Gyroscopic Investing

Suppose in 5 years, gold drops 80%.  Stock market soars 300% over a few years.  Long Term bonds drop 80%.  We have rising interest rates so the bonds are dropping but stock market is doing great.

The PP loses 5% a year for 5 years straight.  People with 60/40  stock/bond portfolios are gaining 30% a year for 5 years.

It appears gold is no longer going to be used for money reserves. 

Do you have a plan B?

Alternatively, what if the US starts to collapse.  Gold does great.  You keep rebalancing out of gold and into US Cash, US Bonds, and US Stocks.  You rebalance once a month for 8 months.  The US looks like it's going away for good.  You feel like you are rebalancing into a black void.  Gold is up 5000% compared to USD.  Oil is being sold in Euros.  The exchange rate is $1000 USD for 1 Euro.

Do you have a plan B to stop rebalancing and just stick 100% with gold?  Or switch to foreign stocks?

Is there every a plan B?  Or we do just follow PP until our death, regardless of whether gold "seems" to fall out of favor for 20 years straight, or whether the US is collapsing? How about once the US Collapses?  Dollars dont exist anymore.  We need a plan B for that right?

Or is Plan B guns and ammo with canned beans?

Bad things can happen. It is true. No portfolio can be totally immune from all of them. But you just invest in the way to diversify against these risks as best you can.

Under this scenario I see:

Portfolio Start:

$1000 Stocks
$1000 Bonds
$1000 Cash
$1000 Gold

$4000 Total

80% Decline Doomsday for Bonds/Gold and +300% for Stocks

$4000 Stocks
$200 Bonds
$1000 Cash
$200 Gold

$5400 Total

Not bad returns when you have 80% losses in two major assets and big gains in another. This assumes cash stays flat and is earning no interest. It also assumes the bond interest is not offsetting losses either.

US Collapse would be a dollar crisis, no? This would be a situation to evaluate as it unfolded most likely. If there was serious Argentina type inflation you may want to choose to not rebalance into bonds/cash until the currency stabilized. Maybe that's the Plan B? To wait?

But the thing is you'd have options. Most investors with no hard assets in that situation would be in big trouble. Realistically though these types of events are rare. Yes it can happen, but there are so many ways it could play out that trying to consider actions ahead of time is almost impossible. I think it's best to have flexible options to deal with these things instead of hard and fast rules. The permanent portfolio allocation gives an investor options for extremes that other approaches do not. IMO.

I had a similar thought and came to the same conclusion: you will just have to evaluate the situation as it unfolds.  If I lived in Greece and had a local PP then I would be very hesitant to rebalance right now.

craigr wrote: Under this scenario I see:

Portfolio Start:

$1000 Stocks
$1000 Bonds
$1000 Cash
$1000 Gold

$4000 Total

80% Decline Doomsday for Bonds/Gold and +300% for Stocks

$4000 Stocks
$200 Bonds
$1000 Cash
$200 Gold

$5400 Total

Once stocks grew to 35% of the portfolio, it would be rebalanced down into the declining bonds and declining gold.  Then again at 35%.  Then again at 35%.

I haven't run the numbers, but I'd guess you would wind up with $1000 or less at the end.  There's no need to run the actual numbers because I arbitrarily created the movements.

You might end up with only 1000.00 but you would own many, many cheap shares waiting to grow in value.

Also you've got some gold & silver bullion to barter with.

MiniB, these are important considerations for an investor. When do we decide that our strategy is not successful? I started my transition to the PP about a year ago. Your scenario of rebalancing into a black hole was one of my greatest concerns. But I have come to the conclusion that while there may be possible scenarios of rebalancing into a black hole, I suspect the greatest risk that I will face is pressure to abandon the PP at the worst possible time, because my portfolio performance is lagging the equity market by a significant margin.

SmallPotatoes wrote: You might end up with only 1000.00 but you would own many, many cheap shares waiting to grow in value.

Also you've got some gold & silver bullion to barter with.

Actually in my example, stocks are going through the roof, up 300% and gold and LT bonds are failing.  So you started with $4k and wound up with only $1k because you kept selling stocks to buy more gold and bonds that kept falling while stocks went gangbusters.

So in the end you have some worthless gold and silver to barter with, because in this scenario, gold has plummetted down 80%.

And you dont have many many cheap shares waiting to grow in value. In fact, you have few high-priced stock shares that just grew 300% in a short period of time.

Of course this is a hypothetical situation and that will probably never happen.  I'm thinking worst case scenario, huge prosperity hits, gold pops, interest rates rise and bonds pop. 

I'm not suggesting it will happen, I'm just questioning what would a Plan B be, and if so when we would be implement it?

If it turns out we can convert lead into gold and gold is now worth $10 an ounce.  Is that time to Plan B?  Or what if an asteroid hits the earth that adds a million pounds of gold to the planet.  Both are very far fetched but not impossible.

What if the US goes the way of Rome.  If we keep rebalancing into US Bonds, then we are catching the falling knife.  Eventually the US will collapse.  Will it be in 10 years or 1000 years?  I think it will be beyond my lifetime but it's possible.  And on the way down, the Bonds will drop 50% overnight, and then slowly drop 10% each day until they are worthless.  People will think "maybe this isnt the end?" and Europe will try to bail us out.  Still keep rebalancing when you hit bands in the PP?

What if Gold is no longer the #2 form of currency after the USD?  What if we start using oil or corn?

What if the USD is no longer the #1 form of currency?  What if the Yuan becomes #1, Euro #2, USD #4 after gold?

I heard the argument, we earn dollars and we spend dollars, so its good to save dollars.  Well everything I spend dollars on is commoditized on the global market. It does me no good to hold 25% USD if USD don't pay for anything.  I imagine Gold will spike, but at a certain point, I rebalance out of gold and into my falling USD, I will run out of money.

I don't mean to sound doom and gloom.  I think the answer may very well be, (as Craig writes about in his blog, I know he feels the same way), get some wilderness survival training, buy some firearms, get some firearms training, and if Plan B becomes necessary, you probably need survival skills and a gun.  So that is your Plan B and just never worry about deviating from PP because if that becomes necessary, then you have the skills and tools to survive in the ugly aftermath.

MiniB wrote:

SmallPotatoes wrote: You might end up with only 1000.00 but you would own many, many cheap shares waiting to grow in value.

Also you've got some gold & silver bullion to barter with.

Actually in my example, stocks are going through the roof, up 300% and gold and LT bonds are failing.  So you started with $4k and wound up with only $1k because you kept selling stocks to buy more gold and bonds that kept falling while stocks went gangbusters.

I see. I misunderstood. But consider that you would be buying bonds that would be going up sharply in yield with the stock profits for one. Secondly, stocks going up 300% so quickly would indicate some other problem most likely in the economy, like inflation, bad inflation. Stock prices can go up under inflation as the currency falls.

I'd also suggest that we aren't going to have prosperity with rapidly rising interest rates. That is certainly caused by high inflation which is not good for stocks in terms of real purchasing power.

I don't want to debate the "what ifs" too much because really this type of thing can't be addressed until it happens and we know what economic forces are in effect.

What if the US goes the way of Rome.  If we keep rebalancing into US Bonds, then we are catching the falling knife.  Eventually the US will collapse.  Will it be in 10 years or 1000 years?  I think it will be beyond my lifetime but it's possible.  And on the way down, the Bonds will drop 50% overnight, and then slowly drop 10% each day until they are worthless.  People will think "maybe this isnt the end?" and Europe will try to bail us out.  Still keep rebalancing when you hit bands in the PP?

Again if there is an extraordinary circumstance taking place you will just have to use your judgement. If the US is hitting very bad inflation and there is no real movement on the part of the government to stop it (by turning off the money spigot) then you may have to re-evaluate rebalancing into bonds. But the thing is you have an option. At least 25% of your wealth will be locked into an asset that can't be devalued (gold). You will be in a significantly better position than most.

No portfolio can protect against all catastrophes. You just have to diversify the best you can. You can go 100% gold and gold mining stocks like some suggest. But if gold plummets tomorrow your portfolio will get KO'd. There are no sure things because we can't predict the future.

What if Gold is no longer the #2 form of currency after the USD?  What if we start using oil or corn?

You know I'm not into predictions, but I'll predict this: Barring some unique and easy way to create gold from another common element, mine it from sea water, etc. Gold isn't going anywhere as a form of money. People forget that gold could be synthesized in some cheap way in the future. But, in the present we have the printing press which means that fiat money is still your biggest threat at any one time. I'm far more worried about Ben Bernanke than fusion created gold.  :)

What if the USD is no longer the #1 form of currency?  What if the Yuan becomes #1, Euro #2, USD #4 after gold?

Again I don't see gold going away. The Yuan or Euro may take #1, but it really doesn't matter. Gold will still be near the top. The Canadian dollar is not the world reserve currency, but they still do OK. If anything, being the world reserve currency has been a curse for the US because it has allowed the country to do a great many irresponsible things and put off the consequences. It may in fact be a good thing for the US to lose this position in order to stave off sure disaster. IMO.

I don't mean to sound doom and gloom.  I think the answer may very well be, (as Craig writes about in his blog, I know he feels the same way), get some wilderness survival training, buy some firearms, get some firearms training, and if Plan B becomes necessary, you probably need survival skills and a gun.  So that is your Plan B and just never worry about deviating from PP because if that becomes necessary, then you have the skills and tools to survive in the ugly aftermath.

Wilderness survival is not glamorous. It's a very meager existence. Even if the US Govt. blew up tomorrow, you'd still have state, county and local government operating at some level. Humans organize and the idea of a Mad Max society is very unlikely if you look at human history.

We can run these scenarios through our heads but I still feel the best plan is to have a set of skills and options you can apply flexibly to any situation instead of some playbook: If A, then B, then C, then D. Because you may get A and then it immediately jumps to Z bypassing all the other planning. So you want to have options, not hard plans, available to you. An option to not sell gold to buy rapidly falling bonds is a good idea. An option to keep money outside of government confiscation is a good idea. An option to sell down gold to buy bonds if you think the situation is settling down. Etc.

The Permanent Portfolio does not have all the answers, but speaking as someone who made a living looking for vulnerabilities in systems and dealing with them, I think it gives an investor options that others won't have in a crisis.

Again as an investor you just diversify and do your best. If you make a mistake then you just pick up and move on. We don't know what the future will do. However, it is rarely as extreme as we may imagine so it's best to have options to cope with extremes, but don't let them consume your thinking.

A few points to make:

1. MiniB, if you haven't already read Marc's Iceland analysis, it's fascinating:

http://europeanpermanentportfolio.blogs ... eland.html

This is what overnight collapses in first world nations look like.  Long story short, in relative terms (vs your Icelandic neighbor), you made out great.  In international terms, you lost vs imports. 

-Other examples to study include:

Argentina 1999-2002: http://en.wikipedia.org/wiki/Argentine_ ... 80%932002)

Russian Ruble Crisis 1998: http://en.wikipedia.org/wiki/1998_Russi ... ial_crisis

Studying history is a great way to see parallels that exist currently in the world.  This is not to say the U.S. will suffer the same fate, but you can begin to recognize signs and analyze your options proactively.

2. U.S. = Rome

I think in many ways this is valid.  Remember that the decline of most empires happens over decades and sometimes hundreds of years, not usually overnight.  Look at England as an excellent example of a recent empire in decline.  They still have a significant seat at the table, but do not dominate world affairs anymore.  This is typical.

3. When to know if the PP is "broken"

As Craig mentioned, fundamental changes would need to take place.  This is where your critical thinking asset comes into play.  Consider what was going on in the U.S. in 1978-1980.  The world was an absolute mess.  Monetary velocity was accelerating and the Fed had been falling further behind real interest rates until Volker.  If handled incorrectly, the U.S. was on course to hyperinflation.  If you had been watching, you might be observing monetary actions closely to see if the will existed to solve the problem.  If it wasn't, perhaps you decided to hold most of your gold until the situation resolved itself.  In most "normal" environments, the PP should perform as expected.

4. Gold losing its place as money

Gold might be synthesized in the future, but here's the caveat: it would take a miraculous breakthrough in technology on par with giving a caveman a laptop.  It's like the peak oil hysteria.  Sure, we may run out of oil suddenly, but more likely it will be a gradual process of less oil = higher prices = more incentive to create lower priced energy = less demand for higher priced oil.  It all works out over time.  Such technological changes take place in the gold market.  Sudden monumental changes can't be predicted and they sure as heck can't be missed--it would be all over the news.  More likely is someone drilling into some previously unknown massive pocket of gold where instant supply is brought onstream virtually overnight. 

5. Guns, beans and survival

IMO, everyone should have a basic understanding regardless of what's going on in the world.  Security and survival are fundamental to the human condition.  Most mad max type scenarios don't last for more than a few weeks or months before societies organize and govern again.  Anything longer and we're not talking economic collapse, we're talking asteroids or nuclear winter: http://en.wikipedia.org/wiki/Nuclear_winter 

If that's the case, good luck!

craigr wrote: Bad things can happen. It is true. No portfolio can be totally immune from all of them. But you just invest in the way to diversify against these risks as best you can.

Yeah, don't see the big gain in stocks with interest rates rising fast and high, but can happen.  

Also, with the PP, it will never be pleasant if you don't buy-in to its prime directive, and are always influenced by how well the "other guy" is doing comparatively.  This is the basement floor of tracking error regret (the biggest realistic challenge with the PP, in my view) and can linger for years. Of course, as shown in 2008, tracking error works both ways, as those downside realities that eviscerate more conventional approaches can be rapid and devastating—even pre-apocolypse.

I agree with Craig.  Being consumed by doomsday scenarios is not a plan, and can paralyze one into inaction, which itself is an investing decision.  Or it can get  potentially worse by shifting strategies (and not just shifting to some goofball variant, but even to other "sound" strategies where losses get locked-in).  Putting outside the guns, zombies, and road warrior lifestyles that invariably appear in these threads, what's really better than the PP until the time all sound plans get so challenged?  I haven't seen anything yet, in reality, in strategy-hedging, or in hypothetical asset-play.  But I suppose even theoretically less-optimal plans can be "better" if only because long-term commitment to them might mean a better chance of sleep at night and lesser losses.

This is exactly why my portfolio is 50% PP+ and 50% sector relative strength.

PP+ in case my RS is wrong, RS in case my PP+ is wrong...

One quote that's followed me from my childhood.

Roald Dahl wrote: MR. BUCKET.  What if they come after us?

MRS. BUCKET.  What if they capture us?

GRANDPA GEORGE.  What if they shoot us?

MR. WONKA. What if my beard were made of green spinach?  Bunkum and tommyrot!  You'll never get anywhere if you go about what-iffing like that.  We want no what iffers around here, right, Charlie?

Any time you invest you have to make a leap of faith that the future rewards outweigh the present cost.  That's just how it goes, and is true whether you're investing in market securities, a bomb shelter, or a vegetable garden.  At some point you have to settle on the best decision you can, and move forward with it.

Personally I think the best insurance is to cultivate an attitude of adaptability and preparedness.  People who develop contingency plans and stay flexible seem to land on their feet no matter what happens.  This goes for investing, career planning, grocery shopping, personal safety, commuting to work, etc.

The PP stands out to me as the only investment plan I've seen that incorporates some protection against the economic system failing to work as advertised.  You can insulate yourself further by being self-sufficient in areas of your life rather than relying on the economic system.  However that invariably lowers your standard of living and I wouldn't call it "investing."  Personally I have chosen to be self-sufficient on a couple limited fronts and frugal in all other areas, and that lets me sleep well at night.

Wonk wrote: 2. U.S. = Rome

I think in many ways this is valid.  Remember that the decline of most empires happens over decades and sometimes hundreds of years, not usually overnight.  Look at England as an excellent example of a recent empire in decline.  They still have a significant seat at the table, but do not dominate world affairs anymore.  This is typical.

I also agree that the US is in decline, and also agree that the US will most likely follow in the UK's footsteps with a slow decline over hundreds of years.

Some history documentary -- I wish I could remember which -- made the point that history makes sudden violent changes for the Caesers and Antoinette's of the world, but the regular folks of the world mostly see incremental changes that move at an imperceptible pace.  An everyday middle class person in a fading empire sees a little less social mobility for their kids, monuments slowly falling into disrepair, less technological and corporate innovation, etc.  It's a little sad, but people can still live happy lives, and it's a far cry from Mad Max.

MiniB wrote: Suppose in 5 years, gold drops 80%.  Stock market soars 300% over a few years.  Long Term bonds drop 80%.  We have rising interest rates so the bonds are dropping but stock market is doing great.

The PP loses 5% a year for 5 years straight.  People with 60/40  stock/bond portfolios are gaining 30% a year for 5 years.

It appears gold is no longer going to be used for money reserves. 

Do you have a plan B?

This is an interesting point, but IMO it's already happened - To some extent anyhow...
From 1995-1999 S+P was up 28.5% per year vs 9.22% for PP

9.2% isn't bad, but it's a massive underperformance when compared to the average investor.  Keep in mind that this was at the height of the greatest bull-market of all time and there was a relative bear-market in bonds and gold.  I wouldn't expect that the disparity would likely ever be this high for this long again. 

Clive- instead of using Decision Moose I would be more inclined to invest in Meb Faber's new ETF "GTAA"  See the following link for further info:

Would appreciate hearing what you think?

http://advisorshares.com/fund/gtaa