Why the PP is better in accumulation than you think

General Discussion on the Permanent Portfolio Strategy

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MachineGhost
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Re: Why the PP is better in accumulation than you think

Post by MachineGhost » Tue Oct 20, 2015 3:24 pm

Reub wrote: Why is true diversity of opinion such an anathema in here? Although I don't always agree with Mr. mathjak he adds a lot to these threads and makes one question himself, which is a good thing.
Ditto.  I've learned a lot from mathjak about retirement concepts that I never really paid attention too before as well as the proven power of discipline.  Talk is cheap, but mathjak has walked the talk.  So he deserves some respect at the very least.
Last edited by MachineGhost on Tue Oct 20, 2015 3:39 pm, edited 1 time in total.
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Re: Why the PP is better in accumulation than you think

Post by MachineGhost » Tue Oct 20, 2015 3:27 pm

So here is the bottom line for 1965+ as far as inflation and 4% SWR adjusted returns are for several portfolios (with all the usual caveats about gold we don't need to rehash again):
Portfolio Real MaxDD
Browne PP -49.35%
Risk Parity PP -58.70%
50/50 10yr -59.46%
Wellesley + 15% Gold -58.38%
100% Stocks -54.34% (it hit -60.69% in 1932, -59.42% in 2008)
Without the gold, Wellesley hits a -74.26% real MaxDD.

I don't know what a safe cushion is in real terms, but -74.26% MaxDD requires nearly an 800% gain just to get back to breakeven.  I suggest -50% is more than enough for anybody with a pulse.

As I've suspected, the 35% to T-Bonds in the Risk Parity PP is a very bad idea in a high inflation period.  But mean variance optimization is not designed to handle portfolio risk in terms of maximum drawdown, only volatility.
Last edited by MachineGhost on Tue Oct 20, 2015 4:55 pm, edited 1 time in total.
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Re: Why the PP is better in accumulation than you think

Post by Dmilligan » Tue Oct 20, 2015 3:46 pm

MachineGhost wrote: BTW, the Browne PP survives as well, generating .43% real CAGR until 2014, assuming you held junk silver coins from 1965 to 1967 then switched to gold in 1968.  0% is at a 4.45% SWR.
MG, did you happen to also calculate the maximum percentage withdrawal that would have sustained the initial principal when adjusted for inflation? If so, I'd be curious to learn that number as a comparable to the 40 year number on Tyler's site.
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Re: Why the PP is better in accumulation than you think

Post by MachineGhost » Tue Oct 20, 2015 4:00 pm

Dmilligan wrote:
MachineGhost wrote: BTW, the Browne PP survives as well, generating .43% real CAGR until 2014, assuming you held junk silver coins from 1965 to 1967 then switched to gold in 1968.  0% is at a 4.45% SWR.
MG, did you happen to also calculate the maximum percentage withdrawal that would have sustained the initial principal when adjusted for inflation? If so, I'd be curious to learn that number as a comparable to the 40 year number on Tyler's site.
Do you mean the inflation-adjusted value each year of the initial starting balance as the lower threshold for each year's total portfolio value?  If so, then there is no minimum SWR as the PP doesn't keep up in this 15 year time frame, except for 3 years but 2 of those were using silver and 1 was the very first year of gold floating (i.e. not reliable).  At the end of 1981, the real initial balance is $1653.87 whereas the PP is down to $911.69.
Last edited by MachineGhost on Tue Oct 20, 2015 4:06 pm, edited 1 time in total.
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Re: Why the PP is better in accumulation than you think

Post by Dmilligan » Tue Oct 20, 2015 4:18 pm

MachineGhost wrote: Do you mean the inflation-adjusted value each year of the initial starting balance as the lower threshold for each year's total portfolio value?
If one retired in 1965 and began to withdraw the same percentage from the PP each year through to the current year, what is the maximum fixed percentage that could be withdrawn annually and still allow the initial portfolio to still be the same in inflation-adjusted dollars as it was on the day of retirement?

For example, Tyler's Withdrawal Rates calculator (https://portfoliocharts.files.wordpress ... -rates.jpg) shows that the PP has a sustainable withdrawal rate of ~4.2% since 1972.
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Re: Why the PP is better in accumulation than you think

Post by MachineGhost » Tue Oct 20, 2015 4:42 pm

Dmilligan wrote:
MachineGhost wrote: Do you mean the inflation-adjusted value each year of the initial starting balance as the lower threshold for each year's total portfolio value?
If one retired in 1965 and began to withdraw the same percentage from the PP each year through to the current year, what is the maximum fixed percentage that could be withdrawn annually and still allow the initial portfolio to still be the same in inflation-adjusted dollars as it was on the day of retirement?

For example, Tyler's Withdrawal Rates calculator (https://portfoliocharts.files.wordpress ... -rates.jpg) shows that the PP has a sustainable withdrawal rate of ~4.2% since 1972.
OIC, you mean the balance at the end of a period is still at least the initial inflation-adjusted starting balance, rather than inflation-adjusted year by year comparisons.

In that case, $1000 in 1965 would turn into $7526.03 at the end of 2014.  The PP could then support a 0.31% SWR and still be slightly ahead at the end with $7535.88.  The real MaxDD is -13.96%
Last edited by MachineGhost on Tue Oct 20, 2015 4:49 pm, edited 1 time in total.
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Re: Why the PP is better in accumulation than you think

Post by dragoncar » Tue Oct 20, 2015 5:00 pm

MachineGhost wrote:
Reub wrote: Why is true diversity of opinion such an anathema in here? Although I don't always agree with Mr. mathjak he adds a lot to these threads and makes one question himself, which is a good thing.
Ditto.  I've learned a lot from mathjak about retirement concepts that I never really paid attention too before as well as the proven power of discipline.  Talk is cheap, but mathjak has walked the talk.  So he deserves some respect at the very least.
Which concepts?  I don't read every thread but am interested in retirement concepts
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Re: Why the PP is better in accumulation than you think

Post by MachineGhost » Tue Oct 20, 2015 5:31 pm

dragoncar wrote: Which concepts?  I don't read every thread but am interested in retirement concepts
Mainly the need for maximum equity growth to reach goals, ignore volatility and MaxDD (i.e. factor it into your plans) and use portfolios that survive safe/sustainable withdrawal rates during the worst historical periods.

My own conclusions are that gold is essentially a poor man's replacement for inadequate equity exposure, some minimum level of gold is always needed to deal with high inflation periods to have a buffer zone, 100% equity isn't really that much riskier than other portfolios and using market timing on 100% equity will blow everything else out of the water.  And that there's a high price to be paid for diversifying out of equity.  I think if you're not in a withdrawal stage, the PP can be a very high price to pay for psychological comfort.  But as Browne said, focus on your career/job for the growth.  Mathjak did both, however.
Last edited by MachineGhost on Tue Oct 20, 2015 5:39 pm, edited 1 time in total.
"All generous minds have a horror of what are commonly called 'Facts'. They are the brute beasts of the intellectual domain." -- Thomas Hobbes

Disclaimer: I am not a broker, dealer, investment advisor, physician, theologian or prophet.  I should not be considered as legally permitted to render such advice!
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Re: Why the PP is better in accumulation than you think

Post by Tyler » Tue Oct 20, 2015 6:45 pm

MachineGhost wrote: And that there's a high price to be paid for diversifying out of equity.  I think if you're not in a withdrawal stage, the PP can be a very high price to pay for psychological comfort.
It all comes down to personal goals.  This may sound crazy to some people, but accumulating the most money is not the primary investing goal for everyone. 

Circling back to the topic of the thread, a goal like financial independence is actually independent of absolute account balance.  A person with $1mm and only $25k in annual expenses is actually much better off than someone with $10mm and $600k in expenses, and that's even before you consider how different investing styles affect portfolio sustainability.  Also, one should realize that many people seeking FI are looking to retire after working 10 years and not 40 (I did in 14), so the typical advice you might give to someone accumulating money into their 60's may not apply.  Basically, someone saving for financial independence may have very different investing preferences than someone wanting to get rich.  I suspect a lack of understanding of that difference in outlook is a source of a lot of the resistance when the topic comes up. 
Last edited by Tyler on Tue Oct 20, 2015 7:05 pm, edited 1 time in total.
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Re: Why the PP is better in accumulation than you think

Post by MachineGhost » Tue Oct 20, 2015 9:55 pm

Tyler wrote: Basically, someone saving for financial independence may have very different investing preferences than someone wanting to get rich.  I suspect a lack of understanding of that difference in outlook is a source of a lot of the resistance when the topic comes up.
I think this is where the financial industry is way behind.  Even all the robo-advisors ask pathetically stupid questions to determine your "risk tolerance" rather than engage in any actual goal planning, sustainable withdrawals and to come up with portfolios to arrive at said goal while taking decreasing duration into account (i.e. target date).  Regular people don't even know what their investing preferences are and tend to overestimate their ability to deal with volatility.  Some good financial advisors do it this way but of course they have expensive conflicts of interest are and/or are clueless about mitigating downside risk.  Why don't you come up with a DIY Step-By-Step-Idiot-Proof webapp to arrive at possible portfolios to reach such goals?
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Re: Why the PP is better in accumulation than you think

Post by Tyler » Tue Oct 20, 2015 10:53 pm

MachineGhost wrote: Why don't you come up with a DIY Step-By-Step-Idiot-Proof webapp to arrive at possible portfolios to reach such goals?
Now that's a bold idea.  Probably a lot harder than it sounds, but something definitely worth pondering. 
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Re: Why the PP is better in accumulation than you think

Post by dutchtraffic » Wed Oct 21, 2015 4:34 am

MachineGhost wrote:
OIC, you mean the balance at the end of a period is still at least the initial inflation-adjusted starting balance, rather than inflation-adjusted year by year comparisons.

In that case, $1000 in 1965 would turn into $7526.03 at the end of 2014.  The PP could then support a 0.31% SWR and still be slightly ahead at the end with $7535.88.  The real MaxDD is -13.96%
A 0.31% withdrawal rate from 1965 till today doesn't look incredibly exciting...are you sure these numbers are correct?
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