PP compared to 8 other asset allocation strategies by Mebane Faber

[BP]

Great chart at the bottom of the blog post:

http://www.mebanefaber.com/2013/07/31/a ... ategies-2/

[annieB]

Awesome.
PP looks like the clear best of class.

[frommi]

Awesome.
PP looks like the clear best of class.

Hm its the lower blue line, isn`t it? 
For Max-DD the PP is the best, but for CAGR there are better ones. 1% more return means you need 20-25% less assets to fund your retirement. And around 20-25% DD is acceptable for that 1% in my eyes. 25% S&P500, 25% EU Stocks, 25% Longterm Bonds and 25% Gold does exactly that according to the Simba spreadsheet. (10,6% CAGR, 11,1% StdDev, Sharpe 0,52 from 1972->2011)

[annieB]

Good for you that you can stand the drawdowns but we've had folks near freaking out at 3-5%.

[MediumTex]

It would be nice if you could just wait for one of those huge drawdowns and buy some of those portfolios then.

[craigr]

Good for you that you can stand the drawdowns but we've had folks near freaking out at 3-5%.

Indeed. In the words of the great Mike Tyson:

"Everybody's got a plan until they get punched in the face."

[goodasgold]

But in computing the PP's CAGR, did Faber take into account rebalancing the portfolio when any segment reaches the recommended bands?

Without this calculation, it seems to me that Faber's results would be greatly distorted.

Comment, anyone?

[frommi]

But in computing the PP's CAGR, did Faber take into account rebalancing the portfolio when any segment reaches the recommended bands?

Without this calculation, it seems to me that Faber's results would be greatly distorted.

Comment, anyone?

The results are with rebalancing.
Playing around with http://www.peaktotrough.com/hbpp.cgi you get 20% Max-Drawdown for the PP 25/25/25/25 and 23,4% Max-Drawdown with 50/25/25/0.
That is nearly the same Drawdown but 1% higher CAGR .

[buddtholomew]

But in computing the PP's CAGR, did Faber take into account rebalancing the portfolio when any segment reaches the recommended bands?

Without this calculation, it seems to me that Faber's results would be greatly distorted.

Comment, anyone?

The results are with rebalancing.
Playing around with http://www.peaktotrough.com/hbpp.cgi you get 20% Max-Drawdown for the PP 25/25/25/25 and 23,4% Max-Drawdown with 50/25/25/0.
That is nearly the same Drawdown but 1% higher CAGR .

According to the calculator, the PP has experienced a DD of 7.21 YTD in late June. Is this accurate? I don't recall experiencing this magnitude of a loss, but I did contribute to GLD and TLT over this time frame.

[frommi]

According to the calculator, the PP has experienced a DD of 7.21 YTD in late June. Is this accurate? I don't recall experiencing this magnitude of a loss, but I did contribute to GLD and TLT over this time frame.

The EU-PP had a DD of 7.1% on 28-June, so yes it seems to be right.

[AgAuMoney]

It would be nice if you could just wait for one of those huge drawdowns and buy some of those portfolios then.

Yeah, maybe just keep 25% in cash so you are ready to pounce on the deal when they occur!

Oh, wait...

[buddtholomew]

According to the calculator, the PP has experienced a DD of 7.21 YTD in late June. Is this accurate? I don't recall experiencing this magnitude of a loss, but I did contribute to GLD and TLT over this time frame.

The EU-PP had a DD of 7.1% on 28-June, so yes it seems to be right.

That may be true, but I am referring to the peaktotrough.com calculator referenced in goodasgold's post. The hard-coded investment classes are US market indices.

[frommi]

That may be true, but I am referring to the peaktotrough.com calculator referenced in goodasgold's post. The hard-coded investment classes are US market indices.

Etfreplay has a portfolio of GLD,SHY,EDV and VTI at -8.4% DD from top and -6.8% from start of the year.

[dragoncar]

Good for you that you can stand the drawdowns but we've had folks near freaking out at 3-5%.

I've said it before and I'll say it again.  People creaking out at 3-5% drawdowns are doing so because they don't expect it from a portfolio touted as "amazingly stable."  It's a matter of expectation, not just the raw drawdown number.  So if they expect up front to get a 25% drawdown (ie that is in their plan) then they could be fine.  Not that anyone should expect less than a 20% potential DD with the HBPP.

As for the no cash portfolios... They don't really exist in the drawdown phase.  I think it's important to model both accumulation and drawdown phases because different portfolios may be more optimal in each phase.

[frommi]

As for the no cash portfolios... They don't really exist in the drawdown phase.  I think it's important to model both accumulation and drawdown phases because different portfolios may be more optimal in each phase.

You are right, and the PP is not the answer to all questions in this regard. I currently have a savings rate of 80%, so every month 80% of fresh cash comes in ready to be deployed in the market or used for unusual expenses. I don`t really have a use for cash lying around, unless i want to be a market timer. In the drawdown phase i think having around 1 year of expenses in cash may be appropriate, but that will never be 25% of all assets for me (except we get a time like 1970-1980 again when cash interest rates are like 10 year t-bond rates or above, that was the time HB invented the portfolio so back then it made perfect sense).

[buddtholomew]

That may be true, but I am referring to the peaktotrough.com calculator referenced in goodasgold's post. The hard-coded investment classes are US market indices.

Etfreplay has a portfolio of GLD,SHY,EDV and VTI at -8.4% DD from top and -6.8% from start of the year.

Traditional HBPP does not hold EDV for the long-term treasury portion of the portfolio. Use TLT for modeling purposes as EDV will distort DDs when treasuries are declining.

[Pointedstick]

Historically, cash has significantly increased the robustness of the portfolio. It may seem counterproductive to have 25% of your portfolio sitting around doing nothing, but the important part is that during the drawdown phase, you can withdraw from cash, which means you don't have to sell the other assets of the portfolio until the rebalancing bands say it's time. This prevents you from having to sell any assets when they're down, which is the biggest cause of retirement portfolio failure.

For more details, see http://gyroscopicinvesting.com/forum/pe ... -part-two/

[frommi]

For my numbers, dividends and interest cover 80% of withdrawals, so with 1 year in cash i can cover 5 years of expenses without selling. Don't you think that is enough?

[dragoncar]

For my numbers, dividends and interest cover 80% of withdrawals, so with 1 year in cash i can cover 5 years of expenses without selling. Don't you think that is enough?

So you're suggesting something like 4% in cash? 

[frommi]

For my numbers, dividends and interest cover 80% of withdrawals, so with 1 year in cash i can cover 5 years of expenses without selling. Don't you think that is enough?

So you're suggesting something like 4% in cash?

I would say it depends on your numbers. When 120% oder 150% of your dividends cover your expenses whats that extra cash for?
On the other hand, when you are in the late phase of your life and you have to consistently sell assets to pay your expenses, it can be better to hold more cash. But that will also reduce the time you can live of the assets in most scenarios (of course not in all!). I hope i don`t ever come to that part, because you have to gamble about the longevity of your life .

I can really only understand holding more cash when you use it as opportunity money, when your assets are in a drawdown phase. But that is currently not part of the PP strategy. I can`t do a backtest where you put your 25% cash into the market when the PP suffers a drawdown of -10% or -15% and look if the results are better than holding no cash. But i doubt it, that would mean that market timing can be done successfull .

[dragoncar]

For my numbers, dividends and interest cover 80% of withdrawals, so with 1 year in cash i can cover 5 years of expenses without selling. Don't you think that is enough?

So you're suggesting something like 4% in cash?

I would say it depends on your numbers. When 120% oder 150% of your dividends cover your expenses whats that extra cash for?
On the other hand, when you are in the late phase of your life and you have to consistently sell assets to pay your expenses, it can be better to hold more cash. But that will also reduce the time you can live of the assets in most scenarios (of course not in all!). I hope i don`t ever come to that part, because you have to gamble about the longevity of your life .

I can really only understand holding more cash when you use it as opportunity money, when your assets are in a drawdown phase. But that is currently not part of the PP strategy. I can`t do a backtest where you put your 25% cash into the market when the PP suffers a drawdown of -10% or -15% and look if the results are better than holding no cash. But i doubt it, that would mean that market timing can be done successfull .

Well you said 1 year of expenses in cash.  My point is that realistically every portfolio has some cash.  Some people just don't count it as part of the portfolio.

You can do that backtest, and it might even work.  Some others here have done momentum PP strategies with good results.  Of course it's possible to successfully time the market!  The question is whether you can count on a back tested strategy to perform as well in the future.  And some would say that you can't RELIABLY market time.

[craigr]

I would say it depends on your numbers. When 120% oder 150% of your dividends cover your expenses whats that extra cash for?

Under very bad markets dividends can sink as companies cut them to conserve cash. Interest rates can also collapse at the same time. In that situation someone with little cash may find they now need to sell depressed assets to pay living expenses. That could greatly exacerbate portfolio drawdown and damage.

[brownehead]

A PP without cash is far less stable, if you backtest it of course the CAGR is higher because the growing assets are the other 3, but DDs and volatility are much higher too!

[frommi]

A PP without cash is far less stable, if you backtest it of course the CAGR is higher because the growing assets are the other 3, but DDs and volatility are much higher too!

Give me numbers!
In some years the DD is lower with more stocks, like this year! In other years the DD is higher, it really depends on the chosen year and timeframe. Sure the volatility is higher, but in other threads there is allways the advice to not look at your portfolio. So when i do that, why should i care about vola or drawdown?

[Coffee]

Good for you that you can stand the drawdowns but we've had folks near freaking out at 3-5%.

People creaking out at 3-5% drawdowns are doing so because they don't expect it from a portfolio touted as "amazingly stable."  It's a matter of expectation, not just the raw drawdown number.  So if they expect up front to get a 25% drawdown (ie that is in their plan) then they could be fine.  Not that anyone should expect less than a 20% potential DD with the HBPP.

I feel your pain.  When I got into this portfolio, I expected it to perform similarly to the S&P, but with more stability: Similar highs, less lows.  "Even, steady growth." 

I was not prepared for the portfolio to flounder while the S&P was rocking.  (To be clear: I'm not placing blame on anybody except myself for this expectation).