Weather the Storm...

[MediumTex]

The objective is to capture gains in an asset that has risen substantially. If the asset continues to increase and a rebalancing band breached, I would sell the asset and restore the portfolio to 4x25. If the asset decreases, I sell the PUT and rebalance the portfolio with the proceeds. If the asset doesn't fluctuate one way or another, I lose the insurance premium.

Do you think that this approach provides better performance than the basic HB PP strategy?

What is the process for deciding when it is time to buy an option?  Is it based on intuition or is there a second layer of rebalance-like triggers that tell you when it is time to buy or sell puts?

I am not convinced that the approach I suggest will outperform the basic HB PP strategy. I have arbitrarily selected a gain of 20% as the trigger to purchase a PUT option on the underlying asset. Maybe, in time, I will realize the futility in actively managing the portfolio and let the 4 assets work as they were designed.

Why not just set your rebalancing bands tighter and rebalance at the point you would have otherwise bought puts?

Wouldn't that do the same thing and get you back to the neutral 25%x4 allocation before you began to get nervous in the first place?

This is basically how PRPFX is managed--i.e., rebalancing much more frequently than the HB PP would call for.

[buddtholomew]

Do you think that this approach provides better performance than the basic HB PP strategy?

What is the process for deciding when it is time to buy an option?  Is it based on intuition or is there a second layer of rebalance-like triggers that tell you when it is time to buy or sell puts?

I am not convinced that the approach I suggest will outperform the basic HB PP strategy. I have arbitrarily selected a gain of 20% as the trigger to purchase a PUT option on the underlying asset. Maybe, in time, I will realize the futility in actively managing the portfolio and let the 4 assets work as they were designed.

Why not just set your rebalancing bands tighter and rebalance at the point you would have otherwise bought puts?

Wouldn't that do the same thing and get you back to the neutral 25%x4 allocation before you began to get nervous in the first place?

This is basically how PRPFX is managed--i.e., rebalancing much more frequently than the HB PP would call for.

I considered tighter rebalancing bands as an option and would rebalance more frequently if these assets were held in a tax-advantaged account.

[Gumby]

For me, my only concern with the PP, during a storm, is how I've set it up. The majority of my 30-year bonds are all in my retirement accounts — which is obviously great for tax efficiency, but I worry that a severe depression would essentially transfer a great deal of my wealth to my retirement accounts when I might actually need access to it (I'm about ~30 years from retirement, still have to pay for tuition, etc.). To be honest, I didn't think a depression was very likely when I originally put those bonds there. Now a depression almost seems unavoidable.

I realize that most people would see large retirement accounts as a good thing, but I worry that I wouldn't have access to those bonds if money were really tight and jobs might not be readily available.

On the other hand, I would feel very unsettled having to hand over most of the income generated by the LTTs to the government as taxes.

I guess there's no perfect way to use a retirement account when money is tight.

[stone]

Medium Tex, "Why not just set your rebalancing bands tighter and rebalance at the point you would have otherwise bought puts?"

I did a premature rebalance out of gold because I was spooked by the same "parabolic" rise that spooked budtholomew. I guess it doesn't help that much though. If you sell 15% before a 16% drop, it makes pretty minimal difference. I guess I'm still harbouring doubts that gold won't  have a >50% drop. I'm 80% thinking it will rise on for years and 20% thinking it will be down to $200/ounce and I won't have the faintest idea why it did so.

[MediumTex]

Medium Tex, "Why not just set your rebalancing bands tighter and rebalance at the point you would have otherwise bought puts?"

I did a premature rebalance out of gold because I was spooked by the same "parabolic" rise that spooked budtholomew. I guess it doesn't help that much though. If you sell 15% before a 16% drop, it makes pretty minimal difference. I guess I'm still harbouring doubts that gold won't  have a >50% drop. I'm 80% thinking it will rise on for years and 20% thinking it will be down to $200/ounce and I won't have the faintest idea why it did so.

Think of my idea as PP training wheels.

It won't necessarily have much effect on performance, but if it makes someone feel better, I say do it.

[moda0306]

Gumby,

A couple things...

- If you don't mind, what is your current allocation among taxable funds, IRA, 401(k), Roth accounts, & "other?"  I have spent a lot of time trying to visualize/analyze problems like yours and I might be able to offer my 2 cents.

- If one of your major expenses may be tuition, consider a 529 plan or Education IRA.

- If you don't have much in a Roth IRA, you might want to consider diverting some funds into that.  You can pull principal out of a Roth.

- While valuations have snapped back a bit, depending on your tax bracket, stocks aren't THAT much more tax-efficient than bonds with dividend and bond rates being at about 2% and 3%, respectively.

- Maybe some kind of "liquidity insurance" allocation needs to be considered, where you make sure that your liquid funds are "diverse enough" to at least keep you in a comfortable spot.  This would probably involve having SOME LTT's, gold, and cash as part of your taxable space.

Lastly, in some of my examples, the tax penalties of withdrawal scare away people probably more than they should.  If you put in $15k into an IRA, and realize a $5k tax benefit between fed & state for doing so, you've essentiall invested a net $10k.  If it doubles in 20 years to a $30k, and your tax bracket is the same, you'll get $17,100 out if you're in the same tax bracket +10% penalty.

If you had invested that net $10k in a taxable account, and it had doubled to $20k (notice this is assuming no taxes along the way on its income), if you needed to liquidate that, and there was a 25% tax on the income, you'd have $17,500.

So, Gumby, in that examply you lost $400 for taking an early withdrawal vs if you'd kept it in a taxable account.  So even if you're "dumb" about it, you don't really lose much.  It's also worth noting that a decent portion of that $10k gain is probably in the form of income taxed along the way and reducing the compounding effect of your investment, so you're more likely not really losing anything in my scenario.  Of course, that's a bit of a clumsy, last-ditch effort and should be avoided for smarter options.

[Lone Wolf]

I am not convinced that the approach I suggest will outperform the basic HB PP strategy. I have arbitrarily selected a gain of 20% as the trigger to purchase a PUT option on the underlying asset. Maybe, in time, I will realize the futility in actively managing the portfolio and let the 4 assets work as they were designed.

If you're like me and simply enjoy staying very close to 4x25, you always have the option to just keep using cash to buy your lagging asset, whatever it may be.  This will generally keep you on a much tighter course toward a true 4x25.  Rebalance events then become even more extraordinarily rare.

Really try not to fret about individual assets if you can.  The portfolio as a whole is an awesome vehicle.  Individually, however, each individual goes through terrible periods of underperformance.  I wouldn't want to own any one of these assets by themselves.  Try not to let what is normal and unavoidable stress you out.

If you still find yourself feeling shaken up by market movements, allow Bob Marley to reassure you until you feel better.

[Gumby]

Thanks Moda,

Here's the approximate allocation...

STOCKS
4% of PP in Retirement
16% of PP in Taxable

GOLD
1% of PP in Retirement
29% of PP in Taxable

LTTs
18% of PP in Retirement
7% of PP in Taxable

CASH
1% of PP in Retirement
24% of PP in Taxable

Those numbers are about a week old, so keep that in mind (gold/stocks already down, etc)

I max out our Roths each year. I think I'm in pretty good shape, but it's hard not to imagine Gold and Stocks getting absolutely trashed. Even if it's irrational, it just feels like the taxable accounts would be tighter in a drawn-out depression scenario than the reality of the whole-PP situation.

I'm not a huge fan of 529s, but I am still weighing the pros and cons.

[moda0306]

Gumby,

You seem to have a pretty solid "liquid portion." 

With maxing out roths, you would seem to have plenty in your retirement accounts to dip into in case of emergency beyond that.  There are ESAs you should check out that are somewhat different than 529 plans.

I guess if I looked at your allocaton, I'd be more concerned about the broad question "Am I saving enough?" Moreso than "Am I restricting my funds too much?"

[moda0306]

It's simply worth noting, that even a tax-deferred (think EE-bonds held for 20 years) doubling of value of an investment, taxed at 20% fed/state at redemption, you're going to have 10% lower Net Realizable Value of investment wealth at that point than if you'd put it in a Roth.

It get's even more important as said asset throws out taxable interest or dividends or with any possible rebalancing along the way.

If a doubling in 20 years really does imply a 3.53% return, and the taxpayer achieved this return in the form of interest income taxed at 25%, that 100% increase in value turns into a 68.6% increase in value.

Just some illustrations as to how parasitic taxes can really be to your investments, and using tax vehicles such as IRA's and Roth's wisely can significantly reduce that drag.

[Storm]

Gumby, I have a very similar setup, and I worry about the same things.  So far, I've had great gains in my taxable account because almost all of my gold is there, but the stocks in there are down about 3% overall.  My 401k is doing awesome as well, since the bonds are in there, but I worry about wanting to retire early and not having enough liquid wealth outside of 401k and IRAs to do so.

I think as long as I have enough money outside the 401k to get from age 50-59.5 when I can begin to draw from IRAs, I should be fine.  What I'll probably do is after early retirement is slowly convert the taxable account over to it's own 4x25 PP.  I could do this over a number of years so as not to realize too many taxable events, and to try to use tax loss harvesting to minimize the impact.  That way, the taxable and sheltered accounts can each stand on their own, so to speak, as a PP, and I don't risk complete wipeout of my taxable account before I can get to the 401k.

I've heard another approach is to begin rolling over standard 401k/IRAs into Roth once you retire early, thereby keeping your income tax bracket low and minimizing taxes for each conversion.  For example, if you could roll over $50K each year after you stopped working, you only show $50K income and end up in a lower tax bracket than someone earning $100K a year.  I still don't know all the details of how this works, but I need to learn sometime in the next 13 years or so (before I turn 50).

[moda0306]

Storm,

There are several exceptions to the tax penalty.  If you roll a certain amount that could get you to 59.5 into a seperate IRA, you can elect to take substantially equal payments from that IRA and be ok.

If you find yourself short of taxable funds, that could be an option.

Most people are in a position where it's much more beneficial to max out some kind of mix between IRA or 401(k) & Roth before trying to develop some giant taxable account for early retirement.

Between being able to withdraw Roth IRA basis early, and the aforementioned election with an IRA, you should have plenty of options with your tax-advantaged accounts, or at least barring some sort of need for an unusually large and immediate liquid stash... but even so, your Roth basis should serve that purpose relatively well.

[Pkg Man]

If you compare the HB portfolio to a garden variety stock-bond mix (VTXVX for example) over the last month or so you will see that the HB portfolio has lost only about 1/2% while the blended fund has lost 2.8%.  So I agree with the earlier sentiments that the HB PP has held up quite well considering.

[Gumby]

I guess if I looked at your allocaton, I'd be more concerned about the broad question "Am I saving enough?" Moreso than "Am I restricting my funds too much?"

I am self-employed and use a SEP IRA to save and also reduce my taxable earnings. But, all that does is funnel 15% of my earnings into yet another retirement account. And, as I said, I max out the Roths as well. It's obviously great for retirement, but I still wonder if I'm short-changing my checking account in a severe deflation scenario. Though, as you point out, I'm pretty liquid (for now). So, maybe my concerns are overblown. I guess I just don't like the idea of losing money from my taxable accounts.

[jco]

Seems that the CME margin hike has a big hand in this... The last time they raised margin gold reacted with 2 very down days.

I've used the buying opportunity to move out of ETFs and into physical.

[buddtholomew]

I would like to provide a quick update on the 2x Ultra-short (GLL) trade. I was stopped out today and realized a gain of over 25%. I am trying not to confuse strategy with outcome, but I do plan to execute a similar trade (collar option) again under the right circumstances.