New PPer needs guidance.

[Mark Leavy]

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

[barrett]

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.

[Professor Disorientation]

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.

[Reub]

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?

[Reub]

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?

[MachineGhost]

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?

[MachineGhost]

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.

[iwealth]

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?

[buddtholomew]

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.

[iwealth]

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.

[KevinW]

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

[MachineGhost]

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?

[barrett]

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.

[buddtholomew]

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.

[Reub]

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?

[screwtape]

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).

[Mark Leavy]

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)



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.






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.

[Mark Leavy]

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:


Nominal CAGR = 9.29%, Real 7.04%







[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%]

[Pet Hog]

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?

[Mark Leavy]

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

[MediumTex]

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.

[MachineGhost]

Using these allocations and rebalance band:

Looks good, but shouldn't the rebalancing bands be 12% / 28% for gold and 18% / 42% for cash?

[MachineGhost]

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.

[buddtholomew]

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.

[MachineGhost]

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.

+1.  Don't be a PPhead.  Think outside the box.