Purpose of the PP

[jacksonM]

Everyone having fun?
PP sucks!
I don’t care what anyone says, WORST portfolio imaginable.
Garbage.

I'm sure you've heard of Einstein's definition of insanity.

If you really are convinced of what you are saying then why do you continue with it at all?

[buddtholomew]

Everyone having fun?
PP sucks!
I don’t care what anyone says, WORST portfolio imaginable.
Garbage.

I'm sure you've heard of Einstein's definition of insanity.

If you really are convinced of what you are saying then why do you continue with it at all?

It would require me to unwind my garbage Gold.
Keep on waiting for this portfolio to actually do something different than a 70/30 equity/bond allocation.
I want to be proven wrong but this portfolio is truly crap.
It may have worked in the past (now + 10 years ago) probably out of shear luck but now it is at the whims of the stock market and the dollar.
We gave up 300+% in stocks over last decade so that the portfolio can go down when stocks finally decline!

[Kriegsspiel]

Everyone having fun?
PP sucks!
I don’t care what anyone says, WORST portfolio imaginable.
Garbage.

I'm sure you've heard of Einstein's definition of insanity.

If you really are convinced of what you are saying then why do you continue with it at all?

It would require me to unwind my garbage Gold.
Keep on waiting for this portfolio to actually do something different than a 70/30 equity/bond allocation.
I want to be proven wrong but this portfolio is truly crap.
It may have worked in the past (now + 10 years ago) probably out of shear luck but now it is at the whims of the stock market and the dollar.
We gave up 300+% in stocks over last decade so that the portfolio can go down when stocks finally decline!

Getting out of the PP over the course of a few years would save you some taxes I'm guessing?

[Tortoise]

YTD performance:

PP: -2.9% return with 4.9% volatility
All-world 60/40 benchmark: -3.1% return with 7.7% volatility

So YTD, compared to a 60/40 portfolio, the PP has provided about the same return (slightly higher, actually) with 36% less volatility.

[buddtholomew]

YTD performance:

PP: -2.9% return with 4.9% volatility
All-world 60/40 benchmark: -3.1% return with 7.7% volatility

So YTD, compared to a 60/40 portfolio, the PP has provided about the same return (slightly higher, actually) with 36% less volatility.

Tortoise, thank you for that.
Problem is the PP under-performed a 60/40 allocation over last 10 years (at least for me)...

[DragonJoey3]

YTD performance:

PP: -2.9% return with 4.9% volatility
All-world 60/40 benchmark: -3.1% return with 7.7% volatility

So YTD, compared to a 60/40 portfolio, the PP has provided about the same return (slightly higher, actually) with 36% less volatility.

Tortoise, thank you for that.
Problem is the PP under-performed a 60/40 allocation over last 10 years (at least for me)...

Budd,

If you are so concerned with what the 60/40 portfolio is doing then I don't understand why you don't use the 60/40 portfolio? If you aren't using a 60/40 allocation then my question is why did you change? Was it 2002? 2008? The volatility?

There is a really great podcast episode that came out last week by J. David Stein on his podcast "Money for the rest of us" in which he points out that investing really shouldn't be about getting the maximum return, it's about having the minimum regret. (I forget how exactly he worded it, but I recommend that epsiode which you can find here.)

Obviously if there were a portfolio that returned as much as 100% stocks with the risk of 100% bonds any of us would take it, but we have to decide where we want to be on the risk spectrum. If you have 50x your annual expenses in your account you can afford to just put the money into US Treasuries and live out your life in comfort. But will you suffer more regret not having put the money at risk than if you risked it and lost?

If you can only console yourself with a portfolio that beats or meets the 60/40 consistently then invest in the 60/40. If you want to beat it consistently then just go 100% stocks which would have CRUSHED the 60/40 over the last 10 years (it's been longer than 10 years since the crash now).

Just using Tylers site the 60/40 would have got you 9.02% annualized from 2009 to 2017, vs the total stock market getting you over 13% in the same time-frame. If you have the stomach for just throwing it all in VTSAX then do it, but if not then you shouldn't really complain if someone willing to take more risk than you got more reward, that was the risk they chose to take.

One of the things I've come to realize is that in the wake of 2008 there was a resurgence in "safe" portfolios. People learned quickly that they didn't have the risk-tolerance they thought they did, but I wonder where all those people were invested in 2007? Just look at this year for example. I was lamenting a few weeks ago how stocks were up nearly 10% this year while the PP was basically flat. Then in 1 week my YTD return was better than stocks, and I was reminded that I just don't have the stomach to tolerate that.

Investing is NOT ALL ABOUT THE NUMBERS it is ALWAYS ABOUT BEHAVIOR! The vast majority of investors under-perform their own asset allocations because they can't help but tinker, or change, or think "this time is different." Asset allocation is a way to help get the investors behavior in line with the numbers they want to see.

So I invest to minimize the risk of regret. The regret of being under-invested and missing out (I have my VP heavily invested in stocks), and the risk of being over-invested and feeling like I took too much risk (I have the bulk of my assets in the PP). Ultimately my Portfolio this year is down 4.5% which is pretty lousy, but ultimately I can console myself in knowing that I have more years to accumulate, and that performance is in line with what I would expect from my portfolio. In context:

(lost my tracking data from pre-2016)
2016: +12.205%
2017: +11.065%
2018: (- 4.053%) YTD (annulized)
Overall: +5.081%

So although 2018 hasn't been the best, I'm still well on track and +5.081% is good enough for me. I can hit all my long-term goals, and I don't feel like I have taken too much risk or left too much money on the table.

You need to decide where the minimal amount of regret is for you.

~DragonJoey3

[stuper1]

That's a great post DragonJoey. You have to understand that Budd only has $13M in his portfolio, so he needs to swing for the fences in order to meet his FI goals. Budd's bitter that he's not getting 15% returns every year, and I'm bitter that I don't have $13M to put into T-bills. I guess the grass really is always greener somewhere else.

[buddtholomew]

That's a great post DragonJoey. You have to understand that Budd only has $13M in his portfolio, so he needs to swing for the fences in order to meet his FI goals. Budd's bitter that he's not getting 15% returns every year, and I'm bitter that I don't have $13M to put into T-bills. I guess the grass really is always greener somewhere else.

Couldn’t be further off base.
Net worth is irrelevant.
There’s nothing special about the PP.
Many hold all 4 assets but no one is naive enough to hold 25% in gold.
I was a novice when I entered the PP so it appeared on the surface to be what I was looking for. In reality it is the coward of all coward portfolios and loses better than it gains.

[stuper1]

Budd,

Have you read any of HB's books or listened to his podcasts to understand why he recommended 25% gold? it's not just about annual returns.

BTW, I always enjoy your Buddbursts, both the happy and sad. Glad you are here. As they say, if you weren't here, we would have to invent somebody like you. You must be doing something right to have $13M.

[buddtholomew]

Budd,

Have you read any of HB's books or listened to his podcasts to understand why he recommended 25% gold? it's not just about annual returns.

BTW, I always enjoy your Buddbursts, both the happy and sad. Glad you are here. As they say, if you weren't here, we would have to invent somebody like you. You must be doing something right to have $13M.

I have read a couple of books and listened to all the podcasts as nauseum. Like I said, I bought into the philosophy hook, line and sinker. Problem is I have 3.23 CAGR to show for it during one of the biggest bull markets of our time. That sucks no matter what anyone says.

It’s pretty difficult to miss that stocks are positive again this year with the assets that differentiate the portfolio (Gold and LTT’s) down around 10% each. The more the market falls the lower these assets go. Garbage. There’s always something going on to clobber the portfolio...rising rates, strong dollar. Doesn’t matter, PP will go down. CPI strongest reading in 6 years, gold declines. Same story, year after year after year.

[DragonJoey3]

That's a great post DragonJoey. You have to understand that Budd only has $13M in his portfolio, so he needs to swing for the fences in order to meet his FI goals. Budd's bitter that he's not getting 15% returns every year, and I'm bitter that I don't have $13M to put into T-bills. I guess the grass really is always greener somewhere else.

Stuper1,

I'm aware that Budd has 8 digits in his portfolio he's mentioned it here before. Hence why I mentioned the possibility of just doing T-bills for everything.

[DragonJoey3]

Budd,

Have you read any of HB's books or listened to his podcasts to understand why he recommended 25% gold? it's not just about annual returns.

BTW, I always enjoy your Buddbursts, both the happy and sad. Glad you are here. As they say, if you weren't here, we would have to invent somebody like you. You must be doing something right to have $13M.

I have read a couple of books and listened to all the podcasts as nauseum. Like I said, I bought into the philosophy hook, line and sinker. Problem is I have 3.23 CAGR to show for it during one of the biggest bull markets of our time. That sucks no matter what anyone says.

Budd,

The portfolio is designed to provide a positive CAGR that is after-inflation. It's primary focus is preservation, and to reach that positive cagr with low-volatility and do so quickly.

Using Tyler's site I would point out:

https://portfoliocharts.com/portfolio/p ... portfolio/

Note the things that the portfolio does well.

• The range of possible CAGR's converges to the mean quickly. (Long term returns chart)

• The mean CAGR is positive by several percent. (Long term returns chart)

• The sequence of returns risk is very low (Start date sensitivity chart)

• Drawdowns are small and unlikely to result in much angst (drawdowns chart [very low ulcer index])

The major flaw to this portfolio is that the returns although consistent and positive, are not going to be as high as a portfolio that takes on higher risk.

My overall portfolio is actually more along the lines of the Golden Butterfly portfolio that Tyler also has on that site. I consider that portfolio as looking something like this:

80% HBPP (money that I want to have very minimal risk on and would like a consistent real return on)
20% Small Cap Stocks (Money that I'm placing at higher risk because in the long run the returns will be higher)

By limiting my high-risk money to 1/5th of my portfolio I'm unlikely to suffer a shock that would cause me to sell-low or send me into panic mode. Also the cash portion of my PP (20% of my portfolio) is my Emergency Fund, so I need to ensure that capital doesn't experience significant draw-downs to the point where I wouldn't have it if I need it.

Harry Browne never said you have to be 100% PP. He advocated for the PP for "Money you can't afford to lose." He also advocated for a VP for "Money you are willing to accept more risk on."

The PP is the coward of all cowards because it is designed to be a bastion that can return a rate above inflation (over nearly every 3 year rolling window) without accepting hardly any risk.

The behavior you are exemplifying is one of the things that drives the market cycles we see. When the market it hot FOMO (fear of missing out) drives people to get in. When it crashes people feel burned and sit on the sidelines while it recovers. It is up to each investor to come up with a means of harnessing that inner drive, and saying "No I will stay the course." Find a portfolio that is acceptable to you in terms of not suffering from massive FOMO, and also not putting yourself at risk of getting hit with a draw-down you can't stomach.

I think the best advice I have heard on this is "take small steps." If you want to change to a more equities position, do enough to feel like you did something, but not so much to feel like you did everything. Take 5 or 10% of your portfolio and put it in the S&P 500 index fund. Be a 90% HBPP, and 10% VP in something that keeps the FOMO at bay.

It's better for you to lose a little of your money chasing yield and feel like you did enough, than to eventually say "To hell with it," and put all your money at risk all at once.

~DragonJoey3

[buddtholomew]

Thanks for the thoughtful responses.
For the record I am invested 70/30 in retirement accounts so don’t feel I have missed the rise in equities by any means.
I have just lost faith in the portfolio to provide stability during market fluctuations (10% or greater) and it has failed to do so during the recent pullback in stocks.
When stocks enter a correction or bear market I want to buy stocks and not sit in Gold and LTT’s.
Hope that makes sense.

[DragonJoey3]

Thanks for the thoughtful responses.
For the record I am invested 70/30 in retirement accounts so don’t feel I have missed the rise in equities by any means.
I have just lost faith in the portfolio to provide stability during market fluctuations (10% or greater) and it has failed to do so during the recent pullback in stocks.
When stocks enter a correction or bear market I want to buy stocks and not sit in Gold and LTT’s.
Hope that makes sense.

I think looking at the data shows that the recent declines in the HBPP are well within the error bounds for the portfolio. It's still been stable as far as I can tell. I think the main beef you have which is accurate is that the returns can be higher with only slightly more risk. I came to that conclusion as well, and hence I'm more along the lines of the Golden Butterfly.

I still think it's a good portfolio for preservation of capital you don't want to lose, and always happy to banter with someone as successful as yourself budd.

~DragonJoey3

[Kriegsspiel]

I'm with you here DragonJoey3. Like I said, I think of the PP more like cash. The PP is the safe side of my barbell, and the other side has been 100% stocks (and now I'm getting into more real estate). So I don't even bother taking more risk in the safe side by tilting towards riskier assets, I just put more in my VP bucket if I want to take more risk. Very simple, and it fits my personality.

I figure having at least 10 years of expenses in the PP bucket will let you ride out any disasters wrought in the VP. Or at least give you some runway to get another job if you're really ruined.

[buddtholomew]

I'm with you here DragonJoey3. Like I said, I think of the PP more like cash. The PP is the safe side of my barbell, and the other side has been 100% stocks (and now I'm getting into more real estate). So I don't even bother taking more risk in the safe side by tilting towards riskier assets, I just put more in my VP bucket if I want to take more risk. Very simple, and it fits my personality.

I figure having at least 10 years of expenses in the PP bucket will let you ride out any disasters wrought in the VP. Or at least give you some runway to get another job if you're really ruined.

You describe what I hope to accomplish in a single taxable portfolio - incorporate the VP into the PP.
Maybe for me thats 35/15/15/35

[dualstow]

Great stuff, Dragon Joey.
I started the pp in late 2010 so I like a pep talk, too, once in a while.
So far so good, though. I am just glad I didn't take all my money and invest it in sapphire screens for iPhone.

[Kriegsspiel]

I'm with you here DragonJoey3. Like I said, I think of the PP more like cash. The PP is the safe side of my barbell, and the other side has been 100% stocks (and now I'm getting into more real estate). So I don't even bother taking more risk in the safe side by tilting towards riskier assets, I just put more in my VP bucket if I want to take more risk. Very simple, and it fits my personality.

I figure having at least 10 years of expenses in the PP bucket will let you ride out any disasters wrought in the VP. Or at least give you some runway to get another job if you're really ruined.

You describe what I hope to accomplish in a single taxable portfolio - incorporate the VP into the PP.
Maybe for me thats 35/15/15/35

To be clear, I meant that I use a simple implementation of the vanilla 4x25. I don't have to think about it at all, no decisions to be made. The VP is where I do all of my deciding. AFAICT I'm doing what Harry believed one should do.

I think ocho or mathjak would read that and tweek out ("Agghh it's all one portfolio! All one risk profile! Arggg!") but I don't (mentally) incorporate my VP into my PP like you said.

[flyingpylon]

Shown below is a chart of the S&P 500 during my "investing life". Got laid off in 2002 for 7 months. Started PP in early 2012 figuring that the market can fool me once, fool me twice, but I'm not going to take it in the shorts a third time. I have since migrated to a GB allocation and have done away with the concept of a VP.

I share this only to point out that those of us that started investing before 2009 may have a very different perspective than those that did not, and for good reason. Everyone will get their "smackdown" eventually, in one form or another. I didn't seriously consider protecting against it until I got older and wiser and had a lot more to lose.

[buddtholomew]

Shown below is a chart of the S&P 500 during my "investing life". Got laid off in 2002 for 7 months. Started PP in early 2012 figuring that the market can fool me once, fool me twice, but I'm not going to take it in the shorts a third time. I have since migrated to a GB allocation and have done away with the concept of a VP.

I share this only to point out that those of us that started investing before 2009 may have a very different perspective than those that did not, and for good reason. Everyone will get their "smackdown" eventually, in one form or another. I didn't seriously consider protecting against it until I got older and wiser and had a lot more to lose.

Maybe missing the point but you increased your stock allocation AFTER experiencing 2008/2009. That is what I am advocating as well. I’ve experienced a 25% decline as well as a 20% decline in...wait for it...gold and LTT’s. Yup, biggest losses have come in those assets. Id rather experience this volatility in an asset class that actually pays you for the risk.

[Cortopassi]

[flyingpylon]

Maybe missing the point but you increased your stock allocation AFTER experiencing 2008/2009. That is what I am advocating as well. I’ve experienced a 25% decline as well as a 20% decline in...wait for it...gold and LTT’s. Yup, biggest losses have come in those assets. Id rather experience this volatility in an asset class that actually pays you for the risk.

I was essentially 100% stocks, then PP with a VP in stocks, then stopped fooling myself and just moved to GB with no VP. So at least in my little reality bubble, I don't consider that to be an increase in stocks.

Perhaps you view volatility differently because you haven't really been burned yet and also because you're starting from a far larger base to begin with. I was pretty cavalier about stock volatility until 2008-9. But experiencing a decline in one or two components of a larger portfolio that is doing "okay" overall is not what I'd call getting burned or smacked down.

One of the larger points made about the PP is to not fixate on individual components but to consider the performance of the portfolio as a whole. That's what I try to do, and the only time it seems to bother me much is when I have to rebalance cash contributions.

[jacksonM]

The year that gold had it's major meltdown helped convince me to stick with the PP. Unlike Bud, I just don't look when I suspect I won't like what I see so when I finally did I was pleasantly surprised to see that the whole portfolio was down only about 2%. Contrast this with 2008 when stocks had a major meltdown and I was down about 40%. So in my mind, the PP was serving it's purpose.

[buddtholomew]

Haha, so the PP wakes up today...
I’m not abandoning the PP, just changing the percentages to suit my temperament.
Stocks are down, Gold and LTT’s are up and I am down .05%. That works for me.

[buddtholomew]

But alas it was not meant to be.
Gold and LTT’s just sitting there while market down 1.6%
We should change the name to the Perplexed Portfolio

But Budd, the PP doesn’t work on a daily basis...
You’re right, it doesn’t work on a daily, weekly, monthly, annual or decade basis either.