Stocks, bonds, and gold have all returned 6.3% annualized over the last 10 years!

[Pet Hog]

Playing around on peaktotrough.com I discovered something interesting: the 10-year returns for stocks, LTTs, and gold are almost equal, at about 6.3% apiece (CAGR). That's starting on May 11, 2007, with dividends reinvested. Pretty amazing given the huge crash in stocks in 2008 and the huge rise and fall of gold around 2012. The portfolio below, beginning with 25% of each (and cash) and no rebalancing, returned 5.15% annualized.



The PP with 35/15 bands returned 6.15% (CAGR) over the same period. Inflation from March 2007 to March 2017 was 1.73% annualized, so the real PP return was 4.42%. Not bad, within the expected 4-6% range.

Over the last five years (from May 11, 2012), however, the 35/15 PP has returned just 3.44% (CAGR), with inflation at 1.22% annualized, so a real CAGR of 2.22%. A bit anemic. I'm expecting a bumper next five years to revert us to the mean!

[eufo]

I'm expecting a bumper next five years to revert us to the mean!

Here's hoping...

[Xan]

I've moved Mathjak's post over to the VP section.

Mathjak is now only allowed to post in the VP and Other sections. More drastic action might be taken if he continues to clobber all real conversations there.

Carry on!

[dualstow]

Interesting, the difference between rebalancing and not rebalancing over the years. It's one of the harder things for me to execute in a disciplined manner. I try to keep it to once a year max if no bands are hit, but I did stocks more gradually, over several moves.

On the other hand, I don't find it too hard to stick with the pp, and I too am expecting a return to the mean, a raise.

[barrett]

Thanks for posting that, Pet Hog. A few years ago there were some discussions on here about whether or not a "rebalancing bonus" actually existed. Over the last ten years it seems clear that is was good to sell down gold and then stocks after pretty huge run ups.

As for my PP expectations going forward, I'll be happy with pretty much anything that beats inflation for the next 5-10 years. Bond and stock prices have just been squeezed so high (in my opinion) in this ZIRP or near-ZIRP environment. If CAPE regresses to its historical mean and cash continues to have really low yields, it's just hard for me to see what the PP's driving engine is likely to be. Could be gold which would be a pleasant surprise.

But I also have no desire to switch to an unbalanced portfolio now. I'm trying to get me and my wife well positioned for optional retirement, and a few negative years right now would really put a damper on our plans.

And just so Dualstow doesn't sneak in and steal credit, Optional Retirement shall now be referred to as OR on Internet forums! That's FIOR for MMM fans.

[dualstow]

Death to abbreviations

[barrett]

Interesting, the difference between rebalancing and not rebalancing over the years. It's one of the harder things for me to execute in a disciplined manner.

I have the same issue. It's way easier for me to do so in the wife's account for some reason (maybe her not giving a rat's ass helps). I'm lowish on bonds and gold for now but not outside a band, and I still feel we are fairly well protected no matter what happens going forward.

[dualstow]

Always easier to manage someone else's portfolio. I wish we (my wife & I ) could manage each other's. Hmm, not going to happen.

[AnotherSwede]

I'm envious you have such a great portfolio.

[barrett]

Always easier to manage someone else's portfolio. I wish we (my wife & I ) could manage each other's. Hmm, not going to happen.

Agreed. Investing our retirement contributions has been on my to-do list for a couple of months. Just threw some funds in IAU, TLT and a TSM fund for my wife (as she is busy in the other room working on something else). So all set on her stuff for the next year. Set it and forget it.

But with my contributions, well, maybe I'll just let them sit in cash until we have another pullback. Ridiculous. Maybe in a few years I can get our daughter to manage my investments!

[dualstow]

I'm envious you have such a great portfolio.

You mean the OP? I think it was just a simulation, wasn't it?
Or you mean availability of American / British treasuries?

[AnotherSwede]

Or you mean availability of American / British treasuries?

Yes, primarily treasuries (even 3+ year duration mutual funds are hard to find in Sweden),
you can't have the cash as cash, in the bank is some kind of risk above deposit guarantee and mutual funds are like 0.4% fee for a negative return (or have corporate bonds for positive return and low fee),
also gold seems less hard to hold physically.

[AnotherSwede]

You mean the OP? I think it was just a simulation, wasn't it?
Or you mean availability of American / British treasuries?

And I meant the PP in general.

[sophie]

Unfortunately, I was kind of expecting the PP to have a bad run in the past few years, because of the outperformance in 2009-2011. I also hope it will have some banner years coming up, but I don't really expect it to happen.

I don't understand some of the recent comments (not in this thread) about rebalancing not having any benefits. It TOTALLY has benefits, and it's the basis for asset allocation theory. It's responsible for something like 1-2% of the PP's return, and what's more, the PP depends on it more than is the case for most portfolios. Implication: the PP is more than just the sum (or average) of its parts. There were quite a number of threads discussing this a few years back, including one containing a link to a very well-done article about the mathematics of rebalancing. If I have time one of these days I'll try to dig some of these up.

[mathjak107]

the answer as to why rebalancing can hurt you is over typical accumulation time frames which span decades not just years , equities have always been the best performers . so with markets typically up 2/3's of the time and down 1/3 you are taking money out of what typically sees the most gains over the long haul and putting it in things that see less gains over long periods of time and may just be the best performer over much shorter years . .

without rebalancing you will be on a constant rising glide path that may become much to volatile or long term sensitive and be a poor choice for counting on short term money from it comfortably .

as michael kitce's found , in order to do better you really have to be a good market timer . it is more for keeping your plan in a "mental allocation " at a point you can deal with rather than a good financial idea based on performance .

Executive Summary
The conventional view of portfolio rebalancing is that it is a strategy to enhance long-term returns by periodically selling the investments that are up (and overweighted) to buy those that are down (and underweighted), in the process of realigning the portfolio to its original target allocation.
Yet the reality is that because most investments go up far more often than they go down, systematic rebalancing is actually more likely to just consistently liquidate the best-performing investments to buy ones with lower returns instead – especially when rebalancing across investments that have very significant return differences in the first place (e.g., rebalancing from stocks into bonds).
As a result, rebalancing may be helpful as a risk management strategy – otherwise higher-returning stocks would compound to the point that they are significantly overweighted relative to lower-returning bonds – but it’s only when rebalancing amongst investments with similar returns in the first place that rebalancing provides a return-enhancement potential.
Ultimately, the fact that rebalancing may actually reduce long-term returns isn’t a reason to avoid it (even if returns are lower, risk-adjusted returns may be improved if the risk is reduced by even more), and sometimes returns really can be enhanced (when rebalancing across similar-return investments, such as amongst sub-categories of equities). Nonetheless, it’s crucial to recognize the role that rebalancing really does – and does not – play in a long-term portfolio!


https://www.kitces.com/blog/how-rebalan ... nt-anyway/

[dualstow]

Wow, that all does make a Swedish pp sound quite difficult & different.

[barrett]

Unfortunately, I was kind of expecting the PP to have a bad run in the past few years, because of the outperformance in 2009-2011. I also hope it will have some banner years coming up, but I don't really expect it to happen.

I don't understand some of the recent comments (not in this thread) about rebalancing not having any benefits. It TOTALLY has benefits, and it's the basis for asset allocation theory. It's responsible for something like 1-2% of the PP's return, and what's more, the PP depends on it more than is the case for most portfolios. Implication: the PP is more than just the sum (or average) of its parts. There were quite a number of threads discussing this a few years back, including one containing a link to a very well-done article about the mathematics of rebalancing. If I have time one of these days I'll try to dig some of these up.

I remember you mentioning mean reversion when the PP was struggling back in 2015, Sophie. I'd love to see an update of Ryan Melvey's "line of best fit" chart that showed the PP hovering around a 4.5% real return. I think his data only went through 2011.

You very well may be referring to a comment I made yesterday when I mentioned earlier conversations (say, in 2014) about the rebalancing bonus. I know that rebalancing lowers risk but the expected bump in returns can take a long time to show up. For example, since I started a PP at the beginning of 2014, a portfolio that had been rebalanced annually has a 4.78% CAGR. With no rebalancing it's 4.77% CAGR. Obviously over that short time frame, stocks have done well, bonds have bounced around but been generally positive, and gold has just meandered. So the bonus really is advantageous when an asset skyrockets and then comes back down. The last really dramatic asset moves were stocks and gold back in 2013, and the presumed rebalancing (selling stocks to buy gold) would not yet have shown up in better returns. In fact, it would have lowered returns as stocks have continued to shine.

Not advocating for anything here. Just talking.