Gyroscopic Investing

Days like today and yesterday prove how challenging it will become for many to invest in the PP during a bull market run in equities. The PP outperforms when equities plunge, but under-performs when equities rise (generally speaking). If you are not a contrarian, then the cognitive dissonance of holding such a portfolio in times of prosperity is overwhelming. In other words, it's tough on the mind when the S&P achieves a 5-year high and your portfolio is down for the day.

That's why you're only supposed to check your portfolio a few times a year.  Helps you sleep better at night when you're only seeing the "big picture" and not being distracted by the minutiae of the day-to-day market gyrations.

Budd,

Your expectations for the PP are too high.  It is not supposed to beat a stock heavy portfolio (although it will at times).  The PP is designed to provide a somewhat consistent annual real return of 3-6%.  That's it.  You'll feel much better if you lower your expectations.

I've always said that a bull market in equities will ensure that a relatively small percentage of people adopt the PP.

I thought something really bad had happened.

I never would have known what bud is talking about if he hadn't posted.

I've completely stopped looking in on the PP and comparing it to other strategies.  I look in on my hypothetical PP in SmartMoney every couple of days, but I look at it the way I look at sports scores.

My investment ideal is to have almost zero mental friction.  The PP will help you get there if you will let it.

clacy wrote: I've always said that a bull market in equities will ensure that a relatively small percentage of people adopt the PP.

What, if anything, do you plan to do during a bull market in equities?

I've matured over the last year and plan to stay the course. I was merely making an observation. The PP is up YTD after all

buddtholomew wrote:

clacy wrote: I've always said that a bull market in equities will ensure that a relatively small percentage of people adopt the PP.

What, if anything, do you plan to do during a bull market in equities?

I've matured over the last year and plan to stay the course. I was merely making an observation. The PP is up YTD after all

Any strategy that is not 100% equities is going to have periods where it underperforms equites, that is almost definitional.

Besides, if 100% equities does not match your risk tolerance than why would you bother comparing the PP to it?

melveyr wrote:

buddtholomew wrote:

clacy wrote: I've always said that a bull market in equities will ensure that a relatively small percentage of people adopt the PP.

What, if anything, do you plan to do during a bull market in equities?

I've matured over the last year and plan to stay the course. I was merely making an observation. The PP is up YTD after all

Any strategy that is not 100% equities is going to have periods where it underperforms equites, that is almost definitional.

Besides, if 100% equities does not match your risk tolerance than why would you bother comparing the PP to it?

Underperforming equities is one thing, but losing .5% when the S&P is up .5% is something completely different.

buddtholomew wrote: Underperforming equities is one thing, but losing .5% when the S&P is up .5% is something completely different.

... Sounds like the exact same thing to me 

melveyr wrote:

buddtholomew wrote: Underperforming equities is one thing, but losing .5% when the S&P is up .5% is something completely different.

... Sounds like the exact same thing to me 

Here's an example:

Underperforming equities with only a .2% gain versus a .5% loss.

MediumTex wrote: I thought something really bad had happened.

Ditto. I heard the news that the S&P 500 was approaching an all time record but the fact that this was something bad for the PP escaped me completely and that's just how I like it.

Having said that, the only PP friendly options available in both mine and my wife's 401k plans are low-expense S&P index funds so that's where all of our new money goes. So if I hear the stock market is going up I say this is cool. I just have to check it occasionally to make sure I'm not getting too far out of balance.

buddtholomew wrote:

melveyr wrote:

buddtholomew wrote: Underperforming equities is one thing, but losing .5% when the S&P is up .5% is something completely different.

... Sounds like the exact same thing to me 

Here's an example:

Underperforming equities with only a .2% gain versus a .5% loss.

I guess if relative performance to equities really bothers you should do 40% stocks, 20% bonds, 20% cash, and 20% gold. In real terms it will probably be a bumpier ride though.

I'm not really sure what you are after. Do you want consistent annual real returns, or do you want a portfolio that follows the stock market? You can't have both.

I'm always rooting for my stocks.

It actually doesn't bother me to see stocks doing better than the PP, in the same way that it doesn't bother me when I see bonds doing better than the PP, or gold. One of those assets is ALWAYS going to be doing better than the PP :-) so get used to it, Budd!! :-)

melveyr wrote: I guess if relative performance to equities really bothers you should do 40% stocks, 20% bonds, 20% cash, and 20% gold. In real terms it will probably be a bumpier ride though.

These "difficult times" are why I only have about 40% of my investable assets in my PP.

However I won't say that my solution is a panacea!  I'm heavy stocks, but I'm also heavy gold and silver. So days like today are still difficult.

IMHO, sure you can look at the HBPP portfolio everyday if necessary and you can compare to any benchmark you wish. But in each case look at the long term return of each; let's say the last 5 years or better still 10 years - a rolling window of the last t years. That would be a fair comparison. I can't think of any strategy that will do better every day or week or month or even year.
Actually I would look at the regressed return over the past t years for comparison to avoid any hiccup on any particular day.

A long term investor who had been in 100% U.S. stocks for the last 13 years would have had a very rough ride for a 0% return.

I'm fine with letting stocks do better than the overall PP on some days.

budd,

don't worry. bears will have their day, and likely soon. This market has so many things likely to pull it down in the next 3- 6 months.

China Bull wrote: budd,

don't worry. bears will have their day, and likely soon. This market has so many things likely to pull it down in the next 3- 6 months.

Ooh, put it in the prediction thread and let's come back in a few months and see if you were right 

http://gyroscopicinvesting.com/forum/ht ... ic.php?t=3

buddtholomew wrote:

clacy wrote: I've always said that a bull market in equities will ensure that a relatively small percentage of people adopt the PP.

What, if anything, do you plan to do during a bull market in equities?

I've matured over the last year and plan to stay the course. I was merely making an observation. The PP is up YTD after all

I'm not planning on doing anything different than I have been.  Budd, you have to ask yourself what you want.  You freak out any time your portfolio loses money, but now your freaking because it didn't keep up with the S&P. 

Which is it?  Do you want low volatility or do you want stock gains. If you value pure performance, then the PP probably isn't for you.  On the other hand, it seems like volatility really bothers you so can you handle an all stock portfolio?

I think budd wants a straight line that always goes up and still beats the stock market in the long run.  I think we all want that but unfortunately it doesn't exist.

melveyr wrote: I think budd wants a straight line that always goes up and still beats the stock market in the long run.  I think we all want that but unfortunately it doesn't exist.

That would be delightful  An observation that the PP was down while the S&P500 was up brought out my true emotions about GLD and TLT. These components of the portfolio are the two that I am most fearful of dominating the outcome of the portfolio returns (negatively) in a black swan event. I guess I like only 50% of the portfolio assets 

There is no reason that you can't commit, say, 50% to a PP and the rest to a Boglehead-style "age in bonds" portfolio.

Reub wrote: There is no reason that you can't commit, say, 50% to a PP and the rest to a Boglehead-style "age in bonds" portfolio.

Another possibility:

Do age in bonds, but your "bonds" are the blend of gold, LTT, and cash. You approach the very safe PP towards the end of your life and if you are lucky you might capture the long term risk premium that equities have provided historically. Of course if you are lucky enough to make it to 75 I wouldn't keep boosting the "bond" portion but just stay at the 4 way split.

Regardless, if underperforming the stock market is seen as a risk in your eyes, the only way to surely mitigate that risk is by holding more equities.

melveyr wrote: I think budd wants a straight line that always goes up and still beats the stock market in the long run.  I think we all want that but unfortunately it doesn't exist.

But it will look like it exists if your samples are spaced far enough apart.

In other words, only look every 5 or 10 years.

A few days ago we worked out that budd needed to overweight cash to reduce volatility enough to feel comfortable. Now we're working out how much he needs to overweight stock to increase volatility enough to feel comfortable. Is anyone else familiar with the Dr Seuss book "The Sneeches?"