Gyroscopic Investing

A thought just occurred.

If January has risen too fast and 2014 was a great year, let's consider the following:

        Instead of looking for a correction to bring PP back to normalcy,  let us ponder the notion of PP rising +25% for this year, 2015.

Your thoughts, please

bedraggled wrote: Your thoughts, please

My thoughts: Yes please!

Yes please. ---
Ahhh!

Warning - while you were reading a new reply has been posted. You may wish to review your post.

PS beat me to the punch. 

Everything was down today except stocks, so let's not get a head of ourselves.  Nothing major, but today was a loss.

I posted the +25% thought because Harry Browne did say to expect the unexpected.  Useful to keep the boss's thought in mind.

It is a bit early but boy would that make up for watching all those 90% stock portfolios zooming up and up the past couple of years!

I checked etfreplay.  PP is up 3.2% YTD!!!  This is the pattern though:  the PP takes off like a house on fire when stocks do poorly, and drags when stocks are doing well.  I remember past threads where this was noticed and people proposed juicing the stock allocation by various means to make it more volatile.

The HBPP is now back above the S&P 500.  Not too shabby.

I find the idea of a 25% gain in the HBPP a little disconcerting. What can go up 25% can also go down 25%.

According to peaktotrough.com, the biggest one-year gain in the PP (rebalanced yearly) was 38%.  Six times since 1972 the one-year gain has been over 15%.  The biggest one year loss was only 6%.  Only three years total have had negative one-year gains.  Of course, backtesting can't predict the future.

Ad Orientem wrote: I find the idea of a 25% gain in the HBPP a little disconcerting. What can go up 25% can also go down 25%.

Anything can go down 100%, which is what draws us to the pp, right?

(stuper1) The biggest one year loss was only 6%. 

That's heartening!

dualstow wrote:

(stuper1) The biggest one year loss was only 6%. 

That's heartening!

At what Maximum Adverse Excursion cost? 

stuper1 wrote: According to peaktotrough.com, the biggest one-year gain in the PP (rebalanced yearly) was 38%.  Six times since 1972 the one-year gain has been over 15%.  The biggest one year loss was only 6%.  Only three years total have had negative one-year gains.  Of course, backtesting can't predict the future.

I was curious when I read this because I have always seen that the PP had five negative years (1981, 1994, 2001, 2008 & 2013). I plugged in 20-year bonds instead of 30 and showed those years as all negative though it's really only 1981 that was down considerably at just over 6% (as stuper1 said). I figure 20 years is a better figure to use on the bonds because most PPs won't really hold all 30-year issues, and there was also a period of time when the longest treasury maturity was only 20 years.

One thing that is obviously masked by these results is that the PP has been down more than 6% during intra-year periods. It's just kind of a fluke of the calendar that it's never been down more than 6%. One thing working in its favor that way is how fast it has generally recovered its losses (see 2008 for a dramatic example when the portfolio was only down for 4-6 weeks before LTTs shot up).

The data on page 25 of Craig & MT's book shows how quick these recoveries have been in the past with only one rolling three-year period showing a barely negative real return. That is a common occurrence with a 60/40 portfolio, and not just for three-year periods.

Ad Orientem wrote: I find the idea of a 25% gain in the HBPP a little disconcerting. What can go up 25% can also go down 25%.

Totally agree with this. The PP is just supposed to crawl along. The big up year that stuper1 mentioned was 1979 when gold was just going sky high. A lot of the years with the best returns were in the 1970s which is one reason that the PP has taken some criticism over the years (some of its great CAGR since 1972 can be attributed to "outperformance" in the 1970s). But that is not really correct. The return on the portfolio as a whole was higher in that decade because inflation was higher. Cash and bonds both had high yields which helped pull everything up.

barrett wrote: I was curious when I read this because I have always seen that the PP had five negative years (1981, 1994, 2001, 2008 & 2013). I plugged in 20-year bonds instead of 30 and showed those years as all negative though it's really only 1981 that was down considerably at just over 6% (as stuper1 said). I figure 20 years is a better figure to use on the bonds because most PPs won't really hold all 30-year issues, and there was also a period of time when the longest treasury maturity was only 20 years.

The duration currently ranges from about 22 to 16.50 years on 30 to 20.  However, as the yield rises the duration decreases.  Back in the 70's, neither 20 nor 30 years would have provided a sufficient barbell "weight" to the PP.  Hmm!

When yields decrease, duration increases. How about reducing cash allocation to maintain a fixed income duration of approximately 8 years when interest rates rise?

Historically, the portfolio will tend to go up simply because more people are pouring more money into the market and the PP is going to capture it regardless of where it goes.  That's a very brief summary of an argument from one of HB's books (forget which one).  Thus, +25% is more likely to occur than -25%.

I'm kind of wondering where the big pop in bonds is leading us.  We're almost at the high point (low yield) from summer 2012 and the 30 year is once again approaching 2%.  Weren't there a few people saying they'd dump their long bonds if yields went below 2%?  What are you all thinking now?

sophie wrote: Historically, the portfolio will tend to go up simply because more people are pouring more money into the market and the PP is going to capture it regardless of where it goes.  That's a very brief summary of an argument from one of HB's books (forget which one).  Thus, +25% is more likely to occur than -25%.

I'm kind of wondering where the big pop in bonds is leading us.  We're almost at the high point (low yield) from summer 2012 and the 30 year is once again approaching 2%.  Weren't there a few people saying they'd dump their long bonds if yields went below 2%?  What are you all thinking now?

If we dump LTT's, where are we going to go. I keep looking at yields of UK, Germany and Japan plus other EU countries. We could have quite a ways to go before we hit bottom on yields. But we have no way of knowing what the future holds so I guess I'll hang on until I hit a rebalance band.

sophie wrote: I'm kind of wondering where the big pop in bonds is leading us.  We're almost at the high point (low yield) from summer 2012 and the 30 year is once again approaching 2%.  Weren't there a few people saying they'd dump their long bonds if yields went below 2%?  What are you all thinking now?

Hey Sophie,

Out of the four PP assets, 30-year bonds to me have the highest possibility of a big downside. I think it was Dualstow who was tempted a few weeks ago to cut back his bond holdings to 20%. I have been fiddling a bit, selling a few bonds here and there when the prices are high, but only enough to bring my bonds back down to 25%. This serves to both 1) take some winnings off the table and 2) bring my cash balance in my IRAs up closer to 10%. I want it to be at at least 10% of those accounts so that I have some dry powder in case something "goes on sale."

When I set up my PP, I did something that I am guessing a lot of people do, and that is that I crammed some money in there that should have just stayed as a VP. In my case I looked at my savings bonds as most of my cash position, so that within my IRAs I had very little real, dry-powder cash. I was in effect putting myself in the same position I was in back in 2008, and that is with no cash to invest when something takes a major tumble. The savings bonds, as I now understand, are great to have when yields are low (they give me extra protection against deflation), but they are not cash in the true sense because I can't cash in a big tranche of them all at once without incurring a bigger tax bill than I want.

Alanw wrote: If we dump LTT's, where are we going to go. I keep looking at yields of UK, Germany and Japan plus other EU countries. We could have quite a ways to go before we hit bottom on yields. But we have no way of knowing what the future holds so I guess I'll hang on until I hit a rebalance band.

Right, we don't know what the hell is going to happen which is why I am not selling bonds down past 25%. I don't think they are going to be the best performing asset, say, over the next 3-5 years, but I don't really have a clue. If we go all Japanese, or even just semi-Japanese, bonds will be one of the assets I want to be holding. I just don't have the stomach to hold on to them until I hit a rebalancing band. Fortunately (or maybe not!) IRAs give me some wiggle room to do a little mini-rebalance without the taxman sniffing around my shrubberies.

You're right Barret. If bonds continue to shine, we want to be holding them. We miss out on stock market surges relative to those investors who hold mostly stocks. We can't be afraid of other assets, otherwise, we might as well go the Boglehead route.

barrett wrote: I think it was Dualstow who was tempted a few weeks ago to cut back his bond holdings to 20%.

I'm constantly tempted to trim, but bonds are still at 27% of pp, and up 26% overall.
I did sell some 7-YR notes yesterday, but that was outside of the pp.

IRAs give me some wiggle room to do a little mini-rebalance without the taxman sniffing around my schruberries.

I must still be waking up. At first I  thought there was some new kind of berry I hadn't heard of. ;-)

dualstow wrote:

barrett wrote: I think it was Dualstow who was tempted a few weeks ago to cut back his bond holdings to 20%.

I'm constantly tempted to trim, but bonds are still at 27% of pp, and up 26% overall.
I did sell some 7-YR notes yesterday, but that was outside of the pp.

IRAs give me some wiggle room to do a little mini-rebalance without the taxman sniffing around my schruberries.

I must still be waking up. At first I  thought there was some new kind of berry I hadn't heard of. ;-)

Sorry about that, Dualstow! Spellcheck was so confused that it didn't bother to correct me.

Greetings, All,

Since I'm the adventurer who suggested a 'grand 2015, if it is to be grand, all 3 asset classes would need good years. (I think this is good thinking).  If this is true, then LTTs would bump up against the 35% band.  That 35% band imposes discipline.  And presently, I am the one pondering Pet Hog's analysis in his 'rebalancing factors' post regarding 40/15 bands.

Regarding my rebalancing explorations, I think I would hang in hoping LTTs would go to 35%- OK, how about 34.8%.  If i am correct, not rebalancing is a convenience PP provides us.  I.e., if LTTs recede from the 35% band without us taking profits, something else will perk up and the PP and we will be just fine.  Optimistic?  Please tell me if I am wrong somewhere

And I still am considering the 40/15 bands with that momentum notion.

Oh, if Europe can have tiny interest rates and Swiss banks can have negative interest rates,  by charging fees, then what of the near-, mid- and long-term futures for US Treasuries?  The PP may do well.

Tentatively yours,
Bedraggled

OK first of all, it's fundamentally impossible for all assets to have a good year.  One or two will go up, the others will go down, cash will stay flat.  That's how the PP works.  And yes, it works well!

Second, you are tying yourself up in knots over rebalancing because it sounds like you're confusing it with market timing.  You're best off setting a rebalance target (20/30 or 15/35) and sticking with it mechanically.  If you want to play with momentum, try something like Decision Moose with the 3 volatile assets - there are plenty of past threads on that and it's a nifty and fun idea for a VP.  However, it's not wrong to rebalance if you're approaching a band and too nervous to let it ride - just don't go outside of 15/35 because that will expose you to big losses if the overweight asset takes a tumble.

Another alternative, if you're still accumulating, is to put new funds into the lagging asset.  Each month (or periodic contribution), figure out what asset is lowest and put all your new funds into that asset.  Then you likely won't have to rebalance unless there's a very big market event.

Holding on to bonds here, till 35%.  Domo Arigato.

I continued rebalancing out of stocks today, since I didn't go all the way when I was supposed to. Pulled the trigger on some index fund sales around 3:00EST, and was pleased to come home for the day and find that the market was up even more at closing.

Haha, I rebalanced out of stocks in June, I think.  I also delayed it as long as possible, and failed to call the peak.  I even sold into a short term dip.

Lowe wrote: Haha, I rebalanced out of stocks in June, I think.  I also delayed it as long as possible, and failed to call the peak.  I even sold into a short term dip.

Well twenty years from now when the S&P is at 8000 we'll ask ourselves, What was I doing, messing around with those sales? :-)