Gyroscopic Investing

Greetings to all.

This is my first ever post here, but I’ve been a long-term follower of this excellent forum. The level of expertise here is extremely impressive, so I’m hoping to ask for some advice.

My situation: I will be retiring in 2022 at age 51, with children still in elementary and junior high school. So my wife and I are looking at a long retirement horizon (say, 45-50 years, as my wife is younger than I am). After retirement, we will have no income, no pension, and no inheritances. We will be supporting the family solely with ongoing withdrawals from our investment portfolio. That means we need to be extremely conservative.

We have accumulated enough capital to live off a conservative withdrawal rate of 3.25% per annum. All of our capital is currently in cash (we just sold our properties), and we are looking at investing it into a Permanent Portfolio (HBPP or GBPP) this year.

Ideally, we would like to leave a bequest, if possible. But most critically, we need to avoid portfolio failure within our retirement horizon.

We are attracted to the Permanent Portfolio because historically it has achieved some real growth while minimizing volatility/drawdowns. We would be happy with just 1.5-2% real growth over time if we can avoid steep, protracted drawdowns that would lead to Sequence of Returns Risk.

From analyses of the historical performance of the Permanent Portfolio (HBPP, GBPP), it seems that our target withdrawal rate of 3.25% per annum is quite safe: we would have made it through the worst historical conditions the world has seen so far. In fact, according to back-testing reported on portfoliocharts.com, the Golden Butterfly appears to have had a Perpetual Withdrawal Rate of 3.5%:

https://portfoliocharts.com/2016/12/09/ ... etirement/

If that’s right, and continues to hold true over the next few decades, then at a 3.25% withdrawal rate, we would have zero risk of portfolio failure.

However, we are very concerned about deploying all our capital into a Permanent Portfolio, or any portfolio, this year in one fell swoop, because of the extraordinary market conditions: by objective measures, it appears that today there is not only a massive bubble in equities (CAPE at ~39), but also simultaneous bubbles across other asset classes:

https://www.gmo.com/asia/research-libra ... pus-begin/

The appeal of the PP is that its four components have tended to zig and zag in different directions, smoothing out volatility and minimizing drawdowns. But I’m not aware of any historical period that resembles the present, with a massive bubble in equities, multiple simultaneous asset bubbles, inflation, and looming rate hikes. It seems there is an elevated risk of at least three parts of the PP doing poorly (maybe even crashing): equities (based on CAPE), LTT (due to rate hikes), STT (which certainly won’t keep up with inflation). Gold would have to ‘shine’ hard just to contain the damage.

This leads me to my questions:

- Should we force ourselves to be agnostic about market conditions and deploy 100% of our capital into a Permanent Portfolio now? Or would it be more cautious to deploy some small portion of our capital into a PP now, and keep the rest in cash to be deployed in batches over time (in a multi-year dollar-cost averaging approach)? Yes, the cash would be eroded by inflation, but could potentially buy more real assets down the road when the bubbles burst.
-
- Is there any reason to worry that a conservative withdrawal rate of 3.25% per annum would NOT survive our horizon of 45-40 years (despite its success over all previous periods)?

- Finally, we will be retiring in Canada and our living expenses will be in Canadian dollars. So if I’m not mistaken, for STT we should purchase short-term Canadian government bonds, for LTT we should purchase long-term Canadian government bonds, and for gold we should purchase a physical gold ETF. But I’m confused about the equity component: the Canadian stock market is very small and highly concentrated in a just a few sectors. My instinct is to purchase VT for the equity component, for better diversification – but would this ‘break’ the logic of the PP insofar as the performance of VT is subject to a whole different set of economic conditions that are external to Canada? And would it be better to buy a Canadian dollar-hedged version of VT, if such a thing exists? Similarly, if we go with the Golden Butterfly, should we stick with US small-cap value stocks (VB), or replace that with, say, Canadian REITS, or a mix of VB and an international value fund (like VTRIX)?

We are excited about retiring, but are extremely worried about putting 100% of our life savings into a portfolio this year given the prevailing market conditions, and potentially experiencing a large draw-down at the very beginning of our retirement.

Thanks for reading this much. And many thanks in advance for any good advice or insight you can share!

I am genuinely interested what kind of advices you will receive- guess you will receive more of the same that you've already read in here. Personally, I have realized that the answer of most of those questions (yeah, you are not alone) is that there is no answer. PP can deep dive the next years. It can be all bad, who knows. There was an interesting article from Kitces shared here by MJ, which make sense (in general) - for the V shaped allocation of stocks in the pre-retirement and early retirement years - in order to keep low volatility (as bonds generally expose low volatility than stocks). But again - we are in uncharted territory where as you already noted - everything goes in almost ideal sync - all up, all down, and with those rates (as you also mentioned) - buying bonds is pretty much pain in the (lower) back. I can't see Gold keeping up the pace, as well. It might be there is an investment dark age coming - noone has a clue. The only piece of advice that I think might be worth to share is to have investment allocations in something that has nothing to do with the markets (land leasing, part of small business, p2p platforms, you name it...).

In my opinion you are right to be concerned about going all in at this point. For the reasons you have stated.

You might look at the historical data and see what the maximum intra-year drawdown is, and ask yourself how you would feel (and act) if you get to experience that after going all in PP at the start of your retirement.

Dollar cost average in, twice a year, over the next 2 years, might be a prudent way to go.

What are you currently investing in? Even if your money is in a savings account, 100% cash, you've essentially made a decision to go 'all in' on a 100% cash portfolio, with inflation increasing and cash completely unable to keep up. Point being, you already have a current asset allocation that may be just as dangerous or more so than the PP.

dockinGA wrote: ↑Wed Feb 02, 2022 1:37 pm What are you currently investing in? Even if your money is in a savings account, 100% cash, you've essentially made a decision to go 'all in' on a 100% cash portfolio, with inflation increasing and cash completely unable to keep up. Point being, you already have a current asset allocation that may be just as dangerous or more so than the PP.

This is true.

I refrained from suggesting purchasing a slice of the one potentially undervalued asset, metal. Which is the alternative form of money in the PP.

Just watched the Grantham interview where he stated both bonds and shares are dramatically overvalued....

Personally, I would take a 1/2 way approach.

Purchase 15% Shares, 15% Bonds and 35% Gold, 35% Cash. On any major dips in bond/shares prices, gradually rebalance back to 4 x 25.
Living in Canada has the same problems of living in Australia, small economy concentrated in a few sectors plus throw in overvalued housing prices.

I would consider internationally diversifying your shares and bonds. We currently hold 25% Gold, 25% One year Aus Gov't Bonds, 50% VDBA
https://www.vanguard.com.au/adviser/pro ... 8/balanced

What I would do immediately is NOT keep all your funds in one bank while making a decision. Put it into a Treasury Money Market fund or buy a short term treasury. I personally witnessed a close relative lose all their savings in a bank the government had declared "safe".

And finally, congratulations with retirement. There is nothing more valuable than being able to spend time with your children while they are young.

Edit:https://www.youtube.com/watch?v=urbbYddk7cQ

Hold cash until mid year and then invest over 6 months.

I don't believe in telling people what to do. So... Here's what I did about two years ago when I didn't know what to make of the world wide hysteria.
I went to all cash and then bought back in to the PP at 10% per month.

I have no idea whether that was a good idea or not. I felt good about it. And... I lucked out and it worked well.

But... You seem like a thoughtful guy. You have to balance all of the great advice you get with what allows you to sleep at night and what will allow you to tell the wife (with a clear conscience) that it will be all right.

It is scary. Just my opinion, but you have the right mindset to handle anything that comes up. Slàinte!

What you’re doing is extremely similar to what my wife and I did. We bought in over a period of time, not all at once. I’m sure that’s what I would do today too.

I know there are studies that say to take the plunge, but I wouldn’t be able to do that.

fairbairn wrote: ↑Wed Feb 02, 2022 9:13 am We have accumulated enough capital to live off a conservative withdrawal rate of 3.25% per annum. All of our capital is currently in cash (we just sold our properties)
.
.
we will be retiring in Canada and our living expenses will be in Canadian dollars.

Personally I do like the liability matched aspect of owner/occupier. You are in effect both landlord and tenant, so doesn't matter if rents soar or collapse you don't have to find the cash to pay the rent. So I'd buy rather than rent, with one-third. Worth perhaps 3% imputed rent.
Another third in stocks paying 3% dividends
Last third in gold. Apply a 1% PWR to the whole, so as though gold were also paying a 3% dividend.
1% of total via imputed rent, 1% via dividends, 1% via PWR, income stream diversity. Land, Stocks, Commodity asset diversity. Along with a blend of fiat and non-fiat currency diversity.

Buy the home at the start, stocks a year later, or vice-versa. Half of gold at start of year, other half a year later.

Rebalancing isn't necessary, is more a risk reduction thing than a reward enhancing thing. Within reason. If 5 years/whatever in stocks have soared and gold becomes relatively lightly weighted, no matter, it served earlier years sequence of return risk reduction. If gold soared, stocks collapsed, then rebalancing is more appropriate, maybe even selling all of gold to buy stocks, it acted and served as a earlier years bad sequence of returns risk reduction.

Mid/later years and stock-heavy is much less of a risk as more often good gains that precursored declines are just giving back some of 'other peoples money'. In later retirement years many opt for simplicity and owning a home along with a low cost global stock fund where the dividends alone are more than enough simplifies management/tax reporting. In twilight years more usually the first partner to fade tends to be cared for at home by the other. Sale of home covers late life all-inclusive care home fees for the longer surviving partner.

Since the PP has rebalancing bands in the 35% to 15% range, you can go heavy in cash to start and still be considered "all in".

Example 34x22x22x22 vs 25x25x25x25

Since the portfolio will be overweigh with cash, you will be forced to buy the lagging asset (any asset that drops below 15%) when the time comes to rebalance.

Vil wrote: ↑Wed Feb 02, 2022 10:01 am I am genuinely interested what kind of advices you will receive- guess you will receive more of the same that you've already read in here. Personally, I have realized that the answer of most of those questions (yeah, you are not alone) is that there is no answer. PP can deep dive the next years. It can be all bad, who knows. There was an interesting article from Kitces shared here by MJ, which make sense (in general) - for the V shaped allocation of stocks in the pre-retirement and early retirement years - in order to keep low volatility (as bonds generally expose low volatility than stocks). But again - we are in uncharted territory where as you already noted - everything goes in almost ideal sync - all up, all down, and with those rates (as you also mentioned) - buying bonds is pretty much pain in the (lower) back. I can't see Gold keeping up the pace, as well. It might be there is an investment dark age coming - noone has a clue. The only piece of advice that I think might be worth to share is to have investment allocations in something that has nothing to do with the markets (land leasing, part of small business, p2p platforms, you name it...).

Thanks, Vil. We will be buying a house to live in. I haven't included that as part of our investment portfolio, but in the very worst scenario our home equity would backstop us if we ever depleted our portfolio (gulp).

murphy_p_t wrote: ↑Wed Feb 02, 2022 1:26 pm In my opinion you are right to be concerned about going all in at this point. For the reasons you have stated.

You might look at the historical data and see what the maximum intra-year drawdown is, and ask yourself how you would feel (and act) if you get to experience that after going all in PP at the start of your retirement.

Dollar cost average in, twice a year, over the next 2 years, might be a prudent way to go.

Thanks, murphy_p_t. This is in line with what I was thinking. Intuitively, this approach could at least partially mitigate the downside risk of a huge (for us) investment.

But according to Vanguard, "research indicates that it's prudent to invest a lump sum immediately." I think that would take more guts than I have, when it comes to deploying my entire life savings.
https://investor.vanguard.com/investing ... t-lump-sum

The largest drawdown for the PP since 2010 was 11.14%, recorded on Mar 17, 2020. But the portfolio recovered within 20 trading sessions.
https://portfolioslab.com/portfolio/har ... -permanent

Even during the 2008 crash, the PP experienced a drawdown of just 12-13%:
http://www.lazyportfolioetf.com/allocat ... permanent/

I think I could live with that. A drawdown of 20-30% would spook the living f*** out of me.

dockinGA wrote: ↑Wed Feb 02, 2022 1:37 pm What are you currently investing in? Even if your money is in a savings account, 100% cash, you've essentially made a decision to go 'all in' on a 100% cash portfolio, with inflation increasing and cash completely unable to keep up. Point being, you already have a current asset allocation that may be just as dangerous or more so than the PP.

Hi, dockingGA. We are currently invested in nothing. We just finalized the sale of all our properties, and the proceeds are sitting in cash in the bank.

Obviously, it would be unwise to keep our life savings as cash deposits in the bank, even just for half a year.

So I am looking at deploying part of our capital into a PP (probably a GBPP) now, and parking another part to deploy into the PP over time.

What should I park the 'dry powder' in? Would it make sense to put it all in VTIP (short-term inflation-protected securities index fund)? Part in VTIP and part in VGSH (short-term treasury index fund)?

Would hugely appreciate advice on where to park the capital that is not getting invested immediately. Thanks!

Hal wrote: ↑Wed Feb 02, 2022 3:14 pm Just watched the Grantham interview where he stated both bonds and shares are dramatically overvalued....

Personally, I would take a 1/2 way approach.

Purchase 15% Shares, 15% Bonds and 35% Gold, 35% Cash. On any major dips in bond/shares prices, gradually rebalance back to 4 x 25.
Living in Canada has the same problems of living in Australia, small economy concentrated in a few sectors plus throw in overvalued housing prices.

I would consider internationally diversifying your shares and bonds. We currently hold 25% Gold, 25% One year Aus Gov't Bonds, 50% VDBA
https://www.vanguard.com.au/adviser/pro ... 8/balanced

What I would do immediately is NOT keep all your funds in one bank while making a decision. Put it into a Treasury Money Market fund or buy a short term treasury. I personally witnessed a close relative lose all their savings in a bank the government had declared "safe".

And finally, congratulations with retirement. There is nothing more valuable than being able to spend time with your children while they are young.

Edit:https://www.youtube.com/watch?v=urbbYddk7cQ

Thanks, Hal. I like the idea of starting with 15% shares, 15% bonds, 35% gold, and 35% cash. This would still technically be a 'pure' PP as it's all (barely) within the rebalancing bands,but tilted to acknowledge the current risks in shares and bonds.

I also like how you are using VDBA in your portfolio. In Canada, there is a similar Vanguard fund called VBAL:
https://www.vanguard.ca/en/advisor/prod ... /etfs/VBAL

I guess the main advantage to this approach is that it would be more tax-efficient than holding the shares and bonds separately, and rebalancing in a taxable account. Presumably one could reduce the tax drag this way, as Vanguard's rebalancing within the ETF would not be subject to capital gains tax.

The drawback is that the bonds held in these asset allocation ETFs are not purely long-term treasuries, but include corporate bonds, mortgage-backed securities and whatnot, of varying durations. Also, the Canadian fund, VBAL, has a very high home country bias.

I intend to engage a Canadian tax expert in the next month or so, to analyze the tax implications of rebalancing our PP over time and the amount of drag that will impose on our Perpetual Withdrawal Rate. Depending on the results of that analysis, it might make a lot of sense for us to do what you are doing, i.e. 1/4 short-term Canadian government bonds, 1/4 gold, and 1/2 VBAL (or similar).

Don wrote: ↑Wed Feb 02, 2022 5:17 pm Hold cash until mid year and then invest over 6 months.

Yes, I too feel that easing in is more conservative. Thanks.

Mark Leavy wrote: ↑Wed Feb 02, 2022 9:11 pm I don't believe in telling people what to do. So... Here's what I did about two years ago when I didn't know what to make of the world wide hysteria.
I went to all cash and then bought back in to the PP at 10% per month.

I have no idea whether that was a good idea or not. I felt good about it. And... I lucked out and it worked well.

But... You seem like a thoughtful guy. You have to balance all of the great advice you get with what allows you to sleep at night and what will allow you to tell the wife (with a clear conscience) that it will be all right.

It is scary. Just my opinion, but you have the right mindset to handle anything that comes up. Slàinte!

Thanks for the kind words, Mark. I'm not knowledgeable at all about investing. So yes, this IS scary. But one can't not be invested.... I'm glad that what you did gave you peace of mind and also worked out for you.

I Shrugged wrote: ↑Wed Feb 02, 2022 9:36 pm What you’re doing is extremely similar to what my wife and I did. We bought in over a period of time, not all at once. I’m sure that’s what I would do today too.

I know there are studies that say to take the plunge, but I wouldn’t be able to do that.

That's the direction I'm leaning in as well. Despite what the studies say.

seajay wrote: ↑Thu Feb 03, 2022 2:56 am

fairbairn wrote: ↑Wed Feb 02, 2022 9:13 am We have accumulated enough capital to live off a conservative withdrawal rate of 3.25% per annum. All of our capital is currently in cash (we just sold our properties)
.
.
we will be retiring in Canada and our living expenses will be in Canadian dollars.

Personally I do like the liability matched aspect of owner/occupier. You are in effect both landlord and tenant, so doesn't matter if rents soar or collapse you don't have to find the cash to pay the rent. So I'd buy rather than rent, with one-third. Worth perhaps 3% imputed rent.
Another third in stocks paying 3% dividends
Last third in gold. Apply a 1% PWR to the whole, so as though gold were also paying a 3% dividend.
1% of total via imputed rent, 1% via dividends, 1% via PWR, income stream diversity. Land, Stocks, Commodity asset diversity. Along with a blend of fiat and non-fiat currency diversity.

Buy the home at the start, stocks a year later, or vice-versa. Half of gold at start of year, other half a year later.

Rebalancing isn't necessary, is more a risk reduction thing than a reward enhancing thing. Within reason. If 5 years/whatever in stocks have soared and gold becomes relatively lightly weighted, no matter, it served earlier years sequence of return risk reduction. If gold soared, stocks collapsed, then rebalancing is more appropriate, maybe even selling all of gold to buy stocks, it acted and served as a earlier years bad sequence of returns risk reduction.

Mid/later years and stock-heavy is much less of a risk as more often good gains that precursored declines are just giving back some of 'other peoples money'. In later retirement years many opt for simplicity and owning a home along with a low cost global stock fund where the dividends alone are more than enough simplifies management/tax reporting. In twilight years more usually the first partner to fade tends to be cared for at home by the other. Sale of home covers late life all-inclusive care home fees for the longer surviving partner.

Thanks, Seajay. Yes, I totally agree about the merits of being owner/occupier. We have set aside funds for buying a house after we arrive in Canada. The capital we intend to invest in the PP is separate (i.e. it's what will be left after buying a house), and will allow us to cover our estimated expenses at a withdrawal rate of 3.25%.

If I understand correctly, you are suggesting that after buying the house (and setting aside, say, two years of living expenses), our remaining capital should be invested 50% into dividend stocks and 50% into gold. It's an interesting idea. I ran a Monte Carlo simulation of this on portfoliovisualizer.com, for a 40 year simulation period, with a 3.25% withdrawal rate. (But I had to choose US stock market for the equity part; there is no dividend stocks option.) The safe withdrawal rate came out as 3.68% and the perpetual withdrawal rate as 2.63%. But putting the worst five years first to stress test for sequence risk, only 48.16% survived all withdrawals.

In comparison, under the same conditions (3.25% withdrawal rate, 40 year horizon, five worst years first), the GBPP had 78.64% surviving all withdrawals.

So at least based on this analysis, the GBPP seems more secure (?).

GT wrote: ↑Thu Feb 03, 2022 8:27 am Since the PP has rebalancing bands in the 35% to 15% range, you can go heavy in cash to start and still be considered "all in".

Example 34x22x22x22 vs 25x25x25x25

Since the portfolio will be overweigh with cash, you will be forced to buy the lagging asset (any asset that drops below 15%) when the time comes to rebalance.

Thanks, GT. This seems wise. It is similar to what Hal proposed (starting at 35% cash, 35% gold, 15% cash, 15% bonds, and then rebalancing over time). This would still be within PP parameters, while potentially allowing the dollar cost averaging effect to mitigate downside risk.

I tip toed in back in 2016 I think. Bought about 50% portfolio and waited 6 months to buy another 50%. Cost me about 50k in missed gains at the time but it was the only emotionally viable option.

The PP is an emotional commitment, sometimes that means letting the façade of control slowly slip away via market timing rather than all at once. Do what's comfortable.

Matthew19 wrote: ↑Fri Feb 04, 2022 10:49 am I tip toed in back in 2016 I think. Bought about 50% portfolio and waited 6 months to buy another 50%. Cost me about 50k in missed gains at the time but it was the only emotionally viable option.

And it could just as easily worked out to the good. So why not be more comfortable?

I Shrugged wrote: ↑Fri Feb 04, 2022 12:34 pm

Matthew19 wrote: ↑Fri Feb 04, 2022 10:49 am I tip toed in back in 2016 I think. Bought about 50% portfolio and waited 6 months to buy another 50%. Cost me about 50k in missed gains at the time but it was the only emotionally viable option.

And it could just as easily worked out to the good. So why not be more comfortable?

It was the more comfortable choice. Sometimes comfort costs.

fairbairn wrote: ↑Fri Feb 04, 2022 10:34 amIt's an interesting idea. I ran a Monte Carlo simulation of this on portfoliovisualizer.com, for a 40 year simulation period, with a 3.25% withdrawal rate.
.
.
In comparison, under the same conditions (3.25% withdrawal rate, 40 year horizon, five worst years first), the GBPP had 78.64% surviving all withdrawals.

Interesting. Thanks, Not used that PV option before

PP with SCV instead of TSM

GB

Both set to worst 5 years first

SCV/TIPS/Gold thirds vs GB look very similar

fairbairn wrote: ↑Fri Feb 04, 2022 9:38 am

dockinGA wrote: ↑Wed Feb 02, 2022 1:37 pm What are you currently investing in? Even if your money is in a savings account, 100% cash, you've essentially made a decision to go 'all in' on a 100% cash portfolio, with inflation increasing and cash completely unable to keep up. Point being, you already have a current asset allocation that may be just as dangerous or more so than the PP.

Hi, dockingGA. We are currently invested in nothing. We just finalized the sale of all our properties, and the proceeds are sitting in cash in the bank.

Obviously, it would be unwise to keep our life savings as cash deposits in the bank, even just for half a year.

So I am looking at deploying part of our capital into a PP (probably a GBPP) now, and parking another part to deploy into the PP over time.

What should I park the 'dry powder' in? Would it make sense to put it all in VTIP (short-term inflation-protected securities index fund)? Part in VTIP and part in VGSH (short-term treasury index fund)?

Would hugely appreciate advice on where to park the capital that is not getting invested immediately. Thanks!

For a short-ish period of time, I wouldn't worry too much about where the dry powder is parked. With VTIP, you're guaranteed to lose purchasing power. With cash or a regular short term fund, you almost certainly will lose purchasing power (but who knows, you might get lucky and we end up with positive real rates somehow), but the end difference will likely be splitting hairs. The most important thing to remember is that the PP/GB is an investing 'philosophy' that is atypical, and you've gotta be 100% comfortable with the allocation mix before jumping in, fully aware that you will be zigging while everyone else is zagging (sometimes in a good way, sometimes bad). It isn't a magic bullet or free lunch, but it does have a very robust performance history. Some people on this forum, however, seem to have expected it to be something it's not.