The GOLD scream room

[buddtholomew]

Even if the 70/30 has outperformed the PP since 2008, eventually you'll run across a timeframe when the 70/30 portfolio falls into that lower band well below the PP. If the relative performance of the two portfolios bothers you now, how will that make you feel?

Thank you Tyler for spending the time to produce the illustration.

I selected the PP for its overall stability and risk adjusted return comparable to a more equity centric portfolio.
Unfortunately, I cannot substantiate my decision as the PP has not kept pace, let alone outpaced a 70/30 or even 60/40 allocation on an annual basis since 2008 (10 years). What I have witnessed is the PP gains less or loses less but the increases pale in comparison to an equity heavy portfolio and the losses are sometimes even greater. Case in point, the latest 10-15% decline in equities clobbered the PP as well since Gold was flat and LTT's down 6%+. My 70/30 allocation with International and IT bonds is UP, yes UP over the same time frame with the PP still negative YTD.

In response to your question, I would feel content if the PP out-performed a 70/30 allocation over the next 15 years, but would still contribute to equities as I have internalized that they decline from time to time. I am prepared for that. What I am not prepared for is a portfolio that doesn't offer diversification when equities decline and is muted during a bull market. Lose/lose.

[ochotona]

I selected the PP for its overall stability and risk adjusted return comparable to a more equity centric portfolio.
Unfortunately, I cannot substantiate my decision as the PP has not kept pace, let alone outpaced a 70/30 or even 60/40 allocation on an annual basis since 2008 (10 years). What I have witnessed is the PP gains less or loses less but the increases pale in comparison to an equity heavy portfolio and the losses are sometimes even greater. Case in point, the latest 10-15% decline in equities clobbered the PP as well since Gold was flat and LTT's down 6%+. My 70/30 allocation with International and IT bonds is UP, yes UP over the same time frame with the PP still negative YTD.

In response to your question, I would feel content if the PP out-performed a 70/30 allocation over the next 15 years, but would still contribute to equities as I have internalized that they decline from time to time. I am prepared for that. What I am not prepared for is a portfolio that doesn't offer diversification when equities decline and is muted during a bull market. Lose/lose.

I think one approach is to enter-exit the components with moving averages. It has been done. It works. But it will still underperform the S&P500 during bull markets.

[sophie]

Budd, why would you expect the PP to outperform the 70/30? That's not the goal. As Harry Browne said, "Investing is about taking the returns that the market gives you."

If there were a risk-free investment that could beat a 70/30 over time, believe me we'd all be there. The problem is, there isn't. And I might point out that your time frame of 10 years for judging stock market behavior isn't long enough. You need at least 15 years. Take a look at the PP vs 70/30 for 1998-2008, and you'll see what I mean.

[buddtholomew]

Budd, why would you expect the PP to outperform the 70/30? That's not the goal. As Harry Browne said, "Investing is about taking the returns that the market gives you."

If there were a risk-free investment that could beat a 70/30 over time, believe me we'd all be there. The problem is, there isn't. And I might point out that your time frame of 10 years for judging stock market behavior isn't long enough. You need at least 15 years. Take a look at the PP vs 70/30 for 1998-2008, and you'll see what I mean.

I’m using it for comparison purposes.
I didn’t invest in the portfolio from 1998-2008 so it is not relevant to me. Perhaps I would feel differently if I did, but I didn’t. If you were taking what the market gives then why invest in Gold or LTT’s? Invest in the market AKA stocks.

[ochotona]

The market could give us -50% soon enough. Not a bet I wish to make. We are late in the cycle.

[eufo]

I didn’t invest in the portfolio from 1998-2008 so it is not relevant to me.

How is past data not relevant?

[stuper1]

Those who do not learn history are doomed to repeat it.

Only a fool learns from his own mistakes. The wise man learns from the mistakes of others.

[buddtholomew]

I didn’t invest in the portfolio from 1998-2008 so it is not relevant to me.

How is past data not relevant?

Backtesting has no predictive value.
It’s fun though, I actually do data mining and predictive analytics for a living.

[eufo]

I didn’t invest in the portfolio from 1998-2008 so it is not relevant to me.

How is past data not relevant?

Backtesting has no predictive value.
It’s fun though, I actually do data mining and predictive analytics for a living.

Then why would it matter if your 70/30 portfolio outperformed YTD?

[Tyler]

How is past data not relevant?

Backtesting has no predictive value.

I disagree.

To ignore evidence of past portfolio behavior is like hiring an employee while refusing to read his resume. Just because you'll never know for certain how he will react to every possible future situation does not mean you can't get a pretty good feel for how his skills match your job requirements by looking at his full body of work.

No portfolio is perfectly predictable, but not all portfolios are equally unpredictable. Backtesting is a terrific way to quantify that uncertainty in order to set realistic expectations.

[buddtholomew]

How is past data not relevant?

Backtesting has no predictive value.

I disagree.

To ignore evidence of past portfolio behavior is like hiring an employee while refusing to read his resume. Just because you'll never know for certain how he will react to every possible future situation does not mean you can't get a pretty good feel for how his skills match your job requirements by looking at his full body of work.

No portfolio is perfectly predictable, but not all portfolios are equally unpredictable. Backtesting is a terrific way to quantify that uncertainty in order to set realistic expectations.

Oh, I believe it applies in other aspects of life, just not investing! Seasonality, trends, etc have predictive value (e.g.forecasts) but the relationship of future returns to historical returns is less substantive to me.

[eufo]

Oh, I believe it applies in other aspects of life, just not investing! Seasonality, trends, etc have predictive value (e.g.forecasts) but the relationship of future returns to historical returns is less substantive to me.

So, again, I ask... why would it matter if your 70/30 portfolio outperformed YTD?

You're using past information to predict the future, just an incredibly small sample. Why would a small sample outweigh a larger one? Because times have changed?

I'm about done here, but you need to understand that you are wrapped up in emotion right now. Emotions won't help you make a smart move financially, except by sheer chance. Maybe you'll get lucky.

[dualstow]

BUDD YOU HAVE TO STAY MY GYROSCOPICINVESTING DRINKING GAME IS WORTHLESS WITHOUT YOU NOOOOOOO

Merits a thread

[flyingpylon]

I'm about done here, but you need to understand that you are wrapped up in emotion right now. Emotions won't help you make a smart move financially, except by sheer chance. Maybe you'll get lucky.

In general people make decisions based on emotions and then use confirmation bias and cognitive dissonance to justify them.

There are some things that people just need to experience for themselves before they "get it" (such as the emotional pain of a significant market drop and loss of portfolio value).

[Xan]

Perhaps it's cynical, or perhaps there's a lot of truth to it, but one of my favorite quotes is "There are two reasons behind every action: a good reason, and the real reason."

[buddtholomew]

First let me say I don’t intend to discount any of Tyler’s work which is awesome and second you are correct that I am too emotional to rationally decide what to do next.

The money is in cash until I can reasses. I will decide without looking at current day gains and losses to avoid the behavioral pitfalls.

Thanks so much.

[Kriegsspiel]

WRT emotions in investing; that's a definite advantage to using the PP philosophy. Big swings in investments create big emotional swings. The PP is so even-keeled, you can't really get emotional over it. It's gonna sit there and return 3-4% real returns pretty consistently. I have had a 100% stocks VP until pretty recently and having the PP core allows me the luxury of not giving a fuck. I think the big trick to unemotional investing is to arrange your affairs so that you have no reason to be emotional.

[Mr Vacuum]

Budd, why would you expect the PP to outperform the 70/30? That's not the goal. As Harry Browne said, "Investing is about taking the returns that the market gives you."

If there were a risk-free investment that could beat a 70/30 over time, believe me we'd all be there. The problem is, there isn't. And I might point out that your time frame of 10 years for judging stock market behavior isn't long enough. You need at least 15 years. Take a look at the PP vs 70/30 for 1998-2008, and you'll see what I mean.

Well said, Sophie. I also liked the way Cliff Asness put it in this interview in the context of who is on the other side of the trade and where does the money go (https://medium.com/conversations-with-t ... 6ba8e92b4f emphasis added):

ASNESS: ... There is the phenomenon that I still want to look into more, because someone has to be making this money. This is going to sound stupid. No one’s figured out who’s making the money. But Jack Bogle quotes these numbers a lot.

There are all these paradoxes where the average mutual fund investor seems to get out and in at the wrong times. Remember I talked about value and momentum?

COWEN: Of course.

ASNESS: I like to call them — it’s a geeky phrase, maybe I’m the only one who likes it. They are momentum investors at a value time horizon. Remember, I told you value works long term. You have to hold 3, 5, 10 years. Momentum is a 6 to 12 month horizon.

If you’re going to be momentum, you’ve got to really do it. You’ve got to be disciplined. You’ve got to come in every day, and you’ve got to count on these under- and overreaction things.

If you wait five years and buy what’s worked for five years, you can call that a negative value investor or a momentum investor working with the wrong numbers. I do think that is one of the things people do too much out there. It’s probably the biggest —

Somebody is making that money. Maybe we’re making some of that money. Maybe it’s the flipside. It’s very hard to track.

[ochotona]

ASNESS: I like to call them — it’s a geeky phrase, maybe I’m the only one who likes it. They are momentum investors at a value time horizon. Remember, I told you value works long term. You have to hold 3, 5, 10 years. Momentum is a 6 to 12 month horizon.

If you’re going to be momentum, you’ve got to really do it. You’ve got to be disciplined. You’ve got to come in every day, and you’ve got to count on these under- and overreaction things.

If you wait five years and buy what’s worked for five years, you can call that a negative value investor or a momentum investor working with the wrong numbers. I do think that is one of the things people do too much out there.

So hard to do, so obvious in hindsight. Buy gold in 2001. Buy equities in 1932, 1982, 2009. Your inner psyche will scream as you do it!

[blue_ruin17]

There's a quote from the Bogleheads PP thread that always stuck with me, and I think it really applies to Budd's chronic PP anxiety:

In my experience, most people don’t particularly like their portfolios, much less get a lift from them. They tolerate their portfolios. They may be pleased enough with the performance, but they don’t get a psychic boost from their portfolios. They don’t enjoy the confidence and strength of spirit that a solid pack or a solid portfolio can provide. And before you say that this really doesn’t matter to you, that so long as your portfolio performs up to a certain standard you couldn’t really care less whether it provides any “psychic strength” or any such mumbo-jumbo hogwash, let me stop you to say that you’re not just wrong, you’re completely wrong. In truth, the only thing that matters to you about your portfolio is its psychic reward, the positive way it makes you feel.

Budd, it is clear to me that the PP is a source of *massive* anxiety for you. You do not tolerate or like the portfolio, much less receive even the slightest "psychic reward" from it. Quite the opposite, in fact: the PP tortures you.

The PP does not jive with you, for whatever reason...and that's okay! It just means it is not for you. There are many portfolios out there that would have me feeling the same way -- that's why I avoid them, regardless of their technical and theoretical merits. Example: the 60/40 portfolio is a damn good portfolio, theoretically, and I would not disparage it if someone asked me my opinion about it... BUT, for me it would be a source of massive anxiety not having a firm foothold in a gold position, and therefore the 60/40 portfolio is totally unsuitable for me, despite its sound construction.

Even if you explain to me in logical terms why the PP is, theoretically, a good fit for you, Budd, I would still maintain the position that the PP is categorically not for you. The evidence is baked into your consistently intense negative emotional reaction to it.

What I can't figure out is if you, Budd, should be in 100% cash or 100% stocks, but I think your optimal portfolio is probably one or the other. You ruminate over even the slightest of gyrations on a daily scale, which would lead me to believe that you would be happiest just parking everything in T-Bills. OTOH, you seem to stress about missing out on long-term equity gains and have stated before that you are comfortable with large stock market corrections. If that's the case, you should just go all-in on stocks and be done with it.

[ochotona]

What I can't figure out is if you, Budd, should be in 100% cash or 100% stocks, but I think your optimal portfolio is probably one or the other. You ruminate over even the slightest of gyrations on a daily scale, which would lead me to believe that you would be happiest just parking everything in T-Bills. OTOH, you seem to stress about missing out on long-term equity gains and have stated before that you are comfortable with large stock market corrections. If that's the case, you should just go all-in on stocks and be done with it.

If he went 100% stocks, the next bear market would explode his head. If he went 100% cash, he'd be deep in FOMO. If he was 50% stocks, 50% cash, the grass would be always greener, so he'd be buying and selling constantly, underperforming a static portfolio of 50-50 (Scott Burn's "Couch Potato")

He should find a professional portfolio manager.

[buddtholomew]

What I can't figure out is if you, Budd, should be in 100% cash or 100% stocks, but I think your optimal portfolio is probably one or the other. You ruminate over even the slightest of gyrations on a daily scale, which would lead me to believe that you would be happiest just parking everything in T-Bills. OTOH, you seem to stress about missing out on long-term equity gains and have stated before that you are comfortable with large stock market corrections. If that's the case, you should just go all-in on stocks and be done with it.

If he went 100% stocks, the next bear market would explode his head. If he went 100% cash, he'd be deep in FOMO. If he was 50% stocks, 50% cash, the grass would be always greener, so he'd be buying and selling constantly, underperforming a static portfolio of 50-50 (Scott Burn's "Couch Potato")

He should find a professional portfolio manager.

Actually, I now believe I have it right where I want it.
Ocho, don’t confuse my questions with my actions as I have been 70/30 in retirement accounts since 2008/9.
The PP with additional cash is just about right for me in a taxable account.
I will keep the 25/21/15/39 allocation in taxable for now and figure out what to do with the additional cash + bonus (hopefully, find out tomorrow) soon.

[l82start]

to paraphrase Yogi Berra, 'good investing is 90 percent mental. The other half is just thinking about numbers’

[dualstow]

[Tyler]

Explaining how your observations about the PP vs your 70/30 portfolio jive with history is sorta tricky, and it inspired me to tinker with a new calculator that directly compares portfolios. It's still a work in progress, but I'll give you a sneak preview as I think it will help.

For anyone interested in playing with the numbers for themselves, the tool is now live.

https://portfoliocharts.com/2018/02/26/ ... -accuracy/

Try a few portfolios with and without gold, and you'll start to really appreciate its ability to raise the floor on returns.

@Budd -- No matter what asset allocation you ultimately settle on, my hope is that you find an archer you trust enough to let her do her job without so much worry about the precise location of every arrow.