Backtesting for the Optimum HBPP Allocations

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AnotherSwede
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Re: Backtesting for the Optimum HBPP Allocations

Post by AnotherSwede » Fri Jul 31, 2015 8:56 am

Justin wrote: Equities: 41%
Bonds: 35%
Gold: 8%
Cash: 16%
Nice, a K�kkenbacher! I'll implement it after next stock market crash, and only if mortgage vs house value vs net worth is still in order. Until then - Desert portfolio!
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Kbg
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Re: Backtesting for the Optimum HBPP Allocations

Post by Kbg » Tue Sep 25, 2018 7:48 pm

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Tyler
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Re: Backtesting for the Optimum HBPP Allocations

Post by Tyler » Tue Sep 25, 2018 8:10 pm

Nice article. Thanks! It's always nice to see people talking about the variety of simple asset allocations available and sharing Harry Browne's ideas.

Now if we can just get these financial guys to stop using single arbitrary start dates to draw definitive conclusions about portfolios. I think a major draw of the PP is not the returns alone but how incredibly consistent it was no matter what timefreame you sample. They start to get there with the Sortino talk, but IMHO it goes deeper than that. The PP is simply an extremely dependable portfolio.
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Kbg
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Re: Backtesting for the Optimum HBPP Allocations

Post by Kbg » Wed Sep 26, 2018 6:58 am

Agree Tyler. Man I really wish there was a smartly leveraged cheap ETF of the PP. I’d be all in on it.
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Re: Backtesting for the Optimum HBPP Allocations

Post by Kbg » Wed Aug 14, 2019 6:54 pm

Thought I would post this. Conceptually one could implement the PP classically or with risk parity weighting. In the latter, cash is more something you dial in later to tame whatever mix you may be doing. (from 1978 using Portfolioviz)

CAGR Stdev Best Yr Worst Yr Max. DD SRatio
9.31% 9.36% 47.49% -12.38% -20.76% 0.53 (SBG eq wt - 33.33%)
9.48% 8.75% 36.51% -9.53% -16.75% 0.58 (32S/43B/25G)

If we throw 25% cash in and adjust proportionally

8.19% 7.04% 38.22% -5.61% -13.45% 0.53 (CSBG eq wt - 25%)
8.30% 6.59% 30.30% -3.55% -11.72% 0.58 (25C/24S/32B/19G)

Take the just above and merge the LTB and Cash into ITBs
8.45% 6.61% 31.43% -2.60% -11.57% 0.60

OR Take the top mix and sub ITBs for LTBs (32S/43ITB/25G)
8.80% 7.68% 39.71% -5.77% -15.08% 0.57

Looks like a risk parity PP is mo bettah in all cases...course it takes a little more work
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sophie
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Re: Backtesting for the Optimum HBPP Allocations

Post by sophie » Thu Aug 15, 2019 7:26 am

Interesting question & reporting - thanks guys!

Applying what I know about statistical analysis to this question...I think you'd have run a permutation test, also known as a bootstrap. I would do this: Take each year's gain and average it with the year before and year after (since a given year's performance is not independent of adjacent years). Randomly shuffle each year since 1972 (or 1974 if you're afraid of the artificial gold spikes in 1972-73), then string together the first 15 years that come up to produce your outcome statistics. Do this several hundred times, or as long as it takes to get a stable distribution. Hope one of you has some time to do this ? (Sadly I don't.)

Going further than that, I'd label each year according to the economic condition represented i.e. prosperity, deflation, inflation, recession. Make sure each of these is represented in the random sample according to historical distributions.

You'd then have to run this for each combination of asset %'s to determine the optimal set. I believe this is what HB did at some point, which is how he arrived at the 25x4 percentages. I'm not sure if he balanced the economic conditions though, so he may have overweighted inflation & recession. That's why the Golden Butterfly is an interesting variation, to me: it recognizes that prosperity has dominated long enough that is not an unreasonable expectation that it will continue to do so going forward.
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Kbg
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Re: Backtesting for the Optimum HBPP Allocations

Post by Kbg » Thu Aug 15, 2019 10:23 am

For me I’ve long thought the actual secret sauce of the PP is the premise that we can not predict...ergo a lot of fancy statistical analysis flies in the face of the premise. We do have history and there we have to make an assumption that future will resemble past.

Good moment for full disclosure...to really properly have done the analysis for risk parity I would have ran the to date st dev each year and tweaked port%s slightly.

25% each is near zero predictive...but back to history, asset to Econ condition was based on historicals.

My backtest assumed the same assets PP came up with and that long term volatility was a tad more “neutral” given some assets have more jet fuel than others.
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