Gyroscopic Investing

Hi,

Should one convert to the PP all at the same time or should the conversion be done more systematically?  Has anyone ever experienced converting to the PP when one of the asset classes was reaching all-time highs?  If so, did it have any affect on the portfolio's performance?

Thanks,
Jeremy

Each way has risks. Going in slowly risks you'll market time the assets and miss out on big gains. Going in all at once means you may buy into a bubble. But generally total portfolio value is still going to be OK even though one asset may fall. Then again, if your current portfolio is very heavy in one asset (heavy in stocks, gold, etc.) then diversifying may reduce risks.

I'm personally an all in kind of guy and that's what I did. My stocks lost money in 2008 but there was no way to avoid that. But the assets I thought would do the worst (LT Bonds) saved the day ultimately. Had I gone in slowly I wouldn't have had that protection. You just won't know what was the right decision until well after the fact.

If you're going to move in slowly then you should make it systematic and dedicate that you'll buy in X% a month until fully allocated (or whatever you feel comfortable doing). Then make sure you do it and not second guess market prices.

One thing to remember is that the Maximum Drawdown that the HBPP experienced recently was about 15%. Compare that to 30 or 40 percent or more for stock-heavy portfolios. So even if you went all-in during the worst possible time, you would have suffered a maximum 15% drop. Note that it recovered within the next two or three months. That was Oct 2008, a historic time.

Consider also that being overweighted in cash is not necessarily risk-free either.

Even having said all of this and trying to be rational, I've taken over a full year and am still 35% in cash, down from 80% early in 2010. Every time I go to buy, the asset looks "too high." And right now I'd have to also say, stocks, bonds, and gold all look "too high."  I guess I should hold my nose and invest the remaining 10% right away.  But I just wish I could get a 15% drop first.

One thing I would caution you to do is to go at least equally all in with all 3 asset classes at once.  Even if you only switch 10% of your portfolio, please do 3.33% stocks, 3.33% LT bonds, and 3.33% gold at once.  The reason is that I made a mistake when implementing my PP, and went all in LT bonds a couple days before stocks/gold.

What happened to me is that stocks had a couple great days of growth and LT bonds dropped a couple %, so I ended up losing out on 2% growth in stocks and capturing 2% losses in LT bonds.

If you go all in you are fully hedged from day 1 and don't have to worry about this scenario.

I would recommend going all in if you can manage it.