Portfolio Charts

[BRUTE]

feature request: predict future

of course that's an unknown. does steveo73 have a link to the relevant MMM discussion? nvm: http://forum.mrmoneymustache.com/invest ... butterfly/

[Tyler9000]

I think that there is a massive chance that the PP and Golden Butterfly portfolios are the result of data mining.

Rather than rehash that conversation, I would recommend that people read the works by Harry Browne before passing judgment on the origins of the Permanent Portfolio. One is free to not share his perspective, but he was not a data miner.

[theanimal]

I appreciate the reminder why I don't visit the MMM forums.

As a fan of Harry Browne and the PP, the golden butterfly is very appealing. I'll be looking into this a lot more. Thanks, Tyler! Love the site.

[Dragline]

This is a great discussion, at least since my last comment. I agree HB was limited by his times, but his views were not built on data per se, but on fundamental ideas of how he thought different asset classes would perform in different conditions.

[FBeyer]

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....

You're missing the point. The faulty use of portfolio backtesting chooses what was best in the past, and applies that to the future. It does not matter whether the 'past best' was a single asset or several. Japan is just the easiest thing to point to in that regard.

I'll concur that PP and the GB look absolutely wonderful for all sorts of reasons(*), but those are the reasons stated in Fail-Safe Investing (Harry Browne) not the color of the right-most pixels on the portfoliofinder pixel chart.

(*) If the Danish taxation laws were slightly different, and if private persons could invest in REIT I would build something that looks a bit like the GB. I am very big fan of the idea of a Permanent type portfolio, especially the butterfly like one with REIT rather than gold. Don't get me wrong. I ONLY arguing about how to apply backtesting and what to conclude from it.

[steveo73]

feature request: predict future

of course that's an unknown. does steveo73 have a link to the relevant MMM discussion? nvm: http://forum.mrmoneymustache.com/invest ... butterfly/

That is the one. It's a great thread.

[steveo73]

I think that there is a massive chance that the PP and Golden Butterfly portfolios are the result of data mining.

Rather than rehash that conversation, I would recommend that people read the works by Harry Browne before passing judgment on the origins of the Permanent Portfolio. One is free to not share his perspective, but he was not a data miner.

This is a great discussion, at least since my last comment. I agree HB was limited by his times, but his views were not built on data per se, but on fundamental ideas of how he thought different asset classes would perform in different conditions.

I agree that the idea of the PP didn't come up from backtesting. The point is though will that portfolio perform in a similar fashion in the future as it has within the past. We don't know. It might but it might not.

So I should clarify my comments to state that the good performances of the PP and the GB may be statistical anomalies.

In stating that I am a fan of a diversified portfolio across asset classes and within asset classes.

[BRUTE]

wow, in reading that MMM thread, brute has learned a lot:
1)there are some incredibly rude humans on the MMM forums, brute will stick with the polite anti-social ubernerds here
2)they don't have very good arguments against the PP/GB

the main argument against PP/GB seems to be that no human can predict the future. therefore, all humans should invest in 100% stocks. lol.

uncertainty is a thing, and a good argument. but arguing with uncertainty for a single asset class or just 2, vs. a more diversified portfolio should be included as the definition of irony. if a human is afraid of uncertainty, he or she should be investing in the Global Market Portfolio, not in 100% domestic stocks or 70/30 or 50/20/30 domestic/foreign/bonds.

the humans over at MMM seem extremely invested in their ideas, and not open to new ones. brute was laughing out loud at times, reading statements like "clearly you don't understand.." and "ah, the old rhetorical trick of making me look dumb".

what brute finds interesting about PP/GB is that apparently, a diversified portfolio can beat a more stock-centric portfolio at WR, which is what counts for brute (and probably most FI types). sure, the exact GB might be a result of backtesting and survivorship bias, but the basic idea works if you substitute any of the parts.

brute likes the slightly more aggressive butterfly (is it still a butterfly?), substituting another aggressive stock fund for the cash. in effect, this makes it a 20% conservative stock, 40% aggressive stock, 20% bonds, 20% other portfolio. one can substitute many broad index funds here. REITs or commodities for gold. TSM funds. international funds. whatever.

if this portfolio worked exactly like described, but any small changes made it break down, brute would attribute this to backtesting error. but the fundamental strategy seems sound.

and certainly the logical conclusion of "the future is uncertain" is not "100% stocks, because stocks always go up".

side rant: brute hates how humans on MMM always talk about "the market", "beating the market", "market returns", but really mean "domestic stock market". "owning the market" in any reasonably sense would mean owning the GMP, not 100% domestic stock. making fun of other humans for "trying to beat the market" if they disagree with 100% domestic stock is absurd.

[FBeyer]

BRUTE should develop a better assholes-on-the-internet filter. Perhaps BRUTE should check into a shop for a software upgrade

[Toska2]

I like my "Brick and Motar Moth".

30% TSM 30% International 20% REITS 10% Small cap value 10% Emerging markets. My elevator speech on it, " It's no Icarus and it gets a little hairy but it still flies." I admit my speech needs work.

[BRUTE]

Toska2: somewhat aggressive stocks with 20% anchor of "other" sounds good, but brute personally is not too fond of REITs. in principle they sound nice ("brick and mortar"), but they seem to correlate highly with stocks. in 2008, both RE and stocks took a nosedive. therefore REITs wouldn't have been much protection. the question is, of course, if this pattern will continue. if only correlation was the same as causation!

[jennypenny]

@Tyler or anyone -- Where is the best place to stick munis in the charts?

[Tyler9000]

@Tyler or anyone -- Where is the best place to stick munis in the charts?

While not a direct replacement, the closest thing is probably a treasury bond of similar maturity.

[jennypenny]

Thanks. That makes sense and works with what I'm trying to do. (It's always hard to work these allocations around 401K offerings and such.)

I like the new visuals on the assets page.

[Tyler9000]

I like the new visuals on the assets page.

Thanks!

I wanted to do something like that starting out, but it took a little while to figure out how to execute it. I think the "puzzle piece" visual metaphor helps tie things together.

[Tyler9000]

uncertainty is a thing, and a good argument. but arguing with uncertainty for a single asset class or just 2, vs. a more diversified portfolio should be included as the definition of irony. if a human is afraid of uncertainty, he or she should be investing in the Global Market Portfolio, not in 100% domestic stocks or 70/30 or 50/20/30 domestic/foreign/bonds.

Yeah, I'm reading "Irrational Exuberance" now which is giving me a new perspective on this. I see now that some investors like to use the Efficient Market Hypothesis not so much as a rational justification to buy the entire world market but as a hammer to validate whatever happens to be popular and discount competing ideas.

"Markets are efficient, therefore whatever is most popular is provably best." It's a tautology that makes perfect sense until the bubble bursts. The more I hear arguments like that, the more I agree with Shiller that investor psychology is just as important as fundamentals in market pricing.

[BRUTE]

"Markets are efficient, therefore whatever is most popular is provably best." It's a tautology that makes perfect sense until the bubble bursts.

humans are basically reverting to the status quo. the status quo at MMM seems to be 100% stock or maybe 70/30. the GB enters the stage. markets are efficient, GB picks some things, therefore it's invalid! revert to the status quo, ignoring the fact that buying 100% stocks is also a pick.

but not to worry, because stocks always go up in the long run.

The more I hear arguments like that, the more I agree with Shiller that investor psychology is just as important as fundamentals in market pricing.

brute would agree. not just for oneself, but also when valuing assets. one of the criticisms brute saw on the MMM forums was "gold doesn't have inherent value" (nothing does), "gold only fluctuates based on people's beliefs"..

if asset prices are affected by humans' beliefs, then a smart investor should probably pay attention to what humans believe. it seems irrational for humans to stick just to the fundamentals because "numbers are rational".

[BRUTE]

by the way, brute isn't sure he made this clear enough earlier ("whoah"): in brute's not so humble opinion, Tyler9000's work and visualizations is a game changer in the (lazy) investing area. the heat map alone is worth its weight in small cap value stock. having all this data for all these assets in one place is very useful, brute hasn't seen it before. and that's not to speak of the other 8(!) calculators, some of which seem unique as far has brute can tell in the FI community, or at least, in combination with the asset history. brute loves the heat map, FI calculator, WR calculator, and the portfolio growth one the most.

[Lucky C]

Tyler, great site! I see you have plots of real CAGR vs. worst year in some of your posts. Have you also shown real CAGR vs. max drawdown somewhere? Max drawdown has some benefits over worst year, in that bear markets don't line up with calendar years. I would rather have a portfolio that had a -30% year and then bounced back the next year than a portfolio that had a -10% decline five years in a row.

Is there also some place where you plot real CAGR vs. volatility for all the options on your Portfolios page? That would be interesting for people who are into judging portfolios by Sharpe ratio. By plotting CAGR vs. volatility for a single portfolio, you could also show the Efficient Frontier for that portfolio, so someone could see how they could tweak that portfolio to better match their desired risk level - though the Efficient Frontier math might get messy for portfolios with many different asset classes.

[Toska2]

@BRUTE in regards to using reits vs bonds or gold. I believe assisted living care, millennials indifference to house ownership and corporations siezing/building supply cheaper all lead to continued reit growth. Bonds leave out inflation and as an asset class will develop a bubble/ have low yield because of target date funds popularity (low interest bonds, in turn makes companies more profitable -> higher stock price) Not using gold is a personal choice. I would rather have people working hard to make them (and me) rich than wait until panic and sell to a greater fool.