Gyroscopic Investing

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.

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.

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.

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.

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.

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%

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

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.

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. 

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?

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. 

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?

MachineGhost wrote: 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.

ochotona wrote: 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!

dutchtraffic wrote: 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.

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. 

dutchtraffic wrote: 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.

ochotona wrote: 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.

Tyler wrote: 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.

Jack Jones wrote: 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?

MachineGhost wrote: 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. 

Tyler wrote: 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?

Tyler wrote: 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?

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.

Jack Jones wrote:

ochotona wrote: 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!

Tyler wrote: 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.