Long Run Expectations For PP

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I Shrugged
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Long Run Expectations For PP

Post by I Shrugged » Sat Dec 20, 2014 8:01 am

What are your expectations for long run REAL rate of return for the PP, and why?

What figure is commonly quoted/accepted?  I think I recall it being 6% real?  That seems quite high.  Past performance does not mean much to me.  I'm not saying it is useless.  But it might not be the best info we've got.    I have not looked up the numbers, but I know numbers and good theory exist for the long term real returns of cash, LT bonds, and stocks.  I would argue that gold over the long term should equal inflation.  So using SWAG numbers:

Cash: 0.0% real
LT Bonds: 1.5% real
Stocks: 6.5% real
Gold: 0.0% real

Looks like 2.0% real for the PP.  Yes, I know it has averaged 6% or something like that.  But 30 years is meaningless as far as predicting the future.  What are you expecting?

And, I'm not saying 2% real is unsatisfactory.  The safety and risk profile of the PP have been very satisfactory to me.  There are spinoff questions which arise from my conclusion, but I'll leave them for others.  First of all, am I wrong?
Last edited by I Shrugged on Sat Dec 20, 2014 8:05 am, edited 1 time in total.
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Re: Long Run Expectations For PP

Post by barrett » Sat Dec 20, 2014 8:13 am

The number that I think is given in the PP book (and elsewhere) is real returns of 3%-6%. I expect we are in for a few years of lower-than-average real returns, but I think that using your numbers for the individual assets one would actually get an overall return that is higher than 2% due to price fluctuations and rebalancing.

Interesting to note that we have been in a low-rate environment for several years now and the PP has turned in some very good performances, 2013 not withstanding.
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Re: Long Run Expectations For PP

Post by sophie » Sat Dec 20, 2014 10:47 am

I think the book said 2-4% real return.  And this year was actually exceptional:  inflation ~ 1.5%, year to date return of the PP was 9.7% if you started with a completely balanced portfolio (per etfreplay with VTI/TLT/GLD/SHV) - so real return around 8%.  The PP's history is the down years have always been followed by extra good years.

Don't you find those numbers surprising, given how we are all in the mindset that the PP can't possibly do well in the current environment?  This is a great year and I had no idea!

The way I always think about the PP is not about the potential real return of the various assets.  It's my pigs and troughs analogy.  Harry Browne realized that the investing world boils down to four main feeding troughs.  Money is always going to be pouring into the system and at any one time will be flowing to one or more of the troughs - and there is nowhere else for it to go.  If one trough is empty the pigs will run to one that's full.  Other investments are just different variations of one or more of them (e.g. corporate bonds are a combination of the stock and bond troughs - so there is no need to buy them).  The gain of the PP reflects gains in the money pouring in, which in turn reflects overall productivity.  So the real return analysis is sort of after the fact, and doesn't get at what actually drives the PP.  Basically, without economic productivity you can't have investment gains.

Make sense??
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Re: Long Run Expectations For PP

Post by KevinW » Sat Dec 20, 2014 2:02 pm

I expect 3-5% real returns. I don't recall where exactly those figures came from. I am targeting a 3% drawdown rate, and I expect that to be extremely likely to be sustainable indefinitely.
sophie wrote: Other investments are just different variations of one or more of them (e.g. corporate bonds are a combination of the stock and bond troughs - so there is no need to buy them).
Yes this is an important point, and I think people that give the PP a cursory look, avoiding primary sources like the published books or radio show, miss out on. The four assets are "elemental" in that other investment vehicles behave like a mixture of multiple PP assets. Like you say, corporate bonds are like a mix of bonds and stocks. International stocks are like a mix of domestic stocks and gold. The total bond market is a mix of bonds and cash with a dash of stocks. If you own all four elements, and there are only four, there is no need to also own blends of the elements, that would be redundant.
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Re: Long Run Expectations For PP

Post by Mark Leavy » Sat Dec 20, 2014 3:52 pm

I'm in the draw down phase.

Based on some of Sophie's work, I'm very comfortable allocating $100 / day / $1,000,000 assets to living expenses.  That is equivalent to a 3.65% real appreciation.

Each quarter, I move that much from my PP cash to my working accounts.  Rebalance as required.

So far, so good.  If you always take a percentage of your assets, then the drain will be self limiting.  If you are taking more than you really gained, then next year you will take less in absolute money.

Just make sure that your lifestyle will always be able to accommodate and adapt to miscalculations and unforeseen events.

- edit: changed 3.56 to 3.65
Last edited by Mark Leavy on Sat Dec 20, 2014 9:33 pm, edited 1 time in total.
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Re: Long Run Expectations For PP

Post by Pointedstick » Sat Dec 20, 2014 5:00 pm

Mark Leavy wrote: So far, so good.  If you always take a percentage of your assets, then the drain will be self limiting.  If you are taking more than you really gained, then next year you will take less in absolute money.
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Re: Long Run Expectations For PP

Post by barrett » Sat Dec 20, 2014 5:58 pm

One of the advantages of being less well-read than you guys is that I almost always remember where I got my information from!

For PP real returns check out the table on page 25 of Craig & MT's book. It shows real three, five and ten-year returns for the PP and also for a 60/40 stock/bond mix. The 3%-6% range that I gave earlier in this thread is taken from the ten-year column. That is a great table because it shows how few failures the PP has had over time (once for three years, never for five or ten...past performance is no guarantee of future results).

Mark, Thanks for sharing your draw down strategy. I am more interested in that aspect of the PP as time goes on. Simplicity is a beautiful thing when it comes to money.
Last edited by barrett on Sat Dec 20, 2014 10:09 pm, edited 1 time in total.
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Re: Long Run Expectations For PP

Post by rickb » Sat Dec 20, 2014 8:01 pm

Melveyr's blog, at http://www.stableinvesting.com/2011/04/ ... hmark.html, shows a logarithmic plot of a 4.5% real rate of return (straight line) with the PP's real return overlaid on top.  Pretty close fit.
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Re: Long Run Expectations For PP

Post by sophie » Sat Dec 20, 2014 8:14 pm

KevinW wrote: I expect 3-5% real returns. I don't recall where exactly those figures came from. I am targeting a 3% drawdown rate, and I expect that to be extremely likely to be sustainable indefinitely.
sophie wrote: Other investments are just different variations of one or more of them (e.g. corporate bonds are a combination of the stock and bond troughs - so there is no need to buy them).
Yes this is an important point, and I think people that give the PP a cursory look, avoiding primary sources like the published books or radio show, miss out on. The four assets are "elemental" in that other investment vehicles behave like a mixture of multiple PP assets. Like you say, corporate bonds are like a mix of bonds and stocks. International stocks are like a mix of domestic stocks and gold. The total bond market is a mix of bonds and cash with a dash of stocks. If you own all four elements, and there are only four, there is no need to also own blends of the elements, that would be redundant.
You all are correct, I misremembered the real return range of the PP.  Mea culpa.  We also did the real return thing to death in another spreadsheet-heavy thread, and again we came up with 3-5% real return/safe withdrawal rate.  3.5% is very safe.

I like the "elemental" description of the four PP assets - it's great to keep in mind the next time someone tells you how they're diversified, because they own 10 different stock funds, and you're not because you only have one stock fund and a lot of Treasuries. 

The PP is a lot like Italian cooking:  just a small number of simple ingredients makes for a wonderful dish.
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Re: Long Run Expectations For PP

Post by KevinW » Wed Dec 24, 2014 3:36 pm

sophie wrote: I like the "elemental" description of the four PP assets - it's great to keep in mind the next time someone tells you how they're diversified, because they own 10 different stock funds, and you're not because you only have one stock fund and a lot of Treasuries. 

The PP is a lot like Italian cooking:  just a small number of simple ingredients makes for a wonderful dish.
Yeah. This is also why I don't bother with adding things like silver or international bonds to the PP. They are redundant with the elements already present. Keep it simple. :)
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Re: Long Run Expectations For PP

Post by Stunt » Wed Dec 24, 2014 5:53 pm

I understand what you are getting at - looking forward, the prospects for the PP assets in real terms appears to be low. But I would argue that all asset classes are looking high right now with all of the liquidity sloshing around. One thing you need to consider is the rebalancing aspect of the strategy and how volatile the assets are. If you look at the annual data, even recently...gold and bonds have dropped significantly allowing for purchase at a discount and adding to future returns. If you think long term return for bonds is 1.5pct, you are neglecting to see the years where it is down 20pct, rebalanced and roars back 30pct the year after resulting in much higher than 1.5pct.

This is validated by long bonds outperforming stocks as a PP component. Just the same with stocks, the long term return might be 7pct but it's not 7pct year in and year out. If you have any suggestions for alternative strategy with similar risk profile, I would love to hear it.
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Re: Long Run Expectations For PP

Post by Tyler » Thu Dec 25, 2014 1:04 am

IMHO, just as important as the real returns (and the underlying understanding that the math behind rebalancing volatile uncorrelated assets is more sophisticated than simply averaging individual averages) are the definition of "long run" and justification for the time frame you choose to study.

Look specifically at the two heat maps here:

http://gyroscopicinvesting.com/forum/pe ... -pictures/

The Permanent Portfolio has had no rolling ten-year periods over the last 40 years with a real CAGR of less than 3.8%. The stock market (commonly accepted to always grow in the long run) has seen six 10-year periods over that same time frame with negative real returns. Both average out to 3-7% real returns "in the long run", but one provides a much more enjoyable ride along the way. 

One should not question the timing of the PP in today's market without also questioning the timing of today's market in the greater "long run" economic cycles. I personally like the PP because of the way it captures that macro vision and generates real returns in all seasons.
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Re: Long Run Expectations For PP

Post by bedraggled » Thu Dec 25, 2014 7:18 am

Hi Folks,

My first Christmas with the HBPP group!  And a great bunch to know.

Having been viewing discussions for 4 months now, I realize you are excellent teachers- and dispensers of knowledge and wisdom.

Now, a few definitions, please.

I believe Tyler referred to IMHO: help!

At the top I Shrugged mentioned SWAG:  ???!!!

And finally, after 4 months I audaciously ask: what is CAGR? 
(I think it has something to do with total return but I enthusiastically avoid the statistics keys on my TI-30 IIXS calculator). 

It has a constant feature- [2nd] followed by the tiny K.  This calculator is a nice one.  Less than $18 at Staples.
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Re: Long Run Expectations For PP

Post by D1984 » Thu Dec 25, 2014 7:39 am

bedraggled wrote: Hi Folks,

My first Christmas with the HBPP group!  And a great bunch to know.

Having been viewing discussions for 4 months now, I realize you are excellent teachers- and dispensers of knowledge and wisdom.

Now, a few definitions, please.

I believe Tyler referred to IMHO: help!

At the top I Shrugged mentioned SWAG:  ???!!!

And finally, after 4 months I audaciously ask: what is CAGR? 
(I think it has something to do with total return but I enthusiastically avoid the statistics keys on my TI-30 IIXS calculator). 

It has a constant feature- [2nd] followed by the tiny K.  This calculator is a nice one.  Less than $18 at Staples.
IMHO = In My Humble Opinion (can also be IMNSHO...In My Not So Humble Opinion; or IMO...in My Opinion).

SWAG = Scientific wild-assed guess (in other words, a completely wild guess but hopefully backed with at least some data or reason behind it)

CAGR = Compound annual growth rate. This is different from the average annual growth rate, especially for volatile investments. See http://www.moneychimp.com/features/market_cagr.htm for a quick overview of the difference. It is actually possible (given a volatile enough asset) to have a negative CAGR when the average return (arithmetic mean) is positive.
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Re: Long Run Expectations For PP

Post by bedraggled » Thu Dec 25, 2014 8:14 am

D1984,

Thanks 4 your quick and courteous response.

As this crew refuses to wake up on Christmas morning, I don't know if I have any TLT SGOL VTI or SHY waiting for me under the tree.  But I have time to respond.

I figure this bunch has another 20 minutes- 9:30 EST.  TWAS easier when they were under 10 years of age.

Best to you and all.
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Re: Long Run Expectations For PP

Post by MachineGhost » Thu Dec 25, 2014 11:42 am

D1984 wrote: CAGR = Compound annual growth rate. This is different from the average annual growth rate, especially for volatile investments. See http://www.moneychimp.com/features/market_cagr.htm for a quick overview of the difference. It is actually possible (given a volatile enough asset) to have a negative CAGR when the average return (arithmetic mean) is positive.
That's an exellent explanation!  Very few realize CAGR is just AAR - SD.  If Wall Street would simply quote their SD for their AAR, it would be easier to compare mutual fund returns.
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Re: Long Run Expectations For PP

Post by LC475 » Sat Jan 03, 2015 4:27 pm

Bond returns were much higher during the 1800s.
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Re: Long Run Expectations For PP

Post by I Shrugged » Sun Jan 04, 2015 8:58 pm

I remain unconvinced that the PP should do any better than 2% real in the long run.  Meaning, a few generations, or 100 years, or however you want to look at it.  That's why I said 30 years is nothing as far as predicting investment returns.  I think we kid ourselves by backtesting.  Let's look at each of the four components individually.

Cash:  There is very long term data showing cash returns equal inflation.  Which makes sense.
Gold:  IMO should equal inflation, for fairly obvious reasons.  After all, you can buy the same suit (or whatever) today with an ounce of gold that you could a few hundred years ago.  Can gold beat inflation for ten years?  Sure!  But I'm talking real long run.
So, that's half the weight of the mix at 0% real.  Whatever you expect to get above inflation IN THE LONG RUN should come from bonds and stocks.  What do you think they should do in the long run?

Then the next question will be, why do you think the next X years will do better than a long run average?
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Re: Long Run Expectations For PP

Post by rickb » Sun Jan 04, 2015 11:47 pm

I Shrugged wrote: I remain unconvinced that the PP should do any better than 2% real in the long run.  Meaning, a few generations, or 100 years, or however you want to look at it.  That's why I said 30 years is nothing as far as predicting investment returns.  I think we kid ourselves by backtesting.  Let's look at each of the four components individually.

Cash:  There is very long term data showing cash returns equal inflation.  Which makes sense.
Gold:  IMO should equal inflation, for fairly obvious reasons.  After all, you can buy the same suit (or whatever) today with an ounce of gold that you could a few hundred years ago.  Can gold beat inflation for ten years?  Sure!  But I'm talking real long run.
So, that's half the weight of the mix at 0% real.  Whatever you expect to get above inflation IN THE LONG RUN should come from bonds and stocks.  What do you think they should do in the long run?

Then the next question will be, why do you think the next X years will do better than a long run average?
The point is that standard deviation matters, and the PP includes assets that violently react to specific market conditions which (counter-intuitively) reduces its std dev.  Of course "IN THE LONG RUN" cash = gold < bonds < stocks.  So, definitely if your horizon is 200 years buy stocks.  However, in the really long run (1000s of years) 0 = cash = bonds = stocks << gold.  So if your horizon is 1000s of years you should definitely buy nothing but gold.

However, if your horizon is less than 200 years (perhaps a few dozen years) you might think about how volatility affects things.  If you're 100% stocks (likely the best option in 100 or so year timeframes) what happens in 10 or 20 or 30 year timeframes?  This is what the PP is for.  Over 10+ year timeframes the PP (somehow, magically) more or less matches 100% stock returns.  The magic is that it doesn't get killed when stocks get creamed.  If you can avoid a 50% down then to get to the next high you have far less work to do.  Reducing the chances that you lose 50% (which exactly what the PP does), means your expected return doesn't have to be has high to match the same return (over relatively short, e.g. dozens of years, timeframes). 

The question is what is your investing horizon?

A few years? 

Go with 100% cash.

More than a few, but less than (say) 50?

The PP is very hard to beat.

50 or more (but less than 1000s)?

Go with 100% stock.

More than a few 1000?

100% gold.
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Re: Long Run Expectations For PP

Post by MachineGhost » Mon Jan 05, 2015 4:36 am

I Shrugged wrote: Cash:  There is very long term data showing cash returns equal inflation.  Which makes sense.
No, fiat cash loses out big time to inflation.  You have to take a risk and lend it out aka T-Bills or CD's to keep pace with inflation.  Back in the days of yonder, cash was literally gold, silver, oxen, barrels of Worchestshire sauce, seashells, something real and tangible, not metaphysical toilet paper.
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Re: Long Run Expectations For PP

Post by rickb » Mon Jan 05, 2015 10:00 am

MachineGhost wrote:
I Shrugged wrote: Cash:  There is very long term data showing cash returns equal inflation.  Which makes sense.
No, fiat cash loses out big time to inflation.  You have to take a risk and lend it out aka T-Bills or CD's to keep pace with inflation.  Back in the days of yonder, cash was literally gold, silver, oxen, barrels of Worchestshire sauce, seashells, something real and tangible, not metaphysical toilet paper.
I'm pretty sure he meant "cash" in the PP sense, which is T-Bills (or equivalent).
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Re: Long Run Expectations For PP

Post by dualstow » Mon Jan 05, 2015 11:00 am

rickb wrote:   However, in the really long run (1000s of years) 0 = cash = bonds = stocks << gold.  So if your horizon is 1000s of years you should definitely buy nothing but gold.
I believe a vampire did that in one of the Anne Rice novels. Got some nice numismatic value out of the coins, too. And manager/custodial risk is not so bad when you have the power of life and death to lord over the custodian.
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Re: Long Run Expectations For PP

Post by LC475 » Mon Jan 05, 2015 11:53 am

I Shrugged wrote: Cash:  There is very long term data showing cash returns equal inflation.  Which makes sense.
Gold:  IMO should equal inflation, for fairly obvious reasons.  After all, you can buy the same suit (or whatever) today with an ounce of gold that you could a few hundred years ago.  Can gold beat inflation for ten years?  Sure!  But I'm talking real long run.
So, that's half the weight of the mix at 0% real.  Whatever you expect to get above inflation IN THE LONG RUN should come from bonds and stocks.  What do you think they should do in the long run?
Sure, basically half the portfolio is for safety, and half is for returns.  The safety half is in two very different kinds of "cash," so no matter what happens you're not going to lose it all.  Now you'd think that having 50% locked up for safety would drag down the portfolio's returns overall, but due to a brilliant design this actually has not been the case in real life.  Despite having these two assets which should, as you say, get only slightly over 0% real return over the very long term (slightly over because there should normally be a small return on the short-term loan that is buying a T-Bill), returns have not suffered.

The return half is split between stocks and bonds.  Now you seem to think that the bond half should drag returns down, but not only have they not done so in real life, unlike for cash and gold there's not even theoretical reason to believe they should.  Bonds got about the same return as stocks in the 1800s in the US.  It's not inevitable that stocks always return more than bonds.  Both amount to giving your money to someone else to use.  In fact, the only reason to think that bonds would continue to return less in the long run is if they have some other advantage over stocks that makes them more desirable, otherwise supply and demand on the market will make their returns more or less equal.  Right now, they do have such an advantage: they're seen as safer.  Will that continue?  Nobody knows; we can't predict the future.
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Re: Long Run Expectations For PP

Post by dragoncar » Mon Jan 05, 2015 7:19 pm

dualstow wrote:
rickb wrote:   However, in the really long run (1000s of years) 0 = cash = bonds = stocks << gold.  So if your horizon is 1000s of years you should definitely buy nothing but gold.
I believe a vampire did that in one of the Anne Rice novels. Got some nice numismatic value out of the coins, too. And manager/custodial risk is not so bad when you have the power of life and death to lord over the custodian.
Why does a vampire need money?
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Re: Long Run Expectations For PP

Post by dualstow » Mon Jan 05, 2015 8:07 pm

dragoncar wrote: Why does a vampire need money?
Partly to cure boredom, and partly to help humanity, which he fell in love with over the centuries.
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