Perspective on the current drawdown

[Pointedstick]

I keep saying over and over if you have a low pucker factor the  pp is fine.

what I object to is  constantly pointing out these short time frames and highlighting the drop because for a long term investor who is comfortably allocated  these are just bumps in the road.

we all agree if you dislike volatility then the pp is fine.

but for those long term investors out there that allow for these swings as part of the deal they are no problem.

I think you are one of the only people here who matches that description. But if we agree that the PP is fine for people who don't like volatility, and that a stock-heavy portfolio will likely provide better returns long-term if you can stomach the volatility… then what are we arguing about?

[iwealth]

what I object to is  constantly pointing out these short time frames and highlighting the drop because for a long term investor who is comfortably allocated  these are just bumps in the road.

This confuses me because I've seen you post on numerous occasions that the portfolio you decided on a few weeks ago has outperformed the PP during that extremely short time frame. Also you've posted numerous times to point out TLT having a bad day. Same for gold. Never pointed out those horrible stock days during that Greece mini-crisis though. 

It's fine, you know, do as you please and all, but that stuff doesn't seem consistent with your message.

[LC475]

This is where you seem to struggle most with understanding the psyche of this forum's members. This is a no-pucker-factor zone. It's a place where people are willing to accept lower returns in exchange for less drawdown anxiety.

Actually, for me,  I'm in no hurry for my money.  I have a long time horizon and low time-preference.  I am emotionally very capable of riding out losses for very long times.  I am perfectly willing to accept drawdowns and volatility in exchange for higher return.

Problem is: nobody is offering that trade.  Ain't nobody living who can be the merchant on the other side of that bargain.  It's not an exchange that exists in the real world, that we can make.  It's not that simple.

Higher drawdown does not equal higher return.  Just 'cause something goes down don't mean it will come back up.  It may never come back up!  Higher drawdown just equals higher drawdown.  Nothing more.  Just equals losing more money.

There's no market overseer who gives you a gold star for losing money.  There's no tradesman who gives you a coupon for better returns in the future because you lost money this year.  That just doesn't exist.

Funny thing about investing: the short-term very much is very, very important to the long-term.  The short-term never goes away.  There may just be one single day, just one teensy-weensy day, when your investments go down 40%.  That 40% will follow your portfolio for the rest of eternity.  It never goes away.  It is never cancelled out.  Once you take that loss, you took it, and you can never un-take it.  The money is gone, the whole 40%, just like it was never there.

So: short-term, long-term, it's all connected.

[ochotona]

Integral Calculus. 

So: short-term, long-term, it's all connected.

[barrett]

This is from LC475 in another thread:

"For me, the point is: the Harry Browne Permanent Portfolio is not going to fail disastrously.  It is going to continue working just fine, working as designed, protecting precious wealth by producing decent returns with low volatility.

Vindication shall not be in all the other portfolios crashing and burning.  Vindication will be in the form of steady, chugging-along progress for the PP, in the face of all its naysayers who are claiming, "Oh no, now it's different, it won't work any more going forward."  Vindication is not in other people losing money (how does that help me?).  Vindication is in me protecting my money."

My intention in starting the thread was really so folks like me who are still relatively new to the PP can put this drawdown in perspective and see "yeah, this is more or less normal PP behavior." Some of us need reassurance from time to time that the portfolio is "working just fine." A 6% drawdown happens pretty frequently. Got it. And I also get Tyler's point that January's big gain was an outlier.

I believe there is a huge difference between how a young investor views a drawdown and how someone closer to retirement views it. It's not just sequence of returns but also the likely fact that an older investor has way more money at stake. A 6% drawdown when looked at through blinders sure feels as if a year's worth of retirement money just disappeared. Time between peaks matters greatly as some of us actually have human feelings and emotions.

[mathjak107]

the problem has always been the more time that passes the greater the change in dollars for a given percentage and since we pay our bills in dollars and not percentages that can be some big numbers.

but how much you are down has a lot depending on when you are starting and the events around you.

if I kept the pp I started last month in effect I would be down 25k and retiring next week .  on the other hand the model I shifted to is only down  7k as of today.

so it is hard to say whether just because you used the pp you will experience less of a hit .  different portfolio's will react to different things at different times. in my case the pp acted very poorly at  this time. the gold took an 8% hit as of the other day . .

under another set of circumstances my 50/50 mix may have taken the bigger hit .

[lordmetroid]

...
Does anyone here really care about yearly returns? That's just cherry picking start/end dates. One's emotional investment stability is affected by max drawdown, not your portfolio values on December 31st of each year.

Yes, I do care about yearly returns because that is what I will be taxed on when I decide to liquidate.

[mathjak107]

my entire maximum  budget in retirement for the up coming year  is based on each years balance on 12/31 . it is very important .

I use bob clyatts method.

4% of the  actual balance or if  the portfolio is down I take 95% of the previous year or 4% of the balance . which ever is higher

[iwealth]

if I kept the pp I started last month in effect I would be down 25k and retiring next week .  on the other hand the model I shifted to is only down  7k as of today.

so it is hard to say whether just because you used the pp you will experience less of a hit .  different portfolio's will react to different things at different times. in my case the pp acted very poorly at  this time. the gold took an 8% hit as of the other day . .

under another set of circumstances my 50/50 mix may have taken the bigger hit .

Another example of you using examples of performance from EXTREMELY short timeframes. I don't get it - in one sentence you say we can't compare the PP's 10-year returns vs. other portfolios because the timeframe is too short, in the next sentence you talk about the significance of the PP underperforming your portfolio over the past month.

My brain spins. 

[LC475]

Some of us need reassurance from time to time that the portfolio is "working just fine." A 6% drawdown happens pretty frequently. Got it. And I also get Tyler's point that January's big gain was an outlier.

I believe there is a huge difference between how a young investor views a drawdown and how someone closer to retirement views it. It's not just sequence of returns but also the likely fact that an older investor has way more money at stake. A 6% drawdown when looked at through blinders sure feels as if a year's worth of retirement money just disappeared. Time between peaks matters greatly as some of us actually have human feelings and emotions.

I think that's very true (the huge difference) and you make some excellent points.

Here's something to think about: pretend you were invested in the Permanent Portfolio in the 1990s.  If you look at a graph of the PP vs. the S&P 1990-1999, you'll see what it was like.  It wasn't pretty, was it?  Try to truly imagine what going through that decade would have felt like.  What would you have been thinking?  Feeling?  Things were not looking good.  It surely seemed as if things had changed, it was a new era as Alan Greenspan said, and the HBPP just wasn't going to work any more as it had in the past.

Look, here's a chart.  Out of laziness, it's just a slice of the chart on Craig's site.



Even giving the PP a, what is that, ten or twenty thousand dollar head-start, stocks still beat it by a lot, a lot, a LOT!  Of course, being so smart, living in the future, we know how the lines went after that.  We know it all worked out for the mighty PP.  And we know that actually, it was working just fine, just as designed, throughout the 1990s.  But would you have been able to stick with it through that decade?

I think if you can get yourself to a mental place where you can truly say, "Yes, I would have stuck out the '90s, because I understand the reasoning behind the portfolio and how it works," when you're at that point you are ready to succeed with the Permanent Portfolio.  Would you have been one of the few PP diehards left standing in 2000 when the crash came?  Do you have what it takes to buck the know-it-all crowd and follow a more humble strategy?  If so, then welcome to the Permanent Portfolio: you will do well.

[iwealth]

Yes, I do care about yearly returns because that is what I will be taxed on when I decide to liquidate.

Can you elaborate on that a bit?

Obviously taxable income is calculated based on the calendar year. But I fail to see how a particular year's investment returns matter since you aren't taxed on anything until you record a capital gain (besides dividends/coupon payments/distributions, etc). If you sell on December 31, 2015, your gains count against 2015's taxes. If you sell on January 1, 2016, your gains count against 2016's taxes. What matters to the tax man is your TOTAL return since you purchased the security.

[mathjak107]

if I kept the pp I started last month in effect I would be down 25k and retiring next week .  on the other hand the model I shifted to is only down  7k as of today.

so it is hard to say whether just because you used the pp you will experience less of a hit .  different portfolio's will react to different things at different times. in my case the pp acted very poorly at  this time. the gold took an 8% hit as of the other day . .

under another set of circumstances my 50/50 mix may have taken the bigger hit .

Another example of you using examples of performance from EXTREMELY short timeframes. I don't get it - in one sentence you say we can't compare the PP's 10-year returns vs. other portfolios because the timeframe is too short, in the next sentence you talk about the significance of the PP underperforming your portfolio over the past month.

My brain spins.

the argument folks keep throwing out there when I say I only care long term what my investments do  is what if you need the money in the short term ?

the pp's low volatility would turn out better.

my answer is not always to that  and I use the  what just happened to me IN THE SHORT TERM  as an example .

but I don't invest for the short term . so  the answer to their question  is,  what if you need the money now and started investing at a  point you bought in much higher  .

[Pointedstick]

the argument folks keep throwing out there when I say I only care long term what my investments do  is what if you need the money in the short term ?

the pp's low volatility would turn out better.

If you need the money in the short term, you can withdraw some from the PP's cash component and ignore the short-term gyrations of the three volatile assets.

[mathjak107]

if you take enough you would or should rebalance selling assets off regardless . if you delay to long you may end up getting burned by waiting with to high an allocation or miss taking advantage of lower prices.

either way assets need to be sold to replace the money .  just skip moving it around your pockets and get it directly from the assets instead.

[iwealth]

the argument folks keep throwing out there when I say I only care long term what my investments do  is what if you need the money in the short term ?

the pp's low volatility would turn out better.

my answer is not always to that  and I use the  what just happened to me IN THE SHORT TERM  as an example .

but I don't invest for the short term . so  the answer to their question  is,  what if you need the money now and started investing at a  point you bought in much higher  .

But wouldn't your hypothetical PP only be down 1-2% since you started it? To me that qualifies as having protected your money short-term.

What if the equity markets severely correct in the next few months? Equity markets do that from time to time. So do bond markets. And gold markets. What makes the PP a better choice for money you may need in the short term is that historically it experiences low drawdowns during ANY type of correction. So you don't need to worry about stocks, bonds, or gold crashing and leaving you 30-40% in the hole.

[mathjak107]

not in dollars,  when 1% represents a 30k loss in 1 month.  2% is 60k....

on the other hand I am down just a bit on the 50/50 and was up until today by a few grand . 

so pp or not is no guarantee if you need the money short term  you won't get hurt worse . it all depends on what and when .

this just happened to be a bad time for the pp in comparison . next time the reverse may be true.

[iwealth]

not in dollars,  when 1% represents a 30k loss in 1 week.  2% is 60k....

on the other hand I am down just a bit on the 50/50. 

so pp or not is no guarantee if you need the money you won't get hurt worse .

You know to be honest, I'm not even sure who is touting that the PP protects money that you may "need" in the short term. It has a 25% cash component - only that much of your money is protected up to the point where you perform your first rebalance. But that's still significantly more than what's protected by a 50/50 portfolio.

[mathjak107]

well as I posted above .

if you take enough you would or should rebalance selling assets off regardless . if you delay to long you may end up getting burned by waiting with to high an allocation or miss taking advantage of lower prices.

either way assets need to be sold to replace the money .  just skip moving it around your pockets and get it directly from the assets instead.

[mukramesh]

This topic has a lot of relevant information and backtesting about how withdrawing from the cash bucket compares with withdrawing evenly from all assets.

http://gyroscopicinvesting.com/forum/ot ... or-a-myth/

[mathjak107]

excellent study here too by researcher michael kitces.



https://www.kitces.com/blog/are-retirem ... on-mirage/

[iwealth]

I agree there's no long-term return benefits to withdrawing from the cash bucket, but there can be some neat benefits tax-wise if you are living off your portfolio returns. There are other threads about that. It does not apply to everyone.

[Tortoise]

In reference to the OP:

So this has not been the greatest of years for the PP so far and I was trying to get some perspective on where things stand in relation to what expectations should be.
[...]
Obviously being down 6% affects a near retiree (I am in that category) much more than a young investor, but I think there are many on here who are eyeballing the finish line.

By using the phrase "finish line," you seem to imply that you'll be liquidating your entire PP the instant you retire. But I suspect that's not the case. If you planned well and are therefore going to be withdrawing only a fraction of your portfolio (e.g., 4%) each year, then short-term market noise should be fairly inconsequential to you, just as it is to a young 20- or 30-something investor. Even you--a soon-to-be retiree--have a fairly long investment time horizon!

I first joined this forum and went all-in on the PP in 2010, and I'm more comfortable with the PP now than ever. I'm a huge fan of the PP and plan to stick with it for many years to come. Over the very short-term it goes up and it goes down, but over 3-year periods its real returns are almost always positive. If you're a PP investor and your time horizon is at least 3 years (it shouldn't be any less), for God's sake, ignore the market noise and focus on what's actually relevant: those 3-year real returns.

[mathjak107]

remember though it depends what you are figuring as your withdrawal rate.

4%  inflation  adjusted  needs at least a 2% real return average the first 15 years mathematically to survive 30 years  (michael kitces study ).

but that would just leave you broke with no spending cuts in the 30th year.

if you want legacy money too it will take a run of 15 years with real returns much greater than 2%.  so just positive returns won't cut it . they need to be 2% real returns or better depending on legacy requirements .

one of my favorite articles on the subject

https://www.kitces.com/blog/What-Return ... ased-Upon/

[barrett]

By using the phrase "finish line," you seem to imply that you'll be liquidating your entire PP the instant you retire. But I suspect that's not the case. If you planned well and are therefore going to be withdrawing only a fraction of your portfolio (e.g., 4%) each year, then short-term market noise should be fairly inconsequential to you, just as it is to a young 20- or 30-something investor. Even you--a soon-to-be retiree--have a fairly long investment time horizon!

Yeah, I was just talking about the end of the accumulation phase. And I was implying no income from there on out which probably won't be the case.

The Kitces links that mathjak cites are good. Though he doesn't include gold in his backtesting, the general idea of keeping spending moderate in the early years of retirement can make a portfolio extra robust.

[AnotherSwede]

If non-cash falls while withdrawing this postpones rebalance.

Ex
$250000 each.
Gold and bonds fall to $200000. Equity doesn't move.
Cash has to go below $115000, a $135000 withdrawal, before the rules suggests a rebalance. This should allow plenty of time for the other to recover, or equity to rally.