The Correlated Risk Parity PP

[Pointedstick]

Good question. I have my own theory that many of the most ardent PP advocates here have ended up in the PP after a bad experience in the markets. Seeing a lot of paper wealth evaporate during the dot-com bust or the Great Recession might understandably trigger some form of Post Traumatic Stress and the PP ends up being the antidote. Others might be naturally thrifty, conservative planners, not a bad thing at all. I think it's a good question because often times people's views (or shall I say zealous views) are a product of their own past experiences which may or may not be relevant to others.

Great point. I started a new thread about this: http://gyroscopicinvesting.com/forum/pe ... se-the-pp/

[mathjak107]

It would be interesting to learn more about demographics of this group to determine what actual "type" of people become PP'ers. I myself am 27 and currently have around 60% of my paycheck going towards savings, and awaiting salary increases and cutting more expenses to raise that value. Whether it is a particular Myers-Briggs test, or something else that we all seem to have a high concentration on that naturally gravitates us here.

Good question. I have my own theory that many of the most ardent PP advocates here have ended up in the PP after a bad experience in the markets. Seeing a lot of paper wealth evaporate during the dot-com bust or the Great Recession might understandably trigger some form of Post Traumatic Stress and the PP ends up being the antidote. Others might be naturally thrifty, conservative planners, not a bad thing at all. I think it's a good question because often times people's views (or shall I say zealous views) are a product of their own past experiences which may or may not be relevant to others.

Speaking personally, of course, I prefer to learn from other people's mistakes rather than waiting to make them myself.  :-)

funny you said that because i spent most of my adult life learning from those a whole lot smarter and more successful than i could be.

i want to learn from those who are doing things right . i rarely spend time reading about the failures in life or seeking out those who failed . .

[MachineGhost]

@Mathjak107: You've been posting this idea in a number of topics on this website. And I agree that we have clearly had an environment that led to falling interest rates for bonds. But don't you also think that equities benefited from this? If rates rise in the future, what's to stop people from exiting equities and buying more bonds? This would cause equities' future returns to go down as well in a 'rising interest rate environment.'

Everybody is "all in" bonds right now because they never bought into equity post-2009.  Junk bonds and T-Bonds.  And in bond funds.  Chasing yield thanks to the Fed.  They are going to get massacred.  Corporations also own other corporation's bonds.

[MachineGhost]

there is a difference between VOLATILITY  AND RISK

Downside volatility is risk.

[mathjak107]

volatility is volatility . the natural rise and fall of market cycles is volatile but the risk of losing money long term from diversified portfolio's over 15 years or more is very very low ..  it can be risky if you mis-match time frames . taking short term money and putting it in long term investments creates risk .

trying to grow money with cd's is low volatility but has much higher risk of loss of purchasing power than markets .  in fact i lost money in a money market in  2008 when mine went belly up .

a 50/50 mix of  just the s&p 500 and 10 year bonds  has never lost money  in any 10 year or 20 year period of time going back to 1926 .

in the mean time cd's  can have a high risk of not keeping up with inflation or missing savings goals .

risk and volatility are two different issues.

even if we take the worst 10 year periods in time  a 50/50 mix had zero risk  of loss of money

each one of these time frames were the worst average returns for the time periods . all other periods were better .

the s&p 500 had a few losing time frames in the 10 year time frame

but a 50/50 mix had zero  losing time frames in the 10 year or 20 year  time frames






.

http://awealthofcommonsense.com/whats-w ... portfolio/

[MachineGhost]

I think maybe you define risk as shortfall risk?  Around here, must of us define risk as a loss of capital, i.e. drawdowns.  The emotional brain doesn't know the difference between an unrealized and a realized loss -- both are incredibly painful.

Until you joined the forum, I never considered the PP as having a significant shortfall risk.  But it is not a growth porfolio, only a capital preservation.  There's not that much tweaking that can be done to the PP, so growth should be relegated to the VP.

[mathjak107]

emotional risk is investor behavior not market action  .  investors do the wrong thing at the wrong time and almost never do as well as the funds themselves . it seems to have no bearing on the type of fund either . balanced funds show the same amount of bad investor behavior as aggressive growth funds ,.

you can see this on morningstar as they track the inflow and outflow of the money and post two returns .

but the natural cycle of the markets themselves have little risk , only investor behavior can make it risky . you can see that above as no 10 year period has ever lost money with a 50/50 mix .

[MachineGhost]

but the natural cycle of the markets themselves have little risk , only investor behavior can make it risky . you can see that above as no 10 year period has ever lost money with a 50/50 mix .

That's not necessarily true.  It is an anomaly related to the US markets only.  We are very lucky and also very spoiled.  Would you have reached your retirement goals if we hadn't had three historically extreme speculative bubbles back to back since 1987?  The other generations are not going to be so lucky.

[mathjak107]

i only reference the american markets . it is the only ones i can talk about . nothing guaranteed but betting on the remote flyer is never a good idea .  this time is different rarely works .

[Xan]

i only reference the american markets . it is the only ones i can talk about . nothing guaranteed but betting on the remote flyer is never a good idea .  this time is different rarely works .

Your myopic vision in terms of time and space are blinding you to all the possible conditions which are out there.  Your belief that the US dollar will continue forever, unlike every previous fiat currency, means that you believe this time it's different.  Your belief that the US stock market will continue its outlier outperformance compared to the rest of the world forever means you believe this time it's different.

[mathjak107]

i never said it will continue forever  , nor did i say i would never act . i said the last few years and now are so far from having gold shine that there is time to buy it . this is not something that ends in a week . as the picture starts to at least show evidence of the dollar weakening you have plenty of time to act . as you say you are not looking to make a buck you are looking to protect .


yeah i know the vision says if you don't have it and sit on it forever you will pay a fortune , but that just is not how things shake out . they trend .  anything that bad that it is over night isn't going to require gold , but bullets .  i can pay  higher price with all the money i made over those decades by not owning it .

a snow storm in the bahamas says add a winter jacket even if you pay a bit more .

[MachineGhost]

I guess it all comes down to can you call a bottom in gold?  Because you seem supremely confident you can get onboard when it is time.

[Pointedstick]

Maybe a parka in the Bahamas is a dumb idea, but what if instead every year you were given a plane ticket to a random destination and you didn't know if it was going to be the Bahamas or Kamchatka, and while prior trends favored places like the Bahamas, it could be Kamchatka at any time?

[mathjak107]

right now a strong dollar , no wage growth , country's sliding in to recession world wide  , commodity's falling like rocks . we are for all purposes right now , in the bahamas .  the fall in gold's price is telling you that .  until i see gold hit at least 1300 i would not add it to my portfolio and at that point add 10% .

[MachineGhost]

Bringing this huge diversion back on topic...

[img width=800]http://i.imgur.com/u8N5uzN.jpg[/img]

[mathjak107]

i think you are missing dividends . i show with dividends the s&p 500 is at 198,500 as of now .  that is from 1/1/2005 to date  , if we use 2004 as a start  then it is 220k

it was 209,000 as of 12/31/2014  and down 5% ytd , that is 198,500 in a decade with 2 back to back recessions . 232k  down 5% if we figure 2004
=220k

http://www.moneychimp.com/features/market_cagr.htm

[MachineGhost]

but why are we looking at a decade with two back to back recessions for a comparison ? 

how about 1986 to 2015 if we want to pick time frames out .  ?

Data limitations.  Gold wasn't an ETF until 2004.  I've posted returns from 1968 elsewhere and don't feel like doing it again.

[mathjak107]

i corrected my post .  re-read it , thanks .  with dividends i show the s&p 500 at 220k today based on 1/1/2004 . that is almost  50% higher than you had . you can double check it on the link i provided

[MachineGhost]

i corrected my post .  re-read it , thanks .  with dividends i show the s&p 500 at 220k today based on 1/1/2004 . that is almost  50% higher than the pp . you can double check it on the link i provided

That's right, ^GSPC does not include dividends!

[mathjak107]

Why would you ever want to even waste time posting an unfair comparison?

[MachineGhost]

Why would you ever want to even waste time posting an unfair comparison?

Didn't think about it and its not my limitation, but the software, or Yahoo.

But $15K is a small price to pay for robust protection.  I can sleep at night.

[mathjak107]

Shame shame on you. But don't forget that was a horrible decade for stocks with 2 back to back recessions and they still did okay in comparison. In fact if a diversified mix of all market segments were used like the wilshire it likely would have been even higher.

At this stage i wouldn't want 100% equity's either. But 50/50 works well.

[MachineGhost]

Shame shame on you. But don't forget that was a horrible decade for stocks with 2 back to back recessions and they still did okay in comparison. In fact if a diversified mix of all market segments were used like the wilshire it likely would have been even higher.

They only did well because they never went back to being undervalued and the Fed induced yield-chasing behavior to keep them constantly overvalued.  You need to realize that this is historically unprecedented, abnormal and the longer it continues on, the worse the underperformance to the downside will be.  You must plan for it.  There is no free lunch.  Can you deal with 1-2% annual returns on 50% of your portfolio after suffering another 50%+ drop?

[mathjak107]

actually yes i can deal with it for a while , especially if the gains have been good going in to the drop .  don't forget markets are usually higher highs and higher lows .  you can often drop a whole lot and still be ahead a more conservative model  because of the cushion of higher gains in an up cycle .


at least for the next 5 years i see equity's returning  about 6%  and bonds about 3%  so a 50/50 mix likely will be in the 4-5%  range .

that is based on the fact dividends and interest rates are joined at the hip . with  dividends at 2% and accounting for 1/3 the markets growth that puts stock returns in the 6% range .

with bonds at 3% a 50/50 mix  should see about 4- 5%  .

my guess is over the next 5 years the pp will do about 1/2 that as rising rates eventually hit the  volatile long term treasury's harder and gold continues to lag  as well as very high cash levels  weighting equity's feeble gains down  .

my crystal ball is only good out to about 5 years , sorry .