Backtesting for the Optimum HBPP Allocations

General Discussion on the Permanent Portfolio Strategy

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Re: Backtesting for the Optimum HBPP Allocations

Post by Peak2Trough » Thu Feb 21, 2013 9:23 am

Thomas Hoog wrote:Could you run your allocations in the 30 years period ?
Interesting point... I actually ran every decade independently when I started this and, as you would expect, got significantly different results for each.  I rather liken it to an exponential moving average vs a normal weight moving average in that we should apply more weight to the more recent results, given that they are the result of particular economic climates.

Having said that, I'm not sure running it for 30 years vs 40 is all that helpful... if we agree more recent data is 'better' then we would eventually narrow it down further and further, and yet still probably wouldn't have a better understanding of what the future may bring. 

I tend to look at the data more as a way to ferret out what effect changes in allocations actually have over time than an attempt to answer what allocation to adopt going forward.
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Re: Backtesting for the Optimum HBPP Allocations

Post by Thomas Hoog » Thu Feb 21, 2013 10:17 am

rocketdog wrote:
Thomas Hoog wrote: I have also been playing around (great data) with set of allocations with round figures 0, 10, 20 etc. and the 40 years periode and the 30 years period. In the 30 years period the HP allocation performs less compared to the 40 years period. However the final conclusion was a 10 % (cash), 20 % (Gold), 30 % (Bonds), 40 (Stocks) allocation for me. It give a slightly better CAGR and some more risk in MAXDD. And that is ok for me.
It also makes sense. The HP 25 % allocation presume an equal duration of the period a favourite asset.  However in the past the period of prosperity (stock) endures longer then p.e. recession (cash) or panic (gold).
I'm surprised that it falls out of your range
Could you run your allocations in the 30 years period ?
Your findings gave me a chuckle, because before I even started this I thought about a 10/20/30/40 allocation like the one you describe.  The reason it fell out of my findings is that the StdDev and MaxDD are in the bottom 50% of such an allocation, and I restricted my data set to only the top 50% in each criteria.  That's because I was trying to find the "sweet spot" between risk and reward, not simply mazimize my reward. 

For those who don't really care about one or more of the criteria, then they can exclude that criteria from their filter.  For instance, if I have more than 20 years before retirement, I might care more about CAGR than either StdDev or MaxDD, so I could exclude StdDev and MaxDD from my filtering criteria. 

You can data mine different scenarios all day long.  My objective was merely to see if I could find reasonable reward at a tolerable risk. 
Ok, now I understand your method. And yes it has a StD below 50 % average.
Using your method and some logical allocations (C= Cash, B= Bonds, G=Gold, S = Stocks)
you get the folowing results

C B G S CAGR StD MAXDD Sharpe SharpeMDD
10 30 20 40 9,8 7,6 19,9% 0,54 20,60
25 25 25 25 9,3 6,8 20,2% 0,52 16,21
20 30 20 30 9,4 6,8 18,8% 0,54 15,35
15 35 15 35 9,5 7,0 17,4% 0,54 26,47
10 40 20 30 9,7 7,3 20,1% 0,55 19,90


and now to put them in your "order". The % means p.e first row 19 % in CAGR that there are 18 % better and 81 % less allocations
Red means last, Green best
C   B   G   S    CAGR StD MAXDD Sharpe SharpeMDD
10 30 20 40 19% 57%    31%     2%     4%
25 25 25 25 45% 29% 33%     5%   22%
20 30 20 30 39% 28% 26%     1%     9%
15 35 15 35 35% 32% 19%     2%     1%
10 40 20 30 23% 37% 32%     0%     7%

So you can choose according to your whishes.
The last one: 10 % TBills, 40 % Bonds, 20 % Gold, 30 % Stocks has a great Sharpe ratio
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Re: Backtesting for the Optimum HBPP Allocations

Post by rocketdog » Thu Feb 21, 2013 11:46 am

Thomas Hoog wrote:The last one: 10 % TBills, 40 % Bonds, 20 % Gold, 30 % Stocks has a great Sharpe ratio
OK, get ready for this...

I did some more in-depth number crunching using a different methodology, and I came up with similar but different bands than I did the first time.  I feel better about these results so I thought I'd share them here. 

This time, I wanted to find the portfolios that gave me the best of all worlds.  So I filtered for the Top 40% under each criteria:

40% Highest CAGR
40% Lowest StdDev
40% Lowest MaxDD
40% Highest Sharpe
40% Highest SharpeMDD

In other words, I was looking for the intersection of just those portfolios that were "best of breed" in each of the given criteria.  What I got in return was 17 portfolios.  Here are the bands for those portfolios:

T-Bills =  9% - 13%
T-Bonds = 32% - 44%
Gold    = 18% - 21%
SP500  = 29% - 35%

Notice anything?  Yes they all encompass the 10/40/20/30 portfolio that Gerard homed in on! 

My new bands result in the following criteria ranges:

CAGR      =  9.66 -  9.70
StdDev    =  7.24 -  7.29
MaxDD    = 19.08 - 20.02
Sharpe    =  0.54 -  0.55
SharpeMDD = 19.84 - 20.80

As you can see, we are splitting hairs here, with most of the criteria differing by only a few tenths -- or even hundredths -- of a percent. 

I'm not suggesting this is the "perfect" portfolio, and clearly the past 40 years is not likely to be repeated.  But I thought it was interesting that these ranges generally indicate that holding less cash and gold but more bonds and stocks has historically provided the best balance between performance and risk.
Last edited by rocketdog on Thu Feb 21, 2013 11:49 am, edited 1 time in total.
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Re: Backtesting for the Optimum HBPP Allocations

Post by annieB » Thu Feb 21, 2013 11:56 am

Great analysis.Fun to follow..
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Re: Backtesting for the Optimum HBPP Allocations

Post by Peak2Trough » Thu Feb 21, 2013 2:05 pm

rocketdog wrote:But I thought it was interesting that these ranges generally indicate that holding less cash and gold but more bonds and stocks has historically provided the best balance between performance and risk.
Fantastic work!  It seems to me the hypothesis above is fairly intuitive as well, given the volatility of gold, and the lack thereof of cash.  In fact, I wonder how close that allocation is to a HBPP allocation equally weighted on volatility.
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Re: Backtesting for the Optimum HBPP Allocations

Post by MachineGhost » Thu Feb 21, 2013 3:09 pm

Peak2Trough wrote: I'm not convinced it has a lot of usefulness above and beyond that of the original Sharpe ratio, but some folks asked for it, and it was easy enough to add so there we have it.
It has use in that it is a number you can actually relate to in practical terms, as opposed to volatility.  But the reason Sharpe and MaxDD are rather similar on a relative basis is because the highest high above a mean to the lowest low below the mean is essentially a peak-to-trough drawdown.
Last edited by MachineGhost on Thu Feb 21, 2013 3:11 pm, edited 1 time in total.
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Re: Backtesting for the Optimum HBPP Allocations

Post by MachineGhost » Thu Feb 21, 2013 3:15 pm

rocketdog wrote: I'm not suggesting this is the "perfect" portfolio, and clearly the past 40 years is not likely to be repeated.  But I thought it was interesting that these ranges generally indicate that holding less cash and gold but more bonds and stocks has historically provided the best balance between performance and risk.
That would make plenty of sense with secular bull markets in stock and bonds since 1980.  If Japan is a taste of our future, such a portfolio may underperform versus naive diversification.
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Re: Backtesting for the Optimum HBPP Allocations

Post by rocketdog » Thu Feb 21, 2013 3:30 pm

MachineGhost wrote:
rocketdog wrote: I'm not suggesting this is the "perfect" portfolio, and clearly the past 40 years is not likely to be repeated.  But I thought it was interesting that these ranges generally indicate that holding less cash and gold but more bonds and stocks has historically provided the best balance between performance and risk.
That would make plenty of sense with secular bull markets in stock and bonds since 1980.  If Japan is a taste of our future, such a portfolio may underperform versus naive diversification.
Absolutely, which is why I qualified my statement.  No telling what will happen over the next "X" number of years.  This is just a fun "rearview mirror" exercise. 

Another thing to consider is that my analysis looked at the entire 40-year period.  But if you're close to (or in) retirement, you don't have the luxury of 4 decades to smooth things out.  So you may want to shift yourself towards a portfolio that has lower StdDev and/or MaxDD readings, even though it wil likely come at the expense of CAGR.  Most retirees don't need any major surprises in their portfolio.
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Re: Backtesting for the Optimum HBPP Allocations

Post by frugal » Thu Feb 21, 2013 3:45 pm

Peak2Trough wrote:
frugal wrote:the most terrible thing investing is the monster DRAWDOWNS.

Can you please let me now the TOP 10 drawdowns of the HB PP ?
I agree that drawdowns are often overlooked, even by the HBPP crowd. 

While I can't tell you what the 10 highest drawdowns were over a given period, you can do do the following on the website:

Enter all the dates, allocations, and other options like you would for a normal query on the site.  Then next to "DD count threshold" enter a number like 10%.  Then when you calculate the returns, look for the "DD > 15% Count" in the results.

What that number is telling you is how many > 15% drawdowns there were over the period and allocation you selected.  For example, if I enter:

01-01-1972
01-01-2013
25 / 25 / 25 / 25
1 yr Tr
30 yr Tr
Rebalance annually
Reinvest dividends
DD Count Threshold 10%

It will tell me there were 8 peak to trough drawdowns of > 10% from 1972-2013. 

Change the DD threshold to 15% and there is only 1.
10-15% is already tough to feel.

but

we have to be prepared.

Thank you again!
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Re: Backtesting for the Optimum HBPP Allocations

Post by Thomas Hoog » Tue Feb 26, 2013 9:34 am

You could plan your financial life with it. The changeover is rather smooth.

Age     Invest period           Style         Cash LT Bonds   Gold     Stocks
20 - 50 > 30 years           aggressive   10       30           20       40
50 - 70 10 / 30 years       equable         10       40           20       30
70 - ~ less then 10 years   relax           15       35           15       35

Age       Invest period     CAGR   StD   MAXDD   Sharpe   SharpeMDD
20 - 50 > 30 years           19%   57%   31%       2%           4%
50 - 70 10 / 30 years       23%   37%   32%       0%           7%
70 - ~ less then 10 years 35%   32%   19%       2%           1%
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Re: Backtesting for the Optimum HBPP Allocations

Post by rocketdog » Tue Feb 26, 2013 9:59 am

Thomas Hoog wrote: Age       Invest period     CAGR   StD   MAXDD   Sharpe   SharpeMDD
20 - 50 > 30 years           19%   57%   31%       2%           4%
50 - 70 10 / 30 years       23%   37%   32%       0%           7%
70 - ~ less then 10 years 35%   32%   19%       2%           1%
That seems weird, that CAGR increases as you approach retirement.  Are you sure that's right?  I would want a high CAGR early in my life and more safety as I age. 

On a related note, I've decided that I'm going to put the same % of my investments into the PP as my current age.  Then each year when I rebalance, I'll add another 1% to one of my PP holdings, thus keeping my PP % equal to my age. 

That seems like a fair compromise to me, increasing my PP while simultaneously decreasing my VP as retirement approaches. 
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Re: Backtesting for the Optimum HBPP Allocations

Post by Thomas Hoog » Wed Feb 27, 2013 6:44 am

sorry, misinterpretation
I have used your "rangorder", so 19 % CAGR means it belongs to the top 19% on CAGR. The actual CAGR is stated somewhere in earlier posts.
The objective is  a decrease in CAGR en increase in safety (in terms of StD en MAXDD).

Your strategy on  ratio VP and PP seems to me a bit weird. VP is some strange invention to satisfy your emotional behaviour. If your behaviour is related to your age, it make sense. But I doubt that.
For me, I don't use a VP. I really have no idea what the future brings.
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Re: Backtesting for the Optimum HBPP Allocations

Post by rocketdog » Wed Feb 27, 2013 2:55 pm

Thomas Hoog wrote:Your strategy on  ratio VP and PP seems to me a bit weird. VP is some strange invention to satisfy your emotional behaviour. If your behaviour is related to your age, it make sense. But I doubt that.
For me, I don't use a VP. I really have no idea what the future brings.
Well, I consider the PP to be a somewhat conservative allocation portfolio.  I have a long investing time horizon, so I'm willing to take higher risks with some of my portfolio (the VP portion).  Since the longer the time horizon you have the more risk you can afford to take, it stands to reason that when I'm young my VP should be larger than my PP, and as I approach retirement I should shift funds from my VP to my PP. 

I'm not recommending that everyone do that, mind you.  It's just the approach I've come up with that fits my investing style.  If my PP repeatedly outperforms my VP over the next 5-10 years, I may reconsider this tactic and start shifting my VP funds into my PP at a faster rate. 
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Re: Backtesting for the Optimum HBPP Allocations

Post by Kriegsspiel » Wed Feb 27, 2013 6:27 pm

I was thinking about skewing the ratios for whatever reason, but it hurt my brain too much.  I just "increased" the size of my non-PP holdings. 
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Re: Backtesting for the Optimum HBPP Allocations

Post by Reub » Fri Mar 01, 2013 4:29 pm

"On a related note, I've decided that I'm going to put the same % of my investments into the PP as my current age.  Then each year when I rebalance, I'll add another 1% to one of my PP holdings, thus keeping my PP % equal to my age."

I like that. Age in PP. The rest split in a Boglehead portfolio. That makes a lot of sense.
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Re: Backtesting for the Optimum HBPP Allocations

Post by rocketdog » Sun Mar 03, 2013 4:39 pm

Reub wrote: "On a related note, I've decided that I'm going to put the same % of my investments into the PP as my current age.  Then each year when I rebalance, I'll add another 1% to one of my PP holdings, thus keeping my PP % equal to my age."

I like that. Age in PP. The rest split in a Boglehead portfolio. That makes a lot of sense.
That's pretty much my approach.  And I have absolutely no evidence that it will perform any better than a pure PP.  But it makes me feel like I'm hedging my bets, so I guess that counts for something (even if it's only illusory).
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Re: Backtesting for the Optimum HBPP Allocations

Post by BearBones » Sun Mar 03, 2013 5:48 pm

Reub wrote: I like that. Age in PP. The rest split in a Boglehead portfolio. That makes a lot of sense.
Resonates with me too, since I'm nearing 100 (and yes, the longevity's from eating lard). Mind if I ask what's in your BH portfolio?
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Re: Backtesting for the Optimum HBPP Allocations

Post by rocketdog » Mon Mar 04, 2013 11:36 am

BearBones wrote:
Reub wrote: I like that. Age in PP. The rest split in a Boglehead portfolio. That makes a lot of sense.
Resonates with me too, since I'm nearing 100 (and yes, the longevity's from eating lard). Mind if I ask what's in your BH portfolio?
Not sure if you're asking me or Reub (or maybe both)?  For me, I'm simply taking a little extra risk in my VP (or BH if you want to call it that).  I have some emerging markets bonds and stocks, some dividend and value stocks, some REITs, and some commodities.  All are in the form of ETFs.
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Re: Backtesting for the Optimum HBPP Allocations

Post by rocketdog » Wed Mar 06, 2013 12:45 pm

Reub wrote: "On a related note, I've decided that I'm going to put the same % of my investments into the PP as my current age.  Then each year when I rebalance, I'll add another 1% to one of my PP holdings, thus keeping my PP % equal to my age."

I like that. Age in PP. The rest split in a Boglehead portfolio. That makes a lot of sense.
I should add that I'm what many would consider "middle-aged", so it's very nearly an even 50/50 split for me between PP and VP.  If I were in my early 20s, I would probably put a somewhat larger percentage of my investments on the PP side (that is, larger than my age). 

For example, maybe a 25-year-old should consider putting more than 25% in their PP, in order to protect more of their savings.  They might even split it 50/50 until they hit 50 years old. at which point they could start keeping their PP equal to their age by shifting funds out of the VP each time they rebalance. 

These are just suggestions, so take them for what they're worth.
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Re: Backtesting for the Optimum HBPP Allocations

Post by Grinners » Fri Mar 08, 2013 10:03 pm

First Post :)

I can't help but feel that the whole idea behind the Permanent Portfolio (and gyroscopic investing in general) would suggest that one should do exactly the opposite of what has best performed over the past 40 years.

IE: If the best allocation was 10, 10, 40, 40 then one for the next 40 years would likely do better investing 40, 40, 10, 10.

I am, of course, only referring to CAGR here.
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Re: Backtesting for the Optimum HBPP Allocations

Post by Grinners » Fri Mar 08, 2013 11:18 pm

For what it's worth, this below is my iteration of choice:

Index  Cash Bonds  Gold  Shares  CAGR
122145 33 0   33     34 9.0078 7.8794 22.89 0.4189
122146 33 0   34     33 9.0133 7.9359 22.69 0.4166


:) 50% allocation of 'fiat' or 'fiat' derivatives was far too high for my liking.

And locking myself in to long term paper (when the average fiat currency has a lifespan of <40 years was of no interest to me). So bonds were dropped and split amongst the other classes.

I acknowledge that my portfolio will hurt during ordinary deflation as compared to HBPP, but feel it will excel during chaotic deflation (currency collapse).

25% 4 ways of course was

102401 25 25 25 25 9.5689 6.8106 18.4 0.567
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Re: Backtesting for the Optimum HBPP Allocations

Post by stone » Fri Mar 29, 2013 12:20 pm

rocketdog wrote:
Thomas Hoog wrote:Your strategy on  ratio VP and PP seems to me a bit weird. VP is some strange invention to satisfy your emotional behaviour. If your behaviour is related to your age, it make sense. But I doubt that.
For me, I don't use a VP. I really have no idea what the future brings.
Well, I consider the PP to be a somewhat conservative allocation portfolio.  I have a long investing time horizon, so I'm willing to take higher risks with some of my portfolio (the VP portion).  Since the longer the time horizon you have the more risk you can afford to take, it stands to reason that when I'm young my VP should be larger than my PP, and as I approach retirement I should shift funds from my VP to my PP. 

I'm not recommending that everyone do that, mind you.  It's just the approach I've come up with that fits my investing style.  If my PP repeatedly outperforms my VP over the next 5-10 years, I may reconsider this tactic and start shifting my VP funds into my PP at a faster rate.
Could you just cut down the cash part of the PP to give a slightly better return and somewhat bumpier ride?
A Japanese person in 1989 even with a long time horizon would be regretting having gone in stock heavy by now.
CraigR once posted something very compelling about a long time horizon actually being no help against risk. If you intend to sell stock in 50 years time and one day before you sell, the market falls by 30%, then that is just as bad as if you only bought the stock the day before. Perhaps if you never intend to sell and have an infinite time horizon as when managing a foundation's endowment fund or whatever, then return and not price volatility is all that matters.
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Re: Backtesting for the Optimum HBPP Allocations

Post by melveyr » Fri Mar 29, 2013 12:37 pm

Yeah time horizon and risk tolerance are two separate things that get conflated all the time by the investment industry. The reason they get conflated is because financial institutions benefit from you thinking that you have a higher risk tolerance. Since most people don't have a ton of money, which means it would be very painful for them to lose it, the firms convince people to take risks by constructing this idea of risk diminishing with time. Financial institutions specialize in offering the riskier products. They cannot compete with things like I-Bonds, so they only push things that are riskier.

You can check out Paul Samuelson or Zvi Bodie to see why risk does not diminish with time. With most things in finance you are less likely to get screwed if you pay more attention to the academics than the salesmen.
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Re: Backtesting for the Optimum HBPP Allocations

Post by KevinW » Fri Mar 29, 2013 1:52 pm

melveyr wrote: The reason they get conflated is because financial institutions benefit from you thinking that you have a higher risk tolerance.
Do you understand why the financial industry has an interest in selling higher-risk investment products? They clearly do since practically every firm and advisor, even consumer-friendly ones like Vanguard and TIAA-CREF, push everyone to very risky portfolios. I've never understood this since the ERs on bond funds are generally comparable or higher than those on stock funds.
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Re: Backtesting for the Optimum HBPP Allocations

Post by stone » Fri Mar 29, 2013 2:34 pm

KevinW wrote:
melveyr wrote: The reason they get conflated is because financial institutions benefit from you thinking that you have a higher risk tolerance.
Do you understand why the financial industry has an interest in selling higher-risk investment products? They clearly do since practically every firm and advisor, even consumer-friendly ones like Vanguard and TIAA-CREF, push everyone to very risky portfolios. I've never understood this since the ERs on bond funds are generally comparable or higher than those on stock funds.
I guessed that the push for retail sales of risky assets came from quite high up the financial food chain. Someone needs to be buying high and selling low in order to feed the gains of those who are buying low and selling high. I guess much of the buying high is done as stock buy backs by corporations but they also want retail customers who are likely to panic and sell low to create bargain buying opportunities. There is a big hunger for dumb money. The dumber the better I guess ???
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