Worst 3 year PP performance ever?

[jason]

Has the PP ever performed worse than 2.98% CAGR over any 3 year period (not calendar years, but any 3 year period)?

Sure. Remember that the three-year period you gave is still positive in real terms. Assuming that we are only interested in real terms, it was worse 1999-2001 and 2000-2002. Also 1981-1983. Some other three year-periods are also well within range of what you are talking about - and probably worse - depending on what inflation data you use, obviously. I know you said that you weren't talking about calendar years but that's a quick answer with the data I am looking at.

Thanks!  When I started the PP, I was so excited to have found something with such strong historical performance of over 9% CAGR with apparently very little downside risk.  But lately, I have been feeling discouraged.  But knowing that this recent, relatively bad period of the PP over the past few years is not outside the historical norm for the PP, I feel a lot better. 

Also, I think we need to be cautious when talking about "real" returns when looking at the PP performance going back many years, at least going back before 1990.  The formula used to calculate inflation/CPI has changed multiple times over the years, apparently making the CPI of more recent years significantly lower than it would have been if they had used older formulas.  So, the CPI of today is not necessarily apples-to-apples with the CPI from the 80s.  No conversation regarding "real" returns is complete without acknowledging this.  If anyone is not familiar with this, there was an article in Time Magazine about it in 2013, which I highly recommend:
http://business.time.com/2013/03/12/if- ... p-so-much/

[MachineGhost]

Apparently making the CPI of more recent years significantly lower than it would have been if they had used older formulas.  So, the CPI of today is not necessarily apples-to-apples with the CPI from the 80s.  No conversation regarding "real" returns is complete without acknowledging this.  If anyone is not familiar with this, there was an article in Time Magazine about it in 2013, which I highly recommend:
http://business.time.com/2013/03/12/if- ... p-so-much/

I'm pretty sure when they change the CPI to be more realistic they backdate it so you're comparing apples to apples.

[Pointedstick]

If anyone is not familiar with this, there was an article in Time Magazine about it in 2013, which I highly recommend:
http://business.time.com/2013/03/12/if- ... p-so-much/

That article seems misleading to me. Gold rising in price is no more inflation than stocks or bonds rising in price would be. Gold is an investment product, not a consumer product. Same with the commodities he describes. What do I care that the price of cocoa has gone up if the price of chocolate hasn't? The point about gas price inflation seems archaic today, as it's now fallen to below the level indicated in the article. And I don't understand how he can claim that taxes have gone up 9% a year for four years. Did I miss something? I certainly haven't seen my tax rates go up 35% in the past 4 years.

His point about wage stagnation reducing potential purchasing power and keeping price inflation low seems like a correct one, but that's a point orthogonal to inflation. It seems to contradict his point: if wage stagnation is keeping inflation low, how can he argue that inflation is actually higher than reported?

The nature of averages ensures that some costs are going up faster than the rate of inflation, and some are going up slower, or even falling. It may well be that inkjet printer ink (a real racket; buy a laser printer!) is rising faster than CPI, but simultaneously, gas prices may be plummeting.

[Tyler]

I ditched the bands in favor of annual rebalancing, but gained the ability to compare many portfolios apples-to-apples in the process.  It seems like a reasonable tradeoff.  The data may look a little different from previous charts as a result of different color scale, new source data, better inflation calculations, and the aforementioned rebalancing changes.  But in general, I consider this improved.

Back to the OP, the worst total real return for the PP over any annual 3-year period is zero.  The most recent 3-year period is just below average but nothing that unusual. 

BTW, note that the worst total 3-year return for a 60-40 Boglehead portfolio over the same timeframe is a 31% loss.  How would that make you feel? 

[Pointedstick]

Superb work, Tyler. I love it.

[Mark Leavy]

That is really gorgeous.  Not just the portfolio robustness, but also your data presentation.
This is the most concise answer I've seen yet to the question of :

"What indicator can I use to judge whether the portfolio is still functioning as planned?"

For those of us in the drawdown mode,
I like how it also shows that 4 to 5 years of living expenses in cash reserves will get you through any tough time (at least historically).

Funny that.  If your investments are 20 to 25 times your living expenses (4%SWR) then having 25% of them in cash gives you 4 or 5 years of cash.  What a system.

[barrett]

Tyler,

Add me to the list of folks who are grateful for this work.

Ultimately I think you can get it down to one square!

[MediumTex]

Tyler,

I hereby bestow on you the honorary degree of Doctor of Chartology.

You are like one of those old school chartisan masters.

[Tyler]

Thanks, guys!  I think I find way too much joy in Excel.   

BTW, my favorite way to read these charts is to think like a very reasonable investor who is hands-off and re-evaluates his asset allocation on a set schedule.  Let's say I put all my money in a stock index fund in 1990 and chose to leave it alone and tweak things as necessary every five years. 

> Look at the 1990 row.  Five years to the right, and I've done alright. 

> Skip down to the 1995 row.  Five years to the right, and I'm a genius!

> Skip down to 2000.  Five years to the right, and all hell has broken loose.  Clearly things are different now, and I really want to mix things up.  But I'll stick to the plan for five more years.

> Skip down to 2005.  Five years to the right, and I'm down again.  Screw it -- I'm selling.


Pretty reasonable, huh?  Note that the real CAGR over that 20 years was a healthy 5.4%  But once you account for mid-term fluctuations, even a good plan is hard to stick to. 
 

[Pointedstick]

5 years would be an eternity for some people. Heck, there are some who can't resist checking multiple times a day. That'll drive you mad with any portfolio!

[Xan]

Gorgeous charts.  And what's also gorgeous is the PP's worst 10-year results: up 31%, compared to stocks which are down almost that much.  Wow.

[MachineGhost]

Back to the OP, the worst total real return for the PP over any annual 3-year period is zero.  The most recent 3-year period is just below average but nothing that unusual. 

Lovely!  But what happened to 2005-2015?.  I wanna see paint for 9,8,7,6,5,4,3,2,1!

[barrett]

Lovely!  But what happened to 2005-2015?.  I wanna see paint for 9,8,7,6,5,4,3,2,1!

Me too! I just didn't want to sound like an ingrate.

[MachineGhost]

Me too! I just didn't want to sound like an ingrate.

As the resident ingrate at times, I was happy to do it for you! 

[Pet Hog]

Apologies to Tyler, but I've made this appendix for his chart to take into consideration the last 10 years.  I've stuck to his format, but the colors are slightly different.  Again, these are real returns and the same conclusions can be drawn: no negative three-year returns.

[img width=300]http://i.imgur.com/jsMtnPE.jpg[/img]

The PP data are from P2T (Jan 1, annual rebalance, dividends not reinvested); inflation data: CPI-U (Jan).

Code: Select all

	PP	CPI
2005	10,000	190.7
2006	10,719	198.3
2007	11,914	202.416
2008	13,472	211.08
2009	13,815	211.143
2010	14,639	216.687
2011	16,553	220.223
2012	18,386	226.665
2013	19,533	230.28
2014	19,000	233.916
2015	20,854	233.707

EDIT: Forgot to mention: Fantastic job, Tyler! Thanks for the inspiration!

[Tyler]

As you wish. 

[img width=600]http://i59.tinypic.com/2mh7yag.jpg[/img]

BTW, nice work Pet Hog.  It's good to see someone verify the results. 

[dragoncar]

can I get a 2015 YTD half-box?

and a pony!

[Mark Leavy]

Damn.

This is really good work. Thank you for sharing it.  Pretty humbling.

[Cortopassi]

I wish I had seen these comparisons 25 years ago.  Better late than never!  Thanks.

[Kbg]

This is really good work. Thank you for sharing it.  Pretty humbling.

+1!

[Kbg]

I ditched the bands in favor of annual rebalancing, but gained the ability to compare many portfolios apples-to-apples in the process.  It seems like a reasonable tradeoff.  The data may look a little different from previous charts as a result of different color scale, new source data, better inflation calculations, and the aforementioned rebalancing changes.  But in general, I consider this improved.

Back to the OP, the worst total real return for the PP over any annual 3-year period is zero.  The most recent 3-year period is just below average but nothing that unusual. 

BTW, note that the worst total 3-year return for a 60-40 Boglehead portfolio over the same timeframe is a 31% loss.  How would that make you feel?

Actually...I do request to see the same version only best vice worst

[Tyler]

[img width=600]http://i59.tinypic.com/9upudz.jpg[/img]

There's no doubt stocks have intoxicating runs if you're lucky enough to live in the right decade.  Just remember that a 100% gain after a 45% loss only gets you back to just above where you started.  Assuming you stuck around. 

[Pet Hog]

While I was still in the mood for playing with Excel, I thought I'd try changing the starting month in my earlier appendix wedge chart for a bit more granularity.  Not everyone starts their PP on January 1st, nor rebalances on January 1st, so I crunched some numbers for different starting dates (the first of every month, then rebalancing, or cashing out, on that anniversary).  Again, I took the data from peak2trough and bls.gov/cpi, but this time with reinvested dividends.

The 12 stacked bars for each "Start Year" represent the 12 months of that year: January on top, December on the bottom.  The colors are similar to Tyler's: dark green, >9%; green, 6–9%; light green, 3–6%; yellow, 0–3%; pink, –3 to 0%; red, less than –3%.  The chart ends with the real return from April 2014 to April 2015 because there isn't CPI data yet for May and June 2015.

Again, no three-year periods with negative real yields.

[img width=500]http://i.imgur.com/8379mtH.jpg[/img]

Thanks again to Tyler for the inspiration.

[Tyler]

Really cool.  Well done.

[jason]

If anyone is not familiar with this, there was an article in Time Magazine about it in 2013, which I highly recommend:
http://business.time.com/2013/03/12/if- ... p-so-much/

That article seems misleading to me. Gold rising in price is no more inflation than stocks or bonds rising in price would be. Gold is an investment product, not a consumer product. Same with the commodities he describes. What do I care that the price of cocoa has gone up if the price of chocolate hasn't? The point about gas price inflation seems archaic today, as it's now fallen to below the level indicated in the article. And I don't understand how he can claim that taxes have gone up 9% a year for four years. Did I miss something? I certainly haven't seen my tax rates go up 35% in the past 4 years.

His point about wage stagnation reducing potential purchasing power and keeping price inflation low seems like a correct one, but that's a point orthogonal to inflation. It seems to contradict his point: if wage stagnation is keeping inflation low, how can he argue that inflation is actually higher than reported?

The nature of averages ensures that some costs are going up faster than the rate of inflation, and some are going up slower, or even falling. It may well be that inkjet printer ink (a real racket; buy a laser printer!) is rising faster than CPI, but simultaneously, gas prices may be plummeting.

I don't think the law of averages necessarily applies to the CPI because the formula may have been changed in a way that intentionally depresses the number.  I have not verified this, but I have read that the formula changes included under-weighting and/or removing gas and food from the equation, and overweighting clothing and electronics.  Gas and food are a substantial portion of many family budgets.  Electronics and clothing are probably not nearly as big of a part of a typical family budget. 

We know by walking around a Wal-Mart that food prices are far higher than they were 10 years ago, while electronics and clothing prices are around the same as they were 10 years ago.  I just bought a big screen TV that was bigger than the one I bought 10 years ago, and the new one cost less than the old one (in nominal terms, not real).  And you can still buy a t-shirt at Wal-Mart for $7.  But this isn't due to a lack of inflation.  This is due to extremely low overseas labor and manufacturing costs.  So, if certain types of goods made overseas are being cherry-picked and are overweight in the CPI, the number becomes skewed, and has less meaning.

I look at the CPI like the unemployment rate.  The formula for the unemployment rate has also been changed over the years, and anyone who is unemployed for more than 18 months is removed from the statistic.  These official statistics have less meaning when they are not reflective of what is happening in the real world.

Gold is actually a somewhat reasonable measure of inflation over time because gold has maintained its approximate buying power over thousands of years.  A well know example is that thousands of years ago, an ounce of gold could buy you a nice suit, a nice belt, and a nice pair of shoes.  Today, an ounce of gold can get you the same thing.  Of course, the price of gold fluctuates, so the the outfit you would have bought in September of 2011 for an ounce of gold would be quite a bit nicer than an outfit purchased today.  But, for example, if gold were trading at $10,000 per ounce, today, or $100 per ounce today, then it would be very apparent that neither of those prices are anywhere close to the value of a nice suit, belt and shoes.  Obviously, "nice" is a subjective term, but I would assume it means at the higher end of the market, and not made in China.