Backtesting for the Optimum HBPP Allocations

General Discussion on the Permanent Portfolio Strategy

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Reub
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Re: Backtesting for the Optimum HBPP Allocations

Post by Reub » Fri Mar 01, 2013 4:29 pm

"On a related note, I've decided that I'm going to put the same % of my investments into the PP as my current age.  Then each year when I rebalance, I'll add another 1% to one of my PP holdings, thus keeping my PP % equal to my age."

I like that. Age in PP. The rest split in a Boglehead portfolio. That makes a lot of sense.
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Re: Backtesting for the Optimum HBPP Allocations

Post by rocketdog » Sun Mar 03, 2013 4:39 pm

Reub wrote: "On a related note, I've decided that I'm going to put the same % of my investments into the PP as my current age.  Then each year when I rebalance, I'll add another 1% to one of my PP holdings, thus keeping my PP % equal to my age."

I like that. Age in PP. The rest split in a Boglehead portfolio. That makes a lot of sense.
That's pretty much my approach.  And I have absolutely no evidence that it will perform any better than a pure PP.  But it makes me feel like I'm hedging my bets, so I guess that counts for something (even if it's only illusory).
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Re: Backtesting for the Optimum HBPP Allocations

Post by BearBones » Sun Mar 03, 2013 5:48 pm

Reub wrote: I like that. Age in PP. The rest split in a Boglehead portfolio. That makes a lot of sense.
Resonates with me too, since I'm nearing 100 (and yes, the longevity's from eating lard). Mind if I ask what's in your BH portfolio?
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Re: Backtesting for the Optimum HBPP Allocations

Post by rocketdog » Mon Mar 04, 2013 11:36 am

BearBones wrote:
Reub wrote: I like that. Age in PP. The rest split in a Boglehead portfolio. That makes a lot of sense.
Resonates with me too, since I'm nearing 100 (and yes, the longevity's from eating lard). Mind if I ask what's in your BH portfolio?
Not sure if you're asking me or Reub (or maybe both)?  For me, I'm simply taking a little extra risk in my VP (or BH if you want to call it that).  I have some emerging markets bonds and stocks, some dividend and value stocks, some REITs, and some commodities.  All are in the form of ETFs.
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Re: Backtesting for the Optimum HBPP Allocations

Post by rocketdog » Wed Mar 06, 2013 12:45 pm

Reub wrote: "On a related note, I've decided that I'm going to put the same % of my investments into the PP as my current age.  Then each year when I rebalance, I'll add another 1% to one of my PP holdings, thus keeping my PP % equal to my age."

I like that. Age in PP. The rest split in a Boglehead portfolio. That makes a lot of sense.
I should add that I'm what many would consider "middle-aged", so it's very nearly an even 50/50 split for me between PP and VP.  If I were in my early 20s, I would probably put a somewhat larger percentage of my investments on the PP side (that is, larger than my age). 

For example, maybe a 25-year-old should consider putting more than 25% in their PP, in order to protect more of their savings.  They might even split it 50/50 until they hit 50 years old. at which point they could start keeping their PP equal to their age by shifting funds out of the VP each time they rebalance. 

These are just suggestions, so take them for what they're worth.
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Re: Backtesting for the Optimum HBPP Allocations

Post by Grinners » Fri Mar 08, 2013 10:03 pm

First Post :)

I can't help but feel that the whole idea behind the Permanent Portfolio (and gyroscopic investing in general) would suggest that one should do exactly the opposite of what has best performed over the past 40 years.

IE: If the best allocation was 10, 10, 40, 40 then one for the next 40 years would likely do better investing 40, 40, 10, 10.

I am, of course, only referring to CAGR here.
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Re: Backtesting for the Optimum HBPP Allocations

Post by Grinners » Fri Mar 08, 2013 11:18 pm

For what it's worth, this below is my iteration of choice:

Index  Cash Bonds  Gold  Shares  CAGR
122145 33 0   33     34 9.0078 7.8794 22.89 0.4189
122146 33 0   34     33 9.0133 7.9359 22.69 0.4166


:) 50% allocation of 'fiat' or 'fiat' derivatives was far too high for my liking.

And locking myself in to long term paper (when the average fiat currency has a lifespan of <40 years was of no interest to me). So bonds were dropped and split amongst the other classes.

I acknowledge that my portfolio will hurt during ordinary deflation as compared to HBPP, but feel it will excel during chaotic deflation (currency collapse).

25% 4 ways of course was

102401 25 25 25 25 9.5689 6.8106 18.4 0.567
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Re: Backtesting for the Optimum HBPP Allocations

Post by stone » Fri Mar 29, 2013 12:20 pm

rocketdog wrote:
Thomas Hoog wrote:Your strategy on  ratio VP and PP seems to me a bit weird. VP is some strange invention to satisfy your emotional behaviour. If your behaviour is related to your age, it make sense. But I doubt that.
For me, I don't use a VP. I really have no idea what the future brings.
Well, I consider the PP to be a somewhat conservative allocation portfolio.  I have a long investing time horizon, so I'm willing to take higher risks with some of my portfolio (the VP portion).  Since the longer the time horizon you have the more risk you can afford to take, it stands to reason that when I'm young my VP should be larger than my PP, and as I approach retirement I should shift funds from my VP to my PP. 

I'm not recommending that everyone do that, mind you.  It's just the approach I've come up with that fits my investing style.  If my PP repeatedly outperforms my VP over the next 5-10 years, I may reconsider this tactic and start shifting my VP funds into my PP at a faster rate.
Could you just cut down the cash part of the PP to give a slightly better return and somewhat bumpier ride?
A Japanese person in 1989 even with a long time horizon would be regretting having gone in stock heavy by now.
CraigR once posted something very compelling about a long time horizon actually being no help against risk. If you intend to sell stock in 50 years time and one day before you sell, the market falls by 30%, then that is just as bad as if you only bought the stock the day before. Perhaps if you never intend to sell and have an infinite time horizon as when managing a foundation's endowment fund or whatever, then return and not price volatility is all that matters.
Last edited by stone on Fri Mar 29, 2013 12:24 pm, edited 1 time in total.
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Re: Backtesting for the Optimum HBPP Allocations

Post by melveyr » Fri Mar 29, 2013 12:37 pm

Yeah time horizon and risk tolerance are two separate things that get conflated all the time by the investment industry. The reason they get conflated is because financial institutions benefit from you thinking that you have a higher risk tolerance. Since most people don't have a ton of money, which means it would be very painful for them to lose it, the firms convince people to take risks by constructing this idea of risk diminishing with time. Financial institutions specialize in offering the riskier products. They cannot compete with things like I-Bonds, so they only push things that are riskier.

You can check out Paul Samuelson or Zvi Bodie to see why risk does not diminish with time. With most things in finance you are less likely to get screwed if you pay more attention to the academics than the salesmen.
Last edited by melveyr on Fri Mar 29, 2013 12:39 pm, edited 1 time in total.
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Re: Backtesting for the Optimum HBPP Allocations

Post by KevinW » Fri Mar 29, 2013 1:52 pm

melveyr wrote: The reason they get conflated is because financial institutions benefit from you thinking that you have a higher risk tolerance.
Do you understand why the financial industry has an interest in selling higher-risk investment products? They clearly do since practically every firm and advisor, even consumer-friendly ones like Vanguard and TIAA-CREF, push everyone to very risky portfolios. I've never understood this since the ERs on bond funds are generally comparable or higher than those on stock funds.
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Re: Backtesting for the Optimum HBPP Allocations

Post by stone » Fri Mar 29, 2013 2:34 pm

KevinW wrote:
melveyr wrote: The reason they get conflated is because financial institutions benefit from you thinking that you have a higher risk tolerance.
Do you understand why the financial industry has an interest in selling higher-risk investment products? They clearly do since practically every firm and advisor, even consumer-friendly ones like Vanguard and TIAA-CREF, push everyone to very risky portfolios. I've never understood this since the ERs on bond funds are generally comparable or higher than those on stock funds.
I guessed that the push for retail sales of risky assets came from quite high up the financial food chain. Someone needs to be buying high and selling low in order to feed the gains of those who are buying low and selling high. I guess much of the buying high is done as stock buy backs by corporations but they also want retail customers who are likely to panic and sell low to create bargain buying opportunities. There is a big hunger for dumb money. The dumber the better I guess ???
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Re: Backtesting for the Optimum HBPP Allocations

Post by melveyr » Fri Mar 29, 2013 3:02 pm

KevinW wrote:
Do you understand why the financial industry has an interest in selling higher-risk investment products? They clearly do since practically every firm and advisor, even consumer-friendly ones like Vanguard and TIAA-CREF, push everyone to very risky portfolios. I've never understood this since the ERs on bond funds are generally comparable or higher than those on stock funds.
They cannot compete on the lower end of the risk spectrum because of products like T-Bills, TIPS, or I-bonds. So the best course of action is to convince people that those products are innapropriate for their situation.

Additionally, they are in the business of selling dreams. You can't build dreams out of low risk investments.
Last edited by melveyr on Fri Mar 29, 2013 3:04 pm, edited 1 time in total.
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Re: Backtesting for the Optimum HBPP Allocations

Post by stone » Fri Mar 29, 2013 4:27 pm

To some extent it might be partly that the people actually doing the retail selling actually believe the hype themselves. I think the way compounding works is really quite counter-intuitive. People all too easily fail to grasp that a 50% loss needs a subsequent 100% gain to get even. That effect creates the illusion that it genuinely is a good idea to be taking goofy risks.
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Re: Backtesting for the Optimum HBPP Allocations

Post by MachineGhost » Fri Mar 29, 2013 6:20 pm

Slotine wrote: To be fair, medicine does have laws against direct-fees tied to the sales.  Gifts, speaking presentations, research payments, advisory fees all borderline legitimate uses, which makes it so hard to combat.
There is kickbacks in referring patients to diagnostic centers owned by the docs doing the referring.  This is especially egregarious in Medicare.  I trust no doctor's referral.  I'll price shop myself, thanks!
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Re: Backtesting for the Optimum HBPP Allocations

Post by MachineGhost » Sat Mar 30, 2013 1:45 pm

I stand corrected, sir!
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Re: Backtesting for the Optimum HBPP Allocations

Post by hedgehog » Sat Jun 15, 2013 4:11 am

Best is multivariate testing where you not only change one parameter (the 25-25-25-25 allocation) but more than one parameter at the same time including the distribution of the stocks, bonds, cash and metals portfolio and the rebalancing bands or timings as well. All at the same time. This is how it is professionally done.

http://en.wikipedia.org/wiki/Multivariate_testing

We need a little more advanced programmer to do that, though.
Last edited by hedgehog on Sat Jun 15, 2013 4:26 am, edited 1 time in total.
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Re: Backtesting for the Optimum HBPP Allocations

Post by Peak2Trough » Sat Jun 15, 2013 11:52 am

hedgehog wrote:We need a little more advanced programmer to do that, though.
Ummmm.... k.  Thanks for your feedback.
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Re: Backtesting for the Optimum HBPP Allocations

Post by bronsuchecki » Thu Aug 22, 2013 3:39 am

Peak2Trough - I note for gold you only have monthly data 1968-1972. You can go to http://www.perthmint.com.au/investment_ ... rices.aspx to download daily London fix data from jan 1968
Disclosure: I work for the Perth Mint. What I say is done in a personal capacity and is not endorsed by the Mint.
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Re: Backtesting for the Optimum HBPP Allocations

Post by hedgehog » Sat Dec 07, 2013 6:27 pm

Peak2Trough:

Possibly could you or would you make your calculator able to calculate some gearing with the PP? Like 1.5x, 2x. Out if pure academic interest to see where it hits a margin call.

- http://gyroscopicinvesting.com/forum/va ... /#msg84425
- http://gyroscopicinvesting.com/forum/pe ... ting-a-pp/

I truly appreciate your tool.
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Re: Backtesting for the Optimum HBPP Allocations

Post by hedgehog » Sun Dec 08, 2013 9:50 am

If I remember correctly Sharpe ratio was featured here: https://web.archive.org/web/20160324133 ... l-returns/
Is it removed with the new design? What's the aggregate Sharpe value?
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Re: Backtesting for the Optimum HBPP Allocations

Post by frugal » Fri Dec 12, 2014 7:39 am

Hello,

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

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Re: Backtesting for the Optimum HBPP Allocations

Post by robtkatz » Wed Jan 07, 2015 10:06 am

  • 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
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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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