Harry Browne Permanent Portfolio Discussion (Cont'd)

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Clive
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Rebalancing

Post by Clive »

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Lbill
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Post by Lbill »

One thing to keep in mind when you're looking at returns is time interval. If you only look at your portfolio returns at the end of every year, the ride will look different than if you look more often (or less often). In 2008, the 4 x 25 PP actually gained about 1% - not too bad compared to the stock market, which lost 37% and a 60/40 portfolio of stocks and bonds, which lost 20% for the year. Long treasuries rode to the rescue late in 2008 and saved the day. But a lot depends on your temporal perspective. On a daily return basis, by the first half of 2008 the 4 x 25 PP experienced a drawdown of 16.5%. Now, that's a darn sight better than the 33% daily return drawdown of a 60/40 portfolio over that time period, but it still gets your attention.
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Roy
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Post by Roy »

Lbill wrote:One thing to keep in mind when you're looking at returns is time interval. If you only look at your portfolio returns at the end of every year, the ride will look different than if you look more often (or less often). In 2008, the 4 x 25 PP actually gained about 1% - not too bad compared to the stock market, which lost 37% and a 60/40 portfolio of stocks and bonds, which lost 20% for the year. Long treasuries rode to the rescue late in 2008 and saved the day. But a lot depends on your temporal perspective. On a daily return basis, by the first half of 2008 the 4 x 25 PP experienced a drawdown of 16.5%. Now, that's a darn sight better than the 33% daily return drawdown of a 60/40 portfolio over that time period, but it still gets your attention.
Excellent point, Lbill.

Bogle and others are correct when they say that one defensive measure is not to "peek". For many investors, especially DYI, frequent looking increases the likelyhood that emotions can impel portfolio tinkerings, and one version of which might include outright capitulation. Or doing so might just cause extra, unnecessary, emotional baggage to manage.

And then there is the "tactical management" viewpoint, in its many forms. The compulsion to do so, even with what has been shown to be a robust, low-fuss strategy, is just as evident in the "permanent" portfolio threads, as elsewhere on the forum.
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craigr
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Post by craigr »

I advise to also not look at a portfolio too frequently. A reason I don't really like posting frequent updates to the portfolio is because I don't want to encourage the habit. Investors that look very often are subject to more emotions than those that leave well enough alone.

If you are unemotional about the thing you can check more often, but it can be hard seeing the different assets bobbing up and down. Not just this, but the markets are not a light switch. The markets are more like a cruise ship. It takes a while for the rudder to change the direction of the portfolio when you are having volatility. Checking a portfolio infrequently is a lot easier to stomach.
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wannabe_CPA
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Post by wannabe_CPA »

I lost track of the original PP thread some time ago, so this may have been covered, but here's a thought I had the other day.

The cash component is a deflation hedge right? So theoretically any kind of cash should work.

The gold component is supposed to be the inflation hedge.

So it seems like holding the right basket of foreign currencies, probably via relatively short term debt securities valued and held in those currencies, would be just as viable of an approach as gold and cash.
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Post by Call_Me_Op »

wannabe_CPA wrote:I lost track of the original PP thread some time ago, so this may have been covered, but here's a thought I had the other day.

The cash component is a deflation hedge right? So theoretically any kind of cash should work.

The gold component is supposed to be the inflation hedge.

So it seems like holding the right basket of foreign currencies, probably via relatively short term debt securities valued and held in those currencies, would be just as viable of an approach as gold and cash.
Harry Browne specifically identified gold as the "inflation hedge" component of the PP for two reasons. The first is that it is a tangible asset that could be held off-shore without generating interest (which requires taxation and reporting). Second, it can respond explosively to inflation, thus lifting the entire portfolio when stocks and long-term bonds head south.
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Post by smurff »

wannabe_CPA wrote:So it seems like holding the right basket of foreign currencies, probably via relatively short term debt securities valued and held in those currencies, would be just as viable of an approach as gold and cash.
Or maybe holding a basket of all the world's market trading currencies, or all the short term debt in those currencies. Sort of like a total stock market fund that you build on your own, using "total world treasury short term bonds." If you do the same with long term bonds (total world treasury long term bond fund), and again with stocks ("total world stock market") in theory you would have a "world" permanent portfolio. Gold is gold, everywhere.
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Post by Lbill »

I believe the trifecta I yapped about earlier may have arrived: bonds, stocks, and gold down the tank together. It will be interesting to see what unfolds in the coming days . . .
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Post by Call_Me_Op »

Lbill wrote:I believe the trifecta I yapped about earlier may have arrived: bonds, stocks, and gold down the tank together. It will be interesting to see what unfolds in the coming days . . .
Wouldn't know that judging from today. Stocks are down, gold is flat, and LT bonds are up.
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Post by Noobvestor »

smurff wrote:
wannabe_CPA wrote:So it seems like holding the right basket of foreign currencies, probably via relatively short term debt securities valued and held in those currencies, would be just as viable of an approach as gold and cash.
Or maybe holding a basket of all the world's market trading currencies, or all the short term debt in those currencies. Sort of like a total stock market fund that you build on your own, using "total world treasury short term bonds." If you do the same with long term bonds (total world treasury long term bond fund), and again with stocks ("total world stock market") in theory you would have a "world" permanent portfolio. Gold is gold, everywhere.
If VG offered a total-world short-bond fund like that, I'd own it in a heartbeat.
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Post by snowman9000 »

Lbill wrote:I believe the trifecta I yapped about earlier may have arrived: bonds, stocks, and gold down the tank together. It will be interesting to see what unfolds in the coming days . . .
Been thinking about/ expecting this to come sooner or later. Some sort of de-risking or downturn that causes cash to be king.
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Post by Noobvestor »

snowman9000 wrote:
Lbill wrote:I believe the trifecta I yapped about earlier may have arrived: bonds, stocks, and gold down the tank together. It will be interesting to see what unfolds in the coming days . . .
Been thinking about/ expecting this to come sooner or later. Some sort of de-risking or downturn that causes cash to be king.
It's kind of funny, too, because I think a lot of folks seem to feel the PP is only getting attention right now due to the gold spike ... but the beauty of the PP is that just when you think you know what's on the upswing, markets change directions and poof, something like cash gets crowned instead!
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Post by Gumby »

Image

I've put together this chart that shows the Total Real Return (dividends reinvested and returns adjusted for reported inflation) of the S&P 500 vs the Permanent Portfolio from January 1, 1970 through October 2010.

The chart shows us a few things. To begin with, inflation was a heavy drag on stocks during the 1970s. Stock investors who weren't reinvesting their dividends would have taken a very long time to recoup their purchasing power. Whether you were reinvesting your dividends, or not, the Permanent Portfolio was fine either way, thanks to Gold and the Portfolio's rebalancing rules.

Certainly the 80's and 90's were an amazing time for stocks. However, compared to the Permanent Portfolio, the chart clearly shows us that the stock market has struggled to maintain that momentum in recent years.

The data also shows us detailed performance during a number of events. You can see the reactions to the '87 crash, the dot-com bubble, 9-11, the "Lost Decade" and the '08 crash.

I don't believe that Harry Browne intended for the Permanent Portfolio to beat the market. Unfortunately, it doesn't seem out of the realm of possibilities. All that we know is that the future is uncertain. If nothing else, the Permanent Portfolio seems to have the legs to deal with that uncertainty.

...

FYI, to create the chart, above, I digitized the returns of Harry Browne's original 1970-2003 Permanent Portfolio chart that is currently up on harrybrowne.org. The software I used to digitize his chart is a fantastic little software package called, DigitizeIt. His chart showed how $100 in a Permanent Portfolio grew nominally to $2000 by the end of 2003. The software was able to accurately fill in the blanks and convert it to raw data. For anyone who is interested, you can download that (nominal) raw data here:

Harry Browne's 1970-2003 Permanent Portfolio (CSV format).

Once I had a starting value of $2000 for December 31st, 2003, I simply started a new portfolio on smartmoney.com with a $2000 starting value using SPY, GLD, TLT and SHY and grabbed the proper values at the end of each month, until this year. Dividends are reinvested. For anyone who is interested, you can download the combined (nominal) raw data here:

Complete 1970-2010 Permanent Portfolio (CSV format).

I used reported inflation data from BLS.gov to estimate the real return of the Permanent Portfolio after inflation. I'm very much aware that inflation as reported by the BLS isn't accurate. However, BLS is still very much a standard for reporting, and I felt it was important to adhere to that standard. If anyone has a subscription to shadowstats.com, I ecourage you to recrunch the nominal data I've provided here.

In order to get the Total Real Return of the S&P 500 (dividends reinvested and returns adjusted for inflation), I pulled the monthly data from here. Their data is sourced from Standard & Poors and Robert J. Shiller.

The chart is shown on a logarithmic scale, which is typically used for comparing long term data, since equal vertical distances anywhere in the chart represent equal percentage changes in return.

I will update this image (use URL below for updates) as new data becomes available from BLS.

If anyone would like to share this chart, you can simply use the following Google Short-URL: http://goo.gl/YK5hC
Last edited by Gumby on Sat Nov 20, 2010 1:26 pm, edited 23 times in total.
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Post by Paul Douglas Boyer »

Gumby wrote: I've put together this chart that clearly shows the Total Real Return (dividends reinvested and returns adjusted for reported inflation) of the S&P 500 vs the Permanent Portfolio from January 1, 1970 through September 2010.
Nice!

Using your reference to the S&P 500 data, were you able to get a single download or did you have to go through and select each month's return by hand?

Can you compute annualized Standard Deviation and Max Drawdown for each? (If I had the S&P 500 data I would give it a shot.)

Just to make clear, you only rebalanced at the 15/35 rule and not also by the calendar. I wonder how many times rebalancing occurred?

Interesting that we start in 1970. I am so used to Simba's spreadsheet that starts in 1972. I wonder if starting before August of 1971 makes sense with gold?
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Post by Noobvestor »

Truly an awesome chart. It got me wondering: I'm assuming folks have done some kind of analysis of a PP-like portfolio before gold became available again - is there anything out there like that? Something that charts, say, just the other three elements vs. the S&P or vs. a lumper-style portfolio?
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Gumby
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Post by Gumby »

Paul Douglas Boyer wrote:Using your reference to the S&P 500 data, were you able to get a single download or did you have to go through and select each month's return by hand?
I selected each month's return by hand. Though, I believe Robert Shiller has raw data that can be downloaded.

http://www.econ.yale.edu/~shiller/data.htm
Paul Douglas Boyer wrote:Can you compute annualized Standard Deviation and Max Drawdown for each? (If I had the S&P 500 data I would give it a shot.)
I'm going to hand that one off (to you), if that's ok! I didn't get the nominal returns. I only collected the Inflation-adjusted Returns with Dividends reinvested. Here you go...

S&P 500 Real Total Return 1970-2010
Paul Douglas Boyer wrote:Just to make clear, you only rebalanced at the 15/35 rule and not also by the calendar. I wonder how many times rebalancing occurred?
I used the 15/35 rule after 2003. I did four rebalances during that time. I can't say what happened before that.
Paul Douglas Boyer wrote:Interesting that we start in 1970. I am so used to Simba's spreadsheet that starts in 1972. I wonder if starting before August of 1971 makes sense with gold?
I'm just guessing, but he probably used 1970 as a starting point for his backtesting so that he could compare (and show) the PP returns over the entire decade against other investments -- right through the Nixon Shock. Remember, he probably started this chart in the mid-1970s. At the time, it probably made sense. He also showed that the portfolio accepted the Nixon shock even though some of the assets were slightly off-balanced. I suppose at the time, it may have been a useful exercise for proving the theory to investors who had gold-backed currencies that starting a Permanent Portfolio would protect them during a conversion to a fiat currency.
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Paul Douglas Boyer
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Post by Paul Douglas Boyer »

Gumby wrote: I'm going to hand that one off (to you), if that's ok!
This chart summarizes the returns vs risk of the two portfolios. The numbers beside each plot point are the Annualized Standard Deviation and the Annualized Real Return, respectively.

Image

Returns shown are real, inflation-adjusted returns, annualized.
Standard Deviation is computed from the STDEV of monthly returns multiplied by sqrt(12).

And here is a chart showing Max Drawdown, based upon monthly returns.
The plot point numbers are Max Drawdown and Annualized Real Return, respectively.

Image

Note that in this chart the Max Drawdown percentage for S&P 500 used real monthly returns while the Max Drawdown for PP used nominal monthly returns!

That Max Drawdown number of over 50% is a tough one to invest in!
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Post by Gumby »

Paul Douglas Boyer wrote:Note that in this chart the Max Drawdown percentage for S&P 500 used real monthly returns while the Max Drawdown for PP used nominal monthly returns!
Paul, my apologies... here is my complete Total Real data for both the Permanent Portfolio and the S&P 500.

Total Real Return PP vs S&P 500 (CSV format)

I should mention that I calculated the real return for the Permanent Portfolio by simply applying the annual average reported BLS inflation to each month. I assume the Shiller data used the reported monthly inflation (instead of the annual average, like I did). It shouldn't make much of a difference other than by a few pennies of volatility. In the end, the average reported inflation would still give the same overall results as using the monthly reported inflation (since they all average out to the same result across each year).
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Post by rwc356 »

Paul - great charts on the returns, risk and drawdown. Quick question about the maximum drawdown. IIRC the stated historical maximum drawdown for the PP has been in the 4-5% range. Is the 4-5% figure calculated on "annual" basis while your 13.5% reflects a "monthly" basis. Is this reason for the difference?
Bob
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Post by Paul Douglas Boyer »

Updated with Real returns for PP and S&P 500

Image

Image

The 24.2% "real" max drawdown of the PP occurred in Feb, 1982.

The 54.3% max drawdown for S&P 500 occurred in Mar, 2009.
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Post by Paul Douglas Boyer »

rwc356 wrote: IIRC the stated historical maximum drawdown for the PP has been in the 4-5% range. Is the 4-5% figure calculated on "annual" basis while your 13.5% reflects a "monthly" basis. Is this reason for the difference?
Bob
YES! That is a key point I've been making recently about Max Drawdown. We need high resolution data to get the REAL MAX. Simba's spreadsheet only uses annual snapshots. That masks things that may happen within the year. Theoretically a portfolio could drop 99% or more and gain it all back before the end of the year and we'd never know with annual snapshots.

And of course, daily snapshots could only increase the calculated Max Drawdown number.

This calculation problem is probably the main reason we usually see Standard Deviation used - it is much easier to calculate. And the relative positions of portfolios on the scatterplot are largely the same.
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Post by Clive »

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Post by Clive »

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Post by Paul Douglas Boyer »

Clive wrote:I had thought the stock (TSM) volatility (Std. Dev) was a bit higher than you indicate Paul, closer to 18 I had in mind.
Yes, due to the data I was using, these are "real" returns, inflation-adjusted. Probably not as meaningful statistically.

It is true that nominal standard deviation of TSM was 18% for 1972 - 2009 when using Annual data.
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Post by Gumby »

Paul Douglas Boyer wrote:Yes, due to the data I was using, these are "real" returns, inflation-adjusted. Probably not as meaningful statistically.
To clarify, the data is "Total Real" returns. They include dividends-reinvested and the returns are adjusted for inflation (based on CPI-U).

BLS released the November CPI-U the other day, so I've updated the chart and data accordingly for Total Real Return on the S&P 500 and the PP.
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Post by Clive »

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Post by matt »

I see that some of the recent discussion has turned into a bit of a "battle of the backtests". I believe this is highly misguided in general and seriously misplaced in the specific case of deciding whether the PP is a good portfolio for an individual to use. The PP is relevant to the investor who acknowledges an uncertain future, not an investor who believes the future can be known by those who can most accurately calculate the past.

But for those who love to backtest anyway, there is one aspect of investing reality that is almost universally ignored in these comparisons which provides an additional edge to the PP relative to other strategies.

What is this reality, you ask? Investors in the market have systematically underperformed the market’s returns. No, this has nothing to do with the costs of investing, which favors passive investors over active. This is something that likely impacts both groups equally. It has to do with the timing of cash flows and the difference between time-weighted and dollar-weighted returns.

The following is from the abstract of Ilia D. Dichev’s paper, “What are Stock Investors' Actual Historical Returns? Evidence from Dollar-Weighted Returns” (download at http://papers.ssrn.com/sol3/papers.cfm? ... _id=544142)
“The empirical results indicate that aggregate dollar-weighted returns are systematically lower than buy-and hold returns. The annual difference is 1.3 percent for the NYSE/AMEX market over 1926-2002, 5.3 percent for Nasdaq over 1973-2002, and averages 1.5 percent for 19 major stock markets around the world over 1973-2004. Thus, this study provides comprehensive evidence that stock investors' actual returns are considerably lower than those from passive holdings and from those documented in the existing literature on historical stock returns. These results have implications for the debate on the equity premium, for the literature on long-run returns following capital flows, for building successful investment strategies, and others.”
You see, private companies tend to go public when times are good and stock valuations are high. In order to fund IPOs, of course, public investors need to have available funds to add to the stock market. Not coincidentally, when times are good, public investors tend to have higher disposable income with which to invest. Over time, this aggregate buy high/sell low activity has meant that even passive investors would have generated an annualized rate of return meaningfully lower than these lump sum investment backtests would imply.

Consider this from an individual investor’s perspective. Let’s say Joe Public gets paid his annual bonus every January 1st. Depending on his current ability, he puts some portion of that in his investment portfolio. So it’s reasonable to assume that in January 2007 and 2008, when bonuses were strong and stock valuations were high, that Mr. Public was able to add a decent chunk of money to stocks. But Mr. Public’s bonus was dramatically reduced in January 2009 and did not improve in January 2010. Mr. Public wasn’t even sure he’d keep his job, so at a time when stock valuations provided for better future returns, Mr. Public didn’t add any new money to stocks.*

On an aggregate basis, Mr. Public’s experience plays out repeatedly over time. Investors add more money to the stock markets at high valuations and less at low valuations, not necessarily because of a greed and fear cycle, but for the simple fact that their incomes and financial flexibility are impaired. Thus, investors buy high and sell low as a group, including passive investors who make no attempt at market timing. As a result, the actual returns of investors do not match the supposed historical results, even before costs. The flip side, of course, is that companies, on average, issue new stock when valuations are high and buy it back when valuations are low. Thus, the “missing returns” go mostly to the private shareholders who are selling stock to the public.

So why does this favor the PP strategy? The PP, through its unique diversity, is at all times attempting to be a low-risk strategy. Thus, its future returns should be less sensitive to the timing of new investments than a higher volatility strategy. For example, the risk level of the stock market varies dramatically based on initial timing of investment. The S&P 500 at 666 in March 2009, for example, had an extraordinary advantage in expected return over today’s level of 1,200. Yet a passive strategy that is fairly heavy on equities ignores this change in expected return. You can argue the same thing about the PP since it is also passive and the expected returns are not fixed, but its much lower volatility mitigates some of the risk of very poor timing.

So when the timing of cash flows is considered, it is likely that traditional investment strategies might underperform their backtests by 1% or so per year, depending on how much is allocated to stocks. Since the PP has historically had a positive correlation to stocks, it is likely that even PP investors would suffer a drag over time in IRR vs TWR, but it should be much less. Thus, the PP strategy has this hidden advantage in IRR that does not show up in any of the standard backtests that usually only consider TWR of a lump sum investment. It also means that traditional investing strategies will have higher average risk levels in an IRR context since volatility is higher during bear markets than bull markets and investors tend to over-participate on the downside and under-participate on the upside.

So chalk up another “selling point” for the PP in the real world.

*Yes, I know some of you are going to respond, “But my disposable income didn’t change over those years and I didn’t adjust my monthly investment amounts, so this didn’t apply to me”. And you’re right, it may not have applied to you. But maybe it will apply to you in the future. Even if it doesn’t, it has consistently applied to the aggregate investing public over time, so it clearly is happening to many investors, even if you’re not one of them.

P.S. The IRR vs TWR differential is also one reason I switched from a traditional Boglehead strategy in early 2007 to an absolute return value investing approach. Because it was painfully obvious in 2007 that my expected returns on stocks were well short of my first investment dollars placed in the summer of 2004.
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Post by Clive »

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Post by matt »

Clive wrote:By that do you mean targeting a particular reward and adding to stock when the holdings are lagging that target, reducing stock as the holdings lead the target?
No, it means that I threw out the idea of a fixed asset allocation in favor of an approach that considers the valuations of all holdings.
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Post by Lbill »

Paul Boyer - Nice charts. I hope I didn't miss it if posted, but I'd be interested in seeing charts illustrating portfolio survival for withdrawal rates of, say 4% - 6% (inflation adjusted) over a 30-year retirement period with the PP vs. 60/40 or other typical stock-bond mixes. I know this has been discussed somewhere, but maybe not quantified. Since the PP has much lower volatility than recommended mixes such as 60/40 in safe withdrawal rate studies, I would expect that fatal drawdowns would be much less likely and probability of portfolio survival much better
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Post by lodrigj »

After reading the recent article in Wired Magazine about computerized trading, does anyone feel less secure in the stock market portion of the PP?

http://www.wired.com/magazine/2010/12/f ... shtrading/

It says that most of the trading on Wall Street is now done by computer algorithms and that the interplay of these is no longer controllable, or even understandable, by humans. Note this is talking about the interaction of these various different programs, and not the individual programs themselves.

Witness the flash crash May 6, 2010.

Any thoughts on whether to take this into consideration for the PP?
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Post by craigr »

lodrigj wrote:After reading the recent article in Wired Magazine about computerized trading, does anyone feel less secure in the stock market portion of the PP?

http://www.wired.com/magazine/2010/12/f ... shtrading/

It says that most of the trading on Wall Street is now done by computer algorithms and that the interplay of these is no longer controllable, or even understandable, by humans. Note this is talking about the interaction of these various different programs, and not the individual programs themselves.

Witness the flash crash May 6, 2010.

Any thoughts on whether to take this into consideration for the PP?
No, I wouldn't worry about it. Computer trading has been around a while. It was largely responsible for the big -25% crash in 1987. The portfolio ended up positive for the year. If someone is selling stocks they are probably buying something else. In 1987 stocks dove by 25% but ended up +1.5% for they year. Yet gold was up +21%. Total portfolio returns were +6.4% for that year.

Even if you left alone a 100% stock portfolio you still recovered your losses quickly. The moral here is to not just be diversified, but don't panic when the market is.

There's probably another moral as well: The only people that need to be concerned with the perils of computer trading are those with portfolios being traded by computers.
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Post by SP-diceman »

lodrigj wrote:After reading the recent article in Wired Magazine about computerized trading, does anyone feel less secure in the stock market portion of the PP?

http://www.wired.com/magazine/2010/12/f ... shtrading/

It says that most of the trading on Wall Street is now done by computer algorithms and that the interplay of these is no longer controllable, or even understandable, by humans. Note this is talking about the interaction of these various different programs, and not the individual programs themselves.

Witness the flash crash May 6, 2010.

Any thoughts on whether to take this into consideration for the PP?
No.
In spite of the "flashcrash" the market is higher.

Wired is just trying to sell magazines.

You will be holding stocks for decades.
If you plan on nanosecond trading, you might worry.


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Post by Lbill »

The problem with usual backtesting is that the results are implicitly based on investing a given amount as a lump sum at the beginning of the backtesting period and then never investing additional amounts during the course of the backtesting period. Of course, almost nobody does this, because they have less money to invest in the earlier years and are investing their earnings incrementally as time progresses. What is being completely ignored is the fact that portfolio risk is skewed toward the later years of the investment horizon, as the investor deploys larger and larger amounts.

Let's examine this in regard to the PP. Since gold wasn't decoupled from the dollar until the early 1970s, the longest backtesting period that is typically used begins in 1972 and ends in 2010. Just how much money did you have to invest back in 1972, compared to - say - 1982, 1992, or 2002? If you're like me I venture to guess, not much. So the backtesting results of the PP from 1972 is really irrelevant for you and I, because we didn't lump-sum our entire stake into the PP in 1972. Even if you were alive and starting to invest in 1972, during the great decade for gold from 1972-1980 we would have had very little at stake.

The outcome of investing in the PP over 30 years, beginning in 1972 would have been a lot more dependent on the performance of the PP during the last decade, 1992-2001, when you had the largest stake, than the first decade, 1972-1981. Granted, this is a cherry-picked example to make the point that portfolio risk is concentrated in a relatively short time period for most people. This is not a unique problem for PP backtesting because it applies to any portfolio. Backtesting results should be adjusted to reflect this risk-skewing, but it never is. If you happen to have a lump sum that you can deploy all at once, and you will never add to your investment over time, then typical backtesting results are more relevant for you. If you are like the rest of us, you should adjust backtesting results for your own situation based on your assumptions about how your investment amounts might be allocated over time. Be aware that, for most people, portfolio risk is skewed toward the years at the end of the investing horizon, and for that reason most portfolios are really a lot more risky than we think they are based on typical backtesting.
"Life can only be understood backward; but it must be lived forward." ~ Søren Kierkegaard | | "You can't connect the dots looking forward; but only by looking backwards." ~ Steve Jobs
Call_Me_Op
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Post by Call_Me_Op »

My view, after learning quite a bit about the PP, is that it is a sound investment approach - but certainly not the only one. The biggest wrinkle I see in it is that physical gold adds an element of inconvenience (purchase/sale/storage), and it is uncertain how reliable the inflation protection will be in the future. I suppose the same can be said of TIPS, though.

What I do like about the PP, and how it has inspired me, is that it has a great deal of thought behind it. It considers all possible economic states and attempts to put something in the portfolio that will prosper greatly for each state. On its surface, this seems better than just stocks and nominal bonds, which can both be hit hard in inflationary times.

With respect to back-testing, I would argue that it's the best we have. Lab experiments always trump theory.
Best regards, -Op | | "In the middle of difficulty lies opportunity." Einstein
snowman9000
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Post by snowman9000 »

Call_Me_Op wrote: With respect to back-testing, I would argue that it's the best we have. Lab experiments always trump theory.
My problem with back testing is that investing is NOT science. Neither is economics for that matter. Back testing has value but people are mistaken IMO to want to view it as part of a science.

Science and scientific method imply absolute repeatablity. By contrast, investors and economic actors, in aggregate, learn and change their responses to inputs and variables.

Investing is more like a game than a science. There are rules (which change), strategies, probabilities of success, limits, etc. Always evolving. It's entirely possible that theory might be better than backtesting. Or not!
:-)

I know it's a weak argument, but it's the best I can do. There is just something about the love and pursuit of, and faith in, backtesting that strikes me as misguided.
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Post by Call_Me_Op »

snowman9000 wrote:
Call_Me_Op wrote: With respect to back-testing, I would argue that it's the best we have. Lab experiments always trump theory.
My problem with back testing is that investing is NOT science. Neither is economics for that matter. Back testing has value but people are mistaken IMO to want to view it as part of a science.

Science and scientific method imply absolute repeatablity. By contrast, investors and economic actors, in aggregate, learn and change their responses to inputs and variables.

Investing is more like a game than a science. There are rules (which change), strategies, probabilities of success, limits, etc. Always evolving. It's entirely possible that theory might be better than backtesting. Or not!
:-)

I know it's a weak argument, but it's the best I can do. There is just something about the love and pursuit of, and faith in, backtesting that strikes me as misguided.
I don't know who stated that back-testing is a science - or who suggested that one should have absolute faith in back-testing. I certainly made no such statements. I do, however, believe it is ignored at one's peril - not because investing is a science, but because it is not. This is analogous to the case of "medical science", where the best information on a medication's side effects is obtained by trying the medication on millions of people. There are simply too many variables for accurate theoretical predictions to be made, so the data are an important guide. So it is that theoretical predictions about how various investments will play together in the real world are of questionable value, and should be augmented by back-testing. That's about the best we can do in the absence of a crystal ball.
Best regards, -Op | | "In the middle of difficulty lies opportunity." Einstein
Gumby
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Post by Gumby »

Lbill wrote:Let's examine this in regard to the PP. Since gold wasn't decoupled from the dollar until the early 1970s, the longest backtesting period that is typically used begins in 1972 and ends in 2010.
Harry Browne always used a backtest from January 1st, 1970 to show how the PP theoretically handled the Nixon shock.

http://harrybrowne.org/PermanentPortfolioResults.htm

Backtesting is no different than performing a test drive on a car. You take it with a grain of salt and you accept it with some level of skepticism. You do it to get a general feel of the performance in specific conditions. Everyone realizes that there is greater risk later on when you have far more precious cargo or passengers along for the ride. The weather conditions will change, the road may be different, but you already have an idea of how the car may handle if you've tested it in many different conditions. I think people already realize this when they look at a backtest. They know it's not a guarantee. Past performance is not an indication of future results. People know this already and they know that their risk levels increase as they age.
Last edited by Gumby on Wed Dec 29, 2010 10:09 am, edited 2 times in total.
matt
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Post by matt »

My first post on this page was either ignored or not well understood, but it argues that the PP is more reliable than most strategies when it comes to back-testing. Because the PP emphasizes low risk in all environments, it is less dependent on time frame than most other strategies. That is obviously not the same as being independent of time frame, for which there is no ideal strategy.
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Post by Call_Me_Op »

matt wrote:My first post on this page was either ignored or not well understood, but it argues that the PP is more reliable than most strategies when it comes to back-testing. Because the PP emphasizes low risk in all environments, it is less dependent on time frame than most other strategies. That is obviously not the same as being independent of time frame, for which there is no ideal strategy.
Matt,

While I agree with you generally, I think some question is raised if you exclude performance in the early-mid 1970's. Gold had recently come off of price control, so had a lot of pent-up demand that was a factor in it skyrocketing. (This was a one-time event.) If you look at PP from (say) 1978-2009 (a full 30+) years, it lags behind a number of other conservative allocations that exhibited similar volatility, and that included little or no gold.
Best regards, -Op | | "In the middle of difficulty lies opportunity." Einstein
Desert
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Post by Desert »

Call_Me_Op wrote:
Matt,

While I agree with you generally, I think some question is raised if you exclude performance in the early-mid 1970's. Gold had recently come off of price control, so had a lot of pent-up demand that was a factor in it skyrocketing. (This was a one-time event.) If you look at PP from (say) 1978-2009 (a full 30+) years, it lags behind a number of other conservative allocations that exhibited similar volatility, and that included little or no gold.
What other allocations (with no gold) exhibited similar volatility?

On a related topic: Gold can be viewed as an inconvenient asset to own - to hold physical bullion requires more effort to purchase, store, and sell than a mutual fund or ETF. However, I look at gold a bit differently: one of my favorite aspects of the PP is that it allows the investor to hold a hard, tangible asset like gold, while still providing a decent return. I really appreciate a portfolio that allows me to hold a hard asset without sacrificing return.
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Post by Call_Me_Op »

Desert wrote:
Call_Me_Op wrote:
Matt,

While I agree with you generally, I think some question is raised if you exclude performance in the early-mid 1970's. Gold had recently come off of price control, so had a lot of pent-up demand that was a factor in it skyrocketing. (This was a one-time event.) If you look at PP from (say) 1978-2009 (a full 30+) years, it lags behind a number of other conservative allocations that exhibited similar volatility, and that included little or no gold.
What other allocations (with no gold) exhibited similar volatility?

On a related topic: Gold can be viewed as an inconvenient asset to own - to hold physical bullion requires more effort to purchase, store, and sell than a mutual fund or ETF. However, I look at gold a bit differently: one of my favorite aspects of the PP is that it allows the investor to hold a hard, tangible asset like gold, while still providing a decent return. I really appreciate a portfolio that allows me to hold a hard asset without sacrificing return.
Not sure what you mean by a portfolio "allowing" you to hold gold.
Best regards, -Op | | "In the middle of difficulty lies opportunity." Einstein
Gumby
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Post by Gumby »

Desert wrote:
Call_Me_Op wrote:
Matt,

While I agree with you generally, I think some question is raised if you exclude performance in the early-mid 1970's. Gold had recently come off of price control, so had a lot of pent-up demand that was a factor in it skyrocketing. (This was a one-time event.) If you look at PP from (say) 1978-2009 (a full 30+) years, it lags behind a number of other conservative allocations that exhibited similar volatility, and that included little or no gold.
What other allocations (with no gold) exhibited similar volatility?
Yes, do tell. We've only spent about a thousand or so posts discussing the low volatility and moderate returns of the PP. We could have all saved a lot of time if you had mentioned these allocations, say, a year ago. :)
Last edited by Gumby on Thu Dec 30, 2010 7:42 am, edited 4 times in total.
Desert
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Post by Desert »

Call_Me_Op wrote: Not sure what you mean by a portfolio "allowing" you to hold gold.
Let me try again: If holding 25% of gold (or any other hard asset) resulted in a portfolio that dramatically underperformed a 50/50 fixed/equity portfolio, it would be a very tough decision to go ahead and hold that 25% in a hard asset. Given that the PP has provided a very good return, and that the portfolio was specifically designed around the volatility of the various asset classes including gold, it makes holding gold an easier decision to make.
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Post by Call_Me_Op »

Desert wrote:
Call_Me_Op wrote: Not sure what you mean by a portfolio "allowing" you to hold gold.
Let me try again: If holding 25% of gold (or any other hard asset) resulted in a portfolio that dramatically underperformed a 50/50 fixed/equity portfolio, it would be a very tough decision to go ahead and hold that 25% in a hard asset. Given that the PP has provided a very good return, and that the portfolio was specifically designed around the volatility of the various asset classes including gold, it makes holding gold an easier decision to make.
Hi Desert,

Do you currently hold most if your assets in PP? If so, how long have you been doing it, and have you implemented it "by the book" or with variations?
Best regards, -Op | | "In the middle of difficulty lies opportunity." Einstein
Gumby
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Post by Gumby »

Call_Me_Op wrote:
Desert wrote:
Call_Me_Op wrote: Not sure what you mean by a portfolio "allowing" you to hold gold.
Let me try again: If holding 25% of gold (or any other hard asset) resulted in a portfolio that dramatically underperformed a 50/50 fixed/equity portfolio, it would be a very tough decision to go ahead and hold that 25% in a hard asset. Given that the PP has provided a very good return, and that the portfolio was specifically designed around the volatility of the various asset classes including gold, it makes holding gold an easier decision to make.
Hi Desert,

Do you currently hold most if your assets in PP? If so, how long have you been doing it, and have you implemented it "by the book" or with variations?
Why not answer his question first?
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Post by Call_Me_Op »

Gumby wrote:
Why not answer his question first?
Various combinations of stocks and treasuries can do the trick too.
Best regards, -Op | | "In the middle of difficulty lies opportunity." Einstein
Gumby
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Post by Gumby »

Call_Me_Op wrote:Various combinations of stocks and treasuries can do the trick too.
When you exclude a so-called "one time-event," I'm sure they would do the trick. Unfortunately, we can't exclude future one-time events as we please.

The idea of pent up demand being the sole reason for gold's rise in the 70s is misguided. Dollars instantly began to lose their value from inflation during that time.

Image
Last edited by Gumby on Thu Dec 30, 2010 10:36 am, edited 3 times in total.
Call_Me_Op
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Post by Call_Me_Op »

Gumby wrote:
Call_Me_Op wrote:Various combinations of stocks and treasuries can do the trick too.
When you exclude a so-called "one time-event," I'm sure they would do the trick. Unfortunately, we can't exclude future one-time events as we please.

The idea of pent up demand being the sole reason for gold's rise in the 70s is misguided. Dollars instantly began to lose their value from inflation during that time.

Image
My claim holds even if you INCLUDE the gold run-up in the 1970s.

Nice graph, by the way.
Best regards, -Op | | "In the middle of difficulty lies opportunity." Einstein
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