No where to hide

[Pointedstick]

--Stocks generally always go up, with some nasty downturns every, say, 7-10 years

I would not at all say that they always go up. from 1966 to 1973, stock pretty much moved sideways. That's a long time for them to not be going up. 2000-2007 was a net-negative period, with three straight difficult down years. Etc. If stocks "generally always go up", we'd be idiots for not putting all our money in them, with maybe some cash to ride out the panics.

--Bonds (I thought) were supposed to be inversely correlated to stock, they would tend to go up more when stocks went down and vv.

No, bonds are often correlated with stocks. This is why Boglehead portfolios can do so well; many times both stocks and bonds are going up… of course they can both go down too.

Are we in some Twilight Zone paradigm where it is completely possible that stocks have peaked, bonds are near a peak, cash pays zero and gold is "controlled" so that for the foreseeable future the PP doesn't work very well?  I have no other option to give that is better, however!!!

Being market agnostic is what I wanted, I am not sure with zero interest rates it all works the way he planned?

Just asking.

It works fine. When all the assets are peaky or manipulated, it's an even better idea to hedge your bets. If stocks and bonds both explode, that money has to go somewhere. If it goes into gold, we're okay. If it goes into cash, everybody's screwed since cash doesn't really rise much (Harry Browne called this condition "tight-money recession") but it'll be over soon. Really nothing survives that condition unscathed.

[dualstow]

If it is impossible for you to be content with the PP when stocks are surging,

One thing's for sure. A lot of people won't love the pp until stocks are plummeting. But will they still be in the pp when it happens?

[sixdollars]

It's hard for me to really understand that "missing out" feeling at the moment since stocks seem to be at all time highs (I guess you never know though, they could still keep going up before another big plunge...).  To me, over-weighting my portfolio into stocks right now would really cause me to lose sleep, so it's hard for me to empathize with those of you who are feeling particularly Bogleheadish nowadays.  Well, to each his own.

[dragoncar]

If it is impossible for you to be content with the PP when stocks are surging,

One thing's for sure. A lot of people won't love the pp until stocks are plummeting. But will they still be in the pp when it happens?

I can't love the PP when it's plummeting.  I can be satisfied if it plummets less than S&P500.

But I can't love the PP when it's underperforming the S&P500, either. 

The problem here is really when the PP tanks harder than S&P500, when it goes negative in "up years," and so on.

[Pointedstick]

I can't love the PP when it's plummeting.  I can be satisfied if it plummets less than S&P500.

But I can't love the PP when it's underperforming the S&P500, either. 

The problem here is really when the PP tanks harder than S&P500, when it goes negative in "up years," and so on.

Exactly. The "tracking error" requires that you be willing to diverge from the mainstream. You need to be suspicious of what "everybody else" is doing, not envious of it. One person sees stocks at all-time highs and says, "Wow, this looks like a bubble that's about to pop. I'm glad I'm not following the herd," and another person says, "Oh boy, stocks are doing great but my portfolio's lagging. I wish I'd been following the herd all this time!"

…And both of those viewpoints would be valid. The trick is knowing which person you are and arranging things accordingly. One wouldn't recommend a Smart car to someone who works on a farm; likewise the PP maybe isn't a great choice for conformists, conventional thinkers, people who have difficulty with loneliness, liberals, and conservatives. That doesn't leave a lot of people, and maybe that helps to explain why the PP is such an eclectic and unpopular portfolio.

[Mark Leavy]

Tracking Error

I define tracking error to be the deviation from a straight line linear growth.  Comparing it to some other index/portfolio doesn't make a lot of sense to me.

[img width=800]http://i62.tinypic.com/9acxao.png[/img]

The above image is a vanilla HBPP from, March 26, 2004 to May 1st, 2015, rebalanced with standard 15/35 bands.

The vertical axis is a log scale.

A linear best fit of the last 11 years of the PP (not corrected for inflation) has a line with:

CAGR of 10.78%
The average deviation from that best fit line is 5.43%
The maximum deviation from that best fit line is 12.74%
The maximum draw down (peak to trough) is 12.67%
The current deviation from that best fit line is 10.84%
The current actual CAGR is 9.83%
The current draw down (peak to trough) is 2.47%

I think this would be a better graph if I added inflation.  I'll probably do that next week sometime.

For those that like to look at your portfolio every day, this is the way to do it.
Update your spreadsheet.  Now look at the graph. (Not the sea of red or green in today's numbers)

Does it look like the underlying model is falling apart? Is something unprecedented happening?

No? Cool. It's all working.

[Edit - Added a linear chart, in case log scales are confusing to anyone]

[img width=800]http://i60.tinypic.com/nef94x.png[/img]

[barrett]

I think this would be a better graph if I added inflation.  I'll probably do that next week sometime.

Mark,

If you can do that, it would be most appreciated. My guess is that the reason we are currently below the line of best fit is because inflation is so low. The CAGR would be expected to go down in such an environment. We all know that big nominal returns make us feel good but that only real returns matter.

[Pfanni]

The problem is that stocks and bonds move in lockstep quite some time, which explains the good performance of anything 60/40 or Bogleheads over the past decades.
Ray Dalio himself stated that a 60/40 is basically a one-way bet on stocks, which is why he doesn't like that portfolio.

What most people just don't seem to grasp is the way 3rd world countries have subsidized our standard of living as well as our portfolio returns ever since China opened up to world trade in the early 80s.
Early 80s was high nominal returns on bonds, yet declining inflation by importing cheaply manufactured goods from offshore countries. We have ever lower inflation and ever lower interest rates because of Globalization. The FED would love to see 4% inflation and the funds rate at 4%. But they can't seem to accomplish this in the face of Globalization.
Side effects included the disappearance of breadwinner, blue collar middle class jobs all through the western world (jobs went offshore over time).
We cannot import cheap goods, yet keep the bad stuff (their relative standard of living) out. Any meaningful uptick in middle class income in the western world would lead to relentless outsourcing once again.
Thirty years of supply-side economics, even Bush senior himself called it Voodoo Economics, have done the utmost damage - one cannot trade with mercantilist nations.
The good news is that we all gonna wind up on the same page, globally speaking, with a much, much lower standard of living and finally we will have fair trade and start over.
(As a side note I think the riots and problems of Baltimore are like a canary in a coal-mine..the problems of these black communities show the way the whole country is headed..the poverty freight train won't exclude the white middle class in the long run).

That's why I think PP is suitable for my view of the world. At some point, deflation will take over big time, 30yr bonds will be king, then the money helicopters will come to stave off deflation, then gold will be king. The timing of course will be impossible to predict, but PP doesn't require timing.

[Kriegsspiel]

What most people just don't seem to grasp is the way 3rd world countries have subsidized our standard of living as well as our portfolio returns ever since China opened up to world trade in the early 80s.

Early 80s was high nominal returns on bonds, yet declining inflation by importing cheaply manufactured goods from offshore countries. We have ever lower inflation and ever lower interest rates because of Globalization. The FED would love to see 4% inflation and the funds rate at 4%. But they can't seem to accomplish this in the face of Globalization. Side effects included the disappearance of breadwinner, blue collar middle class jobs all through the western world (jobs went offshore over time).

We cannot import cheap goods, yet keep the bad stuff (their relative standard of living) out. Any meaningful uptick in middle class income in the western world would lead to relentless outsourcing once again.

Thirty years of supply-side economics, even Bush senior himself called it Voodoo Economics, have done the utmost damage - one cannot trade with mercantilist nations. The good news is that we all gonna wind up on the same page, globally speaking, with a much, much lower standard of living and finally we will have fair trade and start over. (As a side note I think the riots and problems of Baltimore are like a canary in a coal-mine..the problems of these black communities show the way the whole country is headed..the poverty freight train won't exclude the white middle class in the long run).

That's why I think PP is suitable for my view of the world. At some point, deflation will take over big time, 30yr bonds will be king, then the money helicopters will come to stave off deflation, then gold will be king. The timing of course will be impossible to predict, but PP doesn't require timing.

It's funny, when you describe it like that, it sounds like global capitalism is pushing us ever more towards the communist ideal. Westerners are getting poorer, developing countries are takin' urr jabs and getting richer, so everyone is getting more equal.

[ochotona]

It's funny, when you describe it like that, it sounds like global capitalism is pushing us ever more towards the communist ideal. Westerners are getting poorer, developing countries are takin' urr jabs and getting richer, so everyone is getting more equal.

In perfectly competitive markets, economic profits are zero in the long run because new players are able to enter a market, take market share away from the leaders, usually with a lower price for their particular offering.

[dualstow]

...
Ray Dalio himself stated that a 60/40 is basically a one-way bet on stocks, which is why he doesn't like that portfolio.

Doesn't it depend on what kind of bonds one holds?

(As a side note I think the riots and problems of Baltimore are like a canary in a coal-mine..the problems of these black communities show the way the whole country is headed..the poverty freight train won't exclude the white middle class in the long run).

It's certainly a problem, but gosh I hope you turn out to be wrong on that.

[Pointedstick]

...
Ray Dalio himself stated that a 60/40 is basically a one-way bet on stocks, which is why he doesn't like that portfolio.

Doesn't it depend on what kind of bonds one holds?

(As a side note I think the riots and problems of Baltimore are like a canary in a coal-mine..the problems of these black communities show the way the whole country is headed..the poverty freight train won't exclude the white middle class in the long run).

It's certainly a problem, but gosh I hope you turn out to be wrong on that.

I don't think it's quite as dire as all that, but Pfanni's position seems largely correct to me. It's is in fact exactly what Austrian economics predicts: as the market becomes freer and more competitive, prices fall, introducing broad-based deflation. Of course they overlook that wages and interest rates are prices, too. In a deflationary environment, it seems silly to expect wages to rise or nominal interest rates to be much higher than zero.

The potentially unfortunate problem with more competition is that it might turn out that your competitors aren't up to snuff. In a global market, this means that the most globally efficient firms will win, but of course if few of those firms are in your country, there's a big problem. In terms of averages, his doesn't seem like it portends doom for the USA since we have a lot of globally-competitive firms here. But for the below-average, this is indeed a very dire situation, since they're not only competing with their fellow citizens, but rather the whole world.

In the end, the "great equalization" seems inevitable, but once dire poverty has been mostly stamped out and the global minimum standard of living is much higher, then all of the sudden there's no cheap labor anymore, and domestic production will probably return. That's when the robotic production revolution will really take off, and the below-average will be screwed again. Perhaps we'll have a citizen's dividend by then.

[Pfanni]

If you want to read up on this whole third world-deflation theme, I highly recommend this blog:

http://ponziworld.blogspot.ca/2013/03/t ... virus.html

As long as there is a differential in cost/price between the two markets, then the arbitrage makes money. In the context of global trade, the transaction requires buying labour only in the lowest price locales, and selling the finished product to the developed economies, capturing the spread between the standard of living between these two worlds.
Of course, however, all arbitrage strategies are self-destructing, because the act of systematically buying in one market and selling in the another market converges prices such that the arbitrage is no longer profitable.

(the writer deserves a Pulitzer!!!)


Be careful, the blog is oozed with (vested) pessimism - nevertheless this blogger hits the nail on the head.
I don't know why that blogger isn't more popular. One of the very best around IMO.

[barrett]

Tracking Error

I define tracking error to be the deviation from a straight line linear growth.  Comparing it to some other index/portfolio doesn't make a lot of sense to me.

[img width=800]http://i62.tinypic.com/9acxao.png[/img]

The above image is a vanilla HBPP from, March 26, 2004 to May 1st, 2015, rebalanced with standard 15/35 bands.

The vertical axis is a log scale.

A linear best fit of the last 11 years of the PP (not corrected for inflation) has a line with:

CAGR of 10.78%
The average deviation from that best fit line is 5.43%
The maximum deviation from that best fit line is 12.74%
The maximum draw down (peak to trough) is 12.67%
The current deviation from that best fit line is 10.84%
The current actual CAGR is 9.83%
The current draw down (peak to trough) is 2.47%

I think this would be a better graph if I added inflation.  I'll probably do that next week sometime.

For those that like to look at your portfolio every day, this is the way to do it.
Update your spreadsheet.  Now look at the graph. (Not the sea of red or green in today's numbers)

Does it look like the underlying model is falling apart? Is something unprecedented happening?

No? Cool. It's all working.

[Edit - Added a linear chart, in case log scales are confusing to anyone]

[img width=800]http://i60.tinypic.com/nef94x.png[/img]

Thought I should link to Ryan Melvey's graph comparing the PP return to a real return of 4.5%. The data only go through 2010 but this is what Mark is talking about. Here is melveyr's article & graph:

http://www.stableinvesting.com/2011/04/ ... hmark.html

[LC475]

And the rout continues...rationalize all you want, but the bottom line is the portfolio is doing absolutely nothing but racking up losses.

Umm, are you using the same portfolio I am?  Because mine seems to be tooling along steady and boring.  Exactly as designed.  +1% is not thrilling nor even exciting, but if one is looking for excitement, one should look elsewhere.  Don't worry, there'll be +5% years again, too.  There'll even be +10% years.  Maybe next year.  Maybe even this year.  Who can say?  But certainly -- guaranteed -- not every year.  And that's OK!  That needs to be OK for you.  It really does.  Otherwise you are not going to be able to deal.

[Tom]

Mine is down -.46% YTD.

[buddtholomew]

Of course in isolation the YTD performance is of little concern, but compared to a conservative allocation the portfolio is under-performing again. If money flows from one asset to another, then tell me which asset is the beneficiary of these funds of late?

[Pointedstick]

Of course in isolation the YTD performance is of little concern, but compared to a conservative allocation the portfolio is under-performing again. If money flows from one asset to another, then tell me which asset is the beneficiary of these funds of late?

Well let's see, stocks are up 2.5% while gold is up 0.75% and long bonds down 1.8%. So I'm going to say into stocks and gold to a lesser extent, and out of long bonds.

But how "conservative" is a "conservative allocation" really? If you're talking about a stock/bond mix, that's not even remotely in the realm of what I would call conservative. Relative to 100% stocks, maybe. In an absolute sense, no. A graph of the performance will basically look like a smoother version of the stock market. If that's what you want, you should just have that. But just remember that a smoother version of way down is still way down.

[ochotona]

Of course in isolation the YTD performance is of little concern, but compared to a conservative allocation the portfolio is under-performing again. If money flows from one asset to another, then tell me which asset is the beneficiary of these funds of late?

A 50% S&P500 and 50% 30 year T-bond portfolio is -0.79% YTD
A 50% S&P500 and 50% 10 year T-bond portfolio is +1.12% YTD

What conservative allocation are we doing so badly against?

[buddtholomew]

Not everyone is only invested in the US S&P500 fund. I personally hold investments in INT LC, SC and Emerging Markets which are positive approximately 9% YTD. So...the point is money does not have to flow into one of the other PP assets. The recent inflows to international are a prime example.

[Pointedstick]

Not everyone is only invested in the US S&P500 fund. I personally hold investments in INT LC, SC and Emerging Markets which are positive approximately 9% YTD.

…Which in no way should be confused with a "conservative allocation." Comparing the PP to a stock-heavy portfolio that's invested in emerging markets is like judging a battle tank by the standards of a fighter jet. If you want to be disappointed that the TRULY conservative PP is underperforming a bunch of stocks, then maybe you should exit the PP and own more stocks.

[buddtholomew]

Not everyone is only invested in the US S&P500 fund. I personally hold investments in INT LC, SC and Emerging Markets which are positive approximately 9% YTD.

…Which in no way should be confused with a "conservative allocation." Comparing the PP to a stock-heavy portfolio that's invested in emerging markets is like judging a battle tank by the standards of a fighter jet. If you want to be disappointed that the TRULY conservative PP is underperforming a bunch of stocks, then maybe you should exit the PP and own more stocks.

Oh I see..so emerging markets is "too risky" but gold and long-term treasuries are "conservative". Do you feel the same way about INT LC and SC stocks? How are they more risky than the S&P500?

I feel the PP does not hold enough stock exposure to counterbalance declines in gold and/or long-term treasuries. I don't know how others hold the PP knowing that they have lost out on substantial gains since 2009. Just saying...

[sixdollars]

Not everyone is only invested in the US S&P500 fund. I personally hold investments in INT LC, SC and Emerging Markets which are positive approximately 9% YTD.

…Which in no way should be confused with a "conservative allocation." Comparing the PP to a stock-heavy portfolio that's invested in emerging markets is like judging a battle tank by the standards of a fighter jet. If you want to be disappointed that the TRULY conservative PP is underperforming a bunch of stocks, then maybe you should exit the PP and own more stocks.

Oh I see..so emerging markets is "too risky" but gold and long-term treasuries are "conservative". Do you feel the same way about INT LC and SC stocks? How are they more risky than the S&P500?

I feel the PP does not hold enough stock exposure to counterbalance declines in gold and/or long-term treasuries. I don't know how others hold the PP knowing that they have lost out on substantial gains since 2009. Just saying...

If you're going to constantly compare yourself to a conventional bogleheads portfolio, maybe that's the one you should hold - at least then you won't feel like you're missing out all the time. 

But why do I get the feeling - if you switched - that during the next stock bear market you'd be complaining in the bogleheads' forums that the PP is doing so much better and that there's too much risk in stock heavy portfolios. 

I think there's a lot to be said with being content and not comparing yourself to others.  There's always going to be someone with a higher yearly return than you - deal with it.  Find a portfolio that matches your personality and then stick with it - otherwise I don't know what all this stress is going to do to your health

[dutchtraffic]

I'm down nearly 5% since i bought my eu PP just a few weeks ago.... bad timing i guess
Not so low volatility when all 3 assetclasses decide to drop together 

[Pointedstick]

I don't know how others hold the PP knowing that they have lost out on substantial gains since 2009. Just saying...

Wishing you'd acted in the past with the knowledge you have now can only end in disappointment. Seriously. Yes, I missed out on a lot of stock gains by not being 100% stocks. But I also missed out on a lot of gold gains all throughout the prior decade by not being 100% gold. What's the point in wishing you could go back in time and make the perfect decision that nobody at the time (yourself included) could possible have known was the perfect decision? Torturing yourself like that is madness.