Why the PP is better in accumulation than you think

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Re: Why the PP is better in accumulation than you think

Post by mathjak107 » Mon Oct 26, 2015 6:41 pm

THESE GO 40 YEARS  . kitces ran this using not the trinity allocation to corporate bonds  but rather to  bill bengens  safemax study  using 5 year treasury's .  he took bills work the extra step and compiled it over many more allocations and years  in retirement .

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Re: Why the PP is better in accumulation than you think

Post by MachineGhost » Mon Oct 26, 2015 10:49 pm

Desert wrote: It was August 1971, not 1968. 

Using gold prices before 1975 in backtesting meant to support a proposed asset allocation is misleading.
You silly Americans!  Stop thinking domestically.  Gold broke free of the London Pool in 1968.

But, I'm somewhat convinced.  I will switch to silver from now on before 1975 and I don't want to hear any bitching about it.  Pre-1965 junk silver coins were perfectly legal and widely available.
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Re: Why the PP is better in accumulation than you think

Post by mathjak107 » Tue Oct 27, 2015 4:32 am

as harry said silver is no proxy for gold . 2008 proved that point when silver plunged and gold was up .  if you assumed  projecting forward the gold and silver would act the same you would have been totally off base in 2008-2009

eliminating the us market on gold trading is a major difference  compared to only europe trading . just look at how we influence what happens here world wide in any financial market .

why do you insist on fudging missing data for this useless comparison .

we already know how to monitor the pp or any portfolio to see it it is on track in real time
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Re: Why the PP is better in accumulation than you think

Post by mathjak107 » Tue Oct 27, 2015 7:12 am

MachineGhost wrote:
Desert wrote: It was August 1971, not 1968. 

Using gold prices before 1975 in backtesting meant to support a proposed asset allocation is misleading.
You silly Americans!  Stop thinking domestically.  Gold broke free of the London Pool in 1968.

But, I'm somewhat convinced.  I will switch to silver from now on before 1975 and I don't want to hear any bitching about it.  Pre-1965 junk silver coins were perfectly legal and widely available.
but the study  you are trying to  back test is based on all american conditions . american stock market ,american bonds ,american interest rates , American inflation  and with no american gold market  trading you are SOL .

trying to substitute what would have been with londen could be as wong as if they shut down japans stock  markets and said just  base it  on americas's markets .  we know that would be a totally different outcome and a wrong assumption . .

by the way only 3 developed country's  other than the us has survived as high as a 4% SAFE WITHDRAWAL RATE .  so using any of their data instead of our own would be once again well off base .
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Re: Why the PP is better in accumulation than you think

Post by MachineGhost » Tue Oct 27, 2015 3:35 pm

mathjak107 wrote: as harry said silver is no proxy for gold . 2008 proved that point when silver plunged and gold was up .  if you assumed  projecting forward the gold and silver would act the same you would have been totally off base in 2008-2009
The crux of the matter is...  did he say that BEFORE or did he say that AFTER 1975?

And here is a fact...  there was a raging rare coin bull market from 1971 to 1974.  Coincidence?

Also, if gold had been a US market back then, the outperformance of gold would have only overestimated portfolio returns.

So I remain unconvinced it is hallucinotary.  Given how poor the 50/50 10yr does in terms of performance relative to other portfolios with higher diversify scores, I think you are cutting the PP off at its knees.

Anyway, so the rule of thumb is a 2% real return for half of the retirement period to survive?  Does that also apply to 40, 50 or 60 years or does it need to be higher?  Because those of us a lot younger than you are going to live in "retirement" (if it still exists by that time) about the same length as getting to that age!

The PP should cover 2% real return easily but I am skeptical 2% is good enough for more than 30 years given the 4% SWR failure rates of even 100% stock at 25 years and beyond.  Is another rule of thumb half the SWR in real terms?
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Re: Why the PP is better in accumulation than you think

Post by mathjak107 » Tue Oct 27, 2015 4:07 pm

Can't say how long it will hold as no study was done giving us longer term results.
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Re: Why the PP is better in accumulation than you think

Post by MachineGhost » Tue Oct 27, 2015 4:08 pm

mathjak107 wrote: Can't say how long it will hold as no study was done giving us longer term results.
I'm sure someone here with a spreadsheet that is accurate can do it.  I can't seem to get the WR concept to work right.
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Re: Why the PP is better in accumulation than you think

Post by mathjak107 » Tue Oct 27, 2015 4:10 pm

Harry said that about silver in the 1980's in why the best laid investment plans go wrong.
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Re: Why the PP is better in accumulation than you think

Post by mathjak107 » Tue Oct 27, 2015 4:13 pm

You gan google kitces article what is the 4% rule really based on for the details . I am on the nook and can't link.
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Re: Why the PP is better in accumulation than you think

Post by MachineGhost » Tue Oct 27, 2015 4:42 pm

mathjak107 wrote: Harry said that about silver in the 1980's in why the best laid investment plans go wrong.
Okay, that was in Oct. 1987 when he formally unveiled today's PP.  Within that context, silver would surely not work.  Before that, he was using the PRPFX portfolio allocation as far back as late 1982.  No idea what he recommended before that for the 1970's but I have his book coming in.  We will get to the bottom of this!
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Re: Why the PP is better in accumulation than you think

Post by mathjak107 » Sun Nov 01, 2015 3:45 am

which brings us back to my point . trying to back test it when it has no data is silly and serves no point anymore .

the trinity study , bill's safemax , were only tools that allowed  researchers  to find the worst time frames , identify them , and later on  find the common denominator  to the reason they were such bad times .

thanks to michael kitces's numbers crunching we know if it is passing muster in real time if you are trying to live off it  .  we know if any allocation is working  for that matter just by watching the real return average .

less than 2% is a red flag at any point but especially as you get closer and closer to the 15 year mark .


john boogle had an interesting  interview with morningstar the other day .

his math has a 50/50 mix returning only about 3.50-4% the next decade  because of valuations and  rates .


in his 2006 interview his math showed about a 6.50% return  for a 50/50 using index funds and boy did he get that pretty much on target .

so this 2% real return thingie is going to be very important to monitor  if you are spending down . 

i am using  bob clyatts dynamic spending method  to determine my years maximum budget so i recalculate every year  and it is done in real time .

each years max is dynamic  automatically inflation adjusting or cutting slightly back as the years unfold .

dec 31st  we take a snp shot of the portfolio.

we take 4% of the balance  or if markets are down we take what we did the previous year or 5% less , which ever is higher .

we dump that amount in our checking account , keep the same amount in cash  in another cash instrument for next years budget as a safety net and a small emergency fund .

we know know much we have left for the year at any point in time . 

when markets are up we can spend more and when down it forces us to spend a little less so i like the method .

while our bills are constant our  discretionary spending can be as high as we can go  as our retirement wants list and dreams list is far greater than our budget allows .. so we need to know some kind of limit each year to keep from going over .
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Re: Why the PP is better in accumulation than you think

Post by mathjak107 » Sun Nov 01, 2015 4:04 am

here is an excerpt from boggles interview

"Bogle: Well, for U.S. equities, I have a simple formula, as you know. It says divide it up into two segments: One is investment return and the other is speculative return. Investment return is the present dividend yield--a little over 2%--and the earnings growth that follows. And I think it's going to be a little bit of a push for that earnings growth to get to 6%--but I'm going to use 6%. So, that would be an 8% investment return on stocks.

Now, when you get to speculative return, that's whether the P/E ratio go up and pump that up or go down and deflate it. And I look at the P/E from the perspective of past reported earnings--GAAP earnings, as we say it--at being about 20 times. Wall Street looks at it through forward earnings, but forward expected earnings. So, they're using about a 17 P/E, and I'm using about a 20. I'm going to stick to my guns. To go from 20 to 17, that would be about a 2% annual loss. So, I think the best thing we can expect--and this is higher than I'm going to talk about tomorrow--is that 8%, [or 2% dividend yield and 6% earnings growth]. But in fact, I don't think earnings growth is going to be that good, and so I think the P/E could easily get to a more normal long-term range of 15. So, that would be 3% from that number. So, you'd have an investment return of 2% and 5% for 7%, minus 3% for speculative return. That would be 4% for stocks, and that's not a very good number.

And if you look at bonds, the mathematics is a little bit different. If you look at the current yield--as always--you can probably put a pretty good bond portfolio together. I bet you almost have to do better than the 2% or 2.2% on the 10-year Treasury. That's a high-quality relatively short, intermediate-term bond. But if you went a little bit longer--maybe instead of 10 years, you went 12 years--and had a bigger corporate position, which I think most people should have, you might be able to get a 3% yield out of the bonds. So, we've got a 4% return for stocks--maybe a little bearish, but we just don't know--and a 3% return for bonds. That's a 3.5% return on a balanced 50-50 portfolio.

Some important caveats: That's a nominal return. "

http://www.morningstar.com/cover/videoc ... ?id=718639
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Re: Why the PP is better in accumulation than you think

Post by barrett » Sun Nov 01, 2015 6:16 am

mathjak107 wrote: Some important caveats: "That's a nominal return."

http://www.morningstar.com/cover/videoc ... ?id=718639
That's a sobering piece with Jack Bogle. For those of you who don't watch the link, toward the end of the spot he also talks about fund expense, investor behavior & expected inflation of 2% driving investor returns effectively into negative territory.

So, (this is me now, not Jack Bogle) it stinks to be a 50/50 stock/bond investor for the next ten years. You have to have some combination of a big existing cushion, the ability to slash expenses drastically, and/or some kind of income stream.

Because this is, after all, a PP forum, we have to ask what cash and gold might do to returns. I would argue that Bogle's inflation & PE numbers might well be high and that we are more likely than not heading for more disinflation or - because there's not much room left for disinflation - outright deflation.

Long duration bonds should be the asset to own in that kind of environment because they keep making their coupon payments and you might get a pop in terms of price appreciation. Cash is also good, especially if some of your "cash" portion is in savings bonds. Stocks don't like deflation one bit and gold should be expected to tank. So you've got your PP firewalls but no growth engine.

This is all quite pessimistic but it certainly reflects the current situation where a PPer looks at their portfolio late in 2015 and sees it's right where it was a year ago.

Hmm, to hit "Post" or not to hit "Post."
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Re: Why the PP is better in accumulation than you think

Post by ochotona » Sun Nov 01, 2015 6:30 am

barrett wrote: Long duration bonds should be the asset to own in that kind of environment because they keep making their coupon payments and you might get a pop in terms of price appreciation. Cash is also good, especially if some of your "cash" portion is in savings bonds. Stocks don't like deflation one bit and gold should be expected to tank. So you've got your PP firewalls but no growth engine.

This is all quite pessimistic but it certainly reflects the current situation where a PPer looks at their portfolio late in 2015 and sees it's right where it was a year ago.
I don't own any long duration bonds because I refuse to take substantial bets on interest rates. I just bought a chunk of US Treasuries that mature in seven years. That's as long as I care to go. Because what if I'm wrong? I think it's really a coin toss. I'll take my 1.9% YTM, hold to maturity, and be happy about it. Someday the interest rate will normalize, it will take years to heal, though. When rates are high, and LT bonds lower, I will buy.

I know the idea is the volatility of LT Treasuries smashes up against the volatility of other assets, and they magically noise cancel like Bose headphones, but that's like saying, "Getting your leg broken is a good thing, because the docs might find bone cancer on the x-ray which would save your life". That may be true, but I'm a not volunteering to have my legs broken.

Same with gold. 200 day moving average still trending downward. When it starts going dead flat horizontal, the pain may be coming to an end. Maybe next year. My limit order is placed. The cash is set aside, ready to wire. It may sit there another year or two.

The poor return of stocks over the next decade is from a buy-and-hold perspective. At some point, there will be another bear market. Are we in one now? Is it 2016? 2017? Who knows, but from the bottom of that trough to the year 2025, returns may be better... low-normal instead of awful. That's a back-handed way of saying stocks are expensive, and it's risky to be in them now, and as much as it grinds people to talk about "market timing" or "tactical asset allocation", I think that has to be considered as a possible response.
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Re: Why the PP is better in accumulation than you think

Post by mathjak107 » Sun Nov 01, 2015 9:25 am

barrett wrote:
mathjak107 wrote: Some important caveats: "That's a nominal return."

http://www.morningstar.com/cover/videoc ... ?id=718639
That's a sobering piece with Jack Bogle. For those of you who don't watch the link, toward the end of the spot he also talks about fund expense, investor behavior & expected inflation of 2% driving investor returns effectively into negative territory.

So, (this is me now, not Jack Bogle) it stinks to be a 50/50 stock/bond investor for the next ten years. You have to have some combination of a big existing cushion, the ability to slash expenses drastically, and/or some kind of income stream.

Because this is, after all, a PP forum, we have to ask what cash and gold might do to returns. I would argue that Bogle's inflation & PE numbers might well be high and that we are more likely than not heading for more disinflation or - because there's not much room left for disinflation - outright deflation.

Long duration bonds should be the asset to own in that kind of environment because they keep making their coupon payments and you might get a pop in terms of price appreciation. Cash is also good, especially if some of your "cash" portion is in savings bonds. Stocks don't like deflation one bit and gold should be expected to tank. So you've got your PP firewalls but no growth engine.

This is all quite pessimistic but it certainly reflects the current situation where a PPer looks at their portfolio late in 2015 and sees it's right where it was a year ago.

Hmm, to hit "Post" or not to hit "Post."

which is why retirement planning is based on worst case scenario's , not even just  average outcomes .
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Re: Why the PP is better in accumulation than you think

Post by Cortopassi » Sun Nov 01, 2015 11:50 am

All this is telling me that there is going to be blood in the streets in the next decade.  No pension plan can survive this level of return, and there is a limit to which citizens will be taxed to pay for pensions and such without revolt.  More municipalities are going to have to declare bankruptcy, and I do not look forward to what will happen!

All bets are off on comparisons to history for everything, IMO.
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Re: Why the PP is better in accumulation than you think

Post by mathjak107 » Sun Nov 01, 2015 12:24 pm

except as as always , things not even on the radar totally alter what we think is a given when it comes to doom and gloom
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Re: Why the PP is better in accumulation than you think

Post by MachineGhost » Sun Nov 01, 2015 1:06 pm

I don't see any realistic alternative but to think outside the box.

Either we go the way of the high inflation 1970's and a dollar crisis all over again where real assets shine, including the gold heavy PP.

Or we we got the way of Japan where everything sucks, including the PP, but it eeks out a meager miserable existence.  I think the latter is more likely due to the operational reality of the world we live in.  At least for a while.  Eventually we'll shift to the former.

The bigger question is, where will substantial portfolio growth come from?  I need growth and I'm having trouble seeing it coming from anywhere but startup investing, real estate and P2P lending.  And that may be less true growth than a bubble, but I can't afford to be picky.

If the PP had a downside risk more in line with its meager expected returns, it would be academic in worrying about it.  Even mathjak realizes this since he gave up after just a week.
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Re: Why the PP is better in accumulation than you think

Post by mathjak107 » Sun Nov 01, 2015 1:44 pm

My portfolios are never static forever so wherever the longer term trends go the portfolio adapts just as it always has.
Even in poor markets there are funds that bet against the markets .

I never believed in trying to make something work forever
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Re: Why the PP is better in accumulation than you think

Post by Cortopassi » Sun Nov 01, 2015 4:40 pm

mathjak107 wrote: except as as always , things not even on the radar totally alter what we think is a given when it comes to doom and gloom
I hope you are correct!
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Re: Why the PP is better in accumulation than you think

Post by mathjak107 » Sun Nov 01, 2015 4:41 pm

So do all of us
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Re: Why the PP is better in accumulation than you think

Post by ochotona » Sun Nov 01, 2015 9:41 pm

Maybe we have to go global and emerging for growth, after some of this current severe decline abates.

Maybe the 21st Century PP is 50% US stocks, 50% non-US, and a big slice of those Emerging markets.20% REIT, 20% Gold, 20% US Treasuries... ooops, that's Meb Faber's Ivy-5 portfolio. The backtesting shows Faber's has almost 3% more CAGR for similar Sharpe ratio. MAXDD is large but isn't terrible at 21.64%.
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Re: Why the PP is better in accumulation than you think

Post by MachineGhost » Sun Nov 01, 2015 11:00 pm

ochotona wrote: Maybe the 21st Century PP is 50% US stocks, 50% non-US, and a big slice of those Emerging markets.20% REIT, 20% Gold, 20% US Treasuries... ooops, that's Meb Faber's Ivy-5 portfolio. The backtesting shows Faber's has almost 3% more CAGR for similar Sharpe ratio. MAXDD is large but isn't terrible at 21.64%.
I don't like unbalanced risk like that.  They don't consider that equal weight diversification into a similar asset class is not real diversification.  You ultimately need to decide on your top level strategic allocation and then fit everything equally into those three quadrants as the PP does.  The Volatility PP Sr is a good start, but the equity exposure is rather low.  I think the only guideline we really have is the safe withdrawal rates chart otherwise it seems like a crapshoot to decide what to use for strategic.
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Re: Why the PP is better in accumulation than you think

Post by mathjak107 » Mon Nov 02, 2015 3:08 am

ochotona wrote: Maybe we have to go global and emerging for growth, after some of this current severe decline abates.

Maybe the 21st Century PP is 50% US stocks, 50% non-US, and a big slice of those Emerging markets.20% REIT, 20% Gold, 20% US Treasuries... ooops, that's Meb Faber's Ivy-5 portfolio. The backtesting shows Faber's has almost 3% more CAGR for similar Sharpe ratio. MAXDD is large but isn't terrible at 21.64%.
at some point europe and emerging markets will be where the action is again but still to early .  i don't subscribe to  that buy low sell high crap . i don't want to fight a trend or try to catch a  falling a  knife . i want to buy high and sell higher .

which is why my plan has always been dynamic  just nudging things slightly towards the longer term trends with the best possibility of playing out , but even if wrong the effect of being wrong is tiny .

just picking up an extra 1% over 30 years is a big difference in performance and balance .
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Re: Why the PP is better in accumulation than you think

Post by mathjak107 » Mon Nov 02, 2015 3:16 am

MachineGhost wrote:
ochotona wrote: Maybe the 21st Century PP is 50% US stocks, 50% non-US, and a big slice of those Emerging markets.20% REIT, 20% Gold, 20% US Treasuries... ooops, that's Meb Faber's Ivy-5 portfolio. The backtesting shows Faber's has almost 3% more CAGR for similar Sharpe ratio. MAXDD is large but isn't terrible at 21.64%.
I don't like unbalanced risk like that.  They don't consider that equal weight diversification into a similar asset class is not real diversification.  You ultimately need to decide on your top level strategic allocation and then fit everything equally into those three quadrants as the PP does.  The Volatility PP Sr is a good start, but the equity exposure is rather low.  I think the only guideline we really have is the safe withdrawal rates chart otherwise it seems like a crapshoot to decide what to use for strategic.

the chert is a guideline but the ultimate guideline will still be monitoring your own results for that proverbial 2% real return  the first 15 years  of retirement .

don't forget how the 1960's had the worst possible sequences  the first  15 years and the best market run up in history the next 15 but it was to little to late .  they already over spent down their assets the first 15 years .

with results from all asset classes pointing to below average performance this is really going to make things tough to go by what was in the past .

it figures i would retire smack in to it . but luckily our plan has a lot of discretionary spending in it so cutting withdrawals a bit may not be much fun  but it can be done .

the good news is the safe withdrawal rates are called safe because they are already so conservative  just because they are based around the worst conditions we have had  and they were already pretty nasty .

the other good thing is that  we will be not only dynamic with the portfolio  but dynamic with the budget as each year will be based not on some fixed percentage of an opening balance but on the actual balance yearly  .

the issue i have with the "4% rule " is 90% of the time you died with more than you started . not enjoying more things in life that cost money  that you could have is not a good thing either .

so even if you go the standard 4% withdrawals inflation adjusted you still need a  means of increasing withdrawals or risk  leaving to much unspent on the table .

to conservative is no good either ,.

bob clyatt's dynamic spending method automatically gives you more when markets are up .

it can be hard as heck trying to come up with a spending plan using the 4% rule as any increases in a good market can't easily be spent since you are going to need them as a cushion in a down market since the income stream has to remain constant .

the dynamic method does not have a constant income stream . it can vary on the upside unlimited and is limited to just 5% cuts  each year on the down side .

but spending methods in retirement are a whole other topic  and could be their own discussion and this topic is about the pp in the accumulation stage not the decumulation stage ..
Last edited by mathjak107 on Mon Nov 02, 2015 3:54 am, edited 1 time in total.
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