Gyroscopic Investing

A twist to the PP

http://www.morningstar.com/advisor/t/73 ... ingle=true

This guy just doesn't get it.

"Rather than keeping 50% of the portfolio in Treasuries and cash, I opt to go active with PIMCO Total Return ETF BOND. Putting 40% in one actively managed exchangetraded fund will raise eyebrows—isn’t that relying too much on the oracular powers of one man, Bill Gross? Well, no. As much as PIMCO likes to play up Gross’ involvement in its ads, the fund’s outperformance against its passive benchmark has more durable roots. First, it has superior diversification. The fund owns bonds outside of its passive benchmark and can pursue various positiveexpected- return strategies that will forever be shut from passive investors. The fund also has the ability to intelligently use leverage and has low transactional costs in pursuing these advantages."

I like how casually he messes the whole thing up. Just another day at the office 

However, I do appreciate that he acknowledges that Harry Browne pretty much laid the foundation for risk parity. Not many people give him credit for that.

hrux wrote: A twist to the PP

http://www.morningstar.com/advisor/t/73 ... ingle=true

You should check out this thread if you haven't already: http://gyroscopicinvesting.com/forum/in ... 6.msg60592

Reub wrote: This guy just doesn't get it.

I think he was trying to get at managing the duration risk but fumbled on the implementation (he is just a journalist, after all).  If replacing 50% of the fixed income is the goal, then the Hussman Total Return Fund would actually do the job.  But the risk of a downturn in stocks where you have inadequate T-Bonds when the fund is in low duration Treasuries (as currently) would require active risk reduction.

Other than that...  volatility != risk and covariance != correlation.  I think the PP's assets really should have been weighted to the probability of the economic regimes occuring.  The "inflationary recession" risk is the smallest of the four, yet gold is overweight to that probability.

BTW, it seems lost on many that the PP is an active management strategy.  You are the active manager.

I think the PP's assets really should have been weighted to the probability of the economic regimes occuring.  The "inflationary recession" risk is the smallest of the four, yet gold is overweight to that probability.

MG, what's your take on the asset allocation that would be weighted to the regime probability?

The problem with this article, and ones like it, is it assumes the past defines the future. In fact, that's a huge problem with volatility weighting strategies that have become en vogue now. They are applying the same active management argument to a very unknown future.

MachineGhost wrote: The "inflationary recession" risk is the smallest of the four, yet gold is overweight to that probability.

Which really helped the PP over the past 5 years as gold rose 500%.

MachineGhost wrote: BTW, it seems lost on many that the PP is an active management strategy.  You are the active manager.

I guess if you consider mechanistic rebalancing at prescribed bands to be "active".  But that's about as broad a definition as you can get.  I think of active investing as regularly trying to predict where the markets are heading and adjusting your portfolio accordingly.  Which is bad, so don't do that or else the ghost of HB will come for you. 

MangoMan wrote: How can you 'recommend' a fund whose manager is clearly incapable of properly timing the market via his fund selections?

He's not incapable of stock picking and whether he is incapable of timing the market or not because he decided to "do no harm" and stay pat while making sure his approach was robust to Depression-era data during the bottom of 2009 is debatable.  We won't know for 100% sure until the next bottom in stocks whether or not he can really do it despite already doing it in 2000 and 2007.  Besides that robustness, he's made two further changes in response to the Fed's continual PPTing to reduce the negative impact.  Either way, theres no problem with the bond fund.  Fixed income is a lot easier to figure out than psychodrama of stocks!

stuper1 wrote:

I think the PP's assets really should have been weighted to the probability of the economic regimes occuring.  The "inflationary recession" risk is the smallest of the four, yet gold is overweight to that probability.

MG, what's your take on the asset allocation that would be weighted to the regime probability?

I don't think it would be as robust as correlations, but might do better than equal weight.  The reason why is because of the assumptions that identifying the regimes would involve.  You can either trust the market directly or trust institutional authorities for when so and so regime started and ended.  I'll stick with the former.

There was retrospective study done once that looked to see what kind of returns you could make if you invested perfectly in every ideal industry or sector over a complete business cycle.  It was trounced by momentum which is forward-looking.  So even perfect foresight is not enough to guarantee outperformance.

MachineGhost wrote:Fixed income is a lot easier to figure out than psychodrama of stocks!

If anything, the bond market is brutally efficient and even harder to predict than stocks (which is impossible to do as it is).

MangoMan wrote:

MachineGhost wrote:

Reub wrote: This guy just doesn't get it.

I think he was trying to get at managing the duration risk but fumbled on the implementation (he is just a journalist, after all).  If replacing 50% of the fixed income is the goal, then the Hussman Total Return Fund would actually do the job.  But the risk of a downturn in stocks where you have inadequate T-Bonds when the fund is in low duration Treasuries (as currently) would require active risk reduction.

Other than that...  volatility != risk and covariance != correlation.  I think the PP's assets really should have been weighted to the probability of the economic regimes occuring.  The "inflationary recession" risk is the smallest of the four, yet gold is overweight to that probability.

BTW, it seems lost on many that the PP is an active management strategy.  You are the active manager.

How can you 'recommend' a fund whose manager is clearly incapable of properly timing the market via his fund selections?

You need to look at PTTRX. Gross has performed very well despite some ill timed public calls. Regardless his total return bond fund keeps performing