PSA: I now have a 3-year period with no gains

[mathjak107]

a lot of times what we do is nothing more than a case of the emperors  new clothes .  it makes us feel better but it really is no different from what it actually is when looked at as one .

[dualstow]

a lot of times what we do is nothing more than a case of the emperors  new clothes .  it makes us feel better but it really is no different from what it actually is when looked at as one .

As I've often said, I pay close attention to how the (pp+vp) allocations boil down as a whole, but it is important for me to *run* the pp separately to see how it works. Otherwise, I don't have a pp, just a big mishmash. Psychologically speaking, I just don't have the stomach to hold all stocks even though that seems to have the highest potential upside.

Having the pp allows me to get through stock downturns without capitulating. At the end of the Emperor's New Clothes fable, the Emperor spent a lot of money and was left naked and laughed at. Hopefully, I'll end up with millions of dollars and at least one comfortable pair of Dockers. We'll see how it goes.

[Pointedstick]

My current line of thinking is to move into a more Desert-like allocation (overweight stocks and underweight gold) during the next stock crash.

Wow, even Pointedstick is thinking of throwing in the towel on the PP?  I think the bottom is finally in.

Probably! My timing is always terrible so I haven't done anything. But I have been feeling a bit cranky.

I started in August 2012 and my CAGR is about 1.6% (nominal, not real). The basic problem is that this is not enough for an ERE portfolio, and as the years tick on with such low returns, the viability of financial independence itself will falter. I know I can withdraw from cash to preserve the volatile assets' chance to recover, but eventually, those assets have to produce some serious gains, and they have to be above average to make up the difference.

Something I've suspected for a long time is that the PP is fighting the Fed. In an ultra-low rate environment, people are pushed into the stock market for yield, which becomes self-fulfilling due to their purchasing. Since a lot of these people don't really like stocks, once rates rise, many will probably exit the stock market, leading to a period of subpar stock returns or even a crash. At this point, the PP will probably shine, and protect us very well from the crash, and that will be grand. But when will this happen? Until it does, I think the PP will suffer, since gold looks stinky and the 50% fixed income part won't produce much in the way of coupon payments due to the super low rates.

[mathjak107]

seems like you are coming around to what i thought .

[Pointedstick]

seems like you are coming around to what i thought .

Yes, I think so. It's been a background worry of mine for several years, and it seems like things are playing out that way, sadly.

[Cortopassi]

To me, this points to a good near bottom marker for the PP!

Does anyone really think we can continue like this for another 10 years of near zero rates?  Of stock market corrections taking only a couple days and then a couple days to come right back?  Of the Fed still having bullets to prevent/delay/kick the can on the next economic or financial crisis?

While I will take the gains on the 25% stock portion of the PP and the interest on the 25% bond portion, I only see one portion getting us through some unknowable event in the near to medium term future and that is gold.

I wish anyone looking to increase their equity portions good luck, truly.  I would not be able to weather the guaranteed downturns which will come whether you think so or not!

Have we already forgotten this chart from less than a week ago?

[Pointedstick]

To be clear, I have no plans to add stocks right now. You don't buy when something's going up, clearly in a bubble, and experiencing crazy daily volatility. For the moment I'm sticking with the PP, just grousing a bit.

[buddtholomew]

Thanks for being honest PS. I came to the same realization a little earlier (2013) and increased equity exposure in both the PP and retirement accounts.

I had the misconception that the PP would shine when equities declined, but this is certainly not the case. The lower allocation to equities only limits the losses. The greatest bull market in history has been barely strong enough to result in portfolio gains. This also includes a rise in treasuries. As someone alluded to above, the PP distinguishes itself from other portfolios only when gold rises drastically.

HB diversified away from gold to protect gains. Getting into gold at the top has been disastrous.

[dragoncar]

To be clear, I have no plans to add stocks right now. You don't buy when something's going up, clearly in a bubble, and experiencing crazy daily volatility. For the moment I'm sticking with the PP, just grousing a bit.

Budd, we finally converted one!  Yeah grousers unite!

I don't think any of us grousers are liquidating PPs at the moment.  Maybe the bottom really is in and the PP maintains positive return over 3 years and everyone is "happy"

[goodasgold]

My advice is: hang in there, guys. "This too shall pass."

I happily reaped the rewards during my working years, when I had an orthodox Boglehead portfolio. I am retired now and look upon the PP as the best defensive portfolio in existence. May I remind all of you that there have been earlier periods when the PP returned mediocre or even negative returns for several consecutive years?

Yes, I grouse about the gold not going anywhere and even declining (especially when the Chinese market retreated sharply, which seemed like an ideal time for gold to take a Great Leap Forward.) But basically, I am happy with the gold, which will serve the purpose of a "get out of jail free" card if and when a REAL crisis shakes the world economy.

And as much as I used to grumble about cash, as it just sat around doing nothing while other sectors boomed, I have made my peace with it, especially in the form of I-Bonds.

In summary, I ain't goin' nowhere, and I respectfully advise other PPers to do the same.

Peace,

Goodasgold

[Cortopassi]

The greatest bull market in history has been barely strong enough to result in portfolio gains.

From 3-2009 to now,

PP returned total of 63%, 7.8% CAGR
60/40 mix 143%, 14.7% CAGR
100% stock, 211%, 19% CAGR

I would have been more than happy with 7.8% knowing all my eggs were spread around more evenly.  Barely strong enough is exaggerated.

[buddtholomew]

The greatest bull market in history has been barely strong enough to result in portfolio gains.

From 3-2009 to now,

PP returned total of 63%, 7.8% CAGR
60/40 mix 143%, 14.7% CAGR
100% stock, 211%, 19% CAGR

I would have been more than happy with 7.8% knowing all my eggs were spread around more evenly.  Barely strong enough is exaggerated.

Look at the performance compared to a 60/40 allocation. Pretty pathetic. Half the gains, half!!!!!

[Pointedstick]

Look at the performance compared to a 60/40 allocation. Pretty pathetic. Half the gains, half!!!!!

It just goes to show you how much a 60/40 portfolio tracks the stock market. If what you're looking for is basically stock-like performance but with slightly lower drawdowns when the shit hits the fan, I think it's a fine portfolio. Endless charts have confirmed this; it's basically a slightly smoother stock portfolio, and will accordingly have most of the same gains and losses, and at the same times.

[Cortopassi]

Looks like we are all recovered in the market.  Nothing to see here, nothing to worry about.  45 degrees to the upper right forever.

Sure, PP gains were half of 60/40 since 2009.  And a lot has to do with your timing entry into the PP if you went all in at one point in time.

But, with a historic rally, and bonds at historic low rates, please someone tell me, how would you allocate your funds today.?  How can someone consider going 60/40 at apparently generational highs on both stocks and bonds?  It doesn't make sense to me!  An even split does.

You want to buy when low, right?

Gold looks stinky, shouldn't we all be looking to rebalance and/or prop up our allocation to gold, if it is in the losing position currently?  Instead of trying to figure ways to lower our exposure to it in the portfolio?

Seems everyone is totally enamored with stocks, at/near highs, and hating gold, at current lows.  I understand it emotionally makes sense, but logically you need to do the reverse!

[stuper1]

Very good point, Cortopassi.

How does the PP to 60/40 comparison look if you use the time period of 1/1/2001 to today?

[ochotona]

I don't think this is the time to abandon the PP. This coming from someone who has been highly critical of the PP, who is not in the PP now. It is sort of time to think about doing the opposite.

[Cortopassi]

Very good point, Cortopassi.

How does the PP to 60/40 comparison look if you use the time period of 1/1/2001 to today?

Personally, I don't even really want to get caught up in the historical backtesting.  I know you have to, to some extent, but intuitively the uncorrelated assets with rebalancing should work.

But since you asked: 152%, 6.5% PP, 144%, 6.27% 60/40 split.
----------------------
And I don't think current times can be reflected by any historical period.  I am not a student of history.  But the interconnected, digital speed of light transmission of every piece of data related to markets and news is something relatively new and increasing daily.  40 years ago, I imagine a stock market puking across the globe would not have affected US markets like it does now.

HFT computers, everyone invested in the market, knowingly or not through 401ks and pensions, the pension crises, and on and on make it so I would be insane to want to prognosticate anything looking forward or put too much faith into looking backwards and expecting similar.

But as some may know, the time previous to the PP I was into gold/silver and miners because of being convinced of the SHTF scenario.

What I am convinced of now is that the people running the show will not willingly fix things if it involves pain to any special interest (basically everyone) and continue the status quo until it implodes.  It will all be run into the ground and I hope whatever is left afterwards will still be a good life for my kids.

It seems no one is looking out for everyone's or the country's best interest anymore.  It is more seemingly the attitude of I am getting what I can out of this system, everyone else be damned.

[edsanville]

I had the misconception that the PP would shine when equities declined, but this is certainly not the case.

With all due respect, I would consider the following facts:

1) it's only been about 2 days since the stock market had that major decline.
2) in the past, the PP has taken up to a few months for the counterbalancing assets to move up in response to a decline in equities, (just look closely at the 2008 chart for the PP)
3) many people think that this little correction was only the first of many, or a long period of volatility like late 2011, (but nobody really knows of course)
4) as of today, the PP is actually beating the S&P when it comes to 1-month, 2-month, 3-month, 6-month, and YTD returns.  It only lags the S&P by 2.6% for the 1-year returns, and it's been a pretty lackluster year for the PP.

In view of point 4), I wonder why so many people are down on the PP now, of all times.  I'm feeling good with my PP, because I think the stock market's gonna be taking a little "break" soon.  I have no idea when, but it's been a long, long, uninterrupted bull market.

[mathjak107]

seems like you are coming around to what i thought .

Yes, I think so. It's been a background worry of mine for several years, and it seems like things are playing out that way, sadly.

come with  me to the dark side ....lol 

the fact is you can do all the back testing you want but in the end it means nothing .  reality is equity's have been a pretty reliable growth engine over long periods of time .  that does not mean they will be in the future but you know what ?  after the last drop and the amount of folks negative on equity's they still managed to recover faster than any other asset .

that is the key , they can recover , and lately do recover faster than anything else .  they are the best house in the worst neighborhood .

everything else takes to long in cycle time or depends on things crapping the bed for extended periods of time .

that is something that in more modern times does not happen much so basically when the pp falls in a  hole the opposing fighting makes it difficult to get out again .

while you may not like volatility ,  more and more i believe without the volatility on your side to move things out of the hole when down the lack of volatility is the real risk today .

even with the biggest stock rally's the pp is bogged down and out for the count  even being down farther .

years back if equitys were down , just interest could make them whole again in a couple of years . but with that gone , and the potential for the  usual growth engine equity's, tepid  anything that diminishes what they can muster will manifest itself as a loss .


looking at my hypothetical pp i still track that is down 43k in 2 months time and  i can't imagine how or when this will get positive again with even the biggest equity rally's being dragged down .

low volatility is one thing but when it leads to losses where there just seems little way of regaining your way back because your next step may be fighting the fed holding long term bonds in a rising rate climate .  then there is gold still trying to figure out what it is supposed to respond to like an old man with dementia  .


it seems the only way back to positive territory is to count on real negative  EXTENDED CRAP  happening . it can't even be short term stuff as things go right back again as soon as the panic wears off .

anyway just somethings to keep in the back of your mind as you think things through and debate with yourself what to do as i know many are at this point . .

[Tyler]

For all fretting about comparative returns over arbitrary timeframes looking backward, please keep in mind that there are two major problems with that method. 

1) Returns are very different depending on how far back you look.
2) Returns are massively skewed by recency bias.  And the effect goes back decades.

[img width=500]http://s4.postimg.org/51pmso465/PP_vs_BH.jpg[/img]

Basically, anyone who uses a single number to pick one portfolio over another is most likely fooling themselves.  You've got to look at the big picture. 

[Cortopassi]

Tyler, if I am understand the chart correctly, the blue is looking back from a starting point of 1/1/2015, so basically the 60/40 has killed the PP for ~7 years, and if starting back from 1/1/2012 the PP wins for the past 16 years?

And for both lookback periods, anything back more than about 17 years and the 60/40 generally is ~2% higher than PP?

Cool chart if I understand correctly, and shows that any poster on this forum can and will have a different view of the PP likely depending on initial investment date and whether all in or gradual shift to PP over time.

[Tyler]

Yep -- you got it.  The chart shows your comparative CAGR (60-40 returns minus PP returns) depending on how far back you looked.  Above the line means the 60-40 portfolio won.  Below the line means the PP won.

The blue is what the chart looked like if you checked in January of this year.  Note the huge difference even between looking back 6 years and 7. That shows why comparing "returns since year X" can lead to vastly different conclusions as you vary X.

The red is what the chart looked like if you checked three years earlier.  Pretty different, huh?  It's recency bias at work -- not just in emotions, but in the data -- and how perfectly rational people can still be fooled by numbers.  Wait another three years and history will look different yet again.

Even long-term results boiled down to a single number can be deceptive sometimes.  Look back 30 years and a 60-40 portfolio beats the PP by about 1.5% per year no matter whether you looked in 2012 or 2015.  But that's no surprise as that means you're starting both simulations in the mid-80's right before stocks went on their historic run.  Many people might be surprised the PP stayed so close over that timeframe!  It doesn't necessarily reflect what a similar 30-year run might look like looking forward.

Pick a portfolio because it's built on solid economic theory and meets your personal needs in the grand scheme of things, not because you compare a single number picked over an arbitrary timeframe.  You'll be very surprised how much that number might change in just a year or two and make you regret that choice.  Math seems so absolute sometimes, but statistics are fickle and more volatile than you think!

FWIW, I think that the PP and a 60-40 portfolio are both fine choices for investors.  Given enough time, they will regularly swing back and forth regarding which one is "better" and ultimately average out to a very similar result.  Setting aside recency bias, which one you choose is really more about personality than returns. 

[l82start]

FWIW, I think that both the PP and a 60-40 portfolio are both fine choices for investors.  Given enough time, they will regularly swing back and forth regarding which one is "better" and ultimately average out to a very similar result.  Setting aside recency bias, which one you choose is really more about personality than returns. 

i just wanted to quote this for emphasis and a big +1 ....    and point out that knowing your own mental state/tolerance for risk is a prime consideration for which one best meets your needs. its actually kind of amazing how much the success/fail in investing comes down to psychology and understanding your own..

[Gosso]

The US PP has gone through many three year periods of negative (near zero) real returns.  This is not outside the operating parameters of the US PP, whether we like to admit it or not.


(Understanding the above graph: The data measures the trailing 3 year compounded annual growth rate (CAGR), so the most recent data point for August 2015 measures the CAGR from August 2012 to August 2015)

[mathjak107]

but none with zero % interest rates . as well  the fall of interest rates bottoming out and except for an occasional quick flight to safety now is basically fighting investors who have been bidding bonds higher since feb, and gold that has fallen and still falling . 

like the fed is just about out of ammo at zero rates the pp with the tail end of a 40 year bull run in bonds except for some speed bumps is also out of ammo for now .

with 3 asset classes watering down the only game left ,equity's it can't seem to get any traction .  interest rates and commodity's tend to run very long cycles and sometimes can bee  longer  than a few of us will live . equity's seem to have much shorter recovery's , especially because there are different market segments .

midcaps recovered way before large caps did in 2000 .