Questions concerning implementation of a GB/Weird portfolio

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sylvainpbe
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Questions concerning implementation of a GB/Weird portfolio

Post by sylvainpbe » Mon Jan 18, 2021 7:17 am

Hello,
I have never interacted on this forum but I have read a lot of the threads and I would like first to thank you all for the knowledge that is freely available here. It is changing the way I see investing. I am a very conservative person so for me the best way to invest is 
-by limiting drawdowns, 
-have an as regular as possible performance and
-high PWR.
-My goal would be to find a way to invest that could theoretically work for 200 years and to implement it in the next 2 months

I am based in Luxembourg so my spending currency is the Euro. To avoid taxes in Luxembourg the best way is to try to limit dividend or interest incomes because there are taxed vs capital gains that are not taxed if kept for at least 6 months. So the best way is to have capitalising ETF
I have the following issues:

1. 30Y German bonds which is the safest bond in the Euro zone  is -0.12% so a guaranteed loss after 30 years not even taking into account the inflation for the 30Y.So, I have the impression that I have to change the portfolio and not take LT bonds but more cash.Normally those high quality bonds are there to protect against deflation. Do you think that pure cash would be as effective? Do you have another idea to protect myself against the deflation in the Euro currency without getting a negative return in the long run and that would be very safe?

2. I am hesitating between the following portfolios:
A. Something close to the GB portfolio but a bit more offensive (50% stocks instead of 40%), no LT bonds because of the point 1 above but with more cash 30% instead of 20%

12,5% small cap value US, 12,.5% small cap world ex US, 12,5% Total market US, 12,5% Total market ex US, 30% Eur cash, 20% gold

B. Something close to the weird portfolio (https://valuestockgeek.medium.com/the-w ... db7e722ee0) but a bit less offensive (50% stocks + REIT instead of 60%) no LT bonds because of the point 1 above but with more cash 30% instead of 20%

20% US Small caps value, 20% international Small caps ex US, 5% US reit, 5% world ex US reit, 20% gold, 30% Eur cash

I would like to know what do you think is wrong about those 2 portfolios? and if you think I would still be sufficiently protected against all possible bad scenarios like a traditional PP even with larger drawdown obviously?

3. Does anyone know about studies concerning small caps outperformance vs big caps before 1970? Is the outperformance of small caps those last 50 years a biais or a universal truth since the beginning of the stock markets? Is the outperformance only valid in the US?

4. The 30% cash part of the portfolio is it better to have it only in EUR (my spending currency) or a mix of EUR, USD, JPY, CNY (for diversification in case something goes wrong with the euro?). I suppose that gold is protecting me against something bad happening to the euro due to the worldwide economic importance of the eurozone. Gold should react to chaos in that zone.. what do you think?

5. Do you see anything to add that could make the portfolio survive for the very long run? Are there studies somewhere of people analysing asset classes for a longer timeframe?

I found various white papers concerning historical data's from the website global financial data's
I am not going to elaborate because this post is already very long but I found the ones below very interesting:

https://globalfinancialdata.com/7-centu ... ond-yields
https://globalfinancialdata.com/the-cen ... -inflation
https://globalfinancialdata.com/ten-les ... y-investor
https://globalfinancialdata.com/gfd-gui ... th-century

Thank you in advance for your help!!
Regards,

Sylvain
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blue_ruin17
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Re: Questions concerning implementation of a GB/Weird portfolio

Post by blue_ruin17 » Mon Jan 18, 2021 10:40 am

sylvainpbe wrote:
Mon Jan 18, 2021 7:17 am
1. 30Y German bonds which is the safest bond in the Euro zone  is -0.12% so a guaranteed loss after 30 years not even taking into account the inflation for the 30Y.So, I have the impression that I have to change the portfolio and not take LT bonds but more cash.Normally those high quality bonds are there to protect against deflation. Do you think that pure cash would be as effective? Do you have another idea to protect myself against the deflation in the Euro currency without getting a negative return in the long run and that would be very safe?
Even though yields are negative LT bonds can still be profitable. How? Well, yields can plunge even further, thus increasing the capital value of your bonds. In fact, now that they've decided to break the hard floor of 'zero' there is theoretically no limit to how much lower rates could drop. However if you hold cash in place of LT bonds it won't capitalize upon further rate drops.

In the context of the classic PP, you hold LT bonds as a hedge against deflationary depressions. If serious deflation occurs in Europe, what might the ECB do? Drop rates even more. In that case LTT will soften the length and severity of drawdowns that your portfolio experiences. This mechanism works even in a negative interest rate environment.
2. I am hesitating between the following portfolios:
A. Something close to the GB portfolio but a bit more offensive (50% stocks instead of 40%), no LT bonds because of the point 1 above but with more cash 30% instead of 20%

12,5% small cap value US, 12,.5% small cap world ex US, 12,5% Total market US, 12,5% Total market ex US, 30% Eur cash, 20% gold

B. Something close to the weird portfolio (https://valuestockgeek.medium.com/the-w ... db7e722ee0) but a bit less offensive (50% stocks + REIT instead of 60%) no LT bonds because of the point 1 above but with more cash 30% instead of 20%

20% US Small caps value, 20% international Small caps ex US, 5% US reit, 5% world ex US reit, 20% gold, 30% Eur cash

I would like to know what do you think is wrong about those 2 portfolios? and if you think I would still be sufficiently protected against all possible bad scenarios like a traditional PP even with larger drawdown obviously?
Nope, nothing wrong with those portfolios at all. The only observation I would make is that there is no LTT exposure in them so in the event of a serious deflationary event there is no mechanism within those portfolios that will aggressively spike in value in order to off-set loses else where. The cash will help soften the blow but it doesn't have the volatility of LTTs that works in your favour in those situations. But I only mention that because you asked if you would be protected against all scenarios. Lack of LTT's in those portfolios doesn't make them "bad" or "wrong" though they look quite reasonable to me -- but they also aren't going to behave like the PP, so keep that in mind if you're using the PP as a point of reference.
3. Does anyone know about studies concerning small caps outperformance vs big caps before 1970? Is the outperformance of small caps those last 50 years a biais or a universal truth since the beginning of the stock markets? Is the outperformance only valid in the US?
I'm pretty sure the small cap premium has been proven to be a real factor. Small caps legitimately do outperform large cap over the long-run, and this makes sense because you're capturing the exponential growth phase of companies where as there is less room to grow for mature large cap stocks. However, that being said, keep in mind that factor premiums can take years even decades to materialize. Part of the reason that factor premiums even exist at all, I think, is because of psychology: small caps can under preform relative to the broad market for so long that investors begin to capitulate and abandon small caps...which makes them undervalued...which is exactly where the "premium" is earned.
4. The 30% cash part of the portfolio is it better to have it only in EUR (my spending currency) or a mix of EUR, USD, JPY, CNY (for diversification in case something goes wrong with the euro?). I suppose that gold is protecting me against something bad happening to the euro due to the worldwide economic importance of the eurozone. Gold should react to chaos in that zone.. what do you think?
I think you answered your own question here. You spend in EUR, so why own another currency? And if something happens to the EUR, you have gold as a hedge. But also, there is a simplicity factor that must be considered. The more complex and granular your portfolio becomes the less manageable and streamlined it becomes. It reminds me of those old-time planes with the half dozen wings stacked on top of each other: sometimes less is more.
5. Do you see anything to add that could make the portfolio survive for the very long run? Are there studies somewhere of people analysing asset classes for a longer timeframe?
My biggest 'bone to pick' with the investment orthodoxy of today is the total shunning of gold. Not only has gold been proven to boost risk adjusted returns when added to just about any asset allocation, but it also protects your capital from risks that cannot be calculated or measured on a spreadsheet. However, you obviously understand this because in all your model portfolios you've referenced here there has been a solid 20% gold slug which, in my opinion, should be the minimum exposure to gold of any portfolio -- at least that's my personal standard.

If you elect not to have any exposure to LT bonds that may very well work out for you. Indeed, sometimes I have to pinch myself when I am reminded that we live in a world where 30 year bond yields are negative. In the long-term, I don't think this is going to end well. But that's why I own gold. The truth is however that LT bonds are still a legitimate hedge against severe deflation because rates can still drop. In fact, as I mentioned, there isn't even a limit to how far they can drop now, and therefore LT bonds are still an effective hedge against deflation/depression. And that's why I've stuck with them.

In the context of the PP, one of the assets that you hold is always going to be ruinous. One day LTT will be that asset. The next it will be stocks. And then gold. But that's why I love the Permanent Portfolio: I don't have to focus on the individual performance of the component assets at all. Only the aggregate performance of the portfolio as a whole matters.
Last edited by blue_ruin17 on Tue Jan 19, 2021 9:12 am, edited 1 time in total.
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Re: Questions concerning implementation of a GB/Weird portfolio

Post by pors » Tue Jan 19, 2021 4:47 am

Wow, that is an amazing answer @blue_ruin17! You should post more ;D
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Re: Questions concerning implementation of a GB/Weird portfolio

Post by sylvainpbe » Tue Jan 19, 2021 7:25 am

Thank you very much for the time you took to answeer me!!!

I still need to figure out what I will do concerning the LT bonds... That is very hard for me to buy something that has negative yield. I come from deep value investing (net-net stocks) so I am kind of allergic to something that screams" expensive". I have a tendency to always find everything expensive (bonds, stocks, REIT, ...) which had the consequence of giving me bad results the last 10 years. I have to finally accept the fact that picking stocks/bonds,.. doesn't work with my temperament

Theorically, In case central banks drop the rates further in negative territory shouldn't gold go up? Instead of having money in a bank that cost you interest wouldn't people prefer to convert their cash to gold that don't cost them?


I'm pretty sure the small cap premium has been proven to be a real factor. Small caps legitimately do outperform large cap over the long-run, and this makes sense because you're capturing the exponential growth phase of companies where as there is less room to grow for mature large cap stocks. However, that being said, keep in mind that factor premiums can take years even decades to materialize. Part of the reason that factor premiums even exist at all, I think, is because of psychology: small caps can under preform relative to the broad market for so long that investors begin to capitulate and abandon small caps...which makes them undervalued...which is exactly where the "premium" is earned.

==> Would you say that right now small caps are undervalued with the market focusing on growth big caps? and what metrics would you use to find out? CAPE?; The issue is that going that way means market timing... Maybee going all small caps means more volatility?

My biggest 'bone to pick' with the investment orthodoxy of today is the total shunning of gold. Not only has gold been proven to boost risk adjusted returns when added to just about any asset allocation, but it also protects your capital from risks that cannot be calculated or measured on a spreadsheet. However, you obviously understand this because in all your model portfolios you've referenced here there has been a solid 20% gold slug which, in my opinion, should be the minimum exposure to gold of any portfolio -- at least that's my personal standard.

==> For me gold is an insurance policy in case everyting goes badly I still have something that always had value in history. I suppose if everything goes badly the 20% allocation would take a lot of value because everybody will want it that should help mitigate the loss that stocks, bonds,... will have. I am still not sure if I should split 30% Eur / 20% gold or 25% Eur/25% gold

==> In case it is ok for you, I would be very interested to know how you invest? Is it a traditional PP? or something a bit different?

Thank you again for your long answeer!! It is helping a lot...
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Re: Questions concerning implementation of a GB/Weird portfolio

Post by blue_ruin17 » Tue Jan 19, 2021 9:53 am

sylvainpbe wrote:
Tue Jan 19, 2021 7:25 am
Thank you very much for the time you took to answeer me!!!

I still need to figure out what I will do concerning the LT bonds... That is very hard for me to buy something that has negative yield. I come from deep value investing (net-net stocks) so I am kind of allergic to something that screams" expensive". I have a tendency to always find everything expensive (bonds, stocks, REIT, ...) which had the consequence of giving me bad results the last 10 years. I have to finally accept the fact that picking stocks/bonds,.. doesn't work with my temperament
We're not really talking about LT bonds here. We're talking about the psychology and philosophy of investing. After years of struggle and experimentation you've come to a critical realization: you cannot predict the future. How often have I been proven wrong when I was utterly convinced that an asset was "overvalued"? I was expecting a major stock market correction by 2015. I never would have believed that stocks would still be hitting ATHs as late as 2020 (and beyond?). Assets can under and over-preform relative to our expectations for such long periods that even those with the strongest convictions begin to capitulate. This axiom applies to LT bonds in the present context as well.

So if you can't predict the future, and you've accepted that active investing is not suited to your temperament, now what? Well, you adopt an asset allocation strategy that makes logical sense to you and you judge the performance of your investment based on the performance of the portfolio as a whole. I cannot stress this enough because it is the magic key to achieving investment equanimity. The individual performance of the component assets in your portfolio does not matter in isolation. Focus only on the aggregate performance of the portfolio as a whole.

Is there an internal logic to your investment strategy? Does each asset within it play a critical role? Is there a dynamic relationship between the individual assets that serve a higher order within the 'system', the 'machine' that is your portfolio strategy? Yes, there is. And what happens when you start to tinker with one of those components? What if you remove it from the machine altogether? Well, suddenly the system will not necessarily operate as intended or expected, and indeed may well catastrophically break altogether at precisely the very worst time.

LT bonds still make sense, in the context of the PP and similar investment strategies, at least. If we were in the 90s we'd all be talking about how terrible gold is and trying to rationalize how to minimize or even eliminate our exposure to gold. There is always one asset in a properly diversified portfolio -- especially one that hedges against catastrophic outcomes -- that preforms terribly in isolation. But if every asset in your portfolio is doing well at the same time, the potential for the inverse is not only possible, but inevitable! For conservative, defensive investors, this is not acceptable. And hence we include defensive assets like LTs and gold, even though they go through long periods of very poor preformance when considered in isolation. In the context of a conservative, defensive asset allocation these assets are still doing their job even if they are preforming poorly on a nominal basis. It isn't about the individual assets its about the higher-order system as a whole.
Theorically, In case central banks drop the rates further in negative territory shouldn't gold go up? Instead of having money in a bank that cost you interest wouldn't people prefer to convert their cash to gold that don't cost them?
Not if there is intense deflationary pressures. Think of it like a massive tug-of-war battle. Deflation is pulling with all its strength in one direction; the central banks are pulling in the opposite direction, and to add some extra power in their direction they even introduce negative rates. But the rope doesn't move because the forces are approximately equal in each direction. If the rope were viewed in isolation, or if only the force of negative rates were considered, the fact that the rope is barely moving would be puzzling. But if we consider that there are powerful deflationary forces (i.e. worldwide lockdowns???) working in the opposite direction, the dynamic makes more sense. That being said gold has been going up, And of course, eventually every tug-of-war battle ends up with one definitive winner...

==> Would you say that right now small caps are undervalued with the market focusing on growth big caps? and what metrics would you use to find out? CAPE?; The issue is that going that way means market timing... Maybee going all small caps means more volatility?
No clue! If you like small caps you can us the GB because it includes small caps. But trying to figure out if small caps are undervalued...trying to market time it... well, refer back to my first response above.

==> For me gold is an insurance policy in case everyting goes badly I still have something that always had value in history. I suppose if everything goes badly the 20% allocation would take a lot of value because everybody will want it that should help mitigate the loss that stocks, bonds,... will have. I am still not sure if I should split 30% Eur / 20% gold or 25% Eur/25% gold
I wouldn't stress too much about 30/20 vs 25/25. Kind of splitting hairs at that point. What is more critical is that you ensure at least a portion of that gold is physical, preferably in your possession and/or held overseas. If you want to cut down to 20% exposure but you ensure that you have physical custody of it, then I say that's just fine.
==> In case it is ok for you, I would be very interested to know how you invest? Is it a traditional PP? or something a bit different?

Thank you again for your long answeer!! It is helping a lot...
The orthodox Permanent Portfolio is the defensive fortress that protects the majority of my liquid long-term savings.
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sylvainpbe
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Re: Questions concerning implementation of a GB/Weird portfolio

Post by sylvainpbe » Wed Jan 20, 2021 6:53 am

Hello,

I have to think more about all the very interesting points you make..

Code: Select all

If we were in the 90s we'd all be talking about how terrible gold is and trying to rationalize how to minimize or even eliminate our exposure to gold.
==> This is a very interesting way to look at it!!


In case I have further questions I will make sure to come back asking ;)

I would like again to thank you for your time
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Re: Questions concerning implementation of a GB/Weird portfolio

Post by jatwell » Fri Jan 22, 2021 4:23 am

Also remember, you're definitely not holding those LTT for 30 years - is this what you're getting hung up on?

The avg duration in LTT funds have to be maintained, generally it's about 25 years. This means they are constantly selling shorter duration and buying new bonds at prevailing rates.
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Re: Questions concerning implementation of a GB/Weird portfolio

Post by sylvainpbe » Sat Jan 23, 2021 11:04 am

Hello,

No my issue with 30 years german bond is the impression to get a bad deal. I feel like the bond market is manipulated by the ECB.The balance sheet of the ECB has increased by 55% this year. Also, I have never heard of negative long term rates in the financial history so I feel like this is going to end badly for me if I buy such product.

I would have liked to find another product that could protect me against deflation but I didn't find one. The only alternative is going cash instead of LT bonds but I will not get the increase of the value of the LT bonds in case the market crashes.

Normally when rates will go up (maybee in our lifestime? ;) ) stocks, reits, Lt bonds and maybe gold will go down. The only one that will do well will be cash.

In case we go from 30Y German bonds 0.12% negative to 6/7% positive even in a long 10Y period, it does look like this is going to be a big loss (I don't know how to calculate this) especially if we add the bad performance that stocks and reits will have at that time because of rising rates. I am not sure gold will do so well eiter in that scenario because if rates go up people will prefer to have yield that to have nothing with gold. The only one not going down will be cash and well it is cash so it will not compensate the other parts of the portfolio. Is there something I am missing ? I know it looks like we are far aways of rates going up but at some point shoudln't it happen?
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Re: Questions concerning implementation of a GB/Weird portfolio

Post by Dieter » Sat Jan 23, 2021 5:37 pm

Definitely valid options.

My retirement accounts are kinda GBish; targeting 50% stocks, 20% bonds, 15% Cash, 15% Gold
(non-retirement Emergency Fund adds Cash, plus limited stocks and ITB)

With stocks being mostly Total Stock Market, with some SCV, REIT, and International Tilt. (Swensen portfolio holdover)

Bonds are mostly LTT, with some ITB

I would have done better without the tilt in stocks (or owning LTT, or Gold), but no way to know that beforehand.

I fret less about finances.
(just realized I didn't check my allocations since early August; that's a long time for me).
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Re: Questions concerning implementation of a GB/Weird portfolio

Post by pors » Sun Jan 24, 2021 3:36 am

Dieter wrote:
Sat Jan 23, 2021 5:37 pm

(just realized I didn't check my allocations since early August; that's a long time for me).

Wow, how do you do it? ;D
Do you track it somehow to know the portfolio needs to be rebalanced?
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