Gyroscopic Investing

Tortoise wrote: ↑Tue Oct 11, 2022 5:04 pm

Smith1776 wrote: ↑Tue Oct 11, 2022 3:01 pm Someone else on the forum, I can't remember who, pointed out that cash lost value to inflation this past year, therefore cash sucks and stocks are the way to go. That was the gist of the poster's point anyway. I thought to myself, well, wait a minute. Cash has a steady nominal value and has lost value to inflation this year, but stocks have lost an equal amount to inflation in addition to the nominal losses. Inflation affects all dollar denominated assets equally, so cash shouldn't be given some extra criticism when all assets priced in the same currency get impacted the same way.

Indeed.

To bring it back to what I said, though, I didn't give cash extra criticism. I actually pointed out that it's getting walloped less than the other three assets.

My point was simply that cash is getting walloped. You said that cash "benefitted tremendously from these rising rates", but that's not the case if we define "benefitted" as providing a positive real return. It's just losing less real value than the other three assets.

Smith1776 wrote: ↑Tue Oct 11, 2022 3:01 pm I expect that the market will realign itself to providing positive real rates on T-bills in the not too far off future. I still think we're in an adjustment phase to these new higher rates.

Of course. Economic conditions are dynamic, so this won't last forever (thankfully).

If stocks and long dated treasuries are down -25% and cash is unchanged at 0%, then that cash buys 33% more shares - a considerable increase in purchase power. But if you're spending cash on general consumer products/services then cash purchase power has declined.

To rebalance a PP back to equal weightings compared to year start levels, a PP investor might be spending 15% of available cash to buy more stock shares and long dated treasury bonds where its gained 33% of purchase power against each/both. Spending a similar amount from across the portfolio (that is down -15% nominal and -25% real assuming 10% inflation) on CPI products/services and in one sense the PP might have yielded a overall positive real return relative to its 'basket' of things bought (some CPI, some stocks, some bonds). Could be considered as only if you don't rebalance, such as buying more long dated treasury bonds (and stocks) when their price in cash terms is relatively down, spend on CPI items only, then only then is the PP down in real terms.

seajay wrote: ↑Tue Oct 11, 2022 5:34 pm

mathjak107 wrote: ↑Tue Oct 11, 2022 7:15 am So far wellesly seems to be a good place to be as far as balanced portfolios, only down 14.50%.

Fidelity insight income model down even less at 13.20

Permanent portfolio is down 17.43 using morningstar data.

So despite all the charts those who love backtesting posted earlier on , the fact is the pp has reacted completely differently then guessing with the past data .

I doubt there are many last year that would have guessed the pp would be down almost 18% in a year.

So I don’t put a whole lot of faith in back testing and trying to predict what an outcome will be based on the last time as next time is usually just different enough to get a very different result

Unless you're lumping in and out for just months then less than one year volatility doesn't matter. Most accumulate over many years, withdraw/spend over many years.

At times single year or less modest volatility is only to be expected. When to the downside then typically adjacent year(s) see corrections. Golden Butterfly, PP, Wellesley ..etc. are all down year to end of September, likely one of the assets will pop to the upside within a year or so to re-level the balance.

Things are what they are until they aren’t …when it comes to defensive portfolios I track the pp is the laggard of the lot so far.

I only track 3 though ..

But I remember the pp being praised for never being down more than 5% in any given year so I have to think 20% is a pretty big shock to those who went the pp route because they were scared of taking big losses in equities.

I would think a 30% drop in one year in Lt bonds Is more then anyone imagined but I can’t say I am surprised ..I always said rising rates is the kryptonite to the pp defenses

mathjak107 wrote: ↑Wed Oct 12, 2022 2:02 am Things are what they are until they aren’t …when it comes to defensive portfolios I track the pp is the laggard of the lot so far.

I only track 3 though ..

But I remember the pp being praised for never being down more than 5% in any given year so I have to think 20% is a pretty big shock to those who went the pp route because they were scared of taking big losses in equities.

I would think a 30% drop in one year in Lt bonds Is more then anyone imagined but I can’t say I am surprised ..I always said rising rates is the kryptonite to the pp defenses

Hi Mathjak,

Way back HB said he couldn't find any asset that responded well to rising interest rates. How do the funds you track manage superior performance? Active management?

mathjak107 wrote: ↑Wed Oct 12, 2022 2:02 am

seajay wrote: ↑Tue Oct 11, 2022 5:34 pm

mathjak107 wrote: ↑Tue Oct 11, 2022 7:15 am So far wellesly seems to be a good place to be as far as balanced portfolios, only down 14.50%.

Fidelity insight income model down even less at 13.20

Permanent portfolio is down 17.43 using morningstar data.

So despite all the charts those who love backtesting posted earlier on , the fact is the pp has reacted completely differently then guessing with the past data .

I doubt there are many last year that would have guessed the pp would be down almost 18% in a year.

So I don’t put a whole lot of faith in back testing and trying to predict what an outcome will be based on the last time as next time is usually just different enough to get a very different result

Unless you're lumping in and out for just months then less than one year volatility doesn't matter. Most accumulate over many years, withdraw/spend over many years.

At times single year or less modest volatility is only to be expected. When to the downside then typically adjacent year(s) see corrections. Golden Butterfly, PP, Wellesley ..etc. are all down year to end of September, likely one of the assets will pop to the upside within a year or so to re-level the balance.

Things are what they are until they aren’t …when it comes to defensive portfolios I track the pp is the laggard of the lot so far.

I only track 3 though ..

But I remember the pp being praised for never being down more than 5% in any given year so I have to think 20% is a pretty big shock to those who went the pp route because they were scared of taking big losses in equities.

I would think a 30% drop in one year in Lt bonds Is more then anyone imagined but I can’t say I am surprised ..I always said rising rates is the kryptonite to the pp defenses

Very low treasury yields by historic standards was destined to see sizeable LTT price declines when yields rose. But when limited to 25% of the portfolio the losses are diluted and where ideally the other assets would cover those losses. But as this year shows, not always and they might all be down - but to varying magnitudes. As prices decline, so you buy more, add-low/reduce-high, which broadly washes. Or at least has done so since 1927 US and since WW1 UK



Harry specifically suggested the longest dated treasuries, and volatile stocks, as partners to volatile gold, with lower volatility cash as a means to rebalance between high and low volatility assets (and/or between individual volatile assets). The current year just demonstrates that highly volatile assets (stocks/gold/LTT) can all correlate to the downside, as in other years they might all correlate to the upside. The tendency however is not for that to persist, as in how a year after high positive side correlation one or more may endure large declines, or after high negative side correlation one or more tend to see large gains.

Looking at nominal yearly gains/losses, and even when worst years losses were relatively light/low, in real terms the losses were considerably deeper, low nominal yearly losses are a somewhat meaningless comfort. If you drop LTT's due to yields having been low, then equally you should at other times drop gold when the Dow/Gold ratio is low, or stocks when PE's are high. But that's timing - may add alpha, may detract, broadly washes (today's ceiling can become tomorrow's floor).

In some cases you might substitute in alternatives. For instance silver instead of gold from 1933 to the 1970's when investment gold was outlawed. 50% intermediate treasuries instead of a STT/LTT barbell when the longest duration's you could buy in Japan were 10 year.



That could even be applied when the actual assets were available, but for whatever reason you preferred a alternative, maybe flipping some/all of gold into silver at times, or into 10 year T bullet instead of a STT/LTT barbell. The results tend to be similar, where any differences are more down to a case of luck.

Pointedstick wrote: ↑Tue Oct 11, 2022 5:02 pm Has anyone here actually purchased anything with gold directly, or accepted payment in gold for delivery of goods or services? I can say that I have not.

I have on the other hand participated in money-like transactions using cryptocurrencies before, in which they were exchanged for goods or services. Cryprocurrencies may generally be bad and unstable forms of money, but they do seem to be some form of money. Gold I'm not sure about though. It feels more like a commodity one exchanges for money than money itself.

For me, gold is like a foreign currency and there is no country where I can use it as a native currency. Always have to convert.
I used bitcoin once - to buy gold!

Hal wrote: ↑Wed Oct 12, 2022 6:46 am

mathjak107 wrote: ↑Wed Oct 12, 2022 2:02 am Things are what they are until they aren’t …when it comes to defensive portfolios I track the pp is the laggard of the lot so far.

I only track 3 though ..

But I remember the pp being praised for never being down more than 5% in any given year so I have to think 20% is a pretty big shock to those who went the pp route because they were scared of taking big losses in equities.

I would think a 30% drop in one year in Lt bonds Is more then anyone imagined but I can’t say I am surprised ..I always said rising rates is the kryptonite to the pp defenses

Hi Mathjak,

Way back HB said he couldn't find any asset that responded well to rising interest rates. How do the funds you track manage superior performance? Active management?

Well I wouldn’t call it superior performance as they are down too , but they are just not down as much through active mgmt and choice of investment

More brutality:

VOO -1.95%
TLT -1.85%
IAU -1.92%

How much more can you handle?

Xan wrote: ↑Tue Oct 11, 2022 10:04 am Just pointing out that an 18% drop in a year is not unprecedented for the PP. I don't believe the yearly data show it as it's only happened intra-year so far. Fingers crossed that happens this time too.

When has it happened before?

glennds wrote: ↑Thu Oct 13, 2022 9:56 am

Xan wrote: ↑Tue Oct 11, 2022 10:04 am Just pointing out that an 18% drop in a year is not unprecedented for the PP. I don't believe the yearly data show it as it's only happened intra-year so far. Fingers crossed that happens this time too.

When has it happened before?

This is the worst ever drawdown for the PP according to PV and likely more to come.

Lots of theories out there as to why, but my take is we are seeing a large repricing of assets driven by interest rates going back to something approximating normal. The free money from the Fed days are over.

Kbg wrote: ↑Thu Oct 13, 2022 10:45 am

glennds wrote: ↑Thu Oct 13, 2022 9:56 am

Xan wrote: ↑Tue Oct 11, 2022 10:04 am Just pointing out that an 18% drop in a year is not unprecedented for the PP. I don't believe the yearly data show it as it's only happened intra-year so far. Fingers crossed that happens this time too.

When has it happened before?

This is the worst ever drawdown for the PP according to PV and likely more to come.

Lots of theories out there as to why, but my take is we are seeing a large repricing of assets driven by interest rates going back to something approximating normal. The free money from the Fed days are over.

I asked because I had last looked into PP drawdowns when Peak2Trough was still around and I recall maybe 8-9% but nothing like what is happening to the PP now. Yes, it feels like something unprecedented is going on. A traditional retiree's 60/40 portfolio, long considered the conservative standard is down around 21% for the year. The last time something like that happened was 1931 and to a lesser degree 1937.

glennds wrote: ↑Thu Oct 13, 2022 9:56 am

Xan wrote: ↑Tue Oct 11, 2022 10:04 am Just pointing out that an 18% drop in a year is not unprecedented for the PP. I don't believe the yearly data show it as it's only happened intra-year so far. Fingers crossed that happens this time too.

When has it happened before?

Peak2Trough wrote: ↑Sun Nov 16, 2014 7:05 pmI'm using daily data for all four assets going back to 1972...

The "normal" MaxDD with annual rebalancing is 20.24%, not 25%.  And it occurred between 01/21/1980 to 03/37/1980. 

Xan wrote: ↑Fri Oct 14, 2022 8:48 am

glennds wrote: ↑Thu Oct 13, 2022 9:56 am

Xan wrote: ↑Tue Oct 11, 2022 10:04 am Just pointing out that an 18% drop in a year is not unprecedented for the PP. I don't believe the yearly data show it as it's only happened intra-year so far. Fingers crossed that happens this time too.

When has it happened before?

Peak2Trough wrote: ↑Sun Nov 16, 2014 7:05 pmI'm using daily data for all four assets going back to 1972...

The "normal" MaxDD with annual rebalancing is 20.24%, not 25%.  And it occurred between 01/21/1980 to 03/37/1980. 

Using spy, tlt, gld and shy I have this year’s max dd at 17.37% using daily data

Xan wrote: ↑Fri Oct 14, 2022 8:48 am

glennds wrote: ↑Thu Oct 13, 2022 9:56 am

Xan wrote: ↑Tue Oct 11, 2022 10:04 am Just pointing out that an 18% drop in a year is not unprecedented for the PP. I don't believe the yearly data show it as it's only happened intra-year so far. Fingers crossed that happens this time too.

When has it happened before?

Peak2Trough wrote: ↑Sun Nov 16, 2014 7:05 pmI'm using daily data for all four assets going back to 1972...

The "normal" MaxDD with annual rebalancing is 20.24%, not 25%.  And it occurred between 01/21/1980 to 03/37/1980. 

So I just finished playing around with Portfolio Visualizer on this question. Based on a 1978 start, the max DD was 13.52 in 2008 if you eliminate 2022 by setting the end date for 2021. Then if you add 2022 the max DD increases to 15.58% (through September). I would add 2-3% to that number to account for what's happened in October so let's say 18%.

Let's see if this link works. Click on the "Drawdowns" tab near the bottom of the page.

https://tinyurl.com/2p9aj637

Note: I don't know why this tool will not accept LTT earlier than 1978.

The wild card is rebalancing as results will be all over the map depending on what was done and when .

The portfolio labs results show quarterly rebalancing if I remember

The one I linked was based on an annual rebalance.

Either way, I'm sure we agree that what's going on right now is unusually bad.

I'm down 4-5% nominal in the cash equivalent ETFs that I use as part of my PP (SHY and SCHO). It's because they're basically short term Treasury funds damaged by rising yield, but still it's hard to believe.

The PP/GB that I hold is certainly performing no worse than the Boglehead 60/40 in my retirement account. Of course cash is getting walloped by inflation. So is everything else that portfolios are composed of, it's just that cash has been the best performing asset this year.

The real question is what gold is going to do going forward. It has lagged by a few months before taking off in the past (e.g. 2008/2009). It's hard to get a good handle on what drives gold prices, but for sure one of them is the strength of the dollar (dollar up = gold down). The dollar has been strong lately, which is also is a bit mystifying, but maybe it's only strong relative to other currencies. The UK for example has gotten hammered, so if I owned gold denominated in pounds, I would expect the price to have gone up accordingly.

Not only is the dollar strong against other currency but against gold too .
.

Gold in India is up 68% since 2021

sophie wrote: ↑Sat Oct 15, 2022 10:17 am The PP/GB that I hold is certainly performing no worse than the Boglehead 60/40 in my retirement account. Of course cash is getting walloped by inflation. So is everything else that portfolios are composed of, it's just that cash has been the best performing asset this year.

The real question is what gold is going to do going forward. It has lagged by a few months before taking off in the past (e.g. 2008/2009). It's hard to get a good handle on what drives gold prices, but for sure one of them is the strength of the dollar (dollar up = gold down). The dollar has been strong lately, which is also is a bit mystifying, but maybe it's only strong relative to other currencies. The UK for example has gotten hammered, so if I owned gold denominated in pounds, I would expect the price to have gone up accordingly.

You're correct. From the perspective of a UK investor, gold is up about 9% YTD
https://tinyurl.com/5akbcrkt

The GBP has really collapsed. And the USD has strengthened. Both significant deviations from mean. I wonder if the correct answer for gold is somewhere in the middle.

Will TLT free fall ever end?

Not until it looks like things will reverse and we will slow

t-bear52 wrote: ↑Wed Oct 19, 2022 3:26 pm Will TLT free fall ever end?

PP requires persistent patience. 1988 to 1999 saw gold in continual free fall



rebalancing however saw you accumulate multiple more ounces of gold

$10K PP at the start of 1988 ended 1999 at $16.2K
Gold at the start of 1988 $486/ounce
Gold at end of 1999 $290/ounce
PP accumulated 2.7 times more ounces of gold over those years, 8.7% annualized more ounces of gold.

From 1999 those multiple more ounces of gold reaped rewards. In currency terms alone a ounce of gold bought 5 times more US$ (GBP, Yen, Euro) at the end of 2021 than it did at the start of 1999 (when the Euro was born).



As TLT declines and the tendency (through rebalancing) is to buy more bonds (at higher yields), so one day that will turn around and you'll reap the rewards. The PP's 'trick' is that the one asset that is in 'free fall' tends to not correlate with when its other assets are in free fall, but that instead tend to do well and more than offset the 'losing asset'.

But if you watch it day to day, or even weekly/monthly, it will drive you nuts.

With a duration of 18 years if one bought when Tlt yielded 1.50% which is where Tlt was a year ago ,even with the increase in interest payments you are looking at 18-19 years to see about 1 to 1.50% as a return based on increases in interest paid

glennds wrote: ↑Sat Oct 15, 2022 2:28 pm

sophie wrote: ↑Sat Oct 15, 2022 10:17 am The PP/GB that I hold is certainly performing no worse than the Boglehead 60/40 in my retirement account. Of course cash is getting walloped by inflation. So is everything else that portfolios are composed of, it's just that cash has been the best performing asset this year.

The real question is what gold is going to do going forward. It has lagged by a few months before taking off in the past (e.g. 2008/2009). It's hard to get a good handle on what drives gold prices, but for sure one of them is the strength of the dollar (dollar up = gold down). The dollar has been strong lately, which is also is a bit mystifying, but maybe it's only strong relative to other currencies. The UK for example has gotten hammered, so if I owned gold denominated in pounds, I would expect the price to have gone up accordingly.

You're correct. From the perspective of a UK investor, gold is up about 9% YTD
https://tinyurl.com/5akbcrkt

The GBP has really collapsed. And the USD has strengthened. Both significant deviations from mean. I wonder if the correct answer for gold is somewhere in the middle.

If your a British based investor then in addition to some value (over-valued exclusion) rotation viewtopic.php?p=245019#p245019 then further alpha might be added via rotation between index funds and Investment Trusts. For instance Mercantile Investment Trust https://www.trustnet.com/factsheets/t/f ... st-the-plc is pretty much a FT250 stock index type holding, and recently MRC is priced to a near -16% discount to Net Asset Value, so somewhat like buying $100 of assets for $84. Later when that discount to NAV declines or reverts to 0% (or even a premium to NAV), then rotate back into FT250 index tracker again.

TLT 95.76