Gyroscopic Investing

bill wrote: So, my question is, what's wrong with buying short term Treasury bonds, instead of long?  Thanks.

MachineGhost wrote: Short term Treasuries wont provide you any downside protection if stocks and/or gold decline.  So unless you don't plan on buying any stocks, long term Treasuries are necessary to hedge them.  Historically, the worst maximum drawdown for stocks was -85% or so...  25% of that would be -22.25% without any long term Treasuries to help buffer the shock.

When interest rates do rise, they're not going to jump 10% overnight and wipe out a huge chunk of principal.  It will be a multi-decade thing, so there will be plenty of time for rebalancing to capture the volatility highs and lows while muting the negative returns.

Libertarian666 wrote: Are you sure of that? I suspect very strongly that if the Fed ever stops QE, bond rates will head for the moon very rapidly, as there is NO bid for them at anything like the current rates for any other reason than front-running the Fed.

Pointedstick wrote: One of the hardest parts of embracing the PP is learning to accept that not only is at least one of the assets always underperforming at some point in time, but each investor is bound to really hate one of them (seems evenly split between gold ands bonds in my experience but there are some stock-o-phobes).

Pointedstick wrote: In your last thread, you were worried about cash and bonds. Since then, it seems that you've come to terms with cash but are still nervous about bonds. One of the hardest parts of embracing the PP is learning to accept that not only is at least one of the assets always underperforming at some point in time, but each investor is bound to really hate one of them (seems evenly split between gold ands bonds in my experience but there are some stock-o-phobes).

Ad Orientem is absolutely right; you seem think you can predict the future vis-a-vis interest rates. As I suggested before, if you're so sure about this, you should short bonds, because you'll make a killing if you're right. If you're not comfortable putting your money where your mouth is, ask yourself why not. Perhaps it's not that you're sure that interest rates will soon rise, but you're just afraid that it might happen.

In which case, you're in the same boat as all of us. Nothing is certain when investing. We're all at the mercy of congress, the stock market, the banks, the fed, and the Asian wedding industry. We have to accept the returns that we can get from participating in these markets because we acknowledge our inadequacy in attempting to beat them. Even people with decades of experience and powerful analysis algorithms running on supercomputers can't reliably predict the future and beat the markets.

rocketdog wrote:

Pointedstick wrote: One of the hardest parts of embracing the PP is learning to accept that not only is at least one of the assets always underperforming at some point in time, but each investor is bound to really hate one of them (seems evenly split between gold ands bonds in my experience but there are some stock-o-phobes).

Gee, I would have thought cash was the most-hated asset?  At least it is for me*, since it just kind of sits there doing nothing except losing value to inflation year after year after year...

(*Well, maybe "hate" is a strong word.  Let's just say that cash is the smallest of my PP holdings -- about 10% --  so make of that what you will)

bill wrote: For the last 45 years I have been dollar-cost-averaging.  To now take 25% of that money and slam dunk it into something I don't have a good feeling about goes against every fiber of my being.

Ad Orientem wrote:

rocketdog wrote:

Pointedstick wrote: One of the hardest parts of embracing the PP is learning to accept that not only is at least one of the assets always underperforming at some point in time, but each investor is bound to really hate one of them (seems evenly split between gold ands bonds in my experience but there are some stock-o-phobes).

Gee, I would have thought cash was the most-hated asset?  At least it is for me*, since it just kind of sits there doing nothing except losing value to inflation year after year after year...

(*Well, maybe "hate" is a strong word.  Let's just say that cash is the smallest of my PP holdings -- about 10% --  so make of that what you will)

Hahaha  I sort of agree with you. I like cash. It helps me sleep at night. But it really is terribly nonproductive. I have often said that PP is not for everyone. If I were uber-wealthy and could handle the increased volatility there is no way I would hold that much cash.

bill wrote: For the last 45 years I have been dollar-cost-averaging.  To now take 25% of that money and slam dunk it into something I don't have a good feeling about goes against every fiber of my being.

Pointedstick wrote:

bill wrote: For the last 45 years I have been dollar-cost-averaging.  To now take 25% of that money and slam dunk it into something I don't have a good feeling about goes against every fiber of my being.

Dollar-cost-averaging isn't incompatible with the PP or bonds. You can DCA into anything. If you want to implement a PP, you couldeasily DCA into it bit by bit by buying the 4 assets in equal proportions over a series of months or years.

And if you really don't like bonds, that's fine. Maybe the PP isn't for you. But understand their purpose in the PP: to be very volatile and react to falling interest rates, inflation, and fear in the stock market. If you believe that these reactions exist, then your "interest rates are about to spike!" objection is really a prediction of higher inflation, a strong stock market, and the Fed tightening its interest rate policy. Ask yourself if you predicted these things in the past. Did they happen? If not, what makes you so sure they're about to happen now?

Really dig into your reasons for disliking bonds. First you must understand yourself and your feelings and motivations.

smurff wrote: A temporary pandemonium would erupt.  Stock and bond prices would crash, and gold would spike.  Then the markets would settle, stock and bonds would gain a bit, and bond prices would begin a slow decline. Stock prices might gain a lot, depending on whether people thought they were the only worthwhile investment.

Then CNBC will reveal the announcement of the end of QE was a hoax, there would be congressional investigations, etc.  People invested in the PP would watch all of this in calm bemusement, their portfolios calm through the QE storm.

rocketdog wrote: Then this country would be headed for a disaster of biblical proportions.  Old Testament, real wrath-of-God type stuff!  Fire and brimstone coming down from the sky! Rivers and seas boiling!  Forty years of darkness! Earthquakes, volcanoes!  The dead rising from the grave! Human sacrifice! Dogs and cats, living together! Mass hysteria!


(with a nod to Ghostbusters)

Libertarian666 wrote:

rocketdog wrote: Then this country would be headed for a disaster of biblical proportions.  Old Testament, real wrath-of-God type stuff!  Fire and brimstone coming down from the sky! Rivers and seas boiling!  Forty years of darkness! Earthquakes, volcanoes!  The dead rising from the grave! Human sacrifice! Dogs and cats, living together! Mass hysteria!


(with a nod to Ghostbusters)

Exactly, and who would want T-bonds then? 

Ad Orientem wrote:

Libertarian666 wrote:

rocketdog wrote: Then this country would be headed for a disaster of biblical proportions.  Old Testament, real wrath-of-God type stuff!  Fire and brimstone coming down from the sky! Rivers and seas boiling!  Forty years of darkness! Earthquakes, volcanoes!  The dead rising from the grave! Human sacrifice! Dogs and cats, living together! Mass hysteria!


(with a nod to Ghostbusters)

Exactly, and who would want T-bonds then? 

I would. As much as I generally eschew speculative investing I'd be sorely tempted to buy them for a VP in the scenario you are describing. What you are basically proposing is to follow Herbert Hoover's play book and try to work your way out of a nasty recession by tightening the money supply.

I've seen this movie before and I'm pretty sure how it ends. Think 1930's deflationary depression

If the FED actually just stopped all forms of QE with the economy in it's current state the immediate effect would be a stock market crash and probably a gold crash as well. Conservatively I would expect the S&P to lose 20-30% and gold could drop down to around $1000 oz. Worst case scenario the stock market could lose 50%.

LTT yields might jump a bit in the very short term, but in the intermediate term I think they would plunge. Near term Cash would be the only safe haven and I would not be surprised if we saw a fairly dramatic movement in STTs as panicked investors look for the only thing that's safe. The long term winner would almost certainly be long bonds though. Because what you are proposing is a sure fire recipe for a massive deflationary depression.

Think Japan.