Gyroscopic Investing

What should one do with regular capital contribution ? And accumulated dividends/distributions ?

1) Leave them as cash and wait for the next yearly and/or 35-15 rebalance
2) Immediately deploy them trying to rebalance existing portions

Any other suggestions/tips regarding the accumulation phase of the PP ?

Thanks

I did some backtesting on this a while back.  The best performing method is to invest new money equally in all assets (i.e. 25% in cash, 25% in gold, etc).  However:

- I didn't take taxes incurred by rebalances into account, so in a taxable PP you may do better by investing in the lagging asset to avoid rebalances.

- If purchases incur commissions (e.g. gold) and investments are small, you probably won't want to buy in too often.

- For irregular or small additions, it may be better to follow Harry Browne's advice and let additions pile up in the cash bucket, then rebalance out of cash when you hit a band.  This method had the lowest backtested CAGR but it is definitely simplest.

Also, in case your PP is spread across multiple types of accounts:  I treat additions to retirement accounts differently than taxable additions.  For retirement accounts, I split new money into the three volatile (non-cash) assets equally.  Taxable additions either go into cash or physical gold.  When I hit my limit of taxable cash, I'll switch and start putting cash into retirement accounts (particularly tax-deferred), and gold and stocks in taxable.

I agree with Sophie's analysis, but FWIW I follow Browne's advice, direct all contributions to cash, and follow the plain 15/35 rebalance rule. One reason is my desire to stay disciplined about not going down the slippery slope of changing the PP bit by bit until it stops being a PP. Another reason is my desire to keep things simple, or less generously, laziness.

I also let cash accumulate and then rebalance, but will mention that it can make rebalancing more uncomfortable due the larger amounts of money shifting around and wondering if the timing is good or bad.  I might ultimately transition into a different method because of this.

flyingpylon wrote: I also let cash accumulate and then rebalance, but will mention that it can make rebalancing more uncomfortable due the larger amounts of money shifting around and wondering if the timing is good or bad.  I might ultimately transition into a different method because of this.

In a year that I can make regular contributions, it feels weird to buy assets and then think about selling them so soon. And, if I contribute too much too often, I feel I may "dilute" the mix so that one asset doesn't really have a chance to rise to that 35% band.

So while I have been against creating multiple pp's, I have considered separating pp's by time. The "seasoned" one that's been around is separate from the new buys. I haven't actually implemented this, and it might be a horrible idea. It's just something I've been looking into now that my original assets are more than half a decade old.

In the meantime, I pretty much do it Sophie's way.

dualstow wrote: In a year that I can make regular contributions, it feels weird to buy assets and then think about selling them so soon. And, if I contribute too much too often, I feel I may "dilute" the mix so that one asset doesn't really have a chance to rise to that 35% band.

This has been in my mind recently as well. If one is constantly buying the lagging asset, will you ever benefit from rebalancing/"capturing gains"?  My thinking is it makes it less likely. So you benefit by "buying low", but you are unlikely "sell high" in your accumulation phase, unless something drastic happens.

drumminj wrote:

dualstow wrote: In a year that I can make regular contributions, it feels weird to buy assets and then think about selling them so soon. And, if I contribute too much too often, I feel I may "dilute" the mix so that one asset doesn't really have a chance to rise to that 35% band.

This has been in my mind recently as well. If one is constantly buying the lagging asset, will you ever benefit from rebalancing/"capturing gains"?  My thinking is it makes it less likely. So you benefit by "buying low", but you are unlikely "sell high" in your accumulation phase, unless something drastic happens.

We've talked about this before, and the solution is to contribute in a way that doesn't change the balance. So if prior to your contribution you were 30/20/20/30, you make your contributions such that you're still 30/20/20/30 after contributing.

Sounds familiar!

drumminj wrote:

dualstow wrote: In a year that I can make regular contributions, it feels weird to buy assets and then think about selling them so soon. And, if I contribute too much too often, I feel I may "dilute" the mix so that one asset doesn't really have a chance to rise to that 35% band.

This has been in my mind recently as well. If one is constantly buying the lagging asset, will you ever benefit from rebalancing/"capturing gains"?  My thinking is it makes it less likely. So you benefit by "buying low", but you are unlikely "sell high" in your accumulation phase, unless something drastic happens.

You certainly do benefit from "capturing gains", you just do so without selling.  You have all the positive effects without any capital gains taxes.

Jack Jones wrote: We've talked about this before, and the solution is to contribute in a way that doesn't change the balance. So if prior to your contribution you were 30/20/20/30, you make your contributions such that you're still 30/20/20/30 after contributing.

Talked about it yes, but didn't backtest.  If somebody wants to do it that would be great, but I didn't want to invest the time because I think the method is too complicated and thus unsustainable.  It's so much easier to just divide by 4, or alternate asset purchases like PointedStick does.

I think the lagging asset approach does slightly worse than even distribution because there are times when you're preferentially buying assets on their way down, and avoiding buying assets that are gaining.  But it does appeal to my instinct to buy stuff that's on sale.  Not selling high isn't a problem when you're accumulating, as you're still getting the benefit of that increase in value.  I think avoiding taxes in that phase is probably a more important concern.

My retirement accounts are too small, but maybe one day I can do all my selling in there and no taxes will be generated.

sophie wrote:Talked about it yes, but didn't backtest.  If somebody wants to do it that would be great, but I didn't want to invest the time because I think the method is too complicated and thus unsustainable.  It's so much easier to just divide by 4, or alternate asset purchases like PointedStick does.

I don't think there's any backtesting to do.  Apart from trading costs (significant and worth considering, but usually ignored in backtests), the performance will be identical to leaving the portfolio alone completely.

sophie wrote: Talked about it yes, but didn't backtest.  If somebody wants to do it that would be great, but I didn't want to invest the time because I think the method is too complicated and thus unsustainable.  It's so much easier to just divide by 4, or alternate asset purchases like PointedStick does.

Thanks for reminding me about this, Sophie! I'd completely forgotten about this and had drifted into buying the lagging asset. I think maybe I'll return to my former approach. I've also been considering moving to Vanguard and setting it up so that new contributions are automatically split four ways, which is really easy to do with their platform (well, not for gold, but the gold quadrant contributions would go into a cash bucket used to purchase coins on a schedule).

I personally always buy the lagging asset. Avoiding unnecessary capital gains taxes from rebalancing makes up for any theoretical small returns disadvantage that may imply. Or at least that makes most sense for my own situation.

IMHO, the best contribution method is the one that makes you most comfortable contributing. The only bad choice is one that causes you enough stress that you keep your money on the sidelines.

Pointedstick wrote: Thanks for reminding me about this, Sophie! I'd completely forgotten about this and had drifted into buying the lagging asset. I think maybe I'll return to my former approach. I've also been considering moving to Vanguard and setting it up so that new contributions are automatically split four ways, which is really easy to do with their platform (well, not for gold, but the gold quadrant contributions would go into a cash bucket used to purchase coins on a schedule).

Whatcha talkin' bout Willis?

MachineGhost wrote:

Pointedstick wrote: I think maybe I'll return to my former approach.

Whatcha talkin' bout Willis?

He used to buy gold one month (or whatever time period), and then stocks the next, then bonds, etc. One asset at a time, but rotated regularly so that every asset gets a turn, independent of the performance of the pp or any asset.

dualstow wrote: He used to buy gold one month (or whatever time period), and then stocks the next, then bonds, etc. One asset at a time, but rotated regularly so that every asset gets a turn, independent of the performance of the pp or any asset.

That seems pretty open to abuse.  Why buy what is going down each month and just keep plowing into what is going up?  Heck, I did that with gold until recently.  Smart or abuse?  You decide.

I decided. It's smart. Buying the lagging asset is not all it's cracked up to be.

Pointedstick wrote:

sophie wrote: Talked about it yes, but didn't backtest.  If somebody wants to do it that would be great, but I didn't want to invest the time because I think the method is too complicated and thus unsustainable.  It's so much easier to just divide by 4, or alternate asset purchases like PointedStick does.

Thanks for reminding me about this, Sophie! I'd completely forgotten about this and had drifted into buying the lagging asset. I think maybe I'll return to my former approach. I've also been considering moving to Vanguard and setting it up so that new contributions are automatically split four ways, which is really easy to do with their platform (well, not for gold, but the gold quadrant contributions would go into a cash bucket used to purchase coins on a schedule).

So you're still in the PP, Pointed??  That was a topic of conversation at yesterday's meetup!  And you still have different PPs for each account?  It does make things simpler.

I have a vanilla PP in one account and a modified Golden Butterfly portfolio in another (modification = high-rated corporate/treasury bond fund (BLV) instead of 100% treasuries). So far I'm very happy with both this year.

PS,

Does that modified GB look like this:  20% LCB, 20% SCV, 40% BLV, 20% gold?

Exactly.

I like it.  I imagine it will be a bit more volatile than the PP, but with greater reward in the long run.

I'm doing something similar in my 401k, because it has a cheap bond index fund available, plus I feel stupid having a big chunk of cash in a long-term vehicle when I'm nowhere near retirement.

Pointedstick wrote: I have a vanilla PP in one account and a modified Golden Butterfly portfolio in another (modification = high-rated corporate/treasury bond fund (BLV) instead of 100% treasuries). So far I'm very happy with both this year.

Now, what could possibly be the rationale for exposing yourself to credit default risk in lieu of no default risk?  I'm all eyes.

MachineGhost wrote:

Pointedstick wrote: I have a vanilla PP in one account and a modified Golden Butterfly portfolio in another (modification = high-rated corporate/treasury bond fund (BLV) instead of 100% treasuries). So far I'm very happy with both this year.

Now, what could possibly be the rationale for exposing yourself to credit default risk in lieu of no default risk?  I'm all eyes.

Money you can afford to lose?
I have tons of corp bonds (VCIT) in my Vp.