Gyroscopic Investing

MediumTex,

You have suggested adding EDV to PRPFX to make it act more like Harry Browne's portfolio.  If I remember correctly, the proportion is 10% of PRPFX.

Is there any reason TLT can't be substituted, and just bumping it up to 20% of PRPFX?

Thanks

If I was using TLT I might do 15% and 85% PRPFX.

KevD,

I personally invest 90% in PRPFX and 10% in VUSTX (VG LTT) to more closely resemble the 4x25 Permanent Portfolio. Early experience is that this 10% allocation to treasuries may not be sufficient to buoy the portfolio in times of PRPFX weakness. To counterbalance this risk, I hold some additional cash re-balance when either holding exceeds 2% of target.

Buddtholomew

Good info, thanks guys.

I've been thinking about whether it makes sense to maintain a separate allocation to Cash for rebalancing purposes. Looking at the portfolio holistically, PRPFX is 75%, VUSTX 10% and Cash 15% with re-balancing bands set at 2% for each asset. The percentages seem arbitrary as 90/10/0, 85/10/5 or 80/20/20 appear reasonable as well. How do I go about rationalizing one allocation over another?

Best,
Budd

buddtholomew wrote: I've been thinking about whether it makes sense to maintain a separate allocation to Cash for rebalancing purposes. Looking at the portfolio holistically, PRPFX is 75%, VUSTX 10% and Cash 15% with re-balancing bands set at 2% for each asset. The percentages seem arbitrary as 90/10/0, 85/10/5 or 80/20/20 appear reasonable as well. How do I go about rationalizing one allocation over another?

Best,
Budd

Use 90% PRPFX/10% EDV and all of your dreams will come true.

That approach just seems simple to me and EDV works very well to dampen the volatility of PRPFX without diluting the PRPFX holdings too much.

This approach is also very tax efficient.

MT,

How tax-efficient is PRPFX+EDV compared to 4x25 w/ 35/15 rebalancing bands?

moda0306 wrote: MT,

How tax-efficient is PRPFX+EDV compared to 4x25 w/ 35/15 rebalancing bands?

Well, let's say that the portfolio throws off 1.3% in income (1% on 90% and 4% on 10%).  You are left with rebalancing gains, offset by rebalancing losses (if any). 

I would say that is pretty tax-efficient--you have fewer rebalancing gains to worry about, and you also have PRPFX and its extreme tax efficiency.

I don't use this approach myself, but I think it would work great for someone under the right circumstances.

MediumTex wrote:

buddtholomew wrote: I've been thinking about whether it makes sense to maintain a separate allocation to Cash for rebalancing purposes. Looking at the portfolio holistically, PRPFX is 75%, VUSTX 10% and Cash 15% with re-balancing bands set at 2% for each asset. The percentages seem arbitrary as 90/10/0, 85/10/5 or 80/20/20 appear reasonable as well. How do I go about rationalizing one allocation over another?

Best,
Budd

Use 90% PRPFX/10% EDV and all of your dreams will come true.

That approach just seems simple to me and EDV works very well to dampen the volatility of PRPFX without diluting the PRPFX holdings too much.

This approach is also very tax efficient.

100K in PRPFX and 10K in EDV

PRPFX
5/12/2008 high of 38.23
11/10/2008 low of 29.12
23.8% loss over that timeframe, -$23,800
12/15/2008 NAV of 32.07
16.1% loss over that timeframe, -$16,113

EDV
5/12/2008 low of 94.82
11/10/2008 NAV of 105
10.7% gain over that timeframe, $1,078
12/15/2008 high of 152.05
61.4% gain over that timeframe, $6,143

Adding EDV to the portfolio over the 5/12-11/10/2008 timeframe reduced a 23K loss by 1K (net 22K loss). If you continue the analysis through 12/15/2008, where EDV reached a high of 152.05, the net loss over the entire period was 10K. 7K of the 12K recovery, or 58% was attributed to PRPFX and 5K, or 42% attributed to EDV.

So, from PRPFX peak to trough, a 10% allocation to EDV did not buoy the portfolio sufficiently. When long treasuries reached their rally high, the 90% allocation to PRPFX recovered a greater percentage of the portfolio than the 10% allocation to EDV. An investment in EDV limited losses, but I would have been rebalancing into PRPFX (from EDV) well before EDV began its rally. This is the rationale for holding a cash position. The question is how much?

I am surprised that no one has commented on my previous post. What concerns me most is my ability to re-balance into LTTs during a period of substantial declines when I am not convinced that the investment compliments PRPFX well.

Thoughts?

I would look at longer periods a well as the ways in which EDV causes the composition of PRPFX to more closely resemble a traditional PP.

For example, if you look at all of 2008, PRPFX was a down a littler over 8%, the worst year in its history, while EDV was up 50% or so, which would have complemented PRPFX nicely.

Even if you don't want to go with EDV as a complement to PRPFX, in my view some kind of LT bond exposure should be added to PRPFX for investors who are seeking the HB PP experience while utilizing the convenience of PRPFX.

MT, how would you figure in a federal TSP account in place of EDV? Could you simply do 10% of total PP in the G fund instead? I've read that the G fund should be used for TSP's instead of the F, bond fund. Any comments?

MediumTex wrote: I would look at longer periods a well as the ways in which EDV causes the composition of PRPFX to more closely resemble a traditional PP.

For example, if you look at all of 2008, PRPFX was a down a littler over 8%, the worst year in its history, while EDV was up 50% or so, which would have complemented PRPFX nicely.

Even if you don't want to go with EDV as a complement to PRPFX, in my view some kind of LT bond exposure should be added to PRPFX for investors who are seeking the HB PP experience while utilizing the convenience of PRPFX.

Thanks MediumTex. What calculation did you use to determine that 10% was optimal to complement PRPFX and resemble the 4x25 PP? I would like to perform some calculations of my own to validate the percentage allocated to LTT.

I just started with the idea that the 35% treasury allocation in PRPFX needed some additional treasury exposure to make it more HB PP-like.  A 10% slug of EDV seemed to fill this hole in the most compact form possible.

Take a look at the BH PP thread.  Someone posted a few charts of the effect of a 10% EDV/90% PRPFX portfolio compared to 100% PRPFX.  It dampened PRPFX's volatility a lot.  That seems like a sort of funny thing to say, since PRPFX is very conservative to start with.  For me, though, I'm less interested in coming up with something more conservative than PRPFX--my desire is to just find a way to address the lack of LT treasury exposure in PRPFX in as simple a way as possible.

Reub wrote: MT, how would you figure in a federal TSP account in place of EDV? Could you simply do 10% of total PP in the G fund instead? I've read that the G fund should be used for TSP's instead of the F, bond fund. Any comments?

There is nothing in the TSP that resembles EDV, or TLT for that matter.  The TSP's bond fund, the F Fund, tracks the whole bond market, not just long term bonds.  Therefore, it doesn't have the beneficial sharp upward volatility that long term bonds give you when interest rates go down.  The G Fund is essentially a money-market fund that resembles the cash allocation of the HB 4x25 PP.

MediumTex wrote: I just started with the idea that the 35% treasury allocation in PRPFX needed some additional treasury exposure to make it more HB PP-like.  A 10% slug of EDV seemed to fill this hole in the most compact form possible.

Take a look at the BH PP thread.  Someone posted a few charts of the effect of a 10% EDV/90% PRPFX portfolio compared to 100% PRPFX.  It dampened PRPFX's volatility a lot.  That seems like a sort of funny thing to say, since PRPFX is very conservative to start with.  For me, though, I'm less interested in coming up with something more conservative than PRPFX--my desire is to just find a way to address the lack of LT treasury exposure in PRPFX in as simple a way as possible.

Why is a 35% allocation to treasuries insufficient for the bond component of PRPFX? Is the average duration too short for your liking? Is there a way to calculate the average duration for the fund?

buddtholomew wrote:

MediumTex wrote: I just started with the idea that the 35% treasury allocation in PRPFX needed some additional treasury exposure to make it more HB PP-like.  A 10% slug of EDV seemed to fill this hole in the most compact form possible.

Take a look at the BH PP thread.  Someone posted a few charts of the effect of a 10% EDV/90% PRPFX portfolio compared to 100% PRPFX.  It dampened PRPFX's volatility a lot.  That seems like a sort of funny thing to say, since PRPFX is very conservative to start with.  For me, though, I'm less interested in coming up with something more conservative than PRPFX--my desire is to just find a way to address the lack of LT treasury exposure in PRPFX in as simple a way as possible.

Why is a 35% allocation to treasuries insufficient for the bond component of PRPFX? Is the average duration too short for your liking? Is there a way to calculate the average duration for the fund?

I am not MT but I looked at the UST holdings of PRPFX early last year.  You can go to the website and get a schedule of investments under it's filings tab.  I did not calculate the average duration but I did calculate its dollar weighted average maturity (one could take each bond and calculate duration) and it was just over four years (the duration should be just under four years).  That is just too short compared to the HBPP barbell so MT's suggestion of a 90%/10% split is right on the money.  Assuming EDV maintains a roughly 27 year duration, that should put your total UST portfolio duration between 9 and 10 years.

MCSquared wrote:

buddtholomew wrote:

MediumTex wrote: I just started with the idea that the 35% treasury allocation in PRPFX needed some additional treasury exposure to make it more HB PP-like.  A 10% slug of EDV seemed to fill this hole in the most compact form possible.

Take a look at the BH PP thread.  Someone posted a few charts of the effect of a 10% EDV/90% PRPFX portfolio compared to 100% PRPFX.  It dampened PRPFX's volatility a lot.  That seems like a sort of funny thing to say, since PRPFX is very conservative to start with.  For me, though, I'm less interested in coming up with something more conservative than PRPFX--my desire is to just find a way to address the lack of LT treasury exposure in PRPFX in as simple a way as possible.

Why is a 35% allocation to treasuries insufficient for the bond component of PRPFX? Is the average duration too short for your liking? Is there a way to calculate the average duration for the fund?

I am not MT but I looked at the UST holdings of PRPFX early last year.  You can go to the website and get a schedule of investments under it's filings tab.  I did not calculate the average duration but I did calculate its dollar weighted average maturity (one could take each bond and calculate duration) and it was just over four years (the duration should be just under four years).  That is just too short compared to the HBPP barbell so MT's suggestion of a 90%/10% split is right on the money.  Assuming EDV maintains a roughly 27 year duration, that should put your total UST portfolio duration between 9 and 10 years.

Thanks for the analysis MCSquared. I am more comfortable now knowing that the 10% allocation approximates the HBPP mathematically.

LGrand85 wrote:

MediumTex wrote:

buddtholomew wrote: I've been thinking about whether it makes sense to maintain a separate allocation to Cash for rebalancing purposes. Looking at the portfolio holistically, PRPFX is 75%, VUSTX 10% and Cash 15% with re-balancing bands set at 2% for each asset. The percentages seem arbitrary as 90/10/0, 85/10/5 or 80/20/20 appear reasonable as well. How do I go about rationalizing one allocation over another?

Best,
Budd

Use 90% PRPFX/10% EDV and all of your dreams will come true.

That approach just seems simple to me and EDV works very well to dampen the volatility of PRPFX without diluting the PRPFX holdings too much.

This approach is also very tax efficient.

what "rebalancing" do you use with this 90/10 method. And I was having trouble finding the graph that someone made of the historical results?

Either 85/15 or 95/5.  You can also do it once a year.

Once a year is probably the simplest.

MediumTex wrote: Well, let's say that the portfolio throws off 1.3% in income (1% on 90% and 4% on 10%).  You are left with rebalancing gains, offset by rebalancing losses (if any). 

I would say that is pretty tax-efficient--you have fewer rebalancing gains to worry about, and you also have PRPFX and its extreme tax efficiency.

I don't use this approach myself, but I think it would work great for someone under the right circumstances.

I am thinking of 90%PRPFX+10%EDV in taxable account. But isn't EDV tax-unfriendly?

For example, PRPFX gains 10% and EDV losed 2%, so I need to sell part of PRPFX and buy EDV, it will trigger capital gain.
if PRPFX loses and EDV gains, sell EDV and buy PRPFX, another capital gain.

Also EDV is a bond, so it will be taxed regardless of gain/lose.

I just really have no idea "You are left with rebalancing gains, offset by rebalancing losses (if any). "

EDV works better in a tax deferred account, but tax considerations shouldn't be the sole factor in putting together an investment strategy. 

Paying taxes on some of your gains isn't the end of the world.

A rebalancing event in the PRPFX/EDV approach should generate some losses as well as gains.  (If both assets rise or fall in vaue together it seems unlikely that you would hit a rebalancing band.)

MediumTex wrote: EDV works better in a tax deferred account, but tax considerations shouldn't be the sole factor in putting together an investment strategy. 

Paying taxes on some of your gains isn't the end of the world.

A rebalancing event in the PRPFX/EDV approach should generate some losses as well as gains.  (If both assets rise or fall in vaue together it seems unlikely that you would hit a rebalancing band.)

Thanks for your input. I will give a try.

Not that this should influence your decision-making but EDV is up 6.44% today as of this post.

Thanks, M.T.!

In fact I bought PRPFX/EDV in my Roth just a few weeks ago.

And wooooo!

EDV can also fall quickly.

Its recent increases have been pretty amazing, though.