Backtesting is scary!

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boyntonstu
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Joined: Tue Dec 26, 2017 11:18 pm

Backtesting is scary!

Post by boyntonstu » Tue Jan 02, 2018 3:11 pm

I have been using https://www.portfoliovisualizer.com/backtest-portfolio to back test various portfolios,

We are looking for a portfolio with a maximum draw down of less than -10% for 2008.

In comparison to -45%, -10% t would be acceptable.

As most of us know, 80% or more of the managed funds under perform the S&P 500.

We have been thinking of using Vanguard to manage a portfolio for a 0.3% management fee.

Unless and until they can demonstrate that they can outperform the 3 Fund (our Four) portfolio, I am hesitant to use them.

We are 79 and 71 and cannot stomach draw downs.

Should we consider stable bond funds like LQD?

bgf
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Joined: Fri Nov 10, 2017 9:35 am

Re: Backtesting is scary!

Post by bgf » Tue Jan 02, 2018 3:26 pm

if you cannot stomach more than a 10% loss at any time, then it sounds like you should simply go by the old maxim 'do not invest what you cannot afford to lose.'

put 80-85% in a mix of cash and TLT and the remainder in globally diversified equities.
“TE OCCIDERE POSSUNT SED TE EDERE NON POSSUNT NEFAS EST"

Jags4186
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Joined: Wed Jun 18, 2014 7:12 pm

Re: Backtesting is scary!

Post by Jags4186 » Tue Jan 02, 2018 3:32 pm

I agree with bgf. If you can’t stomach a loss of more than 10% then you cannot have more than 20% or so in equities and the remainder in CDs. You can get 2% 1 year CDs right now.

thangngo
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Re: Backtesting is scary!

Post by thangngo » Tue Jan 02, 2018 3:45 pm

Use TIPS. :beer

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siamond
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Re: Backtesting is scary!

Post by siamond » Tue Jan 02, 2018 3:57 pm

Assuming all your savings are in tax-sheltered accounts, so you can modify your investments at will without tax implications... Let me suggest you simplify your life, and use the Vanguard LifeStrategy Income Fund (VASIX). This is a 20/80 (20% equities, 80% bonds) fund of funds, with automatic rebalancing, and the ER is now 0.12%. The worst annual drop was 10.5%, the biggest drawdown was 15% (from Dec-07 to Feb-09), which really shouldn't be that scary. Hard to do simpler and safer. And no need to pay Vanguard (or anybody else) for advice.

In my humble opinion, it would be a severe mistake to go 100% bonds for fear of such limited volatility, you would trade a few months of limited angst with no meaningful risk against a much more real longer-term risk of slow portfolio depletion. One has to keep a modicum of a growth engine in a portfolio, and that means stocks. Also, remember that a severe bout of inflation can do a lot of damage to bond returns in inflation-adjusted terms. There is no free lunch.

boyntonstu
Posts: 42
Joined: Tue Dec 26, 2017 11:18 pm

Re: Backtesting is scary!

Post by boyntonstu » Tue Jan 02, 2018 5:15 pm

Thanks.

VASIX 2008-2017 $10,000 $14,990 4.13% 4.73% 12.08% -10.53% -15.50%

I ran this as well (2003-2017) and the results were superior to just VASIX:

50:50 VASIX:LQD $10,000 $21,563 5.26% 5.34% 10.27% -4.06% -13.60%

Any others to add?

dbr
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Joined: Sun Mar 04, 2007 9:50 am

Re: Backtesting is scary!

Post by dbr » Tue Jan 02, 2018 5:53 pm

In general you can dilute the volatility of stocks which is eventually expressed in maximum loss in a period by allocating more or less to low volatility investments instead. The ultimate is no stocks at all. There are undoubtedly hundreds of combinations that backtest to about 10% max draw down in some arbitrary set of years and no special selection that is indicated. Naturally backtesting does not project any particular certainty as to what can happen in some future period of time. If you postulate some statistical distribution of returns for a portfolio you can calculate a probability that the portfolio will or won't experience a draw down of more than 10% in a given calendar year, or a given running year, or maybe even from an arbitrary peak to trough, etc.

As far as practical investing is concerned you could just invest in a portfolio of TSM and Total Bond and adjust the allocation to where you are confident. You could do the same with TSM and cash as well.

technovelist
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Re: Backtesting is scary!

Post by technovelist » Tue Jan 02, 2018 6:01 pm

boyntonstu wrote:
Tue Jan 02, 2018 3:11 pm
I have been using https://www.portfoliovisualizer.com/backtest-portfolio to back test various portfolios,

We are looking for a portfolio with a maximum draw down of less than -10% for 2008.

In comparison to -45%, -10% t would be acceptable.

As most of us know, 80% or more of the managed funds under perform the S&P 500.

We have been thinking of using Vanguard to manage a portfolio for a 0.3% management fee.

Unless and until they can demonstrate that they can outperform the 3 Fund (our Four) portfolio, I am hesitant to use them.

We are 79 and 71 and cannot stomach draw downs.

Should we consider stable bond funds like LQD?
Perhaps you should consider the Harry Browne Permanent Portfolio (25% in each of cash, long bonds, stocks, and gold). Its worst yearly result (starting in 1972) was -6.29%.
In theory, theory and practice are identical. In practice, they often differ.

dbr
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Joined: Sun Mar 04, 2007 9:50 am

Re: Backtesting is scary!

Post by dbr » Tue Jan 02, 2018 6:09 pm

boyntonstu wrote:
Tue Jan 02, 2018 3:11 pm

We have been thinking of using Vanguard to manage a portfolio for a 0.3% management fee.

Unless and until they can demonstrate that they can outperform the 3 Fund (our Four) portfolio, I am hesitant to use them.
They pretty rigorously use the 3/4 fund portfolio and therefore are guaranteed to underperform it by 0.3% p.a.

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CaliJim
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Re: Backtesting is scary!

Post by CaliJim » Wed Jan 03, 2018 12:21 am

0.3 is not a lot to pay for hand holding and may be worth it if you predecease you spouse ans said spouse is not financially savy

that said..20% total stock market, 60% total bond market, and 20% CDs should give a pretty smooth ride and is easy to set up and maintain.
-calijim- | | For more info, click this Wiki

inbox788
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Re: Backtesting is scary!

Post by inbox788 » Wed Jan 03, 2018 12:40 am

dbr wrote:
Tue Jan 02, 2018 6:09 pm
boyntonstu wrote:
Tue Jan 02, 2018 3:11 pm

We have been thinking of using Vanguard to manage a portfolio for a 0.3% management fee.

Unless and until they can demonstrate that they can outperform the 3 Fund (our Four) portfolio, I am hesitant to use them.
They pretty rigorously use the 3/4 fund portfolio and therefore are guaranteed to underperform it by 0.3% p.a.
Yup! For the most part, they can't outperform the 3 fund portfolio because their fees are higher, and they use pretty much the same funds. At retirement, I would assume that they would recommend Vanguard Target Retirement Income Fund (VTINX) or similar, which is a 30/70 fund.
https://personal.vanguard.com/us/funds/ ... IntExt=INT
As long as you maintained a similar AA, you'd expect similar results differing slightly based on specific funds you select and their fees. I wouldn't stress over the differences.

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