Worst 3 year PP performance ever?

[Tyler]

Really nice graphs Tyler, thanks a lot!

Since you ask for ideas/requests, we would like to see similar plots for the Euro PP described here:  http://www.carterapermanente.es/evoluci ... ermanente/

Its composition is:
25% MSCI EMU
25% Germany Gov 30y
25% gold
25% Germany Gov 1y

The timeframe will only be 16 years but it should be enough to see how it looks...

Hmm... International portfolios are currently out of my wheelhouse. But I'll keep the request in mind if I expand data sets.

[MachineGhost]

We got a new one from Tyler:



The lack of T-Bonds really hurt Swedroe in the 1973-1974 bear.  Or was it gold?

[Kevin K.]

Nice to see that comparison - thanks MachineGhost and Tyler!

As for what hurt the Swedroe portfolio, I'd say it's more a matter of the once-in-a-lifetime events that helped the PP. Quoting William Bernstein:

"For starters, gold was not easily investible during the first decade of this period; in fact, it was downright illegal to own the stuff from 1933 to 1974. Start the analysis in 1980, for example, and you were a full percent better off leaving it out of the portfolio entirely (i.e. owning one third stocks, bonds and bills). Put another way, you can go off the gold standard and open up its ownership only once. It seem highly unlikely that gold will return several percent more than inflation in the coming decades; almost by definition, zero percent above inflation seems more like it."

To be clear, these are Mr. Bernstein's views, not mine. One could easily make a parallel point about SCV and Emerging markets not really being investible assets until very recently.

[mukramesh]

@Kevin: That's true, but gold also seemed to help the PP in the 2000's. I mean, look at all that green compared to the Swedroe portfolio! Also protection against 2008-like events is pretty nifty

[Tyler]

I really like the "Desert Portfolio." I do wonder about it not having a cash component though one could argue that with 60% ten-year notes it should spit out a lot of income each year. But that makes it potentially less tax efficient too. Might have to start another thread.

Try backtesting Desert vs. a PP/Desert Hybrid... instead of 60% 10-year Treas, 30% ST Treas and 30% LT Treas. I think you'll like that combination, too.

[MachineGhost]

I think Desert & Swedroe data-mined the 80's and 90's to come up with their portfolios.

[MediumTex]

Even after gold's run up in the 1970s, gold provided key support to the portfolio during the 1982-2000 bear market for gold in years when the other assets performed poorly.  Look at the year by year PP results for the 1982-2000 period and you may be surprised to see that gold was the leader in the portfolio in a few of those years.

An asset in a secular bear market can still be traded for gains if you can buy low and sell high, which is what the PP forces you to do when you rebalance.

[Tyler]

You really need to delete the first few years when it was illegal to own gold in the U.S.

One can gray out the first few rows of the PP chart if they like (they were pretty average, anyway, and wouldn't change overall impressions), but the harsh times for other portfolios in the 70's are still real. 

I do personally like seeing how gold would have affected various portfolios during that time even if it was illegal for a while.  It's not anymore, and is a nice tool for addressing the economic conditions in the early 70s should they ever arise again. 

[MachineGhost]

You really need to delete the first few years when it was illegal to own gold in the U.S.

Why?  We want to see the performance under as much history and environments as possible.  And gold was able to be legally purchased starting in the early 60's through derivatives or holding offshore, besides already legal gold jewelry and [semi]numismatic gold coins (TR was a coin collector, so FDR made a crony exception).  Bullion coins weren't domestically legal again until 1975.  At the minimum, silver was the poor man's gold.

I mean, did you think that gold being illegal stopped HB and all the other gold bugs?  He bought before 1970.

[lordmetroid]

How about if you was a european and had to deal with the additional risk of the dollar value?
Personally as a Swede I am very interested in seeing these assets would perform in SEK:

Bank account( SEK )
Swedish OMX30( SEK )
TLT( USD )
Gold( USD )

[MachineGhost]

The 30/60/10 fits me a bit better because I think the real return will be a bit higher, and 10% physical gold holding is practical. Being the tinkerer that I am, I've gone a bit further and have introduced a higher risk/higher expected return mix into the equity side, similar in concept to a Larry portfolio.  It backtests well, but may or may not perform well in the future. I wouldn't recommend it to anyone but myself. 

The #1 problem with your portfolio being 60% in T-Bonds is it will underperform the PP in a bond bear market or high inflation regimes, which is not fully represented in the data since the currencies were floated.  We can glimpse a small taste of what to expect in terms of real returns during the tail end of the last Great Inflation:

Code: Select all

Year	PP	Desert
1968	5.36%	2.12%
1969	-9.59%	-12.31%
1970	-0.33%	3.37%
1971	7.60%	8.16%
1972	14.62%	10.41%
1973	5.85%	-10.11%
1974	-0.11%	-12.80%
1975	-0.79%	4.57%
1976	5.96%	12.59%
1977	-1.39%	-5.54%
1978	2.81%	-4.30%
1979	24.63%	3.85%
1980	0.78%	-4.46%
1981	-14.10%	-13.59%

[MachineGhost]

MG, take another look at your data ... seems to be a problem, at least in 1980 and 1981. 

But yeah, if we repeat the 1970's, where we went off the gold standard in 1971, then legalized gold in '75, yes, the PP is preferable in those conditions.  100% gold is even better.

Checked, data is good.  This is what I have for nominal returns:

Code: Select all

Year	Stocks	T-Bills	T-Bonds	Gold
1980	31.74%	11.25%	-4.98%	15.19%
1981	-4.70%	16.58%	0.01%	-32.60%

[MachineGhost]

That's pretty close to what simba's spreadsheet has as well.  What do you have for 10 year bonds?  Or were you using a 50/50 T-Bill/T-Bonds for the 30/60/10 portfolio?  The 50/50 barbell results in a term and duration considerably longer than a 10YT.  I'm modeling a 10YT for the 30/60/10.  It helps a bit in rising-yield environments, relative to a barbell with a longer term and duration.  I nearly went with 5YT, but the 10YT tends to balance the volatility of the equities better.

Oh, you should have been more clear about that as I know some people are following your model but using 30yr bonds?  Eeek!  I modeled mine and yours with 30yrs and 20yrs when 30yr wasn't available.

I think 10yrs @ 60% would certainly change things vs 30yr.  I don't have 10yrs but I think your gains and losses would be all correspondingly lower?

EDIT: Here is real with 10yr:

Year PP Desert
1968 5.36% 2.12%
1969 -9.59% -12.31%
1970 -0.33% 3.37%
1971 7.60% 8.16%
1972 14.62% 10.41%
1973 5.85% -10.11%
1974 -0.11% -12.80%
1975 -0.79% 4.57%
1976 5.96% 12.59%
1977 -1.39% -5.54%
1978 2.81% -4.30%
1979 24.63% 3.85%
1980 0.78% -4.46%
1981 -14.10% -13.59%

[EdwardjK]

The 30-60-10 portfolio no doubt has performed very well due to declining interest rates for the past 30+ years.  I suspect this portfolio will not do as well as the HBPP once interest rates start to creep upwards.  My intuition tells me that both equities and bonds will take a hit.  Then having such a low percentage in gold will hurt the portfolio performance.

[MachineGhost]

MG, that looks a lot closer to what I have, except for 1980 and 1981.  My numbers show 1980 as nearly identical, with the PP winning by one percentage point.  And in 1981, I show the PP losing by 5 percentage points. 

We probably still have a difference in bond duration, I'm guessing.  The proxy I use for 60% of the portfolio of 10YT is 48% 5YT and 12% long bond.  With the excitement in the late 70's/early 80's, I imagine a year or two of duration difference had a significant effect on returns. 

Again, I show the 30/60/10 outperforming the PP by a full percentage point (CAGR) from 1975 to 2014.

Okay, here it is using your weightings of 49% 5-year and 12% 20/30-year.

Code: Select all

Desert	Nominal	Real		PP	Nominal	Real
1968	7.44%	2.72%		1968	10.08%	5.36%
1969	-4.22%	-10.42%		1969	-3.40%	-9.59%
1970	10.71%	5.14%		1970	5.24%	-0.33%
1971	10.72%	7.46%		1971	10.86%	7.60%
1972	11.83%	8.42%		1972	18.03%	14.62%
1973	4.23%	-4.48%		1973	14.55%	5.85%
1974	1.23%	-11.11%		1974	12.23%	-0.11%
1975	12.46%	5.52%		1975	6.15%	-0.79%
1976	15.24%	10.38%		1976	10.82%	5.96%
1977	0.57%	-6.13%		1977	5.31%	-1.39%
1978	5.79%	-3.23%		1978	11.83%	2.81%
1979	20.56%	7.27%		1979	37.92%	24.63%
1980	11.66%	-0.86%		1980	13.30%	0.78%
1981	-0.90%	-9.82%		1981	-5.18%	-14.10%
Total	107.32%	0.86%		Total	147.74%	41.29%

Code: Select all

Desert	Nominal	Real		PP	Nominal	Real
1975	12.46%	5.52%		1975	6.15%	-0.79%
1976	15.24%	10.38%		1976	10.82%	5.96%
1977	0.57%	-6.13%		1977	5.31%	-1.39%
1978	5.79%	-3.23%		1978	11.83%	2.81%
1979	20.56%	7.27%		1979	37.92%	24.63%
1980	11.66%	-0.86%		1980	13.30%	0.78%
1981	-0.90%	-9.82%		1981	-5.18%	-14.10%
1982	26.52%	22.69%		1982	22.46%	18.63%
1983	7.17%	3.38%		1983	3.11%	-0.68%
1984	8.08%	4.13%		1984	2.65%	-1.30%
1985	24.31%	20.51%		1985	19.96%	16.16%
1986	18.48%	17.38%		1986	18.81%	17.71%
1987	3.67%	-0.77%		1987	7.06%	2.62%
1988	6.94%	2.52%		1988	3.74%	-0.68%
1989	18.47%	13.82%		1989	14.33%	9.68%
1990	3.45%	-2.66%		1990	1.57%	-4.54%
1991	17.68%	14.62%		1991	11.94%	8.87%
1992	5.20%	2.30%		1992	3.39%	0.49%
1993	11.93%	9.18%		1993	13.06%	10.31%
1994	-3.70%	-6.38%		1994	-2.39%	-5.07%
1995	24.20%	21.66%		1995	19.61%	17.08%
1996	6.91%	3.59%		1996	5.09%	1.77%
1997	13.76%	12.06%		1997	8.23%	6.52%
1998	15.86%	14.25%		1998	12.98%	11.37%
1999	3.38%	0.70%		1999	3.26%	0.58%
2000	5.19%	1.80%		2000	2.94%	-0.45%
2001	0.82%	-0.73%		2001	0.21%	-1.34%
2002	2.46%	0.08%		2002	3.13%	0.75%
2003	11.26%	9.38%		2003	13.32%	11.44%
2004	5.39%	2.13%		2004	5.99%	2.74%
2005	4.26%	0.85%		2005	7.79%	4.38%
2006	8.73%	6.19%		2006	11.41%	8.87%
2007	11.01%	6.93%		2007	13.16%	9.08%
2008	0.32%	0.23%		2008	2.97%	2.88%
2009	5.09%	2.37%		2009	5.64%	2.92%
2010	11.33%	9.84%		2010	13.38%	11.89%
2011	9.23%	6.27%		2011	11.09%	8.13%
2012	6.45%	4.71%		2012	6.46%	4.72%
2013	3.16%	1.66%		2013	-2.43%	-3.93%
2014	8.46%	7.70%		2014	10.36%	9.60%
Total	370.86%	215.53%		Total	354.45%	199.12%

I see what you did with simba.  This is why I've recommended a 5-year CD ladder in the cash portion of the PP.  You get the best of both worlds.  So no need to junk the PP -- just needs a little tweak.

Code: Select all

PPCD	Nominal	Real
1968	10.44%	5.72%
1969	-2.75%	-8.95%
1970	4.54%	-1.03%
1971	10.91%	7.64%
1972	18.59%	15.18%
1973	15.13%	6.42%
1974	12.16%	-0.18%
1975	6.11%	-0.82%
1976	10.82%	5.95%
1977	6.15%	-0.55%
1978	12.83%	3.81%
1979	38.50%	25.21%
1980	13.90%	1.38%
1981	-5.91%	-14.83%
Total	151.41%	44.96%

Code: Select all

1975	6.11%	-0.82%
1976	10.82%	5.95%
1977	6.15%	-0.55%
1978	12.83%	3.81%
1979	38.50%	25.21%
1980	13.90%	1.38%
1981	-5.91%	-14.83%
1982	22.05%	18.22%
1983	3.97%	0.18%
1984	2.99%	-0.96%
1985	19.99%	16.19%
1986	18.55%	17.45%
1987	7.72%	3.29%
1988	4.71%	0.29%
1989	14.23%	9.58%
1990	1.47%	-4.63%
1991	11.43%	8.37%
1992	3.62%	0.72%
1993	13.38%	10.63%
1994	-1.08%	-3.75%
1995	19.53%	17.00%
1996	5.27%	1.95%
1997	8.45%	6.75%
1998	12.76%	11.15%
1999	3.75%	1.06%
2000	2.99%	-0.40%
2001	-0.58%	-2.13%
2002	3.23%	0.86%
2003	13.61%	11.74%
2004	6.65%	3.40%
2005	8.45%	5.03%
2006	11.65%	9.10%
2007	12.62%	8.54%
2008	2.30%	2.21%
2009	5.98%	3.26%
2010	13.62%	12.13%
2011	11.15%	8.18%
2012	6.55%	4.81%
2013	-2.27%	-3.78%
2014	10.61%	9.85%
Total	361.75%	206.42%

[MachineGhost]

We're getting pretty close on the numbers now.  Your PP numbers still look a bit better than mine, so maybe you have 2 year Treasuries in there instead of cash. 

I'm using 90-day T-Bills.  I wouldn't call myself a Brownehead, but 1.9 duration is not 0 duration.

Where did you find your historical CD data?

http://mortgage-x.com/general/indexes/default.asp

[Pet Hog]

[img width=500]http://i.imgur.com/ZJxPo4g.jpg[/img]

In case anyone's interested, I updated my earlier chart of the last 10 years of monthly PPs, incorporating the May CPI-U number.  Nothing major to see.  I started my PP in May 2013; the yellow bar after two years invested agrees with the 2.00% real yield I've calculated independently for my actual portfolio.

[mathjak107]

you have to keep in mind the permanent portfolio never fell as much as conventional portfolio's in 2008-2009  so they didn't need the gains to get even again.

keep in mind the real return on the s&p 500 the last 15 years is about 1.88%

[barrett]

[img width=500]http://i.imgur.com/ZJxPo4g.jpg[/img]

In case anyone's interested, I updated my earlier chart of the last 10 years of monthly PPs, incorporating the May CPI-U number.  Nothing major to see.  I started my PP in May 2013; the yellow bar after two years invested agrees with the 2.00% real yield I've calculated independently for my actual portfolio.

Thanks for updating, Pet Hog. It's very interesting to see the ripple through effects of the 2008 stock crash and the subsequent quick recovery in that asset. You can also see the "ripple back" effect if you look at 2 & 3-year returns). Ditto with the gold plunge in 2013 so far. I like all the green in years 4-10.

[mathjak107]

keep in mind there is no historical point i am aware of where such low rates and high valuations co-existed.  that can be a nasty combo to deal with going forward.

[barrett]

keep in mind there is no historical point i am aware of where such low rates and high valuations co-existed.  that can be a nasty combo to deal with going forward.

Not an investment expert here, but I don't think low rates by themselves should affect real PP returns. Maybe someone can tell me why that isn't true.

Stocks are high when looked at from the perspective of PE ratio but not unbelievably so, and probably in line with what we should expect in a low yield environment when bonds and cash are not returning so much. Gold may or may not be fairly valued at the moment, but the market over the last couple of years seems to point to an agreed upon price of right around $1200. Bonds could trade in a fairly narrow range for ages. We just don't know.

I think one thing to keep in mind is that in a low-rate environment, nominal and real returns are basically the same thing so we are seeing more clearly how investments really perform. In general I think investors don't see assets for what they really are. What I mean is that their expectations for what a bond, a stock or a precious metal can do for them are too high. There are times where killings can be made (if you expose yourself to a lot of risk), but for the most part, it's the slow upward crawl we are trying to capture. That kind of gets back to Harry Browne's rule #1 which is "Your career provides your wealth."

[mathjak107]

low rates will effect things . historically dividends represented 1/3 of the s&p's gains .  dividends and rates are joined at the hip.  with bonds in the 2% range that puts equities in the 6% total return  area , those are  below average returns,

also if stocks fell 15% the historical average for rates  had you whole again in 2 years ready to move ahead. today that isn't happening either.

throw in the fact high valuations  point to below average returns and thing look pretty stinky.  but most important there is nothing to compare this situation to historically.

[barrett]

mathjak, Are you talking about low returns going forward for the PP as a whole or just for stocks? With inflation near zero, I would take a 6% return on stocks any day.

[MediumTex]

It's weird to hear people talk about stocks being overvalued when the major indices are just now breaking through levels first reached 15 years ago.

[dutchtraffic]

It's weird to hear people talk about stocks being overvalued when the major indices are just now breaking through levels first reached 15 years ago.

They were extremely overvalued as well at that point.
And you are talking about indices, how many stocks have been removed from these indices, their contents are not the same today.

[edit]
And stocks being overvalued, really is not a discussionpoint, it's just a fact.