Why the PP is better in accumulation than you think

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MachineGhost
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Re: Why the PP is better in accumulation than you think

Post by MachineGhost » Wed Oct 21, 2015 1:02 pm

Tyler wrote: Take the PP out of the equation for a moment, and I can say that my calculations for SWRs using stocks and bonds with various start years reasonably match those found in multiple retirement studies.  That gives me confidence that the methodology is sound.  Once that's set, switching portfolios shouldn't break anything.  You might also try calibrating that way to see what happens.
Great idea!  I just did that with 100% stocks but no matter what the WR is, the balance never goes to zero except near 2014 when it is at 19.50%.  Any ideas?  This reminds me of Russian dolls.

This is my formula to calculate the running balance:

=SUM($W13:$AQ13)/(1+SUM($AV13,$AW13))

Where W:AQ are the weighted asset returns, AV is yoy inflation rate and AW is the WR.
Last edited by MachineGhost on Wed Oct 21, 2015 1:07 pm, edited 1 time in total.
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Re: Why the PP is better in accumulation than you think

Post by dutchtraffic » Wed Oct 21, 2015 1:13 pm

ochotona wrote:
Jack Jones wrote:
My understanding of timing is that it's a way to reduce volatility (not increase returns). So why go through all the trouble with a portfolio that already has low volatility?
This is a key point... volatility does not equal risk. You might say, volatility is one kind of risk. But you can have a low volatility portfolio that has very smooth "returns", but those "returns" might be zero, or negative.

My Dad used to say his 1960s Buicks had nice smooth rides, they made he feel safe. He also could not control it in an emergency situation.

Market timing Trend following gets you out of positions, a bit late, before they take you around in back of the woodshed. They get you back in, a bit late, in order to catch most of the next upswing. They do head fake you sometimes.

It gets you out of gold early 2013, back in after a big tumble.

It gets you out of S&P500 November 07... it gets you out Sept 2015. We'll see where that goes.

It gets you out of TLT late 2012, back in early 2014... just in time for a big rally. 2014 was great for long bonds.

Just run the 200 day moving average on any asset you like. That's the indicator. It's pretty simple, but not easy. Can you follow the indicator, and not second-guess it. It's tough!
Simply following a 200 day MA will get you stopped out all over the place.
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Re: Why the PP is better in accumulation than you think

Post by Dmilligan » Wed Oct 21, 2015 1:39 pm

Tyler wrote:
MachineGhost wrote: My understanding was he didn't want the ending balance to fall below the inflation-adjusted beginning balance, ignoring year by year undershoots.  The PP doesn't offer enough growth not to be depleted by inflation + withdrawals to stay above initial principal, which is a rather oddly strict rule.
Yep -- my understanding as well.  When I use "sustainable" withdrawal rate that's exactly the definition I use.  Whereas the "safe" withdrawal rate is where the end balance was exactly 0 (not lower).  The Safe WR for the PP (since 1972) is about 5%, and the Sustainable WR is about 4%.
Correct, I'm looking to try to establish a number based on Tyler's sustainable withdrawal rate methodology but with MG's extrapolated data going earlier than 1972.

The reason I'm asking is that I'm still experimenting with models for living in FIRE out of the portfolio. If the portfolio is needed for 50 years, then I've still been trying to establish a sustainable withdrawal rate. Further, I've been trying to establish an annual withdrawal percentage that still allows the portfolio to somewhat grow with inflation. I recognize that there will be years when the portfolio will be less and more, and the annual draw from the portfolio will also be less or more than the previous year draw (i.e., 4% of less or more). But, I'd like to take as high of a percentage as possible each year, but not take so much that the annual draw amount on a year-by-year basis starts to get eroded by inflation. Does this make sense?

To complicate a little more, I've also been modeling whether the sustainable withdrawal rate is raised (and by how much), if the annual withdrawal percentage draw is taken from the cash portion. Using the sequence of returns since 1972, drawing from cash seems to raise the sustainable withdrawal rate verses taking from the portfolio as a whole. To me, this is a real advantage of the PP for an early retirement portfolio. Also, seems a lot less complicated to manage in retirement.

MG, I'm hoping the .31% number is incorrect. Because that would mean that my annual percentage sustainable draw off a $1M PP is only $3,100! I was planning on the annual draw being closer to $40K!
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Re: Why the PP is better in accumulation than you think

Post by ochotona » Wed Oct 21, 2015 1:44 pm

dutchtraffic wrote: Simply following a 200 day MA will get you stopped out all over the place.
One key point is to only check 1x per month, same day of the month. It will cause some excess trades, for sure. Small price to pay for potential benefits. But it's not a lazy portfolio.
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Re: Why the PP is better in accumulation than you think

Post by dutchtraffic » Wed Oct 21, 2015 2:10 pm

ochotona wrote:
dutchtraffic wrote: Simply following a 200 day MA will get you stopped out all over the place.
One key point is to only check 1x per month, same day of the month. It will cause some excess trades, for sure. Small price to pay for potential benefits. But it's not a lazy portfolio.
Once a month will be very risky, and just randomly looking at some charts, that creates some MAJOR losses.
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Re: Why the PP is better in accumulation than you think

Post by MWKXJ » Wed Oct 21, 2015 2:25 pm

ochotona wrote: One key point is to only check 1x per month, same day of the month. It will cause some excess trades, for sure. Small price to pay for potential benefits. But it's not a lazy portfolio.
Tried rebalancing once a month when following 200 day moving averages via an Ivy portfolio in my VP and failed miserably; could not tear my eyes off of stockcharts.com.  This was doubly the case when the trendlines were moving strongly one way or another in the period immediately before the allotted day for rebalancing.  In such a situation, it is far too tempting to wait "one more day", and then, inevitably, one will begin picking and choosing which days to rebalance for each asset class, and soon after, checking charts all the time.

A hands-off automated rebalancing service might be the solution if such a service exists, however, the idea of a third party tapped in one's various brokerage accounts can itself be another---major---source of anxiety.
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Re: Why the PP is better in accumulation than you think

Post by ochotona » Wed Oct 21, 2015 3:09 pm

MWKXJ wrote: Tried rebalancing once a month when following 200 day moving averages via an Ivy portfolio in my VP and failed miserably; could not tear my eyes off of stockcharts.com.  This was doubly the case when the trendlines were moving strongly one way or another in the period immediately before the allotted day for rebalancing.  In such a situation, it is far too tempting to wait "one more day", and then, inevitably, one will begin picking and choosing which days to rebalance for each asset class, and soon after, checking charts all the time.

A hands-off automated rebalancing service might be the solution if such a service exists, however, the idea of a third party tapped in one's various brokerage accounts can itself be another---major---source of anxiety.
Meb Faber warns that it's emotionally tough to do this kind of work, for exactly the reasons you cite. It's like "training for a marathon", he writes. I agree. But the risk reduction benefits are so strong, I just can't let it go without trying.
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Re: Why the PP is better in accumulation than you think

Post by MachineGhost » Wed Oct 21, 2015 3:30 pm

Dmilligan wrote: MG, I'm hoping the .31% number is incorrect. Because that would mean that my annual percentage sustainable draw off a $1M PP is only $3,100! I was planning on the annual draw being closer to $40K!
Yes, I now believe it is wrong.  I just can't figure out why.  I see no obvious errors.  50% of a previous value is half then it splits again and again into infinity and never actually reaches zero.  So I must be calculating this WR wrong.  Lets see what Tyler says.
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Re: Why the PP is better in accumulation than you think

Post by MachineGhost » Wed Oct 21, 2015 3:35 pm

MWKXJ wrote: A hands-off automated rebalancing service might be the solution if such a service exists, however, the idea of a third party tapped in one's various brokerage accounts can itself be another---major---source of anxiety.
None of them exist yet for simplistic trend following, but more sophisticated risk management does.  If you're interested, see the Hedgeable thread (ask Reub for an invite so he gets the reward points, as well as some yourself).  There's also another service that I'm watching but it is still in beta.  Both are run by Bridgewater alumni.
Last edited by MachineGhost on Wed Oct 21, 2015 3:40 pm, edited 1 time in total.
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Re: Why the PP is better in accumulation than you think

Post by Jack Jones » Wed Oct 21, 2015 3:48 pm

ochotona wrote:
Jack Jones wrote:
My understanding of timing is that it's a way to reduce volatility (not increase returns). So why go through all the trouble with a portfolio that already has low volatility?
This is a key point... volatility does not equal risk. You might say, volatility is one kind of risk. But you can have a low volatility portfolio that has very smooth "returns", but those "returns" might be zero, or negative.

My Dad used to say his 1960s Buicks had nice smooth rides, they made he feel safe. He also could not control it in an emergency situation.
I'm sorry, but I'm not following your point (and you said it was key, so I'd like to understand!)

I was saying that the Permanent Portfolio already has low volatility so market timing isn't likely to reduce it by much. Why not apply SMA trendfollowing to a more volatile portfolio with higher returns and bring the volatility down to PP levels but keeping the higher returns:

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Re: Why the PP is better in accumulation than you think

Post by MachineGhost » Wed Oct 21, 2015 3:51 pm

Jack Jones wrote: I'm sorry, but I'm not following your point (and you said it was key, so I'd like to understand!)
He meant low volatility isn't the same thing as low MaxDD.  Low volatility porfolios tend to have infrequent left bell curve fat tail spikes that wind up "surprising" everyone.
Last edited by MachineGhost on Wed Oct 21, 2015 3:53 pm, edited 1 time in total.
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Re: Why the PP is better in accumulation than you think

Post by Cortopassi » Wed Oct 21, 2015 3:55 pm

I've tried timing before, failed miserably.  Stressed out constantly.  PP removed all that.  No way am I a timer in any fashion!  My timing will either be annual or the bands.
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Re: Why the PP is better in accumulation than you think

Post by iwealth » Wed Oct 21, 2015 4:03 pm

dutchtraffic wrote:
ochotona wrote:
dutchtraffic wrote: Simply following a 200 day MA will get you stopped out all over the place.
One key point is to only check 1x per month, same day of the month. It will cause some excess trades, for sure. Small price to pay for potential benefits. But it's not a lazy portfolio.
Once a month will be very risky, and just randomly looking at some charts, that creates some MAJOR losses.
Do you have backtesting data to back this up or is this just an assumption?
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Re: Why the PP is better in accumulation than you think

Post by lordmetroid » Wed Oct 21, 2015 4:06 pm

Great tool, I used it and decided to trash my cash and buy Small Cap Stocks instead. I know, I know, I said I would not tinker but according to these simulations the Small Cap Stocks wouldn't necessarily do any harm to the volatility. How that is possible, I have no idea.
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Re: Why the PP is better in accumulation than you think

Post by dutchtraffic » Wed Oct 21, 2015 4:06 pm

iwealth wrote:
dutchtraffic wrote:
ochotona wrote: One key point is to only check 1x per month, same day of the month. It will cause some excess trades, for sure. Small price to pay for potential benefits. But it's not a lazy portfolio.
Once a month will be very risky, and just randomly looking at some charts, that creates some MAJOR losses.
Do you have backtesting data to back this up or is this just an assumption?
Not backtested at all, just looking at some random indices and seeing 10-20% drops if using that strategy.
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Re: Why the PP is better in accumulation than you think

Post by Tyler » Wed Oct 21, 2015 4:24 pm

MachineGhost wrote: This is my formula to calculate the running balance:

=SUM($W13:$AQ13)/(1+SUM($AV13,$AW13))

Where W:AQ are the weighted asset returns, AV is yoy inflation rate and AW is the WR.
It appears you're never actually reaching zero because you're using a WR that is a percentage of the remaining portfolio instead of only the first year.  Most classic SWR studies (and my own calculations) assume that expenses are fixed in year one and adjusted up for inflation every year independent of portfolio value along the way.  That's why volatility particularly hurts the SWR -- the portfolio may drop, but the retirement expenses do not!  You need to subtract expenses, not divide them.

I suggest using a systematic approach.  Take an initial portfolio value, and calculate the annual retirement expenses from the initial SWR.  Subtract that from the portfolio value (that assumes expenses are set aside at the beginning of the year).  Then adjust the balance by the real return of the portfolio for that year.  Rinse and repeat, always using the same fixed expenses from year one (By using real returns, you keep the expenses in constant dollars.  If you use nominal returns, be sure to increase the expenses at the rate of inflation).  Once you have a final portfolio value after a certain number of years, you can use that to tinker with the initial WR percentage to level the end point wherever you like (zero for SafeWR, or initial principal for SustWR).  Make sense?
Last edited by Tyler on Wed Oct 21, 2015 6:01 pm, edited 1 time in total.
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Re: Why the PP is better in accumulation than you think

Post by MachineGhost » Wed Oct 21, 2015 6:40 pm

Tyler wrote: It appears you're never actually reaching zero because you're using a WR that is a percentage of the remaining portfolio instead of only the first year.  Most classic SWR studies (and my own calculations) assume that expenses are fixed in year one and adjusted up for inflation every year independent of portfolio value along the way.  That's why volatility particularly hurts the SWR -- the portfolio may drop, but the retirement expenses do not!  You need to subtract expenses, not divide them.

I suggest using a systematic approach.  Take an initial portfolio value, and calculate the annual retirement expenses from the initial SWR.  Subtract that from the portfolio value (that assumes expenses are set aside at the beginning of the year).  Then adjust the balance by the real return of the portfolio for that year.  Rinse and repeat, always using the same fixed expenses from year one (By using real returns, you keep the expenses in constant dollars.  If you use nominal returns, be sure to increase the expenses at the rate of inflation).  Once you have a final portfolio value after a certain number of years, you can use that to tinker with the initial WR percentage to level the end point wherever you like (zero for SafeWR, or initial principal for SustWR).  Make sense?
Thanks!  Here's the new results:

100% Stocks: SafeWR for 88 years (1928) is 3.41%; SustainWR is 3.20%.
50%/50% 10yr: SafeWR for 88 years (1928) is 2.25%; SustainWR is 1.70%.

100% Stocks: SafeWR for 49 years (1965) is 1.52%; SustainWR is 0.74%.
50%/50% 10yr: SafeWR for 49 years (1965) is 1.22%; SustainWR is 0.20%.
Browne PP: SafeWR for 49 years (1965) is 1.64%; SustainWR is 0.26%.

Browne PP: SafeWR for 46 years (1968) is 1.63%; SustainWR is 0.18%.

Browne PP: SafeWR for 42 years (1972) is 2.08%; SustainWR is 0.53%.

If its still not right, I give up for now.
Last edited by MachineGhost on Wed Oct 21, 2015 7:58 pm, edited 1 time in total.
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Re: Why the PP is better in accumulation than you think

Post by Dmilligan » Mon Oct 26, 2015 3:30 pm

I utilized MG's data for 1965-1971 and the Craig/Simba's data for 1972+. I took withdrawals from cash and rebalanced at the 15/35 bands. Here are the results that I get:

For a retirement in 1966:

Portfolio: $3M
Constant WR: 4.7%
1966 withdrawal from cash: $141,000
2014 withdrawal from cash: $1,090,762
1966 inflation-adjusted amount: $1,066,922

No. of individual years outpacing inflation: 14.29%

If 50% of years outpacing inflation, CWR is 4.4%
If 75% of years outpacing inflation, CWR is 3.7%

For a retirement in 1965:

Portfolio: $3M
Constant WR: 4.9%
1965 withdrawal from cash: $147,000
2014 withdrawal from cash: $1,134,909
1965 inflation-adjusted amount: $1,095,766

No. of individual years outpacing inflation: 40.00%

If 50% of years outpacing inflation, CWR is 4.6%
If 75% of years outpacing inflation, CWR is 4.2%

[EDIT] I completely forgot to mention that--in addition to withdrawing out of the cash component--these results are computed utilizing a Robert Clyatt withdrawal method where at least 95% of the previous year is utilized, even if it exceeds the initial CWR.
Last edited by Dmilligan on Mon Oct 26, 2015 5:42 pm, edited 1 time in total.
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Re: Why the PP is better in accumulation than you think

Post by mathjak107 » Mon Oct 26, 2015 4:02 pm

i will only state it one last time , you have zero accurate reference for gold going back to anytime  pre 1975 .  .. you can guess and assume all you want but you have no accurate data to utilize that asset class  in a meaningful way if back testing it for a comparable safe withdrawal rate against what the  standards mean . ..
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Re: Why the PP is better in accumulation than you think

Post by MachineGhost » Mon Oct 26, 2015 4:57 pm

mathjak107 wrote: i will only state it one last time , you have zero accurate reference for gold going back to anytime  pre 1975 .  .. you can guess and assume all you want but you have no accurate data to utilize that asset class  in a meaningful way if back testing it for a comparable safe withdrawal rate against what the  standards mean . ..
You do realize gold broke free of its fix in 1968, right?  The legality of not buying it domestically in the USA is irrelevant to the gold price being available.  It's just a simulation so we can see what might happen.  Path dependency for putting a portfolio together is an illusion.  It's not hard to be conservative with the WR with these caveats in mind.
Last edited by MachineGhost on Mon Oct 26, 2015 4:59 pm, edited 1 time in total.
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Re: Why the PP is better in accumulation than you think

Post by mathjak107 » Mon Oct 26, 2015 5:00 pm

it was not publicly owned until 1975  so it is not really fair trying to utilize an asset before it could be legally owned unless you were a coin collector .

you can't possibly want to do this comparison to the point of bringing  in data that is just DIS-INGENIOUS
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Re: Why the PP is better in accumulation than you think

Post by MachineGhost » Mon Oct 26, 2015 5:06 pm

mathjak107 wrote: it was not publicly owned until 1975  so it is not really fair trying to utilize an asset before it could be legally owned unless you were a coin collector .

you can't possibly want to do this comparison to the point of bringing  in data that is just DIS-INGENIOUS
We're just going to have to agree to disagree.  You want the mirage of exactness, I want fuzzy logic.
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Re: Why the PP is better in accumulation than you think

Post by mathjak107 » Mon Oct 26, 2015 5:08 pm

that is well beyond fuzzy logic my friend    .  counting what is not legal to own nor trades publicly in this country  because it makes the numbers look better is not the right thing to do . the right thing to do is just accept the fact you can not make a comparison in that time frame .  you trying to fill in the missing  data is as i said dis-ingenious at best .
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Re: Why the PP is better in accumulation than you think

Post by MachineGhost » Mon Oct 26, 2015 5:09 pm

mathjak107 wrote: that is well beyond fuzzy logic my friend    .  counting what isnot legal to own so it makes the numbers look better is not the right thing to do . the right thing to do is just accept the fact you cn not make a comparison in that time frame .
1) It wasn't enforced.
1a) It sure as hell wasn't going to be enforced overseas.
2) There was junk silver.

The only reason it even became legal again in 1975 was because of Ron Paul.  No one cared otherwise.  Do today's PPers strike you as being sheep led to the slaughter or would they have found a way to protect their ASSets back then?  After all, Browne figured this out in time to write a book about it in 1970.  Did the illegality stop him?
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Re: Why the PP is better in accumulation than you think

Post by Dmilligan » Mon Oct 26, 2015 5:38 pm

mathjak107 wrote: it was not publicly owned until 1975  so it is not really fair trying to utilize an asset before it could be legally owned unless you were a coin collector .

you can't possibly want to do this comparison to the point of bringing  in data that is just DIS-INGENIOUS
The gold component in the first few years doesn't appear to drastically affect the end results. Previously, I was utilizing historical annual gold prices as set by Treasury ($35.50, $35.40, etc.). The sustainable CWR was still 4.6% (compared to 4.7% with the data MG provided) for 1996.

I'm not necessarily looking for some exact percentage to take as a set-in-stone, guaranteed-not-to-fail CWR percentage. I'm more interested in modeling 1966 as the worst year for retirement to give me some confidence that my PP will sustain me in the manner in which my family is accustomed to living.

I also wanted to satisfy my personal curiosity whether 1966 would vary dramatically from the numbers from Tyler's sustainable WR calculator. I have satisfied myself that it doesn't.

I'm feeling pretty good that using Robert Clyatt's withdrawal technique would have worked with the HPP, even in a 1966 retirement year scenario.
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