Gyroscopic Investing

rocketdog wrote: This is why I find the VP to be psychologically invaluable.  Mine is somewhat stock-heavy, so when the market is on a tear I use my VP to boost my self-esteem.  And when the market crashes I use my PP to console myself. 

I really think that for those who are a ways away from retirement (10years or more),and who can handle a little extra volatility, a good portfolio is 80% HBPP and 20% stock index fund. If you can force yourself to not look, just put 20% in VT and leave it alone, no rebalancing, nothing, until you are around 5 years or so from retirement. If stocks hold to their historic returns it should give a nice goose to your retirement nest egg. And of course you have the PP for safety.

sk55 wrote: hi guys,

does anyone know what the CAGR of the PP is during 1990-2000 when stocks are hot?

just trying to figure out my expectations for PP when stocks do well?

Be aware that the 1990-2000 period was very different from the 2009-2013 stock rally.

1990-2000 was the last decade of one of the most spectacular secular bull market for stocks any of us are ever likely to see.

By contrast, 2009-2013 has been an impressive cyclical bull market in the midst of what still looks to me like a secular bear market for stocks.  The fact that stocks are only slightly higher than they were over a decade ago illustrates this point.

The stock market would need to rack up another five years or so of double digit gains to really make it clear that the secular bear market is over.  It may do this, but then again it may not.  When you look at other ugly secular bear markets for equities you see nightmares like Japan where almost 25 years after the peak of a secular bull market, stocks are still almost 75% off of their all-time highs.  Imagine a Japanese stock investor who invested in 100% Japanese equities in 1989.  In the last 25 years he has watched the value of his investment lose over 50%, even when dividends are taken into consideration.  Where is the additional return from equities compared to other investments for this investor?

There's always other lower volatility options..

SPLV or USMV or ACWV for growth (stocks)
IEI or BND for deflation/recession (bonds, cash)
STIP or TIP for inflation (gold)

Strikes me the above is great for anyone who 1) fears a 2008-style market collapse, 2) fears interest rates have nowhere to go but up, and 3) hates gold's volatility and it's high correlation to the overall PP performance. I can see doing the above 33/33/33 or even 50/25/25 if you like equities.

Low volatility investing may be a "new" fad, but I find the backtests on a fund like SPLV intriguing (http://www.etfbase.com/low-volatility-etfs/). Performance lagged the S&P 500 considerably during the tech boom, and I'm too smart to believe such a bubble can't happen again, but much like comparing the PP to a stock heavy portfolio, over time things tend to balance out.

Ad Orientem wrote:I really think that for those who are a ways away from retirement (10years or more),and who can handle a little extra volatility, a good portfolio is 80% HBPP and 20% stock index fund. If you can force yourself to not look, just put 20% in VT and leave it alone, no rebalancing, nothing, until you are around 5 years or so from retirement. If stocks hold to their historic returns it should give a nice goose to your retirement nest egg. And of course you have the PP for safety.

Well, your HBPP should already have a stock index fund in it, so why would you also have one in your VP?

I've got my age as a percentage in the PP, with the rest in my VP.  But here's the extra twist:  my VP is sort of a PP on steroids, where I still have things divided up between the 3 non-cash asset classes, only with a tilt towards stocks. 

For example, if I were 40 years old I'd have a PP with 10% in each asset.  The remaining 60% would be divvied up as follows:

0% Cash
10% Commodities (silver, broad-basket commodities, sector funds, etc.)
20% Bonds (corporate, foreign, junk, TIPS, etc.)
30% Stocks (high dividend, emerging markets, REITs, etc.)

So overall I'd be allocated like this:

10% Cash
20% Gold & Commodities
30% Bonds
40% Stocks

I have no idea if there is an advantage to this or not, but at least it's easy for me to remember what my strategy is and it gives me the illusion of some control.

rocketdog wrote:

Ad Orientem wrote:I really think that for those who are a ways away from retirement (10years or more),and who can handle a little extra volatility, a good portfolio is 80% HBPP and 20% stock index fund. If you can force yourself to not look, just put 20% in VT and leave it alone, no rebalancing, nothing, until you are around 5 years or so from retirement. If stocks hold to their historic returns it should give a nice goose to your retirement nest egg. And of course you have the PP for safety.

Well, your HBPP should already have a stock index fund in it, so why would you also have one in your VP?

Historically stocks have been the best performing asset class over the long term for the last 200 years or so. Yes, Japan has been in a brutal 20 year bear market and the possibility of that happening here can't be entirely dismissed. But Japan has a lot of circumstances that are unique to its situation. To the best of my recollection there has only been one rolling ten year period in the last 112 years where US stocks did not end higher, that being 1929-1939. And I am not aware of any such occurrence over twenty years.

My pick would be VT or a near equivalent. This adds a level of currency diversification in case of a severe deflationary event (aka Japan) or inflationary event. And if you reinvest the dividends you are guaranteed to beat the index each and every year, whether good or bad. Those added dividends compound over time so in a twenty year period you would not just beat the market, you would kill it. Is there risk? Yes, there is always some risk. But over time the odds are you will come out ahead of your PP in returns.

I've got my age as a percentage in the PP, with the rest in my VP.

 

That's not a bad idea as long as you are stably employed and have enough in reserves that you could tough out a multi year period of unemployment.

Vanguard Total World stock index expense ratio is 0.19%.

Total US is 0.05%, and Total Int'l is 0.16%.

Is there some advantage to the Total World fund that I'm not seeing?

Kriegsspiel wrote: Vanguard Total World stock index expense ratio is 0.19%.

Total US is 0.05%, and Total Int'l is 0.16%.

Is there some advantage to the Total World fund that I'm not seeing?

VT Disadvantages: cost, a lot fewer stocks
VT Advantages: single fund (fire & forget, no rebalancing between US & international), other (?)

(I have a bit in VT in a taxable non-PPish account.)

VT is ideal for a set it and forget it VP. The ER is below .25% which is my threshold for reasonable and fair. I am extremely reluctant to go above that. It's cap weighted and it's global. As noted above no rebalancing required.

I prefer global for the VP over VTI which is all US. The likelihood of the whole word experiencing a catastrophic currency related event at the same time is pretty low. Also my gut says that the incredible economic dominance that the US enjoyed in the 20th century is not likely to repeat itself in the 21st. Not saying we are sliding into third world country status. But I don't see us as the world's unchallenged king of the economic hill anymore.

So the extra cost associated with Total World might be offset by the convenience for a 'check once a year' investor?

Kriegsspiel wrote: So the extra cost associated with Total World might be offset by the convenience for a 'check once a year' investor?

Yes. In addition it is a cap weighted fund. If you are using multiple funds (i.e. VTI and VEU) you are going to loose that.

In addition if you use multiple funds then you have to rebalance periodically, and that can trigger taxes. Any savings gained by using VTI and VEU would likely be lost when you have to rebalance the two funds.

Total World skips out on those taxes when it "balances" itself?

Kriegsspiel wrote: Total World skips out on those taxes when it "balances" itself?

When Samsung goes up and Apple down, no need to sell anything to maintain intl vs US weighting....

Kriegsspiel wrote: Total World skips out on those taxes when it "balances" itself?

No more trading than what you get independently in VTI and VEU that also rebalance themselves. And of course you will have to periodically rebalance between the two of them to keep your asset allocation. But if you want to go with those two, you won't get an argument from me. I think that is perfectly fine, especially if you don't want to have the weighting you would get in VT.

I like VT primarily for its simplicity. I don't consider a VTI and VEU combination to be either better or worse than VT. It's just an added layer of complexity that may or may not be something you feel is justified and I don't.

If you like the idea of holding 2 funds (one US, one ex-US), and you're trying to minimize expenses, and you don't mind funds with shorter track records, you might consider SCHB (0.06%) and SCHF (0.13%).  Bonus: if you have an account at Schwab, rebalancing is commission-free. 

Another frustrating day where equities rise over 1% and the PP is in the red. I can't recall the last time I saw a positive day its been so long. I once felt smart and considered myself a savvy investor. Now I feel like an idiot for investing in this strategy. I'm definitely not going to mention this portfolio to any of my friends.

buddtholomew wrote: Another frustrating day where equities rise over 1% and the PP is in the red. I can't recall the last time I saw a positive day its been so long. I once felt smart and considered myself a savvy investor. Now I feel like an idiot for investing in this strategy. I'm definitely not going to mention this portfolio to any of my friends.

It seems to be because LTTs and gold are falling more than stocks can make up for the losses.  It happens from time to time, and we're all in the same boat so just sit tight and if it bothers you then don't check on what the market's doing day-by-day. 

rocketdog wrote:

buddtholomew wrote: Another frustrating day where equities rise over 1% and the PP is in the red. I can't recall the last time I saw a positive day its been so long. I once felt smart and considered myself a savvy investor. Now I feel like an idiot for investing in this strategy. I'm definitely not going to mention this portfolio to any of my friends.

It seems to be because LTTs and gold are falling more than stocks can make up for the losses.  It happens from time to time, and we're all in the same boat so just sit tight and if it bothers you then don't check on what the market's doing day-by-day.

+1

The PP is not a Swiss watch where all the gears move in tandem with one another. It's sloppy but it tends to work out over the long haul. If I remember right in 2008 there was a nasty period where the PP seemed to be in free fall until the LTTs kicked in.

I'm feeling double the pain this week, because last week I rebalanced by selling some stock funds and used the proceeds to buy some LTTs and gold. 

rocketdog wrote:

buddtholomew wrote: Another frustrating day where equities rise over 1% and the PP is in the red. I can't recall the last time I saw a positive day its been so long. I once felt smart and considered myself a savvy investor. Now I feel like an idiot for investing in this strategy. I'm definitely not going to mention this portfolio to any of my friends.

It seems to be because LTTs and gold are falling more than stocks can make up for the losses.  It happens from time to time, and we're all in the same boat so just sit tight and if it bothers you then don't check on what the market's doing day-by-day.

In my opinion, looking less frequently is not the answer. I would feel the same way if I looked monthly and observed the relative under-performance of the portfolio as compared to a BH 60/40 allocation. The PP catches up when equities tank and relinquishes those gains when equities are on the rise. If the market is up 7 of 10 years, perhaps this is not the best approach to investing for retirement.

Budd, either you've got religion, or you don't. If underperforming the stock market is so psychologically devastating, maybe the PP's not for you ...but then again, that raises the classic question: what's the alternative? Unless you're willing to endure the gut-wrenching volatility of a 100% stock portfolio, you'll always be underperforming the SP500. Your 60/40 portfolio is underperforming it, too.

Maybe you should ask yourself just what it is that makes you so unhappy to see your portfolio underperforming a market index. Is it really a reasonable performance benchmark?

rocketdog wrote: I'm feeling double the pain this week, because last week I rebalanced by selling some stock funds and used the proceeds to buy some LTTs and gold. 

I'm on the same allocation as rocketdog: ( international Europa portfolio)
10% Cash (actual 13 %) (YTD + 1%)
20% Gold & Commodities (actual 12 %) (YTD: - 14%)
30% Bonds (actual 24 %) (YTD + 1 %)
40% Stocks (actual 51 %) (YTD + 17%)
performance YTD: + 4% (Good enough)

But I have to rebalance but I hesitate which is always the cause. It is hard to sell the rising asset and buy the loser. But it will be done on July first. I rebalance quarterly.

Pointedstick wrote: Budd, either you've got religion, or you don't. If underperforming the stock market is so psychologically devastating, maybe the PP's not for you ...but then again, that raises the classic question: what's the alternative? Unless you're willing to endure the gut-wrenching volatility of a 100% stock portfolio, you'll always be underperforming the SP500. Your 60/40 portfolio is underperforming it, too.

Maybe you should ask yourself just what it is that makes you so unhappy to see your portfolio underperforming a market index. Is it really a reasonable performance benchmark?

All of my comparisons have been between the PP and a 60/40 portfolio. It is nonsensical to compare a portfolio's performance to the S&P 500. My point is that the PP underperforms a 60/40 allocation when equities are on the rise. Let's see whether your perspective changes when you have 7 figures invested.

rocketdog wrote: I'm feeling double the pain this week, because last week I rebalanced by selling some stock funds and used the proceeds to buy some LTTs and gold. 

Sounds like you got to take some profits. Nothing wrong with that. I had to rebalance over a month ago when stocks were lower. Since then, the gold & bonds I bought have not done so well, but I feel good. I've been trimming stocks in my vp as well, little by little.

buddtholomew wrote: All of my comparisons have been between the PP and a 60/40 portfolio. It is nonsensical to compare a portfolio's performance to the S&P 500. My point is that the PP underperforms a 60/40 allocation when equities are on the rise. Let's see whether your perspective changes when you have 7 figures invested.

Well, yeah. It's supposed to. It'll underperform a more gold and long bond heavy portfolio when those are on the rise, too. That's the nature of hedging our bets as opposed to concentrating them in the hot asset du jour. How do you know stocks aren't going to tank soon?

If you have 7 figures in your portfolio, I would expect loss prevention to be more important than racking up huge gains. One or more million dollars is a ton of money. A 1% loss represents 10k+ vanishing at that level of wealth. Personally, if I had that much money, I would be much more interested in keeping myself from losing a huge amount of it due to overexposure to un-hedged volatile assets.

I think you need to sort out your goal. When the PP is experiencing minuscule losses, you freak out because you can't tolerate any loss. But when it fails to match the performance of a 60/40, you freak out because you want to harness the huge gains of the stock market.

Which is it? Do you want loss prevention, or better performance? There's no free lunch in investing, and you generally can't have both...