Gyroscopic Investing

Hello friends,

anyone has backtesting results showing what is the historical minimum amount of CASH needed to offset the year loses on the other 3 assets ?

25% Cash is the standard and the rebalance will put everything again at 25, but imagine that you just want to have cash to put stocks/bonds/gold back to their previous values, and cash can for some time (less than 1 year) return to 0%.

I think the historical max. DD is around 20% but at the end of the year is less than 10%. Can I reduce the Cash with some safety to 15%?

Let me know your thoughts.

Thank you and happy 2015!

frugal wrote: Hello friends,

anyone has backtesting results showing what is the historical minimum amount of CASH needed to offset the year loses on the other 3 assets ?

25% Cash is the standard and the rebalance will put everything again at 25, but imagine that you just want to have cash to put stocks/bonds/gold back to their previous values, and cash can for some time (less than 1 year) return to 0%.

I think the historical max. DD is around 20% but at the end of the year is less than 10%. Can I reduce the Cash with some safety to 15%?

Let me know your thoughts.

Thank you and happy 2015!

Cash will not offset losses unless one is earning a respectable yield. However; reducing the cash allocation has a direct impact on fixed income duration. A 1% rise in interest rates with 0% cash would result in a fixed income loss of approximately 17% (excluding interest payments). With 25% allocated to cash, the same 1% rise in rates would result in an 8.5% loss in the fixed income portion of the portfolio.

17% impacting 1/3 of the portfolio or 8.5% on 50% of the portfolio.

buddtholomew wrote:

frugal wrote: Hello friends,

anyone has backtesting results showing what is the historical minimum amount of CASH needed to offset the year loses on the other 3 assets ?

25% Cash is the standard and the rebalance will put everything again at 25, but imagine that you just want to have cash to put stocks/bonds/gold back to their previous values, and cash can for some time (less than 1 year) return to 0%.

I think the historical max. DD is around 20% but at the end of the year is less than 10%. Can I reduce the Cash with some safety to 15%?

Let me know your thoughts.

Thank you and happy 2015!

Cash will not offset losses unless one is earning a respectable yield. However; reducing the cash allocation has a direct impact on fixed income duration. A 1% rise in interest rates with 0% cash would result in a fixed income loss of approximately 17% (excluding interest payments). With 25% allocated to cash, the same 1% rise in rates would result in an 8.5% loss in the fixed income portion of the portfolio.

17% impacting 1/3 of the portfolio or 8.5% on 50% of the portfolio. I chose 5.6% impacting 50% of the portfolio by adding additional cash.

Budd,
sorry to bother you.
Can you please explain me with your example, so I can follow your thougts.
I couldn't understand what you are doing.
Regards!

1. TLT ETF (long-term treasuries) has a duration of approximately 17 years. A 1% increase in interest rates will result in approximately a 17% loss.
a. If TLT and Cash each comprise 25% of your portfolio and TLT incurs a 17% loss (.25*17), the fixed income portion of the portfolio only experiences a 4.25% DD.
b. At 33% of the portfolio, the same 17% loss in treasuries (1% rise in rates) results in a 5.67% (.33*.17) draw-down.

This DD range (4.25 vs 5.67) may be acceptable given the additional 16% available to allocate to equities and gold.

Budd's math is good.

Frugal - you strike me as someone that is trying too hard to optimize a small portfolio.  I could be completely wrong, but your myriad of posts makes me think that you are fretting mightily over a very small number.  Please, please realize that the PP is for preserving wealth - you MUST create wealth via a different mechanism.

You should spend your time growing your assets via adding value to the world.  Use the PP to preserve your wealth.  25/25/25/25 is good enough.

Focus on adding value in your real life and shift excess profit to the PP to preserve it.  You will never get wealthy via the the PP - but it is a damn good way to keep it safe.

Hello,

Mark, the size does matter :-)
I would like to have another Lazy portfolio to work with PP. Do you have any suggestion?

Budd, Cash can be decreased as per the study of one of our colleagues:

C    B    G    S    CAGR  StD  MAXDD  Sharpe  SharpeMDD
10  30  20  40  19%    57%    31%      2%      4%
25  25  25  25  45%  29%  33%      5%      22%
20  30  20  30  39%  28%  26%      1%      9%
15  35  15  35  35%  32%  19%      2%      1%
10  40  20  30  23%  37%  32%      0%      7%



Regards

frugal wrote: Hello,

Mark, the size does matter :-)
I would like to have another Lazy portfolio to work with PP. Do you have any suggestion?

Budd, Cash can be decreased as per the study of one of our colleagues:

C    B    G    S    CAGR  StD  MAXDD  Sharpe  SharpeMDD
10  30  20  40  19%    57%    31%      2%      4%
25  25  25  25  45%  29%  33%      5%      22%
20  30  20  30  39%  28%  26%      1%      9%
15  35  15  35  35%  32%  19%      2%      1%
10  40  20  30  23%  37%  32%      0%      7%



Regards

10  30  20  40  19%    57%    31%      2%      4%
25  25  25  25  45%  29%  33%      5%      22%
20  30  20  30  39%  28%  26%      1%      9%
15  35  15  35  35%  32%  19%      2%      1%
10  40  20  30  23%  37%  32%      0%      7%

Taken from your own data, CAGR is highest for the 4x25 allocation although I suspect a typo for the 10/30/20/40 C/B/G/S breakdown.

Reducing cash increases the percentages held in the other assets. If these assets return more than cash over the back-tested time frame, then a lower cash allocation would result in higher portfolio returns. Nothing earth shattering there...

I have a BH portfolio (VP), but it is approximately 60% of my assets. The main difference between the two portfolios are:

SCV, International and EM exposure as well as REITS. Add one or more of these assets to further diversify, although, some may argue that the PP is already designed with this diversification in-mind. E.g. International equity investments are generally a good inflation hedge, but the PP already holds gold for this purpose.

While I'm babbling on, the BH portfolio will not get you rich, and in the end, my hope is that both BH and HB portfolios achieve comparable results.