Gyroscopic Investing

My "tweaked" PP is 33% stocks, 32% LT bond, 15% gold, 20% cash.

If we split that portfolio into a pure 25% / 25% / 25% / 25% PP and a VP, what is the split between the two, and what does the VP look like?

It turns out that the pure PP comprises 60% of the total assets, the VP is the other 40%.

The VP has a composition of 45% stocks, 42.5% bonds,  12.5% cash, and 0% gold, which in the grand scheme of all things financial, is a conservative portfolio, almost the simplest "Couch Potato" portfolio, but with the safety of added cash. This sub-portfolio was only down -2.38% in 2008 and -1.61% in 2009. The CAGR over the last 40 years was 10.04%, and the Sharpe Ratio was 0.58, both higher than the PP (8.73%, 0.51). But the tweaked portfolio has a Sharpe Ratio of 0.61, higher than either of them alone, and the CAGR is 9.47%

To therefore say that tweaking the PP to 33/32/15/20 amounts to "speculating" is not the truth.

Quick question: How did the portfolio lose 1.61% in 2009? Equities were up that year by around 26% or 27% and bonds (even if you held the bond allocation in 100% LTTs) were down around 22%; if you had the bond allocation in an intermediate term ETF, the loss was even less than that. Cash might have gone up maybe 0.5% in 2009. How does an equal allocation of +27% + -22% and then adding a smaller slice of an asset that didn't really gain or lose much of anything add up to minus 1.61%?

Am I missing something really simple?

D1984 wrote: Quick question: How did the portfolio lose 1.61% in 2009? Equities were up that year by around 26% or 27% and bonds (even if you held the bond allocation in 100% LTTs) were down around 22%; if you had the bond allocation in an intermediate term ETF, the loss was even less than that. Cash might have gone up maybe 0.5% in 2009. How does an equal allocation of +27% + -22% and then adding a smaller slice of an asset that didn't really gain or lose much of anything add up to minus 1.61%?

Am I missing something really simple?

http://www.peaktotrough.com/hbpp.cgi indicates 30-year Treasuries bonds were -27.94% in 2009, S&P500 +26.35%...

ochotona wrote:

D1984 wrote: Quick question: How did the portfolio lose 1.61% in 2009? Equities were up that year by around 26% or 27% and bonds (even if you held the bond allocation in 100% LTTs) were down around 22%; if you had the bond allocation in an intermediate term ETF, the loss was even less than that. Cash might have gone up maybe 0.5% in 2009. How does an equal allocation of +27% + -22% and then adding a smaller slice of an asset that didn't really gain or lose much of anything add up to minus 1.61%?

Am I missing something really simple?

http://www.peaktotrough.com/hbpp.cgi indicates 30-year Treasuries bonds were -27.94% in 2009, S&P500 +26.35%...

Oh, OK, I was using TLT for the bond component and it lost (IIRC...I can't be 100% sure since Morningstar is down for the moment and I'm not sure I trust Yahoo Finance's dividend-adjusted numbers) around 22% in 2009.

With that said, even if you do use the numbers you provided, for a 45/42.5/12.5 S&P 500/LTT/cash portfolio, the results still come in at a 0.34% positive return for the year (assuming 0.40% annual return on the cash component). If you use the actual return for SPY or VOO (again, from memory it was around 26.58%, not 26.35%), the annual return comes out to 1.37% for 2009.

Finally, since you mentioned the 2008 numbers and then the 2009 numbers, would it not be reasonable to show the bond portion of the portfolio as having 30 years to maturity at the beginning of 2008 and then maybe 29 years to maturity at the beginning of 2009 (since the bonds would be a year closer to maturity as a year had elapsed...but you wouldn't sell them except to rebalance and/or once they hit twenty years to maturity)? This would reduce the 2009 losses in the bond portion of the portfolio even further below the -27.94% loss you mentioned.

I use the TLO ETF, so fixed, known long bond maturity dates are not really available to me.

ochotona wrote: To therefore say that tweaking the PP to 33/32/15/20 amounts to "speculating" is not the truth.

Depends on why/how you're tweaking.  If you're going to modify the allocation over time in response to your predictions of future performance of the individual components, that is most definitely speculation.  It's a slightly different brand of speculation from the usual buy-a-stock-and-hope-it-goes-up plan, since you're limiting how far you're straying from the standard 25x4.  What rebalancing bands are you going to use?

If you're doing this because you think gold is over-represented in the portfolio and you're going to stick with these numbers going forward no matter what, that falls under the definition of "investing" - as does the 50/50 Boglehead portfolio.

sophie wrote:

ochotona wrote: To therefore say that tweaking the PP to 33/32/15/20 amounts to "speculating" is not the truth.

Depends on why/how you're tweaking.  If you're going to modify the allocation over time in response to your predictions of future performance of the individual components, that is most definitely speculation.  It's a slightly different brand of speculation from the usual buy-a-stock-and-hope-it-goes-up plan, since you're limiting how far you're straying from the standard 25x4.  What rebalancing bands are you going to use?

If you're doing this because you think gold is over-represented in the portfolio and you're going to stick with these numbers going forward no matter what, that falls under the definition of "investing" - as does the 50/50 Boglehead portfolio.

No timing... static allocation.

As for rebalancing bands, when you consider 15/35 bands, what one is really saying is I want to rebalance when the inital allocation is 0.60 / 1.40 of the original 25%, right?

Applied to a tweaked allocation of 15% for gold, that would be a band of 9 / 21

Applied to a tweaked allocation of 33% for stocks, that would be a band of 20 / 46

Those are my thoughts.