Gyroscopic Investing

I know it's not a simple question. I know this is the question that legions of investors are trying to answer. I know there is no crystal ball and there is only one Warren Buffett. But still I will try  .

I don't want to treat my PP and VP as Dr.Jekyll and Mr.Hyde - i.e. I don't think it should be like strictly obeying HB 4x25% in PP and going insane in VP with all this crazy market-timing thing. I like to think about my VP as a tool to get reasonably better returns than in PP, but without too much risk. I certainly don't think that the notion "VP is for money you can afford to lose" should be understood as a carte blanche to burn the VP money placing risky bets on the stock market. Well, I'm not a market-timer, nor do I like day-trading. So for now I'm just keeping some PRPFX as my VP. I have some ideas in mind, for example adding some emerging markets ETFs (WisdomTree products look interesting) or playing with Mebane Faber's 200-day average-based approach. I think the best definition for what I would like to do is "capturing market trends", rather than "market-timing".

What do you guys do in your VP? I know it's kind of personal question to some extent, but I'm not asking about specifics, I just want to get a sense of high-level strategies and ides my fellow PP faithful follow in their VP.

I'm using the Merriman Ultimate Buy and Hold. With maybe some influences from the Swensen lazy portfolio. I always get caught between wanting the simplicity of the PP and the Swensen lazy portfolio, and the diversification of the UB&H.

http://www.fundadvice.com/articles/buy- ... ategy.html
http://www.bogleheads.org/wiki/Lazy_Por ... _Portfolio

jmourik wrote: I'm using the Merriman Ultimate Buy and Hold. With maybe some influences from the Swensen lazy portfolio. I always get caught between wanting the simplicity of the PP and the Swensen lazy portfolio, and the diversification of the UB&H.

http://www.fundadvice.com/articles/buy- ... ategy.html
http://www.bogleheads.org/wiki/Lazy_Por ... _Portfolio

Thanks for sharing. That's amazing - I actually started my DIY investing from Merriman UB&H portfolio and then I luckily encountered the PP resources, namely craigr's blog and HB website. That was even before the world-famous BH thread on PP came into existence. 

One of the very few similarities between Merriman and Harry Browne approaches is they both suggest using Treasuries only in the bond allocation.

I rarely have money in a variable portfolio, but when I do it's usually in stocks that have been deeply discounted due to some bad events in the news. Assuming I like the company business and fundamentals, I'll put a little money on them. However I also tend to "invest in myself" and have put a great deal of money into my own businesses in the past. I actually feel more comfortable doing that because I know the management so well.

But mostly I just keep my investable assets in the Permanent Portfolio. I find that it gets fine returns without stressing me out too much.

craigr wrote: I rarely have money in a variable portfolio, but when I do it's usually in stocks that have been deeply discounted due to some bad events in the news. Assuming I like the company business and fundamentals, I'll put a little money on them. However I also tend to "invest in myself" and have put a great deal of money into my own businesses in the past. I actually feel more comfortable doing that because I know the management so well.

But mostly I just keep my investable assets in the Permanent Portfolio. I find that it gets fine returns without stressing me out too much.

Thanks craigr, I always appreciate your opinion. And I forgot to mention in my post that I do own 1 (one!) dividend stock that I bought precisely because of the reasons you mentioned. However, I didn't pick it myself - I'm really scared to buy stocks based solely on my opinion. 

foglifter wrote:One of the very few similarities between Merriman and Harry Browne approaches is they both suggest using Treasuries only in the bond allocation.

And so does Swensen!

jmourik wrote:

foglifter wrote:One of the very few similarities between Merriman and Harry Browne approaches is they both suggest using Treasuries only in the bond allocation.

And so does Swensen!

Before I read Browne I had read Swensen and liked what he had to say for the most part (didn't like his big position in REITs though). Swensen was the first investment book I had come across at that point which clearly laid out why you want to avoid non-Treasury bonds. Browne though seemed to make the point first when I later came across his writings. Both are right.

I've raised lots of money for my previous company and am familiar with what is involved and the conflicts of interest inherent in debt financing. Browne and Swensen clearly understand the problem in non-Treasury bonds. Most other authors do not.

Yes, I like Swensen's book "Unconventional Success" a lot. He clearly lays out the portfolio strategy he proposes and the reasons for them. (As did Harry Browne of course  .) Definitely made me rethink my bond allocation, and also the other asset classes really. And then I stumbled up the HBPP thread on the Bogleheads forum...

http://www.amazon.com/Unconventional-Su ... 511&sr=1-1

jmourik wrote:And then I stumbled up the HBPP thread on the Bogleheads forum...

That bogleheads PP thread is one of the most amazing internet discussions I have ever been part of.

foglifter wrote:What do you guys do in your VP? I know it's kind of personal question to some extent, but I'm not asking about specifics, I just want to get a sense of high-level strategies and ides my fellow PP faithful follow in their VP.

I'll be honest.  My VP is dedicated to gold, silver and all precious metals miners in a 33-33-33.  It is a very high risk/high reward play that is not appropriate for most people.  That said, I'm confident in the probabilities while acknowledging the future can play out a number of ways.  Strange thing is the bet has to do with humans repeating the same mistakes as they have in the past and reacting the same way, whereas most people speculate on a subjective assessment of value.  Along with the overweight in PMs, I have a good bit of dry powder accumulating in the event of a panic liquidation like in '08.

You can call me a gold bug for now.    I fully expect to go PP neutral in about 5 years and then overweight equities in about 10 years.  I agree with Craig in that often the best investment is in one's own business.  I wouldn't be where I am today without the same decision.

MediumTex wrote:

jmourik wrote:And then I stumbled up the HBPP thread on the Bogleheads forum...

That bogleheads PP thread is one of the most amazing internet discussions I have ever been part of.

That is so true! And the subject of that thread is truly remarkable - "Updated modification of HB PP". Most of us here can't help trying to find a "better PP", although based on my personal and others experience eventually people tend to come closer and closer to the original HB-suggested allocation. We never cease to update and modify, do we? 

BTW the BH thread comes as a first result if you Google "updated modification". 

Wonk wrote: You can call me a gold bug for now.   ;)  I fully expect to go PP neutral in about 5 years and then overweight equities in about 10 years.  I agree with Craig in that often the best investment is in one's own business.  I wouldn't be where I am today without the same decision.

No, I won't call you a gold bug, this is a VP - you can do whatever you want. 
Seriously, you correctly said that nobody knows how it all will play in the future.

Here is a summary of suggestions so far:

1) Macro bets (Wonk)

2) Stock picking / special situations (Craigr)

3) Meb's monthly trading system

4) Lazy portfolio from another guru

Other options are Meb's other higher returning rotation system: http://www.mebanefaber.com/2009/06/25/c ... g-systems/

Or you could come up with your own lazy portfolio allocation using Simba's spreadsheet or riskcog.com.  Here is an article I wrote up about comparing the RiskCog optimization approach to Swensen and Merriman's suggested portfolios. <Spoiler alert> You can improve on their suggested allocations by finding an optimized portfolio with smaller historical drawdowns. http://www.riskcog.com/lazy_portfolio_comparison.jsp

You could also buy or borrow a trading system from decisionmoose.com, collective2.com or related sites. You could also try to create your own approach. I did just that starting with a system like that outlined in Meb's rotation blog post.

macclary wrote: Here is a summary of suggestions so far:

1) Macro bets (Wonk)

2) Stock picking / special situations (Craigr)

3) Meb's monthly trading system

4) Lazy portfolio from another guru

Other options are Meb's other higher returning rotation system: http://www.mebanefaber.com/2009/06/25/c ... g-systems/

Or you could come up with your own lazy portfolio allocation using Simba's spreadsheet or riskcog.com.  Here is an article I wrote up about comparing the RiskCog optimization approach to Swensen and Merriman's suggested portfolios. <Spoiler alert> You can improve on their suggested allocations by finding an optimized portfolio with smaller historical drawdowns. http://www.riskcog.com/lazy_portfolio_comparison.jsp

You could also buy or borrow a trading system from decisionmoose.com, collective2.com or related sites. You could also try to create your own approach. I did just that starting with a system like that outlined in Meb's rotation blog post.

I also readThe Gleason Report. Don't be distracted by the words "market timing" on the home page - I think it's for marketing purposes. What Tom Gleason does is more of watching market trends. His reports and alerts are free after 30-day delay for non-paying subscribers. Besides the investing topics the report is a fascinating read on what's going on in the global economy. Sometimes he slips into politics, but I normally skip that part unless it is directly related to investing. His track record of buy/sell alerts is pretty good.

foglifter wrote: I also readThe Gleason Report. Don't be distracted by the words "market timing" on the home page - I think it's for marketing purposes. What Tom Gleason does is more of watching market trends. His reports and alerts are free after 30-day delay for non-paying subscribers. Besides the investing topics the report is a fascinating read on what's going on in the global economy. Sometimes he slips into politics, but I normally skip that part unless it is directly related to investing. His track record of buy/sell alerts is pretty good.

As far as the PP is concerned, newsletters are just noise. But for the VP it may provide useful ideas.

I like The Gleason Report, though I wish that the guy would summarize his findings on one page instead of filling 20+ pages (but that goes for most newsletters). Some more newsletters that I subscribe to: GEAB, which provides views that are especially of interest for European investors. Some goldbug/doomer newsletter that shall remain unnamed. And Decision Moose (performance chasing, baaad results these days, but sometimes comments can be interesting).

The advantage of reading multiple newsletters is that you get more diverse info and don't get locked into one view on the economy. But it takes way too much time. I'm going to eliminate most of them once most of my big investment decisions have been taken.

I've been thinking about these two strategies for quite a while: Mebane Faber's sector rotation and 200-day SMA timing. Then I checked back "The greatest HB PP thread" on BH and saw Clive's posting about these onpage 67. I think I could probably split my VP between the two:
- 50% sector rotation with Fido sector funds
- 50% 200-days timing of a 5-class portfolio (e.g. VTI, VEU, VNQ, TLT, DBC)

I also checked out a free issue of NoLoad FundX newsletter (they give 2 months for free) and interestingly all 3 Fido sector funds that are on top according to Mebane Faber's strategy (highest average of 3, 6 and 12mo returns) are included in the BUY list.

I don't really want to do both as it becomes too complex. Perhaps I could just go with sector rotation. What do you guys think?

Clive, if you're back from your investment vacation I'd be glad to hear your thoughts. 

Thanks for jumping in Clive, you did remind me about Swedroe and Taleb allocations. I recently nailed down my PP (finally!) and I do use some limited skewing in the equity bucket: TSM + EM LV + EM SV. I used to have some US SV, but due to high ER of a SV fund in my retirement plan I decided to drop it.

Of course we all know that higher volatility of small stocks does not result in higher returns - so your use of "can" is much appreciated (for the sake of novice investors who will read this post  ).

Being a Fidelity customer I will generally try to use Fido funds and those 25 iShares ETFs (too bad TLT and IAU are not in the list) for my VP. I hope to avoid frequent trades anyways. And when I don't know what to do there's always PRPFX (also NTF)!

I have been considering a PP + IVY +Bogle mix for my VP.  Essentially, it's a 5x20 mix composed of VTWSX, Gold, LT Treas, ST Tres/TIPS, and REIT.  I'm hoping it would act much like a PP, but with Bogle-Swenson twist.  More Global stock covering developed and emerging markets as well as exposure to real estate. It's basically a HB variant incorporating the wisdom of the ages.

With a 40 year timeline and annual rebalancing what do you think?

SmallPotatoes wrote: I have been considering a PP + IVY +Bogle mix for my VP.  Essentially, it's a 5x20 mix composed of VTWSX, Gold, LT Treas, ST Tres/TIPS, and REIT.  I'm hoping it would act much like a PP, but with Bogle-Swenson twist.  More Global stock covering developed and emerging markets as well as exposure to real estate. It's basically a HB variant incorporating the wisdom of the ages.

With a 40 year timeline and annual rebalancing what do you think?

Do you mean Ivy Portfolio by "IVY" - I haven't been able to find a ticker.
Well, VP is VP - the volatility and complexity of your portfolio can vary according to your taste, I just think you're kind of repeating your PP by including it again into your VP. And your 5x20 structure repeats 3 of the 4 buckets of PP: LT Treas,Gold and stocks. I personally think about a simpler and more distinct nature of my VP: I will probably use mostly equities. The simpler structure should also help with monitoring - I don't want to lose sleep over what's going on in my VP. To decrease volatility I can always reduce the overall %% of VP compared to PP.

I don't exclude a possibility of eventually abandoning VP in favor of classic PP though. 

I've been wondering about REITs a bit. How much diversification does it really bring? Also, Swensen says about REITs that they have both equity- and bond-like characteristics, and long-term their return should therefor fall in between those two asset classes. But why wouldn't I then just up my equity and bond percentages, skipping REITs altogether? Looking at some graphs there seems to be quite a high correlation between for example VTI and VNQ...

I have come to divide my VP into two, relatively equal pots in tax deferred accounts because both make sense to me.  The first pot uses Meb's 200MA/NAV rotation but only switching between TSP C (tracks S&P 500 Index) and TSP G (Cash) accounts.  The second pot is a true Boglehead 60% TSM/40% TBM portfolio rebalancing yearly.  When combined with PP, I find it a simple portfolio to maintain while sleeping well at night regardless of the day's financial crisis while recognizing I may be giving up some return in the long run by not utilizing a high risk/high return strategy. 

Clive wrote: The stop loss style that I use (SL7 = start a position with two stops, a time stop set at 12 months after the purchase date and a stop loss at 7% below the purchase price (if the stop loss is hit then sit in cash until the time stop date)) is less prone to large gaps.  Rather than a single year long position I split the allocation into 12 and run one each month (12 overlapping year long positions) which helps to get one or more positions started near year lows.

Clive,

I'm trying to comprehend your approach. Would you mind to clarify a few points?
1. What is the purpose of the 12 months-after-the-purchase stop?
2. Do you you use stop loss, stop limit or trailing stop loss for your SL7 stop? If it's a regular stop, would it be prudent to use a trailing stop to capture any potential up trend?

Thanks!

Clive wrote: I use a fixed stop loss set at 7% below the purchase (or start dates) price, no trailing adjustments.

How did you come up with this particular number - 7%?

Clive wrote: Years ago I tried all sorts from attempting to better the entry/exit timing, trailing stops etc. but found that this simpler approach was just as good as any.  Time diversified, take what's given.

As for the trailing stops: so there is nothing wrong with them in terms of performance and you just chose simplicity?

Thanks for details, Clive!

A problem however is that as SL7 can have you OUT at times then if you're OUT on gold for example then you lose the protective qualities of gold whilst being OUT (such as currency crisis protection).

I don't see how this can happen. If I understood you correctly, you are buying every month since you divided the 25% over the 12 months of the year. So for gold for example, some months might be stopped out while other might not. The only way all your entries will all be stopped out is in a bear downturn which I am assuming is good. During currency debasement, I think most of your monthly gold purchases will be in the money.