Gyroscopic Investing

Does anyone have a recommendation for the rebalancing bands with the Golden Butterfly? I figure they may be a little different since the allocation is 20 percent for each category.

Per the quote below, and others from the thread viewtopic.php?f=9&t=10289 Sophie recommends 30% re-balancing bands [20% plus or minus 30% of 20% (=6%), meaning a range of 14% - 26%]. You might wonder, as I did, why she did not recommend a 40% re-balancing band, such as used with the PP (meaning a range of 15%-35% for the PP and 12%-28% for the GB). My current understanding of her reasoning is that she does not want the percentage of any asset to go significantly below the lower limit for the PP's 40% re-balancing band, which equals 15%. 14% is only 1% below 15% and conforms to a nice round number of a 30% rebalancing band. My sense at this point is that this is her reasoning.

sophie wrote: ↑Wed Dec 18, 2019 7:49 am

Smith1776 wrote: ↑Wed Dec 18, 2019 2:59 am IIt may be worth mentioning that the GB at least partially has Browne's blessing. I recall in Best Laid Plans he said that maintaining a strict 25% holding for each asset was not necessary. A range of 20% to 35% for the target percentages was acceptable. The GB breaks that slightly since the equity is at 40%. However, that's understandable given that 20% and 35% aren't numbers that play nice together and add up to 100%.

Close enough in my book. The Golden Butterfly is still the Permanent Portfolio in my view.

Yup, that's exactly how my thought process went too. It was also my rationale for using 30% rebalancing bands. That reinforces a lower limit of 14% for all the non-stock assets, which fits comfortably within the Permanent Portfolio's parameters (which allows assets to drop to 15% if you're using 40% bands).

Also, it would be interesting to see what Tyler would recommend as rebalancing bands for the GB.

Personally I'm not a hard rebalancing band guy, as I prioritize keeping things generally balanced while being smart about tax management. But if you want to use PP-style bands, I think something between +/- 5% and 10% should work just fine.

Tyler wrote: ↑Sat Feb 29, 2020 2:24 pm Personally I'm not a hard rebalancing band guy, as I prioritize keeping things generally balanced while being smart about tax management. But if you want to use PP-style bands, I think something between +/- 5% and 10% should work just fine.

Thank you Tyler. I'm new to this, having had everything in our household portfolio in a "near-GB" only for about 8 months (since the end of June 2019). We didn't think much about asset allocation before that, but we did minimize spending and save enough to pay off our $390K 30 year home loan about 8 years after buying the house, and have been saving a lot more since.

Maybe, like you, I should also "prioritize keeping things generally balanced while being smart about tax management" rather than being hard over on using strict re-balancing bands.

Using my portfolio as an example would help me understand what you mean by "prioritize keeping things generally balanced while being smart about tax management." This past Sunday, the end of February, as I try to do at the end of every month, I determined our household portfolio's asset allocation percentages, as shown below. And I've also provided some tax information below the asset allocations.

18.4% large equity [15.90% in 401k & non-qualified plan at my employer (S&P500 index), and 2.53% in Roth at a brokerage (VTI)]

18.1% small cap equity (some Value, some blend) [12.15% across 403b(VSIAX), a 401 (SCV index fund), and 457b (SCV index fund) at my wife's employer, 5.95% in joint taxable brokerage account (VTMSX)]

22.2% 25-30 year T-Bonds [6.31% Rollover IRA and 15.86% in 2 Roths at a brokerage]

20.2% Cash [3.49% in 1-3 yr T-Notes in Rollover IRA, 15.53% in T-Bills (9.56% in Rollover IRA, 5.27% in taxable brokerage, 0.7% in HSA cash <needs to be invested - just moved to Fidelity HSA>), 0.16% in cash in inherited and rollover IRAs, 0.30% cash in bank & brokerage accounts, and 0.76% in Roths and HSAs <a large par of which should be invested>)]

21.1% Gold [8.10% in AAAU in taxable brokerage, 4.79% in Am.Eagles, and 8.17% in AAAU in a Roth IRA.]

I'd be happy to share a spreadsheet (or picture of a spreadsheet) showing the above (and below) percentages but I don't know how to do it here.

We live in the Puget Sound region and I will retire from my job sometime in 2022 (when I turn 70) and my wife will retire from her job sometime in 2027 (when she turns 65). We track our yearly living expenses and our social security, pensions, and RMDs will initially cover our living expenses and income taxes, so our portfolio is really insurance for future inflation or unanticipated expenses. We have no loans of any kind, including no education or credit card debt. We have no children or other dependents. I anticipate continuing to use the near-GB henceforth.

Relative to tax management and planning, right now our Tax deferred (401k, non-qualified plan, 403b, 401a, 457b, and inherited and rollover IRAs) % is 47.6% of our total portfolio, our Taxable (brokerage, physical gold, and bank accout) is 24.4% of our total portfolio, and our Tax Free (Roth & HSAs) is 28% of our total portfolio. We are in the 24% tax bracket and every year we are transferring as much money as we can (up to the upper limit of the 24% bracket) from 401k to Roth. We do this because we had been in the 28% bracket before Trump's tax cut that moved us to the 24% bracket, and I anticipate that our government will send us back into the 28% bracket (or more) in the future which is why I'm paying taxes on this now. Also, my calculations show that with our RMDs, our pensions and our Social Security, our actual income will decline a bit after we retire, but probably not enough to move us into a lower tax bracket. We do not have a financial advisor or tax advisor, and we do our own taxes using Turbo Tax (with their review and signature service)

So Tyler, with all that as background, if this were your situation, and given that you "prioritize keeping things generally balanced while being smart about tax management," what would you be doing with respect to re-balancing right now, given the above distributions and tax information? Also, from what I've shared, do you have any other suggestions?

Also, if others of you out there have any thoughts, please share.

I think I figured out how to display a picture of my asset allocation spreadsheet for the end of Feb. Here goes my attempt; I'd appreciate any advice, on rebalancing or otherwise:

LittleDinghy wrote: ↑Tue Mar 03, 2020 10:25 pm So Tyler, with all that as background, if this were your situation, and given that you "prioritize keeping things generally balanced while being smart about tax management," what would you be doing with respect to re-balancing right now, given the above distributions and tax information? Also, from what I've shared, do you have any other suggestions?

The good news is that most of your portfolio is in retirement accounts, which means rebalancing is free from a tax perspective. Use whatever bands you like! Where you'll want to be careful is with the taxable account. Just do your best to minimize taxes, and be sure to account for how required minimum distributions may impact your potential tax bracket when running the numbers. The details are above my pay grade, but I'm sure a good fee-only tax adviser would be able to help.

[deleted]

Tyler wrote: ↑Wed Mar 04, 2020 10:20 am ...be sure to account for how required minimum distributions may impact your potential tax bracket when running the numbers.
...I'm sure a good fee-only tax adviser would be able to help.

Thank you Tyler. It is the RMDs that will keep us in our current tax bracket after retirement.

I've not used a tax advisor before. Do you have a "good fee-only tax advisor" that you use and would recommend? We live in WA state, which does not have state tax, so could probably use anyone in the USA.

Also, fyi, I figured out how to post a picture of my end-of-Feb GB portfolio and added it at the end of my previous posting above. This should be easier to read than my text. Any further thoughts much appreciated.

LittleDinghy wrote: ↑Sat Mar 07, 2020 7:30 pm I've not used a tax advisor before. Do you have a "good fee-only tax advisor" that you use and would recommend?

Unfortunately no. But I can certainly see the benefit of consulting one to double-check your plan.

LittleDinghy wrote: ↑Sat Mar 07, 2020 7:30 pm

Tyler wrote: ↑Wed Mar 04, 2020 10:20 am ...be sure to account for how required minimum distributions may impact your potential tax bracket when running the numbers.
...I'm sure a good fee-only tax adviser would be able to help.

Thank you Tyler. It is the RMDs that will keep us in our current tax bracket after retirement.

I've not used a tax advisor before. Do you have a "good fee-only tax advisor" that you use and would recommend? We live in WA state, which does not have state tax, so could probably use anyone in the USA.

Also, fyi, I figured out how to post a picture of my end-of-Feb GB portfolio and added it at the end of my previous posting above. This should be easier to read than my text. Any further thoughts much appreciated.

This is one who is nationally known: https://daretobedull.com/overviewbio/. He wrote a famous book on investing.

Last I heard or read, he was charging $350 per hour.

And, I don't know how much advising regarding he'll do for portfolio centered around the Permanent Portfolio.

I do remember that his philosophy is that he gets you straightened out as much as possible (within what makes sense tax-wise) in his goal to get you in the proper percentage ownership of each of the Vanguard Big 3 (Total Stock Market / Total International / Total Bond). Then he's done with you and you manage it on your own until you need him because something major in your life has changed.

Vinny

Since LittleDinghy already has a portfolio set up and is looking for rebalancing advice, I was thinking more tax planner or CPA rather than an investment advisor.

Tyler wrote: ↑Sat Mar 07, 2020 10:18 pm Since LittleDinghy already has a portfolio set up and is looking for rebalancing advice, I was thinking more tax planner or CPA rather than an investment advisor.

If you look at his Professional Certifications on that web page I cited you can see this is one he has:

CERTIFIED PUBLIC ACCOUNTANT (CPA)

He's capable of doing the job. Question is whether someone else is at a much lower hourly rate.

Vinny

Thank you both, Tyler and yankees60. One tax planning question I have is what my target should be for asset location in tax deferred, taxable and tax free accounts. Right now we’re stuck with having to put the bulk of our equity investments in my 401k and my wife’s 403b, 401a and 457 ( no gold or treasury offerings available in them). But when I retire in 2-3 years and when she retires in 6-7 years we’ll be able to rollover these accounts to IRAs and will have more flexibility as to asset location to minimize taxes. Also even now every year we’re transferring 401k money to a Roth IRA to the limit of our tax bracket, so have some opportunities every year to shift asset location to reduce taxes. A good tax advisor could help us with establishing our target asset location to work towards. Vnatale have you used the advisor you’re recommending?

The other more urgent question and the reason for my being in this thread is how to decide when to rebalance. I’m guessing now that when my GB bond %, which is now at 22.1%, hits 25 or 26% (I’m not sure which) then that’s when I should do my first GB portfolio rebalance. There is some talk on other threads of bond values really going up a lot more and maybe very soon.

LittleDinghy wrote: ↑Mon Mar 09, 2020 12:46 am Thank you both, Tyler and yankees60. One tax planning question I have is what my target should be for asset location in tax deferred, taxable and tax free accounts. Right now we’re stuck with having to put the bulk of our equity investments in my 401k and my wife’s 403b, 401a and 457 ( no gold or treasury offerings available in them). But when I retire in 2-3 years and when she retires in 6-7 years we’ll be able to rollover these accounts to IRAs and will have more flexibility as to asset location to minimize taxes. Also even now every year we’re transferring 401k money to a Roth IRA to the limit of our tax bracket, so have some opportunities every year to shift asset location to reduce taxes. A good tax advisor could help us with establishing our target asset location to work towards. Vnatale have you used the advisor you’re recommending?

The other more urgent question and the reason for my being in this thread is how to decide when to rebalance. I’m guessing now that when my GB bond %, which is now at 22.1%, hits 25 or 26% (I’m not sure which) then that’s when I should do my first GB portfolio rebalance. There is some talk on other threads of bond values really going up a lot more and maybe very soon.

I have not used the advisor I am recommending. I was thinking of recommending him to someone with whom I do work for. But, in that case, it would for a long-term basis. And, that would be my only reason for not going with him as he does not seem to be that young and he seems to be a one man show. Aside from that, he's probably fine and excellent for a one-time consultation.

In my endless research on my own in finally embracing the Permanent Portfolio I am wrestling with the same questions as you regarding asset location for optimal tax treatment. If I ever come to a conclusion I will certainly let you (and all else) know what I decided is optimal for me.

Vinny

Tyler: in the GB portfolio, you do not consider SV as a VP and the other four assets as a PP, i.e. when rebalancing, you take profits from what would be considered PP assets and rebalance into the SV slice if that is in need of a refill, correct?

williswine wrote: ↑Thu Apr 02, 2020 4:40 pm Tyler: in the GB portfolio, you do not consider SV as a VP and the other four assets as a PP, i.e. when rebalancing, you take profits from what would be considered PP assets and rebalance into the SV slice if that is in need of a refill, correct?

While one can break it down into its permanent and variable subcomponents if they like and balance them according to their needs, personally I think of the GB as one large portfolio from a rebalancing perspective.

Personally, I've simply resigned myself to the idea that rebalancing bands in the GB might just be a little too complicated. Rather, I'd just rebalance annually or (in a non-taxable account) just whenever I feel like it.

Agreed, it is crazy how much more a pain rebalancing appears to be in a PP vs a GB just by adding 1 more asset.

But since I am a glutten for punishment...

For quite a while now (well, pre-coronavirus anyways) I have been planning on implementing a portfolio that tries to take the best of the PP/GB worlds that re-balances based on the Shiller CAPE (https://www.gurufocus.com/shiller-PE.php).

To be honest, the GB made me a little skeptical that it may suffer from recency bias with its tilt towards prosperity. So I was hoping to solve some of that personal worry.

Anyways, imagine a sliding scale. On one end you have an under-priced stock market which would look similar to a GB that has an extra allocation to Small Cap Value. On the other end you have an over-priced market where your asset allocation would look similar to a PP.

Basically, Shiller CAPE doesn't have a very strong predictability over a 10 year period... but it isn't exactly a very weak predictability either. Or in other words, it certainly appears to offer SOME value in assessing equities risk (43% predictability from 1926 to 2012).

Note: 43% does NOT mean it was wrong 57% of the time. If it had 0% predictability it would be completely random. If it had 100% predictability it would be a sure thing. AFAIK, at 43% you have valuable insight, but not enough to bet the barn on.

Obviously, the trick is to never be so deep into equities to really get burned. Afterall, even Graham said you should never be outside of 25%/75% equities. That is why it is important that even when stocks are undervalued you still don't get too crazy in over-weighting them. As we all know, no ratio can predict a plane flying into a building or a pandemic.

The problem is that this type of portfolio is no longer a "simple" portfolio to manage. Knowing exactly what to rebalance and by how much is a lot harder than a vanilla PP or GB because your actual target allocations are changing in response to changes in the CAPE ratio. Hence my need to create some type of "GB/PP Current Weather Setter" tool that would automatically adjust/notify accordingly.

Even from a tax standpoint it really shouldn't change much of anything. Over time, you would essentially be selling out of your Small Cap Value positions as equities overall went from underpriced to overpriced. You would had to sell those equities anyways just to rebalance in a regular GB or PP.

You could probably achieve it by "shooting from the hip". However, I think that the beauty of the PP is its psychological rebalancing that prevents your emotions (and greed) from making decisions. That is why an automated tool seems necessary to really achieve the above hybrid in a lazy-portfolio kind of way.

Here is a very rough example:

Overpriced market:

25% S&P 500
25% Tbills
25% Long Term Treasuries
25% Gold

Fairly priced market:

20% S&P 500
12.5% Small Cap Value
22.5% Tbills
22.5% Long Term Treasuries
22.5% Gold

Underpriced market:

25% Small Cap Value
15% S&P 500
20% Tbills
20% Long Term Treasuries
20% Gold

As the investing climate changes, so too would the rebalancing bands (obviously, since the asset allocations all start to vary)

You can see that the allocations adjust based on how "cheap" the overall stock market it. As it heats up, more automatically gets allocated to the other asset classes as insurance since the risk is higher. Nobody knows for sure what will happen... but that doesn't mean that statistically the predictability is at zero either.

Keep in mind that these are not intended to be rigid "tiers". Instead, it is my hope to make something that has "fluid" asset allocations that are constantly changing. This obviously makes keeping an eye on it a little more demanding as well. However, this is why I want it to be a little more than a basic spreadsheet. I feel like it would be necessary for it to send an email alert once a threshold has been crossed.

CJ043332 wrote: ↑Mon Apr 06, 2020 6:28 pm Here is a very rough example:

Overpriced market:

25% S&P 500
25% Tbills
25% Long Term Treasuries
25% Gold

Fairly priced market:

20% S&P 500
12.5% Small Cap Value
22.5% Tbills
22.5% Long Term Treasuries
22.5% Gold

Underpriced market:

25% Small Cap Value
15% S&P 500
20% Tbills
20% Long Term Treasuries
20% Gold

You can see that the allocations adjust based on how "cheap" the overall stock market it. As it heats up, more automatically gets allocated to the other asset classes as insurance since the risk is higher. Nobody knows for sure what will happen... but that doesn't mean that statistically the predictability is at zero either.

The problem, as it always is with valuation based investing, is that the market can stay irrational longer than you can stay solvent. There is also the problem of "overpriced", "underpriced", and "fairly priced" being completely arbitrary. Over the years I have seen the "fairly priced" marker get quoted over a wide range of numbers. Picking one fundamental metric is arbitrary, and all fundamental metrics are relative. They also place no emphasis on timing at all. I mean Warren Buffet has underperformed the S&P 500 for what... 17 years now? Can you really handle that kind of underperformance? Is that even acceptable? Every fund manager alive would be fired for that kind of performance, yet WB is still looked at as a hero/genius/etc. If someone wants to be tactical in their allocations then they need some kind of a technical or quantitative basis behind it. Otherwise, people are just going to wind up juggling their portfolio based purely on feelings, and that tends to get people in to trouble. I would just be careful with trying to time the market based on your perception of what the market valuation is. Valuations tend to only really matter over very long multi-decade time frames. You're likely to get chopped up and capitulate long before you reap any valuation premium.

pmward wrote: ↑Mon Apr 06, 2020 6:51 pm

CJ043332 wrote: ↑Mon Apr 06, 2020 6:28 pm Here is a very rough example:

Overpriced market:

25% S&P 500
25% Tbills
25% Long Term Treasuries
25% Gold

Fairly priced market:

20% S&P 500
12.5% Small Cap Value
22.5% Tbills
22.5% Long Term Treasuries
22.5% Gold

Underpriced market:

25% Small Cap Value
15% S&P 500
20% Tbills
20% Long Term Treasuries
20% Gold

You can see that the allocations adjust based on how "cheap" the overall stock market it. As it heats up, more automatically gets allocated to the other asset classes as insurance since the risk is higher. Nobody knows for sure what will happen... but that doesn't mean that statistically the predictability is at zero either.

The problem, as it always is with valuation based investing, is that the market can stay irrational longer than you can stay solvent. There is also the problem of "overpriced", "underpriced", and "fairly priced" being completely arbitrary. Over the years I have seen the "fairly priced" marker get quoted over a wide range of numbers. Picking one fundamental metric is arbitrary, and all fundamental metrics are relative. They also place no emphasis on timing at all. I mean Warren Buffet has underperformed the S&P 500 for what... 17 years now? Can you really handle that kind of underperformance? Is that even acceptable? Every fund manager alive would be fired for that kind of performance, yet WB is still looked at as a hero/genius/etc. If someone wants to be tactical in their allocations then they need some kind of a technical or quantitative basis behind it. Otherwise, people are just going to wind up juggling their portfolio based purely on feelings, and that tends to get people in to trouble. I would just be careful with trying to time the market based on your perception of what the market valuation is. Valuations tend to only really matter over very long multi-decade time frames. You're likely to get chopped up and capitulate long before you reap any valuation premium.

Any long term investor that invests in a PP or GB would needs to be able to stomach under-performance. Besides, at 40% equities it is unlikely you will go insolvent.

Furthermore, the CAPE was not chosen by random. A study by Vanguard showed that P/E 10 and PE/1 were basically the only metrics that amounted to anything. As stated above,

Shiller CAPE doesn't have a very strong predictability over a 10 year period... but it isn't exactly a very weak predictability either.

Are you attempting to state:

1. CAPE literally has a 0% predictability rate.

or

2. CAPE has some predictability rate, however that rate should be disregarded entirely for investing purposes even in the smallest of ways.

CJ043332 wrote: ↑Mon Apr 06, 2020 7:05 pm

pmward wrote: ↑Mon Apr 06, 2020 6:51 pm

CJ043332 wrote: ↑Mon Apr 06, 2020 6:28 pm Here is a very rough example:

Overpriced market:

25% S&P 500
25% Tbills
25% Long Term Treasuries
25% Gold

Fairly priced market:

20% S&P 500
12.5% Small Cap Value
22.5% Tbills
22.5% Long Term Treasuries
22.5% Gold

Underpriced market:

25% Small Cap Value
15% S&P 500
20% Tbills
20% Long Term Treasuries
20% Gold

You can see that the allocations adjust based on how "cheap" the overall stock market it. As it heats up, more automatically gets allocated to the other asset classes as insurance since the risk is higher. Nobody knows for sure what will happen... but that doesn't mean that statistically the predictability is at zero either.

The problem, as it always is with valuation based investing, is that the market can stay irrational longer than you can stay solvent. There is also the problem of "overpriced", "underpriced", and "fairly priced" being completely arbitrary. Over the years I have seen the "fairly priced" marker get quoted over a wide range of numbers. Picking one fundamental metric is arbitrary, and all fundamental metrics are relative. They also place no emphasis on timing at all. I mean Warren Buffet has underperformed the S&P 500 for what... 17 years now? Can you really handle that kind of underperformance? Is that even acceptable? Every fund manager alive would be fired for that kind of performance, yet WB is still looked at as a hero/genius/etc. If someone wants to be tactical in their allocations then they need some kind of a technical or quantitative basis behind it. Otherwise, people are just going to wind up juggling their portfolio based purely on feelings, and that tends to get people in to trouble. I would just be careful with trying to time the market based on your perception of what the market valuation is. Valuations tend to only really matter over very long multi-decade time frames. You're likely to get chopped up and capitulate long before you reap any valuation premium.

Any long term investor that invests in a PP or GB would needs to be able to stomach under-performance. Besides, at 40% equities it is unlikely you will go insolvent.

Furthermore, the CAPE was not chosen by random. A study by Vanguard showed that P/E 10 and PE/1 were basically the only metrics that amounted to anything. As stated above,

Shiller CAPE doesn't have a very strong predictability over a 10 year period... but it isn't exactly a very weak predictability either.

Are you attempting to state:

1. CAPE literally has a 0% predictability rate.

or

2. CAPE has some predictability rate, however that rate should be disregarded entirely for investing purposes even in the smallest of ways.

CAPE has 0 predictability when it comes to timing. Like I said, valuation premiums are a multi-decade kind of thing. Most investors do not go multiple decades without tinkering with their portfolio. I see no reason for a long term investor to skew their portfolio up or down based on CAPE. If someone wants a tactical portfolio allocation then it should be based using more technical or quantitative measures. Otherwise, it's probably best to just pick the portfolio allocation and rebalance over time, letting the rebalancing help you buy low and sell high.

pmward wrote: ↑Mon Apr 06, 2020 7:10 pm

CJ043332 wrote: ↑Mon Apr 06, 2020 7:05 pm

pmward wrote: ↑Mon Apr 06, 2020 6:51 pm

CJ043332 wrote: ↑Mon Apr 06, 2020 6:28 pm Here is a very rough example:

Overpriced market:

25% S&P 500
25% Tbills
25% Long Term Treasuries
25% Gold

Fairly priced market:

20% S&P 500
12.5% Small Cap Value
22.5% Tbills
22.5% Long Term Treasuries
22.5% Gold

Underpriced market:

25% Small Cap Value
15% S&P 500
20% Tbills
20% Long Term Treasuries
20% Gold

You can see that the allocations adjust based on how "cheap" the overall stock market it. As it heats up, more automatically gets allocated to the other asset classes as insurance since the risk is higher. Nobody knows for sure what will happen... but that doesn't mean that statistically the predictability is at zero either.

The problem, as it always is with valuation based investing, is that the market can stay irrational longer than you can stay solvent. There is also the problem of "overpriced", "underpriced", and "fairly priced" being completely arbitrary. Over the years I have seen the "fairly priced" marker get quoted over a wide range of numbers. Picking one fundamental metric is arbitrary, and all fundamental metrics are relative. They also place no emphasis on timing at all. I mean Warren Buffet has underperformed the S&P 500 for what... 17 years now? Can you really handle that kind of underperformance? Is that even acceptable? Every fund manager alive would be fired for that kind of performance, yet WB is still looked at as a hero/genius/etc. If someone wants to be tactical in their allocations then they need some kind of a technical or quantitative basis behind it. Otherwise, people are just going to wind up juggling their portfolio based purely on feelings, and that tends to get people in to trouble. I would just be careful with trying to time the market based on your perception of what the market valuation is. Valuations tend to only really matter over very long multi-decade time frames. You're likely to get chopped up and capitulate long before you reap any valuation premium.

Any long term investor that invests in a PP or GB would needs to be able to stomach under-performance. Besides, at 40% equities it is unlikely you will go insolvent.

Furthermore, the CAPE was not chosen by random. A study by Vanguard showed that P/E 10 and PE/1 were basically the only metrics that amounted to anything. As stated above,

Shiller CAPE doesn't have a very strong predictability over a 10 year period... but it isn't exactly a very weak predictability either.

Are you attempting to state:

1. CAPE literally has a 0% predictability rate.

or

2. CAPE has some predictability rate, however that rate should be disregarded entirely for investing purposes even in the smallest of ways.

CAPE has 0 predictability when it comes to timing. Like I said, valuation premiums are a multi-decade kind of thing. Most investors do not go multiple decades without tinkering with their portfolio. I see no reason for a long term investor to skew their portfolio up or down based on CAPE. If someone wants a tactical portfolio allocation then it should be based using more technical or quantitative measures. Otherwise, it's probably best to just pick the portfolio allocation and rebalance over time, letting the rebalancing help you buy low and sell high.

A 2012 research study funded by Vanguard authored by Joseph Davis, Ph.D., Roger Aliaga-Diaz, Ph.D., and Charles J. Thomas, CFA appear to have concluded something quite differently. They did an analysis of several popular metrics and back-tested their predictability.

Do you have any research studies to support your claim of zero predictability over a 10 year period for CAPE?

Now, is there a chance that those Ph.D.'s got it wrong? Sure. Is it also possible that a GB is a worse allocation than a PP? Sure. Worst case scenario you end up with basically a PP or a GB. Back where you started.

What if they are right?

If I play roulette and 40% of the numbers are red and 60% are black (no green on this imaginary wheel)... my investment allocation should not be 50/50. Granted, if I was playing only 1 hand (i.e. a 1 year investment time-frame), I would be crazy to make a huge bet. But the longer you play, the more the true odds have a real impact. If you want to have the highest chance of breaking even over a long horizon (i.e. over a 10 year period), you better be sure you have a 40% red and 60% black allocation.

I would also point out that it appears that the vast majority of Permanent Portfolio investors have in fact adjusted their asset allocations to a GB allocation as equities (over the past 10 years) have become more expensive based on CAPE. Surely, you must see the irony in that.

CJ043332 wrote: ↑Mon Apr 06, 2020 8:05 pm

pmward wrote: ↑Mon Apr 06, 2020 7:10 pm

CJ043332 wrote: ↑Mon Apr 06, 2020 7:05 pm

pmward wrote: ↑Mon Apr 06, 2020 6:51 pm

CJ043332 wrote: ↑Mon Apr 06, 2020 6:28 pm Here is a very rough example:

Overpriced market:

25% S&P 500
25% Tbills
25% Long Term Treasuries
25% Gold

Fairly priced market:

20% S&P 500
12.5% Small Cap Value
22.5% Tbills
22.5% Long Term Treasuries
22.5% Gold

Underpriced market:

25% Small Cap Value
15% S&P 500
20% Tbills
20% Long Term Treasuries
20% Gold

You can see that the allocations adjust based on how "cheap" the overall stock market it. As it heats up, more automatically gets allocated to the other asset classes as insurance since the risk is higher. Nobody knows for sure what will happen... but that doesn't mean that statistically the predictability is at zero either.

The problem, as it always is with valuation based investing, is that the market can stay irrational longer than you can stay solvent. There is also the problem of "overpriced", "underpriced", and "fairly priced" being completely arbitrary. Over the years I have seen the "fairly priced" marker get quoted over a wide range of numbers. Picking one fundamental metric is arbitrary, and all fundamental metrics are relative. They also place no emphasis on timing at all. I mean Warren Buffet has underperformed the S&P 500 for what... 17 years now? Can you really handle that kind of underperformance? Is that even acceptable? Every fund manager alive would be fired for that kind of performance, yet WB is still looked at as a hero/genius/etc. If someone wants to be tactical in their allocations then they need some kind of a technical or quantitative basis behind it. Otherwise, people are just going to wind up juggling their portfolio based purely on feelings, and that tends to get people in to trouble. I would just be careful with trying to time the market based on your perception of what the market valuation is. Valuations tend to only really matter over very long multi-decade time frames. You're likely to get chopped up and capitulate long before you reap any valuation premium.

Any long term investor that invests in a PP or GB would needs to be able to stomach under-performance. Besides, at 40% equities it is unlikely you will go insolvent.

Furthermore, the CAPE was not chosen by random. A study by Vanguard showed that P/E 10 and PE/1 were basically the only metrics that amounted to anything. As stated above,

Shiller CAPE doesn't have a very strong predictability over a 10 year period... but it isn't exactly a very weak predictability either.

Are you attempting to state:

1. CAPE literally has a 0% predictability rate.

or

2. CAPE has some predictability rate, however that rate should be disregarded entirely for investing purposes even in the smallest of ways.

CAPE has 0 predictability when it comes to timing. Like I said, valuation premiums are a multi-decade kind of thing. Most investors do not go multiple decades without tinkering with their portfolio. I see no reason for a long term investor to skew their portfolio up or down based on CAPE. If someone wants a tactical portfolio allocation then it should be based using more technical or quantitative measures. Otherwise, it's probably best to just pick the portfolio allocation and rebalance over time, letting the rebalancing help you buy low and sell high.

A 2012 research study funded by Vanguard authored by Joseph Davis, Ph.D., Roger Aliaga-Diaz, Ph.D., and Charles J. Thomas, CFA appear to have concluded something quite differently. They did an analysis of several popular metrics and back-tested their predictability.

Do you have any research studies to support your claim of zero predictability over a 10 year period for CAPE?

Now, is there a chance that those Ph.D.'s got it wrong? Sure. Is it also possible that a GB is a worse allocation than a PP? Sure. Worst case scenario you end up with basically a PP or a GB. Back where you started.

What if they are right?

If I play roulette and 40% of the numbers are red and 60% are black (no green on this imaginary wheel)... my investment allocation should not be 50/50. Granted, if I was playing only 1 hand (i.e. a 1 year investment time-frame), I would be crazy to make a huge bet. But the longer you play, the more the true odds have a real impact. If you want to have the highest chance of breaking even over a long horizon (i.e. over a 10 year period), you better be sure you have a 40% red and 60% black allocation.

I would also point out that it appears that the vast majority of Permanent Portfolio investors have in fact adjusted their asset allocations to a GB allocation as equities (over the past 10 years) have become more expensive based on CAPE. Surely, you must see the irony in that.

I do not have any "PhD studies", and I personally do not care about these things as academics are always getting these things wrong. A PhD means absolutely nothing in the markets. Case in point, look at the famous Fama-French studies. They pretty much called the top on the "value premium" as soon as they published their research. The value factor has substantially underperformed for 18 years straight now. Small caps have also been much weaker, especially in the last 10 years. I would take these research studies with a grain of salt. Pretty much everyone who ever took Fama-French seriously has lost. CAPE metrics have been better for international than U.S. for over 10 years now, and the "undervalued" international stocks seem just find new ways to become more "undervalued". There are much better ways to be tactical than using valuation metrics.

pmward wrote: ↑Mon Apr 06, 2020 8:17 pm

CJ043332 wrote: ↑Mon Apr 06, 2020 8:05 pm

pmward wrote: ↑Mon Apr 06, 2020 7:10 pm

CJ043332 wrote: ↑Mon Apr 06, 2020 7:05 pm

pmward wrote: ↑Mon Apr 06, 2020 6:51 pm

CJ043332 wrote: ↑Mon Apr 06, 2020 6:28 pm Here is a very rough example:

Overpriced market:

25% S&P 500
25% Tbills
25% Long Term Treasuries
25% Gold

Fairly priced market:

20% S&P 500
12.5% Small Cap Value
22.5% Tbills
22.5% Long Term Treasuries
22.5% Gold

Underpriced market:

25% Small Cap Value
15% S&P 500
20% Tbills
20% Long Term Treasuries
20% Gold

You can see that the allocations adjust based on how "cheap" the overall stock market it. As it heats up, more automatically gets allocated to the other asset classes as insurance since the risk is higher. Nobody knows for sure what will happen... but that doesn't mean that statistically the predictability is at zero either.

The problem, as it always is with valuation based investing, is that the market can stay irrational longer than you can stay solvent. There is also the problem of "overpriced", "underpriced", and "fairly priced" being completely arbitrary. Over the years I have seen the "fairly priced" marker get quoted over a wide range of numbers. Picking one fundamental metric is arbitrary, and all fundamental metrics are relative. They also place no emphasis on timing at all. I mean Warren Buffet has underperformed the S&P 500 for what... 17 years now? Can you really handle that kind of underperformance? Is that even acceptable? Every fund manager alive would be fired for that kind of performance, yet WB is still looked at as a hero/genius/etc. If someone wants to be tactical in their allocations then they need some kind of a technical or quantitative basis behind it. Otherwise, people are just going to wind up juggling their portfolio based purely on feelings, and that tends to get people in to trouble. I would just be careful with trying to time the market based on your perception of what the market valuation is. Valuations tend to only really matter over very long multi-decade time frames. You're likely to get chopped up and capitulate long before you reap any valuation premium.

Any long term investor that invests in a PP or GB would needs to be able to stomach under-performance. Besides, at 40% equities it is unlikely you will go insolvent.

Furthermore, the CAPE was not chosen by random. A study by Vanguard showed that P/E 10 and PE/1 were basically the only metrics that amounted to anything. As stated above,

Shiller CAPE doesn't have a very strong predictability over a 10 year period... but it isn't exactly a very weak predictability either.

Are you attempting to state:

1. CAPE literally has a 0% predictability rate.

or

2. CAPE has some predictability rate, however that rate should be disregarded entirely for investing purposes even in the smallest of ways.

CAPE has 0 predictability when it comes to timing. Like I said, valuation premiums are a multi-decade kind of thing. Most investors do not go multiple decades without tinkering with their portfolio. I see no reason for a long term investor to skew their portfolio up or down based on CAPE. If someone wants a tactical portfolio allocation then it should be based using more technical or quantitative measures. Otherwise, it's probably best to just pick the portfolio allocation and rebalance over time, letting the rebalancing help you buy low and sell high.

A 2012 research study funded by Vanguard authored by Joseph Davis, Ph.D., Roger Aliaga-Diaz, Ph.D., and Charles J. Thomas, CFA appear to have concluded something quite differently. They did an analysis of several popular metrics and back-tested their predictability.

Do you have any research studies to support your claim of zero predictability over a 10 year period for CAPE?

Now, is there a chance that those Ph.D.'s got it wrong? Sure. Is it also possible that a GB is a worse allocation than a PP? Sure. Worst case scenario you end up with basically a PP or a GB. Back where you started.

What if they are right?

If I play roulette and 40% of the numbers are red and 60% are black (no green on this imaginary wheel)... my investment allocation should not be 50/50. Granted, if I was playing only 1 hand (i.e. a 1 year investment time-frame), I would be crazy to make a huge bet. But the longer you play, the more the true odds have a real impact. If you want to have the highest chance of breaking even over a long horizon (i.e. over a 10 year period), you better be sure you have a 40% red and 60% black allocation.

I would also point out that it appears that the vast majority of Permanent Portfolio investors have in fact adjusted their asset allocations to a GB allocation as equities (over the past 10 years) have become more expensive based on CAPE. Surely, you must see the irony in that.

I do not have any "PhD studies", and I personally do not care about these things as academics are always getting these things wrong. A PhD means absolutely nothing in the markets. Case in point, look at the famous Fama-French studies. They pretty much called the top on the "value premium" as soon as they published their research. The value factor has substantially underperformed for 18 years straight now. Small caps have also been much weaker, especially in the last 10 years. I would take these research studies with a grain of salt. Pretty much everyone who ever took Fama-French seriously has lost. CAPE metrics have been better for international than U.S. for over 10 years now, and the "undervalued" international stocks seem just find new ways to become more "undervalued". There are much better ways to be tactical than using valuation metrics.

I see... the CAPE is wrong AND the Ph.D's that backtested the CAPE at Vanguard are ALWAYS wrong... oh wait, but wouldn't your argument than make the CAPE right (since their argument was that the CAPE was not a predictor in the short term)?

I kid, but seriously...

TLDR, "You have no real evidence to support your claim of 0% predictability of CAPE, and dislike people with PhDs."

No judgement... I have no PhD, so I am not offended.