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Discussion Starter #381 (Edited)
How do you handle the cash portion of the Permanent Portfolio? Is there a way to earn a little interest without taking on risk and be able to cash out at any time? I keep some of my cash in a GIC, but transferring from the bank's GIC to an online broker often takes days, and there is a risk of missing out on buying shares.
I do this differently than other people. I have my cash buffer (pure HISA) separated, and don't count it as an investment at all. Not part of PP.

Then, inside the PP, I lump together cash + long term bonds into a single XBB holding. This actually doesn't modify the PP much because the average maturity between cash (0 years) and long term bonds (20 years) is in fact 10 years, which is XBB.

Stated another way, XBB = ZFS + ZFL [ignoring the difference in credit quality]

One implementation is
25% ZFS, the BMO short term bonds
25% ZFL
25% stocks
25% gold

And an equivalent implementation (ignoring the addition of corp bonds) is
50% XBB
25% stocks
25% gold

For me, the second form has been easier. In my RRSP, then I can hold just that big XBB position. This does, however, add credit risk due to the corporate exposure and my portfolio crashed a bit in March, whereas the ZFS/ZFL version would not have crashed.
 

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For me, the second form has been easier. In my RRSP, then I can hold just that big XBB position. This does, however, add credit risk due to the corporate exposure and my portfolio crashed a bit in March, whereas the ZFS/ZFL version would not have crashed.
Bah, XBB just dipped a bit in March... Look at a 50/50 ZFS/ZFL against 100% XBB and you'll see that ZFS/ZFL went underwater around -5% to -6% from 2017 to 2019 while XBB was underwater around -2% to -3% during the same period. Meanwhile, you've also had a better performance with XBB. It's also more liquid and very inexpensive.

I'd prefer an investment going underwater by -15% for 2 weeks than an investment going underwater by -5% for 2 years. But that's me.
 

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I do this differently than other people. I have my cash buffer (pure HISA) separated, and don't count it as an investment at all. Not part of PP.

Then, inside the PP, I lump together cash + long term bonds into a single XBB holding. This actually doesn't modify the PP much because the average maturity between cash (0 years) and long term bonds (20 years) is in fact 10 years, which is XBB.

Stated another way, XBB = ZFS + ZFL [ignoring the difference in credit quality]

One implementation is
25% ZFS, the BMO short term bonds
25% ZFL
25% stocks
25% gold

And an equivalent implementation (ignoring the addition of corp bonds) is
50% XBB
25% stocks
25% gold

For me, the second form has been easier. In my RRSP, then I can hold just that big XBB position. This does, however, add credit risk due to the corporate exposure and my portfolio crashed a bit in March, whereas the ZFS/ZFL version would not have crashed.
To my understanding, the cash acts 3 functions in a HBPP:
1) a stablizer of the portfolio especially during certain economic conditions e.g. tight money recession(IMO, not very likely in near future);
2) a buffer during peroid of uncertainty (may or may not including emergency living expenses);
3) to buy other assets that have fallen in value.

The goal is to make sure it is always there when you need it. Therefore, it has to be absolutely safe and stable.

I think your XBB approach may serve 1) & 2) since you have cash buffer separated. But how about 3)? Would you put extra money from cash buffer to buy dip of other assets or have to sell some assets within PP first?

In terms of Cash Risks, below is a table from the book <Permanent Portfolio> by Craig Rowland. Currently, I put my cash in Bank CD/GIC and split them in different banks to avoid default risk beyond FDIC insurance limit.

20633


In this book, the author suggested T-Bills as the best way to put cash. But, the interest rate and T-Bill yields are as low as zero now. I am not sure if this is a wise decision. Putting it in GIC, I can still earn ~2% per year.
 

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For my cash portion I am using CLF. It’s a 1-5 ladder govt bonds, maturity/duration is 3+, so not much rate risk, credit rating is AA (govt), so not much for default risk, and 12mo yield is 2.2%

It took a small loss during the implosion, but bounced back right away.

lots of brokers let you buy/sell this fund for free.....
 

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Discussion Starter #385 (Edited)
To my understanding, the cash acts 3 functions in a HBPP:
1) a stablizer of the portfolio especially during certain economic conditions e.g. tight money recession(IMO, not very likely in near future);
2) a buffer during peroid of uncertainty (may or may not including emergency living expenses);
3) to buy other assets that have fallen in value.
. . .
I think your XBB approach may serve 1) & 2) since you have cash buffer separated. But how about 3)? Would you put extra money from cash buffer to buy dip of other assets or have to sell some assets within PP first?
I think the single 50% weight bond weight (like XBB) does satisfy these. The way (3) works is by periodic rebalancing. One sells whatever is overweight in the portfolio and buys whatever is underweight. Here, you'd have to sell something within the PP.

If stocks crashed, XBB or gold would end up above the target allocation weight. At rebalancing time (once or twice a year) you would sell some XBB or gold and buy stocks. This is what happens in traditional asset allocation with a bond fund as well, for example 50/50 or 60/40. You sell bonds, buy stocks.

I can show that the two versions I gave in #381 have given equivalent results. I'll use US data because it goes back much further. Link to the back-test in Portfolio Visualizer

Portfolio 1 is the 'proper' PP which separates cash and long term treasuries. Explicit cash, as you are currently doing. Portfolio 2 applies the simplification I discussed, collapsing cash and bonds into a single generic bond fund of a medium term. Here I used IEF which is similar to XGB (pure govt). As noted before, XBB adds corporate exposure, but I like it because of the super low MER and incredibly long track record.

You can see that over 15 years, those two portfolios had virtually the same behaviour. The stats and chart are about the same. That means that although Portfolio 1 was able to use cash to buy depressed assets, and Portfolio 2 sold bonds to buy depressed assets, the result was about the same.

Yes you would think that explicitly having cash separated out would be an advantage, but apparently lumping them together works about as well.

Hmm... but we could have a scenario where stocks crash and bonds are simultaneously very weak. If that were to happen, then the explicit cash version could give superior results instead.

This happened in the 1970s, and here's a link to that backtest for the two PP versions. You can now see that the Portfolio 1 (using cash) has a superior return, outperforming from 1978-1981. But add a few more years and they bounce back to equal performance.

In summary: strictly speaking, the separated cash version is safer and does better during periods of bond market turmoil. However, over the longer term (for the 42 years of data available) they give similar performance.

Faced with ^ that tradeoff, I decided that the benefit of dealing with fewer holdings was worth it. I previously struggled with doing the "cash" part, and this 50% XBB solved that for me. Fewer ETFs, fewer rebalancing trades, and less work overall. I guess the one problem of this method is those bad years in bonds like the 1970s so I might experience worse drawdowns than the ideal PP.
 

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I think the single 50% weight bond weight (like XBB) does satisfy these. The way (3) works is by periodic rebalancing. One sells whatever is overweight in the portfolio and buys whatever is underweight. Here, you'd have to sell something within the PP.

If stocks crashed, XBB or gold would end up above the target allocation weight. At rebalancing time (once or twice a year) you would sell some XBB or gold and buy stocks. This is what happens in traditional asset allocation with a bond fund as well, for example 50/50 or 60/40. You sell bonds, buy stocks.

I can show that the two versions I gave in #381 have given equivalent results. I'll use US data because it goes back much further. Link to the back-test in Portfolio Visualizer

Portfolio 1 is the 'proper' PP which separates cash and long term treasuries. Explicit cash, as you are currently doing. Portfolio 2 applies the simplification I discussed, collapsing cash and bonds into a single generic bond fund of a medium term. Here I used IEF which is similar to XGB (pure govt). As noted before, XBB adds corporate exposure, but I like it because of the super low MER and incredibly long track record.

You can see that over 15 years, those two portfolios had virtually the same behaviour. The stats and chart are about the same. That means that although Portfolio 1 was able to use cash to buy depressed assets, and Portfolio 2 sold bonds to buy depressed assets, the result was about the same.

Yes you would think that explicitly having cash separated out would be an advantage, but apparently lumping them together works about as well.

Hmm... but we could have a scenario where stocks crash and bonds are simultaneously very weak. If that were to happen, then the explicit cash version could give superior results instead.

This happened in the 1970s, and here's a link to that backtest for the two PP versions. You can now see that the Portfolio 1 (using cash) has a superior return, outperforming from 1978-1981. But add a few more years and they bounce back to equal performance.

In summary: strictly speaking, the separated cash version is safer and does better during periods of bond market turmoil. However, over the longer term (for the 42 years of data available) they give similar performance.

Faced with ^ that tradeoff, I decided that the benefit of dealing with fewer holdings was worth it. I previously struggled with doing the "cash" part, and this 50% XBB solved that for me. Fewer ETFs, fewer rebalancing trades, and less work overall. I guess the one problem of this method is those bad years in bonds like the 1970s so I might experience worse drawdowns than the ideal PP.
What if I put Cash in a redeemable GIC and earn 2% annualized interest? Will that lift the return of Portfolio 1 a little bit?

The other thing is tax implication. Maybe it's unique to people like me, I have a very limited TFSA account and no RRSP yet. All my investments are in non-registered accounts now. I am paying taxes for all the interests/dividends already. If I have to sell bonds/gold to buy depressed stock, high capital gain tax may apply.
 

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Discussion Starter #387
What if I put Cash in a redeemable GIC and earn 2% annualized interest? Will that lift the return of Portfolio 1 a little bit?
But then you lose the ability to rebalance when needed by using liquid cash to buy whatever asset has dropped.
 

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Discussion Starter #388
What if I put Cash in a redeemable GIC and earn 2% annualized interest?
I missed the word "redeemable". That's an interesting idea. So then you'd have, in most circumstances, the GIC yield. But in the rare occasion where some asset crashes and you could benefit from cash, I suppose you would do an early redemption and get the cash out? Is that what you're thinking?

You should look into the penalty for early redemption but I think I saw a credit union where the penalty just retroactively cancels the 2% rate and applies a near zero rate instead, which would be fine. So if you really need cash, it retroactively becomes cash. If you go the whole term (perhaps 1 or 2 years) without needing cash, then it's a GIC.

This is an interesting idea :)
 

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Yes, that's what I am thinking. I managed to get a 1-year redeemable GIC with RBC which I can do early & partial redemption without any penalty.
 
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