Gyroscopic Investing

From the article:

The plain-vanilla version of this strategy is quite compelling on its own, and tough to beat. Unfortunately, the approach faces the same challenge as other static allocation approaches in the current environment: record low interest rates and expensive stocks and commodities, which suggests that returns to this approach may not be as strong over the next several years.

In Part 2 of this series we are going to explore some simple techniques that might further improve the performance of this approach, including volatility management, risk parity, moving averages and finally Adaptive Asset Allocation.

In other words, even though it has been working great for 40 years we think it's about to stop working, and even though it relies on a static asset allocation for its success we are going to monkey around with the allocation to try to improve upon it.

MediumTex wrote: In other words, even though it has been working great for 40 years we think it's about to stop working, and even though it relies on a static asset allocation for its success we are going to monkey around with the allocation to try to improve upon it.

Isn't that what half the members here do?

dualstow wrote:

MediumTex wrote: In other words, even though it has been working great for 40 years we think it's about to stop working, and even though it relies on a static asset allocation for its success we are going to monkey around with the allocation to try to improve upon it.

Isn't that what half the members here do?

Well, maybe they do, but it seems to me that an article about the PP should spend more energy describing the strategy itself and why it works, rather than on how someone might change it to make it possibly work better.

It would be like writing an article about a team that had just won a championship against all odds and just glossing over the team's accomplishments and immediately going into how the article's writer would have handled the roster and other coaching decisions if he had been the coach.

dualstow wrote:

MediumTex wrote: In other words, even though it has been working great for 40 years we think it's about to stop working, and even though it relies on a static asset allocation for its success we are going to monkey around with the allocation to try to improve upon it.

Isn't that what half the members here do?

Do you really think it's that many?  I wonder from time to time.

I've monkeyed around with the "Cash" allocation by purchasing savings bonds and the odd FDIC instrument here and there, but by and large I just go with the orthodox Permanent Portfolio.  Sometimes a problem is just solved.

I try to apply my desire to tinker to other areas of my life where I think it's more likely to benefit me.  I feel that it's unlikely I'll get much benefit out of tinkering with the PP.  I do, however, see abundant opportunity to screw myself over.

There are a lot of ways to implement a PP, and I think folks here are very creative with that, with some doing minor modifications like swapping stocks for small caps only or replacing long bonds (TLT) with really long bonds (EDV). But I'd wager that there are far fewer people doing things like tinkering dramatically with the percentages, adding real estate, eliminating cash, or using leverage.

I am not a fan of dogmatism (although I would not be comfortable if anyone omitted any of the asset classes entirely). But if you want to throw in a little silver with your gold, go for it. If using a global stock index fund as opposed to all US will help you sleep at night, knock yourself out. If you like that little extra jolt you get from EDV versus the more pure TLT or buying your own bonds, I don't think you would be committing financial suicide.

I am more concerned with the principal of radical diversification that offers you some protection against any of the four economic conditions that HB identified. Quibbling about details, is just that.

The sense I get with a lot of the mainstream PP tweaking that goes on is that the tweaker may never have fully understood the PP strategy in the first place.

To me, the subtlety of the PP's design, including the way it addresses several quirks in human nature, is just brilliant.

The PP, like the Mona Lisa, is hard to improve upon.  It should just be enjoyed.  Tweaks often only diminish a work.



I would say use the VP for the PP tweaks.  If they work out well, then that's great.  If they don't, you still have your PP.

MediumTex wrote: From the article:

The plain-vanilla version of this strategy is quite compelling on its own, and tough to beat. Unfortunately, the approach faces the same challenge as other static allocation approaches in the current environment: record low interest rates and expensive stocks and commodities, which suggests that returns to this approach may not be as strong over the next several years.

In Part 2 of this series we are going to explore some simple techniques that might further improve the performance of this approach, including volatility management, risk parity, moving averages and finally Adaptive Asset Allocation.

In other words, even though it has been working great for 40 years we think it's about to stop working, and even though it relies on a static asset allocation for its success we are going to monkey around with the allocation to try to improve upon it.

To quote another source of eternal wisdom...."It's deja vu all over again."  Haven't there been other recent articles quoted here that were along the same lines as this one?

Most of the tinkerers here (myself included) limit their tweaks to stay within the framework of the PP and its bedrock assumption that the markets are unpredictable.  Not having access to the same crystal ball that these guys do, I'll stick with Harry Browne's viewpoint.

As the same master quoted above also said:

"It's tough to make predictions, especially about the future."

Lone Wolf wrote:

dualstow wrote:

MediumTex wrote: In other words, even though it has been working great for 40 years we think it's about to stop working, and even though it relies on a static asset allocation for its success we are going to monkey around with the allocation to try to improve upon it.

Isn't that what half the members here do?

Do you really think it's that many?  I wonder from time to time.

Sorry, I should have said we talk about monkeying around. I think a fair few actually tinker, but far less than half.
I do all my tinkering in the VP.

I would challenge the assertion that "stocks are expensive," if he's using the fact that they simply have high-ish P/E ratios.  I'm no stock super-bull, but think of it this way:

A P/E ratio is nothing more than an earnings yield (not too unlike a yield on a bond, though obviously with much more wiggle room in terms of potential future options.  It probably makes a lot of sense to look at earnings yield (both 10 years back and 1 year back) of a stock mutual fund not in a vacuum, but compared to other things the market is offering... namely, fixed income instruments such as bonds.

So if bond rates are as low as they say (they are), then it makes a lot of sense that stocks would trade at a much higher P/E ratio (lower yield).

Doing nothing is often the hardest thing!

Hey, as much of we talk about VP madness, and I do have 7% of my assets in a VP, my PP is very plain vanilla.  I have S&P 500 index funds, real US treasuries dated 2038-2042, and GLD, IAU, SGOL, etc.  The only thing I don't have is physical gold and T-bills for cash.  I use I bonds for as much as I can and FDIC insured savings/checking for the rest, which is also my emergency fund.

I'm pretty plain vanilla PP, and it has served me well since 2009 when I first started it.

TK3 wrote: Doing nothing is often the hardest thing!

Doing nothing may be the hardest thing, but its also plainly stupid in light of the flaws of the PP that have been publicized elsewhere on here.  It's better to implement the orthodox PP and then work on the issue than ignore it and hope it will never reoccur.  That's faith, not reason.  All strategies eventually fail and have to be adjusted.  The time to worry is NOT after a strategy fails and you're broke.

Other than levering up a MT PP portfolio, I wish I had a better answer at the moment.  The PP is hard to improve upon because it makes MPT sense, but its still overweight to certain, infrequent economic environments that are horribly damaging.  I will wait and see what Part II has as far as adaptive asset allocation goes.  I don't think the PP needs to become a binary situation of being either in or out of any asset class (ala trend following or relative momentum), but it may have better flexibility to deal with the non-orthodox economic enviornments if the data can be indicative of better static or dynamic weightings.

MachineGhost wrote: Doing nothing may be the hardest thing, but its also plainly stupid in light of the flaws of the PP that have been publicized elsewhere on here.

Doing nothing would be "plainly stupid" if and only if one believes that they are capable of definitely improving the PP.  Personally, I am aware of two things:

• There may exist some guy out there that can significantly improve on the Permanent Portfolio.  However, I am not that guy.
• It's very, very easy to think one is "the guy" that can meaningfully improve the PP.  (See the article in the original post.)  I'm wary of this trap and choose to spend my energy on tasks with more payoff.

MachineGhost wrote:The time to worry is NOT after a strategy fails and you're broke.

Broke?  Stocks, bonds, gold, and cash all fall to zero?  What sort of scenario leaves you broke with a Permanent Portfolio?

What Lone Wolf said.

I thought the only "flaw" of the pp was the trade-off- the lean years of watching our friends with tech-stock heavy portfolios beat us for 12 months. Sacrificing occasional superior returns I can do. I don't plan to go broke.

Lone Wolf wrote: Broke?  Stocks, bonds, gold, and cash all fall to zero?  What sort of scenario leaves you broke with a Permanent Portfolio?

There were several historical periods that would have left you very broke in real terms, not nominal.  Nominal is an illusion if your purchasing power has dropped 50%-75%+.  In my view, a true PP should not suffer capital losses like that.

MachineGhost wrote:

Lone Wolf wrote: Broke?  Stocks, bonds, gold, and cash all fall to zero?  What sort of scenario leaves you broke with a Permanent Portfolio?

There were several historical periods that would have left you very broke in real terms, not nominal.  Nominal is an illusion if your purchasing power has dropped 50%-75%+.  In my view, a true PP should not suffer capital losses like that.

I think it is fair to say that the PP offers only limited protection against some catastrophic scenarios (i.e. hyperinflation). But one must also consider your position relative to everyone else in society. If you had a PP at 4x25% when a true hyperinflation struck you would lose the value of your bonds and cash. Your stocks would probably still be there at the end of the day though they may have risen or fallen a bit and gold will still be there.

Consider now your plight as opposed to probably 90% of the rest of the population. You would likely be a wealthy man.

The bottom line for me is that the only way to better prepare for a catastrophic event (SHTF scenario) is to anticipate it and orient your portfolio accordingly. Thus if you see hyperinflation coming you want to have a Ron Paul style portfolio (90+% gold and silver). The only problem with this is that most people don't own an infallible crystal ball. And a 90% gold/silver portfolio could crush you in periods of prosperity, deflation and tight money.

So yea, the PP is an imperfect insurance policy against an extreme disaster. But it beats anything I have seen as an alternative.

MachineGhost wrote: There were several historical periods that would have left you very broke in real terms, not nominal. 

Invested primarily in equity markets in the world's largest economy?

Invested primarily in debt of the world's strongest military?

With a full 25% allocation to gold?

When were those historical periods?

MediumTex wrote:

MachineGhost wrote: There were several historical periods that would have left you very broke in real terms, not nominal. 

Invested primarily in equity markets in the world's largest economy?

Invested primarily in debt of the world's strongest military?

With a full 25% allocation to gold?

When were those historical periods?

Germany and Japan 1930's-1945. By 1945 you would still have your gold but everything else would be pretty much worthless. Of course if you had a quarter of your wealth intact you would be way ahead of 98% of your fellow countrymen.

MediumTex wrote: When were those historical periods?

Well, of course, it wasn't as severe in the USA as compared to other countries.  The worst was a -25% or so real loss during the 9-year period between 1939 and 1948.  Bbreakeven was not reached until 1954, a total of 20 years being underwater.  Thats 42.5% of a 47-year working life, not a trivial issue.

Clive can tell you when the similar period was for the UK.

Whats with the arrogance that the US is going to remain the world's largest economy, the world's military superpower and the world's reserve currency?  History suggests otherwise.  The British Empire collapsed as recently as 60 years ago and I believe the PP did not perform well under that scenario at all.

Ad Orientem wrote: I think it is fair to say that the PP offers only limited protection against some catastrophic scenarios (i.e. hyperinflation). But one must also consider your position relative to everyone else in society. If you had a PP at 4x25% when a true hyperinflation struck you would lose the value of your bonds and cash. Your stocks would probably still be there at the end of the day though they may have risen or fallen a bit and gold will still be there.

I consider that kind of thinking to be false assurance.  It does not matter how you fair relative to everyone else in a society, it matters how you fare relative to everyone else on the freakin' planet!  Whats the use of being a one-eyed king in the land of the blind, when lands of the seeing surround you?

Singapore is going to become the world's richest country by 2050.  How will you afford to relocate and live there after the USA turns into a third world banana republic and your PP was decimated by 75% ala Iceland?  25% in gold will not beat out the other 75% of other countries financial assets that did not implode.

MachineGhost wrote:

MediumTex wrote: When were those historical periods?

Well, of course, it wasn't as severe in the USA as compared to other countries.  The worst was a -25% or so real loss during the 9-year period between 1939 and 1948.  Bbreakeven was not reached until 1954, a total of 20 years being underwater.  Thats 42.5% of a 47-year working life, not a trivial issue.

Clive can tell you when the similar period was for the UK.

Whats with the arrogance that the US is going to remain the world's largest economy, the world's military superpower and the world's reserve currency?  History suggests otherwise.  The British Empire collapsed as recently as 60 years ago and I believe the PP did not perform well under that scenario at all.

A few quick observations...
* When considering the crash of '29 and the 25 year nominal recovery period one needs to factor in inflation and deflation. The brutal deflation of the early 30's meant that in real returns the stock market recovered to its pre-crash value by the early 1940's.
* Catastrophic events are a risk and no the PP does not protect you from them completely. But it is probably the best option out there unless your crystal ball comes with a heavy duty warranty.
* When discussing events that predate 1971 it is important to remember that gold was in theory monetized. That means gold was just another 25% slug in cash. While it may be amusing to discuss famous historical calamities remember the PP was not designed for a world economy where money is tied to gold. So we are kinda comparing apples and oranges here.

As Ad Orientem said, don't all of those historical examples depend on gold not being freely traded during the WWII years? What would have happened to the gold price during WWII if it had been freely traded? To be honest I don't actually have any idea what would have happened.

Isn't the classic "old money" portfolio, 1/3 farmland:1/3 art works: 1/3 gold. I guess that is safer than the HBPP on a century by century basis but farmland and art is spectacularly illiquid. I guess it is meant for people who never intend to ever tap into their money but rather to pass it down as a burden from generation to generation .

MachineGhost wrote:

MediumTex wrote: When were those historical periods?

Well, of course, it wasn't as severe in the USA as compared to other countries.  The worst was a -25% or so real loss during the 9-year period between 1939 and 1948.  Bbreakeven was not reached until 1954, a total of 20 years being underwater.  Thats 42.5% of a 47-year working life, not a trivial issue.

Clive can tell you when the similar period was for the UK.

Whats with the arrogance that the US is going to remain the world's largest economy, the world's military superpower and the world's reserve currency?  History suggests otherwise.  The British Empire collapsed as recently as 60 years ago and I believe the PP did not perform well under that scenario at all.

Wait a second, the PP is purely a post-gold standard investment strategy.  I don't think you can look back beyond 1971 or so and get a good sense of how a PP would have done in a gold standard world.  It wasn't designed for that kind of world.

As far as the U.S. being #1, I don't mean to suggest it will always be that way.  I just mean that it's that way right now.  If it changes, maybe we would need to change our investment strategy, but I'll deal with that when it happens (those things tend to change slowly).