Portfolio Charts

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Kipling
Posts: 67
Joined: Fri Mar 17, 2017 11:10 am
Location: London

Re: Portfolio Charts

Post by Kipling »

@Seppia- the UK bias towards UK listed companies has much more recent historical reasons than that. As so often, lurking in the background there is a tax reason. Remember most peoples' pensions investments were invested though funds until very very recently. Until 1997 UK pension fund vehicles could get cash refunds on otherwise unusable (given that pension funds didn't pay tax) dividend tax credits from UK shares. This led them to be very significantly overweight UK equities, as opposed to ROW. Unfortunately this advantage was a significant cash cost to the UK treasury and the new Labour government decided to remove it (the removal of this perk was known as 'Brown's raid on pension pots'). It was also an impermissible restriction on the freedom of movement of capital from an EU law POV so had to go in any event. (See, a whole bunch of tax cases.) It is notable that the proportion of UK equities held by UK pensions funds roughly halved in the decade afterwards, going from 2/3 to 1/3. I agree that there is still at an individual investing level a slight illogical home bias, but that is mainly due to (i) familiarity ("I buy their goods, I buy their shares"); (ii) currency risk fears; (iii) the risk of tax complications; and not to do with the Imperial past.

Tyler9000
Posts: 1666
Joined: Fri Jun 01, 2012 11:45 pm

Re: Portfolio Charts

Post by Tyler9000 »

I saw a comment about Portfolio Charts donations around the forum today, and for those following along you may not be aware that I finally have an option in place for that. I'm not going to link it because I don't want to create any confusion about my motivations for posting here, but if you're truly interested it shouldn't be too hard to find.

All money aside, thanks for many years of support and inspiration!

slowtraveler
Posts: 880
Joined: Sun Jan 11, 2015 10:06 pm

Re: Portfolio Charts

Post by slowtraveler »

Hey Tyler, I've really appreciated the Portfolio Charts site but I have found something confusing when comparing the results to CFireSim. Inputting gold to complement equities into CFireSim seems to always lower the swr, whereas 10-20% gold increases the withdrawal rate in Portfolio Charts.

Is this a result of different data, different time frames, different calculation methodology, or something else?

Thank you Tyler.

Tyler9000
Posts: 1666
Joined: Fri Jun 01, 2012 11:45 pm

Re: Portfolio Charts

Post by Tyler9000 »

I can't speak to CFireSim's methodology, but when it comes to gold I imagine the discrepancy is largely due to the fact that the gold market fundamentally changed quite a bit over the years.

1) The Bretton Woods agreement pegged most of the major global currencies to gold between 1944 and 1971. Think of it as basically eliminating gold's diversification benefits by government fiat.

2) Gold was illegal for individuals to hold in the US in any investable form between 1934 and 1964.

The combined effect is that any portfolio backtested with gold prior to 1970 or so (CFireSim starts in 1871, PC starts in 1970) doesn't really model the effect of gold as it works today on an asset allocation. It actually models the effect of taking that much money out of the market for decades at a time. So it doesn't surprise me that CFireSim suggests that gold lowers SWRs, but I personally wouldn't put much stock into it because we live in a completely different economic system than CFireSim studies.

slowtraveler
Posts: 880
Joined: Sun Jan 11, 2015 10:06 pm

Re: Portfolio Charts

Post by slowtraveler »

Hey Tyler, I read the Buffet 2013 letter to shareholders again and he recommends the S&P500 index with a few caveats, one of them being to not sell stocks when they are well off their highs but use the cash buffer during those times. I want to know if there is a way to stimulate this in portfolio charts because otherwise, it shows the broad stock indexes as more risky than they really are to someone employing a strategy such as a rising equity glidepath or cash buffer.

For example, the 60-40 portfolio has the 2nd worst longest drawdown under the portfolio matrix but one can easily remedy this by selling off bonds during the crash and letting their equities ride it out. Using this, I doubt the 60-40 portfolio would have 10 year drawdowns anymore since stocks have rarely been down for even 5 years in the past. Even the great depression was 4 years from top to bottom, followed by a very sharp recovery.

Tyler9000
Posts: 1666
Joined: Fri Jun 01, 2012 11:45 pm

Re: Portfolio Charts

Post by Tyler9000 »

Interesting idea. I'll have to add that to the list of potential alternative rebalancing strategies. I've been thinking about that larger goal for a while now, and it will require some heavy lifting redesigning the core calculations to get right.

As an aside, I'm not so sure about your comment "stocks have rarely been down for even 5 years in the past". On a compound, inflation-adjusted basis stocks stay down for longer than 5 years pretty regularly. Look back long enough and they've even stayed negative for more than 20 years at a time!

classical_Liberal
Posts: 1664
Joined: Sun Mar 20, 2016 6:05 am

Re: Portfolio Charts

Post by classical_Liberal »

This is not specifically about Portfolio Charts, but about cfiresim.

I'm posting this info here because I figured Tyler9000 might be interested, also most folks who use historical financial sim's tend to use more than one.

I was using PC and cfiresim, investigating increasing the cash portion of my portfolio, for probably obvious reasons. I alway use PC initially thanks to its precision with various investment options (as always thanks Tyler9000), but I also use cfirsim due to its extended historical data set, even though it offers less specific allocation info. I stumbled across something I have not seen mentioned in any FI discussion board before. I'll admit I only frequent ERE now-a-days, but have been a regular on others, like MMM, in the past.

Evidently cfiresim does not use any historical data for the "cash" portion of portfolios investigated in it's simulation. It offers a "growth of cash" option, and I always assumed that it was using a real growth figure in its calculations based on the users input. The default is .25%, which seems conservative, but not unreasonable for real returns of cash over a portfolio lifecycle. What I discovered when increasing my cash allocation, is that it appears as if it's actually only providing that portion of the portfolio .25% nominal returns annually. Meaning that anyone running sims with cfiresim, and using a significant portion of their portfolio as cash, is getting very inaccurate results. The bad results are compounded by the fact that historical periods of high inflation tend to be bad for bonds as well, add in any period with decreased equity returns as well and you are looking at the exact situations having some cash would be helpful, as cash has historically at least come close to holding its real value if deposited(forget preFDIC bank failures here) or in Tbills. Meaning the historical scenarios are made much worse with cash losing due to the simulator inflating away it's real value. Since mainstream FIRE rarely advises any significant amounts of cash, I can see how this may go unnoticed. Here though, PP and even Tyler9000's GB, or other more conservative portfolios are often used.

Maybe others have noticed this? Frankly, I was shocked. I can never see a circumstance, where I would reduced my cash allocation below 10% for liquidity reasons. Which means virtually every scenario I've run on cfiresim has been badly tainted. I don't really see a workaround to this either, given the varying inflation/deflation rates over the years and decades that these historical scenarios encompass.

Tyler9000
Posts: 1666
Joined: Fri Jun 01, 2012 11:45 pm

Re: Portfolio Charts

Post by Tyler9000 »

Yeah, cash in cFIREsim is a purely hypothetical asset with an interest rate that never changes. Which of course is not how interest rates work. And the default rate is set at a very modern level bearing little resemblance to the historical average. IMO it's a gross mischaracterization of cash behavior in an investment portfolio and is kinda strange for a backtesting tool. If you want more history than PC can offer, I'd recommend using FIRECalc and playing with the "your portfolio" tab that includes an option for more accurate 1-month T-bills. And fun fact -- that sorta-hidden FIRECalc customization page was a major inspiration for my own work tracking down as many assets as possible to model withdrawal rates.

Tyler9000
Posts: 1666
Joined: Fri Jun 01, 2012 11:45 pm

Re: Portfolio Charts

Post by Tyler9000 »

This one is for @Seppia and all of the other international ERE-ers out there. Long story short, I've added 6 new European countries, Europe as a whole, lots of new assets, and a new interface that lets you play with all of them at once. I hope you have some spare time on your hands today. :) https://portfoliocharts.com/2020/01/06/ ... than-ever/

classical_Liberal
Posts: 1664
Joined: Sun Mar 20, 2016 6:05 am

Re: Portfolio Charts

Post by classical_Liberal »

@Tyler9000
I see you updated the interface of My Portfolio and updated the data to reflect 2019. Awesome as always, thanks!

wrt Firecalc and cash. Yes it offers Tbills, but also doesn't have any data for gold, commodities, real estate or any international (Cfirsim doesn't have international either). So, it's missing a bunch key components of a noncorrelation portfolio as well. I felt using gold as a proxy for all real assets and US stocks as a proxy for all equities was a better bet in cfiresim, until I noticed the cash thing. Now I think they are both equally bad to investigate noncorrelation strategies. You have the best game in town.

Tyler9000
Posts: 1666
Joined: Fri Jun 01, 2012 11:45 pm

Re: Portfolio Charts

Post by Tyler9000 »

You're welcome! I'm just happy to contribute something new to the conversation and maybe fill in some of those data gaps that others take for granted.

classical_Liberal
Posts: 1664
Joined: Sun Mar 20, 2016 6:05 am

Re: Portfolio Charts

Post by classical_Liberal »

I debated about placing this here, or in the 4% rule thread.

https://earlyretirementnow.com/2020/01/ ... s-part-34/

The link is the most recent post from Early Retirement Now (ERN). A blog that is very popular amongst mainstream FIRE for using historical backtesting and various hypothetical scenarios to debunk the "safeness" of the 4% SWR for early retirees. For those unfamiliar, the whole series is pretty interesting. The author tests various hypothetical common-place FIRE arguments, like "cash cushions", part time jobs in stock corrections, bond tents, later life pensions or Social security, and actually shows how much "meat" is on the bone of these "safety margin" solutions to the 4% rule. Basically, all of these solutions have problems, and rarely back test as effective as people would presume.

However, he finally ran an article trying some very basic noncorrelation portfolio options. Specifically with Gold, the PP, and Tyler9000's Golden Butterfly. Guess what, they ended up being, by far, the most effective strategy he's tested despite his misgivings going into the sims.
Just for full disclosure, except for a quarter-ounce Gold American Eagle coin I got from my late Uncle Karl I own no gold. So, with a little bit of confirmation bias, I set out to prove that gold has no place in a retirement portfolio. The average return over time is simply too low. But gold shines (pardon the pun) when all the other asset classes are hurting. And that’s a huge benefit!
Despite his findings, he has no intention of adding gold to his portfolio. WTF, why are mainstream FIRE people so against this type of investment?
So, am I going to increase my gold holdings? Probably not
He also isn't a believer in the GB, because he believes the investment landscape for small cap value's over-performance has changed. IOW, people have been exploiting this, so it has lost its edge. He goes as far as to run a GB without small cap value tilt to prove his point. I think the point is fair enough, but not justifiable in terms of historical backtesting. I mean, the S&P500 didn't even exist before the late 1950's. And even then, it's not like it existed as a simple index fund investment. Trying to track the top 500 market cap companies back then would have been a nightmare and extremely expensive. So, to be fair, one should also admit that the underlying yield of the US stock market has been inextricably altered as well, since the advent of these new tools. Why cherry pick one segment?

In general, I still think the key to noncorrelation strategies is so much more than the actual performance of the individual assets, but rather how they perform when compared to each other. IOW, when do certain types of investments shine and when do they do poorly. The yield themselves only matter when, in aggregate, they start to perform less than about 3% real over long period of time. As far as I can tell, these relationships between asset classes are pretty predictable in terms of macro events.

ertyu
Posts: 921
Joined: Sun Nov 13, 2016 2:31 am

Re: Portfolio Charts

Post by ertyu »

@CL, don't worry about ERN lol. I read the blog, too, and he has a fairly low equity allocation, quite a lot of his NW is in preferred shares, real estate/rentals, closed end funds, and various yield enhancement strategies. While 10-15% gold (as in 60-25-15) might test favorably compared to a traditional static 60-40 allocation, dude's personal portfolio is way more sophisticated than that. He's got 3M and a paid-off house, and spends 30-ish k a yr. If he says what he's got in place works better for him than a golden butterfly, I believe him.

tl;dr i don't think it's anti-gold prejudice or whatever, dude's just got his personal bases covered better elsewhere

Tyler9000
Posts: 1666
Joined: Fri Jun 01, 2012 11:45 pm

Re: Portfolio Charts

Post by Tyler9000 »

classical_Liberal wrote:
Sun Jan 19, 2020 11:25 pm
Despite his findings, he has no intention of adding gold to his portfolio. WTF, why are mainstream FIRE people so against this type of investment?
I think a lot of people just don't understand gold. Including ERN. And people (rightly) tend to invest in things they understand.

The thing I find most fascinating about the article has nothing to do with the numbers. Behaviorally speaking, I find it interesting that ERN chooses to ignore both the small and value premiums because he doesn't believe the data applies today (something I disagree with, but a common critique with lots of debate on the topic), while simultaneously making no mention at all that from 1834 to 1971 the price of gold was legally fixed to the dollar and the data under a gold standard definitely doesn't apply today. Forget monetary theory -- just look at the green line.

https://en.wikipedia.org/wiki/Gold_as_a ... nt-usd.svg

Now think about how ERN acknowledges that the data including gold is quite desirable without realizing that the majority of the backtest didn't model gold as it behaves today but essentially modeled pulling that percentage of money out in paper cash and hiding it in the closet. How much better would those portfolios have performed with another real asset (commodities, silver, etc) that could legally change price? And on the other end, what does that say about the measurable utility of another asset that is usually ignored today -- cash? Peel back the layers with a bit of context and the results get less conclusive and more thought-provoking.

IMHO that's a good example of how personal biases and holes in our knowledge shade even the most thorough analysis. And I don't mean to be overly critical of ERN, as I respect his thought leadership in SWRs and we all deal with the same issues. If anything, I see it as a good reminder to always question my own assumptions.

bigato
Posts: 2783
Joined: Sat Mar 05, 2011 12:43 pm
Location: Brazil

Re: Portfolio Charts

Post by bigato »

Awesome post Tyler, thank you.

classical_Liberal
Posts: 1664
Joined: Sun Mar 20, 2016 6:05 am

Re: Portfolio Charts

Post by classical_Liberal »

Tyler9000 wrote:
Mon Jan 20, 2020 11:09 am
Now think about how ERN acknowledges that the data including gold is quite desirable without realizing that the majority of the backtest didn't model gold as it behaves today but essentially modeled pulling that percentage of money out in paper cash and hiding it in the closet. How much better would those portfolios have performed with another real asset (commodities, silver, etc) that could legally change price? And on the other end, what does that say about the measurable utility of another asset that is usually ignored today -- cash? Peel back the layers with a bit of context and the results get less conclusive and more thought-provoking.
Right, I totally agree and that was the point I was trying to make above about stocks. You can backtest the performance of stocks all you want, but the bottom line is, until people started having low cost index options, no one actually invested in the "total US stock market". So to measure performance of that asset class, from some historical point and move it into today's world isn't really a the best comparison. What is a better comparison, IMO is to see the historical interactions between "all US Stocks" in aggregate and some other asset class. Even better when you take into considerations how those interactions have changed through the years and in different economic environments.
ertyu wrote:
Mon Jan 20, 2020 3:28 am
@CL, don't worry about ERN lol.
I don't worry about ERN. I worry about all the people in mainstream FIRE who read this stuff and J.L. Collins type stuff as gospel. I don't want them to get caught with their pants down after the current melt up in bonds and US equities runs its course. Nor do I want them to think the only "safe" option is to oversave. I also think for some (posters here), this type of stuff works to keeps them on the sidelines too long, analysis paralysis. There are plenty of ways to invest in a capital preservation mode, Tyler9000 seems to be one of the few people in the FIRE sphere highlighting the "simple path", if you will, to do that.

ertyu
Posts: 921
Joined: Sun Nov 13, 2016 2:31 am

Re: Portfolio Charts

Post by ertyu »

classical_Liberal wrote:
Mon Jan 20, 2020 6:56 pm
I don't worry about ERN. I worry about all the people in mainstream FIRE who read this stuff and J.L. Collins type stuff as gospel. I don't want them to get caught with their pants down after the current melt up in bonds and US equities runs its course. Nor do I want them to think the only "safe" option is to oversave. I also think for some (posters here), this type of stuff works to keeps them on the sidelines too long, analysis paralysis. There are plenty of ways to invest in a capital preservation mode, Tyler9000 seems to be one of the few people in the FIRE sphere highlighting the "simple path", if you will, to do that.
I get your point, and I agree with it. People discuss it in the comments, too. It's who the blogs are targeted to, though. The audience is people who either can't or don't want to become educated managers of their own money beyond "here is my asset allocation, SPY and TLT, rebalance twice a year." There's plenty of people who hail from non-quantitative fields of work for whom "75-25 + a bond glidepath oh and this distribution that distribution" is already complex. That's who the blog is for. If you are that person, oversaving and sticking to a stable passive investing IS what you should do. Thinking yourself too smart and rolling around in Dunning-Kruger is what makes unsophisticated investors broke. If you're not numerically inclined or if you don't have the time to educate yourself - or if you'd rather put your energy elsewhere with the understanding you'll need to work a couple of years more, which is also a legitimate choice - then those blogs are for you. They don't claim to be exhaustive but they serve a purpose.

Tyler9000
Posts: 1666
Joined: Fri Jun 01, 2012 11:45 pm

Re: Portfolio Charts

Post by Tyler9000 »

classical_Liberal wrote:
Mon Jan 20, 2020 6:56 pm
Right, I totally agree and that was the point I was trying to make above about stocks. You can backtest the performance of stocks all you want, but the bottom line is, until people started having low cost index options, no one actually invested in the "total US stock market".
True. While many gold skeptics like to cite the fact that it hasn’t always been practical to own gold in the US, few seem to be bothered by the fact that it hasn’t always been practical to own the total stock market either. Our natural biases affect the inputs that we choose to allow without question or actively fight.

CS
Posts: 554
Joined: Sat Dec 29, 2012 10:24 pm

Re: Portfolio Charts

Post by CS »

My modified permanent portfolio (easing into GB - 9% SCV, 19% TSM, 24% everything else) is at an all time high. Finally, it is earning its keep.

Smashter
Posts: 359
Joined: Sat Nov 12, 2016 8:05 am

Re: Portfolio Charts

Post by Smashter »

@CS I am also quite happy with my GB at the moment. All hail Tyler!

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