Timing the Permanent Portfolio (and Ivy, Swensen, Arnott, Bernstein…)

[Roy]

I didn't realize how much response this post would invoke, but some great replies and analysis. I'm in no way advocating market timing, but I did see a lot of replies regarding the emotion invoked by a technique advocated by Mebane Faber. In fairness to his approach, he clearly states in his book that most investors are better off not employing market timing.

However, if you are so interested, then doing market timing should involve no emotion, but rather a clear set of rules/logic to drive the decisions, and sticking by those rules through thick and thin. This is true of any portfolio allocation, including the PP. Many investors tweak their allocation so much they do more harm than good.

I agree with Faber.  As implied, staying with any strategy (including conventional ones), and even the simple act of rebalancing, can be trying events because of emotions.  Some advisors told me that even with conservative portfolios, their clients were hitting the "Get Me Out Point" or not wanting to rebalance, during the last downturn.  If comparatively simple tasks like that are nerve-wracking, how much more challenging is the task if timing mechanisms (and perhaps even more asset classes to juggle) are added to the chore?  So, I suppose these tactics (however we may question their utility) are for the very few, as Faber himself suggests.  But I wonder how many become enticed into believing that they should be included among that very few?

[Bonafede]

I don't know y'all, but I still think there is something to this Ivy Portfolio, and perhaps combining the PP. Purely mechanical by design, the returns seem pretty similar to the PP. I don't know...just don't know?

[AdamA]

I don't know y'all, but I still think there is something to this Ivy Portfolio, and perhaps combining the PP. Purely mechanical by design, the returns seem pretty similar to the PP. I don't know...just don't know?

The problem is, that it really changes the nature of the PP.

With the PP, you buy assets when they are out of favor and sell them when they are in favor.  With trend following techniques, you buy when the asset is starting to become popular and sell when it is starting to become unpopular (at least in theory).

I do agree that there may be something to the idea of trading market trends that are based on mass psychology, but I just don't have enough confidence going forward that it will work. 




 

[moda0306]

I tend to wonder whether the world of millisecond trades we have today affects the investing public in some ways that will affect what historically seem to be reliable indicators.

I have no idea how this would manifest itself, but I have to think it would change technical indicators going forward.

[Exocet]

For those of you who remember the "Gummy stuff" work (I'm not sure if it is still available here http://www.financialwebring.org/gummy-stuff/), Gummy developed a great spreadsheet to test the 200-MA concept with any security, whether individual stock, ETF, fund, etc.  I ran several scenarios with the spreadsheet, and my conclusions were:

1) For volatile securities: higher CAGR and lower STD Dev can be achieved with 200-MA

2) PPRFX did not increase CAGR or decrease STD Dev with 200-MA (better to stay fully invested at all times)

3) Applying 200-MA to each individual component of the PP increased the CAGR of the overall PP

The methodology in the Gummy spreadsheet allowed for a certain margin below and above the 200-MA.  The results above were achieved with 1% above/below.

[SmallPotatoes]

Chart PRPFX against GTAA.

It's a loose comparison, but you will get the idea. 

[Bonafede]

For those of you who remember the "Gummy stuff" work (I'm not sure if it is still available here http://www.financialwebring.org/gummy-stuff/), Gummy developed a great spreadsheet to test the 200-MA concept with any security, whether individual stock, ETF, fund, etc.  I ran several scenarios with the spreadsheet, and my conclusions were:

1) For volatile securities: higher CAGR and lower STD Dev can be achieved with 200-MA

2) PPRFX did not increase CAGR or decrease STD Dev with 200-MA (better to stay fully invested at all times)

3) Applying 200-MA to each individual component of the PP increased the CAGR of the overall PP

The methodology in the Gummy spreadsheet allowed for a certain margin below and above the 200-MA.  The results above were achieved with 1% above/below.

Just out of curiosity, how did you determine the above?

[Bonafede]

Chart PRPFX against GTAA.

It's a loose comparison, but you will get the idea. 

Small Potatoes....good Point. Good point indeed. I've been questioning the whole timing thing more and more, particularly given the volatile past couple of weeks. Assuming you followed the Ivy Portfolio timing model, you'd actually have gotten out of the market mostly in all noted asset classes around 8/1 (as they were below the 200-SMA). What makes me question the whole credibility of the timing thing, even one with 'controls' like the Ivy Portfolio is this....(Using the Ivy Portfolio as an example):

Assume the all asset classes were above the 200 SMA on 8/1, so you're all in...but the market just crashes, or significantly drops on 8/2, well according to the Ivy Portfolio, you'd have to wait until 9/1 to reevaluate the assets and compare against the 200 SMA. By that time you may have already wiped out a huge chuck of your portfolio.

What I'm saying is...even mechanical timing seems to have significant challenges, and I'm becoming more and more convinced is not the best way to invest. Maybe in a VP...but man, even that requires a lot of work.

-b

[6 Iron]

Rebalancing is little different to timing and can make a big differences (either way). Much depends upon whether the prior trend continues or reverses after having rebalanced.

Midway rebalancing is more likely to achieve the average figure, not being the best, not being the worse - middle road.

Of all of the myriad modifications proposed to HB's permanent portfolio, Clive's proposal of midway rebalancing makes the most sense to me and seems, to me, in the spirit of the permanent portfolio.

[gonetowindsurf]

I believe with the Ivy Portfolio you would rebalance at the end of the month, so if an asset class breached the Moving Average, you would wait until the end of the month to see if it recovered before initiating a buy or sell.
If you look at the short term graph in the link, you can see that there were sell and buy signals initially, but the trend did infact continue without the need to buy or sell the asset.

http://www.mebanefaber.com/timing-model/