Gyroscopic Investing

Has anyone done any backtesting to determine how long the average PP drawdown and/or under-performance lasts?

Since nearly every year has ended in the black, I'm guessing that its less than one year. Based on this assumption, combined w/ the length of the current under-performance vs historical average...is this looking like a good time to move more fully into the PP? ie...we're approaching the end of under-performance and might expect to "revert to the mean" some time in the next year...which might involve out-performance of the PP?

I guess the PP gives me optimism.

I have some long run return charts located here:
http://www.stableinvesting.com/p/long-t ... mance.html

These charts are adjusted for inflation, which highlights that the 70s were actually not an amazing time for the PP (or any conventional strategy). Additionally, just looking at the yearly numbers hides that intra year the PP has had 2 brutal 25% drawdowns.

As far as relative performance goes, looking at my 60 month trailing annualized returns you can see that the PP has been performing on the higher end of its historical performance range (although you might be more curious about a shorter time horizon).

Hopefully these charts help.

melveyr wrote: These charts are adjusted for inflation, which highlights that the 70s were actually not an amazing time for the PP (or any conventional strategy). Additionally, just looking at the yearly numbers hides that intra year the PP has had 2 brutal 25% drawdowns.

Really?  I'm aware of the 1980's one, when was the second?  2008 only hit -16%.

murphy_p_t wrote: Has anyone done any backtesting to determine how long the average PP drawdown and/or under-performance lasts?

Average would be a little difficult to calculate as the PP is always in a drawdown of some sort or another, until it isn't.

But the single largest MaxDD occured from the peak at 01/01/80 until the trough at 03/27/80 and a new high was not reached until 10/19/1982, so that flat period lasted 693 trading days.  Before that time, the single largest MaxDD flat period was 227 trading days.

No rebalancing bands were included in this period so the time difference may be a little more or less.

Both sound like buying opportunies to use that 25% cash or new contributions.

Also, I wonder what the average dividend/coupon rate for the PP is so you don't have to sell assets on these large drawdowns. (Assuming you are living solely off the PP)

Bean wrote: Also, I wonder what the average dividend/coupon rate for the PP is so you don't have to sell assets on these large drawdowns. (Assuming you are living solely off the PP)

IIRC the average yield is around 2%. And yeah, if you get your withdraw rate down to this then you'd rebalance VERY rarely.

Back of the envelope estimate: if you figure the TSM's yield is 1%, cash and bond interest rates average 4% long term, and gold's yield is zero, that works out to 2.25%.

I think these are two distinct questions...

The drawdown period will be significantly shorter than the underperformance periods, assuming by "underperfomring" you're talking relative to say 100% S&P or maybe a 60/40 portfolio.

I think the PP has the ability to underperform the broad market for significant periods of time if we're in a bull market. 

I don't see a two decade bull market like we had in the 80/90's any time soon however.

The duration of a PP's drawdown depends heavily on when one starts the portfolio and when one hits the rebalancing bands.

Slotine did an analysis a while back with random starting points and found that the worst-case time required for a PP drawdown to get back into positive territory was 24 to 32 months (24 months post-2000, 32 months pre-2000).

http://gyroscopicinvesting.com/forum/ht ... 254#p47254

By underperform, I'm saying underperformance vs. the 9% average annual return. I'm holding this up as the bar to measure the PP.

murphy_p_t wrote: By underperform, I'm saying underperformance vs. the 9% average annual return. I'm holding this up as the bar to measure the PP.

On a yearly basis, it underperforms 51.3% of the time and the worst stetch was 4 years from 1999 to 2002.  Keep in mind I use TNotes so it may be a bit more worse with TBills.

Lately, I feel like we keep shredding the PP more and more like Jesus in The Passion of the Christ.

MachineGhost wrote:

murphy_p_t wrote: By underperform, I'm saying underperformance vs. the 9% average annual return. I'm holding this up as the bar to measure the PP.

On a yearly basis, it underperforms 51.3% of the time and the worst stetch was 4 years from 1999 to 2002.  Keep in mind I use TNotes so it may be a bit more worse with TBills.

Lately, I feel like we keep shredding the PP more and more like Jesus in The Passion of the Christ.

That is quite a comment to make. Care to share exactly what you mean to confirm that my interpretation is accurate. Are you suggesting that we are poking holes in the philosophy of the PP and its abilities to navigate this particular economic climate?