New PPer needs guidance.

General Discussion on the Permanent Portfolio Strategy

Moderator: Global Moderator

barrett
Executive Member
Executive Member
Posts: 1535
Joined: Sat Jan 04, 2014 2:54 pm

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.
User avatar
buddtholomew
Executive Member
Executive Member
Posts: 2118
Joined: Fri May 21, 2010 4:16 pm

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.
Reub
Executive Member
Executive Member
Posts: 3158
Joined: Fri Jan 21, 2011 5:44 pm

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.
screwtape
Executive Member
Executive Member
Posts: 252
Joined: Tue May 26, 2015 7:05 pm

Re: New PPer needs guidance.

Post by screwtape » Sat Jun 06, 2015 5:26 pm

Reub wrote: Is anyone here really sayijg that gold and treasuries can't enter into 30 year bear cycles?
Can we come up with some terms besides "bear and bull"? They both start with "B" and at my age I have a hard time remembering which is which.

(But just as soon as I wrote this I think I may have figured it out, I think. Just add "shit" after bull and don't think about whether a bear shits in the woods or not).
Formerly known as madbean
User avatar
Mark Leavy
Executive Member
Executive Member
Posts: 1155
Joined: Thu Mar 01, 2012 10:20 pm
Location: US Citizen, Permanent Traveler

Re: New PPer needs guidance.

Post by Mark Leavy » Sat Jun 06, 2015 9:53 pm

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.
Barrett my apologies for the late reply.  I've been enjoying San Diego - and fatty red meat and red wine :)

Your comment made good sense - and so I went through my spreadsheet today, brought it up to date (as of Friday's close) and tried to find some errors.  I didn't find any, but that wouldn't be the first time that I missed something obvious...

It's only about 10 years of data - so far from enough information to make any long term evaluations.

Yes - When I say "inflation adjusted returns" I really mean "real returns".  From what I can tell, the last 10 years have been better than average for the HBPP.  Closer to 8 to 9 percent real instead of 4 to 5%.  That should be a good indicator that you can't rely too much on any 10 year model...

So... here's what I have in my spreadsheet.  From March 26, 2004 to June 5 2015:

The black line is nominal returns (9.58% CAGR over this period)
The blue/purple line, just below it is the inflation adjusted return.  (7.32% over this period)
The vertical lines are rebalance points (15/35)

Image

Here's the logarithmic chart of just the real (inflation adjusted) returns.
The "best fit" line to these returns is 8.43%.  Note that that the best fit line is a bit higher than actual.

Image


Image

Again, don't get your head too caught up in just the last 10 years.  All this tells me is that the HBPP doesn't appear to be currently broken, and that the last 10 years have been better than average.

AND... Please don't believe these charts on face value.  I've been known to make plenty of clerical errors in the past.  If your data disagrees, I would very much like to know.

To Reub's point - I don't have a chart for the next 10 years.  As soon as I figure out how to do that, I'll let you guys know right away.
Pinky swear.
Last edited by Mark Leavy on Sat Jun 06, 2015 11:20 pm, edited 1 time in total.
User avatar
Mark Leavy
Executive Member
Executive Member
Posts: 1155
Joined: Thu Mar 01, 2012 10:20 pm
Location: US Citizen, Permanent Traveler

Re: New PPer needs guidance.

Post by Mark Leavy » Sat Jun 06, 2015 10:06 pm

MachineGhost wrote: Could you run it again but this time with gold at 20%/cash 30% that I determined was risk parity?
Using these allocations and rebalance band:
Image

Nominal CAGR = 9.29%, Real 7.04%
Image

Image

Image
Image

[I updated this with a fixed lower rebalance band on gold.  I had messed it up on the first run while using MG's recommended 20%]
Last edited by Mark Leavy on Sun Jun 07, 2015 9:35 am, edited 1 time in total.
Pet Hog
Executive Member
Executive Member
Posts: 218
Joined: Tue May 28, 2013 4:08 pm

Re: New PPer needs guidance.

Post by Pet Hog » Sat Jun 06, 2015 11:44 pm

Mark Leavy wrote: So... here's what I have in my spreadsheet.  From March 26, 2004 to June 5 2015:

The black line is nominal returns (9.58% CAGR over this period)
The blue/purple line, just below it is the inflation adjusted return.  (7.32% over this period)
The vertical lines are rebalance points (15/35)
Mark, I trust your data and number-crunching, but peaktotrough over the same period of time gives a nominal CAGR of 7.50% (dividends not reinvested) or 7.57% (dividends reinvested), and that difference of over 2% from your value seems too big to ignore.  The rebalance dates are different, too.  Are you using monthly or weekly data and, therefore, missing some temporary rebalance band breaches?  Even so, I wouldn't have guessed that checking the account daily, weekly, or monthly would make such a big difference in returns.  Any ideas about the discrepancy?
User avatar
Mark Leavy
Executive Member
Executive Member
Posts: 1155
Joined: Thu Mar 01, 2012 10:20 pm
Location: US Citizen, Permanent Traveler

Re: New PPer needs guidance.

Post by Mark Leavy » Sun Jun 07, 2015 12:04 am

Pet Hog wrote:
Mark Leavy wrote: So... here's what I have in my spreadsheet.  From March 26, 2004 to June 5 2015:

The black line is nominal returns (9.58% CAGR over this period)
The blue/purple line, just below it is the inflation adjusted return.  (7.32% over this period)
The vertical lines are rebalance points (15/35)
Mark, I trust your data and number-crunching, but peaktotrough over the same period of time gives a nominal CAGR of 7.50% (dividends not reinvested) or 7.57% (dividends reinvested), and that difference of over 2% from your value seems too big to ignore.  The rebalance dates are different, too.  Are you using monthly or weekly data and, therefore, missing some temporary rebalance band breaches?  Even so, I wouldn't have guessed that checking the account daily, weekly, or monthly would make such a big difference in returns.  Any ideas about the discrepancy?
Thanks for the heads up Pet Hog.  I hadn't thought to check against Peak to Trough.

My numbers are using daily data - downloaded from yahoo - dividends going to cash.

You're right - the difference sounds too big to ignore.
I don't have a lot of time to investigate right now.  Let me think about it...
I tried a quick upload of my excel spreadsheet to google docs and it choked.  When I have more time, I'll figure out how to share the data so that more eyes than just mine can figure out the discrepancy.

Much appreciated.
Mark

Updated -
Here's a dropbox link to my spreadsheet (excel):

https://www.dropbox.com/s/dcfywsgle95g7 ... .xlsx?dl=0
I'm not sure if this allows you to change my personal spreadsheet or not - so please be kind and copy to your own hard drive and play with a local copy.

If you want to play with the allocations or bands - see the light green boxes near the top.  All of the rest of it should be just standard data and formulas.

Cheers,
Mark
Last edited by Mark Leavy on Sun Jun 07, 2015 12:20 am, edited 1 time in total.
User avatar
MediumTex
Administrator
Administrator
Posts: 9078
Joined: Sun Apr 25, 2010 11:47 pm
Contact:

Re: New PPer needs guidance.

Post by MediumTex » Sun Jun 07, 2015 3:31 am

Mark Leavy, thank you for all of that great information in your posts.

To respond to someone several posts up, when I wrote that if one asset is falling, another one must be rising, I only meant that in the general sense that if someone is selling something, they are necessarily buying something else, even if it only the cash they get for the asset they are selling.  If everyone in the U.S. sold all of their stocks for dollars, the value of the dollar would rise.
Only strength can cooperate. Weakness can only beg.
-Dwight Eisenhower
User avatar
MachineGhost
Executive Member
Executive Member
Posts: 10054
Joined: Sat Nov 12, 2011 9:31 am

Re: New PPer needs guidance.

Post by MachineGhost » Sun Jun 07, 2015 10:44 am

Mark Leavy wrote: Using these allocations and rebalance band:
Image
Looks good, but shouldn't the rebalancing bands be 12% / 28% for gold and 18% / 42% for cash?
"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!
User avatar
MachineGhost
Executive Member
Executive Member
Posts: 10054
Joined: Sat Nov 12, 2011 9:31 am

Re: New PPer needs guidance.

Post by MachineGhost » Sun Jun 07, 2015 10:48 am

MediumTex wrote: To respond to someone several posts up, when I wrote that if one asset is falling, another one must be rising, I only meant that in the general sense that if someone is selling something, they are necessarily buying something else, even if it only the cash they get for the asset they are selling.  If everyone in the U.S. sold all of their stocks for dollars, the value of the dollar would rise.
Correct me if I'm wrong: The real value of cash will rise but the nominal value will stay the same whereas stocks would decline in both nominal and real terms.  It's only relevant to other currency's lesser demands if cash rises in real terms.  Fortunately, we don't live in a domestic only vacuum economy.
"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!
User avatar
buddtholomew
Executive Member
Executive Member
Posts: 2118
Joined: Fri May 21, 2010 4:16 pm

Re: New PPer needs guidance.

Post by buddtholomew » Sun Jun 07, 2015 11:23 am

MediumTex wrote: Mark Leavy, thank you for all of that great information in your posts.

To respond to someone several posts up, when I wrote that if one asset is falling, another one must be rising, I only meant that in the general sense that if someone is selling something, they are necessarily buying something else, even if it only the cash they get for the asset they are selling.  If everyone in the U.S. sold all of their stocks for dollars, the value of the dollar would rise.
Pretty weak argument if these are truly PP principles. Perhaps these investors are selling US equities to purchase INT equities. It's a fallacy to believe money can only flow to one of the 4 asset classes a PP investor holds.
"The first principle is that you must not fool yourself and you are the easiest person to fool" --Feynman.
Post Reply