Will This Time Be Different

[portart]

Will stocks go down with the market in the next crash? We as PP loyalists are not supposed to time the market. But what if you feel that there is no much juice left in stocks, that bonds are not in a position to rage, and gold might react differently this time if we have another armageddon in the markets this year. Would it make sense to go 50% cash and 12.5% on the rest in the usual ncrements??  Just saying....

[Xan]

Cash is traditionally the knob to turn to align the PP with your risk tolerance.  But, that doesn't sound like what you're talking about, really; you're talking about timing the market.  I'm not sure whether it's a good idea or not.

[stuper1]

Here's how I'm looking at it.  Stocks will fall at some point.  But is it this year, next year, or the year after that?

When they fall, will the money go into bonds, into gold, or into both?  I don't know which.  I agree with much of what is said on this forum about long bonds not being able to hold up over the long term.  But again, will the bond collapse happen in this decade, the next one, or the one after that?

Therefore, I'm standing pat with the PP.

[Stewardship]

Would it make sense to go 50% cash and 12.5% on the rest in the usual ncrements??  Just saying....

Just consider the extra 25% cash your "variable portfolio," money you can afford to lose on speculation and timing the market, and you'll still be in full compliance.

[dualstow]

Harry Browne talked about possibly taking action (rebalancing) if you happen to notice unusual things going on in the market. I might rebalance at 32% or 33% stocks, and I'm already at 32%. But, I'm still going to knock stocks back to 25%, no less. As a matter of fact, I rebalanced a few % points early several months ago, and as a result I made less than I would have at 35%. Of course, it works both ways. If I had gone with my urge -- not instinct, but urge -- to sell long bonds when some of them were up a whopping 40%, I would have done better than sticking with the plan. But then, what to do with the profits? I see Stuper1 touched on this, above.

In any case, accelerating the timing is not your main problem, in my opinion. It's that you want to cut back your shares to 12.5% instead of 25 or even 20. That's just not a pp. It's just as bad as all these guys who want to eliminate cash every time one or two assets does well.

[Cortopassi]

It is funny seeing the struggle people have with PP and the allocations to try to "time" the market or injecting personal assumptions that stocks are too high, bonds are too high, cash pays no interest, wanting to allocate more to gold because of world events, etc.

I have spent 5 years thinking stocks must go down and gold must go up.  How could it not be so?  We are racking up debt, the economy has been sputtering along and unemployment is terrible.  And I have been WRONG and paid the price for it.  I would wake up day after day hearing "Dow futures up 120" on the biz news, and feel acid in my stomach because that usually coincided with gold getting slammed.

Now in the past three weeks, screw it!  I don't care!  Gold went up to what, almost $1390, and stocks went down a bit, and my gain % went up.  Now gold is back below $1350 and stocks are up, and overall my accounts are hanging in there, vs. me stressing about my overallocation to gold!

I know I am a newbie here and probably don't have enough experience to say this, but if you are considering major allocation changes based off your feelings that things won't continue, then I am not sure PP is for you.  If you want to go to 50% cash, and let's say you are validated in that belief, at least short term, then what's going to happen when things move away from that situation?  My guess is you will be biased, and likely freeze up and not go back to 25% allocation, thinking something bad is yet still around the corner.  And before you know it, it is 3 years later, you are still 50% in cash and gold may be at $2000 (or Dow at 20k)...

Mike

[portart]

It is the "primal urge" to go to avoid losses based on what is looking you in the face. I had this guy I knew, retired, was given some advice at Dow 11,000 that it was about to crash again, this time even lower the previous low. He went all cash (he was not a PP guy so I don't know how much allocation he had in equities). In any case, the market as you know continued to rise to where we are now about 16k. He subsequently quit my cc club and moved away so I don't know if he ever got back in but I doubt so he missed out on his timing. Most people don't go back in when then market goes against them for fear of more loses so yes, it's a difficult strategy unless you hit it exactly right.

I don't know why but it stuck in my head. Lets see, he sold at 11 and were at 16 so it would make sense at some point equities WILL take that hit. We have to be closer to that then now so maybe play the odds. So I like to run things by here because you get a better perspective.

[Pointedstick]

I like to think about buying my current least favorite asset (whatever it may be at the time) like I do going to the dentist: sometimes ya gotta power through the unpleasantness and just do it to avoid things falling apart.

[Tyler]

Parable of the Two Farmers

Two brothers inherited parcels of land from their father.  The land was vast and diverse, and the weather was unpredictable.  One season bountiful rain would shower one end of the fields and the other would be in drought. While the next season the conditions would sometimes switch entirely.  Both brothers decided to farm the land to feed their families.

The studious brother researched the science of farming and meteorology.  He dutifully read the weather predictions for the upcoming season, portioned his seed to the optimum allocations, and moved all of his crops to the better fields each year to maximize yield.  He worked hard every day to till the fields and tend to crops as needed. 

The lazy brother took the same amount of seed and spread it widely over the entire land.  Every year some crops would grow wildly while some would wither and die.  At the end of the season, he would take the excess seed from the successful field and spread it evenly over the land yet again.  He spent most of his time painting landscapes on a hillside.

Many years in a row the studious brother had bountiful crops.  He boasted about his farming knowledge, and chastised the lazy brother for not working harder to maximize his yield.  "Why do you cast your seed into the dry ground, allowing half your crops to die every year?  How wasteful!" 

Then one year the weather predictions were wrong.  The entire crop of the studious brother withered away in drought, while the lazy brother reaped the excess seed from the successful field as he does every year and spread it evenly over the land.  Approaching the lazy brother for a loan to re-seed his land, the studious brother was upset.  "How do you always have seed to lend?  You clearly know nothing about farming!"

"While you spend all day figuring out how to maximize your crops, I take what mother nature gives me.  And then I spend my extra time trading paintings for extra seed as I need it, which honestly isn't much.  Why spend so much life energy growing crops beyond your needs?"

[barrett]

Tyler, Thought the painter brother was going to actually endorse the PP directly but I guess that is why it's a "parable." Not a bad analogy. Thanks.

PS, Thanks for reminding me that I need to go see the dentist. I'll be thinking of my long term treasuries when I'm getting work done on my molars.

Portart, I think we have to keep in mind that the numbers we are choosing to make sense of this stuff in our heads come from the same head that is trying to make sense of them (or something like that). What I don't hear anyone saying is that the Dow was around 14,000 in 2007 and it's "only" at 16,000 now. So little growth over the last six+ years? Of course that is without reinvested dividends but it could go way higher from here. That's not a prediction but we just don't know.

I vote that this thread be renamed "The Lazy Farmer."

[dualstow]

I vote that this thread be renamed "The Lazy Farmer."

How'bout 'The Parable Portfolio'. Kind of has a ring to it. 

[Tyler]

Tyler, Thought the painter brother was going to actually endorse the PP directly but I guess that is why it's a "parable." Not a bad analogy. Thanks.

Well, in the screenplay the scene ends with the camera panning back to the painting on the hillside.  Only it turns out the hill is really a secret bunker full of ammo, Krugerrands, and Libertarian propaganda. 

[jay]

Portart, I was thinking the same and I have decided to "err on the side of safety". IMO, a reasonable allocation at unknown times like these would be 34/22/22/22 with 34% being the cash of course. It kinda hits two birds in one stone:
1) As a whole, it is still a valid PP and does not yet require 15/35 rebalancing
2) One can also think of the extra 12% cash as a variable portfolio

[Roberto]

You don't have to read "doomer porn" every day to realize that something here eventually has to blow, and the possibility of that something being gold, bonds, and stocks (at least for awhile) seems quite real to me.  So...what about trailing stops?  Would I be excommunicated from the PP tribe if as a safety valve I were to put in place 10% trailing stops on whatever I hold as a fund? 

[Kshartle]

You don't have to read "doomer porn" every day to realize that something here eventually has to blow, and the possibility of that something being gold, bonds, and stocks (at least for awhile) seems quite real to me.  So...what about trailing stops?  Would I be excommunicated from the PP tribe if as a safety valve I were to put in place 10% trailing stops on whatever I hold as a fund?

You probably would be, but that shouldn't stop you.

If they continue tapering in the face of the upcoming bad economic reports I will probably sell all my stocks and hold just 50-50 gold and cash.

My thinking is either we'll have deflation and I'll be able to scoop up stocks cheap later or they will hit us with a blast of inflation and 50% in gold will keep me safe.

I don't have any expectation for the economy to improve near term, here or globally.

Even safer might be 60% in several currencies and 40% in gold. That's IF they taper down to zero. Rates will go up is my best guess and the economy can't handle that. The stock buybacks will stop. Companies will have to issue shares to raise capital. Margin buyers will sell with higher rates costing them.

[Pointedstick]

Isn't the whole point of the PP that you don't need to bother with that sort of thing? I can see all three assets falling during a day, a week maybe… but a year or more? Seems implausible to me given how we know the assets work.

[Roberto]

I guess if you feel that the current situation is just "business as usual," and has all been foreseen and managed by the PP strategy, then yes, PS, we shouldn't have to bother with any such safety nets.  My concern is that what may be coming has not occurred in the past (or at least not since the time to which the PP can be back-tested) simply because central bankers around the world are intentionally distorting asset values on an unprecedented scale.

[Pointedstick]

But "business as usual" has always been something unprecedented. It's not as if there was a normal time that was clearly distinct from right now. Rather, the "business as usual" is what we call the past because we have the benefit of hindsight to evaluate it and see that eventually, things turned out okay despite conditions that seemed (and were) unprecedented at the time. We'll be calling QE infinity "business as usual" in a decade or two, with the only difference being that people who were spooked into withdrawing from the markets or going 100% gold will have either missed out on a lot of gains or endured gut-wrenching volatility.

[rickb]

You don't have to read "doomer porn" every day to realize that something here eventually has to blow, and the possibility of that something being gold, bonds, and stocks (at least for awhile) seems quite real to me.  So...what about trailing stops?  Would I be excommunicated from the PP tribe if as a safety valve I were to put in place 10% trailing stops on whatever I hold as a fund?

The problem with trailing stops is how do you know when to get back in?  10% off a bottom?  Golden cross (50 day MA crossing 200 day MA)?  If you don't have an algorithm you can state, you are fundamentally going on gut feel.  Pretty much no one gets this right.  If you have an algorithm, you're fundamentally a market timer.  Pretty much no one beats buy and hold this way either.  Perhaps you're a "momentum-ist" ala Mebane Faber's Ivy Portfolio (many threads here about this), or a more concentrated version of this like William Dirlam's Decision Moose(not as many threads here, but some).  Browne expressed his thoughts about these kinds of strategies in "Why the Best-Laid Investment Plans Usually Go Wrong".  The bottom line is captured in his golden rule #4

Rule #4: No one can predict the future.

If any of these sorts of systems consistently work it's because they can predict the future.  Do you believe in predicting the future, or not?  That is the question.

[edit - added links to threads here about Ivy Portfolio and Decision Moose]

[dualstow]

I guess if you feel that the current situation is just "business as usual," and has all been foreseen and managed by the PP strategy, then yes, PS, we shouldn't have to bother with any such safety nets. 

It's not that I feel the PP has foreseen all and will magically take care of everything. It's just that I can't think of a better safety net. I don't understand why trailing stops are better.

[Cortopassi]

The problem with trailing stops is how do you know when to get back in?  10% off a bottom?

Exactly.  I know I would NEVER get back in, or at least not at the right time.

[portart]

Here is something I think, think being the operative word, how to figure out fake outs from the real thing. Any times stocks drop from an event (war, storms, companies going belly up, corruption, Fed surprise announcments, etc.) stocks almost always recover after the event stops or is priced in and go back to the trend. So like the other day when the Feb announcement dropped stocks 100 pts, the next day it dropped another 30 or so for an hour and then went back up.  In other words, events are great times for quick in and out trades.

However, when all is well and nothing is happening, that seems to be the time when a drop happens that the real thing could be upon us. It starts as few attempts to make a new high and keeps falling short. Then the selling starts, a little each day with a few rallies but each new rally is a higher low. Its not enough to make you sell so you keep hanging or buying dips. After a few weeks of this you start having bigger drops, smaller rally. Before you know it, you so far down you don't want sell. Right about that time the waterfall drops of hundreds of points and there you, falling down the hill. Luckily, if your in this morass, the PP will keep you sane and not broke. But, wouldn't it be nice to avoid all the stock action and have some fresh money to buy after a huge market loss. Who here is smart enough to know that?

[dualstow]

... But, wouldn't it be nice to avoid all the stock action and have some fresh money to buy after a huge market loss.

Yes, it would be nice to have, say, 25% in cash when the market crashes.

[barrett]

The PP's performance has been pretty robust over 40+ years.  However, I don't think we're a bunch of kool-aid drinkers.  If it stops working (which to me means ~ 3 years of negative real returns), people will bail.

TennPaGa, don't you think that would only be true if it were poor performance of some combination of Gold & LTTs  that was putting the PP in negative territory for that three-year period? I mean, if stocks were getting clobbered for three years straight and the PP was only down, say, 5% each of those years, I think I would feel as if I had been protected against HUGE losses. Anyone with a PP would still feel pretty smart compared to the gazillion investors who had taken a severe beating in stocks. I do believe that people would bail on the PP at about three years (probably earlier) if everyone else was making a killing in the stock market while we were all being dragged down by our damn Gold and LTTs. But I don't see that happening for a three-year period due to those two assets being uncorrelated.

[portart]

Something I have observed in my own behavior. Everytime I mess with my PP even a percentage timing sell, my peace of mind goes out the window and I start watching the market emotionally, as as opposed to casually observing it. I don't care to be be doing this. In the final analysis I am better off leaving it alone and takes what it gives me.