Why the PP is better in accumulation than you think

[Tyler]

For reference, my numbers are from the Simba spreadsheet via the Bogleheads forum (the same one Craig used for various analyses).  Feel free to compare and contrast to your own numbers.

https://www.bogleheads.org/wiki/Simba's ... preadsheet

[MachineGhost]

did you include dividends ?  ha ha ha ha

Wasn't that.  Must been a deranged cell formula as I re-copied and paste.  My spreadsheet goes all the way to column BR.  Gets very difficult to work with.  I get 6.08% CAGR now.  Whew!

Back to 1968, the Browne PP is 4.42% and 100% stocks 5.53%.

[MachineGhost]

then why are the balances in the pp ao  much less over most time frames  ? 

Its because the PP is risk overweight gold and the very beginning of its growth in 1972 was a raging gold bull market where everyone thought the dollar was going to collapse.  Initial returns matter a great deal 30-years later. 

If you compare the PP starting in 1987 and do the same analysis, it looks like it would have been a big loser.  Stocks were 7.42% real vs 4.45%.  Timing is everything, but style tilting can also add a lot.  You really don't realize how lucky you are.  But then thats why its best to start significantly investing only after corrections or bear markets.  Your future compounded returns will generally be higher.  It helps to have a chronically overvalued market for 25 years also (aka P/E expansion).

Wellesly since 1972 was 6.04% real. 
Equal Weight Market Cap 7.94% real.
Gold 3.72% real.
Commodities 4.33% real.
Risk Parity PP 4.88% real.

[MachineGhost]

in order to be called safe wiithdrawal rates the portfolio had to specifically stand up to 1907, 1929 , 1937 ,  1965/66 . all of which are the absolute worst case scenario's far exceeding the 1970's .

Now this is something you and me finally agree upon.  If only there was some way to make silver an effective gold proxy, it would be testable.

[mathjak107]

there isn't as silver was predominantly an industrial metal  with a market so thin that the hunt brothers thought they could manipulate it .

[mathjak107]

then why are the balances in the pp ao  much less over most time frames  ? 

Its because the PP is risk overweight gold and the very beginning of its growth in 1972 was a raging gold bull market where everyone thought the dollar was going to collapse.  Initial returns matter a great deal 30-years later. 

If you compare the PP starting in 1987 and do the same analysis, it looks like it would have been a big loser.  Stocks were 7.42% real vs 4.45%.  Timing is everything, but style tilting can also add a lot.  You really don't realize how lucky you are.  But then thats why its best to start significantly investing only after corrections or bear markets.  Your future compounded returns will generally be higher.  It helps to have a chronically overvalued market for 25 years also (aka P/E expansion).

Wellesly since 1972 was 6.04% real. 
Equal Weight Market Cap 7.94% real.
Gold 3.72% real.
Commodities 4.33% real.
Risk Parity PP 4.88% real.

looks right .

but like i pointed out ,even 1% difference is 30% or  more at the end of an accumulation stage .

for just a step up in volatility the difference in value between wellesly at 40% equity and the pp was  huge.  so getting back to the point if you are talking about the pp as an accumulation vehicle i think you could have had far better vehicles . if you want to talk about vehicles for the accumulation stage  i wouldn't bring the pp in to the equation unless cherry picking time frames ,.

just leave the pp alone for what it does , it is in a class by itself in that respect and should not be compared .

[MachineGhost]

there isn't as silver was predominantly an industrial metal  with a market so thin that the hunt brothers thought they could manipulate it .

If I could ever find semi-numismatic silver coin prices for the era, I think it would be doable.  Lots of people hoarded Peace & Morgan silver dollars after the silver standard collapsed.

[MachineGhost]

[quote=http://www.gocurrycracker.com/the-worst ... ment-ever/]In what is one of the hardest financial decisions we ever make, we stick to the plan…  moving half of our bond position into stock during our annual asset reallocation in ’73, and the other half in ’74.  We go all in… 100% stocks.  When the world looks to be on the edge of collapse, we fight that clenching feeling in our gut and follow the plan.[/quote]

What was their system or methodology for determining this?

[quote=http://www.gocurrycracker.com/the-worst ... ment-ever/]
10 Years in daily life is quite enjoyable, but economically things are not looking good.  The stock market has crashed, there is no oil, the President Nixon has just resigned, inflation is out of control, and when adjusted for inflation our portfolio is worth only half of what it was when we started[/quote]

Also, I would think there is a minimum amount to be put to gold to survive an environment like this more comfortably.  What is it?

So mathjak, have you adjusted your SWR to 3%?  Because it said 50/50 @ 4% got destroyed.

[craigr]

Great post.

I know people that got burned in 2000 and took years to get back into the markets only to get burned again in 2008. They have completely cratered their savings from these experiences. All of these investors would have been much happier in a lower volatility portfolio and would have definitely been further along to their retirement savings program. They got sucked in with promises of high returns but ignored volatility.

Longish quote from our book that discusses this:

Even one year of large losses can be very difficult to recover from (especially for someone who is nearing retirement or already retired).
...
Investors should understand the math involved here because it is not symmetrical. For example, recovering from a 50 percent loss can be very difficult because an investor in that situation will need a 100 percent return just to get back to where he started! Even a 40 percent loss (as happened recently in 2008 to U.S. stocks) requires a 66.7 percent gain to get back to even. Depending on how an investor reacts to these kinds of losses, the recovery could happen in a few years if the investor is patient enough to wait, or it could never happen if the investor bails out due to the stress generated by excessive portfolio volatility.

This problem of large losses hobbling a portfolio potentially for years is why investors want to avoid it. The only way to protect against these kinds of losses is to either take almost no risk (which also means limiting potential gains) or use strong diversification within a portfolio.
...
On one occasion when Craig was working as a network engineer he was discussing network architecture with a very experienced designer, Dr. Jose Nabielsky. Dr. Nabielsky responded to a question about the role of high performance in system design with the following comment: “Speed is fine, just be sure you can take the turns.” The translation is that high performance is only one part of network design; it also has to be reliable at all times to handle inevitable problems.

What does this have to do with investing? A lot. It’s tempting to get enchanted with high performance returns in a portfolio. But, having a portfolio that shows red-hot performance is only one measure you need to consider (and probably not the most important one). Investors also need to know what happens when things don’t go according to plan. Can your investment portfolio take the turns? Or does it go flying off a cliff into a fiery death at the first twist in the road?

Red-hot historical returns are not impressive on their own. It is easy to go into a spreadsheet with historical data and hindsight to come up with a portfolio that outperformed everything else, but that doesn’t mean the portfolio will do that in the future. If investing was that easy there would only be one mutual fund—The Hot Historical Return Fund—and everyone would invest all of their money in it.

Designing a portfolio for high returns alone eventually leads to disaster. Portfolios need the ability to generate growth, but must also have the ability to weather the unexpected storms, including investors’ inevitable bouts of fear when the whole market seems to be falling apart. Portfolios need to take the turns.

[mathjak107]

50/50 never got destroyed and has a 100% success rate up to 4% .  i only need about 3% anyway .

[mathjak107]

Great post.

I know people that got burned in 2000 and took years to get back into the markets only to get burned again in 2008. They have completely cratered their savings from these experiences. All of these investors would have been much happier in a lower volatility portfolio and would have definitely been further along to their retirement savings program. They got sucked in with promises of high returns but ignored volatility.

Longish quote from our book that discusses this:

Even one year of large losses can be very difficult to recover from (especially for someone who is nearing retirement or already retired).
...
Investors should understand the math involved here because it is not symmetrical. For example, recovering from a 50 percent loss can be very difficult because an investor in that situation will need a 100 percent return just to get back to where he started! Even a 40 percent loss (as happened recently in 2008 to U.S. stocks) requires a 66.7 percent gain to get back to even. Depending on how an investor reacts to these kinds of losses, the recovery could happen in a few years if the investor is patient enough to wait, or it could never happen if the investor bails out due to the stress generated by excessive portfolio volatility.

This problem of large losses hobbling a portfolio potentially for years is why investors want to avoid it. The only way to protect against these kinds of losses is to either take almost no risk (which also means limiting potential gains) or use strong diversification within a portfolio.
...
On one occasion when Craig was working as a network engineer he was discussing network architecture with a very experienced designer, Dr. Jose Nabielsky. Dr. Nabielsky responded to a question about the role of high performance in system design with the following comment: “Speed is fine, just be sure you can take the turns.” The translation is that high performance is only one part of network design; it also has to be reliable at all times to handle inevitable problems.

What does this have to do with investing? A lot. It’s tempting to get enchanted with high performance returns in a portfolio. But, having a portfolio that shows red-hot performance is only one measure you need to consider (and probably not the most important one). Investors also need to know what happens when things don’t go according to plan. Can your investment portfolio take the turns? Or does it go flying off a cliff into a fiery death at the first twist in the road?

Red-hot historical returns are not impressive on their own. It is easy to go into a spreadsheet with historical data and hindsight to come up with a portfolio that outperformed everything else, but that doesn’t mean the portfolio will do that in the future. If investing was that easy there would only be one mutual fund—The Hot Historical Return Fund—and everyone would invest all of their money in it.

Designing a portfolio for high returns alone eventually leads to disaster. Portfolios need the ability to generate growth, but must also have the ability to weather the unexpected storms, including investors’ inevitable bouts of fear when the whole market seems to be falling apart. Portfolios need to take the turns.

it had to be bad investor behavior and not markets that did them in .  while if you retired in 2000  you are in one of the worst time frames you still are no worse than any other retiree in a similar poorer  time frame .

but retire one year later and you are still golden . so picking one year out of 111 rolling time frames as an example really is a poor example .

[craigr]

it had to be bad investor behavior and not markets that did them in .

I don't even think bad investor is the right term. It's more of natural fear of losing everything/loss aversion in humans. Most people will not simply sit back and watch 20, 30, 40% of their life savings evaporate without panicking. They all talk a big game when markets are doing OK, but the first sign of a moderate loss and they are heading for the exit and usually won't return until well after a recovery. 

[mathjak107]

no doubt ,  but then these folks should not be investors  . you can't blame markets and these same folks may have long bailed out of the pp too by now .

bad investor behavior will always be with us but you can't blame markets for what happens to them . it didn't happen to many of us , self included ..

interesting enough if you look at morningstar's small investor returns the disparity between what investors got and what the fund got is just as wide on balanced funds as growth funds .

even conservative investing does not seem to help those with no pucker factor

[Pointedstick]

no doubt ,  but then these folks should not be investors  . you can't blame markets and these same folks may have long bailed out of the pp too by now .

bad investor behavior will always be with us but you can't blame markets for what happens to them . it didn't happen to many of us , self included ..

Nobody is "blaming the markets." The markets have no intentions, they just are. We're simply acknowledging the reality of human nature and psychology. Lots of people make bad decisions when they're scared, including (gasp!) ourselves from time to time.

[mathjak107]

Great post.

I know people that got burned in 2000 and took years to get back into the markets only to get burned again in 2008. They have completely cratered their savings from these experiences. All of these investors would have been much happier in a lower volatility portfolio and would have definitely been further along to their retirement savings program. They got sucked in with promises of high returns but ignored volatility.

Longish quote from our book that discusses this:

Even one year of large losses can be very difficult to recover from (especially for someone who is nearing retirement or already retired).
...
Investors should understand the math involved here because it is not symmetrical. For example, recovering from a 50 percent loss can be very difficult because an investor in that situation will need a 100 percent return just to get back to where he started! Even a 40 percent loss (as happened recently in 2008 to U.S. stocks) requires a 66.7 percent gain to get back to even. Depending on how an investor reacts to these kinds of losses, the recovery could happen in a few years if the investor is patient enough to wait, or it could never happen if the investor bails out due to the stress generated by excessive portfolio volatility.

This problem of large losses hobbling a portfolio potentially for years is why investors want to avoid it. The only way to protect against these kinds of losses is to either take almost no risk (which also means limiting potential gains) or use strong diversification within a portfolio.
...
On one occasion when Craig was working as a network engineer he was discussing network architecture with a very experienced designer, Dr. Jose Nabielsky. Dr. Nabielsky responded to a question about the role of high performance in system design with the following comment: “Speed is fine, just be sure you can take the turns.” The translation is that high performance is only one part of network design; it also has to be reliable at all times to handle inevitable problems.

What does this have to do with investing? A lot. It’s tempting to get enchanted with high performance returns in a portfolio. But, having a portfolio that shows red-hot performance is only one measure you need to consider (and probably not the most important one). Investors also need to know what happens when things don’t go according to plan. Can your investment portfolio take the turns? Or does it go flying off a cliff into a fiery death at the first twist in the road?

Red-hot historical returns are not impressive on their own. It is easy to go into a spreadsheet with historical data and hindsight to come up with a portfolio that outperformed everything else, but that doesn’t mean the portfolio will do that in the future. If investing was that easy there would only be one mutual fund—The Hot Historical Return Fund—and everyone would invest all of their money in it.

Designing a portfolio for high returns alone eventually leads to disaster. Portfolios need the ability to generate growth, but must also have the ability to weather the unexpected storms, including investors’ inevitable bouts of fear when the whole market seems to be falling apart. Portfolios need to take the turns.

but as kitces study teaches us it isn't the drop . it is the recovery time . a moderate drop and long recovery time can be devastating to a retiree. 2008 was a non event , equity's tripled since the low over a very short period of time and the 2008 retiree is right  on track in there with any other retiree from any other time frame that wasn't worse case .

they are doing just fine despite the drop ..

[Xan]

no doubt ,  but then these folks should not be investors  .

You've said that the PP is unsuitable because regular people need the higher returns of much more stock exposure in order to ever have a hope of retiring.  The PP, you said, is for the weirdo elites who save way more money than normal.

Yet now, anybody who might panic when observing his net worth drop by 40% shouldn't be an investor.  What, pray tell, are the "regular people" supposed to do?

[fi50@fi2023]

Tyler - thanks so much for your work.  Your charts are extremely helpful and convincing.  Also, you give Mathjak something to do, which is a nice side benefit.  Thanks to everyone for the great discussion.

[craigr]

but as kitces study teaches us it isn't the drop . it is the recovery time . a moderate drop and long recovery time can be devastating to a retiree. 2008 was a non event , equity's tripled since the low over a very short period of time and the 2008 retiree is right  on track in there with any other retiree from any other time frame that wasn't worse case .

Yeah but you know that now. What were people thinking in late 2008 with near -40% declines in stocks?

So the recovery time is completely unknown and may not happen on an investor's timetable. Bad markets have a nasty habit of coinciding with job losses for instance. So the moment you may need your life savings to tide you over between jobs after a layoff, is the exact time it could be down significantly and your withdrawals are doing the most damage.

Just as one example.

[dutchtraffic]

but as kitces study teaches us it isn't the drop . it is the recovery time . a moderate drop and long recovery time can be devastating to a retiree. 2008 was a non event , equity's tripled since the low over a very short period of time and the 2008 retiree is right  on track in there with any other retiree from any other time frame that wasn't worse case .

they are doing just fine despite the drop ..

The reason WHY they tripled after the drop should scare you the most..

[mathjak107]

well we always think this is time is different and things aint coming back no matter what our allocation is but the golden rule of investing is turn off the noise and stay the course .  as i pointed out the morningstar small investor returns on conservative fund returns are no better for the small investor then the growth fund returns are .

so in the end if you were going to run for the exit in a fire it really didn't matter what your allocation is .  everything is relative to ones pucker factor and to a gun shy person being down 10% is just as horrible of a  feeling as being down 40% to an aggressive investor and the odds of bailing are the same .

you had folks bailing out of the pp because it was down .

what is interesting though about market fear is , we all fear the losses but once they happen we are okay with it and just wait for the gains .

this was shown to be fact in jason zwiegs book using modern brain imaging gear .  the fear of loss was horrible with horrible stresses but once the drop happened the stresses ended for the most part .

there ias no guarantee when rates rise  on bonds that the pp won't sustain moderate prolonged losses over an extended period of time if gold and bonds take a hit and its investors bail at losses . .

in the end all of us are betting on an out come that may not happen .

[iwealth]

there ias no guarantee when if rates rise  on bonds that the pp won't sustain moderate prolonged losses over an extended period of time if gold and bonds take a hit and its investors bail at losses . .

Just a minor correction above.

You do make a good point though about drawdown tolerance. Taking it a step farther, if one's drawdown tolerance decreases as they move from aggressive to conservative portfolios, then it is likely they'll run for the exit at some point no matter what. Someone able to withstand a 25% drawdown in equities may freak out about a 3% drawdown in the PP.

Also, the PP won't sustain losses because its investors are bailing. That implies it's like an individual small cap stock or something.

[mathjak107]

i mean if pp investors bail out at a loss they will lose money like anyone else .  pp investors have even a smaller tolerance for volatility so even smaller drops will send some running . in fact i have had direct messages from fiolks here telling me they were bailing out of the pp and sustaining losses .

[mathjak107]

there ias no guarantee when if rates rise  on bonds that the pp won't sustain moderate prolonged losses over an extended period of time if gold and bonds take a hit and its investors bail at losses . .

Just a minor correction above.

You do make a good point though about drawdown tolerance. Taking it a step farther, if one's drawdown tolerance decreases as they move from aggressive to conservative portfolios, then it is likely they'll run for the exit at some point no matter what. Someone able to withstand a 25% drawdown in equities may freak out about a 3% drawdown in the PP.

Also, the PP won't sustain losses because its investors are bailing. That implies it's like an individual small cap stock or something.

the morningstar small investor returns  compared to the fund returns shows this is exactly what is happening .  getting wounded by a grenade vs wounded by a bullet strikes the same fear .

chances of survival may be better with one over the other but fear does not differentiate . morningstar returns show investors bail out of conservative funds just the same as growth funds  when volatility picks up .

[MachineGhost]

50/50 never got destroyed and has a 100% success rate up to 4% .  i only need about 3% anyway .

Wrong?

Pure 4% withdrawals for a retirement starting in 1965 were a disaster, with the portfolio dropping to $0 in about 25 years.  This occurred regardless of asset allocation.  A portfolio of 50% stock / 50% bonds failed just as surely as a portfolio of 100% stock

[img width=800]http://www.gocurrycracker.com/wp-conten ... llapse.png[/img]

[mathjak107]

well i show never has 50/50 failed out to 30 years and a 96% success rate out to 35 years  .  50% s&p 500 and 50% intermediate gov't bonds .  maybe you left out  dividends

according to michael kitces , Whether the retiree started at the beginning of the Great Depression, entering into the stagflationary recession of the late 1960s and 1970s, or the credit crisis and panic of 1907 and the slow economic growth that followed, an initial withdrawal rate below 4.5% was both necessary and sufficient for the portfolio to survive for 30 years.



in fact here is the exact data


suppose you were so unlucky to retire in one of those worst time framess ,what would your 30 year results look like :

1907 stocks returned 7.77% -- bonds 4.250-- rebalanced portfolio 7.02- - inflation 1.64--

1929 stocks 8.19% - - bonds 1.74%-- rebalanced portfolio 6.28-- inflation 1.69--

1937 stocks 10.12 - - bonds 2.13 - rebalanced portfolio -- 7.24 inflation-- 2.82

1966 stocks 10.23 - -bonds 7.85 -- rebalanced portfolio 9.56- - inflation 5.38

but the portfolio outcomes are determined in the  first 15 years .

so here are the 15 year results


1907--- stocks minus 1.47%---- bonds minus .39%-- rebalanced minus .70% ---inflation 1.64%

1929---stocks 1.07%---bonds 1.79%---rebalanced 2.29%--inflation 1.69%

1937---stocks -- 3.45%---bonds minus 3.07%-- rebalanced 1.23%--inflation 2.82%

1966-stocks minus .13%--bonds 1.08%--rebalanced .64%-- inflation 5.38%