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Re: Thoughts on right-sizing the PP throughout the accumulation phase of life
Posted: Tue May 26, 2015 1:44 pm
by ochotona
LC475 wrote:
Investors will generally get better results (returns) with the Permanent Portfolio, and that is true for people of any age.
If they stay in it. That's a problem for GAA portfolios also. I was just remarking that Dad (specifically
me) would bark at my kids to stay in their portfolios when they are young rather than get out.
Re: Thoughts on right-sizing the PP throughout the accumulation phase of life
Posted: Tue May 26, 2015 1:55 pm
by iwealth
Tyler wrote:
Shift the comparison back by one year and it looks a lot different. A 60/40 stock/bond portfolio lost 21% of its value in real terms in 1973.
BTW, back to back real returns of -21% in 1973 and -29% in 1974 is precisely the type of scenario that will cause very rational people to ditch a perfectly good investment plan right out of the gate.
Sure, but so can a small negative return during a year when stocks are up 30+%. And trailing stocks by double digits five years in a row in the late 90s. Trailing stocks or a more traditional 60/40 portfolio can be just as mentally devastating as a large drawdown for some investors (including many active posters here).
Ultimately, stock-heavy investors in the accumulation phase can always rely on the market's 100+ year historical resiliency to help them sleep at night.
EDIT: Sorry, I see you already addressed this in a post above!
Re: Thoughts on right-sizing the PP throughout the accumulation phase of life
Posted: Tue May 26, 2015 6:54 pm
by sixdollars
ochotona wrote:
Tyler wrote:
BTW, back to back real returns of -21% in 1973 and -29% in 1974 is precisely the type of scenario that will cause very rational people to ditch a perfectly good investment plan right out of the gate.
That's when Dad barks at Junior(s) to stay in the program.
It sounds like your Juniors are quickly becoming adults who might begin thinking about and managing their portfolios by themselves, no? How do you know they will listen to your advice? What if they feel the pressure of the markets and make that sell in spite of your loud barks?
FWIW I am about the age of your eldest junior, and my father is retired. I have a considerably different investment portfolio than my father, and I'm not sure I would always necessarily agree with his investment advice given that we already have pretty different views. What if one of your kids feels the same way, relatively?
For the record, I'm very happy to have found the PP. I am in the accumulation phase and feel very content given the history and approach of allocating the assets. I can understand the want to optimize, but to me it seems mostly unnecessary - I guess we'll only know in hindsight
Re: Thoughts on right-sizing the PP throughout the accumulation phase of life
Posted: Tue May 26, 2015 7:44 pm
by MachineGhost
Cortopassi wrote:
If you are good at it and it doesn't emotionally wreck you, go for it. Even if I was good at it (I was NOT) and say added a couple hundred k to my overall savings from it, knowing what I know now, I would still not believe the time invested would have been worth it, vs. pursuing other hobbies or working on starting a business instead. There is this magical allure, like gambling, that you can do better. I say without inside information, BS. You are nowadays fighting against computers, HFT algorithms and blatant manipulation (Forex anyone). Why anyone puts their hard earned money in any of this sometimes makes me wonder.
I tend to agree. The VP isn't a serious mechanism unless you're going to be professional with it. And unless you're going to be a professional with it, you're unlikely to want to do all the hard work required to be a success. Chicken and egg.
Re: Thoughts on right-sizing the PP throughout the accumulation phase of life
Posted: Tue May 26, 2015 8:19 pm
by ochotona
MachineGhost wrote:
I tend to agree. The VP isn't a serious mechanism unless you're going to be professional with it. And unless you're going to be a professional with it, you're unlikely to want to do all the hard work required to be a success. Chicken and egg.
That's why I'm trying the robot out. The robot never slumbers.
Re: Thoughts on right-sizing the PP throughout the accumulation phase of life
Posted: Wed May 27, 2015 12:38 pm
by KevinW
Tyler wrote:
It's just that people are far less risk tolerant in reality than they like to think they are, and I believe the average Joe is unlikely to stick with it and ever see anything close to average returns.
+1
I started investing somewhere around 2005 and, being a rational and mathematically inclined person, put everything in a Vanguard Target Retirement fund. During the 2009 crash I was anxious and checking my portfolio every day. I had just barely enough self control to avoid selling out low, but not enough to avoid daily anxiety. Ironically I was more upset than all my peers with $0 savings. Something's wrong with that picture!
Now in my 30s, I am 100% in a vanilla PP and couldn't be happier.
A decent plan that is followed, works a lot better than a superior plan that is abandoned.
Also, I have to mention that I have a pet peeve about older people proscribing asset allocation advice that they themselves were never willing to follow. I'm not saying anyone's doing that here, just pointing out that there is a lot of "do as I say, not as I do" in the world of financial advice. For one thing, suppose you are 22 and saving 20% of your income and follow the Boglehead plan of saving 1 year's expenses before investing in a target date fund. Well, that means you will be in 100% cash for about 4 years earning about 0% real returns. So all their fancy compound interest charts should include 4 years of 0% returns, which of course they don't. I think some authors have been investing so long they forgot how starting from zero works. For another thing, I don't know where the idea that young people have more risk tolerance than old people comes from. Losing your hard-earned savings sucks no matter how old you are. By definition, young people have no confidence-inspiring investing experience to draw confidence from. Indeed, the formative years for Gen X and millennials have been mostly recessions and financial scandals. If anything, it seems that newbie investors should be
more conservative than experienced ones.
So, I actually think that the vast majority of people are best served by holding a simple low-volatility portfolio their whole lives. I.e. the PP plan or something like it.
Re: Thoughts on right-sizing the PP throughout the accumulation phase of life
Posted: Wed May 27, 2015 2:04 pm
by LC475
Tyler wrote:
You can see this in the redemption data -- the average duration that an investor holds any individual fund today is only three years! Even assuming that a few high frequency traders skew the average for everyone else, the idea that an everyday investor is capable of picking a traditional portfolio and passively following it for 30 or more years is largely a myth.
It would be very interesting to see the complete frequency layout. How many investors are holding a fund for 1 year? For 5? For 10? To get a valid number for the median at all, one would have to have this data. I wonder if it's available.
Re: Thoughts on right-sizing the PP throughout the accumulation phase of life
Posted: Wed May 27, 2015 2:10 pm
by LC475
ochotona wrote:
LC475 wrote:
Investors will generally get better results (returns) with the Permanent Portfolio, and that is true for people of any age.
If they stay in it.
Umm, right.
So,... that would seem to be the thing to do.
Allocating only a calculated percentage of your savings to the PP according to your age implies that there are reasons to do so. But if investors will generally get better results with the Permanent Portfolio -- and you're not contesting that; and if that is true irrespective of the investor's age -- and you're not contesting that either; then, well, as I say:
that would seem to be the thing to do. Get a Harry Browne Permanent Portfolio, and let it do its thing.
Re: Thoughts on right-sizing the PP throughout the accumulation phase of life
Posted: Wed May 27, 2015 2:48 pm
by Tyler
LC475 wrote:
It would be very interesting to see the complete frequency layout. How many investors are holding a fund for 1 year? For 5? For 10? To get a valid number for the median at all, one would have to have this data. I wonder if it's available.
I've looked but haven't found anything. If someone finds something, please share. Using total numbers certainly isn't perfect, but even J. Bogle references that stat in his books when he discusses poor investor behavior, so it certainly means
something. The median is definitely more than 3. But probably not a whole lot more.
Re: Thoughts on right-sizing the PP throughout the accumulation phase of life
Posted: Wed May 27, 2015 4:04 pm
by ochotona
You know, back when I started mutual fund investing in the 1980s, there was no way to easily, painless know how much your funds were up or down, moment by moment. I looked at it every quarter. If that often. The information deluge today makes it much harder and more painful to be in any investment program at all!!! I will have to say it was relatively easy for me to be in an aggressive growth fund in 1986 at age 25. Set it and forget it. I was in the storied Fidelity Magellan during it's heydey. It really helped me. Those days are gone.
Re: Thoughts on right-sizing the PP throughout the accumulation phase of life
Posted: Wed May 27, 2015 4:54 pm
by LC475
Tyler wrote:
LC475 wrote:
It would be very interesting to see the complete frequency layout. How many investors are holding a fund for 1 year? For 5? For 10? To get a valid number for the median at all, one would have to have this data. I wonder if it's available.
I've looked but haven't found anything. If someone finds something, please share. Using total numbers certainly isn't perfect, but even J. Bogle references that stat in his books when he discusses poor investor behavior, so it certainly means
something. The median is definitely more than 3. But probably not a whole lot more.
Whoops, sorry, I meant "
mean", which I presume is what they mean by "average." And to get the mean you'd need enough data that you could also get the median, the mode, and, what would be most informative, the whole complete distribution.
Shouldn't there be a source? Where is everybody getting this stat from? Hmm...
Re: Thoughts on right-sizing the PP throughout the accumulation phase of life
Posted: Wed May 27, 2015 5:14 pm
by LC475
LC475 wrote:
Hmm...
OK, it is from this place Dalbar, their Quantitative Analysis of Investor Behavior. The actual number is 3.3 years. Full report is $775.
http://www.dalbar.com/ProductsampServic ... fault.aspx
Re: Thoughts on right-sizing the PP throughout the accumulation phase of life
Posted: Wed May 27, 2015 5:35 pm
by LC475
Dalbar, in turn, is just using data from Investment Company Institute.
Re: Thoughts on right-sizing the PP throughout the accumulation phase of life
Posted: Wed May 27, 2015 5:38 pm
by LC475
May be somewhere in here:
http://www.ici.org/pdf/2015_factbook.pdf
though it doesn't seem to be....
Re: Thoughts on right-sizing the PP throughout the accumulation phase of life
Posted: Wed May 27, 2015 5:45 pm
by LC475
If (big if) Dalbar is simply calculating its retention rate based on the redemption rate reported by ICI, then ICI specifically and explicitly disclaims the validity of such a calculation, for basically the problem Tyler already anticipated:
What are redemptions?
Redemptions occur when mutual fund investors sell back their shares to their fund. Redeeming mutual fund shares is a normal activity for shareholders and is one of the benefits of investing in mutual funds, as the funds provide liquidity to shareholders. By law, mutual funds must stand ready to buy back their shares daily. In 2002, stock fund investors redeemed $880 billion in shares, or about 29 percent of average total net assets.
Does a redemption rate reflect how long investors hold their mutual funds?
No. The redemption rate expresses annual equity fund redemptions as a percentage of average assets. It is not a measure of the length of time an account is held. A small number of shareholders can and likely do generate a disproportionate percentage of the total redemptions, thereby masking the activity of the typical investor.
Direct evidence is lacking on holding periods of individual investors. The redemption rate does not measure the holding period of the typical fund investor.
--
http://www.ici.org/pubs/faqs/faqs_fund_flows
Re: Thoughts on right-sizing the PP throughout the accumulation phase of life
Posted: Wed May 27, 2015 7:03 pm
by Tyler
Good research!
Yep -- the quoted estimated holding period is simply the inverse of the redemption rate. Various analysts have looked at the redemptions and exchanges of the fund market as a whole to come to similar conclusions, but most admit the measure is unreliable when talking about the typical investor.
That said, I did finally find one ICI study that conducted a survey back in the 90's to research individual redemption patterns, and the results were not that far off. The median holding period was five years, and 80% of respondents had held the fund being redeemed less than ten.
http://www.ici.org/pdf/rpt_redempt.pdf
[img width=600]
http://i60.tinypic.com/osx2q1.jpg[/img]
BTW, one of the most interesting data points to me is the sample at the bottom of the chart. More people sold
all of the fund than
part of the fund. Reading the methodology, that reflects actual behavior and is not a sampling artifact. People are naturally indecisive.
Re: Thoughts on right-sizing the PP throughout the accumulation phase of life
Posted: Thu May 28, 2015 10:42 am
by LC475
The three year number (or 3.3), by the way, is only the number if you do a 20 year average. Recently, the numbers are higher. Investors are holding on to their funds for longer. Behavior has improved. Hey, maybe people
can learn!
People hold onto stock mutual funds for over 4 years now, and they have even more peace of mind with asset allocation funds, holding them for almost 5 years. Fixed income people, on the other hand, are the one group not making any progress. They're still quite skittish. Well, probably there's a demographic difference (that Boglehead orthodoxy: old fogies should have more fixed income) and you know what they say. Can't teach old dogs, well, anything.
They already know it.
Re: Thoughts on right-sizing the PP throughout the accumulation phase of life
Posted: Thu May 28, 2015 11:39 am
by Libertarian666
LC475 wrote:
The three year number (or 3.3), by the way, is only the number if you do a 20 year average. Recently, the numbers are higher. Investors are holding on to their funds for longer. Behavior has improved. Hey, maybe people
can learn!
People hold onto stock mutual funds for over 4 years now, and they have even more peace of mind with asset allocation funds, holding them for almost 5 years. Fixed income people, on the other hand, are the one group not making any progress. They're still quite skittish. Well, probably there's a demographic difference (that Boglehead orthodoxy: old fogies should have more fixed income) and you know what they say. Can't teach old dogs, well, anything.
They already know it.
Almost 5 years? Wow, that is... unimpressive.
Although I have no stocks, I have been holding gold now for about 40 years (although not always in exactly the same amount) and have no intention of giving it up any time soon.
Re: Thoughts on right-sizing the PP throughout the accumulation phase of life
Posted: Thu May 28, 2015 11:42 am
by Cortopassi
Goes back to the paper/digital nature of trading. Too easy to get in/out at low or high points based on emotions, latest trend, tips, etc.
Physical gold in hand is MUCH harder to part with!
Re: Thoughts on right-sizing the PP throughout the accumulation phase of life
Posted: Thu May 28, 2015 11:45 am
by ochotona
Cortopassi wrote:
Goes back to the paper/digital nature of trading. Too easy to get in/out at low or high points based on emotions, latest trend, tips, etc.
Physical gold in hand is MUCH harder to part with!
Also, to be fair, if you have move from one mutual fund into another one with a substantially similar philosophy, assuming they were both no-load funds, it's not the same as selling out and going to cash and flipping-and-flopping back and forth that way.
Re: Thoughts on right-sizing the PP throughout the accumulation phase of life
Posted: Thu May 28, 2015 11:55 am
by LC475
ochotona wrote:
Cortopassi wrote:
Goes back to the paper/digital nature of trading. Too easy to get in/out at low or high points based on emotions, latest trend, tips, etc.
Physical gold in hand is MUCH harder to part with!
Also, to be fair, if you have move from one mutual fund into another one with a substantially similar philosophy, assuming they were both no-load funds, it's not the same as selling out and going to cash and flipping-and-flopping back and forth that way.
Right. If you read through the survey Tyler posted, you'll see that people gave a variety of reasons for selling off (partially or fully) a mutual fund. Some switched into other funds. Others needed the cash for a big purchase. Others were unhappy with the performance of the fund vs. the market. There's a wide variety of reasons. It's pretty interesting to see the reasons and the percentages.
Re: Thoughts on right-sizing the PP throughout the accumulation phase of life
Posted: Thu May 28, 2015 3:23 pm
by Tyler
Just to wrap up the research on the average vs median fund retention rates (I'm sure I've bored everyone out of this thread already):
The survey I linked was based on fund redemptions in 1992. I found an older version of the report where LC475 found his helpful charts that had overall averages for 1992.
The average retention rate based on overall fund redemptions as a whole in 1992 was just over 3 years. The median from the survey of individual investors that year was about 5 years. This indicates that adding a year or two to the average rates you see should describe the typical investor reasonably well.
Either way, the record is pretty terrible. Holding an equity-heavy asset allocation for only 5-7 years when it can take twice that long to track the historical average goes a long way towards explaining why individual returns lag so far behind the indices.
Re: Thoughts on right-sizing the PP throughout the accumulation phase of life
Posted: Thu May 28, 2015 6:58 pm
by LC475
Tyler wrote:
Holding an equity-heavy asset allocation for only 5-7 years when it can take twice that long to track the historical average goes a long way towards explaining why individual returns lag so far behind the indices.
Not that I don't want to promote the idea that being fidgety is bad and hurts one's returns, but actually, what goes the longest toward explaining it is mathematical:
http://www.advisorperspectives.com/news ... esults.php
Summary: yes, the total return over the last few decades has been X. However, the total amount of money in the market has gone up*, due not just to returns but to additional contributions. So the more recent performance is more heavily weighted in real life portfolios than earlier performance.
* Wait... that doesn't make sense. I mean, actually, too much sense: the first two statements are tautological. There's no "however." The only way to get a positive return is if more people buy in, i.e. if the amount of stocks being bought exceeds the amount being sold off. Dividends aside. So actually, perhaps the performance lag is not merely as the article suggests an artifact of the particularities of our situation -- high performance earlier when the market had fewer investors and those few investors had smaller positions, and poor performance more recently -- but the phenomenon goes further and is a mathematical inevitability.
Re: Thoughts on right-sizing the PP throughout the accumulation phase of life
Posted: Thu May 28, 2015 10:22 pm
by Tyler
Good point. This thread has already expanded my perspective... There are more ways to miss out on your investment goals than just poor decisions!
I have no doubt that there are other factors at play. However, whether the under-performance is caused by the unavoidable timing of the contributions or the controllable timing of the withdrawals, the end result to the investor is still the same -- The advertised long-term return for volatile investments is likely an illusion for many investors on their personal timeframes.
If anything, the math of dollar-weighted returns may be another good argument for investing in a lower-volatility portfolio from the start. I'll have to think on that for a while.