Big ERN Safe Withdrawal Rates - GB and PP Evaluated

[Kbg]

I ran across this blog a couple of weeks ago. It's really good. Maybe this is old news, new news for me so I'm posting it.

https://earlyretirementnow.com/2020/01/ ... s-part-34/

Warning...this will not go down well for some.

[Mark Leavy]

That was a great read. Pretty fair assessments all around.
Thank you.

Mark

Full disclosure, I am running:
5 years of cash, plus 30/30/40 TQQQ/TMF/Physical gold

[Kbg]

Yeah the SWR of the popular ports around here was was shockingly low.

[Tyler]

A few forum thoughts from when it was first written: viewtopic.php?t=10365

[mathjak107]

I ran across this blog a couple of weeks ago. It's really good. Maybe this is old news, new news for me so I'm posting it.

https://earlyretirementnow.com/2020/01/ ... s-part-34/

Warning...this will not go down well for some.

here was his take


The Permanent Portfolio had the lowest failsafe rate (2.61%). What’s really sneaky about this portfolio is that you certainly improve the performance during the well-known stress periods (1929 crash, 1960/70s) but you create a serious deficiency elsewhere (1930s, more specifically the 1937 bear market) with a sub-3% safe withdrawal rate. It’s like squeezing a balloon! You solve the problem of the 1929 crash but create an equal-size problem or worse elsewhere. Not much of a surprise here; I’ve always had my doubts about the permanent portfolio because you have only 25% of your portfolio in truly high-return assets (stocks) and the rest is exclusively invested in assets that had very little real inflation-adjusted return (cash, gold). And bonds certainly had a decent real return historically, but currently yields on 10-year Treasury bonds only just about reach the inflation rate. 30-year bonds have a yield less than 1 percentage point above most inflation forecasts. Not enough to sustain a 30-year retirement!

[Smith1776]

I've got to agree with Tyler on this one. A dataset and analysis that includes gold when the price was literally fixed by the government doesn't really mean much. Under a gold standard it's basically doubling up on cash without the benefit of interest payments that cash provides.

As Tyler also said, the fact that the author doesn't seem to mention this is suspect too.

A follow up question would be how one would modify the PP under the conditions of a legitimate gold standard. Off the top of my head I'd do something like the following:

- 1/3 stocks
- 1/3 long treasury
- 1/6 gold
- 1/6 cash

[Tyler]

A follow up question would be how one would modify the PP under the conditions of a legitimate gold standard.

Silver might be an interesting option. It's not the same as gold, but it's one of the closer assets to meeting the general Permanent Portfolio design intent under a gold standard. It's certainly better than simply setting the gold return to zero while pretending nothing changed.

[Smith1776]

A follow up question would be how one would modify the PP under the conditions of a legitimate gold standard.

Silver might be an interesting option. It's not the same as gold, but it's one of the closer assets to meeting the general Permanent Portfolio design intent under a gold standard. It's certainly better than simply setting the gold return to zero while pretending nothing changed.

Right, I remember reading somewhere how silver was actually the safe haven from gold during the 1933 gold seizure.

I think that does add some rationale for diversification beyond gold into silver in balanced portfolios.

Beyond that I'd like to do some research as to why executive order 6102 didn't include silver... after all, the bimetallic standard was already in place at the time, so it's not like just gold was money.

[pp4me]

Yeah the SWR of the popular ports around here was was shockingly low.

I don't see anything shocking about the figures in his charts if I'm interpreting them correctly. What am I missing?

[Kbg]

Compared to other options, it is quite low.

The critiques on the 1930s out are valid in terms of the SWR being low. The reality is gold data is missing from the 30s to the 70s for the US, but unless I missed something I think he is using the London price of gold throughout the study...so I don't think we should glibly toss the data because we don't like what it says. Notionally speaking, if it would have been legal in the US the price was likely pretty close to the London spot during the entire time period. International markets were a thing starting in the late 1800s, just with delayed vs. instantaneous information...and particularly so with gold as it was the international balance of payments medium during that timeframe. Also, everyone should understand the implication of no US data and our being enamored with it's properties as an escape from nasty government made money.

I'm not a gold hater at all I have a sizable chunk if it in the paper version, but I do think it is a bit oversold in terms of what it does, doesn't do and what it may protect you from. It is a super good low/no correlation asset historically to other things...and that's why I like it.

[Tyler]

The reality is gold data is missing from the 30s to the 70s for the US, but unless I missed something I think he is using the London price of gold throughout the study...so I don't think we should glibly toss the data because we don't like what it says.

Here's the nominal gold price data taken directly from the ERN spreadsheet. It's priced in USD. Note that the UK was on their own gold standard up to 1931 even before Bretton Woods kicked in.

[Kbg]

Tyler,

Great chart, puts that question to bed. Based on previous SCV discussions, hopefully you know I'm definitely a proponent of trying one's best to make an estimate of what's different. So I'm definitely on board with the "gold history probably doesn't really apply for today's PP until post going off the gold standard" crowd.

[Tyler]

No worries! I'm a huge supporter of independent data analysis and have an open mind. And I appreciate you guys thinking critically and asking good questions. It's how we keep each other honest.

[D1984]

A follow up question would be how one would modify the PP under the conditions of a legitimate gold standard.

Silver might be an interesting option. It's not the same as gold, but it's one of the closer assets to meeting the general Permanent Portfolio design intent under a gold standard. It's certainly better than simply setting the gold return to zero while pretending nothing changed.

Right, I remember reading somewhere how silver was actually the safe haven from gold during the 1933 gold seizure.

I think that does add some rationale for diversification beyond gold into silver in balanced portfolios.

Beyond that I'd like to do some research as to why executive order 6102 didn't include silver... after all, the bimetallic standard was already in place at the time, so it's not like just gold was money.

https://en.wikipedia.org/wiki/Executive_Order_6814

They did something similar with silver (albeit it didn't include American or foreign silver coins). Also, the government shut down the silver futures market a little while after this; it didn't reopen again until the early 1960s (despite silver itself being free-market priced again around the end of WWII; IIRC the price was only controlled briefly in the 1930s and again during the 1942-late 1945 period).

[Smith1776]

A follow up question would be how one would modify the PP under the conditions of a legitimate gold standard.

Silver might be an interesting option. It's not the same as gold, but it's one of the closer assets to meeting the general Permanent Portfolio design intent under a gold standard. It's certainly better than simply setting the gold return to zero while pretending nothing changed.

Right, I remember reading somewhere how silver was actually the safe haven from gold during the 1933 gold seizure.

I think that does add some rationale for diversification beyond gold into silver in balanced portfolios.

Beyond that I'd like to do some research as to why executive order 6102 didn't include silver... after all, the bimetallic standard was already in place at the time, so it's not like just gold was money.

https://en.wikipedia.org/wiki/Executive_Order_6814

They did something similar with silver (albeit it didn't include American or foreign silver coins). Also, the government shut down the silver futures market a little while after this; it didn't reopen again until the early 1960s (despite silver itself being free-market priced again around the end of WWII; IIRC the price was only controlled briefly in the 1930s and again during the 1942-late 1945 period).

Cool! I didn’t know about order 6814. Glad to learn about this as it’s fascinating.