One Line combining all 4 components on a chart

[gonetowindsurf]

Greetings,
Is there any chart expert in the group that would be willing to post a continuous, up to date chart that combines the 4 components of the PP into one line on a chart using vti, gld, shy, tlt? It would be awesome to see how the 4 combined components react on big down days and up days.
It would even more awesome if the chart showed a rebalancing aspect with notation of the adjustments and when.
Thanks for your consideration!
Mike in Pensacola

[pplooker]

Just a question: why would you want to chart it day by day?  Wouldn't year to year be more appropriate?

[Gumby]

I haven't used it in years, but I believe smartmoney.com has a portfolio tracker that lets you track buying/selling and view the combined performance in a chart. Though, you'd have to remember to add the dividends from VTI, TLT and SHY manually into the tool.

But, I agree that day-to-day is a little silly. Might be better to just add up the value of your portfolio into a spreadsheet and pop the grand total into a running chart each month.

[craigr]

Psychologists have looked at the issue of how people interpret pain and financial losses. The human mind can seem to take big pains OK, but they handle many small doses of pain poorly. If you hit a rough market and check the portfolio each day you are inflicting a lot of small doses of pain compared to someone that checks far less frequently. This can kick in emotions relating to loss aversion and can make investors very edgy.

This is the main reason why I don't recommend tracking portfolios too often. Sure, log in and/or check your statements from time to time to make sure your account looks OK and no funny business is going on. But try to restrain yourself from keeping a running tally that is frequently updated. Over the short term, markets are random noise so looking at it too often just consumes energy on something that can't be controlled anyway.

I run this blog and forum on investing and I honestly can't tell you where the market is right now or what my gains are this year. I may have a rough idea, but I don't personally track it that closely. The purpose of a Permanent Portfolio is so we don't have to worry about these matters.

[gonetowindsurf]

Thanks for the responses.
I take issue with "silly" however.
As someone who is new to the PP strategy, I need to know what a drawdown would look like, ie how much pain might be associated with it. I always look at worst case scenario. For instance how did the strategy do during the market plummet? I asked for a daily chart because there were some horrendous market loses on a daily, weekly and monthly basis.
It just seemed easier to me to see the portfolio as one line on a chart, than trying to calculate each component individually. For instance the Permanent Portfolio fund - had a 27% swing from top to bottom- that's pretty steep to stomach (at least to me) for something that is diversified.
A chart would also allow investors like me who wish to fully evaluate the strategy, the opportunity to compare it to other indicies and other strategies and investment vehicles.

[craigr]

Probably the easiest way to track things daily is to create a tracking portfolio at Morningstar with the four core ETFS (VTI, SHY, TLT, GLD). They offer a new portfolio tracker feature that can create these graphs for you. Or you could download the data and put it into a spreadsheet directly. The reason I like Morningstar for this is they include all dividends and distributions in the return numbers so you have a more accurate picture on results.

But I understand the draw to this and admittedly I did it myself at first. But the longer I stick with the strategy the less and less I feel like looking. Hopefully you'll find the same thing happens over time. I've been asked in the past to do something similar on the blog (like weekly or monthly returns). However I just choose not to do this because it tends to cause more problems than help. It's important to be able to keep the hands off the portfolio and allow it to work. The core assets may not move immediately to events but take several weeks or even months. So seeing short-term losses can make you do things to the portfolio that later turn out to be a bad idea.

In October-November 2008 the 4x25 portfolio I think was down -10-15% at the worst according to what someone else mentioned. So the temptation could have been to go to all cash. But by November the LT bonds took off sharply and by year end the losses were gone. It took time for one of the assets to respond (LT Bonds), but they did if you were patient.

Then in January of 2009 I rebalanced into stocks with LT bond money and stocks kept falling. So I did some tax loss harvesting, but mostly just kept holding on to my majority of the shares. I don't remember, but I'm pretty sure the portfolio would have been negative for Q1 2009. Yet, by the summer the losses had been completely erased and by year end there was a huge gain in stocks. Had I been watching it daily, weekly, or even monthly I might have been tempted to do something like sell all the stocks and wait which would have been a bad idea.

[gonetowindsurf]

Thanks Craig for the Morningstar tip, and admitting that you also tracked at first 

and

Clive - thanks for posting your chart - a couple of questions if you don't mind so I get the idea of the rebalance -
your first rebalance from Gold went into Stocks? (clearly the laggard)
and then your Stock rebalance went into ?
And
your total fund value is showing about a 20% increase over the 2 year period?
thanks! for helping me out.
mike

[simata]

There's been some chat about the PP over on the AIM users message board and after I pointed out how you tend to get similar returns no matter if you invest in a domestic or foreign PP due to the currency exchange rates (i.e. a Japanese investors low returns relative to the UK and US since 1972 couldn't have been improved in Yen terms by having instead invested in a US or UK PP), one of the guys made the following observations about a Euro and US PP comparison run (sorry about the format being all out of alignment).  So overall it would appear that both over the long term and over shorter periods there is a relationship between PP and currencies etc. :-

I run two PP's from Sept 14 2009 till now.

The euro PP started with 1 Euro. (imaginary amount to make the calculations easy)
The US PP started with 1 US$.
The exchange rate was 1.46 at Sept 14, so the quotient of the Euro PP value and the US PP value is 1.46

Now fast forward to May 8 2010.
The exchange rate is 1.27
When I divide the Euro PP value by the US PP value we get 1.29

Observations:
1 - When we look at all the values, it seems that the the Euro PP value divided by the US PP value is close to the exchange rate.
2 - The sum of the euro PP and the US PP is nearly constant.( we started with US$ 2.46)

              euro/dollar    euro PP value    euro PP value
                                   divided by             plus
                                  US PP value       US PP value
14-Sep-09 1.4594 1.4503 2.4594
19-Sep-09 1.4705 1.4527 2.4831
26-Sep-09 1.467 1.4486 2.4657
03-Oct-09 1.4537 1.4339 2.4550
10-Oct-09 1.475 1.4580 2.5157
17-Oct-09 1.4869 1.4632 2.5293
24-Oct-09 1.502 1.4757 2.5340
31-Oct-09 1.48 1.4568 2.4872
07-Nov-09 1.4862 1.4608 2.5265
14-Nov-09 1.4868 1.4643 2.5632
21-Nov-09 1.4815 1.4483 2.5740
28-Nov-09 1.4918 1.4655 2.6149
05-Dec-09 1.5068 1.5064 2.6334
12-Dec-09 1.4757 1.4747 2.5652
19-Dec-09 1.4337 1.4341 2.5260
26-Dec-09 1.4398 1.4567 2.5342
01-Jan-10 1.4406 1.4664 2.5297
09-Jan-10 1.4273 1.4305 2.5356
16-Jan-10 1.4374 1.4365 2.5454
23-Jan-10 1.4135 1.4176 2.4859
30-Jan-10 1.3966 1.4045 2.4553
06-Feb-10 1.3691 1.3816 2.4183
13-Feb-10 1.3572 1.3764 2.4242
20-Feb-10 1.3519 1.3776 2.4541
27-Feb-10 1.357 1.3726 2.4611
06-Mar-10 1.3582 1.3863 2.4957
13-Mar-10 1.3765 1.3976 2.4979
20-Mar-10 1.3548 1.3767 2.4869
27-Mar-10 1.3353 1.3727 2.4714
3-Apr-10 1.3468 1.3901 2.5067
10-Apr-10 1.3384 1.3781 2.5257
17-Apr-10 1.3535 1.3852 2.5261
24-Apr-10 1.3311 1.3595 2.5268
1-May-10 1.3315 1.3442 2.5206
8-May-10 1.2746 1.2904 2.4562

Did you start US PP with $1.46 and EU PP with 1 EUR? Isn't it better to sum US PP and EU PP starting with $1.46 (1 EUR) for both to be equally weighted?

[simata]

GoneToWindSurf, AFAICT the PP achieves real (after inflation) gains part due to the stock holding and part due to correlations/volatilities and rebalancing.

Stocks over the long term provide real returns - typically 4% is suggested as a reasonable income withdrawal rate which implies inflation + 4% average returns from stocks.  LT's, gold and cash are more inflation pacing investments over the long term (more recent (since 1970's/80's) declines in interest rates has uplifted returns to inflation+x% compared to the very long term inflation pacing return average).

As a four way blend we might anticipate inflation + 1% therefore.  HOWEVER, if you compare the non rebalanced returns across 1972 to 2009 for Japan, UK and US PP's the PP has produced around a 1.8% higher average compared to the raw (non rebalanced).  Which implies that the PP on average and quite consistently provides a 1.8% value add benefit from correlations/volatilities/rebalancing.

Again AFAICT that 1.8% benefit results out of rebalancing having the effect of reducing the volatility in the most volatile and increasing the volatility in the least volatile, so overall you have a form of four assets with somewhat similar volatilities and somewhat similar real type gains, but having a tendency to zig and zag at different times to each other.



Gold sometimes is highly correlated to stocks, sometimes totally inversely correlated to stocks and overall generally averages no correlation to stocks (around -0.12 Pearsons Correlation (zero being neutral)).  LT's are somewhat inversely correlated to stocks.

Given four assets that achieve similar returns, but zigzag differently then periodically reducing out of winners to add to laggards adds real value compared to not rebalancing.

So overall the PP achieves a larger proportion of its real value add (after inflation gains) from volatility rather than having to rely upon price appreciation.  And volatility tends to be more constant over time (so PP gains are more constant over time).

Potentially PP's returns aren't as good as all-stock gains however i.e. inflation + 4% for all-stock, inflation + 2.8% for PP.  However in practice PP investors are much more likely to achieve that average.  All-stock investors however rarely achieve that market average for a number of reasons, and many all-stock investors don't even achieve inflation pacing rewards.

Another benefit to the PP is that it can be highly tax efficient.  From a personal perspective I can invest in a PP in a manner that very nearly has net = gross.  If my PP makes 9% gross which is also net therefore, then another investor who perhaps invests solely in stocks might have to achieve a 12% or higher taxable gross to compare to that.

Yet in many respects PP is safer than cash.  It generally doesn't have many bad years and even when it does either those declines are very small or they are countered by a larger good year in the year either before or after that bad year.

Simple eh!

Did anybody analyze what is best rebalancing (with mathematical precision)? When I put in excel a few different scenarios where 3 assets are moving fast, slow, up and down it showed that rebalancing is not giving higher returns, but in fact lower. Logically is that if you rebalance asset which is in momentum even after you rebalance it (cut down, back to 33%) will produce less profit after.

[craigr]

Did anybody analyze what is best rebalancing (with mathematical precision)? When I put in excel a few different scenarios where 3 assets are moving fast, slow, up and down it showed that rebalancing is not giving higher returns, but in fact lower. Logically is that if you rebalance asset which is in momentum even after you rebalance it (cut down, back to 33%) will produce less profit after.

Rebalancing is generally seen first and foremost as a risk reduction measure. It is not necessarily going to boost returns in all cases.

Secondly, there is no way to do an analysis with precision because the future is going to be different than the past. Scenarios can play out in ways that are much different than a model can predict.

The rebalancing recommendations help to reduce portfolio volatility and this helps the strategy succeed because the investor is subjected to fewer gut wrenching market swings and is less likely to abandon their investing strategy due to big losses. It may be that over some times a case can be made that rebalancing may lower returns, maybe. But when the portfolio gets into the real world the opposite may be happening because the investor is staying fully invested in their asset classes and not making bad trades in the heat of the moment.

[captain3d]

Hi

You might want to set it up at Risk Grades. I did this a while back for fun. It lets you run the portfolio through various scenarios as well as a single line for risk or price etc.

http://www.riskgrades.com/

It is fun to see but as the idea of the portfolio requires rebalancing to maximize the benefits then you would need a chart that included those actions. I dont know of one though.

I just ran PP through the 'Black Monday' simulation where the S&P dropped 20.5%. PP gained 2% ;-)

phil

[simata]

Rebalancing is generally seen first and foremost as a risk reduction measure. It is not necessarily going to boost returns in all cases.

Important is how often to rebalance to achieve lower volatility but not lowering returns much. Questions are: should we rebalance with time (monthly , yearly, ...) or when assets go out of balance (bands: 20-30%, 17-33%, 15-35%, 10-40%). Without rebalancing: http://www.riskcog.com/portfolio-theme2 ... 074874c74f