Why the PP is better in accumulation than you think

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Tyler
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Why the PP is better in accumulation than you think

Post by Tyler » Mon Oct 19, 2015 12:05 pm

I've written before about how the Permanent Portfolio is a really great retirement option, but I always felt like the accumulation side of the equation needed more attention.  The common argument that the PP "doesn't earn enough money fast enough" in accumulation always seemed intuitively shortsighted to me, but I couldn't quantify my objection so I let it go.  Well, I've done a bit of work and have more insight now.  Check out the example here:

Your Ideal Route to Financial Independence May Be Off the Beaten Path

Short story -- yes the PP earns less on average than other stock-heavy portfolios.  But thanks to the low volatility, it actually doesn't need to match their returns to beat them to financial independence!

And note that the PP is actually not special in that regard.  Typical investing advice is based on quite a myopic view of asset allocation, and when you think beyond traditional stocks and bonds things get really interesting. 
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Re: Why the PP is better in accumulation than you think

Post by mathjak107 » Mon Oct 19, 2015 12:20 pm

then why are the balances in the pp ao  much less over most time frames  ? 

compare balances with funds like wellington , fidelity balanced , even wellesley income and i bet the balances are quite larger so it isn't just about the pp does not fall asw much so ot does need to come back as much .

sure we can cherry pick years the pp did better but i would venture to say  more often then not the pp was quite a bit lower balance wise .exclude those 1970 years when you couldn't own gold  and the pp didn't exist in concept yet and returns are different .
Last edited by mathjak107 on Mon Oct 19, 2015 12:28 pm, edited 1 time in total.
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Re: Why the PP is better in accumulation than you think

Post by buddtholomew » Mon Oct 19, 2015 12:25 pm

Young accumulators are the most vulnerable as they are likely to capitulate and sell at a loss. This early setback could prevent them from investing an entire lifetime. Better in a lower volatility portfolio than a higher one to discover your true risk tolerance. Nice post Tyler.
"The first principle is that you must not fool yourself and you are the easiest person to fool" --Feynman.
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Re: Why the PP is better in accumulation than you think

Post by Tyler » Mon Oct 19, 2015 12:27 pm

mathjak107 wrote: then why are the balances in the pp ao  much less over most time frames  ? 

compare balances with funds like wellington , fidelity balanced , even wellesley income and i bet the balances are quite larger so it isn't just about the pp does not fall asw much so ot does need to come back as much .

sure we can cherry pick years the pp did better but i would venture to say  more often then not the pp was quite a bit lower balance wise
Read the link!  The math behind financial independence is not just about who has the highest balance.
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Re: Why the PP is better in accumulation than you think

Post by mathjak107 » Mon Oct 19, 2015 12:29 pm

, but when discussing balances and how something does not have to go up as much because it didn't fall as much if you want to compare you need to look at balances .  the comparison in that link  TO THE PP GOING BACK TO THE 1970'S IS NONSENSE .

no one knows what gold would have done .  why not peg the gold to 35 bucks and really let the pp shine in those years we couldn't do it here as well as the concept of it wasn't something introduced to the public  .

we all know that allocations are important as far as how the 4% rule holds up but anything in the past over 40% equity's  over the worst time frames held up fine . what we don't know is how 25% equity's in the pp would have worked since there was no pp to measure over the worst time frames the 4% safe withdrawal rate is based on which were decades before the pp's existence . .

as far as volatility , that may play a part mentally but mathematically it isn't the  amount of the drops that effect the 4% safe withdrawal rate . it is the length of recovery time that is the deciding factor . 2008 saw 40% drops , but recovery was so fast that a retiree in 2008 is no different balance wise then any other retiree in history during average times was the same amount of years in .


even moderate drops if they extend out in time can be fatal to the 4% rule .

when talking about the pp you cannot use the term safe withdrawal rates  only withdrawal rates .

in order to be called safe wiithdrawal rates the portfolio had to specifically stand up to 1907, 1929 , 1937 ,  1965/66 . all of which are the absolute worst case scenario's far exceeding the 1970's .

if we rule those out a 60/40 mix would have had a safe withdrawal rate of 6.50% and still have plenty left at the end .

it also isn't about just the income stream not being broken . while the income stream not being broken is one aspect , the balance left at the end of the 30 years is the other and the higher the allocation to stock 90% of the time the bigger balance .

in fact a 60/40 mix at 4% has left more than you started with 90% of the time left over  and 2x or more left almost 70% of the time .


that is a huge difference from just the income squeaking through the 30 years .

the article raises all standard retirement issues  but mixed them up with terms like safe withdrawal rate and comparisons to the pp in there which can not be compared against the standard the term safe withdrawal rates are based on .


what i don't get is why the constant comparison to other portfolio's trying to spot light the pp by cherry picking data and time frames ?

why not accept it for what it is and does with out trying to feel better about the fact you are doing it by always trying to compare it in some way to more conventional models .

IT IS WHAT IT IS AND IT IS A NICE LOW VOLATILITY PORTFOLIO WITH INSURANCE AGAINST THE COLLAPSE OF THE DOLLAR . JUST LEAVE IT AT THAT INSTEAD OF THIS CONSTANT MENTAL MASTURBATION .

THE FACT IS EVEN 1% DIFFERENCE WOULD MEAN A BALANCE 30 YEARS LATER THAT IS  30%  LESS IN BALANCE OR EVEN OR MORE ,SO COMPARISON IS JUST SILLY AGAINST ANYTHING ELSE .
Last edited by mathjak107 on Mon Oct 19, 2015 1:12 pm, edited 1 time in total.
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Re: Why the PP is better in accumulation than you think

Post by Tyler » Mon Oct 19, 2015 1:11 pm

mathjak107 wrote: , but when discussing balances and how something does not have to go up as much because it didn't fall as much if you want to compare you need to look at balances .
This is incorrect.  FI is dictated be the relation between expenses and balances, not by absolute values. Tons of research backs that up.

Image

we all know that allocations are important as far as how the 4% rule holds up but anything in the past over 40% equity's  over the worst time frames held up fine . what we don't know is how 25% equity's in the pp would have worked since there was no pp to measure over the worst time frames the 4% safe withdrawal rate is based on which were decades before the pp's existence . .
We've been through this 100 times already, but let me add one new data point. According to Wade Pfau, the single worst year to retire with a traditional 60-40 portfolio since 1926 was in 1966.  However, 1973 was REALLY close, with a SWR only 0.2% higher.  Retiring in 1973 was on par with retiring in 1929! So yes there's a difference, but it's smaller than you might think.  And importantly, other allocations will have very different high and low years, both in timing and magnitude.  When you expand the analysis beyond stocks and bonds, you get interesting results. 

Image

as far as volatility , that may play a part mentally but mathematically it isn't the  amount of the drops that effect the 4% safe withdrawal rate . it is the length of recovery time that is the deciding factor . 2008 saw 40% drops , but recovery was so fast that a retiree in 2008 is no different balance wise then any other retiree in history during average times was the same amount of years in .
This is mathematically incorrect.  Because retirement withdrawals do not care how your portfolio is doing, a deep drop can severely lower your SWR even if the fund recovers the next year. The math is quite clear in that regard.  A 4% withdrawal becomes an 8% withdrawal when your portfolio falls 50%.  Your portfolio less the withdrawal takes much longer to recover than the pure returns imply.  Volatility matters. 
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Re: Why the PP is better in accumulation than you think

Post by mathjak107 » Mon Oct 19, 2015 1:15 pm

i suggest you read kitces study on the fact  that ,  nooooooo ,  a sizable drop does not matter  as far as sustainability , it is only about recovery time. 2008 was a non event .

as kitces found :

Ultimately, the key point here is simply to recognize that the 2000 retiree is merely ‘in line’ with the 1929 retiree, and doing better than the rest. And the 2008 retiree – even having started with the global financial crisis out of the gate – is already doing far better than any of these historical scenarios! In other words, while the tech crash and especially the global financial crisis were scary, they still haven’t been the kind of scenarios that spell outright doom for the 4% rule.

The viability of a 2008 retiree following the 4% rule is especially notable, and reflects a key (but often ignored or misunderstood) tenet of managing sequence-of-return risk in retirement: it’s actually not just about having a severe market crash in the early years of retirement, but a crash that doesn’t recover quickly. Or more generally, the reality of sequence-of-return risk is that it’s more about having a mediocre decade’s worth of returns, not just a sharp single-year decline that goes through a similarly sharp recovery. And since the markets in the aftermath of 2008 have not stayed down and in fact have been more like a V-shaped recovery (as the S&P 500 has rocketed upwards to now be more than triple its value from the March 2009 trough), it turns out the 2008 financial crisis was an example of something that is not a dangerous sequence-of-returns event after all!
"

https://www.kitces.com/blog/how-has-the ... al-crisis/
Last edited by mathjak107 on Mon Oct 19, 2015 1:19 pm, edited 1 time in total.
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Re: Why the PP is better in accumulation than you think

Post by Tyler » Mon Oct 19, 2015 1:21 pm

I get it.  I just look at many more portfolio options than Kitces does.
mathjak107 wrote:
what i don't get is why the constant comparison to other portfolio's trying to spot light the pp by cherry picking data and time frames ?

why not accept it for what it is and does with out trying to feel better about the fact you are doing it by always trying to compare it in some way to more conventional models .

IT IS WHAT IT IS AND IT IS A NICE LOW VOLATILITY PORTFOLIO WITH INSURANCE AGAINST THE COLLAPSE OF THE DOLLAR . JUST LEAVE IT AT THAT INSTEAD OF THIS CONSTANT MENTAL MASTURBATION .
That's a pretty strong comment coming from a guy dedicated to contrasting his own portfolio to the PP in a PP forum! ;)

I don't cherry pick data.  My methods are all on the table and you're welcome to agree with them or not.  And not everyone finds challenging the conventional investing wisdom such a waste of time.    Rather than spending all day debating details with those who clearly don't care for the analysis, I'll just let the article and data speak for itself and let each person decide whether they find it helpful.
Last edited by Tyler on Mon Oct 19, 2015 1:24 pm, edited 1 time in total.
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Re: Why the PP is better in accumulation than you think

Post by mathjak107 » Mon Oct 19, 2015 1:28 pm

the pp is fine , i think it is out dated but it is still a low volatile investment ,. the big question is how it will do .

1973 is only considered moderately bad . it is not in the realm of  1965/1966 .    1973 was one of about 4 time frames a new retiree was in the hole year 1 . but it still did better than the 4 standard worst case .

i think the link is fine to play with but i think the pp comparison really does not fit in the context of it , but that is my opinion .
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Re: Why the PP is better in accumulation than you think

Post by MachineGhost » Mon Oct 19, 2015 1:35 pm

Tyler wrote: And note that the PP is actually not special in that regard.  Typical investing advice is based on quite a myopic view of asset allocation, and when you think beyond traditional stocks and bonds things get really interesting.
Thank gawd someone is finally getting it and providing the tools and analysis to do it.  You'd likely only see this level of financial analysis in multi-thousand dollar retirement planning software for crony financial advisors, if even at that.
Last edited by MachineGhost on Mon Oct 19, 2015 1:44 pm, edited 1 time in total.
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Re: Why the PP is better in accumulation than you think

Post by mathjak107 » Mon Oct 19, 2015 1:48 pm

did you include dividends ?  ha ha ha ha 
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Re: Why the PP is better in accumulation than you think

Post by mathjak107 » Mon Oct 19, 2015 1:49 pm

i find this article quite interesting . it talks about what made 1965/1966 the bench mark for the worst retirement out come .


http://www.gocurrycracker.com/the-worst ... ment-ever/
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