A more volatile PP, part two

[buddtholomew]

The PP trails in times of prosperity and more so when interest rates are on the rise and inflation expectations are low. I'm not sure its prudent to change the allocation unless one expects this particular environment to persist. I have considered adding an extended market ETF to complement SPY in an attempt to spruce up equity returns when the stock market is in rally mode.

[Tyler]

I plugged Pointedstick's SCV data into my PP retirement spreadsheet, and this is what I found:



For reference, here's the same chart with a "standard" PP:



And for a background on what this even means, read my post here:

http://gyroscopicinvesting.com/forum/ot ... /#msg71974

Long story short, using SCV instead of the TSM works really well when times are good.  But IMO the sweet spot for long-term portfolio survivability is still in the 4-5% WR range (which is notably a little higher than what you'll see for standard stock/bond withdrawal rates).  And note that this is before fees and taxes.  YMMV

Personally, I'm shooting for a WR in the 3-4% range for a little extra safety margin.  Based on the PP history, I'm quite confident it will last me as long as I need.

[D1984]

Thank you for the clarification D1984, I didn't know that and will apreciate the annual figures. However, I think all we agree that EM are more volatile than TSM and I guess that even with the right data the CAGR will be better too.

Koekebakker, you are right about SCV and EM not being perfectly correlated to TSM, but what we really want is correlation with prosperity (TSM is just a proxy for it) and I think both SCV and EM allways have their glory days in every prosperity cycle, when money looks for new and risker assets.

brownehead,

Here you go (first the monthly figures and then the annual ones; note that both monthly and annual returns are TOTAL return figures that include dividends and not just price returns). These were taken straight from a copy of the IFC EM returns data available at http://www.cfapubs.org/toc/rf/1997/1997/3 . I have not included any data for after 12-31-87 because the MSCI EM data start then and the Simba spreadsheet (correctly) uses those for EM returns from 1988 onwards :

Monthly:

Jan-76 7.39%

Feb-76 -0.39%

Mar-76 1.33%

Apr-76 1.67%

May-76 -4.85%

Jun-76 4.56%

Jul-76 1.70%

Aug-76 0.08%

Sep-76 -7.71%

Oct-76 -7.04%

Nov-76 2.61%

Dec-76 6.66%

Jan-77 -2.79%

Feb-77 1.47%

Mar-77 8.55%

Apr-77 5.41%

May-77 1.75%

Jun-77 5.62%

Jul-77 4.49%

Aug-77 3.04%

Sep-77 1.97%

Oct-77 1.49%

Nov-77 1.50%

Dec-77 8.24%

Jan-78 7.23%

Feb-78 9.64%

Mar-78 -0.47%

Apr-78 4.98%

May-78 2.17%

Jun-78 1.98%

Jul-78 1.18%

Aug-78 0.48%

Sep-78 0.93%

Oct-78 3.55%

Nov-78 -2.73%

Dec-78 7.47%

Jan-79 8.43%

Feb-79 5.79%

Mar-79 6.12%

Apr-79 5.57%

May-79 -2.71%

Jun-79 -4.95%

Jul-79 1.35%

Aug-79 7.97%

Sep-79 1.38%

Oct-79 -4.66%

Nov-79 3.68%

Dec-79 2.38%

Jan-80 -0.50%

Feb-80 4.77%

Mar-80 -4.13%

Apr-80 2.28%

May-80 7.12%

Jun-80 1.12%

Jul-80 -2.90%

Aug-80 1.27%

Sep-80 -3.65%

Oct-80 -1.55%

Nov-80 0.88%

Dec-80 6.89%

Jan-81 -2.95%

Feb-81 -2.57%

Mar-81 -1.40%

Apr-81 3.36%

May-81 -8.85%

Jun-81 -2.01%

Jul-81 -7.70%

Aug-81 -1.41%

Sep-81 -8.13%

Oct-81 -4.36%

Nov-81 3.97%

Dec-81 1.26%

Jan-82 -4.99%

Feb-82 -5.56%

Mar-82 -7.08%

Apr-82 -2.36%

May-82 -6.52%

Jun-82 -1.97%

Jul-82 -4.75%

Aug-82 1.29%

Sep-82 2.18%

Oct-82 -4.48%

Nov-82 -0.38%

Dec-82 -2.63%

Jan-83 -8.65%

Feb-83 0.97%

Mar-83 -1.35%

Apr-83 2.01%

May-83 1.92%

Jun-83 -0.45%

Jul-83 1.46%

Aug-83 -0.08%

Sep-83 2.71%

Oct-83 -2.56%

Nov-83 -2.25%

Dec-83 4.39%

Jan-84 4.77%

Feb-84 5.53%

Mar-84 -3.81%

Apr-84 -3.94%

May-84 2.19%

Jun-84 -1.34%

Jul-84 0.20%

Aug-84 1.51%

Sep-84 -1.41%

Oct-84 -3.40%

Nov-84 -2.35%

Dec-84 1.23%

Jan-85 0.78%

Feb-85 -1.66%

Mar-85 3.86%

Apr-85 0.80%

May-85 2.06%

Jun-85 0.99%

Jul-85 1.57%

Aug-85 -0.02%

Sep-85 6.48%

Oct-85 3.22%

Nov-85 -0.31%

Dec-85 -4.03%

Jan-86 3.12%

Feb-86 3.63%

Mar-86 -2.42%

Apr-86 -0.25%

May-86 6.85%

Jun-86 4.14%

Jul-86 2.34%

Aug-86 0.65%

Sep-86 3.13%

Oct-86 4.10%

Nov-86 -1.55%

Dec-86 4.85%

Jan-87 8.99%

Feb-87 7.36%

Mar-87 3.39%

Apr-87 9.76%

May-87 5.69%

Jun-87 1.30%

Jul-87 16.21%

Aug-87 11.22%

Sep-87 15.10%

Oct-87 -25.46%

Nov-87 -9.12%

Dec-87 -5.07%


Annually:

1976 = 4.78%

1977 = 48.48%

1978 = 42.17%

1979 = 33.42%

1980 = 11.37%

1981 = -27.55%

1982 = -31.86%

1983 = -2.50%

1984 = -1.37%

1985 = 14.19%

1986 = 32.12%

1987 = 36.01%

Note several things:

These numbers are (just like the MSCI EM index) market cap weighted (both between countries and within countries)

The late 70s were great for EM; the early and mid-80s sucked

From 1980-1985 EM stunk to high heaven as far as RELATIVE performance (vs the US TSM or the EAFE) goes. Even T-bills did better than EM...heck, cash under a mattress did better. From 1987 (despite crashing hard in October of '87 EM was already up so much for the year it beat the EAFE and US indices handily) to 1993, though, EM smoked both the EAFE and US TSM. EM underperformed again from 1994-1998, killed EAFE and S&P 500 in 1999, underperformed in 2000, from 2001 to 2007 outperformed, lost more than half its value in 2008 and thus did worse than both EAFE and the US TSM, outperformed in 2009-10, did worse than EAFE or US stocks in 2011, and performed better than either in 2012. So far this year EM returns are lagging those of most of the developed world.

SCV:

Didn't SCV only barely keep up with TSM (if not outright underperform it) and the S&P 500 from roughly 1985 to the first quarter of 2000? Didn't it even do worse than LCG or the S&P 500 during some periods (1985-1990 and 1994-1999 come immediately to mind) of these roughly 15 years? I know SCV will over the long-term typically outperform TSM or LCG but my concern is that during the times it is most needed (to offset falling gold or rising bond yields) it might underperform TSM.

[brownehead]

Thank you for the data, I did some new backtesting with it for the years 1976-2012 (yearly results).

Individual Assets:
TSM: CAGR 11.08%, stdev 16.70
EM: CAGR 12.12%, stdev 32.01
Tr20y+: CAGR 8.88%, stdev 12.10
Gold: CAGR 6.49%, stdev 25.51

Now the PP performance, with Tr1-2y for cash and 15-35 rebalance bands:

25% TSM: CAGR 9.5% ($100 to $2873); stdev 9.02; negative years 1981 (-4.41%), 1994 (-2.68%) and 2008 (-0.72%)
25% EM: CAGR 10.54% ($100 to $4082); stdev 11.01; negative years 1981 (-10.48%), 1983 (-2.60%), 1990 (-0.75%), 1994 (-4.47%), 1997 (-3.26%), 2000 (-1.21%) and 2008 (-4.66%)

Obviously EM was too volatile for our conservative PP standars, however if we split the stock part in TSM and EM the results were quite good:

12.5% TSM & 12.5% EM: CAGR 10.07% ($100 to $3485); stdev 9.03; negative years 1981 (-7.37%), 1994 (-3.53%) and 2008 (-2.69%)