Gyroscopic Investing

Thus far in 2013, the PP is down about 2.4% (SHY, TLT, GLD & VTI) whilst the S&P 500 is up about 29.5%.  Acknowledging upfront that we should not look at one years performance in isolation, I ask for opinions on the drivers behind the PP's 2013 performance.

Short term interest rates are being manipulated by the Fed.  Ditto for long term rates.  This has been true for the past 5 years.  What are the drivers behind gold's decline?

All thoughts are appreciated.

Rising real interest rates; the irresistible appeal of a booming stock market; slowly increasing confidence (perhaps misplaced) in an economic recovery.

Well I put a lot of money in the portfolio, so it was bound to go down.

Yup

Several prior years of outperformance and a mean reversion in 2013.

We are basically spoiled being the poster child of investment theories during the last ten years of market turmoil.  Payback is hell. It could be this way for awhile until things even out.  No one knows when but just when you least expect it, things could turn back up.

A year ago I was teetering on the edge of setting up a full PP with part of our assets, but concerns about the pricing of gold and LT Bonds held me back.  What is surprising is how well the PP has held up with those two asset classes in such decline.  Very impressive.  Stocks did the heavy lifting.

Looking forward stocks may have a little further to go but it seems that now gold will have to step in to save the PP in the next year or so.  Of couse if deflation kicks in, it should then be LT Bonds that come to the rescue.

The PP is holding up as a safe refuge in an uncertain world.

All Best

MediumTex wrote: Several prior years of outperformance and a mean reversion in 2013.

I have the PP average return at 7.3% over the last four years and my Bogey at 5.3% REAL!  Craig taught me that I can be happy with a 3.0% real return and I am happy.

portart wrote: We are basically spoiled being the poster child of investment theories during the last ten years of market turmoil.  Payback is hell. It could be this way for awhile until things even out.  No one knows when but just when you least expect it, things could turn back up.

Yes, but why does the payback have to come after I adopt the strategy in the final phase of wealth accumulation a few years before retirement?

Because life's a F****g B***h, I guess.

I remember some older folks getting riled up on the Boglehead forum around late 2008 in a thread called, "Young Investor Excited About Market Crash". Or something like that. I forget the exact title, but it was an investor in her twenties who was indeed excited about being able to buy stocks on the cheap.

On the other hand, there were some investors nearing retirement who didn't take to kindly to her peppy words, as they were seeing their 60% stock portfolios cut in half. I hope they held on, because they're doing fine a few years later if they did.

dualstow wrote: I remember some older folks getting riled up on the Boglehead forum around late 2008 in a thread called, "Young Investor Excited About Market Crash". Or something like that. I forget the exact title, but it was an investor in her twenties who was indeed excited about being able to buy stocks on the cheap.

On the other hand, there were some investors nearing retirement who didn't take to kindly to her peppy words, as they were seeing their 60% stock portfolios cut in half. I hope they held on, because they're doing fine a few years later if they did.

I was in a T.Rowe Price target date fund with an 80/20 stock/bond split in 2008. That was a fund with a 2020 target date but T. Rowe price has a more aggressive strategy than most of the target date funds. I was down 60% at one point. I have learned enough about investing over the years to stay the course when things go south like that but as soon as it recovered I started looking around for another vehicle which led to the PP.

I suspect that if I did the math on that 80/20 fund compared to the PP I'd probably be a lot better off if I'd stuck with it, but I don't see much point in that kind of masochistic exercise. If 2014 turns out like 2013 I do think I'll be looking for greener pastures.

modeljc wrote:

MediumTex wrote: Several prior years of outperformance and a mean reversion in 2013.

I have the PP average return at 7.3% over the last four years and my Bogey at 5.3% REAL!  Craig taught me that I can be happy with a 3.0% real return and I am happy.

6.9 % average return last 12 years. Also happy.

I know the stock market and the bond markets are different... Obviously. But a lot of the price movement around stock earnings is similar to the price movement around long-term bond interest rates.

If stocks were quoted by their 10 year and 1 year trailing earnings yield (PE ratio flipped), rather than their price, people would have so much more perspective on what is really happening when the stock market "returns" them 25% in one year.

Meanwhile, with bonds often looked at in terms of yield, it is exceedingly scary looking to enter the long-term bond market after a big run.  30 year treasuries yielding 2.6% doesn't sound as cool as Dow 15,000.

Looking at the returns of the PP since 2005 against stock market earnings and bond yields, a pull-back was definitely in order!

Has all of the QE done something weird such that now cash is much more useful as an asset just as QE has put a load more cash* into the system?

Before there was that mountain of cash in the system, some assets would get bid down in order to release the funds to bid other assets up. There was a flow out of one asset class and into another. Now perhaps that has broken down somewhat. There is instead a flow out of cash into ALL volatile assets then out of ALL volatile assets back into cash. Cash doesn't shift in price at all obviously but it still keeps its price, acting as a bridge through time such that holders of cash can scoop up a bargain at a later date.

I guess this is just noise layered ontop of the PP logic and the cash part of the PP is there for just this sort of thing. This would give outsized returns some years (as in recent years up until 2013) and duff years (but not catastrophic) such as 2013. Perhaps it is just something we have to learn to live with.

What I think is so interesting is that this has not entailed any rise in short term interest rates. The fall across all assets that happened in June wasn't even prompted by a threat to raise interest rates it was simply a hint at slowing down QE. We all thought that cash was there in the PP to deal with situations such as in 1981 when short term interest rates were hiked. This shows how hard it is to second guess these things.

The irony is that QE was supposed to satiate all wish to hold cash by providing lots of cash. Has it failed to do that by creating a need to hold all of that new cash?



*People always talk about QE having put bank reserves in the banks and that is true BUT the bonds and MBS sold to the Fed were mostly held by non-bank institutions and households. The primary dealers were just a conduit between those original owners and the Fed. Those original owners have swapped bonds for bank deposits even though those bank deposits are mirrored by bank reserves. So the real change from QE is non-banks holding lots of cash and fewer bonds (and MBS).

moda0306 wrote: I know the stock market and the bond markets are different... Obviously. But a lot of the price movement around stock earnings is similar to the price movement around long-term bond interest rates.

If stocks were quoted by their 10 year and 1 year trailing earnings yield (PE ratio flipped), rather than their price, people would have so much more perspective on what is really happening when the stock market "returns" them 25% in one year.

Meanwhile, with bonds often looked at in terms of yield, it is exceedingly scary looking to enter the long-term bond market after a big run.  30 year treasuries yielding 2.6% doesn't sound as cool as Dow 15,000.

That's a very interesting point of view ; thanks, Moda.

Hey PPers!  Long time no post!  The last few months have been crazy for me (boss left and still hasn't been replaced, dog had ACL surgery, then I got summoned for grand jury duty, then major projects have me swamped at work).  So I haven't even had time to lurk, but thought I'd post my 2013 portfolio performances below. 

The #1s are my accounts, the #2s are my wife's accounts.  Our Roths are both 100% pure PPs, albeit using different ETFs.  Our IRAs are sort of like Boglehead portfolios, except with 10% REITS, 10% Gold, and 5% Commodities thrown into the mix.  And our 401Ks are pretty much a straight 70/30 stock/bond blend.  Everything is at Schwab, except my 401K which is at Fidelity:
So, not a good year for the PP as you all know.  Our stock-heavy 401Ks and IRAs really came through for us.  Only now I'm nervous about the tables turning on us in the next couple of years if there's another major downturn. 

Anyway, I'll see if I can post to the forum now and again, but you might not see me for long stretches of time.  Plus I'm writing a novel, which is absorbing what little free time I still had left. 

Which ETFs do you use for your PPs?

Traditional PP returned like -2.5%.

Did you rebalance at some point, or we're you a little bit stock heavy?

rocketdog wrote: I'm writing a novel, which is absorbing what little free time I still had left. 

Would you share the premise?

My PP (two thirds of our investments) performance was -2.61% last year.  Since 1/1/2010, my average annual return has been +6.9%.  Down years suck, but I can live with small losses. 

Since 1/1/2010 returns for my VP (one third of our investments) have been a little better at +10.3% per year, but the returns have been lumpy.

AdamA wrote: Which ETFs do you use for your PPs?

Traditional PP returned like -2.5%.

Did you rebalance at some point, or we're you a little bit stock heavy?

Correction: I just went on Schwab.com to see how they calculated our 2013 returns for our Roth IRAs.  According to Schwab my Roth was up 3.82% on the year, and my wife's was up 2.32%.  She holds EDV, which is a lot more volatile than TLT (which is what I hold).  That said, I'm contemplating converting us both to TLO, since it trades for free on Schwab. 

We started the year with a slightly more diversified PP portfolio that included a REIT and a total bond index ETF (less than 10% of each).  But then I sold those in May to truly make our Roth IRAs pure PP portfolios.  Together our Roths account for only around 10% of our total retirement savings. 

Our ETFs:

Cash = SCHO 25%
Gold = SGOL 25%
Bonds = EDV/TLT 25%
US Stocks = VTI/SCHB 15%
Foreign Stocks = VT/SCHF 10%

Since these are Roth accounts, I added to our positions once or twice during the year with our new contributions.  Note also that I include a foreign stock fund, which is permitted in a PP. 

Kshartle wrote:

rocketdog wrote: I'm writing a novel, which is absorbing what little free time I still had left. 

Would you share the premise?

Sorry, I never talk about my writing projects while I'm working on them.  Not even my wife knows anything about it. 

rocketdog wrote:

Kshartle wrote:

rocketdog wrote: I'm writing a novel, which is absorbing what little free time I still had left. 

Would you share the premise?

Sorry, I never talk about my writing projects while I'm working on them.  Not even my wife knows anything about it. 

I can respect that. Good luck with it.

When you write...do you set aside specific time and/or goals for that time or do you wait for inspiration and then just let it flow?

Do you find a couple drinks make the creative juices flow?