Gyroscopic Investing

My understanding is that the PP allocations take advantage of the fact that the asset classes are not correlated, and that at any given time one or two are up and one or two are down. However in the current environment it seems like all three are up (stocks, bonds, gold all near all time highs-) and cash being cash is not relevant. How can they all be up at once?

Is there a good explanation for this? (Maybe that they are trending in different directions?)

Any thoughts would be appreciated, thanks!

Expensive is a relative term. Bonds and gold have been treading water for a year; it's mostly stocks that have really taken off during that time. Especially with the recent uptick in rates and decline in gold prices, I think it's a great time to buy both.



Ya just gotta jump in. An asset that looks expensive today might be even more expensive tomorrow. I'm sure a lot of people freaked out when gold hit $800 or $1,000/oz; look at where we are now.

The asset classes are chosen because of how they respond to different macroeconomic conditions (inflation, deflation, prosperity, recession), not because they are "uncorrelated".  I suspect all 3 volatile assets being at or near all-time highs means we're in a transitional period.  In particular, LTTs being high implies we're in a deflationary period - however gold being high implies we're in (or the markets are expecting) an inflationary period.  Two or three years from now it will be obvious whether the period we're in right now is actually more deflationary or more inflationary.  If inflationary forces have won, gold will be up and LTTs down.  If deflationary forces have won, LTTs will be up and gold may be down. 

Another dynamic is the timing between the response and the reality.  LTTs react to current interest rates (response coincident with reality), while gold and stocks react to market expectations (response preceding reality).  One way to view the current situation is that we're actually in a deflationary period that the market expects will turn inflationary.  The market may or may not be right, and either way the PP has you covered. 

You have to recognize that "all time highs" are a backward looking measure.  There is no implication that just because something reaches a 52 week high that it is about to start declining in value.  You can only know if it actually was an all time high in retrospect.

meamakim wrote: My understanding is that the PP allocations take advantage of the fact that the asset classes are not correlated, and that at any given time one or two are up and one or two are down... Is there a good explanation for this? (Maybe that they are trending in different directions?)

During my quarter century as an investor, I accumulated a nice portfolio by following the Boglehead philosophy. While the BH approach emphasizes diversification among non-correlated assets on an "age in bonds" basis, I was attracted to the PP after understanding that correlations between assets are not set in stone: they fluctuate, sometimes wildly, and during a crisis correlations tend to "flat line."

So for me the PP emphasis on Harry Browne's four asset classes, one or more of which is calculated to grow or remain stable during periods of prosperity, recession, inflation and deflation, is just what the Personal Finance Doctor ordered. After sweating out the accumulation phase as a fairly strict but generally happy Boglehead, I am enjoying the PP in my retirement, pleased with lower overall returns in exchange for lower volatility. And I hope we will never encounter a nightmare scenario which even the Blessed St. Harry did not forsee. Let us pray this day never arrives!

goodasgold wrote:

meamakim wrote: My understanding is that the PP allocations take advantage of the fact that the asset classes are not correlated, and that at any given time one or two are up and one or two are down... Is there a good explanation for this? (Maybe that they are trending in different directions?)

And I hope we will never encounter a nightmare scenario which even the Blessed St. Harry did not forsee. Let us pray this day never arrives!

Amen to that, brother. Amen to that.

rickb wrote: I suspect all 3 volatile assets being at or near all-time highs means we're in a transitional period.  In particular, LTTs being high implies we're in a deflationary period - however gold being high implies we're in (or the markets are expecting) an inflationary period.....  The market may or may not be right, and either way the PP has you covered.

Good analysis, rickb. It is commonplace, in any given situation, to say that "the market has already factored it in." But sometimes the market is approaching a fork in the road, and opinion is divided as to which fork it will take.

The beauty of the PP approach is that both forks are covered no matter which one is finally taken.

meamakim wrote: the asset classes are not correlated, and that at any given time one or two are up and one or two are down. However in the current environment it seems like all three are up (stocks, bonds, gold all near all time highs-) and cash being cash is not relevant. How can they all be up at once?

Not correlated does not mean "at any given time one or two are up and one or two are down." (emphasis added)  It means that the general trend of them over time is different.

All being up could just be general inflation caused by QE3, to infinity and beyond!

(But actually treasuries have been in a general decline with brief upticks since last summer or fall...  August 27th I sold EDV over $128 and my div reinvest history shows TLT peaked at nearly $127 last June but I turned off reinvesting for Jul, Aug or Sep so it could easily have gone higher.)

Bonds are very expensive from a historical standpoint that's true. They're a little off their all time-highs but well above historical norms. Stocks and gold are not even close to all-time highs though. When you adjust for inflation they have been much higher. It's the way you're measuring them (USD) that's way down.

A lot of stocks are selling for very low multiples and a lot of regions in the world look quite cheap. Gold (silver) imho are headed much much higher in the years to come.