130 Years of 60/40

General Discussion on the Permanent Portfolio Strategy

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Gosso
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130 Years of 60/40

Post by Gosso » Thu Oct 09, 2014 6:50 pm

I wasn't sure where to post this, but I thought it belong along side the PP as a comparison.

I've had this data for awhile but thought I'd share it with y'all (it is up to date to the end of 2013).  The first is a 60/40 (60% stocks, 40% 10 years US bonds) adjusted for inflation, with dividends and interest reinvested, and rebalanced monthly (click to enlarge for all.  Also any data point on chart measures the previous 10 or 20 year CAGR):

[img width=500]http://i61.tinypic.com/2v001ew.png[/img]

Next is 25% stocks and 75% 10 years bonds:

[img width=500]http://i61.tinypic.com/oqlzr9.png[/img]

Pure Stocks:

[img width=500]http://i61.tinypic.com/11bu7ms.png[/img]

Pure 10 Year Bonds:

[img width=500]http://i59.tinypic.com/2j5np1.png[/img]

All data is from Shiller: http://www.multpl.com/sitemap

I find it interesting that the Great Depression wasn't all that bad since dividends were so massive.  The 60's and 70's were worse than the Great Depression (damn hippies..haha).
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Re: 130 Years of 60/40

Post by stuper1 » Thu Oct 09, 2014 7:07 pm

What many would call a very conservative portfolio, 25% stocks and 75% bonds, doesn't always work very well.  On average, the CAGR is around 5%, but you'd better be saving up when the CAGR is over 5%, because you're going to need those extra funds in those times when the CAGR is less than 5%, sometimes way less.

It's so much smoother with the PP.
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Gosso
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Re: 130 Years of 60/40

Post by Gosso » Thu Oct 09, 2014 7:30 pm

It is obvious to me that gold smooths out the rough periods for stocks and bonds (at least when gold is allowed to freely float).

Image

It is basic math.  The PP wins.
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Re: 130 Years of 60/40

Post by clacy » Fri Oct 10, 2014 10:08 am

Gosso wrote: It is obvious to me that gold smooths out the rough periods for stocks and bonds (at least when gold is allowed to freely float).

Image

It is basic math.  The PP wins.
Agreed that the PP wins.  I would argue that it doesn't have to be 100% by the book PP, but a combination of various assets including stocks, treasuries, cash, gold, RE, commodities, etc can also accomplish smoothing out the portfolio.

The vast majority of investors would be better served by tolerating the periods where such a portfolio is trounced by the S&P, but in return have much less aggressive draw downs.
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Re: 130 Years of 60/40

Post by lefuso1978 » Sun Nov 02, 2014 6:11 pm

This new ETF by Global X is doing the allocation 60/40 + alternative assets (gold, real estate, tips, etc) and rolls on a monthly basis. Not sure how the exact allocation is designed but the returns seem well balanced and consistent across time.
The ticker is EFFE.
I have not had a chance to check whether it makes sense to do it yourself or buy a fund/etf of etc that would do it for yourself.
Depends on your own self rigor and your access to market i guess.
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buddtholomew
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Re: 130 Years of 60/40

Post by buddtholomew » Sun Nov 02, 2014 8:05 pm

lefuso1978 wrote: This new ETF by Global X is doing the allocation 60/40 + alternative assets (gold, real estate, tips, etc) and rolls on a monthly basis. Not sure how the exact allocation is designed but the returns seem well balanced and consistent across time.
The ticker is EFFE.
I have not had a chance to check whether it makes sense to do it yourself or buy a fund/etf of etc that would do it for yourself.
Depends on your own self rigor and your access to market i guess.
Definitely not worth the fee and certainly not tax efficient. Also, I don't see an allocation to gold either.
http://www.globalxfunds.com/EFFE
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Re: 130 Years of 60/40

Post by pugchief » Mon Nov 03, 2014 6:43 am

There is no current gold allocation, presumably due to gold's poor recent performance. However, they do allow up to 10% of the assets to be in gold.

Image
http://www.globalxfunds.com/EFFE/IC
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Re: 130 Years of 60/40

Post by Kevin K. » Tue Nov 04, 2014 6:47 pm

I posted this quote from William Bernstein on the 60:30:10 thread, but I think it's relevant to this discussion as well. Since it was illegal to own gold until 1975 I'd suggest running your numbers starting in 1980; you'll get quite different results.

Here's the quote:

What’s wrong with this picture? Several things. For starters, gold was not easily investible during the first decade of this period; in fact, it was downright illegal to sown the stuff from 1933 to 1974. Start the analysis in 1980, for example, and you were a full percent better off leaving it out of the portfolio entirely (i.e. owning one third stocks, bonds and bills). Put another way, you can go off the gold standard and open up its ownership only once. It seem highly unlikely that gold will return several percent more than inflation in the coming decades; almost by definition, zero percent above inflation seems more like it.

Next, compare the difficulty of purchasing and storing gold in, say, 1975 with the ease of buying a gold ETF today. (You’re aware, of course, that GLD is, as of this writing, one of the world’s largest ETFs.). If you’ve read this far, you realize that ease of purchase is a warning signal that the asset class in question’s correlations with other risky assets has risen.

Likewise, the less than 2% gap that separated stock, bonds, and gold for 1964-2011 does not manke any sense, and for much the same reason: The period, particularly its last half, saw a historic bull market in both bonds and gold, a pairing of events not likely to recur any time soon. Assume the same 4% inflation rate for the next several decades, and the returns of stocks look like thy will fall slightly from 9.58% to around 7% (4% inflation plus 2% dividends plus 1% dividend growth), the returns of gold from 8.15% to 4%, the returns of long bonds from 7.77% to the current yield of 2.8%, and bills from 5.33% to God only knows what, but likely close to the assumed inflation rate of 4%. Average together all 4 of these numbers and you get an expected return of...4.5%/0.5% nominal/real. You’ll gain some return from rebalancing, but lose most of that to investment expenses. There will be tears.
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Re: 130 Years of 60/40

Post by Gosso » Wed Nov 05, 2014 8:35 am

Kevin K. wrote: I posted this quote from William Bernstein on the 60:30:10 thread, but I think it's relevant to this discussion as well. Since it was illegal to own gold until 1975 I'd suggest running your numbers starting in 1980; you'll get quite different results.
It was illegal to own physical gold, but it was legal to own gold certificates beginning in 1964.  From Wikipedia:
Wiki wrote:A year earlier, in 1933, Executive Order 6102 had made it a criminal offense for U.S. citizens to own or trade gold anywhere in the world, with exceptions for some jewelry and collector's coins. These prohibitions were relaxed starting in 1964 – gold certificates were again allowed for private investors on April 24, 1964, although the obligation to pay the certificate holder on demand in gold specie would not be honored. By 1975 Americans could again freely own and trade gold. http://en.wikipedia.org/wiki/Gold_Reserve_Act
Obviously this isn't ideal, but it was possible to gain exposure to the price of gold beginning in 1964.
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