Gyroscopic Investing

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.

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.

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?

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).

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.

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:


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%]

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?

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

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.

Mark Leavy wrote: Using these allocations and rebalance band:

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

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.

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.

buddtholomew wrote: 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.

This is meant to be an all-weather portfolio in the long-term if not on a daily basis. Either you buy that or you don't.
If you don't, good luck guessing what you're supposed to be buying this month / quarter / year.

Mark Leavy wrote: My numbers are using daily data - downloaded from yahoo - dividends going to cash.

Nice spreadsheet, Mark.  I think I found the bug.

You appear to have (rightly) used the adjusted closing price data from Yahoo for the daily asset values.  I believe the adjusted price calculation includes reinvested dividends, so applying the dividends to cash in your spreadsheet basically double-counts them.  Setting all TLT and VTI dividends to zero in your spreadsheet gives you a CAGR of 7.70% Nominal and 5.48% Real, which jives better with the PeaktoTrough data. 

This might have been more true 20 years ago.

Mark Leavy wrote:

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

Thanks for the link, Mark.  That's an impressive spreadsheet!  Unfortunately, I think I've spotted an error: you have used adjusted-close prices (which assumes reinvested dividends) for VTI and TLT, yet also added all their dividends to SHY.  If so, you've counted the dividends twice, and that would add maybe 1.5% to your CAGR (assuming average yields for VTI and TLT of, say, 2 and 4%, respectively, over the last 11 years).  Is that possible?

EDIT: Just saw Tyler's response! 

Tyler wrote:

Mark Leavy wrote: My numbers are using daily data - downloaded from yahoo - dividends going to cash.

Nice spreadsheet, Mark.  I think I found the bug.

You appear to have (rightly) used the adjusted closing price data from Yahoo for the daily asset values.  I believe the adjusted price calculation includes reinvested dividends, so applying the dividends to cash in your spreadsheet basically double-counts them.  Setting all TLT and VTI dividends to zero in your spreadsheet gives you a CAGR of 7.70% Nominal and 5.48% Real, which jives better with the PeaktoTrough data.

Outstanding!  Thank you very much for that.
Mark

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MachineGhost wrote:

buddtholomew wrote: 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.

I don't think that money can only flow to one of the PP assets.  I think that money tends to flow in directions that correspond to economic conditions, and if you can locate assets that are good proxies for all conceivable economic conditions, then you should be protected no matter what happens.

When the economy is expanding people tend to buy stocks.

When the economy is contracting, people tend to buy treasuries.

When inflation is rising, people tend to buy gold.

When inflation is falling, it could be for several reasons, and each of those reasons has a PP asset associated with it.

The PP isn't perfect (nothing is), but it's pretty good.

It has been pretty good. But was that because of the colossal run up in treasuries and gold in the past 30 or 40 years? Is that over now? Past performance is no..............

Reub wrote: It has been pretty good. But was that because of the colossal run up in treasuries and gold in the past 30 or 40 years? Is that over now? Past performance is no..............

The stock market has trounced both gold and treasuries over the last 30 or 40 years.  Does that mean that we should be even more afraid of stocks today than of gold or treasuries?

My last off topic post on this thread...

A very hearty thanks to all who helped spot and identify the error(s) in my modeling spreadsheet.
Barrent, Pet Hog, Tyler, MG...

I think I've come to a better understanding of what "adjusted returns" means.  I used to think it was just "split adjusted" but now know that on Yahoo it also means dividend adjusted.

PLEASE DON'T USE THE SPREADSHEET I POSTED!

Tyler's fix will cover most of the corrections, but I'm still worried now that the last few months of data are a mix of "Split Adjusted" and "Yahoo adjusted" data.

Give me a few days to do an update.  I really want the daily returns to reflect the split adjusted closing prices - and the dividends to go to cash.  That is more in line with how my personal finances work.

I'll repost once I get it fixed - as I truly appreciate the scrutiny, honesty and wealth of experience on this board.

Mark

MediumTex wrote:

Reub wrote: It has been pretty good. But was that because of the colossal run up in treasuries and gold in the past 30 or 40 years? Is that over now? Past performance is no..............

The stock market has trounced both gold and treasuries over the last 30 or 40 years.  Does that mean that we should be even more afraid of stocks today than of gold or treasuries?

Yes. It is possible I think for the 3 assets to fall at the same time in a post QE world.  They have been artificially propped up by central banks and could all decline together. Even if only 2 of these fell at the same time it would probably not be very good for the portfolio. Are you certain that these scenarios are impossible?

Reub wrote:

MediumTex wrote:

Reub wrote: It has been pretty good. But was that because of the colossal run up in treasuries and gold in the past 30 or 40 years? Is that over now? Past performance is no..............

The stock market has trounced both gold and treasuries over the last 30 or 40 years.  Does that mean that we should be even more afraid of stocks today than of gold or treasuries?

Yes. It is possible I think for the 3 assets to fall at the same time in a post QE world.  They have been artificially propped up by central banks and could all decline together. Even if only 2 of these fell at the same time it would probably not be very good for the portfolio. Are you certain that these scenarios are impossible?

Gold propped up by central banks? This better be a joke