Gyroscopic Investing

I guess I'm out of the loop here, but what exactly is the problem with the PP right now? Has the PP gone down significantly in value? Or are people just annoyed/resentful because it is lagging the booming stock market?

If it's the latter, I would simply say that benchmarking your portfolio against a stock index is a surefire way to drive yourself crazy and make bad decisions. The whole reason why these stock benchmarks are emphasized is for Wall Street to get you to change your mind, rack up fees, and chase a rabbit you can't beat...

Lance Roberts: Why Benchmarking Your Portfolio Is A Losing Bet

But, if you enjoy chasing volatile indexes — that nobody in their right mind would put all of their money into — I wish you lots of luck!

happyspec wrote:Zen Portfolio! Now that's a nice and absolutely appropriate name for the PP – I fully agree with you, Tyler - OOOMMMM 

I'm sure people will think I'm joking when I say this, but I'm not. I started doing HeartMath a few months ago, and the meditative biofeedback literally made me stop caring about the ups and downs of money — otherwise known as Financial Stress. I didn't start doing HeartMath to combat Financial Stress, but the noticeable reduction in Financial Stress that I experienced was an unexpected benefit.

The thing about stress is that it is insidious. You can't even perceive that your body is stressed — even when someone points it out to you. But, the fact that a dip in your portfolio makes you uneasy is the definition of Financial Stress.

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If you practice various forms of meditation, breathing, HeartMath biofeedback, etc. you can turn off the chronic elevation of stress hormones and stop making emotional decisions that are proven to lead to negative outcomes.

I will point out that cortisol (the stress hormone) has a half-life of ~3-4 weeks, so even though HeartMath will quickly reduce your cortisol output, you won't feel any benefits for ~3-4 weeks of daily practice, when the excess cortisol finally starts to wash out of your body.

For those who are interested, I got a simple $85 biofeedback sensor that attaches to my iPhone and it connects to a free HeartMath InnerBalance app that teaches you the simple technique. Once you learn the technique, you just practice it regularly anywhere you want (can be done while driving, or even while you are having a conversation) and reap the long list of health benefits from stress reduction.

In behavioural finance, it was discovered that people experience more intense feelings when they loose as compared to winning the same amount.
Most stable portfolios (including PP) experience about the same number of down days as up days. That is just the way the market works.
Combine those two and its easy to understand why looking at a portfolio every day (or even ofter?) is a sure fire way to be and remain anxious about it, even if you have solid gains on longer timeframes.

Interestingly, the Fed releases a daily survey of Financial Stress (known as the Financial Stress Index).

http://www.clevelandfed.org/research/da ... ess_index/

I would assume that people who ditch the PP will simply find themselves experiencing even higher levels of Financial Stress when they adopt a portfolio with higher risk. Right now the Financial Stress Index is the lowest it's been in awhile  (currently we are in a "Grade 1, Low stress period") which is obviously tempting people to take on more risk. Given the volatility of that stress index, I doubt it will stay that way for too long!

Rien wrote: Combine those two and its easy to understand why looking at a portfolio every day (or even ofter?) is a sure fire way to be and remain anxious about it, even if you have solid gains on longer timeframes.

I think it's getting really interesting here. We are talking about the damages to our bodies, souls and minds that result from investing. Based on my own experience I cannot emphasize strongly enough how important it is for me to have a strategy that works acceptably and suits yourself so that you can keep peace of mind. This peace is worth much more than the next percent of return - especially if you keep in mind that, as Rien points out, gains won't do you as much good as losses will hurt you. Our enemy is stressful thinking - and this is triggered by Cortisol and Cortisol is its result. I remember a comparison of various investment strategies that was shown on this board. The PP did have a quite acceptable return but it was by far not the highest. But it had the lowest or second-lowest Max Drawdown. This is a very attractive combination.

I'm not someone who benchmarks the PP against the stock market. All I need is about 6% gain per year to achieve my retirement goals.

For the past 2 years, I have not had 6% a year with the PP (it's the Canadian PP). So that is my problem with the PP now. Perhaps 2 years is not a long enough time to judge the portfolio...

Really, I want an ultra-safe method of making 6% a year. Is there another way to achieve this?
I sometimes think a basket of high-quality dividend-paying stocks would be the best way; however, nowadays, EVERYONE thinks dividend paying stocks are the way to go, so my instinct is to avoid them.

3% a year is not enough so I can't just buy bonds.

christina wrote: I sometimes think a basket of high-quality dividend-paying stocks would be the best way; however, nowadays, EVERYONE thinks dividend paying stocks are the way to go, so my instinct is to avoid them

Christina, Your instinct is right . Stocks are REALLY volatile and the opposite of an "ultra-safe method". You should use a stock-heavy Buy-and-Hold-Portfolio only if you are able to look solely at your payouts, i.e. dividends, and forget about your book losses. I wouldn't be able to do this. Are You? Ask yourself: What will I do when you begin retirement and the markets crash? Panic?! Or sit it through filled up with cortisol and have one drink more? I'm sure you don't want to spend your retirement years being glued to a computer screen and sweating blood when the next BEAR hits the street. And it will, this is for sure .

Kshartle wrote: frommi you realize you've singlehandedly initiated the greatest stock collapse in history with these moves?

j/k - succesful investing is not easy. It's not easy emotionaly or practically.

Good luck.

BTW - are you global with your stocks and are you still holding ST treasuries or cash?

Yes, i have 25 positions in bluechips around the world, US, GB, Japan, China, Brazil and Australia. EU and germany are covered with low cost ETFs from my PP. I haven`t decided yet if i replace them with hand picked stocks. Currently EU stocks are not as expensive as US stocks, so handpicking is not necessary at the moment.
I am sitting on around 15% cash now for the next opportunities that come around. Whats cool now is that nearly 40% of my yearly costs are already covered by dividends and they are growing every year. .

christina wrote: Really, I want an ultra-safe method of making 6% a year. Is there another way to achieve this?

I don't think so. It's a problem for everyone, not just PP holders. I used to have a savings account that paid me 5%; no more. Bond investors have been tearing their hair out over the low yields. You an get municipal bonds at 6% or more in the USA, but those are obviously anything but "ultra-safe".

Pointedstick wrote:

christina wrote: Really, I want an ultra-safe method of making 6% a year. Is there another way to achieve this?

I don't think so. It's a problem for everyone, not just PP holders. I used to have a savings account that paid me 5%; no more. Bond investors have been tearing their hair out over the low yields. You an get municipal bonds at 6% or more in the USA, but those are obviously anything but "ultra-safe".

The junk bond fund JNK is paying close to 6.5% right now but you're kidding yourself if you think this is not risky. Besides credit risk there's interest rate risk and inflation risk.

No way to get 6% safely with this much debt floating around and these low rates.

Interestingly emerging markets underperformance has left their dividend yield about 50-75% higher than the US and their forward P/E about 35% lower.

If stocks are going to keep going you would think they (EM) should outperform a little on a relative basis for a while. This is not without major risk though but to me it's kind of like bying platinum when it's lower than gold. They both might go down but once platinum is below gold how much more risky is it really? At that point the relative upside potential outwieghs the relative downside.

How much longer can the US stocks outperform ex-US whether going up or down, they have a lot of distance now. I realize the US stocks are very global and are most of the top companies in the world.

Just gotta be diversified now. If it all collapses and stocks are chopped in half.....well pile in when people are jumping out of windows.

happyspec wrote: Sorry to hear that, frommi  . For which reasons did you quit? Doesn't a split in a PP and a VP work for you?

No. I had more ideas for stocks to buy than money and i am not convinced about the PP. I know that i perhaps sell my gold when it falls further to 1000$ oder below, because i have no trust in it.  So i did it now .

As i entered the PP at the start of the year i was really clueless and the strategy and base of the PP were really sound. But than i began to descramble the PP (i am an software engineer ) and my doubts that it can work going forward began to rise. At the same time i found the sites of dividend growth investors and was immediatly interested and began to read books about it and value investing. I studied the works of Ben Graham, Warren Buffet, Seth Klarman, Martin Whitman and some other successfull value investors. I have to say that i was invested in stocks from the end of 2008 until 2011 where i sold at the bottom. At the end i had only 2% returns, so i was really frustrated because i missed the rally in 2012, perhaps that was the reason i was so fascinated about the PP when i found it. But now i feel prepared for everything that comes my way, even when my networth will take a huge drop. For me its like a hobby to read financial statements of companies and research the whole evening or weekend for new opportunities. Perhaps that is the biggest difference between me and the most other PP users.

frommi wrote:
No. I had more ideas for stocks to buy than money and i am not convinced about the PP. I know that i perhaps sell my gold when it falls further to 1000$ oder below, because i have no trust in it.  So i did it now .

If you plan on selling at $1,000 might as well sell now above $1,300. If you wait to sell at $1,000 you'll probably just catch a bottom

I might be biased but I don't think we'll ever see $1,000 again and if we did there should be major support. I think we'd need titanic deflation for that. That would be a nearly 50% decline from the peak which doesn't look like a blow-off top to me.

Even if we got that kind of deflation the problems in the world economy might push a lot of people into gold. The dollar should still be the big winner implying a lower gold price but all money should get more valuable (compared to goods and services, and business profit expectations).

Stocks might lose 50% but gold only 20% so not bad at all.

We'll see.

Kshartle wrote:
If you plan on selling at $1,000 might as well sell now above $1,300. If you wait to sell at $1,000 you'll probably just catch a bottom

I might be biased but I don't think we'll ever see $1,000 again and if we did there should be major support. I think we'd need titanic deflation for that. That would be a nearly 50% decline from the peak which doesn't look like a blow-off top to me.

Even if we got that kind of deflation the problems in the world economy might push a lot of people into gold. The dollar should still be the big winner implying a lower gold price but all money should get more valuable (compared to goods and services, and business profit expectations).

Stocks might lose 50% but gold only 20% so not bad at all.

We'll see.

Return to the mean is enough for gold to reach that level, in the gold section there is a nice chart that shows that golds bullruns have only to do with negative real cash yields, so when short term yields begin to rise gold will not be a good investment. But i sold also because i don`t know how much its really worth, with only 2% yearly digged out of the ground you can`t even be sure if the miner`s allin-costs are the bottom. But in the end i don`t know what happens with gold, it just doesn`t fit my investment style any more.

+ I love my dividends. 

frommi wrote:
+ I love my dividends. 

In '81 the S&P div was over 6% and the 30 year over 16%.

If it ever looks like this again I will split 50-50 and not look at it for 5 years.

Kshartle wrote:

frommi wrote:
+ I love my dividends. 

In '81 the S&P div was over 6% and the 30 year over 16%.

If it ever looks like this again I will split 50-50 and not look at it for 5 years.

Of course inflation was 10.3% in 1981 and people were probably worrying that it would go higher. Everyone knew that negative real dividend rates were a sucker's bet and 30-year bonds at 16% would be creamed as inflation crept ever higher and higher...

Kshartle wrote:
In '81 the S&P div was over 6% and the 30 year over 16%.

If it ever looks like this again I will split 50-50 and not look at it for 5 years.

I am at around 4% dividend yield currently without searching for yield and mainly focused on undervalued and dividend growth companies ( OK i have 10% REITs ). In 2008 S&P500 dividends were cut by 20%, but most dividend growth stocks even raised them further. It all depends on the businesses you invest in.

Kshartle wrote:Just gotta be diversified now. If it all collapses and stocks are chopped in half.....well pile in when people are jumping out of windows.

And the rest of us will be sitting pretty with our LTTs, and primed to rebalance

When everything else goes down, banks and people pretty much have no choice but to throw their dollars into Treasury auctions and the secondary market if they want a return. The effect usually happens instantaneously (except for those short term cash-is-king situations, of course).

For instance, here is what happened during the 2011 "Debt Ceiling" crisis, when people thought the US might choose to default on its debt...

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...Yep. LTTs skyrocketed as the stock market tanked and politicians threatened to default.

Pointedstick wrote:

Kshartle wrote:

frommi wrote:
+ I love my dividends. 

In '81 the S&P div was over 6% and the 30 year over 16%.

If it ever looks like this again I will split 50-50 and not look at it for 5 years.

Of course inflation was 10.3% in 1981 and people were probably worrying that it would go higher. Everyone knew that negative real dividend rates were a sucker's bet and 30-year bonds at 16% would be creamed as inflation crept ever higher and higher...

Yeah, hey what does everyone "know" right now? The only thing I think I see as a general agreement is that the FED will taper at some point soon and the economy is slowing getting better. Now I disagree with both but that seems to be the overwhelming opinion now. Not as rock solid as in '07 saying housing prices ALWAYS rise but.......

Gumby wrote:
And the rest of us will be sitting pretty with our LTTs, and primed to rebalance

Gumby please I'm eating.......

J/K, who knows, there might be some big bond rallies ahead. I think it's interesting that the correlation between long bonds and stocks has moved from solidly negative for years to neutral/slightly positive in the last couple months.

To me that signals future stock growth is dependant on additional QE or at least continuation. Could mean something else entirely but I don't think the market rises much further on it's own from here.

Kshartle wrote:

Gumby wrote:
And the rest of us will be sitting pretty with our LTTs, and primed to rebalance

Gumby please I'm eating.......

Well, I wonder... When you really think about your "cash" savings and you are sitting on the sidelines waiting to pile in while people are jumping out windows, do you really think that the FDIC private bank (or CD or Money Market Fund) you're holding your cash in is safer than a Treasury? I don't. :/

Gumby wrote:

Kshartle wrote:

Gumby wrote:
And the rest of us will be sitting pretty with our LTTs, and primed to rebalance

Gumby please I'm eating.......

Well, I wonder... When you really think about your "cash" savings and you are sitting on the sidelines waiting to pile in while people are jumping out windows, do you really think that the FDIC private bank (or CD or Money Market Fund) you're holding your cash in is safer than a Treasury? I don't. :/

No I've advocated holding no more than 1-2 months living expenses in the bank now on several threads.

I don't think bank deposits are anywhere near as safe as the rest of the population does.

Kshartle wrote:No I've advocated holding no more than 1-2 months living expenses in the bank now on several threads.

So, now I'm curious, but if you have very little cash and you hold no bonds, how will you be able to "pile in" to stocks/gold if both of them were to tank at the same time (i.e. a bond rally)?

Gumby wrote: ...Yep. LTTs skyrocketed as the stock market tanked and politicians threatened to default.

That would be great, as long as i am not retired the stock market can tank all day long for me to pick up the stocks. But i doubt that its doing it. Currently there is too much money on the sidelines waiting to get into the market on dips. If i had sold gold or bonds as many did in march/april, i would not buy bonds or gold again only because its 0,6% (bonds) or 15% (gold) lower now. That money will flow into the stock market in the next year-end-rally. 

Gumby wrote:

Kshartle wrote:No I've advocated holding no more than 1-2 months living expenses in the bank now on several threads.

So, now I'm curious, but if you have very little cash and you hold no bonds, how will you be able to "pile in" to stocks/gold if both of them were to tank at the same time (i.e. a bond rally)?

Ohhh not me, I'm talking about anyone holding cash or bonds or whatever.

If they really have a deflationary crash I envision stocks falling harder. If they collapse to a ridiculous level I can see holding my nose and selling gold to buy stocks. I'd have fewer dollars no doubt but regardless if the S&P was cut in half over the course of a year I would probably be all in.

I have about 4 months living expenses in the bank but I'm expecting to use some in a business venture soon.

Kshartle wrote: Ohhh not me, I'm talking about anyone holding cash or bonds or whatever.

Oh.. Ok. Got it.