Why the PP is better in accumulation than you think

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

Post by mathjak107 » Sun Nov 01, 2015 1:44 pm

My portfolios are never static forever so wherever the longer term trends go the portfolio adapts just as it always has.
Even in poor markets there are funds that bet against the markets .

I never believed in trying to make something work forever
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Re: Why the PP is better in accumulation than you think

Post by Cortopassi » Sun Nov 01, 2015 4:40 pm

mathjak107 wrote: except as as always , things not even on the radar totally alter what we think is a given when it comes to doom and gloom
I hope you are correct!
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Re: Why the PP is better in accumulation than you think

Post by mathjak107 » Sun Nov 01, 2015 4:41 pm

So do all of us
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Re: Why the PP is better in accumulation than you think

Post by ochotona » Sun Nov 01, 2015 9:41 pm

Maybe we have to go global and emerging for growth, after some of this current severe decline abates.

Maybe the 21st Century PP is 50% US stocks, 50% non-US, and a big slice of those Emerging markets.20% REIT, 20% Gold, 20% US Treasuries... ooops, that's Meb Faber's Ivy-5 portfolio. The backtesting shows Faber's has almost 3% more CAGR for similar Sharpe ratio. MAXDD is large but isn't terrible at 21.64%.
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Re: Why the PP is better in accumulation than you think

Post by MachineGhost » Sun Nov 01, 2015 11:00 pm

ochotona wrote: Maybe the 21st Century PP is 50% US stocks, 50% non-US, and a big slice of those Emerging markets.20% REIT, 20% Gold, 20% US Treasuries... ooops, that's Meb Faber's Ivy-5 portfolio. The backtesting shows Faber's has almost 3% more CAGR for similar Sharpe ratio. MAXDD is large but isn't terrible at 21.64%.
I don't like unbalanced risk like that.  They don't consider that equal weight diversification into a similar asset class is not real diversification.  You ultimately need to decide on your top level strategic allocation and then fit everything equally into those three quadrants as the PP does.  The Volatility PP Sr is a good start, but the equity exposure is rather low.  I think the only guideline we really have is the safe withdrawal rates chart otherwise it seems like a crapshoot to decide what to use for strategic.
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Re: Why the PP is better in accumulation than you think

Post by mathjak107 » Mon Nov 02, 2015 3:08 am

ochotona wrote: Maybe we have to go global and emerging for growth, after some of this current severe decline abates.

Maybe the 21st Century PP is 50% US stocks, 50% non-US, and a big slice of those Emerging markets.20% REIT, 20% Gold, 20% US Treasuries... ooops, that's Meb Faber's Ivy-5 portfolio. The backtesting shows Faber's has almost 3% more CAGR for similar Sharpe ratio. MAXDD is large but isn't terrible at 21.64%.
at some point europe and emerging markets will be where the action is again but still to early .  i don't subscribe to  that buy low sell high crap . i don't want to fight a trend or try to catch a  falling a  knife . i want to buy high and sell higher .

which is why my plan has always been dynamic  just nudging things slightly towards the longer term trends with the best possibility of playing out , but even if wrong the effect of being wrong is tiny .

just picking up an extra 1% over 30 years is a big difference in performance and balance .
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Re: Why the PP is better in accumulation than you think

Post by mathjak107 » Mon Nov 02, 2015 3:16 am

MachineGhost wrote:
ochotona wrote: Maybe the 21st Century PP is 50% US stocks, 50% non-US, and a big slice of those Emerging markets.20% REIT, 20% Gold, 20% US Treasuries... ooops, that's Meb Faber's Ivy-5 portfolio. The backtesting shows Faber's has almost 3% more CAGR for similar Sharpe ratio. MAXDD is large but isn't terrible at 21.64%.
I don't like unbalanced risk like that.  They don't consider that equal weight diversification into a similar asset class is not real diversification.  You ultimately need to decide on your top level strategic allocation and then fit everything equally into those three quadrants as the PP does.  The Volatility PP Sr is a good start, but the equity exposure is rather low.  I think the only guideline we really have is the safe withdrawal rates chart otherwise it seems like a crapshoot to decide what to use for strategic.

the chert is a guideline but the ultimate guideline will still be monitoring your own results for that proverbial 2% real return  the first 15 years  of retirement .

don't forget how the 1960's had the worst possible sequences  the first  15 years and the best market run up in history the next 15 but it was to little to late .  they already over spent down their assets the first 15 years .

with results from all asset classes pointing to below average performance this is really going to make things tough to go by what was in the past .

it figures i would retire smack in to it . but luckily our plan has a lot of discretionary spending in it so cutting withdrawals a bit may not be much fun  but it can be done .

the good news is the safe withdrawal rates are called safe because they are already so conservative  just because they are based around the worst conditions we have had  and they were already pretty nasty .

the other good thing is that  we will be not only dynamic with the portfolio  but dynamic with the budget as each year will be based not on some fixed percentage of an opening balance but on the actual balance yearly  .

the issue i have with the "4% rule " is 90% of the time you died with more than you started . not enjoying more things in life that cost money  that you could have is not a good thing either .

so even if you go the standard 4% withdrawals inflation adjusted you still need a  means of increasing withdrawals or risk  leaving to much unspent on the table .

to conservative is no good either ,.

bob clyatt's dynamic spending method automatically gives you more when markets are up .

it can be hard as heck trying to come up with a spending plan using the 4% rule as any increases in a good market can't easily be spent since you are going to need them as a cushion in a down market since the income stream has to remain constant .

the dynamic method does not have a constant income stream . it can vary on the upside unlimited and is limited to just 5% cuts  each year on the down side .

but spending methods in retirement are a whole other topic  and could be their own discussion and this topic is about the pp in the accumulation stage not the decumulation stage ..
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Re: Why the PP is better in accumulation than you think

Post by barrett » Mon Nov 02, 2015 5:58 am

MachineGhost wrote: I don't see any realistic alternative but to think outside the box.

Either we go the way of the high inflation 1970's and a dollar crisis all over again where real assets shine, including the gold heavy PP.

Or we we go the way of Japan where everything sucks, including the PP, but it eeks out a meager miserable existence.  I think the latter is more likely due to the operational reality of the world we live in.  At least for a while.  Eventually we'll shift to the former.
And what might cause that shift? Japan has certainly been trying to get the juices flowing to no avail. And if there is a reasonable chance of high inflation happening in the next few years, then it certainly make sense to hedge against it, right?
MachineGhost wrote: The bigger question is, where will substantial portfolio growth come from?  I need growth and I'm having trouble seeing it coming from anywhere but startup investing, real estate and P2P lending.  And that may be less true growth than a bubble, but I can't afford to be picky.

If the PP had a downside risk more in line with its meager expected returns, it would be academic in worrying about it...
Yeah, that seems to be the crux of the angst in this thread at the moment. We are hedging for everything but don't see the potential for assets to really shine... only to not stink too badly if conditions are right.

In an effort to bring this topic back to where Tyler started, yes, I believe that the PP has been a fine growth portfolio up until now. What we are questioning is what will power it going forward?
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Re: Why the PP is better in accumulation than you think

Post by mathjak107 » Mon Nov 02, 2015 7:33 am

japan blew it day one and there central bank continued to do the wrong thing 2 or 3x . plus japan had very little inflation . they needed very little in gains to sustain life , as well as they  did not just have to invest in the Japanese markets .

we are not a japan by any long shot .
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Re: Why the PP is better in accumulation than you think

Post by MachineGhost » Mon Nov 02, 2015 11:18 am

barrett wrote: And what might cause that shift? Japan has certainly been trying to get the juices flowing to no avail. And if there is a reasonable chance of high inflation happening in the next few years, then it certainly make sense to hedge against it, right?
The former seems like it will occur when all the foreign sovereign USD-denominated debt at near zero interest rates starts blowing up once the Fed raises.  It will be like dominoes collapsing around the world and then eventually it will hit the last man standing, the US.  So depending on how slow/clueless/idiotic the ruling/bureaucratic class is at the Fed, NGOs, etc. the SHTF may last a couple of years or it may be nipped in the bud rather quickly as the USD is replaced as the world's reserve currency.  Foreign nations will be demanding its replacement because their stupidity would have been no different than the pegging of their currencies to gold in the 1930's.  Pegs ALWAYS fail, everywhere and anywhere without exception.  If we're very lucky, the US come out of this standing alive.  A lot could depend on whether or not we shift to the right politically because you know progressive liberals like Sanders or Clinton would throw us under the bus to sing Kumbaya! with the incestuous NGOs.  Those are the same NGO's "advising" the current EU clusterfuck.  Not holding my breath here.

OTOH, I think Japanization will occur if voters are again stupid and elect more Nanny-State NeoConners, like Sanders, Clinton, Rubio, etc.  Pretty much all of the top tier lot except for Trump, Fiorina, Kasich and Christie.  We need a wholesale shakeup of overregulation, not more of the same Bullshit That Has Gone Before.  Stagnation and loss of confidence is what causes persistent deflation.  Japan has a lack of immigration, women are second class citizens, a ridiculously huge and aged population and they don't date, bother to have sex or get married.  It's a whole litany of social issues that we really don't have yet, so economic overregulation is the immediate #1 risk, i.e. turning more and more into that socialist basketcase called France.

Its also quite possible we can have both scenarios occuring one after another or even at the same time!

I think we have a few years left while the Middle Eats does their stupid religious war.  There's not enough retail participation in the equity market for another bubble top yet, but I think legal startup investing will light a fire under their ass.

Hey, that's just my opinion, but I could be wrong!
Last edited by MachineGhost on Mon Nov 02, 2015 11:28 am, edited 1 time in total.
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Re: Why the PP is better in accumulation than you think

Post by Kriegsspiel » Tue Nov 03, 2015 6:06 am

MachineGhost wrote:
barrett wrote: And what might cause that shift? Japan has certainly been trying to get the juices flowing to no avail. And if there is a reasonable chance of high inflation happening in the next few years, then it certainly make sense to hedge against it, right?
The former seems like it will occur when all the foreign sovereign USD-denominated debt at near zero interest rates starts blowing up once the Fed raises.  It will be like dominoes collapsing around the world and then eventually it will hit the last man standing, the US.  So depending on how slow/clueless/idiotic the ruling/bureaucratic class is at the Fed, NGOs, etc. the SHTF may last a couple of years or it may be nipped in the bud rather quickly as the USD is replaced as the world's reserve currency.  Foreign nations will be demanding its replacement because their stupidity would have been no different than the pegging of their currencies to gold in the 1930's.  Pegs ALWAYS fail, everywhere and anywhere without exception.  If we're very lucky, the US come out of this standing alive.  A lot could depend on whether or not we shift to the right politically because you know progressive liberals like Sanders or Clinton would throw us under the bus to sing Kumbaya! with the incestuous NGOs.  Those are the same NGO's "advising" the current EU clusterfuck.  Not holding my breath here.

OTOH, I think Japanization will occur if voters are again stupid and elect more Nanny-State NeoConners, like Sanders, Clinton, Rubio, etc.  Pretty much all of the top tier lot except for Trump, Fiorina, Kasich and Christie.  We need a wholesale shakeup of overregulation, not more of the same Bullshit That Has Gone Before.  Stagnation and loss of confidence is what causes persistent deflation.  Japan has a lack of immigration, women are second class citizens, a ridiculously huge and aged population and they don't date, bother to have sex or get married.  It's a whole litany of social issues that we really don't have yet, so economic overregulation is the immediate #1 risk, i.e. turning more and more into that socialist basketcase called France.

Its also quite possible we can have both scenarios occuring one after another or even at the same time!

I think we have a few years left while the Middle Eats does their stupid religious war.  There's not enough retail participation in the equity market for another bubble top yet, but I think legal startup investing will light a fire under their ass.

Hey, that's just my opinion, but I could be wrong!
You may be right about all this. Except for the sex part. The Japanese DO have sex, it's just with tentacle monsters.
One horse can carry 125 kg on its back, but it can drag 2500 kg on a cart. If it pulls a barge along a river, it can drag 30,000 kg, 30 tonnes, and it can drag 50 tonnes if the weight is on a barge in quiet water, i.e., on a canal.
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Re: Why the PP is better in accumulation than you think

Post by mathjak107 » Tue Nov 03, 2015 7:57 am

i have a yen for a japanese call girl    ha ha ha
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Re: Why the PP is better in accumulation than you think

Post by portart » Tue Nov 03, 2015 10:14 am

I am retiring in two years. I have the classic 25% PP. If I retired two years ago and drew out 4%, I am guessing I would down close to 8% since PP earned next to nothing in this time period. Assuming this is the case, what would I have to drop down to the the third year to avoid depleting my portfolio to the point that it would not come back to par as far as not outliving the money, assuming another 25 years of life? The original PP had money rates earning something in the 5% range. The money portion is now dead in the water with almost negative rates. Stocks and bonds keep the combination from outperforming enough to over come the shortfall in the cash portion. Gold is a wild card mainly for protection which can go many years before rebounding and can drop even futher due to its extreme volatility. What's everyone's take on this?
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Re: Why the PP is better in accumulation than you think

Post by mathjak107 » Tue Nov 03, 2015 10:20 am

i use a dynamic method of spending in retirement .

4% of each years balance  each dec 31st .

if markets are down i take 5% less then the previous draw or the same draw , which ever is higher .
if the 2nd year is down then it is the same story , 4% of the balance or 5% less , which ever is higher .

because it is dynamic it back tested out 1005 past 40 years of spending
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Re: Why the PP is better in accumulation than you think

Post by portart » Tue Nov 03, 2015 10:28 am

You say you draw out 4% a year. Call me dumb but could you clarify how this works to keep you from depleting your core balance? You say if "the markets are down, you take less then 5% less of the previous draw."  How much less? You are taking out on 4% so you would have a negative draw?  Is that right?  Can you explain this again in another way as I don't really have my head wrapped around it?  example, you take 4% a year Dec 31st. The markets are down (how far down, the market or my PP?). In this case you take 5% less then the year before where the year before you took 4%, huh?  I am missing something here.
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Re: Why the PP is better in accumulation than you think

Post by mathjak107 » Tue Nov 03, 2015 12:10 pm

okay , day 1 of retirement you have 1 million clams saved .

you can start with a 40k paycheck first year .

next dec 31st you have an up year and  have 1,200.000 .00 so your pay check is now 48k .

3rd year  we have a bad year and you are back to 1 million on dec 31  .so you are going to take which ever is higher  4% of the million which is 40k or  48k  less the 5% which is  45,600.00 . in this case 45,600 is higher and that is your new pay check for the year .


4th year you repeat and take nother 5% pay cut if need be .

the idea is this keeps you  from having to take huge pay cuts if say we fall 40% .  for your portfolio to survive only small cuts are needed with this method of withdrawals .
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Re: Why the PP is better in accumulation than you think

Post by Pet Hog » Tue Nov 03, 2015 12:54 pm

portart wrote: I am retiring in two years. I have the classic 25% PP. If I retired two years ago and drew out 4%, I am guessing I would down close to 8% since PP earned next to nothing in this time period. Assuming this is the case, what would I have to drop down to the the third year to avoid depleting my portfolio to the point that it would not come back to par as far as not outliving the money, assuming another 25 years of life? The original PP had money rates earning something in the 5% range. The money portion is now dead in the water with almost negative rates. Stocks and bonds keep the combination from outperforming enough to over come the shortfall in the cash portion. Gold is a wild card mainly for protection which can go many years before rebounding and can drop even futher due to its extreme volatility. What's everyone's take on this?
Let's say you literally retired two years ago, on November 2, 2013.  From peaktotrough.com, with a portfolio of $1 million (and dividends reinvested), we get the following numbers:

Initial values of stocks, bonds, cash, gold, and total PP:

11/2/2013: 250,000 250,000 250,000 250,000 1,000,000

After one year:

11/2/2014: 290,416 289,363 250,325 223,177 1,053,281

That's a gain of 5.3%.  Withdrawing 4% from cash, that's $42,131, gives the following allocation:

11/2/2014: 290,416 289,363 208,194 223,177 1,011,150

The next year elapses:

11/2/2015: 307,067 303,056 208,714 215,414 1,034,251

That's a gain of 2.3%.  Withdrawing 4% ($41,370) from cash gives:

11/2/2015: 307,067 303,056 167,344 215,414 992,881

Overall, you would be down less than 1% from your starting million.  Would this return be worse from a different starting date?  Perhaps.  But we can see from this example that the PP hasn't been performing too badly recently.
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Re: Why the PP is better in accumulation than you think

Post by mathjak107 » Tue Nov 03, 2015 1:06 pm

your master score card is this :

you need to maintain at least a 2% real return average for  the first 15 years of a 30 year retirement to stand up to the traditional 4% safe withdrawal rate .

if you are getting less than that 7 years or so in you need to  cut back the pay check .

if you fail to get that 2% real return for the first 15 years then there will not be enough left to grow even if markets do turn around after that .
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Re: Why the PP is better in accumulation than you think

Post by MachineGhost » Tue Nov 03, 2015 1:11 pm

mathjak107 wrote: if you fail to get that 2% real return for the first 15 years then there will not be enough left to grow even if markets do turn around after that .
How much slack is there?  Can you miss a couple or a string of years and make it up later before the 15th year, or MUST each and every year be at least 2% real return without exception?
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Re: Why the PP is better in accumulation than you think

Post by mathjak107 » Tue Nov 03, 2015 1:19 pm

yes , in fact that is what will happen  as sequence risk takes over . however being down for an extended period of time day 1 before an up cycle develops that cushion could seriously effect your outcome . the first 5 years can be pretty crucial to the success of the retirement while the first 15 determine the entire 30 year plus outcome .


follow that ?


this why methods like the rising glide path are now becoming popular  to protect the early years when the most damage can be done .
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Re: Why the PP is better in accumulation than you think

Post by mathjak107 » Tue Nov 03, 2015 1:30 pm

keep in mind it isn't the size of the drop at all that hurts  a retirement which is why draw down is a mental thing more than mathamatical . it is the length of time a recovery takes  that is key .

even a modest drop for a couple of years  can do damage  which is why even the pp can be at risk as a retirement portfolio ,  for a 2008 retiree it  was a  non event financially , perhaps not mentally  because the recovery was so quick .

those who retired in 2008 are on track to be no different then any other retiree in any other normal time frame .

the y2k retiree is very different and they are on track to match the 1929 retiree which means income wise they will get through most likely but with very little left .

90% of the time retirees with a 50/50 mix or 60/40 following the 4% swr  have ended with more than they started  so the y2k retiree is  on track to rival the 1929 retiree .
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Re: Why the PP is better in accumulation than you think

Post by Tyler » Tue Nov 03, 2015 1:53 pm

mathjak107 wrote: keep in mind it isn't the size of the drop at all that hurts  a retirement which is why draw down is a mental thing more than mathamatical . it is the length of time a recovery takes  that is key .

even a modest drop for a couple of years  can do damage  which is why even the pp can be at risk as a retirement portfolio ,  2008 was a  non event because the recovery was so quick .
Both the size and duration of the drop matter.  Unless you intentionally cut back your expenses in the down year (a fine idea, BTW), your fixed expenses (that do not shrink with your portfolio decline) will take out a large chunk of your investments and greatly prolong the recovery time to get back to where you were before.  Drawdown complicates the recovery time, and volatility does have a measurable effect on withdrawal rates. 

You're correct about the performance percentages of a 60/40 portfolio, and it's a fine choice in retirement.  But using the same methodology other portfolios (including the PP) have supported higher withdrawal rates 100% of the time over the data we have available.  One is free to choose the portfolio with the longer data set if that makes them feel more comfortable, but ignoring good opportunities simply because Ibbotson Associates didn't include those assets in their annual returns yearbook that the Trinity and Bengen studies used is up to the individual.
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Re: Why the PP is better in accumulation than you think

Post by mathjak107 » Tue Nov 03, 2015 1:58 pm

not quite true about steep drops , michael kitces did a paper on this . it is only the duration . a steep drop like 2008  was a non event to its success rate .. a modest drop over an extended duration has far more serious consequences .

the worst case scenario's the 4% safe withdrawal rate is based on already expects steep drops .  that is why it is called a safe withdrawal rate .  all it cares about is the 15 year average is at least a 2% real return .


https://www.kitces.com/blog/how-has-the ... al-crisis/
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Re: Why the PP is better in accumulation than you think

Post by dutchtraffic » Tue Nov 03, 2015 2:02 pm

You keep assuming things always recover within a year or so, clearly this is nonsense.

Image

Now what..? US is replaying this scenario now.
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Re: Why the PP is better in accumulation than you think

Post by Tyler » Tue Nov 03, 2015 2:06 pm

mathjak107 wrote: not quite true about steep drops , michael kitces did a paper on this . it is only the duration . a steep drop like 2008  was a non event to its success rate .. a modest drop over an extended duration has far more serious consequences .
From the Kitces paper (empahsis added):
The viability of a 2008 retiree following the 4% rule is especially notable, and reflects a key (but often ignored or misunderstood) tenet of managing sequence-of-return risk in retirement: it’s actually not just about having a severe market crash in the early years of retirement, but a crash that doesn’t recover quickly.
He doesn't say the severity of the drop does not matter.  Only that the recovery time also matters.  I don't disagree with that at all.  Also note that he's discussing the survival of a stock/bond portfolio (that I do not dispute), while I'm comparing performance of two different portfolios.  Other portfolios he does not consider also do quite well while avoiding both the sharp and long declines. 
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