The Correlated Risk Parity PP

[Pointedstick]

You keep talking about this "long-term accumulation" phase. Mukramesh is trying for ERE, as am I. Many others are in their 50s or 60s and expect to retire soon. Most of us here don't have this "long-term accumulation" thing because we are expecting to retire within a relatively short period of time. You're throwing out advice that's completely inapplicable to the personal situations of many to most of the posters here. I don't think there are any people here who are 25 and expect to work until they're 65. Why not? Because the PP doesn't appeal to them, most likely, and they are probably already following some variant of your advice.

[mukramesh]

@mathjak107:

No one here is really saying you are wrong. We are just saying that if you are right, we'll make money. If you are wrong, we'll still make money! (Of course, this is assuming the PP works as advertised. But no reason to doubt just yet, have you seen those nifty charts in the stickied topic?)

On the other hand, someone following your advice will make a killing if you are right. If you are wrong, they may be unable to fund their retirement.

Someone following the PP has a much narrower set of ranges so they can plan for a much more specific target retirement date.

[mathjak107]

You keep talking about this "long-term accumulation" phase. Mukramesh is trying for ERE, as am I. Many others are in their 50s or 60s and expect to retire soon. Most of us here don't have this "long-term accumulation" thing because we are expecting to retire within a relatively short period of time. You're throwing out advice that's completely inapplicable to the personal situations of many to most of the posters here. I don't think there are any people here who are 25 and expect to work until they're 65. Why not? Because the PP doesn't appeal to them, most likely, and they are probably already following some variant of your advice.

isn't 50 or 60 a bit late to start investing for retirement ?  if they are not first starting out and already made their goal then i will say it for the 10th time. they are doing the right thing at that stage.

but if they are fisrt starting out in their 20's or 30's they may want to question using the pp as a growth vehicle.

that is all i keep saying . but i still get comments about those in their 50's or 60's.

it does not pertain to them.

the only thing they may want to think about is the pp has very low equity levels  and 25% equity's has  had a horrible success rate failing way to many time frames ,especially the worst we had.

there is zero way to know if long term bonds and gold would have helped or hurt those worst case scenario's since they happened before the pp was possible.

no other time frames we had were ever as bad so we just do not have enough data on how the pp would have done.

so basically if you use the pp in retirement it is like building a house to weather storms we had  since the 1970's without ever knowing if it could weather anything prior .

i wasn't comfortable using it because of that fact but if you are , go right a head.

those 4 worst case scenario's may never happen again  but if they do then all that protection you wanted to have in the accumulation stage killed you off in the retirement stage when actions reverse . .

[mukramesh]

no other time frames we had were ever as bad so we just do not have enough data on how the pp would have done.

Agreed here. We are just saying that the past performance of the US stock market is not enough to convince us of its continued performance into the future.

[mathjak107]

which is why you need to be flexible in where and how you invest .  just remember the greater the protection you want from those flyers that may never happen the smaller the nest egg will end up if we don't have those flyers happen.

what we plan for through traditional retirement planning is designed as is to with stand some pretty bad results without failure .

[mukramesh]

just remember the greater the protection you want from those flyers that may never happen the smaller the nest egg will end up if we don't have those flyers happen.

Yes, agreed here, too. I consider the PP a fairly good compromise between 'safety' and 'returns.' It's not going to make as much money as a 100% stock portfolio if times are good. But it's also still done pretty well for a so-called 'conservative' portfolio for generating real returns.

what we plan for through traditional retirement planning is designed as is to with stand some pretty bad results without failure .

Yes, but those are past results. Going forward, are we guaranteed that there won't be a time where stocks take a 30yr slump? Remember, average returns/CAGR/whatever you want to call it is actually just a way of representing 'exponential growth.' There is no guarantee that this will continue forever even though we had fantastic exponential growth in the past.

The PP, instead of relying on pure exponential growth of a particular asset, relies on rebalancing. The assets take turns pulling the entire portfolio forward. It's a different model and subject to different risks. But you have to admit, it's much less concentrated and much less dependent on a single asset than what you recommend.

[mathjak107]

just remember the greater the protection you want from those flyers that may never happen the smaller the nest egg will end up if we don't have those flyers happen.

Yes, agreed here, too. I consider the PP a fairly good compromise between 'safety' and 'returns.' It's not going to make as much money as a 100% stock portfolio if times are good. But it's also still done pretty well for a so-called 'conservative' portfolio for generating real returns.

what we plan for through traditional retirement planning is designed as is to with stand some pretty bad results without failure .

Yes, but those are past results. Going forward, are we guaranteed that there won't be a time where stocks take a 30yr slump? Remember, average returns/CAGR/whatever you want to call it is actually just a way of representing 'exponential growth.' There is no guarantee that this will continue forever even though we had fantastic exponential growth in the past.

The PP, instead of relying on pure exponential growth of a particular asset, relies on rebalancing. The assets take turns pulling the entire portfolio forward. It's a different model and subject to different risks. But you have to admit, it's much less concentrated and much less dependent on a single asset than what you recommend.

i wouldn't even compare the pp to a  100% equity portfolio. performance comments were really based against far more conservative investing . mixes like 60/40 50/50 and even 40/60 have just over and over left the pp well behind  and have done so over the same conditions the pp was supposed to do better in .  just compare most long term periods to wellesly income , a conservative 40/60 mix .  there was little comparison between the two

[lordmetroid]

You keep talking about this "long-term accumulation" phase. Mukramesh is trying for ERE, as am I. Many others are in their 50s or 60s and expect to retire soon. Most of us here don't have this "long-term accumulation" thing because we are expecting to retire within a relatively short period of time. You're throwing out advice that's completely inapplicable to the personal situations of many to most of the posters here. I don't think there are any people here who are 25 and expect to work until they're 65. Why not? Because the PP doesn't appeal to them, most likely, and they are probably already following some variant of your advice.

I am also aiming for Extreme Early "retirement", aiming for an accumulation phase if 3 to 10 years, depending on how well my own private business ventures works out. I just want reasonable returns jurist importantly to not loose any of my meat egg.

[Tyler]

You keep talking about this "long-term accumulation" phase. Mukramesh is trying for ERE, as am I. Many others are in their 50s or 60s and expect to retire soon. Most of us here don't have this "long-term accumulation" thing because we are expecting to retire within a relatively short period of time. You're throwing out advice that's completely inapplicable to the personal situations of many to most of the posters here. I don't think there are any people here who are 25 and expect to work until they're 65. Why not? Because the PP doesn't appeal to them, most likely, and they are probably already following some variant of your advice.

I am also aiming for Extreme Early "retirement", aiming for an accumulation phase if 3 to 10 years, depending on how well my own private business ventures works out. I just want reasonable returns jurist importantly to not loose any of my meat egg.

I accumulated my nest egg in 14 years.  HB Rule #1.

I think Mathjak's portfolio advice is excellent for the traditional career path of working 40 years and putting away 10% a year.  I reject that paradigm, so it makes sense that I might invest differently.

I do think it's a strawman argument that the PP is an unsafe retirement portfolio just because we don't know precisely how it would have performed before 1972.  We can see how well it has performed since then (far more consistently than 60-40!) and Mathjak has also shown what the warning signs of a failing portfolio look like: <2% real returns for 15 years.  While the PP has never come anywhere near that (3.4% is the worst to date) nobody here is arguing that you should stay in the PP if returns ever trend that direction.  We'll be smartly making changes as well.  We follow the PP because it makes sense for us and meets our needs, not because we are Harry Browne religious followers. 

Also, I should point out that Mathjak's portfolio method of constantly swapping allocations based on newsletters and gut feel has not been mathematically tested for retirement safety over ANY timeframe.  Just because one buys lots of stocks and bonds when they actively and persistently move funds around does not mean studies that assume passive buy & hold stock-bond allocations apply.  If one truly wants back-tested retirement security over all long-term timeframes and is not simply holding other portfolios to a higher standard than his own, perhaps he should follow the 60-40 portfolio he keeps quoting studies for. 

[mathjak107]

nothing is 100% as tested unless you use only an index fund and intermediate term bonds .

however what is tested is the fact we know on the equity side that as allocations drop failure rates go up. so where go how much you allocate to diversified funds will really be the factor. as we saw the difference been 5 year treasuries and 7 year corporate's dropped swr  on the worst cases by about 1/4%  .

i can change the  equity funds over and over and as long as my overall allocation stays the same success rates do not change much . they are not based on average returns as much as they are based on sequence of returns each year.

however since pp users like to picture all the chicken little scenario's how about a not so far fetched one.

that basically 40 year bond bull market chart that just went lower and lower  during most of the pp' existence has its  mirror image start to trend up.

so you have 25% equity's and a bond position that is highly volatile and takes awful hits as rates rise.

talk about making a big bet  on rates . i would sooner take chances with equity's which even in rising environments has done okay long term.

in fact the markets have never had a losing 20-  30 year period the last 146 years  not in nominal or real returns .  it has been through wars ,depressions ,crashes and a almost total financial collape , all the things pp'ers  dream about yet at no point in our history have they lost money 20 years or more .


could they one day ?  sure , but since i have to bet my retirement on something i will take market risk over interest rate risk in that case any day ,.

[iwealth]

having a rising rate environment for just a few years at a time iin a 40 year run is not the same as fighting an up turn in rates for decades possibly with the volatility of long term bonds .

So why do you think rates are going to rise? Just because they are low? Inflation? A super hot economy? The fed isn't going to raise rates and more importantly continue to raise rates unless one of those things is occurring. They aren't going to tighten the money supply for no reason. I'm not saying we won't see a token rate increase or two, but you can rest assured they won't continue with raises unless the economy gives them the all-clear.

[Tyler]

i can change the  equity funds over and over and as long as my overall allocation stays the same success rates do not change much . they are not based on average returns they are based on sequence of returns each year.

Success rates in the studies you quote are based on sequence of returns for broad total stock and total bond indices (or 5-year treasuries in the Bengen study) using a passive investing strategy.  They are not at all based on active trading.  Claiming that actively trading stocks does not change the result is a major assumption on your part not supported by any study.  One can easily see that in how most actively managed stock funds lag the market index -- there have been thousands of studies to that end.  If you can provide a long-term study that reflects every trade you have made over the years and how withdrawal rates would project to the worst of times years before you started I am happy to stand corrected and sign up for your newsletter.  Until then, I humbly suggest you stop holding the PP to a standard to which you do not hold yourself.

[mathjak107]

i can change the  equity funds over and over and as long as my overall allocation stays the same success rates do not change much . they are not based on average returns they are based on sequence of returns each year.

Success rates in the studies you quote are based on sequence of returns for broad total stock and total bond indices (or 5-year treasuries in the Bengen study) using a passive investing strategy.  They are not at all based on active trading.  Claiming that actively trading stocks does not change the result is a major assumption on your part not supported by any study.  One can easily see that in how most actively managed stock funds lag the market index -- there have been thousands of studies to that end.  If you can provide a long-term study that reflects every trade you have made over the years and how withdrawal rates would project to the worst of times years before you started I am happy to stand corrected and sign up for your newsletter.  Until then, I humbly suggest you stop holding the PP to a standard to which you do not hold yourself.

swapping funds for other equity funds once every  few years is hardly active trading  . i can certainly give you a year by year return for every single year ,which is much further a head than an s&p 500 index fund as well as documented right on line .  i started one year after they did in 1987  but non the less you have each years returns we got and how they compared to  an s&p 500 index fund .

http://www.fidelityinsight.com/about/pe ... f2012.html

[mathjak107]

having a rising rate environment for just a few years at a time iin a 40 year run is not the same as fighting an up turn in rates for decades possibly with the volatility of long term bonds .

So why do you think rates are going to rise? Just because they are low? Inflation? A super hot economy? The fed isn't going to raise rates and more importantly continue to raise rates unless one of those things is occurring. They aren't going to tighten the money supply for no reason. I'm not saying we won't see a token rate increase or two, but you can rest assured they won't continue with raises unless the economy gives them the all-clear.

why did rates on bonds rise the last 6 months ?

[Tyler]

swapping funds for other equity funds once every few years is hardly active trading 

Sure it is.  Why else do it?  It's not the same as day trading, but you're still moving things based on intuition in an attempt to beat the markets rather than investing passively. 

Boasting about beating the market runs completely counter to the core assumptions and methodology of the retirement studies you are quoting.  You may like to think they still apply, but they do not. 

I'm not interested in your returns.  Using the same critique you level to the PP, how can we be assured you're not just lucky and your methodology would not fail in the worst of times before you started? 

[iwealth]

why did rates on bonds rise the last 6 months ?

I have no idea but if I had to guess:

1) got too low too fast
2) fed is telegraphing a rate increase and with no QE program underway, bond traders are worried people might freak and liquidity in the bond market will dry up making it wildly volatile (which could work in either direction)
3) all that QE over in Europe - why not invest in bonds where the central banks are buying?

Maybe the better question is, why do you think bond yields reached all time lows just 6 months ago considering everyone already knew a rate increase is on the way?

Also, how high do you think our rates can get when German 10-year yields are still under 1%?

[Tyler]

http://www.fidelityinsight.com/about/pe ... f2012.html

The newsletter started in 1986?  It hasn't even been around for 30 years to test for retirement.  The PP has 14 more years of history than that.  50% more! 

All prodding aside, I'm not saying it's a bad method.  I just want to cut off the mantra that one cannot trust things that haven't been around forever.  Cutting through the dogma and looking at real-life behaviors, we appear to actually be on the same page here. 

[Pointedstick]

in fact the markets have never had a losing 20-  30 year period the last 146 years  not in nominal or real returns .  it has been through wars ,depressions ,crashes and a almost total financial collape , all the things pp'ers  dream about yet at no point in our history have they lost money 20 years or more .

False. From: http://www.crestmontresearch.com/docs/S ... -11x17.pdf

1901-1921: -2% real CAGR
1929-1949: -1% real CAGR
1961-1982: -1% real CAGR

And there are many 20-year periods that yield a 0% or 1% real CAGR. As well as 30-year periods that yield only a 3% real CAGR.

Your rosy view of the markets is not reflected in the actual data.

[iwealth]

http://www.fidelityinsight.com/about/pe ... f2012.html

2013 should have been an amazing year for high growth stocks, but your newsletter underperformed the S&P500 by 6%. There's a reason hedge funds have been getting destroyed by index funds lately and it's because all of those quants and high frequency traders running the funds are exploiting the same edges. It's all been arbitraged away.

[mathjak107]

It is never about a year or even a few years. It is about your final results

[Pointedstick]

It is never about a year or even a few years. It is about your final results

That's not what you said. You said (among other things) that the US stock market has never had a 20-year period of negative real returns. That's demonstrably false.

[mathjak107]

it is not false according to other data on the web  at all.  other sources show no 20 or 30 year negative returns.  only 10 year or less .

so who's data is correct ?

in fact you can calculate it yourself right here .  as an example 1901-1921 comes up positive.

1901-1921 1.60% cagr

1929-1949  2.09 cagr

1961-1982 2.55% cagr


http://www.moneychimp.com/features/market_cagr.htm

other sources show no negative returns as well starting at 20 years


.





other references on other sources are here as well

Through ourentire 142-year period, the average annual return has been 8.84% (6.66% after inflation), a figure that is about in line with the median for each of the intervals summarized in the table. As the table also shows, no 20- or 30-year period has ever posted a loss, a record that also applies to inflation-adjusted returns. There were, however, 16 cases of negative returns out of the total of 138 for five-year intervals (25 after inflation); and four cases out of 133 for 10-year intervals (14 after inflation).

[Pointedstick]

I'm not sure what accounts for the differences but I imagine how survivorship bias is taken into account may have something to do with it. Perhaps people who were unlucky enough to invest in companies that closed their doors got the lower return. Either way, those are not impressive numbers.

[mathjak107]

why did rates on bonds rise the last 6 months ?

I have no idea but if I had to guess:

1) got too low too fast
2) fed is telegraphing a rate increase and with no QE program underway, bond traders are worried people might freak and liquidity in the bond market will dry up making it wildly volatile (which could work in either direction)
3) all that QE over in Europe - why not invest in bonds where the central banks are buying?

Maybe the better question is, why do you think bond yields reached all time lows just 6 months ago considering everyone already knew a rate increase is on the way?

Also, how high do you think our rates can get when German 10-year yields are still under 1%?

i could never guess by how much we will go up or even when we will see no return back down lower than we are , even if temporary  . but i will  say with quite certainty we will go up  and it will be very painful for tlt and for quite a long time .

i think for a strategy that claims to be neutral it is making one hell of a bet on rates staying low .  but time will tell  who is right , we can debate this in advance forever.  my prediction is  THE PP WILL HAVE SOME REAL TOUGH HEADWINDS GONG FORWARD  . .

with rates this low and valuations this high conventional investing is going to find it tough but i believe the pp's weight in long term treasury's and low equity allocations will make it way more difficult than ever before ..

[mathjak107]

I'm not sure what accounts for the differences but I imagine how survivorship bias is taken into account may have something to do with it. Perhaps people who were unlucky enough to invest in companies that closed their doors got the lower return. Either way, those are not impressive numbers.

these  studies are based on broad  index's  or well diversified funds  not individual companies which introduces a whole other issue of risk namely individual company risk  and are not comparable .