Updated PP Performance Charts

[MachineGhost]

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09/1977-2012 HBPP: 7.41% CAR, -21.24% MaxDD[/align]

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09/1977-2012 PMPP: 8.30% CAR, -22.38% MaxDD[/align]

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09/1977-2012 MTHBPP: 9.50% CAR, -5.86% MaxDD)[/align]

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09/1977-2012 MTPMPP: 9.04% CAR, -7.81% MaxDD
09/1977-2012 MTPMPP: 9.33% CAR, -7.02% MaxDD with 5% BlackSwan Protection[/align]

Modern-day commissions have been deducted on annual rebalancing (bands were not used).  Note that before deregulation of brokerage fees in 1978, it cost approximately .90% of the transaction value.  Annual rebalancing would have not have been feasible.

HBPP: The standard Permanent Portfolio by Harry Browne.  

PMPP: This is what I like to call the Post-Modern Permanent Portfolio, always a work in progress.  This includes about half of the equity allocation in non-U.S. international stocks (or 100% in world), the short-term fixed income in I-Bonds/E-Bonds or 5-year CD ladders at A-rated banks, and the real spread among several other historically-proven wealth preservation assets beyond gold (semi-numismatic gold coins, real estate, farmland, timber, colored diamonds, rare stamps, fine wine, fine art, autombolies, canned goods, soap, cigarettes, alcohol, jewelry, guns, ammo).  For the purpose here I'm tracking just gold and 50% foreign stocks (1997+).

MTHBPP: Same as HBPP, but with simple market timing applied to the portfolio.

MTPMPP: Same as PMPP, but with simple (pre-2000) and advanced market timing applied to the portfolio.  In an alternative portfolio, I've carved out 21.8% (about 5% of the portfolio, 2006+) from the long-term fixed income to be permanently in Zero Coupons for "Black Swan" protection.

The PP is like a Rube Goldberg puzzle.  Push one thing and another pops out.  There is no perfect PP portfolio and its all about the trade offs you are willing to make to avoid certain future risks.

[Ad Orientem]

Nice charts. Thanks for posting.

[MachineGhost]

Nice charts. Thanks for posting.

I updated all the charts and stats to account for short-term fixed interest.  Such interest is earned at the Commercial Paper rate which is the best I can do for now.

[Reub]

Thank you for those great charts, MG!

[MachineGhost]

Just for archival purposes.  This was quarterly rebalanced.  It looks to me as if the MaxDD was actually in 2008 not 1981.  Cash interest differences may be at play with the MaxDD between my charts and this one.

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[MachineGhost]

I have updated the HBPP chart and stats back to 09/1977 to reflect total return SPX and total return 30-year Treasury Bonds.  

[MachineGhost]

I have updated the chart and stats for both MT portfolios.  For some bizarre reason, the gold returns were identical to cash.

I've also decided to cease using EDV for BlackSwan Protection.  EDV does not track Zero Coupons properly, perhaps because it is a ETF.  For instance, in 2008 it returned -9% whereas three other mutual funds of shorter duration returned 20% or so.  Inexcusable.

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EDIT: EDV may have a distribution not yet back adjusted.

[D1984]

MachineGhost,

That can't be right...EDV is the ETF version of VEDTX and both VEDTX and EDV show as returning upwards of 55% in 2008...Vanguard would get sued to pieces if one of their ETF clones of their mutual funds (especially when the mutual fund itself has such a high minimum it isn't available to most individual investors...people would wonder if the ETF was being used to hide losses in the fund and thus favor institutional investors over retail) performed that differently from the underlying fund....it would be suspicious to say the least.

EDIT: Like you said; there has to be a HUGE distribution of capital gains unaccounted for...that would explain why the price was lower at the end of 2008 than at the beginning. EDV does distributions to get around the "phantom income" issue.

[MachineGhost]

I have updated the chart and stats for the PMPP back to 09/77.  There is a noticeable difference between 09/77 and 01/78 starting dates in terms of a higher MaxDD.

[MachineGhost]

EDIT: Like you said; there has to be a HUGE distribution of capital gains unaccounted for...that would explain why the price was lower at the end of 2008 than at the beginning. EDV does distributions to get around the "phantom income" issue.

Thanks for telling us about VEDTX, but even that has not been adjusted.  Is there still imputed income with VEDTX?

BTTRX's performance is surprising despite having a declining duration lower than FLBIX, the longest maturity non-Zero I can find.

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[D1984]

Thanks for telling us about VEDTX, but even that has not been adjusted.  Is there still imputed income with VEDTX?

BTTRX's performance is surprising despite having a declining duration lower than FLBIX, the longest maturity non-Zero I can find

As regards VEDTX and phantom income: I have no idea (although Yahoo Finance does show multiple distributions in 2008 including one in mid-December)...all I know is that it shows on M*star as having been a good bit up more than BTTRX was in 2008.

Try comparting BTTRX vs WHOSX (roughly half zeros and half coupon LTTs) in lieu of comparing it with FLBIX and see what you get.

Also, if you want longer-duration zeros than BTTRX for 2007 you might want to use Pimco's PEDIX as VEDTX wasn't around all that year. I actually have a chart comparing annual returns all the longest dated zero-coupon (including the now-discontinued ACTAX 2030 Target Maturity) vs coupon bond LTT funds available from 1986 to the present...I can post it if you'd like.

I suspect that BTTRX will start having less interest rate volatility around 2015-16 as it starts to have a maturity/duration of less than 10 years.

[MachineGhost]

Also, if you want longer-duration zeros than BTTRX for 2007 you might want to use Pimco's PEDIX as VEDTX wasn't around all that year. I actually have a chart comparing annual returns all the longest dated zero-coupon (including the now-discontinued ACTAX 2030 Target Maturity) vs coupon bond LTT funds available from 1986 to the present...I can post it if you'd like.

Sounds good, please do.

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It does not look like PEDIX had a distribution, but actually tanked?

[D1984]

Sounds good, please do.

Here you go



Several notes:

1. I took this data from Archive.org's copies of Yahoo Finance webpages and American Century and Benham (the Target Maturity zero coupon funds American Century had were originally named the Benham Target Maturity trusts; these are the Benham funds Harry Browne mentioned when discussing zeros in his first book about the PP; this is also the reason that they all except the 2030 target one have a ticker symbol that starts with "BT" instead of "AC" ) prospectus data. The only fund year I could not find performance data for was for BTTNX in 1988 (nothing went back that far). Since VUSUX (the coupon LTT fund) returned 9.15% for that year and the longest-dated zero fund available (the 2015 trust BTFTX) returned 11.08% I assume it is reasonable to estimate maybe a 10.10% return for the 2010 Target Maturity Trust BTTNX for the year 1988.

2. There is no data for 2010 onwards for BTTNX because it liquidated at NAV (as it was supposed to do, being a target date 2010 fund) in the autumn of 2010.

3. ACTAX was incepted in 2001 but the US Treasury stopped issuing 30-year bonds that year (so by extension there were no long-dated Treasury STRIPS available after that year). The CSR I talked to on the phone told me that by 2004-2005 ACTAX included some Agency STRIPS as well as Treasuries as there simply weren't enough long-term purely Treasury zeros available due to the abovementioned discontinuation (at the time no one knew the Treasury would start issuing 30-year bonds again a year or so later). He also said that due to this American Century decided to close and liquidate this fund at NAV on 6-17-2005; shareholders were told to send instructions as to whether to dump the proceeds into BTTRX or redeem their funds in cash.

4. WHOSX (Wasatch-Hoisington) data is only included from 1997 onward because that was the year the fund adopted its current strategy of roughly half coupon LTTs and half LTT zeros. Note that this is an actively managed fund and not an index fund so this strategy could change at any time (although notice would be given to shareholders in a quarterly report/filing if it did).

5. The Target Maturity funds seem to start acting less like LTT funds and more like intermediate Treasury funds about 8-11 years from maturity (VEDTX/EDV and PEDIX/ZROZ do not share this trait as they are designed to maintain a 25+ year maturity/duration at all times).

[D1984]

It does not look like PEDIX had a distribution, but actually tanked?

PEDIX did poorly in 2009 but then again so did every other LT zero-coupon fund (thanks to rising rates and a shift to risk assets after everyone realized the financial world wasn't ending). If you are talking about the huge dip in late 2009 then PEDIX did indeed pay a distribution:

http://finance.yahoo.com/q/hp?s=PEDIX&a ... f=2012&g=v

PEDIX had a distribution of over $2.76 in December 2009 and in fact has made monthly distributions of varying sizes every month since its late 2006 inception.

[MachineGhost]

What do you think is going to happen to PEDIX and VEDTX in a rising rate environment, whether by economic recovery or higher nominal inflation?  Will these funds be wiped out or would it be an infinite divisions of smaller and smaller principal?

[Pointedstick]

What do you think is going to happen to PEDIX and VEDTX in a rising rate environment, whether by economic recovery or higher nominal inflation?  Will these funds be wiped out or would it be an infinite divisions of smaller and smaller principal?

Personally I am expecting my EDV to get wiped out, and continually hit rebalance bands. Once that happens, I hope to buy it up on the cheap and make a killing later.

[D1984]

What do you think is going to happen to PEDIX and VEDTX in a rising rate environment, whether by economic recovery or higher nominal inflation?  Will these funds be wiped out or would it be an infinite divisions of smaller and smaller principal?

I'll second that "wiped out" vote...although I don't think they will ever truly be 100% wiped out as that would imply default. Even if LTT rates go to 14% a $1,000 par value 25-year STRIP that is currently paying, say, 3% will go from around $477 to $43; roughly a 91% loss. But to endure such a rate change, either:

1. The economy would be performing so well that bonds would have to offer 14% to entice investors to buy them (which means that equities would be doing spectacularly well and soaring along with the economy itself),

2. Inflation would be horrible and gold would be shining (if you ask how gold could do well when rates were that high consider that at, say, 20% inflation 14% is a negative real rate) or the Fed would be hiking rates that high trying to suppress said inflation and you could rebalance out of your cash/STTs and back up the truck to buy zeros yielding 14%

3. People had lost trust in our currency and our ability to repay our debts (either that or perhaps if we stopped being a sovereign currency issuer) and we have to offer yields that high to convince investors to buy our bonds (assuming with loss of currency sovereignty comes loss of central bank as buyer of last resort as well) in which case you're probably screwed whether you hold the PP or any other portfolio.

Honestly, I can't see zeros (or coupon LTTs) yielding anywhere close to that any time soon. I actually find it difficult to fathom them yielding even 7% like they did back in 1999-2000...well, at least until the economy fully recovers from its current doldrums.

[D1984]

What do you think is going to happen to PEDIX and VEDTX in a rising rate environment, whether by economic recovery or higher nominal inflation?  Will these funds be wiped out or would it be an infinite divisions of smaller and smaller principal?

Personally I am expecting my EDV to get wiped out, and continually hit rebalance bands. Once that happens, I hope to buy it up on the cheap and make a killing later.

Pointedstick, are you 100% in EDV or do you have some regular coupon-bearing bonds (or TLT or VUSUX) as part of your 25% LTT allocation? I could never see having all my LTTs in zeros (too much bias towards deflation) unless all my gold and equities were in more-volatile-than-usual allocations as well (maybe SCV/LLCG blend for the equities and a 2X gold ETF for the gold).

Although....I suppose a decent LTT allocation could be made up of a mix of EDV and EE bonds if one had the proportions of each right so that the overall duration (zeros having the same duration as their maturity and EE bonds having almost the same duration as ordinary cash) roughly matched that of TLT or VUSUX....don't know how one would handle rebalancing, though.

[Pointedstick]

I have three PPs, two of which use EDV for the LTTs and one of which uses TLT. None are invested in any individual bonds though if yields go up to 14% I'll be buying them up like there's no tomorrow. I have considered swapping out the VTI for an SCV fund in my more VP-ish taxable PP but haven't taken the plunge yet. The confidence that the entire PP concept has given me makes me feel more secure in my choices, even though I can sit here and type that I expect one quarter of it to drop like a rock. I tell myself that if interest rates rise, I can only win; not only can I buy EDV/TLT shares on the cheap, but I can also buy bonds themselves and lock in high rates for 30 years, and the bond funds themselves will start to raise their dividends as well.

[clacy]

I too use EDV for a big chunk of my LTT portion.  I also use BTTRX as well. Roughly speaking I'm holding 40% EDV, 30% TLT and 30% BTTRX to make up my LTT asset class. 

[MachineGhost]

All charts and stats now align to a starting date of 09/1977.

[dragoncar]

Cool, two questions:

Which market timing algorithm is used?

Is MaxDD on a month-to-month basis, day-to-day, etc?