Gyroscopic Investing

The theory behind the PP is that it is a long term investment strategy. Makes a lot of sense. But when you get to near retirement age "long term" is relative. I  recently spent a few days making calculations and found that during my pre-PP 30-year investment history I averaged 6% annual return. This following no particular strategy other than my own "gut feel".  Some years I traded heavily and other years I did nothing, depending on what life stage I was in.  This includes losses in 1987 and 2008 and the mad dotcom gains of the late '90s.

Contrasting this 6% I am looking at 2% average annual return since I found the PP (combination of 4XHB and PRPFX). Obviously if I wait long enough this 2% will likely improve but how long is long enough?

Is anyone else in the same situation?

So I have been doing some in depth analysis of the PP, based on data starting in 1970.  Based on the monthly returns for the PP from Jan 1 1970 to the present month of Aug 1, 2013, I looked at the 36 month (3 year), 48 month (4 year), and 60 month (5 year) trailing returns.

That is to say: For each month I compared the value of the portfolio to the value 36, 48, and 60 months prior.  I then took that return and averaged it to the number of years (not annualized though I will do that shortly) to determine the average rate of return for any given month depending on how long you were invested ranging from 3-5 years.  I did this for all the months I had data for (starting in 1973 for 3 year, and 1975 for 5 year).  Here are the results I have seen:



Years InvestedSmallest ReturnLargest ReturnAverage ReturnStandard Deviation
3 Years 1.92% 25.16% 9.14% 4.43%
4 Years 2.46% 29.08% 10.57% 5.17%
5 Years 3.51% 25.75% 10.95% 5.02%



Based on the past performance of the PP I would say that if you remain invested for 5 years you should see (with 60% probabily) a return of between  30% - 80% on your initial capital.

So if I took $10,000 and invested in the PP for 5 years, historically my odds would look like this



Initial investmentFinal Value after 5 yearsHistorical likelihood
$10,000.00 $12,965 - $17,985 68%
$10,000.00 $10,455 - $20,495 96%



I'm working on getting a lot more data out this weekend that I wanted to post on here, since I've been analyzing it for a while now.  But there is a preview 

Very interesting. Thank you.

Mdraf wrote: But when you get to near retirement age "long term" is relative.

Is anyone else in the same situation?

I am. Been in the PP for about 3 years and saw decent returns the first two, but obviously I'm not as happy with the YTD results so far. I don't know about you but a year of <= $0 returns at this point is probably going to push forward my target retirement date at least a year. Even if this was the year I'd probably be reluctant to do it.

Still, I went back and checked on where I would be if I had stuck with the plan I was using before I switched to the PP and results were about the same. I still like the PP better though. Especially the gold.

The appeal of the PP for me is the way it protects me from losses while providing an opportunity for nice gains.

In other words, since I know that losses hurt more than gains of similar magnitude, I was drawn to a strategy that had historically provided excellent protection against losses if held for a year or more.  Other strategies will normally ask you to occasionally wait several years before recovering from large drawdowns and this is something that I never coped with very well.

True but you can do the same by placing trailing stop losses on your investments which is what I was doing before. So had I not switched to all in PP I would have been stopped out of gold this year well before the big collapse. And right now I'd be putting a stop loss on VTi well above my cost basis.

Be sure to look at real returns after inflation.  If inflation was at 3.5% annual average during your pre-PP years, then your real return was really only 2.5%.  Maybe in your PP years so far, your real return was 0%.  So, the difference in average annual returns is only 2.5%.  It's still not what you want, but it's not as bad as a 4% difference.  Wait around a few years, and it may turn around completely.  No strategy works well all the time, or else everyone would be doing it.

Mdraf wrote: True but you can do the same by placing trailing stop losses on your investments which is what I was doing before. So had I not switched to all in PP I would have been stopped out of gold this year well before the big collapse. And right now I'd be putting a stop loss on VTi well above my cost basis.

Consistently managing a stop loss strategy effectively is beyond the skill level and desire of a lot of regular investors.

I'm not sure that I would be interested in trying to stay on top of a strategy like that, in part because it invites tinkering and emotional decision making (for me anyway).

stuper1 wrote: Be sure to look at real returns after inflation.  If inflation was at 3.5% annual average during your pre-PP years, then your real return was really only 2.5%.  Maybe in your PP years so far, your real return was 0%.  So, the difference in average annual returns is only 2.5%.  It's still not what you want, but it's not as bad as a 4% difference.  Wait around a few years, and it may turn around completely.  No strategy works well all the time, or else everyone would be doing it.

That's a good point. Thanks.  But wait around a few years was my original point. Dragonjoes's calculations were very helpful.

stuper1 wrote: Be sure to look at real returns after inflation.  If inflation was at 3.5% annual average during your pre-PP years, then your real return was really only 2.5%.  Maybe in your PP years so far, your real return was 0%.  So, the difference in average annual returns is only 2.5%.  It's still not what you want, but it's not as bad as a 4% difference.  Wait around a few years, and it may turn around completely.  No strategy works well all the time, or else everyone would be doing it.

I should note that I also have data for the real return of the portfolio as well.  Over a period of 5 years trailing return it never had a negative real return.  It did however come very close to 0 at one point, but I believe the average real return annualized over a 5 year trailing period was around 4%.

I'll have more data once I get home, and I'll do a data dump this weekend of my findings.

Mdraf wrote: And right now I'd be putting a stop loss on VTi well above my cost basis.

I was googling on "stop loss" and came across this story about someone who lost a lot of money with a stop loss on VTI during the 2010 flash crash.

http://online.wsj.com/article/SB1000142 ... 26282.html

Mdraf wrote: The theory behind the PP is that it is a long term investment strategy. Makes a lot of sense. But when you get to near retirement age "long term" is relative. I  recently spent a few days making calculations and found that during my pre-PP 30-year investment history I averaged 6% annual return. This following no particular strategy other than my own "gut feel".  Some years I traded heavily and other years I did nothing, depending on what life stage I was in.  This includes losses in 1987 and 2008 and the mad dotcom gains of the late '90s.

Contrasting this 6% I am looking at 2% average annual return since I found the PP (combination of 4XHB and PRPFX). Obviously if I wait long enough this 2% will likely improve but how long is long enough?

Is anyone else in the same situation?

Do you know that the PP returns from the last 30-35 years are higher than 6%, right? And are you sure that now, near retirement age, with more fear to speculate and low interest rates, your return would be better than that 2%? Btw, PP returns from the very last years are far higher than 2% too!

notsheigetz wrote:

Mdraf wrote: And right now I'd be putting a stop loss on VTi well above my cost basis.

I was googling on "stop loss" and came across this story about someone who lost a lot of money with a stop loss on VTI during the 2010 flash crash.

http://online.wsj.com/article/SB1000142 ... 26282.html

The flash crash of May  2010 is famous. It was due to high speed trading computers. It triggered a lot of my stop losses but I just bought them back in the next few days. Later circuit beakers were instituted to prevent this. There have been further smaller flash crashes since but if they reverse within a short period of time (minutes) the brokers will reverse the stop loss sale.