Is The PP Good For Investing?

[Pointedstick]

Forgive me, but maybe you can grit your teeth and bear it knowing that the PP most likely overcome it within 3 years, but considering how empty the forum was in 2013 with a tiny loss...  I think such a MaxDD again will turn the forum into a ghost town.

Not a ghost town… probably more like a psych ward!

[glennds]

Good point. The operative word there was "seemingly"


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I continue to think that the biggest risk to almost any PP investor is a state of sustained prosperity because that little 4-5% real PP return can get pretty boring when the stock market is providing double that seemingly without much effort or risk.
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[PP67]

Welcome back, MT!

I think "highly successful investor" = "lucky"... and I have never been very lucky...  Also, I tend to view the PP as as close to a 4% inflation adjusted CD with a little risk as I have found thus far...

[Austen Heller]

I'm sure the PP IS good for investing, but it has been challenging for me.

In my own case, I embraced the PP concept around 2010 or so, but it has been tough for me to stick with over the last year or so.  The problems I have had:

1)  LT Bonds: I have always had trouble with these.  Although these were an important part of the PP when Harry Browne initially developed the portfolio, I keep feeling that if the ghost of Harry came to me in my sleep, he would tell me that "These LT bonds will not work like they're supposed to when the rates are this low".  I have been jumping in and out of these for a few years based on rates.  Last year, I loaded up when then 30-yr was at 4%, but then I bailed out completely at 3.3% to protect the profits.  Now the 30-yr is at 2.6%, so my timing was clearly bad, but I can't get push myself to get back in now.  I have been taking the alternative approach of holding a much larger position of shorter-term bonds in the 5-yr area of the rate curve (the bullet approach, as opposed to the barbell approach of the classic PP).  These don't have the same power as the LT bonds, but they're better than nothing, and they also will hopefully have some capital gains from 'riding the yield curve', since they are positioned at the steepest area of the curve.

2) Gold:  I have no problem with the current pricing of gold, in fact I think it's having a great sale these days with the price around $1200.  However, scaling-up is the problem for me.  I don't like the ETFs, I just don't trust 'em.  Clearly the best option is physical gold, but that has it's own set of problems.  I know that you can buy a bunch of gold coins, and they don't take up much space, but security is still my main concern.  So, I am massively underweight this important asset class.

Due to my problems with LT bonds and gold, I end up having a classic stock-heavy Boglehead type of portfolio.  This has worked out OK for the last few years, but I need to get my ducks-in-a-row before the next big market meltdown comes.

[buddtholomew]

I'm sure the PP IS good for investing, but it has been challenging for me.

In my own case, I embraced the PP concept around 2010 or so, but it has been tough for me to stick with over the last year or so. 

A successful HBPP investor will have the following 2 qualities:

1. Accept the future is unknown and hold all 4 assets within acceptable tolerances (15/35).
2. Have confidence that rising asset/s will out-perform falling asset/s to produce a positive real return over time.

Note that the PP has performed admirably since 2010 if you ascribed to the above philosophy. The good news is you were heavy in equities when they were performing well. Now is the perfect time to rebalance into a more sensible allocation. HB himself did this when he diversified away from gold to a more moderate holding.

[barrett]

Due to my problems with LT bonds and gold, I end up having a classic stock-heavy Boglehead type of portfolio.  This has worked out OK for the last few years, but I need to get my ducks-in-a-row before the next big market meltdown comes.

Yeah, it's hard to jump into LTTs right now. I'll buy a few when I make my IRA contributions in a coupe of months. Ditto with my wife but I am not going to enjoy it. I sold a few at around 3% and a few more around 2.8%, was under-balanced and then they rallied even more. You just never know. And I really mean that.

Plenty of people are happy with a "stock-heavy Boglehead type" portfolio. It's not the worst thing in the world if you have a long investing horizon and can hold on when stocks are getting crushed and your bonds don't have enough juice to counteract the drop. Stocks often bounce back quickly but those drops are killer.

Have you thought about just holding lower percentages on LTTs and gold? Even at 10-15%, you get a lot of the benefits of those assets. Regarding the gold coins, maybe start by just getting one or two. If that feels OK you can go from there.

I love looking at Ryan Melvey's Intraday Interplay graph on his site which is:

http://www.stableinvesting.com/p/recent ... mance.html

Kind of a mishmash of thoughts but a lot of us struggle with holding such volatiles assets.

And, yes, MT it is great to have you back on here. We all went through a bit of a withdrawal during your hiatus.

[LC475]

Do you really believe a 25% MaxDD is "low volatility"?  Don't fall victim to recency bias.

That occurred once in the 42 year data set, right?  As I recall, it was in the early 1980s when almost all investments were doing very poorly. 

No, it did not ever occur.  This is bogus and a lie.  Mr. Ghost knows this, but is fond of repeating the lie for reasons unknown to any but himself.

[MediumTex]

Do you really believe a 25% MaxDD is "low volatility"?  Don't fall victim to recency bias.

That occurred once in the 42 year data set, right?  As I recall, it was in the early 1980s when almost all investments were doing very poorly. 

No, it did not ever occur.  This is bogus and a lie.  Mr. Ghost knows this, but is fond of repeating the lie for reasons unknown to any but himself.

What is your understanding of the maximum peak to trough PP drawdown that occurred in the 1981-1982 period?

***

I love this sentence:

Mr. Ghost knows this, but is fond of repeating the lie for reasons unknown to any but himself.

That is the kind of sentence that I would like to spray paint on a wall.

[glennds]

A successful HBPP investor will have the following 2 qualities:

1. Accept the future is unknown and hold all 4 assets within acceptable tolerances (15/35).
2. Have confidence that rising asset/s will out-perform falling asset/s to produce a positive real return over time.

Note that the PP has performed admirably since 2010 if you ascribed to the above philosophy. The good news is you were heavy in equities when they were performing well. Now is the perfect time to rebalance into a more sensible allocation. HB himself did this when he diversified away from gold to a more moderate holding.

I might add to your list:
3. Have sufficient discipline and patience to stay committed to the strategy even if it feels like you're missing the party going on for those invested entirely in one of the asset classes.
4. Resist the urge to tinker with the portfolio to feel like you're being productive. The HBPP involves a lot of inaction once you set it up, and the "set it and forget it" mentality is counter-intuitive for most people. In our linear thinking society, inaction is not usually a virtue even though in some situations, it can be the smartest strategy.  A corollary to this might be to resist the urge to obsess over the portfolio. In some respects I believe one of the design criteria of the HBPP is to protect us from ourselves.

[Coffee]

You have been missed.

P.S. The PP is the super safe car that doesn't have enough horse power to get out of its own way and ends up getting creamed by a big rig truck that has, "Market Returns" painted on the side.

[dualstow]

So good to see you,Medium Tex!

[barrett]

The HBPP involves a lot of inaction once you set it up, and the "set it and forget it" mentality is counter-intuitive for most people. In our linear thinking society, inaction is not usually a virtue even though in some situations, it can be the smartest strategy. 

Dang, I wish I had written that!

[MachineGhost]

Plenty of people are happy with a "stock-heavy Boglehead type" portfolio. It's not the worst thing in the world if you have a long investing horizon and can hold on when stocks are getting crushed and your bonds don't have enough juice to counteract the drop. Stocks often bounce back quickly but those drops are killer.

Plenty of people have no real experience of what a secular bear market is like because we haven't had one since the markets have been chronically overvalued since, say, 1992.  What could go wrong?  And we all know this shoe drop is a-coming.  It's how you choose to deal with the potentiality ahead of time that is going to determine your eventual fate.  Thank gawd for the PP but you really have to do it as prescribed because every potential putcome is so darn asset class co-dependent on each other.  It's an all-or-nothing whole package deal here.  Any tactical or tilting adjustements are a whole package deal as well.  Can't have half of one and two of another.  I give myself more stress not being purely vanilla to deal with the PP's annoying fragilities than I would just "set it and forget it" and close my eyes (and ears and mouth) to a -25% MaxDD.

[Xan]

I'm really honestly asking here: when did the PP's max drawdown of 25% occur?

[MachineGhost]

P.S. The PP is the super safe car that doesn't have enough horse power to get out of its own way and ends up getting creamed by a big rig truck that has, "Market Returns" painted on the side.

+100

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[frugal]

Plenty of people are happy with a "stock-heavy Boglehead type" portfolio. It's not the worst thing in the world if you have a long investing horizon and can hold on when stocks are getting crushed and your bonds don't have enough juice to counteract the drop. Stocks often bounce back quickly but those drops are killer.

Plenty of people have no real experience of what a secular bear market is like because we haven't had one since the markets have been chronically overvalued since, say, 1992.  What could go wrong?  And we all know this shoe drop is a-coming.  It's how you choose to deal with the potentiality ahead of time that is going to determine your eventual fate.  Thank gawd for the PP but you really have to do it as prescribed because every potential putcome is so darn asset class co-dependent on each other.  It's an all-or-nothing whole package deal here.  Any tactical or tilting adjustements are a whole package deal as well.  Can't have half of one and two of another.  I give myself more stress not being purely vanilla to deal with the PP's annoying fragilities than I would just "set it and forget it" and close my eyes (and ears and mouth) to a -25% MaxDD.

MG,

how are you?

How do you know that stockmarket is overvalued?

What conditions would make you get out of PP?

My best regards.

[MachineGhost]

how are you?

How do you know that stockmarket is overvalued?

What conditions would make you get out of PP?

Doing good, how are you frugal?

There are many forward-looking indications that the US stock market is overvalued.  It may not be in a bubble, but stocks are not currently priced to deliver returns higher than TBills or TBonds over the next decade.  Everything is basically being forced to zero yields as the law of equilibrium demands.  Except, TBills and TBonds dont usually have the same downside risk as equity.  Going by history, a secular bear market low would be around 75% lower from where equities are currently.  We haven't had a secular bear market low since around 1980. From Faber:

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I wouldn't ever give up on the PP; the PP would stop working on me first.  I'd say it will cease working when your country's long term bond defaults.  Since that is starting to happen around the world, I don't have an answer as to what to do since I'm not familiar with exactly what happens during sovereign debt defaults.  Last time we had that happen was during the 1930's.  Do only long-term bonds turn into toilet paper while leaving cash and short-term durations suitable replacements?  Or does it all blow up equally?  Clueless.  But I think you can adjust your equity exposure down and cash up if you had to use lower-duration, newly issued, post-default bonds, which means availing yourself of a weighting mechanism to keep the relative asset risks normalized.  Tricky question though because everyone is going to be fleeing into the USD and TBonds as the defaults spread country to country.  What happens when the US has its own moment?  That I do not know either, I just hope I have a lot of gold at the time as would have worked in Iceland.  I think we can look towards Japan over the next year or two to get a taste of what is coming for the US because they are the farthest along this MMR/Keynesian/Socialism debt-backed fiat money nightmare for coming up with a working solution.  The EU may stave off The Fall with QEternity for awhile; but once Greece exits, its the beginning of the end.

[sophie]

I'm really honestly asking here: when did the PP's max drawdown of 25% occur?

I believe it was in 1981, which was the worst performing year for the PP (down 4% nominal, 13% real).  However, it was a tight money recession and stock portfolios were doing no better, so it didn't come with any "market envy" problems.  And the next year the PP posted its best ever return (23%).

2013 was possibly worse than 1981, because the PP was down 2-3% while stock portfolios were going gangbusters.  I remember MediumTex had to keep reminding us that this performance during a major drawdown in one of the volatile assets just showed the PP's strength.  Several of us have had past horrific experiences with the market though, and I think that made it a lot easier to put that loss into perspective.

[MachineGhost]

I'm really honestly asking here: when did the PP's max drawdown of 25% occur?

I believe it was in 1981, which was the worst performing year for the PP (down 4% nominal, 13% real).  However, it was a tight money recession and stock portfolios were doing no better, so it didn't come with any "market envy" problems.  And the next year the PP posted its best ever return (23%).

It was in 1969.  I've already discussed this many times in other threads and there's even one thread on what happened economically in 1969 to have caused it.  So use the search function, people!  You can also use Peak2Trough's backtester and set it to 4/1/1968 and you'll get close (20% MaxDD or so I as recall) because he calendar aligns rebalances.

Generally, after a losing year, the PP will run for about 11-12 years before having another losing year.  The 2000's were the exception with just 6 years.

[Xan]

It was in 1969.  I've already discussed this many times in other threads and there's even one thread on what happened economically in 1969 to have caused it.  So use the search function, people!

Can you tell me what search terms should have been used?

Are results from before the closing of the gold window even valid?

[Gosso]

Here are my results for the inflation-adjusted drawdowns of the PP and 60/40:



It's interesting that the drawdown for the PP exceeded the 60/40 drawdown in 2013, which is a rare event.

And also, welcome back MT!

[MachineGhost]

Can you tell me what search terms should have been used?

Are results from before the closing of the gold window even valid?

Hmm, try searching under "inflation 1969".

Are results before 1987 when the PP didn't exist even valid?

Besides Gosso's chart shows 1980 is almost -25% in real terms which blows away -25% in nominal.  So let's worry about that instead of 1969.

[Xan]

And how exactly would I have searched for 1969 in order to find out the answer was 1969?

[Gosso]

Besides Gosso's chart shows 1980 is almost -25% in real terms which blows away -25% in nominal.

I think you got that flipped around, if inflation is 5% and the nominal drawdown is -25% then the real drawdown would be -30%.  So drawdowns in real terms look worse.

[LC475]

What is your understanding of the maximum peak to trough PP drawdown that occurred in the 1981-1982 period?

My understanding is that it was not 25%.  It was, instead, less than 25%.  That is my understanding.  Thanks for asking!

I believe this is also Mr. Ghost's understanding, that he knows he doesn't have a leg to stand on with his erroneous/exaggerated/misremembered claim, because otherwise he would simply post the data showing his rectitude and we would all proceed to agree with him.  Instead, he has chosen to "dig in" and continue to lob his spurious criticism of the PP as frequently as he possibly can work it in.

The rest of us just say: Show Me the Data!

But he can't.  'Cause his claim is bogus.  He doesn't have the data.

Also, as a minor, tiny, irrelevant I'm sure, note: the biggest actual "draw-down" (you know, the kind that actually exists outside of Ghostly imaginations) for the PP came immediately after experiencing a ~18.5% gain in a single month.  It lasted for three months and at bottom amounted to a loss of ~20%.  Oh, the humanity.

Yep, gold can be volatile.  Yep, gold sure was volatile in 1980.  Yep, gold could be volatile again.  And yep, the PP smoothed things out as well as could possibly be expected when an asset amounting to 25% of it suddenly skyrockets to the moon and then just as suddenly crashes to the floor.