pmward wrote: ↑
Wed Apr 17, 2019 11:39 am
I just wish that if Budd were going to try to refute the PP that he would do it objectively. It bothers me that all he does is come here every day gold is down and say "gold sucks, PP sucks, stocks are good". There's no objective argument there, it's purely subjective, and for a forum that is based around the PP I feel it provides an inaccurate and bad view to someone who ventures here to learn more about the PP. I think it's important to honestly and openly discuss the strengths and weaknesses of the PP so people can make a valid educated decision. No portfolio is perfect and choosing a portfolio is nothing but a balancing act of trading off strengths and weaknesses. Markets are also cyclical, so just looking at the last 10 years and stating that a 70/30 out performed a PP over that small time frame is meaningless in the grand scheme. It's a weak argument that has no value for investors considering the PP today.
The main weakness of the PP (whenever I say PP I'm also referring to all variations like golden butterfly, desert portfolio, all seasons, etc) is that it will underperform stocks in a strong cyclical bull market. This is not a novel idea, the data going back in time clearly shows this, and it's something that every investor knows going in. I've never seen anyone anywhere state that PP would out perform a stock heavy portfolio in prosperity. However, the PP tends to out perform and catch up whenever stocks are in a cyclical bear market. Someone should not go into the PP expecting to out perform in a bull market. If they want to chase performance in a bull market, absolute nominal returns are the only thing they care about, and seeing any tracking error in their portfolio is something that causes them undue stress and pain... then the PP is clearly not a good fit for them as an individual.
The next big weakness of the PP isn't really anything with the PP itself, it's human psychology. People tend to grow interested in defensive portfolios like the PP when times are bad; and historically when times are bad are the *worst* time to swap to a PP. Historically, the best times to swap to a PP are times like now when we are 10 years into a cyclical bull market and everyone is complacent, taking extraordinary amounts of risk, and thinks that stocks will go up forever. Those that bought into the PP between the years of 2008-2011 when there was fear in the air had a bad ride up until now. Those that buy in today when there is an absence of fear in the air are likely to have a much better ride in the next decade (and those that invested back in 2008-2011 will finally get their reversion to the mean if they stuck to their guns and didn't capitulate, those that capitulated will likely compound their losses by selling a past loser to buy a future loser).
Yet another weakness is that at any period of time one or two assets will always be in a bear market. Really, this is a feature, not a bug, but human psychology can sometimes have a hard time buying low and selling high. We all want to buy high and sell low. And, if someone buys into the PP at a time when one of the assets are in a bubble (like gold was in the early 2010's), then that single asset is highly likely to underperform for many years. It's not easy to keep buying something that you keep losing on, but that's precisely the magic behind how the PP works. Someone buying into the PP today are likely to have stocks be that asset that underperforms over the next decade. At least once people get through the first big macro cycle they will be at a point where on the whole they are profitable on all the assets, but that can take many years of rebalancing to get through that full cycle, and if someone has a false expectation of all the assets performing all the time they can wind up jaded and resentful against the PP as a whole (and the people that follow it) simply because they focus on the underperforming assets at the exclusion of the portfolio as a whole.
I don't need to spend as much time discussing the merits of the PP, as those are well documented here, but the most attractive feature of the PP is it's consistent returns over time. The PP and all it's variations tend to perform in a very tight range over any long period of time, they have very low drawdowns, very quick time to recover, and a high safe withdrawal rate. This style of investing is like the proverbial tortoise in the race vs the hare. It may not get those crazy 20-30% gain years that stocks alone do, but every time stocks go into a cyclical bear market the PP always tends to catch up. So while stocks race ahead in a bull market, they both tend to wind up in the same place when stocks go into their cyclical bear market. There is value in steady and consistent returns over a long period of time, with very low drawdowns. Whether there is prosperity, inflation, deflation, recession, etc the PP always slowly keeps chugging along. These strengths are are a very attractive quality to some people (me being one of them) and those people tend to value those strengths enough to find them as a whole worth accepting the tradeoffs in the weaknesses category. But the PP is *not* for everyone. If someone wants the drug like rush of chasing returns and trying to out perform year after year then they are better suited to a portfolio that will give them that fix. If someone loves buying high and hates buying low, then the PP is not going to be a portfolio that brings them joy.
I think it's valuable to honestly discuss the strengths and weaknesses of the PP (and variants) in an objective manner. I find no value however in subjective complaining and making meaningless blanket statements like "x is good and y is bad" with no real evidence, reasoning, or discussion provided. I think it's harmful to the community as a whole and is doing a disservice to those that come here for honest answers. The biggest mistake investors make is infinitely projecting the present into the future. This is something that needs to be avoided, both when times are good and when times are bad, because the truth is that it's inevitable that the pendulum will keep swinging and it is a 100% fact that at any moment in time the coming 10 years will look very different from the previous 10 years. I would love to hear Budd provide some objective arguments backed by evidence and numbers beyond just simply the fact that his 70/30 out performed the PP over the last few years (which in a period of strong prosperity it is kind of like "well duh, of course it did, it *should have*").