Maximum DRAWDOWN in a HB-PP

[frugal]

Hello HB followers,

I know the yearly return (profit and loses) from the past 3 decades, but I don't know what was during those years the maximum DD that HBPP had.

So, for a year that had +10% could have in the middle of the year -15 ou -20% ?


Can you please clear up this situation and where can we see that data.


With my best regards

[Peak2Trough]

If you reinvest dividends and rebalance on 35/15 bands, my data shows a 18.4% maximum drawdown from January 1980 to March 1980.

2008 is another interesting year because although the HBPP ended basically flat, there was a 14% drawdown from March to November of that year.

[Pointedstick]

https://web.archive.org/web/20160324133 ... l-returns/

[k9]

Don't forget to include inflation. That implies a HUGE drawdown in 1980. Quite bad for a conservative asset allocation, but that doesn't happen often, so...

[craigr]

All portfolios can have bad drawdowns. There is no way to know what the maximum will be going forward. My general observation with the Permanent Portfolio is that it moves like a rudder of a ship, not like a motorbike. So the change in assets could be sudden, but more likely it will be a somewhat slower move to offset drawdowns. The key is to have some funds in a big slug of cash so you can wait things out if it happens. This is why I really like the cash allocation even though it gives a lot of people heartache. When the markets are doing crazy stuff, having a cushion of cash is really calming and can keep investors from making bad knee jerk reactions.

[frugal]

If you reinvest dividends and rebalance on 35/15 bands, my data shows a 18.4% maximum drawdown from January 1980 to March 1980.

2008 is another interesting year because although the HBPP ended basically flat, there was a 14% drawdown from March to November of that year.

18,4 is already a big DD 
It's not the same as looking only to the end of the years...
Psicologically it is not easy.

https://web.archive.org/web/20160324133 ... l-returns/

Missing max DD

Don't forget to include inflation. That implies a HUGE drawdown in 1980. Quite bad for a conservative asset allocation, but that doesn't happen often, so...

Inflation is the same for one ALL people, so we only have to invest as best as we can.

All portfolios can have bad drawdowns. There is no way to know what the maximum will be going forward. My general observation with the Permanent Portfolio is that it moves like a rudder of a ship, not like a motorbike. So the change in assets could be sudden, but more likely it will be a somewhat slower move to offset drawdowns. The key is to have some funds in a big slug of cash so you can wait things out if it happens. This is why I really like the cash allocation even though it gives a lot of people heartache. When the markets are doing crazy stuff, having a cushion of cash is really calming and can keep investors from making bad knee jerk reactions.

After being FINANCIAL INDEPENDENT the approach should be the same with a PP?





Thank you ALL!

[LifestyleFreedom]

A drawdown is not the same thing as losing money when you have a long-term horizon.  When there is a drawdown and you need to cash out the investment in the short term for personal financial reasons, then yes, the end result is a permanent loss of capital.

With a long-term horizon and plenty of cash, you can ride out a drawdown.  The conventional wisdom is to have an investment portfolio that is worth 25 to 33 times your annual living expenses (which is where the 4% to 3% safe withdrawal rate idea comes from).  With 25% of the HBPP portfolio in cash, that means you have 6 to 8 years of living expenses in cash in the HBPP.

You can decide for yourself about the risk that an HBPP drawdown in the future will last more than a few years (in other words, past performance is no guarantee of future results):
http://crawlingroad.com/blog/wp-content ... 2-2011.png

[Reub]

Is there another type of diversified, all weather portfolio that does relatively well when the PP does poorly?

[MediumTex]

Is there another type of diversified, all weather portfolio that does relatively well when the PP does poorly?

100% cash perhaps?

[Pointedstick]

Is there another type of diversified, all weather portfolio that does relatively well when the PP does poorly?

The Temporary Portfolio: short stocks, short bonds, short gold, and short cash! 

[LifestyleFreedom]

Is there another type of diversified, all weather portfolio that does relatively well when the PP does poorly?

The PP is a way to tame Mr. Market.  Three strongly-noncorrelated but highly-volatile asset classes (stocks, long-term bonds, and gold) are played off against each other to sell high and buy low.  The fact that some of these asset classes produce an income stream (dividends or interest) is a detail.  Mr. Market and a disciplined rebalancing strategy do the heavy lifting for the portfolio.

Another approach to investing is buying assets that produce a rising income stream that stays even or ahead of inflation.  Examples include income real estate and dividend growth companies.  Mr. Market only plays a role when the assets are purchased initially.  From then on, the assets themselves do the heavy lifting.  As long as the assets continue to produce a sustainable growing income stream, they are kept and their market price is irrelevant.  Perhaps one's heirs care what their market price is, but the current owner should not care.

[k9]

Unless that particular asset is overvalued. If a house I own or a dividend-growing stock became so expensive that capital gains would provide me with as much money as the 20 next years of income, I couldn't resist the idea of selling it & reinvest the money in something where price & income are not that disconnected.

[Peak2Trough]

You're right, an 18% drawdown is not insignificant.  But you have to keep it in perspective...

Over that same period, a 100% stock portfolio had a MDD of 55%.

A 60% stock, 40% LTT had MDD of 34%.

Both of those had similar returns to the HBPP, so on a risk-adjusted basis, the HBPP absolutely crushed the more "standard" portfolios...

[HB Reader]

You're right, an 18% drawdown is not insignificant.  But you have to keep it in perspective...

Over that same period, a 100% stock portfolio had a MDD of 55%.

A 60% stock, 40% LTT had MDD of 34%.

Both of those had similar returns to the HBPP, so on a risk-adjusted basis, the HBPP absolutely crushed the more "standard" portfolios...

Having lived through 1980 as a young investor, I agree.  In March 1980 it was just becoming clear to many investors that the Volcker Fed was serious about the tightening announced in October 1979.  For the next couple of years, it was a very unsettled time in all investment markets.  It wasn't clear for a long period if gold had really peaked and traditional stock/bond portfolios were taking big hits.  The only really safe place to hide was TBills and money market funds.

That was a little before HB came up with PP as we know it here, but in his newsletter he had already gotten out of precious metals and was biding his time in Treasury money market funds.  An HBPP as we know it here would have taken a hit, but would have fared better than most other diversified strategies.  It would have also "forced" you to position yourself to participate to some degree in the subsequent stock and bond bull markets that began developing in 1982. 

[LifestyleFreedom]

Unless that particular asset is overvalued.

I also prefer a drawup to a drawdown because it makes me look like a genius.

[j831526]

The IVY Portfolio has some similarities to the HBPP. Faber has 5 asset classes: U.S. Stocks, U.S. Bonds, non-U.S. stocks, commodities, and real estate. He doesn't include cash as an asset class, but individual investors can do that themselves. He has a re-balancing strategy (don't recall what it is, but it's there). His main difference besides his asset classes is a technical strategy to avoid large draw downs. He uses the 10 month moving average. Any asset class ETF below its 10 month simple MA is sold and left in cash until it regains its MA.

I'm not particularly fond of monthly MA check and the potential whipsaws, but the general idea of adding a technical circuit breaker of some type to escape an asset class experiencing a secular bear market has an emotional appeal to me.

Has anyone experimented with a similar idea, or does this destroy the premise behind the way HBPP operates?

Thanx

[craigr]

The IVY Portfolio has some similarities to the HBPP. Faber has 5 asset classes: U.S. Stocks, U.S. Bonds, non-U.S. stocks, commodities, and real estate. He doesn't include cash as an asset class, but individual investors can do that themselves. He has a re-balancing strategy (don't recall what it is, but it's there). His main difference besides his asset classes is a technical strategy to avoid large draw downs. He uses the 10 month moving average. Any asset class ETF below its 10 month simple MA is sold and left in cash until it regains its MA.

I'm not particularly fond of monthly MA check and the potential whipsaws, but the general idea of adding a technical circuit breaker of some type to escape an asset class experiencing a secular bear market has an emotional appeal to me.

Has anyone experimented with a similar idea, or does this destroy the premise behind the way HBPP operates?

Thanx

I've never seen market timing based on moving averages (or any other kind of market timing) work in practice. For one, the theory may be fundamentally broken. Why is 10 months the right number? Why not 9 months? Why not 12.5? Why not 18.92?

Then there is the human emotion side. You have to sell out, then you have to buy back in. That's two points of stress. First you have to be robotic enough to watch the markets constantly and not let it get to you. Then you have to act on the signals. So do you sell immediately? But you just read something that makes you think you should wait because things might turn around. Oh no it fell some more. Ok so you sell now. Then a month later (as you point out) it goes back up. Drat. Time to buy again, but this time you think it may fall so you wait a little. Shoot. Went up again! Now you buy in. Oh no, it dropped. Time to sell again! Wait, how much was this costing me in taxes and trading fees? Oh well never mind that. So I gotta sell, but it might recover so I'll wait. Ooops, it kept falling! Damn it, I knew I should have sold. I'll do it tomorrow. Etc.

I think the above inner dialogue is very common in most investors trying to market time. It's hard enough for a mechanical rebalancing like the Permanent Portfolio. I can't imagine how hard it would be to have to go through this inner turmoil constantly.

[Pointedstick]

Then there is the human emotion side. You have to sell out, then you have to buy back in. That's two points of stress. First you have to be robotic enough to watch the markets constantly and not let it get to you. Then you have to act on the signals. So do you sell immediately? But you just read something that makes you think you should wait because things might turn around. Oh no it fell some more. Ok so you sell now. Then a month later (as you point out) it goes back up. Drat. Time to buy again, but this time you think it may fall so you wait a little. Shoot. Went up again! Now you buy in. Oh no, it dropped. Time to sell again! Wait, how much was this costing me in taxes and trading fees? Oh well never mind that. So I gotta sell, but it might recover so I'll wait. Ooops, it kept falling! Damn it, I knew I should have sold. I'll do it tomorrow. Etc.

This is so true. It can even affect the "experts", as shown rather dramatically in this epic Bogleheads thread: http://www.bogleheads.org/forum/viewtopic.php?t=5934

[k9]

Then there is the human emotion side. You have to sell out, then you have to buy back in. That's two points of stress. First you have to be robotic enough to watch the markets constantly and not let it get to you. Then you have to act on the signals. So do you sell immediately? But you just read something that makes you think you should wait because things might turn around.

Ten months MA is not "watching the markets constantly". Ten months MA moves slowly.
That being said, I don't really see the difference with the PP here.

It's 1999 and I should sell my stocks ? But look at the returns ! And buy so much gold ? Are you kidding me ? Gold was down for 20 years, I haven't stopped buying it and it's getting lower and lower, and you want me to buy more instead of those +50% stocks ? Gold, in the new economy ? It's not 1973 anymore !

OK, now it's late 2008 and I should buy some stocks ? But look at what just happened ! And sell my precious gold ? At the end of the world as we know it

Once you've got a strategy and you're sure it's right for you, the only thing to do (and it's the hard part) is to apply the procedure like a robot and not let emotions interfere with you. I'm not sure the advised MA strategy is good there, but it's not harder to apply it consistently once you're convinced by it.

[j831526]

K9 is correct; Faber only reviewed the portfolio monthly. While this works well in his stats, it wouldn't have worked so well if the timing of market downturns were such that much of the damage was done before his review date. Those who claim he could always intervene early when things looked bad are re-introducing emotion over discipline.

I had in mind using weekly P&F charts based on the average true range for the ETF and using 2 box reversals. If you look at some sample charts done this way, you'll do very little trading and always be on the right side of the big trends with few whipsaws. Using the charts of VTI, TLT, and GLD I saw a 50% gain for VTI, 6.7% loss for TLT, and a 10% loss for GLD using the limited data available. The VTI data covered 2 significant market downturns while the TLT and GLD data covered none (GLD was exited on a 3 box drop from the top and hasn't had a new buy signal since; so, the last exit trade data isn't complete).

The possible conclusion based on only this limited experiment is you pay about 10% insurance during an extended secular bull market but can avoid 35% (added VNQ in here) to 50% losses when the bear gets nasty.

Ok, I just really like P&F charts:-)

[Gosso]

I think 50% in a PP and 50% in a SMA VP is a nice split.  When the markets are flat and the SMA is getting whipsawed then you'll be happy to have the B&H of the PP.  When gold or stocks tank then you'll be glad the SMA placed you in cash before things got nasty.

I like the idea of diversifying investment strategies.  But as Craig said, it requires a thorough understanding (and trust) of the SMA strategy, or else the person is likely to screw it up.  You gotta fully commit, if not then don't bother.

This is also a hedge against the PP failing to work in the future.  I don't think this will happen, but in my mind the SMA strategy doesn't hurt me and adds diversification.

[j831526]

I need to clarify my previous append. The "losses" for GLD and VTI were not absolute losses. They were relative losses to what you'd have made with a buy and hold strategy. As a straight trading vehicle the weekly ATR close only P&F charts don't generate much profit unless you've had a BIG sell off and a chance to get in cheap for a good rebound. Whipsaws are surprisingly expensive. Using the charts I describe strips out a lot of noise; you're in positions for years - not weeks or months. This is what suggested them to me as a potential bear market circuit breaker add-on to HBPP.

[craigr]

Then there is the human emotion side. You have to sell out, then you have to buy back in. That's two points of stress. First you have to be robotic enough to watch the markets constantly and not let it get to you. Then you have to act on the signals. So do you sell immediately? But you just read something that makes you think you should wait because things might turn around.

Ten months MA is not "watching the markets constantly". Ten months MA moves slowly.

You have to watch the charts though. It is a chart reading technical analysis system. You can't just let it glide for weeks or months. You have to check at least weekly. IMO.

That being said, I don't really see the difference with the PP here.

I don't disagree that all passive portfolios that use rebalancing are going to have an emotional rebalancing effect. It is unavoidable unless you are letting it all ride and not rebalancing. But the Permanent Portfolio bands are very wide so this impact is very minimal. Plus, there is almost no chance of getting whipsawed like in a moving average strategy.