Gyroscopic Investing

Hello All,

While I have had a PP for a while, I just realized I may have been over- analyzing things.

Is this reasoning correct....

1. There are two items in a portfolio, that being savings and investments. Savings should be a store of value.  Investments should (hopefully) increase in value but also run the risk of losing some or all of their value

2. Savings = Gold and Cash, Investments = Bonds and Shares.

The HBPP is an equal split between Savings and Investments. Basically a Barbell Portfolio similar to that espoused by Nassim Taleb

Taking it further....

An elderly person who could not recover from a large loss may have a larger savings component. Say 35% Cash, 35% Gold and a smaller investment component. Say 15% Shares, 15% LTT

An younger person may be in the opposite situation, say 30% Savings, 70% Investments

Is it really just as simple as that?? 

(and all the time I spent on efficient frontiers, standard deviation etc were a waste of time  )

Hal

I like the way you think. This is a very elegant way of describing the portfolio. One quibble would be that 70% "investments" would give you 35% bonds, effectively increasing your bond barbell's duration and making you more sensitive to rate increases and inflation. But I guess if you have a lot of time to ride out such events this could be okay. If I ran a PP this way, I would consider switching to intermediate-term bonds or throwing some high-grade corporates in there too.

To some extent, savings is cash plus gold BUT gold is extremely volatile - so increasing savings by increasing cash AND gold will add volatility to the overall portfolio (probably not what an elderly person is looking for).

We've talked about this before, but another way to look at it is there are 3 volatile components that all tend to grow over the long term plus cash acting as a "stabilizing" component.  You can vary the stability by increasing or decreasing the cash component.  So, for example, an elderly person more interested in stability than potential growth might boost the cash to 50% leaving 16.66% for each of gold, stocks, and long term bonds while a young person not much interested in stability might reduce the cash all the way to 0% boosting each of the others to 1/3 [note to young people out there - I would not recommend this since most people are more risk averse than they think they are].

One of the things I like about the PP is that it's multi-layered. 

Yes, you can look at it as stocks/bonds being offensive and gold/cash being defensive.  You can also look at it as three volatile uncorrelated assets with cash ballast, or as four assets selected for specific economic conditions. 

All three perspectives are correct.  Its outward simplicity is an attractive veneer for a surprisingly sophisticated portfolio.

Thanks for your input.

I was trying to think of a simple way of explaining the concept to an elderly person with no financial knowledge.  I discovered that if I cannot explain the concept in a few words, I really don't understand it fully myself. The concept of a 2/3 Savings (50% cash, 16.6 Gold) 1/3 Investment (16.6 Shares, 16.6 Intermediate Bonds) seems reasonable for someone around 80 years old. And perhaps an opposite ratio for someone in their 20's

Maybe we have a new portfolio, the Pointed Stick / Rickb 80/20 portfolio (patent pending) for 80 year old folk and for 20 year olds

Hal

Out of curiosity, what would you suggest for your children if they were just starting their first job?

Hal wrote: Out of curiosity, what would you suggest for your children if they were just starting their first job?

100% cash until they had at least $10k, possibly 15 or 20k. After that, BH 60/40 at Vanguard with monthly auto-investment for a kid who has found a stable comfortable job they can stomach for decades and/or who has low interest in money and investing. PP for every other situation.

Savings is the cash that is leftover after you consume your income.

You then swap that cash for "investments" that generate a return above inflation (hopefully), even though technically you are still "saving" since you're "buying" "investments" from others on the secondary market, not funding capital investments that improves the real economy.

Gold is no longer money, so don't confuse it with cash.  It's a Plan B insurance policy against systemic or sovereign default.  You won't have stable purchasing power for scary periods of time if you bought an equal amount of gold and cash together (I know this because I already backtested it).  Currencies compete with other currencies for purchasing power, not gold.  But in the long run its a zero sum game as currencies cancel each other out.