Poll: HBPP Component Predictions for 2015

[barrett]

Nice work on that chart, Pet Hog. Can you make one up for the next ten-year period to put us all at ease? I am one of those that has concerns about low returns going forward but your chart is a great visual to see where we have been. Thanks for posting it.

[AdamA]

The black line on the chart is the 10-year moving average of the real returns (not the CAGR).  It shows that the PP is continuing to do its thing, even though we have experienced two years of negative real returns in the past three years.  The real CAGR over the last 10 years has been 4.86%.

Great chart!

Thanks for posting it.

[Tyler]

I'm a little late to the party, but thanks for the PP update!

[steve]

This is my personal commentary
2015 year end review and commentary
Long term Bonds had a negative year -1.8%
Gold also had a negative year down -10.7 %
Total Stock Market up .4%
US Dollar index up 8.96%
Total portfolio decreased by 2.9 %
My take and why I call it a Golden Year
In our portfolio our currency is a 50/50 split between US dollar and Gold so the Dollar value going up about 9% and gold going down about 10 % keeps us just about even, when the value of the dollar goes down (inflation) the value of gold goes up. This year I re balanced after not touching the portfolio since end of June 2013. Now back to why I call it a golden year, if the value is measured in US dollars  the value actually increased 6.06% but what makes this a golden year for me was I got to tax loss harvest gold to reduce my income tax by more then portfolio went down and pay no capital gain on the sale of stocks. This was my year to reduce online gold and take more physical possession. Good bye 2015 and good bye to GTU

[MediumTex]

If someone simply read all of the hand wringing posts from 2015, it would probably come as a surprise that all of that angst was over a 2.9% loss for the year.

I hope that 2016 gives us something to feel better about.

[barrett]

If someone simply read all of the hand wringing posts from 2015, it would probably come as a surprise that all of that angst was over a 2.9% loss for the year.

I hope that 2016 gives us something to feel better about.

Good to have you back, MT. When you disappear for weeks or months, it makes me think of that scene from Forrest Gump where he runs back and forth across the US and there is a hairy hoard of harriers following close behind. At a certain point he just gets bored and announces that he is going home.

I don't really get why the PP dips affect younger/working investors so much. When one is close to retirement, however, any significant dip is rough... at least that is how it feels to me. The PP gave us all a big head fake in January of 2015 and then trended lower from there. And the eventual-fraud mathjak was there to fan any flame he could. A little pressure applied in the correct place can do a lot of damage. In this case people on here started focussing more and more on how their portfolios were doing on a day-to-day basis. In a low-nominal-return environment, that is bound to drive people nuts.

I actually think that our current situation (high stock & bond valuations, extremely low cash yields, gold generally trending lower) is an excellent stress test for the PP. I guess it's also a stress test for many of the folks on here (me included) who want to fiddle with percentages or fret about the injustice of it all.

Question for you, MT... Do you still believe that the odds of prosperity, inflation, deflation & recession are about equal? I remember that from your Jake podcast and thought it was an excellent way of looking at this mix of assets. That way of thinking of things is almost the same as just being agnostic about the future but not quite. Thanks.

[ochotona]

I don't really get why the PP dips affect younger/working investors so much.

The answer is that the PP has world-class safe withdrawal rates (SWR). That's not in question. So it serves retirees very well. But you have to have a large enough pot o' gold to withdraw from to meet your needs and wants.

So other portfolios which have better CAGR but maybe poorer SWR than the PP look very attractive to people in the accumulation phase of life.

I found a wonderful table which puts it all in perspective. Even the GEM portfolio, which I am talking up in the VP part of the forum, isn't materially better than the PP for SWR, even though it just kills the PP for CAGR (15%-ish CAGR over the last 40 years).

And GEM is so much more work. PP is literally 15 minutes a year, right? At some point the GEM and any active strategy will exceed the cognitive capabilities of an aging person. Asking an adult child to do a GEM for Mom or Dad... no, not a fair request, unless the kid is a quant. But asking them to rebalance a PP once a year? That's OK, and if it avoids a 1% advisory fee that's great.

A different tool for every job. That's all it is. That's why younger people are stressing. They wonder if they have the right tool for this phase of life. The PP might be the right tool for them... depending on their age, salary, wealth levels, retirement expectations, etc. "It all depends".

[barrett]

Thanks for posting that, ocho. Haven't looked at the GEM Portfolio yet. And, yeah, the importance of the amount of work it takes to maintain an allocation can vary wildly from one situation to another. In my case my wife is completely uninterested in how we are invested as long as the strategy is not losing too much. If I were to kick the bucket years before her, I'd want her to have something that is easy to maintain. As discussed in other threads, even The PP is probably too complicated for those who just don't want to learn.

[ochotona]

And, yeah, the importance of the amount of work it takes to maintain an allocation can vary wildly from one situation to another. In my case my wife is completely uninterested in how we are invested as long as the strategy is not losing too much. If I were to kick the bucket years before her, I'd want her to have something that is easy to maintain. As discussed in other threads, even The PP is probably too complicated for those who just don't want to learn.

Assuming we have time to prepare for our mortal ends, we could hand over to our partners very simple portfolios with (1) one balanced mutual fund, (2) a pile of gold,  and (3) lots of cash in the bank, designed to by approximately PP at the hand-off time. Of course it will drift; but it probably won't be a disaster. It will all be OK in the end so long as they know how much to take out every year.

[barrett]

Assuming we have time to prepare for our mortal ends, we could hand over to our partners very simple portfolios with (1) one balanced mutual fund, (2) a pile of gold,  and (3) lots of cash in the bank, designed to by approximately PP at the hand-off time. Of course it will drift; but it probably won't be a disaster. It will all be OK in the end so long as they know how much to take out every year.

That is more or less my plan but it's complicated by needing to understand the tax implications of withdrawing from different types of accounts. Alas, if this is among our biggest worries, then life is not so bad. Hopefully I'll live long enough so that phase one (basically withdrawing from tax-deferred and a high-cost-basis taxable account) will be more or less completed, and phase two (withdrawing from Roths & taking SS) can begin. At least that is how I see it playing out at this point.

[sophie]

Sounds like your first goal will be to reduce the number of accounts, THEN the number of funds.  Could you arrange things so that you only have to deal with one set of bank accounts, one taxable brokerage account, and one Roth IRA?

And, if the PP is too complicated you probably want to pick ONE income-producing fund, like Wellesley or a Vanguard balanced or LifeStrategy fund for each account.  Also you might look into annuitizing a tax-deferred account instead of Roth-converting it.  Between these, your wife will have a steady income plus no more than two investments to tap should the need arise.

Also now I understand several of your recent posts!  I would say, though, that if your priority is simplicity you shouldn't worry too much about optimizing CAGR.  The PP is a great tradeoff between the two, but if it won't work for you then probably best to forget it, or at least be prepared to move out of it when you need to.

[barrett]

In the interest of institutional diversification we both have accounts set up at Fidelity and TD Ameritrade. Don't really know if this makes much of a difference and it's definitely one of the things I will try to simplify in the early stages of retirement. As an aside, TD's printed statements are just terrible and its website isn't much better.

I have NOT looked at annuitizing a tax-deferred account but that possibility crossed my mind earlier today when the spellcheck function on this site told me that I was spelling "annuitizing" incorrectly! The first thing that popped up when I Binged it was "annuitizing a tax-deferred account."

Wellesley is definitely on my radar.

[sophie]

FWIW I'm planning on annuitizing one of my 403b accounts (with TIAA-CREF).  It'll be sort of like my own personal version of social security, just enough to cover basic expenses assuming SS is about half strength by then.

I have wondered what could happen to complicated investing schemes when you get older.  My mother is about to turn 80 and I am seeing her start to struggle with tracking finances, even though she's still plenty sharp-witted.  This is in fact a real issue with the smorgasboard of retirement asset schemes that the tax code forces upon us, and of course multi-asset management makes things more complicated yet.

[MediumTex]

Question for you, MT... Do you still believe that the odds of prosperity, inflation, deflation & recession are about equal? I remember that from your Jake podcast and thought it was an excellent way of looking at this mix of assets. That way of thinking of things is almost the same as just being agnostic about the future but not quite. Thanks.

I don't think that the odds are the same, but I don't really know what the odds are.  From a historical perspective in the U.S., the odds of economic expansion and inflation seem to be substantially higher than the odds of economic contraction and deflation.

On the subject of long term gains and long term losses in certain markets, I always marvel at the way the airline industry and the modern leveraged financial services industry (to name two such industries) have actually been overall losers since their creation.  I think that Nassim Taleb said that these industries "eat like a bird and shit like an elephant."  The problem with each, of course, is that the investment gains are privatized and the large periodic losses are socialized through bailouts.