Back to the Simple, Dumb PP?

[MachineGhost]

I am seriously considering going in the opposite direction and going to a simple, dumb PP (with the equal size exposure modification and correlated risk parity weights, of course!) and reducing its portfolio exposure from 100% to 40%-15%.

Nothing beats the PP.  Nothing.  I've tortured them all.  However, I do think its elegancy is in its correlated risk parity to capture volatility and "improving" on this just adds much more complexity and drawdown for a meager 1% or 2% more CAGR.  Not worth it in my book. 

I also have my doubts about whether or not the PP will work as a whole with downside risk management, so I rather not mess with things and free up my time and worry for more productive endeavours.  The PP seems more of a trading model than a strategic asset allocation strategy.  But, I just can't pull the trigger on the PP at a 100% allocation knowing that stocks are overvalued and bonds may implode over the next year or two with no downside risk management in place (I'm assuming more than just a rise to double digit interest rates will happen as the torch shifts to China around 2032).

Thoughts?

[MachineGhost]

As always, it would be very helpful if you were more specific. I don't want to hunt through thousands of your posts and probably still be wrong. So when you say the above, could you very specifically state what allocations you mean as they apply to your own portfolio? S/B/G/C? Also, do you mean LTT when discussing bonds?

I'm not sure how I can be more specific, but I have in mind drastically simplifying my enhanced PP down to just the free Schwab ETF's (RSP, SCHX, SCHM, SCHA, WMCR, TLO, SGOL).  That means no more alternative and private investments, no more multiple brokerage accounts, no more multiple assets in the real asset class beyond gold, no more downside risk management and certainly no more torturing or backtesting the PP.  This dumbed down PP portfolio will most likely take up a 40% slot in my new portfolio and will become the foundation core.  The other 60% isn't germane to the discussion but you can view it as a VP if that helps -- with downside risk management, of course!

I've found that the time, focus and stress my enhanced PP requires is not worth the extra small CAGR (if any) it provides above the simple, dumb PP.  Part of this is because trying to turn that 25% into an economic growth engine is frustratingly ridiculous!!!!  I just feel like I got a much better use for my limited time now and should apply it to better opportunities.

[Tyler]

Good for you, MG.  I agree -- at some point the marginal benefit of constantly trying to tweak performance simply becomes not worth the effort.  The PP is perhaps the best foundation you can find for consistent results with minimum effort.  Build around it with your VP if you like, but let it do its thing.  If you're worried about downside risk, turning your primary focus to factors more in your control (like earning more and spending less) will ultimately have a much larger ROI than almost any investing tweak you can come up with. 

[Kriegsspiel]

As always, it would be very helpful if you were more specific. I don't want to hunt through thousands of your posts and probably still be wrong. So when you say the above, could you very specifically state what allocations you mean as they apply to your own portfolio? S/B/G/C? Also, do you mean LTT when discussing bonds?

I'm not sure how I can be more specific, but I have in mind drastically simplifying my enhanced PP down to just the free Schwab ETF's (RSP, SCHX, SCHM, SCHA, WMCR, TLO, SGOL).  That means no more alternative and private investments, no more multiple brokerage accounts, no more multiple assets in the real asset class beyond gold, no more downside risk management and certainly no more torturing or backtesting the PP.  This dumbed down PP portfolio will most likely take up a 40% slot in my new portfolio and will become the foundation core.  The other 60% isn't germane to the discussion but you can view it as a VP if that helps -- with downside risk management, of course!

I've found that the time, focus and stress my enhanced PP requires is not worth the extra small CAGR (if any) it provides above the simple, dumb PP.  Part of this is because trying to turn that 25% into an economic growth engine is frustratingly ridiculous!!!!  I just feel like I got a much better use for my limited time now and should apply it to better opportunities.

I already explained what I was looking for, and you still did not give me an answer. 

It looked like MG meant to have his assets split 60-85% VP to 15-40% PP.

[MachineGhost]

I already explained what I was looking for, and you still did not give me an answer. 

Oh sorry, its the 25% stocks, 35% bonds, 20% gold, 20% cash dealio.  But the point wasn't the composition of the PP but my overall plan.

http://gyroscopicinvesting.com/forum/pe ... msg122844/

[MachineGhost]

Thanks for clarifying. My PP is pretty close to that allocation, so I think it's a great idea. 

I will centralize all of my patches here (soon as I find them all!): http://gyroscopicinvesting.com/forum/pe ... msg125648/

[MachineGhost]

@MangoMan And what are your thoughts about my plan not my PP composition?

[Gabe]

"I would not give a fig for the simplicity this side of complexity, but I would give my life for the simplicity on the other side of complexity."

[dualstow]

I'm not trying to make a cult out of it, but if there were a consistently better plan than the pp, Harry Browne seems like he'd be smart enough to find it and sell it. I mean, people expect this stuff to be hard and to be complex, and he probably could have sold a lot more copies if the strategy hadn't been so simple. Maybe it's too simple to swallow.

[Kbg]

I'm not trying to make a cult out of it, but if there were a consistently better plan than the pp, Harry Browne seems like he'd be smart enough to find it and sell it. I mean, people expect this stuff to be hard and to be complex, and he probably could have sold a lot more copies if the strategy hadn't been so simple. Maybe it's too simple to swallow.

Agree it is pretty amazing. And all of its qualities can be turned into a growth portfolio with intelligent use of leverage.

[stuper1]

I'm not trying to make a cult out of it, but if there were a consistently better plan than the pp, Harry Browne seems like he'd be smart enough to find it and sell it. I mean, people expect this stuff to be hard and to be complex, and he probably could have sold a lot more copies if the strategy hadn't been so simple. Maybe it's too simple to swallow.

Agree it is pretty amazing. And all of its qualities can be turned into a growth portfolio with intelligent use of leverage.

Hi Kbg,

I haven't had time to catch up on your posts regarding the leveraged PP.  Could you summarize a few basic things like how much extra CAGR could be expected from a leveraged PP, and how much extra checking/trading would be involved (weekly/monthly/quarterly?) ?  Thanks.

[ochotona]

I think it makes good sense not to let the perfect become the enemy of the good. And I've thought of the PP as a trading device also... "pull handle (PP) in case of fire". But I would definitely dollar cost average into the non-cash assets. I'm doing that with 1/4 of my assets, which are also taxable, so I am buying & holding.

[sophie]

Good for you, MG.  I agree -- at some point the marginal benefit of constantly trying to tweak performance simply becomes not worth the effort.  The PP is perhaps the best foundation you can find for consistent results with minimum effort.  Build around it with your VP if you like, but let it do its thing.  If you're worried about downside risk, turning your primary focus to factors more in your control (like earning more and spending less) will ultimately have a much larger ROI than almost any investing tweak you can come up with.

Truer words were never spoken!  I wish you'd been at the NYC meetup.  The topic of this thread constituted a big part of the conversation.

I suppose that corollary #1 is that all of us need to spend less time posting on this form, which has pretty much a zero ROI, but it's just way too much fun and educational.

And, I continue to marvel at the robustness of the PP's deceptively simple construction, and how it is actually a total asset/financial management plan masquerading as an asset allocation.  It's so tempting to mess with it because it looks so simple minded, but in fact it's anything but.  It's sort of like a Jenga game where you can't take out any more logs without collapsing the structure.

[MachineGhost]

And, I continue to marvel at the robustness of the PP's deceptively simple construction, and how it is actually a total asset/financial management plan masquerading as an asset allocation.  It's so tempting to mess with it because it looks so simple minded, but in fact it's anything but.  It's sort of like a Jenga game where you can't take out any more logs without collapsing the structure.

I don't like to accept things on faith when it comes to my hard-earned money, so I had to go through my little period of prosecuting the PP to make sure it was really rock solid despite being a dumbed down, simplistic idea that Browne cooked up from the initial PRPFX incarnation.  In my view, he didn't have the high resolution data in 1987 to prove beyond a reasonable doubt that it would work and until recently there wasn't any proof beyond a reasonable doubt that it couldn't be improved.  MT and Craigr cheerleading it up using low resolution data is not proof - its hubris and hope.

Even now, I recoil at the sheer horror that the thing bloody works and there is no fundamental improvement to be had.  Once my ego gets over its wounded pride, my temper and stress levels will love the simplicity.  But my brain is always going to have a toe curling problem with it.  It's best for the PP to be out of sight, out of mind from here on. 

Still, when the PP hits another -25% or worse MaxDD (probably when the current monetary order goes kaput), it's gonna be fun watching y'all squirm!  But you know what?  I'm sort of okay with that crazy downside risk now as long as I have some real and tangible gold.  That is what makes it all worthwhile at the end of the day.

[dualstow]

Still, when the PP hits another -25%

Another?

[sophie]

He's referring to the 1981 drawdown, I believe - that right MG?  And, it was real returns not nominal I think.  Note though that a standard stock/bond portfolio would have been hammered a lot worse that year.

I went through the same process in getting to know the PP, MG - just a bit more on the sidelines.  I am not, and never have, taken the PP on faith.  The phases went like this:

1.  Wow, what a strange portfolio.  It's done pretty well lately so I ought to look into it.  Bernstein says it's ok.

2.  That's too much cash.  I don't get it.  33x3 backtests a lot better.  I should think about using that instead.

3.  That's WAY too much gold.  Nobody puts 1/4 of their assets into gold.  Isn't that like buying a single stock with 1/4 your assets?  What was Harry Browne thinking?

4.  Bonds are too high right now, and putting so much of the portfolio into single assets seems risky.  Maybe a momentum strategy is the way to go.  It backtests really well.  Then I wouldn't have to buy those bonds.

5. The fixed 25% allocations seem way too oversimplified.  Let me tinker with it to see if I can't get better returns.

6.  <listen to the radio show and read the epic PP thread on Bogleheads>

7.  The cash allocation is making more sense now.  But why use Treasuries when you can get better returns from a CD?

8.  <buys first batch of gold coins and stashes temporarily in a knitting basket> This is awesome!  And strangely empowering!

9.  Watch other people go through steps 1-8, and gradually understand more and more of the PP's inner workings.

It's been quite a process!  A lot more involved than just buying a target date fund or a setting up a 50/50 Boglehead portfolio.  But those are just as much "faith-based" as the PP, if not actually more so.

[dualstow]

Wow, that's really good list of thoughts that probably (and should) come up to the thinking investor. Nice!

When I think about investors and gold, I think about those who missed the fairly recent 10+ year bull run (myself included), and those who were in it and profited heavily from it. Even the best backtest cannot compare with personal experience.

Even some of those who were doing well must have been so tempted to bail early on. This was a fun experiment, but this gold thing can't go on for more than a couple years.It's a fluke!  Something like that.

[sophie]

Didn't you have your dividend stocks at that time dualstow?  I remember 2009 all too well though.  Everyone was petrified.  Buying stocks was the last thing any of us wanted to do.  I got super-lucky because I was buying an apartment at the time - I'd liquidated all my taxable investments in early 2008, and was ready to reinvest later in 2009 after the worst of the panic had subsided.  Pure chance, and even then I missed out on some of the runup.  A broker had recommended some Blackrock funds with high expense ratios and high dividends that included a lot of converted capital - which were just a god-awful approach but it felt better than plunging into a stock fund.

Glad you liked the list.  I left off various steps having to do with shifting from buying individual stocks & active funds to passive, index investing.  Those preceded step 1.

[dualstow]

Didn't you have your dividend stocks at that time

Yes, since 2004-5, and I still have most of them. Rather than tinker with the pp, I bet on prosperity by owning plenty of stocks in the variable portfolio. Well, aerospace, "sin stocks" and stuff.

I certainly didn't have any gold bullion, pre-pp, except an old coin my grandfather left me.

[dragoncar]

I'm not trying to make a cult out of it, but if there were a consistently better plan than the pp, Harry Browne seems like he'd be smart enough to find it and sell it. I mean, people expect this stuff to be hard and to be complex, and he probably could have sold a lot more copies if the strategy hadn't been so simple. Maybe it's too simple to swallow.

Agree it is pretty amazing. And all of its qualities can be turned into a growth portfolio with intelligent use of leverage.

Hi Kbg,

I haven't had time to catch up on your posts regarding the leveraged PP.  Could you summarize a few basic things like how much extra CAGR could be expected from a leveraged PP, and how much extra checking/trading would be involved (weekly/monthly/quarterly?) ?  Thanks.

Right now the cagr is very close to a simple multiple of the PP For whatever leverage you are using because interest rates are low.  I am curious at what interest rate the leveraged PP starts to look real bad. 

I know personally there is a sort of double whammy possible when using margin-- if interest rates rise, your cost of borrowing goes up but you likely lose value in bonds as stocks so possibly you liquidate at terrible time

[MachineGhost]

He's referring to the 1981 drawdown, I believe - that right MG?  And, it was real returns not nominal I think.  Note though that a standard stock/bond portfolio would have been hammered a lot worse that year.

That's just part of the palliative I agreed to to end the LC475 fiasco.  The deal is that -- even when using a real investment vehicle at the time as opposed to untradeable indexes -- the PP sufffered a nominal -25% drawdown during the 1981-1982 double dip recession.  You may not have experienced -25% if you were rebalancing at the beginnings or ends of the year.  It was more evident during the summer months.

I think there's a chart of reblancing the PP from Jan to Dec in my Resort thread.  January stands out as an anomaly.

[MachineGhost]

It wasn't 1981-1982 (although that may be true in real terms) but the peak coming off gold in 1980:

[img width=800]http://i.imgur.com/WYrwPGa.png[/img]

Crikey, with the better data, it looks like the underwater time actually got extended to about 138 weeks!

In April 1980, inflation was at a staggering 15.7% yoy.  In June 1982 at the second trough, inflation was 7.06% yoy.

By the time the underwater period ended in October 1982, inflation was down to 5.14% yoy.

I think next time could easily be just as bad or worse.  The gold bug doom porners are going to have a field day!

[barrett]

Hey, MG,

Not trying to start another argument about the max PP drawdown… just trying to get my numbers to more or less jive with yours.

Correct me if I'm wrong but I believe your point is that looking at data only on 1/1 of each year hides the worst of the worst, and that there's a period in the early 1980s that constitutes the largest drawdown in real terms that the PP has sustained to date. So far, so good?

Just so we know that we are comparing apples to apples, I'm using the peaktotrough.com calculator.

With all assets starting at 25% and using 35/15 rebalancing bands (and reinvesting all dividends and interest), from 1/21/80 to 6/1/82 the PP lost 9.28% in nominal terms. There was one rebalance from stocks to gold on 1/29/81 which actually hurt performance because gold continued to plunge, so owning more of it turned out to be a bad thing.

So that drawdown lasted about 28.33 months and we should take the 9.28% figure and then add inflation numbers to that.

The best inflation data I seem to be able to get is at InflationData.com. I can't get as granular as I'd like on that calculator, but the inflation figure I get from 1/1/80 to 5/31/82 is 24.68%. Adding 9.28% and 24.68% gets us 33.96%. So, roughly a 34% drawdown in real terms.

Your chart above is meant to show the total amount of time that the PP was under water in real terms (not just the drawdown, but the total time until an investor was back to break even in real terms), correct?

To clear up why this drawdown doesn't show up in data taken from 1/1 of one year to 1/1 of the next, let's take a quick look at some nominal numbers. The PP went up 16.33% (!!!) in the 1/1/80 to 1/21/80 period. And from 6/1/82 to 1/1/83 it was up 28.92%.

Lastly, gold was clearly the culprit as virtually any stock/bond/cash mix during that drawdown performed much better than the PP.

Are we more or less on the same page?

[MachineGhost]

Are we more or less on the same page?

No sweat.  I've replied here: http://gyroscopicinvesting.com/forum/pe ... #msg147691

[Kbg]

Agree it is pretty amazing. And all of its qualities can be turned into a growth portfolio with intelligent use of leverage.

Hi Kbg,

I haven't had time to catch up on your posts regarding the leveraged PP.  Could you summarize a few basic things like how much extra CAGR could be expected from a leveraged PP, and how much extra checking/trading would be involved (weekly/monthly/quarterly?) ?  Thanks.

Right now the cagr is very close to a simple multiple of the PP For whatever leverage you are using because interest rates are low.  I am curious at what interest rate the leveraged PP starts to look real bad. 

I know personally there is a sort of double whammy possible when using margin-- if interest rates rise, your cost of borrowing goes up but you likely lose value in bonds as stocks so possibly you liquidate at terrible time

I don't use margin leverage. I use 3x ETFs. With regard to the ETF's, I would say the odds are quite high that the imputed interest will accrue to the owner of the ETF. One would need to dive into the prospectus to find that out. But normally, the risk free rate goes to the holder of a leveraged instrument. Sometimes exactly the opposite.

With regard to performance this year I leverage to 2x and the returns this year as of last night are 12.69% vs. 6.44% for a normal PP using the ETFs I post results on. Interestingly a 75% SHY and 8.33% 3xETF version is up 6.69%. Now here is something totally crazy and very non-intuitive. Since 2012 a normal PP has a CAGR of 5.79% with a 15.01% max drawdown.  The 75% SHY/8.33% 3x ETFs version has a CAGR of 3.95% and an 8.43% max drawdown. The 2x leverage version (50% SHY) is 7.10%/-16.54% since 2012.

See the VP thread for a long post on path dependency and start dates relative to performance...short version: leveraged return rates are path dependent so speculating about how things will turn out is quite useless. All we can say is a choppy market is going to suck and a trending one is going to be awesome.

Part of my strategy is to harvest the volatility. Now this could easily have gone the other way (over time it should help not hurt however), but I hit my rebalance bands during the Feb market swoon and rebalanced on 9 Feb. This rebalance as of two days ago bumped my personal returns to just slightly under 20% vs. 12.69%. If the stock market can continue to chugg along a little bit more I will likely hit another rebalance band.