Author Topic: Portfolio Charts - The Golden Butterfly  (Read 275088 times)

Kevin K.

  • 5 O'Clock Shadow
  • *
  • Posts: 18
Re: Portfolio Charts - The Golden Butterfly
« Reply #250 on: August 02, 2016, 05:17:00 PM »
The difference is that the article that talltexan references is about an academic study based on evidence and data, whereas the article you referenced is an argument based on words, with very few actually numbers relating specifically to golds' commonly stated uses.

Actually the article I referenced is based on a great deal more diverse and detailed evidence and data than the very short and misleading study talltexan cited, which as I said doesn't account for the multitude of roles gold has historically played but instead ONLY looks at gold as a supposed "hedge" against economic crises.

Here are a few key quotes from the article:

"The primary argument for the ownership of gold is that over long time frames it tracks inflation closely and protects against the erosion of purchasing power fiat money always produces.  In terms of portfolio design, it also offers an asset uncorrelated with equity and fixed investments.  From 1802-1997, gold turned in a virtually identical number to inflation.  Its returns, like all asset classes, can veer upwards or downwards for long periods of time.  From 1972-1982 gold returned an  inflation adjusted 11.4% per year, more than 10% above all other asset classes.  From 1982-2000 gold varied up and down between about $250 and $400 an ounce.   From 2000-2015, gold gained about 430%, far outdistancing all other asset classes even though the official inflation rate for that period was only 2.4% annually and 30.3% for the total period."

"It is essential to note that very long term return numbers for gold are misleading and very likely significantly understate its performance in US dollars.  Priced in US dollars, US gold price was fixed by the US government from 1900-1971 and thus gave no return.  From 1972 through 2011 gold increased about 50 times in value (5000%), about the same as the S&P 500 equity index with dividends invested for that 40 year period."

"Ibbotson conducted a study of the benefits of precious metals diversification covering the 1971-2004 period (Idzorek, CFA, Ibbotson Associates, 2005).  Of particular note is their finding that precious metals tend to do best when traditional asset classes like equities and fixed income have negative returns.  Ibbotson recommends the following allocations to gold: 7.1% for conservative portfolios, 12.5% for moderate portfolios, and 15.7% for aggressive portfolios, as defined by equity/fixed allocations.   A World Gold Council study published in Forbes in August 2007 found a -.03 correlation, very low, for gold with other asset classes including equities, fixed, commodities, and REITís for 2000-2010 and "no stable positive correlation between gold and oil prices.  Dimson et al (Credit Suisse Global Investment Returns Yearbook, 2012) anlyzed gold returns from 1900-2011 across 19 countries and found that  gold was the only asset class with a positive correlation to inflation, 0.20%, while all others had negative correlations including -.52 for equities and -.74 for bonds.  And, for much of that period gold's price was fixed by government in the US and other countries". 

BattlaP

  • Stubble
  • **
  • Posts: 173
Re: Portfolio Charts - The Golden Butterfly
« Reply #251 on: August 02, 2016, 06:27:43 PM »
Where you see 'diverse and detailed' I see deliberately non-specific and cherrypicking. If you find the article convincing, then enjoy. If you would like me to pick at the quotes you selected I definitely can, just at a glance there is several glaring problems. I'm not going to bother if you've already made up your mind. Not trying to be a jerk, just saving my breath for where it will actually count.

k9

  • Stubble
  • **
  • Posts: 241
  • Age: 39
Re: Portfolio Charts - The Golden Butterfly
« Reply #252 on: August 09, 2016, 06:56:32 AM »
BattlaP, I can find any evidence either in the "gold has never been an edge" either. It mentions an article yet fails to give actual numbers (and the actual article, as far as I can tell, cannot be read for free). I'm not really convinced gold didn't outperform german bonds in the 1920s, for instance, or French francs in the period from 1914 to 1980 (sic). Or Russian bonds/stocks after communism came in until a few years after its fall. Or any asset for jews in 1930's Germany. Or bonds in 2000's Argentina. Or <insert list of dozens of sovereing defaults in the last 150 years around the world>.

Sure, in the US, gold, when taken in isolation, was not a wonderful asset. I guess not losing a war ever (heck, you didn't even have to *fight* a war on your own soil, ever) helped a bit. So, I have to somewhat agree with the article, I guess:

if you have nothing to hedge against, gold is a bad hedge.

The thing is, gold isn't only a hedge. Its absence of correlation with stocks makes it a good diversifier, unless you disagree with modern portfolio theory (and since you tend to cite academic papers and dismis non-academic ones, I'm pretty sure that's not your position).

tommie

  • 5 O'Clock Shadow
  • *
  • Posts: 10
Re: Portfolio Charts - The Golden Butterfly
« Reply #253 on: August 09, 2016, 07:42:33 PM »
Long thread, took an hour or two to read.

To chime in i would never invest in something without using a moving average. I find it slighly insane to suggest one would invest in a 'buy and hold' forever like if asset A, B, C always would have negative correlation just because it used to 20 years ago. I even find data that is too old to be highly suspicious and portfolios that proove themselves by using age-old data to be poor examples. The most obvious problem is that if one backtest enough one will of course find a strategy that always outperforms all others in some way or the other.

Like this:
https://goo.gl/HbVEug

Image from the above:


It's a case where the backtest is basically created to produce a favorable outcome for already known data. It would be easy to improve it further but the more optimizations the less it would matter since the optimizations would basically try to beat history, something that isn't hard to do at all and becomes less and less relevant (in my opinion) the farther way back in history we go.

But i do believe in trends. Trends are everywhere and is a constant in every field imaginable. It's something that has occured for much, much ... longer then there has been a stock market.

Using a moving average (and sticking with it!) is often (in my liftetime at least) a better hedge against bad times then any sort of asset class in itself. However i do believe past data has some (note: some) validity and it's slighly funny how gold actually did go quite well during the recent, and on-going(?), market crisis due to what is commonly called 'Brexit'. That's not to say it always will -- who knows. That's where a MA comes in; if asset is under longer trend 'X' (or we use a golden cross etc) invest in something "safer". It's simple and at least we will have some sort of indicator and not blindly investing in something that was great to invest in between the year 1971-2016 and that someone on the internet wrote something compelling about.

Another thing that seem to be overlooked in this thread is that some of you seem to ignore timing in general. The aggressive 100% stock alternative might be great in the long run but it would hardly be great for someone investing 100% of their funds in say the year 2000 or 2007 and wanting (for some reason) to exit a couple of years later. But if you always can time the market, good for you.

steveo

  • Handlebar Stache
  • *****
  • Posts: 1944
Re: Portfolio Charts - The Golden Butterfly
« Reply #254 on: August 10, 2016, 02:09:45 AM »
tommie - have you ever traded with a moving average. It's not so simple. You can get washed around all over the place. What if stocks go up and down and hang around a certain price all the time you are selling and buying at a loss and not getting dividends. On top of that you are taking a tax hit.

What if you then start tweaking things so that you only buy if it goes up a certain amount and then you end up buying late and then it corrects or being too scared to buy because you think you've missed the uptick but it keeps going.

I've traded (I use foreign currencies) and I will continue to do so but not with my FI assets. In my opinion it's basically gambling. I checked my big trade that I made about a year ago today. It's down about 2%. When I put my position in I was sure I was right. I wasn't. I'll hang on for longer because I've learnt not to bet the house and for me it's easier to hold something rather than sell at a loss but those mechanical trading rules probably would have had me at a real loss right now.

I should add that trading has taught me that mechanical trading and modern trading theory (always use a stop loss etc) doesn't work very well at all.

At the same time I'm confident that if I put my money into a reasonable asset allocation and hold it for the long term I'll come out of it more than okay.
« Last Edit: August 10, 2016, 02:15:21 AM by steveo »

tommie

  • 5 O'Clock Shadow
  • *
  • Posts: 10
Re: Portfolio Charts - The Golden Butterfly
« Reply #255 on: August 10, 2016, 04:33:52 AM »
tommie - have you ever traded with a moving average. It's not so simple. You can get washed around all over the place. What if stocks go up and down and hang around a certain price all the time you are selling and buying at a loss and not getting dividends. On top of that you are taking a tax hit.

What if you then start tweaking things so that you only buy if it goes up a certain amount and then you end up buying late and then it corrects or being too scared to buy because you think you've missed the uptick but it keeps going.

I've traded (I use foreign currencies) and I will continue to do so but not with my FI assets. In my opinion it's basically gambling. I checked my big trade that I made about a year ago today. It's down about 2%. When I put my position in I was sure I was right. I wasn't. I'll hang on for longer because I've learnt not to bet the house and for me it's easier to hold something rather than sell at a loss but those mechanical trading rules probably would have had me at a real loss right now.

I should add that trading has taught me that mechanical trading and modern trading theory (always use a stop loss etc) doesn't work very well at all.

At the same time I'm confident that if I put my money into a reasonable asset allocation and hold it for the long term I'll come out of it more than okay.

Yes.

Yes, it's simple. The hard part has to do with the human using it.
One will get 'washed around' using stocks. Stocks, as you say, go up and down so no matter what one gets 'washed around'. If one think being 'washed around' is a problem one shouldn't invest in stocks (or anything) to begin with. The trend is our friend, the noise our enemy.

The beauty of the trend is the same sort of beauty found with the GB style portfolio. The smoothing out of the curve. It's the same basic fundamentals that the old school 60/40 portfolio is based on and tries to achieve. It's all about smoothing since a smoother curve is a great hedge against irrational human behaviour and emotion. We don't just fight with the index (the averages), we also fight with ourselves and our emotions. It's a war on two fronts. I don't like to fight wars in my spare time so any sort of smoothing that can be done and turn the war from a two front one to a single front one is great in my book.

I don't understand what you mean with taxes. This would be true if trading for short term gains, not if trading on broader index funds with say 1 check per month against longer trends in some different asset classes. I'm from Sweden, we got something called 'ISK' with a fixed 0.2% tax per year if only trading funds. The fee part mostly becomes a problem if trading high frequence with things that comes with fees such as international ETF's. Basically a non-problem with things such as index funds. Please don't make this a thread about taxes, yes they're important but ... it's a huge topic. :-)

That you're down only 2% for something you refer to as pure gambling really doesn't seem too bad.
It's ok to hang on if you can base that 'hanging on' on something tangible.

Never selling from a loss in say 2008 would cause you to loose 30-40% instead of around 10% for a longer MA like SMA200. But yes -- you would sell based on a exit strategy. It's fine if you don't believe in trends. You seem to be one of the few to argue against having an exit strategy based on something tangible. If that works for you -- great.

You also seem to read my post as if one should apply a trending strategy on short term gains and high frequence trading. This thread is about a GB style portfolio and not about high frequency trading. The example i provided is definately more high frequency due to the 2 month MA, but it was just an example of optimizing for historical data not as a template for using trends (i would never use a short 2 month MA).

steveo

  • Handlebar Stache
  • *****
  • Posts: 1944
Re: Portfolio Charts - The Golden Butterfly
« Reply #256 on: August 10, 2016, 04:58:01 AM »
Yes, it's simple. The hard part has to do with the human using it.

Are you prepared to risk your financial independence on this ?

One will get 'washed around' using stocks. Stocks, as you say, go up and down so no matter what one gets 'washed around'. If one think being 'washed around' is a problem one shouldn't invest in stocks (or anything) to begin with. The trend is our friend, the noise our enemy.

Personally I disagree with this premise. How do you handle being washed around ? Why have that problem ? Your point about the trend being your friend and the noise the enemy is true but how do you know this at that point in time. Are you prepared to risk your financial independence on squiggly lines on a chart ?

The beauty of the trend is the same sort of beauty found with the GB style portfolio. The smoothing out of the curve. It's the same basic fundamentals that the old school 60/40 portfolio is based on and tries to achieve. It's all about smoothing since a smoother curve is a great hedge against irrational human behaviour and emotion. We don't just fight with the index (the averages), we also fight with ourselves and our emotions. It's a war on two fronts. I don't like to fight wars in my spare time so any sort of smoothing that can be done and turn the war from a two front one to a single front one is great in my book.

I think you are stating that trend following is easier. I don't believe this. I think it's easier to buy and just sit there.

Please don't make this a thread about taxes, yes they're important but ... it's a huge topic. :-)

I think it's important to recognise this and I'll give an example why. I made something like $25k on one big trade years ago. I had an account of about $10K. Sounds great right ? I was a genius. I traded that thing with balls of steel and a great feel. I saw the trend, I waited for a pull back and I went in and in and in and held that until close to the end. I also got taxed half of that because I pay capital gains taxes on profits. The next year I lost something like $10k. Was I up $15k ? No - I was up $5k.

That you're down only 2% for something you refer to as pure gambling really doesn't seem too bad.

It's okay but my point is that I'm not betting my financial independence assets on some trend following theory. There are thousands of these theories out there. It's easier to see them with hindsight than it is to trade them consistently.

You seem to be one of the few to argue against having an exit strategy based on something tangible. If that works for you -- great.

I tell you how I learned that. I read all the books on trading. They all said have a stop loss. I know a guy who was a big trader. We are talking forex positions of $20 million of his own money. That is leveraged but every cent movement on that position is about $200k. He said if you have a stop loss you just get washed out and that you need to have balls to hold a position for a long time if you want to make money.

What professionals do and what you read are two different things.

You also seem to read my post as if one should apply a trending strategy on short term gains and high frequence trading. This thread is about a GB style portfolio and not about high frequency trading. The example i provided is definately more high frequency due to the 2 month MA, but it was just an example of optimizing for historical data not as a template for using trends (i would never use a short 2 month MA).

It's the same thing. It's just a mechanical set of trading rules based on squiggly lines on a chart.

I've highlighted the key point here though. It's an optimised solution that worked great in the past.

I'll tell another story. When I was trading I said okay I know how to use MS Access and I know trading. I'll come up with a system. It looked good but it didn't work. The same guy I'm talking about was bankrolled to do the same thing. They had a trader, some computer programmer and probably a tonne of money. It didn't work.

The guy I'm talking about is a multi-millionaire and he got there via trading. He has also done I think pretty well on his own account. At the same time he knows he loses money all the time and it's basically a gamble. I think most of his money was made trading other peoples money and getting paid a fortune to do it and then investing in a housing boom in which he simply bought low and held on for years.

I know another guy from school. He decided to get into trading. He got a job in it. He told one of my friends I've got a system. You bankroll me and we'll split the profits. He had all the data to state this is going to work. He lost all the money.

Another one to wrap up the longest post ever. The same guy I know who has a lot of money did the same thing. He took money off people and said I'm starting my own hedge fund. It failed. He was wealthy enough and had enough integrity to pay everyone back the lost money but the point is professional successful traders still lose money hand over foot.

Do you really think your edge is following a simple trend following system ? My edge is really simple - I realise that I can't predict the future and I use low cost index funds in a real simple asset allocation because I know that although I won't win the game I also won't lose it.
« Last Edit: August 10, 2016, 05:12:33 AM by steveo »

mathjak107

  • Pencil Stache
  • ****
  • Posts: 558
Re: Portfolio Charts - The Golden Butterfly
« Reply #257 on: August 10, 2016, 06:22:22 AM »
anyone remember fabian and his moving average system . you know the drill , you give up the bottom 10% and top 10% and you keep everything in the middle .

well if you were around in the fabian days you know that worked well -until it didn't .

just a little tweaking was all it needed they said , so putting their own money on the line and letting us track the new tweaked moving average system we all got to see it fail again and the dollars evaporate . the market volatility picked up and the swings greater then ever and the system just reacted to slowly to get in or out .

eventually the fabian system went away as it only worked as planned until your money was invested and on the line .

tommie

  • 5 O'Clock Shadow
  • *
  • Posts: 10
Re: Portfolio Charts - The Golden Butterfly
« Reply #258 on: August 10, 2016, 06:25:09 AM »
Do you really think your edge is following a simple trend following system ? My edge is really simple - I realise that I can't predict the future and I use low cost index funds in a real simple asset allocation because I know that although I won't win the game I also won't lose it.

Yes and no.
I think trends + asset allocation is a sound strategy, not an edge that will "win".
I don't believe in winning, i believe in not losing.

Funny enough we seem to have the same idea on investing and share the "I won't win the game, but i also won't lose it".
The only difference being that i use long trends for my individual assets (that is in low cost index funds).

The basic point i wanted to make and to contribute with in this thread was that a basic trend is a very time proven strategy but that over optimization is a very time proven fallacy of trading, the example i gave in my first post in this thread is in line with your stories and in line with what i call over optimization and "unsimplification". Your examples of people having the "greatest" algorithms is the same sort of thing (thank you for the examples).

Why i like trends is because it's something that occur everywhere (not just in the stock market) and isn't something made up by the stock market or guys pushing the ultimate "Golden Butterfly" in books or on blogs. Long trends naturally occur everywhere and is a long proven fact or as near a fact that we possibly can hope something to be. It's as true as the earth not being flat (but of course some will argue that this could only be in our imagination and off we go again with a 1000 page thread). If someone believes the earth is flat and trends do not occur, great for them.

mathjak107

  • Pencil Stache
  • ****
  • Posts: 558
Re: Portfolio Charts - The Golden Butterfly
« Reply #259 on: August 10, 2016, 06:39:17 AM »
personally if it is very  long term money ,  i have never ever seen the need to mitigate short term temporary drops and permanently give up long term gains.   that goes for using bonds , trading systems and hedging .

all protect against short term temporary events . but odds are not just leaving that money alone in equity's will permanently hurt long term performance .

all this stuff comes in to play when short term volatility is a problem because the money really is not  all long term money .  i can see mitigating short term drops when the money does not have a few decades left before use  but even at 65 we still have money we will not eat with for 30 years hopefully .

personally i think it is easier and more reliable to just match the type of  investments to the time frame you want to spend the money . you will likely have a better outcome too  by not mitigating drops that have no meaning on the longer term money .

smetimes you have to take a step back , get back to basics and just question the logic behind doing certain things .

yeah i get it , not every one has a pucker factor for the swings on the long term money  and that is fine . but you do have quite a few investors that do have this pucker factor but do not think of the logic behind what they do .
« Last Edit: August 10, 2016, 06:49:55 AM by mathjak107 »

steveo

  • Handlebar Stache
  • *****
  • Posts: 1944
Re: Portfolio Charts - The Golden Butterfly
« Reply #260 on: August 10, 2016, 07:06:02 AM »
If someone believes the earth is flat and trends do not occur, great for them.

I don't think you are getting it. Yes trends occur. That is why investing in the stock market is a great long term investment. It's the asset class that should increase over time better than most other asset classes.

The point is that you believe that you can jump in and out and time the trend to increase your returns. I'm stating that is really really hard. Very few people do this consistently especially over your investing career. You have to put this into perspective - you believe that over the course of your say 10 year saving timeframe and then say 30 year retirement that you can maximise your returns via a simple trend following system. In my experience you'd be better off just doing this off gut feel. Say the market looks to high and you are 80/20 stocks/bonds and then you revert back to 50/50 stocks/bonds.

I watched an interview with Jack Bogle recently and he said basically exactly the same thing but he was hesitant about even suggesting reverting back to the 50/50 scenario mainly because it's so hard to pick the right time.

steveo

  • Handlebar Stache
  • *****
  • Posts: 1944
Re: Portfolio Charts - The Golden Butterfly
« Reply #261 on: August 10, 2016, 07:07:26 AM »
eventually the fabian system went away as it only worked as planned until your money was invested and on the line .

Exactly. It looks great when you backtest it. The problem is you can't make money of it.

tommie

  • 5 O'Clock Shadow
  • *
  • Posts: 10
Re: Portfolio Charts - The Golden Butterfly
« Reply #262 on: August 10, 2016, 10:41:45 AM »
If someone believes the earth is flat and trends do not occur, great for them.

I don't think you are getting it. Yes trends occur. That is why investing in the stock market is a great long term investment. It's the asset class that should increase over time better than most other asset classes.

Long term? Please define 'Long term', what is the exit for this 'long term' period?
That it should increase over time is a very broad assumption to make. There are several periods in time where 100% stocks equals 100% suck.
I really don't understand or grasp the concept of using undefined timelines or what it would be good for.

Quote
The point is that you believe that you can jump in and out and time the trend to increase your returns.

No, i don't believe i will beat the index in this mythical period called 'long term'. :-)

Quote
I'm stating that is really really hard.

I completely agree.

Quote
Very few people do this consistently especially over your investing career.

Yes, we agree. Just like i wrote in a previous post.

Quote
You have to put this into perspective - you believe that over the course of your say 10 year saving timeframe and then say 30 year retirement that you can maximise your returns via a simple trend following system.

No, I don't believe in maximing returns as an idea or concept.

Quote
In my experience you'd be better off just doing this off gut feel. Say the market looks to high and you are 80/20 stocks/bonds and then you revert back to 50/50

If it works for you, great!

Quote
I watched an interview with Jack Bogle recently and he said basically exactly the same thing but he was hesitant about even suggesting reverting back to the 50/50 scenario mainly because it's so hard to pick the right time.

I would go so far to say it's impossible to time anything so it isn't even worth trying. Using your "gut feel" as you explain is exactly that though -- you're trying to time the market by using your emotions. :-)

k9

  • Stubble
  • **
  • Posts: 241
  • Age: 39
Re: Portfolio Charts - The Golden Butterfly
« Reply #263 on: September 26, 2016, 02:38:14 AM »
You EMH people should know that even if an asset has a low, or even zero return, it can help the efficiency of a portfolio.
...or even negative return (after fees and taxes), actually, since you're talking about gold.

But many people aren't EMH fans here, hence the controversies in this thread, between GB proponents (which is a pure product of EMH) and stock-heavy proponents (Bogle fans who only play whith the total stocks/bonds cursor, where more stocks = more returns = more risk and that's pretty much it, works from Fama&French being considered "data mining" at best). Trying to praise the virtues of gold to EMH believers is a waste of time : they already know. And total-market-only guys won't listen. If you show them results from portfoliocharts, they will tell you the time frame is too short. And if you show results from cfiresim's 160-years-long dataset, they will tell you the time frame is too long because it includes periods when gold ownership was forbidden/tied to dollar.

The only thing on which EMH and Bogle fans agree on, though, is on the fact that trend following is evil, so maybe yur post will finaly make they agree on something ;) Which is kinda funny, IMHO, because the highly-praised act of rebalancing *is* a variation on trend-following (the belief that the current trend will revert; the only way I can imagine a permanent portfolio to blow off is through excessive rebalancing; imagine what happened to poor PP investor in 1923's Germany, when he "kept the course" and kept buying and buying and buying Weimar bonds to keep his allocation constant).

arebelspy

  • Administrator
  • Senior Mustachian
  • *****
  • Posts: 27688
  • Age: -999
  • Location: Traveling the World
Re: Portfolio Charts - The Golden Butterfly
« Reply #264 on: September 26, 2016, 02:59:52 AM »
I'm not sure you're interpreting EMH within any understanding I've ever heard.

From my understanding:
EMH states assets are fairly priced by the market.

It has nothing to say about different assets being worthwhile, or not, as far as I know.

I don't see that EMH has anything to say about the GB portfolio versus TSM portfolio, at all.

In fact, I'd argue someone who strongly believes in EMH would be more likely to buy a lot of random things, reflecting the overall nature/composition of ALL assets.  GB is a very carefully selected subset of that.  TSM (or Bogleheads) is even more so.  But again, one can believe in EMH and invest just in TSM; the EMH has nothing to say about GB vs TSM.

The best argument against the GB, IMO, is the fact that it's data fitting via back testing.  If the GB hadn't performed so well over these past 30 years, some other portfolio would have, and this thread would be about that portfolio.  That, combined with the fact that past performance doesn't guarantee future results means we have to say we don't know if the GB will be any better going forward than one of those other portfolios, so there's no compelling reason to use it, IMO (over a portfolio that makes more "sense," for example).

None of this has anything to do with EMH, FWIW.  :)
We are two former teachers who accumulated a bunch of real estate, retired at 29, and now travel the world full time with two kids.
If you want to know more about me, or how we did that, or see lots of pictures, this Business Insider profile tells our story pretty well.
We (rarely) blog at AdventuringAlong.com. Check out our Now page to see what we're up to currently.

k9

  • Stubble
  • **
  • Posts: 241
  • Age: 39
Re: Portfolio Charts - The Golden Butterfly
« Reply #265 on: September 26, 2016, 03:23:30 AM »
My bad, I'm conflating EMH with MPT. Ah, acronyms. Well, while the opposite is true, EMH does *not* need MPT to hold, so forget what I said. Or, better, replace EMH with MPT everywhere.

arebelspy

  • Administrator
  • Senior Mustachian
  • *****
  • Posts: 27688
  • Age: -999
  • Location: Traveling the World
Re: Portfolio Charts - The Golden Butterfly
« Reply #266 on: September 26, 2016, 04:01:44 AM »
My bad, I'm conflating EMH with MPT. Ah, acronyms. Well, while the opposite is true, EMH does *not* need MPT to hold, so forget what I said. Or, better, replace EMH with MPT everywhere.

Ah, I follow, and yeah, your posts totally holds with MPT replacing EMH.  If I'd have thought of it, I'd have asked "Do you mean MPT?," but I was just thinking you were confused on EMH (or that I was), rather than using accidentally using the wrong acronym.  :)

My main problem of backfitting remains the same.
We are two former teachers who accumulated a bunch of real estate, retired at 29, and now travel the world full time with two kids.
If you want to know more about me, or how we did that, or see lots of pictures, this Business Insider profile tells our story pretty well.
We (rarely) blog at AdventuringAlong.com. Check out our Now page to see what we're up to currently.

deeshen13

  • 5 O'Clock Shadow
  • *
  • Posts: 93
Re: Portfolio Charts - The Golden Butterfly
« Reply #267 on: September 26, 2016, 10:29:54 AM »
Special thanks to 'Interest Compound' for his insights and contribution to the first few pages of this thread. Heck of a lot of value for the Early Retireee.

Thanks much.

Daniel S

  • 5 O'Clock Shadow
  • *
  • Posts: 60
Re: Portfolio Charts - The Golden Butterfly
« Reply #268 on: October 08, 2016, 06:54:29 PM »
Thanks for the great thread, particularly both Interest Compound and Tyler for their amazing input.

It turns out that I've been ready to FIRE for a while, but I had absolutely no idea until I started reading (very recently) about Bogleheads, MPT, 4% and related stuff. So with this realization, I've decided that the next step is to take my money out of cash and get it working. I've been in cash for years, being too afraid to do anything with it.

The next step for me is to decide asset allocation, and that's where this discussion has been really helpful, but also kind of concerning, to me.

Interest Compound has concerns that novices will be attracted to GB due to back-testing results and he's right - I'm definitely a novice at AA, and I'm very much attracted to GB due to it's past performance, which show's it's historically low volatility.

My questions are:

1. I accept that GB might not perform the same way in the future as it does in back-testing. But if you take this stance, then does back-testing have any value at all? What other tools or techniques are there to compare different AAs?

2. In my case I want to achieve a minimum SWR and I don't care if I under-perform other AAs in terms of the end balance. I only care that my money lasts until death no matter what the markets might throw at us. Is that the same as saying that risk adjusted returns are more important to me than total returns? My feeling is that GB might be a safer choice for this purpose rather than stock-heavy, or less diversified alternatives. But GB would probably not be the best choice for accumulators. Would people agree?

3. People have said that bonds are likely to under-perform from here, given where interest rates are right now. Would adjusting GB to cater for this be a good thing, or would that be considered market timing and something to be avoided?

4. Not specifically related to GB, but there seems to be a perception that the current environment is very different to any ever seen in history and that the dangers are greater than ever. Do people here generally agree with this, or is there a chance that it could possibly be put down to media scaremongering? Or perhaps many of today's circumstances have been seen before, but lost or forgotten in time?

5. Would it be fair to say that 40 years of historical analysis is better than 100 years, because 40 years ago is closer to today's reality than 100 years ago was?

My apologies if my questions display my naivety. Any responses will be greatly appreciated.

Classical_Liberal

  • Handlebar Stache
  • *****
  • Posts: 1114
  • Age: 43
Re: Portfolio Charts - The Golden Butterfly
« Reply #269 on: October 08, 2016, 08:42:39 PM »
@Mrnotrobot (nice name)

Iím by no means the most advanced investor here & am probably not qualified, but I feel like typing so Iíll give your questions a shot.

Preface: I was sitting on the figurative fence you are on regarding how to proceed with AA about six months ago, although Iím only about halfway to FIRE and was not all cash.

  • Good question!  Gold had a boost when Bretton Woods ended and gold was legal to own in the US again, which happened to be right around the same time the market took a dump and stayed bad for a decade in the early 70ís (coincidence?).
     
    https://en.wikipedia.org/wiki/Bretton_Woods_Conference
    http://www.multpl.com/inflation-adjusted-s-p-500
    http://goldprice.org/gold-price-history.html

    Some would argue this creates dubious data about GB from that era.  How much of the gold boost was from the end of BW and how much from the general state of the economy is difficult to discern due the extent to which they may have been interrelated.  I think itís more important to understand WHY gold performed well in the 70ís and particularly in the late70ís/early 80ís, rather than just trusting the backtesting.  Itís equally important to understand why the other components of the GB or PP are there as well. Understanding why each asset class is chosen is probably more important than any back testing.
  • In accumulation many on this forum prefer to be stock heavy because, although itís more volatile, it provides, historically, the highest returns.  They are willing to risk a smaller chance of delaying FIRE for a greater chance of decreasing time working.  IMHO, AA should be reconsidered during different parts in the lifecycle of a portfolio.  In accumulation volatility can be a friend if you have some dry powder that can be replaced later by income, in early drawdown it is most certainly the arch enemy.  In the end, it all depends on one's goals and how accurately you want to be able to predict your FIRE date.  If someone has a very high savings rate (>75%) even a large portion of cash isnít a horrible option because there usually isnít enough time for inflation to eat away at your money.
  • Again learn WHY each asset class is included in GB.  Personal, I absolutely ďtinkerĒ with AA based on current economic conditions.  Is this market timing?  Yes!  However, I have a good understanding of why Iím making some substitutions.  For instance, I have access to CDís that currently pay better yield than short term treasuries, with a FDIC guarantee that they wonít lose face value.  The Short Term Treasury portion of the GB is essentially cash; Iím currently choosing a different way to hold that cash (CD ladder) which provides better returns.
  • Who knows? Long term ZIRP is a new development, but what will it do?  Everyone always thinks that they are special, or this time is different.  Maybe it is?
  • Generally more data will increase precision, but more data with now nonexistent economic factors may decrease accuracy. 

    https://www.ncsu.edu/labwrite/Experimental%20Design/accuracyprecision.htm

    I'd rather have more data than less.  By definition, back testing is always using a different set of circumstances that no longer exist in the present.  I'd rather have a better chance at possibly back testing something similar by including more data, hence more possible economic situations.

Before you make a decision keep researching and reading, not just on internet forum :).  If you are not comfortable with your AA, youíre more likely to not stick with it when it matters most.  Youíve probably spent years to become competent at your job, which has supplied you with income for living up to this point.  Now youíll be dependent on your savings to generate that income.  It makes sense to spend at least a small percentage of your time now to learn how you're gonna generate income from here forwardÖ Right?

A couple of threads from another forum regarding this & related topics I found helpful:
 
http://forum.earlyretirementextreme.com/viewtopic.php?f=3&t=7798
http://forum.earlyretirementextreme.com/viewtopic.php?f=3&t=6635

Congrats on FIRE and good luck!  Start a journal here and tell us how you did it!  Likely we have much to learn from you as well!

arebelspy

  • Administrator
  • Senior Mustachian
  • *****
  • Posts: 27688
  • Age: -999
  • Location: Traveling the World
Re: Portfolio Charts - The Golden Butterfly
« Reply #270 on: October 08, 2016, 09:44:32 PM »
A couple of threads from another forum regarding this & related topics I found helpful:
 
http://forum.earlyretirementextreme.com/viewtopic.php?f=3&t=7798
http://forum.earlyretirementextreme.com/viewtopic.php?f=3&t=6635

Make sure you read counter-arguments, too.

Reading only gold bugs will make you think it's the greatest investment since the automatic bread slicer.  Not everyone agrees.  And yes, there are a few people on ERE that don't favor gold, but they don't tend to put forth rigorous arguments on why, because they tend to get steamrolled since the majority over there love it--sort of the opposite of here.  So don't just read here, don't just read there, but get multiple sources.
We are two former teachers who accumulated a bunch of real estate, retired at 29, and now travel the world full time with two kids.
If you want to know more about me, or how we did that, or see lots of pictures, this Business Insider profile tells our story pretty well.
We (rarely) blog at AdventuringAlong.com. Check out our Now page to see what we're up to currently.

Radagast

  • Handlebar Stache
  • *****
  • Posts: 1450
  • Location: West of the Mountains, East of the Sea
  • One does not simply work into Mordor
Re: Portfolio Charts - The Golden Butterfly
« Reply #271 on: October 08, 2016, 11:43:05 PM »
1. I accept that GB might not perform the same way in the future as it does in back-testing. But if you take this stance, then does back-testing have any value at all? What other tools or techniques are there to compare different AAs?
It may have value. But, in 1975 would you have been able to pick the portfolio that you now think was best over the past 40 years? I would not have.

Quote
2. In my case I want to achieve a minimum SWR and I don't care if I under-perform other AAs in terms of the end balance. I only care that my money lasts until death no matter what the markets might throw at us. Is that the same as saying that risk adjusted returns are more important to me than total returns? My feeling is that GB might be a safer choice for this purpose rather than stock-heavy, or less diversified alternatives. But GB would probably not be the best choice for accumulators. Would people agree?
I think it does not have enough stock for accumulators or retirees, unless you are very scared of stocks. Stocks have similar or even less "deep" risk compared to bonds or gold, but over time generate a lot more returns. I recommend keeping at least 60% in stocks unless you mentally cannot. I suggested 70% stocks and 10% each in the other three earlier in the thread. Perhaps as low as 50% stocks in retirement.

Quote
3. People have said that bonds are likely to under-perform from here, given where interest rates are right now. Would adjusting GB to cater for this be a good thing, or would that be considered market timing and something to be avoided?
Avoid. The best guess of the entire world is the current market price. You might want to increase stock ownership, as above.

Quote
4. Not specifically related to GB, but there seems to be a perception that the current environment is very different to any ever seen in history and that the dangers are greater than ever. Do people here generally agree with this, or is there a chance that it could possibly be put down to media scaremongering? Or perhaps many of today's circumstances have been seen before, but lost or forgotten in time?
Which was more different and dangerous: Lydians invented coins? Mongols conquered China, Russia, and the Mid East? Magellan's crew sailed around the world? The Turks invaded Austria? The US and Soviets contemplated ending the world any minute now? Stock and bond markets had high prices in 2016? Every time in all of history was completely different from the time before, and often eerily similar to earlier events. Now is different from any in recent US history, but there may be parallels from other places or times. Read books by Ben Bernstein, for example "The Four Pillars of Investing" and then his booklet "Deep Risk". In general people consider the world to be a safer place than it was a few decades ago, so they are willing to risk sending more income to their future selves. This makes prices on everything higher. The real question going forward is, are they/we correct that the world is now permanently safer? If yes prices will continue up, if not, prices will fall.

Quote
5. Would it be fair to say that 40 years of historical analysis is better than 100 years, because 40 years ago is closer to today's reality than 100 years ago was?
1000 years is better for generalities, 30 or 10 recent years is better for little details. 100 and 40 are ok for things that fall between the two.

Daniel S

  • 5 O'Clock Shadow
  • *
  • Posts: 60
Re: Portfolio Charts - The Golden Butterfly
« Reply #272 on: October 09, 2016, 03:10:18 AM »
Understanding why each asset class is chosen is probably more important than any back testing.

If GB inherits the AA reasoning behind the permanent portfolio, then I think I understand it well enough.

Quote
IMHO, AA should be reconsidered during different parts in the lifecycle of a portfolio.

I agree. In my case I'll be jumping straight into the later phase and I'm hoping to never have a need to alter again. It would be prudent for me to get it right the first time.

Quote
Personal, I absolutely ďtinkerĒ with AA based on current economic conditions.  Is this market timing?  Yes!

Given my novice level, I'll be trying to avoid it.

Quote
Who knows? Long term ZIRP is a new development, but what will it do?  Everyone always thinks that they are special, or this time is different.  Maybe it is?

Yeah, this "feeling" that something is going to happen probably always exists and never leaves.

Quote
hence more possible economic situations.

Good point. You can always choose to ignore the earlier information, but it probably doesn't hurt to have it there in case it shows something.

Quote
Before you make a decision keep researching and reading, not just on internet forum :).  If you are not comfortable with your AA, youíre more likely to not stick with it when it matters most.  Youíve probably spent years to become competent at your job, which has supplied you with income for living up to this point.  Now youíll be dependent on your savings to generate that income.  It makes sense to spend at least a small percentage of your time now to learn how you're gonna generate income from here forwardÖ Right?

Definitely! And because you really should stick with it, the initial allocations become seriously important. One of the most compelling reasons that GB appeals is because of the low 2 year longest draw-down period (historically speaking, of course). How anyone could stay the course through a 10 year draw-down period is beyond me.

Quote
A couple of threads from another forum regarding this & related topics I found helpful:
 
http://forum.earlyretirementextreme.com/viewtopic.php?f=3&t=7798
http://forum.earlyretirementextreme.com/viewtopic.php?f=3&t=6635

Congrats on FIRE and good luck!  Start a journal here and tell us how you did it!  Likely we have much to learn from you as well!

Thanks!

Daniel S

  • 5 O'Clock Shadow
  • *
  • Posts: 60
Re: Portfolio Charts - The Golden Butterfly
« Reply #273 on: October 09, 2016, 03:39:32 AM »
1. I accept that GB might not perform the same way in the future as it does in back-testing. But if you take this stance, then does back-testing have any value at all? What other tools or techniques are there to compare different AAs?
It may have value. But, in 1975 would you have been able to pick the portfolio that you now think was best over the past 40 years? I would not have.

In 1975 did funds offer choices along the lines of conservative, balanced and aggressive? If they did, then does this suggest that the fund managers thought they could pick well enough? Were they right? Don't know.
Technology has improved a lot since 1975, combined with a much wider choice of trading instruments and better data quality, you'd think we would have a better chance these days that back-testing might be more telling of the future.

Quote
Quote
2. In my case I want to achieve a minimum SWR and I don't care if I under-perform other AAs in terms of the end balance. I only care that my money lasts until death no matter what the markets might throw at us. Is that the same as saying that risk adjusted returns are more important to me than total returns? My feeling is that GB might be a safer choice for this purpose rather than stock-heavy, or less diversified alternatives. But GB would probably not be the best choice for accumulators. Would people agree?
I think it does not have enough stock for accumulators or retirees, unless you are very scared of stocks. Stocks have similar or even less "deep" risk compared to bonds or gold, but over time generate a lot more returns. I recommend keeping at least 60% in stocks unless you mentally cannot. I suggested 70% stocks and 10% each in the other three earlier in the thread. Perhaps as low as 50% stocks in retirement.

I think the "mentally cannot" will come into play with me. I couldn't tolerate anything like a 10 year draw-down period, probably not even a 5 year one, unless 20+ successful years had already passed by.

Quote
Quote
3. People have said that bonds are likely to under-perform from here, given where interest rates are right now. Would adjusting GB to cater for this be a good thing, or would that be considered market timing and something to be avoided?
Avoid. The best guess of the entire world is the current market price. You might want to increase stock ownership, as above.
Sorry, are you saying avoid bonds, or avoid adjusting?


Radagast

  • Handlebar Stache
  • *****
  • Posts: 1450
  • Location: West of the Mountains, East of the Sea
  • One does not simply work into Mordor
Re: Portfolio Charts - The Golden Butterfly
« Reply #274 on: October 09, 2016, 01:33:06 PM »
1. I accept that GB might not perform the same way in the future as it does in back-testing. But if you take this stance, then does back-testing have any value at all? What other tools or techniques are there to compare different AAs?
It may have value. But, in 1975 would you have been able to pick the portfolio that you now think was best over the past 40 years? I would not have.
In 1975 did funds offer choices along the lines of conservative, balanced and aggressive? If they did, then does this suggest that the fund managers thought they could pick well enough? Were they right? Don't know.
Technology has improved a lot since 1975, combined with a much wider choice of trading instruments and better data quality, you'd think we would have a better chance these days that back-testing might be more telling of the future.
The thing with liquid markets is that to predict the future is to change the future. If everyone has backtesting results to tell them future, the future will be different because of their actions.

Quote
Quote
Quote
2. In my case I want to achieve a minimum SWR and I don't care if I under-perform other AAs in terms of the end balance. I only care that my money lasts until death no matter what the markets might throw at us. Is that the same as saying that risk adjusted returns are more important to me than total returns? My feeling is that GB might be a safer choice for this purpose rather than stock-heavy, or less diversified alternatives. But GB would probably not be the best choice for accumulators. Would people agree?
I think it does not have enough stock for accumulators or retirees, unless you are very scared of stocks. Stocks have similar or even less "deep" risk compared to bonds or gold, but over time generate a lot more returns. I recommend keeping at least 60% in stocks unless you mentally cannot. I suggested 70% stocks and 10% each in the other three earlier in the thread. Perhaps as low as 50% stocks in retirement.
I think the "mentally cannot" will come into play with me. I couldn't tolerate anything like a 10 year draw-down period, probably not even a 5 year one, unless 20+ successful years had already passed by.
I agree that the stocks/long term bonds/gold triangle is probably your best shot at three uncorrelated assets. Still, don't expect things to play out as nicely in the future as they did in the 70's.

I suggest that you not consider gold as a replacement for stocks. If you would otherwise be considering a 40% stock / 60% bond portfolio, then sure the GB may be for you. (Personally I think that is too conservative, and more likely to work against you than for you.) If you would otherwise be thinking of a 64/36 portfolio, then keep the 64% stocks and if you want gold then take it from the bond side. Either way I suggest that you should include international stocks.

Quote
Quote
Quote
3. People have said that bonds are likely to under-perform from here, given where interest rates are right now. Would adjusting GB to cater for this be a good thing, or would that be considered market timing and something to be avoided?
Avoid. The best guess of the entire world is the current market price. You might want to increase stock ownership, as above.
Sorry, are you saying avoid bonds, or avoid adjusting?
Avoid thinking you can outguess the bond market.

Classical_Liberal

  • Handlebar Stache
  • *****
  • Posts: 1114
  • Age: 43
Re: Portfolio Charts - The Golden Butterfly
« Reply #275 on: October 09, 2016, 02:20:18 PM »

I suggest that you not consider gold as a replacement for stocks. If you would otherwise be considering a 40% stock / 60% bond portfolio, then sure the GB may be for you. (Personally I think that is too conservative, and more likely to work against you than for you.) If you would otherwise be thinking of a 64/36 portfolio, then keep the 64% stocks and if you want gold then take it from the bond side. Either way I suggest that you should include international stocks.


I believe this is a wise statement and is what I have done.  Shifting towards a 60/40 portfolio due to realizing my real risk tolerance & getting closer to FI. I want to limit sequence risk when I get there.  When I decided to add gold beyond a small SHTF amount, I pulled it from my "bond" side allocation.  This is partially due to the limited upside/low EV of bonds in the current economic climate.

I also like international stocks, particularly at the moment because they seem to be a better value.  Of the 60% stock allocation I'm aiming for 30% US large cap, 10% US small cap and 20% international.  Realize this important point though; international stocks tend to be much more correlated to gold than US stocks. I'm only holding 10% gold, so this does not concern me.  If one has closer to a GB portfolio with only 40% stocks and 20% gold, that person should be cautious holding a large percentage of their equity allocation in international as it could very well destroy the underlying theory of that portfolio.

One last important distinction of someone choosing a GB-like portfolio, particularly one which is slightly more equity heavy.  Be diligent in understanding why the bond allocation is not a total bond market, but rather a split between cash and longer term treasuries. I've played with Tyler's calculators and with backtesting it doesn't seem to make a big difference (TBM vs LTT).  However, in theory (if you believe in the underlying theory), it could in the future.

Edit: spelling and grammar
« Last Edit: October 09, 2016, 02:23:59 PM by Classical_Liberal »

Radagast

  • Handlebar Stache
  • *****
  • Posts: 1450
  • Location: West of the Mountains, East of the Sea
  • One does not simply work into Mordor
Re: Portfolio Charts - The Golden Butterfly
« Reply #276 on: October 09, 2016, 02:51:16 PM »
Realize this important point though; international stocks tend to be much more correlated to gold than US stocks. I'm only holding 10% gold, so this does not concern me.  If one has closer to a GB portfolio with only 40% stocks and 20% gold, that person should be cautious holding a large percentage of their equity allocation in international as it could very well destroy the underlying theory of that portfolio.
Do you think this is mostly because of fluctuations in the value of the dollar? Either way I agree that including a large allocation to international stocks will probably reduce the utility of gold.

mathjak107

  • Pencil Stache
  • ****
  • Posts: 558
Re: Portfolio Charts - The Golden Butterfly
« Reply #277 on: October 09, 2016, 02:52:33 PM »
my feeling is i would be very careful with both long term bonds and gold .

there is a good chance stock returns may be weak for a while .

so far rising bond rates have seen TLT the long treasury bond fund fall 6% in 90 days and gld gold fall 8% in 90 days . with rates more inclined to rise than fall i think any extra drag from this stuff will keep whatever traction equity's manage to gain from taking hold .

i do speculate in gold and bought gld again friday  for likely the 7th or 8th time this year , but these are for just quick hits .



steveo

  • Handlebar Stache
  • *****
  • Posts: 1944
Re: Portfolio Charts - The Golden Butterfly
« Reply #278 on: October 09, 2016, 03:21:05 PM »
Avoid thinking you can outguess the bond market.

I have a small amount of bonds in my portfolio but I'm starting to think it's going to be a good spot to be based on the massive negativity around bonds.

Classical_Liberal

  • Handlebar Stache
  • *****
  • Posts: 1114
  • Age: 43
Re: Portfolio Charts - The Golden Butterfly
« Reply #279 on: October 09, 2016, 03:50:27 PM »
Realize this important point though; international stocks tend to be much more correlated to gold than US stocks. I'm only holding 10% gold, so this does not concern me.  If one has closer to a GB portfolio with only 40% stocks and 20% gold, that person should be cautious holding a large percentage of their equity allocation in international as it could very well destroy the underlying theory of that portfolio.
Do you think this is mostly because of fluctuations in the value of the dollar? Either way I agree that including a large allocation to international stocks will probably reduce the utility of gold.

Full understanding of gold prices are beyond my scope. Obviously I dont subscribe to only invest in what you completely understand. :)  I'm still learning, but I do see its benefit as a non correlator to my largest holding (us stocks).

My best answer: Yes partially currency related, partially related to emerging and developing markets being heavily tied to commodity prices.  Partially related to a trade imbalance with the US.

Whenever I try to wrap my head around gold movement that seems to be counter intuitive and I want a quick brush up, I read something like this:

https://snbchf.com/swissgold/gold/gold-silver-prices/

arebelspy

  • Administrator
  • Senior Mustachian
  • *****
  • Posts: 27688
  • Age: -999
  • Location: Traveling the World
Re: Portfolio Charts - The Golden Butterfly
« Reply #280 on: October 09, 2016, 06:28:14 PM »
Avoid thinking you can outguess the bond market.

I have a small amount of bonds in my portfolio but I'm starting to think it's going to be a good spot to be based on the massive negativity around bonds.

Were you going for unintentional irony, quoting something and then saying the opposite of its advice?  ;)
We are two former teachers who accumulated a bunch of real estate, retired at 29, and now travel the world full time with two kids.
If you want to know more about me, or how we did that, or see lots of pictures, this Business Insider profile tells our story pretty well.
We (rarely) blog at AdventuringAlong.com. Check out our Now page to see what we're up to currently.

steveo

  • Handlebar Stache
  • *****
  • Posts: 1944
Re: Portfolio Charts - The Golden Butterfly
« Reply #281 on: October 10, 2016, 12:24:33 AM »
Avoid thinking you can outguess the bond market.

I have a small amount of bonds in my portfolio but I'm starting to think it's going to be a good spot to be based on the massive negativity around bonds.

Were you going for unintentional irony, quoting something and then saying the opposite of its advice?  ;)

No. My take of the initial comment is that trying to pick the bond market isn't going to work. I'm not second guessing myself at all but all the negativity surrounding bonds to me means that bonds might actually do well.

Daniel S

  • 5 O'Clock Shadow
  • *
  • Posts: 60
Re: Portfolio Charts - The Golden Butterfly
« Reply #282 on: October 10, 2016, 01:19:22 AM »
Thanks for some very good advice. I'm definitely learning a lot from this exchange and thinking about some things that never occurred to me before.

Taking everything on board so far, I'm considering something along the lines of:

25% Total Stock Market
25% International Small
18% Long Treasuries
17% Short Treasuries
15% Gold

This increases overall stock exposure, slightly reduces the less predictable impacts of gold, and adds international. I think it still maintains the fundamental foundations of GB.

There's still plenty of research ahead of me though, and I'm not in too much of a hurry.

The above looks pretty good using Tylers calculators with longest draw-down of 3 years, worst year of -15.1%, 40yr worst case SWR around 6.0%. CAGR compared to GB increases as to be expected. I'll be trying for an initial WR around 3.5% so there's a decent buffer for me. With luck I might even achieve perpetuity.

Daniel S

  • 5 O'Clock Shadow
  • *
  • Posts: 60
Re: Portfolio Charts - The Golden Butterfly
« Reply #283 on: October 10, 2016, 01:38:04 AM »
The thing with liquid markets is that to predict the future is to change the future. If everyone has backtesting results to tell them future, the future will be different because of their actions.

We have the marketing of trading your way to riches on our side. They're pretty good at it.


mathjak107

  • Pencil Stache
  • ****
  • Posts: 558
Re: Portfolio Charts - The Golden Butterfly
« Reply #284 on: October 10, 2016, 02:25:11 AM »
if greenspan is correct and we are headed in to what appears to be a period of stagflation long term bonds are a poor place to be . i happen to notice wellesley income shed about 1/2 their long term bond position the last 3 months ,same with the permanent portfolio fund , they have none .

k9

  • Stubble
  • **
  • Posts: 241
  • Age: 39
Re: Portfolio Charts - The Golden Butterfly
« Reply #285 on: October 10, 2016, 07:36:32 AM »
1. I accept that GB might not perform the same way in the future as it does in back-testing. But if you take this stance, then does back-testing have any value at all? What other tools or techniques are there to compare different AAs?

There's none. All you can do is reason about the past, understand why good/bad outcomes happened and try to make an educated guess about the future.

Both AA are based on different sets of beliefs and knowledge. Both allocations suffer a survivorship bias. GB seems amazing because it performed well and, after the fact, you can make a story about why it performed well and why it should keep performing well. The very same can be said about the 100% total stock allocation, although they pretend the opposite. You don't believe me ? Then have a look  at all the 100% investors, and ask them how many actually replicate a total stock market. Most of them will actually tilt their allocation to favor US stocks, or even (gasp!) only own US stocks (a total stock allocation should be about 45% US, 40% developed non-US, 15% emerging), and most of them will have a compelling story about why they did so ("oh, it's easier" (jlcollinsnh), "oh, the rest of the world is crap, US rulez" (John Bogle), etc.) but the truth is they think "oh, over the last x decades, this asset class/allocation performed very well, so I except it will keep the same". There are not many 100% stocks proponents in the rest of the world (especially Japan and many countries in Europe), and there's a good reason for that. Survivorship bias and retrofitting here, despite what everybody pretends.

Meb Faber, in one of his last books, made an interesting point, though. He observed dozens of very different ETF-based asset allocations and concluded that, in theory, all of them produced the same annualised return over the last 45 years, more or less 1%. And his conclusion is that, more than the actual AA, the important point lies in fees/taxes.

I think he is right and I would add you need to take into consideration behavioral aspects : are you sure you will be ready to rebalance when needed ? If not, you should probably go all in stocks, with just one fund (whether it is 100% US or worldwide). Do you want to never care about where you next money-to-invest should go ? Same thing. Do you feel uncomfortable lending all your money to one single company ? Then don't put all your money in VTSAX or anything. Do you feel uncomfortable having only financial assets ? Then buy a house / earn some gold bullions. Etc. Now this is up to you, only *you* can answer these questions. Don't listen to all those fairy tales about why allocation x or y is the best and is guaranteed to succeed in the future. Nobody knows, despite what they pretend.

So, read all those opinions and make you own. Only you can tell if you should implement a 100% TSM, a GB or anything else.

arebelspy

  • Administrator
  • Senior Mustachian
  • *****
  • Posts: 27688
  • Age: -999
  • Location: Traveling the World
Re: Portfolio Charts - The Golden Butterfly
« Reply #286 on: October 10, 2016, 07:49:36 AM »
The very same can be said about the 100% total stock allocation, although they pretend the opposite. You don't believe me ? Then have a look  at all the 100% investors, and ask them how many actually replicate a total stock market. Most of them will actually tilt their allocation to favor US stocks, or even (gasp!) only own US stocks (a total stock allocation should be about 45% US, 40% developed non-US, 15% emerging), and most of them will have a compelling story about why they did so ("oh, it's easier" (jlcollinsnh), "oh, the rest of the world is crap, US rulez" (John Bogle), etc.) but the truth is they think "oh, over the last x decades, this asset class/allocation performed very well, so I except it will keep the same".

I find it odd, and rather rude, that you are claiming to read the minds of many different people, and are calling all of them liars.

I don't agree with your assessment that everyone who is 100% TSM is doing it because of past results, and no other reason, and if they say otherwise, they're lying.
We are two former teachers who accumulated a bunch of real estate, retired at 29, and now travel the world full time with two kids.
If you want to know more about me, or how we did that, or see lots of pictures, this Business Insider profile tells our story pretty well.
We (rarely) blog at AdventuringAlong.com. Check out our Now page to see what we're up to currently.

Daniel S

  • 5 O'Clock Shadow
  • *
  • Posts: 60
Re: Portfolio Charts - The Golden Butterfly
« Reply #287 on: October 10, 2016, 08:46:30 AM »
@k9

I believe that diversification (across and within asset classes) increases the chances of success and it's a comfort that back-testing supports this historically. 100% TSM is out of the question in my mind, especially given that I am not in accumulation stage.

Regarding Faber's 1% claim? What does the "in theory" part mean? If this applies to ETFs, then would managed funds be even worse than 1%? Does he propose an alternative?

Good points about counter-party risks. What is the general consensus on this? I was thinking of implementing using only Vanguard wholesale. Maybe too off topic for this thread.

AdrianC

  • Pencil Stache
  • ****
  • Posts: 962
  • Location: Cincinnati
Re: Portfolio Charts - The Golden Butterfly
« Reply #288 on: October 10, 2016, 09:23:29 AM »
Avoid thinking you can outguess the bond market.

The bond market is not a "free" market. Base interest rates are not set by the market.

You can lose real money in long term bonds. The GB portfolio holder knows this, but is betting on negative correlation and subsequent  rebalancing. It seems to me this is more of a speculation than an investment. It has worked. It might work again. I see no reason to be sure that it will work.

Daniel S

  • 5 O'Clock Shadow
  • *
  • Posts: 60
Re: Portfolio Charts - The Golden Butterfly
« Reply #289 on: October 10, 2016, 09:30:20 AM »
I see no reason to be sure that it will work.

Can't the same be said of anything?

k9

  • Stubble
  • **
  • Posts: 241
  • Age: 39
Re: Portfolio Charts - The Golden Butterfly
« Reply #290 on: October 10, 2016, 03:52:06 PM »
I find it odd, and rather rude, that you are claiming to read the minds of many different people, and are calling all of them liars.

I don't agree with your assessment that everyone who is 100% TSM is doing it because of past results, and no other reason, and if they say otherwise, they're lying.
Sorry for seeming rude. Not my intention. I was trying to be sarcastic (and questioning the main opinion in this community, too). English is not my native language.

Regarding Faber's 1% claim? What does the "in theory" part mean? If this applies to ETFs, then would managed funds be even worse than 1%? Does he propose an alternative?
By "in theory', I mean "when you only consider raw performance of indexes/asset classes", i.e without considering fees & taxes. His conclusion was something like "do not spend too much time tinkering the perfect AA, anyway, on the very long term they all provide similar returns. Instead, focus on reducing fees & taxes, because this is where you can loose most of your money".

Quote
Good points about counter-party risks. What is the general consensus on this? I was thinking of implementing using only Vanguard wholesale. Maybe too off topic for this thread.
The general consensus is that almost nobody really cares. I do, but I tend to be an exception. Even the PP doomers implement their 25% of gold with ETFs rather than bullion, more often than not. Don't worry too much about that.

Daniel S

  • 5 O'Clock Shadow
  • *
  • Posts: 60
Re: Portfolio Charts - The Golden Butterfly
« Reply #291 on: October 10, 2016, 05:05:39 PM »
@k9

Re Faber, like this right?

"all of them produced the same annualised return over the last 45 years, more or less within 1% of each other"

AdrianC

  • Pencil Stache
  • ****
  • Posts: 962
  • Location: Cincinnati
Re: Portfolio Charts - The Golden Butterfly
« Reply #292 on: October 10, 2016, 06:14:25 PM »
I see no reason to be sure that it will work.

Can't the same be said of anything?

Sure, but we can assign rough probabilities to various allocations. 

A globally diversified portfolio of stocks is likely to generate decently positive real returns over the long term. Say 3-5%.

60% of the GB portfolio's assets are not likely to generate decently positive real returns over the long term. Maybe 1%. Does anyone believe otherwise?

The hope is that an annual rebalance captures price fluctuations between the assets to make up for their poor underlying returns. Will it? Why? Just because it did in this relatively short back-test?

An annual rebalance seems arbitrary. Why not have some timing scheme for the rebalancing and make it even better?

Classical_Liberal

  • Handlebar Stache
  • *****
  • Posts: 1114
  • Age: 43
Re: Portfolio Charts - The Golden Butterfly
« Reply #293 on: October 10, 2016, 08:03:24 PM »

The hope is that an annual rebalance captures price fluctuations between the assets to make up for their poor underlying returns. Will it? Why? Just because it did in this relatively short back-test?

An annual rebalance seems arbitrary. Why not have some timing scheme for the rebalancing and make it even better?

Actually no, you are missing the point of GB.

arebelspy

  • Administrator
  • Senior Mustachian
  • *****
  • Posts: 27688
  • Age: -999
  • Location: Traveling the World
Re: Portfolio Charts - The Golden Butterfly
« Reply #294 on: October 10, 2016, 08:34:02 PM »

The hope is that an annual rebalance captures price fluctuations between the assets to make up for their poor underlying returns. Will it? Why? Just because it did in this relatively short back-test?

An annual rebalance seems arbitrary. Why not have some timing scheme for the rebalancing and make it even better?

Actually no, you are missing the point of GB.

I agree.  There are plenty of valid critiques for the GB.  I'm not sure this is one.  MPT is worth researching if you think it is, IMO.
We are two former teachers who accumulated a bunch of real estate, retired at 29, and now travel the world full time with two kids.
If you want to know more about me, or how we did that, or see lots of pictures, this Business Insider profile tells our story pretty well.
We (rarely) blog at AdventuringAlong.com. Check out our Now page to see what we're up to currently.

Radagast

  • Handlebar Stache
  • *****
  • Posts: 1450
  • Location: West of the Mountains, East of the Sea
  • One does not simply work into Mordor
Re: Portfolio Charts - The Golden Butterfly
« Reply #295 on: October 10, 2016, 08:54:42 PM »
Avoid thinking you can outguess the bond market.

The bond market is not a "free" market. Base interest rates are not set by the market.

You can lose real money in long term bonds. The GB portfolio holder knows this, but is betting on negative correlation and subsequent  rebalancing. It seems to me this is more of a speculation than an investment. It has worked. It might work again. I see no reason to be sure that it will work.
The treasury sells bonds at auction to the highest bidder, and they trade freely on the market after that. Others (the Fed) can try to influence that, but nobody has to pay attention. It's like saying the bailout of GM means stocks are not traded in a "free" market anymore. For example, rates have been much lower ever since the Fed raised rates. Japan has been trying to raise rates for decades but they keep dropping anyhow.

The duration of the bonds in the PP/GB is a little more than 9 years right now, which is longer than most commonly recommended bond funds, but not outrageously longer. It is hard to say 9 years is speculation but 6 years is safe. Or perhaps you are just arguing against owning any bonds, in which case I think you will most likely be 60% to 100% correct.

60% of the GB portfolio's assets are not likely to generate decently positive real returns over the long term. Maybe 1%. Does anyone believe otherwise?

The hope is that an annual rebalance captures price fluctuations between the assets to make up for their poor underlying returns. Will it? Why? Just because it did in this relatively short back-test?
OK sure. But compare to Vanguard's 40/60 Lifestrategy Conservative Growth fund. In real terms, it has 40% in US bonds (+1%), 20% in international bonds (-0.5%) and 40% in global stocks (+3% to +5%). Is that really any better? It looks to me like Lifestrategy has the lower expected return. And that fund can't expect a significant rebalancing bonus. I agree the GB is conservative (too much so for me), but for people who want a conservative portfolio and can tolerate the strange components it seems fine.

Radagast

  • Handlebar Stache
  • *****
  • Posts: 1450
  • Location: West of the Mountains, East of the Sea
  • One does not simply work into Mordor
Re: Portfolio Charts - The Golden Butterfly
« Reply #296 on: October 10, 2016, 09:20:38 PM »
Of the 60% stock allocation I'm aiming for 30% US large cap, 10% US small cap and 20% international.  Realize this important point though; international stocks tend to be much more correlated to gold than US stocks. I'm only holding 10% gold, so this does not concern me. 
I find myself an admirer of both Interest Compound's 50% Total US Stock Market/50% Total International Stock Market, and Tyler's Golden Butterfly. Maybe the best thing is to follow my old motto "when in doubt, do both." This would give
35% US TSM
25% Int. TSM
10% small cap value
10% long term bonds
10% short term bonds
10% gold
which is pretty much exactly what you have. This addresses my concerns of the GB being too conservative and the all-stock portfolio seeming to "float around" too much. I can't convince myself to own gold right now, but if I change my mind later when I have enough money to bother I hope to do something similar.

Daniel S

  • 5 O'Clock Shadow
  • *
  • Posts: 60
Re: Portfolio Charts - The Golden Butterfly
« Reply #297 on: October 11, 2016, 05:51:41 AM »
An annual rebalance seems arbitrary. Why not have some timing scheme for the rebalancing and make it even better?

Definitely possible for somebody that wants to do it. But finding a good indicator to signal the timing of the re-balance would probably involve back-testing. Then this may apply to the chosen indicator:

Quote
It has worked. It might work again. I see no reason to be sure that it will work.

I like the scheduled re-balance idea because it is mechanical and emotionless, unlike my many failed attempts at trading equities and forex over the years.

AdrianC

  • Pencil Stache
  • ****
  • Posts: 962
  • Location: Cincinnati
Re: Portfolio Charts - The Golden Butterfly
« Reply #298 on: October 11, 2016, 06:50:10 AM »
The hope is that an annual rebalance captures price fluctuations between the assets to make up for their poor underlying returns. Will it? Why? Just because it did in this relatively short back-test?

An annual rebalance seems arbitrary. Why not have some timing scheme for the rebalancing and make it even better?

Actually no, you are missing the point of GB.

The point of the GB, as I understand it, is to achieve reasonable returns (and good withdrawal rates) with low portfolio volatility by combining asset classes that zig and zag differently (negative correlation). Is that correct?

Say you're aiming for a 4% real return over the long term.

40% of GB (stocks) should achieve that.
60% of GB (bonds, gold) likely will not.

To achieve 4% there has to be some other factor, and there is. It's the selling of one asset that has a relative increase in price (capital gain) and the buying of another that has a relative reduction in price. The rebalancing process.

What am I missing?

So why rebalance once a year on December 31st? Is that optimal?

Has a back test been done to try rebalancing at other times? More frequently? Less frequently? Why not?

mathjak107

  • Pencil Stache
  • ****
  • Posts: 558
Re: Portfolio Charts - The Golden Butterfly
« Reply #299 on: October 11, 2016, 07:11:43 AM »
if you are a long term investor hedging reduces temporary short term dips at the expense of  permanently hurting long term gains. that logic never made much sense to me.

unless you have shorter term needs which require matching investments to a shorter time frame  adding all these other things to run counter  may not be a great idea .

i run two separate portfolio's being retired . i have a conservative income model which provides money for eating in the near term and holds investments appropriate for that time frame but then i hold a much more aggressive portfolio for eating in 20 or 30 years .

no one really knows how a safe withdrawal rate actually would work out with portfolio's that holds a fair amount of  gold since you cannot stress test against the time frames the worst case scenario's are based on .