Portfolio Charts

[ThisDinosaur]

Hey Tyler. Any reason you have REITs, but no other market sector data? Is that data not available?

[Tyler9000]

It's admittedly harder to get data because I require that there at least be data to 1972. But even then, most historical returns data either is not reliable, is copyrighted, or is prohibitively expensive. If you have any suggestions, I'm all ears!

[BRUTE]

brute just found the portfolio charts site and is very impressed. is the golden butterfly anything humans really do in practice, or do they just mainly stick with PP?

what is great about the visualizations is how brute can actually see the correlation between gold and stocks, making the PP much more viable vs. some of the more modern "100% stocks" type portfolios. if brute just looks at average returns, it seems to completely lose out over time. but the PP seems very competitive if brute looks at the heat map and CAGR, and the GB plain blows 100% stocks out of the water.

[Tyler9000]

I recently transitioned my Permanent Portfolio to a Golden Butterfly variant (using TSM and SCB instead of LCB and SCV). I'll be happy to keep everyone informed on how it goes.

Yeah, portfolio theory is a lot more sophisticated and interesting than simply looking at the average returns. I'm always happy to hear when others find the charts as illuminating as I do.

[Dragline]

brute just found the portfolio charts site and is very impressed. is the golden butterfly anything humans really do in practice, or do they just mainly stick with PP?

Kind of, although I've been incorporating P2P Lending into this. In my investments outside of tax-advantaged accounts, I'm currently running something that looks like about 15% LTT (EDV for more bang), 15% Gold, 15% REITS/MLPs (divided into real estate, oil and wood), 22% equities (currently almost all US but adding foreign) and 33% Lending Club. Its also about 35% levered.

This is why I've been itching for Tyler to add in a "plug" feature, where you could just take some "assumed investment" and that has a fixed return forever that you can set (like an annuity or a stream of rents you believe or want to assume would be stable).

[Tyler9000]

Your request is definitely on my radar, and I've been tinkering with the idea of a more flexible tool suitable for individual customization. I'm taking my time on that one, as I think there's some product potential there if I do it right.

[BRUTE]

I think there's some product potential there if I do it right.

brute advises Tyler9000 not to try selling software to humans who're trying to save money... just not a great market, brute thinks. maybe with some kind of ad model.

just the calculators alone have amazing value though.

and just to clarify: if brute had invested the same money into a GB portfolio, including gold, long term treasuries, and short term treasuries, he would have MORE money left over than a 100% TSM portfolio for pretty much any start date and any length of time? (assuming of course same start date and length for GB and TSM portfolio). brute is trying to wrap his head around volatility.

[Toska2]

That's only true if a lump sump is invested in both or same amount at the same time regardless of differences before.

Since TSM is more volatile one might end up richer because he bought on the lows. Typically one invests throughout their working years. (Fighting human nature, but BRUTE should have no problem)

[Tyler9000]

brute advises Tyler9000 not to try selling software to humans who're trying to save money... just not a great market, brute thinks. maybe with some kind of ad model.

Yeah, I'm not sold on the idea. Just brainstorming. I get requests for advanced features that don't always lend themselves to simple online calculators but could work well as a standalone spreadsheet or piece of software. I find it interesting that a surprising percentage of people who have contacted me are financial advisors. I even had a hedge fund manager looking to pick my brain. In marketing terms, I'm starting to identify different groups of users and they have different needs and motivations.

BTW, I tried turning on paid ads once. It lasted about 10 minutes before I realized they were way too distracting and off-message, and I'm actually planning to upgrade soon to remove the few ads that are already there by default. The beauty of FI is that profitability isn't my primary concern.

[Tyler9000]

and just to clarify: if brute had invested the same money into a GB portfolio, including gold, long term treasuries, and short term treasuries, he would have MORE money left over than a 100% TSM portfolio for pretty much any start date and any length of time? (assuming of course same start date and length for GB and TSM portfolio). brute is trying to wrap his head around volatility.

Not exactly. The thing that makes the Golden Butterfly so interesting is not that it always beats stocks (which isn't true), but that it generates stock-like returns much more consistently.

Try the Benchmark calculator and you'll see what I mean. Plug them both in side by side and vary the first year of returns. Try 1980 and 2000. The stock market can be all over the map and involves much more timing luck than people want to believe. The Golden Butterfly just consistently does its thing.

Where people get tripped up is the concept of risk-adjusted returns. Too many people think that markets must reward them for all of the added risk they take, but that's not necessarily true. For some people a portfolio that holds its own with the stock market but without the roller coaster ride is a much better option.

[BRUTE]

risk-adjusted return seems really hard to understand. brute thanks Tyler9000 for the examples. brute believes humans want to believe in the narrative that "risk == return", which is not necessarily true.

some humans also want to fetishize pain and its tolerance, maybe because of protestant work ethic? brute thinks, for example, that one popular narrative among indexers and especially 100% stock indexers (MMM, jhcollins, GCC) is that since risk == reward, pain is good. these humans seem to almost celebrate their stock losses, because they believe it is what enables them to get richer.

brute isn't so sure about fetishizing losses. he likens it to realizing that taking a band-aid off quickly is painful but better. but then they go out and seek pain, thinking it must be even better to feel more pain.

sure, humans would probably do good not to panic in a stock market cash, sticking to their strategy. but it's not necessarily true that the more volatile one's portfolio behaves, the richer one will become.

did brute get that right?

[Tyler9000]

"Fetishizing losses" is an astute observation that I think is absolutely true. This is easiest for young investors who have yet to actually experience a true bad year like 2008, but even experienced investors can fall into it as a natural defense mechanism. I'll also point out that believing you will have the money to purchase shares during a crash with 100% in any one asset is a very job-centric perspective.

Another phenomenon I see a lot is idealizing a vague and never quantified "long-term" where the promised superior returns are always right around the corner if you wait long enough. That one might actually need to use the money before then is too often ignored. Investors tend to fixate on maximizing their theoretical future net worth and lose sight of why they save to begin with.

And then there's the Robot Fallacy, where intelligent people rationally believe that emotions are stupid and assume they're much stronger than that and will never sell low. Sure it is best not to panic, but to assume you are personally above normal human psychology is naive. Even for BRUTE and HAL9000's cousin.

IMHO, the most important takeaway is that one does not need to invest in a risky and volatile way to achieve satisfactory returns. Contrary to popular belief, the risk/reward relationship in investing is not necessarily linear for every portfolio. And once you start thinking of investing as an activity to support your important life goals rather than a maximization game of chance, different portfolios may appeal to you.

[BRUTE]

haha team AI

[BRUTE]

playing around with the calculators, brute has discovered that a GB substituting emerging markets for small value performs slightly better historically, but does not seem to have longer draw down.

if one is willing to accept 4 year draw downs, a GB with large cap, small cap, emerging, long term treasury, and gold seems to enable a SuWR of 6.6% and SWR of 7.5%(!) over 30 years

interestingly, this last portfolio cannot be found in the portfolio finder? brute is requiring those 5 assets and enters a 6% minimum, but the list comes up empty. edit: nvm, it has only 5% cagr and is thusly found.

[BRUTE]

new favorite: the emerging value butterfly

20% large cap value
20% small cap value
20% emerging
20% ltt
20% gold

cagr 8.12% since 1972
3 years longest drawdown
-18.7% worst year

enables a 7.3% SuWR and 7.7% SWR, i.e. FI in 8-12 years with a 50% savings rate starting from scratch, or 4-5 years at 75%

either brute is doing something wrong, or this thing is ERE on steroids. opinions?

[BRUTE]

feature request: comparison over time of how each asset class did during each year. this would enable brute to correlate different asset classes against each other and see which form good combinations.

also, comparing the rightmost (final) CAGR for each starting year when comparing 2 portfolios, to compare which portfolio would've won depending on start year.

[FBeyer]

new favorite: the emerging value butterfly
... opinions?

You don't use portfolio backtesting to find the portfolio that had the highest historical CAGR.
Whatever time period you choose you can always find THE ONE, that performed best. That means nothing in the future.
Japan is the novice example given in The Intelligent Asset Allocator. Portfolio backtesting from 1970 up to 1990 would have told you to BUY JAPAN NOW!!!
Check out how that would've fared: http://www.thebubblebubble.com/japan-bubble/

Portfolio backtesting is about gauging the stability of returns of your portfolio not the expected returns of your portfolio.

[Tyler9000]

Portfolio backtesting is about gauging the stability of returns of your portfolio not the expected returns of your portfolio.

Very true.

One tool I particularly like for this sorta detail is the Portfolio Growth calculator. It's really good at showing both stability and trends. An extreme example is Emerging Markets:



Note that the lighter colors are from more recent timeframes. Also note how many endpoints you can see at the bottom of the chart. These are both signs that the high historical returns that one sees with Emerging Markets are generated mostly by past periods that aren't around anymore, and that recent history is setting new lows for the data set. Both returns and SWRs may not remain as advertised.

@Brute: I'm looking at ways to make it easier to directly compare portfolios. I'll see what I can do.

[BRUTE]

Whatever time period you choose you can always find THE ONE, that performed best. That means nothing in the future.
Japan is the novice example given in The Intelligent Asset Allocator. Portfolio backtesting from 1970 up to 1990 would have told you to BUY JAPAN NOW!!!
Check out how that would've fared: http://www.thebubblebubble.com/japan-bubble/

this is not betting on a single country, or asset class. this portfolio contains stocks, gold, and long term bonds, and is therefore more diversified than most of the common stock/bond slide portfolios - and still beats them in overall returns?

brute is mainly excited about the idea of the CAGR - not knowing about this before, average returns seem a complete scam now. just comparing this measure in assets completely changes the game, doesn't it? all of the sudden a Total Stock portfolio doesn't seem that great, whereas the PP seems pretty good.

the way brute sees it, it's kind of common wisdom among many humans that "volatility + time == wealth", leading them to very stock centric portfolios. but if measured with actual compound returns, or CAGR, this is not true, as volatility can drain gains quickly. it becomes more important to avoid losses, even if this means not grabbing all the rallies.

in CAGR terms since 1972, a Total Stock portfolio and the PP are a measly 1.1%pa apart. TS and Golden Butterfly are 0.1% apart - for just about the riskiest vs. just about the safest/most diversified portfolio one could imagine.

[steveo73]

Brute - this is discussed on the MMM forum. It's not as simple as what you are stating. I think that there is a massive chance that the PP and Golden Butterfly portfolios are the result of data mining. Yeah the results some impressive but will those some results hold true for the next 40-60 years.