Gyroscopic Investing

If one's goals are primarily wealth preservation rather than wealth creation/growth, are there any better forms of investment than the PP? Don't just rely on backtesting, but imagine that the next 50 years could be tumultuous and dramatically different than the past 50.

This is a fundamental question, of course, since stocks, LTTs, and gold could conceivably drop by 60-90% going forward and cash could get ravaged by inflation. The PP might not respond as well as it has in the past, suffering drawdowns over several years, and lot of people could jump ship (especially if traditional investments are doing better). But is really anything safer out there if the future is unknowable? How would those who have not embraced the HBPP (such as a Boglehead) respond?

If I hand to pick one thing the PP is missing, it would be income producing land.

Reasoning:
People will always need food
People will always need shelter
People will always need clothing

However, you can't take land with you and this is where the PP wins, mobility.  Which I consider important for the unknowable future.

I-bonds and/or TIPS in a tax-advantaged account, that's how a Boglehead would respond.

iwealth wrote: I-bonds and/or TIPS in a tax-advantaged account, that's how a Boglehead would respond.

"TIPSymandias":

I met a traveller from an antique land
Who said: I have seen a curious bond
This bond made a promise rare among men and kings,
Backed by full faith and credit
The bond made it clear to all who bought, purchasing power is safe
Those who look upon the bond are counseled to take comfort
That which is will always be, a promise made is a promise kept,
And other assorted platitudes and assurances.
On the back of the bond these words appear:
"Inflation is tamed for all time!
Gold is barbarous and obsolete, inflation look upon this mighty bond and despair!"
No record of the issuer of the bond remains. Round the decay
Of this curious promise, boundless and bare
The lone and level sands of change stretch far away.

Bridgewater Associates has what they call a "Safe Portfolio" - designed to preserve capital even in a depression environment, see http://sdcera.granicus.com/MetaViewer.p ... ta_id=9141 (which also describes the the construction of Bridgewater's All Weather portfolio).  It apparently consists of 10% gold, 30% T-bills, 40% TIPS, and 20% T-bonds.  There's a performance chart showing (simulated) returns from 1929 to 1933, where this portfolio is basically a flat line (0%), while a conventional 60/40 stock/bond portfolio loses 70% of its value and even Bridgewater's All Weather portfolio (conceptually similar to the PP) loses more than 40% of its value.

rickb wrote: Bridgewater Associates has what they call a "Safe Portfolio"

Thanks, rickb. Something like this might get through a severe deflationary environment, but it would seem that real returns would get clobbered in an environment of high inflation. As for iBonds and TIPs alone, I just don't believe the inflation rates that they are pegged to are true measures of inflation. And then they are taxed...

I know all of this has been discussed before, but I think that it is worth revisiting. I am surprised at my reaction and that of others with the recent decline in gold prices. If gold dropped to 600/oz and other PP components did not fully counter, would I or people jump ship? Same for severe decline in LTTs or equities.

My primary goal is wealth preservation, since I am about 3/4 into my career. So I just want to rehash this so I and others do not abandon the PP when/if our 60/40 equity/bond friends are making money and we are losing more of our hard earned savings than past data on the PP have "predicted." I need to consistently be able to say, "Stay the course. The future in unknowable. This is as sound an investment allocation as it gets."

I might be inclined to be a little more weighted to protect against inflationary and deflationary tails, rather than prosperity if I were only concerned with protection and less so with growth.

30% Tbills
30% LTT
20% Gold
20% Real Estate, energy sector stocks, farmland

Something along those lines.

You might have a 10% variable portfolio where you invested in hedge funds or directly in businesses where you might find some outsized returns.  Or you might play with fine art, diamonds, and other "fun stuff" that many wealthy families have invested in over the ages.

Thanks. I wonder how a PP that is 40% Tbills and 20% each of the 3 remaining assets would compare. This would likely have sufficient inflation protection. And, although nominal returns could drop in a recession, real returns would likely not.

Any role for TIPS, or do you think that gold is sufficient (or more) reliable inflation protection?

Or, is 4x25 really the favored asset ratio for long term wealth preservation?

Boosting the cash portion, even to the point of 70/10/10/10 doesn't hurt the CAGR all that much (hits the CAGR a little more than 1% while nearly halving the standard deviation - over the last 40 years).  However, the more you increase the cash the less the gold protects you from a currency collapse scenario. 

All things considered, the 4x25 allocation is brilliant.  Most scenarios (including many that absolutely kill most portfolios) are handled with nary a glitch. 

Is there a scenario that kills the PP?  For example, what if a giant asteroid hits the earth?  I think pretty much any scenario that devastates the PP is in all likelihood more devastating to any other rational portfolio. 

Holding 25% gold while still basically keeping up (long term) with a 100% stock portfolio is almost unbelievable. 

rickb wrote: Boosting the cash portion, even to the point of 70/10/10/10 doesn't hurt the CAGR all that much (hits the CAGR a little more than 1% while nearly halving the standard deviation - over the last 40 years).  However, the more you increase the cash the less the gold protects you from a currency collapse scenario. 

All things considered, the 4x25 allocation is brilliant.  Most scenarios (including many that absolutely kill most portfolios) are handled with nary a glitch. 

Is there a scenario that kills the PP?  For example, what if a giant asteroid hits the earth?  I think pretty much any scenario that devastates the PP is in all likelihood more devastating to any other rational portfolio. 

Holding 25% gold while still basically keeping up (long term) with a 100% stock portfolio is almost unbelievable.

hi rick,

why 100% TIPS or 100% STT or 100% CD is not more conservative and better for preservation?

Tks

frugal wrote:why 100% TIPS or 100% STT or 100% CD is not more conservative and better for preservation?

I think what rickb is saying is that the HBPP, even with 25% gold, nearly matches the long-term performance of a 100% stock portfolio.

I think.

Desert wrote: That mix may or may not keep up with inflation, but I believe it would come close.

I don't think it will. I fully expect interest on T-Bills & Notes to be less than the true rate of inflation for years. Then come taxes which can be as high as 43.4%.

Most recent 3 year T-Note 0.375%. CPI-U last year, if you believe that to be an accurate estimate of inflation (which I don't), was 1.7%.

BearBones wrote:

Desert wrote: That mix may or may not keep up with inflation, but I believe it would come close.

I don't think it will. I fully expect interest on T-Bills & Notes to be less than the true rate of inflation for years. Then come taxes which can be as high as 43.4%.

Most recent 3 year T-Note 0.375%. CPI-U last year, if you believe that to be an accurate estimate of inflation (which I don't), was 1.7%.

I-bonds bought right now will at least keep up, and 5-year CDs are only trailing by a little. Ally is offering 'em at 1.6% at the moment. That's better than 5-year TIPS! You need to grab some 10-year bonds in order to actually beat inflation.

But yeah, it's a lean time for fixed income coupon payments for sure.

Pointedstick wrote: I-bonds bought right now will at least keep up, and 5-year CDs are only trailing by a little. Ally is offering 'em at 1.6% at the moment.

My VP contains international equities and cash in Canadian banks (could also do gold in SDB; have written about this elsewhere). Just bought 1 year GIC (CD equivalent) for 1.6%. For those close to the Canadian border, consider this both a means of higher interest as well as some measure of geographic diversification.

I don't understand the rage over iBonds since one is limited in contribution to 10k/yr per individual. So, assume that a couple put away the max from age 35 to 65, they would accumulate 600k (assuming interest keeps up but does not beat inflation). At current yield, this would generate only 10k in income. That might work for an extreme Early Retirement Extremer who's, in fact, not able to retire very early, but would it not do much for the vast majority of us.

BearBones wrote: I don't understand the rage over iBonds since one is limited in contribution to 10k/yr per individual. So, assume that a couple put away the max from age 35 to 65, they would accumulate 600k (assuming interest keeps up but does not beat inflation). At current yield, this would generate only 10k in income. That might work for an extreme Early Retirement Extremer who's, in fact, not able to retire very early, but would it not do much for the vast majority of us.

Its only 10K per SSN per electronic.  There's also 10K per SSN for paper and per SSN from tax rebates.

MachineGhost wrote: Its only 10K per SSN per electronic.  There's also 10K per SSN for paper and per SSN from tax rebates.

Nope. Only 5k paper I Bonds available from overpayment in taxes, and I believe that this also would be the limit for couple if filing jointly.
http://www.treasurydirect.gov/indiv/res ... ibonds.htm

Otherwise, paper I Bonds no longer available as of 1/1/12
http://www.treasurydirect.gov/news/pres ... nd0711.htm

So, now you are up to 13K per year interest if you have maxed out for 30 years....

BearBones wrote: Otherwise, paper I Bonds no longer available as of 1/1/12
http://www.treasurydirect.gov/news/pres ... nd0711.htm

Wow, that sucks!  I was under the impression the Treasury itself would no longer sell paper bonds directly, not that they would prevent financial institutions from doing so...

Well, there's always whole life insurance with a PUA rider from a mutual insurance company aka the Infinite Banking Concept.   You heard it here first, folks!  The Next Big Financial Fad.  But seriously, it actually had a heyday back in the high tax-high inflation 70's as a tax shelter until the IRS slapped on contribution limits (i.e. if you go past the limit, it becomes taxable).  But from what I gather, the limit is only per contract.  You can have as many insurance contracts as you desire.  As people are so desparate for yield nowaday, the hucksters are smelling blood like chum in the water.  It won't be long now before the seminars and infomercials start happening...

MachineGhost wrote: Well, there's always whole life insurance...

I have never seen a life insurance contract (other than term) that I felt like I completely understood. So, for me, that does not fall under the category of wealth preservation. Thanks, though.

$10,000 per year into a cash instrument is, to me, not an insignificant amount.

If you are seeding your PP with similar amounts in each asset every year, that means that you would be talking about saving $30,000-$40,000 every year before the ibonds limit really became a problem.  That's a lot for most people.

I think that some of the people who are bothered by the $10,000 limit are thinking about moving a large sum into the PP all at once and would like to be able to buy a BIG chunk of ibonds in the first year.

Desert wrote: And for some people, $600K in cash is a nice little nest egg.  Many are retiring with far less than that.

Yes, no doubt. My point is that it is damn hard to put enough $ into I Bonds to draw any significant interest income. And even then, the interest is meant to counteract inflation, not add enough to draw from.

But I am contradicting myself in that the original question was how to protect wealth, not to provide returns above inflation. I definitely see them as a component in a wealth preservation strategy.

To make my original question more relevant, I should probably rephrase as follows:
What might be the most conservative portfolio (least likely to suffer draw downs in all economic conditions) that might provide 2-4% real returns? In such a case, might HB suggest anything other than 4x25?

This is very relevant to Peak2Trough's thread on backtesting (http://gyroscopicinvesting.com/forum/ht ... ic.php?t=5). I bet the answer is buried in there. I am just not be smart enough to see it. 

BearBones wrote: This is very relevant to Peak2Trough's thread on backtesting (http://gyroscopicinvesting.com/forum/ht ... ic.php?t=5). I bet the answer is buried in there. I am just not be smart enough to see it. 

Use this as basis: http://gyroscopicinvesting.com/forum/ht ... 335#p27335

BearBones wrote: What might be the most conservative portfolio (least likely to suffer draw downs in all economic conditions) that might provide 2-4% real returns? In such a case, might HB suggest anything other than 4x25?

2-4% real returns seems pretty significant, especially if avoiding draw downs.  The long-term average of the U.S. stock market is only 6%-7% real and you know the risks that comes with that.

Right now I think the PP is probably your best bet, and I don't have high hopes for that given the current interest rates.

My approach is to forget about the draw downs, and invest in companies which have an established history of growing their dividend distributions.

But if you do remain concerned about draw downs, and many who follow this investing approach are, you might be interested to know that there is a large number of such companies with a beta lower than the market, making a low-volatility portfolio a realistic possibility.  Additionally the dividends help to mitigate the impact of draw downs, by providing cash and so reducing or eliminating the need to sell assets during those draw down times.  (Or the other way of looking at it, by providing cash which allows lowering cash reserves and putting more money to work, further increasing the yield.)

BearBones wrote: What might be the most conservative portfolio (least likely to suffer draw downs in all economic conditions) that might provide 2-4% real returns? In such a case, might HB suggest anything other than 4x25?

IMO: the PP diluted with a VP of short term Treasuries (cash). Suppose for the sake of argument that the PP earns 4% real and cash earns 0% after taxes; then you can target 2% real with 1/2 PP, 1/2 cash, or

12.5% stock
12.5% T-bonds
12.5% gold
62.5% T-bills

which is quite similar to other super-conservative portfolios including the one MachineGhost linked to.

MachineGhost wrote: Use this as basis: http://gyroscopicinvesting.com/forum/ht ... 335#p27335

I forgot about that, MG. Lots of work on your part. Thanks.

AgAuMoney wrote: But if you do remain concerned about draw downs, and many who follow this investing approach are, you might be interested to know that there is a large number of such companies with a beta lower than the market, making a low-volatility portfolio a realistic possibility.

Thanks. Even with lower beta, I'd still be concerned about drawdown in a severely deflationary environment. I'm also equally concerned about gold and LTTs, especially if other asset classes do not counter powerfully enough to mitigate losses.