This Forum & Dissenting Opinions of the HBPP

[Pointedstick]

The way I see it, if your time horizon is truly 15-20 years, why mess around with any asset allocation portfolio?  Just put everything in stocks.  I've been figuring that once I've saved enough in the PP to cover basic living expenses, I might happily plow the rest into stocks - either bought directly or via index funds.

That is exactly my thinking as well. My plan is to use the PP as a low-risk savings vehicle for FIRE, then once I hit "the number," put new contributions into a more risky 100% stock allocation, slowly increasing the total portfolio percentage that's in stocks.

[Cortopassi]

I'm not planning on going that far!  But probably at least into the Golden Butterfly which is certainly more stock heavy and a bit less cash/short term.

[Fred]

It seems extremely counter-intuitive that a very cash heavy portfolio would be the best way to beat inflation.

I'm guessing it's the interest on the ST's keeping pace with inflation, especially if the fed is aggressively raising them to fight it like they were in the 70's.

[Greg]

The way I see it, if your time horizon is truly 15-20 years, why mess around with any asset allocation portfolio?  Just put everything in stocks.  I've been figuring that once I've saved enough in the PP to cover basic living expenses, I might happily plow the rest into stocks - either bought directly or via index funds.

That is exactly my thinking as well. My plan is to use the PP as a low-risk savings vehicle for FIRE, then once I hit "the number," put new contributions into a more risky 100% stock allocation, slowly increasing the total portfolio percentage that's in stocks.

Normally I think of "FIRE" as "Finance, Insurance and Real Estate". How does this relate here? Is it saying you'd have enough money to pay for all of the insurance and housing/mortgage costs you'll have for the reasonable future? Or including something else?

[Pointedstick]

Financial Independence / Retire Early

[jafs]

That makes sense, Fred.

Is this really a PP though?  The even split between the asset classes seems to be a major feature of the idea.

[Greg]

Financial Independence / Retire Early

Ahh. My job is all acronyms, and I hate that there are multiple definitions for the same acronym. Thanks for the clarification.

[barrett]

The way I see it, if your time horizon is truly 15-20 years, why mess around with any asset allocation portfolio?  Just put everything in stocks.  I've been figuring that once I've saved enough in the PP to cover basic living expenses, I might happily plow the rest into stocks - either bought directly or via index funds.

That is exactly my thinking as well. My plan is to use the PP as a low-risk savings vehicle for FIRE, then once I hit "the number," put new contributions into a more risky 100% stock allocation, slowly increasing the total portfolio percentage that's in stocks.

I'm not planning on going that far!  But probably at least into the Golden Butterfly which is certainly more stock heavy and a bit less cash/short term.

Is this maybe a case of recency bias though? I mean stocks are not exactly tearing it up at the moment but they have been the least crappy of the big three. Would you all be feeling differently if stocks were down 10% this year with gold and LTTs flat?

[Cortopassi]

Is this maybe a case of recency bias though? I mean stocks are not exactly tearing it up at the moment but they have been the least crappy of the big three. Would you all be feeling differently if stocks were down 10% this year with gold and LTTs flat?

Of course.  Which is why I am delaying any change to my PP.

[Pointedstick]

Is this maybe a case of recency bias though? I mean stocks are not exactly tearing it up at the moment but they have been the least crappy of the big three. Would you all be feeling differently if stocks were down 10% this year with gold and LTTs flat?

I don't think so. Long-term, stocks have been the biggest drivers of portfolio growth in a reasonably stable society, even taking into account all the crashes. These crashes and all the volatility are intolerable for people with short-term savings goals, little liquidity, emotional problems when it comes to finances, or who are trying to live off the investments at more than like 2% SWR, and for such people the PP makes a great deal of sense. For long-term portfolio growth beyond what you need to live on, I don't see a big downside. If I'm already financially independent and my 100% stock VP crashes 50%, who cares? I can still live off of the PP part.

[Pointedstick]

This gets back to something I posted back in 2013: http://gyroscopicinvesting.com/forum/ot ... tor-a-myth

I'm still more optimistic about the PP now than I was when I wrote that, but I think there's still a very important lesson: the safest portfolio is one that's full of a shitload more money than you need. The actual asset allocation starts to matter less and less the more money you have. If your portfolio is all stocks but 100x your annual expenses, then you could endure a Japan-style long drawdown of 69% and be left with 31x annual living expenses which is still in the safe zone! You could live on the dividends alone forever and forget about the principal entirely.

The obvious counterargument is that with a portfolio 100x your annual expenses, the PP will be perfectly fine too. And that's true. But frankly such a large PP would get hard to manage, especially the physical gold part. I'm not sure how comfortable I'd be with half a million or more in gold coins. The total simplicity of a 100% something portfolio with no rebalancing, no physical goods, no weird tax games to play etc becomes pretty appealing IMHO.

I've observed that that the higher my net worth rises entirely through savings (because the PP sure hasn't been doing anything for the last two years) the less financially and monetarily conservative I seem to be. The abundance seems to be eroding the scarcity mindset that attracted me to conservative portfolios in the first place.

[Tyler]

The vertical years do not match the horizontal, i.e. 1972 year 2 does not match 1973 and so on.  Or am I misreading it wrong and the intention is to show sequence of returns risk?  If the latter, sophie may be right after all.  Crikey!!!

I'm fairly sure each row of the chart is showing the CAGR of an investment started in the year indicated and held for the indicated number of years.  So 1972 year 2 is showing the (annualized) CAGR of an investment made in 1972 and held for two years - as opposed to 1973 year 1 which shows the CAGR of an investment started in 1973 and held for 1 year.  The basic point of these kinds of charts is that they show how long you need to hold an investment until your CAGR approaches "normal".

Yep!  That's exactly right.  The goal is to quickly display every investing timeframe at a glance. There's usually quite a lot of turbulence hiding behind the long term averages of most portfolios, and if people really understood that I think many would make different choices.

[Cortopassi]

PS,

Your previous thread comment:

If you want to live off your investments, you just need a shitload of money.

Is 100% correct.  That was always my goal in being too risky for the first 20 years of investing, and getting absolutely freaking nowhere.  Now that I am older, with one child a couple years from college and another one 4 years after that, and at most ideally only 15 working years left, I am 180 degrees polar opposite of what you are saying about yourself become less risk averse.  As my net worth grows, I am much more risk averse. 

I see three cases --

1) Shitload of money.  Then you are right, and I would have been more than happy to have it all in a 5% money market (not possible now or in the foreseeable future)
2) Not enough money to live carefree.  Mentally I am able to deal with that, if it ends up being the case.  Live day to day and do what you can.
3) Somewhere in the middle.  This is ME right now and scares the crap out of me. I want the pendulum to swing to #1, but with things the way they are with the PP and my aversion to too high of a stock concentration, my retirement situation can go either way.  The unknown is the most scary part.

[Pointedstick]

Yes, I agree, Corto. The stage when you have between 5 and 25x expenses is the scary one. You're working toward financial independence, but you're not there yet, and every loss or down year sets back your goal…

For me a big focus has been on controlling costs. I think you and I have different feelings about college, but if you're going crazy trying to figure out how to spend half a million dollars to send your kids to top-tier schools, I could see how that's stressful. But there are alternatives, I promise! You can beat the system! And I think college is overrated anyway. It's over in four years and even if you have a very negative college experience like I did, you'll probably be just fine if your head is screwed on straight and you have a loving family.

[sophie]

Yup, agree with PS.  Use the PP to build a base of money that will be the most dependable lifeline you can possibly have:  minimized risk of painful drawdowns, plenty of cash to draw on for emergencies, built-in protection against several Black Swan events, and built-in asset management.  This is more dependable than a job or any government benefits you can think of.  Perfect it is not, because there's no such thing, but it's pretty darn close.

Once you have that, you can now go out and take risks that you might otherwise not have.  You can quit your job, start your own business, put new savings into higher yielding but riskier investments, spend money on something you might have hesitated on in the past, etc.  Or just wake up in the morning and feel like you don't need to pander to your boss or take on more work than you really want to.

PS I get the idea that you're pretty close to FIRE - what will you do when you get there?  I figure I'm about 3 years away, but since I'm highly unlikely to lose my job in that 3 years I'm already enjoying some of the above benefits.  Corto - you'll get there soon enough!

And incidentally, who says the PP has "done nothing" for the past two years?  It was negative in 2013 and will be slightly negative this year, probably, but mine was up 9% in 2014.  It's definitely trailed my stock/bond retirement portfolios, but just wait for that next market crash.

[Cortopassi]

No, no plans on high cost colleges. 

I don't know how true those "Net Cost Calculators" are on the college websites, but I did a few of those, and plugged in real numbers for salary, assets, etc and I really was getting numbers like $14,000 for Harvard, $12,000 for Princeton and similar for Stanford. 

Odds of getting in are difficult, but I also have two fully paid prepaid tuition plans for Illinois schools, so that is always an option.

I have no plans of breaking the bank for college, or care at all about a prestigious name.

We live on squat.  I am a cheap bastard.  Our mortgage is paid.  Our highest expenditure per year is real estate taxes of about $9500. 

[Tyler]

I was at one time convinced that choice of portfolio is everything.  I now believe, firmly, that your choice of portfolio is of minimal importance compared to your ability to stick with it over the long term. 

I completely agree.  I do believe AA is very important, but not for the reasons most people think. 

It's important to avoid bad asset allocations (concentrated bets on volatile recent performers, for example).  But once you've passed that threshold, your ability to actually stick with the same plan for many years (and avoid shooting yourself in the foot along the way) is far more important to your ultimate returns than tweaking the percentages of your holdings.  Most people who lose money blame the markets or the portfolio, when reality their own shortsighted choices are the main culprit. 

Asset allocation is still very important to the extent that you're comfortable with your portfolio holdings, volatility, and longest potential drawdown and are willing to trust your decision even when times are bad.  Since everyone has different personalities, biases, and needs, no single portfolio will work for everyone.  But no single portfolio needs to work for everyone if they can just settle on one that works for them and leave it alone! 

[barrett]

No, no plans on high cost colleges. 

I don't know how true those "Net Cost Calculators" are on the college websites, but I did a few of those, and plugged in real numbers for salary, assets, etc and I really was getting numbers like $14,000 for Harvard, $12,000 for Princeton and similar for Stanford. 

Odds of getting in are difficult, but I also have two fully paid prepaid tuition plans for Illinois schools, so that is always an option.

I have no plans of breaking the bank for college, or care at all about a prestigious name.

We live on squat.  I am a cheap bastard.  Our mortgage is paid.  Our highest expenditure per year is real estate taxes of about $9500.

Hopefully you give yourself credit for all of the above. In spite of your horrendous investing record that you often write about, many of your financial decisions have been outstanding.

[Pointedstick]

Odds of getting in are difficult, but I also have two fully paid prepaid tuition plans for Illinois schools, so that is always an option.

Then you hit the jackpot! the UI system is awesome! I grew up in Champaign-Urbana and am still sort of kicking myself that I didn't attend UIUC. Several friends did and had wonderful experiences. I'm going to go out on a limb and say that if you're the kind of person who posts to this forum and has prepaid tuition there, I have a feeling your kids are going to be accepted.

Our highest expenditure per year is real estate taxes of about $9500.

Whoa!!!! That's crazy high! Are you in Chicago or CU? That's a rough position to find yourself in, for sure. Any plans to retire somewhere cheaper?

[Pointedstick]

Asset allocation is still very important to the extent that you're comfortable with your portfolio holdings, volatility, and longest potential drawdown and are willing to trust your decision even when times are bad.  Since everyone has different personalities, biases, and needs, no single portfolio will work for everyone.  But no single portfolio needs to work for everyone if they can just settle on one that works for them and leave it alone!

I think this is the most important thing to understand. If you choose an asset allocation that is hypothetically objectively the best one out there, but you can't stay with it because you hate it, it's worthless. A 100% anything portfolio held for 30 years and bought consistently is probably a million times better than jumping in and out of different strategies over time.

However, your emotions change over time. At one point in your life, you may feel comfortable investing very aggressively, and at another time, you may feel the need to be much more conservative, and both can be totally legitimate feelings--but doesn't this constitute jumping around? What if you turn conservative just before a huge stock boom (raises hand) orbecomey comfortable with more volatility and risk just before the market collapses?

It's one thing to Know Thyself, but when happens when Thyself changes?

[Pointedstick]

Yup, agree with PS.  Use the PP to build a base of money that will be the most dependable lifeline you can possibly have:  minimized risk of painful drawdowns, plenty of cash to draw on for emergencies, built-in protection against several Black Swan events, and built-in asset management.  This is more dependable than a job or any government benefits you can think of.  Perfect it is not, because there's no such thing, but it's pretty darn close.

Once you have that, you can now go out and take risks that you might otherwise not have.  You can quit your job, start your own business, put new savings into higher yielding but riskier investments, spend money on something you might have hesitated on in the past, etc.  Or just wake up in the morning and feel like you don't need to pander to your boss or take on more work than you really want to.

PS I get the idea that you're pretty close to FIRE - what will you do when you get there?  I figure I'm about 3 years away, but since I'm highly unlikely to lose my job in that 3 years I'm already enjoying some of the above benefits.  Corto - you'll get there soon enough!

Yep, I'm 3 about years away from hitting my target assuming zero investment returns during that time. I'll get there in two years if the PP goes up an average of 10% per year instead.

As for what I want to do, I plan to start businesses to pursue all the zany ideas I have kicking around in my head, and use my stock-heavy VP to provide seed money. I may work another year or two longer than necessary to build the fund up even more, putting 100% of my paycheck into it and living off the PP, and also because I kinda like my job and might wanna stay on for a bit longer. And stashing away more cash would make me feel better about the prospect of affording health care without the cushy corporate cadillac health insurance I currently have for the family. That's my biggest worry, in fact. I'm concerned that I might take so little income in retirement that we'll get kicked onto Medicaid. I don't want that at all.

I also plan to become a better cook and make dumplings and cheesecake all the friggin' time.

[bigamish]

PS,

Your previous thread comment:

If you want to live off your investments, you just need a shitload of money.

Is 100% correct.  That was always my goal in being too risky for the first 20 years of investing, and getting absolutely freaking nowhere.  Now that I am older, with one child a couple years from college and another one 4 years after that, and at most ideally only 15 working years left, I am 180 degrees polar opposite of what you are saying about yourself become less risk averse.  As my net worth grows, I am much more risk averse. 

I see three cases --

1) Shitload of money.  Then you are right, and I would have been more than happy to have it all in a 5% money market (not possible now or in the foreseeable future)
2) Not enough money to live carefree.  Mentally I am able to deal with that, if it ends up being the case.  Live day to day and do what you can.
3) Somewhere in the middle.  This is ME right now and scares the crap out of me. I want the pendulum to swing to #1, but with things the way they are with the PP and my aversion to too high of a stock concentration, my retirement situation can go either way.  The unknown is the most scary part.

Yes, I agree, Corto. The stage when you have between 5 and 25x expenses is the scary one. You're working toward financial independence, but you're not there yet, and every loss or down year sets back your goal…

For me a bug focus has been on controlling costs. I think you and I have different feelings about college, but if you're going crazy trying to figure out how to spend half a million dollars to send your kids to top-tier schools, I could see how that's stressful. But there are alternatives, I promise! You can beat the system! And I think college is overrated anyway. It's over in four years and even if you have a very negative college experience like I did, you'll probably be just fine if your head is screwed on straight and you have a loving family.

Yup, agree with PS.  Use the PP to build a base of money that will be the most dependable lifeline you can possibly have:  minimized risk of painful drawdowns, plenty of cash to draw on for emergencies, built-in protection against several Black Swan events, and built-in asset management.  This is more dependable than a job or any government benefits you can think of.  Perfect it is not, because there's no such thing, but it's pretty darn close.

Once you have that, you can now go out and take risks that you might otherwise not have.  You can quit your job, start your own business, put new savings into higher yielding but riskier investments, spend money on something you might have hesitated on in the past, etc.  Or just wake up in the morning and feel like you don't need to pander to your boss or take on more work than you really want to.

PS I get the idea that you're pretty close to FIRE - what will you do when you get there?  I figure I'm about 3 years away, but since I'm highly unlikely to lose my job in that 3 years I'm already enjoying some of the above benefits.  Corto - you'll get there soon enough!

And incidentally, who says the PP has "done nothing" for the past two years?  It was negative in 2013 and will be slightly negative this year, probably, but mine was up 9% in 2014.  It's definitely trailed my stock/bond retirement portfolios, but just wait for that next market crash.

This is one of the best sequences of posts I've seen in awhile.  I hope the new PPers take note.  For many of us (myself included) it really is about the long game, staying the course, saving profusely, and reaching your FIRE goals in as safe a manner as possible.  Then afterwards having the financial freedom to get fancy should one choose to do so.

I now return to my lurker hibernaculum.

[MachineGhost]

It seems extremely counter-intuitive that a very cash heavy portfolio would be the best way to beat inflation.

Don't confuse short term Treasury debt with zero duration currency.  I would have preferred if 1-year T-Bills were available because the ST Treasury fund actually has a duration of about 2.3 years.  Duration differences can matter a lot in tightening cycles or other sensitive climates.

In reality we would just ladder/stack the cash in individual 5-year CD's to get the best of all worlds anyway.  Bond funds are deadly.

[Tyler]

However, your emotions change over time. At one point in your life, you may feel comfortable investing very aggressively, and at another time, you may feel the need to be much more conservative, and both can be totally legitimate feelings--but doesn't this constitute jumping around? What if you turn conservative just before a huge stock boom (raises hand) orbecomey comfortable with more volatility and risk just before the market collapses?

It's one thing to Know Thyself, but when happens when Thyself changes?

IMHO, the key is to realize why optimizing your investments feels so important in the first place.

Investing often becomes especially stressful for prospective early retirees.  They have a really big goal in mind with that money (one of the few that can't be bought on credit), and want it as fast as possible.  But a retirement date can be just as negatively affected by volatility of a large portfolio as it can be positively affected by returns.  It's that unpredictable balance, interspersed with very here-and-now career pain and all kinds of other life events, that causes a lot of cognitive dissonance.  Based on where you are at any given moment, you may feel more or less risk averse.  That's perfectly normal, if not particularly helpful for your investment plan. 

I've been FIRE for over a year now.  Now that I think about it, it's kinda interesting how my perspective on money has changed.  The last few years before reaching my goal were full of a variety of emotions, so I definitely understand the conflicting goals and motivations.

I wouldn't say I'm more or less financially conservative after FIRE.  If anything, I'm simply less emotional about money.  Where I used to check my investments dozens of times a day, now I'll go weeks without thinking about them.  I sometimes think about tweaking my PP in the retirement account, but it's more of an intellectual exercise to practice good money management than a desire to make more money I don't need or dial down risk even more.  I've personally found that once a sustainable system is in place, constantly reevaluating my investment risk tolerance seems kinda unimportant in comparison. 

[MachineGhost]

The way I see it, if your time horizon is truly 15-20 years, why mess around with any asset allocation portfolio?  Just put everything in stocks.  I've been figuring that once I've saved enough in the PP to cover basic living expenses, I might happily plow the rest into stocks - either bought directly or via index funds.

I hate to nitpick again as I haven't read all of Browne's relevant books to follow the evolution, but my current impression is he did all the backtesting and research in the 1970's with Coxon to come up with the PRPFX which is a very real asset heavy portfolio.  Then he simplified that down to the orthodox PP in 1987 for his new book.  If he actually did any additional research in the interim, I'd be very interested to read about it!

The PP may not get any respect, even from me, because it just seems like an oversimplified, dumbo's portfolio for the Boobus masses.  But even after three or four years of personally working to attack it, it turns out to be a set of Matryoshka dolls.  Sometimes innovative serendipity like that does happen out of sheer dumb luck and I'd like to know for sure or not.  I'm not a Browne worshipper.  I think he was politically flawed and that people overestimate his financial intelligence in coming up with the PP.  So I remain to be proven wrong.