Gyroscopic Investing

Thanks everyone!  Glad this has been helpful.  For probably odd reasons, these kinds of uncertainties in PP implementation are some of the things I agonized about before jumping in, because I was afraid of doing it wrong and losing out.  The simulations helped me get over that.  Personally, I'm planning to go with a "modified" DCA, buying bonds & gold only every 3 months, simply because I can't automate ETF investments.

It would be neat if somebody (sophie?  :-)) could do multiple simulations over different, randomly selected time intervals between 1972 and now.  With the results of that, I'd feel a lot more confident in calling one method better than another.

I didn't save the data but I did that before I posted these numbers, and the ranking doesn't change. In fact, DCA does even better during stable market conditions compared to the other two options, but I wanted to be sure that the same held true during the kind of turmoil we've been seeing recently, and likely will continue to see in the near future.

If it's not too much work and/or too much to ask, could you see what effect those 2-8 rebalances would have if they were taxable? I'd also be curious (in a nervous, anticipatory sort of way) to see what additional impact slamming the dividends with capital gains tax would have on the final balance.

Good question.  The 8 rebalances wouldn't have any tax implications since they were all from cash.  Different story with the other two - one involved selling gold, the other selling bonds.  Will check that out this weekend and re-post.

sophie wrote: OK, I redid some simulations and reviewed my code just to make sure.  I got similar results with different test runs, but here's what's probably most relevant:

Really cool, sophie!  It's nice to lace some of our nuts and bolts ideas on "how to do a PP" with hard data.  Good stuff.

[quote="sophie"]
Thanks everyone!  Glad this has been helpful.  For probably odd reasons, these kinds of uncertainties in PP implementation are some of the things I agonized about before jumping in, because I was afraid of doing it wrong and losing out.  The simulations helped me get over that.  Personally, I'm planning to go with a "modified" DCA, buying bonds & gold only every 3 months, simply because I can't automate ETF investments.

[quote]

When you say DCA, are you speaking about let's say you had $1000 coming in every month that you'd be putting in $250 in each category every month? Also I'm assuming you are doing the bonds and gold in 3 month intervals since for bond purchases you need at least $1000 (for Fidelity at least for one bond), and gold would want to minimize transaction costs.

Also I'm wondering, for the idea of DCA versus buying the lagging asset. Is this comparing then DCA to Value Averaging? From what I remember reading the book on Value Averaging by Michael Edleson, there was something about Value Averaging doing a bit better than DCA over time. Not sure if this is considered the same however.

In case for those interested, I liked the book although I still am reading through it currently.

http://www.amazon.com/Value-Averaging-S ... 0470049774

DCA = straight division of the contribution into 4 categories. My simulation ignores minimum purchase limits.    You could either accumulate in cash and then purchase when you have the $1000, or accumulate into TLT.  Which you can't do with auto investment in Fidelity. 

I did in fact try a run with $7.95 fees across the board for everything except cash, and again the same ranking of the 3 strategies holds.  It's surprisingly robust.

sophie wrote: DCA = straight division of the contribution into 4 categories. My simulation ignores minimum purchase limits.    You could either accumulate in cash and then purchase when you have the $1000, or accumulate into TLT.  Which you can't do with auto investment in Fidelity.   

I did in fact try a run with $7.95 fees across the board for everything except cash, and again the same ranking of the 3 strategies holds.  It's surprisingly robust.

I can understand that then. I was thinking more if you are purchasing physical bullion versus an ETF such as IAU. With IAU, you might only pay a few dollars to transact and it might make sense if you do this every 3 months or so to get the transaction costs on that down as much as possible.

I'm not sure how it is though for gold bullion providers but at goldmart.com, the shipping/insurance values raise up until you reach $5000 when it drops to 0. Up until $5000 though it's like $19.99 for shipping and insurance so unless you're a larger investor these values could eat up a bit more of the returns if you're doing DCA with it versus lumped sums of a few thousand every 3 months as you said or potentially every 6 months depending on how quickly you can build up cash for gold.

Sophie,

I think there's another option that hasn't yet been considered: an investor could add to each asset class to maintain their current proportions.

In other words, if the portfolio is currently at 30% bonds, 22% gold, 26% cash, and 22% stocks, then contribute new money to each class in exactly those proportions.

It seems to me that this is a "moderate" option, in between adding to cash (frequent rebalancing) and contributing to the four equally (infrequent or possibly never rebalancing).  The "proportional" approach is the one that ensures that contributions have no effect one way or the other on when rebalancing takes place.

Xan wrote: Sophie,

I think there's another option that hasn't yet been considered: an investor could add to each asset class to maintain their current proportions.

In other words, if the portfolio is currently at 30% bonds, 22% gold, 26% cash, and 22% stocks, then contribute new money to each class in exactly those proportions.

It seems to me that this is a "moderate" option, in between adding to cash (frequent rebalancing) and contributing to the four equally (infrequent or possibly never rebalancing).  The "proportional" approach is the one that ensures that contributions have no effect one way or the other on when rebalancing takes place.

Debating whether to invest additional funds equally among the 4 asset classes (each asset will comprise 25% of the overall portfolio) or in proportion to their current allocations (24%, 23%, 25%, 26%). There is not much difference between the two options in my circumstances (either purchase more GLD or TLT...oh boy ), so I assume either approach is sufficient. How about in situations where one or more assets have deviated from the 25% allocation to a greater degree?

buddtholomew wrote:

Xan wrote: Sophie,

I think there's another option that hasn't yet been considered: an investor could add to each asset class to maintain their current proportions.

In other words, if the portfolio is currently at 30% bonds, 22% gold, 26% cash, and 22% stocks, then contribute new money to each class in exactly those proportions.

It seems to me that this is a "moderate" option, in between adding to cash (frequent rebalancing) and contributing to the four equally (infrequent or possibly never rebalancing).  The "proportional" approach is the one that ensures that contributions have no effect one way or the other on when rebalancing takes place.

Debating whether to invest additional funds equally among the 4 asset classes (each asset will comprise 25% of the overall portfolio) or in proportion to their current allocations (24%, 23%, 25%, 26%). There is not much difference between the two options in my circumstances (either purchase more GLD or TLT...oh boy ), so I assume either approach is sufficient. How about in situations where one or more assets have deviated from the 25% allocation to a greater degree?

If you use 15-35% rebalancing bands, and you invest new money according to the current allocations, you will see slightly more gains in the long run.  That's the way I do it.

And you are going with the current trends and not trying to pick the turns.That could save some drawdowns.
Tip of the hat to all of you for all the analysis...
[/quote]

I'm about to allocate some contributions and I'm not sure what's best.  The backtesting is cool, but it seems extremely path dependent.  It would be neat to try different start dates.  I lean towards BTLA just because it is easiest but of course I don't want to leave money on the table.

dragoncar wrote: I'm about to allocate some contributions and I'm not sure what's best.  The backtesting is cool, but it seems extremely path dependent.  It would be neat to try different start dates.  I lean towards BTLA just because it is easiest but of course I don't want to leave money on the table.

For a large new contribution I usually buy equal amounts of each. I used to BTLA, but now I'm transitioning to more of an equal-contribution approach, which also has the beneficial side effect of forcing me to wait a month or two between contributions, causing me to check less frequently.

I wanted to bring this thread back and see where people are at with their contribution methods.

I'm currently adding to the lagging asset, but I can see why equal contributions would be beneficial. A rising tide raises all boats and equal contributions raise all assets. This maintains the AA 'drift' until a natural rebalance band occurs. Let the winners ride, let the losers slide. I may as well be quoting passages from the Book of Harry because this is all in line with what he recommended. It's as if he was a genius or something!

I was burned last month when I added to gold and bonds because they were "cheap" to get them back to the right percentages.

No more small tweaks for me. My plan is to do an annual rebalance early every January, and since I am still working, as my cash band is likely to be the one to hit the high side, I will rebalance when that occurs.

I've ended up with a mixed strategy. Large contributions, like the annual Roth IRA deposit, get split evenly between the four assets. Small contributions get thrown into cash, and periodically distributed among the lagging assets (about every 3 months).

I prefer to purchase lagging assets more frequently and in smaller increments to restore AA.

Just yesterday I exchanged 2% of SPY for LTT's and Cash.
That makes a TLT purchase at 124 and another at 118. I had previously sold some at 141. Small moves, all within the 4x25 framework.

One last thing...I fully expect stocks to rise, gold and LTT's to fall following the FED announcement so I went the opposite direction.

Budd, I expect gold to rise this afternoon after the announcement. We'll see!

Cortopassi wrote:Budd, I expect gold to rise this afternoon after the announcement. We'll see!

Oh god, now look what you've done!

buddtholomew wrote:

Cortopassi wrote:Budd, I expect gold to rise this afternoon after the announcement. We'll see!

Oh god, now look what you've done!

Looks like you win for the short term, on gold. But stocks are also less the exuberant right now too.

By tomorrow or the next few days, I fully expect to be right.

Well, then. Nothing is exuberant...

All I can ask for now is for gold to go sub $1100 so I can average down in early Jan. And for stocks to not drop so much in the next two weeks that I can't lock in any gains.

Not much to ask for, is it?

Seems like a reasonable request, if only because I want the same

Canadian long term bond ETF popped +1% on the rate hike news today. Canada should be following the trend shortly. To show what it's like trading in a non-reserve currency, gold dropped -1% but the CAN dollar dropped -1% too, so even-steven.

I'm retired, with no incoming money. All of my interest and dividends get swept to cash. The theory is that eventually I'll add to lagging assets. The practice is, I never get around to doing it. We spend most of the earnings, lol. Although this year we finally have reined that in, and I'll have to decide soon. I can add to gold, and would have NO problem with that right now.

JohnnyFactor wrote:I wanted to bring this thread back and see where people are at with their contribution methods.

I'm still trying to figure out how to ease into a bigger pp as total, i.e. more pp less vp, without missing a rebalancing opportunity.
One possibility is to create a second pp in another account as some people do.
A second way- forget rebalancing and just get overall allocation right.

Whatever happens, I can see myself rationalizing loading up on more gold. Bank interest won't suddenly go up just because the Fed rate did. Gold *seems* cheap and still has the possibility of going up in my lifetime. Stocks are already 30% of my pp. Bonds...will stand pat for now.

I've mentioned this before in another post.
PP investors may be disappointed, but the portfolio remains positive YTD.
It's the up, up, up followed by down, down, down that has left many feeling despair.

Gold has and will always be the wildcard with the PP.
The metal represents 7.5% of my overall portfolio 70/30 + 4x25PP + Cash but still produces the most anxiety.

70/30 is up ~9% after yesterday and my version of the PP up ~3.
70/30 stays fully invested at all times, including re-balancing.

dualstow wrote:Whatever happens, I can see myself rationalizing loading up on more gold. Bank interest won't suddenly go up just because the Fed rate did. Gold *seems* cheap and still has the possibility of going up in my lifetime. Stocks are already 30% of my pp. Bonds...will stand pat for now.

I hear you dualstow!

I really don't understand what's going on in the markets right now. Stock performance since the election completely defies reason, gold is approaching the 1100 mark despite the interest rate increases, and who knows what's happening to bonds. The Fed says it's going to raise interest rates three times next year, but then how could long bond interest rates possibly keep going up, when European bond rates are so low? Investors will pile into US Treasuries and that will push interest rates back down.

It is tempting to try to tweak the PP contributions to take advantage of current events, but I honestly don't know how to. I'll probably hold off on bond-buying though...rates may not go up much, but they're highly unlikely to go down. Which means that I won't buy bonds and then the rates will drop like a stone.

Incidentally, has anyone noticed that one year T bills are a better deal right now than online high-yield savings accounts?? 0.9% interest not subject to state/local taxes, as compared with ~1% interest for online savings.