Gyroscopic Investing

mandynshane wrote: maybe the real test will be tomorrow lets re-visit because I am studying volatility and honestly curious how my allocation holds up.

What kind of conclusions can you draw based on one day of market activity?

The better question, IMHO, is whether any of these PP knockoffs perform better than the traditional PP to a degree that they are worth monkeying around with.

No I totally agree and would never base conclusions on one or two days I have went back several years.. but the past isn't as important as the present is and on days like today I like to see how it does. I'm curious how much I will lose tomorrow? with lots of different holdings in even traditional pp I'm curious how it compares. Essentially I'm trying to see if I can prove its performance wrong. That is the only way I will know if I'm right.

I don't like seeing lots of volatility in a portfolio. What swings up in value quickly can come crashing down just as fast.

So far Ive had hardly any volatility in this portfolio I know that people say the Swiss franc is going to take a hit but as far back as I go with this combo very little Volatility.

My portfolio didn't seem to shoot up as much as the pp portfolio today

mandynshane wrote: So far Ive had hardly any volatility in this portfolio I know that people say the Swiss franc is going to take a hit but as far back as I go with this combo very little Volatility.

Is there any kind of economic theory behind your portfolio, or is it one of those monkeys-in-a-typewriter-shop backtest jobs?

you guessed it monkeys-in-a-typewriter-shop backtest jobs-
but they got paid a fair wage. It either works or it doesn't, right? I mean you cant really lie about these things can you? it's pretty easy to see how asset classes correlate to each other I see it in the pp. I know plenty of people who don't believe in pp but they never take the time to dig in and understand it and watch how it moves in the market. the original pp does work clearly. Explaining how each asset class can be totally doing its own thing and yet work together in harmony isn't easy to explain but its easy to see in everyday performance.

mandynshane wrote: It either works or it doesn't, right?

Well, I think there is more to it than that.

Things can work well for long periods and then one day they just stop working, and you discover then that you were just observing what appeared to be patterns in a basically random set of data.

Backtesting tells you if something worked at some point in the past.  When you have a strong theory to go with your backtesting results, however, it can provide you with a stronger basis for anticipating what future performance might be expected to look like.

As Harry Browne said, we don't use backtesting to prove a thesis, we only use it to disprove a thesis.  With the portfolio you are describing, it doesn't sound like there is any real economic theory behind it other than it consists of assets that have played well together in the past.  These relationships may or may not continue into the future.

I like the PP because it basically defines all possible economic environments that may show up in the future (including the likely and unlikely ones) and provides a way for me to invest safely without having to make any correct predictions.

mandynshane wrote:my thoughts may be wrong but in theory they have worked well so far

mandynshane, welcome.

How far back have you tested this portfolio?

MINT seems to be about 2 years old
PLW seems to be about 4 years old
FXF seems to be about 5 years old

Most investors don't have access to sophisticated backtesting software that would allow them to backtest investment equivalents well before ETF inception dates. Would you mind sharing your method and its timeline?

Medium Tex, "BTW, how would you be protected during an extended period of deflation?  I don't know if emerging market debt is where I would want to be in that environment.  You can say "that probably won't happen", but that's what people always say before something unexpected happens."

If deflation in the USA corresponded with the USD continuing to slump; then emerging market local currency debt might do really well.  This time last year when deflation fears were in the air, it did really well. Modern emerging market local currency debt with free floating currencies is a very different beast to the emerging market debt back when those currencies used to be pegged to the USD (and so were like Greek debt is now) rather than being as they are now -like a free floating developed currency except  with a growing economy and low debt levels.

Deflation is our currency doing well, not declining.

Deflation benefits domestic bonds and the USD, nothing foreign.

Moda, I don't think it is as cut and dried as that. If wages in the USA were to fall, house prices in the USA were to fall, the stock market were to slump, M2 money supply were to fall, unemployment in the USA were to rise and the US deficit were to increase despite interest rates being kept low- then that could give you deflation together with a falling dollar. There might be inflation (in USD terms) for oil and global commodities purely down to exchange rate issues but the overall basket would show deflation. I think just such a scenario could be unfolding now for the US and UK.
Would you call the post 2008 scenario in Iceland a deflation? I would and yet the Icelandic currency plummeted in value and imports became very expensive for Icelanders.
The "tight money 1981 style recession" with high interest rates much above inflation (where cash is the best performing asset) would seem to me the scenario that would give a strong USD despite a lack of prosperity.

The deflation I described above would be great for LTT in USD terms and yields would fall BUT if you were to sell your USD bonds and try and buy something foreign (or gold etc) you would see that things weren't so great.

Well 2008 was probably initially very much deflation, but when you default to devalue your currency you could probably end up with high interest rates and inflation (which from what I've heard has helped their country immensely), which is one many central banksters attempt to do in the face of a depression.

I think what we might be talking about is a "recessionary reprioritization" where things like houses and business assets fall in value, but due to continued commodity inflation "deflation" appears by many to not be happening.

If by deflation you mean the USD slumping compared to other currencies, that doesn't mean that currencies aren't in demand in net... in any recession, what was once valued (nice houses and stocks) start to be held behind safe assets like money in the bank... just because the US declined from the Euro, doesn't mean that both of our collective societies aren't trying to move from certain consumer or business assets and debt into owning more currency... I know I am.

This is all actually probably what you were trying to get at... I guess when you said that "If deflation in the USA corresponded with the USD continuing to slump" you meant that this was a usual trait of deflation.

I think we're seeing a mass deleveraging and reprioritization to safe assets, creating way more supply of loans (depositors, CD holders, and bond-holders) than willing borrowers.  These same people, though, still need to heat their home and drive to whatever job they can get, thus commodities keep rising in price.  This would naturally have a very rate-lowering affect on our cash held in banks, and would probably even lag commodity inflation for a time.  Also, as we've "recovered" we've seen a decline of the dollar to other currencies in large part because the dollar gained huge strength in the wake of the financial meltdown.

Just my random blatherings.

Good distinction, stone.

I think its important to realize that the PP is designed to protect your purchasing power in your own country. That is why the bond allocation changes depending upon your country.

I understand your concerns stone, but personally I plan to live in the US for the forseeable future so the risk you highlighted is less applicable to me. However, it still is relevant for someone with ambitions to live abroad.

It would be an interesting exercise to construct a PP for a traveling man. Perhaps the bond allocation would be split among how often someone would visit that country?

For instance if I was going to spend half my time in the US, and quarter in Japan and a quarter in the UK my cash and LTGB section would reflect these weightings...

melveyr,

That's a good point... I wonder if the % of commerce in a country used by the USD should also be taken into consideration.

If 30% of Mexican commerce uses the USD, maybe if you live in Mexico you should have 30% of your bonds in US bonds.

  Stable day..

cef      .65
fxf    -.52
mint    .09
plw    .27
vti      .57
tei    1.33

my portfolio  +.24%

s&p 500      +.50%

mandynshane wrote:   Stable day..

cef      .65
fxf     -.52
mint    .09
plw     .27
vti      .57
tei    1.33

my portfolio  +.24%

s&p 500       +.50%

mandynshane, would you be willing to share how you went about backtesting this portfolio? I don't see a way to do this prior to 2007, with the ETFs you've chosen.

For instance if I was going to spend half my time in the US, and quarter in Japan and a quarter in the UK my cash and LTGB section would reflect these weightings...

I am trying to construct a PP little more international  for a while, because I´m not US resident without the possibility of establish a local PP. And so I would like to be a bit less tied to the fate of the dollar or U.S. economy without losing the stability that gives the traditional PP.
So I backtest this PP in etfreplay.com:
VTI 12.5
VEU 12.5
IAU 25
TLT 25
SHY 12.5
BWZ 12.5

Confront with US PP and International PP: VTI-IAU-TLT-SHY / VEU- IAU-TLT-BWZ.
For the last 3 years and In each year specific. And always for the moment the return is in the middle of a US PP and a International PP (obviously). But the good thing is the volatility remains reasonable.

2009: Return 15.8 Volatility 10.8
2010: Return 13.4 Volatility 8.0
YTD: Return 7.8 Volatility 5.8

It may be a good option for those of us who don't live in U.S. or any country with large economy and we want to be less exposed to the fluctuations of the dollar abroad.

I would like to know what you think?
regards

escafandro,

What is your local currency?  Is it pegged to the dollar?

Hi MT,
It´s Peso Uruguayo and No is not pegged to the dollar directly. The dollar is a strong currency of reference as well the Euro and the Brazilian Real. In recent months the dollar has been depreciating strong here. But that's not my biggest concern because I don´t know how much longer I'll be living in Uruguay. So my interest was in approach as close as possible to the concept of International PP that work more or less well regardless of where you live.

OT:

What's life in Uruguay, like? Is it anything resembling the picture that EscapeArtist.com paints it to be? (I haven't found them to be very accurate, ala Costa Rica, Panama and Colombia).

I am an Argentinian living in Uruguay recently.
Having said that, my impression is that a quite natural country with a long coastline, and out of Montevideo is rugged in most villages, people very friendly and willing (especially inside the country), and I think probably is the most egalitarian countries in Latin America (a large middle/lower middle class). With a very participatory democracy (at least for what latin americans are used).
And it's quiet, which is sometimes pleasant and sometimes frustrating (especially for anxious people like me).
On the downside there are too many state monopolies for my taste (telephone, internet, oil, banks) and the cost of living is a bit high for the region (only behind Brazil and Chile). The infrastructure is also a little delayed. And it is a fairly conservative country too.
Here are a few good pictures of the coast of Montevideo: http://www.viajeauruguay.com/sitios-tur ... evideo.php
regards

escafandro,

Thank you for that brief mental tour through Uruguay.

One of the real kicks I get out of internet forum discussions is having a chance to talk to people I would never cross paths with in the real world.

If you haven't visited Texas before, do not come in July or August.  It feels like sticking your head in an oven right now.  If there is anything else you would like to know about Texas I would love to describe it for you.

We have deviated a lot from the main theme of the post, but that's the beauty of the PP (we do not have to constantly be worried and talking about how our investments go).
I really wanted to visit Austin sometime. For two reasons: I saw some videos that I liked (especially the river area), and more important this is where Terrence Malick live, I'm a huge fan.