Gyroscopic Investing

I'm curious to know how people have determined their PP/VP split.  What reasoning have you used to figure out how much you could potentially afford to lose in your VP?

I'm currently at 70% PP simply because I have stock from a previous employer that I acquired quite cheaply.  It will probably take at least a few years to divest to minimize taxes (not that it's millions of dollars or anything).  I don't really feel the need to speculate at all and I'd probably sell it sooner rather than later, but it's been on a very nice run over the past year (and especially today!) which makes it tough.

To make a further distinction, I realize that some people put their "nest egg" in strategies other than the PP.  My question is really centered around how you allocate the split between nest egg and speculation.

Hi,

I'm thinking to make 90-10%

To lose 10% is already very very bad feeling.

Better to be conservative, no?

I'm quite young and have both a lot of time before retirement (and even ER if I can) and a very small portfolio for the moment, so a rather large VP (about 50% for the moment) fits me well. It will probably reduce with time, as my total portfolio grows.

I have lost 56% on the S&P in the stock market in 08' crash and kept on buying through it.  This was completely acceptable to me due to a firm belief in Boglehead indexing and dollar cost averaging.

So I guess based on my firm belief in Boglehead and now PP logic, my answer is 56%. Otherwise I should be adjusting my portfolio's exposure to risky assets.

My VP has fallen 25% over the last few months. It's hurt, but I haven't sold anything. I have, however, delayed a purchase I was going to make by selling some. My exit strategy basically consists of "hope it goes back up" which I fully realize is idiotic. So I'm still hopeful it will bounce back, but once (if?) it does, I'm putting it right into my PP. Even though I can tolerate those wild swings, I much prefer the comfort and predictability of the PP's smooth performance.

Pointedstick wrote: My VP has fallen 25% over the last few months. It's hurt, but I haven't sold anything. I have, however, delayed a purchase I was going to make by selling some. My exit strategy basically consists of "hope it goes back up" which I fully realize is idiotic. So I'm still hopeful it will bounce back, but once (if?) it does, I'm putting it right into my PP. Even though I can tolerate those wild swings, I much prefer the comfort and predictability of the PP's smooth performance.

Maybe it is to much % of your total

Is it 20% the weight of your VP?

I think 10% is better 

I intend for it to be 0%. It's all company stock I accumulated before learning about the PP. Right now it's about 30% of my total investments.

0% to VP.
I buy discretionary items with the money I can afford to lose.

Pointedstick wrote: My VP has fallen 25% over the last few months. It's hurt, but I haven't sold anything. I have, however, delayed a purchase I was going to make by selling some. My exit strategy basically consists of "hope it goes back up" which I fully realize is idiotic. So I'm still hopeful it will bounce back, but once (if?) it does, I'm putting it right into my PP. Even though I can tolerate those wild swings, I much prefer the comfort and predictability of the PP's smooth performance.

The stock in my VP is pretty volatile, and I have been watching it go up and down, up and down, up and down for the last 11 years.  I thought I had a similar exit strategy to yours, but my problem is now the opposite:  It has gone up 50% in the last year (after an almost 50% swing in the middle of the prior year), and 550% since the beginning of 2009!  Of course I did not buy any more when it was low, because who knew it was going to do that?  But selling when the price is rising is difficult too.  I did sell some early last year to move into my PP as I was setting it up, and while I don't think that was a "mistake" it's hard to miss out on a 50% gain.

Not truly knowing when to buy or sell is just more proof to me that perhaps I shouldn't be messing around with individual stocks anyway.

I guess I'm still wondering how/why people have decided on their personal PP/VP ratio, but perhaps it just comes down to circumstances.

I've been in that situation, flyingpylon. What I've found worked well for me was to sell half and realize a nice big gain, but you also hold some out for future gains. That said, 550% in 3 years is pretty awesome. Unless it's a gigantic amount of money we're talking about here, I'd probably sell it all and be content with the humongous profit, unless I had a really solid intuition that the factors propelling it so high were going to continue.

I almost started this thread a while back.  There's not much guidance on this topic.

I'm 100% PP because:  Anything I put into a VP, I expect to get higher returns.  If there really was another investment I expected to have higher returns, I would do it.  My investment in the PP is mostly one of doubt regarding future economic conditions.

flyingpylon...if an investment doubles, you might consider taking out 1/2 of your money (your orig. investment) and let the rest run?

Lots of volatility in your VP...what kind of stocks have you invested in giving those swings? My mining stocks have been volatile, but in the wrong direction of last year or more

While you are in the process of saving for retirement in an uncertain world, unless you are quite wealthy, just how do you go about figuring how much of the money you have you "can afford to lose"? I figure I can't afford to lose anything right now.

flyingpylon wrote: The stock in my VP is pretty volatile, and I have been watching it go up and down, up and down, up and down for the last 11 years.  I thought I had a similar exit strategy to yours, but my problem is now the opposite:  It has gone up 50% in the last year (after an almost 50% swing in the middle of the prior year), and 550% since the beginning of 2009!  Of course I did not buy any more when it was low, because who knew it was going to do that?  But selling when the price is rising is difficult too.  I did sell some early last year to move into my PP as I was setting it up, and while I don't think that was a "mistake" it's hard to miss out on a 50% gain.

You have two choices.  You can implement a trailing stop (based on a percent or volatility) or you can use intermediate-term or long-term market timing.  Much depends on how correlated it is to the market.  If it was something like a natural resource stock with its own boom-bust cycle, you would be better off using a trailing stop.

It isn't "how much can you afford to lose."  Any investment has risk of loss, including the PP.  (Just because it hasn't happened, does not mean it won't.)  In addition there are loss mitigation strategies which can be employed if you so desire.  So loss really isn't the issue.

For me, the issue is that the PP requires gov't bonds.  I find that a bitter pill to swallow.

I've discovered I can tolerate about 10% of my investable assets to be in gov't bonds.  By definition then, that limits my PP to about 40% to 50% of assets and thus my VP is 50% to 60%.

In practice my PP is in its own account which, somewhat coincidentally, has 40% of my investable assets.  A year ago it was right about 50%.  Two years ago about 60%.  The other stuff has done well...

My VP is primarily in gold, silver, and dividend growth stocks.  I do have some more speculative stocks and some other assets (including a bit of cash) but the silver and other stuff which is technically not allowed in a PP is less than 20% of my assets.

So how do I count it?

Just looking at the PP account, my PP is 39.9% of my assets as of the close of market Friday.

Looking at the percentage of bonds and extrapolating an ideal 4*1/4 PP from that, my PP is currently 36% of assets (bond prices have dropped lately).

Or if I assume the bonds are about 15% of my PP, then I can consider that about 60% of my assets are in a PP which is running at the bottom limit of 15% gov't bonds and somewhat low on cash.

Or I can also consider that about 80% of my assets are in a PP which is running too low on gov't bonds and at the bottom limit of 15% cash.

The appearance is in how you present it...  You can fudge your own books without ever lying about a single account, just in the presentation of the data.

Just remember to NOT supplement your VP from the PP when the VP goes down.  It is perfectly OK, and in fact encouraged, to supplement your PP from the VP!  (Having my PP in its own account makes this very clear and easy for me to track.  Money never comes out of the PP account to be invested in non-PP ways.)

I'm targeting a 40/60 PP/VP split within the next couple of years with a 15-20 year timeline to retirement.  I'll shift another 4% from the VP to the PP each year until I hit an 80/20 PP/VP split, and I'll maintain that ratio until retirement.  Once I'm officially retired, I'll shift another 1% annually from the VP to the PP each year until I'm 90% PP, which is where I'll stop.  From then on I'll use the remaining 10% in the VP to speculate. 

My reasoning (as flawed as it might be) is that I have enough time to recover large drawdowns in my VP before retirement, and I need the added volatility for potentially larger gains than the PP will provide in the short term.  It could be wishful thinking, but I only have history to use as a guide, so we'll see if the patterns of history continue marching on. 

Like the saying goes, the most dangerous 4 words in investing are: "This time, it's different". 

The PP can be expected to underperform during prosperity due to its low stock allocation, and overperform during almost all other times due to its heavy flight-to-safety asset allocation, to borrow a phrase from Sophie that I really like. It's actually quite a pessimistic portfolio. An idea I really like is simply having your VP be more stocks, maybe even more volatile ones like small caps. That will juice your overall portfolio's performance during periods of prosperity while not detracting from the safety of your PP during other times nor requiring dangerous speculations in your VP.

Here's a hypothetical definition:

You "can't afford to lose" enough money cover your bare-bones living expenses.  Basically your mortgage/rent, plus food, etc.  Anything you can't immediately cut in the wake of a job loss or other crisis.

Assuming a 4% SWR, you "can't afford to lose" 25 times your annual expenses.

In other words, once you are set up for retirement, you can't afford to lose your retirement fund -- anything above that is gravy.

What do you think?  This definition ends up implying quite a high number (vs. say a 1 year emergency fund)

I like that definition a lot, and it's basically what I'm using for myself. Then again, that 25x figure makes the most sense when you're talking about being able to replicate a given level of expenditure indefinitely without reducing the principal i.e. ERE. For a conventional retirement, actuarial facts and an indifference to depleting the principal might dictate a lower level that one could still be comfortable with.

"The PP can be expected to underperform during prosperity due to its low stock allocation, and overperform during almost all other times due to its heavy flight-to-safety asset allocation, to borrow a phrase from Sophie that I really like. It's actually quite a pessimistic portfolio. An idea I really like is simply having your VP be more stocks, maybe even more volatile ones like small caps. That will juice your overall portfolio's performance during periods of prosperity while not detracting from the safety of your PP during other times nor requiring dangerous speculations in your VP."

For this reason, this is the decision I've made for myself.  I think of it as insurance that I'll stick with the PP.  But I'm unsure about the allocation, ie. SCV, international, percentage, etc.  Also, seems like a poor time to buy in given the market run up.

dragoncar wrote: Here's a hypothetical definition:

You "can't afford to lose" enough money cover your bare-bones living expenses.  Basically your mortgage/rent, plus food, etc.  Anything you can't immediately cut in the wake of a job loss or other crisis.

Assuming a 4% SWR, you "can't afford to lose" 25 times your annual expenses.

In other words, once you are set up for retirement, you can't afford to lose your retirement fund -- anything above that is gravy.

What do you think?  This definition ends up implying quite a high number (vs. say a 1 year emergency fund)

Loosing is TERRIBLE, I panic with losses

I will do 90% PP 10% VP just because of historical performance but its hard to invest all my savings on 2 strategies

One day at a time wrote: For this reason, this is the decision I've made for myself.  I think of it as insurance that I'll stick with the PP.  But I'm unsure about the allocation, ie. SCV, international, percentage, etc.  Also, seems like a poor time to buy in given the market run up.

Sounds like a good time to double down on treasury bonds and gold, then.