Gyroscopic Investing

MediumTex wrote: It appears that the tortoise has returned to the track.

I felt the clouds that followed me over the last week begin to part. Doom and gloom was replaced by a sense of relief that the PP was once again performing as advertised. I am obviously way too invested in the daily fluctuations of the portfolio and need to reassess my priorities. Somehow, I need to disassociate strategy with outcome at least in the short term.

Best-
Budd

buddtholomew wrote: I felt the clouds that followed me over the last week begin to part. Doom and gloom was replaced by a sense of relief that the PP was once again performing as advertised. I am obviously way too invested in the daily fluctuations of the portfolio and need to reassess my priorities. Somehow, I need to disassociate strategy with outcome at least in the short term.

Best-
Budd

What if you just looked at it once a week?

buddtholomew wrote:

Pointedstick wrote: Why did you check it today? Seems like it might be better for your blood pressure to look at it less frequently. 

I am not fond of surprises ;-)

I see the smiley.  But after sitting on it for a day I still want to say...

It's a surprise every time you check.  Check less often and you have fewer surprises.

I check my portfolio results out of anticipation and hope.  In the past I've found that when hope turns to dread I want to check less often.  But I do still check prices to figure out the best place to make the next investment.

Slotine wrote: Those damn straight beautiful lines melveyr post might lull you into a sense that this is a money market fund.

Be prepared for negative returns.  Even on a yearly scale, there are bound to be some.



For all the stability the perm portfolio provides, that's still 1/6 of your time fretting.

I'm not exactly following that data.

How do you get rolling negative one year returns 1/6 of the time over a 12 year period when there was, at most, one year with a small negative return (2008)?

I don't want anyone to be lulled, but the PP ride is pretty smooth, even compared to what looks like a straight line with t-bills or CDs, but which are consistently losing out to inflation every single year.

We must decide on some allocation.  The PP is a good fit for many investors who don't like a lot of risk and excitement with their investments.  Some need more risk and excitement, and there are plenty of places for them to go.

Sooner or later there will be a serious test of PP investors, and some will stick with it and some will move on to something else.  2008 was probably the last serious test when the portfolio did experience a large decline (even though it was less than half the size of the loss that many investors experienced), though the decline was short-lived as treasury bonds shot up near the end of the year, which is what the PP theory suggested would happen.

I have always said that people need to determine if the PP is right for them based on their own needs and emotional constitution.  I think that I, Craig and others here strive to paint a clear picture of what the PP is about and what to expect from it over time.  In our book, we certainly don't present it as a magic bullet, but rather as a theoretically sound approach to managing what will always be an uncertain future.

There is a lot more wisdom than might appear in the simple advice: "Don't look in on the portfolio too often."

Just a few things here:

The portfolio turns like a rudder on a ship, not like a high performance motorcycle. Watching it day to day is just going to drive you nuts.

Nothing is perfect. The best you can do is widely diversify against catastrophe. No portfolio is going to prevent loss. Again, even 100% t-bills is subject to inflation losses.

Please keep expectations in check. All investments have risks. As humans we are not able to predict the future or those events that could cause those risks to show up. The best we can do is research and diversify with our imperfect knowledge. After that, it's out of our control.

If someone thinks they can predict the future, then perhaps they should actively trade, etc. I can't predict the future which is why I widely diversify, passively invest, and don't watch my portfolio.

I think most people here would be shocked at how infrequently I look at my portfolio performance. I only do YTD updates on the blog because people expect it, other than that I really don't look at things very often because I just don't feel like it adds any value. I can't do anything about it anyway, anything I would do is likely to increase risks, and finally it just causes a lot of unneeded worry about things you don't have control over.

I am very grateful for this thread and for other threads that have spoken about the psychological aspects of investing in the PP.

I, like another poster in this thread, somewhat sort of expected sideways days I suppose, but not really down days... and not really down months in which all four of the components were down for an extended period of time. It has caught me by surprise, and since the quest to be a rational, successful investor naturally includes conquering one's fears and carrying on with the plan even when it's counter intuitive, I think it's really valuable to discuss these sorts of things in a transparent fashion. Why everything being down all at once and for so long caught me by surprise I do not know, except that it was not what I expected or anticipated somehow. What can I say? I'm new to this.

As a new investor, and as someone investing for the first time with taxable money (we have retirement money in the TSP and, quite frankly, the volatility of our TSP doesn't bother me at all in the slightest and never has), I am very glad that I decided to dollar-cost-average (DCA) into the PP with my taxable money**. That way, my losses the first month (from all four assets being down at the same time) were much smaller than they would have been had I jumped in whole hog, and my losses thus far in the second month (everything is still down, though bonds did do well the other day, but not well enough for bonds to be in positive territory for me yet) are bigger but still not as shocking as they would have been had I jumped in with everything from the first day.

I am only writing these things in order to be of service to others who are starting/have recently started/who are looking into the PP. I am committed to the PP, for, to me, there is no other strategy that makes half as much sense. But I do feel that there is value in sharing with others, hey, this has been my experience, etc. As far as checking my portfolio so often, I understand the argument that it's probably not the best course of action for those looking for peace of mind, but to me I find it fascinating to watch how the components behave, and I am also trying to work my way through my methods for how I will continue to DCA over the next many months, etc.

I am grateful for these boards and for the wisdom they provide.

[**Isn't it funny that I feel completely differently about my taxable money than I do about my TSP money? I know, it doesn't make much sense, does it. But I'm a freakout cow nut job over losses in our taxable account and I don't even bat an eyelash over losses in our TSP account, though it's basically all the same: money that is ours, just sitting in different places.]

Slotine,

Over that time period, what would be the longest an investor would have to wait to be back in the green if they started their PP on one of those unlucky days?

My intuition says it probably isn't more than 18 months or so.

Slotine wrote:

MediumTex wrote: Slotine,

Over that time period, what would be the longest an investor would have to wait to be back in the green if they started their PP on one of those unlucky days?

My intuition says it probably isn't more than 18 months or so.

18 months give

Code: Select all

Sep 2001        -0.72
Dec 2001        -0.31
Feb 2002        -0.15
Jul 2002        -0.19
Oct 2008        -1.03
Apr 2009        -0.13
Jun 2009        -0.06
Jul 2009        -0.09

You need to go to 24-months to clear the board.  For pre-2000, 32-months.

That can't be right.  If there are that many periods of 18 months+ with negative returns, then there would have to be multiple calendar years (2001 and 2008, at least) with negative returns, and we already know that's not the case.  Can you recheck your figures?

This is a very helpful exercise though...thanks for going to the effort of generating the numbers, and I'd very much like to see them once corrected/verified.

I'm assuming that those 18 month numbers don't mean that the portfolio was in the red the whole time, just that the last day that the portfolio was in the red from the start date was a date that was 18 months (or more) after you started.

I assume that this involves a situation where you bought during an unusual upward surge in the strategy, after which it declined or went sideways for a while, and then dipped unusually in the coming months (it was presumably up a lot in the period in between, or else there would have been more down years).

An easy way to avoid this would be to ease into the portfolio over a few months.  As I have said before, I view this as more an exercise in getting acclimated to the portfolio (and you might miss out on some gains by doing it this way), but it could also help protect you from the bad luck of buying the portfolio at an interim high and then seeing it go sideways or decline for a while.

Over time, though, none of this matters much.  If you understand the strategy and don't look at it too often, over time it should take care of you.

One interesting exercise is to look at the years surrounding the PP's down years.  For example the -4.1 loss the portfolio experienced in 1981 was surrounded by gains of 14.2% in 1980 and 23.6% in 1982.  When you look at the basically flat performance of the portfolio in 2008, you see that in 2007 it returned 13.3% and in 2009 it returned 10.5%.

MomTo2Boys wrote: I am very grateful for this thread and for other threads that have spoken about the psychological aspects of investing in the PP.

I, like another poster in this thread, somewhat sort of expected sideways days I suppose, but not really down days... and not really down months in which all four of the components were down for an extended period of time. It has caught me by surprise, and since the quest to be a rational, successful investor naturally includes conquering one's fears and carrying on with the plan even when it's counter intuitive, I think it's really valuable to discuss these sorts of things in a transparent fashion. Why everything being down all at once and for so long caught me by surprise I do not know, except that it was not what I expected or anticipated somehow. What can I say? I'm new to this.

As a new investor, and as someone investing for the first time with taxable money (we have retirement money in the TSP and, quite frankly, the volatility of our TSP doesn't bother me at all in the slightest and never has), I am very glad that I decided to dollar-cost-average (DCA) into the PP with my taxable money**. That way, my losses the first month (from all four assets being down at the same time) were much smaller than they would have been had I jumped in whole hog, and my losses thus far in the second month (everything is still down, though bonds did do well the other day, but not well enough for bonds to be in positive territory for me yet) are bigger but still not as shocking as they would have been had I jumped in with everything from the first day.

I am only writing these things in order to be of service to others who are starting/have recently started/who are looking into the PP. I am committed to the PP, for, to me, there is no other strategy that makes half as much sense. But I do feel that there is value in sharing with others, hey, this has been my experience, etc. As far as checking my portfolio so often, I understand the argument that it's probably not the best course of action for those looking for peace of mind, but to me I find it fascinating to watch how the components behave, and I am also trying to work my way through my methods for how I will continue to DCA over the next many months, etc.

I am grateful for these boards and for the wisdom they provide.

[**Isn't it funny that I feel completely differently about my taxable money than I do about my TSP money? I know, it doesn't make much sense, does it. But I'm a freakout cow nut job over losses in our taxable account and I don't even bat an eyelash over losses in our TSP account, though it's basically all the same: money that is ours, just sitting in different places.]

Mom2ToBoys,

Understanding what drives your emotions is a HUGE part of successfully investing. It's great that you are aware of this. We are our own biggest enemy when investing 

Slotline, your rolling return graphs are fantastic. One thing I'm unsure about is whether dollar cost averaging makes sense with the HBPP. I have inadvertently been in effect DCA into it because my other half started off very skeptical with the HBPP and her skeptism has gradually been slipping and so consequently we have gradually moved out of cash somewhat. In principle though, DCA just looks to me as a way to bamboozle people into taking on more risk rather than being a genuine way to reduce risk I mean, if you have a ten year time window, would your portfolio size at the end of the 10 years be more "certain" if you just had a say 50% cash allocation all the way through rather than tapering down from 100% to 25% cash (given a same overall "cash exposure")? Personally I'm also not that taken with the nominal safety of cash especially since in the UK we had a 30% devaluation or something like that in 2008.

This is great stuff, Slotine. Thanks for sharing.

Having to wait only 2 or 3 years to show a net gain in a newly started PP is really not bad at all. Anybody whose investment time horizon is less than 2 or 3 years probably shouldn't be investing anyways--PP or otherwise. They'd be better off just saving in cash.

Tortoise wrote: This is great stuff, Slotine. Thanks for sharing.

Having to wait only 2 or 3 years to show a net gain in a newly started PP is really not bad at all. Anybody whose investment time horizon is less than 2 or 3 years probably shouldn't be investing anyways--PP or otherwise. They'd be better off just saving in cash.

I agree.  Slotine's charts provide valuable insights into what an investor should realistically expect of the PP.

For an investor making regular contributions (as most of us are), I have to also think that this would smooth out the choppiness a bit as you are buying more of the portfolio through all of these peaks and troughs.

I'm assuming those charts are adjusted for dividends. 

What rebalancing approach is reflected in the charts?  Typically I would expect to see annual rebalancing in this sort of model, just because it's easier to do than actually tracking rebalancing bands.

One potential buy signal for the PP would appear to be when it drops below a previous price point going back 18 months or more.  In other words, if you take the data from the charts above and turn it on its head, the probability seems tiny of buying at the wrong time when the portfolio dips below a price point from 18 months or more in the past.

I sort of hate to get into this type of discussion about the PP and entry points, because as a practical matter they are not going to be that useful for most investors, and could cause an investor to miss out on gains probably more often than he would miss out on losses.

Each investor has to figure out for himself what will work best for him, but the information above does suggest that a person who decided to ease into the portfolio might be able to minimize future regret to some extent through this approach, all things considered (including the mental acclimation process that easing in to the portfolio also provides).

stone wrote:I'm unsure about is whether dollar cost averaging makes sense with the HBPP.

...

I'm also not that taken with the nominal safety of cash especially since in the UK we had a 30% devaluation or something like that in 2008.

That uncertainty poses a really good question.

TL;DR :    I believe in dollar cost averaging (DCA).

The long version...


Analysis:

Assuming a single asset (e.g. gold), over your desired timeframe, with respect to cash, DCA:

• makes no sense in a steady uptrend (but when will that ever the case?)
• is beneficial but not ideal in a steady downtrend (again, when is that?)
• Is likely beneficial when the price varies unpredictably up and down over time (seems typical)

Given I cannot predict future price with respect to cash, and 2/3 of the scenario are beneficial, I'm probably going to pick DCA when buying a single asset.

But what about the PP?

The way I see it, the typical simple PP is just 4 assets.  At any given time the price of any of those assets will be randomly different with respect to each other than it was the last time you looked.  Or in other words, cash will be varying randomly with respect to any other asset as they all vary randomly with respect to each other.

Now your perspective re. cash devaluation throws a little bit of a twist into it.  If you look at cash with respect to an average of the other three assets, and you assume cash is then in a steady downtrend (or subject to a significant (30%!) devaluation at any time), obviously DCA would make no sense.  But if cash really does vary randomly then DCA is likely beneficial.  And if cash is rising in value then DCA is beneficial but not ideal.

Again, without foreknowledge of a steady trend, 2/3 of the scenario result in DCA being beneficial.

Given that I cannot predict the future in the short term (month to month say, for six months or a year out), I have to assume that cash will be varying randomly in regards to the other three assets or that each asset will be varying randomly with each other.

Thus I think DCA is likely to be beneficial and is the safest approach UNLESS you can predict cash to be in a steady downtrend with respect to the other 3 assets.

(Now if you have no choice (e.g. this is not a lump sum conversion but rather accumulating assets over time) then DCA is really your only choice.  It's nice to know that it is likely to be beneficial.)


My experience:

I went thru a similar decision process with a lump sum and did about a 90-day DCA when I created my PP in a rollover IRA.  My plan was to keep it as its own account and manage it as a self-contained PP.  I already had a sizable allocation to precious metals and stocks in other accounts, but no treasuries other than whatever was held in various bond index funds in my 401(k) (which totaled about 50% of my investable assets, mostly cash and bonds, about 30% stock index).

I did a rollover of that 401(k) to an IRA.  It came out of that mix of investments and as soon as it hit the IRA I purchased about 1/3 my desired final allocation in TLT, VTI, and IAU (and SHY).  About 1 month later I brought each class to 2/3's my final allocation.  And about 2 months after the IRA was opened I invested the last portion to bring each class to 25% each.  (So in essence, each non-cash class went roughly to 8%+/-, 16%+/-, 25%+/- over 3 months.)

When I did a rollover of a company pension into an IRA I did a DCA of approximately 8-10 months.  (It got a bit confusing because most of the pension money was invested about 8 months out, but some other money had been added to the account (commingled) and there were some significant dividends, and a couple of asset sales...  It didn't reach my desired steady state for almost a year.)


My Conclusion:

The pension => IRA was not so good.  I started investing the first week in April 2009.  Less than one month previous turned out to be the stock market bottom and that became the beginning of a sustained uptrend for about the next 18 months.  I would have been better off to have dumped in everything on day 1.  But I'm not as bad off as the stock index would suggest.  I was buying individual stocks.  And by the end of the year my cost on most of them was way closer to the April 2009 value than to the March 2010 value because they were not individually each in a steady uptrend.

That 401(k) => IRA => PP DCA was a good thing.  Or at least not bad.  I know I got some better prices the 2nd and 3rd times than if I had purchased all at once.  In the end it boosted my return a low percentage.

I did the 401(k) rollover starting in March 2011 so I knew that DCA had not been ideal in 2009.  But it turned out to be a good thing in 2011.  (But I didn't drag it out so long the second time...  of course the money had been invested before so it wasn't as 'new' as the pension rollover.)  (BTW, that PP account is about 20 months old, up over 7% YTD, up over 22% since origination, for a CAGR over 12%.  FWIW it currently has individual stocks and VBK instead of VTI, and it holds CEF instead of IAU and it has about 40% of the treasuries as EDV.)

MomTo2Boys wrote: [**Isn't it funny that I feel completely differently about my taxable money than I do about my TSP money? I know, it doesn't make much sense, does it. But I'm a freakout cow nut job over losses in our taxable account and I don't even bat an eyelash over losses in our TSP account, though it's basically all the same: money that is ours, just sitting in different places.]

It makes sense to me, as most investments held in a taxable account are more easily accessible and generally do not incur a withdrawal penalty (although early termination of a CD will result in interst lost). Money in a tax-deffered account is not accessible to me without penalty (under 59-1/2), so why concern yourself with the daily fluctuations.

Medium Tex

One potential buy signal for the PP would appear to be when it drops below a previous price point going back 18 months or more.  In other words, if you take the data from the charts above and turn it on its head, the probability seems tiny of buying at the wrong time when the portfolio dips below a price point from 18 months or more in the past.

I guess though, so very often, things like that are just an illusion. In principle it is possible that the probability of further falls is exactly the same after an 18month dip as at any other time. Just as the chance of your next coin toss landing heads up is exactly the same irrespective of whether you have just landed heads up. Basically the HBPP might follow a totally random walk (but with an upward drift) such that prices really don't predict what it is going to do at all.
http://en.wikipedia.org/wiki/Geometric_Brownian_motion

Two sample paths of Geometric Brownian motion, with different parameters. The blue line has larger drift, the green line has larger variance.

Thanks Slotine, your charts are very insightful.

I spent about a year learning about the PP before I committed any funds.  The historically decent returns and the reduced volatility made me a believer.  However as your analysis shows, the month you choose to enter the PP can dramatically alter your initial performance.  Nobody likes to setup an investment and watch it immediately fall.

I am going through some of those first-year jitters, but already enjoy the reduced volatility compared to my old stock/bond mix.

Please relax and let the PP works for you.
Nothing is more precious than independence,
life, liberty, and the pursuit of happiness.

AdamA wrote: Try to stop checking on it so frequently.  Just leave things alone for 6 months or so.  Use all the free time you'll have to develop a new hobby.  The less time spent watching the markets, the better.

Says the guy with 1,600 posts on the Permanent Portfolio message board.

Do the board regulars really check their own portfolios every 6 months?  I check mine about once a day.  I can't help it.  It only takes about 20 seconds to check.  Now, I wish I could stop checking my e-mail 30 times a day...  that's probably a hobby's worth.

Not checking your portfolio regularly is one way to express the peace-of-mind that the PP can give you. Personally, I still check every day or two, but my manifestation of that peace-of-mind is that the movements don't really seem to affect me. Whatever you choose to do, you've gotta stay sane!

I check a model PP I set up on SmartMoney almost every day just because I like watching the way it moves.  I look in on my actual accounts once or twice a month.

To me, watching a model portfolio is sort of like playing a video game.  There is very little emotional involvement, but it can be entertaining.

When the PP has a bad day, it may help to check out the long term performance of TLT, VTI, IAU or GLD on Morningstar. They've always been "up" over time. Think more long term.

Craig,  Why don't you set up three or four model PP portfolios of static PP portfolio's on the site that folks who are trying hard not to look at their own portfolio's can look at on a daily basis?  Sort of like using a nicotine patch to stop smoking?  That way we can still come here to peak at the movement of the portfolios and to see what folks are posting!  This forum would then be proving some treatment for those of us to look at our own portfolios too much. 

TK3 wrote: Craig,   Why don't you set up three or four model PP portfolios of static PP portfolio's on the site that folks who are trying hard not to look at their own portfolio's can look at on a daily basis?   Sort of like using a nicotine patch to stop smoking?   That way we can still come here to peak at the movement of the portfolios and to see what folks are posting!   This forum would then be proving some treatment for those of us to look at our own portfolios too much.   

I have set something up that automatically publishes each day. It usually updates by the evening. It assumes annual rebalancing.
http://www.stableinvesting.com/p/recent ... mance.html