Weather the Storm...

[buddtholomew]

Unrealized gains in GLD have evaporated. Does a PP investor sit on their hands and weather the storm? Un-nerving and unsettling to say the least.

[moda0306]

What would the Opportunity Cost have been? 

Looks like you probably bought in late July, about.  Stocks have collapsed since then, while cash is cash and would have returned a measly amount over that period.

Long-term bonds have exploded, so I guess that may be a lost opportunity, but rarely are mid-to-long-term treasuries someone's alternate investment strategy.

The PP has handled the last few months (and years) amazingly.  Despite gold's current drop, I am very happy with the performance of the portfolio.

0% return over two months is hardly a disaster... I wouldn't exactly call that a "storm." 

[AdamA]

Does a PP investor sit on their hands and weather the storm? 

Yes. 

Stop looking at the assets in isolation.  Look at the PP as a whole.  There is no storm, the PP is doing fine.

[moda0306]

bud,

I'd also say that if it's gold that gives you the willies within the PP, you can do things to avoid the stress you feel.

One trick is to the degree that the volatility of the PP is stressing you out, set aside a certain amount of cash in excess of your 25% allocation.  It has actually worked wonders for me having money that I have set aside for a refinance not in the PP, but just in cash... worked wonders in my sleeping at night, that is.

[MediumTex]

Look at how everything else has done.  Not nearly as well as the PP.

I can almost guarantee you that if you look back on the current period in six or twelve months you will be happy that you didn't abandon ship on the PP.

But people WILL abandon the PP ship during times like these.  It's human nature that when the whole herd gets spooked some will run blindly, whether or not such action is rational.

Periods of fear like this just happen from time to time.  It's not any reason to abandon the strategy, though. 

Think of all the past periods of fear that the PP has weathered.  Is right now worse than 2008?  Is right now worse than the 1987 crash?  What I see right now is just garden variety fear.  It will pass.

[slk23]

Even if you look at gold in isolation it's still above its 200 day moving average and so far the trend is intact.  Based on its past behavior it'll probably recover soon.

[Lone Wolf]

Hi Budd, have you got any way to view just your aggregate portfolio value rather than the individual asset values?  I just check mine once per month, and only in aggregate.  Inevitably one hears how the stock market's doing and on my monthly checkups I'll peek at the gold price and such out of curiosity.  But generally I just try to look at the package.  The whole portfolio bundled together works extraordinarily well (and is much more pleasant to look at.)

With volatile assets like stocks, 30-year bonds and gold, at least one of them is bound to do something to upset you on any given day.  I would not spend a lot of time paying attention to how each one's doing.

Just sharing what works for me.  I don't find that this day-to-day stuff is worth getting upset about.

Since you sounded worried, I checked.  The portfolio is about where it was a month ago.  What gold is doing just doesn't matter very much.

[upside]

Unrealized gains in GLD have evaporated. Does a PP investor sit on their hands and weather the storm? Un-nerving and unsettling to say the least.

LOL

How do you figure? My HBPP 4x25 portfolio is up around 11% year to date. Couldn't be happier about it. In fact, I was actually glad gold dropped and LTT's shot up recently since it pushed my portfolio farther away from a re-balance.

[buddtholomew]

It is astounding to me how calm many PP investors are when an asset moves down 20% in a short timeframe. For me, it is difficult to stand idly by and watch a substantial portion of the portfolio value evaporate. I am still convinced that we should be more active in capturing short-term gains and losses to take advantage of this volatility. Personally, I bought GLL (2x Ultra-short) to hedge my GLD position when spot gold was trading in the high 1800's.

I would be surprised to learn that many of the intelligent PP investors on this forum do not use options or inverse funds (less optimal) to complement their portfolio. Please be honest...

Budd

[AdamA]

For me, it is difficult to stand idly by and watch a substantial portion of the portfolio value evaporate.

You're not watching a substantial portion of the portfolio value evaporate, you're watching a portion of an asset value evaporate.

It will be almost always be compensated by a large move in the opposite direction by another asset class.

You've got to get used to this idea.

All of this hedging with options or inverse funds is just going to nickel and dime you out of money in the long term.

 

[craigr]

I'm a taxable investor. Trading in and out of assets only rewards Uncle Sam.

The portfolio total value is still positive for the year. The solution to worrying about one asset going down in value is to stop watching the portfolio so closely. Also remember that the portfolio has other assets that can offset steep losses in any one area:

https://web.archive.org/web/20160324133 ... firewalls/

[buddtholomew]

Thanks for the link. While I agree with all of the conclusions reached in the article, I still believe that a substantial increase in one of the holdings should not be ignored. Although GLD did not breach re-balancing bands to the upside, I could not stand idly by and watch a 25% gain evaporate without any intervention. I only intend to buy PUT options to protect gains in an asset when it has risen by more than 20% and a tolerance band has not been reached. Where is the flaw in this reasoning?

With all due respect Adam1226, GLL has saved me 15K in unrealized losses.

Best-
Budd

[AdamA]

With all due respect Adam1226, GLL has saved me 15K in unrealized losses.

Can you explain the details behind this trade?

[buddtholomew]

30% increase in GLL (purchased at 15.03, current price of 19.39). 45K investment x .3 = 15K

[HB Reader]

It is astounding to me how calm many PP investors are when an asset moves down 20% in a short timeframe. For me, it is difficult to stand idly by and watch a substantial portion of the portfolio value evaporate. I am still convinced that we should be more active in capturing short-term gains and losses to take advantage of this volatility. Personally, I bought GLL (2x Ultra-short) to hedge my GLD position when spot gold was trading in the high 1800's.

I would be surprised to learn that many of the intelligent PP investors on this forum do not use options or inverse funds (less optimal) to complement their portfolio. Please be honest...

Budd

I buy put options to protect profits on occasion in my VP, but never in my PP.

Sometimes it works out, but in the long run I suspect very few people make money consistently using options.  And those that do are probably sellers, not buyers, of options.

My PP is up about 13% this year, so I'm not going to sweat a 16% or so decline in gold (from it's all time nominal high).

 

[MediumTex]

It is astounding to me how calm many PP investors are when an asset moves down 20% in a short timeframe. For me, it is difficult to stand idly by and watch a substantial portion of the portfolio value evaporate. I am still convinced that we should be more active in capturing short-term gains and losses to take advantage of this volatility. Personally, I bought GLL (2x Ultra-short) to hedge my GLD position when spot gold was trading in the high 1800's.

I would be surprised to learn that many of the intelligent PP investors on this forum do not use options or inverse funds (less optimal) to complement their portfolio. Please be honest...

Budd

I buy put options to protect profits on occasion in my VP, but never in my PP.

Sometimes it works out, but in the long run I suspect very few people make money consistently using options.  And those that do are probably sellers, not buyers, of options.

My PP is up about 13% this year, so I'm not going to sweat a 16% or so decline in gold (from it's all time nominal high).    

I feel the same way.

The PP is complete as is.  No tinkering is needed to optimize it.

When an asset nears a rebalancing band, historically it is just as likely to continue rising as it is to pull back.  I would be surprised if you could consistently come out a winner by buying options to protect gains as an asset neared a rebalancing point.

I rely on the theory behind the PP and the historical results of the application of this theory to provide a sense of calm when the markets get spooked.  Once you fully internalize the PP concepts, it's not that hard.

[buddtholomew]

The objective is to protect unrealized gains in the underlying asset and not make money on the PUT option. I consider the option as an insurance premium and would prefer to have the contract expire worthless.

[AdamA]

The objective is to protect unrealized gains in the underlying asset and not make money on the PUT option. I consider the option as an insurance premium and would prefer to have the contract expire worthless.

Why are you so concerned with unrealized gains?  They remain unrealized once your put expires.  What do you then?

[SmallPotatoes]

Sorry to sound so ignorant, but is something happening to the PP?

I am 100% PP and don't really check it but once a year, and I tune out market noise, so I'm not sure what's up.

Just living my life carefree as a provision of the PP. Should I be concerned?

[MediumTex]

Sorry to sound so ignorant, but is something happening to the PP?

I am 100% PP and don't really check it but once a year, and I tune out market noise, so I'm not sure what's up.

Just living my life carefree as a provision of the PP. Should I be concerned?

The PP has had a few bad days lately, along with everything else.

Happily, as Paul Boyer shows in his comparison of different lazy portfolios, the PP has outperformed all of them in the recent downturn.

It looks like the PP is down 2-3% in the last few days. 

Different people have different tolerances for volatility.  Although the PP is appropriate for most investors, there are some investors who simply have no tolerance for any volatility of any kind, and for an investor such as this it may be that only a 100% allocation to t-bills is going to allow them to sleep well at night.  In my experience, however, it's a very unusual investor who simply buys 100% t-bills and leaves it at that.  What seems to be more common is the investor gets spooked during a market downturn and moves into t-bills.  Once the market bottoms and begins rising again, the investor sells his t-bills and moves back into a riskier allocation.  Over time, this approach typically leads to the investor selling at the market bottoms and buying at market tops, creating a portfolio that badly underperforms the broader market, while also generating a lot of stress along the way.  Part of what is so appealing to me about the PP is that it completely short circuits this entire process and provides the amateur investor an opportunity for nice gains in a fairly low volatility and low risk strategy.

[buddtholomew]

The objective is to protect unrealized gains in the underlying asset and not make money on the PUT option. I consider the option as an insurance premium and would prefer to have the contract expire worthless.

Why are you so concerned with unrealized gains?  They remain unrealized once your put expires.  What do you then?

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.

[MediumTex]

The objective is to protect unrealized gains in the underlying asset and not make money on the PUT option. I consider the option as an insurance premium and would prefer to have the contract expire worthless.

Why are you so concerned with unrealized gains?  They remain unrealized once your put expires.  What do you then?

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?

[stone]

Isn't the Hussman Fund the perfect example of hedging with put options? As far as I can work out the Hussman Fund converts the wild gyrations of a stock only portfolio into a decade long, grinding, very slow decline. Basically it seems to loose 0.2% per month come what may. The Hussman Fund weekly updates are a great read. They give the full on pessimistic explanation as to why the fund has full put option protection. I guess the intention is to bide their time until they are optimistic, do away with the puts and let the stocks blossom. I guess the point is that people in that fund don't want to sell up and wait in cash (or the PP ) because of tax reasons or something. It all seems to rest on trusting that Hussman knows when to stop buying the put options. I can't help wondering how that is going to come about. Surely as soon as his widely read weekly update has anything less than total gloom; his broadcasted opinion will drive prices up above his fair value level???

[Storm]

I feel like I got a huge bargain by purchasing ~$2K worth of SGOL yesterday at less than $160 a share (spot price < $1600).  I'm still in accumulation phase and I try to AVOID taxable events at all costs.

Buying this low DEFINITELY captures volatility in a positive way.  The upward trend of gold is still intact.  I see no reason to believe that the economic fundamentals giving us a bull market in gold have changed in any way, and even if they have, the PP protects me to the downside.

[buddtholomew]

Why are you so concerned with unrealized gains?  They remain unrealized once your put expires.  What do you then?

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.