Gyroscopic Investing

I'm new to the PP and considering going all in!

But... I know we are not supposed to be market timing... but it scares me that all aspects of PP seem to be firing on all cylinders recently.  I'd feel better if some asset classes were up and some were down.  I'd rather not end up buying into PP at the worst possible time.

I'd go from 70% cash, 27% stocks, 3% bonds (retarded, I know) to a standard 4x25% PP plus a 20% VP focusing on REIT (I rent) and dividend stocks (for fun).

Would you go all in?  Or scale in?  Or wait?

This is my life savings, so it has me a little freaked out... but sitting on 70% cash can't continue.

There are two ways to approach this as have been discussed before:

1) Go all in and get it over with.
2) Go in slowly.

If you go all in to get it over with there is a chance you could hit the portfolio at the wrong time. But historically it's generally been the case that waiting around caused investors to miss out on portfolio gains than taking any serious loss.

If you go in slowly it may be OK, but you just need to make sure you don't turn it into a market timing maneuver and fail to implement the plan. If you choose to do it over time then you must set a fixed percentage you will invest, no matter what, each month, quarter, etc. and stick to it. It's too easy to bail out on the plan by getting wound up second guessing yourself.

Also there is nothing saying you need to go 100% with all your money if you are nervous. You could just lower your cash position to 50% for instance and with the remain 50% implement the Permanent Portfolio/VP options. That way you can adjust to see how things work without much risk exposure (keeping in mind that even cash has risks).

I understand your concern. I have been reading about the PP for some time yet like you was concerned about buying into the concept at such high valuations. I ultimately decided upon a blended approach for the investment. I took 50% of my IRA and purchased the 4 ETF's (VTI, TLT, SHY and GLD). THe balance of the 50% will be invested over the next 5 months. If I get cold feet along the way, at least I have 50% into the PP.

I may miss some gains/losses by moving into the PP over a 6 month period - but to me it has allowed me to sleep - which is one of the purposes/results of the PP anyway.

Good luck and find a timetable you can live with.

My first piece of advice (and one that overrides anything I am going to say after this) is to only do what you are comfortable with.  You're doing the right thing by asking questions and taking time to understand the strategy before you commit to it.  Sounds like you've been reading the "Golden Rules of Investing". 

Now, if this were me, I would simply go all-in and not worry about it.  The reason is that I have fully embraced the idea that I cannot predict the future and therefore won't know a top from a bottom from a middle when I see it.  Given that, I'm looking for an investment that won't beat me up too badly if I buy in at the top.  That means a widely diversified portfolio that is unlikely to experience huge swings in value.

For example, if you buy stocks at the top of a stock market bubble, you can easily lose 40% of your money in a sudden crash.  It could take years and years to claw your way back to the highs and break even.  This means that the timing of when you buy is very important.  But since I'm convinced that we can't time the markets (or at least that I cannot), your investment future is overly dependent on a huge dice roll.  I hate that feeling.

On the other hand, if you have an investment that's designed to mute these big swings, your timing doesn't really help or hurt all that much.  Personally, I'm convinced that the diversification the portfolio makes enormous swings in value very unlikely.  And as you can see from the portfolio's past performance, the occasional losses the portfolio experiences occur at much more manageable levels.  While this doesn't guarantee anything, it shows that the past results do not invalidate the theory of the portfolio (and in fact support it.)

I think that Paul Boyer's charts on max drawdown are very useful for understanding what your worst-case scenario might look like.  That's not to say that you can't experience a larger max drawdown than what you see in the chart, but it's unlikely to suddenly adopt the characteristics of, say, a portfolio composed of 100% emerging market stocks.  I'd suggest spending a few minutes looking that data in the eye and thinking about whether you could accept that loss without losing your cool.  That's a prerequisite for going all-in.

akratic wrote: This is my life savings, so it has me a little freaked out... but sitting on 70% cash can't continue.

Back in 2008, lots of people were going to 100% cash, and depending on the timing this was not a bad decision based on the massive losses in stocks at that time.  So your 70% cash position may be a great idea right now - no one knows.  I went from mostly stocks to mostly cash back in Sept 2008 when the S&P500 was at 1200, and I looked like a genius when the S&P crashed down to 666, but now I look less smart since the S&P is back to near 1200, but at least I didn't go along for the roller coaster ride, and I am certain that have less gray hair as a result.

Your options for your cash are:
1) Invest it all in the PP, and risk losing 10-20% if the PP is currently at a relative maximum value and starts to trend lower.
2) DCA over 6, 12, or 24 months, and risk that the PP trends higher from today, making you wish that you had lump-summed in today.

The natural instinct is to choose option 2, so as to minimize the risks of rapid nominal losses if the PP tanks.  However, I personally lump-summed in when I got my PP started over a year ago.

The good thing about buying the stock and long-term bond portions in a lump-sum manner is that any price changes of these 2 assets generally tend to offset one another in the short term, but all the while you are getting the 1.5% yield from stocks and the 4% yield from the bonds.  So at least with those, you won't get burned too bad by lump-summing, and you get immediate access to the dividend & interest income streams.

Then all you have to do is convince yourself to lump-sum into the gold position, which is not too hard to do since the US has over $12+ trillion in debt, political gridlock, citizens opposed to new taxes, etc....gold is a bargain at $1300, $1500, $2000.  Any short-term drop in the price of gold is a gift for you to load up.

There, now your PP is all set up!

I think the PP only tends to feel like a bad idea when there is lots of prosperity... historically, that seems to be the only time that I think I'd be queasy about my PP allocation, that is, when my friends and neighbors are all getting 25% return and I'm getting 8%.

So, if you have money you can afford to lose, maybe try some kind of growth fund or something, and you can capture some more if the economy picks back up, but with both deflationary & inflationary pressures tugging so hard, I don't think there's anywhere to be besides the PP and still feel safe.

Additionally, given your current portfolio, I would definitely suggest a switch.  Cash will only provide good returns in a late 70's/early 80's type fed. interest rate boost, and your portfolio, in general, is very prone to currency problems.

My 2 cents.

akratic,

I've had the same reservations in the past regarding the PP, and even to a degree in rebalancing the PP. So I'd agree, do what you are comfortable with.

I for one have found that by going all in, I tend to hit a stock/fund/etf/etc. at the high, and suffer a pretty big loss as a result. So, I'm now a big fan of wading in slowly based on a very firm and intentional plan. As CraigR mentioned, it has to be very purposeful so as not to turn into market timing...whether it is a fixed amount/% per month, quarter, etc.

Hope this helps. Again...whatever you are comfortable with.

-b

Thanks guys.

I've thought about it some more and weighed your feedback, and I'm going all in.  I've decided that waiting is analogous to betting that my current asset allocation is superior to the PP, which I cannot justify.

Besides, I expect my net worth to roughly double in the next year... due primarily to being young and having few assets.  Contributing my future paychecks will be my version of scaling in.

Now to figure out the implementation details.  I've started a new thread about that here.