Golden Butterfly Portfolio

A place to talk about speculative investing ideas for the optional Variable Portfolio

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Tyler
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Re: Golden Butterfly Portfolio

Post by Tyler » Tue Feb 02, 2016 12:53 pm

Man, the value vs. growth debate really is a rat hole!  Google is an adventure. 

Following up on my previous argument for SCV, I also appreciate the argument by Bill Bernstein that small cap growth is an inherently poor asset class because it (by definition) boots its best performers out of the index when they do really well and out-grow it.  I also can see the macroeconomic argument that in times of struggle for the stock market as a whole people may favor value stocks, which would explain the slightly lower correlations and work well in a PP-style AA.  So I can see how the value tilt for small caps may perhaps be intrinsically beneficial for this particular portfolio.

The Golden Butterfly definitely works.  Maybe SCV will continue to be the better choice over SCB and maybe not, but IMHO neither option is likely to steer you wrong.  As Meb Faber likes to say, maybe the best takeaway is to go enjoy your summer (well, at least for the Aussies this time of year).  :)
Last edited by Tyler on Tue Feb 02, 2016 12:57 pm, edited 1 time in total.
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Re: Golden Butterfly Portfolio

Post by koekebakker » Wed Feb 03, 2016 12:38 am

One thing that speaks in favor of SCB is that there will be less opportunities for behavorial mistakes.
The problem with SCV investing is that the premium is a moving target. Even if it still exists, you still have to catch it.
Is Vanguards SCV-fund 'valuey' enough to capture the premium? Or do you need the expensive special sauce from DFA or Bridgewater funds? And if your SCV-fund starts tracking a different index, or changes its methodology (which happens quite often) do you switch as well? Or is that performance chasing? And what about all the other new 'factors'? If you've decided there's a value premium, how about momentum, or quality? Where do you stop? And can you hold on to hose funds for 20+ years?

All of this seems pretty far removed from the simplicity of owning total market funds.
It might still be a good idea diversify beyond US megacaps but I would choose funds which are as widely diversified and as passive as possible.
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Re: Golden Butterfly Portfolio

Post by ochotona » Wed Feb 03, 2016 5:43 am

I came up with this variant of the GB, and I like it:

20% Gold
20% US Stocks
20% Small Cap Blend
20% Intermediate Term Treas
20% Total Bond Market
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Re: Golden Butterfly Portfolio

Post by Reub » Wed Feb 03, 2016 1:11 pm

ochotona wrote: I came up with this variant of the GB, and I like it:

20% Gold
20% US Stocks
20% Small Cap Blend
20% Intermediate Term Treas
20% Total Bond Market
Numbers please?
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BearBones
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Re: Golden Butterfly Portfolio

Post by BearBones » Wed Feb 03, 2016 1:27 pm

ochotona wrote: I came up with this variant of the GB, and I like it...
Like it too! More of a bogleheads-tilted GB. I've been playing with the charts and am favoring this for an IRA. Not as SHTF/1970s-repeat protection, but seems pretty safe with higher CAGR.

                  CAGR    Worst Yr      Longest DD
PP              4.8        -11.9            2 (really closer to 3 )
GB              5.8        -8.8              2 (really closer to 2.9 )
Mofified GB  5.5        -11.1            3 (really closer to 3.8 )
Displayed    6.4        -10.2            3 (really closer to 3.7 )

Image
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ochotona
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Re: Golden Butterfly Portfolio

Post by ochotona » Wed Feb 03, 2016 7:26 pm

Yes, a Bogle-type lazy might the bonds all as Total Bond Index (US Aggregate Bond Index). This portfolio makes a concession to safety, and has 1/2 of bonds in Intermediate US Treasuries. It has 20% Gold. Large Cap and Small Cap blend as discussed, rather than Small Cap Value. Bond durations kept shorter... I just hate the interest rate risk; there will be tears someday. I think it would be a pretty robust portfolio for an IRA. CAGR is 1.2% more than the PP, huge over a long period of time.

[img width=590]http://i779.photobucket.com/albums/yy76 ... lsz5g1.png[/img]

MT edit: fixed image width
Last edited by ochotona on Thu Feb 04, 2016 3:31 am, edited 1 time in total.
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Tyler
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Re: Golden Butterfly Portfolio

Post by Tyler » Wed Feb 03, 2016 10:15 pm

ochotona wrote: I came up with this variant of the GB, and I like it:

20% Gold
20% US Stocks
20% Small Cap Blend
20% Intermediate Term Treas
20% Total Bond Market
I think that's just fine, but total bond market and intermediate treasuries are extremely similar.  So I'm not sure what that's buying you over just holding 40% of one or the other.
Last edited by Tyler on Wed Feb 03, 2016 10:35 pm, edited 1 time in total.
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ochotona
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Re: Golden Butterfly Portfolio

Post by ochotona » Thu Feb 04, 2016 5:44 am

Tyler wrote:
ochotona wrote: I came up with this variant of the GB, and I like it:

20% Gold
20% US Stocks
20% Small Cap Blend
20% Intermediate Term Treas
20% Total Bond Market
I think that's just fine, but total bond market and intermediate treasuries are extremely similar.  So I'm not sure what that's buying you over just holding 40% of one or the other.
The correlation between IEF and BND is high, but not 1.00. It's actually 0.75. You get a bit of diversification.
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Re: Golden Butterfly Portfolio

Post by Jpeizie » Thu Feb 18, 2016 5:24 am

Tyler et al,

I've finally decided to stop lurking and post something here! I wanted to pick the board's brain about the GB. Specifically, why do you like small cap? It seems to me that this tilts the portfolio really far in the direction of the stock market in general and toward the idea that the small cap premium will stay intact specifically. I read through the thread so I know you're aware there's a lot of uncertainty about that last point. So why make such a huge bet on it with 20% of the portfolio? In addition, I am really starting to buy into a lot of the demographic worriers saying that Japan is a more extreme preview of what we can expect from the US stock market. All of that makes me really uncomfortable about placing such a relatively large bet on the US market continuing its historic performance going forward.

All that said, I'm considering a portfolio that is basically the GB but instead of 20% small caps, it would use 20% residential REITs. I like this basically because sitting back and collecting rent as a landlord has and probably always will make good money, REIT's are highly volatile so from a PP perspective it seems like they should be a good addition, and residential REITs should be less highly correlated to the market than REITs in general. In other words, I expect residential REITs to weather a recession much better than REITs with heavy business/retail exposure. 

Thoughts?
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Tyler
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Re: Golden Butterfly Portfolio

Post by Tyler » Thu Feb 18, 2016 10:45 am

Hi JPeizie.  Welcome to the forum!

Good questions.

I like small cap because it provides good diversification away from large cap, not just in correlations but also in company exposure.  Because of cap weighting, the price of large cap funds (or even total market funds) is really driven by a relative handful of mega caps.  Honestly, mid-caps or total international would also be reasonable choices for the same reason.

Beyond the simplified GB version, I also am attracted to the specific combination of VB/VBR with VTI.  They all also include a good amount of mid caps as well, and the resulting combined portfolio has a relatively even spread between small, mid, and large.  Just something to think about.

To be honest, I like small cap value because it works.  The historical performance over blend or growth is pretty striking.  Now opinions differ on why it works and whether it will continue to work, and I've discussed that in the thread a bit.  I don't know the answer.  The most vocal supporter of SCV is probably Larry Swedroe.  So for the pros, google some of his articles.

REITs are also a tempting choice, but I don't like them for myself because between my house and the REITs already included in the stock market index, I'm already plenty exposed to real estate.  I didn't include them in the GB because many others are in the same boat, and for those people a portfolio with REITs may not be as diverse as it seems on the surface.  But everyone's situation is different, and they may also be a decent option for you.

And don't forget -- if you're worried about the US going the direction of Japan, the good ol' Permanent Portfolio is still an excellent option.  I've been very happy with it.  No 5th component or tilting required. 

Hope that helps.
Last edited by Tyler on Thu Feb 18, 2016 12:51 pm, edited 1 time in total.
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ochotona
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Re: Golden Butterfly Portfolio

Post by ochotona » Thu Feb 18, 2016 2:20 pm

What about a PP with 25% SCV?

(Took a quick look... I like it)
Last edited by ochotona on Thu Feb 18, 2016 3:33 pm, edited 1 time in total.
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Re: Golden Butterfly Portfolio

Post by Austen Heller » Thu Feb 18, 2016 6:46 pm

I first learned about the Fama-French small-cap value advantage back in 2004.  This is how VBR, the small-cap value ETF, has done since then, compared to total stock market (VTI):

Image

I know these dates are cherry-picked, but as long as I've been investing, SCV has not been worth the effort.

The following chart includes dividends:
VISVX (small-cap value) vs VTSAX (total stock market)
Image
Last edited by Austen Heller on Thu Feb 18, 2016 6:52 pm, edited 1 time in total.
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