Gyroscopic Investing

If you decided to increase the PP's diversification beyond Harry Browne's classic 4x25, what would you add to the portfolio?

P.S. The standard PP is doing quite well today, at least so far. 

Real Estate (Timberland is my preference)

80% in a standard HBPP
* 20% VTI
* 20% TLT or VGLT
* 20% VGSH or SHV
* 20% Gold coins and or bullion

20% VP
* 10% VT
* 10% TGBAX

Yeah, real estate, probably in the form of a broad REIT index.

How about 20% to be invested in Powerball tickets whenever the prize is over $400 million?

(Edit: that would probably go better in the VP)

Since the asset classes in the PP were picked to handle 4 different economic scenarios (prosperity=stocks, inflation=long term treasury bonds, deflation=gold, and recession=cash), I've been trying to think of any other possible scenarios that might need covered in a 5x20.  The only thing I've been able to come-up with is "super-prosperity". 

I have two competing definitions of "super-prosperity".  The first is a localized dramatic improvement in living conditions, such as what Dubai has experienced since the 1980s.  The second is a large scale dramatic improvement in living conditions, such as the arrival of the mundane singularity[1].

Since craigr's Rule # 3 recommends that "the money that’s precious to you shouldn’t be risked on a bet that you can outperform other investors"[2], I've been trying to find investments that aren't speculative that fit either my first, second, or both definitions of "super-prosperity".  What I've noticed is that "super-prosperity" in either definition would spur greater consumption of finite basic materials, such as land, steel, concrete, electricity, and hours available for work.  Increased demand on an immobile supply means higher prices and presumably more profit for investors.  I think in the case of normal prosperity, that basic material supply can keep growing as needed, but in the case of "super-prosperity" demand gaps upward so much that the supply will lag behind.

In conclusion, my suggestion is a commodities index for the case of "super-prosperity".  Candidates include VDE, VAW, XES, and IYM [3], which are all up thus far this year. 


[1] http://nextbigfuture.com/2011/10/progre ... y-dec.html
[2] http://gyroscopicinvesting.com/forum/pe ... al-safety/
[3] http://money.usnews.com/funds/etfs/commodities

Some ideas for the 20%:

PRPFX
REITs
Private Equity
Hedge Funds
Bitcoins

I/EE savings bonds

blackomen wrote: Some ideas for the 20%:

PRPFX
REITs
Private Equity
Hedge Funds
Bitcoins

PRPFX- That's doable, but why not just use the 4x25%? It's safer and cheaper.
REITS- Maybe but I'd probably index that (VNQ?).
Private Equity- That's off the charts speculative. I don't have that kind of stomach.
Hedge Funds- NO WAY! That is one of the worst performing investments by class out there. The Fees and Expenses almost always condemn you to grossly underperforming the index. These are the kind of people Al Capone was talking about when he warned "those Wall Street guys are crooks. It's a racket."
Bitcoin- Negative. If I want to do currency speculation (and I don't) I will stick to actual sovereign currencies thank you very much.

If I could prove some sort of rebalancing bonus may exist, then maybe I'd do 40% equities split between low and high volatility (SPLV and SPHB).

So 20% each of:
SPLV
SPHB
TLT
GLD
SHY

or 20% REITs.

For further diversification make it six:

-international stocks
-international bonds

A fail-safer portfolio.

It has no sense to look for a new asset without a new economic scenario to cover. If you add new assets just for more "asset diversification" you have to find in which scenarios they work better and reduce the corresponding part from the standar PP. For example, if you add REIT and think that it is good for inflation and prosperity you should have less gold and stocks, but you shouldn't reduce cash and bonds portions or your protection against deflation and recession would be insufficient.

jacob_h wrote: Since the asset classes in the PP were picked to handle 4 different economic scenarios (prosperity=stocks, inflation=long term treasury bonds, deflation=gold, and recession=cash), I've been trying to think of any other possible scenarios that might need covered in a 5x20.  The only thing I've been able to come-up with is "super-prosperity". 

the most likely 5th economic condition i can think of is "currency transition" and in many ways gold already covers this rare and temporary economic condition, but if there were some strong indicators of what the new currency was going to be ahead of time then there are obvious wealth preservation reasons to be invested early. my best guess would be silver then possibly bit coin or some other emerging crypto currency..  but such a transition is a very black swan type event and by its nature difficult or imposable to predict the specifics of.... which makes it a bit of un-Permanent Portfolio'ish investment.. 

5th economic condition: no economy.  Invest in guns to protect yet gold

6th economic condition: post monetary society (hyper prosperity or singularity)  Invest in social capital / "wuffie" / Internet memes

Thanks for your thoughtful responses.

As for myself, I have always wondered about recessions, the discussion of which St. Harry Browne limited (so far as I know) to "tight money" recessions, as occurred in 1981 with Volcker's remedial interest rate boost to squeeze out inflation.

A "run-of-the-mill" recession, such as the one we have been experiencing since 2008, seems to have escaped Harry B's radar. Would anyone like to clarify what Harry Browne would say about the 2008-2013 recession we have been experiencing?

As for my personal portfolio, I still have about 1/3 of it in my old Boglehead portfolio, heavy in intermediate nominal bonds, TIPS, and international and EM stock funds.

dragoncar wrote: 5th economic condition: no economy.  Invest in guns to protect yet gold

6th economic condition: post monetary society (hyper prosperity or singularity)  Invest in social capital / "wuffie" / Internet memes

I don't know if no economy is possible since the economy is a byproduct of humans interacting with each other.  I think a more likely 5th scenario would be a confiscatory economy, characterized by Zimbabwe or Nazi Germany.  In those cases, international social capital would be more useful.  Using guns will make you a target of the local gestapo.  Social capital will get you out of that country.  So, invest time/money in international projects of scientific, artistic, religious, or educational merit.  This reminds me of the idea of tithing or charity - you regularly give of yourself to a larger group and it looks out for you in extreme circumstances.

In your 6th scenario, the high technology for easy living could also presumably be weaponized creating an arms race among regular citizens with computer virus / anti-virus software wars as an example.  Investing time and money in personal security preparedness might be worth it.  But, I don't know of a PP-esque instrument you could put money into for this scenario.  Besides, if your hyper-prosperity is anything like the world of Prime Intellect [1], I don't know that it would be useful to have any investments of any kind.

As far as a currency transition scenarios go, there have been several within even recent history (d.mark to euro, US Notes to FRNs, pounds stirling to us dollars as world reserve currency) and most people seem to muddle through at worst or not notice at best.  Additionally, I don't any currency will be replacing the US Dollar as reserve currency anytime soon because no group with an alternate currency (whether it be silver, bitcoin, or a gold-backed renminbi) has a navy that will be replacing the dominance of the US Navy in protecting the high seas - the conduit of global trade.

I would suggest then that in addition to my super prosperity we should be concerned with a confiscatory economy as a potential scenario for investment.  But, the correct investment for the confiscatory economy may be more akin to working on your career than sinking wealth into a PP-esque financial instrument.

[1] http://www.localroger.com/prime-intellect/

After the normal 4 x 20, I would put the remaining 20% in my VP which would consist of several dividend growth stocks.  I would purposely reinvest the dividends to purchase more shares.  These would be solid, established, blue chip companies such as Exxon Mobil, Chevron, Coke, P&G, etc -- and maybe allocate a small portion to Cracker Barrel since we tend to frequent our local "CB" several times a month.

jacob_h wrote:
As far as a currency transition scenarios go, there have been several within even recent history (d.mark to euro, US Notes to FRNs, pounds stirling to us dollars as world reserve currency) and most people seem to muddle through at worst or not notice at best.  Additionally, I don't any currency will be replacing the US Dollar as reserve currency anytime soon because no group with an alternate currency (whether it be silver, bitcoin, or a gold-backed renminbi) has a navy that will be replacing the dominance of the US Navy in protecting the high seas - the conduit of global trade.

  a currency transition made up of a slow switch of world reserve or the controlled adoption of a new currency like with the euro are not the potentially traumatic type that would require much  preparation.... as for us dollars failing i agree it is an event i wouldn't worry much about until other currency's started to topple first (ie the euro) and even if the us dollar did go bad it would likely still retain its "pile of "S" with the fewest flies status" (world reserve)..  but the dollar ultimately is still fiat faith based money and the loss of that faith is a black swan possibility, an unlikely one perhaps, and probably one which gold would see us through well enough, but if we are looking for economic conditions not fully covered by 4x 25  i suspect it might qualify.

goodasgold wrote: Thanks for your thoughtful responses.

As for myself, I have always wondered about recessions, the discussion of which St. Harry Browne limited (so far as I know) to "tight money" recessions, as occurred in 1981 with Volcker's remedial interest rate boost to squeeze out inflation.

A "run-of-the-mill" recession, such as the one we have been experiencing since 2008, seems to have escaped Harry B's radar. Would anyone like to clarify what Harry Browne would say about the 2008-2013 recession we have been experiencing?

As for my personal portfolio, I still have about 1/3 of it in my old Boglehead portfolio, heavy in intermediate nominal bonds, TIPS, and international and EM stock funds.

I would hardly call this a "Run-of-the-mill recession". It is probably the first time in history that the reserve currency country has behaved in such an insanely profligate way with absolutely no justification other than political expediency. I expect the crash to be equally historic.

I don't have a suggestion for 5x20. It would be what the Chinese call painting eyes on the dragon.
My vp is my fifth element.
-----

Bob wrote: and maybe allocate a small portion to Cracker Barrel since we tend to frequent our local "CB" several times a month.

I try not to buy a stock simply because I use the product, even though that's still psychologically appealing.

I *do* indulge in the converse: if I already own the stock, I may have dividends in mind while consuming the product.
So, recently a company called B&G Foods (BGS) bought Pirate's Booty snacks. I've seen the bags in the grocery store and since I own shares, I went and bought a bag. Not bad. 

brownehead wrote: It has no sense to look for a new asset without a new economic scenario to cover. If you add new assets just for more "asset diversification" you have to find in which scenarios they work better and reduce the corresponding part from the standar PP. For example, if you add REIT and think that it is good for inflation and prosperity you should have less gold and stocks, but you shouldn't reduce cash and bonds portions or your protection against deflation and recession would be insufficient.

Harry Browne did the same. Cash doesn't cover recessions but he added it anyway, probably more for stability than anything else. Stocks, bonds and gold are the necessary ingredients for a PP. Beyond that it's personal preference. Harry himself suggested in his book 'why the best-laid...' that you could include up to 15% other investments in the PP. (Another interesting thing I read was that he suggested that you can alter the percentages of the 4 asset classes anywhere between 35% and 20% if you wanted.)

Tying assets to specific economic climates is a bit too strict imo. For example: gold is supposed to protect you from inflation but it protected you during 'the lost decade' as well. Foreign stocks will give good returns during global  'prosperity' but can protect you from US under performance as well. The vanilla PP on it's own is pretty well diversified but that doesn't mean it can't be improved.

5th condition : stagflation because of high energy prices (peak oil, etc.). Then, either energy commodities or forest land.

Libertarian666 wrote:
I would hardly call this a "Run-of-the-mill recession". It is probably the first time in history that the reserve currency country has behaved in such an insanely profligate way with absolutely no justification other than political expediency. I expect the crash to be equally historic.

By "run-of-the-mill" recession, I meant one not characterized by a deliberately sharp increase in the interest rates (although this may well be the eventual result of our profigate overspending).

And I agree with you that we are playing with fire by piling on huge and ever-growing debt. Actions have consequences, and I am dismayed by the prevailing Krugmania, even on this board,  which adamantly ignores our mounting national debt and the need to repay it in the future. Thank God we PPers have had the foresight to build up personal gold reserves, at least until the day when the government confiscates gold (again.)

Japan is behaving even more recklessly than we are, having reached the "quadrillion yen debt point," as indicated in this CNN report:

http://money.cnn.com/2013/08/09/news/ec ... l?iid=Lead

koekebakker wrote: Harry Browne did the same. Cash doesn't cover recessions but he added it anyway, probably more for stability than anything else. Stocks, bonds and gold are the necessary ingredients for a PP. Beyond that it's personal preference. Harry himself suggested in his book 'why the best-laid...' that you could include up to 15% other investments in the PP. (Another interesting thing I read was that he suggested that you can alter the percentages of the 4 asset classes anywhere between 35% and 20% if you wanted.)

Stocks, bonds and gold are the growing assets, but cash is also necesary, not only for stability (something very important to "stay the course") but also to buy cheap assets during the recession. As HB said there is no permanent asset which profits from a recession (you can earn money with short selling, but that isn't usefull as a permanent asset), so cash earning growing yields is the best option he could find (and I cannot imagine one better).

koekebakker wrote: Tying assets to specific economic climates is a bit too strict imo. For example: gold is supposed to protect you from inflation but it protected you during 'the lost decade' as well. Foreign stocks will give good returns during global  'prosperity' but can protect you from US under performance as well. The vanilla PP on it's own is pretty well diversified but that doesn't mean it can't be improved.

History will tell about the "lost decade", but I think we lived every possible sceneario (prosperity, inflation, recession and also deflation) and I'm not sure which one was the predominant. What I know is that the US dollar index was at 120 in 2001 and in 2011 it was around 80, at the same time oil was at $23 in 2001 and at $87 in 2011, so maybe gold indeed did its job.

k9 wrote: 5th condition : stagflation because of high energy prices (peak oil, etc.). Then, either energy commodities or forest land.

Stagflation is just inflation without prosperity and gold worked extremely well with it in the '70s.