Gyroscopic Investing

Hi All,
I have just read Craig's book and I am planning to convert my investments over to the permanent portfolio but I wanted to get a bit more understanding on the advice he gives to Australians to increase the percentage in Long term bonds to 35% (decreasing cash to 15%) to make up for the fact that the Australian treasury only sells 15 year bonds.
I am anxious about the impact of doing this on the portfolio - as all the graphs in the book are based on US figures and 25% split.
Can anyone explain why it might be a good idea to change the allocation in this way?
Does anyone think it is a bad idea?

The loading of bonds is to just get the average duration up to what the 50/50 mix would do for US investors with longer bonds. If you were to simply do the 25% split you will probably find performance is still fine. You might not have as much deflation protection, but on the plus side your interest rate risk would be lower as well. If you decided to keep it simple with a 25% split I really couldn't quibble.

Unfortunately investing is not a science. The 25% numbers were settled on after many years by Harry Browne because it was a reasonable trade-off between performance, safety and simplicity. Is the right number for each asset higher or lower? Honestly we won't know until many years pass. Even then, once we determine what worked best in the past is not likely to be the right number going forward.

For me, the biggest issue by far is having constant exposure to all the asset classes at all times. You're much better off for instance having 25% in bonds than 0% because you were unsure what the right number would be. Make sense?

Hi Craig,
Thanks for responding.
That does make sense.
I might stick with 25% then. I am keen to keep things as simple as possible.

Hi SarahJane and CraigR,

Another Aussie here, but my book is still in the mail...

With the 15 year bond, is that sold when it hits 14 years and a new 15 year bond purchased?
SarahJane; I had set up a PP for my parents and myself about a year ago. Works well. Welcome aboard.

Hal

You would probably want to sell that bond when it hits its 10th year, or even sooner. Once a 15-year bond is a only single year to its maturity date, it's lost most of its volatility, meaning that it's not providing that quarter of your portfolio with much protection.

Hi PointedStick,

So you are really keeping the same ratio Harry recommended for the US PP.  30 year LTT purchase and 20 year sale becomes 15 year purchase and 10 year sale. (but with a 35% allocation to bonds overall).

Thanks for the explanation
Hal

Thanks Pointed Stick.
And G'Day Hal!

i would also appreciate thoughts on how much international stock to buy. I am thinking 15% Aussie and 10% Vanguard world fund.
Is that sensible (and I understand there are no perfect answers to this!)

SarahJane wrote: Thanks Pointed Stick.
And G'Day Hal!

i would also appreciate thoughts on how much international stock to buy. I am thinking 15% Aussie and 10% Vanguard world fund.
Is that sensible (and I understand there are no perfect answers to this!)

That sounds pretty reasonable to me. The PP, especially in non US markets is not an exact science. But I would be pretty comfortable with that. On the subject of the bonds, this is a gray area. But one option you might consider is to just go all in 10-5 year bonds and skip the cash. It would give you a similar effect as the 25% STT and 25% LTT if 30 yr bonds were available. But I would strongly encourage holding a separate cash reserve if you decided to do that. Otherwise I think Craig's suggestion is fine.

Yeah it is really important to understand that if hypothetically the PP had some sort of guarantee (it doesn't!), it would be totally void in any country but the US. Your stock and bond markets will fluctuate as they should according to PP theory, but gold will be reacting mostly to changes in the US. Your country could have a massive inflation while the US has declining inflation. Gold will appear like it's rising to you, but it won't be in real terms. The PP relies on your bonds being in the worlds reserve currency.

If the US loses "top dawg" status, I will probably reevaluate my own strategy.

For what it's worth, this is my Ozzie Permanent Portfolio implementation:

25% Gold bars from Pert Mint
25% Vanguard Australia: Fixed Interest Australian Fund (Treasury and govt. bonds)
25% Vanguard Australia: International Bond Fund (Treasury and govt. bonds)
12.5% Vanguard Australia: Global Equity Fund (ex Australia)
12.5% Vanguard Australia: Australian Stock Market Fund

Given that both the Australian and global bond funds have durations of around 5 to 6 years, I've decided  not to have cash allocation but a 50% allocation in bonds.  I've also opted for a global allocation of half of the bond and stock portion as a diversification strategy. 

... in my previous post, I forgot to say that I decided not to go with the recommended approach of buying directly 15-year bonds because of the added hassle of having to transact them on an annual basis (when duration is 14 years) and because it is the government that arbitrarily sets the purchase price.

Exocet wrote: For what it's worth, this is my Ozzie Permanent Portfolio implementation:

25% Gold bars from Pert Mint
25% Vanguard Australia: Fixed Interest Australian Fund (Treasury and govt. bonds)
25% Vanguard Australia: International Bond Fund (Treasury and govt. bonds)
12.5% Vanguard Australia: Global Equity Fund (ex Australia)
12.5% Vanguard Australia: Australian Stock Market Fund

Given that both the Australian and global bond funds have durations of around 5 to 6 years, I've decided  not to have cash allocation but a 50% allocation in bonds.  I've also opted for a global allocation of half of the bond and stock portion as a diversification strategy.

It's not quite an HBPP but frankly there is nothing in there that gives me any heartburn. You are well and broadly diversified. I think your portfolio will do fine over the long term with very limited volatility.

Exocet wrote: For what it's worth, this is my Ozzie Permanent Portfolio implementation:

25% Gold bars from Pert Mint
25% Vanguard Australia: Fixed Interest Australian Fund (Treasury and govt. bonds)
25% Vanguard Australia: International Bond Fund (Treasury and govt. bonds)
12.5% Vanguard Australia: Global Equity Fund (ex Australia)
12.5% Vanguard Australia: Australian Stock Market Fund

Given that both the Australian and global bond funds have durations of around 5 to 6 years, I've decided  not to have cash allocation but a 50% allocation in bonds.  I've also opted for a global allocation of half of the bond and stock portion as a diversification strategy.

Looks perfect. I like that you went for Treasury exposure. I think it makes a ton of sense because the US is the 800 pound gorilla in the global economy. Also, I think going for intermediate term and (combining cash and long bonds) is very reasonable and I would argue it gives you a higher expected return with the same level of risk. I am moving towards intermediate myself, even though the barbell is very easy for me to implement.

Exocet wrote: For what it's worth, this is my Ozzie Permanent Portfolio implementation:

25% Gold bars from Pert Mint
25% Vanguard Australia: Fixed Interest Australian Fund (Treasury and govt. bonds)
25% Vanguard Australia: International Bond Fund (Treasury and govt. bonds)
12.5% Vanguard Australia: Global Equity Fund (ex Australia)
12.5% Vanguard Australia: Australian Stock Market Fund

Given that both the Australian and global bond funds have durations of around 5 to 6 years, I've decided  not to have cash allocation but a 50% allocation in bonds.  I've also opted for a global allocation of half of the bond and stock portion as a diversification strategy.

Where are you getting the international bonds from?  I don't see it on theVanguard Australia site.

The ETF providers in Canada don't have a global bond ETF (let alone a US treasuries ETF), so I would be kinda surprised if Australia did.

Gosso wrote:

Exocet wrote: For what it's worth, this is my Ozzie Permanent Portfolio implementation:

25% Gold bars from Pert Mint
25% Vanguard Australia: Fixed Interest Australian Fund (Treasury and govt. bonds)
25% Vanguard Australia: International Bond Fund (Treasury and govt. bonds)
12.5% Vanguard Australia: Global Equity Fund (ex Australia)
12.5% Vanguard Australia: Australian Stock Market Fund

Given that both the Australian and global bond funds have durations of around 5 to 6 years, I've decided  not to have cash allocation but a 50% allocation in bonds.  I've also opted for a global allocation of half of the bond and stock portion as a diversification strategy.

Where are you getting the international bonds from?  I don't see it on theVanguard Australia site.

The ETF providers in Canada don't have a global bond ETF (let alone a US treasuries ETF), so I would be kinda surprised if Australia did.

Check this link:

https://www.vanguardinvestments.com.au/ ... IFIIFH.jsp

Once there, download the fund fact sheet - you'll see the fund composition (Treasury, country-diversified).

Alternatively, for a mix of government and high grade corporate bonds, check this on:

https://www.vanguardinvestments.com.au/ ... ICSIFH.jsp

Exocet wrote: Check this link:

https://www.vanguardinvestments.com.au/ ... IFIIFH.jsp

Once there, download the fund fact sheet - you'll see the fund composition (Treasury, country-diversified).

Alternatively, for a mix of government and high grade corporate bonds, check this on:

https://www.vanguardinvestments.com.au/ ... ICSIFH.jsp

Looks like you have an annual tracking error of roughly 0.50% based on the 5 year average returns.  This would include the MER and hedging costs, so that's not too bad, but a little rich for a bond ETF.  Are you bothered by the 27% in Euro bonds and 32% in Japanese bonds?  The Euro is a ticking time bomb and best case for Japan is to stay flat.  I'd rather own their stocks instead of bonds.

Also, how does it have a "yield-to-maturity" of 4.1%?  Something seems off there.

If I were in Australia I'd build the following portfolio:

50% in Australian bonds/CDs (average duration around 5 years)
20% World stocks
10% Australian stocks
20% Gold

Just my two cents.

Gosso wrote:

Exocet wrote: Check this link:

https://www.vanguardinvestments.com.au/ ... IFIIFH.jsp

Once there, download the fund fact sheet - you'll see the fund composition (Treasury, country-diversified).

Alternatively, for a mix of government and high grade corporate bonds, check this on:

https://www.vanguardinvestments.com.au/ ... ICSIFH.jsp

Looks like you have an annual tracking error of roughly 0.50% based on the 5 year average returns.  This would include the MER and hedging costs, so that's not too bad, but a little rich for a bond ETF.  Are you bothered by the 27% in Euro bonds and 32% in Japanese bonds?  The Euro is a ticking time bomb and best case for Japan is to stay flat.  I'd rather own their stocks instead of bonds.

Also, how does it have a "yield-to-maturity" of 4.1%?  Something seems off there.

If I were in Australia I'd build the following portfolio:

50% in Australian bonds/CDs (average duration around 5 years)
20% World stocks
10% Australian stocks
20% Gold

Just my two cents.

Why that allocation?

I started with an equal split between bonds (1/2 5 year and 1/2 10 year) from the RBA, then Gold (QAU) and Australian Shares (IOZ).

I'm going to put some more money in and I'm thinking through the following questions:
- Should I own the bonds directly (very difficult to track price changes), or buy an ETF (much easier buy/sell process, and MUCH easier to track price changes, there are several options around .25% pa with 100% government bonds)

- Should I top up Australian stocks, or perhaps add some international exposure?


What do you guys think?

LonerMatt wrote: Why that allocation?

I started with an equal split between bonds (1/2 5 year and 1/2 10 year) from the RBA, then Gold (QAU) and Australian Shares (IOZ).

I'm going to put some more money in and I'm thinking through the following questions:
- Should I own the bonds directly (very difficult to track price changes), or buy an ETF (much easier buy/sell process, and MUCH easier to track price changes, there are several options around .25% pa with 100% government bonds)

- Should I top up Australian stocks, or perhaps add some international exposure?

What do you guys think?

I'm guessing your stock market is similar to Canada, mainly banks and miners.  These two sectors are large parts of our economy, but not 75% of it.  So it makes sense to hold stocks from other developed economies, and possibly emerging, since this is where most of the consumer staples/discretionary, info tech, health care, industrial, etc are located.  I'm guessing Australia is also infested with McDonald's and Walmart's.

Adding international stocks to the Canadian PP decreased standard deviation and increased CAGR, so the backtesting shows that this helped the portfolio.  Even if it showed to hurt the portfolio I would still include international stocks for the diversification.  Also, look at the Japanese PP, it would have greatly benefited from international stocks...they would have dampened the Nikkei bubble during the 80's and helped during the 90's.

The allocations I presented in my previous post were just a suggestion.  You could maintain 25% is gold and lower international stocks to 15% or even 10%.

Gosso wrote: I'm guessing your stock market is similar to Canada, mainly banks and miners.  These two sectors are large parts of our economy, but not 75% of it.  So it makes sense to hold stocks from other developed economies, and possibly emerging, since this is where most of the consumer staples/discretionary, info tech, health care, industrial, etc are located.  I'm guessing Australia is also infested with McDonald's and Walmart's.

Mining and banking do make up large sections of the economy, that's true, that's true.

I've often thought of maybe holding some stocks in a place like Indonesia (fast growth, not tied to Australia), but developing indexes might be worth a look too.

I believe that any allocation to international stocks must be accompanied by a similar allocation to international bonds as well as cash (although Australia does not have a currency basket ETF).  This is so because every economy follows its own economic cycle.  Otherwise, the protection capabilities of PP wouldn't trigger.  An allocation like this would make sense to me:

12.5% International stocks
12.5% Australian stocks
12.5% International LT bonds
12.5% Australian LT bonds
25% Australian cash
25% Gold

Exocet wrote: I believe that any allocation to international stocks must be accompanied by a similar allocation to international bonds as well as cash (although Australia does not have a currency basket ETF).  This is so because every economy follows its own economic cycle.  Otherwise, the protection capabilities of PP wouldn't trigger.  An allocation like this would make sense to me:

12.5% International stocks
12.5% Australian stocks
12.5% International LT bonds
12.5% Australian LT bonds
25% Australian cash
25% Gold

That seems reasonable.