Gyroscopic Investing

So here's my general understanding of the Permanent Portfolio strategy.

Although 75% of the asset classes have a ZERO expected return in the long run when looked at in isolation, the portfolio has managed to capture remarkable gains. This works because in a way, you are locking in the short term volatility gains by periodically rebalancing your allocations. The beauty of it is that there is no market timing involved because you are AUTOMATICALLY buying low and selling high. It's almost as if it takes advantage of those that jump in and out of investments by letting them create the volatility, only for you to systematically capture it in the end.

I see it now. The PP Strategy is definitely something. I am now ready to implement it... or so I thought.

Since the key ingredient here is rebalancing... I was wondering if any magic in the strategy is lost if I chose to periodically contribute to each of the PP assets to bring the allocation back to 25%. Rebalancing seems to be an annual event for most people, but if I make monthly contributions to my PP i doubt I will ever need to rebalance (except in severe market crashes).

So my question is, do periodic contributions to the PP that bypass rebalancing hurt the PP in anyway? Maybe in the form of lost asset class momentum?

dvcb, from what I can see, keeping your portfolio closer to 4x25% by contributing to the lagging assets will still give you the automatic volatility capture advantage of the strategy. The extra momentum effect of letting the winners run that is gained from the 15%-35% bands has actually been fairly modest. It is more a case of that effect together with the trading costs meaning that it is not worth making many two way trades so as to more tightly hug the 4x25% ratios. If you are accumulating your PP, then I think it is sensible to buy the lagging assets as soon as the amount of savings you're paying in justified the trading cost (eg if it costs you $10 per trade and you have $500 then it might be worth saving up some more before making a trade).

As always the key thing to remember is that at any given moment all that matters is what you are holding. At any given moment, the assets will perform exactly the same whether you have held them for a second or fifty years. The buy versus hold distinction is just part of Wall Street's arsenal of bamboozlement

dvcb wrote: So here's my general understanding of the Permanent Portfolio strategy.

Although 75% of the asset classes have a ZERO expected return in the long run when looked at in isolation, the portfolio has managed to capture remarkable gains.

Maybe we can say that about the gold in isolation. But the other asses all can absolutely deliver real returns by themselves. Cash to a lesser degree, but still a small return.

Since the key ingredient here is rebalancing... I was wondering if any magic in the strategy is lost if I chose to periodically contribute to each of the PP assets to bring the allocation back to 25%. Rebalancing seems to be an annual event for most people, but if I make monthly contributions to my PP i doubt I will ever need to rebalance (except in severe market crashes).

I doubt it. Eventually the asset values in the portfolio are likely to greatly outweigh any contributions you can make. So the more years that go by the less and less impact, if any, is likely to be had.

Also, rebalancing is first and foremost for risk management. Any rebalancing bonus that generates extra returns is just gravy. Personally, when making new contributions I would buy the lagging assets always. Since we don't know when the fortunes of the asset can change, you may find you're buying it on deep discount. Buying things on sale is usually the best choice vs. buying something with a sharply escalating price.

What's the best way to make it work if I want to make monthly contributions to a Roth? Save up and contribute quarterly or something?

beafet wrote: What's the best way to make it work if I want to make monthly contributions to a Roth? Save up and contribute quarterly or something?

Just contribute to the cash portion, and then rebalance the best you can between your TSP and your Roth when the cash gets to be over 35%.