Perspective on the current drawdown

[barrett]

So this has not been the greatest of years for the PP so far and I was trying to get some perspective on where things stand in relation to what expectations should be. Peaktotrough shows a drawdown (so far, that is) of 6.22% from 2/2/15 to 7/21/15. Since 1/1/1980 there have been 20 drawdowns of 6% or more, or one about every 20 months. I've only been invested in the PP since the beginning of 2014 so this is probably about what I should expect. That smooth upward line when looked at from a distance is beautiful. Up close things look a lot more bumpy! The current drawdown is also magnified by the fact that January was such a strong month (up more than 4%).

For those of you who only check your balances once a year this volatility probably doesn't faze you. I guess we noobies just need more assurance. For me the plus side is that gold and bonds are both cheaper than they were six months ago, so they should at least be closer to short term bottoms, whatever those may be. Or, looked at another way, there should be less downside risk in the PP now than there was at the beginning of February.

If I backtest for 8% drawdowns the number drops to 7 for that same time period, or about once every five years.

Obviously being down 6% affects a near retiree (I am in that category) much more than a young investor, but I think there are many on here who are eyeballing the finish line.

Just thought it would be worthwhile to discuss the numbers.

[Libertarian666]

Interestingly, my "weird, crazy" portfolio is down about 3% for the year so far, although I haven't calculated the drawdown from the peak.

It's possible that I may be in a position to make some more portfolio investments sometime in the next year or so, in which case I'll be happy if my preferred investments are cheaper at that point.

[Tyler]

The PP is down 6% from its peak in early February.  But for the year it is only down 2%.  So the other way to look at it is that the recent drop is not the unusual event we should be focusing on, and the 4% gain in January alone was the true outlier. Gotta look at the big picture. 

BTW, down 2% is pretty ordinary over the short term.

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[Tom]

I'm down a little under 3% YTD.  I look at the PP as the "reality" mode of investing.  Seems like the market doesn't know where it's going and there's a lot of fear selling in treasuries and gold.  Gains in stocks are probably a result of over confidence.  I look at the small loss as the premium you pay to be ahead of the reality that will likely occur later down the line - that correction will likely put those of us in the PP up and incur major losses for people not properly diversified.  Not a bad price to pay for the protection.

[AdamA]

Obviously being down 6% affects a near retiree (I am in that category) much more than a young investor, but I think there are many on here who are eyeballing the finish line.

Just thought it would be worthwhile to discuss the numbers.

This is the reason the PP has a 25% cash allocation; so you don't have to sell anything to cover expenses when it's down. 

I like to view these drawdown's as the spring coiling tighter.  I think MT said that once, and it's true.  These drawdowns tend to be relatively short-lived and can be followed by large gains. 

The -2% down year in 2013, was followed by a very strong +12% year in 2014. 

Besides, what else are you going to do?  50/50 BH, which is prone to much higher volatility?

100% cash equivalents?

Give it a year, you'll be glad you did.

[Greg]

Interesting article on how everything is relative (recency bias)

http://www.wikinvest.com/wiki/Recency_bias

TL;DR, when you enter the market shapes your opinions. If you enter at a downtime as it keeps going down, you're going to have a very different perspective than someone who had a large run up and is now just losing a bit now.

[goodasgold]

Interesting article on how everything is relative (recency bias)

http://www.wikinvest.com/wiki/Recency_bias

TL;DR, when you enter the market shapes your opinions. If you enter at a downtime as it keeps going down, you're going to have a very different perspective than someone who had a large run up and is now just losing a bit now.

The eternal lesson is to disregard short-term trends and the Chicken Little Syndrome. As always, PP investors should should look to the long term and respect the wisdom of the ages: "This too shall pass away."

[Tom]

Interesting article on how everything is relative (recency bias)

http://www.wikinvest.com/wiki/Recency_bias

TL;DR, when you enter the market shapes your opinions. If you enter at a downtime as it keeps going down, you're going to have a very different perspective than someone who had a large run up and is now just losing a bit now.

The eternal lesson is to disregard short-term trends and the Chicken Little Syndrome. As always, PP investors should should look to the long term and respect the wisdom of the ages: "This too shall pass away."

We're also down less than 3%.  It's so minor.  Someone said it before, but it's worth repeating that if you were in the PP when people were losing 40% in stocks you have a much different perspective for the years the PP lags.  The goal is to minimize losses and it really does that.  You can't always win but at least you don't lose big when you lose.

[bedraggled]

Peaktotrough says that since 1-1-2014, HBPP is +4.75%.

Does this back the assertions that the HBPP is ok?

[bedraggled]

I believe Craigr checks his HBPP once a year, if nothing is stirring.

I think gold is heading to $500 or less but, at the moment "nothing is stirring."

[dutchtraffic]

I believe Craigr checks his HBPP once a year, if nothing is stirring.

I think gold is heading to $500 or less but, at the moment ?nothing is stirring."

It costs about $1100 to pull gold out of the ground.

[ochotona]

The extraction costs of any mineral don't matter. If gold mining slows or stops for a while, there's enough gold above ground and being traded around as paper gold to keep traders busy.

I believe Craigr checks his HBPP once a year, if nothing is stirring.

I think gold is heading to $500 or less but, at the moment ?nothing is stirring."

It costs about $1100 to pull gold out of the ground.

[Xan]

The extraction costs of any mineral don't matter. If gold mining slows or stops for a while, there's enough gold above ground and being traded around as paper gold to keep traders busy.

I believe Craigr checks his HBPP once a year, if nothing is stirring.

I think gold is heading to $500 or less but, at the moment ?nothing is stirring."

It costs about $1100 to pull gold out of the ground.

I think the point is that the mining cost provides something of a price floor.

[rickb]

The extraction costs of any mineral don't matter. If gold mining slows or stops for a while, there's enough gold above ground and being traded around as paper gold to keep traders busy.

It costs about $1100 to pull gold out of the ground.

I think the point is that the mining cost provides something of a price floor.

And Ochotona's point is that mining costs don't matter. 

Which seems to me to be laughable untrue.

Sure the price might temporarily drop below the mining costs but it certainly won't stay there very long.

[KevinW]

I like to view these drawdown's as the spring coiling tighter.  I think MT said that once, and it's true.  These drawdowns tend to be relatively short-lived and can be followed by large gains. 

+1

And, the perennial question: if one were to quit the PP, what will they use instead? We have to actually invest in something, and every portfolio has its downsides.

[mathjak107]

if you want no downside bury it in the yard because there is nothing  that isn't going to sacrifice gains for risk or volatility.

the pp comes close but in my opinion sacrifices to much in the way of long term gains for low volatility.

it will all depend on your personal pucker factor . volatility in a portfolio is not risk . it simply means you need to ride out the natural  swings over time in the business cycle . .

sometimes the peaks and valley's will be higher and sometimes lower . the end result at the end of an accumulation stage has always been the greater volatility accepted the  greater the pile of money at the end .

even in retirement low equity portfolios failed way more times than 40/60 to 60/40 have  .  we can't back test the pp through those same worst of times since there is zero data on gold  and the pp .

the pp was back tested just through later nasty times but nothing like the  worst cases we had already had .

[mathjak107]

Interesting article on how everything is relative (recency bias)

http://www.wikinvest.com/wiki/Recency_bias

TL;DR, when you enter the market shapes your opinions. If you enter at a downtime as it keeps going down, you're going to have a very different perspective than someone who had a large run up and is now just losing a bit now.

The eternal lesson is to disregard short-term trends and the Chicken Little Syndrome. As always, PP investors should should look to the long term and respect the wisdom of the ages: "This too shall pass away."

We're also down less than 3%.  It's so minor.  Someone said it before, but it's worth repeating that if you were in the PP when people were losing 40% in stocks you have a much different perspective for the years the PP lags.  The goal is to minimize losses and it really does that.  You can't always win but at least you don't lose big when you lose.

but a balanced portfolio lost about 18% in 2008 not 40%.  even 100% equity's in large caps ,small ,caps and midcaps would have been a non even a few years later in 2008 .

it makes little sense in all cases to keep discussing short term events when discussing long term investments.

it makes as little sense as using long term investments for short term needs .

if it turns out that way then it is just self inflicted damage in both cases  and has zero to do with the investments  only your own personal situation that came up .

[dutchtraffic]

The eternal lesson is to disregard short-term trends and the Chicken Little Syndrome. As always, PP investors should should look to the long term and respect the wisdom of the ages: "This too shall pass away."

We're also down less than 3%.  It's so minor.  Someone said it before, but it's worth repeating that if you were in the PP when people were losing 40% in stocks you have a much different perspective for the years the PP lags.  The goal is to minimize losses and it really does that.  You can't always win but at least you don't lose big when you lose.

but a balanced portfolio lost about 18% in 2008 not 40%.  even 100% equity's in large caps ,small ,caps and midcaps would have been a non even a few years later in 2008 .

it makes little sense in all cases to keep discussing short term events when discussing long term investments.

it makes as little sense as using long term investments for short term needs .

if it turns out that way then it is just self inflicted damage in both cases  and has zero to do with the investments  only your own personal situation that came up .

These arguments are false, do not even have the energy to debunk them anymore.
Please stick to your own pp-hate thread.

[mathjak107]

show us facts , you talk a lot but have yet to produce a single study backing anything you say . i see you disputing every point i say but nothing to support it .

show me i am wrong and i will agree . i can't tell you how many times i switch views as i learn more , in fact very few of the stances i took even a year ago do i still have as more and more  information was brought to light and new research and studies done .

[Greg]

show us facts , you talk a lot but have yet to produce a single study backing anything you say . i see you disputing every point i say but nothing to support it .

show me i am wrong and i will agree . i can't tell you how many times i switch views as i learn more , in fact very few of the stances i took even a year ago do i still have as more and more  information was brought to light and new research and studies done .

Agreed with mathjak regarding evidence. We needs more facts and figures and statistics, not just words.

[barrett]

it makes little sense in all cases to keep discussing short term events when discussing long term investments.

Well, it was actually the short-term events I was interested in discussing when I started this thread. Can we keep the heated discussion over on that other thread? At least for a couple of days maybe?

[iwealth]

but a balanced portfolio lost about 18% in 2008 not 40%.  even 100% equity's in large caps ,small ,caps and midcaps would have been a non even a few years later in 2008 .

Here's some facts (Mathjak, please do not dispute these)

A 70/30 total stock/total bond portfolio started on 1/1/2007 dropped 40% peak to trough during the worst of the recession.
Not balanced enough? A 50/50 portfolio dropped 30%.
25/75 dropped 15%.

The PP was down about 14% at its worst, similar to a 25/75 portfolio.

Here's an opinion (feel free to dispute this)

Does anyone here really care about yearly returns? That's just cherry picking start/end dates. One's emotional investment stability is affected by max drawdown, not your portfolio values on December 31st of each year.

[mathjak107]

trying to judge markets in the short term whether the pp or conventional is silly as far as results.  depending on events and time frame results will vary.

if you are investing in long term investments than the long term is the only criteria that counts. look at the results over 15 or 20 years.

you think I remember my portfolio was in the stock market crash in 1987 , the tech bubble or 2008 ?  not at all , turn off the noise , look again down the road and odds are you will be quite happy .

are we talking volatility ?  risk  ,  or returns ?

volatility may be an issue if that is important . but everything else will likely be just fine long term

[iwealth]

trying to judge markets in the short term whether the pp or conventional is silly as far as results.  depending on events and time frame results will vary.

if you are investing in long term investments than the long term is the only criteria that counts. look at the results over 15 or 20 years.

you think I remember my portfolio was in the stock market crash in 1987 , the tech bubble or 2008 ?  not at all , turn off the noise , look again down the road and odds are you will be quite happy .

are we talking volatility ?  risk  ,  or returns ?

volatility may be an issue if that is important . but everything else will likely be just fine long term

This is where you seem to struggle most with understanding the psyche of this forum's members. This is a no-pucker-factor zone. It's a place where people are willing to accept lower returns in exchange for less drawdown anxiety. It's very easy to say in retrospect that riding out that 40% drawdown was no big deal because stocks always come back. But at the time it was terrifying. Do you remember how many companies were being priced like bankruptcy was just around the corner? If not for unprecedented levels of government stimulus and fed intervention, stocks would NOT have recovered.

How many more bullets do you really think the government and the fed have in their chambers to fend off another serious recession? Maybe they are still fully loaded, I don't know. I choose not to forever rely on government entities to keep my stocks propped up in rotten times.

That said, if anyone here truly believes that their PP is going to beat out the returns of a stock heavy portfolio over a 30+ year timeframe, I'd agree with you that they don't understand their own portfolio. It's unlikely. It hasn't happened before. It may or may not happen in the future. But I feel comfortable guaranteeing that in the worst of times, the stock heavy investor with no "pucker factor" is going to experience some extreme anxiety. And that's the type of investor that lives in these parts.

It seems ironic after a 6 year bull market to new all-time highs that we're talking about getting overweight on stocks BECAUSE the fed is getting ready to pull back on stimulus.

[mathjak107]

I keep saying over and over if you have a low pucker factor the  pp is fine.

what I object to is  constantly pointing out these short time frames and highlighting the drop because for a long term investor who is comfortably allocated  these are just bumps in the road.

we all agree if you dislike volatility then the pp is fine.

but for those long term investors out there that allow for these swings as part of the deal they are no problem.