Gyroscopic Investing

The forum amassed quite a large number of members and I was wondering what reasons drive people to maintain a Variable Portfolio.

Purely for out-performance of the broad market and/or HBPP.

clacy wrote: Purely for out-performance of the broad market and/or HBPP.

This.  I want to see if I can consistently get 20-30% returns with a small amount of my portfolio, rather than the consistent 9-10% returns we're used to.

The thing that's a bit scary, is that if I was able to get 20-30% returns with my VP, I would be quite tempted to move my entire PP into this strategy.  We all know how disastrous that could be!

I think the best outcome would be if we can juice returns with a small portfolio, say 5-10%, while the 90-95% PP continues to do it's thing.

Went with "I use VP to save money for home purhcase or other similar goals"

1) I keep a muni bond fund as a proxy to money I would use to pay down my mortgage and when the balances are equal, they will wipe each other out 
2) I keep silver in VP because I trust the government to never pay off 16 trillion in debt without massive inflation.

Because if my PP loses or significantly underperforms, I think that I can live with this if it is because of having far less stocks than most, far more gold than most, or far more cash than most. But NOT because I was the fool to buy long term treasuries at such historically low levels.

I speculate with very minimal amounts of money.  I use the VP to simply satisfy the various inklings I get. 

The v in my vp may as well stand for vestigial. I keep it around for the dividends but if by some freak of nature it outperforms the pp, I'll trim shares and turn that into more gold, cash, etc. I also have munis in the vp. I want to own them, and they don't have any place in the pp.
So: INCOME.

"None of the above."  By the way...what's the difference between the first question and the second?

I've got no interest in speculation, because I'm really lousy at it.  But, I do like putting some retirement account money into income-producing bond funds and REITs that don't belong in the PP.  I don't really expect them to beat the PP, it's just that it's emotionally more satisfying and feels more secure to see these funds generate a bit of money every month or quarter.

Also, some of my retirement accounts should be considered VP because they can't be made part of the PP.  So maybe you should add two responses to your poll:

1) Desire to diversify with investment strategies other than the PP.
2) Retirement funds with limited options, that can't be integrated into the PP.

sophie wrote:  By the way...what's the difference between the first question and the second?

I think the second one implies no illusion that the HBPP (or broad market) will be consistently beaten  :) and yet, speculators gotta speculate.
I guess some of my holdings, like iRobot stock, fall into this category.

I am starting to lean more and more along the lines of using the VP to offset the PP's weaknesses and keep the PP pure.  I may not get there, but I think mentally it would be a lot less stress than having doubts about PP modifications.

dualstow wrote:

sophie wrote:  By the way...what's the difference between the first question and the second?

I think the second one implies no illusion that the HBPP (or broad market) will be consistently beaten  :) and yet, speculators gotta speculate.
I guess some of my holdings, like iRobot stock, fall into this category.

Speculation as in I think this will beat buying a lottery ticket?  Yup, that's my Apple stock.

My brother is an example of this type of speculation I think.  He has his own business and lives in the SF bay area.  He figures he won't be able to afford a house unless he plays the stock market and wins big, so he put stacks of money into Sirius.  That is kind of scary but I couldn't talk him out of it.  I started a 529 account as a baby gift, and promised matching contributions if he set up automatic investments.  He's starting to notice how the fund is building up.

It is amazing how "speculation" means something very different on this forum than it does to everyone else.

I just realized that I failed to mention "income" in the 3d option, it is now fixed.
Sophie, thanks for a great suggestion, I've added those 2  options to the poll.

I don't have a VP, but one day I will. I'll open it sometime between Christmas and New Years Day during the one week in the year when I allow myself to look at my investments to decide if I should re-balance my PP.

What will happen (I'm guessing in 2022, but who knows?) is that I will calculate the Shiller PE and notice that it has dropped below 10. When that happens, I will open a VP that is equal in size to my PP stock allocation. I'll buy a low cost S&P500 index fund for my VP. Every year thereafter if the Shiller PP is less than 15 then I'll add or remove the same amount to my VP as my stock allocation in my PP.

At some point I'll retire or need a bunch of money or during re-balancing week I'll see that the Shiller PE is above 20. When any of those events occur, I'll close my VP and any money I don't need from it I will re-balance into my PP.

I think I may get some extra return over the PP buying stocks for low valuations and maybe selling them for higher valuations, but that is not the real reason I am opening a VP when the Shiller PE gets below 10. I'm opening my VP to protect myself from Secular Bull Stock Market Envy. When a guy at the gym, or my neighbor, or my boss, or my brother-in-law starts boasting about his outsized stock investment returns I'll think about how I bought extra stocks when no one else wanted them, when everyone was buying paintings or coins or vintage cars or complicated insurance policies or anything except stocks. That will make me feel good, and I won't dump my PP.

Until then I'm just hanging around with a PP.

cowboyhat wrote: I don't have a VP, but one day I will. I'll open it sometime between Christmas and New Years Day during the one week in the year when I allow myself to look at my investments to decide if I should re-balance my PP.

What will happen (I'm guessing in 2022, but who knows?) is that I will calculate the Shiller PE and notice that it has dropped below 10. When that happens, I will open a VP that is equal in size to my PP stock allocation. I'll buy a low cost S&P500 index fund for my VP. Every year thereafter if the Shiller PP is less than 15 then I'll add or remove the same amount to my VP as my stock allocation in my PP.

At some point I'll retire or need a bunch of money or during re-balancing week I'll see that the Shiller PE is above 20. When any of those events occur, I'll close my VP and any money I don't need from it I will re-balance into my PP.

I think I may get some extra return over the PP buying stocks for low valuations and maybe selling them for higher valuations, but that is not the real reason I am opening a VP when the Shiller PE gets below 10. I'm opening my VP to protect myself from Secular Bull Stock Market Envy. When a guy at the gym, or my neighbor, or my boss, or my brother-in-law starts boasting about his outsized stock investment returns I'll think about how I bought extra stocks when no one else wanted them, when everyone was buying paintings or coins or vintage cars or complicated insurance policies or anything except stocks. That will make me feel good, and I won't dump my PP.

Until then I'm just hanging around with a PP.

I really love this answer.  Damn, I wish I had the intestinal fortitude necessary to go a whole year without looking at my portfolio.

My rule is that it is okay to look anytime, but not to touch. The good thing about that rule is that you get bored of looking and not touching, because what is the point, and then you stop wanting to look.

Storm wrote: I really love this answer.  Damn, I wish I had the intestinal fortitude necessary to go a whole year without looking at my portfolio.

I had this same problem.  Prior to the PP, I was spending two hours a day futzing with my "investments.". The discovery of the PP left a huge void in my life in the sense that I had to find a new way to spend this time.

I thought very hard about this, and chose something I'd always wanted to do.  It is amazing what can happen when you spend a year doing something for two hours 4-5 times a week, and I rarely check my portfolio now  mostly for lack of interest.

AdamA wrote:

Storm wrote: I really love this answer.  Damn, I wish I had the intestinal fortitude necessary to go a whole year without looking at my portfolio.

I had this same problem.  Prior to the PP, I was spending two hours a day futzing with my "investments.". The discovery of the PP left a huge void in my life in the sense that I had to find a new way to spend this time.

I thought very hard about this, and chose something I'd always wanted to do.  It is amazing what can happen when you spend a year doing something for two hours 4-5 times a week, and I rarely check my portfolio now  mostly for lack of interest.

AdamA, my relationship with my investment portfolio has gone through the same phases! Besides extra free time I feel less paranoid about my VP decisions as I realize whatever I do it won't affect my PP.

cowboyhat,

If long-term treasury rates are truly the market's prediction of S-T rate going forward into the future (it would make sense that this is the case), maybe we should not be waiting for a p/e ratio of 8 (another way of saying 12.5% yield) before we buy stocks in a VP.

I think the p/e ratio only being attractive at below 8 is a relic of when interest rates were at 9%... now the bond market is literally giving us a steaming pile of cow dung for returns... taking on some volatility and risk to get 5-7% (or maybe even about 4.5% as the S&P Shiller yield is about now) makes a TON more sense today than it did in 1981, or any time in recent memory.

Just a thought... I really like what you're saying, though.

For some perspective, here's a link to the Nikkei's Shiller P/E ratio:

http://www.quora.com/What-is-the-curren ... Nikkei-225

It has a Shiller P/E of 37, or about 2.7% yield... much higher than safe debt in Japan, but much lower than what one would expect from a "cheap" stock market.

AdamA wrote: The discovery of the PP left a huge void in my life in the sense that I had to find a new way to spend this time.

I thought very hard about this, and chose something I'd always wanted to do. 

...I became an active poster on an internet forum. 

moda0306 wrote: I think the p/e ratio only being attractive at below 8 is a relic of when interest rates were at 9%... now the bond market is literally giving us a steaming pile of cow dung for returns... taking on some volatility and risk to get 5-7% (or maybe even about 4.5% as the S&P Shiller yield is about now) makes a TON more sense today than it did in 1981, or any time in recent memory.

The Fed Model which assumes there is a correlation between stock yields and bond yields is bunko.  The durations do not align.  You cannot mix a 50+-year duration (stocks) with a 8-year duration (10-year Treasury).  It simply doesn't hold up earlier than the post-1981 twin bond and stock bubble.

The P/E ratio is just simplistic sentiment guage as far as P/E ratio expansion and contraction is concerned.  It's hardly the best way to determine the value of a future stream of discounted cash flows.

I use it to continually prove the hypothesis that I suck at investing.

Every time I think about getting an hourly job, I remind myself of the modified day-trading I did while on maternity leave with my first kid. Over the 8+ years I'd been with the company I was with, because we all had stock options, we watched the stock price obsessively. It was fascinating to see how in the course of a day, the stock would start at X and go up and down by miniscule amounts all day long. Sometimes it would end up, sometimes down, but the real key was the second-by-second fluctuations. There was money in that!

So I created all kinds of rules for myself to test out this theory I had that one could make substantial amounts of money just by buying and selling a stock in tiny amounts over the course of a day. I forget-all what the rules were, beyond that it had to be a "forever" stock, one I'd happily own forever. I liked no debt, low beta, and I forget what else I used as my criteria. I also set a rule that, unlike most day-traders, I would not seek to be out of my position at the end of the day no matter what. Since it was a forever stock, I didn't need to sell at a loss. I'd just hold it until I gained.

Anyway, this worked beautifully for awhile and I made a decent amount of money. Eventually, I got caught in a position with HD that I had to hold it for something like six weeks, which took up the rest of my maternity leave and indicated to me that I couldn't quit my day job to do this, since I couldn't reliably make the small amount I was seeking to make every day. The two other things I took away: Doing it in a non-tax-deferred account -- which I did because I was testing to see if I could replace my paycheck -- created lots of work at tax time. The comment "it's a dumb idea; you'd pay too much in taxes by short-term capital gains plus trading fees" held no water for me, because my profits were calculated to be after trading fees (which were high at the time through Schwab, at perhaps $19.95?) and as far as the taxes, the short-term cap gains tax rate was the same rate I'd pay on my paycheck, MINUS social security, so it was OK with me. It was in the days before ETFs and smartphones and $9 trades, too.

To sum up, I am thinking more and more these days about doing this again with $5,000 in my VP, in a Roth account. I LOVED the rush of this type of trading; it suits my personality very well. This may seem like small change, but it would be really simple to make $20-50 a day doing this, always starting with $5K.

Figuring It Out wrote:
To sum up, I am thinking more and more these days about doing this again with $5,000 in my VP, in a Roth account. I LOVED the rush of this type of trading; it suits my personality very well. This may seem like small change, but it would be really simple to make $20-50 a day doing this, always starting with $5K.

Isn't this really just gambling? 

AdamA wrote:

Figuring It Out wrote:
To sum up, I am thinking more and more these days about doing this again with $5,000 in my VP, in a Roth account. I LOVED the rush of this type of trading; it suits my personality very well. This may seem like small change, but it would be really simple to make $20-50 a day doing this, always starting with $5K.

Isn't this really just gambling? 

Her broker would probably hiss at you "Shhhhhhhhhhhh!"

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Isn't this really just gambling? 
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"just" gambling? I don't know. It's buying something at one price and aiming to sell it for a higher one, preferably soon after purchasing it in the first place. Closer to what any of us is attempting with the PP than Vegas-style gambling, in my view.

The rush is more from the feeling that I'm getting away with something than from a "gambler's" rush. (Although, since I've never gambled in the way I think you're implying, I couldn't say for sure.) Of course, in the end, it's all just a crapshoot, isn't it?