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J4B, long time reader, big fan. for many years i have had an AA that looks very similar to yours.
Thanks!

in recent years i began to really worry about currency debasement and that worry has not abated (lol). i view it as a risk in both deflationary (policy response) and inflationary environments. how are you thinking about this -- the gold and then equity making up 50% meant to suffice?
. . .
i think these things are now more than tail risks on anything longer than a 1-2 year timeline (and possibly even in the short term) and the consequences severe enough that for me they justify revisiting the AA, moreso than other attempts at market timing. very interested to hear your thinking on this.
Checking if I understood your concern... Considering that equities and gold are the traditional assets for safety against currency destruction, you're wondering if the 50% in these is enough to offer protection, when the other 50% is in fixed income -- and therefore vulnerable.

I was going to respond "yes I think it's OK" when I first saw your post, but I decided to take some time to do a bit of studying before posting.

For this, I think Argentina is a very useful case study. Let's look at Argentina, from the perspective of an Argentinian investor in their local currency. The numbers below are a bit rough, but reasonably accurate.

~ Case Study: Argentina ~

Their currency has been disintegrating over the last 10 years. Using the USD as a reference, the Argentine Peso has been depreciating at a rate of 28% per year. The currency has lost 92% of its value: it's basically been wiped out.

Here are the 10 year annual returns of each of the asset classes in their local currency. Note that stocks includes domestic & foreign, analagous to "XIC and XAW" for us.

Stocks: 33% cagr
Gold: 43% cagr
Bonds: 10% cagr

Clearly, this is a total disaster for fixed income investors. This is the horror scenario that people like Dalio sometimes talk about. The net return in USD (which we're using as a stable reference) is 10% less 28% depreciation = -18% per year.

Losing money at 18% per year is catastrophic. This is a great illustration of the danger of bonds during high inflation / money printing / devaluation. Just three years of that and you've lost half your capital!!

My asset allocation is 20% gold, 30% stocks, 50% bonds. How would that work out for an Argentinian?

The overall return would have been roughly 24% annually. The NET return after considering currency destruction is: 24 - 28 = -4%

Losing money at 4% is not quite as catastrophic. In fact this result is probably within the "noise" considering that I calculated all of this pretty crudely. This is almost a ZERO result.

~ Argentina Result ~

So is "20% gold and 30% stocks" enough to preserve capital during extreme currency destruction?

The Argentina case study shows that it's pretty darn close to a zero result, which means capital is mostly preserved.

One might be tempted to look at these numbers and say, oh boy, I should weigh much more in stocks and gold (and get rid of bonds). But think of what would have happened if this currency destruction happened while stocks also crashed (globally) which is a possibility!

Balancing these risks is VERY hard. If you weigh more into stocks or reduce bonds, you might get better preservation of capital, but you also might catch a weak stock market -- that would give a much worse result.

I think the 20/30/50 allocation does reasonably well in all the economic conditions, including currency destruction.
 

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Checking if I understood your concern... Considering that equities and gold are the traditional assets for safety against currency destruction, you're wondering if the 50% in these is enough to offer protection, when the other 50% is in fixed income -- and therefore vulnerable.
yup, exactly that

The overall return would have been roughly 24% annually. The NET return after considering currency destruction is: 24 - 28 = -4%
this is far better than i would have expected. very interesting stuff.
 

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I started to regret that I sold MNT for CGL.C back in May. It seems MNT does have a reason for its high premium. Plus, MNT has a much lower management fees(0.3%) compared to CGL.C(0.5%).
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MNT
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CGL.C
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this is far better than i would have expected. very interesting stuff.
It's a better result than I expected as well. Note that my calculations are based on 50% bond weight at the 10 year maturity (like XBB, VAB).

Many investors would see these figures and say: this clearly shows why you need to be entirely in stocks & gold. Those are the only assets which protected against currency collapse and the bonds were a disaster.

The problem is that the bonds are needed for volatility reduction. For example if you look at the US markets with equal weight stock/gold allocation, you get some insane drawdowns such as 33% drop in 1980 ... 26% drop in 2008 ... 20% drop in 1974, etc.

Adding the weight in bonds cuts those declines in half, and this is the main reason to hold bonds. The bonds are not for performance; they are for stability. This is widely misunderstood by people who complain about the zero yields of bonds. We're holding them for stability, not performance.

If someone has no concerns at all about volatility then perhaps they should invest in 50% stocks, 50% gold, and skip bonds entirely. It's an OK idea. Just don't expect to do well if we get deflation.

So that's the tradeoff. If you want or need stability (such as in retirement or withdrawal mode) then you need bonds
 

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The overall return would have been roughly 24% annually. The NET return after considering currency destruction is: 24 - 28 = -4%
Based on that calculation, a currency destruction of 100% would mean 24 - 100 = -76%. Not sure that makes sense, how could you still have 24% of your money left?

Isn't the calculation 1.24 * (1 - 0.28) = 0.8928 = -10.72% ?

100$ invested goes up to 124$, meanwhile currency loses -28% which means losing 34.72$ which means there's 89.28$ value left.
100$ invested losing -28% currency which means 72$ value left and goes up 24% to 89.28$.
 

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I'm applying average annualized rates to all of this. These are calculation shortcuts that I've used over the years but maybe the approximation doesn't work so well with larger numbers like these? Not sure.

I'll try another method with some real numbers. 10 years ago the exchange rate for ARS/USD was 0.254 and today it's 0.014 ... that's the 94% currency wipeout. Ouch.

Say the investor started with 10,000 ARS = 2,540 USD
Assuming investments gain at 24%, ending value = 10,000 * 1.24^10 = 85,944 ARS
The final value in US dollars = 85,944 * 0.014 = 1,203 USD

Over this decade, 2540 USD turned into 1203 USD, which is -7% CAGR.

My original estimate was 4% annual loss, but this calculation shows 7% annual loss. That's painful, certainly, but still better than the wipeout.

The frightened Argentinian who went entirely into stocks & gold instead, fleeing bonds entirely, would have enjoyed 38% annual return for an ending value = 10,000 * 1.38^10 * 0.014 = 3,507 USD ... total preservation of capital.

Which is why people who are very afraid of inflation and devaluation pile into stocks and gold. I can't blame them.
 

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I'm applying average annualized rates to all of this. These are calculation shortcuts that I've used over the years but maybe the approximation doesn't work so well with larger numbers like these? Not sure.
(Yes, you can use approximations with addition/subtraction instead of multiplications for rates between about -5% to 5% and for only one operation. [Because if a stock increases by 5% one hundred times and decreases by -5% one hundred times, you'll end up with a net result of -22%.] I put this message in parenthesis as I didn't want to distract from the main discussion, sorry.)
 

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For the Argentine investor, any security denominated in a stable currency (USD, Euro, Mexican Peso, etc) would have been a boon. They could have bought US treasuries or bunds and they would have done okay.

Of course there is no reason to believe that USD or the Yen would not suffer the same fate as the Argentine Peso. So currency diversification is the key. With a global stock ETF such as VXC, one not only taps into the world equity premium, but also gets at least some protection against inflation/currency devaluation.
 

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So currency diversification is the key. With a global stock ETF such as VXC, one not only taps into the world equity premium, but also gets at least some protection against inflation/currency devaluation.
Right, which is why it's so important to hold foreign securities, without currency hedging. For Canadians that could mean ZSP, XAW, XWD, VXC and such.

Gold is basically a currency that cannot be devalued by governments printing money.
 

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Question. All those ETF you guys are talking about still have >50% exposure from US market. Why not buying a combination of XMI & XEC in order to have exposure to foreign markets? They have mutually exclusive exposures and absolutely no North American exposure. Seems easier to control the foreign diversification, not?

That way you could decide whether you go 70% N. America, 20% EAFE, 10% Emerging Markets or 85% N. Am., 10% EAFE, 5% EM, or...
 

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Question. All those ETF you guys are talking about still have >50% exposure from US market. Why not buying a combination of XMI & XEC in order to have exposure to foreign markets? They have mutually exclusive exposures and absolutely no North American exposure. Seems easier to control the foreign diversification, not?

That way you could decide whether you go 70% N. America, 20% EAFE, 10% Emerging Markets or 85% N. Am., 10% EAFE, 5% EM, or...
I think the global market cap is preferable in terms of simplicity. I haven't found a good reason to slice and dice it, whether for equity or currency exposure.
 

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Why not a one-fund solution for global equity?

Vanguard - VEQT (MER 0.25)
US (41.7%)
Canada (30%)
World (21.2%)
Emerging Markets (7.1%)

iShares - XEQT (MER 0.20)
US (46.91%)
Canada (23.53%)
World (24.01%)
Emerging Markets (5.21%)
 

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I think the global market cap is preferable in terms of simplicity. I haven't found a good reason to slice and dice it, whether for equity or currency exposure.
Thanks, makes sense.

I guess I was asking that as it would better fit my investment style. I'm stock-picking North American stocks and I buy ETF only for the exposure I can't have from stock-picking and I like to control my strategy between sectors, foreign exposure, stock correlation, etc.
 

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Thanks, makes sense.

I guess I was asking that as it would better fit my investment style. I'm stock-picking North American stocks and I buy ETF only for the exposure I can't have from stock-picking and I like to control my strategy between sectors, foreign exposure, stock correlation, etc.
If you are stock picking your Canada and US allocation, then yes, those choices make sense to broaden the exposure to EAFE and emerging markets.
 

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Hey James,

Did you watch Ben Felix's latest video on Gold:
?
I am gradually, sequentially going through each Ben Felix video and finally got to gold.

As I posted elsewhere (forget where) there is definitely some bias showing. And he is spinning facts to support his bias as can be expected by someone who receives an education in the mainstream, equity culture of today.

He cited a paper about gold's real return (keeping up with inflation) since the 1970s. He says that in this modern day timeframe, gold did not keep up well with purchasing power. But then he cites an extreme, historic data point going back thousands of years. At that point he makes a joke that if your time horizon is a few thousand years, you will be OK. But otherwise, he implies, we don't have a basis to think gold keeps up with inflation.

Wrong. I even showed the data source and calculation in post #118. There is pricing data for gold available in the 1800s and 1900s both in Britain and US, so let's not pretend that we "didn't know the price of gold" in the past.

From this data, we know that gold has kept up with inflation over time periods such as 100 years and 150 years.

Gold is volatile, and so are stocks. The really nice returns in stocks that all of these PWL types cite ... the long term real returns ... are based on about 100 years of historical data. We also have real returns for gold over similar time frames.

It's true that in these long time frames, stocks have superior real returns, but gold is also showing about 0% real return meaning that it does keep up with inflation.

Not only that, but of course we actually know that gold has preserved value over even longer timeframes (as Ben jokes about) when stocks didn't even exist. Gold was preserving purchasing power long before the concept of stocks came into existence.

It's pure spin / bias to recommend stocks based on ~ 100 year performance, but then disregard gold performance data which exists for the same ~ 100 year horizon.
 

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I am gradually, sequentially going through each Ben Felix video and finally got to gold.
. . .
It's pure spin / bias to recommend stocks based on ~ 100 year performance, but then disregard gold performance data which exists for the same ~ 100 year horizon.
I think the primary mistake Ben makes is disregarding the long term performance of gold. A liquid asset that preserves purchasing power over many hundreds of years is an enormous success story. There are few other things in world history that can make the same claim.

He's saying that we have no clue what the return of gold will be in our shorter time horizons. Yes he's correct, the return could be just about anything!

But we also have no clue what the return of stocks will be in our time horizons. There have been periods of 30-40 years where stocks did terribly, falling short of the supposed 5% real return.

The sad truth is that in our limited, mortal time horizons, we are not assured ANY of these returns from anything. Here's all we know: stocks have a long term 5% real return, bonds 2% real return, gold 0% real return. All of these are long term returns, which may or may not continue going forward.

Here's my logic: there are no guarantees about any of these returns. All 3 assets (stocks, bonds, gold) have performed well through history, so I will hold all three. Any one of them could turn out to be a total "dud" and useless for the next 10 20, or 30 years. I would rather diversify across all 3, instead of concentrating my bets in just stocks or bonds. This gives a higher likelihood of a successful outcome.

It could turn out that gold performs horribly for the next 20 years. That would not mean I've made a mistake here. It could turn out that stocks perform horribly for the next 20 years. Again, not a mistake. I actually expect one of these three to be very disappointing going forward.
 

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I just want to point out that gold is hitting new record high (all time high) prices almost daily, valued in CAD. Things that routinely hit new all time highs are usually said to be in a bull market.

Since gold is a currency, it must be quoted in relation to another currency. The pair that is relevant to Canadian investors is Gold vs CAD. Here's the chart going back to 2011.

The previous all time high was $1882 back in 2011, but you can see that we've been higher than this ever since mid 2019. This chart shows $2481 but this morning it's higher at roughly $2490.

The Canadian Dollar appears to be rapidly losing value against gold. Maybe they can print more money and reduce interest rates further to fix this. (that's a joke)

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