Gyroscopic Investing

barrett wrote: Both 1982 and 1995 were really strong years for the PP. Also, when money comes out of assets through selling, it has to go somewhere. Apart from Chinese ceramics (Damn! Why didn't I buy?), some of the obvious choices are real estate (already getting high as well), gold & cash (terrible yields for the moment). So maybe there won't be a crash in both stocks and bonds because the alternatives are not great.

buddtholomew wrote: Congratulations and welcome.

MachineGhost wrote: I've noticed an interesting effect of using monthly closing data, even if you buy on the open of the next day.  It somehow seems to literally halve historical MaxDD's.  I cannot quite figure out why this is so, but it makes suspect all systems based on monthly data like "A Quantitative Approach to Tactical Allocation".

julian wrote: Your 1981 numbers seem off

iwealth wrote: Indicative of a consistent market behavior at month's end? But either way, I much prefer to backtest using random start days and variable holding periods. Surely makes for a more robust system.

iwealth wrote: If one backtests a timing or rotation system based on end of month closing numbers and performs the transactions the following trading day, you are seeing a vast reduction in historical drawdown?

So if one backtests that same system using varying start dates such as the 2nd of the month, 3rd of the month, etc., assuming results are consistent with trading on the first of the month, wouldn't that eliminate doubt about the robustness of the system?

MachineGhost wrote: ↑Wed May 21, 2014 5:15 am I did this fun exercise mainly to see how bonds respond during overvalued market crashes.

1973: Stocks -18.19%, Bonds -5.66%, Gold 72.35%, Cash 2.46%
1974: Stocks -29.81%, Bonds -0.05%, Gold 60.00%, Cash 4.61%
(Nifty Fifty Implosion: http://www.ozy.com/flashback/nifty-fift ... 37.article)
(Gold was not legal to own again until January 1, 1975 and only thanks to Ron Paul's diligent legislative efforts, so you'd have crushing PP losses unless you had invested in other real assets like, say, Chinese ceramics.  Not kidding.)

1981: Stocks -9.05%, Bonds -3.79%, Gold -32.60%, Cash 9.82%
(Tight money to break inflation expectations; gold imploded previous year.)

1987: Stocks 4.15%, Bonds -10.67%, Gold 19.98%, Cash 2.88%
(US Dollar Implosion: https://en.wikipedia.org/wiki/Black_Monday_%281987%29)
(The year Harry Browne came out with the current PP allocation.)

1994: Stocks 1.31%, Bonds -12.87%, Gold -2.25%, Cash -0.16%
(Bond Implosion: http://money.cnn.com/magazines/fortune/ ... /17/79850/)

2000: Stocks -8.26%, Bonds 21.66%, Gold -5.53%, Cash 4.58%
2001: Stocks -9.57%, Bonds 1.35%, Gold 1.91%, Cash 5.05%
2002: Stocks -22.70%, Bonds 13.28%, Gold 24.65%, Cash 2.12%
(Tech Implosion.  Without 09/11 fear, it seems likely gold would not have responded so favorably.  That is also the year I first bought gold, so it had to have been a fear trade.)

2008: Stocks -36.19%, Bonds 38.97%, Gold 2.60%, Cash 3.89%
(Subprime Implosion.)

2014-:
(TBD Implosion.)

So it seems to me that the market could vaciilate between either bonds or gold in providing crash protection.  I don't think we can universally say that bonds always hedge equity, as I previously thought.  In some cases, it is the cash yield alone that barely just saves the overall PP at the end of the day.  Can the same be said of now with interest rates at nearly zero if both stocks and bonds crash at once?  My worst fear is a worser repeat of 1981 or 1994 where nothing responds; I see nothing to suggest we're not going to have such a "Tight Money" repeat and it'll probably be far worse since I don't believe we've had both stock and bonds overvalued at the same time before along with zero paying cash.  That puts a tremendous amount of pressure on gold to outperform against a massive deflationary headwind.  And pigs fly.