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Multi-Region Permanent Portfolio

Index tracking funds and ETFs
Newroad
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Re: Multi-Region Permanent Portfolio

#339464

Postby Newroad » September 10th, 2020, 2:05 pm

Hi 1nvest.

Re your discussion of bonds above, whilst I understand them at a superficial level, I regard myself as less qualified to judge their relative merits than with stocks. This is not to say I am any kind of stocks guru ;)

Consequently, the mix of a conservative (in context) ETF, VAGP, with an investment trust which invests in racier, higher yielding fixed income assets. VAGP's bond portfolio has an average maturity of around 9 years as I recall - so there is certainly some interest rate sensitivity there - but not extreme. I judge that active management in trusts like HDIV, IPE and CMHY will do better than an ETF in the higher yielding market segment, but whether that's true at all (and if so, if it's sufficiently true to counteract the higher fees) only the very long term will tell.

Hence, not putting all my eggs in one basket and having the 50/50 split.

Regards, Newroad

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Re: Multi-Region Permanent Portfolio

#339500

Postby ignotus20 » September 10th, 2020, 4:09 pm

Thanks everyone for the very helpful replies, especially to 1nvest, dspp, mc2fool and Newroad for their detailed posts. To Adamski's point, I'd definitely regularly read any blog or book 1nvest has written (or plans to).

I am investing a reasonably significant lump sum and my main interest is capital preservation, low volatility and gains circa 2.5-3% after inflation - which would have sounded fairly easily achievable until six or seven months ago. I may or may not need to be drawing down from this portfolio to pay living expenses, but it's probably safest to anticipate that I will be. I don't mind whether the drawings are generated via dividends/coupons/interest, rebalancing or a combination thereof.

A further factor behind the attraction of the PP is that I don't want to have to tinker with this very often nor agonise a lot over capital allocation decisions, a simple rules-based approach that works most of the time is what I am looking for. I have other funds where I am prepared to get more 'creative', but not with this portfolio.

My main motivation for considering more than one region (outside UK) was diversify my risk and stabilise the returns. I acknowledge that I might stabilise them so much that I don't make any real post-inflation gains at all if I follow this path.

I will be spending some funds outside the UK, but I will live here for the majority of the time. As other posters have said, my concern over a UK-only portfolio is how things will play out here over the next decade or so as the potential for volatility seems quite significant. From what I've read of the PP theory, the different components should all hedge each other off to an extent (and inflation) so it maybe this is diversifying excessively. The point over sticking with gold in USD is a fair one. My main motivation for this post was to encourage a discussion of the relative pros/cons of regional diversification.

1nvest
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Re: Multi-Region Permanent Portfolio

#340114

Postby 1nvest » September 14th, 2020, 3:27 am

I'll also have a 'modest' (near 6 digit start of payment of occupational pension) lump sum to drop into the market soon. Throwing a spanner into the PP works I do like a Talmud asset allocation of a third each UK home, US stock, gold. To me a 50/50 US stock/gold barbell is a form central currency unhedged global bond bullet. Two extremes/opposites that is somewhat like holding a barbell of 20 year and 1 year gilt barbell that broadly compares to a central 10 year bond bullet. Higher volatility, and in some years both stocks and gold can drop, but usually when that is the case the years either side of that tend to see one or the other do relatively well.

Here's a more for fun (messing around with LibreOffice Calc) image I created, but that is highly subjective

Image

It's also somewhat more aligned with 'Old Money' - generational wealth mantra of a third, a third, a third (land, gold, art) but where art is instead replaced by stocks. Keynes art collection value was investigated by Dimson and others https://academic.oup.com/raps/advance-a ... 01/5716334 and observed to have yielded around comparable longer term rewards.

Conceptually you might rebalance infrequently, and perhaps include some UK stocks as a proxy for UK home value - for liquidity purposes. What appeals to me is that in including some of home value as part of the portfolio, the higher capital value of the portfolio means a lower SWR figure can be applied, and a great way to substantially reduce risk is to reduce the SWR figure. £333K in each of home, US stocks, gold, £1M total with a 2.5% SWR (£25K/year income), excluding imputed rent, is considerably safer than a 3.75% SWR applied to a £666K amount (that provides the same £25K/year).

Domestic £ currency, primary reserve currency (US$) and global currency (gold) currencies diversification; Land, stock, commodity asset diversification.

Looking at something like this is indicative of the higher volatility that endures. For some periods such as 1994 to 2004 in that link (and somewhat from 2012 onward also) the two can be quite similar in rewards, but at other times see that Talmud blend spike down, or up to a new higher/lower plateau.

It's a question of character/nature. Whether you see volatility as a risk, or just something that you ride through. Also many would hate having so much in gold, whilst others like having two thirds of 'in hand' assets (land and gold) just a third having counter party risk (stocks). Many in India look totally differently upon gold, as their domestic currency has at times been a lot less 'dependable' (lacks trust/faith).

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Re: Multi-Region Permanent Portfolio

#340138

Postby jonesa1 » September 14th, 2020, 9:22 am

1nvest wrote:Conceptually you might rebalance infrequently, and perhaps include some UK stocks as a proxy for UK home value - for liquidity purposes. What appeals to me is that in including some of home value as part of the portfolio, the higher capital value of the portfolio means a lower SWR figure can be applied, and a great way to substantially reduce risk is to reduce the SWR figure. £333K in each of home, US stocks, gold, £1M total with a 2.5% SWR (£25K/year income), excluding imputed rent, is considerably safer than a 3.75% SWR applied to a £666K amount (that provides the same £25K/year).



On the basis that it isn't practical to access the home value for most people, how does adding it into the portfolio de-risk the SWR, given that the assets generating realisable value are unchanged and the amount being withdrawn is unchanged?

Andrew

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Re: Multi-Region Permanent Portfolio

#341345

Postby 1nvest » September 19th, 2020, 11:07 am

jonesa1 wrote:
1nvest wrote:Conceptually you might rebalance infrequently, and perhaps include some UK stocks as a proxy for UK home value - for liquidity purposes. What appeals to me is that in including some of home value as part of the portfolio, the higher capital value of the portfolio means a lower SWR figure can be applied, and a great way to substantially reduce risk is to reduce the SWR figure. £333K in each of home, US stocks, gold, £1M total with a 2.5% SWR (£25K/year income), excluding imputed rent, is considerably safer than a 3.75% SWR applied to a £666K amount (that provides the same £25K/year).


On the basis that it isn't practical to access the home value for most people, how does adding it into the portfolio de-risk the SWR, given that the assets generating realisable value are unchanged and the amount being withdrawn is unchanged?

Andrew

Including home value, supplemented with some UK stocks/Pounds as a proxy for land (liquidity), has the potential to 'trade' more capital as different assets ongoing valuations swing around, and those swings can be very large. Somewhat like a 1.5x leveraging, without the overheads of borrowing costs, along with greater diversification, land, stock, gold third each versus 50/50 stock/gold

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Re: Multi-Region Permanent Portfolio

#341902

Postby Stonge » September 22nd, 2020, 10:48 am

Interesting article on HL

https://www.hl.co.uk/news/articles/how- ... d-ftse-100

may be relevant in some way

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Re: Multi-Region Permanent Portfolio

#347419

Postby NumberGoUp » October 13th, 2020, 3:21 pm

I started an "international" Permanent Portfolio back in ~September 2017.
I was aware that as originally described by Harry Browne it was constructed with US equities and bonds, but just put that down to typical US investor myopia. And it never occurred to me that I should translate the "use domestic markets" thing to just using UK equities and gilts... instead I went about "going global" with it.

What I ended up with was:
  • 25% Vanguard FTSE Global AllCap Index Fund (more diversified down into the small caps than VWRL).
  • 25% PHPP - A "precious metals basket" ETF (physical) which is 50% gold, 20% silver, 20% platinum, 10% palladium (more diversified than just gold)
  • 25% long bonds split 3 ways between Vanguard U.K. Long Duration Gilt Index Fund / IBTL / IBGL (GBP/EUR/USD)
  • 25% "cash" between: ERNS/ERN1/ERNU (GBP/EUR/USD)

The "cash" holdings are technically ultra-short (<1year) duration bond funds which seemed slightly more appealing than money market funds. This was set up on ATS where there was no facility to hold FX. Now its been migrated to II that'd be an easy option; I've stuck with the ETFs for now but if I was starting from scratch I might just be tempted to hold the currency directly. OTOH it's nice to get at least a pittance in yield. Did wonder about trying to add JPY or even CHF into the FX mix, but not researched whatever similar options might be available in any more detail.

I am entirely comfortable with the portfolio's GBP value fluctuating with FX rates. The obvious way to tame it somewhat would be to just go entirely GBP for the bonds and cash though. That'd give 50% GBP, 50% <rest of the world> exposure... which is inline with what most of the "permabear" trusts (PNL, CGT, RICA) seem to maintain when I've looked at their factsheets, presumably an acknowledgement that noone knows where FX will go next.

Annual returns since inception from 2017 to the latest annual topup-and-rebalance 1st week in October have been -3.1%, 21.2%, 6.9% for an overall 7.9%pa annualised. I actually set it up with a lump sum and then have been topping up with 25% of that amount every year... on that basis its done the equivalent of a constant-rate 8.6%pa (pumped up by the first top-up "buying the dip"). So far I haven't actually had to sell anything to rebalance... appropriate direction of the top-ups has been sufficient to get things back to 4x25%; it was touch and go whether I'd have to sell some of the precious metals ETF this year though.

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Re: Multi-Region Permanent Portfolio

#348857

Postby 1nvest » October 19th, 2020, 9:47 am

It's difficult to find PP bad cases, however Japan 1990's is about the worst. Looking at that it would have been better for a Japanese PP'er to have held US stocks rather than domestic stocks for their 25% stock allocation.

Another choice to a global PP might be to hold the 50% 'bond' barbell (short and long dated Gilts) as-is, but hold a barbell of US stocks and gold for the other half, 25% primary reserve currency (US$), 25% global currency (gold), for a overall 50% domestic (Pounds) and 50% foreign currency diversification.

Harry Browne did advocate holding ones own domestic stocks for non US PP'ers, suggesting that the inter-working with each other (one asset up, another asset down) would break-down if another countries stocks (or whatever) were being held and that may be experiencing a different stage of economic cycles. However diluting down over-exposure to ones own currency, down from 75% to 50%, so it seems - can be beneficial at times.

Whilst a global PP has appeal, for me the concern is costs. Assuming a broad average of 20% withholding taxes applied against dividends/interest and say a 8% average return, of which perhaps half is from interest/dividends = 0.8%/year drag. Add on (for simplicity) 0.2% average costs (fund management fees/whatever), and 1%/year overheads. In contrast a PP of 50% in UK gilts held inside ISA, physical gold, US non dividend stock(s), once purchased might get to keep that 1% for ones own benefit.

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Re: Multi-Region Permanent Portfolio

#348878

Postby 1nvest » October 19th, 2020, 10:32 am

Pulling down yearly gains data from portfoliovisualizer.com, which is US$ data, for a asset allocation of 12.5% US stocks, 12.5% global stocks excluding US (as ball-park the US makes up around half of stock equities - so I'm assuming here that that combination is a proxy for 'global stocks'), along with 25% gold and 50% global unhedged bonds (as a proxy for 50/50 short/long dated bond barbell i.e. central 10 year bond bullet), and using FRED data for year end Pound/US Dollars then ... from the start of 1994 (for which data is available) to end of 2019 in Pound terms that yielded a relatively smooth 6.8% annualised. Bank of England indicates that over the same period inflation annualised 2.8%. So a +4% after inflation type reward.

I believe that portfoliovisualizer data includes fund fees, and may very well include withholding taxes applied, but exclude any additional domestic taxes (capital gains tax, dividend tax ..etc.)

As Harry used to say, the PP is for money you can't afford to lose. At times its security will see it lag other assets, at other times other asset allocations will see much of their 'gains' being handed back again to perhaps be no better, maybe worse, than if they'd held a PP. The hardest part of the PP is not falling into the greed trap, jumping around asset allocations/profit chasing - which also tends to be one of the main reasons for relatively poor outcomes.

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Re: Multi-Region Permanent Portfolio

#349139

Postby NumberGoUp » October 20th, 2020, 10:09 am

Doesn't portfoliovisualizer.com do everything with inflation adjusted real returns though? (So that 6.8%pa will be on top of US inflation rates). I'm an infrequent user of that site (seem find portfoliocharts.com more useful) but certainly when I mouse over any its portfolio analysis results' 'i' icons it says 'Inflation adjusted end balance' and 'Inflation adjusted CAGR'. Not sure what you get "pulling down yearly gains data" from the site though.

Certainly portfoliocharts is very explicit about this. Their methodology page (forum won't let me post link) says "Returns quoted are REAL. This means that all returns are adjusted for inflation. Inflation varies every year and is measured by CPI of each country.". Couldn't find anything equivalent on portfoliovisualizer but I get the impression it's considered to be the only sensible way to do things in these sort of multi-decade a lifetime of investment analysis tools.

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Re: Multi-Region Permanent Portfolio

#349792

Postby dspp » October 22nd, 2020, 11:17 am

NumberGoUp wrote: Their methodology page (forum won't let me post link)


When you have done something of the order of twice as many posts as you have then you are permitted to post links.

Inflation correcting does seem the right way to do these exercises.

regards, dspp


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