Gyroscopic Investing

There are a couple of conflicting thoughts on this forum about the PP; some advocate that a PP is sufficient for every phase of life, others think that a PP is a low volatility, moderate return portfolio that may be inappropriate for a younger person early in the accumulation phase of life, and they need another, significantly riskier, higher reward portfolio in order to have a successful retirement.

I have come up with a PP "right-sizing" rule for someone in the accumulation phase of life, and I'm pretty happy with it as far as I've thought it through. In a nutshell, here it is.

"Plan to have a PP large enough to fund retirement from retirement day until age 70, or for the next ten years, whichever is later". What does this mean?

I plan to retire by 65. I place particular importance to age 65-70, because bad portfolio returns just before retirement and early into retirement are especially bad, this is "sequence of returns risk". Lots of people who thought they were going to retire or were in retirement in 2008 had a pie thrown into their face. Also, I am not going to take Social Security until 70. So I really need a higher probability that I will be able to draw off my investments from ages 65-70. Therefore, now in my mid-50s, I have sequestered enough assets into a PP so that ages 65-70 are covered. I have made very conservative PP total return assumptions... just 3% real return.

As this point, age 70 is more than 15 years in the future. But as we know also, conventional portfolios (the rest of my holdings) can have a ten-year period where they essentially don't have any gains. So as I age, I am going to make sure that the PP is sized so that it always covers the consumption needs of the next decade ahead. When I turn 61, I will up-size my PP to cover 65-71. When I turn 62, I will up-size my PP to cover 65-72. When I turn 70, I will up-size my PP to cover 70-80. Etc. 

Of course, I have to do the global portfolio calculations to make sure that everything, PP or not, is going to last my whole life, but the role of the PP is that of a ten year long bucket of money to combat sequence of returns risk. The PP even has enough pure cash to cover approximately two years of consumption, which is another recommendation for retirement. So if the markets all went into the toilet, I would be under somewhat less pressure to liquidate at a bad time in order to live, and in order to fund the next incremental annual PP addition.

Eventually, the PP may grow to dominate or become the entire portfolio (especially if gold and long bonds really go "on sale"), but at least I have a plan for the minimum size it should be. This type of thinking also gives a young person who wants to have a PP a way to find an appropriate size of PP for their age, though I have not done any math based on a young age.

Hi
I understand your concern about funding retirement in a low-yield world.
However stock market's don't always go up plus they are absolutely unpredictable.
You want to beat average market returns of PP by investing in more of an extreme fashion.
You could end up losing more money instead of making more money.
Can you stomach that risk?

Don't forget noone can time markets and they don't ring a bell at the top for you to get out.

Pfanni wrote: Hi
I understand your concern about funding retirement in a low-yield world.
However stock market's don't always go up plus they are absolutely unpredictable.
You want to beat average market returns of PP by investing in more of an extreme fashion.
You could end up losing more money instead of making more money.
Can you stomach that risk?

Don't forget noone can time markets and they don't ring a bell at the top for you to get out.

So, your opinion is to only have a PP, never a VP. I have a problem with that. Also, I am not doing any market timing at all.

I think the previous poster was just asking a legitimate question.

Go for it if you can stomach the risk!  It seems you've thought things through and know what the risks are.

Why don't you take social security earlier than 70?  I don't know if this discussion has been had here before, but when I run the numbers it looks to me like its often better to take retirement earlier if you factor in compounding interest at modest rates.

http://www.fool.com/investing/general/2 ... o-you.aspx

I understand the instinct to balance maximization in accumulation and sustainability in retirement.  However, I personally reject the idea that the maximization part should come through high risk investing.  IMHO, you're far more likely to accumulate a comfortable retirement nest egg by wisely controlling your expenses, saving a large percentage of your income, and investing it conservatively than you are by racking up consumer debt, putting away the standard 10% in a 401k, and betting it all on stocks.  Maximize the investment contributions you can actually control, not the hypothetical returns you cannot. 

Tyler wrote: ....racking up consumer debt, putting away the standard 10% in a 401k, and betting it all on stocks.

Wow, when did I say that? Did I say it on the alternative universe gyroscopic forum?

My apologies -- I didn't mean to imply you said anything like that.  I actually find your transition plan quite reasonable and well thought through.

My comment was more general, and was simply to offer a different perspective on retirement accumulation in reply to your opening sentence.  The average investor has a pretty warped attitude around where wealth comes from.  I like to believe most people here are decidedly above-average. 

I am not sure the when to take SocSec question has been settled. The less solvent the system is, the more I want to take it early. Recent news hasn't been good.

I personally find the PP/VP approach a bit weird, though I get why HB developed the method. However, at the end of the day it is a bit of a rhetorical ruse. One only has a single bucket of assets and together they have a historical expected return and risk profile. At a macro personal level that is what you should focus on. Separate buckets are really more for emotions/the mental aspect of investing than how they will or will not matter for an expected retirement earnings stream.

Kbg wrote: I personally find the PP/VP approach a bit weird, though I get why HB developed the method. However, at the end of the day it is a bit of a rhetorical ruse. One only has a single bucket of assets and together they have a historical expected return and risk profile. At a macro personal level that is what you should focus on. Separate buckets are really more for emotions/the mental aspect of investing than how they will or will not matter for an expected retirement earnings stream.

I completely agree, sub-portfolios are all just dotted lines in the sand. But they are useful for organizing. The impact on the global portfolio of having PP be a part of it has been good. Didn't have any gold before, now I have a sizable slice; have more cash now, and less exposure to stocks.

ochotona wrote: There are a couple of conflicting thoughts on this forum about the PP; some advocate that a PP is sufficient for every phase of life, others think that a PP is a low volatility, moderate return portfolio that may be inappropriate for a younger person early in the accumulation phase of life, and they need another, significantly riskier, higher reward portfolio in order to have a successful retirement.

Just curious -- anyone want to briefly summarize why they believe the latter? 

Tyler wrote:

ochotona wrote: There are a couple of conflicting thoughts on this forum about the PP; some advocate that a PP is sufficient for every phase of life, others think that a PP is a low volatility, moderate return portfolio that may be inappropriate for a younger person early in the accumulation phase of life, and they need another, significantly riskier, higher reward portfolio in order to have a successful retirement.

Just curious -- anyone want to briefly summarize why they believe the latter?

What I'm about to say is all dependent on what data source one uses and the "usual retirement assumptions" but standard financial thought is that A) you want to be able to live a certain lifestyle comfortably and never get to zero on your asset pile before you die no matter how long you live within a normal human life span + 10 to 20 years and B) the historical U.S. market  history of stocks being the highest returning asset class at the cost of high volatility. Therefore, take more risk with stocks to have more money to retire on.

In reality there are so many assumptions one has to make with all of it that it almost (does) boggle the mind.

It Bogles the mind

Sitting around the dinner table with my brother and our aging parents yesterday on Memorial Day continues to bring this damn effing subject to the forefront for me all the time, i.e. financial security in retirement and how to get there, and I was completely sick and tired of devoting time to it, hence the PP.

I technically had a VP for 25 years.  Good luck with that, for those who want to dedicate the time and have the balls to ride anything they might have up and down.  If I owned something it absolutely went the opposite way >50% of the time -- I would get stopped out, averaged down or became a long term investor in some piece of crap, that once I finally got sick of holding it and sold, conveniently turned the next day.

If you are good at it and it doesn't emotionally wreck you, go for it.  Even if I was good at it (I was NOT) and say added a couple hundred k to my overall savings from it, knowing what I know now, I would still not believe the time invested would have been worth it, vs. pursuing other hobbies or working on starting a business instead.  There is this magical allure, like gambling, that you can do better.  I say without inside information, BS.  You are nowadays fighting against computers, HFT algorithms and blatant manipulation (Forex anyone).  Why anyone puts their hard earned money in any of this sometimes makes me wonder.

I am a conservative guy.  I am in the peak earning years.  I have completely shut down any VP investing and all is going into PP.  I feel it is the right choice, or at least certainly more well balanced than anything I could put together.

Cortopassi wrote: Sitting around the dinner table with my brother and our aging parents yesterday on Memorial Day continues to bring this damn effing subject to the forefront for me all the time, i.e. financial security in retirement and how to get there, and I was completely sick and tired of devoting time to it, hence the PP.

I technically had a VP for 25 years.  Good luck with that, for those who want to dedicate the time and have the balls to ride anything they might have up and down.  If I owned something it absolutely went the opposite way >50% of the time -- I would get stopped out, averaged down or became a long term investor in some piece of crap, that once I finally got sick of holding it and sold, conveniently turned the next day.

I am a conservative guy.  I am in the peak earning years.  I have completely shut down any VP investing and all is going into PP.  I feel it is the right choice, or at least certainly more well balanced than anything I could put together.

Corto, you sort of prove my point. We're all in our 50s, and the PP is a good fit, and a better fit as we get older. But you had a VP for a quarter-century. You reaped the benefits of lots of risk in your portfolio, now you have the luxury of cruising along, and that's great. I am in the same place in life. I just don't think it's the right thing to advise to my children, ages 18 and 23.

And if I don't think it's right for a 20-something, but it is right for a 50-something, then there has to be a math-based methodology for a rational transition from PP + Conventional to All PP or Mostly PP. That's what I'm trying to arrive at.

So many people people say, "I got sick of my managing my investments one day in my 50s and went to the PP and now I sleep better at night". I agree with the sentiment, but should "feelings of being sick" drive the decision?

Feelings are so fleeting and subjective; they can't possibly be the basis for shifting one's investment strategy, anymore than, "I got sick of my car, so I bought a new one" is any good.

One big item that is incorrect.  I had a VP for 25 years that returned, as best I estimated, about 1.1% average annual nominal return.  So I went absolutely nowhere, and lost WRT to inflation, over 25 years, with me trying to outsmart the market.  I was the poster child of getting in and out at the absolute wrong times.  I was the poster child of overtrading.  I was the poster child of listening to friend's hot tips.

I feel I am currently in the financial security of a small bass boat, that should have been a cruise ship had I been with a PP for the past 25 years.

I believe I prove the case for having a PP from day one.  Spend your energies in other fun or fruitful endeavors.  Don't get sucked into the hype of Wall Street and getting rich by investing.  Do it slowly and surely with a PP.

I am not saying your thinking is wrong, ocho.

As for the feelings aspect, just like a lot of things, the "paper" nature of trading is the part that screwed me a lot.  The ability to pull up Etrade or IB or whatever, and decide you've had enough of something and click a button and sell something for a huge loss, or get into that short term option that evaporates to zero, is a lot different than having that physical car, or physical gold coin, or stack of $100 bills and doing the same thing as quickly based on feelings and emotions.  Absolutely I believe emotions and feelings are the basis for a lot of the way the general public invests.

I guarantee if I was forced to run physical $100 bills through my hands equivalent to the trades I have made in the past without thinking, I would have paused and not done a lot of the trades I did.

Having a VP that consists of a schizophrenic blend of whatever particular asset (not even asset class) seems hot is doomed to expensive underperforming failure unless you have a serious edge, which you probably don't, or you're very lucky, which you probably aren't. The real way to make this work is to invest in broad asset classes instead; a stock index, a bond index, etc, like with a 60/40 style Boglehead portfolio. But when you do that, you're only marginally improving on the PP's long-term return because the PP itself is made up of these same broad asset classes, only more of them! Over decades, you might beat the PP's return by 100-150 basis points, but you're exposed to much more risk in the process.

Ochotana, I would be wary of assuming that "10 years of expenses" is enough to ride out an underperforming high-risk VP. Take a gander here: http://gyroscopicinvesting.com/forum/pe ... ic-graphic

There have been multiple periods in your own lifetime when a 100% stock portfolio returned less than or equal to a 0% real CAGR over 15 years, and a few nearly 20-year periods. Even if you have the nerves of steel necessary to avoid selling at an importune time for a decade or longer, is that really the kind of poor performance you want to expose yourself to the risk of?

Just for reference, I'm not talking about juggling a PP and a 100% stock portfolio... I'm talking about a PP and a 60/40-ish portfolio. The 60/40 portfolios I have contain sectors that the PP just doesn't have represented at all, so in a sense it's yet another type of diversification. I am a firm believer in turning the non-PP part over to a robot and then fuhgeddaboutit; am doing this at a furious pace. Everything will be on auto-pilot. Watching, buying, selling is a big time-waster.

ochotona wrote: Corto, you sort of prove my point. We're all in our 50s, and the PP is a good fit, and a better fit as we get older. But you had a VP for a quarter-century. You reaped the benefits of lots of risk in your portfolio, now you have the luxury of cruising along, and that's great.

I think the traditional risk/reward premise (high risk = high reward) is a core issue here.  The thing I believe most people don't understand is that while the market is the sum of all the investment decisions made by individuals, the average return of the individual is not the market rate. 

[img width=600]http://moneyinvestexpert.com/wp-content ... vestor.png[/img]

Note that this data was collected by studying mutual funds (including index funds).  Many of these investors would classify themselves as passive investors.  Why the huge discrepancy?  Basically, people are not robots or spreadsheets, and accounting for psychology downside risk has a measurable drag on returns.  When their investments "underperform" for even short amounts of time, they instinctively look for ways to "fix" the problem.  They sell, reallocate, mix things up, and generally mis-time every decision.  You can see this in the redemption data -- the average duration that an investor holds any individual fund today is only three years!  Even assuming that a few high frequency traders skew the average for everyone else, the idea that an everyday investor is capable of picking a traditional portfolio and passively following it for 30 or more years is largely a myth.

Don't get me wrong -- I think a 60/40 Boglehead portfolio is a fine investment option for the long run assuming one does not touch it in the meantime.  It's just that people are far less risk tolerant in reality than they like to think they are, and I believe the average Joe is unlikely to stick with it and ever see anything close to average returns.  For anyone truly above average in that regard, I commend you and encourage you to do whatever you feel is best with your money.

Now of course the PP doesn't completely solve that problem.  Reading the history here, many people can't handle a relatively meager 1% drop in the PP for more than a month or two and either freak out or bail.  A 60-40 BH portfolio suffering through a negative CAGR for more than a decade must feel like financial Armageddon to someone like this.  It's really a psychology problem rather than a portfolio problem.  However, I do strongly believe that most investors would greatly benefit from a low-SD portfolio (such as the PP).  Accounting for human psychology, minimizing standard deviation can result in far greater returns than maximizing CAGR.  And the CAGR of the PP is quite impressive in its own right (trailing a 60/40 portfolio by only 0.18%/year over the past 40+ years), so for me it is an excellent accumulation portfolio as well. 

Tyler wrote: And the CAGR of the PP is quite impressive in its own right (trailing a 60/40 portfolio by only 0.18%/year over the past 40+ years), so for me it is an excellent accumulation portfolio as well.

I think I missed that memo! I just ran 60/40 vs. PP on PortfolioVisualizer.com, and got a 1.58% difference per annum over 1974-2014. That's a very large difference, almost a 2x difference over 40 years, and that's my point. But much more risk, of course.

All of your points about psychology, though, excellent.

Shift the comparison back by one year and it looks a lot different.  A 60/40 stock/bond portfolio lost 21% of its value in real terms in 1973. 

BTW, back to back real returns of -21% in 1973 and -29% in 1974 is precisely the type of scenario that will cause very rational people to ditch a perfectly good investment plan right out of the gate. 

Tyler wrote: BTW, back to back real returns of -21% in 1973 and -29% in 1974 is precisely the type of scenario that will cause very rational people to ditch a perfectly good investment plan right out of the gate.

That's when Dad barks at Junior(s) to stay in the program.

ochotona wrote:

Tyler wrote: BTW, back to back real returns of -21% in 1973 and -29% in 1974 is precisely the type of scenario that will cause very rational people to ditch a perfectly good investment plan right out of the gate.

That's when Dad barks at Junior(s) to stay in the program.

Are we talking about children here? Or adults? What if Dad is himself panicking because he's a few years from retirement and discovers that his portfolio has just fallen by nearly half?

Investors will generally get better results (returns) with the Permanent Portfolio, and that is true for people of any age.

In 2009 Dad (76 at the time) told me to get him out, nearly exactly at the low.

It happens a lot!

If they did not get out, they would be much better off.  But the emotions get to be as intense as any ones a human has.  Looking at life savings evaporating is as tough as death losing a job, etc.  Probably even worse, because it ends up being drawn out over longer periods.