This Forum & Dissenting Opinions of the HBPP

[jafs]

I'd say greed and the diversion of gains to those at the top are a major factor.

The average CEO in the 50's made about 30-50x an average employee, and today they make about 200x as much.

If there were an index fund with lower costs that tracked the best companies to work for, that would be interesting, but I don't think one exists.

[Pointedstick]

Greed is always a factor. Humans are greedy by nature. Is there any reason to believe that people have gotten greedier in the last 30 years? If not, the answer is probably a systemic change of some sort.

[jafs]

That's interesting - I'm not sure I'd agree that it's just human nature to be greedy.

It does seem to be a major factor in this country, and it's sort of supported/promoted by our culture.  As far as systemic changes, the Taft-Hartley Act seems to have been a strong cause of the decline of unions, which traditionally helped employees get better wages/working conditions/benefits.  And Reagan-era policies also seem to have benefited those at the top as well - you can see the shift clearly in charts from the 80's-today.

I don't know if people have gotten greedier or not, but consumerism seems to have taken off, and more people feel that they have to have the latest toy/gadget - I blame some of that on advertising.

[MachineGhost]

Greed is always a factor. Humans are greedy by nature. Is there any reason to believe that people have gotten greedier in the last 30 years? If not, the answer is probably a systemic change of some sort.

Greed can be constrained.  I think the Thatcher Revolution definitely unleashed it to a new level, i.e. "Greed is Good".  We're still living with the after-effects.  Heck, Slick Willie is the one that sold out to Wall Street in repealing Glass Steagall and making student loan debt non-dischargable in bankruptcy.  We've already went through the ringer with the former, next to come is the latter.

Of course middle-class white men are now offing themselves.  They lost out.  The next stock market crash should do them in for good like the Negro family.  Twilight of NeoLiberalism!

Basically, far too many economic ignoramuses conflate the financial economy with the real economy.  So when the former benefits, the latter suffers.  Well, at least we are further along in that recognization after 6 years of Japanification than before...  in theory.

P.S.  It's not greed that is the fundamental, it's envy.  Greed is not biological and doesn't exist universally.

[MachineGhost]

And, yes, you're right about the secondary market in that way - the thing I like about PARWX is that I'd be benefiting from companies that offer "outstanding workplaces", rather than ones that s***w their employees to do well.  I'm old enough to be saddened at the wage stagnation/reduction in benefits/disappearance of defined benefit pensions/etc. that we see now.  I would feel bad about making money because a company pays low wages/doesn't offer benefits to their employees, for example.

http://etfdb.com/type/investment-style/ ... sponsible/

On a 5-year basis, the KLD tracking ETF outperformed the PAWRX.  So you see, PAWRX is already inferior because of its high management fee and taxes will drag the return down even more over time.  Also, they don't tell you PAWRX's internal transactions costs in the fee schedule, so that's another extra bite against the returns.  Although the turnover looks relatively low. 

Cost Summary

The following summarizes the average quantifiable costs described. Advisor and soft dollar costs are excluded due to the large range in advisory fees and the difficulty of quantifying soft dollar costs. When working with a financial advisor, it is important to add the advisory fee to the mutual fund costs listed below for an accurate depiction of total potential costs.

Non-Taxable Account Taxable Account

Expense Ratio .90% Expense Ratio .90%

Transaction Costs 1.44% Transaction Costs 1.44%

Cash Drag .83% Cash Drag .83%

– Tax Cost 1.00%

Total Costs 3.17% Total Costs 4.17%

As illustrated, hidden costs have infiltrated the mutual fund industry and are being paid by many unsuspecting investors. Despite potential drawbacks, investors can acquire broad tax efficient diversification at a fair price by utilizing mutual funds properly. In addition to potentially utilizing mutual funds, high net worth investors can obtain broad tax efficient diversification through direct ownership of securities or through privately managed accounts. These possibilities can increase transparency and eliminate many of the costs directly linked to mutual fund ownership. Cost considerations are one of many factors to analyze when allocating your portfolio and making investment decisions.

[jafs]

Those are interesting - thanks for that.

I'll definitely look into them, especially the KLD400 index fund.  But, it's been around for an even shorter time than PARWX, and PARWX has beaten it every year except one.  I already checked the tax stuff, and it's a non issue for us.

I've done a fair amount of research, and am generally convinced that index funds are almost always the best way to go.  Certainly statistically they do as well, if not better than active strategies (some of that is because of investor behavior/mistakes).  But does that mean that there can't be any decent active funds and/or that investors can't use them without making those mistakes?

[jafs]

Well, the kld index etf performs virtually identically to vstmx in my idea.

The portfolio loses a little less in 2008, and has a slightly smaller max DD, and gets a very slightly lower cagr.

But it's probably a bit less risky as well.

Definitely worth considering - I appreciate your input.

[christina]

I'm more of a lurker, and have been doing so for about 4 years, since I started with the PP.
Yes, I believe most discussions are civil, however, I will say that almost ALL discussions veer WAAAY off topic, to the point of excluding the OP. 

[sophie]

Basically, what you're doing is falling prey to a behavioral bias called the recency effect.  I think you might be well served at this point to read a book on all the behaviorlal biases that average investor's fall prey to that torpedoes their long-term returns (the average return for the past 20 years for them is only 3.5% CAGR!).  I think Jason Zweig is the author of one.

Bingo.

Jafs is in good company here, given the recent emotionally charged discussions, but the market ultimately does not forgive.  Note that the return of the average investor could be beaten simply by holding T bills/money market funds during that same 20 year period.

I figured this out when I ran a real return simulation of the PP during a withdrawal period alongside some very simple portfolios, e.g. Boglehead 50/50 or 50% stocks/50% cash.  The idea was to start with a portfolio of $1M and assume that you withdraw 4% in year 1 ($40K), then increase withdrawals according to inflation each year and rebalance the portfolio when bands are hit (with the PP) or annually (other portfolios).  The ending balance varied a lot with the start date, but the most notable observation is that no matter which strategy you pick, you would end up a multimillionaire just by sticking with the strategy over 20-30 years.  It was a strong piece of evidence that in point of fact, no one actually does this.

This is a fatal flaw in long-term backtesting - what's the use if there is zero chance you're going to hold a portfolio for that length of time?  I was at one time convinced that choice of portfolio is everything.  I now believe, firmly, that your choice of portfolio is of minimal importance compared to your ability to stick with it over the long term.  Perhaps the best strategy is simply to hold an enormous e-fund in cash and put all your investment money into a low ER stock index fund, and quit worrying about it.  The PP may just be too complicated, with the "uncomfortable with gold and bonds" factor as a fatal flaw.

[barrett]

This is a fatal flaw in long-term backtesting - what's the use if there is zero chance you're going to hold a portfolio for that length of time?  I was at one time convinced that choice of portfolio is everything.  I now believe, firmly, that your choice of portfolio is of minimal importance compared to your ability to stick with it over the long term.  Perhaps the best strategy is simply to hold an enormous e-fund in cash and put all your investment money into a low ER stock index fund, and quit worrying about it.  The PP may just be too complicated, with the "uncomfortable with gold and bonds" factor as a fatal flaw.

Not sure if it's too complicated but it certainly is not an easy portfolio for many people to hold. And that's probably more true if one is around people who talk about investments a lot. I seem to have surrounded myself with people who know nothing about money! Investors who do well with the PP are those who don't check its performance frequently, and have accepted that it's a portfolio that will keep them from getting crushed at any point. Also, the whole thing about "one asset is bound to being doing poorly at any point" is really tough for most people to accept.

[jafs]

There was a study by some brokerage house showing that their clients had done best who had forgotten about their portfolio (some had even died).

I'm very aware of the ways in which it's hard for people to stick to a strategy, given fluctuations in the markets and understandable psychological tendencies (loss aversion, chasing yields, etc.)

In some ways, you have to do exactly the opposite of what you want/feel, which is to sell when things are falling and buy when they're rising.

I would imagine that the main reason people under-perform their own portfolio returns is that they don't stick to "buy/hold" and/or "re-balance as necessary".

In the end, I'll probably wind up reverting to a total market fund, figuring the diversification and other benefits of an index fund are important.

[dualstow]

It was very interesting reading Tyler's post (Reply #12) over Thanksgiving week. A bombshell!

There's obviously a difference between dissenting opinions and constant threadjaking, as others have pointed out.

[MachineGhost]

This is a fatal flaw in long-term backtesting - what's the use if there is zero chance you're going to hold a portfolio for that length of time?  I was at one time convinced that choice of portfolio is everything.  I now believe, firmly, that your choice of portfolio is of minimal importance compared to your ability to stick with it over the long term.  Perhaps the best strategy is simply to hold an enormous e-fund in cash and put all your investment money into a low ER stock index fund, and quit worrying about it.  The PP may just be too complicated, with the "uncomfortable with gold and bonds" factor as a fatal flaw.

That is true and this probably derives from the fact that they have no true "savings" so they are risking everything in "investments", so naturally they are Nervous Nellies about the latter and emotionally tinker to their detriment.  A true "savings" would be your start-over-again fund in case you lose your job or some other Black Swan calamity as well as enough to start your "investments" again.  If you have that safeguard in place, you won't be prone to tinker with your "investments" or take on greater risks and get wiped out.  The PP has that built in sort of but I argue that true "savings" needs to be related to the actual expenses to start over again not what conveniently fits into the 25% bracket.  Its quite feasible and normal to have a larger cash portion relative to the other three assets in the beginning.

I believe this concept is hugely understated in terms of behavioral psychology.  Everyone would feel a lot more comfortable and less stressed with true "savings" before they mess around with "investments".  The problem with the orthodox PP is it is just not low risk enough (in either emotions or actual numbers) to qualify as "savings", hence why I came up with the Volatility Parity Jr.  That should be solely for your "savings" as it will preserve your wealth with the least risk possible.  If you're going to go for high level growth to reach investment goals (i.e. Browne Permanent Risk Parity), then contributing to a perpetually growing 25% cash allocation is an oxymoron.  Carve it out it to "savings" and stop growing it past the point it is needed.

[Libertarian666]

There was a study by some brokerage house showing that their clients had done best who had forgotten about their portfolio (some had even died).

Well, that would certainly keep them from withdrawing too much for living expenses! 

[jafs]

[jafs]

I wonder if you can help me understand something.  It seems that when stocks and bonds (especially ltg bonds) both do badly the culprit is "stagflation", which I take to mean a combination of a poor economy with high inflation.

What I don't get is how that can persist for very long - inflation is generally understood as a rise in the costs of goods and services (pace to our Austrian brethren).  So if the economy isn't doing well, people can't afford higher prices and I'd expect one of two things (or both) to happen.  People will not buy stuff at those prices, which should bring them down (supply and demand) and/or as that happens, businesses will struggle, lay people off, etc. and we'll move into a recessionary trend.

Then ltg bonds should do well, right?

So either inflation will drop or the economy will spiral downwards - what am I missing?

[Libertarian666]

I wonder if you can help me understand something.  It seems that when stocks and bonds (especially ltg bonds) both do badly the culprit is "stagflation", which I take to mean a combination of a poor economy with high inflation.

What I don't get is how that can persist for very long - inflation is generally understood as a rise in the costs of goods and services (pace to our Austrian brethren).  So if the economy isn't doing well, people can't afford higher prices and I'd expect one of two things (or both) to happen.  People will not buy stuff at those prices, which should bring them down (supply and demand) and/or as that happens, businesses will struggle, lay people off, etc. and we'll move into a recessionary trend.

Then ltg bonds should do well, right?

So either inflation will drop or the economy will spiral downwards - what am I missing?

What you're missing is hyperinflation. See the Austrian or German examples from the last century.

[Tyler]

So either inflation will drop or the economy will spiral downwards - what am I missing?

Just one guess -- Credit.  Look at student loan debt.  School is insanely unaffordable and gets worse every year but easy government-subsidized credit keeps the money pump flowing.  It may be unsustainable in the long run, but it introduces a delay to market reactions. 

Beyond that, I think markets are simply a lot less rational than the INTJs who study them for a living want to accept.

[barrett]

This stagflation link is not bad:

http://useconomy.about.com/od/glossary/ ... lation.htm

It doesn't happen often and it's not likely to happen at all without some bad fiscal policy. Hopefully the 1970s were a lesson in how not to do things.

[jafs]

I understand hyperinflation as another extreme economic condition.  But it doesn't explain why normal market forces wouldn't affect stagflation.

And, that's sort of what I thought, that it would be very unusual, because of market forces.  And also that we might have learned from past mistakes about fiscal policy.

The credit piece is also interesting.

[Pointedstick]

Market forces are always interacting with government forces. Something that might not fail in a free market may fail in a market that is heavily controlled by government.

[jafs]

Sure, that makes sense.

But, government policy wouldn't be aimed at producing/extending stagflation, since it sucks.  Fed policy has the dual mandate of unemployment/inflation - it wants to create conditions for higher employment and also control inflation.

Stagflation would sort of be the opposite of that, with lower employment and higher inflation.

[Pointedstick]

Sure, that makes sense.

But, government policy wouldn't be aimed at producing/extending stagflation, since it sucks.  Fed policy has the dual mandate of unemployment/inflation - it wants to create conditions for higher employment and also control inflation.

Stagflation would sort of be the opposite of that, with lower employment and higher inflation.

You're assuming an awful lot of rationality on the part of the ones who run the government.  Obviously nobody wants this condition, yet policies were deliberately promulgated that resulted in it. It can happen again as long as there are no forces to push government in rational directions the way there are for the market.

[barrett]

I think a wage/price freeze is unlikely to happen again any time soon, at least here en Los Estados Unidos. Also, The Fed has gotten really good at communicating its intentions for the most part. It just doesn't seem like it now because they have nothing to communicate... except maybe that they are out of moves which wouldn't go over well.

[sophie]

I wonder if you can help me understand something.  It seems that when stocks and bonds (especially ltg bonds) both do badly the culprit is "stagflation", which I take to mean a combination of a poor economy with high inflation.

They'll also do poorly during a tight money recession.  So will everything else though, except cash.

The "stagflation" of the 1970's is the single best example of why holding gold is useful.  All portfolios with < 20% gold had negative real returns during that period.  It's all there in Tyler's charts.