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Discussion Starter #201 (Edited)
I agree with you that stocks pose a similar problem. The difference is that I am an optimist when it comes to stocks, so I would not have a problem rebalancing into stocks during a bear market, at least as long as I am a saver (once retired I will be more cautious).
Good points. I have some doubts about both stocks and gold. With stocks, I worry that PE multiples are just a figment of the human imagination and mood (or index-based money flows), and that we could see 20 years of reducing multiples -- destroying all returns, even when there is fundamental corporate growth.

With gold, I worry that it's just a speculative trading vehicle that's also just a function of the human imagination and mood.

But at least I have similar feelings on both stocks & gold in my allocation. I don't feel compelled to pour money into one over the other; I'm neutral on them relative to each other. I am confident that I can rebalance between them just fine. I'm a bit more worried about taking money out of bonds (which I trust) and putting them into either stocks or gold.

But 60/40 doesn't save me from that problem either. The benefit of this allocation is that I believe in the fundamentals of risk parity and asset class diversification. It also will help to see steady annual returns, which should help keep me calm and know that it's working as planned.
 

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Discussion Starter #202
Isn't it amazing how much of investing is psychological?

Over the years, I have warmed up to the idea of just buying a well run balanced fund -- this is what I recommend to friends and family now. If you buy for example MAW104 or GGF31148 (two excellent balanced funds that I've researched in detail), and you just leave the money invested, you are likely going to do well.

Similarly, anyone in a couch potato or permanent portfolio strategy is also going to do well, if they can stick with the plan over the decades.
 

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I have come to the same conclusion over the years. The more passive approach one takes, the better the results.
 

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Discussion Starter #204
Within the last year I discovered that the following allocation is identical. Here's my alternate PP:

25% stocks
50% bond fund with avg maturity of 10 years
25% gold


The reason this is equivalent is that a broad bond fund such as XBB actually holds both short & long term bonds. XBB (or another generic, high quality "10 year" bond fund) holds everything with an average maturity at 10 years. But it does hold long term treasuries and short term bonds too.

To see proof of this, look at the portfolio visualizer web site. Portfolio 1 is the PP using a single 50% weight in 10 year bonds. Portfolio 2 is the bonds separated into short term + long term treasuries.

https://www.portfoliovisualizer.com/backtest-asset-class-allocation?s=y&mode=1&timePeriod=4&startYear=1972&firstMonth=1&endYear=2019&lastMonth=12&calendarAligned=true&initialAmount=10000&annualOperation=0&annualAdjustment=0&inflationAdjusted=true&annualPercentage=0.0&frequency=4&rebalanceType=1&absoluteDeviation=5.0&relativeDeviation=25.0&asset1=TotalStockMarket&allocation1_1=25&allocation1_2=25&asset2=TreasuryNotes&allocation2_1=50&asset3=Gold&allocation3_1=25&allocation3_2=25&asset4=LongTreasury&allocation4_2=25&asset5=ShortTreasury&allocation5_2=25

The historical results are identical!

Therefore, an easy and practical way to implement the PP in Canada is to hold:

25% in XIC / XAW / etc
50% in XBB or VAB, or maybe XGB
25% in MNT or CGL.C

I think this is a better realization of the PP and it's equivalent to the original. You've gotten rid of the awkward stuff (cash and long term bonds) and replaced it with a standard, generic bond fund. The backtest linked above also shows that it really is equivalent to the original PP, except that here I'm using the industry-standard XBB or VAB. This isn't exactly a 10 year government bond fund, but it's close. XBB has a much lower MER than XGB, but I suppose you could use XGB as well.
Thanks to Topo for helping me look this over. Then we went off on some tangents, which might confuse others following the thread.

Curious if anyone else has any thoughts on my "simpler" PP allocation described here?
 

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It was an informative pleasure eavesdropping on the dialogue between you and Topo.

Last year, I adjusted my IPS to include 5% gold (plus opportunistic holdings of two miners). This was largely because a) gold appeared attractively priced, and b) I had become persuaded by the PP arguments about the value of gold’s non-correlation.

I have been contemplating increasing that amount. However, I am taking my time.

The simpler version of the PP you have described is interesting. Its ease, lack of volatility and impressive back testing are compelling.
 

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If you buy for example MAW104 or GGF31148 (two excellent balanced funds that I've researched in detail), and you just leave the money invested, you are likely going to do well.
If you are young and in accumulation stage, that might work. Especially if like many, you are busy working and earning an income. May be true for your 25/50/25 portfolio too.

However, for those who are about to, or already in retirement, how would it work for them? "and you just leave the money invested, you are likely going to do well." wouldn't work for them. And those portfolios have next to no yield meaning no cash flow to live off. (Less that $20k pa if they have a million saved). And if they draw down another $20k from portfolio, how long will the portfolio last?

I know we have had this type of discussion before, but there is no portfolio where "one size fits all"
 

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Discussion Starter #207
It was an informative pleasure eavesdropping on the dialogue between you and Topo.

Last year, I adjusted my IPS to include 5% gold (plus opportunistic holdings of two miners). This was largely because a) gold appeared attractively priced, and b) I had become persuaded by the PP arguments about the value of gold’s non-correlation.

I have been contemplating increasing that amount. However, I am taking my time.

The simpler version of the PP you have described is interesting. Its ease, lack of volatility and impressive back testing are compelling.
Thanks! Happy to hear the discussion has been useful. I agree that one should not make hasty changes to an allocation. Over the span of several years, I gradually adjusted my 25% gold down to 20% and finally got to a mix I like.
 

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Discussion Starter #208 (Edited)
However, for those who are about to, or already in retirement, how would it work for them? "and you just leave the money invested, you are likely going to do well." wouldn't work for them. And those portfolios have next to no yield meaning no cash flow to live off. (Less that $20k pa if they have a million saved). And if they draw down another $20k from portfolio, how long will the portfolio last?
These are good points. But remember that balanced funds are suitable for ongoing withdrawals, and yes are suitable for retirees. A more conservative allocation would be even better, but there is no problem whatsoever leaving the money invested and selling off shares to get cashflow... possibly for the rest of one's life.

The problem are big bear markets; when stocks drop and stay low for say 10 or 15 years as described here. This causes 'sequence of return' harm to the capital. The only way around it is a higher fixed income allocation, or reducing your withdrawals during bad times.

I know we have had this type of discussion before, but there is no portfolio where "one size fits all"
True, and I agree, but a balanced fund or 50/50 is pretty close. It really can withstand withdrawals even during bear markets, up to a point. Take a look at this historical study I did, withdrawing from 60/40 in bear markets. What happens is that money actually comes out of the bonds, not the depressed stocks: https://www.canadianmoneyforum.com/showthread.php/138014-Withdrawing-from-60-40-in-down-years

Up to a point of course! The % fixed income in the asset allocation is a big factor in all of this. Higher % fixed income is better positioned for bear markets and withdrawals.

So while I agree that there are no "one size fits all" answers, the balanced fund is not a bad attempt, and it can be suitable for ongoing withdrawals for a retiree.
 

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It works with any size of balanced portfolio. Withdrawal rates for RIFs have been engineered with appropriate drawdowns in mind, albeit most of us would still want some reserve in mind for longevity risk beyond age 95 or 100.
 

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Discussion Starter #211
It works with any size of balanced portfolio. Withdrawal rates for RIFs have been engineered with appropriate drawdowns in mind, albeit most of us would still want some reserve in mind for longevity risk beyond age 95 or 100.
To clarify AltaRed, do you mean that ongoing withdrawals (for a retiree) from a balanced fund should be OK?

e.g. my parents are nearly entirely in MAW104 with some GICs as well. Their plan is to keep drawing down MAW104 for the rest of their lives. From what I can tell, it's a solid plan. The GICs add additional cushion in case of horrendous market performance.

They've been selling off the units as they need cash, well under 3% withdrawal rate currently.
 

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Seems perfectly fine to me, and especially so at 3% withdrawal rate, which is less than RRIF (or VPW) percentages.

Added: The GIC reserve is a good thing. My spouse is doing something similar.
 

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Discussion Starter #213
Thanks. Yes I think as long as the withdrawal rate is kept low, there shouldn't be a problem. Of course it's easy to say now with MAW104 up 15% YTD. It probably feels very different doing the withdrawals in a really bad year, but still should be sustainable.
 

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Thanks. Yes I think as long as the withdrawal rate is kept low, there shouldn't be a problem. Of course it's easy to say now with MAW104 up 15% YTD. It probably feels very different doing the withdrawals in a really bad year, but still should be sustainable.
It will indeed feel different in a series of multiple down years. One or two years won't (shouldn't) affect the psyche, but a string of them probably will.
 

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Discussion Starter #215 (Edited)
It will indeed feel different in a series of multiple down years. One or two years won't (shouldn't) affect the psyche, but a string of them probably will.
This was one of my primary motivations for choosing the permanent portfolio. I wanted the freedom to be able to withdraw funds at any time and not feel like I'm under the thumb of the equity market. From past history, the PP has provided a much steadier pattern of positive returns over the years, compared to 60/40.

I have debated this a bit with CFA and CFPs. The strongest counter argument they gave me to the PP is that these correlations between asset classes are unreliable, especially gold's correlation. We might expect stocks and bonds to continue having low correlation based on fundamentals, but gold's correlation is a bigger question.

Therefore, while 60/40 can reasonably be expected to be a smoother experience due to stocks & bonds having fundamentally different behaviours, the addition of gold may or may not create a benefit. The past history, in which gold had low correlation and nice balancing behaviour, might have been a total fluke / random.

I think it's an important criticism for PP investors to remember. Adding gold is not guaranteed to improve the portfolio, not even guaranteed to reduce volatility. You could potentially still have a deeply negative year, or a few, and the PP going forward may look nothing like the amazing PP of the past.

From a capital allocation standpoint, the question is: do you add this weird asset (gold) in the hopes of diversification benefit, even when there is absolutely no guarantee that it will smooth over bad years and reduce volatility?

(My answer is yes. I know there are no guarantees, and this is a somewhat random game. However I think there are economic fundamentals which cause gold to behave differently than stocks and bonds, notably the inflation and fiat devaluation response)
 

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It works with any size of balanced portfolio. Withdrawal rates for RIFs have been engineered with appropriate drawdowns in mind, albeit most of us would still want some reserve in mind for longevity risk beyond age 95 or 100.
Sorry, you lost me there. I didn't think we were talking about RRIFs. Not sure RRIFs were "engineered" in any way. GOC made a big step change not that long ago, mostly because of lobbying by retirement groups. I wouldn't use those draw down rates as a guide for anything. They just determine how much has to be moved from RRIF to Taxable account (less the tax the govmnt takes off). You spend whatever you want.

I joked that $2Million would be needed, because a 1Million portfolio with less than 2% yield wouldn't provide much of a retirement life. If drawn down to boost cash flow, as J4B said, it has serious SofR risk.
 

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I've refrained from discussing PP or gold in general, since I have no belief in gold myself. To each their own.

FWIW, my spouse's investable assets (RIF) are somewhat like your parents, except primarily VBAL (at RBC DI), with her TFSA as the fixed income reserve. If there are multiple down years in equity markets, I'd recommend she not spend* all of her RIF withdrawal in such years and put some of it back in her TFSA.

* Not that she will necessarily do so anyway.....
 

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I joked that $2Million would be needed, because a 1Million portfolio with less than 2% yield wouldn't provide much of a retirement life. If drawn down to boost cash flow, as J4B said, it has serious SofR risk.
I purposely refrained from calling your earlier "joke" bullshite to be polite. Draw down of principal, not just investment income, should ALWAYS be part of the withdrawal plan and does NOT cause irreparable SoR risk if done prudently with VPW methodology (which is akin to RIF withdrawal methodology and thus my reference). J4B's parents are already conservative with 3% withdrawals. Their plan is solid.

Not drawing down a portion of principal, at least the capital appreciation, is akin to cocooning oneself from life. It's conservatism run amok. I will now refrain from going around in circles yet again.
 

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Discussion Starter #219
My own research over the years agrees with what AltaRed says. With a 60/40, 50/50, or 40/60 portfolio, you should be able to draw cash out of it for many decades, including in down years, provided that you're withdrawing at a reasonable withdrawal rate. The flexibility to be variable (VPW) helps extend the capital longer. The withdrawals are a combination of interest + dividends + liquidation. The mix does not matter.

An income / dividend approach does offer important psychological advantages (comfort and less focus on price volatility) but does not fundamentally make the capital last longer, nor does it give a higher cashflow in a sustainable way.
 

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There is no financial theory/mathematical analysis that supports withdrawal methodologies that do not tap into principal as part of a withdrawal methodology for Joe Q Public. I consider it a disservice to the CMF community for the more senior members of CMF to be promoting such materials as anything more than a personal objective....for whatever reasons they may personally have.
 
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