Historical U.S. Portfolio Disasters — Wrapping It All Up

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SimpleGift
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Historical U.S. Portfolio Disasters — Wrapping It All Up

Post by SimpleGift » Fri Jul 13, 2018 2:04 pm

This post briefly summarizes the essential points from two recent threads on U.S. stock and bond disasters over the past century. For this discussion, we focus on an 80/20 stock-heavy portfolio, a middle ground 50/50 mix, and a bond-heavy 20/80 portfolio. First, their relative real performances over the full 1871-2016 period, and then during the historical U.S. portfolio disasters (chart below):
  • 80/20 Portfolio............6.2% CAGR
    50/50 Portfolio............5.0% CAGR
    20/80 Portfolio............3.7% CAGR

    Image
    Note: Chart shows 3-year rolling average monthly returns, inflation-adjusted with dividends reinvested.
    Sources: S&P stock returns from Shiller; 10-year Treasury returns from Medium
A couple of observations:
  • 1. Pure stock market crashes — such as the Great Depression, the Tech Crash and the 2008 Financial Crisis — are obviously hardest on those with stock-heavy portfolios, with real losses of 40%-60%. High-quality bonds have proven the best ballast. As these crashes are usually times of high unemployment, stock-heavy investors need have either recession-proof jobs or very ample emergency funds.

    2. Inflation shock disasters — such as World War I, the 1940s Rate Caps and the 1970s Oil Price Crisis — have been very hard on ALL portfolios, stock-heavy and bond-heavy alike. The only portfolio saviors during these crisis periods would be substantial allocations to TIPS and/or cash (e.g., Treasury bills or money market funds).
Thoughts to add?
Cordially, Todd

staythecourse
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Re: Historical U.S. Portfolio Disasters — Wrapping It All Up

Post by staythecourse » Fri Jul 13, 2018 6:42 pm

Great graphic.

As you and others know U.S. TIPS have only been marketed since 1997 so we can only guess what they SHOULD do in those time periods and not what they DID do.

The real question I continue to ponder in these discussions and analysis are how does this information make a difference in anyone's asset allocation for the passive investor? If one is going to insulate inflation as mentioned and they decide to add TIPS to do it how much do they add? Is 5 10, 20% sufficient to really make much of a difference in the outcomes? Is 5% vs. 20% going to be the difference between relaxing at the pool knowing you are hedging vs. being scared about eating dog food going forward when these trouble times occurred? Many of the portfolio insurances you would have to add A LOT to make a difference as the volatility of stocks are SO MUCH greater then TIPS (for example). This all at the expense of lower returns year after year when majority of time stocks will outperform.

I still believe the best hedge is just time. If you have the ability to weather the storm it seems reasonable to just do NOTHING and if you have a high equity allocation just ride out the storm. As the great economist Milton Friedman (I think) said (paraphrasing): It is the DUTY of the equity investor to lose money from time to time and should do it without reproach.

Good luck.
"The stock market [fluctuation], therefore, is noise. A giant distraction from the business of investing.” | -Jack Bogle

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SimpleGift
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Re: Historical U.S. Portfolio Disasters — Wrapping It All Up

Post by SimpleGift » Fri Jul 13, 2018 11:30 pm

staythecourse wrote:
Fri Jul 13, 2018 6:42 pm
I still believe the best hedge is just time. If you have the ability to weather the storm it seems reasonable to just do NOTHING and if you have a high equity allocation just ride out the storm.
For stock-heavy portfolios, I believe you're right. If one breaks down the 144 years of data we have since 1871 into four separate 36-year periods (table below), those portfolios with the highest stock allocations had the most consistent returns over all four periods (real CAGR). So despite deep stock market crashes, time seemed to heal most wound for stocks.
  • Image
    Sources: S&P stock returns from Shiller; 10-year Treasury returns from Medium
But for bond-heavy portfolios, returns were not so consistent over the four periods. Bonds had a hard time recovering from the inflation shocks of the middle years. This is where TIPS would have helped — i.e., in portfolios with high bond allocations.
staythecourse wrote:
Fri Jul 13, 2018 6:42 pm
If one is going to insulate inflation as mentioned and they decide to add TIPS to do it how much do they add?
With high stock allocations, I wouldn't worry about adding TIPS, since stocks themselves have shown the ability to recover from inflation shocks over time, as we saw above. For portfolios with high bond allocations (50%-100%), I'd seriously consider half in high-quality nominals and half in TIPS. These investors have the greatest inflation risk, and adding a substantial TIPS allocation is not likely to be at the expense of long-term real portfolio returns. Just my perspective.
Cordially, Todd

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Re: Historical U.S. Portfolio Disasters — Wrapping It All Up

Post by Tdubs » Sat Jul 14, 2018 6:19 am

staythecourse wrote:
Fri Jul 13, 2018 6:42 pm
Great graphic.

As you and others know U.S. TIPS have only been marketed since 1997 so we can only guess what they SHOULD do in those time periods and not what they DID do.

The real question I continue to ponder in these discussions and analysis are how does this information make a difference in anyone's asset allocation for the passive investor? If one is going to insulate inflation as mentioned and they decide to add TIPS to do it how much do they add? Is 5 10, 20% sufficient to really make much of a difference in the outcomes? Is 5% vs. 20% going to be the difference between relaxing at the pool knowing you are hedging vs. being scared about eating dog food going forward when these trouble times occurred? Many of the portfolio insurances you would have to add A LOT to make a difference as the volatility of stocks are SO MUCH greater then TIPS (for example). This all at the expense of lower returns year after year when majority of time stocks will outperform.

I still believe the best hedge is just time. If you have the ability to weather the storm it seems reasonable to just do NOTHING and if you have a high equity allocation just ride out the storm. As the great economist Milton Friedman (I think) said (paraphrasing): It is the DUTY of the equity investor to lose money from time to time and should do it without reproach.

Good luck.
In 1929, doing nothing would have been suicide for a retiree or someone suddenly unemployed.

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Re: Historical U.S. Portfolio Disasters — Wrapping It All Up

Post by Dottie57 » Sat Jul 14, 2018 6:33 am

Tdubs wrote:
Sat Jul 14, 2018 6:19 am
staythecourse wrote:
Fri Jul 13, 2018 6:42 pm
Great graphic.

As you and others know U.S. TIPS have only been marketed since 1997 so we can only guess what they SHOULD do in those time periods and not what they DID do.

The real question I continue to ponder in these discussions and analysis are how does this information make a difference in anyone's asset allocation for the passive investor? If one is going to insulate inflation as mentioned and they decide to add TIPS to do it how much do they add? Is 5 10, 20% sufficient to really make much of a difference in the outcomes? Is 5% vs. 20% going to be the difference between relaxing at the pool knowing you are hedging vs. being scared about eating dog food going forward when these trouble times occurred? Many of the portfolio insurances you would have to add A LOT to make a difference as the volatility of stocks are SO MUCH greater then TIPS (for example). This all at the expense of lower returns year after year when majority of time stocks will outperform.

I still believe the best hedge is just time. If you have the ability to weather the storm it seems reasonable to just do NOTHING and if you have a high equity allocation just ride out the storm. As the great economist Milton Friedman (I think) said (paraphrasing): It is the DUTY of the equity investor to lose money from time to time and should do it without reproach.

Good luck.
In 1929, doing nothing would have been suicide for a retiree or someone suddenly unemployed.
So what should an investor have done in 1929 and how would they know this time is different?

Tdubs
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Re: Historical U.S. Portfolio Disasters — Wrapping It All Up

Post by Tdubs » Sat Jul 14, 2018 7:01 am

Dottie57 wrote:
Sat Jul 14, 2018 6:33 am
Tdubs wrote:
Sat Jul 14, 2018 6:19 am
staythecourse wrote:
Fri Jul 13, 2018 6:42 pm
Great graphic.

As you and others know U.S. TIPS have only been marketed since 1997 so we can only guess what they SHOULD do in those time periods and not what they DID do.

The real question I continue to ponder in these discussions and analysis are how does this information make a difference in anyone's asset allocation for the passive investor? If one is going to insulate inflation as mentioned and they decide to add TIPS to do it how much do they add? Is 5 10, 20% sufficient to really make much of a difference in the outcomes? Is 5% vs. 20% going to be the difference between relaxing at the pool knowing you are hedging vs. being scared about eating dog food going forward when these trouble times occurred? Many of the portfolio insurances you would have to add A LOT to make a difference as the volatility of stocks are SO MUCH greater then TIPS (for example). This all at the expense of lower returns year after year when majority of time stocks will outperform.

I still believe the best hedge is just time. If you have the ability to weather the storm it seems reasonable to just do NOTHING and if you have a high equity allocation just ride out the storm. As the great economist Milton Friedman (I think) said (paraphrasing): It is the DUTY of the equity investor to lose money from time to time and should do it without reproach.

Good luck.
In 1929, doing nothing would have been suicide for a retiree or someone suddenly unemployed.
So what should an investor have done in 1929 and how would they know this time is different?
The solution would have been very un-Boglehead.

It took the market three years to bottom the first time. So any kind of panicked selling in the first year would have been wiser than a hold strategy. Let's say you are a retiree and you had the means to survive an 85% plunge spread over three years (your bank didn't fail!). By 1934, you really need to see some good years because you need money from your stocks to live on. And, sure enough, 1933-37, you could start claiming redemption in your hold strategy as the market crawled back. Then 1937 comes and destroys whatever is left of your stock holdings just eight years after the first crash. The panicked seller of 1930 would have looked pretty wise by comparison. The Boglehead who stuck with his allocations could be homeless.

Pull all your money out, stick it in a mattress. Sell apples.

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Re: Historical U.S. Portfolio Disasters — Wrapping It All Up

Post by Call_Me_Op » Sat Jul 14, 2018 7:05 am

Very nice Todd. Always enjoy and appreciate your posts.
Best regards, -Op | | "In the middle of difficulty lies opportunity." Einstein

NoHeat
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Re: Historical U.S. Portfolio Disasters — Wrapping It All Up

Post by NoHeat » Sat Jul 14, 2018 7:17 am

Todd, I don’t understand the graph.
What is the y axis?
Are portfolio rebalanced on a specific schedule?

Dottie57
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Re: Historical U.S. Portfolio Disasters — Wrapping It All Up

Post by Dottie57 » Sat Jul 14, 2018 7:21 am

Tdubs wrote:
Sat Jul 14, 2018 7:01 am
Dottie57 wrote:
Sat Jul 14, 2018 6:33 am
Tdubs wrote:
Sat Jul 14, 2018 6:19 am
staythecourse wrote:
Fri Jul 13, 2018 6:42 pm
Great graphic.

As you and others know U.S. TIPS have only been marketed since 1997 so we can only guess what they SHOULD do in those time periods and not what they DID do.

The real question I continue to ponder in these discussions and analysis are how does this information make a difference in anyone's asset allocation for the passive investor? If one is going to insulate inflation as mentioned and they decide to add TIPS to do it how much do they add? Is 5 10, 20% sufficient to really make much of a difference in the outcomes? Is 5% vs. 20% going to be the difference between relaxing at the pool knowing you are hedging vs. being scared about eating dog food going forward when these trouble times occurred? Many of the portfolio insurances you would have to add A LOT to make a difference as the volatility of stocks are SO MUCH greater then TIPS (for example). This all at the expense of lower returns year after year when majority of time stocks will outperform.

I still believe the best hedge is just time. If you have the ability to weather the storm it seems reasonable to just do NOTHING and if you have a high equity allocation just ride out the storm. As the great economist Milton Friedman (I think) said (paraphrasing): It is the DUTY of the equity investor to lose money from time to time and should do it without reproach.

Good luck.
In 1929, doing nothing would have been suicide for a retiree or someone suddenly unemployed.
So what should an investor have done in 1929 and how would they know this time is different?
The solution would have been very un-Boglehead.

It took the market three years to bottom the first time. So any kind of panicked selling in the first year would have been wiser than a hold strategy. Let's say you are a retiree and you had the means to survive an 85% plunge spread over three years (your bank didn't fail!). By 1934, you really need to see some good years because you need money from your stocks to live on. And, sure enough, 1933-37, you could start claiming redemption in your hold strategy as the market crawled back. Then 1937 comes and destroys whatever is left of your stock holdings just eight years after the first crash. The panicked seller of 1930 would have looked pretty wise by comparison. The Boglehead who stuck with his allocations could be homeless.

Pull all your money out, stick it in a mattress. Sell apples.
Since there is FDIC insurance for banks, I think having several years of cash available might be good. Here’s hoping we don’t see the likes of the Great Depression again.

Tdubs
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Re: Historical U.S. Portfolio Disasters — Wrapping It All Up

Post by Tdubs » Sat Jul 14, 2018 7:25 am

Yeah, FDIC. One of the great, simple legislative achievements of the 20th century.

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Re: Historical U.S. Portfolio Disasters — Wrapping It All Up

Post by SimpleGift » Sat Jul 14, 2018 8:17 am

NoHeat wrote:
Sat Jul 14, 2018 7:17 am
Todd, I don’t understand the graph.
What is the y axis?
Are portfolio rebalanced on a specific schedule?
The Y-axis is monthly portfolio returns (inflation-adjusted with dividends reinvested). In the chart, these monthly returns are 36-month rolling averages, to smooth the data and make it comprehensible. The portfolios are not rebalanced.
Cordially, Todd

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Re: Historical U.S. Portfolio Disasters — Wrapping It All Up

Post by siamond » Sat Jul 14, 2018 8:44 am

SimpleGift wrote:
Sat Jul 14, 2018 8:17 am
NoHeat wrote:
Sat Jul 14, 2018 7:17 am
Todd, I don’t understand the graph.
What is the y axis?
Are portfolio rebalanced on a specific schedule?
The Y-axis is monthly portfolio returns (inflation-adjusted with dividends reinvested). In the chart, these monthly returns are 36-month rolling averages, to smooth the data and make it comprehensible. The portfolios are not rebalanced.
Well, if the Y-axis is about returns of a fixed allocation, it seems to me that portfolios are implicitly rebalanced (in this case, every month).

I do not understand how a 36-month rolling average can end up with values ranging from -2.5 to 2.5 though...

SelfEmployed123
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Re: Historical U.S. Portfolio Disasters — Wrapping It All Up

Post by SelfEmployed123 » Sat Jul 14, 2018 8:57 am

I have very much enjoyed all three of these posts. Having recently read If You Can by William Bernstein, I think it's really helpful to have a good understanding of what markets have done in the past. My impression is the focus of all three posts seems to be for retirees who are in the wealth preservation stage. Am I wrong about that? If that is in fact correct, would there be any potential implications for those of us still in the accumulation stage?

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Re: Historical U.S. Portfolio Disasters — Wrapping It All Up

Post by GAAP » Sat Jul 14, 2018 9:49 am

I'm struck by how similar the lines are in general, varying primarily in degree. Given some of the near-religious expounding by proponents on both sides of the spectrum, I would expect to see much greater differences.

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Re: Historical U.S. Portfolio Disasters — Wrapping It All Up

Post by Hyperborea » Sat Jul 14, 2018 9:57 am

GAAP wrote:
Sat Jul 14, 2018 9:49 am
I'm struck by how similar the lines are in general, varying primarily in degree. Given some of the near-religious expounding by proponents on both sides of the spectrum, I would expect to see much greater differences.
The issue is that the measurement by the OP is in real monthly returns. Even a fractional percent difference per month means a much larger difference compounded over time. Also, the differences have been smoothed away by using rolling 36 month averages. Both of those together make the difference appear small.
"Plans are worthless, but planning is everything." - Dwight D. Eisenhower

GAAP
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Re: Historical U.S. Portfolio Disasters — Wrapping It All Up

Post by GAAP » Sat Jul 14, 2018 10:01 am

Hyperborea wrote:
Sat Jul 14, 2018 9:57 am
GAAP wrote:
Sat Jul 14, 2018 9:49 am
I'm struck by how similar the lines are in general, varying primarily in degree. Given some of the near-religious expounding by proponents on both sides of the spectrum, I would expect to see much greater differences.
The issue is that the measurement by the OP is in real monthly returns. Even a fractional percent difference per month means a much larger difference compounded over time. Also, the differences have been smoothed away by using rolling 36 month averages. Both of those together make the difference appear small.
Ahh, yes -- but "bonds are for safety" and "stocks are for the long haul". Both of those positions gloss over the fact that bonds and stocks can both do very poorly/well.

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Re: Historical U.S. Portfolio Disasters — Wrapping It All Up

Post by SimpleGift » Sat Jul 14, 2018 10:46 am

SelfEmployed123 wrote:
Sat Jul 14, 2018 8:57 am
My impression is the focus of all three posts seems to be for retirees who are in the wealth preservation stage. Am I wrong about that? If that is in fact correct, would there be any potential implications for those of us still in the accumulation stage?
All three of the "portfolio disaster" posts in fact cover a wide range of portfolio allocations, from stock-heavy mixes typical of accumulators to bond-heavy ones more typical of retirees.

In the accumulation stage with high stock allocations, a few essential points from my perspective:
  • 1) Be prepared for a dramatic ride over the long haul, with soaring gains and deep portfolio drawdowns (-40% to -60% at times). High-quality bonds have helped smooth the ride.

    2) Stock market crashes have been times of high unemployment. Especially if one doesn't have a recession-proof job, it's wise to maintain an ample emergency fund.

    3) Don't worry too much about long-term inflation protection other than stocks. Even though stock-heavy portfolios have suffered mightily in past inflation shocks, over time they've compensated with higher returns in other periods.
In the decumulation stage with high bond allocations, a few takeaways:
  • 1) Maintaining at least a 20%-30% allocation to stocks has helped preserve long-term capital value.

    2) Allocating up to one-half of bonds to TIPS and/or T-bills would serve as insurance against inflation shocks.
Others may have additional points to highlight from the historical record that I've missed.
Cordially, Todd

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Re: Historical U.S. Portfolio Disasters — Wrapping It All Up

Post by staythecourse » Sat Jul 14, 2018 11:46 am

SimpleGift wrote:
Sat Jul 14, 2018 10:46 am
SelfEmployed123 wrote:
Sat Jul 14, 2018 8:57 am
My impression is the focus of all three posts seems to be for retirees who are in the wealth preservation stage. Am I wrong about that? If that is in fact correct, would there be any potential implications for those of us still in the accumulation stage?
All three of the "portfolio disaster" posts in fact cover a wide range of portfolio allocations, from stock-heavy mixes typical of accumulators to bond-heavy ones more typical of retirees.

In the accumulation stage with high stock allocations, a few essential points from my perspective:
  • 1) Be prepared for a dramatic ride over the long haul, with soaring gains and deep portfolio drawdowns (-40% to -60% at times). High-quality bonds have helped smooth the ride.

    2) Stock market crashes have been times of high unemployment. Especially if one doesn't have a recession-proof job, it's wise to maintain an ample emergency fund.

    3) Don't worry too much about long-term inflation protection other than stocks. Even though stock-heavy portfolios have suffered mightily in past inflation shocks, over time they've compensated with higher returns in other periods.
In the decumulation stage with high bond allocations, a few takeaways:
  • 1) Maintaining at least a 20%-30% allocation to stocks has helped preserve long-term capital value.

    2) Allocating up to one-half of bonds to TIPS and/or T-bills would serve as insurance against inflation shocks.
Others may have additional points to highlight from the historical record that I've missed.
I do remember reading somewhere if one continues to invest during the Great Depression the return to one's baseline portfolio value was something like half the time (7 vs. 15 years). Someone please correct me on the specific numbers, but the thought exercises does show IF (a BIG IF) one can continue to invest into a headwind the results are quite impressive. That, of course, leads the question do you have a job that really is immune to stock volatility. So safety of labor income SHOULD be part of the willingness, ability, and need to take risk. And no surprise it is if you read Mr. Swedroe excellent coverage of this in his book. Those 2-5 pages is worth the cost of the book alone.

Good luck.
"The stock market [fluctuation], therefore, is noise. A giant distraction from the business of investing.” | -Jack Bogle

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Re: Historical U.S. Portfolio Disasters — Wrapping It All Up

Post by NoHeat » Sat Jul 14, 2018 2:17 pm

SimpleGift wrote:
Sat Jul 14, 2018 8:17 am
In the chart, these monthly returns are 36-month rolling averages, to smooth the data and make it comprehensible.
I'm puzzled by the reasoning behind the averaging, if what you're focusing on is the effect of disasters.

Compound returns are what really matter. Average returns can differ significantly from compound returns, especially when there are strong downward movements.

Here's a concrete example: consider returns of 20%, 20%, -80%, 20%, 20% over five equal periods; the average return is zero, but the compound return per period is quite different, -16%. Using average returns would hide the impact of the disastrous period.

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Re: Historical U.S. Portfolio Disasters — Wrapping It All Up

Post by SimpleGift » Sat Jul 14, 2018 3:11 pm

NoHeat wrote:
Sat Jul 14, 2018 2:17 pm
SimpleGift wrote:
Sat Jul 14, 2018 8:17 am
In the chart, these monthly returns are 36-month rolling averages, to smooth the data and make it comprehensible.
I'm puzzled by the reasoning behind the averaging, if what you're focusing on is the effect of disasters.

Compound returns are what really matter. Average returns can differ significantly from compound returns, especially when there are strong downward movements.
The choice of smoothed monthly returns in the OP chart was just a visual aid to better compare the relative performances of the three portfolios (80/20, 50/50, 20/80) during the various crisis periods over the past century.

A chart of monthly returns alone is much too noisy to convey anything — and a chart of monthly compound returns (below) doesn't visually convey as well the portfolio differences during crisis periods (to my eye), compared with the OP chart.
  • Image
    Sources: S&P stock returns from Shiller; 10-year Treasury returns from Medium
If interested in compound returns for each of the crisis periods, see the charts in the original stock and bond disaster posts.
Last edited by SimpleGift on Sat Jul 14, 2018 3:16 pm, edited 1 time in total.
Cordially, Todd

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Re: Historical U.S. Portfolio Disasters — Wrapping It All Up

Post by petulant » Sat Jul 14, 2018 3:16 pm

Another consideration would seem to be real estate, which I think would offset some of the risk from bonds. Owning one’s own home, for example, can insulate from inflation in rent, while any mortgage would be devalued. Some might say a mortgage offsets bonds, but I think the liquidity characteristics are sufficiently different to differentiate them to some extent.

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Re: Historical U.S. Portfolio Disasters — Wrapping It All Up

Post by AlphaLess » Sat Jul 14, 2018 3:21 pm

NoHeat wrote:
Sat Jul 14, 2018 7:17 am
Todd, I don’t understand the graph.
What is the y axis?
Are portfolio rebalanced on a specific schedule?
+1

Maybe post the data in an excel spreadsheet?

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Re: Historical U.S. Portfolio Disasters — Wrapping It All Up

Post by Hyperborea » Sat Jul 14, 2018 3:36 pm

SimpleGift wrote:
Sat Jul 14, 2018 3:11 pm
NoHeat wrote:
Sat Jul 14, 2018 2:17 pm
SimpleGift wrote:
Sat Jul 14, 2018 8:17 am
In the chart, these monthly returns are 36-month rolling averages, to smooth the data and make it comprehensible.
I'm puzzled by the reasoning behind the averaging, if what you're focusing on is the effect of disasters.

Compound returns are what really matter. Average returns can differ significantly from compound returns, especially when there are strong downward movements.
The choice of smoothed monthly returns in the OP chart was just a visual aid to better compare the relative performances of the three portfolios (80/20, 50/50, 20/80) during the various crisis periods over the past century.
One thought would be to chart the forward returns from a certain date for given allocation. So, for the particular month you would calculate the returns of a given weight portfolio for the next n years. Do that for each allocation and for values of n={10, 20, 30, and 40}. That would likely be interesting and more enlightening.
"Plans are worthless, but planning is everything." - Dwight D. Eisenhower

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Re: Historical U.S. Portfolio Disasters — Wrapping It All Up

Post by ignition » Sat Jul 14, 2018 3:58 pm

That's interesting. To be honest I didn't know cash is a good inflation hedge? I always thought the opposite.

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Re: Historical U.S. Portfolio Disasters — Wrapping It All Up

Post by SimpleGift » Sat Jul 14, 2018 4:15 pm

AlphaLess wrote:
Sat Jul 14, 2018 3:21 pm
Maybe post the data in an excel spreadsheet?
Good suggestion! An Excel spreadsheet with the complete data set can be downloaded here:

U.S. Monthly Stock and Bond Returns, 1871-2016

The original monthly U.S. stock returns and inflation data are from Shiller, while the original 10-year Treasury monthly total returns are found here. Let me know in a PM if you have any problems with the download or the data.

Feel free, all, to use the data and produce any alternative charts you desire!
Cordially, Todd

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Re: Historical U.S. Portfolio Disasters — Wrapping It All Up

Post by Valuethinker » Sat Jul 14, 2018 5:14 pm

ignition wrote:
Sat Jul 14, 2018 3:58 pm
That's interesting. To be honest I didn't know cash is a good inflation hedge? I always thought the opposite.
I think the early 1980s Volker period when the Fed was trying to crush inflation may distort the numbers?

Since cash pays the lowest return in the long run it should be a poor inflation hedge. Even pre tax.

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Re: Historical U.S. Portfolio Disasters — Wrapping It All Up

Post by Wildebeest » Sat Jul 14, 2018 5:36 pm

Another great post by SimpleGift.

Thanks.

It matters how this data affects you. It is a new, brave world ( the book was published in 1932). It is a different world then 86 years ago and even 10 years ago and I think the next disaster which may turn into a "Boglehead portfolio disaster" will affect people differently then it did in the past.

I did not care for Nassim Taleb's personality but I think he had worthwhile insights in "Black Swan" and I thought "Fooled by Randomness" was a better book, read these before reading "Anti Fragility". I recommend all three books* with the following proviso: * If you do not like "Fooled by randomness" I suggest not to read the other two.
The Golden Rule: One should treat others as one would like others to treat oneself.

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Re: Historical U.S. Portfolio Disasters — Wrapping It All Up

Post by willthrill81 » Sat Jul 14, 2018 5:46 pm

Tdubs wrote:
Sat Jul 14, 2018 7:01 am
Dottie57 wrote:
Sat Jul 14, 2018 6:33 am
Tdubs wrote:
Sat Jul 14, 2018 6:19 am
staythecourse wrote:
Fri Jul 13, 2018 6:42 pm
Great graphic.

As you and others know U.S. TIPS have only been marketed since 1997 so we can only guess what they SHOULD do in those time periods and not what they DID do.

The real question I continue to ponder in these discussions and analysis are how does this information make a difference in anyone's asset allocation for the passive investor? If one is going to insulate inflation as mentioned and they decide to add TIPS to do it how much do they add? Is 5 10, 20% sufficient to really make much of a difference in the outcomes? Is 5% vs. 20% going to be the difference between relaxing at the pool knowing you are hedging vs. being scared about eating dog food going forward when these trouble times occurred? Many of the portfolio insurances you would have to add A LOT to make a difference as the volatility of stocks are SO MUCH greater then TIPS (for example). This all at the expense of lower returns year after year when majority of time stocks will outperform.

I still believe the best hedge is just time. If you have the ability to weather the storm it seems reasonable to just do NOTHING and if you have a high equity allocation just ride out the storm. As the great economist Milton Friedman (I think) said (paraphrasing): It is the DUTY of the equity investor to lose money from time to time and should do it without reproach.

Good luck.
In 1929, doing nothing would have been suicide for a retiree or someone suddenly unemployed.
So what should an investor have done in 1929 and how would they know this time is different?
The solution would have been very un-Boglehead.

It took the market three years to bottom the first time. So any kind of panicked selling in the first year would have been wiser than a hold strategy. Let's say you are a retiree and you had the means to survive an 85% plunge spread over three years (your bank didn't fail!). By 1934, you really need to see some good years because you need money from your stocks to live on. And, sure enough, 1933-37, you could start claiming redemption in your hold strategy as the market crawled back. Then 1937 comes and destroys whatever is left of your stock holdings just eight years after the first crash. The panicked seller of 1930 would have looked pretty wise by comparison. The Boglehead who stuck with his allocations could be homeless.

Pull all your money out, stick it in a mattress. Sell apples.
Literally every form of trend following I've seen would have benefited investors greatly in 1929, 1966, 2000-2002, 2008, etc. Academic research has demonstrated that the ability for trend following to benefit retirees, who may not have a decade or more to wait for markets to recover, in particular may be substantial.
“It's a dangerous business, Frodo, going out your door. You step onto the road, and if you don't keep your feet, there's no knowing where you might be swept off to.” J.R.R. Tolkien,The Lord of the Rings

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siamond
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Re: Historical U.S. Portfolio Disasters — Wrapping It All Up

Post by siamond » Sat Jul 14, 2018 6:36 pm

SimpleGift wrote:
Sat Jul 14, 2018 4:15 pm
AlphaLess wrote:
Sat Jul 14, 2018 3:21 pm
Maybe post the data in an excel spreadsheet?
Good suggestion! An Excel spreadsheet with the complete data set can be downloaded here:

U.S. Monthly Stock and Bond Returns, 1871-2016
Thanks, but... I think AlphaLess meant the spreadsheet with the computations for the data used in the OP's graph, notably the Y axis (which continues to puzzle me as well).

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siamond
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Re: Historical U.S. Portfolio Disasters — Wrapping It All Up

Post by siamond » Sat Jul 14, 2018 6:52 pm

Hyperborea wrote:
Sat Jul 14, 2018 3:36 pm
One thought would be to chart the forward returns from a certain date for given allocation. So, for the particular month you would calculate the returns of a given weight portfolio for the next n years. Do that for each allocation and for values of n={10, 20, 30, and 40}. That would likely be interesting and more enlightening.
You can do exactly that (and much more) for an arbitrary portfolio with the Simba backtesting spreadsheet, albeit based on annual returns, not monthly.

Here is an example (inflation-adjusted annualized returns over a period (cycle) of 30 years from a given starting date on the X axis), with the portfolios used in the OP. This type of chart can be found in the Analyze_Portfolio tab, scroll down for the portfolio cycles chart, select the metric you're interested in. Give it a try, this is very easy to do...

Image

Image

ignition
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Re: Historical U.S. Portfolio Disasters — Wrapping It All Up

Post by ignition » Sun Jul 15, 2018 4:38 am

Tdubs wrote:
Sat Jul 14, 2018 6:19 am
staythecourse wrote:
Fri Jul 13, 2018 6:42 pm
Great graphic.

As you and others know U.S. TIPS have only been marketed since 1997 so we can only guess what they SHOULD do in those time periods and not what they DID do.

The real question I continue to ponder in these discussions and analysis are how does this information make a difference in anyone's asset allocation for the passive investor? If one is going to insulate inflation as mentioned and they decide to add TIPS to do it how much do they add? Is 5 10, 20% sufficient to really make much of a difference in the outcomes? Is 5% vs. 20% going to be the difference between relaxing at the pool knowing you are hedging vs. being scared about eating dog food going forward when these trouble times occurred? Many of the portfolio insurances you would have to add A LOT to make a difference as the volatility of stocks are SO MUCH greater then TIPS (for example). This all at the expense of lower returns year after year when majority of time stocks will outperform.

I still believe the best hedge is just time. If you have the ability to weather the storm it seems reasonable to just do NOTHING and if you have a high equity allocation just ride out the storm. As the great economist Milton Friedman (I think) said (paraphrasing): It is the DUTY of the equity investor to lose money from time to time and should do it without reproach.

Good luck.
In 1929, doing nothing would have been suicide for a retiree or someone suddenly unemployed.
If I backtest in cFiresim, starting in 1929, an 80/20 stock/bond portfolio would survive just fine over 30 years with a 4% inflation adjusted withdrawal rate. If you use a 3% rate even 100% stocks does very well.

Tdubs
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Re: Historical U.S. Portfolio Disasters — Wrapping It All Up

Post by Tdubs » Sun Jul 15, 2018 6:47 am

ignition wrote:
Sun Jul 15, 2018 4:38 am
Tdubs wrote:
Sat Jul 14, 2018 6:19 am
staythecourse wrote:
Fri Jul 13, 2018 6:42 pm
Great graphic.

As you and others know U.S. TIPS have only been marketed since 1997 so we can only guess what they SHOULD do in those time periods and not what they DID do.

The real question I continue to ponder in these discussions and analysis are how does this information make a difference in anyone's asset allocation for the passive investor? If one is going to insulate inflation as mentioned and they decide to add TIPS to do it how much do they add? Is 5 10, 20% sufficient to really make much of a difference in the outcomes? Is 5% vs. 20% going to be the difference between relaxing at the pool knowing you are hedging vs. being scared about eating dog food going forward when these trouble times occurred? Many of the portfolio insurances you would have to add A LOT to make a difference as the volatility of stocks are SO MUCH greater then TIPS (for example). This all at the expense of lower returns year after year when majority of time stocks will outperform.

I still believe the best hedge is just time. If you have the ability to weather the storm it seems reasonable to just do NOTHING and if you have a high equity allocation just ride out the storm. As the great economist Milton Friedman (I think) said (paraphrasing): It is the DUTY of the equity investor to lose money from time to time and should do it without reproach.

Good luck.
In 1929, doing nothing would have been suicide for a retiree or someone suddenly unemployed.
If I backtest in cFiresim, starting in 1929, an 80/20 stock/bond portfolio would survive just fine over 30 years with a 4% inflation adjusted withdrawal rate. If you use a 3% rate even 100% stocks does very well.
Four percent withdrawal rate in an age with no SS and only a few percent of the labor force having pensions?

ignition
Posts: 154
Joined: Sun Dec 11, 2016 11:28 am

Re: Historical U.S. Portfolio Disasters — Wrapping It All Up

Post by ignition » Sun Jul 15, 2018 7:19 am

Tdubs wrote:
Sun Jul 15, 2018 6:47 am
ignition wrote:
Sun Jul 15, 2018 4:38 am
Tdubs wrote:
Sat Jul 14, 2018 6:19 am
staythecourse wrote:
Fri Jul 13, 2018 6:42 pm
Great graphic.

As you and others know U.S. TIPS have only been marketed since 1997 so we can only guess what they SHOULD do in those time periods and not what they DID do.

The real question I continue to ponder in these discussions and analysis are how does this information make a difference in anyone's asset allocation for the passive investor? If one is going to insulate inflation as mentioned and they decide to add TIPS to do it how much do they add? Is 5 10, 20% sufficient to really make much of a difference in the outcomes? Is 5% vs. 20% going to be the difference between relaxing at the pool knowing you are hedging vs. being scared about eating dog food going forward when these trouble times occurred? Many of the portfolio insurances you would have to add A LOT to make a difference as the volatility of stocks are SO MUCH greater then TIPS (for example). This all at the expense of lower returns year after year when majority of time stocks will outperform.

I still believe the best hedge is just time. If you have the ability to weather the storm it seems reasonable to just do NOTHING and if you have a high equity allocation just ride out the storm. As the great economist Milton Friedman (I think) said (paraphrasing): It is the DUTY of the equity investor to lose money from time to time and should do it without reproach.

Good luck.
In 1929, doing nothing would have been suicide for a retiree or someone suddenly unemployed.
If I backtest in cFiresim, starting in 1929, an 80/20 stock/bond portfolio would survive just fine over 30 years with a 4% inflation adjusted withdrawal rate. If you use a 3% rate even 100% stocks does very well.
Four percent withdrawal rate in an age with no SS and only a few percent of the labor force having pensions?
Yes, why not?

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