Gyroscopic Investing

I heard about the PP a while back and it sounded interesting.

I am aware of a recent book that seems to present many of Harry Browne's ideas in an updated way.

What I'm not sure about is whether the strategy is actually going to continue working.

I am very concerned about the stock market.  It seems very overvalued at current levels.

I am also very concerned about long term treasuries.  Yields seem very low and I am concerned that they will begin rising soon, which will be very bad for long term bond holders.

It also bothers me a lot to put so much of my allocation into "cash" which yields basically nothing, but generates a loss every day that inflation chips away at its real value.

Finally, gold seems like an asset that's just dead in the water.  The secular bull market technicals have all been destroyed and now its just floundering, and I'm pretty sure the falling price of oil is going to be providing downward pressure on the price of gold as well going forward.

All in all, the PP is intriguing, but it just seems a bit farfetched overall.  I have an open mind, but I also have common sense. 

Can someone help me get more comfortable with the idea of the PP?  There seem to be a lot of smart and well-informed people here at this interesting forum.

Thanks in advance.

I decided to have the neural pathways in my mind reconfigured to follow a more logical course, and it took a little longer than I thought it would to get that project wrapped up.

So what did I miss?

Lots of interesting stuff I imagine.

Glad to have you back!

MediumTex wrote: So what did I miss?

Actually it's been notably quiet. I think a lot of people lost interest in the PP in 2013.

MediumTex wrote: I decided to have the neural pathways in my mind reconfigured to follow a more logical course, and it took a little longer than I thought it would to get that project wrapped up.

Welcome back, TexCutus of Borg.

You had me going there for a while!!

Nice to see you back.  Your perspectives and literary turns have been much missed.

MangoMan wrote: Approximately 97 pages in the Figuring Out Religion thread. Oh, and nothing's been figured out. 

Speak for yourself!

I can actually think of several weaknesses that the PP hasn't been battle-tested under, but I don't want to be a party pooper.

MachineGhost wrote:

MangoMan wrote: Approximately 97 pages in the Figuring Out Religion thread. Oh, and nothing's been figured out. 

Speak for yourself!

I can actually think of several weaknesses that the PP hasn't been battle-tested under, but I don't want to be a party pooper.

The PP should always be compared to other available strategies when thinking about the extent to which it is truly an "all-weather, all-season, battle-tested" portfolio.

In truth, of course, the PP is very fragile, it just happens to be much less fragile than almost anything else that can provide an investor with a consistently positive real rate of return with low volatility.

I continue to think that the biggest risk to almost any PP investor is a state of sustained prosperity because that little 4-5% real PP return can get pretty boring when the stock market is providing double that seemingly without much effort or risk.

MediumTex wrote: The PP should always be compared to other available strategies when thinking about the extent to which it is truly an "all-weather, all-season, battle-tested" portfolio.

That's a good point.  I'm concerned about the fragility of the PP and how to better make it anti-fragile.  Dalio's All Weather portfolio actually sucks compared to the PP.  There is nothing better than the PP... any enhancement you can make is merely tactical adjustments or tilting.

In truth, of course, the PP is very fragile, it just happens to be much less fragile than almost anything else that can provide an investor with a consistently positive real rate of return with low volatility.

Do you really believe a 25% MaxDD is "low volatility"?  Don't fall victim to recency bias.

MachineGhost wrote: Do you really believe a 25% MaxDD is "low volatility"?  Don't fall victim to recency bias.

That occurred once in the 42 year data set, right?  As I recall, it was in the early 1980s when almost all investments were doing very poorly. 

I don't like the idea of a 25% draw down, but when I look at the entire 40+ year history I am comfortable with the level of risk and volatility.  I feel like I am an informed consumer when it comes to the PP.

Don't let the perfect be the enemy of the good comes to mind.

As I recall, there has never been a 36 month period in the history of the PP where a PP investor would have lost money, even if he bought at a peak.

If a PP investor with a time horizon of less than 36 months saw the Fed begin to aggressively raise interest rates in the middle of a recession, then it might make sense to consider something safer until the markets stabilized.

The problem is that PP tinkering almost always leads to regret unless one is a highly skilled investor, and even highly skilled investors often get it wrong when they start rearranging things.

But you're right, the PP is low volatility most of the time, but occasionally it has encountered turbulence that has taken up to 36 months to fully absorb.

Bad things can happen.  The world is uncertain.  All we can do is hedge our bets as best we can without becoming so conservative that we make it impossible to get consistently positive real returns.

MediumTex wrote: That occurred once in the 42 year data set, right?  As I recall, it was in the early 1980s when almost all investments were doing very poorly. 

Once in the 46-year data set and in 1969.  You're a bit behind.

Forgive me, but maybe you can grit your teeth and bear it knowing that the PP most likely overcome it within 3 years, but considering how empty the forum was in 2013 with a tiny loss...  I think such a MaxDD again will turn the forum into a ghost town.

There is at least one scenario where the PP may not recover in 3 years.  That is when the economy and equites disconnect.  HB made an implicit assumption that equities always follows economic growth, but history shows that to be otherwise.  I'm thinking of the 1960's in particular here.  It didn't last that long but the point is it could happen again.  For that reason, I'm not 100% in equities to be exposed to Prosperity (and it certainly doesn't hurt that equities are not currently priced to deliver satisfactory long-term returns over the next 8+ years).

MachineGhost wrote:

MediumTex wrote: That occurred once in the 42 year data set, right?  As I recall, it was in the early 1980s when almost all investments were doing very poorly. 

Once in the 46-year data set in 1969.  You're a bit behind.

Forgive me, but maybe you can grit your teeth and bear it knowing that the PP most likely overcome it within 3 years, but considering how empty the forum was in 2013 with a tiny loss...  I think such a MaxDD again will turn the forum into a ghost town.

Are you saying that we might see regular posters just disappear for months and post nothing?

Seems unlikely.

MediumTex wrote:

MachineGhost wrote:

MediumTex wrote: That occurred once in the 42 year data set, right?  As I recall, it was in the early 1980s when almost all investments were doing very poorly. 

Once in the 46-year data set in 1969.  You're a bit behind.

Forgive me, but maybe you can grit your teeth and bear it knowing that the PP most likely overcome it within 3 years, but considering how empty the forum was in 2013 with a tiny loss...  I think such a MaxDD again will turn the forum into a ghost town.

Are you saying that we might see regular posters just disappear for months and post nothing?

Seems unlikely.

We missed you.

I think your book killed posters :-)

Recession + Inflation means we should make a pause in our PP?

Happy 2015!

MachineGhost wrote: Forgive me, but maybe you can grit your teeth and bear it knowing that the PP most likely overcome it within 3 years, but considering how empty the forum was in 2013 with a tiny loss...  I think such a MaxDD again will turn the forum into a ghost town.

Not a ghost town… probably more like a psych ward!

Good point. The operative word there was "seemingly"


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I continue to think that the biggest risk to almost any PP investor is a state of sustained prosperity because that little 4-5% real PP return can get pretty boring when the stock market is providing double that seemingly without much effort or risk.
[/quote]

Welcome back, MT!

I think "highly successful investor" = "lucky"... and I have never been very lucky...  Also, I tend to view the PP as as close to a 4% inflation adjusted CD with a little risk as I have found thus far...

I'm sure the PP IS good for investing, but it has been challenging for me.

In my own case, I embraced the PP concept around 2010 or so, but it has been tough for me to stick with over the last year or so.  The problems I have had:

1)  LT Bonds: I have always had trouble with these.  Although these were an important part of the PP when Harry Browne initially developed the portfolio, I keep feeling that if the ghost of Harry came to me in my sleep, he would tell me that "These LT bonds will not work like they're supposed to when the rates are this low".  I have been jumping in and out of these for a few years based on rates.  Last year, I loaded up when then 30-yr was at 4%, but then I bailed out completely at 3.3% to protect the profits.  Now the 30-yr is at 2.6%, so my timing was clearly bad, but I can't get push myself to get back in now.  I have been taking the alternative approach of holding a much larger position of shorter-term bonds in the 5-yr area of the rate curve (the bullet approach, as opposed to the barbell approach of the classic PP).  These don't have the same power as the LT bonds, but they're better than nothing, and they also will hopefully have some capital gains from 'riding the yield curve', since they are positioned at the steepest area of the curve.

2) Gold:  I have no problem with the current pricing of gold, in fact I think it's having a great sale these days with the price around $1200.  However, scaling-up is the problem for me.  I don't like the ETFs, I just don't trust 'em.  Clearly the best option is physical gold, but that has it's own set of problems.  I know that you can buy a bunch of gold coins, and they don't take up much space, but security is still my main concern.  So, I am massively underweight this important asset class.

Due to my problems with LT bonds and gold, I end up having a classic stock-heavy Boglehead type of portfolio.  This has worked out OK for the last few years, but I need to get my ducks-in-a-row before the next big market meltdown comes.

Austen Heller wrote: I'm sure the PP IS good for investing, but it has been challenging for me.

In my own case, I embraced the PP concept around 2010 or so, but it has been tough for me to stick with over the last year or so. 

A successful HBPP investor will have the following 2 qualities:

1. Accept the future is unknown and hold all 4 assets within acceptable tolerances (15/35).
2. Have confidence that rising asset/s will out-perform falling asset/s to produce a positive real return over time.

Note that the PP has performed admirably since 2010 if you ascribed to the above philosophy. The good news is you were heavy in equities when they were performing well. Now is the perfect time to rebalance into a more sensible allocation. HB himself did this when he diversified away from gold to a more moderate holding.

Austen Heller wrote: Due to my problems with LT bonds and gold, I end up having a classic stock-heavy Boglehead type of portfolio.  This has worked out OK for the last few years, but I need to get my ducks-in-a-row before the next big market meltdown comes.

Yeah, it's hard to jump into LTTs right now. I'll buy a few when I make my IRA contributions in a coupe of months. Ditto with my wife but I am not going to enjoy it. I sold a few at around 3% and a few more around 2.8%, was under-balanced and then they rallied even more. You just never know. And I really mean that.

Plenty of people are happy with a "stock-heavy Boglehead type" portfolio. It's not the worst thing in the world if you have a long investing horizon and can hold on when stocks are getting crushed and your bonds don't have enough juice to counteract the drop. Stocks often bounce back quickly but those drops are killer.

Have you thought about just holding lower percentages on LTTs and gold? Even at 10-15%, you get a lot of the benefits of those assets. Regarding the gold coins, maybe start by just getting one or two. If that feels OK you can go from there.

I love looking at Ryan Melvey's Intraday Interplay graph on his site which is:

http://www.stableinvesting.com/p/recent ... mance.html

Kind of a mishmash of thoughts but a lot of us struggle with holding such volatiles assets.

And, yes, MT it is great to have you back on here. We all went through a bit of a withdrawal during your hiatus.

MediumTex wrote:

MachineGhost wrote: Do you really believe a 25% MaxDD is "low volatility"?  Don't fall victim to recency bias.

That occurred once in the 42 year data set, right?  As I recall, it was in the early 1980s when almost all investments were doing very poorly. 

No, it did not ever occur.  This is bogus and a lie.  Mr. Ghost knows this, but is fond of repeating the lie for reasons unknown to any but himself.

LC475 wrote:

MediumTex wrote:

MachineGhost wrote: Do you really believe a 25% MaxDD is "low volatility"?  Don't fall victim to recency bias.

That occurred once in the 42 year data set, right?  As I recall, it was in the early 1980s when almost all investments were doing very poorly. 

No, it did not ever occur.  This is bogus and a lie.  Mr. Ghost knows this, but is fond of repeating the lie for reasons unknown to any but himself.

What is your understanding of the maximum peak to trough PP drawdown that occurred in the 1981-1982 period?

***

I love this sentence:

Mr. Ghost knows this, but is fond of repeating the lie for reasons unknown to any but himself.

That is the kind of sentence that I would like to spray paint on a wall.

buddtholomew wrote:

A successful HBPP investor will have the following 2 qualities:

1. Accept the future is unknown and hold all 4 assets within acceptable tolerances (15/35).
2. Have confidence that rising asset/s will out-perform falling asset/s to produce a positive real return over time.

Note that the PP has performed admirably since 2010 if you ascribed to the above philosophy. The good news is you were heavy in equities when they were performing well. Now is the perfect time to rebalance into a more sensible allocation. HB himself did this when he diversified away from gold to a more moderate holding.

I might add to your list:
3. Have sufficient discipline and patience to stay committed to the strategy even if it feels like you're missing the party going on for those invested entirely in one of the asset classes.
4. Resist the urge to tinker with the portfolio to feel like you're being productive. The HBPP involves a lot of inaction once you set it up, and the "set it and forget it" mentality is counter-intuitive for most people. In our linear thinking society, inaction is not usually a virtue even though in some situations, it can be the smartest strategy.  A corollary to this might be to resist the urge to obsess over the portfolio. In some respects I believe one of the design criteria of the HBPP is to protect us from ourselves.

You have been missed.

P.S. The PP is the super safe car that doesn't have enough horse power to get out of its own way and ends up getting creamed by a big rig truck that has, "Market Returns" painted on the side.

So good to see you,Medium Tex!

glennds wrote: The HBPP involves a lot of inaction once you set it up, and the "set it and forget it" mentality is counter-intuitive for most people. In our linear thinking society, inaction is not usually a virtue even though in some situations, it can be the smartest strategy. 

Dang, I wish I had written that!

barrett wrote: Plenty of people are happy with a "stock-heavy Boglehead type" portfolio. It's not the worst thing in the world if you have a long investing horizon and can hold on when stocks are getting crushed and your bonds don't have enough juice to counteract the drop. Stocks often bounce back quickly but those drops are killer.

Plenty of people have no real experience of what a secular bear market is like because we haven't had one since the markets have been chronically overvalued since, say, 1992.  What could go wrong?  And we all know this shoe drop is a-coming.  It's how you choose to deal with the potentiality ahead of time that is going to determine your eventual fate.  Thank gawd for the PP but you really have to do it as prescribed because every potential putcome is so darn asset class co-dependent on each other.  It's an all-or-nothing whole package deal here.  Any tactical or tilting adjustements are a whole package deal as well.  Can't have half of one and two of another.  I give myself more stress not being purely vanilla to deal with the PP's annoying fragilities than I would just "set it and forget it" and close my eyes (and ears and mouth) to a -25% MaxDD.