Alternative to PP

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stuper1
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Alternative to PP

Post by stuper1 » Mon Feb 22, 2016 10:03 pm

I'm thinking about getting a bit more aggressive with my overall portfolio, as I still have about 20 years to retirement.  I've been playing with various ideas involving higher allocations to stocks over at portfoliocharts.com.  I know it may not be the best time to get heavier into stocks, so maybe I'll wait until the next big correction before implementing anything. 

Here's one portfolio I've come up with that appeals to me:

15% large-cap blend stocks
10% small-cap value stocks
15% emerging market stocks
20% gold
20% long-term U.S. treasury bonds
20% cash

Portfoliocharts.com says that the sustainable withdrawal rate for that portfolio over a 40-year retirement is 5.8%, as compared to 3.8% for the 4x25 PP.  Keep in mind, I'm not planning to retire for 20 years, but I'm using the SWR as a proxy for finding a good growth portfolio, which maybe is faulty thinking.

I know the past can't predict the future, so this is just backtesting that doesn't necessarily mean very much.  Can someone more knowledgeable than me give me some input on what the risks are with this alternative portfolio?  I understand that I'm going a bit shorter on gold, bonds, and cash, all of which appeals to me, as I think gold is a bit heavy in the regular PP, bond rates are probably headed up at some point, and cash seems like a bit of a waste at this point as long as I have plenty of money for emergencies.

I guess what I'm asking is whether this 15/10/15 split in stocks really adds much versus just putting 40% in total U.S. stocks like VTI?  Portfoliocharts.com says that the sustainable withdrawal rate for that option would be 4.3%.  So, it seems to me that portfoliocharts.com is telling me that the 15/10/15 split with it's 5.8% SWR would potentially give me a boost of about 1/3 in my CAGR over time versus just putting 40% in VTI, assuming that the future repeats the past, which of course won't happen.
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Re: Alternative to PP

Post by Jpeizie » Mon Feb 22, 2016 11:42 pm

I'm just getting started, but my planned portfolio is the one you're comparing against (40% TSM). You're also pretty close to the Golden Butterfly. In another thread I was talking big about using REITs in my portfolio but after looking closer at the P/E ratios right now for REITs, I think I'm just going to use vanilla TSM.

As for why I decided not to use SCV (or SCB) or EM's, I haven't been convinced that SCV or SCB is actually going to outperform TSM in the future. The premium hasn't been there for like 10 or 15 years now, and maybe its just a statistical fluctuation, but to my mind its because the market recognized the inefficiency and corrected for it. I know there are people who disagree with me and they are probably a lot smarter than me, but I'm comfortable with it.

I decided not to include any international or EM's because I live in an EM right now, and no way would I invest in the crony capitalism that goes on in some of these countries. Its totally a personal bias and I'm sure I'm on the wrong side of history, but I just can't make myself pull the trigger.
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sophie
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Re: Alternative to PP

Post by sophie » Tue Feb 23, 2016 8:13 am

Looks like a PP with some extra stock funds on the side.  Perfectly justifiable, but I suggest keeping the PP separate as a core defensive holding, and then tracking the 100% stock portfolio separately.  It would make it easier to manage, because I can't imagine how you'd deal with rebalancing this puppy except as an annual event.

Big caveat about backtesting:  your results will be weighted by conditions that may be more dominant during your backtest period than they will be going forward.  For example, emerging stocks have done amazingly well because of the boom in China and the huge shift to outsourcing from the U.S.  I doubt that performance will be replicated in the next 20 years.  Similarly, small cap stocks have outperformed large caps historically, but now that the secret is out I suspect the market will arbitrage away the difference.

For this (and other) reasons, it just makes far more sense to me to pick a portfolio based on your ability to stick with it.  If keeping a mix of stock funds on the side will do that for you, then that's the reason to do it.
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BearBones
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Re: Alternative to PP

Post by BearBones » Tue Feb 23, 2016 8:41 am

Looks good. Not too far from what I came up with independently for my IRA (separate from my PP).
15 LCB, 10 SCB, 10 EM, 30 LTT, 10 STT, 15 Gold, 10 REIT.

Yours is biased more toward inflation protection. And has too much in EM for me to stomach. The question is, as others have said, are you going to stick to this? How about in the next global recession when EM stocks get pummeled even more than SP500, and gold tanks (or at least does not protect you). Or when US large caps are on a tear. And most owning a traditional 60/40 are fairing better.
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Re: Alternative to PP

Post by Alanw » Tue Feb 23, 2016 12:20 pm

One of the major premises of portfolio construction according to HB, Warren Buffett or Jack Bogle is to keep the portfolio SIMPLE. I do not care to hold 25% in gold so I keep a separate HBPP for rebalance purposes at 70% of total portfolio value. This gives me a 17.5% exposure to gold and the other assets. You can use 80% for a 20% exposure, 60% for a 15% exposure, etc. The other 30% is kept in Wellesley to tilt the total portfolio a little towards large cap value stocks and corporate bonds. You could use Wellington, VTI or any other fund to suit your needs. This keeps things very simple for my purposes and makes rebalancing very easy.
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Re: Alternative to PP

Post by mike878 » Wed Feb 24, 2016 9:13 am

I'm also about 20 years from retirement, and for what it's worth, here's what I landed on.  For simplicity, I combined the idea of a variable portfolio focusing on blue chip dividend paying companies with that of the permanent portfolio.  I also combine all different accounts(ira,401k,savings etc) and treat as 1 giant portfolio, and then do my best to optimize for tax considerations, tax harvesting etc...

20% Blue Chip-Dividend Paying Stocks (T, SO, JNJ, PG, DAL, STO, XOM, UP, GE, WFC, WMT etc....)
20% Total Stock Market/SP500 Tracking Funds etc...
20% Bonds (Split roughly in half with Total Bond Funds with 7 year avg maturity (crappy 401k choices) and actual 30Y Treasuries&TLT)
20% Cash (Savings Accounts, Money Market, and SHY)
20% GOLD (IAU, GLD)

Since, I have automatic contributions going into some of these, I've been periodically rebalancing a few times a year.  I will probably transition into the  more typical PP strategy and have everything go into the cash bucket  and then rebalance when 1 category falls below 16% or above 24%.

As a side note I love Tyler's PortfolioCharts.com...and have tested many different allocations of a 5X20 strategy in order to keep with simplicity (too bad 100 isn't nicely divisible by 6 or 7) and at the same time have a higher weighting towards stocks which have historically generated better returns.  My feelings on the future are a little pessimistic, so I like the fact that the modification I made keeps the portfolio focused on quality companies that are generating ample cash flow to pay a safe dividend.
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Tyler
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Re: Alternative to PP

Post by Tyler » Wed Feb 24, 2016 9:45 am

sophie wrote: Big caveat about backtesting:  your results will be weighted by conditions that may be more dominant during your backtest period than they will be going forward.  For example, emerging stocks have done amazingly well because of the boom in China and the huge shift to outsourcing from the U.S.  I doubt that performance will be replicated in the next 20 years.  Similarly, small cap stocks have outperformed large caps historically, but now that the secret is out I suspect the market will arbitrage away the difference.
Very true.  The Pixel charts for individual assets can be revealing for this type of thing.  Emerging markets is perhaps one of the best examples. Note that much of the great backtesting performance is due to the period before 1994.  The last 20 years have been much less kind.  Small caps have been more stable.  Even if the out-performance over large caps is over, I don't see them notably under-performing either. 
sophie wrote:For this (and other) reasons, it just makes far more sense to me to pick a portfolio based on your ability to stick with it.  If keeping a mix of stock funds on the side will do that for you, then that's the reason to do it.
+100
Last edited by Tyler on Wed Feb 24, 2016 9:58 am, edited 1 time in total.
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stuper1
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Re: Alternative to PP

Post by stuper1 » Wed Feb 24, 2016 11:10 am

Tyler,

You mentioned that much of the emerging markets great performance was prior to 1994.  I think a really good addition to your charts, which would help see such trends over time, would be a chart with the portfolio real CAGR on the y-axis and years on the x-axis.  It would have say three lines of different colors.  One line would simply show the trailing 1-year performance.  A second line would show the trailing average 3-year performance.  The third line would show the trailing average 5-year performance.
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Tyler
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Re: Alternative to PP

Post by Tyler » Wed Feb 24, 2016 12:12 pm

Interesting idea.  I'll have to try that.
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MachineGhost
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Re: Alternative to PP

Post by MachineGhost » Sat Mar 26, 2016 11:59 am

Think outside the box not put lipstick on a pig.
"All generous minds have a horror of what are commonly called 'Facts'. They are the brute beasts of the intellectual domain." -- Thomas Hobbes

Disclaimer: I am not a broker, dealer, investment advisor, physician, theologian or prophet.  I should not be considered as legally permitted to render such advice!
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