Gyroscopic Investing

or, "How I Learned to Stop Worrying and Love the Bonds"

This is not another thread about changing the 4 x 25 settings or about substituting components. It is also not a general thread about easing in vs going in all at once. I've read those.
Specifically, it's about dealing with wealth that is somewhat "locked up" in stocks and corporate bonds, with very little else.
I'm jealous of those who were mostly in cash when they discovered the permanent portfolio, but there must be a lot of people like me. Bogleheads who were nearly fully invested in a traditional stock/bond mix. (Mostly stocks, gradually moving into bonds as you age).

A few months ago, I took some free cash & purchased a piece of PRPFX because of an aversion to buying and holding physical gold. (I'm over that*). Since then, I've experienced trepidation about creating my own PP. I did buy IAU & a couple coins, I did buy long-term treasurys directly, and I did make sure I had an equal share of vanguard's treasury money market fund. The sum of these is still very small compared to the stock holdings I've built up over the years.

I had a sort of epiphany: there's never been any stress about buying PRPFX, since the whole package is bought at once. It's a very different experience from buying gold alone when it *appears* to be so high. Any gold bought is diluted, for lack of a better term, by the other assets. There are even some Swiss francs in there. Why then, I asked myself, would it be a problem to have a DIY pp, as long as I can afford to buy bonds and squirrel away some cash for every share of gold that I pinch my nose and buy? Answer: it is *not* a problem. I guess I finally get it.

Now that I'm running out of free cash, it's not so simple. 

For those of you who are moving into the pp from all stocks or mostly stocks, I would like to know if you sold off stocks at what felt like a suboptimal time to build up your pp. Right now, I don't have the desire to sell stocks or anything else at a loss. That would feel like violating the old injunction against peformance chasing. If my stocks soared, I don't think I'd have a problem selling them and taking a tax hit to buy gold, whether gold rises or falls. But, they have yet to soar.

Last thing: As I mentioned, buying PRPFX feels good because it's the whole package. When you buy it, you're buying stocks along with everything else. So, if you've traditionally been stock heavy, it's comforting. Therefore, I'm wondering if I should buy even more stocks as I buy these other assets, or if I should just designate a piece of my current holdings as "pp stocks". (I do hold both total indexes and some individual stocks).
Why would you want to do that? You already have too much in stocks. You need to get moving on these other assets.
The short answer is that it would be a surefire way to break out of paralysis, to avoid doing nothing. I will have some cash, because I've already set it aside for this year's 401(k) contribution.
Also, if you've ever bought some individual stocks or funds that are different than your current holdings and plugged them into your online portfolio, you've had the  experience of seeing a gain of +/- 1% or less in these newcomers while your old holdings are all over the place. You silently say to yourself that these are not "seasoned" holdings yet, so they don't really count.

So, back to the situation of having a glut of stocks, little cash and PP holdings that are paltry by comparison. Chances are, your stock holdings are already seasoned. Let's say you have a stock index fund that's already up 20%. Should you weigh the cost or the current value of that fund against all the gold and the bonds you just bought?
I don't know, and this is why I'm really tempted to just buy fresh stock when I can afford to buy more of the other components, and to designate all my old wealth as the variable portfolio. However, if the consensus here is that it's crazy and that I should put an indefinite hold on stock-buying until I build up the other assets, I will certainly consider that. I don't think the answer is in the 'Failsafe Investing' book. Perhaps it is covered in one of the radio shows.

*Note: I took craigr's recommendation and tried out bullion coin dealer AJPM and was very satisfied. Actually got my coins 7 days after mailing a personal check.

I think the first thing you should do is decide what VP-PP mix you would like to hold.  If you want the PP to be a relatively large portion of your total portfolio, you need to sell off some of the existing stocks to fund the other components.  At some point you have to deal with the elephant in the room.  I did just the same a few weeks ago by selling off most of my company stock, which will be moved to the PP by the end of year. 

Remember that one of the tenants of the PP is that you can't reliably predict the future.  If you were 100% in cash right now, would you buy your existing porfolio?  If not, then that tells you it is time to sell some of those existing assets.

Pkg Man wrote: I think the first thing you should do is decide what VP-PP mix you would like to hold.  If you want the PP to be a relatively large portion of your total portfolio, you need to sell off some of the existing stocks to fund the other components.  At some point you have to deal with the elephant in the room.  I did just the same a few weeks ago by selling off most of my company stock, which will be moved to the PP by the end of year.  

Remember that one of the tenants of the PP is that you can't reliably predict the future.  If you were 100% in cash right now, would you buy your existing porfolio?  If not, then that tells you it is time to sell some of those existing assets.

Thanks for the reply. I would like to have a 90% PP / 10% vP mix. I'm dedicating dividends from the vP to the PP right now but that's not much, especially after taxes. "If you were 100% in cash right now, would you buy your existing porfolio?" That's a great question. I would buy it if I hadn't heard of the PP but honestly, no. If I were 100% in cash, I'd plunge into the PP or do 50% PP and 50% cash waiting in the wings, but certainly not all this stock.

I appreciate the advice. I'm going to start selling some winners.

As you do so I would recommend buying each of the PP components at the same time.  In other words, don't try to time the market by buying gold first, bonds a week later, etc.  That's about the same thing as playing roulette.  You might get lucky, but you might not.

Keep in mind too that losers can continue to be losers.  Just something to think about.

Clive, 

What's the largest drawdown you have seen?

Dualstow wrote: "I would like to know if you sold off stocks at what felt like a suboptimal time to build up your pp. Right now, I don't have the desire to sell stocks or anything else at a loss. That would feel like violating the old injunction against performance chasing. If my stocks soared, I don't think I'd have a problem selling them and taking a tax hit to buy gold, whether gold rises or falls. But, they have yet to soar."

This statement reveals two problems:

#1 You're trying to time the markets. How do you know this is "a suboptimal time to build a PP"? How do you know your stocks will ever soar? The answer to both questions is, you don't know! Nobody knows!

#2 Second, "I don't have the desire to sell stocks or anything else at a loss" reveals a classic investor behavioral error called the disposition effect.

http://en.wikipedia.org/wiki/Disposition_effect

Excellent bibliography on this here:

http://disposition-effect.behaviouralfinance.net/

If you believe PP is a superior allocation, you are taking too much risk relative to the PP by holding too many stocks and not enough of the other asset classes. You are also incurring opportunity risk by not being invested in asset classes that could well perform better than stocks (gold possibly falling into this category, but who knows).

One last point: HB says in Rule #17 of Financial Safety, "If you are hesitating, it is because you don't yet know enough about the investment or problem to make a confident decision. That means you shouldn't take the plunge until you know more and you're sure you understand all the ramifications."

I would just sell everything and buy what you want. I call that buying peace of mind. Value= Priceless

Clive,

I am trying to determine what the largest decline was; meaning high to low. I found about 10% to be the largest in 2008.  Where did u see a 15% decline?

pkg man, I agree about buying all the components in once. My initial post mentions that it's the only way that's comfortable for me. Although I'd rather be buying gold at US$300 an ounce, the current price is not too far off from a LT treasury. And adding some ETFs allows me to buy a block of every asset at once.

Clive, those are very interesting suggestions. I think the difficult part for me would be that I would worry to much about how to replace a defensive stock with another, should things go wrong. I would be concerned about how to classify certain stocks, and would probably rely on the help of others in defining them. The true components of the pp are so simple, so that even if I could substitute for say, long term treasuries, I wouldn't want to.
You wrote:

IMO the PP can also be quite volatile at times, its just that most of the historic yearly based data has benefited from the year ends not coinciding with the drawdowns.

Yikes, so the pp's historical data simply benefits from not crashing near year-end? ha, I'm going to pretend I never read that. (Kidding. Obviously, you are still a fan of the pp).

Drewskers, I have no defense. You are right. But, as I said, selling losers to buy gold feels like performance chasing. Selling stocks that are up, even if I love them and want to hold them -- that's something I can stomach. As long as it's to acquire all four pp components.

Steve, so would I ... if it were someone else's holdings.  ;)

Clive wrote:

dualstow wrote: Obviously, you are still a fan of the pp

If you consider the PP as a bond or cash like investment its great.  If however you have higher expectations of it being more of a stock like investment then you might have some regrets.

At its core the PP is a form of stock, bond, currency and cash blend which is a good core combination to hold overall.  In isolation and 100% loaded into however   No more than perhaps 100% loading into bonds only.

Clive,

Given the nuances between the traditional 4x25 portfolio and PRPFX, would you still characterize the fund as a substitute for FI? In other words, would you consider replacing a portion/all of FI holdings with PRPFX in a rising interest rate environment?

Best,
Budd

Clive wrote:

dualstow wrote: Obviously, you are still a fan of the pp

If you consider the PP as a bond or cash like investment its great.  If however you have higher expectations of it being more of a stock like investment then you might have some regrets.

At its core the PP is a form of stock, bond, currency and cash blend which is a good core combination to hold overall.  In isolation and 100% loaded into however   No more than perhaps 100% loading into bonds only.

I have expectations of it being a wealth preservation investment.

Clive,

I looked at SS & still cant find the 15% drawdowns. What dates r u using?

julian wrote: Clive,

I looked at SS & still cant find the 15% drawdowns. What dates r u using?

Julian, please see my post about the data that was used to calculate the 'real' max drawdown.

1) Gold prices just sank
2) Sh*t
3) I think I'll be buying more gold in 12 months.

The PP is at its best when its assets are acting volatile.... as opposed to being in any one asset long-term of course.

The volatility is what allows the PP to come close to the long-term return of an all-stock portfolio.