The PP, marginal utility, and investment "faith"

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Re: The PP, marginal utility, and investment "faith"

Post by Pet Hog » Thu Jan 06, 2022 7:25 pm

I agree, Kevin, this year looks daunting. Making around 12% nominal with the PP seems like an impossible joke.
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Re: The PP, marginal utility, and investment "faith"

Post by Smith1776 » Sat Jan 08, 2022 6:53 am

After having some time to think about it, I think the Golden Butterfly might be the ticket for investing my dad's estate money.
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Re: The PP, marginal utility, and investment "faith"

Post by Vil » Sat Jan 08, 2022 9:33 am

Smith1776 wrote:
Sat Jan 08, 2022 6:53 am
After having some time to think about it, I think the Golden Butterfly might be the ticket for investing my dad's estate money.
This is how I ended investing my EUR stuff( on top of pure US PP kept in USD). Hegding US PP was a stupid initial move. Though I keep less stocks than pure GB (i.e. 30-35% ) in both the EMU behemoths and SCV, and keep only about 10% in Long EUR bonds, rest are global ITs. This allocation is making me feel fine. Split between 2 european brokers and 2 ETF providers (+physical gold), keep only piece in paper Gold for rebalancing convenience. I try to invest in methodology, do not care way too much in historical data mining and curve fitting 'le par excellence'..
Last edited by Vil on Sat Jan 08, 2022 9:50 am, edited 1 time in total.
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Re: The PP, marginal utility, and investment "faith"

Post by Kriegsspiel » Sat Jan 08, 2022 9:36 am

I think the GB is a fine choice. Even with the traditional PP 4x25, adding SCV to the stock allocation seems like a swell idea.
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Re: The PP, marginal utility, and investment "faith"

Post by Kevin K. » Sat Jan 08, 2022 10:22 am

Smith1776 wrote:
Sat Jan 08, 2022 6:53 am
After having some time to think about it, I think the Golden Butterfly might be the ticket for investing my dad's estate money.
I couldn't imagine disagreeing with anyone's choice of the GB, but FWIW here are a couple of thoughts after going down the rabbit hole (once again) playing with the Portfolio Finder tool on Tyler's amazing site, rereading his epic post on the "three secret ingredients" and mulling over possible impacts of today's truly unprecedented interest rate situation and sky-high equity valuations on returns going forward.

One is that Tyler's Pinwheel Portfolio is surely what I would choose if I were still in the accumulation phase (though he makes a pretty compelling argument that it's great for retirees too - provided of course that you don't [as I must admit I've tended to do] conflate volatility with risk, since you have to be able to handle a potential drawdown of 26% or more for several years). With only 10% gold, no LTT's and only 25% total in bonds and cash (15% ITT's, 10% cash) and perfectly diversified equities encompassing LCB, SCV, Int'l., EM and REITS an investor in it could be quite sanguine about the cash/bond drag, interest rate spikes and raging inflation that characterize the current investing environment.

Interestingly (to me, anyway), you can also get the exact same SWR and PWR's as the Pinwheel with a much lower ulcer index (4.3 vs. 6.1) using 20% TSM, 20% SCV, 10% Total International, 10% gold and the rest in a GB-style LTT/BIL barbell. Substituting all ITT's for the barbell if (like me) you don't really want to own a big chunk of 30 year Treasuries at the moment yields nearly identical results. I guess this is kind of a Pinwheel/GB hybrid that acknowledges the value of including SCV, LTT's and gold shown by Tyler's article while hedging its bets on the two easiest-to-hate assets (LTT's and gold) by subbing ITT's and reducing gold to the bare minimum needed to help with sequence-of-returns risk/SHTF insurance. It doesn't have the pretty symmetry of the GB or Pinwheel but seems to me to have some merit.
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Re: The PP, marginal utility, and investment "faith"

Post by boglerdude » Sat Jan 08, 2022 8:21 pm

How do these passive indexes avoid getting front run. They are forced to sell when a stock no longer meets the publicly known criteria. eg it is no longer "value" and has to be sold to...Citadel
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Re: The PP, marginal utility, and investment "faith"

Post by demerez » Sun Jan 09, 2022 7:31 am

I feel the decision you are going through, as I also was in a similar situation. I had an 8-figure windfall and had previously spent years to make sure I didn't screw up.

I often observe that 6,7,8-figure wealth will always feel uncomfortable because those numbers are still within risking your own and your family's future. There is a lot on the line. When it's +9 figure, volatility is less felt.

I ended up doing 50-50 lump sum and DCA, so that whatever happened, I would be fine with it, getting an intermediate result. I didn't want to risk getting the negative outcome.

I see redundancy as the most important concept here. Insuring via holding more cash (or long volatility, tail risk, gold...) than normal ensures survival. I find it really easy to stick to a strategy when I know my life expenses will be covered no matter what happens. In addition, you get stronger every time there is a liquidity-shortaged crash.
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Re: The PP, marginal utility, and investment "faith"

Post by mathjak107 » Sun Jan 09, 2022 7:36 am

Why not run two separate conservative portfolios..

Put your desired allocation in the pp and then do another conservative model less interest rate sensitive…..even splitting it between the pp and say wellesly for simplicity.

If I did the pp , personally I wouldn’t use Wellesly too as that does hold a decent amount of long term treasuries.. i would want something with more intermediate to ultra short term bonds
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Re: The PP, marginal utility, and investment "faith"

Post by dockinGA » Sun Jan 09, 2022 3:42 pm

mathjak107 wrote:
Sun Jan 09, 2022 7:36 am
Why not run two separate conservative portfolios..

Put your desired allocation in the pp and then do another conservative model less interest rate sensitive…..even splitting it between the pp and say wellesly for simplicity.

If I did the pp , personally I wouldn’t use Wellesly too as that does hold a decent amount of long term treasuries.. i would want something with more intermediate to ultra short term bonds
Mathjak, what are your feelings on the GB? Do you feel like it mitigates some of the interest rate risk you're concerned with? It's definitely more tilted towards times of prosperity, which I know is another one of your concerns with the vanilla PP.
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Re: The PP, marginal utility, and investment "faith"

Post by Hal » Sun Jan 09, 2022 5:01 pm

Just another point to add :)

On listening to HB's radio show yesterday, he advised that he wanted the most volatile assets in the four asset classes. So.....
1/ Did SCV ETF's exist back in 2004?
2/ Substituting SCV for the TSM provides a return improvement
and
3/ 40% SCV in the Golden Butterfly actually has a lower Ulcer Index and higher return than the standard GB
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Re: The PP, marginal utility, and investment "faith"

Post by dualstow » Sun Jan 09, 2022 5:59 pm

Hal wrote:
Sun Jan 09, 2022 5:01 pm
On listening to HB's radio show yesterday, he advised that he wanted the most volatile assets in the four asset classes. So.
1/ Did SCV ETF's exist back in 2004?
Good question. I remember Harry being into growth stocks in his Best Laid Plans book.
On the Money Talk radio show which came out later, he embraced a simple S&P 500 fund.
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Re: The PP, marginal utility, and investment "faith"

Post by Smith1776 » Sun Jan 09, 2022 8:23 pm

Is anyone able to provide evidence that Harry Browne's definition of "aggressive growth stocks" is the same as the academic definition for growth stocks?

The academic definition would be the top 3 deciles of stocks by some valuation metric such as price to book.

According to Browne's writing his definition of aggressive growth stocks were those that were the most volatile. That would indicate high beta stocks to me, not necessarily stocks with the highest valuations.
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Re: The PP, marginal utility, and investment "faith"

Post by dualstow » Sun Jan 09, 2022 9:08 pm

i think he just had a list of growth stock funds that he recommended. No idea how he chose them.
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Re: The PP, marginal utility, and investment "faith"

Post by ppnewbie » Sun Jan 09, 2022 9:18 pm

One thing I was thinking about the PP that made me nervous was the gyroscopic effect could be slowing down if everything is expensive.

Cash - expensive - big negative real yield
Stocks - 40 CAPE
LTT - expensive - negative real yield
Gold - the only thing that may not be expensive.
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Re: The PP, marginal utility, and investment "faith"

Post by Smith1776 » Sun Jan 09, 2022 9:23 pm

ppnewbie wrote:
Sun Jan 09, 2022 9:18 pm
One thing I was thinking about the PP that made me nervous was the gyroscopic effect could be slowing down if everything is expensive.

Cash - expensive - big negative real yield
Stocks - 40 CAPE
LTT - expensive - negative real yield
Gold - the only thing that may not be expensive.
Totally. The only thing that assuages some of my fear is a tilt towards value in the equity portion of the portfolio.
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Re: The PP, marginal utility, and investment "faith"

Post by Kevin K. » Mon Jan 10, 2022 10:59 am

Smith1776 wrote:
Sun Jan 09, 2022 9:23 pm
ppnewbie wrote:
Sun Jan 09, 2022 9:18 pm
One thing I was thinking about the PP that made me nervous was the gyroscopic effect could be slowing down if everything is expensive.

Cash - expensive - big negative real yield
Stocks - 40 CAPE
LTT - expensive - negative real yield
Gold - the only thing that may not be expensive.
Totally. The only thing that assuages some of my fear is a tilt towards value in the equity portion of the portfolio.
Agree completely.

Tyler's article on the most efficient portfolios makes it very clear how valuable SCV is not as a "tilt" but to counterbalance the tech-driven nature of TSM. Of course his post is based on 50 years of history but looking at the present moment we're in a situation where according to Larry Swedroe value stocks are the most attractive they've ever been.

There's a long thread about this on Bogleheads at the moment (or you can just look at Swedroe's Twitter feed if you're on Twitter, which I'm not). Adding to the incentive to seriously consider adding a slice of SCV is that the Avantis (ex-DFA) folks offer ETFs that are far superior to VBR and other SCV index funds in capturing the value premium. Here's a good article comparing them with more established small cap options:

https://www.optimizedportfolio.com/smal ... -showdown/

The article looks at them in the context of the Larry Swedroe portfolio but IMHO this is not the time to have 70% in ITT's. But "Golden Butterfly-izing" a PP by adding a slice of AVUV in lieu of half or more of the TSM makes all kinds of sense (along with switching out the LTT/STT barbell for ITTs and iBonds).
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Re: The PP, marginal utility, and investment "faith"

Post by ppnewbie » Mon Jan 10, 2022 11:17 am

Was looking at VBR the other day (and just now based on the article). Is it still considered cheap, with it's 100% run up in a year and a half. Asking because I'm looking to move my Tech GB to the actual GB.
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Re: The PP, marginal utility, and investment "faith"

Post by Smith1776 » Mon Jan 10, 2022 2:56 pm

So here are the 5 ETFs I’d use to construct a GB portfolio for the hypothetical Canadian investor.

Cash - ZMMK - BMO money market fund - 14bps
Long bond - ZFL - BMO Federal long term bond - 20bps
Gold - KILO.B - Purpose gold etf - 20bps
Stocks - VEQT - vanguard global equity - 22bps
Value stocks - VVL - vanguard value fund - 35bps
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Re: The PP, marginal utility, and investment "faith"

Post by Smith1776 » Mon Jan 10, 2022 6:49 pm

The only thing I don’t like about the Golden Butterfly is the name. 😆😆😆

(Sorry Tyler!)

I usually just take to calling it All Weather.
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Re: The PP, marginal utility, and investment "faith"

Post by dualstow » Mon Jan 10, 2022 9:21 pm

Smith1776 wrote:
Mon Jan 10, 2022 6:49 pm
The only thing I don’t like about the Golden Butterfly is the name. 😆😆😆

(Sorry Tyler!)

I usually just take to calling it All Weather.
If memory serves, Tyler once lamented that a lot of people pick on the name, a name that was just kind of a quick and casual invention, like scratch music for a movie. Well, the portfolio is too popular now to change it. It would be like swapping Also Sprach Zarathustra with new music for 2001 a Space Odyssey (ok, not exactly), which was the scratch music that never got changed.

i think of it as the Tyler Portfolio, even though there’s also Pinwheel and whatnot.
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Re: The PP, marginal utility, and investment "faith"

Post by Kevin K. » Mon Jan 10, 2022 9:24 pm

Smith1776 wrote:
Mon Jan 10, 2022 6:49 pm
The only thing I don’t like about the Golden Butterfly is the name. 😆😆😆

(Sorry Tyler!)

I usually just take to calling it All Weather.
It’s OK. I understand the Canadian version is called “The Frozen Biting Fly” anyway. 😏
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Re: The PP, marginal utility, and investment "faith"

Post by Smith1776 » Mon Jan 10, 2022 10:33 pm

That's a good point. Since it's Canadian and since the stock portion is globally diversified, it's not technically a GB. What shall I call it then?

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Re: The PP, marginal utility, and investment "faith"

Post by Kevin K. » Mon Jan 10, 2022 10:51 pm

I like it!
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Re: The PP, marginal utility, and investment "faith"

Post by mathjak107 » Tue Jan 11, 2022 1:49 am

dockinGA wrote:
Sun Jan 09, 2022 3:42 pm
mathjak107 wrote:
Sun Jan 09, 2022 7:36 am
Why not run two separate conservative portfolios..

Put your desired allocation in the pp and then do another conservative model less interest rate sensitive…..even splitting it between the pp and say wellesly for simplicity.

If I did the pp , personally I wouldn’t use Wellesly too as that does hold a decent amount of long term treasuries.. i would want something with more intermediate to ultra short term bonds
Mathjak, what are your feelings on the GB? Do you feel like it mitigates some of the interest rate risk you're concerned with? It's definitely more tilted towards times of prosperity, which I know is another one of your concerns with the vanilla PP.
It is to heavy in long term bonds for my taste and I want more diversification on the gold side now with other inflation hedges…i would limit long term bonds to 5% …..
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Re: The PP, marginal utility, and investment "faith"

Post by seajay » Tue Jan 11, 2022 2:30 am

Historically it helped to include some gold in a otherwise stock/bond blend. The difference between 50/50 stock/bond and 40/60 is broadly just noise, so adding in some gold might have 40/40/20 stock/bond/gold. For 40/60 adding in more volatile stock holdings (SCV/bonds) might further narrow the differences compared to 50/50 TSM/bonds.

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Whether bonds should comprise a barbell, bullet, ladder, treasury only, treasury/corporate mix, whatever and average weightings/duration is more a case of what is available/preferred.
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