Gyroscopic Investing

I try not to check the portfolio every day but if I'm bored at work I have a hard time resisting the temptation to click on the MorningStar button to see what's happening.

I've been in the PP about 3 years and I think this might be the best single day performance I have yet seen which was a complete surprise.

I wasn't paying close attention to the news but I heard something about a bad jobs report.

I know it means very little in the overall scheme of things but it brings me to my observation which is that after watching it for three years I think the PP does a lot better with bad economic news that it does with good.

notsheigetz wrote: I know it means very little in the overall scheme of things but it brings me to my observation which is that after watching it for three years I think the PP does a lot better with bad economic news that it does with good.

My impression, too. I built my porftfolio the Boglehead way, and in my retirement I am going defensive, focusing on the preservation of what I've accumulated, so the PP was just what the doctor ordered. I thank Taylor over at the BH list for favorably reviewing and excerpting the PP book, which is what induced me to give the PP strategy serious attention.

notsheigetz wrote: I know it means very little in the overall scheme of things but it brings me to my observation which is that after watching it for three years I think the PP does a lot better with bad economic news that it does with good.

I concur. The PP has two flight-to-safety assets and only one prosperity asset. Furthermore, gold is a lot more volatile than stocks are. It's sort of an inherently bearish portfolio more so than it is conservative. It's a tricky problem to solve without messing with the percentages... I wish there was a more-volatile stock fund that wasn't leveraged or sector weighted. I've been considering buying a small-cap value index the next time the market crashes again because I want more upside stock volatility, but who knows how long the historically superior performance of small-cap stocks will last?

notsheigetz wrote:
I've been in the PP about 3 years and I think this might be the best single day performance I have yet seen which was a complete surprise.

I remember a string of days similar to today that occurred roughly 2 years ago when S&P downgraded the US credit rating.  It was fun to watch. 

Pointedstick wrote: I concur. The PP has two flight-to-safety assets and only one prosperity asset.
...
It's sort of an inherently bearish portfolio more so than it is conservative. It's a tricky problem to solve without messing with the percentages... I wish there was a more-volatile stock fund that wasn't leveraged or sector weighted.

Why not just have a lot of stocks in your vp?

dualstow wrote:

Pointedstick wrote: I concur. The PP has two flight-to-safety assets and only one prosperity asset.
...
It's sort of an inherently bearish portfolio more so than it is conservative. It's a tricky problem to solve without messing with the percentages... I wish there was a more-volatile stock fund that wasn't leveraged or sector weighted.

Why not just have a lot of stocks in your vp?

That's in fact what I've done, but I still feel the urge to tinker with the PP. I tell myself I'm optimizing it. I'm making it a better version of itself. More like how it really is. Yeah, that's it! I can quit whenever I want!

Maybe I should just lay off and be content with my SCV VP.

Pointedstick wrote: That's in fact what I've done, but I still feel the urge to tinker with the PP. I tell myself I'm optimizing it. I'm making it a better version of itself. More like how it really is. Yeah, that's it! I can quit whenever I want!

Ha! That would have made a pretty good cartoon for the pp book, except that it would feature an active manager and his customer.
Friend: "What happened to all your savings?"
"He optimized them." 
Then again, Browne did say that the 25% shares were somewhat arbitrary and for simplicity's sake. I suppose there's a little wiggle room there. The only reason I don't is because I don't trust myself to tilt in the right direction.

dualstow wrote: Then again, Browne did say that the 25% shares were somewhat arbitrary and for simplicity's sake. I suppose there's a little wiggle room there. The only reason I don't is because I don't trust myself to tilt in the right direction.

I don't really either, which is why I would prefer the 25% stock allocation to have a bit more punch. The reality is that only one of the four slices of the HBPP pie benefits from prosperity, and ideally we'd like to eating that slice 100% of the time because our economy is firing on all cylinders. But there are three tyes of non-prosperity we hedge against and only one type of prosperity we agree to benefit from. So there's a degree of pessimism baked into the portfolio even though it's ostensibly neutral with regard to the prevailing economic conditions.

Which is I guess a fancy way of saying that the HBPP isn't the end-all and be-all of all portfolios. It might well be too pessimistic for an entrepreneurial-minded optimist with a lot of savings, an extremely robust career, and a long time horizon who's living in a prosperous society during its rise. Of course that probably doesn't describe many of us. 

Pointedstick wrote: The PP has two flight-to-safety assets and only one prosperity asset. Furthermore, gold is a lot more volatile than stocks are. It's sort of an inherently bearish portfolio more so than it is conservative.

Agreed on the observation that lately the portfolio seems to benefit most from bad news.  However, I sometimes have to remind myself that the strong negative correlation between stocks and LTTs hasn't always been the case.  Back in the 80s & 90s, for example, both did quite well at the same time and moved together.  Here's some great charts from Melveyr:

http://www.stableinvesting.com/2013/01/ ... n-not.html

So I see the portfolio not so much as 75% bearish, but positioned to make money no matter the market conditions.  And just keep in mind that historically stocks are not always the prosperous loners like they're behaving right now.

It's been that way recently, but not so much last year.  Gold and stocks spent a lot of time moving together, and bonds were the lone counterweight.  Upward price movements in bonds were never enough to make up for the losses in stocks and gold when they had their bad days.  That's when I spent a lot of time backtesting with EDV and considering buying zeroes instead of nominal bonds.

Normally, a nice color-coded line plot would be expected here, but I'm just too lazy tonight.

Bonds can also do well during prosperity because of the nice income stream. This is assuming it is beating actual inflation though.

I've commented for years that if someone wanted more upside in the stocks they can just own more stocks in the VP. Just use an index fund and realize that it may bite you eventually. But then again it could be just the upper some people want.

Personally with the average historical growth of the 4x25 almost matching the growth of a 100% stock portfolio with around 1/3-1/4th the volatility, I don't feel like messing with it. But I understand the urge. I'd just say that the time to be debating putting in more stocks for speculation was back in 2009, not today when it's at an all-time high. So anyone looking to do it should really make sure they are prepared in case the markets go wonky again.

Pointedstick wrote:

notsheigetz wrote: I know it means very little in the overall scheme of things but it brings me to my observation which is that after watching it for three years I think the PP does a lot better with bad economic news that it does with good.

I concur. The PP has two flight-to-safety assets and only one prosperity asset. Furthermore, gold is a lot more volatile than stocks are. It's sort of an inherently bearish portfolio more so than it is conservative. It's a tricky problem to solve without messing with the percentages... I wish there was a more-volatile stock fund that wasn't leveraged or sector weighted. I've been considering buying a small-cap value index the next time the market crashes again because I want more upside stock volatility, but who knows how long the historically superior performance of small-cap stocks will last?

Don't wish to start another thread but i'm just wondering how you can state that gold is alot more volatile than stocks? i'm not disagreeing but if someone asked me that question wo having facts in hand or getting a clear definition of volatile, i would wo hesitation state that gold is alot less volatile than stocks - have we ever seen gold price drop or rise by more than say 5% in one day ? gold price thru much of the 80's, while low, was very steady and not volatile. 

China Bull wrote: Don't wish to start another thread but i'm just wondering how you can state that gold is alot more volatile than stocks? i'm not disagreeing but if someone asked me that question wo having facts in hand or getting a clear definition of volatile, i would wo hesitation state that gold is alot less volatile than stocks - have we ever seen gold price drop or rise by more than say 5% in one day ? gold price thru much of the 80's, while low, was very steady and not volatile.

I will cede the floor to Mr. Melvey. 

China Bull wrote:

Pointedstick wrote:

notsheigetz wrote: I know it means very little in the overall scheme of things but it brings me to my observation which is that after watching it for three years I think the PP does a lot better with bad economic news that it does with good.

I concur. The PP has two flight-to-safety assets and only one prosperity asset. Furthermore, gold is a lot more volatile than stocks are. It's sort of an inherently bearish portfolio more so than it is conservative. It's a tricky problem to solve without messing with the percentages... I wish there was a more-volatile stock fund that wasn't leveraged or sector weighted. I've been considering buying a small-cap value index the next time the market crashes again because I want more upside stock volatility, but who knows how long the historically superior performance of small-cap stocks will last?

Don't wish to start another thread but i'm just wondering how you can state that gold is alot more volatile than stocks? i'm not disagreeing but if someone asked me that question wo having facts in hand or getting a clear definition of volatile, i would wo hesitation state that gold is alot less volatile than stocks - have we ever seen gold price drop or rise by more than say 5% in one day ? gold price thru much of the 80's, while low, was very steady and not volatile.

Gold is extremely volatile. Large price swings are entirely likely. It has been known to lose 30% inside of a year. Or stack up multiple losing years in a row.

Stocks, bonds and gold are all volatile in their own ways. We need to always remember this. It's only when we combine the volatilities to offset each other that we get a safer allocation.

China Bull wrote: Don't wish to start another thread but i'm just wondering how you can state that gold is alot more volatile than stocks? i'm not disagreeing but if someone asked me that question wo having facts in hand or getting a clear definition of volatile, i would wo hesitation state that gold is alot less volatile than stocks - have we ever seen gold price drop or rise by more than say 5% in one day ? gold price thru much of the 80's, while low, was very steady and not volatile.

Volatility is not risk.  Gold lost 70% of its nominal value from its peak in 1980 to the bottom around 1999-2001.