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 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 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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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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Re: Minimum time frame for holding PP

Post by Jeffreyalan » Wed Apr 18, 2018 7:42 pm

Any thoughts on using an ETF for cash needs in the next 3 years? SHV or MINT?
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Re: Minimum time frame for holding PP

Post by ochotona » Wed Apr 18, 2018 8:35 pm

Jeffreyalan wrote:Any thoughts on using an ETF for cash needs in the next 3 years? SHV or MINT?
These ETFs are not FDIC insured, and any bond, even if short term, has interest rate risk. I would steer you to an online bank which are paying 1.6% or more now.
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Re: Minimum time frame for holding PP

Post by Jeffreyalan » Wed Apr 18, 2018 9:01 pm

Just trying to understand, although not FDIC insured, wouldn’t a Treasury ETF like SHV or BIL be about as safe a vehicle as could be? If they went bust then all bets might be off correct?
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Re: Minimum time frame for holding PP

Post by Xan » Wed Apr 18, 2018 9:04 pm

Jeffreyalan wrote:Just trying to understand, although not FDIC insured, wouldn’t a Treasury ETF like SHV or BIL be about as safe a vehicle as could be? If they went bust then all bets might be off correct?
If the underlying T-Bills went bust, yes. This is a good argument for owning those directly. But the ETF can go bust for many other reasons than the supposedly-underlying asset disappearing.
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Re: Minimum time frame for holding PP

Post by jhogue » Thu Apr 19, 2018 8:42 am

I think ETFs like BIL are fine for smaller portfolios. Once you start growing the portfolio larger, it makes sense to start phasing in T bills held directly in a brokerage account or Treasury Direct.
“Groucho Marx wrote:
A stock trader asked him, "Groucho, where do you put all your money?" Groucho was said to have replied, "In Treasury bonds", and the trader said, "You can't make much money on those." Groucho said, "You can if you have enough of them!"
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Re: Minimum time frame for holding PP

Post by buddtholomew » Fri Apr 20, 2018 12:11 pm

The PP is for suckers.
Gold and treasuries sell off worse than stocks.
This is my fear realized...
PP will not help when things go south.
You will lose as much in a decline and you better rebalance from cash before 1 of the assets recovers else you’re stuck like everyone else.
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Re: Minimum time frame for holding PP

Post by stuper1 » Fri Apr 20, 2018 2:17 pm

Budd,

You used to drive me crazy with these posts every time things go down a bit. Now, I would feel like something was wrong if you didn't post. Thank you for your consistency. And THANK YOU for helping me get closer to finding my zen.
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Re: Minimum time frame for holding PP

Post by buddtholomew » Fri Apr 20, 2018 2:22 pm

stuper1 wrote:Budd,

You used to drive me crazy with these posts every time things go down a bit. Now, I would feel like something was wrong if you didn't post. Thank you for your consistency. And THANK YOU for helping me get closer to finding my zen.
Nothing like the status quo.
I am zenless.
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Re: Minimum time frame for holding PP

Post by dualstow » Fri Apr 20, 2018 3:07 pm

budd, when you get a chance, can you tell us what your new plan is?
Is it to convert everything pp to the boglehead portion of your portfolio?
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Re: Minimum time frame for holding PP

Post by buddtholomew » Fri Apr 20, 2018 3:38 pm

DS, plan is not altered very much at all, more equities, less gold, less long-term treasuries and more cash - 30/20/15/35.
The cash is to purchase equities during any decline and also to add to gold and LTT's only when the lower band is breached.
LTT's are almost there again, but I'll only add enough to stay above the 15% floor.

I no longer believe that the PP is somewhat of a magical solution to my personal investing type - conservative.
I'm a lot more comfortable adding to stocks than to gold or LTT's.
I don't see either of these investments as "downside protection" when stocks fall and I would rather take my risk in stocks than either of those two.

BH portion remains at 70/30.

Hope this helps.

Here’s the best part...70/30 beat my PP by 16 basis points today. “Don’t fool yourself and you are the easiest person to fool”.
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Re: Minimum time frame for holding PP

Post by dualstow » Fri Apr 20, 2018 10:31 pm

Cool, thanks.
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Re: Minimum time frame for holding PP

Post by Jeffreyalan » Sun Apr 22, 2018 1:01 pm

Thanks for all the input. For now I think I might do a Desert Portfolio. The drawdowns are enough for me to handle (I think) and I can move to cash a year out.

60% IEF
30% VTI
10% IAU
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Re: Minimum time frame for holding PP

Post by buddtholomew » Tue Apr 24, 2018 12:53 pm

How's everyone enjoying their false protection?
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Re: Minimum time frame for holding PP

Post by Cortopassi » Tue Apr 24, 2018 1:11 pm

Assuming that is sarcastic, not so much. But what can you do? Even minimally, gold and bonds are buffering the stock drop.

At some point, everyone will realize, oh, maybe the economy isn't doing as good as we thought, and bonds will benefit.

Gold is always the wildcard.
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Re: Minimum time frame for holding PP

Post by buddtholomew » Tue Apr 24, 2018 5:12 pm

Cortopassi wrote:Assuming that is sarcastic, not so much. But what can you do? Even minimally, gold and bonds are buffering the stock drop.

At some point, everyone will realize, oh, maybe the economy isn't doing as good as we thought, and bonds will benefit.

Gold is always the wildcard.
Yes definitely sarcastic, but aren’t you the least bit concerned? We’ve been holding our breath for almost a decade now...
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Re: Minimum time frame for holding PP

Post by jhogue » Tue Apr 24, 2018 6:09 pm

I am not concerned.

I am not holding my breath for ten years.

As a store of wealth, gold is supposed to just sit there most of the time-- even for decades.
“Groucho Marx wrote:
A stock trader asked him, "Groucho, where do you put all your money?" Groucho was said to have replied, "In Treasury bonds", and the trader said, "You can't make much money on those." Groucho said, "You can if you have enough of them!"
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