Where should new contributions go?

[Mr Vacuum]

Meanwhile PRPFX is up 10% on the year. What does Michael Cuggino know that we don't? (I'm guessing it has to do with the stock picks swinging back in his favor.)

[Kbg]

Until further notice we are in prosperity mode...it is really no more complicated than that. By any objective measure the US economy is doing very well. Spend some time looking at data vs. reading opinions. It is a far more useful exercise and infinitely better use of your limited reading time. Head on over to the FRED data site. Check out jobs, corp profits, housing, industrial production, NAPMI, Sentiment, Recession probability, Consumer Spending. They are all telling the same story.

Of course most folks want to figure out if Trump and/or Hillary and/or the election is impacting the stock market. With regard to the stock market, it is most definitely pricey but such a state could go on for years or end tomorrow.

With regard to Gold HB said it very well in his books...gold does well when people like cash and they don't like the dollar. Well folks, people like the dollar right now so don't expect gold to be hitting it out of the park.

We can't predict the future, but it really isn't that difficult to figure out what is going on in the here and now. If inflation stays limited and the Fed continues to raise ST interest rates, guess what? Gold is going to continue to suck and at best we can hope LTTs aren't going to kill us. To offset we are getting a tad more on our cash and stocks will be the bearer of any performance for the PP. Compared to heavier allocations to stocks the PP, get ready for it folks, isn't going to do well.

But let's make this super simple...find a LT graph/chart of the PP compared to stocks and what happens to the PP investor is beyond easy to see. Lag big time in a stock bull market, bear market catch up (mostly), rinse, repeat. History suggests the stock market is getting long in the tooth so maybe catch up time is just around the corner. Stupid, at this point in time, is loading up on stocks (at least US ones). That would be called chasing performance. if you want to load up on stocks and tilt your allocation wait until you are really glad you have all that gold, LTTs, cash and can't stand the thought of buying stocks. For PP doing a George Costanza is (seriously) likely the best approach. Just do the opposite of what you want to do.

And as I constantly harp on in the 20% VP PP thread...don't pay attention to single assets. You should be focused at the portfolio level.

[JohnnyFactor]

I've always believed prosperity is in the cards for 2016-2020 but weird things can happen that derail momentum. It's why I invest 4x25 regardless of my beliefs (with some VP on the side because its fun).

[blue_ruin17]

It seems to me that deciding where new contributions go is actually a matter of deciding what re-balancing band strategy you are committing to.

And deciding what re-balancing band strategy to commit to is really a matter of practicality, utility and function rather than of comparing returns and volatility numbers.

******

For example, if an investor has his HBPP locked up in a retirement account which won't be relied upon for withdrawals for a few decades, the 15/35 bands is probably the optimal strategy as it will allow for the portfolio to really capture those bull market gains, with the acceptable trade-off of the portfolio allocations becoming quite distorted compared to 25/25/25/25. In this case, new contributions should be evenly split, so as to allow the portfolio to ride the waves up and lock-in larger gains when the 35 bands are hit. Simple, low maintenance and portfolio management is condensed to minutes a year.

However, if an investor is relying upon the HBPP's cash allocation as an emergency fund, for example, then perhaps the 15/35 bands introduce an unreasonable 'shrinking' effect on the cash portion of the portfolio. Over the months and years, the volatile and income-generating portions of the portfolio will inevitably grow compared to the cash allocation. Perhaps, some investors will view this as being functionally unpractical, as the utility of the HBPP also serving as an 'emergency fund' vehicle is somewhat sacrificed.

This investor, therefore, is perhaps served by maintaining the 25/25/25/25 split by buying lagging assets with new contributions. If the portfolio is very small, then allowing cash to accumulate until the 35 band is hit would be even more optimal, as it would ensure that even more cash is immediately accessible from the portfolio.

A third investor may have the HBPP in a taxable account. Having to sell any asset would introduce undesirable tax-outcomes. This investor will want to avoid these re-balancing outcomes by buying the lagging assets in order to ensure the the 'hot' assets can't trigger any re-balancing.

Yet another investor may distrust the current monetary paradigm and be emotionally uncomfortable with allowing the gold allocation to drift any lower than 20% (just in-case SHTF!). A 20/30 rebalancing band is therefore optimal for this investor, on an emotional level. Or perhaps they always want gold at 25% of portfolio value: BTLA for new contributions, then, to keep the portfolio balanced.

******

One of the beautiful characteristic of the HBPP is that it is extraordinarily flexiblein its ability to be functional and utilitarian in regards to serving an investors practical requirements or emotional tolerances -- without sacrificing the core mechanics which drive the portfolio. This is a feature of the portfolio that is often overlooked when comparing the HBPP to other asset allocation strategies which fundamentally lack this pragmatic ability to serve the practical, real-world needs of an investor.

Backtesting seems to reveal that 15/35 is historically optimal in terms of performance, and this is reasonably likely to be true in the future as well. But perhaps comparing backtesting results is less valuable when deciding what re-balancing bands to use, and where to allocate new contributions than considering the practical requirements of your portfolio. Consider utility, taxes, convenience, emotions, and let these factors influence your decision. Don't chase slight performance improvements at the expense of practical portfolio utility.

[dualstow]

I've always believed prosperity is in the cards for 2016-2020 but weird things can happen that derail momentum. It's why I invest 4x25 regardless of my beliefs (with some VP on the side because its fun).

I feel the same. More than ten years ago, I had a strong urge to dump things like oil and tobacco and "invest in the future!" (tech). I ended up doing both, but what has really paid off through thick and thin? Oil and tobacco.

It's just too hard to guess, and even those superforecasters are full of it. (Ok, I haven't actually read the book).