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Discussion Starter #1
Ray Dalio's "All Weather Portfolio" is meant to weather any economic season.

According to Dalio, there are only four economic seasons:

1. Higher than expected inflation (rising prices)
2. Lower than expected inflation (or deflation)
3. Higher than expected economic growth
4. Lower than expected economic growth

The "All Weather Portfolio" is meant to perform well in all of these "seasons." It looks like this:

7.5% Gold
7.5% Commodities
30% Stocks
40% Long Term US Bonds
15% Intermediate US Bonds

What do you think of Dalio's portfolio? What surprises me personally is how conservative it is. Only 30% in stocks.
 

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It's a very similar concept to the Permanent Portfolio, which is 25% stocks, 25% bonds, 25% gold, 25% cash. I think the concept is solid, and I use the permanent portfolio myself. Generally with these methods you are giving up a little bit in returns, for added stability and lower volatility. That tradeoff is more useful to certain investors than others, but for me, it's an excellent tradeoff.

I personally think the Permanent Portfolio is easier to implement than this All Weather Portfolio. With all weather, you're going to have a tough time with 7.5% "commodities". What does that mean, the CRB index? You won't find a good ETF that tracks that. It also requires very high exposure to long term US bonds, which is a bad move as a Canadian investor where CAD is your base currency. There is no good Canadian equivalent, because we don't have a big market for long term government bonds, so you really can't achieve the same effect in Canada.

If the All Weather concept appeals to you, take a look at this simple portfolio as an alternative, which is very easy to implement for a Canadian investor with just 4 ETFs:

34% stocks (half Canadian index XIC, half US index ZSP unhedged)
33% bonds (XBB)
33% gold (MNT)

For the 21 years I have data for, 1997-2017, this simple portfolio -- with annual rebalancing -- returned 6.6% annually with a positive return every year. Compare that to the traditional 60/40 portfolio which returned 6.8% annually (yes a higher return) but with much more volatility, including some very negative years.

This graph shows the annual returns of the above stock/bond/gold portfolio. Look how amazingly steady this pattern is, and the annualized return is nearly the same as a 60/40 fund.

stocks-bonds-gold2.png
 

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Discussion Starter #4 (Edited)
I often see the "100 minus your age" rule for stock allocation. E.g. if you're 40, then have 60% of your money in stocks.

But I also hear from people who have a much smaller percentage in stocks. Dalio's All Weather is 30%. The Permanent Portfolio is 25%.

Sometimes, it seems that more seasoned, experienced, and wealthy investors have less money in stocks than the "100 minus age" recommendation.

What are your thoughts on stock allocation? Do most investors put too much of their portfolio in stocks?
 

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You could go with either one. They actually have the same fee: XBB and ZAG both have 0.09% management fee and 0.10% MER. About a year ago, iShares slashed the fees on XBB.
I checked the MER of XBB with TDDI before posting that comment and it was shown 0.19%. Where do you check the MER info? I also checked the XBB fund fact but it doesn't provide MER info.
 

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What are your thoughts on stock allocation? Do most investors put too much of their portfolio in stocks?
Everyone has different risk tolerance so I wouldn't generalize and say investors put too much in stocks. There are many people who are absolutely OK with the risk that comes with say a 90% stock allocation.

However, it's now been nearly 40 years of strong equity performance, and I think that has made people forget about how risky stocks are. Events like the 2008 crash followed by a stimulus-induced recovery have trained people to think that stocks not only go up, but when they decline, they only decline briefly. I believe that many investors have forgotten how risky stocks are. By risky I mean, the reality is: stocks can decline, and then stay depressed for 10 or even 20 years... potentially with zero real return for two decades. If something like this happens on the cusp of your retirement, you are screwed and ruined. A situation like this hasn't happened in a long time and most people seem to think they won't ever see it happen. (I think it will happen).

That risk is compounded by another effect, which people generally don't think of: the conditions that lead to such bad stock performance also stress your personal finances, and you end up having to withdraw money out of your stock portfolio at the worst time ever.

But again you can't generalize... an investor may be fully aware of stock risk, and decide it's worth it, perhaps because such declines won't distress them. My experience though, talking with many friends and coworkers through two bear markets (2001 and 2008) is that most people really can't handle stock volatility. People might handle a -20% decline but once you get into -40% or -50% losses, the pain just gets too intense. People give up, abandon stocks, and never come back. Or they might need the money due to job loss and have no choice but to "capitulate" their investments.

Luckily during those past bear markets, I was heavy in fixed income. Therefore, I survived, didn't capitulate, and am still investing. That experience taught me that there is a lot of value in lower risk approaches. It's really valuable to have a portfolio that fares well during bear markets, both for the psychological comfort, and also the real benefit of having your capital intact in case you're forced to withdraw from it.

I really like investing in a lower risk way, even if it means lower returns. Sticking to these methods should let me handle bear markets relatively well, meaning I can stay invested, consistently, sticking with the plan -- which leads to the best outcome.

I'm currently 25% stocks, 25% bonds, 25% gold, 25% cash. I'll admit this is too heavy in cash, and my current idea is to wait for any one of those asset classes to crash, eliminate the cash component, and re-allocate to equal weight: stocks, bonds, gold. That would take me all the way up to 33% or 34% stocks, a record high for me.

This is the chart I posted earlier in the thread.
 

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I checked the MER of XBB with TDDI before posting that comment and it was shown 0.19%. Where do you check the MER info? I also checked the XBB fund fact but it doesn't provide MER info.
0.19% is the most recently published MER for XBB, but that's based on calendar year 2017. In that year, the fund had high expenses in the first half of the year, but the fees were slashed mid year. So MER going forward is much less.

It's on the iShares web page
https://www.blackrock.com/ca/individual/en/products/239493/ishares-canadian-universe-bond-index-etf

This shows the management fee of 0.09%. You'll see on the ZAG page that they have the same mgmt fee. The MER includes a few extra costs plus taxes and generally is about 10% to 20% higher than the management fee.

Given that XBB and ZAG both have 0.09% management fee and are structurally very similar, if the ZAG MER is 0.10% then the XBB MER is also probably the same.

The XBB fees were dropped in May 2017. Therefore you won't have an official number for the true MER until the full 2018 calendar year is over. It's going to be either 0.10% or 0.11%.
 

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I like it though would replace high risk government bonds with lower risk corporate bonds. The rating agencies are wrong US government bonds are not as safe long term as corporate bonds. Would use silver for 7.5 for commodities. Depending on age would maybe consider using 5 year GICs for intermediate bonds & perhaps some deferred annuities for longer term bonds. Probably best not to use bond fund instead individual bonds. Only 30% stocks as they are more volatile then bonds, commodities more volatile then stocks so lower percentage held then stocks
 

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I agree lonewolf that a 30 year US Treasury bond has risk, isn't pristine credit quality. Especially not with the political dysfunction going on down south.

I'd still prefer an approach that uses high quality Canadian bonds. You also don't need to go as far out as 30 year treasuries to get safety... as I showed above, even XBB in combination with stocks and gold gives quite a safe portfolio. And XBB is hardly a wacky investment.

These US-centric approaches like All Weather should be carefully evaluated against a CAD basis. The ideal positioning for a Canadian investor may be different than for an American. Note that gold does a better job at protecting Canadian investors than Americans.
 

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Adding to my Saturday night complaints about stock investment... another reason I'm not such a fan of stock investing is that people (including myself) tend to do things in stock investment that just hurt our results, and make our outcomes worse than index investing. So while stocks may offer an attractive risk-vs-reward in the ideal sense, people usually don't invest the ideal (index) way. Instead they will do some ad hoc stock picking, which inevitably leads to portfolios heavy in things like NT, RIM, GE, C, and countless other losers. Or people latch onto ETF ideas, like loading up on XEG for the energy sector.

Stocks are always marketed as fun and exciting. We're given a million ropes to hang ourselves with. New stock investors usually enter the market with wildly unrealistic, over-optimistic estimates of the returns they will get. Greed is there from day one.

Many of those problems don't exist in fixed income investing. I have known countless people who have blown away huge amounts of money in stocks, and ultimately done far worse than a GIC ladder.

To some degree, I limit my stock exposure to both protect me from myself, and to protect myself from Wall Street / Bay Street and their endless scams.

There's a big difference between the "ideal" stock investment experience, and what actually happens with real people. But you won't read about it here, because people don't tend to brag about their failures and losses on the internet.
 

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Discussion Starter #12
James, I agree that 25% cash is a bit high. I'm in a similar situation. Do you keep your cash in very short term (2-3 month) GICs so at least it's earning something? Similar to T-Bills?

There's a good chance that the bank of Canada will raise interest rates later this year, which might give you a good opportunity to buy bonds with higher interest, or bond funds at a cheaper price.

As for moving more cash into equity: I have no idea where the stock market is moving. I have no idea if we're on the cusp of a bear market, or whether the bull still has a long run ahead of him. Absolutely no idea. I don't think anyone knows. We can see the DOW roaring into the 30,000s, or falling under 20,000. I don't know. All I can do is try to have different asset classes and prepare for different eventualities.
 

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both the permanent portfolio (which i prefer to the all-weather portfolio if i have to pick one) have significant drawbacks by virtue of the fact that they will only "work" over long periods of time so that all of the phases of each asset have a chance to dominate and prove their worth

gold and commodities go through long dead periods as do bonds to a lesser extent (gold has been dead money for 5 years and is a consumptive asset rather than a productive asset ... it actually costs you money to hold it, it isn't even neutral money) thus you need to hold the permanent portfolio for a long, long time for it to pay off ... anyone over the age of about 40 may not get much benefit from it where equities will be more predictable

equities typically don't have long periods of negative years as the others do

buffet is proof of this as he avoids both gold and commodities

http://pages.stern.nyu.edu/~adamodar/New_Home_Page/datafile/histretSP.html
 

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one more thing ... the returns for the sp500 understate the use of sector allocation

the sp500 currently has 7 major and 3 minor sectors

judicious use of sector allocation would improve sp500 returns considerably ....

you can't do this with gold or silver at all

you can certainly do it with commodities but it requires expert skill

anticipating and using sectors in the sp500 is much easier to do

found a bloomberg chart that shows variations by sector over the last 10 years for the sp500 and you can see that performance varies widely

http://www.sectorspdr.com/sectorspdr/Pdf/All Funds Documents/Document Resources/10 Year Sector Returns
 

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There is a video Nov 2014of Tony Robbins talking about the all weather portfolio most likely I saw it on you tube.

Over last 75 yrs yearly returns
largest loss 3.95%
average loss 1.6%
win ratio 86%
Averaged almost +10%

The portfolio is based on balancing risk the higher the risk the less of that asset is held in the portfolio
 

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gold and commodities go through long dead periods as do bonds to a lesser extent (gold has been dead money for 5 years
fatcat I understand those criticisms, but gold has not been dead money valued in CAD. If you look at MNT, the 5 year annualized return of MNT has been 2.7% after fees, actually the same as bonds (XBB) over 5 years according to Morningstar.

Both gold and bonds have outperformed cash in the last 5 years.

And yes, the permanent portfolio is very much a long term strategy. But I'd turn your argument on its head: going forward, we don't know which asset class will be strong for the next 20 years. You and virtually everyone else in the mainstream assumes it will be stocks, with bonds and gold being weak. But nobody knows how this will really play out.

In fact, it could turn out that stocks are weak for the next 20 years and perhaps gold is strong. Or some other permutation. The permanent portfolio or all weather put you in a good spot no matter what it turns out to be.

At the core of these all weather approaches is a key idea that's an extension of the couch potato methodology: we have no idea which assets will be strong in the next decade or two. So we maintain constant allocations to several of them, maximizing our chances of performing well. And yes of course, in doing so, there will be some part of the portfolio that's dead money for 10 or even 20 years. That's intentional.

The point is you don't know which asset class will be the dud, and which will be the champ. If you're certain stocks will continue being the champ already 35 years into their bull market, then I can see why you'd see no value in bonds or gold. I guess most investors think stocks are going to have a 50 or 60 year bull market streak. Wacky, but sure, anything is possible.
 

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James, I agree that 25% cash is a bit high. I'm in a similar situation. Do you keep your cash in very short term (2-3 month) GICs so at least it's earning something? Similar to T-Bills?
I keep it in high interest savings plus a few GICs, but it's mostly high interest savings.

There's a good chance that the bank of Canada will raise interest rates later this year, which might give you a good opportunity to buy bonds with higher interest, or bond funds at a cheaper price.
Very hard to predict. If it was such a certainty, then it's already priced into bonds. Timing the bond market is just as difficult as timing the stock market.
 

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fatcat I understand those criticisms, but gold has not been dead money valued in CAD. If you look at MNT, the 5 year annualized return of MNT has been 2.7% after fees, actually the same as bonds (XBB) over 5 years according to Morningstar.

Both gold and bonds have outperformed cash in the last 5 years.

And yes, the permanent portfolio is very much a long term strategy. But I'd turn your argument on its head: going forward, we don't know which asset class will be strong for the next 20 years. You and virtually everyone else in the mainstream assumes it will be stocks, with bonds and gold being weak. But nobody knows how this will really play out.

In fact, it could turn out that stocks are weak for the next 20 years and perhaps gold is strong. Or some other permutation. The permanent portfolio or all weather put you in a good spot no matter what it turns out to be.

At the core of these all weather approaches is a key idea that's an extension of the couch potato methodology: we have no idea which assets will be strong in the next decade or two. So we maintain constant allocations to several of them, maximizing our chances of performing well. And yes of course, in doing so, there will be some part of the portfolio that has been dead money for 10 or even 20 years.

The point is you don't know which asset class will be the dud, and which will be the champ. If you're certain stocks will continue being the champ already 35 years into their bull market, then I can see why you'd see no value in bonds or gold.
i take your meaning james, going forward, we don't know at all ... but historical data tells us that the chances are simply not equal that gold, bonds, stocks and cash will perform equally

there is a better than 25% chance that equities will outperform ... especially if we look at sector allocation ... than there is that gold will outperform

here is a chart that shows what i mean


gold and commodities are much more erratic and the holding period for the permanent portfolio will have to be very long for these assets to play their part ... at least 50 years

if you look at the chart i linked up thread you see that though stocks have bad years, they never have had more than 3 negative years in a row and mostly they have a mix of good and bad years

stocks are like riding up and down the low mountains of kansas where gold is like the swiss alps high jagged peaks and low valleys

get caught in a bad gold cycle ... like the last 5 years and you have dead and consumptive money

so yeah, if you are 20 years old the permanent portfolio is probably an ok model but anyone else, you can get caught in a bad downdraft
 

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if you look at the chart i linked up thread you see that though stocks have bad years, they never have had more than 3 negative years in a row and mostly they have a mix of good and bad years
Maybe not in a row, but what's more important are the bull and bear phases over multiple years. Here is a 15 year period with about zero return in stocks, 1965 to 1980: http://schrts.co/xfZeij

That isn't ancient history either. Stocks were hated by the time 1980 rolled around. Fifteen years of dead money and 40% declines along the way... just brutal.
 

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Maybe not in a row, but what's more important are the bull and bear phases over multiple years. Here is a 15 year period with about zero return in stocks, 1965 to 1980: http://schrts.co/xfZeij

That isn't ancient history either. Stocks were hated by the time 1980 rolled around. Fifteen years of dead money and 40% declines along the way... just brutal.
good and fair point (though you have switched to the dow instead of the 500, close enough though) ...

this is why ronald reagan got elected ...

i tend to think that during that period one could have done well enough by using sector allocation wisely and reaping dividends along the way ..

with gold, you have merely a binary set of choices ... gold good or gold bad ... as we know, gold doesn't pay dividends and even costs money to own ...

there will be times when you will be glad to own gold ... and i do love the stuff, it is beautiful ... but i just think that 25% is way too much ...

you don't and it's your portfolio and that's what matters :)
 
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