No gains to be had

[Fred]

I've been in the PP for about 7 years now and this year seems kind of unusual in that in the past I could always look at the numbers and see how much better off I would have been if I had a crystal ball and knew which of the 4 sectors to put all my money in. According to PeaktoTrough for this year, we have....

S&P500  + 1.84%
Gold        - 7.61%
T-Bonds  -  .21 %
Cash        + .12%
   
Total for balanced PP @ start of year = -1.46%

So, for all the hand-wringing I've been reading about in recent threads, where are all the gains missed out on for the year? Obviously it would have been better to have been 100 percent invested in stocks but who would do that, and especially for such a small advantage?       

[mathjak107]

a diversified mix is still up okay .  i use fidelity so looking at their index funds :

  fidelity nasdaq composite index is up 9%

, fidelity spartan international  is up  8%  ,

fidelity total bond up 1% ,

fidelity spartan 500 3.32% 

fidelity spartan small cap 3.67%.

fidelity spartan mid cap index up  3%

a  conventional mix  of equities covering the various segments  and bonds would still be fine , not great but okay.

[Tom]

In my opinion the portfolio is really doing it's job and today is good example.  It's been lagging, but no serious loss for the year and on days like today the asset no one would otherwise hold (LTTs) reacts to a world event (China devaluation) and gave it a good boost.

The year is not over and the conclusion on a Fed rate hike in September has not happened yet.  There's still room to put the PP above the S&P for the year, but with less volatility.  And while majthak pointed out areas where you could have higher returns, you'd have to have a very specific crystal ball to know specifically what sectors of the stock market to put your money in to achieve it for this year and then exactly when to time it to get out to avoid major losses and also know what to put them back into.  I think most people would fail at that task.

[mathjak107]

No crystal ball needed. That is what makes up a typical diversified conventional portfolio. You buy it and rebalance it . No more crystal ball needed to guess market segamants than the pp

[Cortopassi]

Past few days, with China devaluing, interesting dollar is down as well, and look here, gold is finally relatively strong for once.

Again, happy to be in the PP.

[Tom]

No crystal ball needed. That is what makes up a typical diversified conventional portfolio. You buy it and rebalance it . No more crystal ball needed to guess market segamants than the pp

You didn't mention what percentages in each.

[mathjak107]

What ever percentages someone wants . The basic total market fund is about 75% s&p 500 so it is really up to the investor as to what allocations they want.

Right now  i am about 50% equities with 10% of that international.

The remaining 40% is about 1/2  fidelity blue chip growth and fidelity growth and income. The other half is 75% vti and 25% the extended market index.

The other 50% are varius bond funds

[Fred]

What ever percentages someone wants . The basic total market fund is about 75% s&p 500 so it is really up to the investor as to what allocations they want.

Right now  i am about 50% equities with 10% of that international.

The remaining 40% is about 1/2  fidelity blue chip growth and fidelity growth and income. The other half is 75% vti and 25% the extended market index.

The other 50% are varius bond funds

Love the names - "blue chip growth", "growth and income". Who doesn't want that?

The last time I invested in a Fidelity "growth" fund it was called "aggressive growth" back in the 90's. Don't know if it's still around or not but I enjoyed the obscene day to day returns while it lasted.

[Tom]

What ever percentages someone wants . The basic total market fund is about 75% s&p 500 so it is really up to the investor as to what allocations they want.

Right now  i am about 50% equities with 10% of that international.

The remaining 40% is about 1/2  fidelity blue chip growth and fidelity growth and income. The other half is 75% vti and 25% the extended market index.

The other 50% are varius bond funds

But what allocations would currently be outperforming the PP and by how much?  50% equities and 10% international is in my opinion a much higher risk allocation and I would want a much higher payoff for that additional risk.

[Fred]

Every PP sector was up today giving me hope that the my original Subject line was nothing but a bout of pessimism. Apparently there ARE gains to be had which stands to reason. We live on a planet of 7 billion people constantly seeking to better their lives and willing to make trades for this purpose. How could it be otherwise. If there is a better system capable of tapping into this momentum with less volatility than the PP I'm all ears but it is the best I've heard so far.

[Cortopassi]

Gold was up
VTI was up (down earlier)
TLT was down (up earlier)
Dollar down

Only 2 of 4 components were up, and the PP was still overall up for the day, which is the goal, not necessarily all being up.

[mathjak107]

Tom-Like any portfolio you can' t go by a year or even 2 or 3 years. You really need longer time frames because the daily action is almost random.

Ytd i am up about 3% . But we had no real up cycle yet this year.

I don't consider a 50/50 mix riskier .i consider it more volatile.

[Tom]

Tom-Like any portfolio you can' t go by a year or even 2 or 3 years. You really need longer time frames because the daily action is almost random.

Ytd i am up about 3% . But we had no real up cycle yet this year.

I don't consider a 50/50 mix riskier .i consider it more volatile.

Volatility is what I meant by risk.  You're right, about looking at the k by term, but you were speaking about portfolios doing better this year so I was curious.

Year to year matters a little more to me  personay as I don't use the PP just for long term retirement, I'm all in with everything since there's a significant cash portion.  I personally wouldn't feel comfortable with more volatile approaches considering that. I know even the PP can and will lose money any given year, I feel more comfortable taking the risk with it than other approaches.

[Tyler]

I don't consider a 50/50 mix riskier .i consider it more volatile.

Volatility is what I meant by risk.  ...

Year to year matters a little more to me  personay as I don't use the PP just for long term retirement

Risk in investing has been a topic I've thought a lot about lately. Funny enough, I posted this just today: http://portfoliocharts.com/2015/08/12/r ... rld/.  There's also a nice PP tie-in to help explain when and why it might be a superior long-term investing option for some people compared to other portfolios with higher average returns. 

Long story short if you don't care to click the link -- risk is measured in life goals, not standard deviations.  Everyone has different goals, and sometimes a portfolio that provides less uncertainty can be more valuable for a specific investment plan than one that provides higher average returns.  For example, a 50/50 portfolio is not particularly risky if you're saving towards retirement over the long term and can tolerate a floating retirement date if markets sour.  But it might be significantly risky for someone using it for a college fund who does not have tens of thousands of extra dollars lying around if markets don't cooperate when their child graduates high school.

Since everyone has different life goals, it's important to be specific when discussing risk.  Different goals may sometimes call for different portfolios and strategies.  I think a lot of the disagreement about various investing strategies often comes down not to portfolio theory but to a misalignment of the definition of "risk". 

[mathjak107]

In a nut shell when you mismatch time frames and try to use volatile assets for short term needs that is risk.

Flowing with the natural market cycles which typically fit within the market time frames as to when the money is needed is volatility.

Typically counting on market gains in long term assets in anything less than 10-15 years may or may not happen according to plan. But the odds are very
good you will be able to sell at a profit 15 years out or more.

But a portfolio is not just about long term needs. I am living off my portfolio so i have cash for bill paying the next 2 years , i have bonds and dividends filling up the buckets to be used after the next 2 years .

Even some equitys can be sold at a loss if needed as long as we have one up cycle before doing so.

Even those drawing 4% inflation adjusted who retired in 2008 right before the plunge are on track today like it never happened.

A recent study by michael kitces shows the 2000 and 2008 retiree is still on track to have 4% withdrawals hold just fine but the 2008 retiree will likely have quite a bit left over at the end.

The 2000 retiree will likely need no income adjustment but money for heirs left over is on track to be one of the lowest levels and they may actually be the 5th worst case scenario at the end of 30 years.

Even a plunge day 1 like 2008 was not a problem. What michael found is it isn't the size of
the fall early on when spending from a portfolio , it is the length of time even a moderate dip takes to recover.

No other time frames except 2000 are any different so far than those before them at this point in time

[Cortopassi]

Great article on Sarah and the 20 year plan, Tyler!

[Greg]

Great article on Sarah and the 20 year plan, Tyler!

+1

[barrett]

Great article on Sarah and the 20 year plan, Tyler!

Agreed. And in the photo you grabbed for the top of the article, it looks like Sarah has great hair to go along with her financial savvy!

Seriously Tyler, all of the stuff you have been putting out really resonates with me personally as I am hoping the PP will be my investment plan from here on out, with a possible retirement date 1-5 years from now.

I do like mathjak's idea of maybe throwing everything into Wellesley if I get too old (or too dead) to explain everything to my wife.

[Tom]

In a nut shell when you mismatch time frames and try to use volatile assets for short term needs that is risk.

I said year to year matters a little more to me since I'm all in (but have emergency cash outside of it), but didn't mean it's a huge factor.  It's for money that isn't neccesarily short term, but that I may need in less than 30 years.  I don't feel comfortable keeping it all in cash doing nothing even though I don't really know what it's for yet.

[Xan]

But a portfolio is not just about long term needs. I am living off my portfolio so i have cash for bill paying the next 2 years , i have bonds and dividends filling up the buckets to be used after the next 2 years .

Am I crazy or were you recently asserting that having different "buckets", particularly a cash bucket, was just fooling yourself and lowering your returns?

[PP67]

Tyler,

I enjoyed your "Risk in the Real World" article but had a question....  It looks like you were comparing the risk of outcomes by either investing $2,000/mo in stocks and hoping you still had the average return in 20 yrs when you wanted it for college costs (but might have quite a bit less than what you need) vs the same 20 yr risk but investing 50% more ($3,000/mo) in a PP...  Wouldn't you have to compare the same investment amounts (either $2k/mo or $3k/mo) in both portfolios and see what the range of outcomes would be in 20 yrs?  I suspect that the worst case of the stock investments may be quite a bit higher that the worst case PP which is what I think you would getting at...

[Cortopassi]

PP67, you made me just realize that as well.

So if you change the 100% stock portfolio to $3k/year, the minimum at the end is $77k, still less than the PP $93k, and it seems this should have been the analysis?
Or is you change the PP to $2k/year, the minimum at the end is $58k, vs. $51k for the 100% stock

Tyler, if these are right, it does seem unclear whether the scenario is apples to apples with a different yearly input.

If you instead take $2k toward PP and $1k toward 100% stock, the resulting minimum is $84k, for example.

[Tyler]

That's a good point!  Please note that the goal of the article is not necessarily to argue for the PP over stocks, but to illustrate that a good financial plan considers savings, returns, and uncertainty as a whole.  There are many ways to get there.  The fun thing about the calculator is that you can play with the inputs to find a combination that works for you personally.  I don't claim that even the PP is a one-size-fits-all solution for every individual and goal.

Thanks for the feedback.  I added a minor clarification, noting that the PP outperforms the TSM on the low end (the key measure for the example) even at the same savings rate.  It still supports the larger point, IMHO.

[mathjak107]

Xlan i don't use a bucket system . When i say i channel dividends and interest into my cash bucket i am referring to the fact i keep two years cash in reserve.

Whatever i am short comes from a systematic withdrawal of all pieces of the pie maintaining my 50/50 allocation.

A bucket system  would drain all cash ,then all bonds then eventually refill from stocks down the road. Allocations change and go higher and higher as you spend down. You can be 80% equitys with some bucket systems before refilling as long as 15 years later.

While mentally comforting there is no actual advantge to using buckets over systematic withdrawal.

I do yearly rebalancing from all pieces to make up my two years cash.
That is not a bucket system.

[mathjak107]

i do want to mention that i have nothing against using a bucket system. they are very good mentally . but the claims of them being superior to systematic withdrawals have been found not to be accurate .

it really boils down to personal preference and not performance . .