Gyroscopic Investing

Posted: **Fri Mar 06, 2020 6:29 pm**

As I continue my research into an ultimate Permanent Portfolio implementation.....

I had consistently stated that I was NOT going to have a Variable Portfolio....that I had no needs to attempt to outperform the Permanent Portfolio nor did I (after all this research is finally completed) want to spend any more time researching any other forms of investing.

However, most of the discussion I've seen regarding the Permanent Portfolio seems to revolve around the percentage allocations 25 / 25 / 25 / 25 with some upping or decrease among those four or subtracting one of the four or adding another investment or some form of substitution. Not seen as much discussion regarding absolute dollar amounts.

For me when you are analyzing anything, whether it be $$$$ related or, even baseball statistics, you just don't live and die with the percentages. You need to see how they fit in context with the absolute numbers.

I know that many here are familiar with William Bernstein. He's in my top 3 of personal finance writers.

He ingrained in me the phrase of "winning the game". Why continue to take on unneeded if you have won the game.

That leads me to perhaps creating a Variable Portfolio but for the opposite reason than what seems typical for creating a Variable Potrfolio.

The typical seems to be an attempt to enhance while mine would be full protection mode.

That further leads me to TIPS and am now doing my due diligence regarding them by reading anything I can find on them in this forum.

I'd not be using them in place of any of the four Permanent Portfolio components but, instead, to "take some off the table". I'm willing to accept less returns than the Permanent Portfolio would probably provide.

And, I've read all the arguments that you cannot trust the government in regards to determining the CPI and how TIPS would not perform in terms of hyper-inflation.

But don't we also have to take into account what are the possibilities of scenarios such as hyper-inflation?

Now...finally getting to the title of this topic...

I've read many times in the forum how I Bonds are superior to TIPS. And, they well may be in every single aspect except for one.

If one has an established portfolio of a certain size that is going to be transformed 80% to a Permanent Portfolio and 20% to either I Bonds or TIPS....it is possible with TIPS but not possible with I Bonds. Is it not true that as a single person with no trusts, I am limited to buying $15,000 of I Bonds in 2020 ($10,000 direct purchase and rig my 2019 tax return to give a $5,000 refund which I then dedicate to I Bonds purchases)? Yet my TIPS purchases are unlimited.

Every time I read the I Bonds / TIPS comparisons here I keep reading these statements that the I Bonds are superior but the I Bonds limit versus TIPS unlimited does not seem to get mentioned as a dramatic and, in some cases, extreme difference between the two.

Vinny

Posted: **Fri Mar 06, 2020 6:36 pm**

I'm not an expert in TIPS vs IBonds so I will leave that to someone else. But you do mention implementing this as a defensive VP. Are you sure that this is actually safer than just being in the PP? Or does it just feel safer? What metrics do you personally care to use to define safety (max drawdown, time to recover, safe withdrawal rate, etc)? Can both approaches be quantified in any way with those metrics? Do you have a need for more liquidity than 25% cash? How many years worth of expenses is your 25% cash bucket? At least some food for thought.

Posted: **Fri Mar 06, 2020 7:00 pm**

pmward wrote: ↑Fri Mar 06, 2020 6:36 pm I'm not an expert in TIPS vs IBonds so I will leave that to someone else. But you do mention implementing this as a defensive VP. Are you sure that this is actually safer than just being in the PP? Or does it just feel safer? What metrics do you personally care to use to define safety (max drawdown, time to recover, safe withdrawal rate, etc)? Can both approaches be quantified in any way with those metrics? Do you have a need for more liquidity than 25% cash? How many years worth of expenses is your 25% cash bucket? At least some food for thought.

Thanks for the quick response and the excellent questions.

I would be happy with TIPS if I put $100,000 into them today and I had exactly $100,000 in today's dollars of purchasing power ten years from now. In other works, no real return. But also no real loss of purchasing power. Tex and Craig wrote their book in 2013? TIPS had only been around for 16 years. Now they've been around for 23 years, nearly 42% more time. Some would say that they still have not been tested by wild hyper-inflation? I lived through all the inflation from the 60s until it abated sometime in the 80s. Will I encounter another period like that for the rest of my lifetime? Will I experience an even worse one? And, will TIPS completely fail or have severe failure during either of those events?

Vinny

Posted: **Fri Mar 06, 2020 7:20 pm**

MangoMan wrote: ↑Fri Mar 06, 2020 7:07 pm I don't see the point of either if you are doing a PP. You get inflation protection from stocks and partly gold.

Don't you get the inflation protection but with more risks than you would with TIPS?

There were some threads on risk parity a few years ago and Machine Ghost posted some comparisons. If you have 'won the game', you might want to consider a modified PP allocation that is more risk parity aligned. Something along the lines of 35% stocks, 50% LTT and 15% gold, with no cash.

But aren't you taking out the most riskless assets, and, one if you had all in a short-term treasury fund would be essentially paying the rate of inflation?

Although do I have to quickly take that back for the time period after the 2008 / 2009 financial crisis when there was almost no return from short-term treasuries while there was some inflation, though quite low?

Posted: **Fri Mar 06, 2020 7:56 pm**

yankees60 wrote: ↑Fri Mar 06, 2020 7:00 pm
Thanks for the quick response and the excellent questions.

I would be happy with TIPS if I put $100,000 into them today and I had exactly $100,000 in today's dollars of purchasing power ten years from now. In other works, no real return. But also no real loss of purchasing power. Tex and Craig wrote their book in 2013? TIPS had only been around for 16 years. Now they've been around for 23 years, nearly 42% more time. Some would say that they still have not been tested by wild hyper-inflation? I lived through all the inflation from the 60s until it abated sometime in the 80s. Will I encounter another period like that for the rest of my lifetime? Will I experience an even worse one? And, will TIPS completely fail or have severe failure during either of those events?

Vinny

I'm not asking just about TIPS. I'm thinking of it from the portfolio as a whole. If you increase bond holdings you could expose yourself to some serious right tail risk that you might not realize. It's not the individual assets that matter so much as the whole mixture. For instance, I view the GB as a PP with a 20% VP in SCV. So whatever you do, I would advise you to look at the portfolio as a whole in the same way. But first, you have to quantify what matters to you for your portfolio as a whole. I mean, if you're worried about inflation primarily, it helps to keep your cash as short as possible, something like 3 month bills. The shorter the better if you want to reduce risk of rising rates as much as possible. I would think that and gold would have 50% of your portfolio hedging an inflationary shock. You could even split your cash if that helps you sleep at night, something like half 3 month bills and half 2-3 year TIPS.

Posted: **Fri Mar 06, 2020 8:47 pm**

pmward wrote: ↑Fri Mar 06, 2020 7:56 pm
yankees60 wrote: ↑Fri Mar 06, 2020 7:00 pm
Thanks for the quick response and the excellent questions.

I would be happy with TIPS if I put $100,000 into them today and I had exactly $100,000 in today's dollars of purchasing power ten years from now. In other works, no real return. But also no real loss of purchasing power. Tex and Craig wrote their book in 2013? TIPS had only been around for 16 years. Now they've been around for 23 years, nearly 42% more time. Some would say that they still have not been tested by wild hyper-inflation? I lived through all the inflation from the 60s until it abated sometime in the 80s. Will I encounter another period like that for the rest of my lifetime? Will I experience an even worse one? And, will TIPS completely fail or have severe failure during either of those events?

Vinny
I'm not asking just about TIPS. I'm thinking of it from the portfolio as a whole. If you increase bond holdings you could expose yourself to some serious right tail risk that you might not realize. It's not the individual assets that matter so much as the whole mixture. For instance, I view the GB as a PP with a 20% VP in SCV. So whatever you do, I would advise you to look at the portfolio as a whole in the same way. But first, you have to quantify what matters to you for your portfolio as a whole. I mean, if you're worried about inflation primarily, it helps to keep your cash as short as possible, something like 3 month bills. The shorter the better if you want to reduce risk of rising rates as much as possible. I would think that and gold would have 50% of your portfolio hedging an inflationary shock. You could even split your cash if that helps you sleep at night, something like half 3 month bills and half 2-3 year TIPS.

In the current portfolio I set up in January 2003 with all new investments going to Vanguard Prime Money Market from since then it's evolved to a 60% fixed (all the money market investments plus an initial investment in Vanguard short-term investment grade bond fund) and 40% equity. It's somewhat of a barbell. Little risk on one end with high risk on the other end.

Hence the obvious attraction to the Permanent Portfolio.

But let me put out some numbers to clarify my thinking.

Let's say I have $200,000 to invest in total. And, with Social Security and other sources that is enough to take me through the end of my life.

Everyone seems to discuss investing the $200,000 in the classic Permanent Portfolio without regard to how much return that $200,000 needs to generate.

And, let's say even $160,000 is going to be enough with the other sources to "win the game".

I'd then do $160,000 in the Permanent Portfolio which I'd viewed as more risky than TIPS but potential more reward.

I'd view the $40,000 in the TIPS as providing, in Bernstein's words, a solid plank that is just going to keep pace--little risk, little (real) return.

I'm at a point in my financial life in which I should be emphasizing safety over return. I have a lot to lose by taking too much risk in search of return and not a need for a lot of (real) return.

It's the product of living a fairly frugal life and way below my means.

Vinny

Vinny

Posted: **Fri Mar 06, 2020 10:00 pm**

yankees60 wrote: ↑Fri Mar 06, 2020 8:47 pm
Vinny

Vinny

Now he's doing it twice! :-)

Posted: **Sat Mar 07, 2020 7:55 am**

yankees60 wrote: ↑Fri Mar 06, 2020 8:47 pm
In the current portfolio I set up in January 2003 with all new investments going to Vanguard Prime Money Market from since then it's evolved to a 60% fixed (all the money market investments plus an initial investment in Vanguard short-term investment grade bond fund) and 40% equity. It's somewhat of a barbell. Little risk on one end with high risk on the other end.

Hence the obvious attraction to the Permanent Portfolio.

But let me put out some numbers to clarify my thinking.

Let's say I have $200,000 to invest in total. And, with Social Security and other sources that is enough to take me through the end of my life.

Everyone seems to discuss investing the $200,000 in the classic Permanent Portfolio without regard to how much return that $200,000 needs to generate.

And, let's say even $160,000 is going to be enough with the other sources to "win the game".

I'd then do $160,000 in the Permanent Portfolio which I'd viewed as more risky than TIPS but potential more reward.

I'd view the $40,000 in the TIPS as providing, in Bernstein's words, a solid plank that is just going to keep pace--little risk, little (real) return.

I'm at a point in my financial life in which I should be emphasizing safety over return. I have a lot to lose by taking too much risk in search of return and not a need for a lot of (real) return.

It's the product of living a fairly frugal life and way below my means.

Vinny

Vinny

The unknown can always happen. You don't really know how much you're going to need for the rest of your life. What if medical emergencies come up? What if you need to go to assisted living? What if you live to 120? The unknown unknowns are where the risks truly lie. The black swans. And you do not just need to think about life black swans, but financial ones. Lets say you put that 80% in a permanent portfolio and 20% in TIPS (which is what you're describing above). Well what is going on right now? A deflation. You traded some deflation protection for inflation protection, which would not be helping as much. I mean the PP by itself only averages 2-3% above inflation over the long term. You're reducing that further. And since it is an average, one must remember it doesn't do 2-3% above every year... there could even be a string of years it averages under. And while TIPS would keep up with inflation (presumably, though is negative TIPS in our future???), they are still such a low return investment that they dampen the PP's return and increase the odds that the portfolio as a whole does not keep up with inflation.

One other belief I kind of want to bring into question a bit, is the belief that bonds are low risk. You stated specifically "Little risk on one end with high risk on the other end." Are bonds, TIPS, money markets, etc truly less risky than stocks? It depends on the metrics you look at. Also, what happens to those risks when bonds get into this insane low yield level? What happens to the risks when/if bond yields go negative? What is safer in that environment, a 100% PP or an 80% PP and 20% TIPS?

You can see on this portfoliovisualizer a comparison on the PP and an 80% PP / 20% TIPS portfolio going back to 2001. You can see both pace each other well.... up until the financial crisis, then they start to diverge quite a bit, with the TIPS portfolio obviously lagging big time in the current low interest rate deflationary environment: https://www.portfoliovisualizer.com/bac ... tion5_2=20

Now let's tighten up the date range a bit to highlight this discrepancy a bit more. Let's go from 2012 to today. Both have almost an identical max drawdown... but the one with TIPS had .6% less CAGR per year, and only a 4.54% CAGR, which is only ~2% return above inflation. Since the drawdowns are the same, but one returned more above inflation, which one of these portfolios seems more risky than the other in our current market environment? https://www.portfoliovisualizer.com/bac ... tion5_2=20

Mind you we are limited to 2001 in our testing. But in that time period in the best of times it kept pace with the PP (at which point, what was even the point of the added complexity?) and in the worst of times (and the current prevailing trend) it has underperformed by quite a significant margin. Given that knowledge, is there really a point in the added complexity? Or is it just an illusion of added safety that is really shooting yourself in the foot?

Posted: **Sun Mar 08, 2020 10:50 am**

Vinny: I would not touch TIPS right now with a 10 foot pole. Buy I Bonds if you want some inflation protection with your cash.

The reason is that TIPS can have a negative return if we end up in a deflation. I bond interest rates can drop to zero, but not below.

If you are looking to lock up some cash and get some interest out of it in return, I would look at bank CDs that are still offering reasonable rates - before those rates go down, if it's not too late already. However, why do you want to lock up your cash? What you want now is dry powder, as much of it as possible. If things continue to go the way they're going, in another month or so we will all be rebalancing into stocks, and we'll need that cash. My advice is to put it in a Treasury-only money market, sit tight, and wait.

Also - if you haven't already, I would be sure to open Treasury-only MM's everywhere you might need them. They were either closed to new investors or had very high initial investment minimums in the aftermath of 2008. That could happen again.

Posted: **Sun Mar 08, 2020 6:06 pm**

sophie wrote: ↑Sun Mar 08, 2020 10:50 am Vinny: I would not touch TIPS right now with a 10 foot pole. Buy I Bonds if you want some inflation protection with your cash.

The reason is that TIPS can have a negative return if we end up in a deflation. I bond interest rates can drop to zero, but not below.

If you are looking to lock up some cash and get some interest out of it in return, I would look at bank CDs that are still offering reasonable rates - before those rates go down, if it's not too late already. However, why do you want to lock up your cash? What you want now is dry powder, as much of it as possible. If things continue to go the way they're going, in another month or so we will all be rebalancing into stocks, and we'll need that cash. My advice is to put it in a Treasury-only money market, sit tight, and wait.

Also - if you haven't already, I would be sure to open Treasury-only MM's everywhere you might need them. They were either closed to new investors or had very high initial investment minimums in the aftermath of 2008. That could happen again.

Sophie: the problem with the I Bonds is the dollar limitation. As a single person I'm limited to $15,000 to invest in all of 2020 unless I create some trusts?

When I FINALLY go Permanent Portfolio it will be pure in every almost every way. When it comes to the cash portion it will be ONLY treasuries - either via a money market fund that is 100% (unlike the Vanguard one which does not maintain even being close to 100%) or, more likely, buying individual bonds myself. Therefore NO bank CDs.

When I go to Permanent Portfolio I'll be going 25% stocks. And, last I looked (a while ago) I was already at 40% stocks. That means, unless stock have even greater declines when I go Permanent Portfolio I'm going to need to be SELLING stock rather than BUYING it.

Finally, I'm looking at the TIPS as being my Variable Portfolio.

If I had $200,000 and was going to dedicate 80% / $160,000 to the Permanent Portfolio and the remaining 20% / $40,000 to a Variable Portfolio, I could not do the entire $40,000 with I Bonds. Where would the other $25,000 go? I can do the entire $25,000 with TIPS.

And, if I'm transforming a current portfolio of greater than $200,000 into a Permanent Portfolio and a Variable Portfolio that $25,000 I Bond gap, of course, grows even larger.

Vinny

Posted: **Mon Mar 09, 2020 11:28 am**

+1 on Sophie's comment.

You may not be able to fully implement this year, but with planning you can get ibonds up to 40K in a couple of years...4 at the max.

Posted: **Mon Mar 09, 2020 7:37 pm**

Kbg wrote: ↑Mon Mar 09, 2020 11:28 am +1 on Sophie's comment.

You may not be able to fully implement this year, but with planning you can get ibonds up to 40K in a couple of years...4 at the max.

However, it still is not like doing a Golden Butterfly wherein you can immediately do 20 / 20 / 20 / 20 on the traditional four and then 20 say on small cap value.

If one had $400,000 to invest and wanted to immediately implement it that would be mean $80,000 to the small cap value. And, to be told, sorry, you can only invest $15,000 a year in small cap value? Would anyone be advising small cap value as an option? Wouldn't you say invest in the next best thing to small cap value, which also allows unlimited investing, and gradually replace that next best thing with small cap value?

Vinny

Posted: **Mon Mar 09, 2020 7:46 pm**

yankees60 wrote: ↑Mon Mar 09, 2020 7:37 pm
If one had $400,000 to invest and wanted to immediately implement it that would be mean $80,000 to the small cap value. And, to be told, sorry, you can only invest $15,000 a year in small cap value? Would anyone be advising small cap value as an option? Wouldn't you say invest in the next best thing to small cap value, which also allows unlimited investing, and gradually replace that next best thing with small cap value?

That next best thing in my opinion is 90 day bills.

Posted: **Mon Mar 09, 2020 7:51 pm**

pmward wrote: ↑Mon Mar 09, 2020 7:46 pm
yankees60 wrote: ↑Mon Mar 09, 2020 7:37 pm
If one had $400,000 to invest and wanted to immediately implement it that would be mean $80,000 to the small cap value. And, to be told, sorry, you can only invest $15,000 a year in small cap value? Would anyone be advising small cap value as an option? Wouldn't you say invest in the next best thing to small cap value, which also allows unlimited investing, and gradually replace that next best thing with small cap value?

That next best thing in my opinion is 90 day bills.

On a permanent basis, i.e., the rest of my life? I'm not yet in retirement mode but not far from it.

Vinny

Posted: **Mon Mar 09, 2020 7:53 pm**

yankees60 wrote: ↑Mon Mar 09, 2020 7:51 pm
pmward wrote: ↑Mon Mar 09, 2020 7:46 pm
yankees60 wrote: ↑Mon Mar 09, 2020 7:37 pm
If one had $400,000 to invest and wanted to immediately implement it that would be mean $80,000 to the small cap value. And, to be told, sorry, you can only invest $15,000 a year in small cap value? Would anyone be advising small cap value as an option? Wouldn't you say invest in the next best thing to small cap value, which also allows unlimited investing, and gradually replace that next best thing with small cap value?

That next best thing in my opinion is 90 day bills.
On a permanent basis, i.e., the rest of my life? I'm not yet in retirement mode but not far from it.

Vinny

No, but you roll those treasuries into I-bonds every year. Although, I still do not understand your choice in doing this in a VP. I know your reasoning is for safety, but I personally see this as less safe, not more safe than a vanilla PP. Especially since negative interest rates very well could be in our cards in the very near future.

Posted: **Mon Mar 09, 2020 8:18 pm**

pmward wrote: ↑Mon Mar 09, 2020 7:53 pm
yankees60 wrote: ↑Mon Mar 09, 2020 7:51 pm
pmward wrote: ↑Mon Mar 09, 2020 7:46 pm
yankees60 wrote: ↑Mon Mar 09, 2020 7:37 pm
If one had $400,000 to invest and wanted to immediately implement it that would be mean $80,000 to the small cap value. And, to be told, sorry, you can only invest $15,000 a year in small cap value? Would anyone be advising small cap value as an option? Wouldn't you say invest in the next best thing to small cap value, which also allows unlimited investing, and gradually replace that next best thing with small cap value?

That next best thing in my opinion is 90 day bills.
On a permanent basis, i.e., the rest of my life? I'm not yet in retirement mode but not far from it.

Vinny
No, but you roll those treasuries into I-bonds every year. Although, I still do not understand your choice in doing this in a VP. I know your reasoning is for safety, but I personally see this as less safe, not more safe than a vanilla PP. Especially since negative interest rates very well could be in our cards in the very near future.

Following all. And, my desire for TIPS may be flawed and you may well be right. I'm not yet at the point to decide one or the other. Just, as usual, gathering more information / opinions.

Vinny

Posted: **Mon Mar 09, 2020 8:26 pm**

yankees60 wrote: ↑Mon Mar 09, 2020 8:18 pm
Following all. And, my desire for TIPS may be flawed and you may well be right. I'm not yet at the point to decide one or the other. Just, as usual, gathering more information / opinions.

Vinny

I'm not sure it's flawed. I mean I can see where you're coming from and why you are thinking this way. I just don't want to see you get yourself in trouble, and that's why I've tried to present some other angles to look at it from. In the event of negative interest rates especially, I-bonds are the only cash asset that would be "safe". It's crazy that we have come to this point, but where does one store safe risk-free money if rates go negative? It's a crazy world we live in right now.

Posted: **Mon Mar 09, 2020 8:58 pm**

yankees60 wrote: ↑Mon Mar 09, 2020 7:37 pm
Kbg wrote: ↑Mon Mar 09, 2020 11:28 am +1 on Sophie's comment.

You may not be able to fully implement this year, but with planning you can get ibonds up to 40K in a couple of years...4 at the max.
However, it still is not like doing a Golden Butterfly wherein you can immediately do 20 / 20 / 20 / 20 on the traditional four and then 20 say on small cap value.

If one had $400,000 to invest and wanted to immediately implement it that would be mean $80,000 to the small cap value. And, to be told, sorry, you can only invest $15,000 a year in small cap value? Would anyone be advising small cap value as an option? Wouldn't you say invest in the next best thing to small cap value, which also allows unlimited investing, and gradually replace that next best thing with small cap value?

Vinny

Maybe I misunderstood the question...my point was it is possible to purchase 10K in ibonds a year and you could have 40K invested after four years. If one overpays on taxes then you can do more via your federal tax refund. Let's say you do the slow boat taking 4 years to convert all 40K to ibonds. year one you put 30K in some other kind of bond, year 2 pull out 10k move to ibonds, rinse repeat.

Gyroscopic Investing

TIPS versus I Bonds

TIPS versus I Bonds

Re: TIPS versus I Bonds

Re: TIPS versus I Bonds

Re: TIPS versus I Bonds

Re: TIPS versus I Bonds

Re: TIPS versus I Bonds

Re: TIPS versus I Bonds

Re: TIPS versus I Bonds

Re: TIPS versus I Bonds

Re: TIPS versus I Bonds

Re: TIPS versus I Bonds

Re: TIPS versus I Bonds

Re: TIPS versus I Bonds

Re: TIPS versus I Bonds

Re: TIPS versus I Bonds

Re: TIPS versus I Bonds

Re: TIPS versus I Bonds

Re: TIPS versus I Bonds