Gyroscopic Investing

Pointedstick wrote:

Marc wrote: You are right, looking on a yearly basis there are several years you can point to that showed LT bonds were needed.

However, looking on 3-5 year basis, to my knowledge, there are no periods where you needed the long term bonds to preserve your purchasing power compared to global stocks/gold/ST bonds portfolio.

Allow me to add to your knowledge. Here are the historical results of a portfolio consisting of 20% short-term bonds, 40% international stocks, and 40% gold. The 5-year rolling returns that would have reduced your purchasing power in real terms are shown in red. I calculated these real returns for both CPI as well as CPI+2, which I'm using as a placeholder for your estimated "true inflation" figures. If you believe your own numbers, the portfolio you're talking about had 13 years that experienced rolling 5-year negative real returns compared to 8 if you believe the U.S. government's CPI numbers (and only two and one for the PP, respectively). Needless to say, if CPI+2 is even too low, this portfolio becomes even worse…

Thanks for pointing that out. So I was wrong, kicking LT bonds out does make you lose over a 5 year horizon, on a regular basis.

I appreciate you confronted me with the numbers. 

Back to the drawing board.

LC475 wrote:

Marc wrote: I estimate  that even during the great depression in the US 1930-1940 where interest rates also went down from 4% to 2% a portfolio with global stocks and gold would have been sufficient. Global stocks taking a hit, gold going up. 

But we must always ask: why?  There is no reason for gold to go up during a deflationary depression, is there?  Can you explain to me why gold absolutely must go up in value in every deflationary depression?  I do not think there is any such reason.

I can explain to you why gold absolutely must go up in times of high and accelerating inflation.  I can explain why bonds must go up in times of deflation or decelerating inflation.  But there is no causal link between gold and depressions, between gold and "bad times".  What if during the bad times, people do not want to buy as much gold?  Why would they?  Is there something about gold that says during bad times people absolutely must increase their demand for it?  I do not think so.

Furthermore, the reason for gold going up during the 1930s in the US is very, very clear and straightforward.  We do not need to speculate about it.  The Federal Government changed the set price of gold.  That's it.  It was not the depression that made the price go up.

Two things come to mind, although I wouldn't put them in the "absolute guarantee" category.

1. Gold is money...in deflation, people may want to hold tightly onto their money because they don't know how they might get more in future.

2. Anticipation of another "currency event", which is what I will classify FDR revaluing gold during the last depression.

Desert wrote:

Marc wrote:
Thanks for pointing that out. So I was wrong, kicking LT bonds out does make you lose over a 5 year horizon, on a regular basis.

I appreciate you confronted me with the numbers. 

Back to the drawing board.

This is one of the very few times I've seen anyone admit he is wrong on the internet.  I appreciate your honesty here Marc.

Thanks so much for noticing Desert link

LC475 wrote:

But we must always ask: why?  There is no reason for gold to go up during a deflationary depression, is there?  Can you explain to me why gold absolutely must go up in value in every deflationary depression?  I do not think there is any such reason.[/quote]

I do not claim tis is the definite answer, but there is one thing in common during hyperinflation and deflation: the people become uncertain about the future. This feeling of uncertainty is combatted through the purchase of assets that have proven track records.
It is said that the price of gold has an inverse relation to the trust the people have in their government. To which I would add that the trust in govt has a direct relation to the feeling of a predictable future.

I also think that the POG is mostly set by big money, not the average investor. Big money might perceive the future differently than the average investor.

Pointedstick wrote:Personally, I find that Harry Browne's prescription to speculate with your business and invest your money conservatively fits me much better.

That is what appealed to me as wel. Especially when you hear HB say it in his own words on his broadcasts.

I am wondering though if the next 100 years will be like the last 100 years. I suspect the previous 100 years are an aberration, and that thus investing for security might be the wrong thing to do if this is the only thing we do. Living a live that is in itself secure towards the future might be the better option.

Have you seen this: http://www.peakprosperity.com/crashcourse ?
What do you think of this?

Desert wrote:

Marc wrote:
Thanks for pointing that out. So I was wrong, kicking LT bonds out does make you lose over a 5 year horizon, on a regular basis.

I appreciate you confronted me with the numbers. 

Back to the drawing board.

This is one of the very few times I've seen anyone admit he is wrong on the internet.  I appreciate your honesty here Marc.

Nobody knows what happens in the next 5 years, it can be wrong to not hold LTT but it can also be right. But the chances of being wrong holding LTT are high. Arguing with historic returns where yields where much higher is nonsense. All these backtests are for your brain to calm it down, but its bullshit to do backtests when you invest your money for the future. Its like looking for the best mutual fund of the last 3 years. And I think everybody here will agree that that doesn`t work.

frommi wrote: Nobody knows what happens in the next 5 years, it can be wrong to not hold LTT but it can also be right. But the chances of being wrong holding LTT are high. Arguing with historic returns where yields where much higher is nonsense. All these backtests are for your brain to calm it down, but its bullshit to do backtests when you invest your money for the future. Its like looking for the best mutual fund of the last 3 years. And I think everybody here will agree that that doesn`t work.

I think everybody here agrees its bullshit to use backtests to attempt to say anything about future returns.  But that is not why Browne did extensive backtesting of his concepts, and not the point folks here are making.  Backtests can't prove anything will always be the way its been in the past, but they can certainly prove some assertion is wrong. 

Assertion: looking at 5 year intervals, stocks+gold+cash is sufficient to keep up with inflation (i.e. long term bonds are not needed)

Backtesting shows this assertion is wrong for 13 (or 8, depending on how you want to count inflation) rolling 5 year periods between 1972 and 2010, i.e. wrong 13 (or 8 ) out of 38 times.  It's like MythBusters.  This myth is busted.

You say "the chances of being wrong holding LTT are high".  Why do you say this?  LTT's current price reflects the existing market consensus, i.e. in the overall market at the current price those willing to bet it will go down are exactly balanced by those willing to bet it will go up.  By saying the chances LTT will go down are high, you're saying you know better than the overall market.  Let's just say, I doubt it. 

rickb wrote: I think everybody here agrees its bullshit to use backtests to attempt to say anything about future returns.  But that is not why Browne did extensive backtesting of his concepts, and not the point folks here are making.  Backtests can't prove anything will always be the way its been in the past, but they can certainly prove some assertion is wrong. 

Assertion: looking at 5 year intervals, stocks+gold+cash is sufficient to keep up with inflation (i.e. long term bonds are not needed)

Backtesting shows this assertion is wrong for 13 (or 8, depending on how you want to count inflation) rolling 5 year periods between 1972 and 2010, i.e. wrong 13 (or 8 ) out of 38 times.  It's like MythBusters.  This myth is busted.

You say "the chances of being wrong holding LTT are high".  Why do you say this?  LTT's current price reflects the existing market consensus, i.e. in the overall market at the current price those willing to bet it will go down are exactly balanced by those willing to bet it will go up.  By saying the chances LTT will go down are high, you're saying you know better than the overall market.  Let's just say, I doubt it.

Backtest a 5-year period starting with 10 year treasuries at 2.5%, because that is the situation today. Any other comparison is comparing apples with oranges.
The chances are higher simply because you have more to loose in LTT as to gain. When the stock market crashes (and this is the reason you hold the LTTs) your hedging win in LTTs is much smaller than in 2008 or 2011. Its even possible that you will loose in LTTs when equities suffer, when the reason the stock markets tanks is increasing yields or ending QE.
In the last 130 years 10-year treasury yields were never long under 2%.  When you don`t trust me, look here: http://www.multpl.com/interest-rate/

And at last is the fact that in the last 10 years asset allocation strategies have become the new fad in investing. In every university you learn that shit (and that markets are allways efficient). When everybody uses the same strategies it becomes fragil and blows up. We have seen how destructive that can be in May and June, but in the next yield spike everybody will run for the same door and blood will spill out of LTTs. (sorry for that analogy  )

murphy_p_t wrote: Two things come to mind, although I wouldn't put them in the "absolute guarantee" category.

1. Gold is money...in deflation, people may want to hold tightly onto their money because they don't know how they might get more in future.

This statement is absolutely true.  However, it is false, because by "deflation" we do not mean "a decrease in the price of things in terms of gold".  We mean "a decrease in the price of things in terms of dollars."  Could we have a gold deflation?  Yes.  There could be a big decrease in the supply of gold somehow.  Fort Knox sinks into the center of the Earth.  But that is not what Harry Browne is talking about when he says deflation.  He is meaning dollar deflation.

2. Anticipation of another "currency event", which is what I will classify FDR revaluing gold during the last depression.

Now that is a legitimate plus-factor for gold in a deflationary depression.  Or, Rien put it broader: people become uncertain about the future, and/or don't trust their gov't.  General fear and uncertainty, in other words, whether of a currency event or something else, can be a reason for people to buy gold.

However, here's a minus-factor: in deflation it takes fewer dollars to buy the same amount of products, because the dollars are worth more.  That affects all products, including gold.  It now takes fewer dollars to buy the same amount of gold that you bought in the past.  Fewer dollars to buy X, means, by definition, the price of X is now lower.  X has gone down.  Going down is bad for investments.  We want them to go up.

So, there are both plus-factors and minus-factors.  I feel like my minus-factor is stronger and more directly linked to the phenomenon of deflation itself.  If deflation is coupled with a panicky or uncertain situation, certainly your factor could come into play then, and could be much stronger.  But deflation is not necessarily accompanied by panic.  There was mild and consistent deflation for about 100 years in the 1800s.  This deflation did not make people panic.  But it would have been consistently and mildly bad for gold, except for gold equaled dollars back then.

Rien wrote: Have you seen this: http://www.peakprosperity.com/crashcourse ?
What do you think of this?

Looks like he's got a newsletter, only $30.00/mo, which is great considering exponential debt growth will soon render the dollar worthless.  What a saint. 

Lowe wrote:

Rien wrote: Have you seen this: http://www.peakprosperity.com/crashcourse ?
What do you think of this?

Looks like he's got a newsletter, only $30.00/mo, which is great considering exponential debt growth will soon render the dollar worthless.  What a saint. 

But what do you think of the material in the crashcourse?

frommi wrote: (and that markets are always efficient)

Always efficient at what?

How about an equal split between bonds, global stocks and gold? I'm personally starting to lean more towards that. It is still PP-like. By bonds I mean the total bond market that can be implemented using VBMFX, BND or AGG.

PointedStick, when you have time you can spare, can you please let us know what the worst 3 or 5 years periods are?

thanks

jay wrote: How about an equal split between bonds, global stocks and gold? I'm personally starting to lean more towards that. It is still PP-like. By bonds I mean the total bond market that can be implemented using VBMFX, BND or AGG.

PointedStick, when you have time you can spare, can you please let us know what the worst 3 or 5 years periods are?

thanks

[shadow=red,left]UPDATE: this post is slightly inaccurate since my backtest did not include enough US stocks to fully approximate a global stock fund like VT. The gist is still correct, but updated numbers and graphs are available at[/shadow] http://gyroscopicinvesting.com/forum/pe ... /#msg82590

No problem, now that I've got my spreadsheet, it's pretty easy to plug in new numbers.

That allocation isn't too bad. Historically it's beaten the PP by one percent or so, though it's had a few more periods of negative returns:

MangoMan wrote: PS, are those results using international stocks or global [US + international]?

My data source doesn't actually have global stocks, so I try to simulate it. But you're making me realize that my simulation wasn't as good of an approximation of VT as it should have been because it didn't include enough US stocks. I've switched this simulation to a blend of half VEU and half VTI, which is a pretty good approximation of VT (give it a shot at http://www.etfreplay.com/combine.aspx).

With this change, the global stocks/US bonds/gold portfolio looks a little better in terms of rolling negative real return periods, but a little worse in terms of average real return:

Here's a more accurate rendition of Marc's proposed 20% st treasury 40% world stocks 40% gold portfolio using world stocks rather than international stocks:



Compared to the original numbers in my first chart, we see the same difference as the global stocks/bonds/gold portfolio: the number of rolling 5-year negative real return periods is lower, but so is the average real return.

Thanks PS. I really appreciate the time you're putting into this. Out of curiosity, what re-balancing method are you using? To be more like the 15/35 original PP method, I supposed a 3-way split would have to use a 20/46 band.

Marc: what do you think of this equal split?

jay wrote: Thanks PS. I really appreciate the time you're putting into this. Out of curiosity, what re-balancing method are you using? To be more like the 15/35 original PP method, I supposed a 3-way split would have to use a 20/46 band.

Marc: what do you think of this equal split?

The data source I'm using is rather primitive and doesn't actually do rebalancing. However as Kshartle has showed, rebalancing is usually a wash; sometimes it improves returns, and sometimes is detracts from them. What it does is return you to the original risk profile, so it's possible that my data overstates the drawdowns in the absence of rebalancing.

Pointedstick wrote:
The data source I'm using is rather primitive and doesn't actually do rebalancing.

Are you effectively rebalancing annually, i.e. computing the annual return as (for example) 20% of the ST return plus 40% of the world stock return plus 40% of the gold return?

rickb wrote:

Pointedstick wrote:
The data source I'm using is rather primitive and doesn't actually do rebalancing.

Are you effectively rebalancing annually, i.e. computing the annual return as (for example) 20% of the ST return plus 40% of the world stock return plus 40% of the gold return?

Oh yes, you're right! In fact they even say they rebalance annually at http://www.riskcog.com/

jay wrote: Thanks PS. I really appreciate the time you're putting into this. Out of curiosity, what re-balancing method are you using? To be more like the 15/35 original PP method, I supposed a 3-way split would have to use a 20/46 band.

Marc: what do you think of this equal split?

Thanks for asking Jay.

I'm reverting back to the idea to use only global stocks and gold. Indeed volatility is a lot higher than the traditional PP, and indeed over a 5 year period it happens a lot that you have lost purchasing power in contrast to the traditional PP where this never happened. However, the performance always comes back and over a period of 10y the PP2 outperforms the PP4 most of the time. So it depends on your time frame, if you need the money next year or in 5 years, you want the traditional pp, but if you only need it in 10 years, and you are ok with the higher volatility in exchange for higher returns, than I think a PP2 is the best choice.

Here the advantages I see for the PP2, 50% global stocks/50% physical gold:

• Hard assets only
• Truly global, when you move country you can keep the same pp
• Long term (10 years) it outperforms the traditional PP in most cases by on average 1% per year.
• Much higher returns if serious economic crises hits that destroys bonds/cash such as gov default or hyperinflation
• Simpler, only 2 assets

The only drawback is much higher volatility.

I prefer it though and have sold half my long term bonds, and will liquidate the rest as well.

Marc wrote: Here the advantages I see for the PP2, 50% global stocks/50% physical gold:

• Hard assets only
• Truly global, when you move country you can keep the same pp
• Higher returns in the long term in all economic climates (10y) (not 100% sure about this)
• Much higher returns if serious economic crises hits that destroys bonds/cash such as gov default or hyperinflation
• Simpler, only 2 assets

I'm not sure I agree that stocks are a "hard asset"; certainly not like physical gold coins you can touch. Your other points seem right to me.

Other drawbacks I can see:

• A lower income stream
• More vulnerability to bad decision-making if you have an emotional tendency to sell during drawdowns
• You have to have additional cash reserves outside your portfolio if you want to maintain an emergency fund or the kind of "dry powder" necessary to pounce on really good deals like a crazy stock crash that has everyone running around like headless chickens

Still, it's not a bad portfolio at all. Nice and simple, good returns, better risk/reward characteristics than trying to offset stocks with bonds alone. As long as you have 5 or so years of cash living expenses, I'd say it's not a bad deal.

Pointedstick wrote:

Marc wrote: Here the advantages I see for the PP2, 50% global stocks/50% physical gold:

• Hard assets only
• Truly global, when you move country you can keep the same pp
• Higher returns in the long term in all economic climates (10y) (not 100% sure about this)
• Much higher returns if serious economic crises hits that destroys bonds/cash such as gov default or hyperinflation
• Simpler, only 2 assets

I'm not sure I agree that stocks are a "hard asset"; certainly not like physical gold coins you can touch. Your other points seem right to me.

Other drawbacks I can see:

• A lower income stream
• More vulnerability to bad decision-making if you have an emotional tendency to sell during drawdowns
• You have to have additional cash reserves outside your portfolio if you want to maintain an emergency fund or the kind of "dry powder" necessary to pounce on really good deals like a crazy stock crash that has everyone running around like headless chickens

Still, it's not a bad portfolio at all. Nice and simple, good returns, better risk/reward characteristics than trying to offset stocks with bonds alone. As long as you have 5 or so years of cash living expenses, I'd say it's not a bad deal.

Thanks. You are right, stocks are not considered hard assets according to wikipedia.

I mean assets that cannot be inflated away. The money that the gov prints is directly stolen from those that hold cash bills. It is not stolen from those that hold stocks or gold. Because more cash is in circulation the value of fiat goes down. Those that have lend out a certain amount of fiat (bond holders, depositors) are also being hurt because they get less back than they gave. And those that need to repay the contracts are benefiting (the state, mortgage holders) since they need to pay back less than they got.

I realize it's gold bug talk, but it is true. Gold bugs will shunn stocks though, but in the PP2 stocks are equally valued since the goal is preservation of purchasing power in all economic climates, in the long term (10 years). I hope I can produce the backtests that proof this. 


A lower income stream is only true if you count interests as income stream but capital gains not. I disagree with this approach. Money coming from interests buys the same as money coming from capital gain.  Therefore I see both as income streams.

You are right though that if you have difficulty with volatility and fear and greed take you over quickly, this portfolio is not for you, the ride will be more volatile and indeed if you don't balance properly even more so.

Your last point is a good critique. Since this PP2 can be down still after 5 years, you will have a problem if you need cash for an emergency or if you want to speculate and buy cheap assets that pass by. Good that you make me aware of this.  hmmm... Maybe cash should be part of it after all?

Stability of purchasing power has great value, the problem with using cash to get it is that it is so fucking expensive these days. 0% interest, high credit risk, high inflation, it's a joke really. Would it not be possible to get more stability with a 'hard' asset that is liquid?

Or maybe gold should not be 50% but only 33% and stocks 66%? Probably will be less volatile to the downside since very long term gold loses purchasing power vs stocks.


Ps: your bitcoin donation just increased by 50% in value. I gave you 0.1 btc 7 days ago, worth $20, now worth $30. Isn't it amazing?  

Marc wrote:hmmm... Maybe cash should be part of it after all?

I think we're really zeroing in on a great portfolio.  The only thing I'd suggest is adding long bonds back in, just as a hedge against the possibility that your predictions about the future don't come true.  Not to go nuts with it, just 25% or so.

So we're at 25% stocks, 25% gold, 25% LTTs, and 25% cash.  Great!

Xan wrote:

Marc wrote:hmmm... Maybe cash should be part of it after all?

I think we're really zeroing in on a great portfolio.  The only thing I'd suggest is adding long bonds back in, just as a hedge against the possibility that your predictions about the future don't come true.  Not to go nuts with it, just 25% or so.

So we're at 25% stocks, 25% gold, 25% LTTs, and 25% cash.  Great!

lol

meh, no thanks.

been there, done that.


There are 2 ways to get safety in investing.

By hedging your bets or diversifying your bets.

Hedging your bets means that when you win here, you lose there per definition.

Diversifying your bets means, when you win here, you may also win there, or you may lose there.


I think the PP offers the most safety but by using hedging exclusively it is also at the expense of growth.

I like to find safety by placing bets on many different great investments. A portfolio consisting of many different undervalued assets can be - almost - as safe as a pp I think, but have a - much higher - chance of going up in purchasing power achieving not 7% but 15% per year. And even if you are unlucky and many of them do not work out, you can still achieve that 7%. (That's how Ray Dalio has build the biggest hedge fund in the world making greater profits/creating more value than some of the biggest companies in the world.)

Not easy to accomplish for the individual investor, I agree, but the only way to achieve safety and growth together I think.