Stay the course...How long is too long?

[Mdraf]

The theory behind the PP is that it is a long term investment strategy. Makes a lot of sense. But when you get to near retirement age "long term" is relative. I  recently spent a few days making calculations and found that during my pre-PP 30-year investment history I averaged 6% annual return. This following no particular strategy other than my own "gut feel".  Some years I traded heavily and other years I did nothing, depending on what life stage I was in.  This includes losses in 1987 and 2008 and the mad dotcom gains of the late '90s.

Contrasting this 6% I am looking at 2% average annual return since I found the PP (combination of 4XHB and PRPFX). Obviously if I wait long enough this 2% will likely improve but how long is long enough?

Is anyone else in the same situation?

[DragonJoey3]

So I have been doing some in depth analysis of the PP, based on data starting in 1970.  Based on the monthly returns for the PP from Jan 1 1970 to the present month of Aug 1, 2013, I looked at the 36 month (3 year), 48 month (4 year), and 60 month (5 year) trailing returns.

That is to say: For each month I compared the value of the portfolio to the value 36, 48, and 60 months prior.  I then took that return and averaged it to the number of years (not annualized though I will do that shortly) to determine the average rate of return for any given month depending on how long you were invested ranging from 3-5 years.  I did this for all the months I had data for (starting in 1973 for 3 year, and 1975 for 5 year).  Here are the results I have seen:



Years InvestedSmallest ReturnLargest ReturnAverage ReturnStandard Deviation
3 Years 1.92% 25.16% 9.14% 4.43%
4 Years 2.46% 29.08% 10.57% 5.17%
5 Years 3.51% 25.75% 10.95% 5.02%



Based on the past performance of the PP I would say that if you remain invested for 5 years you should see (with 60% probabily) a return of between  30% - 80% on your initial capital.

So if I took $10,000 and invested in the PP for 5 years, historically my odds would look like this



Initial investmentFinal Value after 5 yearsHistorical likelihood
$10,000.00 $12,965 - $17,985 68%
$10,000.00 $10,455 - $20,495 96%



I'm working on getting a lot more data out this weekend that I wanted to post on here, since I've been analyzing it for a while now.  But there is a preview 

[Mdraf]

Very interesting. Thank you.

[notsheigetz]

But when you get to near retirement age "long term" is relative.

Is anyone else in the same situation?

I am. Been in the PP for about 3 years and saw decent returns the first two, but obviously I'm not as happy with the YTD results so far. I don't know about you but a year of <= $0 returns at this point is probably going to push forward my target retirement date at least a year. Even if this was the year I'd probably be reluctant to do it.

Still, I went back and checked on where I would be if I had stuck with the plan I was using before I switched to the PP and results were about the same. I still like the PP better though. Especially the gold.

[MediumTex]

The appeal of the PP for me is the way it protects me from losses while providing an opportunity for nice gains.

In other words, since I know that losses hurt more than gains of similar magnitude, I was drawn to a strategy that had historically provided excellent protection against losses if held for a year or more.  Other strategies will normally ask you to occasionally wait several years before recovering from large drawdowns and this is something that I never coped with very well.

[Mdraf]

True but you can do the same by placing trailing stop losses on your investments which is what I was doing before. So had I not switched to all in PP I would have been stopped out of gold this year well before the big collapse. And right now I'd be putting a stop loss on VTi well above my cost basis.

[stuper1]

Be sure to look at real returns after inflation.  If inflation was at 3.5% annual average during your pre-PP years, then your real return was really only 2.5%.  Maybe in your PP years so far, your real return was 0%.  So, the difference in average annual returns is only 2.5%.  It's still not what you want, but it's not as bad as a 4% difference.  Wait around a few years, and it may turn around completely.  No strategy works well all the time, or else everyone would be doing it.

[MediumTex]

True but you can do the same by placing trailing stop losses on your investments which is what I was doing before. So had I not switched to all in PP I would have been stopped out of gold this year well before the big collapse. And right now I'd be putting a stop loss on VTi well above my cost basis.

Consistently managing a stop loss strategy effectively is beyond the skill level and desire of a lot of regular investors.

I'm not sure that I would be interested in trying to stay on top of a strategy like that, in part because it invites tinkering and emotional decision making (for me anyway).

[Mdraf]

Be sure to look at real returns after inflation.  If inflation was at 3.5% annual average during your pre-PP years, then your real return was really only 2.5%.  Maybe in your PP years so far, your real return was 0%.  So, the difference in average annual returns is only 2.5%.  It's still not what you want, but it's not as bad as a 4% difference.  Wait around a few years, and it may turn around completely.  No strategy works well all the time, or else everyone would be doing it.

That's a good point. Thanks.  But wait around a few years was my original point. Dragonjoes's calculations were very helpful.

[DragonJoey3]

Be sure to look at real returns after inflation.  If inflation was at 3.5% annual average during your pre-PP years, then your real return was really only 2.5%.  Maybe in your PP years so far, your real return was 0%.  So, the difference in average annual returns is only 2.5%.  It's still not what you want, but it's not as bad as a 4% difference.  Wait around a few years, and it may turn around completely.  No strategy works well all the time, or else everyone would be doing it.

I should note that I also have data for the real return of the portfolio as well.  Over a period of 5 years trailing return it never had a negative real return.  It did however come very close to 0 at one point, but I believe the average real return annualized over a 5 year trailing period was around 4%.

I'll have more data once I get home, and I'll do a data dump this weekend of my findings.

[notsheigetz]

And right now I'd be putting a stop loss on VTi well above my cost basis.

I was googling on "stop loss" and came across this story about someone who lost a lot of money with a stop loss on VTI during the 2010 flash crash.

http://online.wsj.com/article/SB1000142 ... 26282.html

[brownehead]

The theory behind the PP is that it is a long term investment strategy. Makes a lot of sense. But when you get to near retirement age "long term" is relative. I  recently spent a few days making calculations and found that during my pre-PP 30-year investment history I averaged 6% annual return. This following no particular strategy other than my own "gut feel".  Some years I traded heavily and other years I did nothing, depending on what life stage I was in.  This includes losses in 1987 and 2008 and the mad dotcom gains of the late '90s.

Contrasting this 6% I am looking at 2% average annual return since I found the PP (combination of 4XHB and PRPFX). Obviously if I wait long enough this 2% will likely improve but how long is long enough?

Is anyone else in the same situation?

Do you know that the PP returns from the last 30-35 years are higher than 6%, right? And are you sure that now, near retirement age, with more fear to speculate and low interest rates, your return would be better than that 2%? Btw, PP returns from the very last years are far higher than 2% too!

[Mdraf]

And right now I'd be putting a stop loss on VTi well above my cost basis.

I was googling on "stop loss" and came across this story about someone who lost a lot of money with a stop loss on VTI during the 2010 flash crash.

http://online.wsj.com/article/SB1000142 ... 26282.html

The flash crash of May  2010 is famous. It was due to high speed trading computers. It triggered a lot of my stop losses but I just bought them back in the next few days. Later circuit beakers were instituted to prevent this. There have been further smaller flash crashes since but if they reverse within a short period of time (minutes) the brokers will reverse the stop loss sale.