A TFSA strategy to protect against an apocalypse - MoneySense

A TFSA to protect against an apocalypse

This stringent investor’s portfolio is prepared for hyperinflation and much more

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Trevor Bonnici

Trevor Bonnici

AGE: 47
PLACE: Toronto
TFSA TOTAL: $47,895
STRATEGY: a portfolio that protects against hyperinflation and maintains his purchasing power

TFSA Holdings

Gold 25%
Mawer Global Bond Fund 35%
1 to 5-year TIPS VTIP ETF 10%
Polar Long/Short Fund (POL202)
(small- to mid-cap Cdn. equities)
5%
GIC ladder
(self-built in a self-directed account with 3rd party GICS that are CDIC-insured)
TOTAL 100%

Trevor Bonicci is 47-years old and works in the financial industry in Toronto. He has one aim with the $47,895 TFSA portfolio he put together recently, and that’s to protect his purchasing power at retirement. He’s even okay if he makes a zero real rate of return, as long as he’s protected against hyperinflation of the loonie and other currencies as well. “Preservation is the goal for my portfolio,” says Trevor who admits his approach is a bit unorthodox.

Trevor’s goal is a simple one. “I just want to ensure that what I hold today will be able to have the same purchasing power 30 years from now with as little risk as possible,” says Trevor. “I used to be a 100% equity kind of guy, but I really believe that past performance is not indicative of future return. In fact, if $100,000 today keeps up with inflation on a 0% rate of return, I’m happy.”

Trevor stresses that he’s a good saver and he believes that a portfolio that protects against hyperinflation makes perfect sense in today’s economic environment. He’s also wary of holding too much of any one currency. “If Canada ends up like Venezuela—and it’s always a possibility—I can sleep better with this portfolio,” says Trevor. “I can close my eyes and probably be okay—short of a nuclear catastrophe.”

Trevor bases his portfolio on four holdings, 25% each of stocks, long-term bonds, gold bullion and cash—a strategy known as s a Permanent Portfolio—a portfolio described as one you would build with money you can’t afford to lose. The Permanent Portfolio Holdings include 25% stocks for periods of prosperity and inflation, 25% long-term bonds for periods of deflation and recession, 25% gold bullion for periods of inflation and 25% cash for periods of recession and inflation. The portfolio is rebalanced annually back to its original allocation.

The Permanent Portfolio strategy was first introduced by Harry Browne and Terry Coxon in their 1981 book Inflation-Proofing your Investments: A Permanent Portfolio that will protect you against Inflation and Depression and updated in 1987 in the book, Why the Best Laid Investment Plans Usually Go Wrong. It’s a simple strategy with just four asset classes rebalanced annually, as well as tax efficient and cost efficient. It also claims to provide “true” diversification based on the four economic cycles of prosperity, recession, inflation, and deflation. It then holds assets that will benefit from each stage regardless of when it started or how long it lasts.

And the proof is in the pudding. Permanent Portfolio Results have clocked in at 8.89% compound annual growth rate for the years 1972 to 2013.

Both Trevor and his wife have Defined Benefit Pension Plans at work so he really doesn’t believe he needs to take on any risk with volatile equities. “If I’ve already won the game, why take the added risk?” says Trevor. “Even with a zero return, I’d be fine because my savings habits are strong. I’m not greedy. I’ll be fine. But we can’t just assume that what happened in the past will happen again.”

Right now, all Trevor wants is a second opinion on his TFSA strategy. Is this a good way to invest outside him and his wife’s Defined Benefit Pension Plans? “I’ve really studied this method of investing and want to make sure I’m not missing something,” says Trevor. ” Should I have a different asset mix to accomplish my goals of investing in safe havens? I’d appreciate a second opinion.”

What the pro says

Trevor has built TFSA portfolio around the presumption that inflation might return, or currencies may be devalued. “But virtually no one thinks this will happen in the economy, and interest rate hikes make it an increasingly unlikely scenario,” says John DeGoey, a portfolio manager with Industrial Alliance in Toronto, who doesn’t see this as an optimal TFSA strategy for Trevor. In fact, DeGoey likens Trevor’s investment strategy to be comparable to building a shelter in his backyard and keeping a year’s supply of water and canned goods in case there’s an apocalypse.

Of course, stresses DeGoey, any strategy could be suitable or sensible since no one knows what the future holds for sure, “but it is likely prudent to build a more flexible portfolio based on multiple alternative possible outcomes rather than betting the farm on a single strategy/worldview. This is really what my biggest concern about this strategy is.”

As for performance, DeGoey would expect this portfolio to perform poorly but have moderate volatility. “Note that an alternative in the current environment would be to use a high-interest daily savings account and get about 1.5% to 2% guaranteed with no volatility and complete liquidity. Inflation is currently running at a little under 2%.  This strategy is predicated on an outcome of hyperinflation that by all accounts is highly improbable. “The Bank of Canada has targeted inflation at 2% with 1% variance, or between 1% and 3%, since 1990, has not deviated from the target and has consistently hit that target,” says DeGoey. “Why does Trevor doubt the Bank of Canada, one of the most credible monetary institutions in the world?”

As well, Trevor should be looking to get some diversification by investing some of his money out of Canada, notes DeGoey. “So exchange-traded funds such as Vanguard FTSE Global All-Cap ex-Canada (Ticker: VXC) or iShares MSCI World Index ETF (Ticker: XWD) from Blackrock, would be two good options to add to his portfolio.”

Finally, regarding his feeling of security with his Defined Benefit Pension Plan (DBPP), DeGoey has this to say: “If Trevor feels as secure as he says he is because of his solid Defined Benefit Pension Plan (DBPP), then why is he investing so conservatively, aiming only to replicate purchasing power? If you have a DBPP and feel secure, you can swing for the fences with discretionary investments.”

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