Gyroscopic Investing

Desert's 30/60/10 (stocks/10-year treasuries/gold) portfolio has been talked about on here a few times but I thought it deserved its own thread.

I don't like that it doesn't have a cash component (though the interest payments on the treasuries sure help). I do like that it allows one to hold a decent amount of equities and some gold while delivering a fairly smooth ride... also that the 10-year bonds aren't as volatile as the 30-year issues (could be either good or bad depending on which way rates go).

This is just a cursory first post. I wanted to hear what others have to say. Thanks.

30% cash + 30% long treasuries is functionally very similar to 60% 10-year treasuries, and would allow this portfolio to have a dedicated cash component. Seen in this light, the portfolio is basically a PP with only 10% gold, a slight bet against high inflation and financial cataclysm.

Yes - I agree.  it is a very similar bet on the economic fundamentals.  Slightly different allocations than 25% across the board - but the principles seem consistent.

I can agree with underweighting gold a little - as it is more volatile than the other assets.  I don't think I would go down to 10%, but that is just nit picking at that point.

A lot of solid thought all around.

Another +1, if you squint the Desert Portfolio looks a lot like a 4x25 PP with some modest reallocation.

If you squint another way, it also looks like Vanguard Target Retirement Income Fund (VTINX) which is approximately 30/50/20 stocks/total bond/short term TIPS. The 10% gold and 20% ST TIPS allocations are both inflation hedges, albeit based upon different economic philosophies.

I still prefer the vanilla 4x25, but the Desert Portfolio seems OK and may be easier to implement in some 401k accounts.

I read somewhere Desert keeps the bonds until maturity? So he has essentially a 10-0 year laddered bond allocation. Is that right?

ILoveMoney wrote: I read somewhere Desert keeps the bonds until maturity? So he has essentially a 10-0 year laddered bond allocation. Is that right?

I believe he mentioned that as an option only. If bonds get whacked he has the option of holding them to maturity. This can of course be done with 30-year bonds as well but that's a long wait. I was wondering if a 20-0 laddered bond allocation would have any particular advantage or disadvantage for this portfolio.

The Desert portfolio frees up my thinking about the bonds. It makes me think about just holding T-bonds themselves, in maturities ranging from 1-20 years, with the average being 10 years, and forget about mark-to-market, and resale price risk due to interest rates, just hold 'em and then eat 'em. Who needs cash? Your cash is "on the way", so to speak. You can always sell some bonds early if you get into a pinch. Just keep a big enough emergency fund; balance that one off with long bonds... a mini-barbell, if you want.

For discussion purposes:  http://portfoliocharts.com/portfolio/desert-portfolio/

Desert -- Please let me know if I should change anything to most accurately represent your idea.

We could also talk about the "Greedy Desert".

stk      bnd    gold
40% / 50% / 10%

The Desert Portfolio looks pretty solid to me.  I just ran it through PortfolioVisualizer.com and it shows a 9.06% CAGR:

Thanks!  I made it for conversations just like this one. 

I believe I've found good data for 10-year treasuries (the same used on PortfolioVisualizer) and have updated the charts accordingly.  It'll take time to get that option in the calculators that everyone else can use, but the summary charts should represent your concept as intended.

Higher in equities and fixed income while lower in gold exposure.

Notice the pattern? General trend of the market over the last 4+ years.
stocks up, bonds (IT-bonds) up and gold lower.

For the record, I like the Desert portfolio especially for those who have a real psychological hangup with gold and long term treasuries.  The 70's were worse than the PP and the 80's and 90's were better, all as you'd expect based on the allocations.  But in the grand scheme of things it could be a pretty reasonable option for a lot of people. 

I sorta see it as a gateway drug for natural Bogleheads to the PP perspective. Up the gold a little, and you're basically there.

ochotona wrote: We could also talk about the "Greedy Desert".

stk      bnd    gold
40% / 50% / 10%

Thank you ochotona!

This is pretty close to my own allocation and "Greedy Desert" is probably the best lazy portfolio name so far 

Stocks may give a sell signal soon using 10  month moving average, at which point I will roll from 60% stock to 30% or 40% stock. Desert or Greedy Desert.

Not disagreeing, but why do you think the 10 month moving average provides a reasonable sell signal over some other possibilities?  What index are you comparing to the average?  Also, can you provide a link where one could check the 10 month moving average on a regular basis?  This obviously falls under the heading "market timing", but I for one,  think it's okay to "tweak" a portfolio by 5 -10% and still remain true to the underlying philosophy, staying within or close to the 15%-35% bands. 

Good idea for a separate thread, barrett. I've been interested in Desert's portfolio since I first saw it mentioned, probably by you.
As with most lazy portfolios, it's one I could definitely live with. My total vp+pp has about 9% in gold right now and I have 10-year treasuries that are not in the pp. Not that far off.

Is the equity portion just broad market? Or, is it more like something Larry Swedroe would use, e.g. a tilt to small value? Emerging markets?

Desert wrote: There's always the sleazy brother-in-law financial sales guy with the spray tan that wants to sell them a portfolio of load funds and private REITs.  When spray-tan-guy hears that they've got 25% in gold and 25% in long bonds, they're toast. 

It's a crazy world where gold elicits more fear and revulsion than does bronze.

{on stocks}
Now after staring at the 30/60/10 portfolio a bit, one can't help but compare it to the Larry Portfolio.  For those willing and able to take a bit more risk, tilting toward small value equity and emerging markets is something to consider.  The equity allocation I personally hold is 1/3 each of Small Cap value, Total Stock Market (U.S.) and Emerging Markets.
...
But the expected return is higher due to higher risk.
...
  This mix isn't for the very risk averse, and introduces some additional tracking error.  One could forgo TSM, but I'm not willing to take on that much tracking error when growth is in favor.

Interesting. Thank you!

Very nice thesis, Desert. Agree with you on gold.

I am staying away from all emerging market ETFs, they all follow indices which have big slices of Kung Pao in them; I don't want to end up being Kung Pao investor. We'll wait until China settles (melts?) down.

Longstreet, I like looking at 10 month MA one day a month, on the last calendar day of the month. It's easy, and mostly works as shown on portfoliovisualizer.com.  But caution, you have to use "Adjusted closing prices". If you use raw closing prices, and ignore the dividends, you will think you're doing worse than you really are, it will throw off the calculation, and you'll get a premature sell signal... this might happen soon.

Longstreet wrote: Not disagreeing, but why do you think the 10 month moving average provides a reasonable sell signal over some other possibilities?  What index are you comparing to the average?  Also, can you provide a link where one could check the 10 month moving average on a regular basis?  This obviously falls under the heading "market timing", but I for one,  think it's okay to "tweak" a portfolio by 5 -10% and still remain true to the underlying philosophy, staying within or close to the 15%-35% bands.

ochotona wrote: Stocks may give a sell signal soon using 10  month moving average, at which point I will roll from 60% stock to 30% or 40% stock. Desert or Greedy Desert.

One third of your stock allocation to EM is a pretty big bet. You are adding a lot of political risk to your already small equity allocation.
As far as I know the Larry Portfolio holds EM close to market weight and mainly tilts to (international) small and value.

Also note that emerging markets backtest well only before 1989/1990, when it was a lot harder to invest in them. After that they returned about the same as TSM with much higher risk.

I love your synopsis above, Desert. I also think that "Spray Tan Guy" should be regularly referenced on this forum.

Two questions....

1) Any hard and fast rebalancing guidelines for the 30/60/10?

2) For the little guy investor you are thinking about helping, don't you think that a cash component is necessary so that they don't have to sell assets when real life intervenes? I mean, you probably understand tax efficiency so it's not an issue for you. But that's a subject that will make lots of people's eyes glaze over. Maybe slide 1/6 of the 10-year bonds over to cash?

Lastly, this mix strikes me as fairly similar to Ray Dalio's All-Weather Portfolio. It doesn't have the really long bonds but does have a very similar equity/bond/commodity mix.

Desert wrote: As much as I like the Permanent Portfolio, I think it would be very tough to educate an a typical low-income person sufficiently to be able to defend that portfolio to their peer group.  There's always the sleazy brother-in-law financial sales guy with the spray tan that wants to sell them a portfolio of load funds and private REITs.  When spray-tan-guy hears that they've got 25% in gold and 25% in long bonds, they're toast. 

A really important point you bring up is that of "defending a portfolio" to a peer group. Throw in your spouse's input, not to mention one's own feelings, and one either needs to be very well versed in what a portfolio's expectations are, OR have a simple portfolio to defend.

As mentioned on here frequently, it's almost impossible to get anyone to even consider the merits of a 4x25PP. That's probably the main reason this forum thrives.

here is a whole assortment of popular portfolio's .

http://www.obliviousinvestor.com/8-lazy-etf-portfolios/

This is a great option not only for people hesitant about the PP, but also for 401ks without access to gold.  Of course many 401ks lack access to treasuries as well.  How well would an intermediate bond index fund serve?

Based on Tyler's charts a 15% stake in gold might be better. The portfolio lost money in terms of real returns over a 10 year period in the 70s.

So it is basically a 30/70 with a slight gold hedge, which seems to lower the volatility even more. Not a bad portfolio, but returns over the next 40 years are likely to be quite a bit lower, even if bonds do not enter an outright bull market. Found this concerning 48-81: http://awealthofcommonsense.com/real-ri ... portfolio/ Seems like real returns of 30/70 would have been close to flat over that time period? The gold would of course make up for some of the lost ground if that scenario were to become reality again.