Gyroscopic Investing

Pointedstick wrote: If that's the way you feel, how about a low-volatility version of the PP? Say, 30% SHV, 30% IEI (shorter-term bonds), 30% SPLV (low-volatility stocks), 10% GLD.

I've been tracking something similar for over a year now. Ironically I have it named "Low Vol PP" in Google Finance. 40% SPLV, 25% IEI, 25% VTIP, 10% GLD.

VTIP is a 2.5 yr duration TIPS fund. I like it as a cash replacement, especially if you trim down your gold inflation protection.

Pointedstick wrote: That is simply the way of the PP

The Tao of PP!
Yeah, the whole point, I thought, was inner volatility (individual assets) but outer calm (whole package).

LC475 wrote:

buddtholomew wrote: I previously had an allocation to VGPMX and switched to GDX in retirement accounts (rollover) when management left and the prospectus changed. I am since down 30+% and rebalanced to 5% of portfolio recently as bands were breached. I now own an additional batch in taxable at 3% of total.

I dont want to sell down 30% and lock in losses.

Well, if you think the prospects for GDX are not good, by selling it while down 30% you are not locking in losses, don't look at it that way; rather, you are getting out in the nick of time, escaping greater losses.

Don't fall into the "Previous Investment Trap".  Would you buy GDX today if you didn't own any?  If you would not, then should you fail to sell GDX today?

If you think that this investment is just going to go down, down, down, and it serves no purpose for you, in fact causing you endless angst, then to sell today is to get out at the top.  The past is gone.  It doesn't exist any more.  If the graph is going to go down in the future, then this is the peak, the tip of the mountain, right now.  The perfect time to sell.  The price in the past is irrelevant -- that's gone now.

I can appreciate that point of view and ascribe to this philosophy in other aspects of my life. It is a behavioral trap to sell investments when they are low at the time when the equity premium is high.

Thank you for consolidating the details in a single post. I still need to work through the role I expect these investments to play in a globally diversified portfolio.

Budd, Just curious if you had the same feeling with stocks in 2008 as you currently have with gold. My own experience was that I had been in and out of stocks for 20 years or so at that point. They always made me uncomfortable and there was money to be made in bonds, cash and increasing home equity. Anyway, my accountant "advised" me in 2007 that I wasn't taking enough risk if I wanted to reach my retirement goals (never mind that I myself had not defined what those were). I put half of my IRA money in stocks and was pretty soon down 50% in that asset and had lost 25% of my retirement savings. Needless to say, I rued the day that I had taken someone's advice. Fortunately I eventually recovered those losses but that was a journey I never want to take again if I can help it. Just trying to figure out if you are only averse to losses in gold or if they hurt as much in other assets (for example, with the 50/40/10 portfolio you outlined a couple pages back, you would have been down quite a lot overall last month when stocks dropped sharply).

Good question. I rebalanced into both SCV, INT. Developed and SC as well as EM. I have no issues rebalancing in retirement accounts when a tolerance band is breached. I only started investing in 1-2008 so my immediate experience was a decline followed by the current recovery.

And you implemented a partial PP when gold was at its frothy heights, right? That indeed sounds painful but I would urge you to focus on the performance of your overall portfolio. With the asset mix you gave, you should have had some good years despite the drop in gold. And at 10% of your portfolio, you have way more exposure than most people do to gold in the event that we hit a patch when it performs brilliantly.

I personally find that I can get a decent picture of how well I am doing by going back and just looking at my year-end statements for the last ten years or so. Hopefully your overall picture since 2008 is positive.

buddtholomew wrote:

MachineGhost wrote:

buddtholomew wrote: Whatever! Worst mistake I ever made was finding out about this portfolio. I'm done here for a while. There's nothing magical about this portfolio and the sooner you realize that, the better off you will be.

Are you fracking serious?!!

Conventional BH wisdom and their perspective on gold has been accurate for me personally. I have not witnessed the value gold provides in a well diverisifed portfolio of stocks, bonds and cash. Sorry.

Just because you haven't personally experienced it yet doesn't mean it doesn't have any future use.  You'd do well to study the high inflation period from the late 1960's to 1980.  Gold saved your ass.  Literally.

buddtholomew wrote: I suppose that I fall into the crowd that believed rampant inflation (QE) would erode my savings and gold was the only means to protect my wealth. Some see the glass as half full - PP up YTD, but I see it as half empty - the lost opportunity of allocating a significant sum to an asset that has blown up in my face.

So what was wrong is that you fell prey to the conspiracy of misinformation that surrounds QEternity, not that the PP doesn't work as intended.

buddtholomew wrote: I can appreciate that point of view and ascribe to this philosophy in other aspects of my life. It is a behavioral trap to sell investments when they are low at the time when the equity premium is high.

The equity premium -- if it actually exists which I do not believe -- is near zero.

The reason you don't want to sell here is because we're near a capitulation low.  Sentiment is extremely bearish and that is when bottoms are formed.

MachineGhost wrote:

buddtholomew wrote: I can appreciate that point of view and ascribe to this philosophy in other aspects of my life. It is a behavioral trap to sell investments when they are low at the time when the equity premium is high.

The equity premium -- if it actually exists which I do not believe -- is near zero.

The reason you don't want to sell here is because we're near a capitulation low.  Sentiment is extremely bearish and that is when bottoms are formed.

Why would I follow your theory? Been hearing the same thing about GDX for over a year now. Also, how did your prediction on LTT's work out? Still waiting for equities and treasuries to fall at the same time? You know TLT is up 20%.

MachineGhost wrote:

buddtholomew wrote: I suppose that I fall into the crowd that believed rampant inflation (QE) would erode my savings and gold was the only means to protect my wealth. Some see the glass as half full - PP up YTD, but I see it as half empty - the lost opportunity of allocating a significant sum to an asset that has blown up in my face.

So what was wrong is that you fell prey to the conspiracy of misinformation that surrounds QEternity, not that the PP doesn't work as intended.

If I fell prey, I would have 100% invested in gold and not 10%. The PP works as intended...I just question the role of one of the assets in the portfolio and history is no comfort. The planets would have to align to see the type of increase experienced in the 70's.

buddtholomew wrote:

MachineGhost wrote:

buddtholomew wrote: I suppose that I fall into the crowd that believed rampant inflation (QE) would erode my savings and gold was the only means to protect my wealth. Some see the glass as half full - PP up YTD, but I see it as half empty - the lost opportunity of allocating a significant sum to an asset that has blown up in my face.

So what was wrong is that you fell prey to the conspiracy of misinformation that surrounds QEternity, not that the PP doesn't work as intended.

If I fell prey, I would have 100% invested in gold and not 10%. The PP works as intended...I just question the role of one of the assets in the portfolio and history is no comfort. The planets would have to align to see the type of increase experienced in the 70's.

I'm 5% in planetary alignment futures

dragoncar wrote: I'm 5% in planetary alignment futures

I've gone short on "planetary alignment futures" and long on "stupidity" and "government growth" - I'm thinking both of those are going to pay off.

Seriously - the PP seems to be doing just fine - I can even live with the slight draw-down last year as a small price to pay for sleeping well at night.  I don't lose much sleep over the fact that gold's gone down as the other assets have been making up for it, and likely gold will have its day again sometime down the road.  As a bit of a contrarian investor, I find that whatever's down now is usually a good buy for the future.

buddtholomew wrote: Why would I follow your theory? Been hearing the same thing about GDX for over a year now. Also, how did your prediction on LTT's work out? Still waiting for equities and treasuries to fall at the same time? You know TLT is up 20%.

You could look at sentiment.  Bottoms only happen when sentiment is extreme one way or another as that is when sellers or buyers dry up.

My prediction on LTT wasn't a prediction, it was a false buy signal from data corruption.  I later rebought in after the actual bottom.  No sweat.

buddtholomew wrote: If I fell prey, I would have 100% invested in gold and not 10%. The PP works as intended...I just question the role of one of the assets in the portfolio and history is no comfort. The planets would have to align to see the type of increase experienced in the 70's.

There was nothing extraordinary about the 70's other than wage contracts being linked to inflation.  All the Guns N' Butter inflation post-WWII was "baked into the cake" and would rear its ugly head eventually, which it did after JFK was elected.  Just as it will in the future due to QEternity, unless the Fed causes such a "Tight Money" recession so fast it will simply crush the PP.  Considering that Greenspan recently said he's glad he's not the head of the Fed right now because he simply wouldn't know what to do, I'm not betting on the Fed instead of gold.

Can someone help me out here?  Why do people keep referencing the decade after the legalization of gold again as the ringer that won't be repeated again and therefore gold is not a useful asset? I'm cherry picking here but roughly from March 05 to Oct 11 the gold to stock returns were literally a 100x better -- 453% to 4.4% (divs probably kick the latter up a bit). LT bonds chipped in but seems to me gold pretty much carried the PP during the time frame.

I actually believe the LT real return of gold is zero...but I'm pretty sure I will expire before infinity does and it seems to make sense to ride the surf until then. It also seems entirely possible that GLD could go back to the 40s over the next 3.5 years.

Kbg wrote: Can someone help me out here?  Why do people keep referencing the decade after the legalization of gold again as the ringer that won't be repeated again and therefore gold is not a useful asset? I'm cherry picking here but roughly from March 05 to Oct 11 the gold to stock returns were literally a 100x better -- 453% to 4.4% (divs probably kick the latter up a bit). LT bonds chipped in but seems to me gold pretty much carried the PP during the time frame.

I actually believe the LT real return of gold is zero...but I'm pretty sure I will expire before infinity does and it seems to make sense to ride the surf until then. It also seems entirely possible that GLD could go back to the 40s over the next 3.5 years.

It sounds like you've been listening to the Boglehead groupies?  They're only right about one thing: The gold-dollar peg being broken unleashed decades of pent up inflationary demand against the U.S. dollar that will unlikely to ever occur again in the future.  But what they ignore is the post-WWII period before the 1970's when inflation was building up where gold would have been protective if it was freely traded (or you illegally bought it overseas or whatever before 1963-1975).  They also ignore that the bank reserves that has been created by the Fed since the sub-prime crisis simply dwarfs everything else historically.  If the Fed does not reign it in during a robust economic expansion by paying interest on the reserves, raising short term rates, liquidity draining, etc.. then the 1970's may look like a walk in the park.  History rhymes, but never repeats exactly.  Yellen is a Dove and the last two remaining Hawks on the Fed board will be gone next year.

Correct you are, sir!  Gold doesn't ever change in real value; only what it is measured against does.  If people demand paper assets more, then gold will go down in nominal price.

MachineGhost wrote: It sounds like you've been listening to the Boglehead groupies? 
Correct you are, sir!  Gold doesn't ever change in real value; only what it is measured against does.  If people demand paper assets more, then gold will go down in nominal price.

Don't get me wrong...I am not a gold fan/bug per se, but I am a fan of it in this portfolio construct. See my post about volatility and yours ref the non-rebalanced PP.

Kbg wrote: Can someone help me out here?  Why do people keep referencing the decade after the legalization of gold again as the ringer that won't be repeated again and therefore gold is not a useful asset? I'm cherry picking here but roughly from March 05 to Oct 11 the gold to stock returns were literally a 100x better -- 453% to 4.4% (divs probably kick the latter up a bit). LT bonds chipped in but seems to me gold pretty much carried the PP during the time frame.

It's just an argument to use to throw out the data suggesting that gold actually works as a diversifier. It would be the same as me saying that the great stock returns from the past 40 years are irrelevant because the 1980s and 1990s skewed the results. Now of course the 1980s and 1990s do skew stock return results upwards a lot, but that doesn't mean you shouldn't own stocks. Likewise, the 1970s and 2000s skewed gold a lot as well, but again that was just gold's time in the sun.

I actually believe the LT real return of gold is zero...but I'm pretty sure I will expire before infinity does and it seems to make sense to ride the surf until then. It also seems entirely possible that GLD could go back to the 40s over the next 3.5 years.

Gold is an insurance asset. It's where you park you profits from the other assets to guard against inevitable currency problems. And I say inevitable because they always are. Heck, the U.S. stock market data most people rely on for "proof" of stock superiority is largely only around 80 years old. Prior to that the data is not as cut and dry and there is huge survivorship biases. Plus, if you look at other countries the stock market was never a sure thing at all. There have been wars, government failures, etc. that have made many other markets net losers long-term. Good stock returns aren't promised either.

Stock markets don't always go up and fiat currencies don't last very long historically speaking. If you look at the currencies in issue today most of them are probably less than 50 years old, and almost none are more than 100 years old. That's a lot of turnover. So better to hedge this a bit and own some gold which is a universally accepted currency at all times and in virtually all cultures.

Kbg wrote: Don't get me wrong...I am not a gold fan/bug per se, but I am a fan of it in this portfolio construct. See my post about volatility and yours ref the non-rebalanced PP.

I know what you're getting at and there can be a case made for having the risk contribution of the PP equalized, but the long-term historical track record of equal weighting in portfolios beat out all of the fancy financial engineering.  I feel its probably safest to increase the cash allocation if you cannot tolerate another -25% MaxDD (nominal).  There's very little risk that will go wrong other than increasing retirement shortfall risk.

MachineGhost wrote:

Kbg wrote: Don't get me wrong...I am not a gold fan/bug per se, but I am a fan of it in this portfolio construct. See my post about volatility and yours ref the non-rebalanced PP.

I know what you're getting at and there can be a case made for having the risk contribution of the PP equalized, but the long-term historical track record of equal weighting in portfolios beat out all of the fancy financial engineering.  I feel its probably safest to increase the cash allocation if you cannot tolerate another -25% MaxDD (nominal).  There's very little risk that will go wrong other than increasing retirement shortfall risk.

I agree via my backtesting. Using naive volatility weighting the performance is just not as good. My theory for it is that you end up over weighted on assets near the top of their cycle when volatility tends to be low and therefore over weight based on what is about to happen. The reverse is also true; under weight due to bearish market volatility just when the future is going to be brighter.

Gold up 19.4% at $1433.50 at 5:00 pm CST?...

Fat finger or Apocalypse Now?...

False alarm...

Gold Chart Error: Concerning the price spike, there was an issue with the data feed & live data is now correct.

http://www.goldseek.com/

It was interesting to gauge my reaction in the event that gold really did shoot up 20% overnight...  It made me realize how I glad I was to have a position in gold but also how I wish I had converted more of my gold ETFs to physical coins...  Sort of like waking up from a dream and realizing you had a second chance to make choices before it becomes a reality...

PP67 wrote: It was interesting to gauge my reaction in the event that gold really did shoot up 20% overnight...  It made me realize how I glad I was to have a position in gold but also how I wish I had converted more of my gold ETFs to physical coins...  Sort of like waking up from a dream and realizing you had a second chance to make choices before it becomes a reality...

I agree. It's good to get those fake wakeup calls from time to time. Hopefully, before the next major market weirdness, we all position ourselves so that we are comfortable that our portfolios are as bullet-proof as possible. I feel much like you, PP67, regarding gold. As as been expressed many times on this forum, it can be good to have some gold in ETFs in retirement accounts for rebalancing... but I don't really trust them to come through for me when it is gold's time to really carry the whole package.

The other possibility is, of course, that we are all still asleep and the price really did shoot up 20%!

Nonesense.