Gyroscopic Investing

I thought someone out there might have the relative volatility numbers on gold, stocks and LTTs. In my short time in the PP (since the beginning of this year more or less), it seems to me that both gold and LTTs have been more volatile than stocks... that they both have considerably more days than stocks with price variations of more that one percent, for example. Can someone either confirm this or show me otherwise? Where 60/40 BH-type investors have days here and there that they hear the phrase "markets plunge!", I feel like that's a super common thing in the PP. I know the usual warnings about not looking at assets in allocation. I'm just curious if my brain is sifting through the numbers and telling me that there is more volatility than there actually is. Thanks.

The gain to pain ratio shows that the PP has had a tough couple of years, while the 60/40 has enjoyed much happiness.  The chart below shows the gain to pain ratio measured over two year rolling periods (the higher the G/P the better).  It's pretty interesting - I bet it would be a leading indicator for fund flows into various mutual funds or ETFs for the PP and 60/40.

[img width=500]http://i58.tinypic.com/2e2m3pv.png[/img]

Great chart Gosso!

Just one thing...how is the pain/gain ratio calculated?  Interestingly, the 60/40 appears to be very close to the PP or better for almost all the time except some periods in the 1970s.  I imagine that's the eras when gold was skyrocketing.  That's a bit counterintuitive given the performance charts showing the smoother, steadier performance over time of the PP.

I've really been enjoying the recent posts on this board.  Some very thoughtful and serious queries and comments.

Barrett:

I looked through my recent simulation data and I don't really have anything to answer your question.  For what it is worth, this is what I can offer.

For gold and long term treasuries.  (using daily data over the last 10 years)
GLD has had a maximum draw down of 38% lasting 1046 days.
TLT has had a maximum draw down of 27% lasting 960 days.

These numbers are not inflation adjusted.

If interested, I could, with a small amount of work, come up with draw down numbers (for the last 10 years) that included equities and/or a vanilla PP.

I tend to look at draw down instead of standard deviation or variance as the metric of "volatility", however I am quite intrigued by Gosso's pain metric.  It makes a lot of sense to me and I think it is worth looking at.

The once and future melveyr (hallowed be his name) once talked about allocating portfolio positions inversely proportional to their volatility.  Seriously brilliant.  Except volatility is difficult to define.  I ran a few simulations using 10 year maximum draw downs as a proxy for volatility and the portfolios performed quite well.  Regardless of asset class.

Mark,

I was actually asking a much simpler question but I am happy to have it taken in a more interesting direction. My question was merely if gold and LTTs have been more volatile than stocks this year. I asked it at about 8:00am today and, sure enough, LTTs were up over 1% and gold went up almost 3% today. A three percent rise in stocks would produce headlines like "S&P Storms Ahead!" But these big moves in bonds and gold just seem to be happening a lot more frequently than they do with stocks. I realize with bonds that big moves are more common when interest rates are this low, so I guess that's the answer to part of my query.

Yeah, draw downs are what really matters as you have pointed out Mark (ditto with Sophie in another thread today).

By the way, what ever happened to melveyr? It seems he was gone from this forum before my time. Maybe we can tempt him back to weigh in on Gosso's Pain to Gain Ratio.... or Curve Fitted Back Testing (I too thought it had something to do with a spinal issue). Reminds me of Pointedstick's Carless Living thread that a bunch of us mistook for Careless Living.

Apropos of nothing, I ran some numbers.  These don't really mean anything, but I thought I would calc them just the same.
(All numbers current to today - no inflation adjustments)

Using 10 year daily data, dividends reinvested (purple verticals) I came up with these numbers:

GLD: 9.72% CAGR, 40.52% draw down, 1173 days
TLT: 11.71% CAGR, 25.03% draw down, 762 days
VTI: 11.66% CAGR, 55.96% draw down, 1226 days

PP (15/35 bands) : 9.98% CAGR, 12.67% draw down, 512 days

You can clearly see that all of the three volatile assets are indeed volatile - and that the PP does a fine job of smoothing them all out.
It may not be optimum, and it is certainly not prescient, but it is a good bet.

GLD
[img width=600]http://i61.tinypic.com/346auu0.png[/img]

TLT
[img width=600]http://i57.tinypic.com/2vdjpe8.png[/img]

VTI
[img width=600]http://i60.tinypic.com/qxqtfr.jpg[/img]

Permanent Portfolio (15/35)
[img width=600]http://i58.tinypic.com/2wd7ue0.png[/img]

This comes up from time to time. The TL;DR version is that long bonds and their funds like TLT lag the other two major asset classes in volatility. Most don't see this as a huge problem, but for those who do, there's are a few solutions: zero-coupon bonds or one of their funds, like EDV or ZROZ, for instance.

Mark Leavy wrote: The once and future melveyr (hallowed be his name) once talked about allocating portfolio positions inversely proportional to their volatility.  Seriously brilliant.  Except volatility is difficult to define.  I ran a few simulations using 10 year maximum draw downs as a proxy for volatility and the portfolios performed quite well.  Regardless of asset class.

Another poster (long gone, along with his posts), Clive, was all over this.  Here's a thread with a quote of one his (self-deleted) posts:

http://gyroscopicinvesting.com/forum/pe ... -weighted/

Last I heard, he still posts (same username) at BH.

I don't think it's any big secret that melveyr is Ryan Melvey, who blogs (only occasionally at this point) at stableinvesting.com.  As it turns out (also not any big secret) he's really, really young (maybe 23 now).  My guess is he'll eventually end up at some hedge fund, like maybe Bridgewater.  If I were Ray Dalio, I'd make him an offer he couldn't refuse.

rickb wrote: I don't think it's any big secret that melveyr is Ryan Melvey, who blogs (only occasionally at this point) at stableinvesting.com.  As it turns out (also not any big secret) he's really, really young (maybe 23 now).  My guess is he'll eventually end up at some hedge fund, like maybe Bridgewater.
...

Could be. I think he's presently at Amazon. I miss his stableinvesting posts.

Fun thread.

sophie wrote: Great chart Gosso!

Just one thing...how is the pain/gain ratio calculated?  Interestingly, the 60/40 appears to be very close to the PP or better for almost all the time except some periods in the 1970s.  I imagine that's the eras when gold was skyrocketing.  That's a bit counterintuitive given the performance charts showing the smoother, steadier performance over time of the PP.

Thanks!  The gain to pain ratio is the sum of the returns from positive months divided by the sum of the returns from negative months (can be used on daily data as well).  I thought it was neat that the ratio showed a large divergence between the PP and 60/40 over the past few years, and might be applicable to barrett's questions.

I think the two year rolling was a bit too noisy, so I extended the G/P ratio to five year rolling, and it looks much more clear.  I don't think it tells us anything new, but still interesting to see.

[img width=500]http://i62.tinypic.com/33krf5h.png[/img]

Mark Leavy wrote: Apropos of nothing, I ran some numbers.  These don't really mean anything, but I thought I would calc them just the same.
(All numbers current to today - no inflation adjustments)

Using 10 year daily data, dividends reinvested (purple verticals) I came up with these numbers:

GLD: 9.72% CAGR, 40.52% draw down, 1173 days
TLT: 11.71% CAGR, 25.03% draw down, 762 days
VTI: 11.66% CAGR, 55.96% draw down, 1226 days

PP (15/35 bands) : 9.98% CAGR, 12.67% draw down, 512 days

You can clearly see that all of the three volatile assets are indeed volatile - and that the PP does a fine job of smoothing them all out.
It may not be optimum, and it is certainly not prescient, but it is a good bet.

GLD
[img width=600]http://i61.tinypic.com/346auu0.png[/img]

TLT
[img width=600]http://i57.tinypic.com/2vdjpe8.png[/img]

VTI
[img width=600]http://i60.tinypic.com/qxqtfr.jpg[/img]

Permanent Portfolio (15/35)
[img width=600]http://i58.tinypic.com/2wd7ue0.png[/img]

When the endless gold and long bonds suck conversation fires up again posters should study Mark's GLD vs. TLT charts.  I'll go out on a ledge here...just about the time long bonds go off the cliff folks who have been accumulating gold as it has cratered are going to be happy.