Gyroscopic Investing

sophie wrote: This made me like the PP more and more.  Just set up automatic investments and have the discipline to buy gold regularly regardless of the price, and you get free momentum effects without having to compute 10 month moving averages!

I must be dense, but I do not see how automatic investments (in what assets exactly?) equates to using a 10-month moving average.  Could your explain more by what you mean?

Kriegsspiel wrote: It still doesn't make sense.  If you buy your lagging asset on its way down, you start out getting a "better price" relative to your other investments, and the further it goes down, the better the price will be.  Since our belief is that the 4 investments will produce a profit, isn't buying MORE of them when you can get them for a cheaper price a better way to juice returns than buying into one who's momentum is already being produced by market forces?

That would only make sense if the asset was undervalued, because only valuation matters to returns in the long-term.  In the short-term, downside momentum will incur mean reversion of overvalued assets to undervalued.  So buying a falling knife is not a good idea, even within the PP context since short-term periods do not imply that all four assets are always perfectly non-correlated.  I've found this chart to be helpful in visualizing correlation vs risk:

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Most of the PP assets in the long-term are around .10-.20 correlation.  In the short-term they can be nearer to 1 than 0, i.e. gold and bonds over the past several years.

MachineGhost wrote: That would only make sense if the asset was undervalued, because only valuation matters to returns in the long-term.  In the short-term, downside momentum will incur mean reversion of overvalued assets to undervalued.  So buying a falling knife is not a good idea, even within the PP context since short-term periods do not imply that all four assets are always perfectly non-correlated.

What would be an example of your lagging asset being overvalued?  And why wouldn't this work in the opposite, too?

Most of the PP assets in the long-term are around .10-.20 correlation.  In the short-term they can be nearer to 1 than 0, i.e. gold and bonds over the past several years.

That's kind of what I'm trying to say.  If one of the axioms of success in investing is to 'be greedy when others are fearful,' it would seem that if you see your % in one asset dropped, then that's the asset to be greedy for.

Kriegsspiel wrote: What would be an example of your lagging asset being overvalued?  And why wouldn't this work in the opposite, too?

Gold right now or overvalued stocks when they finally give up the ghost?

It does work in the opposite, which is why momentum works.  Until it mean-reverts.  The rebalancing bands are a crude form of market timing, essentially buying/selling any asset after its gone up or down 40%.

That's kind of what I'm trying to say.  If one of the axioms of success in investing is to 'be greedy when others are fearful,' it would seem that if you see your % in one asset dropped, then that's the asset to be greedy for.

Everything in life has a context, theres nothing simple that is true at face value.  So only if it is undervalued.  If you don't buy an asset when it is undervalued, you are speculating on psychology as opposed to intrinsic.  Buffett's quote you referenced is related to 1987 when Coke was trading under $10 after Black Monday.  That was a no brainer.  So long as you take momentum profits to buy the lagging aset, you're sending the market's money (somebody exchanged you cash for your asset) after bad, not your own.

Ahh, never mind what I've said, I realized the error I was making as I was laying in bed.  I think I am on the same mental wave as you, but my frame of reference for "calculating" it was off.  It's so simple now that I realize it.  When I said that buying the lagging asset was buying the "cheapest" asset, I didn't take into account that it MATTERS when you start your portfolio.  I basically got into the PP at the height of the gold run, so my "tared" 25% for gold was basically at the highest it's ever been.  Now, when I'm seeing my gold % slip down, mentally, I'm thinking "hey, gold is on sale now," but really that's only RELATIVE to the high price that I paid just to get the 25% allocation.  I would imagine looking at long term PP ratios instead of MY ratios would be a better guage.

So yes, now I see you guy's points.

I don't have any problem with other approaches.  But I don't see any of them as more or less "neutral" or "agnostic" than any other.  Each will perform better under different circumstances (with equal contribution performing best under historical circumstances).  If momentum effects suddenly vanish due to new trading algorithms, then lagging asset might be the best performer (it's a similar discussion as constant rebalancing vs. other possible rebalancing bands... wider bands will do better when there is more momentum)

In hindsight, i wish I had sold stocks before the current Canadian market crash. Most of my investment is in registered accounts so I'm not worried about taxes.
And isn't it hard to buy gold now when it is free fall although I probably hit rebalancing band.
Also, when do we check the portfolio and decide to rebalance? Whenever there is big crash?

metta2006 wrote: And isn't it hard to buy gold now when it is free fall although I probably hit rebalancing band.
Also, when do we check the portfolio and decide to rebalance? Whenever there is big crash?

"hard to buy gold now" ?  Gold funds and ordering physical are easy to buy, so you must mean psychologically?

Yeah, it can be.  I find it harder to buy in a fund than I do physical at a local shop.  But now I cannot find physical ANYWHERE to take in hand. Physical can be ordered from almost anywhere, but that is more similar to buying a fund in my mind - money goes out, nothing in return.  It's different if you take possession of a chunk of cold metal that quickly warms to your touch and weighs down your pocket when you leave.

As for when to rebalance, I like the band limit to trigger, but then it depends on how often you check.  If you check annually vs. quarterly vs monthly vs weekly.  I tend more toward frequent watching, but...

I tend to watch closely and rebalance within a week or two of hitting the band limit on the way up.  On the way down I don't check as often and the delay between hitting the limit and putting in more to the down assets might be as short as 4-6 weeks or as long as several months.

So, based on what Sophie has written here and elsewhere, and what folks have been writing in this thread, I'm starting to think that I've been off the mark in how I've been approaching adding new contributions to my PP. But perhaps I'm simply confused.

I came across you all about two years ago, read a ton, became convinced that the PP made sense as part of an overall investment strategy, and jumped in on 1 July 2011. Currently, my PP is entirely contained within my Roth and is 100% EFT (IAU, SHY, TLT, VTI). I've been actively trying to grow it relative to my variable portfolio (it's at 20% of my total right now) and so I haven't been worried about re-balancing bands at all.

After the fun we've had this week with gold and equities, my PP stands at:
IAU 22.71%
SHY 25.47%
TLT 26.27%
VTI 25.56%

I had been planning on adding new funds next week, and what I've been doing is purchasing each asset in appropriate amounts to bring the overall PP back to as close to 4X25% as possible for the amount I was adding (so for any given buying event I'd snag, for example, X shares of VTI, Y shares of SHY, and maybe no shares of TLT and IAU). If were to add new funds right now, obviously I'd end up buying more shares of IAU than anything else, and I would have been happy that the current price of ~$13 was less than the last time I bought IAU when it was ~$15.

But what I've been reading herein has caused me to think that this might be a less-than-optimal approach. Am I correct in this supposition? Or am I just confused?
Thanks.
-WD

not confused, just denial and you should be
Sophie did some backtesting and concluded that adding funds should be in the same amount as your present allocation
In your case p.e. 22,71 % IAU.
I am confused because it seems logical to use your approach because that's the optimal risk protection. Or the buy the lagging asset because of the dollar average effect but not buying 4 components because of transaction costs.
Secondly the system to prove the results is very complex. It depends on the scale of your portfolio because of transactions cost, personal taxes, timing to buy once a month or yearly or when cash hits its 35 % band.
So until Sophie has time to work this issue more profund, I think you should do what seems best for you.
My question is also: are Sophie results also valid for selling (p.e. retirement) if I would take out 3 % of the portfolio, should I sell the 4 assets according to their present allocation. In  your case 22,71 % IAU ? or sell the heaviest asset in your case TLT ?

How to handle withdrawals - excellent question.  HB had suggested to withdraw from cash and rebalance when it gets down to 15%.  I would think that this performs better than selling assets at each withdrawal, and wins points for simplicity too.

I would like to stress a few things: 
1) If you're tying yourself up in knots trying to figure out the optimal strategy, then go with what's easiest.  The PP is supposed to free you from worrying about your investments, not cause more problems.
2) The "DCA" approach is worth considering if you can set up automated investments.  Note that varying these automated investments every month to match the portfolio balance would violate point #1 above (and also HB's Rule #1, unless you're a professional money manager).  Most of us should be able to do this for at least 2-3 of the assets.  Gold requires special handling, e.g. buying a set amount every quarter.  I suggest letting the rest pile up in a cash account.
3) The larger the portfolio gets relative to your contributions, the less difference your strategy will make.  A few previous posters have made this point, as I have also.

Would a simple way to buy the "cheapest" asset be to just track all 4 components in a virtual portfolio, and buy whichever is performing the worst in the virtual portfolio?

For example, you start out fully tared in both, $25 x4.  In this imaginary world, you see your virtual portfolio's stocks take a 20% ($5) tumble in month 1, all other assets stay the same:
S; $20 - 21%
B; $25 -26.3%
G; $25 - 26.3%
C; $25 - 26.3%

Say your paycheck is $5, which you put all into stocks to get your real portfolio back to 25% each.

Next month, virtual stocks have dropped another 10%, the others stay the same:
S; $18 - 19.3%
B; $25 - 26.8%
G; $25 - 26.8%
C; $25 - 26.8%

And if you look at your real portfolio:
S; $22.50 - 23%
B; $25.00 - 25.66%
G; $25.00 - 25.66%
C; $25.00 - 25.66%

So you'd put all $5 into stocks again, even if that brings your real portfolio above 25% for stocks (to 26.8%).  You'd probably re-balance according to the virtual portfolio also.

Does anyone see a systematic flaw in this approach?  I was just spitting it out as I thought about it, so don't be too harsh if there's some glaring flaw...

The virtual portfolio asset percentages would differ from the actual amounts as soon as you contribute more, and especially after you rebalance.

Step1:  Sell outperforming asset
Step2:  cash in hand
Step3:  buy lagging asset

With cash already in hand (and tragged the 35% bar) I will just buy into the lagging asset.

I'll treat the cash as if they are from the step one.

Eventually, your growing asset will outweight your new money. That's when you should start from step1 for rebalancing.

I think each contribution should act as its own indendent PP, starting at 25x4 and rebalancing on its own bands independent of your other PPs.  :-)

For my taxable accounts, I add the money directly to the underweight assets when I contribute funds each quarter.

For the non-taxable accounts (i.e. IRAs), I just add the money to cash, and if cash is overweight beyond a rebalancing band, then I rebalance.

Xan wrote: ↑Sun Apr 14, 2013 2:01 pm But that's just an argument for constantly rebalancing.  If you want to constantly rebalance, then go for it.  I believe in the rebalancing bands, and so I don't want my contributions to have any effect on when and whether I rebalance.

Xan,

From reading the above (plus what you wrote prior in this Topic) and what I've read where you stated that you use a separate Permanent Portfolio for each of taxable, traditional retirement, Roth Retirement am I correct to assume you prefer following black and white formulas rather then making investment judgements (aka guesses)?

I am not, though, remembering if you are Classic Permanent Portfolio, e.g., buying 25% each of the four components when you first started.

Could you reveal your current percentage holdings of each of the four components and how you hold each, e.g., physical gold or specific ETF...?

Thanks

Vinny