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

[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 .

[MediumTex]

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 .

Haven't interest rates been at 0% since 2009?

It seems like we've had 6 years to see how the PP does in a 0% interest rate environment.

[mathjak107]

yep and long treasury bonds did great!  they were the growth engine for the pp. in fact the pp did well when equity's plunged because of them .  they continued to do okay hitting a speed bump every now and then but still continuing their drop until February when they bottomed and reversed direction .

odds are at these levels that is over . yeah you will get short term pops when trouble hits but once it simmers down bond rates are trying to rise as they have been doing since feb until the last couple of weeks made them a safe haven . but that is short lived as we saw them get hit when stocks took off  again . basically i think you will see the interest and that is about it going forward ..

i think the pp has kind of ended up after 40 years at a point where it reached a point where it has no guns.

the guns that do the heavy lifting when gold is on vacation  are pee shooters .

25% equity's is okay with a total bond fund  , the equity's at these valuations stand a chance of adding lift . but battling against falling long term  treasury's and gold is more than can get traction .  with little end in sight short of a long term meltdown and extended flight to safety  the pp can't get out of the hole it is stuck in .


the yield on the 10-year Treasury was every bit as volatile as the equity market. But as investors lost their fear of stocks, Treasury yields worked their way higher, . Having at one point fallen below 2%, the 10-year finished the week up 13 basis points to 2.18% - roughly where it started the year.



of course these are my own opinions and not intended to say my way is the way it will play out .

it is only my reason why i stopped doing it almost immediately once i saw what the market action was doing to it ..

[Gosso]

Math,

But what about stocks being overvalued as well:


http://www.multpl.com/shiller-pe/

"It's not that easy being green B&H"


Maybe we should all sit in cash and wait for the Great Resettm

[mathjak107]

they are and that is why i feel gains will be tepid going forward and being they are still the best house in the worst neighborhood anything that impedes those below average gains is going to be a killer to performance .


also the shiller cape was revised and you can't compare to past years , it isn't apples to apples but i still agree by any measure we were to high .  but you have the fed back stopping them . if things pick up and the fed raises rates after the first round it means the economy is doing better and that is good for stocks .

if the economy isn't doing well  qe4 is on deck .

i think we reached a point in time that without taking on more volatility an overly conservative portfolio will be at best a struggle to keep pace . it is basically depending on calamity to give it lift and not the new normal times .  that is really kind of betting against the house  . we are still the most desirable place in the world to invest .  .

i think the new normal requires a portfolio that complements each other and plays nice  and unlike the past does not fight each other's efforts  so strongly .

[frommi]

Thanks Gosso for your posts!
I stopped using the PP in late 2013 but started a 3xPP two months ago with 25% of my networth. If history is any guide (and especially when i read the latest comments here) its the perfect time for that. Won`t take long until either inflation picks up or the FED has to ease again, both should be net positive for the PP.

[mathjak107]

inflation  picking up is bad for bonds and so far gold has not shown a good response to inflation . maybe if inflation was running out of control but so far it has lagged inflation for most of it's more modern life .

so i don't see that being a good thing for it .

[4x4]

Are you confusing the role of the PP w that of the VP?

Why not keep money you can't lose in the PP and allocate that which is more discretionary to a VP?

[helpme]

I started investing in the PP in mid-2011.  My gains are now equal to those I saw in August, 2012.  In other words, I haven't made any money in the PP in three years.

The caveat is that I've been regularly and aggressively contributing to the PP.  So my early gains in 2011/2012 were small as a percent of my current total portfolio value.  Losses in 2015 are applied to a much higher portfolio value.  Hopefully that makes sense.

Overall, not super happy with this portfolio.  I might try to move out of it by continually rebalancing into stocks but never rebalancing out of stocks until my allocation is more boglehead like.

Did the gain calculation include stock dividends and bond income?

[frommi]

Are you confusing the role of the PP w that of the VP?

Why not keep money you can't lose in the PP and allocate that which is more discretionary to a VP?

Because i am not a sheep of HB.

[4x4]

Are you confusing the role of the PP w that of the VP?

Why not keep money you can't lose in the PP and allocate that which is more discretionary to a VP?

Because i am not a sheep of HB.

Well whether you are a sheep, goat, or donkey, I have no idea... However, you seem to be a bit confused about something....

[frommi]

Well whether you are a sheep, goat, or donkey, I have no idea... However, you seem to be a bit confused about something....

No i am not, and the beauty of the PP idea is that i don`t have to be right on anything and still can make a profit. The best time to start an investment is when nobody likes it, in case of the PP its the same. Personally i think gold will play a major role in the next years returns for the PP, but who cares?

Btw. the reason why most PP years end in green is because the PP erases most drawdowns in the last months of the year.

[BP]

About 2.5 years for me with only a 15% gold allocation.  Right now  the PP is negative both nominal and real.  Would have been even worse with a 25% gold allocation.  BH is positive both nominal and real with the same 25% stock.