Gyroscopic Investing

Sometimes I wonder what would happen if the PP strategy suddenly were to catch on with the general public and become the most popular investment strategy in the world.  (That will probably never happen, and yet I still like to wonder about this.)

If the PP is a good investment strategy for an individual person, does that imply that if almost every individual were to adopt it, the world's economy would likely become more prosperous overall than it is today?  Or do the PP's beneficial properties depend to some extent on its being a contrarian investment strategy?  If the PP were to go completely mainstream, would it suddenly stop providing its amazingly stable positive returns?

I can't even begin to imagine how expensive gold would be if virtually everyone on this planet had 25% of their savings in gold.

to quote the disgraced governor of illinois, we'd be "effen golden"

(my guess, the US$ will prob be linked to gold / oil / commodity basket before that happens...after the US$ is re-valued...downwards)

Hah! This seems to be a universal question on investment forums. At Bogleheads, it's "What if the entire world turned to indexing?"

I thought the moment that PP is underperformed, people would drop it en masse

IMO human nature makes this extremely unlikely to ever happen.  However if it did I imagine the four asset classes would become less volatile which would erase the rebalancing bonus.  I expect this would be a net outflow of stocks, lowering the P/E ratio of the market, and a net inflow into treasuries, pushing their yields down.  Gold would be bid up to astronomical prices by current standards.  So the total return from stocks would likely be higher while the total return of the other three asset classes would be closer to zero.

Investments besides the 4 PP assets would disappear, or be limited to VP purchases, in which case they would sell at much higher yields.  Notably corporate and municipal bonds would be unmarketable or prohibitively expensive to issue, which might not be the worst thing ever.

Considering how strange the PP seems to most people, I would be shocked if more than a tiny percentage of investors ever used the strategy.

If, however, lots of people did decide to use it, I think the biggest effect would be on the price of gold.

Agreed w/ MT.

Gold would skyrocket.

Treasury vs corporate/muni yield spreads would rise to unreasonable, unusual proportions.

Stocks may even drop, as most people are at over 25% into the stock market.

Tortoise wrote: If the PP is a good investment strategy for an individual person, does that imply that if almost every individual were to adopt it, the world's economy would likely become more prosperous overall than it is today?  Or do the PP's beneficial properties depend to some extent on its being a contrarian investment strategy?  If the PP were to go completely mainstream, would it suddenly stop providing its amazingly stable positive returns?

If the general public ever came to believe the PP is The One Investment Strategy to own (which is sometimes referred to as "the Holy Grail"), all four asset classes would increase in price and lose their non-correlation with each other.  The PP would stop working, in other words.  People would then get discouraged and start selling.  All four asset classes would start to decrease in price.  Eventually, many investors would not be able to stand the pain of losses anymore and would sell at whatever price they could get (which is sometimes referred to as "capitulation").  Eventually, only the True PP Believers would be left and the PP would start working again.

This phenomenon has been observed many times over the centuries.  In 1600s Holland, it happened with onions (aka Tulipmania).  In the late 1990s, it happened with Internet and fiber optic stocks.  In the 1970s, it happened with gold and silver (and baseball cards).  It has happened with real estate many times (in the 1700s in South America when is was called the South Sea Bubble, in the decade of the late 2000s which is the period we are still recovering from).  Most investors tend to buy near the top and sell near the bottom because they chase returns on the upside and get scared out on the downside.

This has been discussed in the context of all investors using index funds.  As such funds have been around for quite a while, and yet there are still plenty of investors, both institutional and individual, who chose not to use them, I don't think the possibility of everyone adopting the PP is even remotely feasible.

Let me provide one reason why it will not occur.  The group that manages our pension investments would have no reason for existence if such and investment strategy were adopted.  No rational thinking person would propose a system that eliminates their job.

In addition, there will always be those who think they can beat the market, no matter how persuasive the argument for not even trying.

Pkg Man wrote: In addition, there will always be those who think they can beat the market, no matter how persuasive the argument for not even trying.

Exactly.  There will always be speculators.  It's human nature.