Minimum time frame for holding PP

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Jeffreyalan
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Minimum time frame for holding PP

Post by Jeffreyalan » Fri Mar 30, 2018 12:11 pm

I would like to get people's opinions on a person's individual investment time frame and holding the PP. You know how advisers will say if you don't have XX amount of years to invest then don't put your money into stocks. Well what is that number for the PP?

My situation is that I am able to now put the majority of my paycheck into savings. I am looking to move cross-country in a few years and then I will need some of those funds. The time fame is unknown. Could be 2 years. Could be 3. Or maybe as many as 5. With timeframes in that range, is the PP safe for my savings to assume I will not have lost any $$ and will have hopefully made more that just keeping It all in a savings account or cd? Or is the potential for a loss or a minimal gain in relation to risk not enough for that short of a time?

Thanks in advance for any guidance!
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Re: Minimum time frame for holding PP

Post by stuper1 » Fri Mar 30, 2018 12:27 pm

Are you familiar with the calculators at portfoliocharts.com? You might try playing around with some of those. The drawdown calculator will tell you the deepest drawdown and how long it took to recover.

For your situation, where you might need the money in as little as two years, I might choose something like 55% cash and 15% each in stocks/LTTs/gold. The drawdown risk is fairly small, but it still has an average annual real return of 3.4% over inflation. But your risk tolerance might be different than mine.

Another way to look at that suggestion would be 60% in the PP and 40% in side cash to reduce volatility.
Last edited by stuper1 on Fri Mar 30, 2018 9:01 pm, edited 1 time in total.
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Re: Minimum time frame for holding PP

Post by barrett » Fri Mar 30, 2018 12:40 pm

Jeffreyalan wrote:I would like to get people's opinions on a person's individual investment time frame and holding the PP. You know how advisers will say if you don't have XX amount of years to invest then don't put your money into stocks. Well what is that number for the PP?

My situation is that I am able to now put the majority of my paycheck into savings. I am looking to move cross-country in a few years and then I will need some of those funds. The time fame is unknown. Could be 2 years. Could be 3. Or maybe as many as 5. With timeframes in that range, is the PP safe for my savings to assume I will not have lost any $$ and will have hopefully made more that just keeping It all in a savings account or cd? Or is the potential for a loss or a minimal gain in relation to risk not enough for that short of a time?

Thanks in advance for any guidance!
I think one of the big plusses of a portfolio with a generous allocation to cash is that one doesn't necessarily have to have a separate emergency fund for most of life's expenses (exceptions would be the real whoppers like buying a home). If you have, say, $100,000 in a PP, then you would have $25,000 in cash which could be held in a savings account, CDs, T-Bills or whatever. No idea what you would be looking at in expenses for your move, but in the above scenario, you would have $10,000 - $12,000 to spend before you hit a 15% rebalancing band on your cash. This is all assuming that you have your PP investments in a taxable account.

I think a lot of what advisers tell clients is based on portfolios that don't have a cash component built into them. Their advice is also based on sequence of returns risk which has historically been much lower with a PP or GB allocation. Tyler's "start date sensitivity" charts at portfoliocharts.com are a great tool for getting a feel for how likely a portfolio is to drastically underperform during your particular timeframe.

Hope this makes sense. Your overall portfolio size is an important factor in really answering your question.
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ochotona
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Re: Minimum time frame for holding PP

Post by ochotona » Fri Mar 30, 2018 2:18 pm

Jeff, if you need the money in 2-5 years, just buy a 2 to 5 year Treasury bond which will yield 2.2% to 2.5% and be done with it. There are plenty of scenarios under which the PP will do worse than that over the next 2-5 years.
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Re: Minimum time frame for holding PP

Post by Pet Hog » Fri Mar 30, 2018 4:16 pm

Back in 2015 when Tyler was beginning to crank out his beautiful Excel charts, I took the data from peaktotrough and made my own blatant-Tyler-ripoff chart with monthly starting dates (see this thread and my chart here). I found that there were several starting dates where the PP rebalanced annually had negative real returns after five years. The worst lasted for nine years! That was from June/July 1973 to June/July 1982, so perhaps it was an unusual time with wild gold and LTT fluctuations and high inflation. (Note that I'm talking about real returns being negative; you would still have made good returns nominally.) So although quite a rock in its long-term performance, the PP does still have some risk if you need your money within five years. I agree with ochotona and stuper1 that shorter-term treasuries look quite appealing today with their decent yields, and I think I would suggest something like stuper1's 60:40 PP/STT blend for a 2-5 year timeframe.
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Re: Minimum time frame for holding PP

Post by sophie » Sat Mar 31, 2018 11:08 am

Interesting findings Pet Hog! Would you post a list of those > 3 year periods? The 1973 - 1982 time frame would have been bad for any portfolio btw, especially 1981-82.

The PP can still work for withdrawals as long as they are no more than ~1/3 the cash allocation, because it won't force selling of volatile assets that have not increased in value. example: a $100,000 25x4 PP should be able to handle a $10,000 cash withdrawal.

If I were anticipating a big expenditure within 3 years, though, I'd just keep it in cash separately from the portfolio.
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Re: Minimum time frame for holding PP

Post by Desert » Sat Mar 31, 2018 9:32 pm

Pet Hog wrote:Back in 2015 when Tyler was beginning to crank out his beautiful Excel charts, I took the data from peaktotrough and made my own blatant-Tyler-ripoff chart with monthly starting dates (see this thread and my chart here). I found that there were several starting dates where the PP rebalanced annually had negative real returns after five years. The worst lasted for nine years! That was from June/July 1973 to June/July 1982, so perhaps it was an unusual time with wild gold and LTT fluctuations and high inflation. (Note that I'm talking about real returns being negative; you would still have made good returns nominally.) So although quite a rock in its long-term performance, the PP does still have some risk if you need your money within five years. I agree with ochotona and stuper1 that shorter-term treasuries look quite appealing today with their decent yields, and I think I would suggest something like stuper1's 60:40 PP/STT blend for a 2-5 year timeframe.
And of course we have to compare with the alternatives .... while a small negative real return doesn't sound good, it sure beats a large negative real return. I wonder how cash would have compared in that period.
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Re: Minimum time frame for holding PP

Post by Tortoise » Sun Apr 01, 2018 1:31 pm

Agree with Sophie: my cut-off between cash savings and PP investments is three years. There have been very few three-year periods over which the PP provided a negative return.

If I need the money in less than three years, cash. Otherwise, PP.
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Re: Minimum time frame for holding PP

Post by Desert » Sun Apr 01, 2018 8:54 pm

Tortoise wrote:Agree with Sophie: my cut-off between cash savings and PP investments is three years. There have been very few three-year periods over which the PP provided a negative return.

If I need the money in less than three years, cash. Otherwise, PP.
That will work fine, if cash outperforms the PP in real terms. I'm struggling to figure out which path comes with more risk though.
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sophie
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Re: Minimum time frame for holding PP

Post by sophie » Mon Apr 02, 2018 8:02 am

If you're wanting to spend a pot of savings within 3 years, you're not looking for performance, you're looking for preservation. Desert, not sure I understand your question? I'd say any reasonable portfolio with volatile assets that can provide positive real returns can beat cash over a long enough time frame. Cash in general doesn't give you positive real returns.

Here's an extreme example of the potential dangers of holding cash for extended periods: Most NYC cooperatives refinance the underlying mortgage every 10 years. Some use this opportunity to borrow money for anticipated capital expenses for the next 10 year period. This makes some things easier, like keeping maintenance charges constant, but it's a monetary disaster. Not only are you holding cash for up to 10 years before spending it, you're paying interest on it the whole time. When my former building did this, they effectively turned an $800K cosmetic upgrade project into something close to $6 million in refinance penalties and mortgage interest over 10 years.
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Desert
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Re: Minimum time frame for holding PP

Post by Desert » Mon Apr 02, 2018 10:04 pm

sophie wrote:If you're wanting to spend a pot of savings within 3 years, you're not looking for performance, you're looking for preservation. Desert, not sure I understand your question? I'd say any reasonable portfolio with volatile assets that can provide positive real returns can beat cash over a long enough time frame. Cash in general doesn't give you positive real returns.

Here's an extreme example of the potential dangers of holding cash for extended periods: Most NYC cooperatives refinance the underlying mortgage every 10 years. Some use this opportunity to borrow money for anticipated capital expenses for the next 10 year period. This makes some things easier, like keeping maintenance charges constant, but it's a monetary disaster. Not only are you holding cash for up to 10 years before spending it, you're paying interest on it the whole time. When my former building did this, they effectively turned an $800K cosmetic upgrade project into something close to $6 million in refinance penalties and mortgage interest over 10 years.
Yeah, I think we're agreeing here. My point is that cash might not beat an HBPP, in terms of safety, even over a short period of time. The bogleheads tend to compare cash to something like a 60/40 stocks/bond portfolio, and then recommend staying in cash for short periods. But with a portfolio like the HBPP, one might be safer in that portfolio than cash, even for short periods. And that's because of the importance of real returns. Cash might actually be riskier, in real terms, than a balanced portfolio like the HBPP.
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Re: Minimum time frame for holding PP

Post by stuper1 » Mon Apr 02, 2018 11:14 pm

According to the Drawdowns calculator at portfoliocharts.com, the PP has an ulcer index of 2.5 and a 100% cash portfolio has an ulcer index of 3.3. These are based on historical real returns. The ulcer index sort of integrates the area above the drawdown curve and thus incorporates both the duration and depth of drawdown. The lower the ulcer index, the less pain, so the PP has been about 25% less painful than an all cash portfolio when measured using real returns.
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