Gyroscopic Investing

Posted: **Wed Jun 26, 2013 9:27 am**

I see a lot of negativity on the permanent portfolio out there. At this point, it looks like the portfolio is down about 8-9% off its highs. Consider this a litmus test for your risk tolerance. If you're sweating bullets right now, you either need to chill and stay the course, or you need to save dramatically more for retirement and move to a lower volatility portfolio. I think you should do the former. The portfolio has weathered many storms over the last 40 years--it will survive this one. The worst thing you can do is abandon your convictions and sell near a bottom.

If it helps you feel any better, I only hold about 20% of my investable assets in the permanent portfolio. The remaining 70-80% is in gold, silver and miners. I'm sitting on 35-70% drawdowns in that sector and wouldn't think for a second about abandoning those positions. If anything, I'm reconsidering allocating more cash to add to those positions. Although sentiment has changed over the last few years, nothing about the fundamentals has changed from what I see. Perhaps if I needed that money any time soon, I would be nervous. But I wouldn't hold such volatile positions if I were that close to retirement.

We should be thankful for times like these. They test us and our convictions. We either believe in the road we've chosen or we don't. If you're in the permanent portfolio, just ride it out. In a few years you'll look back and be glad you did.

Posted: **Wed Jun 26, 2013 9:30 am**

Wonk,

I was thinking about you this morning as I saw the quotes for gold and the miners.

Good post.

Posted: **Wed Jun 26, 2013 9:30 am**

Having been through 2008 and not using PP at the time (I had a portfolio of stocks, gold and junk bonds at the time which was a massive FAIL..) this volatility is nothing. I hope to put more money to work in the PP at these cheaper prices.

Posted: **Wed Jun 26, 2013 9:32 am**

Words of wisdom. If you're not close to needing to make withdrawals from your portfolio, you should actually be celebrating right now to have been given the opportunity to buy gold and bonds the most reasonable prices seen in years.

Posted: **Wed Jun 26, 2013 10:26 am**

Wonk,

Good post.

Question: What, if anything, would cause you to re-evaluate your "VP"?
Esp. regards the miners. Any concerns some/many of them will go bust?

Posted: **Wed Jun 26, 2013 10:42 am**

Thanks for the post, Wonk. It's nice to reset in a positive tone.

I'm hopefully getting close to ER, and I actually don't mind the mild downturn right now. From a SWR perspective, having gold and bonds correct from unusual highs before I start making withdrawals is a positive for my long-term security. It's better to retire in a dip than at a peak.

And in the meantime, I also put some new money into gold and bonds this week. Buying things on sale feels nice. It sure beats plowing money into stocks when that feels like it's on the verge of popping.

Posted: **Wed Jun 26, 2013 11:00 am**

I don't want to rain on the parade, but gold and treasuries can fall much further before they stage a recovery. We all reached the same conclusion that gold had no where to go but up and that the fed would do everything in its power to maintain a low interest rate environment. Unfortunately, both of these "facts" proved to be wrong. I am reminded of a quote..."the markets can remain irrational longer than you can remain solvent." I repeat this to myself over and over now before making any investment that is not in accordance with my IPS. Good luck.

Posted: **Wed Jun 26, 2013 11:08 am**

buddtholomew wrote: I don't want to rain on the parade, but gold and treasuries can fall much further before they stage a recovery.

Sure, but that applies to any falling asset. Unless you think it's going to zero, I think buying when it's falling is probably better than buying when it's rising.

buddtholomew wrote: We all reached the same conclusion that gold had no where to go but up and that the fed would do everything in its power to maintain a low interest rate environment. Unfortunately, both of these "facts" proved to be wrong.

We did? I think we all knew that the gold party was going to come to an end when the Fed stopped or failed in its efforts to suppress the interest rate. Now, the Fed previously stated that this would happen in response to a target unemployment rate, but apparently Bernanke was mad at Obama firing him on national TV and decided to wreck the markets for fun. That's just how the cookie crumbles sometimes.

Posted: **Wed Jun 26, 2013 11:59 am**

buddtholomew wrote: I don't want to rain on the parade, but gold and treasuries can fall much further before they stage a recovery. We all reached the same conclusion that gold had no where to go but up and that the fed would do everything in its power to maintain a low interest rate environment. Unfortunately, both of these "facts" proved to be wrong. I am reminded of a quote..."the markets can remain irrational longer than you can remain solvent." I repeat this to myself over and over now before making any investment that is not in accordance with my IPS. Good luck.

I can remain solvent indefinitely. And although my losses YTD are quite annoying, I'll be adding to my positions as I get new investable funds from my employment. Unfortunately those new funds are not anywhere near as large as my existing investment, which accounts for the annoyance, as otherwise I'd be happy to see precious metals on sale.

Posted: **Wed Jun 26, 2013 12:04 pm**

Pointedstick wrote: If you're not close to needing to make withdrawals from your portfolio...

Well I'm not anymore!

Posted: **Wed Jun 26, 2013 1:24 pm**

I think the thing that's been most disturbing over the past 6 months is watching bonds and gold behaving almost in lock-step. Gold is down 25%-30% for the year (depending on which fund you track) and bonds are down about 11% YTD. Stocks are up around 12%, which is enough to offset the loss in bonds but not enough to also make much of a dent in gold's losses. And of course, cash just sits there doing nothing (except lose value to inflation, of course).

Now, if you like to live dangerously, you might wait until you feel gold and bonds have bottomed out, then tap into your cash to pick up some bargains. I'm considering just that, although I may decide to use cash from my VP instead of my PP (an acceptable move, although not the other way around). Luckily I have a 15-20 year time horizon until I need these funds, so plenty of time left for me to ride out this rollercoaster.

All I can say is, "Thank goodness for my VP!"

Posted: **Wed Jun 26, 2013 1:35 pm**

rocketdog wrote: I think the thing that's been most disturbing over the past 6 months is watching bonds and gold behaving almost in lock-step.

That's the thing about holding uncorrelated assets: sometimes they move together, sometimes they don't. If they always moved in opposition, they would be correlated, but negatively.

Posted: **Wed Jun 26, 2013 1:39 pm**

rocketdog wrote: I think the thing that's been most disturbing over the past 6 months is watching bonds and gold behaving almost in lock-step. Gold is down 25%-30% for the year (depending on which fund you track) and bonds are down about 11% YTD. Stocks are up around 12%, which is enough to offset the loss in bonds but not enough to also make much of a dent in gold's losses. And of course, cash just sits there doing nothing (except lose value to inflation, of course).

Now, if you like to live dangerously, you might wait until you feel gold and bonds have bottomed out, then tap into your cash to pick up some bargains. I'm considering just that, although I may decide to use cash from my VP instead of my PP (an acceptable move, although not the other way around). Luckily I have a 15-20 year time horizon until I need these funds, so plenty of time left for me to ride out this rollercoaster.

All I can say is, "Thank goodness for my VP!"

I was in the process of posting a similar comment. Thank goodness for my VP. Without the VP, I am not sure that I would be able to stay the course with the PP. I am also starting to question why I am invested in the PP as I felt a lot more confident re-balancing into equities in 2009 than I feel investing in gold.

Posted: **Wed Jun 26, 2013 1:48 pm**

I am in absolute disbelief about what's happening with gold. It's surreal. Down another 4% today.

However - the fundamentals of asset pricing and the economy haven't changed. This isn't going to change anything for me, even if this ends up being the PP's fourth negative year since 1972.

Posted: **Wed Jun 26, 2013 2:03 pm**

rocketdog wrote: All I can say is, "Thank goodness for my VP!"

Amen, brother! My VP is saving my bacon right now, +40% ytd. Makes me a little sick to think that I sold some VP and moved it into PP earlier this year, but whatever...

Posted: **Wed Jun 26, 2013 7:47 pm**

flyingpylon wrote:
rocketdog wrote: All I can say is, "Thank goodness for my VP!"
Amen, brother! My VP is saving my bacon right now, +40% ytd. Makes me a little sick to think that I sold some VP and moved it into PP earlier this year, but whatever...

please do tell about your VP

Posted: **Wed Jun 26, 2013 8:34 pm**

murphy_p_t wrote: please do tell about your VP

Wish I could say that it was due to my investing acumen, but it's not. It's a single stock from a previous employer that I've hung onto for more than 10 years that has gone gangbusters over the last 18 months or so. Experience tells me it could just as easily drop like a rock at any time, so I have been taking some profits off the table. A little too early as it turns out, but I guess that's still better than too late.

Posted: **Thu Jun 27, 2013 9:32 am**

murphy_p_t wrote:
flyingpylon wrote:
rocketdog wrote: All I can say is, "Thank goodness for my VP!"
Amen, brother! My VP is saving my bacon right now, +40% ytd. Makes me a little sick to think that I sold some VP and moved it into PP earlier this year, but whatever...
please do tell about your VP

What do you want to know? My VP is equity-heavy, but also ventures into many non-PP type assets: REITs (US and foreign), commodities, foreign stocks, foreign bonds, corporate bonds, junk bonds, high dividend stocks, low volatility stocks, oil stocks, and so on. It holds 15-20 different types of assets at all times. I also have a small stake in stock of the company I work for, which is up 46% since inception over my cost basis.

My VP was up 10% YTD at the end of April. In May it lost 1.5%, leaving me up 8.5% YTD. That may decrease further when the June numbers come out, but I'll still be comfortably in the black YTD.

Right now my VP makes up about 80% of my portfolio, with the PP making up the other 20%. So even though my PP is down 7% YTD, my overall portfolio is still up 5.5% YTD thanks to the VP.

I have a plan in place to annually shift a portion of my VP into my PP until my PP is the same % as my age. I am targeting to have that process completed over the next 5 years, buying up the lagging PP assets as I go in order to scoop up as many bargains as I can.

Posted: **Thu Jun 27, 2013 10:56 am**

Pointedstick wrote:

Sure, but that applies to any falling asset. Unless you think it's going to zero, I think buying when it's falling is probably better than buying when it's rising.

[/quote]

Why exactly do you think buying an asset when it's falling is better than buying when it's rising? I'm not saying I disagree, I'd like to understand your rationale. Thanks

Posted: **Thu Jun 27, 2013 11:07 am**

glennds wrote:
Pointedstick wrote: Sure, but that applies to any falling asset. Unless you think it's going to zero, I think buying when it's falling is probably better than buying when it's rising.
Why exactly do you think buying an asset when it's falling is better than buying when it's rising? I'm not saying I disagree, I'd like to understand your rationale. Thanks

I generally don't like to speculate about whether an asset will rise or fall in the near future; I've made too many bad calls before to trust myself. This means that what matters to me is the current price. A falling asset has a lower current price than it had before, therefore it's a better deal compared to if I had bought it before. The opposite applies to a rising asset: it's more expensive than if I had bought it in the past, and its future returns depend on the upward trend continuing, which I can't be sure of.

Posted: **Thu Jun 27, 2013 11:14 am**

That's a great post, Wonk. It's one thing to see "remain calm" posts from full-fledged pp'ers who got in ten years ago at a very timely entry point for gold, and quite another to see a post from someone who is gold-heavy and experiencing deep drawdowns.

I myself have been hoping for gold to drop because it's such a small amount of my pp+vp (less than 8% now), and I want more.
Part of the reason for that is because I have traditionally invested in stocks, so gold is new for me; I own it because of CraigR & Harry Browne.

I don't know if this makes any sense but for me, having many 1oz gold coins is different than having many dollars or shares of stock. Yes, more gold can be discovered and mined in Alaska's Pebble mine (or on some asteroid), or even synthesized. It's still a lot harder than executing a stock split or printing currency.

Therefore, while I am still relatively young -- ok, I'm MT's age -- I'd like to accumulate gold to the point that it becomes a forth of my total holdings, and not just a 1/4 of my meager pp. Even if I pass away before the price of gold has another surge like it's had in the past decade.

Posted: **Thu Jun 27, 2013 12:48 pm**

Wonk wrote: I see a lot of negativity on the permanent portfolio out there. At this point, it looks like the portfolio is down about 8-9% off its highs. Consider this a litmus test for your risk tolerance. If you're sweating bullets right now, you either need to chill and stay the course, or you need to save dramatically more for retirement and move to a lower volatility portfolio. I think you should do the former. The portfolio has weathered many storms over the last 40 years--it will survive this one. The worst thing you can do is abandon your convictions and sell near a bottom.

If it helps you feel any better, I only hold about 20% of my investable assets in the permanent portfolio. The remaining 70-80% is in gold, silver and miners. I'm sitting on 35-70% drawdowns in that sector and wouldn't think for a second about abandoning those positions. If anything, I'm reconsidering allocating more cash to add to those positions. Although sentiment has changed over the last few years, nothing about the fundamentals has changed from what I see. Perhaps if I needed that money any time soon, I would be nervous. But I wouldn't hold such volatile positions if I were that close to retirement.

We should be thankful for times like these. They test us and our convictions. We either believe in the road we've chosen or we don't. If you're in the permanent portfolio, just ride it out. In a few years you'll look back and be glad you did.

Good post, Wonk.

I wish I could convince some of these people who are thinking of bailing out to just stick to it for another 2 years. The PP has historically rewarded investors who wait out periods like this.

For me it's difficult to understand how such a small loss can send people running.

I think this is probably because I had enough investing "experience" (ie, had been duped enough times) before getting into the PP to appreciate all of the security that this strategy really has to offer.

I think people who haven't experienced these types of things might not fully understand what the PP is really all about.

https://web.archive.org/web/20160324133 ... firewalls/

Posted: **Thu Jun 27, 2013 2:17 pm**

murphy_p_t wrote: Wonk,

Good post.

Question: What, if anything, would cause you to re-evaluate your "VP"?
Esp. regards the miners. Any concerns some/many of them will go bust?

I'd need to see very attractive equity valuations, for one (Shiller PE below 15). I'm a big believer in secular markets and we're only 13 years into one that typically lasts 16-18 years. So, if we're at year 20 and I'm holding a bag full of gold valued at $200/oz, I'd say I probably got it wrong. Also, I've never seen a 10+ year bull market flame out in such an anticlimactic way. No parabola? Doesn't pass the sniff test.

I'd also need to see a commitment to positive real interest rates. A year or two doesn't count. Many countries (US included) need to continue to devalue in order to sustain high asset prices. Devaluation is the politically expedient choice. I'll bet on that one.

Miners. They go broke all the time. Very volatile industry--which is why I play the sector and not individual companies. Although, look at the largest miner in the world--Barrick. 5x earnings? Absurd. As a sector, the miners are nearing single digit PEs--levels we've only seen in the midst of an "end of the world" scenario. I can't possibly imagine a more attractive risk/reward equation at the moment(aside from investing in my own business ;-)

Posted: **Thu Jun 27, 2013 2:36 pm**

dualstow wrote: That's a great post, Wonk. It's one thing to see "remain calm" posts from full-fledged pp'ers who got in ten years ago at a very timely entry point for gold, and quite another to see a post from someone who is gold-heavy and experiencing deep drawdowns.

It helps that the majority of my basis in gold/silver is at or below the current spot. It was all just imaginary profit until I actually liquidate the position. If I piled in at $1900/$49, it would probably hurt a lot more.

Posted: **Thu Jun 27, 2013 3:00 pm**

Wonk wrote:
dualstow wrote: That's a great post, Wonk. It's one thing to see "remain calm" posts from full-fledged pp'ers who got in ten years ago at a very timely entry point for gold, and quite another to see a post from someone who is gold-heavy and experiencing deep drawdowns.
It helps that the majority of my basis in gold/silver is at or below the current spot. It was all just imaginary profit until I actually liquidate the position. If I piled in at $1900/$49, it would probably hurt a lot more.

I'm very gold-heavy and this is pretty nauseating even though I'm still way in profit overall.
However, I'm not going to panic and sell now; that would be silly.

Gyroscopic Investing

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