Gyroscopic Investing

iwealth wrote: But what is the PP's SWR? The portfolio's only been investable since the 70s. And the first few years came right after we came off the gold standard. And then the last 35 years have been a runaway bond bull market. I still don't think the PP has been tested in all market conditions.

History shows that the PP supports a 4% SWR in a much more stable manner than a typical stock/bond portfolio that the SWR study was based on.  Check out the last chart in the first post here:  http://gyroscopicinvesting.com/forum/pe ... -pictures/

To answer PS's original question, I agree with the premise of "extra money" you can afford to take risks with.  I don't think I would throw it all in a stock index, though.  The PP is my passive investment strategy of choice, and I feel no need to juice returns once financially independent.  For my VP above and beyond the money that supports my everyday life, I think I'd be more inclined to take a more active role in how the money is used and angel invest, play with Lending Club, start a new business, etc. Stuff where even when I lose money I feel good for trying. 

I wonder, is there really much opportunity to boost returns by investing in stocks once you've amassed great wealth?  Why take the risk of that 50% haircut?  The CAGR of the PP (35/15) since 1/1/1972 has been 9.28%, while for the S&P500 it has been 9.58% (dividends reinvested, numbers from peak2trough).  I think if I had $2 million, or $2 billion, I would just maintain the PP and take the 5% average real return and sleep soundly.  I would agree with Pointedstick if stocks were significantly better an investment than the PP, but that's just not the case.  My apologies to PS, but I think this sounds a lot better:

"Imagine you are a person who spends $40,000 a year, and this spending level is sustained by a permanent portfolio of $2 million, all in stocks. This represents a 2% withdrawal rate. Now imagine that the stock market tanks, so your portfolio falls grows to only, say, $1 million $2.1 million. Even with this disastrous decline, you are still able to withdraw the same amount safely, this time at "only" a 4% rate 1.9% rate! You still have enough plenty of money to sustain your lifestyle with no changes, and as a result, you can wait out the decline and reinvest your dividends and coupons and interest in now-super-cheap shares, then rebalance, priming you for an even higher sum of money after a few years when the market recovers regardless of what happens in the stock market."

That was fun!

Pet Hog wrote: "Imagine you are a person who spends $40,000 a year, and this spending level is sustained by a permanent portfolio of $2 million, all in stocks. This represents a 2% withdrawal rate. Now imagine that the stock market tanks, so your portfolio falls grows to only, say, $1 million $2.1 million. Even with this disastrous decline, you are still able to withdraw the same amount safely, this time at "only" a 4% rate 1.9% rate! You still have enough plenty of money to sustain your lifestyle with no changes, and as a result, you can wait out the decline and reinvest your dividends and coupons and interest in now-super-cheap shares, then rebalance, priming you for an even higher sum of money after a few years when the market recovers regardless of what happens in the stock market."

That was fun!

Pointedstick wrote: Thoughts?

This is what the wealthy do (from NT's 2008 Wealth in America report):

I feel like I should have coherent thoughts on this, because I do in fact have the situation PS describes.  Retired, large PP, and able to live off 1.0-1.5% easily.  We could live on half that without trying too hard.  So our PP grows most years, even after funding our lifestyle.  I don't know how to view it.  I'll babble a little, let's see if anything makes sense.  Wm. Bernstein wrote that a guy like Bill Gates could be 100% stocks without much concern.  I've mentioned how I don't want to rebalance and pay the taxes.  As a result I'm something like 35% stocks right now.  I have decided to listen to Bernstein on that, and not worry about stocks getting to more than their share.  Sure, I will feel terrible if they go down 90%.  But whether I have 25% or 45% at that time, it won't materially affect my lifestyle.  Geez, it's hard to write that and believe it.  But it's true.

The opposite view of course is that I should be laying off risk.  I should be more cash-like, more gold, etc.  Well, I want the money to grow, to keep pace with and hopefully beat inflation.  I need stocks in the mix. 

Why do I want the money to grow?  Because!  The people who are planning to 4% SWR their way down to zero are doing that because they have to, more or less.  I don't.  I want to make a bigger pile and do something good with it.

Well, as I thought, just some babbling and no real answer to the question.  Maybe the real answer is, if you have a decent plan, given enough money the AA doesn't matter a helluva lot.

I Shrugged wrote: I feel like I should have coherent thoughts on this, because I do in fact have the situation PS describes.  Retired, large PP, and able to live off 1.0-1.5% easily.

You are to be congratulated!!!  I only hope to do half as well.  I also like PS's PP/VP model.  A combination of municipal bonds and dividend stocks in the VP would provide some income while minimizing the tax bill - but I'm not sure I'd bother with munis unless my PP was giving me too much of a tax headache.

I think if I were in your situation, I'd "rebalance" by taking the excess stocks and counting them as a VP.  And consider converting from stock index funds to individually held dividend stocks, if qualified dividends provided a useful advantage over the ordinary kind and the capital gains wouldn't result in too much of a tax bite.

I Shrugged wrote: I feel like I should have coherent thoughts on this, because I do in fact have the situation PS describes.  Retired, large PP, and able to live off 1.0-1.5% easily.  ...  Maybe the real answer is, if you have a decent plan, given enough money the AA doesn't matter a helluva lot.

Nice work!  I pretty much agree with your last statement, but I think you give yourself too little credit for your accumulation skills.  Your financial instincts have an admirable track record, and I'm sure you'll make similarly wise choices moving forward.