Gyroscopic Investing

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ahhrunforthehills wrote: So opinions on Option 1 vs Option 2 would be appreciated (keeping in mind currency risk).

#2 is worse.

I've been experimenting with the Canadian HBPP and mixing U.S. exposure into it (see my other thread).

What I've found through backtesting is that, in the long run (going back to 1971), mixing U.S. equity exposure into the Canadian HBPP (50% CDN equity, 50% U.S., within the HBPP 25% equity allocation) appears to have provided a consistent, positive diversifying effect, namely higher returns and lower volatility.

However, when I tested the Canadian HBPP with 50% of the stocks, bonds and cash invested in US securities, returns decreased and volatility increased, compared to a straight 100% domestic Canadian portfolio.

blue_ruin17 wrote:...higher returns and lower volatility.

Do you mean lower volatility in just the equity portion, or the entire portfolio?

JohnnyFactor wrote:

blue_ruin17 wrote:...higher returns and lower volatility.

Do you mean lower volatility in just the equity portion, or the entire portfolio?

Over the entire portfolio.

(Real Returns)

50% CANADIAN EQUITIES 50% U.S. (within 25% HBPP equities allocation)
Overall Portfolio Stats (1971 to 2015)
Average Gain (Geometric) 5.258%
Average Gain (Arithmetic) 5.469%
Median Annual Gain 4.875%
Standard Deviation 6.742%

100% CANADIAN EQUITIES (within 25% HBPP equities allocation)
Overall Portfolio Stats (1971 to 2015)
Average Gain (Geometric) 4.977%
Average Gain (Arithmetic) 5.227%
Median Annual Gain 4.500%
Standard Deviation 7.376%

As I mentioned though, I tried to do the same thing by comparing a 100% Canadian HBPP to a portfolio that splits the stock AND bond + cash allocations between Canadian and U.S. assets. The returns were lower and the volatility was higher for that particular split compared to the 100% Canadian portfolio.

It appears that exposing a non-U.S. HBPP to foreign Bonds and cash damages the integrity of the portfolio, though there does appears to be a long-term positive diversification effect to exposing a Canadian HBPP to U.S. stocks.