Gyroscopic Investing

Not a whole lot of discussion of it here, but there are a bunch of long threads over on Bogleheads discussing this recent paper from Bridgewater:

https://www.bridgewater.com/grappling-w ... everywhere

For the minority of commenters who took the time to actually read the report rather than dissing Ray Dalio because he's been wrong about the market in the past the data offered and tentative conclusions and recommendations made seem to be quite compelling overall. They're not saying we're going to be in a zero interest rate/negative real return bond environment forever, but that on a global basis this being the new normal has a bunch of interesting implications. Jonathan Clements and other mainstream writers have been making the same points; in fact I got the idea for the short-term bond barbell below from him.

Speculating as to what Harry Browne would or wouldn't do if he were alive today reminds me too much of religious arguments from my childhood but I do wonder if he'd have thought 30 year Treasuries paying 1.4% interest were worth allocating 25% of one's nest egg to (and then we could go down the rabbit hole talking about 5 giant companies generating 100% of the TSM's return, "paper" gold, etc.).

Bridgewater also echoes Vanguard (albeit in a much more detailed and specific way) in calling for international diversification in both equities and bonds [especially in China] and it's hard not to see U.S. exceptionalism being as much of a casualty of the current environment as earning a real return on Treasuries. So with that in mind here's a somewhat tongue-in-cheek riff on the GB that takes current conditions into account:

20% TSM
20% TI (VXUS or equivalent)
20% Short Tips (VTIP, etc.)
20% STT (VGSH/SHY, etc) other STT
20% Gold

Now while the 5 x 20% construction is appealing for ease of implementation and rebalancing I can see room for plenty of tweaking: cut the TIPS in half or forego them altogether, overweight the U.S. rather than underweighting it slightly (or get greedy and go with some or all in QQQ or the like but in a lower % with more bonds for ballast).

Obviously I've backtested this but with TIPS data being so scanty it doesn't mean much. But as an exercise in designing not a "Permanent" portfolio (which, heretical as it sounds, may not really exist) but one that has assets to respond to economic conditions not equally but in light of how likely they are to occur and how devastating they would be (U.S. investors only) I think it might have some merit.

interesting he dumped commodities too .

with such drastic changes it seems the all weather is anything but all weather.

i think the irony is over the years many of the things the bridgwater model held or is now holding were tried in the many dr frankenstein versions of the pp and ultimately rejected .

i finally got to listen to the whole video . i have to say i agree with their very strong logic ....

deflation is very unlikely .... we are seeing reflation , as the lever on the interest rate machine is likely to stop at minus .50 to minus 1% and spending by the gov't is really the only option .....

inflation or stagflation is far and away more likely with reflation than deflation is .

that does not sit well for long term bonds at all if it plays out . we can have negative real returns on them and steep losses for quite a while .

i can see why with their logic they dumped tlt

I've been playing around with these ideas some more, while bearing in mind that the PP and GB as they are have done just fine this year. But the way I look at it is if it's okay to morph the PP into the GB it's also OK to look at other iterations as long as the PP principles of choosing assets based on their response to particular economic conditions rather than just looking at backtesting are respected.

My personal take on the asset classes: TSM's outperformance vs. international, SCV, etc. since 2008 is entirely dependent on the success of 5-6 giant corporations (the so-called FAANGs). Valuations are rich and the U.S. is busy debasing its currency and ceding leadership to other countries as fast as it can.

Gold makes sense now more than ever due to the aforementioned factors plus the pandemic.

LTT's offer far more risk than reward and I very much doubt Browne would own them today. Cash really is trash, but important dry powder nonetheless and as Tyler has pointed out far more potent as inflation protection than it's generally credited with being.

Two quotes from a thread well-known FA Ferri started today on Bogleheads:

"International stock investing is becoming more about diversifying industry groups and styles rather than diversifying currencies. Do a "Compare" of VTI and VXUS on the Vanguard website, scroll down to industry group comparisons, and you'll see what I mean. International stock represents many of the products we buy as consumers even though we don't make those products in the US anymore. It's truly is a global market. You'll also see that investing internationally is value investing. The industry groups like energy and finance and industrial are where value stocks come from. That's why international stocks have lower valuations than US stocks. Again, look at the "Compare." I recommend one-third of stock allocation to international. "

Rick Ferri

"Both INTL and VAL stocks have suffered a decade or more of substantial underperformance relative to FAAMGT. Interestingly almost all of the US market outperformance during this time can be ascribed to a just a handful of mega-cap LCG darlings which has been the dominant driving force in US market gains. Will that continue going forward? No one knows with certainty.

Both INTL and VAL are concentrated in cyclical sectors and the last decade of stagnant economic growth has been unkind to cyclical stocks and very kind to high growth tech. This long trend has brought about huge differences in valuations between VAL/INTL and the tech darlings at present. After the Covid-19 crisis gets under control it is possible but perhaps unlikely that coordinated global growth will resume at brisk pace. If that does happen one would expect cyclical stocks to benefit greatly. Likewise brisk growth typically ignites some inflation which typically has greater negative impact on growth stocks than on value stocks. IMO we have to accurately predict the global macroeconomic future in order to accurately separate future winners from future losers. In the absence of such knowledge it seems reasonable to me to have very broad equity exposure and cover multiple bases.

Typically at the onset of a bull market like the one we had starting in 2009, all market sectors take off which is a very positive sign. As the bull market ages market leadership often narrows significantly but never in my memory have such massive gains come from so few stocks while the rest of market struggled for gains. That has been the case in the US for a decade. Without mega cap tech growth darlings the market would have struggled a lot like INTL. Many market participants have climbed aboard the only fast train running which has driven those great gains. Historically when market gets so dependent on such a small number of stocks for its gains, it is not a good sign for their future. Often the great news is behind them. I don't know if the current tech downdraft is over now but there is still a long way to go for some tech darling valuations to meet economic reality. It may never happen.They may just keep going. I have missed the boat on AMZN for 20 years because of its consistently absurd valuations. Perhaps TSLA will be another winning boat that I miss, but I'm willing to take that chance. I believe it to be wise at present to keep holding onto both past losers as well as past winners."

Garland Whizzer

So getting back to a Bridgewater-informed version of the GB, I think there's at least as good an argument for VXUS as for VBR but it makes sense to me to cut the international back slightly vs. the domestic equities and also trim the gold to the minimum necessary for meaningful SHTF performance.

20% TSM
15% Total International
15% Gold

What to do about the bonds and cash is more of a quandary, at least for me. Maybe 35-40% T-bills and the rest LTT's for some deflation insurance?

I could also see trying to hew more closely to the elegance (and rebalancing ease) of the GB's 5 x 20 by going with 20% each of the risk assets and putting the entire remaining 40% in T-bills.

As much as I don’t care for tips vtip may actually be the best choice