Why the PP is better in accumulation than you think

[Dmilligan]

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same percentage from the PP each year through to the current year, what is the maximum fixed percentage that could be withdrawn annually and still allow the initial portfolio to still be the same in inflation-adjusted dollars as it was on the day of retirement?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.

[MachineGhost]

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same percentage from the PP each year through to the current year, what is the maximum fixed percentage that could be withdrawn annually and still allow the initial portfolio to still be the same in inflation-adjusted dollars as it was on the day of retirement?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%

[dragoncar]

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

[MachineGhost]

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.

[Tyler]

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. 

[MachineGhost]

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?

[Tyler]

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. 

[dutchtraffic]

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?

[ochotona]

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.

When I say "market timing", it's called "speculation". When MachineGhost says it, people listen.

'The firm was best known for its commercials in the 1970s and 1980s based on the phrase, "When E. F. Hutton The Machine Ghost talks, people listen" (which usually involved a young professional remarking at a dinner party that his broker was E.F. Hutton, which caused the moderately loud party to stop all conversation to listen to him).'

Market time the HBPP, and it will be a fine accumulation portfolio, and still low volatility.

Which... TA-DA! ... magically re-mathjacks the thread back to it's intended purpose, HBPP for the accumulation phase.

[Jack Jones]

Market time the HBPP, and it will be a fine accumulation portfolio, and still low volatility.

My understanding of timing is that it's a way to reduce volatility (not increase returns). So why go through all the trouble with a portfolio that already has low volatility?

Also, Tyler: Fine work!

[Tyler]

A 0.31% withdrawal rate from 1965 till today doesn't look incredibly exciting...are you sure these numbers are correct?

I might believe 3.1%, but IMHO 0.31% sounds a little dubious.  I calculate the sustainable WR going back to 1972 as just over 4%, and while starting in 1965 was certainly bad it wasn't that much worse than the early 70's. For reference, typical stock/bond SafeWRs calculated since 1972 are only 0.2-0.3% higher than those calculated since the 1870s.

[Tyler]

It uses actual sequence of returns for every rolling start year since 1972.

Nice ideas on the chart.  I'll have to look into that.  I shaded the accumulation range to help, but perhaps can be even more explicit. 

[MachineGhost]

A 0.31% withdrawal rate from 1965 till today doesn't look incredibly exciting...are you sure these numbers are correct?

The PP just doesn't provide enough growth to handle inflation plus withdrawals if you never want to go below your inflation-adjusted starting balance.

[MachineGhost]

When I say "market timing", it's called "speculation". When MachineGhost says it, people listen.

'The firm was best known for its commercials in the 1970s and 1980s based on the phrase, "When E. F. Hutton The Machine Ghost talks, people listen" (which usually involved a young professional remarking at a dinner party that his broker was E.F. Hutton, which caused the moderately loud party to stop all conversation to listen to him).'

Market time the HBPP, and it will be a fine accumulation portfolio, and still low volatility.

Actually, I should stop using that term because it implies forecasting rather than downside risk management.  I don't believe in market timing per se, because it is just impossible to predict what the markets are going to do at a turning point in future time or price.  You can get rough probabilities, but nothing is ever 100% certain.

I disagree that even using downside risk management on the PP makes it a fine accumulation vehicle.  It will come at cost of a few percent CAGR's.  The PP is not even remotely the best accumulation portfolio.  It's a wealth preservation portfolio.

[MachineGhost]

I might believe 3.1%, but IMHO 0.31% sounds a little dubious.  I calculate the sustainable WR going back to 1972 as just over 4%, and while starting in 1965 was certainly bad it wasn't that much worse than the early 70's. For reference, typical stock/bond SafeWRs calculated since 1972 are only 0.2-0.3% higher than those calculated since the 1870s.

My understanding was he didn't want the ending balance to fall below the inflation-adjusted beginning balance, ignoring year by year undershoots.  The PP doesn't offer enough growth not to be depleted by inflation + withdrawals to stay above initial principal, which is a rather oddly strict rule.

[MachineGhost]

My understanding of timing is that it's a way to reduce volatility (not increase returns). So why go through all the trouble with a portfolio that already has low volatility?

Also, Tyler: Fine work!

Food for thought.  The PP drew down to -25% intrayear in real terms in 1981.  Or -50% end of year with a 4% SWR.  Does that strike you as "low volatility"?

Still, the fact is with a 4% SWR, the PP is the best portfolio I've seen for a high inflation period.  Does it also hold up in other environments?

[Tyler]

My understanding was he didn't want the ending balance to fall below the inflation-adjusted beginning balance, ignoring year by year undershoots.  The PP doesn't offer enough growth not to be depleted by inflation + withdrawals to stay above initial principal, which is a rather oddly strict rule.

Yep -- my understanding as well.  When I use "sustainable" withdrawal rate that's exactly the definition I use.  Whereas the "safe" withdrawal rate is where the end balance was exactly 0 (not lower).  The Safe WR for the PP (since 1972) is about 5%, and the Sustainable WR is about 4%.

The real CAGR of the PP since 1972 is 5%, and even over all rolling 10-year timeframes it's somewhere between 3-6%.  That's after inflation, and is more than enough consistent growth to support reasonable withdrawal rates.  Volatility knocks the sustainable withdrawal rate down a bit from that point, but the PP volatility is pretty low compared to other options so we're not talking 5% worth of difference.  Now if you're substituting silver that's a whole 'nother matter, as silver is way more volatile than stocks, bonds, or gold and may change the results.

BTW, if a drawdown changes from 25% to 50% due to the WR, the WR is much higher than 4% at that point. 

[MachineGhost]

The real CAGR of the PP since 1972 is 5%, and even over all rolling 10-year timeframes it's somewhere between 3-6%.  That's after inflation, and is enough growth to support reasonable SWRs.  Volatility knocks the withdrawal rate down a bit from that point, but the PP volatility is pretty low compared to other options so we're not talking 5% worth of difference. 

I have the PP returning a real 4.44% after inflation since 1965, a real 4.42% since 1968 and a real 4.80% since 1972.  Starting with a balance of $548.95 in 1965 inflates away to $4131.38 at the end of 2014.  The PP itself starting with a balance of $548.95 in 1965 inflates away to $4136.79 after inflation and .31% SustainableWR.  Using 4% withdrawal, the PP inflates away to $653.39 at the end of 2014.  I mean, .44%, .42% and .80% is not a lot of growth left.  Are you sure you're not using the PP terminal value and comparing it to the starting balance without inflation adjusting the starting balance for each and every year until the terminal value date?

BTW, if a drawdown changes from 25% to 50% due to the WR, the WR is much higher than 4% at that point.

I calculate each yearly PP balance separately adjusted for both inflation and the withdrawal.  There is no inflation included in the withdrawal.  So it is always the sum of inflation percentage + withdrawal percentage that is reducing the PP balance.

-25% is with 0% withdrawal.  4% is -50%.  In real terms.

So who's got the errors?

[Tyler]

Yeah, I adjust every year along the way.

Take the PP out of the equation for a moment, and I can say that my calculations for SWRs using stocks and bonds with various start years reasonably match those found in multiple retirement studies.  That gives me confidence that the methodology is sound.  Once that's set, switching portfolios shouldn't break anything.  You might also try calibrating that way to see what happens.

[ochotona]

Market time the HBPP, and it will be a fine accumulation portfolio, and still low volatility.

My understanding of timing is that it's a way to reduce volatility (not increase returns). So why go through all the trouble with a portfolio that already has low volatility?

This is a key point... volatility does not equal risk. You might say, volatility is one kind of risk. But you can have a low volatility portfolio that has very smooth "returns", but those "returns" might be zero, or negative.

My Dad used to say his 1960s Buicks had nice smooth rides, they made he feel safe. He also could not control it in an emergency situation.

Market timing Trend following gets you out of positions, a bit late, before they take you around in back of the woodshed. They get you back in, a bit late, in order to catch most of the next upswing. They do head fake you sometimes.

It gets you out of gold early 2013, back in after a big tumble.

It gets you out of S&P500 November 07... it gets you out Sept 2015. We'll see where that goes.

It gets you out of TLT late 2012, back in early 2014... just in time for a big rally. 2014 was great for long bonds.

Just run the 200 day moving average on any asset you like. That's the indicator. It's pretty simple, but not easy. Can you follow the indicator, and not second-guess it. It's tough!

[MachineGhost]

Take the PP out of the equation for a moment, and I can say that my calculations for SWRs using stocks and bonds with various start years reasonably match those found in multiple retirement studies.  That gives me confidence that the methodology is sound.  Once that's set, switching portfolios shouldn't break anything.  You might also try calibrating that way to see what happens.

Great idea!  I just did that with 100% stocks but no matter what the WR is, the balance never goes to zero except near 2014 when it is at 19.50%.  Any ideas?  This reminds me of Russian dolls.

This is my formula to calculate the running balance:

=SUM($W13:$AQ13)/(1+SUM($AV13,$AW13))

Where W:AQ are the weighted asset returns, AV is yoy inflation rate and AW is the WR.

[dutchtraffic]

Market time the HBPP, and it will be a fine accumulation portfolio, and still low volatility.

My understanding of timing is that it's a way to reduce volatility (not increase returns). So why go through all the trouble with a portfolio that already has low volatility?

This is a key point... volatility does not equal risk. You might say, volatility is one kind of risk. But you can have a low volatility portfolio that has very smooth "returns", but those "returns" might be zero, or negative.

My Dad used to say his 1960s Buicks had nice smooth rides, they made he feel safe. He also could not control it in an emergency situation.

Market timing Trend following gets you out of positions, a bit late, before they take you around in back of the woodshed. They get you back in, a bit late, in order to catch most of the next upswing. They do head fake you sometimes.

It gets you out of gold early 2013, back in after a big tumble.

It gets you out of S&P500 November 07... it gets you out Sept 2015. We'll see where that goes.

It gets you out of TLT late 2012, back in early 2014... just in time for a big rally. 2014 was great for long bonds.

Just run the 200 day moving average on any asset you like. That's the indicator. It's pretty simple, but not easy. Can you follow the indicator, and not second-guess it. It's tough!

Simply following a 200 day MA will get you stopped out all over the place.

[Dmilligan]

My understanding was he didn't want the ending balance to fall below the inflation-adjusted beginning balance, ignoring year by year undershoots.  The PP doesn't offer enough growth not to be depleted by inflation + withdrawals to stay above initial principal, which is a rather oddly strict rule.

Yep -- my understanding as well.  When I use "sustainable" withdrawal rate that's exactly the definition I use.  Whereas the "safe" withdrawal rate is where the end balance was exactly 0 (not lower).  The Safe WR for the PP (since 1972) is about 5%, and the Sustainable WR is about 4%.

Correct, I'm looking to try to establish a number based on Tyler's sustainable withdrawal rate methodology but with MG's extrapolated data going earlier than 1972.

The reason I'm asking is that I'm still experimenting with models for living in FIRE out of the portfolio. If the portfolio is needed for 50 years, then I've still been trying to establish a sustainable withdrawal rate. Further, I've been trying to establish an annual withdrawal percentage that still allows the portfolio to somewhat grow with inflation. I recognize that there will be years when the portfolio will be less and more, and the annual draw from the portfolio will also be less or more than the previous year draw (i.e., 4% of less or more). But, I'd like to take as high of a percentage as possible each year, but not take so much that the annual draw amount on a year-by-year basis starts to get eroded by inflation. Does this make sense?

To complicate a little more, I've also been modeling whether the sustainable withdrawal rate is raised (and by how much), if the annual withdrawal percentage draw is taken from the cash portion. Using the sequence of returns since 1972, drawing from cash seems to raise the sustainable withdrawal rate verses taking from the portfolio as a whole. To me, this is a real advantage of the PP for an early retirement portfolio. Also, seems a lot less complicated to manage in retirement.

MG, I'm hoping the .31% number is incorrect. Because that would mean that my annual percentage sustainable draw off a $1M PP is only $3,100! I was planning on the annual draw being closer to $40K!

[ochotona]

Simply following a 200 day MA will get you stopped out all over the place.

One key point is to only check 1x per month, same day of the month. It will cause some excess trades, for sure. Small price to pay for potential benefits. But it's not a lazy portfolio.

[dutchtraffic]

Simply following a 200 day MA will get you stopped out all over the place.

One key point is to only check 1x per month, same day of the month. It will cause some excess trades, for sure. Small price to pay for potential benefits. But it's not a lazy portfolio.

Once a month will be very risky, and just randomly looking at some charts, that creates some MAJOR losses.