Author Topic: Portfolio Charts - The Golden Butterfly  (Read 287072 times)

AdrianC

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Re: Portfolio Charts - The Golden Butterfly
« Reply #400 on: October 19, 2016, 06:05:09 AM »
But then the guy who went all in on emerging markets made about 11% CAGR ! Who wants to make only 4% when you can earn an amazing 11% per year ?
I'm sarcastic yet a little serious. If you answer this question seriously (and ignore the fact I'm semi-trolling) you'll probably end up with arguments that answer the question "why would one choose GB instead of 60/40 ?" (or any mix of assets, anyway)

Please, give us the answer to your question: "why would one choose GB instead of 60/40 ?"


k9

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Re: Portfolio Charts - The Golden Butterfly
« Reply #401 on: October 19, 2016, 01:59:35 PM »
Because one might prefer reduced volatility over a potential better return ? Because there are less "worse case scenarios" (ie a higher SWR) with GB than with 60/40 ?

(Please note that I don't especially consider the GB to be superior per se to any other AA. Both GB and 60/40 have advantages and defaults. I am not implementing the GB myself (nor the 60/40, nor the 100% emerging portfolios).)

mathjak107

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Re: Portfolio Charts - The Golden Butterfly
« Reply #402 on: October 19, 2016, 05:58:01 PM »
we don't know if the gb has a higher swr . it can't be back tested against the specific time frames a swr is based on since gold was not freely traded  before 1975 .

the term safe withdrawal rate is based on 1926,1937,`1965,1966

today the gb is showing more volatility just like the permanent portfolio is than a 60/40 . gold and 30 year Treasury's got pummeled the last 90 days . if this is the new normal as rates rise those two portfolio's may show more volatility while permanently reducing long term gains in comparison because of the hedging . .
« Last Edit: October 19, 2016, 06:02:05 PM by mathjak107 »

k9

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Re: Portfolio Charts - The Golden Butterfly
« Reply #403 on: October 20, 2016, 02:45:49 AM »
Well, no, the term SWR is not based on specific dates. It is based on the worse case scenario for a given period of time (eg all 30-year periods starting from year x). As a matter of fact, the SWR for stock-heavy portfolios was determined on bad periods for stocks, which are the years you mentioned.

You can determine a SWR for asset allocations starting from 1972, as Tyler does in his tools, but those SWR values are rather high as they only include a small timeframe.

Volatility on a 90-day period is totally irrelevant, because on such a period you withdraw very little money.

As for the last part of your message: I agree it can have bad consequences on the GB, precisely because of the hedging. But don't forget it is also somewhat anti-hedged with its SCV component; if stocks skyrocket and LT bonds slowly die, it should be okay. A 20% TSM - 20%SCV - 20%LTT is generally almost functionally equivalent to a 60% TSM, in terms of returns.

mathjak107

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Re: Portfolio Charts - The Golden Butterfly
« Reply #404 on: October 20, 2016, 02:56:09 AM »
nope , the term is based on the worst case scenario's which were if you retired in the years i listed . if you are testing any later time frames than you are not comparing apples to apples .

it is not just picking time frames out of a hat that you think are examples . any guesses at what gold did pre 1975 is just that , a guess and no one knows for sure what would have happened if it traded freely as it does today . sorry i don't accept tylers 1972  comparisons, we had that discussion when he was claiming  the same thing for the permanent portfolio .

don't forget a comparison has to take in to consideration the balance's left over  too , not just the draw rate . while a 4% safe withdrawal rate with a 60/40 mix has a high success rate over 30 years the fact is 90% of the time it left you with more than you started with 30 years prior and 67% more than 2x what you started with ,so it is not just about a daw rate not failing . .

tyler made the claim the pp was capable of a higher draw rate but  he never compared the same time frames nor compared balances left when we had that discussion last year ..

if we eliminated the time frames listed from the equation and started at a later date after 1966 the safe withdrawal rate for a 60/40 mix would be 6.50% and it still would have a considerable balance left  . it is cut back to 3.60% in practice to clear 1965/1966 . but if we forget about the worst case dates and go to 4% , then that  gives you about a 95% success rate ,not 100% .

to have a 100% success rate the gb by comparison would have to clear 1965/1966 and we have no idea what gold would have done .


as michael kitces stated

https://www.kitces.com/blog/what-returns-are-safe-withdrawal-rates-really-based-upon/
« Last Edit: October 20, 2016, 03:36:21 AM by mathjak107 »

Tyler

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Re: Portfolio Charts - The Golden Butterfly
« Reply #405 on: October 20, 2016, 09:24:21 AM »
All of this is covered in the withdrawal rates FAQ. And terminal portfolio values in retirement are studied in the new Retirement Spending tool.

« Last Edit: October 20, 2016, 10:00:28 AM by Tyler »

mathjak107

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Re: Portfolio Charts - The Golden Butterfly
« Reply #406 on: October 20, 2016, 11:08:42 AM »
i  read it but going back to 1972 does not get the gold estimate any more correct nor does it mean it passed the worst case scenario's either . worst time frames ever were the first 15 years if you retired in 1965/1966  . if we remove that time frame we would be calling it a 6.50% rule .

steveo

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Re: Portfolio Charts - The Golden Butterfly
« Reply #407 on: October 20, 2016, 03:07:05 PM »
i  read it but going back to 1972 does not get the gold estimate any more correct nor does it mean it passed the worst case scenario's either . worst time frames ever were the first 15 years if you retired in 1965/1966  . if we remove that time frame we would be calling it a 6.50% rule .

This is one of the reasons I don't like relying on Tyler's site to pick an asset allocation and why I think some people who use it may not realise what they are doing.

The flip side of this is that I don't believe that there is anyway to pick a perfect asset allocation because the data isn't perfect and the future will be different from the past.

If people use Tyler's site to get ideas about asset allocations and just use it as a guide I think that is cool. They shouldn't think because of the past performance of the GB that it will work out that way in the future.

mathjak107

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Re: Portfolio Charts - The Golden Butterfly
« Reply #408 on: October 20, 2016, 05:38:33 PM »
i agree ,it is useful . it just has it's faults when folks try to draw conclusions about safe withdrawal rates and portfolio's heavy in gold . i have seen folks say the permanent portfolio has a higher draw rate and then test from 1975 on  or they forget about the balances left over from a 60/40  . as long as you understand you cannot do safe withdrawal rates without stress testing 1965 and 1966 as starting years or you are not comparing apples to apples

Daniel S

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Re: Portfolio Charts - The Golden Butterfly
« Reply #409 on: October 20, 2016, 06:04:23 PM »
In the case of any portfolio with gold, it makes sense to exclude any pre-1970's data back to the early 1930's, doesn't it? It wasn't legal to own gold so you would never choose such a portfolio. If gold ownership were to be banned again, then anybody that has a gold allocation would be forced to choose another portfolio without a gold allocation.

It's interesting that gold had a massive run between 1929 and the year of the ownership ban. This coincided with the 1929 crash. To me it suggests that if gold were not banned, then it is likely an allocation to gold in a portfolio would have had the desired effect throughout the entire 100 past years.

http://www.macrotrends.net/1333/historical-gold-prices-100-year-chart

arebelspy

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Re: Portfolio Charts - The Golden Butterfly
« Reply #410 on: October 20, 2016, 06:06:44 PM »
In the case of any portfolio with gold, it makes sense to exclude any pre-1970's data back to the early 1930's, doesn't it? It wasn't legal to own gold so you would never choose such a portfolio. If gold ownership were to be banned again, then anybody that has a gold allocation would be forced to choose another portfolio without a gold allocation.

Sure, but then you're also excluding the worst years to retire, so it's difficult/impossible to gauge how good a portfolio with gold would have been then, and you aren't comparing apples to apples.
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Daniel S

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Re: Portfolio Charts - The Golden Butterfly
« Reply #411 on: October 20, 2016, 06:31:11 PM »
I see it as being not possible to compare apples with apples during the ban years.

arebelspy

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Re: Portfolio Charts - The Golden Butterfly
« Reply #412 on: October 20, 2016, 07:56:54 PM »
I see it as being not possible to compare apples with apples during the ban years.

Sure, and that's fine, but then talking about a 4% WR isn't even a valid concept at that point, as without those years, as MJ pointed out, it would be a 6.5% WR (haven't confirmed the math, but assuming it's correct).

We simply don't know how the GB would have performed in the truly bad 30-year timeframes.  We've only seen it in mostly good timeframes.
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Tyler

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Re: Portfolio Charts - The Golden Butterfly
« Reply #413 on: October 20, 2016, 09:11:03 PM »
Sure, and that's fine, but then talking about a 4% WR isn't even a valid concept at that point, as without those years, as MJ pointed out, it would be a 6.5% WR (haven't confirmed the math, but assuming it's correct).

It's not correct.  The Withdrawal Rates FAQ gives multiple examples directly comparing numbers calculated since 1972 to those since 1926 and even 1870 from various retirement studies.  The difference is only about 0.3%.

The quoted 6.5% number is simply the average SWR since 1870 from the previously linked Kitces study.  But using the average SWR rather than the worst is not the correct fallback when more years of data is not available.  You simply use the worst year you do have access to.  And you can see in the charts Kitces and Pfau independently provide that 1973 wasn't much better for a retiree than 1966.
« Last Edit: October 21, 2016, 08:50:09 AM by Tyler »

arebelspy

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Re: Portfolio Charts - The Golden Butterfly
« Reply #414 on: October 21, 2016, 12:28:54 AM »
Thanks for that, Tyler. You're absolutely correct.
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mathjak107

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Re: Portfolio Charts - The Golden Butterfly
« Reply #415 on: October 21, 2016, 01:35:18 AM »
Sure, and that's fine, but then talking about a 4% WR isn't even a valid concept at that point, as without those years, as MJ pointed out, it would be a 6.5% WR (haven't confirmed the math, but assuming it's correct).

It's not correct.  The Withdrawal Rates FAQ gives multiple examples directly comparing numbers calculated since 1972 to those since 1926 and even 1870 from multiple retirement studies.  The difference is only about 0.3%.

The quoted 6.5% number is simply the average SWR since 1870 from the previously linked Kitces study.  But using the average SWR rather than the worst is not the correct fallback when more years of data is not available.  You simply use the worst year you do have access to.  And you can see in the charts Kitces and Pfau independently provide that 1973 wasn't much better for a retiree than 1966.

i only  agree if the portfolio does not use gold .   you sill do not know what  the wild card  GOLD pre 1975 would have done  .   any predictions about the permanent portfolio  and gb that involves 1965 ,1966 or 1973 are going to be wrong .

i doubt very much when it comes to passing through those specific worst case time frames the the gb had a higher draw rate than a 60/40 mix and balance  . which is the comment i objected to . my point is we just can't tell for sure so that comment about the gb doing that  is false . it can't be accurately known .

the gb with i think 10% gold won't be that far off but something like the pp is so gold heavy it  would totally be off in left field somewhere if you wanted to stress test it for comparison over those worst time frames .

« Last Edit: October 21, 2016, 01:48:07 AM by mathjak107 »

k9

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Re: Portfolio Charts - The Golden Butterfly
« Reply #416 on: October 21, 2016, 02:24:22 AM »
nope , the term is based on the worst case scenario's which were if you retired in the years i listed . if you are testing any later time frames than you are not comparing apples to apples .

it is not just picking time frames out of a hat that you think are examples . any guesses at what gold did pre 1975 is just that , a guess and no one knows for sure what would have happened if it traded freely as it does today . sorry i don't accept tylers 1972  comparisons, we had that discussion when he was claiming  the same thing for the permanent portfolio .

Nowhere in the original trinity study was the SWR ("SAFEMAX") defined as "the rate at which you could deplete your portfolio if you retired on years x, y, z, or w". It was defined as (my wording as I can't find the paper back) "the maximum rate one could use to safely withdraw from his portfolio without depleting it in a given timeframe, no matter what the starting date". The fact that the worse years (those which defined SAFEMAX) were the ones you listed is a result of the study, not a definition.

As for the apples to apples, and thanks to the above definition, nothing forbids you to calculate SWR on smaller timeframes if that's all you've got, to compare different AAs. Now, sure, you cannot compare 1926-present's SWR for a 60/40 with a 1972-present SWR for GB. You have to adapt the timeframes, obviously, and be aware the longer the timeframe, the safest the SAFEMAX.

Quote
don't forget a comparison has to take in to consideration the balance's left over  too , not just the draw rate .
Once again, you're wrong. The SWR does not care about balance left. But I agree that has to be taken into consideration when looking at the whole picture. The Trinity study is just that, an academic study, and it's been stated many times that nobody does actually that : spend x% (inflation adjusted) of the original value of the portfolio, no matter what, and consider that dying with $0 left is as much a success as dying with millions.

mathjak107

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Re: Portfolio Charts - The Golden Butterfly
« Reply #417 on: October 21, 2016, 03:05:42 AM »
the SAFEMAX withdrawal rate is the highest sustainable withdrawal rate in the worst-case historical scenario. that would be 1965/1966 as a starting point . as kitces calculated not only is it 1965/1966 as a starting point but it is specifically the first 15 years of that period that make it the absolute worst case and the reference point that safemax had to be brought down to to clear ..
« Last Edit: October 21, 2016, 04:18:46 AM by mathjak107 »

mathjak107

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Re: Portfolio Charts - The Golden Butterfly
« Reply #418 on: October 21, 2016, 03:09:29 AM »
here are your worst case scenario's . there are no worse time frames .





suppose you were so unlucky to retire in one of those worst time framess ,what would your 30 year results look like :

1907 stocks returned 7.77% -- bonds 4.250-- rebalanced portfolio 7.02- - inflation 1.64--

1929 stocks 8.19% - - bonds 1.74%-- rebalanced portfolio 6.28-- inflation 1.69--

1937 stocks 10.12 - - bonds 2.13 - rebalanced portfolio -- 7.24 inflation-- 2.82

1966 stocks 10.23 - -bonds 7.85 -- rebalanced portfolio 9.56- - inflation 5.38

for comparison the 140 year average's were:

stocks 8.39--bonds 2.85%--rebalanced portfolio 6.17% inflation 2.23%

so what made those time frames the worst ? what made them the worst is the fact in every single retirement time frame the outcome of that 30 year period was determined not by what happened over the 30 years but the entire outcome was decided in the first 15 years.

so lets look at the first 15 years in those time frames determined to be the worst we ever had.

1907--- stocks minus 1.47%---- bonds minus .39%-- rebalanced minus .70% ---inflation 1.64%

1929---stocks 1.07%---bonds 1.79%---rebalanced 2.29%--inflation 1.69%

1937---stocks -- 3.45%---bonds minus 3.07%-- rebalanced 1.23%--inflation 2.82%

1966-stocks minus .13%--bonds 1.08%--rebalanced .64%-- inflation 5.38%

it is those 15 year horrible time frames that the 4% safe withdrawal rate was born out of since you had to reduce from what could have been 6.50% as a swr down to just 4% to get through those worst of times.


so what it boils down to is any time you fall below a 2% real return average over the first 15 years you run the danger of 4% not holding. but even a 1/2% cut in spending will make you whole again over the next 15 years or longer.


Daniel S

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Re: Portfolio Charts - The Golden Butterfly
« Reply #419 on: October 21, 2016, 04:24:23 AM »
As long as a person is aware that using Tyler's tools don't cover periods prior to 1972, I don't see what the problem is. If they want to go back further in history, they simply need to go elsewhere. If they are assessing any portfolio with a gold allocation between the early 1930's and 1971, then it would be highly advisable to acknowledge that gold was not traded freely on the markets and ownership was restricted during these years.

I myself am looking for an asset allocation today, when gold ownership is not restricted. I'm more than happy to exclude the periods of history when this was not the case. I have a smaller subset of data for back-testing and that's ok with me. I don't consider 43 years (1972 - 2015) a small time period anyway.

mathjak107

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Re: Portfolio Charts - The Golden Butterfly
« Reply #420 on: October 21, 2016, 04:28:58 AM »
i agree 100% with you . my only objection was the claim that the gb had a higher swr rate than a 60/40 mix and by definition of the worst case scenario's that claim can not be confirmed . it holds even more truer for the pp with it's big allocation to gold .

personally i think going forward will be nothing like the last 35 years . we have only known rates to go down except for a few short term speed bumps .

we never had bond rates with such low real returns and high stock valuations before .

i think anything with long term bonds will be nothing like the back testing of the past . sure there is a chance we can see rates go negative but odds are as the last 90 days have shown us we are more inclined to go up then down.

except for some  short term speed bumps in the road we have been in a bond bull market for 35 years .

i think any back testing that involves back testing with long term bonds will be very different going forward .

i am a big believer that like steering a big ship we will have to nudge our portfolio's to keep them on course and the old buy and die with some rebalancing may be a poor way to go . better to adjust as things unfold to fit the big picture . i have been doing just that for 30 years now . but i think going forward for at least the next 10 years that may be the order of battle .

i use assets and investments when it is their time in the sun and when the big picture changes on to different types of funds .


unconventional  times may call for unconventional investing  .

when i think back to how many things looked like a given 40 years ago but were not even close to playing out that way .

who ever thought we would be paying less income taxes and 100k would soon be in the 15% bracket , or when inflation was soaring that 40 years later deflation is a bigger issue . the 5% passbook savings account was a joke . who ever thought we would sell our kids to get 5% risk free . 40 years later .

the bottom line is be careful looking in the rear view mirror when driving . back testing and thinking you are safe today can be pretty wrong .  especially when you have never been on this road before .

even back in the 1930's when rates were low ,  in real return they were quite high . the cpi  plunged 18% so even 2% was a huge return .

not the case today so we have no history to really go by in the past .

« Last Edit: October 21, 2016, 05:36:57 AM by mathjak107 »

Daniel S

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Re: Portfolio Charts - The Golden Butterfly
« Reply #421 on: October 21, 2016, 05:43:15 AM »
I'm not too clued up on bonds, but would diversifying bond allocation internationally be likely to help? It looks like emerging market interest rates are still comparatively high.

http://www.global-rates.com/interest-rates/central-banks/central-banks.aspx

AdrianC

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Re: Portfolio Charts - The Golden Butterfly
« Reply #422 on: October 21, 2016, 06:37:26 AM »
Please, give us the answer to your question: "why would one choose GB instead of 60/40 ?"

Because one might prefer reduced volatility over a potential better return ?

Fair enough.

Because there are less "worse case scenarios" (ie a higher SWR) with GB than with 60/40 ?

Only if we include the 1970's, when gold went up over 1,000% (125% in 1979 alone).

Since 1980:
GB SWR 6.4% $0 remaining
60/40 SWR 8.5% $0 remaining

Last 30 years:
GB SWR 6.9% $0 remaining
60/40 SWR 8.5% $0 remaining

mathjak107

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Re: Portfolio Charts - The Golden Butterfly
« Reply #423 on: October 21, 2016, 07:10:54 AM »
pretty much the results i would expect . not the gb out performing in swr .   thanks for the math .
« Last Edit: October 21, 2016, 07:12:30 AM by mathjak107 »

Daniel S

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Re: Portfolio Charts - The Golden Butterfly
« Reply #424 on: October 21, 2016, 07:51:07 AM »
Please, give us the answer to your question: "why would one choose GB instead of 60/40 ?"

Because one might prefer reduced volatility over a potential better return ?

Fair enough.

Because there are less "worse case scenarios" (ie a higher SWR) with GB than with 60/40 ?

Only if we include the 1970's, when gold went up over 1,000% (125% in 1979 alone).

Since 1980:
GB SWR 6.4% $0 remaining
60/40 SWR 8.5% $0 remaining

Last 30 years:
GB SWR 6.9% $0 remaining
60/40 SWR 8.5% $0 remaining

1980 scenario:

This back-test shows a large amount left over for both GB and 60/40 with a withdrawal rate of 6.4%, although it does show 60/40 having a considerably higher end balance.

This back-test shows a lesser, but still very significant amount left over for both GB and 60/40 with a withdrawal rate of 8.5%, although again it does show 60/40 having a considerably higher end balance.

Last 30 Year scenario: Same situation i.e. significant money left for both percentage withdrawals.

You are probably right that SWR is better for 60/40 over the time periods you have mentioned, but I'm not sure on those figures.

(Edited to correct global bonds to total bonds)
« Last Edit: October 21, 2016, 07:59:57 AM by MrNotRobot »

mathjak107

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Re: Portfolio Charts - The Golden Butterfly
« Reply #425 on: October 21, 2016, 07:55:40 AM »
of course from this point on ,as i said things can be very different . as rates rise a portfolio heavy in long term treasury's vs a 60/40 mix with combo of short term and intermediate bonds will likely see very different results . especially if stocks move ahead but  in the single digits .

i see what happens to the permanent portfolio i track . every time stocks get traction the powerful pull from bonds and gold suck the portfolio  right back down again

if we turned the corner on bond rates then all that history on these hedged portfolio's will go out the window .

right now the supposed low volatility permanent portfolio is seeing greater swings than conventional models .
« Last Edit: October 21, 2016, 07:59:07 AM by mathjak107 »

Daniel S

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Re: Portfolio Charts - The Golden Butterfly
« Reply #426 on: October 21, 2016, 08:14:50 AM »
Sorry @AdrianC, I've just realized that you are talking about worst case for any start year rather than those specific times being the start years.

But I still can't seem to find a year where balance would end at zero for those percentages, using these back-tests.

Daniel S

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Re: Portfolio Charts - The Golden Butterfly
« Reply #427 on: October 21, 2016, 09:47:26 AM »
I've checked all of the portfolios and GB has the highest 10 year PWR of all of them. Quite a few, including TSM, have a negative 10 year PWR. But it needs to be remembered that this is worst case. No doubt there were specific years that would have given much better than GB's 3.6%. How much would people read into this? Would you consider the 10 year PWR a pretty good comparative measure between the portfolios? I suppose it is may only be a comparison of volatility.

Why is the 10 year PWR so important? Why not 5 year or 15 year? On the 15 year the GB isn't so special.

Because the 10 year is based on a greater number tests than the 15 year. The 5 year would be great to see, but it is not provided.

This got me interested in what the 5 year PWR might look like and I think the Retirement Spending calculator might be able to answer the question.

I'm pretty sure the lower band on the Range of Account Balances show the worst case scenario for the number of years, for the withdrawal rate entered. So I played around with the percentages until the 5 year coincided with the worst case balance returning to the starting balance of $1M (marked with the red arrow). I think the percentage when this becomes the case is the equivalent of the PWR.

Assuming that I'm correctly interpreting this calculator's results then GB has a 5 year PWR around 2.4% and the 5 year point on these charts would be based on 38 possible start years (1972 - 2010). This is definitely not an exact method of determining the 5 year PWR, but I think it gives a good indication.





Tyler

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Re: Portfolio Charts - The Golden Butterfly
« Reply #428 on: October 21, 2016, 10:11:16 AM »
Assuming that I'm correctly interpreting this calculator's results then GB has a 5 year PWR around 2.4% and the 5 year point on these charts would be based on 38 possible start years (1972 - 2010). This is definitely not an exact method of determining the 5 year PWR, but I think it gives a good indication.

It's technically 40 possible start years (1972 - 2011, and '72 counts as year 1 not 0), but your interpretation of the charts is correct.  :)

Classical_Liberal

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Re: Portfolio Charts - The Golden Butterfly
« Reply #429 on: October 21, 2016, 12:47:39 PM »
Because the 10 year is based on a greater number tests than the 15 year. The 5 year would be great to see, but it is not provided.

This is an excellent look!  Not only does it have more data, the reduction in shorter term volatility shows exactly why the GB shines in early drawdown!

As mathjak107 continually points out, portfolios fail because of poor performance early on. Each successive year in drawdown sequence risk is reduced.  With only 20 years left to fund, one doesn't even need positive real returns for 4% WR success, the only real threat is runaway inflation.  This is why I repeatedly go back to goals.  The portfolio should evolve overtime. If goal is only portfolio success,  IMO the only legit argument against GB in early drawdown is the missing data & that can't be changed.  Either believe the data we do have, or dont.  If the goal is "how to die the richest no matter what", obviously there are better choices.

Any argument that "this time it's different" (ie high PE/10 and ZIRP) is only debatable in theory.  I get the theory, if I were to FIRE tomorrow it would be of concern.  However, this would only serve to further fuel my desire to add alternative asset classes that have better potential to not underperform and/or underperform, but with reduced volatility.  GB does this with gold (different class) and cash/bonds (reduced volatility).

mathjak107

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Re: Portfolio Charts - The Golden Butterfly
« Reply #430 on: October 21, 2016, 12:56:24 PM »
well like i said if the last 3 months are any indication of what is going to be as rates rise and we mimic a tight money situation  even though we are not in one look out for the volatility in the GB AND PP .

with gold and long term bonds pulling down in the same direction you will likely see a volatility range far exceeding a 60/40 mix  . especially if the 60/40 mix is a dynamic mix like i use and all the bonds are not in very interest sensitive bond funds

« Last Edit: October 21, 2016, 12:58:43 PM by mathjak107 »

steveo

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Re: Portfolio Charts - The Golden Butterfly
« Reply #431 on: October 21, 2016, 07:06:56 PM »
Because the 10 year is based on a greater number tests than the 15 year. The 5 year would be great to see, but it is not provided.

This is an excellent look!  Not only does it have more data, the reduction in shorter term volatility shows exactly why the GB shines in early drawdown!

As mathjak107 continually points out, portfolios fail because of poor performance early on. Each successive year in drawdown sequence risk is reduced.  With only 20 years left to fund, one doesn't even need positive real returns for 4% WR success, the only real threat is runaway inflation.  This is why I repeatedly go back to goals.  The portfolio should evolve overtime. If goal is only portfolio success,  IMO the only legit argument against GB in early drawdown is the missing data & that can't be changed.  Either believe the data we do have, or dont.  If the goal is "how to die the richest no matter what", obviously there are better choices.

Any argument that "this time it's different" (ie high PE/10 and ZIRP) is only debatable in theory.  I get the theory, if I were to FIRE tomorrow it would be of concern.  However, this would only serve to further fuel my desire to add alternative asset classes that have better potential to not underperform and/or underperform, but with reduced volatility.  GB does this with gold (different class) and cash/bonds (reduced volatility).

The problem with 30 year periods between 1972 and 2010 is that there aren't a lot of them is there. I assume that once you get past 1980 then it's not really considering a 30 year period but it still calls it a success.

Looking at shorter time periods makes things a little more interesting because you get more time periods to test.

I think a key point to consider for all of us is what do we want when it comes to portfolio returns. For me personally I couldn't care less about becoming the richest person that I can be. I'm much more interested in my success in remaining free of paid work that I don't want to do.

So having some defensive assets or a holding uncorrelated assets actually becomes fairly important for someone like myself.

mathjak107

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Re: Portfolio Charts - The Golden Butterfly
« Reply #432 on: October 22, 2016, 01:40:40 AM »
when it comes down to it , all we need is 1 period to stress test with . 1966 .  if your portfolio passed starting in 1966 you are good to go . that is the worst time frame to date .

that is our hurricane sandy as a new yorker would say . if i built my house to standards that withstood sandy odds are pretty good i am at least starting out with a house that has a reasonably good chance of survival . it does not mean we can't have a more powerful storm one day . we can , but odds are pretty low .

it does not matter if we have a thousand more sample dates if they are not worse  . pass 1966 and you are at 100% .

to stand up to 4% draw rates you need at least a 2% real return average the first 15 years .  that is easy enough to monitor as you go go towards the 15 year mark . if 5 years in you are under that ,there is your red flag you need to react .
« Last Edit: October 22, 2016, 01:42:41 AM by mathjak107 »

steveo

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Re: Portfolio Charts - The Golden Butterfly
« Reply #433 on: October 22, 2016, 05:42:15 PM »
when it comes down to it , all we need is 1 period to stress test with . 1966 .  if your portfolio passed starting in 1966 you are good to go . that is the worst time frame to date .

I don't see the point in this. It's catering for the very worst scenario which means in the vast majority of situations you will be working too long. Is that what you want to do. If things look bad you could just return to work in the very very rare situation where you retire in the worst possible year.

to stand up to 4% draw rates you need at least a 2% real return average the first 15 years .  that is easy enough to monitor as you go go towards the 15 year mark . if 5 years in you are under that ,there is your red flag you need to react .

This would be a good thing to monitor but it's really what most people I assume are going to do. If things are looking bad you can react though in so many ways. Spend less, go back to work, downsize your house etc.

« Last Edit: October 22, 2016, 05:44:21 PM by steveo »

mathjak107

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Re: Portfolio Charts - The Golden Butterfly
« Reply #434 on: October 22, 2016, 06:32:37 PM »
how long you want to work is up to you as well as the draw rate you are comfortable with .  i went for 100% success rate but i didn't chose to work longer , i sniped the budget by 1/2% and will play it by ear .

if we do better then worst case i got some nice raises coming over time

but i will leave you with this :

if you think working longer at 40 or 50 is miserable or finding a job at 40-50 is difficult , try it at 80  if you have to .  just something to keep in the back of your mind when you start reducing the security blanket  for the awe craps in life .
« Last Edit: October 22, 2016, 06:34:19 PM by mathjak107 »

Frs1661

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Re: Portfolio Charts - The Golden Butterfly
« Reply #435 on: October 23, 2016, 06:08:14 AM »


when it comes down to it , all we need is 1 period to stress test with . 1966 .  if your portfolio passed starting in 1966 you are good to go . that is the worst time frame to date .

... {snip}

Just because 1966 was the worst start year for a 60/40 equity/bonds portfolio doesn't mean it would be the worst for alternative GB. For example, the worst start year for a 50/50 cash/bonds portfolio was 1973.

Nothing magic about 1966 once you add other asset classes. No reason a stock/bonds portfolio couldn't see conditions worse than 1966 in the future either.

Back testing is just a guide anyway. There are less data available for back testing the GB and that's something you have live with if you choose to use it. No matter the portfolio we choose we will all likely have to be a little flexible at some point to make it work, and that's OK.

mathjak107

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Re: Portfolio Charts - The Golden Butterfly
« Reply #436 on: October 23, 2016, 07:04:11 AM »
i still see the worst start year for 50/50 as 1966 because all the damage is done in the first 15 years in every worst case scenario time frame . you can not look at 30 or 40 year results . they were all not bad  going out longer but the failure's were in the first 15 years when assets were so depleted that even having the greatest bull market in history in the 1966 time frame could not salvage it .

so the bottom line is we do not know how other assets would have stress tested in those early years , especially gold   . by the time 1973 came that 50/50 mix if you retired in 1966 was very depleted
« Last Edit: October 23, 2016, 08:02:04 AM by mathjak107 »

Classical_Liberal

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Re: Portfolio Charts - The Golden Butterfly
« Reply #437 on: October 23, 2016, 09:13:38 AM »
if you think working longer at 40 or 50 is miserable or finding a job at 40-50 is difficult , try it at 80  if you have to .  just something to keep in the back of your mind when you start reducing the security blanket  for the awe craps in life .

to stand up to 4% draw rates you need at least a 2% real return average the first 15 years .  that is easy enough to monitor as you go go towards the 15 year mark . if 5 years in you are under that ,there is your red flag you need to react .

Given that the vast majority of people on this forum plan to retire in their 30's and 40's, how do you reconcile this fear of finding work at 80 given your often repeated sentiment that portfolio failure is evident in the first 15 years?

mathjak107

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Re: Portfolio Charts - The Golden Butterfly
« Reply #438 on: October 23, 2016, 10:59:15 AM »
at a 4% draw rate or close  there was barely enough money left in every worst case scenario to sustain even 30 years  of life .if your retirement is 40 years or more and you cut your draw you may make it  .   but you could also find yourself in to your late 70's or early 80's  under those same conditions and running low on dough and have to deal with that . if you got a fair amount of discretionary income you can cut back , but if everything is a need and not a want you may be in trouble and need to work again ..

so that is why i would only stress test against those acknowledged worst case time frames .

it is all going to be about your draw rate and how well a duplication of time frames like 1965 ,1966  pan out
« Last Edit: October 23, 2016, 11:05:08 AM by mathjak107 »

Classical_Liberal

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Re: Portfolio Charts - The Golden Butterfly
« Reply #439 on: October 23, 2016, 11:23:06 AM »
@ mathjack107

That still makes no sense.  If a 40 year old retiree sees at 50 or 55 a worse case scenario playing out, I doubt that person is going to think, "Well, this sucks!  Walmart greeter and cat food at 70, I guess".  More likely that person will correct the situation in one of a multitude of ways, choosing whichever means is most pleasent to that individual.  OTOH, if the scenario is within two standard deviations of mean, there is no problem and discussions of AA will be virtually meaningless.

Either way, no ones looking for a job at 80.  That's just fear mongering.

Forgive my off topic rant.


mathjak107

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Re: Portfolio Charts - The Golden Butterfly
« Reply #440 on: October 23, 2016, 11:32:13 AM »
regardless , if you end up having to go back to work down the road in   most cases it is going to get harder and harder both to work and or find work the older you are when you realize you have to do it . ..

unless you have the discretionary income to cut back  you will have few options .


not everyone who retires that young has that much slack in the plan  built in so it can be easy to hit trouble if you have no room to start slashing things ..
« Last Edit: October 23, 2016, 11:33:54 AM by mathjak107 »

lordmetroid

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Re: Portfolio Charts - The Golden Butterfly
« Reply #441 on: October 23, 2016, 05:06:27 PM »
Retirement is for wussies. I will never retire!
However, having FU-money and paid off mortgage and then some saving will allow me to do awesome adventures.
« Last Edit: October 24, 2016, 10:54:19 AM by lordmetroid »

AdrianC

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Re: Portfolio Charts - The Golden Butterfly
« Reply #442 on: October 24, 2016, 06:02:18 AM »
Sorry @AdrianC, I've just realized that you are talking about worst case for any start year rather than those specific times being the start years.

But I still can't seem to find a year where balance would end at zero for those percentages, using these back-tests.

I was talking about those specific start years (1980 & 1986). I didn't do every year from 1980 onwards. Would be an interesting exercise, though.

You had PorfolioVisuallizer set for "Withdraw fixed percentage". You're drawing 6.4% of portfolio balance each year. If you look at the annual returns tab you'll see in the final year, 60/40 withdraws $209,350 and GB withdraws $134,514. Not apples to apples.

I'm using "Withdraw fixed amount" adjusted for inflation, withdrawing an initial $64,000. This is the usual method for SWR.

For 1980-2015:
6.4% SWR
Final year withdrawal is $197,365.
Year end balances are: 60/40 $8,286,066, GB $0.
60/40 could support a higher SWR (8.5%).

(No doubt in my mind that these SWRs will not be seen in the next 30 years. Plan accordingly.)
« Last Edit: October 24, 2016, 06:11:25 AM by AdrianC »

effigy98

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Re: Portfolio Charts - The Golden Butterfly
« Reply #443 on: October 24, 2016, 01:01:54 PM »
Every article I read spells doom and gloom for LTT. Nobody likes gold, so I try to kind of ignore the hate around gold as I do not see a good alternative for this wildcard asset and why would banks hold so much of it if it did not matter??

So the question for LTT, is there an alternative for this asset class in a rising interest rate environment that will cover deflation? Is cash just better (or safer)? Or should we just stick with LTT if we believe in the GB?

mathjak107

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Re: Portfolio Charts - The Golden Butterfly
« Reply #444 on: October 24, 2016, 01:14:54 PM »
why  not stay dynamic and roll with the bigger picture . it isn't like you have to marry an asset before it is close to time . sure you may miss a bit of the gains early on  but if you are wrong about it being a trend you will be in better shape  . right now it appears the trend will be up in rates . no need to act yet and sell bonds , especially interest rate sensitive ones but the red flag should be up in my opinion

Daniel S

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Re: Portfolio Charts - The Golden Butterfly
« Reply #445 on: October 25, 2016, 12:43:08 AM »
Sorry @AdrianC, I've just realized that you are talking about worst case for any start year rather than those specific times being the start years.

But I still can't seem to find a year where balance would end at zero for those percentages, using these back-tests.

I was talking about those specific start years (1980 & 1986). I didn't do every year from 1980 onwards. Would be an interesting exercise, though.

You had PorfolioVisuallizer set for "Withdraw fixed percentage". You're drawing 6.4% of portfolio balance each year. If you look at the annual returns tab you'll see in the final year, 60/40 withdraws $209,350 and GB withdraws $134,514. Not apples to apples.

I'm using "Withdraw fixed amount" adjusted for inflation, withdrawing an initial $64,000. This is the usual method for SWR.

For 1980-2015:
6.4% SWR
Final year withdrawal is $197,365.
Year end balances are: 60/40 $8,286,066, GB $0.
60/40 could support a higher SWR (8.5%).

(No doubt in my mind that these SWRs will not be seen in the next 30 years. Plan accordingly.)

Yep, that's where I went wrong. But there are other periods where GB had a higher SWR:

2000-2015
GB: 9.4% Link
60/40: 6.8% Link

I think it shows that if you are unlucky enough to FIRE at the start of a bad equity bear run, then you are much better off with GB, and vice-versa if you are lucky enough to FIRE at the start of an equity bull run.

mathjak107

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Re: Portfolio Charts - The Golden Butterfly
« Reply #446 on: October 25, 2016, 02:31:33 AM »
it is  really an extended down turn not in tight money where the pp or gb may do better . even a bad drop like 2008 , which was short lived would not do as well for the gb over a 60/40 .

a modest extended down turn is harmful . a v-shaped drop likely a non event . 2008 to a retiree who just retired is a non event in the scheme of things .

all in all you would really be betting against the house counting on the gb to do better , especially if rates go up and that is the reason stocks lag .

when it gets down to singling out a time frame to have a particular asset or portfolio shine why not just forget everything else and show 30 year treasury bonds for 2000-2015  for that matter .  it beat them all .
« Last Edit: October 25, 2016, 03:46:45 AM by mathjak107 »

effigy98

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Re: Portfolio Charts - The Golden Butterfly
« Reply #447 on: October 25, 2016, 09:23:49 AM »
During rising interest rates from 77-81 the PP (similar) did better than 60/40. I see a lot of articles arguing against 60/40 in a rising interest rate environment as well. Maybe everyone is just pessimistic.

http://seekingalpha.com/article/1546002-the-permanent-portfolio-during-rising-interest-rates-heres-what-happens

mathjak107

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Re: Portfolio Charts - The Golden Butterfly
« Reply #448 on: October 25, 2016, 09:31:54 AM »
well just look at the last 3 months . pp fell almost  6 or 7 %  as bond and gold investors got a sniff of the corner being turned . someone  seeking the low volatility of the pp after brexit lost 7% of their investment while 60/40 is up .. i would not trust back testing under today's conditions nor set a path i wasn't ready to alter .
« Last Edit: October 25, 2016, 09:35:14 AM by mathjak107 »

effigy98

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Re: Portfolio Charts - The Golden Butterfly
« Reply #449 on: October 25, 2016, 09:39:28 AM »
3 months is very short term, plus if you re-balanced after the drop of brexit not down by much. I like to re-balance after big swings especially with fidelity commission free trades. I have multiple portfolios including GB and 60/40. They are still pretty close to each other in total gains/loss this year.