The Correlated Risk Parity PP

[mukramesh]

@mathjak107:

Regarding your argument about stocks being the way to go for all long term investing, you agree that this is only true for the US investor or for those investing in the US stock market, correct? Other countries (Japan, for instance) haven't had the same rosy stock market history as us.

Secondly, from the year 1/1/2000 to today, I believe the PP has done better than the S&P500. Going forward for the next 15 years, you expect the S&P500 to outperform the PP on the grounds that it did so in the past for previous 30 year rolling periods? I believe most statisticians would say that extrapolation of the past performance far into the future is a fallacy.

Thirdly, PP investors wouldn't really call gold an investment and I agree with your point that it isn't really insurance (there is no payout, etc.). However I still consider gold a hedge against the other parts of the portfolio going down. And it really did it's job in the 2000s. In fact it generated huge returns compared to the stock market on that time frame.


Again, you keep arguing about PP investors taking a concentrated bet on interest rates not rising and on gold eventually becoming a winner. I would argue that you are the one advising to take a concentrated bet. The PP is widely diversified and is the antithesis of a concentrated bet. What happens if interest rates go up? The PP will be fine and hopefully generate its 3-6% real returns. What about if gold keeps taking? Same thing. (Okay I get that I am being a little hypocritical here because of the extrapolation thing...). The point is, the PP is built to have different components take up the slack at different points in time.

PP investors just prefer to not take a concentrated bet and accept lower returns than the one winning asset would have given us. We also implicitly assume that we cannot make a bet on which asset will be the winner over a particular time frame.

[mathjak107]

forget comparing 10 years or even 15 years ,you may as well  compare daily .

what you want to know is over a typical accumulation period spanning decades how did i compare by the end of the game  to other methods once all the cycles and events are done .

my time frame would have left more than a million dollars on the table if i stayed with the pp because i was afraid of the future.

your  results will vary but if you are going to compare you can't do it until the totals are in

[iwealth]

forget comparing 10 years or even 15 years ,you may as well  compare daily .

Then why have you been posting reminders about TLT's recently poor daily performance? You seem to have different rules for stocks and everything else.

[mukramesh]

forget comparing 10 years or even 15 years ,you may as well  compare daily .

Right but I am talking about a hypothetical investor who started in the year 2000 and has a 30 year investment time frame. The first 15 years are over and stocks didn't do so well; he has 15 years to go. What does he do?

[Reub]

Mathjak, you're a breath of fresh air around here. There are just too many Kool-Aid drinkers around. Questioning the basics is stimulating and healthy. Please keep it up.

Btw, may I ask what your line of work is? Just curious. Thanks!

[mathjak107]

i only tell it like i see it . i don't accept myth folk lore or mis-information passed from one ill informed person to another .

i question everything and most important i follow most of the top researchers today so i can learn .

believing your own bull-sh%t can leave you quite far from what you could have achieved.

[mathjak107]

forget comparing 10 years or even 15 years ,you may as well  compare daily .

Then why have you been posting reminders about TLT's recently poor daily performance? You seem to have different rules for stocks and everything else.

because tlt is not a stock , it could see a very very long term up cycle in interest rates .. equity's may need just a few years to cycle around not decades.

stocks can grow when rates rise , they have no problem with that . bonds ,especially long term bonds are down and out for the count when rates rise .

two different vehicles with different cycles and purposes .

equity's are up 2/3's of the time and down only 1/3 so hoping for that black swan event to stop the rate rising is betting against the house.

that is why i believe playing with long term bonds at this point is playing with a falling knife.

[Reub]

And if bonds are toxic and gold is tepid at best then how can the PP stay profitable? Equities cannot make up for it. No way!

[mathjak107]

Mathjak, you're a breath of fresh air around here. There are just too many Kool-Aid drinkers around. Questioning the basics is stimulating and healthy. Please keep it up.

Btw, may I ask what your line of work is? Just curious. Thanks!

motor control and factory automation specialist , at least for 12 more work days and then retired.

[mathjak107]

And if bonds are toxic and gold is tepid at best then how can the PP stay profitable? Equities cannot make up for it. No way!

i think a conservative mix of equity's and  low interest rate sensitize bond funds are the way to go for a few years . then  review  when conditions change.

[iwealth]

Mathjak, you're a breath of fresh air around here. There are just too many Kool-Aid drinkers around. Questioning the basics is stimulating and healthy. Please keep it up.

What is it that makes someone a Kool-Aid drinker? I assume that is meant to be a derogatory term. Is it confidence in their choice to hold the PP? Is it not agreeing with your concerns? Is Mathjak drinking his own Kool-Aid because he has strong convictions and refuses to back down from his position against the PP as a suitable retirement portfolio?

[mukramesh]

forget comparing 10 years or even 15 years ,you may as well  compare daily .

Right but I am talking about a hypothetical investor who started in the year 2000 and has a 30 year investment time frame. The first 15 years are over and stocks didn't do so well; he has 15 years to go. What does he do?

So, uh, no answer for this?

[mathjak107]

it was a poor time frame for stocks . that is all it was . it is only a piece of the long term accumulation period someone has or will have .

the first 15 years were poor , the next 15 may be much better and once again a conventional mix may leave the pp well behind over a typical accumulation time frame

we invest for decades to save for retirement , so what happens in the short term is nothing . it is like judging a baseball game by the first few innings ..

picking out a piece of a total time frame is useless . it is like me going what did the pp do the last 7 years while we had one of the biggest bull runs for stocks .

i can pick out 110 out of 111 rolling 30 year periods where that same equity investment performed poorly in 2000 and beat the pp in every other one,. but it is silly.

the only thing that counts is how you did over your 25-40 years of trying to grow your nest egg.

[mukramesh]

the first 15 years were poor , the next 15 may be much better and once again a conventional mix may leave the pp well behind over a typical accumulation time frame

Sure or the next 15 years may be just as volatile as the last... That's why I was asking what your advice was. You are saying the next 15 years will show a sizeable out-performance for the stock market. I'm not sure that is really guaranteed.

[Pointedstick]

You keep talking about this "long-term accumulation" phase. Mukramesh is trying for ERE, as am I. Many others are in their 50s or 60s and expect to retire soon. Most of us here don't have this "long-term accumulation" thing because we are expecting to retire within a relatively short period of time. You're throwing out advice that's completely inapplicable to the personal situations of many to most of the posters here. I don't think there are any people here who are 25 and expect to work until they're 65. Why not? Because the PP doesn't appeal to them, most likely, and they are probably already following some variant of your advice.

[mukramesh]

@mathjak107:

No one here is really saying you are wrong. We are just saying that if you are right, we'll make money. If you are wrong, we'll still make money! (Of course, this is assuming the PP works as advertised. But no reason to doubt just yet, have you seen those nifty charts in the stickied topic?)

On the other hand, someone following your advice will make a killing if you are right. If you are wrong, they may be unable to fund their retirement.

Someone following the PP has a much narrower set of ranges so they can plan for a much more specific target retirement date.

[mathjak107]

You keep talking about this "long-term accumulation" phase. Mukramesh is trying for ERE, as am I. Many others are in their 50s or 60s and expect to retire soon. Most of us here don't have this "long-term accumulation" thing because we are expecting to retire within a relatively short period of time. You're throwing out advice that's completely inapplicable to the personal situations of many to most of the posters here. I don't think there are any people here who are 25 and expect to work until they're 65. Why not? Because the PP doesn't appeal to them, most likely, and they are probably already following some variant of your advice.

isn't 50 or 60 a bit late to start investing for retirement ?  if they are not first starting out and already made their goal then i will say it for the 10th time. they are doing the right thing at that stage.

but if they are fisrt starting out in their 20's or 30's they may want to question using the pp as a growth vehicle.

that is all i keep saying . but i still get comments about those in their 50's or 60's.

it does not pertain to them.

the only thing they may want to think about is the pp has very low equity levels  and 25% equity's has  had a horrible success rate failing way to many time frames ,especially the worst we had.

there is zero way to know if long term bonds and gold would have helped or hurt those worst case scenario's since they happened before the pp was possible.

no other time frames we had were ever as bad so we just do not have enough data on how the pp would have done.

so basically if you use the pp in retirement it is like building a house to weather storms we had  since the 1970's without ever knowing if it could weather anything prior .

i wasn't comfortable using it because of that fact but if you are , go right a head.

those 4 worst case scenario's may never happen again  but if they do then all that protection you wanted to have in the accumulation stage killed you off in the retirement stage when actions reverse . .

[mukramesh]

no other time frames we had were ever as bad so we just do not have enough data on how the pp would have done.

Agreed here. We are just saying that the past performance of the US stock market is not enough to convince us of its continued performance into the future.

[mathjak107]

which is why you need to be flexible in where and how you invest .  just remember the greater the protection you want from those flyers that may never happen the smaller the nest egg will end up if we don't have those flyers happen.

what we plan for through traditional retirement planning is designed as is to with stand some pretty bad results without failure .

[mukramesh]

just remember the greater the protection you want from those flyers that may never happen the smaller the nest egg will end up if we don't have those flyers happen.

Yes, agreed here, too. I consider the PP a fairly good compromise between 'safety' and 'returns.' It's not going to make as much money as a 100% stock portfolio if times are good. But it's also still done pretty well for a so-called 'conservative' portfolio for generating real returns.

what we plan for through traditional retirement planning is designed as is to with stand some pretty bad results without failure .

Yes, but those are past results. Going forward, are we guaranteed that there won't be a time where stocks take a 30yr slump? Remember, average returns/CAGR/whatever you want to call it is actually just a way of representing 'exponential growth.' There is no guarantee that this will continue forever even though we had fantastic exponential growth in the past.

The PP, instead of relying on pure exponential growth of a particular asset, relies on rebalancing. The assets take turns pulling the entire portfolio forward. It's a different model and subject to different risks. But you have to admit, it's much less concentrated and much less dependent on a single asset than what you recommend.

[mathjak107]

just remember the greater the protection you want from those flyers that may never happen the smaller the nest egg will end up if we don't have those flyers happen.

Yes, agreed here, too. I consider the PP a fairly good compromise between 'safety' and 'returns.' It's not going to make as much money as a 100% stock portfolio if times are good. But it's also still done pretty well for a so-called 'conservative' portfolio for generating real returns.

what we plan for through traditional retirement planning is designed as is to with stand some pretty bad results without failure .

Yes, but those are past results. Going forward, are we guaranteed that there won't be a time where stocks take a 30yr slump? Remember, average returns/CAGR/whatever you want to call it is actually just a way of representing 'exponential growth.' There is no guarantee that this will continue forever even though we had fantastic exponential growth in the past.

The PP, instead of relying on pure exponential growth of a particular asset, relies on rebalancing. The assets take turns pulling the entire portfolio forward. It's a different model and subject to different risks. But you have to admit, it's much less concentrated and much less dependent on a single asset than what you recommend.

i wouldn't even compare the pp to a  100% equity portfolio. performance comments were really based against far more conservative investing . mixes like 60/40 50/50 and even 40/60 have just over and over left the pp well behind  and have done so over the same conditions the pp was supposed to do better in .  just compare most long term periods to wellesly income , a conservative 40/60 mix .  there was little comparison between the two

[lordmetroid]

You keep talking about this "long-term accumulation" phase. Mukramesh is trying for ERE, as am I. Many others are in their 50s or 60s and expect to retire soon. Most of us here don't have this "long-term accumulation" thing because we are expecting to retire within a relatively short period of time. You're throwing out advice that's completely inapplicable to the personal situations of many to most of the posters here. I don't think there are any people here who are 25 and expect to work until they're 65. Why not? Because the PP doesn't appeal to them, most likely, and they are probably already following some variant of your advice.

I am also aiming for Extreme Early "retirement", aiming for an accumulation phase if 3 to 10 years, depending on how well my own private business ventures works out. I just want reasonable returns jurist importantly to not loose any of my meat egg.

[Tyler]

You keep talking about this "long-term accumulation" phase. Mukramesh is trying for ERE, as am I. Many others are in their 50s or 60s and expect to retire soon. Most of us here don't have this "long-term accumulation" thing because we are expecting to retire within a relatively short period of time. You're throwing out advice that's completely inapplicable to the personal situations of many to most of the posters here. I don't think there are any people here who are 25 and expect to work until they're 65. Why not? Because the PP doesn't appeal to them, most likely, and they are probably already following some variant of your advice.

I am also aiming for Extreme Early "retirement", aiming for an accumulation phase if 3 to 10 years, depending on how well my own private business ventures works out. I just want reasonable returns jurist importantly to not loose any of my meat egg.

I accumulated my nest egg in 14 years.  HB Rule #1.

I think Mathjak's portfolio advice is excellent for the traditional career path of working 40 years and putting away 10% a year.  I reject that paradigm, so it makes sense that I might invest differently.

I do think it's a strawman argument that the PP is an unsafe retirement portfolio just because we don't know precisely how it would have performed before 1972.  We can see how well it has performed since then (far more consistently than 60-40!) and Mathjak has also shown what the warning signs of a failing portfolio look like: <2% real returns for 15 years.  While the PP has never come anywhere near that (3.4% is the worst to date) nobody here is arguing that you should stay in the PP if returns ever trend that direction.  We'll be smartly making changes as well.  We follow the PP because it makes sense for us and meets our needs, not because we are Harry Browne religious followers. 

Also, I should point out that Mathjak's portfolio method of constantly swapping allocations based on newsletters and gut feel has not been mathematically tested for retirement safety over ANY timeframe.  Just because one buys lots of stocks and bonds when they actively and persistently move funds around does not mean studies that assume passive buy & hold stock-bond allocations apply.  If one truly wants back-tested retirement security over all long-term timeframes and is not simply holding other portfolios to a higher standard than his own, perhaps he should follow the 60-40 portfolio he keeps quoting studies for. 

[mathjak107]

nothing is 100% as tested unless you use only an index fund and intermediate term bonds .

however what is tested is the fact we know on the equity side that as allocations drop failure rates go up. so where go how much you allocate to diversified funds will really be the factor. as we saw the difference been 5 year treasuries and 7 year corporate's dropped swr  on the worst cases by about 1/4%  .

i can change the  equity funds over and over and as long as my overall allocation stays the same success rates do not change much . they are not based on average returns as much as they are based on sequence of returns each year.

however since pp users like to picture all the chicken little scenario's how about a not so far fetched one.

that basically 40 year bond bull market chart that just went lower and lower  during most of the pp' existence has its  mirror image start to trend up.

so you have 25% equity's and a bond position that is highly volatile and takes awful hits as rates rise.

talk about making a big bet  on rates . i would sooner take chances with equity's which even in rising environments has done okay long term.

in fact the markets have never had a losing 20-  30 year period the last 146 years  not in nominal or real returns .  it has been through wars ,depressions ,crashes and a almost total financial collape , all the things pp'ers  dream about yet at no point in our history have they lost money 20 years or more .


could they one day ?  sure , but since i have to bet my retirement on something i will take market risk over interest rate risk in that case any day ,.

[iwealth]

having a rising rate environment for just a few years at a time iin a 40 year run is not the same as fighting an up turn in rates for decades possibly with the volatility of long term bonds .

So why do you think rates are going to rise? Just because they are low? Inflation? A super hot economy? The fed isn't going to raise rates and more importantly continue to raise rates unless one of those things is occurring. They aren't going to tighten the money supply for no reason. I'm not saying we won't see a token rate increase or two, but you can rest assured they won't continue with raises unless the economy gives them the all-clear.