In retirement the PP seems to work, what am I missing??

[MustacheAndaHalf]

Tyler - In an earlier post you said you "get it" and posted a 1975 start date chart.  Could you update the most recent chart to skip 1972-1974?  I mention it because the Permanent Portfolio (PP) is 1/4th gold, and gold gains +3.3% by including those years.

I don't think people should look at replicating Swensen's portfolio for themselves.  The top performer in Tyler's chart is Swensen (Portfolio manager of the Yale Endowment).  Isn't private equity the top performing asset class in the Yale portfolio?  Yale can run it's own hedge fund, without paying 20% of profits of 2% of assets [1].  When Yale invests in private equity, it can get a full 17% of the return.  An individual investor has a different story:
private equity earns 17%, then  hedge fund takes 1/5th of profit = 13.6% return
investor has 113.6% in hedge fund, then hedge fund fee of 2% of assets = 11.1% return.
Where Yale can earn 17%, an individual investor gets 11%.

[1] http://money.cnn.com/2014/12/22/investing/hedge-fund-fees-2015/

[GorgeousSteak]

You guys all seem to know alot more about this stuff than me.  So after seeing the charts and reading about the Golden Butterfly, what are some reasonable arguments against it?  Why wouldn't I want the allocation that gives me almost the highest CAGR with almost the lowest standard deviation?  is it just that the data doesn't go back far enough to be convincing?  Or is it something more along the lines of it not being fundamentally sound?  My AA is quite different than some of these options that appear to give high returns and low volatility.  But its very tempting after messing with Tyler's site and reading some of the articles to make some changes.

[beltim]

You guys all seem to know alot more about this stuff than me.  So after seeing the charts and reading about the Golden Butterfly, what are some reasonable arguments against it?  Why wouldn't I want the allocation that gives me almost the highest CAGR with almost the lowest standard deviation?  is it just that the data doesn't go back far enough to be convincing?  Or is it something more along the lines of it not being fundamentally sound?  My AA is quite different than some of these options that appear to give high returns and low volatility.  But its very tempting after messing with Tyler's site and reading some of the articles to make some changes.

You should read the article brooklynguy posted.  Briefly, without some underlying logic, any sort of data mining for an optimal allocation is suspect.  The question shouldn't be: why not the Golden Butterfly?; instead, the question should be: why the Golden Butterfly.

Interestingly, if you leave the gold out of the Golden Butterfly, you give up 0.1% of CAGR, but reduce volatilty for 45%.  Weird, since gold is supposed to be the asset that is the most constant.  Does this mean a 25/25/25/25 Large Cap Blend/Small Cap Value/Long Term Treasuries/Short Term Treasuries is the optimal allocation?  Probably not.  But I'd certainly feel better about that portfolio than the PP or the Golden Butterfly.  And I suspect if you started the data from 1980, or 1900, instead of 1972, the PP and Golden Butterfly would lose their lustre.

[Tyler]

Tyler - In an earlier post you said you "get it" and posted a 1975 start date chart.  Could you update the most recent chart to skip 1972-1974?  I mention it because the Permanent Portfolio (PP) is 1/4th gold, and gold gains +3.3% by including those years.

I recommend that you compare multiple Pixel charts side by side as they already contain the information you're looking for.  That way you can see all investing periods at once and decide for yourself which rows to exclude for whatever reason you feel is important.  Single averages hide a lot of information, and debating start years is a slippery slope.  The Pixel chart contains 946 discrete CAGRs covering every investing environment.  Why limit yourself to just one? :)

I don't think people should look at replicating Swensen's portfolio for themselves.  The top performer in Tyler's chart is Swensen (Portfolio manager of the Yale Endowment).  Isn't private equity the top performing asset class in the Yale portfolio?  ...

The Swensen Portfolio displayed at Portfolio Charts is a simple investor-friendly version using readily available low-cost Vanguard index funds and basic annual rebalancing.  The more sophisticated Yale portfolio is an entirely different animal. 

[steveo]

Over short periods, I totally agree – the price of gold is driven by speculation in the short term.  In the very long term, gold tracks the price of inflation almost better than any other measurement.
...
Now, whether that's useful to individual investors as a hedge against inflation is a different question.  But I simply said that the price of gold should track inflation over the long term, and I think that's true.

I hope that people look at this in some detail because if it matches inflation it doesn't mean it is a good hedge at all against inflation. I think stocks do much better when it comes to beating inflation. I think the conventional wisdom on gold being a good hedge against inflation is wrong.

[steveo]

You guys all seem to know alot more about this stuff than me.  So after seeing the charts and reading about the Golden Butterfly, what are some reasonable arguments against it?  Why wouldn't I want the allocation that gives me almost the highest CAGR with almost the lowest standard deviation?  is it just that the data doesn't go back far enough to be convincing?  Or is it something more along the lines of it not being fundamentally sound?  My AA is quite different than some of these options that appear to give high returns and low volatility.  But its very tempting after messing with Tyler's site and reading some of the articles to make some changes.

You should read the article brooklynguy posted.  Briefly, without some underlying logic, any sort of data mining for an optimal allocation is suspect.  The question shouldn't be: why not the Golden Butterfly?; instead, the question should be: why the Golden Butterfly.

Interestingly, if you leave the gold out of the Golden Butterfly, you give up 0.1% of CAGR, but reduce volatilty for 45%.  Weird, since gold is supposed to be the asset that is the most constant.  Does this mean a 25/25/25/25 Large Cap Blend/Small Cap Value/Long Term Treasuries/Short Term Treasuries is the optimal allocation?  Probably not.  But I'd certainly feel better about that portfolio than the PP or the Golden Butterfly.  And I suspect if you started the data from 1980, or 1900, instead of 1972, the PP and Golden Butterfly would lose their lustre.

I feel that the PP suffers from cherry picked data and a misunderstanding of how gold actually works in a portfolio. In stating that its a diversified portfolio which will decrease volatility and at some point in the future there will probably be another massive appreciation of gold. At some point in the future stocks will tank and stocks will soar. How you react to all of these events makes a difference.

[effigy98]

Tyler's charts really opened my eyes to how withdrawing during volatility has an impact on your long term portfolio and is what started me  worrying about what is the best asset allocation and if golden butterfly is the answer.

Does this mean a 25/25/25/25 Large Cap Blend/Small Cap Value/Long Term Treasuries/Short Term Treasuries is the optimal allocation?  Probably not.  But I'd certainly feel better about that portfolio than the PP or the Golden Butterfly

Is this true? Is this allocation better? It sure seems like an easier one to balance yearly not having to deal with physical gold. I just want to know what has the LOWEST volatility but the highest returns so during the withdraw phase I can sleep at night. This is similar in my desire to finish paying off the house, from all the evidence that is a bad move but I am very risk adverse after getting laid off in tech multiple times and having to spend many hours (of my own time) every year learning new technologies just to keep my job... as I get older this becomes harder for me to stay motivated so I am very motivated to FI and get out of this grind (rat race), just don't want to wavier in confidence so I do the perpetual one more year thing so I am trying to nail down a strategy I can get behind. You guys have a lot more knowledge and passion in this area. Tell us newbies what to do so we can focus on learning the next 20 fad acronyms in tech this month so we can keep these high paying jobs.

[Tyler]

Is this true? Is this allocation better?

I'm not sure where Beltim got the volatility number for the GB portfolio without gold.  By my calculations (since 1972) it's a 7.5% standard deviation with gold and 10% without.  Perhaps he was also looking at other assets or a different data set.  In any case, even without gold I think that's a nice portfolio that I would have no problem with.  But "better" is up to the individual.  Everybody is different.

I just want to know what has the LOWEST volatility but the highest returns so during the withdraw phase I can sleep at night. ...  You guys have a lot more knowledge and passion in this area. Tell us newbies what to do so we can focus on learning the next 20 fad acronyms in tech this month so we can keep these high paying jobs.

I totally feel for your job frustration.  However, please understand that nobody here can tell you how you should invest your own life savings.  One thing I've learned over the years that there's no such thing as a single perfect portfolio that works best for everyone.  The best any of us can do is to offer all the information we can so that you can make a wise decision for yourself. 

Explore various investing options from a variety of sources here and elsewhere.  Find a few that appeal to you and read the supporting books and articles in full.  Perhaps even alter them a little based on your own needs and preferences with an eye towards building something you're personally comfortable holding on to for a very long time.  But definitely don't be hasty or rely on quick easy answers.  You deserve better!

And most importantly, always remember that you don't have to get the absolute highest risk-adjusted returns to be very successful financially.  Find something "good enough" that you're comfortable with, and redirect that optimization energy towards bulking up your MMM muscles on the expense side.  You'll probably be a lot happier and more secure in the long run.

[MustacheAndaHalf]

Tyler - In an earlier post you said you "get it" and posted a 1975 start date chart.  Could you update the most recent chart to skip 1972-1974?  I mention it because the Permanent Portfolio (PP) is 1/4th gold, and gold gains +3.3% by including those years.

I recommend that you compare multiple Pixel charts side by side as they already contain the information you're looking for.  That way you can see all investing periods at once and decide for yourself which rows to exclude for whatever reason you feel is important.  Single averages hide a lot of information, and debating start years is a slippery slope.  The Pixel chart contains 946 discrete CAGRs covering every investing environment.  Why limit yourself to just one? :)

Earlier regarding gold in 1972-1974 you posted you "get it".  Now you're posting charts that include gold's performance including 1972-1974, so I would say you don't "get it".

I don't think people should look at replicating Swensen's portfolio for themselves.  The top performer in Tyler's chart is Swensen (Portfolio manager of the Yale Endowment).  Isn't private equity the top performing asset class in the Yale portfolio?  ...

The Swensen Portfolio displayed at Portfolio Charts is a simple investor-friendly version using readily available low-cost Vanguard index funds and basic annual rebalancing.  The more sophisticated Yale portfolio is an entirely different animal.
[/quote]
Correct, which is why its incorrect to use Swensen's name for a portfolio which is not David Swensen's.

[Tyler]

Earlier regarding gold in 1972-1974 you posted you "get it".  Now you're posting charts that include gold's performance including 1972-1974, so I would say you don't "get it".

I posted a summary chart for a bunch of portfolios over a single timeframe simply to illustrate that the relationship between returns and volatility is not linear for all asset allocations.  Only three of the portfolios shown contain any gold at all.  One is free to ignore them as outliers if they so choose, and I don't believe it negates the point. 

Please understand I'm not pushing anything.  Nobody should ever invest in something they're not comfortable with. 

Correct, which is why its incorrect to use Swensen's name for a portfolio which is not David Swensen's.

The Swensen portfolio is from his book published for individual investors.  You should read it!

[beltim]

Is this true? Is this allocation better?

I'm not sure where Beltim got the volatility number for the GB portfolio without gold.  By my calculations (since 1972) it's a 7.5% standard deviation with gold and 10% without.  Perhaps he was also looking at other assets or a different data set.  In any case, even without gold I think that's a nice portfolio that I would have no problem with.  But "better" is up to the individual.  Everybody is different.

Hmm.  I swear I saw a standard deviation of 17.5%, but I must have either misread it or been looking at a different portfolio.

I think that's a fine portfolio if you want a 50% allocation to bonds.  But I wouldn't use that data to say your portfolio should have 50% bonds.  The problem with the gold data is that 1972-1980 is definitionally a one-time event: going from a government-set price to a market-set price.  The problem with using bond data from 1972 is that it is the best time period to invest in bonds in history.  Will that repeat?  Probably, but only after a multi-decade long period of lower performance.

Tyler, is the source data you use downloadable somewhere?  I'd like to play with it for a few things, and I have long term data for stocks, bonds, bills, and cash, but not the range of asset classes you do.

[beltim]

The problem with using bond data from 1972 is that it is the best time period to invest in bonds in history.

As an addendum to this, the 20 best 30-year stretches for Treasury bonds have been the last 20 30-year stretches.

[Tyler]

Tyler, is the source data you use downloadable somewhere?  I'd like to play with it for a few things, and I have long term data for stocks, bonds, bills, and cash, but not the range of asset classes you do.

Sure.  I get most of my data from Simba's Backtesting Spreadsheet (compiled by several people on the Bogleheads forum).  You can download it for yourself.  It's an excellent tool.

[Tyler]

The problem with using bond data from 1972 is that it is the best time period to invest in bonds in history.

As an addendum to this, the 20 best 30-year stretches for Treasury bonds have been the last 20 30-year stretches.

Yep.  That's why I really like the Pixel chart to see how portfolios with treasuries performed in the 70's when rates skyrocketed.  I also like to study high stock portfolios on either side of that historic 20-year bull market in the 80's and 90's. ;)  Averages lie, and the big picture is more informative than a single long-term return. 

[MustacheAndaHalf]

Going to have to agree to disagree, then.  Swensen recommends one thing and does another.  He recommends infrequent rebalancing for tax reasons - but in the Yale Endowment he rebalances frequently and pays no taxes (since it's for the benefit of Yale).  He invests significantly in pre-IPO ("private equity") and leaves that out of his recommended portfolio.  In short he's telling people "Why don't you do this untested thing, while I do something else."  If Swensen had never done well with the Yale Endowment, his book wouldn't be relevant.  I'd suggest Swensen's results are represented by what he did, rather than what he wrote for others to do.

Actually it's like Warren Buffet that way - nobody calls the S&P 500 "the Buffet".  Warren Buffet recommends most people invest in the S&P 500.  Most of Mr Buffet's wealth is not S&P 500, but in Berkshire Hathaway, which beat the S&P for a very long time.  Buffet is not famous for recommending the S&P, he's famous for beating it.