Gyroscopic Investing

Ad Orientem wrote: My understanding is that most of the charts and spread sheets showing the historic returns of the PP (such as the ones Craig has put up) do not include dividends or yield from bonds. In other words they reflect the gains, and occasional losses based on the volatility of the four assets. The volatility is pretty much what makes the PP work. Dividends and yield are a bit like an unexpected desert served gratis after a good meal. They add to the sweetness but most of us don't pay a lot of attention to them because that 9% CAGR was all volatility.

rickb wrote:

Ad Orientem wrote: My understanding is that most of the charts and spread sheets showing the historic returns of the PP (such as the ones Craig has put up) do not include dividends or yield from bonds. In other words they reflect the gains, and occasional losses based on the volatility of the four assets. The volatility is pretty much what makes the PP work. Dividends and yield are a bit like an unexpected desert served gratis after a good meal. They add to the sweetness but most of us don't pay a lot of attention to them because that 9% CAGR was all volatility.

I disagree.  I think nearly all the charts and spreadsheets are showing the total return, dividends included.  For gold, this is the same since gold doesn't return any dividends, but dividends/interest are generated by all of the other three assets and AFAIK the historical return numbers are inclusive of these.  In this regard cash is the opposite of gold - the principal amount never varies but it generates an interest amount (well, it has historically generated an interest amount - not so much now). 

On the other hand, the total return that is generally presented excludes taxes, trading fees, and buy/sell spreads.  So, for example, when you buy gold coins you generally pay 2-3% more than the spot price of bullion and when you sell you get more like spot and you're supposed to pay the collectibles tax on any gain you made.  This leakage is not factored into the returns that are presented.  Similarly, if you rebalance and sell stock to buy something else the trading fees and taxes you have to pay are not included. 

One of the issues with including these effects is that they are different for everyone; they depend on when you start your portfolio, how much and how you add as time goes on (which affects when you rebalance), the specific form you hold the assets in (physical gold is different from GLD which is different from GTU) etc etc etc.  It's certainly possible to create a spreadsheet that takes all of these things into account, but it would not be a trivial exercise.  If anyone really wanted this there are some job shop sorts of places where you could post your requirements and get bids for how much it would cost to develop.

jason wrote:

rickb wrote:

Ad Orientem wrote: My understanding is that most of the charts and spread sheets showing the historic returns of the PP (such as the ones Craig has put up) do not include dividends or yield from bonds. In other words they reflect the gains, and occasional losses based on the volatility of the four assets. The volatility is pretty much what makes the PP work. Dividends and yield are a bit like an unexpected desert served gratis after a good meal. They add to the sweetness but most of us don't pay a lot of attention to them because that 9% CAGR was all volatility.

I disagree.  I think nearly all the charts and spreadsheets are showing the total return, dividends included.  For gold, this is the same since gold doesn't return any dividends, but dividends/interest are generated by all of the other three assets and AFAIK the historical return numbers are inclusive of these.  In this regard cash is the opposite of gold - the principal amount never varies but it generates an interest amount (well, it has historically generated an interest amount - not so much now). 

On the other hand, the total return that is generally presented excludes taxes, trading fees, and buy/sell spreads.  So, for example, when you buy gold coins you generally pay 2-3% more than the spot price of bullion and when you sell you get more like spot and you're supposed to pay the collectibles tax on any gain you made.  This leakage is not factored into the returns that are presented.  Similarly, if you rebalance and sell stock to buy something else the trading fees and taxes you have to pay are not included. 

One of the issues with including these effects is that they are different for everyone; they depend on when you start your portfolio, how much and how you add as time goes on (which affects when you rebalance), the specific form you hold the assets in (physical gold is different from GLD which is different from GTU) etc etc etc.  It's certainly possible to create a spreadsheet that takes all of these things into account, but it would not be a trivial exercise.  If anyone really wanted this there are some job shop sorts of places where you could post your requirements and get bids for how much it would cost to develop.

Yes, if the spreadsheet/website allows the user to fill in all needed variables such as ordinary income tax rate, long term capital gains tax rate, gold premium paid when buying gold, etc., this definitely could be done.  But I'm not really keen on paying a programmer to make it.  I was hoping a programming enthusiast or Excel wizard would read my post and would be inspired to create it, and share it with all of us. 
I find it ironic that PPers are extremely cautious and conservative, yet we dove into an investment strategy where we really don't even know what the after tax yield has been, historically.  I moved forward with the PP, anyway, because I felt like I didn't have another option - I couldn't find another fail-safe investing strategy.

nwagers wrote: What is the heart of the question? If you're trying to compare the PP to another portfolio then what you really want to know is if the PP is more or less tax efficient than another strategy.

In some ways, it's probably slightly less efficient. Gold would be at 28% (if not a PFIC) and cash and bond yield would be at your marginal tax bracket.

Stock growth would be at the lower capital gains rate. So a portfolio with a larger percentage of stocks, like a 60/40, is likely to be a little more efficient.

Tyler wrote: Well according to Fidelity, PRPFX has a 10-year average return of 7.95% before taxes, 7.41% after taxes on distributions, and 6.40% after taxes on distributions and sale of fund shares.  That assumes the maximum marginal tax rate.  The big distribution in December may skew that up for 2013.  So that's one data point.

In a homemade HBPP, the taxes for an early retiree will be 0% in years when they don't realize more than $72.5k in capital gains (as a couple filing jointly), don't sell gold, and when the bond and cash interest is less than the standard deduction and exceptions.  For many people drawing down from cash and planning their capital gains carefully, that's most years. 

So reality is somewhere in between those two ends of the spectrum for most people.  In general, the PP is pretty darn tax efficient and the diversity of the core holdings gives you the ability to plan taxes during a rebalance on your terms.