Gyroscopic Investing

Not sure how useful these observations and questions are. But I thought of sharing them.

Today, a typical 25x4 portfolio lost 2.59%. A 25x4 Canadian portfolio lost 2.75%. I personally lost somewhere in between (I own a hybrid CAD/USD PP, with a 66/33 split).

During the five or so years since I started tracking the portfolio, the only two days that I know of that saw similar drops are Oct 10, 2008 and Dec 1, 2008. There was a lot of volatility during that period (Lehman, AIG etc...), but gold was a little ahead of the stock market in both the collapse and recovery. By March 2009 when the S&P was still bottoming, gold had already recovered.

I think the ferocity of the drop is scary. I plan to stick to the plan, or at least try to. What concerns me is that this drop might (will?) spark margin calls and the collapse of several hedge funds, not only in gold but also in other asset classes, esp. the stock market. I'm just trying to be mentally ready if this happens.

My main question is: 2008 saw an intra year drop of 17% (May to October I believe), which was all recovered during the last 2 months of the year, thanks to the last minute spike in LTT. Does anyone have a list of all such intra year drops, how long they lasted and what happened in the 6 months after?

Thanks to all
  -jay

I cannot answer your question, but will pose another one in context. Can LTT's provide adequate support if required to buoy the portfolio as they did in 2008? In other words, has the decline in interest rates over the last few years reduced their ability to counteract declines in equities and gold?

buddtholomew wrote: I cannot answer your question, but will pose another one in context. Can LTT's provide adequate support if required to buoy the portfolio as they did in 2008? In other words, has the decline in interest rates over the last few years reduced their ability to counteract declines in equities and gold?

That's my main fear. In many ways I feel we are vulnerable to another equity crash like 2009 but LTT'S are in a much weaker position for new PP adopters like myself.

If I recall, yields were around 4.0-4.5% in late 2008 during the decline. Dropped to around 2.5% or so? But then rebounded pretty fast in early 2009. But gold also went up 5% so there was some buffer there.

http://www.treasury.gov/resource-center ... ation.aspx

If it repeats though the same thing won't happen. Bonds could offset a lot of losses even from this point, but then again gold could also go up. There are too many ways for things to unfold. You will have lots of people running for the exits looking to put money into anything that isn't the stock market.

Then there is the 25% in cash which is also in play.

But mostly again there is a bit of a firewall built in with the 25% allocation in the stocks. A very sharp market decline, even with no other assets responding, still is limited in the damage caused. A brutal 50% decline would be a -12.5% impact to the portfolio. Let's even say that the gold market drops 50% as well to make the total losses to -25% total. This is not great, but compared to what a stock holder experienced in 2008 it is still ahead.

And then of course the other issue is we are only talking about one day snapshots of performance. Being patient to give assets a time to settle is usually a good idea. In 2008 I watched stocks dive and it took, literally, weeks before long term bonds caught on fire. It was not instant. It never is.

Very insightful post. Perhaps I need a deeper understanding of bond yields, but to counteract losses in equities and gold of 50%, LTTs would have to drop over 3% in yield. With the 30 year treasury yielding 2.88, how is this possible? My understanding must be incomplete, but is there a floor to treasuries where gains can no longer be achieved? Keep cash out of the discussion for a moment.

Cash is the only component that I feel confident about right now!

Reub wrote: Cash is the only component that I feel confident about right now!

And cash sucks too!

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