Gyroscopic Investing

So last fall, I opened up an IRA and put $5,000 in.  I bought about $4,000 worth of LT treasuries and had $900 and change left over and thought, why not buy some silver?  So I bought a few shares of SLV with the rest, just for kicks.  Then, a few months ago, I had some money freed up in my VP from some corporate bonds I sold for a profit, and I thought, let's buy some GDX since miners will probably go to the moon.

Anyway, these two trades alone, the SLV and GDX are VP trades and are not where I got into trouble.  Where I got into trouble was later on when I was dishonest to myself and lumped SLV and GDX into my PP gold holdings.  I thought at the time "these are precious metals stocks, and I really should include them in my PP so I am not overweight PMs."  An innocent enough thought, but by including them in my spreadsheet under the PP tab instead of VP, I was now giving them weight in my 25x4 split.

So, like a cancer, today I excised these holdings to my VP tab where they should have remained.  Sure, the SLV might give my PP a nice uptick on my annual returns, just like the GDX might give it a nice downtick, but these belong in the VP, not the PP.

So, I took them out, and sure enough, I'm underweight gold now.  So I just locked in 451 shares of IAU at $14.525 a share and will spend the next few paycheck cycles adding some much needed gold.  Today happened to be a good day due to the dip in gold price.

I guess the whole point of this long-winded story is that I found from personal experience how easy it is to start tinkering with the 4x25 formula.  I didn't intend to tinker, but after buying some VP holdings I thought "I really shouldn't be so overweight PMs."  This was the start of being dishonest to myself and tinkering.

From now on, I commit to only own the following assets in my PP:

Stocks:  FSTMX and FUSEX
Bonds:  Secondary auction US Treasuries
Gold:  GLD, SGOL, and IAU (for diversification) as well as physical
Cash:  I-bonds, Money Market, and FDIC insured Savings

One more thing to mention - this tinkering probably lowered my annual return.  For one thing, GDX has not had as big of a return as GLD/SGOL/IAU would have.

I guess this is a real lesson learned for me here - tinkering usually never improves the PP formula.

Storm,

That's great stuff.

It's the well-intentioned human mind making things worse in the sincere attempt to make things better.

Good stuff, thanks for sharing!  Fairly cheap lesson, all in all.

This is why I completely agree with the concept of separating the Permanent Portfolio from the Variable Portfolio.  It's interesting how once you mix the two you will certainly begin looking at the assets in isolation.  And that, as we know, is a terrible thing for the PP.

Great post.  I have the same tendency.  My solution:  No VP.  (It's not as easy as it sounds).

Were you very underweight? In Best Laid Plans, Harry talks about how he no longer recommends the Swiss franc for the pp. He wrote that if you want to own some, make it part of your gold holdings, but "I hope that it will be less than 5% of your entire (pp) holdings." Granted, you held something entirely different, but I suppose it depends on how close you were to rebalancing bands.

dualstow wrote: Were you very underweight? In Best Laid Plans, Harry talks about how he no longer recommends the Swiss franc for the pp. He wrote that if you want to own some, make it part of your gold holdings, but "I hope that it will be less than 5% of your entire (pp) holdings." Granted, you held something entirely different, but I suppose it depends on how close you were to rebalancing bands.

I wasn't very underweight.  I was at about 23% gold, 22% stocks, 22% bonds, cash 33% (need to convince the wife to rebalance), and when I took out GDX and SLV my gold dropped to 18%.  After the purchase of IAU I'm back at 20.81% gold.

I just need to convince the wife to let me make another gold purchase with some of our cash that has been accumulating - now is a great time to be buying more.

Storm,

Do you find it difficult to convince your wife to buy so much gold?

moda0306 wrote: Storm,

Do you find it difficult to convince your wife to buy so much gold?

Probably only if it's in the form of bullion. 

My wife would happily have me buy as much gold as I could, but it would have to be in the shape of women's jewelry.

My wife said my coins were "too orange" but beyond that, left the decision to me. ;-)

MediumTex wrote:

moda0306 wrote: Storm,

Do you find it difficult to convince your wife to buy so much gold?

Probably only if it's in the form of bullion. 

My wife would happily have me buy as much gold as I could, but it would have to be in the shape of women's jewelry.

LOL!  You are too close to reality for me good sir!  Actually my wife is a native from Taiwan, and when we got married in 2009, her parents gave us several ounces of gold.  The asian cultures are very much in tune with the concept of gold as money.  The only reason I need to talk her into it is that she is still in "nesting mode" and wants to buy a house asap.  So I need to convince her that the cash portion of our PP is better invested in gold rather than sitting in an FDIC insured savings account waiting to be used as a downpayment on a house. 

In reality, my wife is the best partner I have ever met... how many women understand that gold is money even?  I just need to talk her into (re)investing some of her hard earned money (along with my own hard earned money) into a portfolio that has continued to give us good returns.

Storm wrote: In reality, my wife is the best partner I have ever met... how many women understand that gold is money even?   I just need to talk her into (re)investing some of her hard earned money (along with my own hard earned money) into a portfolio that has continued to give us good returns.

You've got yourself a great wife!

My wife was a little skeptical of gold at first, too, but trusted me on it.  However once I gave her the 60,000 foot view of how money is created in our system (when she asked about quantitative easing one day) and how it used to work, she got it.  (Think of the really, really short version of Harry Browne's "99% of Everything You Need to Know About Money").