Gyroscopic Investing

Hey friends,

After posting a few questions on here a few months back I'm starting to drift into the PP.  As I've read and done research I came across this study online:

http://www.goldbullionstrategyfund.com/ ... -final.pdf

I'm not qualified enough to know if the interpretation of their data is accurate or not but what I found interesting about it is that they find an optimal allocation to gold to be around 20% (the other 80 they have allocated to a traditional "balanced" 60/40 stock/bond portfolio, so the the total portfolio is 50/30/20 stock/bond/gold).

I'm curious about everyone's thoughts are their four economic conditions.  They use a 2x2 grid to describe conditions where inflation is either rising or falling and whether there is a growing economic climate or not.

So "normal" = growing economy and rising inflation
"ideal" = growing economy and falling inflation
"stagflation" = shrinking economy and rising inflation and
"deflation" = shrinking economy and falling inflation

How do these categories relate to HB's four classic conditions? 

According to the study, gold did good in "normal", excellent in "stagflation," fairly flat in "ideal" and terrible in "deflation," which seems like a strong argument for its inclusion in any portfolio.

I guess I bring all this up because I think gold has been the biggest hurdle for my resistance to implementing the PP.

Thanks for the thoughts!

The economic framework of that quadrant is exactly how the PP was designed. Bridgewater (the largest hedge fund group in the world) produced that specific chart, and they follow the same underlying philosophy as the PP for their All Weather fund. Harry Browne's description of 4 environments is somewhat misleading because you have combinations of the two axis of inflation / growth. I think he understood that when designing the PP, but I think his explanation could have been better. The quadrant is the correct way to look at things from a very high level.

dr ratdog wrote: So "normal" = growing economy and rising inflation
"ideal" = growing economy and falling inflation
"stagflation" = shrinking economy and rising inflation and
"deflation" = shrinking economy and falling inflation

How do these categories relate to HB's four classic conditions? 

According to the study, gold did good in "normal", excellent in "stagflation," fairly flat in "ideal" and terrible in "deflation," which seems like a strong argument for its inclusion in any portfolio.

Actually, that would be average in "normal" (because there is no fear, despite inflation, so stocks perform very well), poor in "ideal" (because there is no fear and not inflation, the 2 factors gold protects against), average in "deflation" (PP theory calls this "recession" and calls "deflation" what you call "ideal") and excellent in stagflation.

Here's the big picture (this is somewhat subjective) :

normal : stocks + ; LT bonds + ; cash = ; gold =
ideal : stocks + ; LT bonds + ; cash = ; gold -
stagflation : stocks - ; LT bonds - ; cash - ; gold +
deflation : stocks - ; LT bonds = ; cash + ; gold =