Why the PP is better in accumulation than you think

[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.

[MWKXJ]

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.

Tried rebalancing once a month when following 200 day moving averages via an Ivy portfolio in my VP and failed miserably; could not tear my eyes off of stockcharts.com.  This was doubly the case when the trendlines were moving strongly one way or another in the period immediately before the allotted day for rebalancing.  In such a situation, it is far too tempting to wait "one more day", and then, inevitably, one will begin picking and choosing which days to rebalance for each asset class, and soon after, checking charts all the time.

A hands-off automated rebalancing service might be the solution if such a service exists, however, the idea of a third party tapped in one's various brokerage accounts can itself be another---major---source of anxiety.

[ochotona]

Tried rebalancing once a month when following 200 day moving averages via an Ivy portfolio in my VP and failed miserably; could not tear my eyes off of stockcharts.com.  This was doubly the case when the trendlines were moving strongly one way or another in the period immediately before the allotted day for rebalancing.  In such a situation, it is far too tempting to wait "one more day", and then, inevitably, one will begin picking and choosing which days to rebalance for each asset class, and soon after, checking charts all the time.

A hands-off automated rebalancing service might be the solution if such a service exists, however, the idea of a third party tapped in one's various brokerage accounts can itself be another---major---source of anxiety.

Meb Faber warns that it's emotionally tough to do this kind of work, for exactly the reasons you cite. It's like "training for a marathon", he writes. I agree. But the risk reduction benefits are so strong, I just can't let it go without trying.

[MachineGhost]

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!

Yes, I now believe it is wrong.  I just can't figure out why.  I see no obvious errors.  50% of a previous value is half then it splits again and again into infinity and never actually reaches zero.  So I must be calculating this WR wrong.  Lets see what Tyler says.

[MachineGhost]

A hands-off automated rebalancing service might be the solution if such a service exists, however, the idea of a third party tapped in one's various brokerage accounts can itself be another---major---source of anxiety.

None of them exist yet for simplistic trend following, but more sophisticated risk management does.  If you're interested, see the Hedgeable thread (ask Reub for an invite so he gets the reward points, as well as some yourself).  There's also another service that I'm watching but it is still in beta.  Both are run by Bridgewater alumni.

[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?

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.

I'm sorry, but I'm not following your point (and you said it was key, so I'd like to understand!)

I was saying that the Permanent Portfolio already has low volatility so market timing isn't likely to reduce it by much. Why not apply SMA trendfollowing to a more volatile portfolio with higher returns and bring the volatility down to PP levels but keeping the higher returns:

[MachineGhost]

I'm sorry, but I'm not following your point (and you said it was key, so I'd like to understand!)

He meant low volatility isn't the same thing as low MaxDD.  Low volatility porfolios tend to have infrequent left bell curve fat tail spikes that wind up "surprising" everyone.

[Cortopassi]

I've tried timing before, failed miserably.  Stressed out constantly.  PP removed all that.  No way am I a timer in any fashion!  My timing will either be annual or the bands.

[iwealth]

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.

Do you have backtesting data to back this up or is this just an assumption?