Ready for Some Good News???

[stuper1]

As of today, the HBPP is at an all time high (according to peaktotrough.com if you started 1/1/1972, rebalanced at 35/15, and reinvested dividends), having completely recovered from the drawdown that started in November 2012.

To me, this is very good news, as it only took about 19 months for full recovery from a significant drawdown (which was only about 7% at worst, when measured monthly).

A typical 60/40 portfolio has experienced drawdowns of 25% or more at various times and taken 40 months or more to recover.

Hooray again for the PP.

[craigr]

Slow and steady wins the race.

[MachineGhost]

Not to rain on your parade, but 7% is really nothing to the PP.  The worst MaxDD is around -25% which is a scary chunk of your wealth to lose.  I don't know if that was less harsh in real terms.

[Loafer]

Including real expenses?

[Reub]

Possibly a diversification of the money you can't afford to lose into three different portfolios consisting of one part PP, one part Boglehead, and one part Vanguard Wellesley is a better way to go? All are low cost, proven over time and tend to complement each other well.

[MachineGhost]

Including real expenses?

Well, not point-in-time.

[MachineGhost]

Possibly a diversification of the money you can't afford to lose into three different portfolios consisting of one part PP, one part Boglehead, and one part Vanguard Wellesley is a better way to go? All are low cost, proven over time and tend to complement each other well.

What is the standard Boglehead composition?  If Wellesly is 40% bonds then I think you would be guilty of assuming the bond bull market will continue for another 30 years.  It clearly can't as there's no room to do so.

[buddtholomew]

Possibly a diversification of the money you can't afford to lose into three different portfolios consisting of one part PP, one part Boglehead, and one part Vanguard Wellesley is a better way to go? All are low cost, proven over time and tend to complement each other well.

What is the standard Boglehead composition?  If Wellesly is 40% bonds then I think you would be guilty of assuming the bond bull market will continue for another 30 years.  It clearly can't as there's no room to do so.

MG, what is your asset allocation? It would help me understand your perspective on equities, gold, treasuries and cash.

As a heuristic, BH portfolios are generally age-10 in fixed income, so a 30-year old investor is 80/20 and a 60-year old 50/50. It is fairly safe to assume that BH portfolios are generally overweight equities during the accumulation phase and glide lower when approaching retirement.

I have stated this elsewhere, but my overall portfolio is as follows. BH in tax-deferred, PP in taxable.

Equities: 50% (includes BH 70%, PP 25%)
Bonds: 40% (includes BH 30% ST/IT bonds and Stable Value funds, PP 25% ea. LT bonds and Cash) - total weighted fixed income duration of 6.2 years
PM&M: 10% (includes BH 2.5% gold miners, PP 25% gold)

[MachineGhost]

MG, what is your asset allocation? It would help me understand your perspective on equities, gold, treasuries and cash.

I answered this in another thread, but basically I'm not fully invested in the PP so I'm cash heavy.  I am waiting for stocks to correct back down to below/fair valuation because I believe the risk of a deflation from overvalued high yield bonds and other debt instruments is rather high,  will drag down stocks as shown historically, and such a deflation eats the PP.  The same could also be said of higher unexpected inflation killing bonds and stocks, but juicing gold up unlike in a deflation.  I am semi-retired so I cannot risk losing a 25% chunk of my wealth.

Of course, it doesn't look like its going to happen anytime soon after this past week.  Sentiment is too bearish and the EU is pulling a Bernanke, so I am now reconsidering whether or not I want to just say fvck it and go full hog.  Ideally, I'd like to see gold trigger a buy signal before I do so, because that would be a good sign as any that stocks and bonds are going to collapse.  The deflationary aspect is harder to see because of the way QEternity increases stocks and bonds correlations.

[buddtholomew]

MG, what is your asset allocation? It would help me understand your perspective on equities, gold, treasuries and cash.

I answered this in another thread, but basically I'm not fully invested in the PP so I'm cash heavy.  I am waiting for stocks to correct back down to below/fair valuation because I believe the risk of a deflation from overvalued high yield bonds and other debt instruments is rather high, will drag down stocks as shown historically, and such a deflation eats the PP.  I am semi-retired so I cannot risk losing a 25% chunk of my wealth.

Of course, it doesn't look like its going to happen anytime soon after this week.  Sentiment is too bearish and the EU is pulling a Bernanke, so I am now reconsidering whether or not I want to just say fvck it and go full hog.  Ideally, I'd like to see gold trigger a buy signal before I do so, because that would be a good sign as any that stocks and bonds are going to collapse.

Waiting for the opportune time to allocate investments to the portfolio may not surface during our lifetime. Have you considered investing in all assets equally and holding additional cash to limit draw-downs? I am certain this approach has crossed your mind more than once, so what is preventing you from executing?

Waiting for the ideal set of circumstances to present themselves is more stressful than seeing a pullback in your portfolio of the magnitude you describe. I was under the impression that the PP endured a single DD of 20%, but it was recovered within a 2-year period. Your retirement is significantly longer than 2 years, correct?

[MachineGhost]

Waiting for the opportune time to allocate investments to the portfolio may not surface during our lifetime. Have you considered investing in all assets equally and holding additional cash to limit draw-downs? I am certain this approach has crossed your mind more than once, so what is preventing you from executing?

Waiting for the ideal set of circumstances to present themselves is more stressful than seeing a pullback in your portfolio of the magnitude you describe. I was under the impression that the PP endured a single DD of 20%, but it was recovered within a 2-year period. Your retirement is significantly longer than 2 years, correct?

Of course, I've considered it but the feeble gains the PP throws off every year doesn't offset the non-symmetrical risks at this juncture.  So I'm a market timer, which means I don't want to buy gold when its declining (I made that mistake once already) and don't really want to buy stocks when they're priced to deliver negative returns for at least the next 7 years.  Can overvalued bonds possibly pick up the slack when they've already had a good sized move to resistance already in an era of decreasing QEternity?  It's not a bet I'm willing to make because bonds do not always offset stock losses in the past as I've posted elsewhere; gold has played that role at times.  But while gold continues to decline, its stupid to invest in it.  One reason the PP doesn't generate a lot of return every year is because one or more of the assets always drag down the gains of the others.  I'm not waiting for the "ideal", I'm waiting for the "rational".  To me, the rational looks to be when gold flashes a buy.  In the meantime, very little of the gains in stocks and bonds will be retained after their bubble ends.  In such deflationary scenarios, gold does not go up.  So it pays to be careful.

Didn't last year teach you guys anything?  It was a negative loss for the PP both in nominal and real terms.  It's just a taste of what is to come, I fear.  And historically the PP experienced a -25% peak to trough MaxDD on a daily granularity basis and can certainly blow past it in the future on new "macroeconomic events" never seen before in history, like stock and bonds being simultaneously overvalued and dropping.  Nothing has changed since 2007-2008; the risks are even bigger than before.

Keep in mind the main driver of the PP is the equity...  literally everything else is secondary and revolves around the equities.  I use the PP as a strategic allocation template; I don't drink the Kool-Aid lock stock and barrel.  I'm sure many others here would agree with me if they dared to.

BTW, bubbles occur because investors are not willing to wait for when it is actually rational to buy, but because they are afraid of missing out or are desparate to chase yield.  Who do you think comes out ahead in the end?

[buddtholomew]

Analysis by paralysis. Do your self a favor and move all-in. Keep cash reserves to buy gold when it flashes a buy signal.

[Alanw]

Possibly a diversification of the money you can't afford to lose into three different portfolios consisting of one part PP, one part Boglehead, and one part Vanguard Wellesley is a better way to go? All are low cost, proven over time and tend to complement each other well.

I used this philosophy last year when I reconstructed my girl friends retirement account. 40% HBPP, 40% Wellesley and 20
% VTI/BND/CASH. Didn't want to go all in on one particular allocation. The entire portfolio came to: stock=35%, bonds=42%, gold=10%, cash=13% and I do like the 3% distribution of Wellesley. Glad to see someone on the forum had similar thoughts.

[Reub]

I think that this type of diversification is almost bullet proof under almost all circumstances. Not being that good with charts and math, I wonder how the numbers would work out for a portfolio of these three parts over the long term w.r.t. CAGR and MaxDD.

[Alanw]

I think that this type of diversification is almost bullet proof under almost any circumstances. Not being that good with charts and math, I wonder how the numbers would work out for a portfolio of these three parts over the long term in terms of CAGR and MaxDD.

Will leave that to one of the chartists on the forum.  My guess would be the CAGR and MaxDD would fall somewhere between the PP and Wellesley.  The cash position is 3 - 4 years living expenses leaving it unnecessary to tap the other positions unless in an extreme emergency or prolonged slump of stocks/bonds/gold. Who knows. About as safe as I could come up with without going to all cash or treasuries. And very easy to rebalance.

[Reub]

It's almost like having three different types of permanent portfolios that all compliment each other in differing ways, one with an emphasis on gold and cash, another on low cost active, proven management by professionals, and the last emphasizing the long term growth potential of equities, dampened by one's risk and age. Obviously all three utilize bonds of various types.

[Alanw]

Yes. It uses a variety of bonds, a variety of stocks with an emphasis on large cap, blue chips, some gold and some cash.  Also, it was easy to explain; conservative without putting everything into one distinct portfolio.  Diversified without slice and dice. ER of .16. She thinks I'm a genius.

[jabba]

Waiting for the opportune time to allocate investments to the portfolio may not surface during our lifetime. Have you considered investing in all assets equally and holding additional cash to limit draw-downs? I am certain this approach has crossed your mind more than once, so what is preventing you from executing?

Waiting for the ideal set of circumstances to present themselves is more stressful than seeing a pullback in your portfolio of the magnitude you describe. I was under the impression that the PP endured a single DD of 20%, but it was recovered within a 2-year period. Your retirement is significantly longer than 2 years, correct?

Of course, I've considered it but the feeble gains the PP throws off every year doesn't offset the non-symmetrical risks at this juncture.  So I'm a market timer, which means I don't want to buy gold when its declining (I made that mistake once already) and don't really want to buy stocks when they're priced to deliver negative returns for at least the next 7 years.  Can overvalued bonds possibly pick up the slack when they've already had a good sized move to resistance already in an era of decreasing QEternity?  It's not a bet I'm willing to make because bonds do not always offset stock losses in the past as I've posted elsewhere; gold has played that role at times.  But while gold continues to decline, its stupid to invest in it.  One reason the PP doesn't generate a lot of return every year is because one or more of the assets always drag down the gains of the others.  I'm not waiting for the "ideal", I'm waiting for the "rational".  To me, the rational looks to be when gold flashes a buy.  In the meantime, very little of the gains in stocks and bonds will be retained after their bubble ends.  In such deflationary scenarios, gold does not go up.  So it pays to be careful.

Didn't last year teach you guys anything?  It was a negative loss for the PP both in nominal and real terms.  It's just a taste of what is to come, I fear.  And historically the PP experienced a -25% peak to trough MaxDD on a daily granularity basis and can certainly blow past it in the future on new "macroeconomic events" never seen before in history, like stock and bonds being simultaneously overvalued and dropping.  Nothing has changed since 2007-2008; the risks are even bigger than before.

Keep in mind the main driver of the PP is the equity...  literally everything else is secondary and revolves around the equities.  I use the PP as a strategic allocation template; I don't drink the Kool-Aid lock stock and barrel.  I'm sure many others here would agree with me if they dared to.

BTW, bubbles occur because investors are not willing to wait for when it is actually rational to buy, but because they are afraid of missing out or are desparate to chase yield.  Who do you think comes out ahead in the end?

I feel the same, buying equities now looks like a few % upside compared to a 15-30% downside, so cash is a nice place to be. I see perhaps some value in buying gold miners as the hammering of gold will end sometime in the next 12 months, maybe some value in emerging markets but in general US equities are overbought and heading for a dump.

My strategy is start dipping toe into miners and a bit of gold over the summer, keep cash and wait for equities to correct, I could be waiting until 2015 but now I am not worried about how to make a $, rather how can I hold onto my $

[dualstow]

[BTW, bubbles occur because investors are not willing to wait for when it is actually rational to buy, but because they are afraid of missing out or are desparate to chase yield.  Who do you think comes out ahead in the end?

The Kool-Aid drinkers.

[dualstow]

...buying equities now looks like a few % upside compared to a 15-30% downside, so cash is a nice place to be.

You never know. A lot of people gave up on the S&P 100 points ago. Stock could crash...or, maybe we'll be rebalancing out of stocks four times before a different asset gets its turn in the sun.

[buddtholomew]

Optomism trumps Pessimism and often times Realism.