Backtesting for the Optimum HBPP Allocations

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frugal
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Re: Backtesting for the Optimum HBPP Allocations

Post by frugal » Wed Jan 07, 2015 11:05 am

robtkatz wrote:
  • frugal wrote: Hello,

    who is using different allocation than 25-25-25-25% ? And why?

    Thank you and great 2015!
    Frugal, one might use a different allocation in order to cut down volatility.  As an old timer, the most important thing for me is to do the best I can while keeping the draw-downs low.
    Here's a model of what I think can match the PP return but with lower draw-downs.
    • 44% IEF:  iShares 7-10 Year Treasury Bond
    • 18% TLT:  iShares 20+ Year Treasury Bond
    • 13% IAU:  iShares Gold Trust
    • 25% IJH:  iShares Core S&P Mid-Cap
Hello !

CAn you please post the backtest chart :-)
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Re: Backtesting for the Optimum HBPP Allocations

Post by ozzy » Wed Jan 07, 2015 11:58 am

Hi Frugal, here's the 10-year chart:

Image

The backtesting software is called EzBackTest, and its free and easy to use!  Google it and you'll be able to backtest for yourself.

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Re: Backtesting for the Optimum HBPP Allocations

Post by frugal » Wed Jan 07, 2015 1:41 pm

ozzy wrote: Hi Frugal, here's the 10-year chart:

Image

The backtesting software is called EzBackTest, and its free and easy to use!  Google it and you'll be able to backtest for yourself.

Ozzy
Hello,

thank you ozzy. The annualized returns are not so different from the standard allocation.

Unfortunately I already tested the software but it doesn't work with EUROPEAN ETFs  :(
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Re: Backtesting for the Optimum HBPP Allocations

Post by MachineGhost » Wed Jan 07, 2015 11:10 pm

frugal wrote: Unfortunately I already tested the software but it doesn't work with EUROPEAN ETFs  :(
As long as Yahoo has the data, you might be able to get this to work:  https://code.google.com/p/mypersonalindex/
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Re: Backtesting for the Optimum HBPP Allocations

Post by frugal » Thu Jan 08, 2015 2:36 am

MachineGhost wrote:
frugal wrote: Unfortunately I already tested the software but it doesn't work with EUROPEAN ETFs  :(
As long as Yahoo has the data, you might be able to get this to work:  https://code.google.com/p/mypersonalindex/
MachineGhost,

EzBackTest didn't work with me for European ETF's

Now I will test this new software. First test was also impossible...

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Re: Backtesting for the Optimum HBPP Allocations

Post by MachineGhost » Thu Jan 08, 2015 2:40 am

frugal wrote: Happy 2015 MG!
Happy 2015 to you too, frugal!

And BTW, I'm currently about 54.5% average cash between my two PP portfolios.  I think you would be shocked at how much cash it actually takes to reduce the PP's -25% MaxDD to a more tolerable number.  I don't believe you can reach your retirement goals and also have a low drawdown portfolio by increasing cash.  It hurts the return too much, so it is one or the other.  One thing that could work is to increase the cash to just enough so there is never a negative year historically.
Last edited by MachineGhost on Thu Jan 08, 2015 2:47 am, edited 1 time in total.
"All generous minds have a horror of what are commonly called 'Facts'. They are the brute beasts of the intellectual domain." -- Thomas Hobbes

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Re: Backtesting for the Optimum HBPP Allocations

Post by frugal » Thu Jan 08, 2015 3:47 am

MachineGhost wrote:
frugal wrote: Happy 2015 MG!
Happy 2015 to you too, frugal!

And BTW, I'm currently about 54.5% average cash between my two PP portfolios.  I think you would be shocked at how much cash it actually takes to reduce the PP's -25% MaxDD to a more tolerable number.  I don't believe you can reach your retirement goals and also have a low drawdown portfolio by increasing cash.  It hurts the return too much, so it is one or the other.  One thing that could work is to increase the cash to just enough so there is never a negative year historically.
MachineG,

Howdy?

a) That I didn't know... you have 2 different PPs?

b) I've been doing rebalancements only by adding new cash to the assets and put it at 25% ? Why it is not good for retirement goals? Or you are saying that I am only adding to the asset CASH ?

c) Is that possible to increase the CASH part to the point of 0 negative years?


Harry Browne Permanent Portfolio
Start Date
End Date
Starting Capital
S&P 500 %
Gold %
T-Bonds %
Cash %
Cash Option
Long Bond Option
Rebalance
Reinvest Div/Int
Result View
Show Rebalancing
Show Component Returns
DD Count Threshold %



Date S&P500 Tbond Tbill Gold Total
1969 200 500 9,100 200 10,000 (+2.15%)
1970 204 511 9,295 204 10,215 (+8.57%)
1971 222 554 10,092 222 11,090 (+5.82%)
1972 235 587 10,679 235 11,735 (+5.54%)
1973 248 619 11,270 248 12,385 (+6.08%)
1974 263 657 11,955 263 13,137 (+7.66%)
1975 283 707 12,871 283 14,143 (+7.38%)
1976 304 759 13,820 304 15,187 (+6.91%)
1977 325 812 14,775 325 16,236 (+4.69%)
1978 340 850 15,467 340 16,997 (+7.24%)
1979 365 911 16,586 365 18,227 (+12.66%)
1980 411 1,027 18,686 411 20,534 (+11.63%)
1981 458 1,146 20,859 458 22,922 (+12.30%)
1982 515 1,287 23,425 515 25,742 (+15.40%)
1983 594 1,485 27,032 594 29,706 (+7.87%)
1984 641 1,602 29,159 641 32,042 (+9.52%)
1985 702 1,755 31,935 702 35,094 (+10.47%)
1986 775 1,938 35,279 775 38,768 (+9.14%)
1987 846 2,116 38,504 846 42,312 (+5.63%)
1988 894 2,235 40,674 894 44,697 (+6.41%)
1989 951 2,378 43,281 951 47,562 (+9.63%)
1990 1,043 2,607 47,452 1,043 52,145 (+7.45%)
1991 1,121 2,801 50,985 1,121 56,028 (+7.53%)
1992 1,205 3,012 54,825 1,205 60,247 (+4.08%)
1993 1,254 3,135 57,059 1,254 62,703 (+4.70%)
1994 1,313 3,283 59,742 1,313 65,650 (+2.45%)
1995 1,345 3,363 61,204 1,345 67,257 (+8.48%)
1996 1,459 3,648 66,396 1,459 72,963 (+4.98%)
1997 1,532 3,830 69,701 1,532 76,594 (+5.97%)
1998 1,623 4,058 73,859 1,623 81,163 (+6.50%)
1999 1,729 4,322 78,659 1,729 86,438 (+3.98%)
2000 1,797 4,494 81,786 1,797 89,875 (+6.05%)
2001 1,906 4,766 86,738 1,906 95,316 (+5.31%)
2002 2,008 5,019 91,344 2,008 100,378 (+2.36%)
2003 2,055 5,137 93,499 2,055 102,747 (+2.19%)
2004 2,100 5,250 95,544 2,100 104,994 (+1.64%)
2005 2,134 5,336 97,108 2,134 106,712 (+3.21%)
2006 2,203 5,507 100,223 2,203 110,135 (+4.86%)
2007 2,310 5,774 105,094 2,310 115,487 (+5.95%)
2008 2,447 6,118 111,351 2,447 122,364 (+4.53%)
2009 2,558 6,395 116,391 2,558 127,902 (-0.12%)
2010 2,555 6,387 116,250 2,555 127,747 (+1.51%)
2011 2,593 6,484 118,000 2,593 129,670 (+2.03%)
2012 2,646 6,615 120,398 2,646 132,305 (+0.60%)
2013 2,662 6,655 121,126 2,662 133,105 (-0.50%)
2014 2,649 6,622 120,514 2,649 132,433 (+1.73%)
2015 2,695 6,737 122,605 2,695 134,730 (+0.45%)
2015-01-08 2,651 7,060 122,863 2,761 135,335

Years 46.05
CAGR 5.82%
Starting Capital 10,000
Ending Capital 135,335
Total Return 1253.35%
Max Drawdown 2.14% (1980-01-21 - 1980-03-27)
DD > 10% Count 0
Annualized Std. Dev 3.67%
Sharpe Ratio 0.10
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Re: Backtesting for the Optimum HBPP Allocations

Post by MachineGhost » Thu Jan 08, 2015 9:35 am

frugal wrote: b) I've been doing rebalancements only by adding new cash to the assets and put it at 25% ? Why it is not good for retirement goals? Or you are saying that I am only adding to the asset CASH ?
I meant that if you did more than 25% cash to reduce the portfolio risk, it will will reduce the return and increase retirement shortfall risk.  I can't remember, but I think even at 50% cash the PP still had a moderate MaxDD, maybe -15% or so.  In other words, raising the cash level isn't quite as efficient as using trendfollowing.
c) Is that possible to increase the CASH part to the point of 0 negative years?
It certainly is.  I did it before a few years ago using Simba's spreadsheet and Excel Solver.  I actually did it so the net return after inflation was at least 0% each and every year.
Years  46.05
CAGR  5.82%
Starting Capital  10,000
Ending Capital  135,335
Total Return  1253.35%
Max Drawdown  2.14% (1980-01-21 - 1980-03-27)
DD > 10% Count  0
Annualized Std. Dev  3.67%
Sharpe Ratio  0.10
It didnt put 2009 and 2013 to 0%+ but whos being nitpicky?  What was the cash % for this?  And BTW you should start from 4/1/1968.
Last edited by MachineGhost on Thu Jan 08, 2015 9:38 am, edited 1 time in total.
"All generous minds have a horror of what are commonly called 'Facts'. They are the brute beasts of the intellectual domain." -- Thomas Hobbes

Disclaimer: I am not a broker, dealer, investment advisor, physician, theologian or prophet.  I should not be considered as legally permitted to render such advice!
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Re: Backtesting for the Optimum HBPP Allocations

Post by frugal » Thu Jan 08, 2015 3:14 pm

MG,

as I remember the Cash was 90% :)

Maybe I'm going to add some INTERNATiONAL STOCK INDEX and increase a bit the STOCKS... later in a downleg...

Hug.
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Re: Backtesting for the Optimum HBPP Allocations

Post by robtkatz » Fri Jan 09, 2015 6:50 am

MachineGhost wrote: I meant that if you did more than 25% cash to reduce the portfolio risk, it will will reduce the return and increase retirement shortfall risk.  I can't remember, but I think even at 50% cash the PP still had a moderate MaxDD, maybe -15% or so.  In other words, raising the cash level isn't quite as efficient as using trendfollowing.
[ ... ]
What is the method for trend-following?
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Re: Backtesting for the Optimum HBPP Allocations

Post by MachineGhost » Fri Jan 09, 2015 8:19 am

robtkatz wrote: What is the method for trend-following?
Simple MA, etc..
"All generous minds have a horror of what are commonly called 'Facts'. They are the brute beasts of the intellectual domain." -- Thomas Hobbes

Disclaimer: I am not a broker, dealer, investment advisor, physician, theologian or prophet.  I should not be considered as legally permitted to render such advice!
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Re: Backtesting for the Optimum HBPP Allocations

Post by robtkatz » Fri Jan 09, 2015 10:34 am

MachineGhost wrote:
robtkatz wrote: What is the method for trend-following?
Simple MA, etc..
Is there a reference that explains this in detail?  I don't know much about it.
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Re: Backtesting for the Optimum HBPP Allocations

Post by MachineGhost » Fri Jan 09, 2015 10:50 am

robtkatz wrote: Is there a reference that explains this in detail?  I don't know much about it.
I would not recommend doing it since you're a neophyte, but heres a white paper about it:

http://papers.ssrn.com/sol3/papers.cfm? ... _id=962461
"All generous minds have a horror of what are commonly called 'Facts'. They are the brute beasts of the intellectual domain." -- Thomas Hobbes

Disclaimer: I am not a broker, dealer, investment advisor, physician, theologian or prophet.  I should not be considered as legally permitted to render such advice!
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Re: Backtesting for the Optimum HBPP Allocations

Post by WrightO » Wed Mar 04, 2015 8:19 pm

The mysterious peaktotrough.com calculator...........  ;D

For the period 01-01-2010 to 03-05-2015, I allocate 100% to S&P500 and use  "None" for rebalancing (the other options are the defaults). The output gives some returns under "Tbill" as well as under "S&P500" and adds them together to get the total return. The first entry in the "Tbill" column is 0, so the nonzero growth in that column is from 0 initial investment! There are other instances of the same sort of behavior. What am I missing here? Can I rely on the output from the calculator?
 
Thanks,

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Re: Backtesting for the Optimum HBPP Allocations

Post by mukramesh » Mon Mar 09, 2015 2:32 pm

You probably have 'Reinvest Div/Int' set to NO. All dividends get put into Cash (T-Bills) and then get added to your total returns.
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Re: Backtesting for the Optimum HBPP Allocations

Post by bedraggled » Fri May 29, 2015 6:17 am

When I try a 33/33/33/1 portfolio from 1-1-1975 to today with 35/15 bands, the S&P 500 and T Bond components match each year for 40 years.  I tried several times.  This problem may exist with the 4x25 but I need to wrap up for the morning

What is the problem, please.

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Re: Backtesting for the Optimum HBPP Allocations

Post by bedraggled » Sat Jun 13, 2015 8:09 pm

Follow up from my last inquiry: has anyone noticed the same numbers when running an HBPP peaktotrough 40 year analysis?

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Re: Backtesting for the Optimum HBPP Allocations

Post by Justin » Fri Jul 31, 2015 8:12 am

Long time reader, first time poster. Too many people to thank for informative posts over the years, just hoping I can start to contribute a bit to pay back my debt to you all.

Today I was reading here:

http://www.ritholtz.com/blog/2015/07/th ... dilemma-2/

There is a section towards the back which reminded me of this fantastic thread where they say the global equity and debt market caps are respectively 48 and 41 trillion dollars. If you include gold as 9 trillion dollars worth, and then M3 of 18 trillion then you get the following ratios:

Equities: 41%
Bonds: 35%
Gold: 8%
Cash: 16%

Your mileage may vary but I thought this might be of interest.
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Re: Backtesting for the Optimum HBPP Allocations

Post by mathjak107 » Fri Jul 31, 2015 8:16 am

although i am not keen on gold at all  i think it is a well balanced retirement portfolio  , in my opinion  i wouldn't go longer than intermediate term on the bonds though .
Last edited by mathjak107 on Fri Jul 31, 2015 8:18 am, edited 1 time in total.
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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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Re: Backtesting for the Optimum HBPP Allocations

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

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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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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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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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