Gyroscopic Investing

doodle wrote:

buddtholomew wrote: Another wonderful day for the PP. The planets would have to align perfectly for this portfolio to have a positive day. I have come to expect these losses in the portfolio, with the only question being how much am I down today. I wish I never would have found this approach to investing. I've heard it all before so save your breath.

1. Its like a rudder on a ship...
2. If you cant stand a 4% loss...
3. Everything else is down...
4. What is the alternative...
Blah, blah, blah...the facts are the facts.

I really feel like the stock market has peaked. I don't see any positive news going forward that will push it higher. So although your traditional portfolio might have outperformed the PP for the last year my guess is that it will see a pull back sometime over the summer.

Well, at least 60/40 portfolio is up YTD. Cant say the same for the PP. If the 60/40 falls over the summer, I suspect the PP will too. This unwavering faith in the PP has got to stop. It is hazardous to your wealth.

Xan wrote: Wasn't EVERYTHING down today?  (Apart from cash, of course.)  All by about the same amount?  I must confess I don't see how what the Fed did would cause everything to drop, but who knows in such a complex system.

If anyone needed more evidence that it's been the Fed goosing asset prices all along, I think we're getting the first hint of it today. Looks like the only folks who didn't lose were the ones holding 100% cash.

buddtholomew wrote:

doodle wrote:

buddtholomew wrote: Another wonderful day for the PP. The planets would have to align perfectly for this portfolio to have a positive day. I have come to expect these losses in the portfolio, with the only question being how much am I down today. I wish I never would have found this approach to investing. I've heard it all before so save your breath.

1. Its like a rudder on a ship...
2. If you cant stand a 4% loss...
3. Everything else is down...
4. What is the alternative...
Blah, blah, blah...the facts are the facts.

I really feel like the stock market has peaked. I don't see any positive news going forward that will push it higher. So although your traditional portfolio might have outperformed the PP for the last year my guess is that it will see a pull back sometime over the summer.

Well, at least 60/40 portfolio is up YTD. Cant say the same for the PP. If the 60/40 falls over the summer, I suspect the PP will too. This unwavering faith in the PP has got to stop. It is hazardous to your wealth.

Im just wondering how long it will be until you are singing its praises again  ...its always darkest before the dawn.

If you pull out now and put it into a 60/40 and stocks get hit hard then you will suffer a double whammy. Sometimes when you are lost in the wilderness the best course of action is to just stay put.

Hey Budd, since principal fluctuations seem to really unnerve you, have you perhaps thought about switching to a portfolio that's more emotionally suited for you?

I know folks have recommended a 100% cash or cash-like portfolio to you before, but perhaps 100% bonds might work too if you think of them purely in terms of income rather than principal value. A $1m portfolio of munis could easily produce $50k/yr in tax-free income, and you wouldn't have to worry about principal fluctuations since you'd always have that income. Who cares if the paper value of your portfolio fell to $900k if you were still getting your $50k in income, for example?

Of course, such a portfolio would be riskier than a PP due to all the additional risks of munis and your vulnerability to high levels of inflation, but it might be better suited to your personal risk tolerances and outlooks. I would never say that I thought the PP is for everyone.

Pointedstick wrote: Hey Budd, since principal fluctuations seem to really unnerve you, have you perhaps thought about switching to a portfolio that's more emotionally suited for you?

I know folks have recommended a 100% cash or cash-like portfolio to you before, but perhaps perhaps 100% munis might work too if you think of them purely in terms of income rather than principal value. A $1m portfolio of munis could easily produce $50k/yr in tax-free income, and you wouldn't have to worry about principal fluctuations since you'd always have that income. Who cares if the paper value of your portfolio fell to $900k if you were still getting your $50k in income, for example?

Of course, such a portfolio would be riskier than a PP due to all the additional risks of munis and your vulnerability to high levels of inflation, but it might be better suited to your personal risk tolerances and outlooks. I would never say that I thought the PP is for everyone.

I appreciate your recommendations and I do hold a significant portion of my taxable investments in VG IT-TE. I am in my late 30's and still in the accumulation phase, so monthly income for living expenses is not of concern. Capital preservation, inflation adjusted returns and low volatility are the primary objective for this investment. Also, the money should be available for emergencies in the event of a job loss.

I am drawn to the PP philosophy, but the investment approach is not as conservative as I was initially led to believe - given historical annualized returns (4 down years with the largest decline of -6% over a +/-40-year time frame). I rarely have additional funds to contribute to this taxable account, else I would settle on bi-monthly contributions to mitigate some of the declines.

buddtholomew wrote: Well, at least 60/40 portfolio is up YTD. Cant say the same for the PP. If the 60/40 falls over the summer, I suspect the PP will too. This unwavering faith in the PP has got to stop. It is hazardous to your wealth.

Wouldn't you be nervous having 60% of your money in stocks right now?

buddtholomew wrote: I am drawn to the PP philosophy, but the investment approach is not as conservative as I was initially led to believe - given historical annualized returns (4 down years with the largest decline of -6% over a +/-40-year time frame).

I can sympathize. If you like the idea of the PP but need it to be more conservative, why not boost cash at the expense of all the other assets? 55% cash and 15% stocks, bonds, and gold produces an extremely smooth ride but preserves the essence of the PP. Of course, such a portfolio will underperform a more stock-heavy portfolio even worse, so you'll still need to decide which is more important: capital preservation or growth from the stock market.

AdamA wrote:

buddtholomew wrote: Well, at least 60/40 portfolio is up YTD. Cant say the same for the PP. If the 60/40 falls over the summer, I suspect the PP will too. This unwavering faith in the PP has got to stop. It is hazardous to your wealth.

Wouldn't you be nervous having 60% of your money in stocks right now?

Not at all...because I know what to expect from a portfolio that is weighted to equities. My expectations are that this portion of the investment could lose 50%+ at any time. In my retirement account, I have 40% invested in Stable Value, IT-Bonds and TIPS to re-balance should the need arise. If the PP follows the direction of equities, then I may as well be invested in an equity heavy portfolio and adopt the same strategy in taxable.

Pointedstick wrote:

buddtholomew wrote: I am drawn to the PP philosophy, but the investment approach is not as conservative as I was initially led to believe - given historical annualized returns (4 down years with the largest decline of -6% over a +/-40-year time frame).

I can sympathize. If you like the idea of the PP would need it to be more conservative, why not boost cash at the expense of all the other assets? 55% cash and 15% stocks, bonds, and gold produces an extremely smooth ride but preserves the essence of the PP. Of course, such a portfolio will underperform a more stock-heavy portfolio even worse, so you'll still need to decide which is more important: capital preservation or growth from the stock market.

If I include the IT-Tax Exempt holding in taxable, I am SPY 20%, GLD 15%, TLT 15% and 50% Cash and Bonds. This is in-line with the above proposed allocation.

buddtholomew wrote: Another wonderful day for the PP. The planets would have to align perfectly for this portfolio to have a positive day. I have come to expect these losses in the portfolio, with the only question being how much am I down today. I wish I never would have found this approach to investing. I've heard it all before so save your breath.

I find it interesting that you would post this sentiment of frustration with the PP on a day in which a 60/40 portfolio (VTI/BND) suffered even more of a loss (-1.0%) than the PP (-0.9%).

So evidently what you are frustrated with--at least today--is not the PP relative to a more conventional 60/40 portfolio, but rather the fact that you feel you were misled into believing that the PP is a far more stable portfolio on a day-to-day basis than it actually is.

This is what I do to put things in perspective when I need it: I just look at a plot stock, bond, gold, and cash returns over time with PP returns overlaid on the same plot. Simply looking at the individual volatile asset curves zig and zag around the PP curve, while the PP curve still manages to rise above the cash curve over time, gives me a feeling of comfort--despite daily swings in price. The stability you crave may not be there on a daily basis, but it definitely asserts itself over periods of a few years or more.


(Image source: https://web.archive.org/web/20160324133 ... 2-2011.png)

Budd, is it the PP's unpredictability or its volatility that bothers you? A drawdown of 4-5% over 8 months doesn't lend much to the volatility argument. But for me personally, it can be maddening when expected correlations between the assets fail to materialize. Like stocks, bonds and gold crumbling on the same day.

Maybe some discussion is in order about what sort of upcoming economic conditions could drive the PP back to new highs.

iwealth wrote: Budd, is it the PP's unpredictability or its volatility that bothers you? A drawdown of 4-5% over 8 months doesn't lend much to the volatility argument. But for me personally, it can be maddening when expected correlations between the assets fail to materialize. Like stocks, bonds and gold crumbling on the same day.

Maybe some discussion is in order about what sort of upcoming economic conditions could drive the PP back to new highs.

Both. A 4-5% decline in the PP is the second worst annual performance for the portfolio over a +/- 40 year time frame (keep in mind that a 5% decline is $80K USD or a new MBZ). Also, if the assets are all going to decline at once, or the leading asset is unable to buoy the entire portfolio, then the investment is certainly not meeting my expectations.

Cash may lose out to inflation, but a negative return loses out to inflation even more. Also, looking at a chart of historical returns is meaningless. I too am calmed by an upward slope and positive gains, but there is no guarantee that the portfolio will perform as advertised...so I've come to learn.

buddtholomew wrote:

iwealth wrote: Budd, is it the PP's unpredictability or its volatility that bothers you? A drawdown of 4-5% over 8 months doesn't lend much to the volatility argument. But for me personally, it can be maddening when expected correlations between the assets fail to materialize. Like stocks, bonds and gold crumbling on the same day.

Maybe some discussion is in order about what sort of upcoming economic conditions could drive the PP back to new highs.

Both. A 4-5% decline in the PP is the second worst annual performance for the portfolio over a +/- 40 year time frame (keep in mind that a 5% decline is $80K USD or a new MBZ). Also, if the assets are all going to decline at once, or the leading asset is unable to buoy the entire portfolio, then the investment is certainly not meeting my expectations.

Cash may lose out to inflation, but a negative return loses out to inflation even more. Also, looking at a chart of historical returns is meaningless. I too am calmed by an upward slope and positive gains, but there is no guarantee that the portfolio will perform as advertised...so I've come to learn.

hi

the big difficulty is to start in a DOWN YEAR.

The other fellows almost always started with WINNING YEARS, I guess.

iwealth wrote:But for me personally, it can be maddening when expected correlations between the assets fail to materialize. Like stocks, bonds and gold crumbling on the same day.

The same day?  That's waaay too short a time frame to say anything about correlations.  The "gears" just aren't that much in lockstep.  We're playing long-term trends here.

We invest in these four assets because they're uncorrelated.  Uncorrelated means that sometimes they move together, and sometimes they move separately.  Overall, the sum of them moves upwards, and with a little volatility capture via rebalancing, that's the PP.

You're expecting 100% anti-correlation if you want one to move up exactly as another moves down.  That's just as rare as 100% correlation, and really it's not what we want in the PP anyway.

frugal wrote:hi

the big difficulty is to start in a DOWN YEAR.

The other fellows almost always started with WINNING YEARS, I guess.

Frugal, I think you're exactly right.  For what it's worth, I started relatively recently as well, and am down overall.  But yes, it would be MUCH easier to be able to say:

I was as high as +6% but now I'm down to +3%.

as opposed to

I'm down 3%.

When really they're both the same(ish).

Xan wrote:

iwealth wrote:But for me personally, it can be maddening when expected correlations between the assets fail to materialize. Like stocks, bonds and gold crumbling on the same day.

The same day?  That's waaay too short a time frame to say anything about correlations.  The "gears" just aren't that much in lockstep.  We're playing long-term trends here.

We invest in these four assets because they're uncorrelated.  Uncorrelated means that sometimes they move together, and sometimes they move separately.  Overall, the sum of them moves upwards, and with a little volatility capture via rebalancing, that's the PP.

You're expecting 100% anti-correlation if you want one to move up exactly as another moves down.  That's just as rare as 100% correlation, and really it's not what we want in the PP anyway.

Understood, and it was incorrect to write "same day" when I meant to imply frustration with the overall trend as of late which is down for the 3 volatile assets. Won't edit the previous post now, but I agree with your sentiments.

buddtholomew wrote: Both. A 4-5% decline in the PP is the second worst annual performance for the portfolio over a +/- 40 year time frame (keep in mind that a 5% decline is $80K USD or a new MBZ). Also, if the assets are all going to decline at once, or the leading asset is unable to buoy the entire portfolio, then the investment is certainly not meeting my expectations.

Cash may lose out to inflation, but a negative return loses out to inflation even more. Also, looking at a chart of historical returns is meaningless. I too am calmed by an upward slope and positive gains, but there is no guarantee that the portfolio will perform as advertised...so I've come to learn.

No portfolio will always perform as advertised, though, that's the thing. Investing is inherently uncertain. Maybe this will be a bad year for the PP and it will end with a 6% loss. If that's a disaster to you, then I really think you need waaaaaaaay more cash. Since your overall allocation is nearly half cash, why bother picking on the PP part when gold and bonds are down? Just look at your overall return, including the munis and extra cash. It may be smoother than you're imagining.

I'll also admit I'm rather puzzled that a 5% loss in a portfolio you thought was more conservative is more unnerving than a 50% loss in a portfolio you knew was volatile. If a 5% drawdown loses you the ability to buy a luxury car, then a 50% drawdown loses you the ability to buy a luxury house, regardless of how much you may or may not be mentally prepared for the possibility of it happening.

iwealth wrote:Understood, and it was incorrect to write "same day" when I meant to imply frustration with the overall trend as of late which is down for the 3 volatile assets. Won't edit the previous post now, but I agree with your sentiments.

Oh, and I agree with yours as well!  I'm just as frustrated...  But I really do believe that I'm positioned to handle anything.

Pointedstick wrote:

buddtholomew wrote: Both. A 4-5% decline in the PP is the second worst annual performance for the portfolio over a +/- 40 year time frame (keep in mind that a 5% decline is $80K USD or a new MBZ). Also, if the assets are all going to decline at once, or the leading asset is unable to buoy the entire portfolio, then the investment is certainly not meeting my expectations.

Cash may lose out to inflation, but a negative return loses out to inflation even more. Also, looking at a chart of historical returns is meaningless. I too am calmed by an upward slope and positive gains, but there is no guarantee that the portfolio will perform as advertised...so I've come to learn.

No portfolio will always perform as advertised, though, that's the thing. Investing is inherently uncertain. Maybe this will be a bad year for the PP and it will end with a 6% loss. If that's a disaster to you, then I really think you need waaaaaaaay more cash. Since your overall allocation is nearly half cash, why bother picking on the PP part when gold and bonds are down? Just look at your overall return, including the munis and extra cash. It may be smoother than you're imagining.

I'll also admit I'm rather puzzled that a 5% loss in a portfolio you thought was more conservative is more unnerving than a 50% loss in a portfolio you knew was volatile. If a 5% drawdown loses you the ability to buy a luxury car, then a 50% drawdown loses you the ability to buy a luxury house, regardless of how much you may or may not be mentally prepared for the possibility of it happening

The PP is in the event of a job loss, whereas the 60/40 allocation is earmarked for retirement. Each investment has their own purpose. I re-balanced a 65/35 portfolio during the 2008 downturn to maintain my allocation so am well aware of my risk tolerance for these funds.

M.T. is it possible for you to set up a Permanent Portfolio Hotline to help Budd and others to come back in off of the ledge on the down days?

Make sure the call center is adequatly staffed given all of the down days...tight money recession on the horizon anyone?

buddtholomew wrote: Make sure the call center is adequatly staffed given all of the down days...tight money recession on the horizon anyone?

As much as a tight money recession would hurt, I would kill for the opportunity to pick up a load of 30 year bonds at a good interest rate and stocks that yielded a good dividend. Im not as concerened with principal loss, Im simply looking for a portfolio kicking off about 25 grand a year in interest and divdends. If I could get that, i would quit my job tomorrow!

doodle wrote: As much as a tight money recession would hurt, I would kill for the opportunity to pick up a load of 30 year bonds at a good interest rate and stocks that yielded a good dividend. Im not as concerened with principal loss, Im simply looking for a portfolio kicking off about 25 grand a year in interest and divdends. If I could get that, i would quit my job tomorrow!

Yes please! Imagine 30-year treasuries at 10% or GE and Intel trading at $10 share. Yum.

Today that effortless $25k/yr income would take more than $500k and riskier types of stocks and bonds; in a recession you could buy your $25k/yr retirement on sale for half off or more.

I don't know what I could say to Budd at this point to comfort him.

Perhaps we are seeing the investment equivalent of the "Princess and the Pea" scenario where even a seemingly minor irritant in the form of a single digit decline in value over a period of less than 12 months sets in motion a series of self-reinforcing negative thought patterns that strengthen based upon their own destructive pattern and frequency and finally drive the person completely crazy. 

See the Tacoma Narrows bridge collapse for an example of what I am talking about with respect to the self-reinforcing nature of bad rhythms and frequencies.

As always, I don't mean to trivialize Budd's concerns, and his threads seem to attract a huge amount of interest so I know he is tapping into something that many people are feeling, I just don't have anything to tell him beyond what I've already told him.  No investment with any potential to outpace inflation only goes up and never goes down in value.

I admit, though, that I don't understand this process of mentally liquidating your accounts multiple times each day to make sure all of your money is still there.  Who cares if your account fluctuates in value a little over short time periods?  What would the point of ZERO volatility be in a long term investment?  When people talk about all of the money they have "lost" because their total account is worth 1% less than it was yesterday, I wonder why they aren't talking about all of the money they have "made" because their total account is worth 20% more than it was three years ago.