Gyroscopic Investing

+1 for HB Reader. I've actually copied & saved his post for my personal archives, because I don't assume everything on the internet will always be there for review.

Heaven knows I've played around with the Boglehead forum's Simba spreadsheet far too much, so it's always a great sanity check to remind myself that results for any backtest should be taken with a HUGE grain of salt. Still, I find backtesting useful for getting a general idea of the way assets work under different economic environments, and if the Simba spreadsheet is good enough for Mssrs. Rowland & Lawson (such as on page 25), then it's good enough for me!

To the OP:

It may very well be that the 30/60/10 portfolio is more efficient than HBPP, esp considering that T-bonds are not as volatile as stocks & gold. However, the behavioral simplicity of managing a 25x4 portfolio is of tremendous value to the Average Joe, most of whom have little real interest in retail investing.

I can't even get people to read about this stuff. Several years ago, I handed out copies of basic investing books to several friends, family, and coworkers. The number that read more than a few pages: zero. So how did you like the book? Sorry, *insert random excuse*, can't you just tell me what you would do?

However, a person that can differentiate between day trading, high-fee AUM advisors, Boglehead, slice & dice factor investing, and PP, is most likely not an Average Joe investor. As long as you can buy-hold-rebalance robotically, then running a variation of HBPP will probably not be a much different experience over an investing lifetime, outside of a severe Rumsfeld unknown unknown environment.

+2 for HB Reader for writing one of the wisest and most informative finance posts I've read anywhere. I am printing it out.

And Phalanx, boy do I hear you with getting folks to read even the most basic stuff about investing. I'll hand out a copy of HB's 16 Rules and hope I can get friends to read that, then insist they read Goldie & Murray's "The Investment Answer" (a mere 66 pages) and at that point I'll know they care enough about their financial future to have a conversation.

What I appreciate about the OP sharing this 30:60:10 thing is something I also appreciate about Craig and MT's many postings on the PP and investing in general, namely the huge importance of investing only in things you really understand (Rule #9) and allocating based on macro-economic conditions AND worst-case scenarios rather than data mining/asset class backtesting.

Given the logistical and conceptual hurdles some who would otherwise choose the PP face in implemeting it I'm glad that options such as this one, MT's 90% Wellesley/10% gold and such are out there for folks to consider. I just wish they were better-known, as nearly everything I'm reading, even on Bogleheads and the like, is still talking about 50-60% stocks as a conservative allocation and no investments outside of stocks and bonds. It's like 2008 never happened.

I still don't have a good solution on rebalacing a 30/60/10 portfolio.  I guess the simple way would be to do it annually just rebalacing back to original amounts.  That might be overkill, so another thought would be to rebalance when any one of the 3 assets gets to a certain percent over the original amount.

Also, if one wanted to go with 10 year maturity on the bond allocation, probably just annually buying a 10 year bond on the secondary market would be the easiest solution.  Fidelity offers easy access to this type of trade.

As a practical matter I think you have to fudge a bit and make part of the 60% bond allocation a CD ladder, Treasury MM fund or the like, especially if you're in the distribution rather than accumulation phase.

Buying individual treasuries is as you say the obvious option, but there's also the ETF IEF that covers treasuires in that maturity range quite well if the goal is to keep things as simple as possible.

Thank you Thank you Thank you HB Reader!!!!  That was a fantastic reminder that it's all too easy to build a house of cards when backtesting.

In a sense we are conducting a very large experiment:  what happens to portfolios over extended time periods when the owners have full control, myriad options to choose from, and making trades is almost effortless and nearly instantaneous?  It is one reason why I've been very gun-shy about suggested portfolio tweaks, after venturing down that path myself initially.  I'm concerned about how prevalent the effects of constant portfolio churn and disastrous attempts at market timing are going to be, when people start having to depend on these savings for survival.

I'll just add one other thing:  in the 1960s and 1970s, investment portfolios were fairly uncommon beasts because most people had pensions, not 401Ks.  Saving money meant stashing it in a passbook savings account and a Christmas club.  Buying stocks was for people with lots of excess money - which did NOT describe my family.  My parents did have a few stock investments but it was peripheral to their core finances.

HB Reader, you were ahead of your time, clearly.

I will add a big BRAVO to those already posted for HB Reader's excellent post. It really is one of the better one's I've seen on this forum in quite a while.

Kevin K. wrote: As a practical matter I think you have to fudge a bit and make part of the 60% bond allocation a CD ladder, Treasury MM fund or the like, especially if you're in the distribution rather than accumulation phase.

Buying individual treasuries is as you say the obvious option, but there's also the ETF IEF that covers treasuires in that maturity range quite well if the goal is to keep things as simple as possible.

IEF has a duration of about 7.5 years.  Seems a little short if you are combing the 25% cash and 25% long treasuries.

I too appreciate the pitfalls of backtesting, but I have been thinking about using the intermediate bonds for a long time.  I'm not convinced that a 10 or 15% allocation to gold would be that different than a 25% allocation over the long run.

sophie wrote: The other is that physical gold is worth relatively much more than stocks and bonds stashed in a tax-deferred account.  That's because with the physical gold, you only need to pay the collectibles tax on the gains when you sell.  With the retirement account, you need to pay full ordinary income rates on the entire amount on withdrawal.  So that 25% gold stash, if you have most of it in physical, is effectively weighted even more than 25% unless you're the rare individual whose savings are in Roth or taxable accounts.

Sophie, Can you please explain this further? Are you saying that one should mentally give a heavier weighting to physical gold because you only pax taxes on profits whereas with a regular IRA one pays taxes on anything that is withdrawn (let's forget tax brackets for the sake of clarity) regardless of whether or not there is a profit?

rickb wrote: The point is not to keep up with the Joneses.  The point is to have a portfolio that more or less keeps up in normal times, but will preserve your accumulated wealth even if the Joneses are absolutely crushed.

rickb, thanks for this eminently quotable summary of the PP philosophy. That should at the very least be on a sticky note next to my desk.

And I'd like to add my kudos to the HB Reader kudo pile for sharing his investing journey. It's really helpful for me to read an account from someone who has been following a PP-esque investing philosophy for a long time.

IEF has a duration of about 7.5 years.  Seems a little short if you are combing the 25% cash and 25% long treasuries.

I too appreciate the pitfalls of backtesting, but I have been thinking about using the intermediate bonds for a long time.  I'm not convinced that a 10 or 15% allocation to gold would be that different than a 25% allocation over the long run.
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You're right about IEF not being ideal. iShares has another ETF, ticker TLH, that hits the 10 year duration just about perfectly.

As for the gold, 10% is probably at the outer limits of the comfort zone for many non-PP investors. As Desert's backtesting shows, it's enough to smooth the ride but not enough to drag the portfolio down.

Thinking a bit more about HB Reader's post, I don't know how much difference it makes when individual investors got access to various market segments, be it gold (other than coins) or index funds. Not only are there relatively short histories for all investable assets but the nature of those assets and the market altogether has changed rapidly over the years and continues to do so. When HB Reader got started the stock market was mostly the provenence of wealthy investors; now it is largely run by institutional investors and has gotten exponentially more complex, with options, hedge fund, computerized trading, near-total global interlinking of markets and market info and so on. The latest thing is the entry of the so-called Robo-investing companies into the market (excellent overview of this exploding category here: http://www.etf.com/sections/blog/23365- ... =1&start=8).

So it seems to me you look at backtested results but take them with a huge grain of salt, paying particular attention to how portfolios have fared during market crises.

Trying to make sure you have assets that can perform in all four of the major economic cycles Harry Browne identified also makes sense, but it seems to me it's valid to point out that cash and short-term bonds returning nothing for years on end, a gold market that's mostly made up of paper and manipulation and a U.S government that's willing to use the threat of Treasury Bond default for political theater are all things that Mr. Browne might not have anticipated (and that might have prompted further tweaking of the PP formula).

We question the allocation to one or more of the assets when they are out of favor. We fear the volatility most in the asset we like the least. Just some observations I've made over the years.

HBR, I learned so much from your post. Sometimes we forget how easy we have it these days with regard to both access to investments and low-fee options.

HB Reader wrote: In 1967 I bought British Sovereigns at the coin and stamp desk of a major department store (Wannamakers) in Philadelphia for less than a 10% premium over gold value.  It was like buying a pair of shoes.

I love it! Wish we could still do that. The building is now mostly a Macy's. Used to be a Lord & Taylor. No coins or stamps in sight.