The Reason to Quit PP

[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?

[mathjak107]

what does the words "i think "  mean to you

[AdamA]

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 .

But that "flaw" has never really caused a problem for the PP.

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 .

What has changed in the world over the past ten years to make you say that?

[LC475]

There is no way Mr. Browne would recommend a reduction in the gold allocation.  I believe that to a large extent the Permanent Portfolio is a way of getting people to hold gold and be able to keep holding it during a potentially long period of low returns or losses, when otherwise they'd bail.

Harry Browne thought there was and is a very real risk of high inflation coming to the dollar.  Eventually.  He just didn't think it would happen immediately.

25% is a good amount.

[mathjak107]

keep in mind harry was a gold bug .

in 40 years gold has returned less then a t-bill rolled over . i doubt that was herry's vision  sure it had some periods of time where it out performed but it's ability to  grow money over long periods of time has usually been far and away been bested by other assets .


basically  gold tracked inflation , which while a poor money maker  is okay,  but once you figure in storage costs and insurance or fund fees like gld  you actually  lagged inflation and always will because of the costs .


so betting as much on that fact as you would on equity's , which  more often than not over 20 years or longer  has  produced  a lot more  money over a lot more time frames , seems to me to be a big imbalance .

[Libertarian666]

There is no way Mr. Browne would recommend a reduction in the gold allocation.  I believe that to a large extent the Permanent Portfolio is a way of getting people to hold gold and be able to keep holding it during a potentially long period of low returns or losses, when otherwise they'd bail.

Harry Browne thought there was and is a very real risk of high inflation coming to the dollar.  Eventually.  He just didn't think it would happen immediately.

25% is a good amount.

I agree that HB would not lower the gold allocation.

[mathjak107]

so the hypothetical question becomes ,  does that mean you shouldn't  if it seems the thing to do and he may have been wrong about allocating so much ?  remember he was inherently a gold bug and loved his gold . after all he was to gold what peter schiff was to the 2008 crash . but that does not mean they got it right forever .

as i said ,  i don't think harry visioned gold to perform so poorly over such long periods of time without the economy fairly cycling around to give it far more days in the sun where it was the only aseet to shine . .
so far  the last 40 years have been  just like john templeton said " the  four most expensive words in  the english language are  " this time is different ."

[barrett]

Harry Browne designed and refined his 4X25 PP during a time when gold was stinking up the place for 20 years and stocks were on a long bull run. Bonds and cash were also doing well during that period. It seems if there were ever a time for him to NOT include gold in a portfolio, that would have been it. Yes, he was a gold bug early on but I think he morphed into something quite different. He also lived until 2006 so he was able to see a lot of what we would consider "modern financial history."

Gold may continue to be a downer... as may stocks. We are not really trying to get the timing exactly right with gold (or any other asset for that matter). I think your real issue is with a truly passive approach to investing. I for one don't want to think about this stuff all the time and I'll take an approach that is just good enough to beat inflation over the long haul. There are those who want to get rich quickly and others who just want to put their money to work in a way that it crawls slowly upward.

[mathjak107]

why do we think tht something as complex as investing can stay passive forever in a static mix ?  why do people think they can devote zero time and input to anything in life and get good results forever ?

the answer is that they were able to do so because the long term trend for almost 40 years has been interest rates falling . yeah , there were some relatively short bumps in the road but basically any strategy that included stocks and bonds did very well over long investing time frames .  so doing nothing worked quite well .

but when that trend reverses  that format may not work well at all and so going forward may require a whole lot more nudging an steering then the past did .

you can see on this chart it has been one continuous downward slope for 40 years  and except for some short term dips most of us have  never been in  a bond bear market


rising rates hurt gold and bonds and things may need adjusting along the way . but that is up to the individual investor to decide what is right for them .

[Pointedstick]

why do we think tht something as complex as investing can stay passive forever in a static mix ?  why do people think they can devote zero time and input to anything in life and get good results forever ?

the answer is that they were able to do so because the long term trend for almost 40 years has been interest rates falling . yeah , there were some relatively short bumps in the road but basically any strategy that included stocks and bonds did very well over long investing time frames .  so doing nothing worked quite well .

but when that trend reverses  that format may not work well at all and so going forward may require a whole lot more nudging an steering then the past did .

you can see on this chart it has been one continious downward slope for 40 years .

This argument comes up constantly, but the late 70s experienced dramatic hikes in interest rates and the PP did fine, largely due to gold and cash. And you can't say that gold's performance during this time was just a blip from coming off the gold standard since that was several years earlier.

Finally, interest rates are largely driven by inflation and inflation expectations. If you are expecting the interest rate trend to reverse, what you are really saying is that you expect a period of rising inflation, which is exactly when we should expect gold to do best.

[mathjak107]

they were only short term bursts  in the 1970's .  not decades long like an up or down cycle in rates can take . by the 1980's it was one big slope down and that is when the pp came to be , not in the 1970's .

who knows had harry introduced the pp in the 1970's before monday morning quarterbacking  perhaps he would have weighted bonds differently or in fact never introduced the pp.

[mathjak107]

why do we think tht something as complex as investing can stay passive forever in a static mix ?  why do people think they can devote zero time and input to anything in life and get good results forever ?

the answer is that they were able to do so because the long term trend for almost 40 years has been interest rates falling . yeah , there were some relatively short bumps in the road but basically any strategy that included stocks and bonds did very well over long investing time frames .  so doing nothing worked quite well .

but when that trend reverses  that format may not work well at all and so going forward may require a whole lot more nudging an steering then the past did .

you can see on this chart it has been one continious downward slope for 40 years .

Finally, interest rates are largely driven by inflation and inflation expectations. If you are expecting the interest rate trend to reverse, what you are really saying is that you expect a period of rising inflation, which is exactly when we should expect gold to do best.

which it hasn't done and other assets ended up beating it long term  because that high inflation never  materialized .  which is my whole point here .

sitting in gold day in and day out  waiting for that inflation to happen  when the fed mandated inflation level has not even  been reached  and the world is slowing down may be way to much weight in that asset .

personally i can't see betting my money on a plan that never changes with the times and the bigger picture and has demonstrated that long term there is no value in holding the remote flier longer then you have to .


if anything the allocations should be dynamic , at least weighting by what has real possibility and what does not .  fighting the fed with gold never ends well  when inflation pressures are just not in the world ..


but it is your money , your choices  to do as you see fit .

[Pointedstick]

Finally, interest rates are largely driven by inflation and inflation expectations. If you are expecting the interest rate trend to reverse, what you are really saying is that you expect a period of rising inflation, which is exactly when we should expect gold to do best.

which it hasn't done and other assets ended up beating it long term  because that high inflation never  materialized .  which is my whole point here .

…Because there was no inflation. IMHO gold's run-up in the 2000s was driven by inflation expectations that proved false. If real inflation hits, gold will respond. Do you dispute this?

sitting in gold day in and day out  waiting for that inflation to happen  when the fed mandated inflation level has not even  been reached  and the world is slowing down may be way to much weight in that asset .

I only brought it up because you predicted rough waters when interest rates rise. You can't simultaneously say that the interest rate trend is about to reverse and also say that we'll be waiting around for long time for some inflation. The interest rate trend will reverse because there is rising inflation! If interest rates rise without any meaningful inflation, that would be a terribly irrational thing for the Fed to do. Anything's possible, of course, but that would be really, really stupid.

personally i can't see betting my money on a plan that never changes with the times and the bigger picture and has demonstrated that long term there is no value in holding the remote flier longer then you have to .

That's not a ding against the PP, that's a ding against most retail investors who use passive portfolios.