Golden Butterfly Portfolio

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ochotona
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Re: Golden Butterfly Portfolio

Post by ochotona » Fri Jul 29, 2016 6:50 pm

The GB does fine if you take the two type of Treasuries and replace them one 40% bloc of Intermediate (5 year duration) Treasuries.
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Re: Golden Butterfly Portfolio

Post by curlew » Fri Jul 29, 2016 6:52 pm

Mr Vacuum wrote:
Dieter wrote: The way I look at it, the big difference in GB is the 40% to stock; 20% each the rest -- tilt to prosperity.

Secondarily is where to put that extra 20% to prosperity. Adding to LCB or Total Stock would work. Or going like Desert Oasis and 1/3 in Totl US, SCV, EM.

Given that TSM / LCB are primarily Large/Huge Growth, I like the added diversification of Small, value, REIT, and/or Intl (Small or EM.)
Well said. Browne's principle was to hold the entire market at all times in order to reap the returns of whichever cap/factor/segment is doing well at any given time. Looking past the prosperity tilt, the GB is intriguing because of how explicit it is about doing that, which you don't see that much in a typical 4x25 PP. The morningstar xray with Tyler's 50/50 VTI/VB is a sight to behold with a nearly perfect split across the style box and only two funds.
I have said this before but I'll say it again one more time. In the foreword to Craig and MT's book William Bernstein stated that he didn't think there was anything wrong with the Permanent Portfolio at all but that he questioned whether people would be able to stick with it when LT bonds and gold where "under-performing" which they inevitably would. I've been in the PP for about 6-7 years and I understand very well what he was saying. The PP rarely has a negative return but now it has happened twice since I adopted it, leading me to seriously think about bailing out.

Along comes the GB which back-tests with a better CAGR and the same maximum DD with a greater prosperity tilt towards stocks and I'm sold.

I think this kind of psychological factor is very important. If you aren't 100 percent sold on the plan then you aren't going to stick to it when the going gets rough.

All the talk about the GB not having the same success in the future sounds exactly the same as what I often hear about the PP.
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Re: Golden Butterfly Portfolio

Post by dualstow » Fri Jul 29, 2016 8:37 pm

curlew wrote:In the foreword to Craig and MT's book William Bernstein stated that he didn't think there was anything wrong with the Permanent Portfolio at all but that he questioned whether people would be able to stick with it when LT bonds and gold where "under-performing" which they inevitably would. I've been in the PP for about 6-7 years and I understand very well what he was saying. The PP rarely has a negative return but now it has happened twice since I adopted it, leading me to seriously think about bailing out.

Along comes the GB which back-tests with a better CAGR and the same maximum DD with a greater prosperity tilt towards stocks and I'm sold.

I think this kind of psychological factor is very important. If you aren't 100 percent sold on the plan then you aren't going to stick to it when the going gets rough.
...
I have extra stocks, among other things, in my vp, that I might never sell. That's my tilt to prosperity.
VS the golden butterfly, perhaps it's 6 of one and a half dozen of the other. Works for me, anyway.
RIP Daniel Kahneman | Happy Good Friday
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Re: Golden Butterfly Portfolio

Post by barrett » Sat Jul 30, 2016 7:45 am

Desert wrote:
Tyler wrote:
Desert wrote: Let me try another way of explaining my point: I've seen the claim that the PP has delivered 60/40-like returns with much lower volatility. But that statement is only close to true when the starting point for comparison is in the early 70's that includes the one-time gold reset. The PP has underperformed the 60/40 by a whopping 2.4% CAGR in the 40-year period from 1975 to 2015. If you reworked your excellent website such that all backtesting results started in 1975, the results of *comparisons* of various portfolios would change dramatically. The PP wouldn't change much, but the others would. And my claim is that those results would represent a more realistic comparison of portfolios. The early 70's gold data delivers a PP outperformance that is unlikely to repeat (and wasn't legal to own at the time).
I agree with Desert. A starting date of 1975 is superior because individuals couldn't legally own gold until 1975 (at least that is my understanding), and because there was almost surely some pent up demand for it that played itself out in 1973-74. Interestingly its price plunged from late 1974 through the middle of 1976... The end of pent up demand? I don't have a better explanation. Perhaps this is one of Tyler's considerations when deciding on a start date?

And, to be clear, I write this, Tyler, as someone who believes you have done as much or more than anyone as far as giving us tools to compare different asset mixes. In addition to that, your posts both here and elsewhere are extremely lucid, profound and just plain decent in their tone.

So put this in the category of a puny little nitpick. Also, as Tyler has stated over and over, we are all free to use his charts from whatever start date we choose.
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Re: Golden Butterfly Portfolio

Post by Kevin K. » Sat Jul 30, 2016 9:22 am

It can't be said too often: THANK YOU TYLER for the amazing gift of the Porfolio Charts site.

I do agree with Desert and barrett that any backtesting of portfolios involving gold should start in 1975. Running the numbers as Desert suggested (his portfolio vs. GB and classic 60:40) I come up with this:

https://www.portfoliovisualizer.com/bac ... 0&Gold2=20

Now one could argue that, especially when comparing returns to Desert's one ought to invert the stock:bond proportions in the Bogleheads portfolio since Desert's has only 40% volatile assets, but any way I've played with it the superiority of both of these truly diversified allocations in terms of risk:return and (most important to me!) the ability to stay the course, sleep at night and have a livable real-world SWR is obvious.

I have to confess that one of the things I really like about Desert's newest iteration is only having to "deal" with 10% gold, but as I reflect on the historical performance of the PP and begin to really "get" not the backtesting of but the logic behind the Golden Butterfly I can see a lot of long-term virtues in not messing with the PP any more than GB does.

I shared an earlier post by this author on another thread, but here's a very recent one (2015) that, in the context of looking at all of the common alternative asset classes, contains the clearest and most insightful discussion of the role of gold - from a guy who is absolutely not a gold bug or indeed a partisan fan of any asset class. Pre-PP days when I pursued a complex MPT slice-and-dice approach I had everything invested with his firm and I almost stuck it out just to get his brilliant market insight newsletters. I think it speaks really clearly to why gold is so important given what the Fed is doing and the global debasing of fiat currencies. Would love to hear your thoughts.

http://www.evansonasset.com/?Page=64
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Re: Golden Butterfly Portfolio

Post by barrett » Sat Jul 30, 2016 10:46 am

curlew wrote: I've been in the PP for about 6-7 years and I understand very well what he was saying. The PP rarely has a negative return but now it has happened twice since I adopted it, leading me to seriously think about bailing out.
curlew,

I believe your experience of having two negative years out of six or seven is exactly what historical PP returns would predict. When looked at in real terms, the PP has lost money in 13 of the last 41 years (1975-2015)... so roughly one year in three. My source is:

https://portfoliocharts.com/portfolio/p ... portfolio/

The reason that we are seeing more negative nominal years right now (yes, I realize that the sample size is small) is that inflation is so close to zero. 20 years ago, the PP may have showed a 2% nominal gain when inflation was at 4%. Just making up numbers but you get the idea.

Not saying that all is rosy going forward, just that the PP has continued to perform within its historical range.
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Re: Golden Butterfly Portfolio

Post by Tyler » Sat Jul 30, 2016 11:08 am

Desert wrote: Let me try another way of explaining my point: I've seen the claim that the PP has delivered 60/40-like returns with much lower volatility. But that statement is only close to true when the starting point for comparison is in the early 70's that includes the one-time gold reset. The PP has underperformed the 60/40 by a whopping 2.4% CAGR in the 40-year period from 1975 to 2015. If you reworked your excellent website such that all backtesting results started in 1975, the results of *comparisons* of various portfolios would change dramatically. The PP wouldn't change much, but the others would. And my claim is that those results would represent a more realistic comparison of portfolios. The early 70's gold data delivers a PP outperformance that is unlikely to repeat (and wasn't legal to own at the time).
I totally agree that reducing portfolio performance to a single number can be deceiving. Cut out 1972-1974, and you lose the early gold run-up. You also lose a few terrible years for stocks. So the single "Long-Term CAGR" shown on the Heat Maps will definitely change to reflect that, and if that's your primary metric to compare portfolios then I agree the start date is very important.

But the Heat Map itself will remain completely unchanged. I encourage people to try all of the different calculators to study portfolios from different perspectives, as many of the tools are designed to look not just at one timeframe, but at all of them simultaneously. One number really doesn't tell the whole story.

Even accounting for the early gold years, I believe that looking at the big picture reinforces that the PP is an extremely consistent option less susceptible to start date bias than the vast majority of alternatives. That said, I agree that comparing the 60/40 to the PP isn't just about consistency, and also isn't just about returns over a specific timeframe. That's why I'm thankful for forums like this to debate the various tradeoffs. ;D
Last edited by Tyler on Sat Jul 30, 2016 12:39 pm, edited 16 times in total.
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Re: Golden Butterfly Portfolio

Post by buddtholomew » Sat Jul 30, 2016 11:48 am

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Re: Golden Butterfly Portfolio

Post by buddtholomew » Sat Jul 30, 2016 11:49 am

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Re: Golden Butterfly Portfolio

Post by buddtholomew » Sat Jul 30, 2016 11:55 am

Let me preface this comment with the following:
I have nothing against the GB as I have benefited from a 50/40/10 allocation since 2008/9.

My only concern with PP investors transitioning to higher equity/FI allocations at this time, is I am selling stocks and harvesting bond gains to rebalance. We cannot ignore the fact that we are in the midst of a 7-year bull run, yields on the 10-year and 30-year are at 1.4% and 2.19% respectively. Reminds me of mathjak right before the 2015/2016 January declines.

The above doesn't even consider the change from 25% gold to a lower allocation.
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Re: Golden Butterfly Portfolio

Post by Dieter » Sat Jul 30, 2016 2:26 pm

buddtholomew wrote:Let me preface this comment with the following:

I have nothing against the GB as I have benefited from a 70/30 allocation since 2008/9. My only concern with PP investors transitioning to equities at this time is I am selling stocks to rebalance. We cannot ignore the fact that we are in the midst of a 7-year bull run, yields on the 10-year and 30-year are at 1.4% and 2.19% respectively. Reminds me of mathjak right before the 2015/2016 January declines.
* Everything feels overvalued, esp. LTT.

* Stocks aren't cheap, but (depending on who you ask, of course) aren't significantly overvalued.
(a current article from Swedroe and discussion on that other forum... https://www.bogleheads.org/forum/viewto ... 0&t=196202)

* STT (SHY) - at least 9 year bull market... :)

International about the only asset class with low(wish?) valuations.

But yeah, SCV is more volatile -- 4 down years in the last nine (one for the SP500)
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Re: Golden Butterfly Portfolio

Post by ochotona » Sat Jul 30, 2016 2:37 pm

Dieter wrote:International about the only asset class with low(wish?) valuations.
International Small Cap is just now posting positive 1-year look-back momentum. 0.49% return over the last year. I am looking at a Schwab ETF, SCHC.
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Re: Golden Butterfly Portfolio

Post by Dieter » Sat Jul 30, 2016 2:52 pm

ochotona wrote:
Dieter wrote:International about the only asset class with low(wish?) valuations.
International Small Cap is just now posting positive 1-year look-back momentum. 0.49% return over the last year. I am looking at a Schwab ETF, SCHC.
Also to consider -- Vanguard FTSE AW xUS Sm-Cp Idx Inv (VFSVX) if want both developed and Emerging Small Cap.

I've gone with VG International Explorer. (VINEX) -- Yeah, Active Management; used to split 50/50 the above two, but wanted to reduce number of funds
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Re: Golden Butterfly Portfolio

Post by Kevin K. » Sat Jul 30, 2016 5:27 pm

Along the same lines Dieter, the equity allocation from Bob Clyatt (you may know his book "Work Less, Live More") is a good showcase for an all-seasons portfolio arrived at by running all of the asset class valuations and historical returns through the DFA screens:

The Sandwich Porfolio

20% VFINX S&P500
8% VTMSX Tax Managed Small
6% VGTSX Total International Equity
10% VINEX Internat'l Explorer (small)
6% VEIEX Emerging Markets
30% VBIIX Intermediate Bond Index
11% BEGBX International Bond
5% VGSIX REIT Index
4% Money Market Fund

On the other hand, the returns of this allocation and its even more complicated sibling, the RIP porfolio, not to mention the drawdowns during the '08 crisis, are enough to make a PP'er (or, heck, put-in-all-in-Wellesley-and-call-it-a-day) investor out of many (including me):

http://www.workless-livemore.com/ration ... portfolio/

Explorer is a good fund, not doubt but I think Desert's 10% each to TSM, SCV and EM is very well thought out and complicated enough. Larry Swedroe recommends SCV and EMV for the entire 30% equity allocation in some iterations of his Larry portfolio; okay if you can live with the massive tracking error (something we PP fans are usually pretty good at).
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Re: Golden Butterfly Portfolio

Post by barrett » Sun Jul 31, 2016 8:20 am

Desert wrote: Tyler, I hadn't been out to your site for a while; it's even better! I really appreciate you sharing it with all of us.
Just wanted to second that! I spent an hour on there this morning and it's bound to be one of the more productive things I do today! Just started delving into the articles. The site is terrific, Tyler. Many thanks for giving folks both the insights and the tools to kick the tires on the various portfolios.
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Re: Golden Butterfly Portfolio

Post by mukramesh » Mon Aug 01, 2016 2:45 pm

Desert wrote:
Let me try another way of explaining my point: ... If you reworked your excellent website such that all backtesting results started in 1975, the results of *comparisons* of various portfolios would change dramatically. ...
Tyler has a graph that actually tracks Start Date Sensitivity
https://portfoliocharts.com/portfolio/s ... nsitivity/

This actually makes the PP look better to me than a 60/40 portfolio.
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Re: Golden Butterfly Portfolio

Post by Kbg » Mon Aug 01, 2016 3:30 pm

barrett wrote:
Desert wrote: Tyler, I hadn't been out to your site for a while; it's even better! I really appreciate you sharing it with all of us.
Just wanted to second that! I spent an hour on there this morning and it's bound to be one of the more productive things I do today! Just started delving into the articles. The site is terrific, Tyler. Many thanks for giving folks both the insights and the tools to kick the tires on the various portfolios.
+1!
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Re: Golden Butterfly Portfolio

Post by MachineGhost » Sat Aug 20, 2016 9:45 pm

Using the new, cleaner data, can anyone confirm this is the optimal Golden Butterfly composition?

Image
"All generous minds have a horror of what are commonly called 'Facts'. They are the brute beasts of the intellectual domain." -- Thomas Hobbes

Disclaimer: I am not a broker, dealer, investment advisor, physician, theologian or prophet.  I should not be considered as legally permitted to render such advice!
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Re: Golden Butterfly Portfolio

Post by Reub » Sat Aug 20, 2016 9:57 pm

How do we see the CAGR and the average return on this portfolio? The heat map doesn't seem to bring it up.
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Re: Golden Butterfly Portfolio

Post by Tyler » Sat Aug 20, 2016 10:13 pm

Not bad, MG! "Optimal" means different things to different people, but that's a pretty nice chart.
Reub wrote:How do we see the CAGR and the average return on this portfolio? The heat map doesn't seem to bring it up.
There's only so much I can fit into one chart. ;)

Try hovering your mouse over the individual cells. Also, you might try the Annual Returns and Long Term Returns calculators (copy/paste the portfolio to make it easy).
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Re: Golden Butterfly Portfolio

Post by Reub » Sat Aug 20, 2016 10:18 pm

Thanks, Tyler. I think that is vital information though!
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Re: Golden Butterfly Portfolio

Post by MachineGhost » Sun Aug 21, 2016 12:41 pm

Tyler wrote:Not bad, MG! "Optimal" means different things to different people, but that's a pretty nice chart.
In my lingo "optimal" is risk efficient, i.e. the most reward relative to the least amount risk and over the shortest amount of time.

The only problem with this optimal portfolio is it is highly sensitive to MidCap Value and SmallCap Value weights. Anything below a 15% allocation of either will increase the maximum drawdown in line with other portfolios. So this leads me to believe it is just a fluke of timing and not robust.

Here's the correlated risk parity PP:

Image

It is slightly more optimal than the Browne PP. Worth the bother yet? Not at all.

At the strategic level, it does seem that the generic Golden Butterly is the most "optimal" portfolio. However, we must keep in mind that the data set used to construct that is limited. Only the Shahidi Balanced reflects data for the four assets classes back to the 1920's. Those weights are perhaps perhaps significantly different than 1968+: 20% stocks, 30% T-Bonds, 20% commodities, 30% long-term TIPS. Fiddling around it is clear that gold is superior to commodities, so that's an easy replacement. And the TIPS are superior to cash, but I don't know how well they would work in a "tight money" situation. Yet, this longer-term portfolio is still within 5% of the ballpark of the Browne PP! So I think between the three portfolios, 25% is a good enough heuristic weight to sleep at night. You could be taking on a lot of unanticipated risk with a 40% allocation to equities from a risk efficient perspective. However, if you can't reach your financial goals with 20%-25% in stock, you don't have much choice otherwise. Why take on more risk if you don't need it?

I really want to use 40% because I'm greedy and hate constraints, but there's really no reason to. Or is there?
"All generous minds have a horror of what are commonly called 'Facts'. They are the brute beasts of the intellectual domain." -- Thomas Hobbes

Disclaimer: I am not a broker, dealer, investment advisor, physician, theologian or prophet.  I should not be considered as legally permitted to render such advice!
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Re: Golden Butterfly Portfolio

Post by Kbg » Tue Aug 23, 2016 1:54 pm

I don't why TIPS wouldn't do well in a tight money situation, but that is an interesting question. You've got both the CPI adjuster and probably demand working for you as people bolt to TIPs from normal bonds. Maybe one of our bond gurus could speculate for us.
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GB wins the portfoliovisualizer.com SWR shoot-out

Post by ochotona » Sat Aug 27, 2016 5:49 pm

The Golden Butterfly stands alone at the far right of the pack, with a 5.1% withdrawal rate with a 95% chance of success based on historical data, and only 25% of the time was the ending wealth of a $1 million portfolio less than $2.328 million after 30 years in retirement.

Image
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Re: Golden Butterfly Portfolio

Post by Tyler » Sat Aug 27, 2016 7:00 pm

Nice number crunching! It makes me want to focus on making more portfolio comparison charts. :)
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