne's book was really an eye opener.

I'm not convinced that creating a Canadian PP is a simple matter. The Canadian dollar tracks commodities, even gold, much more closely than the US dollar. This US dollar tends to rise during crises, and this really shows up in the long bond. If you plot the Canadian long bond ETF (XLB.to) and mid-term (XBB.to) against IEF and TLT, and then compare what happened to all those ETFs during the 2008 crisis, the difference seems obvious. TLT and IEF provided a more powerful (positive) response, even while the Canadian dollar dropped against the US dollar during that short period. Browne's  thinking about long bonds was that they essentially provided a powerful counterbalance during deflation or hard times. But the Canadian dollar is not a reserve currency. So, the "flight to safety" aspect of the US dollar that becomes more apparent with long bonds, just has not materialized in the same way for Canadian long bonds (or at least it hasn't yet). Then again, deflation protection is currency-dependent. For us Canadians, these factors just make things somewhat more difficult from an allocation perspective.

soninlawofgus wrote: I'm not convinced that creating a Canadian PP is a simple matter. The Canadian dollar tracks commodities, even gold, much more closely than the US dollar. This US dollar tends to rise during crises, and this really shows up in the long bond. If you plot the Canadian long bond ETF (XLB.to) and mid-term (XBB.to) against IEF and TLT, and then compare what happened to all those ETFs during the 2008 crisis, the difference seems obvious. TLT and IEF provided a more powerful (positive) response, even while the Canadian dollar dropped against the US dollar during that short period. Browne's  thinking about long bonds was that they essentially provided a powerful counterbalance during deflation or hard times. But the Canadian dollar is not a reserve currency. So, the "flight to safety" aspect of the US dollar that becomes more apparent with long bonds, just has not materialized in the same way for Canadian long bonds (or at least it hasn't yet). Then again, deflation protection is currency-dependent. For us Canadians, these factors just make things somewhat more difficult from an allocation perspective.

I believe you should still invest in the long term bonds of the country you reside in because typically the largest investors of any financial exchange are the citizens of the country that created the financial exchange. In a typical recession that is set off by the local stock exchange crashing, most of the domestic investors will rush to local long term bonds, not US long term bonds which may or may not be a good deal. The reason everyone in this financial crisis went to buy US long term bonds is that this crisis was global in scope (or almost global). US long bonds are bought by everyone when everyone suffers through a bear market. Most recessions are local and not global in scope.

Craig or MediumTex does that sound right?

Indices and Clive -- both interesting posts! Thank you.

Indices: The TSX has had such a prolonged period of outperformance relative to the S&P, that I cannot recall a time when folks retreated to long bonds. So that's an interesting observation.

Clive: I reworked your points of comparison using CADUSD=X and CEF.A (the Canadian dollar priced gold fund). I had missed the not-unimportant relationship between gold, the loonie, and the US dollar. This really helps to clarify the picture.

where do i find historical performance data for the DIY PP?

www.stingyinvestor.com

Canada data, with asset mixer tool:

http://www.ndir.com/cgi-bin/downside_adv.cgi

investnoob wrote: So, in summary, a "Canadian Permanent Portfolio" could look something like this:

Cash: 25% TD Canadian T-Bill Fund (MER of 0.37%) held in a TD Waterhouse brokerage account.

Long Term Bonds: 25% BMO Long Federal Bonds Index ETF (MER 0.20%) through a questrade brokerage account.

Stock: 25% TD Canadian Index-e (MER of 0.31%) held in a TD Waterhouse brokerage account.

Gold: 25% Claymore Gold Bullion ETF (MER of 0.5%) through a questrade brokerage account.

Regarding the cash portion , you would be much better off in a high interest savings account  (TDB8150 at TD brokerage).  It currently pays 1.25%, while the Tbill fund currently pays around 0.39%

A while back I came across this Canadian version of the Permanent Portfolio from an advisor at National Bank:
http://preserveyourwealth.ca/permanent_portfolio.php

1. 20% INTERNATIONAL Stocks – during times of economic growth, stocks lead the way in terms of greater returns.
2. 25% Short Term Bonds – in times of deflation, bond prices tend to go up and they provide reasonable income in times of prosperity
3. 20% Gold - during times of higher or hyperinflation, gold will rise and provide a safe haven against currency devaluation
4. 25% Real Return Bonds – a good hedge during times of inflation or deflation
5. 10% Canadian Preferred Shares - provide higher yield than bonds during times of prosperity

The only part I disagree with is the Preferred shares.  The ETFs that I would consider for these are very top heavy in financials which you'd already have exposure to in the stock portion.  They're also interest rate sensitive, and we already have that in the bond portion.

As far as gold goes, it seems no one is aware of the ETRs from the Royal Canadian Mint (MNT).  It's bascially an ETF backed by the gold held at the mint, and the MER is 0.35  (cheaper than CGL) and it trades in Canadian dollars

mgtow,

I wouldn't use real return bonds, since during a deflation they will return less than their face value.  See HERE.  From what I have read this doesn't apply to US TIPS.

I'd also not use a preferred shares ETF, and simply go with a market cap weighted ETF, like XIU.

I had never heard of MNT before, but it seems like a fine choice for a gold ETF.

20% in US/International stocks is fine with me.  You could also go with 15% US/International and 5% Emerging Markets.