Gyroscopic Investing

Just came across this thread while doing some reasearch. That withdraw rate chart with the sharp dip on the 3.5% wr in Tyler's chart is a bit spooky.  Makes me think there's a sequence-of-returns like risk to when you hit the rebalancing bands. Didn't think it would show up so dramatically (figured that overtime it would balance out). Has anyone investigated this further? Are there ways to better mitigate it? I am hoping it is just an error in his data

robg wrote: That withdraw rate chart with the sharp dip on the 3.5% wr in Tyler's chart is a bit spooky.  Makes me think there's a sequence-of-returns like risk to when you hit the rebalancing bands. Didn't think it would show up so dramatically (figured that overtime it would balance out). Has anyone investigated this further?

Yes. 

Below is a chart showing the historic Permanent Portfolio performance after expenses using a 3.5% initial WR.  Green means it's still growing by more than 1% annually even after expenses and inflation.  Beige means it's pretty much tracking inflation within a reasonable tolerance.  I see no reason to be concerned.

[img width=500]http://i57.tinypic.com/rwnwx2.jpg[/img]

Thanks Tyler.

I'm a bit confused though-- is that chart showing returns after the 3.5% inflation adjusted withdraw each year? Or before?

robg wrote: Thanks Tyler.

I'm a bit confused though-- is that chart showing returns after the 3.5% inflation adjusted withdraw each year? Or before?

After.

Tyler that chart is a work of art!!!!

I am guessing that the vertical axis is the starting year, and the horizontal axis is the value relative to the initial balance each year, assuming 3.5% of the portfolio withdrawn each year.  Is that right??

Also is that 3.5% of the portfolio each year, or is the 3.5% the value of the initial portfolio balance, with the annual widthdrawal amount increasing each year to keep pace with inflation?  The latter is how I did it in my spreadsheets because I think it's a fairer assessment of spending patterns.  If your portfolio increases in size due to a big return one year, it's not necessarily the case that the next year your spending would increase to keep pace.  That would make a big difference in the safety calculations.

Also did you correct the balance each year for inflation?  I did NOT do that in my spreadsheet, but it's probably more correct to do so.

The chart is my custom version of the Crestmont Research chart first outlined in this thread:

http://gyroscopicinvesting.com/forum/pe ... c-graphic/

The vertical axis is the starting year, and the horizontal axis is the ending year.  Where they meet shows you the CAGR of the Permanent Portfolio between the two years (after retirement expenses and inflation).  This allows you to visualize PP performance over any time frame you like. 

The data accounts for inflation each year using CPI data, so all returns are real.  The 3.5% WR is based on the portfolio value in the starting year, and is increased annually by the inflation rate but not the portfolio value.  The goal is simply to maintain constant purchasing power over time, and I totally agree with you about not inflating or deflating lifestyle with your portfolio returns.  I assumed all expenses were taken out of cash, and rebalanced using the 15/35 bands (not annually).  I ignored taxes, as that depends so much on your personal situation. 

The two diagonal lines are the 10- and 20-year time frames.  They're helpful to visualize how quickly the PP recovers from short-term gyrations and returns to its steady average returns. 

Basically, from my perspective the Permanent Portfolio is a great retirement portfolio. 

Tyler wrote:
Basically, from my perspective the Permanent Portfolio is a great retirement portfolio. 

Couldn't agree more!

Bump.

Did you all use peaktotrough.com data for your backtesting data?

after reading through all this stuff
and trying to refine our withdrawal plane for retirement  i think the best way is keep 1 years withdrawals in the checking account ready to go.

then the following year refill by drawing equally from the whole pie.  drawing just from a cash buffer makes no sense . while  a cash buffer can be helpful if first retiring and without a good up cycle  first  with the pp you likely will not fall enough to matter so spending from a cash buffer only may be a moot point.

i will draw from all parts to fill the following years budget

mathjak107 wrote: after reading through all this stuff
and trying to refine our withdrawal plane for retirement  i think the best way is keep 1 years withdrawals in the checking account ready to go.

then the following year refill by drawing equally from the whole pie.  drawing just from a cash buffer makes no sense . while  a cash buffer can be helpful if first retiring and without a good up cycle  first  with the pp you likely will not fall enough to matter so spending from a cash buffer only may be a moot point.

i will draw from all parts to fill the following years budget

If you rebalance at your yearly fill-up time, you're basically rebalancing to 1/4 * (total - 1 year's expenses), overweighting cash by one year's expenses.  If you contrast this with just spending from cash and rebalancing yearly there's not much difference, except with your approach you'll be carrying a little more cash (cash in your checking account - but cash is cash).  If instead, you spend from cash and rebalance by 15/35 bands you likely won't rebalance every year which might make a difference.  Note that if your spending causes band-based rebalancing more than once a year, this means your yearly spend is significantly more than 10% of your total - and you're in big trouble. 

My drawdown method is here:

http://gyroscopicinvesting.com/forum/pe ... #msg119628

I've started out by keeping about 4-6 months of cash in a checking account and the rest in short term treasuries.  But I've found I don't like looking that often in retirement and plan to extend that to a full year.  That will also make it easy to set a budget at the beginning of each year. BTW, I do count the checking account as part of the PP cash. 

Also to answer Kriegsspiel's question extremely late, I use data from the Simba Spreadsheet @ Bogleheads (the same place Craig pulls most of his historical data).

Desert wrote: Tyler, would you then look at your portfolio only once per year?

I still look at my portfolio pretty regularly mostly out of old habit.  But at this point I'm comfortable with my investments and don't get too up or down about it. You'll see from my posts that I prefer to spend that energy researching and understanding the PP in deeper and more complex ways.  The more I learn, the less I worry.  And I also have simple backup plans in mind should times ever call for them.  Getting a fun part time job or moving to a beautiful state like Colorado with very low property taxes are much more constructive retirement contingencies than yanking your life savings back and forth. 

Tyler wrote: My drawdown method is here:

http://gyroscopicinvesting.com/forum/pe ... #msg119628

I've started out by keeping about 4-6 months of cash in a checking account and the rest in short term treasuries.  But I've found I don't like looking that often in retirement and plan to extend that to a full year.  That will also make it easy to set a budget at the beginning of each year. BTW, I do count the checking account as part of the PP cash. 

Also to answer Kriegsspiel's question extremely late, I use data from the Simba Spreadsheet @ Bogleheads (the same place Craig pulls most of his historical data).

setting a side a years worth of cash seems to be the easiest when you re balance  for spending down.

it was a lot trickier when i used the two fidelity insight models since cash was not a part of them.

i had set a side 1  years withdrawals with all dividends ,interest ,distributions and pension check going to fill up the 2nd year in advance.

now i don't have to do that anymore.

we just will keep the one years spending in a money market less what will come in from pension and social security.  i will throw about 50k in another money market as an emergency fund so i don't have to upset the portfolio balance and i am done.

the problem looking with the PP is the cycles are very very long for assets like gold to have their day in the sun and things can look no so hot for quite a while. that was why i abandoned it back in the 1980's.  in hind site it did  well over such a long period.

did you know if you bought the PP  BACK IN THE 1980'S on the worst possible day when gold  peaked around 800 that just by rebalancing over those decades that before gold fell from the almost 2k high your return would have beaten the s&p return if you bought that too on the same day. i believe the gold averaged 9.80% vs the s&p 500 9.6%