Gyroscopic Investing

Posted: **Sun Aug 15, 2010 4:29 pm**

Hi All,

Sorry if this is perhaps a redundant question, but I wanted to toss out a thought on a 60% Lazy Portfolio / 40% PP structure. Where the Lazy Portfolio serves as the Variable portion.

The risk here is that I'm not sure if the Lazy Portfolio - say for example the Ultimate Buy and Hold - structure would cannibalize the PP. The PP I get, no probs there. Where I start to have confusion/concerns is when bolting on the VP, and not looking at the 'entire' portfolio as a whole. It seems that it would make sense to not look at the PP and VP in isolation of one another, similar to not wanting to look at an asset class in isolation of one another. So

So if we took this approach of 60% Ultimate Buy and Hold / 40% PP, the 'entire' portfolio would look like:

60% Ultimate Buy and Hold:
Vanguard Int-Tm Trs;Inv 20%
Vanguard Sh-Tm Trs;Inv 12%
Vanguard Intl Val;Inv 12%
Vanguard Dev Mkts;Inv 12%
Vanguard Infl-Prot;Inv 8%
Vanguard Sm-Cp Idx;Inv 6%
Vanguard SC Val I;Inv 6%
Vanguard Value Idx;Inv 6%
Vanguard 500 Index;Inv 6%
Vanguard EM St Id;Inv 6%
Vanguard REIT Idx;Inv 6%

40% PP
Gold 25%
Cash 25%
LTB 25%
Stocks 25%

I'm not yet savvy enough to understand the impact on such a portfolio, and not even sure it is a good idea. Any ideas/thoughts on this?

Thanks!

-b

Posted: **Sun Aug 15, 2010 6:25 pm**

There was a time in my "PP journey" when I thought about mixing PP and VP but eventually I came to a conclusion that HB's advice to treat VP as money one can afford to lose is the most sensible choice. The %% allocation between PP and VP IMHO doesn't have much sense - I'd better think about the PP size in terms of anticipated expenses in retirement and based on that number and the amount of money left after paying the living expenses each month figure out how much should be saved in PP monthly. I realize that it might come to 100%, leaving nothing to mess around with in VP. This scenario doesn't mean you can't have a VP at all - it just suggest a more modest size of VP if one's retirement needs cry for a bigger PP.

As per asset allocation: your 60% VP looks like Merriman's ultimate buy-and-hold portfolio. I did use it before I learned about PP and successfully was burned down in 2008 witnessing most correlations between "asset classes" going to +1. Eventually I dropped various slices one by one and use only US TSM and EM value funds for the equities part of my PP. There were 2 distinct phases in this simplification process:
1. I moved from LB/LV/SB/SV to TSM/SV allocation after reading this BH thread on TSM vs. slice-n-dice approach.
2. I dropped developed stocks completely since US TSM (or S&P500) has a big chunk of multinational companies and hence it sufficiently captures the developed markets returns. Also, developed markets have become pretty closely correlated with the US.

From the risk perspective your lazy-portfolio VP is a moderate growth portfolio, and we can say that PP is a conservative portfolio. Of course you can use your stated allocations for a while as a test. Personally, I would allocate the bigger part of the total portfolio to PP (70-80%) and used a more aggressive approach instead of a lazy portfolio in VP. Otherwise these 2 portfolios just don't look radically different to justify keeping them both in these proportions. Don't get me wrong: I don't want to say VP must be aggressive - I just think otherwise VP is not needed at all.

Think simplicity: either invest in PP only, or have PP as an untouchable core and use VP as a limited sandbox for your investment ideas.

Posted: **Sun Aug 15, 2010 8:29 pm**

My take is that this portfolio is too complicated and not well diversified. If you mix these portfolios together what you essentially will have is a stock-heavy allocation.

Holding the Permanent Portfolio at 40% of the allocation would mean the assets it holds make up that similar percentage in your portfolio. For instance, instead of 25% in an asset position you have 40% of 25%, or 10%. So instead of holding 25% in gold you effectively hold 10% in this mix, etc. But you hold much more in stocks in the other 60%. It looks like around 40% of your portfolio would be in stocks from this mix plus the 10% from the Permanent Portfolio allocation so you'd be at 50% stock allocation. This is just something to which you should be alerted because the portfolio would be heavily overweighting stocks over cash, bonds and gold.

Lastly, these portfolios that have many small slices to various stock sectors always seem a bit arbitrary to me. Why 6% and not 8% for a piece? Why 8% and not 10% or even 15%? What's the reasoning why these assets were chosen? What is the strategy and why should it work?

If you wanted to take more risk in the portfolio, I'd just buy more stocks with the Variable portfolio but do it with a simple broadly based index fund. Or use this area for a stock sector specific gamble. Alternatively, you could just run the PP for a year or two while you get comfortable and then branch out to a riskier variable portfolio side if you feel you need it. You may find that you probably don't need to have a variable portfolio at all, or at least a very small one only.

Posted: **Mon Aug 16, 2010 6:55 am**

craigr wrote: My take is that this portfolio is too complicated and not well diversified. If you mix these portfolios together what you essentially will have is a stock-heavy allocation.

Lastly, these portfolios that have many small slices to various stock sectors always seem a bit arbitrary to me. Why 6% and not 8% for a piece? Why 8% and not 10% or even 15%? What's the reasoning why these assets were chosen? What is the strategy and why should it work?

Hi CraigR and Foglifter, thank you both for the feedback. It's always nice to get some other thoughts on things.

Regarding the 60 Lazy Portfolio / 40 PP example, I'll completely agree that it is overly complex, more of a conservative approach, and the percentages seem quite arbitrary. Not saying this is the approach I'd want or ever suggest using, but my question is more of looking at one's entire portfolio, with the impact of the Variable Portfolio on the Permanent Portfolio.

Where I'm confused is that Harry Browne advocates the PP for the money we can't/don't want to lose. Got it, makes sense. And then the Variable Portfolio for the money we can afford to lose, or want to speculate with. Got it, makes sense.

However, in terms of looking at one's overall portfolio...this would include the PP and the VP. If we are using the VP to say up on various other stocks/bonds, it only seems prudent to see how/if this may impact the PP, and the Overall Portfolio's allocations, correlations, etc. Am I wrong or confused in thinking like this?

Only threw out the Lazy Portfolio/Permanent Portfolio to illustrate an example as I know this is the way some, myself included, may actually have to look at their portfolios given limited access to various funds through 401k/403b, etc.

Thanks again!

-b

Posted: **Mon Aug 16, 2010 8:53 am**

This is pretty much what I'm using now, about 1/3 PP, 2/3 UB&H. A bit too complicated, yes. But I want to ease into the whole PP thing first, see how it suits me. I'm sure I'll always have a VP component though, I'm having too much fun playing around.
So I'll let it ride for a while, and if I really like it, start moving more into the PP. Probably with something like 85%PP when I'm done, that would be my target for now. And then the VP more risky like Craigr suggests. As long as I can stand it :-)

Posted: **Mon Aug 16, 2010 11:04 am**

Bonafede wrote:However, in terms of looking at one's overall portfolio...this would include the PP and the VP. If we are using the VP to say up on various other stocks/bonds, it only seems prudent to see how/if this may impact the PP, and the Overall Portfolio's allocations, correlations, etc. Am I wrong or confused in thinking like this?

Looking at your total portfolio across all accounts is a good idea. As for determining how the variable portfolio will impact the permanent portfolio, that gets trickier. The Permanent Portfolio is the core assets that you must have. It may be that the stock component correlates highly with the Variable Portfolio that is stock-heavy. But the overall core position should still have the diversification of the Permanent Portfolio fundamentally.

Now as to whether it is a good idea to run a Variable Portfolio. That depends on what you are trying to achieve. I would just suggest that trying to get market beating returns is really difficult and there is no guarantee that a stock heavy allocation will achieve better results going forward.

The last question to ask is what draws you to each approach? Here is what drew me to the Permanent Portfolio:

1) Several decades of empirical data through a variety of markets.
2) Respectable real after-inflation returns with very low drawdowns.
3) Very wide diversification that includes non-stock and non-bond assets in the portfolio.
4) A solid and understandable strategy based on sound economic reasoning why it was formulated.

When looking at other approaches I'd want to know more about how/why it was formulated and how/why it should work under a variety of markets (both good and bad [or even very bad]). If you find that you like the answers you receive, then certainly it's worth considering for the Variable Portfolio. But if you don't find answers you like, then just hold the Permanent Portfolio until you do find something that suits your needs.

Posted: **Mon Aug 16, 2010 8:36 pm**

All, thanks for the responses on these. Given me some great things to think about and learn more about.

Clive, do you happen to know of any resources where I can learn more about Mebane's Quant model? I've seen this discussed a number of times and have done some quick searches online and came across some things, but not sure if there are some good resources you've come across.

Thanks again for your help!!

-b

Posted: **Mon Aug 16, 2010 9:53 pm**

Here's the link: http://www.mebanefaber.com/timing-model/
You'll see a download link to his paper “A Quantitative Approach To Tactical Asset Allocation”?.

You might find also interesting this post:
http://www.mebanefaber.com/2009/06/25/c ... g-systems/

Posted: **Tue Aug 17, 2010 6:39 am**

This is great y'all. Thanks so much for the feedback. I read Mebane's paper last nite, and it is pretty impressive. I've got some heavy learning to do before even attempting this sort of approach, but it seems like it compliments the PP approach very well.

Thanks again for the help and hope everyone's week is going well!!

-b

Posted: **Wed Aug 18, 2010 2:59 pm**

Clive,

What are your thoughts on breaking down the equity portion of the PP such as:

SC
SCV
Intl' SCV
Intl LCV

And then as mentioned replacing the Cash portion perhaps with Mebane's Quant method?

I think I've officially reached the point where even I think I'm trying to complicate the PP too much. Always good to learn though!

Thanks!

-b

Posted: **Wed Aug 18, 2010 3:27 pm**

Bonafede wrote:
And then as mentioned replacing the Cash portion perhaps with Mebane's Quant method?

I think I've officially reached the point where even I think I'm trying to complicate the PP too much. Always good to learn though!

Thanks!

-b

I've been in your shoes at some not very distant point. And I'm not alone. I'm almost sure you will end up with a simpler allocation at the end of your mental journey. As I've mentioned earlier, my slice-and-dicing ended in a core TSM + some emerging markets value.

As to Mebane Faber's approach etc. - I'm playing with it in my VP.

Posted: **Wed Aug 18, 2010 3:39 pm**

foglifter wrote:
Bonafede wrote:
And then as mentioned replacing the Cash portion perhaps with Mebane's Quant method?

I think I've officially reached the point where even I think I'm trying to complicate the PP too much. Always good to learn though!

Thanks!

-b
I've been in your shoes at some not very distant point. And I'm not alone. I'm almost sure you will end up with a simpler allocation at the end of your mental journey. As I've mentioned earlier, my slice-and-dicing ended in a core TSM + some emerging markets value.

As to Mebane Faber's approach etc. - I'm playing with it in my VP.

Thanks for the empathy Foglifter. Always helps to know I'm not the only one who has and continues to experience these thoughts with the PP. What I struggle with is that I see the beauty of the PP, but also want to try and capture additional gains through the VP. However, I struggle with the tension of how much to put in the PP vs. the VP. Hence my desire to try and combine/leverage them together as one....crazy?

Posted: **Wed Aug 18, 2010 3:48 pm**

Simple beats complicated.

Posted: **Wed Aug 18, 2010 4:13 pm**

craigr wrote: Simple beats complicated.

This.

Posted: **Wed Aug 18, 2010 4:52 pm**

Bonafede wrote:
foglifter wrote: I've been in your shoes at some not very distant point. And I'm not alone. I'm almost sure you will end up with a simpler allocation at the end of your mental journey. As I've mentioned earlier, my slice-and-dicing ended in a core TSM + some emerging markets value.

As to Mebane Faber's approach etc. - I'm playing with it in my VP.
Thanks for the empathy Foglifter. Always helps to know I'm not the only one who has and continues to experience these thoughts with the PP. What I struggle with is that I see the beauty of the PP, but also want to try and capture additional gains through the VP. However, I struggle with the tension of how much to put in the PP vs. the VP. Hence my desire to try and combine/leverage them together as one....crazy?

Crazy it is

. And this is also something I tried to do, but at the end I came to a conclusion that it's better to keep them separate. For me it was doable because my wife and I have 4 IRA accounts total plus a 401(k). I understand that complete account-wise separation might not be feasible, in this case you could keep it separated on paper (Excel sheet).

For example, if some position is held in one account and amounts to 35% of the overall portfolio, then you might consider 25% of it as part of your PP and 10% as VP. You can actually separate the two parts based on the number of shares.

Posted: **Wed Aug 18, 2010 6:28 pm**

Clive wrote: 1. Swap the TSM PP allocation for more volatile holdings. Larry Swedroe's Fat Tails approach outlines why Small Cap Value are a reasonable choice, as generally small and value have a degree of inverse correlation, but are both quite volatile.

2. Swap out the PP's cash for a low-down investment style that potentially provides more than cash average rewards. I don't personally think that the Ultimate Buy and Hold fits that low down bill, instead perhaps consider Mebane Faber's Quantitative model (Q). Q can go from all in cash to all in stocks, but typically averages 70% stock exposure, 30% cash. If 25% of your funds are in that then typically that's 17.5% in stock, 7.5% cash, which when added with the 25% PP stock component expands average stock exposure up to 42.5% amounts, but may see stock exposure as high as 50% at times (or as low as 25% at other times). The Q's low historic year on year down's are low enough to provide some confidence that as a PP cash component alternative it may do a reasonable job, whilst also potentially boosting the PP's total rewards overall.

To give a feel for how a PP with a SCV instead of TSM, and Q instead of cash would have historically performed in the US here are the yearly % total gains that my version of Simba's spreadsheet throws out

1972 15.21
1973 12.78
1974 17.46
1975 9.23
1976 20.32
1977 12.48
1978 17.08
1979 43.48
1980 12.12
1981 -2.95
1982 26.20
1983 9.46
1984 1.18
1985 23.20
1986 18.42
1987 5.71
1988 8.63
1989 11.24
1990 -3.28
1991 13.68
1992 8.70
1993 17.58
1994 -2.22
1995 19.48
1996 8.54
1997 8.40
1998 3.12
1999 1.99
2000 12.39
2001 5.41
2002 7.70
2003 19.88
2004 12.55
2005 9.66
2006 14.27
2007 10.69
2008 -1.39
2009 13.15

11.29% annualised, (6.23% real (after inflation)).

Compared to a conventional PP (but that holds 2 year treasuries as the 'Cash' instead of T-Bills)

1972 18.60
1973 14.36
1974 14.41
1975 6.84
1976 11.77
1977 5.06
1978 11.88
1979 39.27
1980 14.18
1981 -4.13
1982 23.57
1983 3.47
1984 3.12
1985 20.19
1986 18.12
1987 6.44
1988 4.24
1989 12.94
1990 1.59
1991 12.96
1992 4.34
1993 12.70
1994 -2.58
1995 19.65
1996 4.78
1997 7.39
1998 10.61
1999 4.36
2000 3.04
2001 0.39
2002 7.17
2003 13.88
2004 6.29
2005 8.03
2006 10.74
2007 13.43
2008 -0.71
2009 10.53

9.53% annualised average (4.85% real)

These are historic figures that likely wont be the same in the forward time direction. I would generally expect total returns going forward to be lower than we've seen historically.

Best. Clive.

Clive,

Quick question. How did you account for the timing of the quant model in Simba's spreadsheet? I've tried playing with the numbers and can't seem to come to your numbers?

Thanks!

-b

Posted: **Wed Aug 18, 2010 6:30 pm**

craigr wrote: Simple beats complicated.

Well said CraigR. Thanks again to you and the other posters for continuing to humor and help poor souls like me

.

-b

Posted: **Wed Aug 18, 2010 6:47 pm**

Bonafede wrote:
craigr wrote: Simple beats complicated.
Well said CraigR. Thanks again to you and the other posters for continuing to humor and help poor souls like me .

-b

"So the last shall be first, and the first last..."

PP won't make you rich, but it'll help preserve and grow what you have.

Posted: **Thu Aug 19, 2010 12:03 pm**

The enemy of a good idea is the thought of a perfect plan.

Posted: **Thu Aug 19, 2010 10:47 pm**

So, I've reached nirvana perhaps....I've reached the point where simplicity has definitely won out. Keeping the PP as is (perhaps with only minor tweaks to the equity), and then using the VP is definitely the way to go. Thanks everyone for your help. Now just to figure out the % to put in and keep in the PP vs. the VP. Oh the decisions...

Gyroscopic Investing

Thoughts on 60% Lazy Portfolio / 40% PP

Thoughts on 60% Lazy Portfolio / 40% PP

Re: Thoughts on 60% Lazy Portfolio / 40% PP

Re: Thoughts on 60% Lazy Portfolio / 40% PP

Re: Thoughts on 60% Lazy Portfolio / 40% PP

Re: Thoughts on 60% Lazy Portfolio / 40% PP

Re: Thoughts on 60% Lazy Portfolio / 40% PP

Re: Thoughts on 60% Lazy Portfolio / 40% PP

Re: Thoughts on 60% Lazy Portfolio / 40% PP

Re: Thoughts on 60% Lazy Portfolio / 40% PP

Re: Thoughts on 60% Lazy Portfolio / 40% PP

Re: Thoughts on 60% Lazy Portfolio / 40% PP

Re: Thoughts on 60% Lazy Portfolio / 40% PP

Re: Thoughts on 60% Lazy Portfolio / 40% PP

Re: Thoughts on 60% Lazy Portfolio / 40% PP

Re: Thoughts on 60% Lazy Portfolio / 40% PP

Re: Thoughts on 60% Lazy Portfolio / 40% PP

Re: Thoughts on 60% Lazy Portfolio / 40% PP

Re: Thoughts on 60% Lazy Portfolio / 40% PP

Re: Thoughts on 60% Lazy Portfolio / 40% PP

Re: Thoughts on 60% Lazy Portfolio / 40% PP