New PPer needs guidance.

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dragoncar
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Re: New PPer needs guidance.

Post by dragoncar » Fri Jun 05, 2015 4:10 pm

MediumTex wrote:
Matthew19 wrote:
buddtholomew wrote: Run as far away as fast as possible...I could not be more sincere. This portfolio is not what they make it out to be. This is the 7th day of straight losses...the money you can't affort to lose...my a$$
I'm sorry for the losses but I really don't plan to run. I can appreciate that this is a strange market and while it adjusts the PP will have some short term stagnation. I don't plan to look at it daily or even weekly, I run a business and have a family, I'd rather enjoy life.
If the PP were a 10 hour international flight, budd would be the guy sitting next to you who turns to you every 30 minutes and says: "I'm pretty sure the plane is about to crash."
Budd is the guy next to you during turbulence saying "wow, this jet airliner, often touted for it's extreme stability in flight, is sure rocking a lot!  airliner for the lunch you can't afford to lose, my ass!"
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Re: New PPer needs guidance.

Post by MediumTex » Fri Jun 05, 2015 4:24 pm

dragoncar wrote: Budd is the guy next to you during turbulence saying "wow, this jet airliner, often touted for it's extreme stability in flight, is sure rocking a lot!  airliner for the lunch you can't afford to lose, my ass!"
Deep and subtle with the deftest touch.

[claps]
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Re: New PPer needs guidance.

Post by sixdollars » Fri Jun 05, 2015 5:58 pm

iwealth wrote: Since the start of the year, the portfolio is down what, 0.75% this year?

So, the equivalent of flying along at 30,000 feet and plummeting to 29,775.
I'm imagining the following conversation.

Budd: "I should never have gotten on this plane flight.  I felt fine as we ascended, but now it feels as though we're falling way too fast..."
Me: "Dude, we've only descended like 225 feet."
Budd: "OMG turbulence!  I think the plane is crashing!"
Me: "This is normal for a long plane ride - I'd almost find it more strange if we encountered NO turbulence."
Budd: "Hold me, I'm scared."
Me: "Okay, come on in buddy."
Last edited by sixdollars on Fri Jun 05, 2015 6:00 pm, edited 1 time in total.
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Re: New PPer needs guidance.

Post by MachineGhost » Fri Jun 05, 2015 9:12 pm

I really fear this is what will happen to budd when the PP hits that infamous maximum drawdown that I-used-to-mention-but-no-longer-do-due-to-he-who-shall-remain-nameless:

[align=center]Image[/align]
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Re: New PPer needs guidance.

Post by MediumTex » Fri Jun 05, 2015 10:19 pm

MachineGhost wrote: I really fear this is what will happen to budd when the PP hits that infamous maximum drawdown that I-used-to-mention-but-no-longer-do-due-to-he-who-shall-remain-nameless:
I was thinking more of an internal pressure-induced event:

Image

I watched "Scanners" for the first time when I was about 12 years old, and in retrospect that was probably not a good idea.  It's a disturbing movie.
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Re: New PPer needs guidance.

Post by Matthew19 » Fri Jun 05, 2015 11:50 pm

I didn't expect this thread to end up with exploding heads haha

I'll say this for anyone who feels like they are missing out the stock market gains: the people who are stock heavy aren't selling, and you probably wouldn't be either. When it turns and takes a dump they will give it all back. I did it in 2010-2013 with the gold miners. Huge gains at first, but I never sold and now they are all negative. I would have loved to have had the modest gains of the PP instead of being half right in asset class timing.
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Re: New PPer needs guidance.

Post by MediumTex » Fri Jun 05, 2015 11:53 pm

Matthew19 wrote: I didn't expect this thread to end up with exploding heads haha
Going from some basic PP newbie questions to an exploding head without straying too far off topic and doing it in under 4 pages is pretty impressive.
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Re: New PPer needs guidance.

Post by Reub » Sat Jun 06, 2015 12:00 am

Maybe budd has a point. Is the PP positively biased because of the long term bull markets in gold and treasuries? Are we only here because of recency bias? What if these bulls have run their course? How do we know that what has happened in the past will repeat in the future?  What if business cycles behave differently or these assets become less valuable or worthless?
Last edited by Reub on Sat Jun 06, 2015 12:16 am, edited 1 time in total.
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Re: New PPer needs guidance.

Post by Pointedstick » Sat Jun 06, 2015 12:22 am

Reub wrote: Maybe budd has a point. Is the PP positively biased because of the long term bull markets in gold and treasuries?
What long-term bull market in gold?
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Re: New PPer needs guidance.

Post by MediumTex » Sat Jun 06, 2015 1:23 am

Pointedstick wrote:
Reub wrote: Maybe budd has a point. Is the PP positively biased because of the long term bull markets in gold and treasuries?
What long-term bull market in gold?
And I would point Reub back to some of the PP basics, like if one asset is falling, another asset MUST be rising, and if you can somehow find proxies for assets associated with all conceivable economic environments, then you will always have at least one winner in your portfolio, and that's enough to protect you.
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Re: New PPer needs guidance.

Post by Mark Leavy » Sat Jun 06, 2015 1:54 am

Good question Reub (and Budd).

I think you should always question the fundamentals of any system.  The problem is in not having a decent metric to evaluate whether the fundamentals are working or not.  You can't look at the day to day swings.  That is just noise and will drive you crazy.  But without something else to look at, you can never be sure that it is all working.

The metric that I have finally settled on is a linear fit of the inflation adjusted returns.  Here's the vanilla HBPP over the last 10 years:

[img width=800]http://i57.tinypic.com/2z8ng2w.png[/img]

The linear fit of the inflation adjusted growth rate is 8.45%.
The average (RMS) deviation from that best fit line is 4.88%
The largest deviation from the line (not MaxDD) is 13.5%
Our current deviation from that best fit linear line is 8.58%

So... yes we are down a little bit from average over the last 10 years.
We are still aways a bit from even our worst 10 year slump.

Nothing in this picture makes me think the model is broken.

Think of this post as just an example.  You need some metric that can give you an accurate picture of the model performing to plan.  Pick whatever you want - but a day/week up/down will not give you the information you are looking for.

Hope this helps.

All the best,
Mark
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Re: New PPer needs guidance.

Post by barrett » Sat Jun 06, 2015 6:49 am

Mark Leavy wrote: The metric that I have finally settled on is a linear fit of the inflation adjusted returns.  Here's the vanilla HBPP over the last 10 years:

[img width=800]http://i57.tinypic.com/2z8ng2w.png[/img]
The linear fit of the inflation adjusted growth rate is 8.45%.
The average (RMS) deviation from that best fit line is 4.88%
The largest deviation from the line (not MaxDD) is 13.5%
Our current deviation from that best fit linear line is 8.58%
Mark,

Thanks for sharing that. A couple of questions...

By "inflation adjusted growth rate" you mean, real rate of return, correct? If so, shouldn't that number be something around 4.5% instead of 8.45%?

Your post is similar to Ryan's Melvey's "What's My Benchmark" article here:

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

Also, I really think we need a quick performance link on the home page of this forum so that we all know what we are talking about when we get into the debate about whether or not the PP's current performance is tracking its historical performance. I get frustrated when I read most 'tracking error' posts because the PP is not supposed to track some other index like the S&P 500 or a 60/40 Bogleheads setup. We should only be comparing it to itself. Only then can we have reasonable discussions about whether or not it is lagging, broken, outperforming, regressing to the mean, etc.
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Re: New PPer needs guidance.

Post by Professor Disorientation » Sat Jun 06, 2015 8:38 am

Matthew,

When to sell separates the winners from the losers. I buy penny stocks and have had some success with them (this is the variable part of my portfolio). My goal is for every penny stock to double (of course not all of them do). This is my selling plan. When the stock doubles I will sell half of my holdings. Then when the stock declines 25% from its highest point I sell the remainder of my shares. These are the kind of stocks you date, not marry.
A common refrain I hear is "What if it goes back up after you sell?" Maybe 1 out of 10 might, but most of them will fall further but you have your cash in your hands.

If you had sold on a 25% decline from the stock's high, you would have pocketed some nice profits. It is sickening to watch a stock with nice gains turn red in negative territory. The plan I use above  helps to prevent this.
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Re: New PPer needs guidance.

Post by Reub » Sat Jun 06, 2015 8:52 am

MediumTex wrote:
Pointedstick wrote:
Reub wrote: Maybe budd has a point. Is the PP positively biased because of the long term bull markets in gold and treasuries?
What long-term bull market in gold?
And I would point Reub back to some of the PP basics, like if one asset is falling, another asset MUST be rising, and if you can somehow find proxies for assets associated with all conceivable economic environments, then you will always have at least one winner in your portfolio, and that's enough to protect you.
What about when 2 assets are falling and the other is overvalued?
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Re: New PPer needs guidance.

Post by Reub » Sat Jun 06, 2015 8:55 am

Mark Leavy wrote: Good question Reub (and Budd).

I think you should always question the fundamentals of any system.  The problem is in not having a decent metric to evaluate whether the fundamentals are working or not.  You can't look at the day to day swings.  That is just noise and will drive you crazy.  But without something else to look at, you can never be sure that it is all working.

The metric that I have finally settled on is a linear fit of the inflation adjusted returns.  Here's the vanilla HBPP over the last 10 years:

[img width=800]http://i57.tinypic.com/2z8ng2w.png[/img]

The linear fit of the inflation adjusted growth rate is 8.45%.
The average (RMS) deviation from that best fit line is 4.88%
The largest deviation from the line (not MaxDD) is 13.5%
Our current deviation from that best fit linear line is 8.58%

So... yes we are down a little bit from average over the last 10 years.
We are still aways a bit from even our worst 10 year slump.

Nothing in this picture makes me think the model is broken.

Think of this post as just an example.  You need some metric that can give you an accurate picture of the model performing to plan.  Pick whatever you want - but a day/week up/down will not give you the information you are looking for.

Hope this helps.

All the best,
Mark
Thank you, Mark! Your posts are always polite and insightful. But do you have a 10 year chart available for the next 10 years?
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Re: New PPer needs guidance.

Post by MachineGhost » Sat Jun 06, 2015 9:33 am

Mark Leavy wrote: Think of this post as just an example.  You need some metric that can give you an accurate picture of the model performing to plan.  Pick whatever you want - but a day/week up/down will not give you the information you are looking for.
Could you run it again but this time with gold at 20%/cash 30% that I determined was risk parity?
"All generous minds have a horror of what are commonly called 'Facts'. They are the brute beasts of the intellectual domain." -- Thomas Hobbes

Disclaimer: I am not a broker, dealer, investment advisor, physician, theologian or prophet.  I should not be considered as legally permitted to render such advice!
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Re: New PPer needs guidance.

Post by MachineGhost » Sat Jun 06, 2015 9:34 am

barrett wrote: Also, I really think we need a quick performance link on the home page of this forum so that we all know what we are talking about when we get into the debate about whether or not the PP's current performance is tracking its historical performance. I get frustrated when I read most 'tracking error' posts because the PP is not supposed to track some other index like the S&P 500 or a 60/40 Bogleheads setup. We should only be comparing it to itself. Only then can we have reasonable discussions about whether or not it is lagging, broken, outperforming, regressing to the mean, etc.
Yes, we should have it track the global financial asset portfolio so we can stop worrying about tracking error anxiety.
"All generous minds have a horror of what are commonly called 'Facts'. They are the brute beasts of the intellectual domain." -- Thomas Hobbes

Disclaimer: I am not a broker, dealer, investment advisor, physician, theologian or prophet.  I should not be considered as legally permitted to render such advice!
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Re: New PPer needs guidance.

Post by iwealth » Sat Jun 06, 2015 10:22 am

Reub wrote: What about when 2 assets are falling and the other is overvalued?
If you are the type of person that insists on making opinions on whether assets are over/undervalued, passive investing just isn't for you. It doesn't matter how you structure your portfolio (PP, 60/40, etc.), something will always be rising, falling, "overvalued" or "undervalued". The PP is particularly bad for such a person because the individual assets are in fact quite volatile and swing rapidly from highs to lows and vice versa.

Honestly, if you are so concerned, just go to cash for awhile until 1) two assets aren't falling and 2) the other asset doesn't appear overvalued. What do you have to lose? It depends on your age of course, but if you have plenty of investing years left, you still have plenty of time to make gains and in the meantime what's more valuable than peace of mind?
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Re: New PPer needs guidance.

Post by buddtholomew » Sat Jun 06, 2015 11:27 am

MediumTex wrote:
Pointedstick wrote:
Reub wrote: Maybe budd has a point. Is the PP positively biased because of the long term bull markets in gold and treasuries?
What long-term bull market in gold?
And I would point Reub back to some of the PP basics, like if one asset is falling, another asset MUST be rising, and if you can somehow find proxies for assets associated with all conceivable economic environments, then you will always have at least one winner in your portfolio, and that's enough to protect you.
Where do we find evidence of these 2 fundamental principles of the portfolio - namely another asset MUST be rising when one or more is falling and you will ALWAYS have one winner that is sufficient to protect you. These are at the core of the PP philosophy. How can you be so sure?

I have personally witnessed 1 negative Year and YTD we are negative as well. I don't recall the specifics, but negative years are 2-5 in 40 and now they are becoming more frequent.
Last edited by buddtholomew on Sat Jun 06, 2015 11:31 am, edited 1 time in total.
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Re: New PPer needs guidance.

Post by iwealth » Sat Jun 06, 2015 12:19 pm

buddtholomew wrote: Where do we find evidence of these 2 fundamental principles of the portfolio - namely another asset MUST be rising when one or more is falling and you will ALWAYS have one winner that is sufficient to protect you. These are at the core of the PP philosophy. How can you be so sure?

I have personally witnessed 1 negative Year and YTD we are negative as well. I don't recall the specifics, but negative years are 2-5 in 40 and now they are becoming more frequent.
May be helpful if everyone provides their definition of "protection" first because I'm sure MT's will be different than yours.
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Re: New PPer needs guidance.

Post by KevinW » Sat Jun 06, 2015 12:22 pm

barrett wrote: I get frustrated when I read most 'tracking error' posts because the PP is not supposed to track some other index like the S&P 500 or a 60/40 Bogleheads setup. We should only be comparing it to itself. Only then can we have reasonable discussions about whether or not it is lagging, broken, outperforming, regressing to the mean, etc.
+1
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Re: New PPer needs guidance.

Post by MachineGhost » Sat Jun 06, 2015 12:34 pm

buddtholomew wrote: Where do we find evidence of these 2 fundamental principles of the portfolio - namely another asset MUST be rising when one or more is falling and you will ALWAYS have one winner that is sufficient to protect you. These are at the core of the PP philosophy. How can you be so sure?
He means that in real terms.  Cash certainly won't go up in nominal terms when the other three are declining.

Look, if you find the vanilla PP too risky the simplest solution to the problem is to increase the cash balance so that the overall portfolio risk is at a level you're comfortable with historically.

If you're arguing that the non-correlation of the assets is breaking down, well, what is the alternative?
Last edited by MachineGhost on Sat Jun 06, 2015 12:35 pm, edited 1 time in total.
"All generous minds have a horror of what are commonly called 'Facts'. They are the brute beasts of the intellectual domain." -- Thomas Hobbes

Disclaimer: I am not a broker, dealer, investment advisor, physician, theologian or prophet.  I should not be considered as legally permitted to render such advice!
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Re: New PPer needs guidance.

Post by barrett » Sat Jun 06, 2015 1:20 pm

buddtholomew wrote: I have personally witnessed 1 negative Year and YTD we are negative as well. I don't recall the specifics, but negative years are 2-5 in 40 and now they are becoming more frequent.
Budd, The actual number of negative years in real terms is eight so far. This is according to the data in Craig & MT's book. I am also including 2013 (their data only went through 2011). The reason the nominal returns are now more frequently negative is most likely because they are clustered around a lower number due to really low inflation.

For example, if we have 4% - 5% inflation, we would expect much higher nominal returns than we are getting now. The higher nominal returns help to "mask" the down years because even in a down year, you might still be getting an annualized nominal return of 2% or so (think 1999 to 2002).

When looked at from this perspective, the PP is (I would argue) in fact underperforming slightly since the middle of 2013. This is what Mark's graph shows. If it continues to underperform for an extended period, then maybe the approach needs to be rethought.

Your entry point IIRC was early 2013, so a tough time psychologically, but over the long haul it shouldn't matter much.
Last edited by barrett on Sat Jun 06, 2015 2:55 pm, edited 1 time in total.
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Re: New PPer needs guidance.

Post by buddtholomew » Sat Jun 06, 2015 2:36 pm

MachineGhost wrote:
buddtholomew wrote: Where do we find evidence of these 2 fundamental principles of the portfolio - namely another asset MUST be rising when one or more is falling and you will ALWAYS have one winner that is sufficient to protect you. These are at the core of the PP philosophy. How can you be so sure?
He means that in real terms.  Cash certainly won't go up in nominal terms when the other three are declining.

Look, if you find the vanilla PP too risky the simplest solution to the problem is to increase the cash balance so that the overall portfolio risk is at a level you're comfortable with historically.

If you're arguing that the non-correlation of the assets is breaking down, well, what is the alternative?
I hold additional cash (duration, 5.6 years) to dampen the volatility, but since 09/2011 I have only earned a total return of approximately 13%, 3.4% CAGR). For comparison purposes a 50/0/25/25 over the same period returned 45%, 10.4% CAGR). I bought gold at the top and now bond yields are at the bottom....the fun never ends.

I intend to stay invested in the PP, but the experience has not been as rewarding as I expected.
"The first principle is that you must not fool yourself and you are the easiest person to fool" --Feynman.
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Re: New PPer needs guidance.

Post by Reub » Sat Jun 06, 2015 3:08 pm

Is anyone here really saying that gold and treasuries can't enter into 30 year bear cycles? And that equities can't decline also? Can I have that guarantee in writing?
Last edited by Reub on Sun Jun 07, 2015 6:53 pm, edited 1 time in total.
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