Gyroscopic Investing

Interesting article that is somewhat related to the issue of maximum drawdown - it possibly makes the case for a PP more compelling:

http://macrobusiness.com.au/2011/07/are ... long-term/

buddtholomew wrote:

MediumTex wrote:

buddtholomew wrote: It is difficult to watch your investments tread water when the market (S&P500) has such a wonderful week (+5.5%). I am reluctant to allocate additional funds to an investment approach that does not participate in such robust equity moves.

Watching the market that closely and drawing conclusions based on weekly moves is very dangerous.

Be careful.

I don't intend to act on my observations, but are merely highlighting the fact that the PP may lag in times of a robust equity market. Of course, these periods are temporary and are followed by downturns as well.

The key macro theme to keep in mind right now, though, is that we are in the midst of a secular bear market for equities, which is characterized by fierce upward rallies, followed by long grinding sideways or downward movements.

There ARE long periods of time when equities are the place to be, but NOW is not one of those times.  Once the stock market breaks through the highs of a decade ago, we could start talking about a new equity bull market, but what we are seeing right now is just a typical long term bear market with occasional cyclical bull markets like we have seen since 2009.

I think this generational bear market for stocks is part of what makes the PP such a solid choice at this particular point in history.  I predict that it will be a decade or more before the stock market begins another secular bull market, so I am very comfortable with the PP and don't fear missing out on impressive gains from equity heavy portfolios.

If my prediction about the duration of the current secular bear market for stocks is wrong, I won't be losing anything since I'm not betting anything on this prediction.  I just think that the PP is an especially appropriate approach to investing, given the overall uncertainty in the markets and the general sense that the current crop of political and economic leaders are simply not up to the task.

Grumby "Also, the PP has to go down in order to go up. It's like breathing. You have to exhale (people go to cash) in order to inhale (people take their cash and go buy asset x)."

I'm not sure about this. If the PP had perfectly matched asset classes that were individually very volatile but when combined into  the 25:25:25:25 gave zero overall portfolio volatility; then surely it would be even better than it is?  Don't the trading activities of the likes of Goldman Sachs etc report very long periods without a single loosing day? I thought they re-balance non-correlated assets on a second by second basis but I'm pretty clueless about such things.

About people moving in and out of cash- From what I understood, once the government creates bank reserves by government spending, the only way those can be reduced is by tax payments or by primary dealers buying government bonds from the government. Everything else is just passing them around. If people just sit on the money, then prices don't get bid up. If people frenetically pass the money around bidding up assets, then there are still just as much bank reserves in the system. Governments are continuously emitting cash and bonds (that is what those debt clocks show) and most of the time banks further increase the money supply by making loans. To my mind the PP is riding the asset price inflation caused by that.

stone wrote:Grumby

I'm Gumby dammit. ...Not Grumby.

stone wrote:If the PP had perfectly matched asset classes that were individually very volatile but when combined into  the 25:25:25:25 gave zero overall portfolio volatility; then surely it would be even better than it is?

Who said the assets were perfectly matched? Not to mention that a PP only stays 25:25:25:25 for about a minute. Then it begins to wander off target as one asset grows and another shrinks. Most people's PPs resemble something more along the lines of 22:21:30:26 as time goes on. Nobody really has a perfectly matched portfolio. Not sure where you got that idea from.

stone wrote:Don't the trading activities of the likes of Goldman Sachs etc report very long periods without a single loosing day? I thought they re-balance non-correlated assets on a second by second basis but I'm pretty clueless about such things.

For one thing... Goldman Sachs and other houses use supercomputers to zig and zag around the general public with highly managed portfolios. They own the casino — we just put our chips on various parts of the table. You can't really compare the PP to a game that's rigged for the big boys. They are entirely different sports.

stone wrote:About people moving in and out of cash- From what I understood, once the government creates bank reserves by government spending, the only way those can be reduced is by tax payments or by primary dealers buying government bonds from the government. Everything else is just passing them around. If people just sit on the money, then prices don't get bid up. If people frenetically pass the money around bidding up assets, then there are still just as much bank reserves in the system. Governments are continuously emitting cash and bonds (that is what those debt clocks show) and most of the time banks further increase the money supply by making loans.

You must have misunderstood me. When people sell Gold, Stocks and Bonds on the same day, the demand for cash rises. This obviously puts downward pressure on the PP. Eventually, the markets muster up the courage to purchase one of those assets. It can take a day or it can take 18 months. But, eventually, the demand for cash goes down as people move back into other assets. This happens every second of every trading day, by billions of people all over the globe. Supply and Demand are constantly changing — on every asset in the market. There is no straight line for any investor.

stone wrote:To my mind the PP is riding the asset price inflation caused by that.

Sure. Any nominal rise in an investment can be due to inflation. The only way to know for sure is to check the "real" data after the fact.