PP/VP Strategy Sanity Check

General Discussion on the Permanent Portfolio Strategy

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Kriegsspiel
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Re: PP/VP Strategy Sanity Check

Post by Kriegsspiel » Fri Jan 25, 2019 1:22 pm

I think we had a discussion about 'age in PP' which I like, because I kinda think of the PP like a bond. But personally, I try to keep around 10 years of spending in the PP, and I'm ok with the rest in other stuff. I think I did a back of the envelope on 10 years of expenses with a 4% real return, like the PP, and it would last a bit over 12 years or something like that, which is plenty of runway for you in case the rest of your investments went to shit too. If they didn't, then you could do whatever.
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Re: PP/VP Strategy Sanity Check

Post by pmward » Fri Jan 25, 2019 1:23 pm

Kbg wrote:
Fri Jan 25, 2019 12:46 pm
Summing up total bonds versus treasuries. The former gets you a bit more return for a bit more risk but has higher correlation with the stock market due to the corporate bond element. Treasuries are almost always risk off assets so they zig when stocks zag which is a nice feature. IIRC a US total bond fund is about 65% government anyway...either choice will be just fine.

The above pretty much sums up the trade offs. It can be made more complex, but it really isn't.
That is a great way to look at it. If I add a bond allocation to my retirement it would not to be try to maximize returns, it would be simply to add a tool to dampen the dips. So, I think that that would favor using treasuries. If I become super concerned about return, there are probably better ways to increase return on the equity side, like small or mid cap tilt. Though, given my propensity in the past to want to try to time the market, I think I'm better off not trying to tilt and just accepting the market returns. My life has certainly been less stressful and more enjoyable since I stopped trying to do that. If I ever did feel a strong conviction to tilt my portfolio in any direction, I think that would be something I would be better off separating into a true VP that is completely separate from both my PP and my long term retirement portfolio and fully in the realm of money that I'm totally ok to lose if worse comes to worse.
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buddtholomew
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Re: PP/VP Strategy Sanity Check

Post by buddtholomew » Fri Jan 25, 2019 2:05 pm

Pmward, your thoughts are my thoughts but said more eloquently. Like others have said find the VP % you are comfortable with and the PP % in each asset you are comfortable holding while still maintaining the framework and philosophy AND stick to it for a while then reassess. We are tweakers at heart ;)

I personally only invest in the PP in my taxable account (EF initially and keeps growing...) with a 70/30 tax-deferred retirement portfolio. Comes out to 55/35/10 or thereabouts when viewed holistically.
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Kbg
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Re: PP/VP Strategy Sanity Check

Post by Kbg » Fri Jan 25, 2019 3:41 pm

Well...I feel vindicated and destroyed in this thread by one article.

https://www.advisorperspectives.com/art ... roy-wealth

Head on down to the "Results" section for the bottom line.

Some excellent points in here...
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Re: PP/VP Strategy Sanity Check

Post by pmward » Fri Jan 25, 2019 5:01 pm

Yes that was a good read. Of course a couple things to be careful of. They are testing one specific bucket approach that is specific to retirees. They are also testing said bucket approach specifically vs a 60/40 portfolio and nothing else. They also are not accounting for total assets, just assuming an SWR and that all funds withdrawn will be spent. In some cases, where someone barely has enough retirement to get by, the bucket approach may have them at a lower equity allocation than 60%. On the other hand, someone with say 2+ million in retirement may actually benefit by having more invested in equities with a bucket approach than 60/40.

For instance, let's use the person with 2 million. Let's assume that said person has $60,000 in yearly expenses as that's kind of considered the typical norm these days. If that person used a 60/40 they would have 1.2 million in equities. If, however, they used a bucket approach with 5 years of assets in the low risk bucket they would have 1.7 million in equities. If they had a conservative 10 years in the low risk bucket they would have 1.4 million in equities. Both above a 60/40 portfolio. If they also had their "low risk bucket" invested in PP as opposed to bonds, they would also likely get a bit more return out of it as well.

So it is a good article, and I think it has some good general advice, but there's definitely some holes that can be poked in it, and results will vary depending on the person and their total assets. There's also some strategy that can be employed. They mentioned the selling low phenomena in the bucket approach if done on a hard set date yearly schedule, but that can be avoided by having a hard rule that you don't rebalance from equities to the low risk bucket on years that the market is down. That allows you to live off of your low risk bucket while you wait for equities to recover and avoids the sell low. Of course, the tradeoff being that this requires a bit of management and can't just be automated. Like most things in life, it's not black or white but varying shades of grey.
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Re: PP/VP Strategy Sanity Check

Post by ochotona » Fri Jan 25, 2019 6:22 pm

The only way to go is run a Monte Carlo, parameterize it a bit pessimistically, and examine the cumulative probability of your portfolio surviving to end of life. If it does to a 95% chance, what more can you do?

Portfoliovisualizer.com has Monte Carlo. Portfoliocharts.com has a historically based look at safe and perpetual withdrawal rates. Both are insightful.
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Re: PP/VP Strategy Sanity Check

Post by Kriegsspiel » Sat Jan 26, 2019 7:17 am

ochotona wrote:
Fri Jan 25, 2019 6:22 pm
The only way to go is run a Monte Carlo, parameterize it a bit pessimistically, and examine the cumulative probability of your portfolio surviving to end of life. If it does to a 95% chance, what more can you do?
Save more money ;D
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To sleep, perchance to dream; ay, there's the rub
For in that sleep of death what dreams may come
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Re: PP/VP Strategy Sanity Check

Post by ochotona » Sat Jan 26, 2019 10:19 am

Kriegsspiel wrote:
Sat Jan 26, 2019 7:17 am
ochotona wrote:
Fri Jan 25, 2019 6:22 pm
The only way to go is run a Monte Carlo, parameterize it a bit pessimistically, and examine the cumulative probability of your portfolio surviving to end of life. If it does to a 95% chance, what more can you do?
Save more money ;D
Spend less!
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Re: PP/VP Strategy Sanity Check

Post by sophie » Sun Jan 27, 2019 7:43 am

pmward, don't overthink this! And, especially pay attention to dualstow's warning: frequent strategy switching is really a form of active investing in disguise, and it also tends to chase high returns. Which means you're always buying into a new strategy just when it's about to revert to the mean i.e. go down. You can't know if you're buying into a new portfolio at the right time, but that would be when it's doing badly, not when it's doing well. So yes, simple is best. 100% stocks is certainly that!

I have different portfolio buckets, but it's mostly because I'm working with employer retirement accounts which limits investing options and ability to move $$ around. The problem with choosing to do this is that you really don't know what's going to happen over the next 15 years (that being the longest zero-return period for stocks historically). There are many people who saw their retirement accounts evaporate in 2008-2009, lost their jobs, had too little savings to pay their living expenses, and ended up having to raid their retirement accounts before the stock prices had a chance to recover.

I suggest picking a reasonable portion of retirement funds that you can put into 100% stocks if you like, and that you can "protect" by keeping a PP as the rest of your savings. Aim to grow both of them over time, and don't sweat it too much about exactly what proportion is what. When you're within ~10 years of retirement you may want to start moving out of that 100% stock position, but it will depend on lots of things like how much total savings you have, what your options are etc.
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Re: PP/VP Strategy Sanity Check

Post by pmward » Sun Jan 27, 2019 9:12 am

Thanks Sophie. Great advice. And yes this is exactly what I'm working on doing is locking in a strategy, writing it down on paper, and sticking to it so I'm not bouncing around strategies. I like you also have the 401k issue, which houses a great deal of my assets, but has limited options, so yes that's definitely part of why the "bucket" approach is so appealing. It kind of gives me a delineation so I don't have to worry about balancing across different accounts. It actually helps simplify things to a degree.

I do think that I am leaning towards what you're mentioning, building my PP for the defensive / capitol preservation side of my portfolio, and then starting off full on stocks for the long term capitol growth side of things. I am going to kick the can down the road as far as deciding whether or not to include bonds in my retirement accounts until next year, since building my PP will be building a larger defensive allocation than I'm used to having in and of itself. I think that just having the PP in and of itself will give me peace of mind, which will help me with the behavioral finance side of things, and allow me to stick to my long term strategies. Next year I'll have a better feel for the PP and I can then decide if I want to continue building that out exclusively for my defensive allocation, or if I want to let that grow organically and add some bonds into my retirement accounts. Either way, until now I've never had any defensive allocation, and it probably wasn't wise for me to have been taking all of that risk with no mind for preserving my capitol. Since I have such a high savings rate, I'm going to do just fine long term, so there's no need to be overly aggressive. I think that having somewhere in the ballpark of 20% of my total assets in defensives (through PP and possibly a future separate bond allocation) is a smart thing to help with the behavioral side of things. I have definitely learned a lot through doing all of this research lately. I also have one of HB's books on the way, and have been slowly making my way through the radio show. I also found last week that after committing to creating a PP, creating my PP account and transferring the cash and stock side of things over to that account already gave me a bit of peace of mind. I was able to get through the day at work without obsessively checking the market. I also didn't feel like I had to check my account balances every evening. That's a big step in the right direction.
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Re: PP/VP Strategy Sanity Check

Post by pmward » Thu Jan 31, 2019 1:38 pm

I've been doing a lot of modeling in portfolio visualizer the last few days. I'm really noticing some interesting things. The first being that in the accumulation phase, like I'm in, the actual division of the portfolio doesn't really matter much for the first ~8 years or so. At my current savings rate, when altering the start and end dates for all combinations of bull and bear timeframes (within the limited date ranges they provide) when making monthly contributions and annually rebalancing, there really is not that great of a difference in asset allocation styles. Whether I choose 100% stock, HBPP, 60/40, or a modified PP (70 stock/10/10/10 or 55 stock/15/15/15) I seem to always hit my FI number on an average of about ~11-12 years regardless of which years I start in (surprisingly even holds true if I start in 98 or 99 right before 2 large bear markets). This also assuming that I never get raises and keep only contributing at my current rate (odds are I will be contributing more each year). Now after that point my monthly contributions start becoming such a small drop in the bucket and things start to vary a bit more. This has been kind of an eye opening exercise, in that I was assuming that the difference of having a higher stock percentage in the early accumulation years would be more noticeable. Instead, I'm not really seeing that at all in the data. The difference is definitely noticeable when my account gets over a million, but at that point I probably would rather not have the roller coaster ride anyways. HBPP is definitely the smoothest ride from that point on. So since in the early years it doesn't matter that much what I do, maybe my current early game portfolio should look more like my desired end game portfolio? My FI target number is currently about 1.5 mil. Once I reach that I don't plan on retiring right away, so at that point I would most likely want to be in a 25/25/25/25 PP to keep standard deviation down and protect my capitol. Then anything I make and save from working is purely fun money.

It really does seem to me that the thing that matters the most where I am at is purely savings rate. So that tells me that while I might want to be a bit more aggressive until I reach my FI, that I probably should model my portfolio now so that it's easy to move to 25/25/25/25 long term (especially since a great deal of my savings will be in taxable accounts, where I will have to eat a lot of capitol gains if I have to do a huge rebalancing act). So I think what I'm leaning towards is probably going 55stock/15/15/15 from the get go. That had a max draw down of 25% in 2008, which is tolerable for me at this point in time (I mean I already just sat through a 20% draw down last month...). With access to stocks and short term treasuries in my 401k I should be able to make this work across all my accounts by keeping all the gold and LTT's in my IRA and taxable accounts. Then, as I approach my FI number I can slowly and easily move to 25/25/25/25 over time mostly through new contributions as opposed to selling and realizing capitol gains. Is there anything I'm overlooking here? Thoughts?
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Re: PP/VP Strategy Sanity Check

Post by Kriegsspiel » Thu Jan 31, 2019 4:01 pm

Yup, the savings rate is the most important thing. ERE Jacob said he only utilized a savings account for the first 4 years while he figured out how to invest. If your savings rate is high enough (I'm talking 75% or so), you're going to get to 4% or 3% without much contribution from investment returns.

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To die, to sleep
To sleep, perchance to dream; ay, there's the rub
For in that sleep of death what dreams may come
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