Gyroscopic Investing

Posted: **Fri Nov 02, 2012 1:26 pm**

Nothing wrong with splitting your assets amongst different portfolios, one for each of your investing personalities, and I don't mean that to be insulting. I'm probably going to do the same myself. Maybe half and half with a PP and a combo of Vanguard funds like Wellington and Wellesley. They invest in large cap dividend paying stocks and high quality bonds (so I'd be tilted large cap value). I have no idea how that or any other portfolio will perform in the future. My guess is that it'll outperform a full-PP some years and underperform others, as would any other portfolio in existence.

On another note, days like today are mentally brutal and tend to frighten me. Not because the PP itself dropped, but because it becomes painfully obvious each asset class is propped up right now by the fed's QE. A relatively good jobs report increases the likelihood QE will end sooner rather than later, and gold's reaction looks like there's a deflationary fear. But then long bonds are also down. Who knows, just feels ugly.

Posted: **Fri Nov 02, 2012 1:30 pm**

buddtholomew wrote:What disturbs me the most is when an asset tumbles 2.25% in a single day.

If an asset "tumbles" 2.25% in a single day — and that asset comprises roughly 25% of your portfolio — then that asset alone cannot cause your portfolio to "tumble" more than 0.7% or so.

Does a 0.7% decrease in your portfolio really make you uneasy?

(...Or is it that you just can't bear to watch the volatility of the individual assets?)

Posted: **Fri Nov 02, 2012 1:33 pm**

See page 200 for "calming": If any of the PP assets loses 50%, the entire portfolio is only down 12.5%, assuming the other parts of the PP stay the same.

If 2.25% represents a "tumble", you ain't seen nothin' yet!

Some folks should be totally risk free, I guess. There's no free lunch out there.

Posted: **Fri Nov 02, 2012 1:47 pm**

iwealth wrote:On another note, days like today are mentally brutal and tend to frighten me. Not because the PP itself dropped, but because it becomes painfully obvious each asset class is propped up right now by the fed's QE.

I posted this earlier in the thread, but I'll post it again (excuse the outdated chart)...

One very good reason why it makes no sense to look at the daily swings of the PP is that it's very difficult to put those swings into perspective in terms of the value of the Dollar (and Cash). While the US PP appears to have gone down over the past few days, the reality is that the dollar just got stronger.

In fact, if we take a look at the Dollar Index (DXY) — which is widely used as a measure of the relative value of the Dollar, versus other currencies — we see that the short-term swings of PRPFX is inversely correlated with the value of the Dollar. In other words, if the PP is falling in value, it usually means that the value of your dollar-based PP and your Cash is getting stronger and you just can't see it.

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Posted: **Fri Nov 02, 2012 2:23 pm**

hpowders wrote: Some folks should be totally risk free, I guess. There's no free lunch out there.

Where is that "risk free" investment in a world where t-bills are locking in losses of 3% per year due to inflation?

Posted: **Fri Nov 02, 2012 2:37 pm**

MediumTex wrote:
hpowders wrote: Some folks should be totally risk free, I guess. There's no free lunch out there.
Where is that "risk free" investment in a world where t-bills are locking in losses of 3% per year due to inflation?

Yeah. Good point. Many seniors are being forced to take unprecedented risks because their money market funds are "earning" negative returns. I wish the economy would double its current growth rate so the Fed would raise rates. Never thought I would ever say that.

The toughest thing is witnessing conservative folks deal with risk for the first time because they have no choice. They may never have seen anything go down before. It's rough and I hope Uncle Ben begins to realize it.

Posted: **Fri Nov 02, 2012 2:42 pm**

hpowders wrote: See page 200 for "calming": If any of the PP assets loses 50%, the entire portfolio is only down 12.5%, assuming the other parts of the PP stay the same.

If 2.25% represents a "tumble", you ain't seen nothin' yet!

Some folks should be totally risk free, I guess. There's no free lunch out there.

We all know that individual investors sell at the most in-opportune times (usually at market lows), but these same people state with confidence that they will be able to stick to the plan during a downturn. I prefer to assess my emotions more regularly and allocate investments accordingly to avoid falling into a similar trap.

Posted: **Fri Nov 02, 2012 2:46 pm**

buddtholomew wrote:
hpowders wrote: See page 200 for "calming": If any of the PP assets loses 50%, the entire portfolio is only down 12.5%, assuming the other parts of the PP stay the same.

If 2.25% represents a "tumble", you ain't seen nothin' yet!

Some folks should be totally risk free, I guess. There's no free lunch out there.
We all know that individual investors sell at the most in-opportune times (usually at market lows), but these same people state with confidence that they will be able to stick to the plan during a downturn. I prefer to assess my emotions more regularly and allocate investments accordingly to avoid falling into a similar trap.

If it wasn't for emotions, we'd all be multi-millionaires. Buying high and selling low is no joke and is all too common, I bet. William Bernstein states that it takes years to train oneself into being a successful investor. I don't doubt it.

Posted: **Fri Nov 02, 2012 2:47 pm**

buddtholomew wrote:
hpowders wrote: See page 200 for "calming": If any of the PP assets loses 50%, the entire portfolio is only down 12.5%, assuming the other parts of the PP stay the same.

If 2.25% represents a "tumble", you ain't seen nothin' yet!

Some folks should be totally risk free, I guess. There's no free lunch out there.
We all know that individual investors sell at the most in-opportune times (usually at market lows), but these same people state with confidence that they will be able to stick to the plan during a downturn. I prefer to assess my emotions more regularly and allocate investments accordingly to avoid falling into a similar trap.

You don't think you might be falling into it now?

Where are you going to go if you are leaving the PP because of its perceived overall volatility?

I really want to know the answer to this question, because I might want to go there too.

Posted: **Fri Nov 02, 2012 2:50 pm**

The problem is there is no "investment simulator" to get one to feel what it's like to really lose one's own money, if only temporarily. How do you teach folks not to panic if you can't simulate the real feeling of panic first?

Many folks simply do not realize what they are getting into when they attempt to invest in these markets.... until it is too late.

Posted: **Fri Nov 02, 2012 2:53 pm**

MediumTex wrote:
buddtholomew wrote:
hpowders wrote: See page 200 for "calming": If any of the PP assets loses 50%, the entire portfolio is only down 12.5%, assuming the other parts of the PP stay the same.

If 2.25% represents a "tumble", you ain't seen nothin' yet!

Some folks should be totally risk free, I guess. There's no free lunch out there.
We all know that individual investors sell at the most in-opportune times (usually at market lows), but these same people state with confidence that they will be able to stick to the plan during a downturn. I prefer to assess my emotions more regularly and allocate investments accordingly to avoid falling into a similar trap.
You don't think you might be falling into it now?

Where are you going to go if you are leaving the PP because of its perceived overall volatility?

I really want to know the answer to this question, because I might want to go there too.

Falling into what now? Neither the equity market nor the PP is at the lows. Also, I never said that I was leaving the PP, but rather contributing additional funds to another investment (VWIUX if you must know). I sincerely doubt that you "want to know"...you are committed to the PP and will defend its philosophy no matter what the future holds. That, to me, should be more scary than diversifying beyond the PP.

Posted: **Fri Nov 02, 2012 2:55 pm**

To the person who is bothered by how the PP was flat one day when the stock market was up that day, realize that the S&P 500 lost 38% in 2008 compared to maybe 2% for the PP.

Posted: **Fri Nov 02, 2012 2:55 pm**

buddtholomew wrote:
MediumTex wrote:
buddtholomew wrote: We all know that individual investors sell at the most in-opportune times (usually at market lows), but these same people state with confidence that they will be able to stick to the plan during a downturn. I prefer to assess my emotions more regularly and allocate investments accordingly to avoid falling into a similar trap.
You don't think you might be falling into it now?

Where are you going to go if you are leaving the PP because of its perceived overall volatility?

I really want to know the answer to this question, because I might want to go there too.
Falling into what now? Neither the equity market nor the PP is at the lows. Also, I never said that I was leaving the PP, but rather contributing additional funds to another investment (VWIUX if you must know). I sincerely doubt that you "want to know"...you are committed to the PP and will defend its philosophy no matter what the future holds. That narrow mindset, in my opinion, is more worrisome than diversifying beyond the PP.

Posted: **Fri Nov 02, 2012 2:57 pm**

hpowders wrote: To the person who is bothered by how the PP was flat when the stock market was up, realize that the S&P 500 lost 38% in 2008 compared to maybe 2% for the PP.

Are bonds factored into your calculations? A 60/40 portfolio favored a lot better than 38% during that timeframe.

Posted: **Fri Nov 02, 2012 3:00 pm**

buddtholomew wrote:
hpowders wrote: To the person who is bothered by how the PP was flat when the stock market was up, realize that the S&P 500 lost 38% in 2008 compared to maybe 2% for the PP.
Are bonds factored into your calculations? A 60/40 portfolio favored a lot better than 38% during that timeframe.

No, because he was specifically referring to stocks, I believe. Hey, a 57% bonds, 43% stocks did even better in 2008!

Given any day, the grass is always greener. Not easy to think long-term. Folks are so easily distracted. I don't have the answer. Wish I did.

Posted: **Fri Nov 02, 2012 3:08 pm**

buddtholomew wrote:
MediumTex wrote:
buddtholomew wrote: We all know that individual investors sell at the most in-opportune times (usually at market lows), but these same people state with confidence that they will be able to stick to the plan during a downturn. I prefer to assess my emotions more regularly and allocate investments accordingly to avoid falling into a similar trap.
You don't think you might be falling into it now?

Falling into what now?

The trap you described in your post above.

I sincerely doubt that you "want to know"...you are committed to the PP and will defend its philosophy no matter what the future holds. That, to me, should be more scary than diversifying beyond the PP.

Well, I might put it like this: "I will defend the PP and its philosophy because I don't know what the future holds."

Why would that be scary?

I would say I have PP conviction, but that doesn't mean that I don't take other points of view seriously. The fund you mentioned is a municipal bond fund and I don't think that there is anything wrong with municipal bonds (so long as you understand the risks), even though I don't personally care for them.

Posted: **Fri Nov 02, 2012 3:13 pm**

buddtholomew wrote:
hpowders wrote: To the person who is bothered by how the PP was flat when the stock market was up, realize that the S&P 500 lost 38% in 2008 compared to maybe 2% for the PP.
Are bonds factored into your calculations? A 60/40 portfolio favored a lot better than 38% during that timeframe.

Do you mean 60% stocks and 40% bonds or the opposite?

Vanguard Wellington is pretty close to the mix above and it lost about 23% for the year in 2008.

Vanguard Wellesley is close to 60% bonds and 40% stocks and it lost about 10% in 2008.

I just don't like exposure to losses of that size. I can't deal with them. I get too freaked out. I can't think clearly and I start making bad decisions.

Posted: **Fri Nov 02, 2012 3:15 pm**

MediumTex wrote:
buddtholomew wrote:
MediumTex wrote: You don't think you might be falling into it now?

Falling into what now?
The trap you described in your post above.

I sincerely doubt that you "want to know"...you are committed to the PP and will defend its philosophy no matter what the future holds. That, to me, should be more scary than diversifying beyond the PP.
Well, I might put it like this: "I will defend the PP and its philosophy because I don't know what the future holds."

Why would that be scary?

I would say I have PP conviction, but that doesn't mean that I don't take other points of view seriously. The fund you mentioned is a municipal bond fund and I don't think that there is anything wrong with municipal bonds (so long as you understand the risks), even though I don't personally care for them.

I've grown tired of this discussion. Of course you don't care for muni bond funds - they aren't part of the 4 x 25 PP. So, if your AA calls for bonds and tax-deferred accounts are maxed with FI, then what would you care for? Let me guess - Treasuries (either short or long-term).

Posted: **Fri Nov 02, 2012 3:24 pm**

buddtholomew wrote: I've grown tired of this discussion. Of course you don't care for muni bond funds - they aren't part of the 4 x 25 PP. So, if your AA calls for bonds and tax-deferred accounts are maxed with FI, then what would you care for? Let me guess - Treasuries (either short or long-term).

In the situation you describe above, I might say go buy some I-bonds. They going to pay you about what municipal bonds are paying right now (though you will eventually have to pay taxes on I-bond interest).

Lots of people like municipal bonds. It's just a different approach to investing than the Permanent Portfolio.

Posted: **Fri Nov 02, 2012 3:30 pm**

MediumTex wrote:
buddtholomew wrote: I've grown tired of this discussion. Of course you don't care for muni bond funds - they aren't part of the 4 x 25 PP. So, if your AA calls for bonds and tax-deferred accounts are maxed with FI, then what would you care for? Let me guess - Treasuries (either short or long-term).
In the situation you describe above, I might say go buy some I-bonds. They going to pay you about what municipal bonds are paying right now (though you will eventually have to pay taxes on I-bond interest).

Lots of people like municipal bonds. It's just a different approach to investing than the Permanent Portfolio.

You can only purchase a maximum amount of I-bonds per year. TE Muni's are not a different approach to investing than the PP. This is entirely my point - it doesn't have to be all PP or nothing.

Posted: **Fri Nov 02, 2012 3:37 pm**

MediumTex wrote: Vanguard Wellesley is close to 60% bonds and 40% stocks and it lost about 10% in 2008.

I just don't like exposure to losses of that size. I can't deal with them. I get too freaked out. I can't think clearly and I start making bad decisions.

Up to this point the PP has avoided those sized losses, but then again so did Wellesley from 1972-2007 (a 6.5% loss in 1974 was the previous worst), and yet from 1975-2011, Wellesley outperformed the PP with a 10.86% vs. 9.19% CAGR w/ similar standard deviations. I did leave out 1972-1974 because I believe gold needed a few years to settle. So even if you start at 1977 which erases a few fantastic years for Wellesley, it still outperformed 10.34% to 9.19%. Not necessarily throwing these numbers out there to compare the two portfolios, just to point out that before 2008, Wellesley had yet to experience its largest loss.

I'm no math teacher, but I'll assume it's accurate to say any portfolio's worst performance is always ahead of it, we just don't know when.

Posted: **Fri Nov 02, 2012 3:39 pm**

buddtholomew wrote: TE Muni's are not a different approach to investing than the PP.

Municipal bonds have a whole constellation of risks (e.g., credit risk, default risk, call risk, etc.) that are not present with treasuries. It is a different approach to investing than the PP.

Posted: **Fri Nov 02, 2012 3:56 pm**

iwealth wrote:
MediumTex wrote: Vanguard Wellesley is close to 60% bonds and 40% stocks and it lost about 10% in 2008.

I just don't like exposure to losses of that size. I can't deal with them. I get too freaked out. I can't think clearly and I start making bad decisions.
Up to this point the PP has avoided those sized losses, but then again so did Wellesley from 1972-2007 (a 6.5% loss in 1974 was the previous worst), and yet from 1975-2011, Wellesley outperformed the PP with a 10.86% vs. 9.19% CAGR w/ similar standard deviations. I did leave out 1972-1974 because I believe gold needed a few years to settle. So even if you start at 1977 which erases a few fantastic years for Wellesley, it still outperformed 10.34% to 9.19%. Not necessarily throwing these numbers out there to compare the two portfolios, just to point out that before 2008, Wellesley had yet to experience its largest loss.

I'm no math teacher, but I'll assume it's accurate to say any portfolio's worst performance is always ahead of it, we just don't know when.

Wellesley provides little deflation protection, so it would make sense that it did well during a period where there were no deflationary economic conditions.

The PP, OTOH, provides protection in all economic environments.

The U.S. first began experiencing deflationary conditions in 2007 when the housing market started to roll over and the economy went into recession (people didn't see it then, but that's what was happening).

Here is a comparison of Wellesley and the PP over the 2007-2011 timeframe (which has basically been a period of continuous deflationary economic conditions which the Fed has tried to offset through 0% interest rates and QE):

***

Wellesley:

2007: 5.19%
2008: (12.58%)
2009: 14.05%
2010: 10.36%
2011: 8.94%

Avg. for 2007-2011 timeframe: 5.19%

***

Permanent Portfolio:

2007: 13.3%
2008: (.7%)
2009: 10.5%
2010: 14.5%
2011: 10.5%

Avg. for 2007-2011 timeframe: 9.62%

***

Wellesley is a great fund, but it's not built for all economic conditions. I don't mind slightly lower returns in exchange for the all-weather protection that the PP provides.

JMHO, of course.

Posted: **Fri Nov 02, 2012 4:33 pm**

MediumTex wrote:
Wellesley:

2007: 5.19%
2008: (12.58%)
2009: 14.05%
2010: 10.36%
2011: 8.94%

Avg. for 2007-2011 timeframe: 5.19%

***

Permanent Portfolio:

2007: 13.3%
2008: (.7%)
2009: 10.5%
2010: 14.5%
2011: 10.5%

Avg. for 2007-2011 timeframe: 9.62%

***

Wellesley is a great fund, but it's not built for all economic conditions. I don't mind slightly lower returns in exchange for the all-weather protection that the PP provides.

JMHO, of course.

Agreed, the PP is the only popular "lazy" portfolio I've seen that intentionally provides some protection against deflation. Out of curiosity, where are you getting those Wellesley returns? Per Simba's spreadsheet, I'm seeing these returns for Wellesley over that time period:

2007: 5.61%
2008: -9.84%
2009: 16.02%
2010: 10.65%
2011: 9.63%

But I do get the same return for the PP as you listed.

Posted: **Fri Nov 02, 2012 4:41 pm**

iwealth wrote: Agreed, the PP is the only popular "lazy" portfolio I've seen that intentionally provides some protection against deflation. Out of curiosity, where are you getting those Wellesley returns? Per Simba's spreadsheet, I'm seeing these returns for Wellesley over that time period:

2007: 5.61%
2008: -9.84%
2009: 16.02%
2010: 10.65%
2011: 9.63%

But I do get the same return for the PP as you listed.

Sorry about that, I was looking at the Vanguard site here and I was looking at the wrong column. Your numbers are correct.

With the correct returns, I've got VWINX at 6.41% average annual returns over the 2007-2011 period.

Gyroscopic Investing

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