Gyroscopic Investing

Wow! Thanks everyone for the responses! I especially enjoyed the link to PortfolioCharts.com. The Golden Butterfly allocation is VERY alluring. I may slowly morph into that, though the timing seems awful to buy more equities... VERY slowly morph into that.

I'm really glad I stumbled onto this site!

buddtholomew wrote: I personally would not rebalance if the transaction resulted in any taxes. Some investors have tighter rebalance bands and others don't rebalance at all.

Thanks budd. I will probably avoid taxes by not selling anything as you suggest, and try to pluck up the courage to buy bonds with remaining cash, as discussed in another thread (http://www.gyroscopicinvesting.com/foru ... &start=204). But would welcome any other opinions on whether or not a "new" PP should start well balanced at 25x4.

To encourage the PP doubters: have a look at this thread "Is the successful salaried retail investor a myth?" which is unfortunately a bit hidden in the Other Discussions forum: see http://www.gyroscopicinvesting.com/foru ... 7&start=12. This is one of the most reassuring threads I have read about the PP. Start about halfway down page 2. Maybe the thread, or some of it, should be made more visible: moved to Permanent Portfolio Discussion, retitled and made a sticky, for example. A quote from Tyler, in the thread:

The average "Tyler" SWR for the PP historically is a pretty amazing 5.3%. The best year to retire was 1978, where one could have supported a ridiculous 7.7%WR for ten years without depleting capital at all. The worst year to retire was 1987 where the max WR was still a healthy 3.8%. I haven't run a full analysis of a 50/50 BH portfolio yet, but I can tell you that using the same methodology the max SWR is -2.5% if you retired in 1972. That's not a typo -- if you didn't add at least 2.5% to your portfolio every year, you would have lost value ten years later. That's why long-term SWR discussions for stock/bond mixes usually center around very conservative numbers.

Frankly (assuming I haven't screwed up somewhere, of course) I find this astonishing and very reassuring. Basically, from what I can tell the conservative SWR for the Permanent Portfolio to last indefinitely is right around 4%. And an older retiree with less worry about maintaining principal could easily push to 5% without much argument from me. Compare this to most SWR calculations for "traditional" portfolios (where 4% may only sustain you for 30 years before you're broke), and the PP is one great retirement portfolio.

The PP really would be a good retirement portfolio. CAGR and low volatility both contribute to SWR.

Have been checking the forum the past couple of weeks and noticed a number of posts regarding PP being down quite a bit from the years high and also noticed my PP was down too. I started the PP in early 2011. Actually my portfolio consists of around 60 - 70% HBPP and 20 - 30% VWINX with a little extra cash. I had noticed in the past that my portfolio balance wasn't changing much so I thought I had better check to see where I was compared to previous years. This Dec. I am up 1% from the beginning of the year, up 1% from the beginning of 2013 and down about 1% from early 2011. Basically no change in portfolio balance while withdrawing 4 - 5% in retirement. I am quite happy with the results especially the low volatility. If only I would have heard about the PP 25 years ago. The one thing that Harry Browne wrote about that many of us fail to adhere to is "Only look at your portfolio once a year and rebalance if necessary". That one rule would make life a lot easier for most of us.
Keep up the great posts on this forum and enjoy the Holidays.

I think I have been in the PP for 7+ years. So I have gains in all classes. Over the long run it looks good. I am sure there will be better allocations going forward, but I don't know how to find them.

Alanw wrote:Have been checking the forum the past couple of weeks and noticed a number of posts regarding PP being down quite a bit from the years high and also noticed my PP was down too. I started the PP in early 2011. Actually my portfolio consists of around 60 - 70% HBPP and 20 - 30% VWINX with a little extra cash. I had noticed in the past that my portfolio balance wasn't changing much so I thought I had better check to see where I was compared to previous years. This Dec. I am up 1% from the beginning of the year, up 1% from the beginning of 2013 and down about 1% from early 2011. Basically no change in portfolio balance while withdrawing 4 - 5% in retirement. I am quite happy with the results especially the low volatility. If only I would have heard about the PP 25 years ago. The one thing that Harry Browne wrote about that many of us fail to adhere to is "Only look at your portfolio once a year and rebalance if necessary". That one rule would make life a lot easier for most of us.
Keep up the great posts on this forum and enjoy the Holidays.

Thanks for checking in, Alanw. We don't hear much from the satisfied PP users! How did you decided on adding the 20-30% VWINX? Just looking for a bit more income overall?

Alanw wrote: Actually my portfolio consists of around 60 - 70% HBPP and 20 - 30% VWINX with a little extra cash.

I had about the same mix up until the end of last year, funding my Roth IRA's exclusively with VWINX and calling it my VP. In January I read about the Golden Butterfly and switched out the VWINX for Small Cap Value. Turned out to be a good year for SCV so I'm happy with the results so far.

barrett, Income was part of the reason plus wanting some exposure to corporate bonds, which Wellesley has and not wanting to put all eggs in one basket. It's a very conservative portfolio but suits me well in retirement. Of course the first half of the year when the PP was on a tear, I wished all assets were in the PP. The last several months not so much. I think the main thing is staying with the allocation and not looking at the portfolio so often which I am guilty of.

barrett wrote:Thanks for checking in, Alanw. We don't hear much from the satisfied PP users! How did you decided on adding the 20-30% VWINX? Just looking for a bit more income overall?

Yes it would be great to hear from other satisfied (or even unsatisfied) users, particularly those who have an long-established PP. How do you manage your PP in terms of adding and withdrawing funds, in combination or not with other investments?

My own personal PP is completely separate from VWINX and outside cash. It is held in both IRA, one other brokerage account and savings account. I rebalance using 30 - 20 bands. I know that 35 - 25 bands may produce a slightly higher CAGR but my primary interest is portfolio stability with nominal after inflation returns. So far, so good.

Welcome, tarentola. And, thanks for linking to that thread (discussing safe withdrawal rates). I second the vote to sticky it.

Thank you for the welcome, Sophie.

On withdrawal rates: "it is reasonable to expect a Permanent Portfolio to earn, over a period of years, an average yearly return of at least 5% above the inflation rate", Harry Browne wrote in Why the Best-Laid Investment Plans Usually Go Wrong. In a footnote, he added: "For the 1970-1987 period, the average growth rate in the hypothetical portfolio was 12.0%, or 5.2% above the inflation rate." Very close to Tyler's calculated 5.3% SWR.

Alanw wrote:My own personal PP is completely separate from VWINX and outside cash. It is held in both IRA, one other brokerage account and savings account. I rebalance using 30 - 20 bands. I know that 35 - 25 bands may produce a slightly higher CAGR but my primary interest is portfolio stability with nominal after inflation returns. So far, so good.

This is a misnomer and is highly path dependent. The only thing 30/20 guarantees is less tracking error.

Whether the bands should be wider or narrower depends a lot on price action that cannot be determined in advance. We can curve fit to the past, but it won't indicate what will work best moving forward. Obviously the best time to rebalance would be right when the prices are about to reverse, but one can never know that.

When I was working on an interesting rebalancing experiment a few years ago, it became evident that frequent rebalancing was a better approach to capture smaller price movements and keep allocations where we want them. The only caveat was avoiding excessive commissions or all gains would be lost in the friction.

I like the idea behind bands instead of timeframes, so I would aim for narrower bands to capture more gains.

For me, I'm still working and constantly pushing money into my portfolio, so I almost never have to sell anything... I just buy up whatever is lagging behind the other assets and let the rising assets ride. It hasn't gotten terribly out of balance yet, but I suppose that day will come where I will be forced to sell something that has run up too hot.

eufo wrote:I like the idea behind bands instead of timeframes, so I would aim for narrower bands to capture more gains.

This statement is demonstrably not true. It is true for a ranging market/set of instruments, it is not true for a trending market/set of instruments.

Pretend for a moment that stocks are in a five year bull market and gold is in a five year bear market. In this case frequent rebalancing would trim your best performing stock with a LOWER overall average exit price because you are exiting earlier in the up cycle and increase your worst performing stock with a HIGHER overall entry price because you are entering earlier in the down cycle. Now in our pretend land rebalance exactly at the end of year 5 and compare the results.

The only thing we know for sure is rebalancing keeps us closer to our ideal portfolio allocation and risk profile...that's it, nothing more. Well actually we know a bit more, more rebalancing drives up costs and causes more tax events in taxable accounts.

Dollar cost averaging is impacted by the same math. If you know the market is going to go up for an extended period (and we don't) dollar cost averaging is a horrible idea. If it goes down it is genius, but perfect genius is trading at the exact nose over/turn up points.

More to the point, what PPer was happy they faithfully rebalanced and bought more gold from mid 2011 to Jan 2016...my guess is exactly nobody or for that matter who was happy they faithfully rebalanced and sold more gold from 2006 to 2011. Again, likely nobody.

I ended up believing my own propaganda (earlier in this thread), and added more of my VP cash and Euro high-yield stocks to the PP in December 2016. My portfolio is now PP 75%, VP 25% of total investments.

As my bond allocation was already low, I had to buy some bonds (without enthusiasm, given the likely direction of interest rates), to keep the portfolio within PP rebalance bands. Gold was already at 30% so I did not need to add any gold to the new PP. I have now gone from 26-18-30-26% stocks-bonds-gold-cash to 28-16-23-33%.

The Stocks section of the PP now contains:

• Euro HY shares 24% (Sanofi, Vinci, SES etc)
  MSCI Europe ETF 43%
  Emerging Markets ETFs 11%
  Japan ETF 10%
  Healthcare and Tech ETFs 12%

This was a result of combining existing investments into the PP and so is a bit complicated. I suppose it has the virtue of diversity. I will leave it for the moment but intend to go in the direction of simplification. The VP now holds only US (mostly) and UK high-yield shares, so I do have US exposure as well.

The Cash section now contains:

• short-term bond ETFs 21%
  a life assurance policy (cashable any time) 40%
  cash deposit account at local bank 17%
  cash in a dealing account 22% (for rebalancing)

... in fact all my cash except my current account (checking account which also feeds my debit card).

Withdrawals: I am retired with a small state pension so am depending on my investments for some of my income. I intended to withdraw 3% per year and I had set up my life assurance to make regular payments into my current account, but that was depleting an account which was paying 2% per year (a lot for a safe account these days in Europe) so I stopped it.

Now I just withdraw 3000 euros when my current account falls below 1000 euros (up to a maximum of 3% per year of course). This method has the advantage of keeping almost all my cash “in play”, with the possibility of gaining interest. Also a small current account small reduces the scope for bank card frauds.

So the PP cash component, in addition to the benefits often cited in this forum, can contribute to a personal money management system for a retiree. No more standing orders: I just have to check my current account and top it up occasionally.

Usually I do not spend all the 3% and it remains in the PP cash reserve, but I keep an account of it so that the unspent balance can be earmarked as a fund for later spending on travel, house maintenance or whatever.

I have also unitized the portfolio so I can track progress in a way that takes account of withdrawals.

In summary: a VP, a PP and a current account. Nothing remarkable about any of this, but I am enjoying a huge feeling of relief since I completed this setup. I feel I have a stable portfolio that will now require little intervention and I take much less interest in what the markets are doing from day to day. Now I just have to psych up to buy more bonds...

PS thanks to Xan for taking over the hosting of this indispensable forum

[glow][/glow]I am not a fan of counting other sources of cash which have other purposes like insurance as a proxy for the dedicated cash which has definite functions in the pp or gb.

If you need life insurance you should not be removing money and if you don't need it then you should not have insurance.

Things tend to not work out as we wanted when we try to use the same money for dual purposes.

The cash in the pp has a definite job to do. The cash or short term bonds act as a barbell for the long term treasury's. It also acts as options to buy stocks at lower prices but with no expiration date.

Using your life insurance as cash is like using social security as a proxy for bonds .

I am retired but our spending cash has nothing to do with what we hold as cash in our portfolio.

Kbg wrote:

eufo wrote:I like the idea behind bands instead of timeframes, so I would aim for narrower bands to capture more gains.

This statement is demonstrably not true. It is true for a ranging market/set of instruments, it is not true for a trending market/set of instruments.

Applause! "Let your winners run, cut your losers short"

i agree , trends tend to go on for a while as opposed to flashes in the pan like brexit and the election which were really hicups .

rebalancing to much just takes money out of what is going up . unless you are a great market timer odds are pretty good to frequently rebalancing will hurt you .

mathjak107 wrote:
If you need life insurance you should not be removing money and if you don't need it then you should not have insurance.
...

Using your life insurance as cash is like using social security as a proxy for bonds .

I am retired but our spending cash has nothing to do with what we hold as cash in our portfolio.

I should have explained that here a life assurance policy is often used for savings as there is some tax relief on it. My intention here was savings, not insurance.

eufo wrote:Needless to say, I really chose the wrong moment to buy gold.

The odds of an asset going down as soon as you buy it is almost 100%. The PP is a "cover all bases" portfolio. Something is always going up and something is always going down.

JohnnyFactor wrote:

eufo wrote:Needless to say, I really chose the wrong moment to buy gold.

The odds of an asset going down as soon as you buy it is almost 100%. The PP is a "cover all bases" portfolio. Something is always going up and something is always going down.

And yet, you must bite the bullet and recognize that you must invest in all assets equally from the start, no matter how "over-valued" or "under-preforming" or "totally insane" an asset appears to be.

You just never know when a hated asset might come to your rescue.

It reminds me of a certain Eastern parable, one version of which goes something like this:

There is a Taoist story of an old farmer who had worked his crops for many years. One day his horse ran away. Upon hearing the news, his neighbors came to visit.

"Such bad luck," they said sympathetically.

"We'll see," the farmer replied.

The next morning the horse returned, bringing with it three other wild horses.

"How wonderful," the neighbors exclaimed.

"We'll see," replied the old man.

The following day, his son tried to ride one of the untamed horses, was thrown, and broke his leg. The neighbors again came to offer their sympathy on his misfortune.

"We'll see," answered the farmer.

The day after, military officials came to the village to draft young men into the army. Seeing that the son's leg was broken, they passed him by. The neighbors congratulated the farmer on how well things had turned out.

"We'll see" said the farmer.

"Stocks are overvalued!"

We'll see.

"Bond rates can only go up!"

We'll see.

"Gold is going to take a decade to un-wind!"

We'll see,"

"With rates near 0%, cash is trash!"

We'll see.

According to some sources 85% of hold time your portfolio is in drawdown and 15% is peaking from the previous high. Get used to things going down.

Hey blue ruin, great post. Of course I'd heard that parable before, but it really is appropriate for thinking about permanent portfolio performance. It seems that at least one asset is always looking bad, and that the asset that goes up to help is often the one least expected to do so.

With regards to my earlier statement about preference to narrower bands to capture gains... let me put some qualifiers on that. My calculations were based on a non-taxable account using commission free ETFs. Taxable accounts or situations that would involve a lot of friction (trading fees) should be broader banded to avoid grinding away capital.

Markets trend and they countertrend. We never know which it's going to be. Assuming no friction or taxes... in a countertrending instrument, frequent rebalancing creates a gain from no movement. This is enough reason to enjoy frequent rebalancing in my mind.

Letting winners run is more profitable right until they turn over and suddenly we're overweight in something that often is seeing a steep decline, while likely underweight something that is making a huge comeback. Broader bands rely more on market timing than narrow bands, because to truly enjoy the fruits of broader bands, they need to be near reversals. If we miss the reversal by even just a percentage point, we may give all those potential gains right back.

We can't know the future, so, in my opinion, it's best to stick as close to our preferred asset allocation as we can (within reason).