Gyroscopic Investing

jimbojones wrote: I've only been following the PP for a few months now, so I certainly understand the negative feelings related to the recent performance.  For me, the problem comes down to comparing the performance of Gold to the performance of a standard 50/50 or 60/40 bogleheadish portfolio.  For instance, today, the PP lost about 0.10%.  That doesn't seem alarming until you compare it to a bogleheadish portfolio that gained 0.42%.  Especially when Gold lost 1.17%. 

So it's natural to think the PP is failing based on that comparison, but in reality it only lost 0.10%.  Hang in there.

Exactly. My retirement portfolio (60/40) is performing admirably given the recent political uncertainty. The HBPP is underperforming this mix of late (I believe YTD as well) which presents a dilemma for me, as money in this investment falls into the "cannot afford to lose" category. I realize that you cannot measure performance on a daily basis and the portfolio is positive YTD, but that doesn't mean I should ignore fluctuations in the portfolio as the economic climate changes.

I recently posted in another thread that I would not invest 100% of my assets in the PP. MediumTex was right, PP investors are more inclined to abandon the portfolio in times of economic prosperity. Even a conservative 60/40 portfolio is outpacing the PP and meeting my expectations.

I have a feeling the performance of the PP will improve during January, after the "fiscal cliff" thing is decided once and for all.  I think the poor performance of the PP has come from a net movement of investors out of most assets and into cash until they perceive more "certainty" (rightly or wrongly).  People are preferring cash until something happens to tell them which way the wind will blow next.

If you look at the charts, the PP started to suffer as we got closer to the US elections.  Once the elections were decided, the PP recovered a bit until people started to focus on the "fiscal cliff" thing.  Once this is decided (whatever the result), I think the PP will start to gain again.  That's just my guess, anyway.

Really though, if you study the PP's past performance, a week or two of losses isn't the tiniest bit unusual.  I looked at lots of historical charts before I went into the PP, so I knew what to expect.  Freaking out about a single days' performance is even more nonsensical, if you ask me.

melveyr wrote: What if the PP dropped 50% in the middle of a year and happened to move back up to break even by Jan 1?

That 50% could have just as easily lined up with Jan 1. I wouldn't place too much emphasis on the Julian calendar. I think looking at intra year peformance is a great way to kick the tires. The PP is riskier than most people here think because they just look at the year end values.

The specific rules of the HBPP are not as important as the consistency of applying the rules.  The HBPP is nothing more than a mechanical trading system based on a 25/25/25/25 allocation of stocks/LTT/cash/gold with 15/35 rebalancing rules.  The fact that the HBPP only has to be traded every two or three years on average is just a property of the system.

By trying to "optimize" the performance of the HBPP over the last 40 years of fiat-currency market data, one runs the risk of curve fitting.  A trading system that starts out fitting the past data like a mitten is turned into a trading system that ends up fitting the past data like a glove.  Since the future relative performance of the four asset classes may not be the same as their past relative performance, optimization to the past might result in subperformance in the future.

A book I like that explains trading systems is The Universal Principles of Successful Trading: Essential Knowledge for All Traders in All Markets by Brent Penfold (http://www.amazon.com/gp/product/0470825804).

Applying the principles of this book to the HBPP would mean to choose the "factory default values" of 25/25/25/25 and 15/35 (or whatever you decide to use) and then backtest this system.  If it works OK on past data and you feel confident of trying the system for the future (in other words, it either works or it doesn't work with its factory default values), then you assume the next trade will be twice as bad as the worst past trade.  You have to be prepared for this type of surprise event taking place.

Only a philosopher can answer why you would assume future performance is only twice as bad rather than three or four times as bad as the worst past performance, but the idea is that markets change with time (usually).  As an investor and trader, people have to be prepared to handle these kinds of surprise possibilities.

One can rebalance yearly according to the Julian calendar, monthly, daily (which may be difficult if the gold component is in coins or bullion in one's safety deposit box), every 500 days (which is arbitrarily chosen to make a point), or whatever.  The idea is to do the rebalancing consistently according to a predetermine plan and to test it first to make sure it works on past data (with the proviso that the worst future performance might be a lot worse than the worst past performance).  Be prepared to handle this possibility.

One of my approaches to managing this possible risk is to use strategy diversification.  I will put no more than perhaps 40% of my investible funds in the HBPP on grounds that even though the HBPP worked OK in the past, it might stop working for some unknown reason in the future.

I also think of the HBPP as a form of index investing.  The stock, LTT, and gold components used with the HBPP are really index types of assets.  Since I believe in John Bogle and the advantages of index investing for a large percentage of my portfolio, I consider the HBPP to be a less volatile form of index investing relative to pure stock index investing.

edsanville wrote: I have a feeling the performance of the PP will improve during January, after the "fiscal cliff" thing is decided once and for all.  I think the poor performance of the PP has come from a net movement of investors out of most assets and into cash until they perceive more "certainty" (rightly or wrongly).  People are preferring cash until something happens to tell them which way the wind will blow next.

If you look at the charts, the PP started to suffer as we got closer to the US elections.  Once the elections were decided, the PP recovered a bit until people started to focus on the "fiscal cliff" thing.  Once this is decided (whatever the result), I think the PP will start to gain again.  That's just my guess, anyway.

Really though, if you study the PP's past performance, a week or two of losses isn't the tiniest bit unusual.  I looked at lots of historical charts before I went into the PP, so I knew what to expect.  Freaking out about a single days' performance is even more nonsensical, if you ask me.

Hi,

can you publish good detailed charts?

Tks

Year to date as of yesterday my portfolio increased by approx 5.75% my last rebalance was the end of Jan 2011,  I am basically 100% all in the PP.  When I just step back slightly and see that my portfolio increased 21.63% from last re-balance point and in 2010 I had an increase of +14.5% and in 2011 an increase of +15.01%    even a small year to date increase compounds the growth from the past.

I've long felt that the biggest road block for most people adapting the HBPP is relative under performance during prosperity (or in this case quantitative prosperity).

Steve:

You have made the best point that I have read regarding the "Recent Performance" question so far!

I have never been convinced that compounding works well when a portfolio is vulnerable to major downward market swings [like the lossess experienced in 80/20, 60/40, or 50/50 porfolios in 2008]. 

It appears that small annual losses or annual gains don't wreck, or set back, the long-term compounding affects that a short-term 30-40% loss can cause to a portfolio.

Yes, I would love to have consistent annual gains with no losses but I cannot get to the growth that I need [5%] from a portfolio that is too safe containing no economic risk!

What keeps me from dumping the PP is the thought of going back to reading articles like this one while trying to figure out what to do with my money..... Any relation to Deepak I wonder?

edsanville wrote: I have a feeling the performance of the PP will improve during January, after the "fiscal cliff" thing is decided once and for all.  I think the poor performance of the PP has come from a net movement of investors out of most assets and into cash until they perceive more "certainty" (rightly or wrongly).  People are preferring cash until something happens to tell them which way the wind will blow next.

If you look at the charts, the PP started to suffer as we got closer to the US elections.  Once the elections were decided, the PP recovered a bit until people started to focus on the "fiscal cliff" thing.  Once this is decided (whatever the result), I think the PP will start to gain again.  That's just my guess, anyway.

Today's looking good for this prediction, if I do say so myself!

I increased the total invested in the PP by 25% before market close on 12-31. Although I am itching to check on the performance this morning, my New Year's resolution is to "refresh" less frequently. So far, so good.

I don't even know whether the markets are up, down or sideways, nor how the PP is performing today. The above post does provide a hint, but the magnitude is unknown. I'll probably check at 1:20PM this afternoon when ETF prices are settled for the day. I once calculated that I refreshed the portfolio value on average 50-60 times per day. Insane!!

buddtholomew wrote: I increased the total invested in the PP by 25% before market close on 12-31. Although I am itching to check on the performance this morning, my New Year's resolution is to "refresh" less frequently. So far, so good.

I don't even know whether the markets are up, down or sideways, nor how the PP is performing today. The above post does provide a hint, but the magnitude is unknown. I'll probably check at 1:20PM this afternoon when ETF prices are settled for the day. I once calculated that I refreshed the portfolio value on average 50-60 times per day. Insane!!

Hi Budd,

you check your portfolio value 60 times a day?

Are you 100% in PP?


Regards

frugal wrote:

buddtholomew wrote: I increased the total invested in the PP by 25% before market close on 12-31. Although I am itching to check on the performance this morning, my New Year's resolution is to "refresh" less frequently. So far, so good.

I don't even know whether the markets are up, down or sideways, nor how the PP is performing today. The above post does provide a hint, but the magnitude is unknown. I'll probably check at 1:20PM this afternoon when ETF prices are settled for the day. I once calculated that I refreshed the portfolio value on average 50-60 times per day. Insane!!

Hi Budd,

you check your portfolio value 60 times a day?

Are you 100% in PP?


Regards

Hi Frugal-

That was the "old" Budd. The new and improved Budd hasn't checked his portfolio balance once this year 

I am invested 50/50 in the PP and conventional 60/40 Boglehead portfolio.

buddtholomew wrote:That was the "old" Budd. The new and improved Budd hasn't checked his portfolio balance once this year 

Budd, I know I've mentioned this before, but my favorite way to avoid checking my portfolio is to just look at this daily %-change of the PP assets:

[align=center]http://www.google.com/finance/chart?cht ... hy&tlf=12h[/align]

[align=center]Red = Stocks
Blue = Bonds
Yellow = Gold
Green = Cash[/align]

It's like taking the pulse of the PP without needing to get a full checkup. You can bookmark that link and even add it to your smartphone homescreen. After awhile, if you check it enough, you just get used to the fact that nearly every day the lines tend to balance each other out.

And, for me, if you look at it enough times, over enough weeks — and you use it as a crutch to stop looking at the raw numbers in your portfolio — the realtime chart becomes pretty boring to look at. And after a few months, you just stop looking at your portfolio because you can tell that each day the portfolio really doesn't do that much without having to look at the minuscule fluctuations in your account.

And now, I rarely — if ever — need to even look at the realtime chart. I keep it pinned in my OS X Dashboard, but I hardly even notice it anymore.

Good luck to you this year!

Dear Budd,

I would like to know why you chosed 50/50  and what is your AA of Bogle,s portfolio.

Thank you

buddtholomew wrote:

frugal wrote:

buddtholomew wrote: I increased the total invested in the PP by 25% before market close on 12-31. Although I am itching to check on the performance this morning, my New Year's resolution is to "refresh" less frequently. So far, so good.

I don't even know whether the markets are up, down or sideways, nor how the PP is performing today. The above post does provide a hint, but the magnitude is unknown. I'll probably check at 1:20PM this afternoon when ETF prices are settled for the day. I once calculated that I refreshed the portfolio value on average 50-60 times per day. Insane!!

Hi Budd,

you check your portfolio value 60 times a day?

Are you 100% in PP?


Regards

Hi Frugal-

That was the "old" Budd. The new and improved Budd hasn't checked his portfolio balance once this year 

I am invested 50/50 in the PP and conventional 60/40 Boglehead portfolio.

Gumby wrote:

buddtholomew wrote:That was the "old" Budd. The new and improved Budd hasn't checked his portfolio balance once this year 

Budd, I know I've mentioned this before, but my favorite way to avoid checking my portfolio is to just look at this daily %-change of the PP assets:

[align=center]http://www.google.com/finance/chart?cht ... hy&tlf=12h[/align]

[align=center]Red = Stocks
Blue = Bonds
Yellow = Gold
Green = Cash[/align]

It's like taking the pulse of the PP without needing to get a full checkup. You can bookmark that link and even add it to your smartphone homescreen. After awhile, if you check it enough, you just get used to the fact that nearly every day the lines tend to balance each other out.

And, for me, if you look at it enough times, over enough weeks — and you use it as a crutch to stop looking at the raw numbers in your portfolio — the realtime chart becomes pretty boring to look at. And after a few months, you just stop looking at your portfolio because you can tell that each day the portfolio really doesn't do that much without having to look at the minuscule fluctuations in your account.

And now, I rarely — if ever — need to even look at the realtime chart. I keep it pinned in my OS X Dashboard, but I hardly even notice it anymore.

Good luck to you this year!

Thanks Gumby for the recommendation. I'll create a portfolio view in Yahoo Finance with my current allocation (no totals) and monitor the percentages for re-balancing purposes only. It is definitely counterproductive to check the portfolio too often as the constant fluctuations produce either exuberance (short-lived) or unwelcome anxiety.

Happy New Year!
Budd

The New Year's resolution to check on the portfolio only after market close remains intact. As a thought experiment, I decided to look at the intraday gyrations for each of the individual assets as they traded on 1-4 and the likely emotions I would have felt. Keep in mind that on 1-3 the PP had an unusually bad day while the market remained flat. GLD and TLT traded lower.

7AM - Down marginally for the day - Oh great, second down day in a row, but its not too bad...
8AM - Down more for the day - It's a down day anyway...a few hundred here or there wont matter in the long run...
9AM - Lowest point for the day - Disgust...As soon as I contribute any money...I'm such an idiot...this portfolio is for "doomsdayers". Market is flat?? WTF?
11AM - Substantial recovery - Relief. Maybe this portfolio does work as planned...come on baby, finish positive for the day...
12PM - High for the day - Yeah!! Market is too exuberant and GLD, TLT are way oversold...I am now recovering some of those losses from the day before...
1PM - Slightly below the high for the day - Fantastic. Stick with the plan and ignore the noise...you can do it.

Would have been exhausted by mid-day. Can only imagine if I only looked at it once a year. Its a goal anyway.