The Reason to Quit PP

[Pointedstick]

The elephant in the room is that all investments rely on the greater fool theory. Stocks, bonds, gold, houses... everything. It's not that there are no economic fundamentals, but all asset prices are heavily based on emotions and public opinion. Selecting one asset to point this out for obfuscates that it is true to for all assets--the only difference is the matter of degree.

[mathjak107]

Stocks down 6.37% YTD today, PP down 3.36% with treasuries rallying.  I would guess there's a good chance that by end of year stocks and the PP will be within striking distance of each other in either direction, but the PP never saw a 10% correction where you had to wonder where the bottom would be.  I'll take it.

but that comparison is  to a 100% large caps fund  which would only be one fund in a diversified portfolio .

i show the more diversified insight growth model  down 1.27%  ytd  and that is 90% stock . nothing special , just an assortment of stuff covering all market segments .

the 70/30 growth and income model is down 1.79%

the income and capital preservation model 30% stock is only down  .78%.

diversified portfolio's had a lot more upside cushion when they fell so they are not nearly down as much as the s&p 500 alone .

typically after the s&p 500 has been the only game in town like last year it has taken 5 years of unwinding where it lagged midcaps and small caps every time . so once it again it was lagging the other indexes when things fell .

a diversified mix of large caps , small caps , reits and short term and intermediate term  bonds is really not down much ytd .    i miss the nice gains we had but ytd really nothing to speak of at this point .

if you really want to compare i see a lot lot less pain then the pp right now in the models,, even in the equity heavy growth model .

as you get closer to the more conservative 30% equity  model it is has  70% less loss then the pp  in this down blast ytd  .


that is because you are confusing volatility with losses and gains .

the pp is less volatile . but that does not mean at times it's losses won't be greater since other models develop bigger cushions from which they fall .


as i say , i don't give a hoot about peaks and valleys . if the  volatility matches my comfort level  that is all i care about in that regard . all the rest is about whether i am meeting my goals AND EXPECTATIONS FOR THAT ALLOCATION .

[Tom]

Stocks down 6.37% YTD today, PP down 3.36% with treasuries rallying.  I would guess there's a good chance that by end of year stocks and the PP will be within striking distance of each other in either direction, but the PP never saw a 10% correction where you had to wonder where the bottom would be.  I'll take it.

but that comparison is  to a 100% large caps fund  which would only be one fund in a diversified portfolio .

i show the more diversified insight growth model  down 1.27%  ytd  and that is 90% stock . nothing special , just an assortment of stuff covering all market segments .

the 70/30 growth and income model is down 1.79%

the income and capital preservation model 30% stock is only down  .78%.

diversified portfolio's had a lot more upside cushion when they fell so they are not nearly down as much as the s&p 500 alone .

typically after the s&p 500 has been the only game in town like last year it has taken 5 years of unwinding where it lagged midcaps and small caps every time . so once it again it was lagging the other indexes when things fell .

a diversified mix of large caps , small caps , reits and short term and intermediate term  bonds is really not down much ytd .    i miss the nice gains we had but ytd really nothing to speak of at this point .

if you really want to compare i see a lot lot less pain then the pp right now in the models,, even in the equity heavy growth model .

as you get closer to the more conservative 30% equity  model it is has  70% less loss then the pp  in this down blast ytd  .


that is because you are confusing volatility with losses and gains .

the pp is less volatile . but that does not mean at times it's losses won't be greater since other models develop bigger cushions from which they fall .


as i say , i don't give a hoot about peaks and valleys . if the  volatility matches my comfort level  that is all i care about in that regard . all the rest is about whether i am meeting my goals AND EXPECTATIONS FOR THAT ALLOCATION .

Thanks condescending professor, but I didn't confuse anything nor did I use the word volatility or say there isn't a portfolio out there that is doing better than the PP right now.  I was merely using the S&P as a benchmark to compare the current PP performance to show that it's performance is not terrible.  I don't mean to be a dick, but I'm getting pretty tired of you.

[iwealth]

that is because you are confusing volatility with losses and gains .
the pp is less volatile . but that does not mean at times it's losses won't be greater since other models develop bigger cushions from which they fall .
as i say , i don't give a hoot about peaks and valleys . if the  volatility matches my comfort level  that is all i care about in that regard . all the rest is about whether i am meeting my goals AND EXPECTATIONS FOR THAT ALLOCATION .

Quite a response to the simple and factual assertion that the PP has outperformed the S&P500 YTD. Another barrage of random statistics pertaining to a bunch of investment newsletter models that nobody here uses concluded by calling the original poster confused. Yes, there will always be some portfolio allocation performing better than another portfolio allocation. Got it, everyone's got it.

You are so dug in to your position that you can't even admit gold performed admirably during the financial crisis despite more than tripling from 2005 (start of the housing downturn) through 2011. Instead you choose to focus on bonds performing better for full-year 2008 and that gold is down 40% from the 2011 peak. True and true, but neither of those facts detracts from the incredible boost gold provided to portfolios during that 6-year timeframe which of course was captured by PP investors via rebalancing.

[Kbg]

except treasury's reaction  to the event in 2008 blew golds out of the water .  as i said , another asset always did better .  TLT UP 34% , GLD 5%

Golds run up for whatever reason started way before in 2005. It then petered out , just the opposite in 2008.  Then it resumed again in 2009 . No one really knows why  , there are loads of guesses but it could have just been the bigger fool theory at work and based on nothing else.

without high inflation being present golds reaction to any news or events will be tepid if at all .  unless high inflation is in the works gold will not respond to much in an effective manner . there likely will always be something else that did a better job .

which is why bernstein said the flaw with the pp is it has  equal money in assets that have anything but an equal chance of playing out .

Beware of MJ's stats. They are cherry picked. Let's take a more realistic/broader view of GLD vs. TLT during the crisis.

I picked the week of 10/12/07 as the "start of the crisis." Why? That also was the week equities peaked. One could have gone a bit earlier and I wouldn't argue with that point (and OBTW gold would have done even better than TLT relative to its peak value).

The opening prices that week were:

GLD: 72.66
TLT: 87.77

GLD's max high (100.44) occurred the week of 3/20/08 with an open to peak return of 38.23%
TLT's max high (123.15) occurred the week of 12/19/08 with an open to peak return of 40.31%


If we look to the point when the crisis had subsided let's go with the week of 3/6/09...the absolute bottom in equities.  We find from 10/12/07 - 3/6/09:

GLD: 27.02% (close 92.29)
TLT: 18.79% (close 104.26)

And as MJ did correctly note, GLD pretty much trashed TLT into the 2011 hiccup. And, we all know how well GLD has done since 2011 (-42%) while TLT is up low single digits.

So what can we actually understand/conclude, based on real prices at non-cherry picked times?

1. Gold and LTTs pretty much returned the same thing during the crisis at their peaks.

2. From crisis beginning to end GLD bested TLT by "only" 43.8% in returns.

3. What has really driven the relative performance of TLT vs. GLD over this time period and since? Inflation expectations. Initially the market believed inflation would be the longer term byproduct of QE, but that has since changed. Prediction: This relative performance of TLT & GLD will continue to be based on inflation expectations. The moment the market flips its opinion you can be assured that GLD will be outperforming TLT. If/when that happens, I make zero predictions as to timing.

4. Starting and ending dates matter when reviewing market history... You see this constantly in the financial press (cherry picking of points in time to support an argument).

The whole thing about HB and PP is the assumption you can't or don't want to try to predict the future. If this applies for you, the PP makes sense. If it doesn't, PP does not. It is that simple. Financial academics have proven (repeatedly) that equally balanced portfolios perform better over time than more complex weighting schemes due to the instability of the values that go into more complex portfolio weighting formulas. Said differently, these variables aren't predictive. It has also been posted (and was written about by HB), that if you have a bias then indulge it by reallocating 5-10% points toward your bias. Just don't go hog wild. The cost is higher volatility, the reward is higher returns if you get it right.

Full Disclosure: I am not positive if my calcs are dividend adjusted...so here are the Morningstar Returns


ETF                    2007    2008      2009      2010      2011    Total Rtn
GLD (Price)    30.56    4.96      23.99    29.27    9.57    98.35
TLT (Price)      10.23    33.92  -21.80    9.05    33.96    65.38




Note added after original post: Equally weighted in this context means fixed percentage of a portfolio vice percentage is adjusted (annually, quarterly, monthly etc.) due to whatever formula is being used for weighting.

[ochotona]

It's time to quit every portfolio. 50% cash, 50% intermediate bonds.

[dualstow]

It's time to quit every portfolio. 50% cash, 50% intermediate bonds.

Why?

[ochotona]

It's time to quit every portfolio. 50% cash, 50% intermediate bonds.

Why?

Every asset imaginable is below it's 10 month moving average. Across the board. There will be a time to buy, but not today.

[Cortopassi]

Ocho,

That portfolio would show bias toward the US government keeping control.

Not at all saying they won't, but "time to quit every portfolio" would mean (to me) get out of anything corporate or government related/controlled. 

Might mean income producing real estate, gold, silver, fine art, etc.

[ochotona]

Ocho,

That portfolio would show bias toward the US government keeping control.

Not at all saying they won't, but "time to quit every portfolio" would mean (to me) get out of anything corporate or government related/controlled. 

Might mean income producing real estate, gold, silver, fine art, etc.

I don't know about art. Silver and gold are both losing money for people lately. They will bottom eventually, but I don't like to catch the falling commodities knife. REITS are doing worse than stocks, and I don't want to be a real landlord. No, really, cash and low volatility bonds, seriously. The storm won't last forever, but it's a dangerous time now.

[buddtholomew]

It's time to quit every portfolio. 50% cash, 50% intermediate bonds.

Have you backtested 50/50 

This type of post screams frustration and is a clear indicator to focus attention on something non-investment related.

[Xan]

"quit every portfolio" is obviously impossible, unless you mean give everything away and have $0 to your name.  Any allocation is a portfolio.

[ochotona]

It's time to quit every portfolio. 50% cash, 50% intermediate bonds.

Have you backtested 50/50 

This type of post screams frustration and is a clear indicator to focus attention on something non-investment related.

I have "backtested" 2000-2002, and 2008-2009, so to speak, and choose to step away for a short period of time. I also was aggressively buying in 2009, and don't want to give up my gains at age 54.5.

I'm not frustrated at all. I'm calm. I'm just sharing my perspective.

[Cortopassi]

I know you have had a gold # in mind to get back in.  Do you have a similar # for S&P/Dow/Nasdaq to step back in?  Just curious.

The getting back in was always unworkable for me, as well as the getting out at the wrong time.

[ochotona]

I know you have had a gold # in mind to get back in.  Do you have a similar # for S&P/Dow/Nasdaq to step back in?  Just curious.

The getting back in was always unworkable for me, as well as the getting out at the wrong time.

Of course, we begin by saying that no one can predict the future...

Gold below $900. S&P500 below 1700.

[Cortopassi]

And if by chance or fate one or both of those numbers are not reached, do you have a timeframe after which you bite the bullet and get back in regardless?

The graphic below shows my problem with what you are doing, and quite likely reflects my thinking at the time.  One day I would be thinking I'm the smartest guy in the room because I got out.  The next day I would feel others count their gains.  It was a terrible mental situation.

[buddtholomew]

I know you have had a gold # in mind to get back in.  Do you have a similar # for S&P/Dow/Nasdaq to step back in?  Just curious.

The getting back in was always unworkable for me, as well as the getting out at the wrong time.

Of course, we begin by saying that no one can predict the future...

Gold below $900. S&P500 below 1700.

Those are arbitrarily selected totals and not really a plan to resume investing in instruments other than cash and bonds.

[ochotona]

http://www.advisorperspectives.com/dsho ... erages.php

Yes, it's not PP. So, why did anyone here even ask about it? Y'all might as well be Wahabis asking how bacon tastes.

[dualstow]

Yes, it's not PP. So, why did anyone here even ask about it? Y'all might as well be Wahabis asking how bacon tastes.

I always wonder if Wahabis eat wasabi.

[Cortopassi]

Meb Faber, Ivy Portfolio, I certainly looked at that at the same time as the PP.  Quantitative Approach to Tactical Asset Allocation and its comparison and tweaks to the PP.

http://gestaltu.blogspot.com/2012/08/pe ... rt-ii.html

Here was a good discussion on this forum that came up related to this:

http://gyroscopicinvesting.com/forum/ot ... ation'/12/

And it reminded me that the reason I did not do it is I did not want to deal with potentially likely more trading and watching moving averages.

[Kbg]

This is only an 11 year backtest so caveat emptor...but here is a way to get most if not all the benefits of PP, probably beat the overall performance, and it will likely continue to work into the future. Of course, past returns are no guarantee of future performance.

1. At the first of each month check the previous 3 months' returns
2. Buy the top 3 by return and allocate 33.3% each
- To buy, the asset's return must have been positive over the prior 3 mo period
- If not, substitute with SHY or your favorite STT vehicle
- Thus, you could have 100%, 66.67%, 33.33% or 0% allocated to SHY

Since 2005:

Traditional PP: 5.37% CAGR/-15.51% DD (annual rebalance)
Absolute MO, Top 3 PP: 8.75% CAGR/-11.83% DD

Since 2012 this version has under performed the traditional PP 1.68 vs 1.05% and 8.76 vs. 10.72%DD.

Interestingly if you happen to follow my VP PP posts, from 2012 a full up 3xETF version of the above returned 12.79/-19.87% DD.

Limiting the 3xETF allocation to 11.11% vice 33.33% the stats are 4.39/-6.86 DD.

Both are amazing to me but the leveraged scaled down to "normal" rotation version has 4x the returns with only 2/3rds the DD as the standard rotation version from 2012. It also trashed the standard PP with less volatility (portfolio NOT individual asset).

Hint: The leveraged results are truly non-intuitive.

Best part of all perhaps...you don't have to debate holding gold or LTTs or equities with yourself. If they are "on"/we are in that macro environment they are "in." If not, they aren't.

[mathjak107]

that is because you are confusing volatility with losses and gains .
the pp is less volatile . but that does not mean at times it's losses won't be greater since other models develop bigger cushions from which they fall .
as i say , i don't give a hoot about peaks and valleys . if the  volatility matches my comfort level  that is all i care about in that regard . all the rest is about whether i am meeting my goals AND EXPECTATIONS FOR THAT ALLOCATION .

Quite a response to the simple and factual assertion that the PP has outperformed the S&P500 YTD. Another barrage of random statistics pertaining to a bunch of investment newsletter models that nobody here uses concluded by calling the original poster confused. Yes, there will always be some portfolio allocation performing better than another portfolio allocation. Got it, everyone's got it.

You are so dug in to your position that you can't even admit gold performed admirably during the financial crisis despite more than tripling from 2005 (start of the housing downturn) through 2011. Instead you choose to focus on bonds performing better for full-year 2008 and that gold is down 40% from the 2011 peak. True and true, but neither of those facts detracts from the incredible boost gold provided to portfolios during that 6-year timeframe which of course was captured by PP investors via rebalancing.

gold will always have short term moves based on the dollar  not crises unless inflationary ...

at the height of the financial crises gold actually fell  16% in 2008  but it ended up positive for the year . so , no golds response to the crises was pretty tepid but that is because the dollar was up 18%

in 2003-2007 the dollar was weak losing 25%  so gold made a nice move based on the dollar .


2009-2011 the dollar lost 18% so gold went up .  but the rise  , like nasdaq during the dot coms was way out of proportion and was just based on the bigger fool theory .


since the dollar has strengthened gold has fallen barely responding to any of todays events . .unless we have high inflation gold will not respond to  world news much . only changes in the dollar will move it .

you will see short term fluctuations for all sorts of reasons including speculation . yesterdays big 24 dollar up move shows 1/2 of it gone in over night trading this morning .  .


there needs to be a basis for sustained moves to hold . with the fed still under its own inflation mandate and the  dollar to strong  a basis for a move in gold seems pretty far off .

[iwealth]

gold will always have short term moves based on the dollar  not crises unless inflationary ...

Does this really matter? If gold responds to the dollar and the dollar responds to a crisis, what difference does it make? You still get the desired response.

at the height of the financial crises gold actually fell  16% in 2008  but it ended up positive for the year . so , no golds response to the crises was pretty tepid but that is because the dollar was up 18%

Even bonds didn't respond strongly until November of 2008 after SPY had already plummeted 50%. Nothing really escaped the wrath of September/October 2008.

in 2003-2007 the dollar was weak losing 25%  so gold made a nice move based on the dollar .
2009-2011 the dollar lost 18% so gold went up .  but the rise  , like nasdaq during the dot coms was way out of proportion and was just based on the bigger fool theory .

So from 2009-2011 the dollar was up 18% and gold doubled. It's a stretch to credit 100% of gold's rise to dollar weakness. Not saying it didn't help but there was more at play there. And the bigger fool theory provides opportunities to rebalance out of spikes in either direction. I don't think there are many buy-and-hold PP investors. Granted, if you started your PP at the gold peak, that was unfortunate. Perhaps it is the type of portfolio that truly needs to be dollar cost averaged into over the course of time.

since the dollar has strengthened gold has fallen barely responding to any of todays events . .unless we have high inflation gold will not respond to  world news much . only changes in the dollar will move it .

What recent events have actually posed a threat to our banking systems or currency? What's happened in the world that's truly scary as of late? Not much if you ask me. Things are pretty tepid out there. Gold seems to be doing exactly what one would expect it to do in this environment. And it's a lousy environment for gold, don't get me wrong.

you will see short term fluctuations for all sorts of reasons including speculation . yesterdays big 24 dollar up move shows 1/2 of it gone in over night trading this morning .  .

I can't form opinions based on gold being up $20 one day and then down $7 the next. It's just noise. Look at the S&P 500 lately if you want to see wild swings in each direction. And feel free to discuss the irrelevance of those moves to your decision to hold stocks.

there needs to be a basis for sustained moves to hold . with the fed still under its own inflation mandate and the  dollar to strong  a basis for a move in gold seems pretty far off .

Agreed 100%. If anything the sustained move should continue down. Anyway, I don't think we're really arguing about anything here. You don't like gold. I think there's a place for it in a risk-parity portfolio like the PP. That's about it.

[mathjak107]

actually yes it does matter if gold only responds  to crisis when the dollar is weak or we have high inflation  because as bernstein pointed out , the flaw in the pp  is committing  equal  amounts of  money to anything but equal chances of outcomes playing out .

so this is why i think if harry was alive today we would see some fine tuning  and revisions possibly with gold limited to no more than a 10% stake  which to me makes sense .  betting 25% on equity's and 25% on gold to me just seems  to be a pretty big speculation on gold .

[Pointedstick]

actually yes it does matter if gold only responds  to crisis when the dollar is weak or we have high inflation  because as bernstein pointed out , the flaw in the pp  is committing  equal  amounts of  money to anything but equal chances of outcomes playing out .

so this is why i think if harry was alive today we would see some fine tuning  and revisions possibly with gold limited to no more than a 10% stake  which to me makes sense .

Are you sure that's actually what harry Browne would do? Or is that just what you would do?