Golden Butterfly Portfolio

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

Moderator: Global Moderator

pmward
Executive Member
Executive Member
Posts: 1190
Joined: Thu Jan 24, 2019 4:39 pm

Re: Golden Butterfly Portfolio

Post by pmward » Mon Mar 09, 2020 8:54 am

sophie wrote:
Mon Mar 09, 2020 8:33 am
pmward wrote:
Thu Mar 05, 2020 1:50 pm
So far in 2020 both small caps and value in general have been exceptionally weak. This drought for both is indeed pretty crazy, and I don't think anyone would be silly for questioning both small caps and value at this point. I think 40% VTI would not be unreasonable at all if anyone does not have faith in SCV going forward. I've also done some looking into ways to use momentum trend here on the other 20% stock bucket...
Otherwise known as buying high and selling low. This is how you screw up your portfolio returns. The drop in small caps is a buying opportunity, not an indication to sell them. I suspect they are harder hit than large companies by the chaos in Chinese manufacturing.
I'm not making any changes personally. I mainly meant that it wouldn't be unreasonable for someone to give up hope in both small cap and value at this point. But who knows, with all this craziness, value and small caps might finally get a chance to shine once the market starts to rebound. It certainly could be a very good environment for both to shine.
Kevin K.
Executive Member
Executive Member
Posts: 239
Joined: Mon Apr 26, 2010 2:37 pm

Re: Golden Butterfly Portfolio

Post by Kevin K. » Thu Mar 12, 2020 7:25 pm

The SCV underperformance vs. TSM is indeed dramatic and has been for years now.

Tyler's comment on his site about the theory behind the GB:

"The large/small barbell works well for this but other options are also fine. The permanence of the value premium is also debatable, but it is not central to the portfolio and other options like small cap blend or a broad international fund also work."

I still think tilting towards prosperity by having 40% equities vs. 25% makes sense. But I must admit I've been thinking that 10% in SCV or SCB might be enough after seeing the SCV crater the overall performance vs. the PP. Of course I'm writing this on a day when stocks, LTT's and gold all tanked in unison so maybe down is up and I'd better not do any tweaking or rebalancing anytime soon.
User avatar
Tyler
Executive Member
Executive Member
Posts: 1931
Joined: Sat Nov 12, 2011 3:23 pm
Contact:

Re: Golden Butterfly Portfolio

Post by Tyler » Thu Mar 12, 2020 8:46 pm

Kevin K. wrote:
Thu Mar 12, 2020 7:25 pm
The SCV underperformance vs. TSM is indeed dramatic and has been for years now.
That's true. But if SCV always outperformed TSM nobody would invest in large caps anymore. ;)

I hear ya, though. SCV is certainly painful right now, and there's no way around it. I definitely wouldn't change your AA because of the events of a few weeks or even years, as for all we know SCV will come roaring back and leave TSM in the dust once the recovery starts. But I have no problem with people using days like today to take a hard look at their own risk tolerance and think about what that means to their long-term investing strategy. Just be sure to look at the big picture and not single assets in isolation.

BTW, even I am a little personally conflicted between SCV or SCB in my own portfolio. It has nothing to do with recent performance, though, and you'll see some of that thought process if you re-read this thread. I just philosophically relate to the Browne idea of diversifying investments across economic conditions more than I relate to the factor investing mindset of filtering for the most profitable investments. The former distributes risk, while the latter concentrates it. I absolutely appreciate the cap diversification of a small cap fund when paired with a large cap fund, but I can see both sides on the value premium. Long story short, even a guy like me who invented the GB is willing to tweak ideas to my own needs and preferences when necessary.

So no matter how you invest, my best advice is to pick a reasonably-diversified portfolio you're comfortable sticking with and piling more money into even in times like now. Do that, and in the long run you'll be set for life.
Mechanical engineer, history buff, treasure manager... totally not Ben Gates
dragoncar
Executive Member
Executive Member
Posts: 1111
Joined: Wed Aug 10, 2011 7:23 pm

Re: Golden Butterfly Portfolio

Post by dragoncar » Fri Mar 13, 2020 2:29 am

Kevin K. wrote:
Thu Mar 12, 2020 7:25 pm
The SCV underperformance vs. TSM is indeed dramatic and has been for years now.

Tyler's comment on his site about the theory behind the GB:

"The large/small barbell works well for this but other options are also fine. The permanence of the value premium is also debatable, but it is not central to the portfolio and other options like small cap blend or a broad international fund also work."

I still think tilting towards prosperity by having 40% equities vs. 25% makes sense. But I must admit I've been thinking that 10% in SCV or SCB might be enough after seeing the SCV crater the overall performance vs. the PP. Of course I'm writing this on a day when stocks, LTT's and gold all tanked in unison so maybe down is up and I'd better not do any tweaking or rebalancing anytime soon.
I use SCB instead of SCV and hold SC because, as Tyler pointed out, the barbell gives you something approximating a nice equal-weight in all the boxes of a morningstar-style grid
Kevin K.
Executive Member
Executive Member
Posts: 239
Joined: Mon Apr 26, 2010 2:37 pm

Re: Golden Butterfly Portfolio

Post by Kevin K. » Fri Mar 13, 2020 1:56 pm

Thanks Tyler, thanks dragoncar!

I'm not ready to make any changes to the GB and it's always good during times like these to review the careful thought that went into creating it.

As always I'm grateful for the discussion and in times like these especially appreciate your pioneering work Tyler. Harry Browne would be very proud of the multiple ways you've taken his work to the next level and made it available to another generation (or two).
User avatar
vnatale
Executive Member
Executive Member
Posts: 3669
Joined: Fri Apr 12, 2019 8:56 pm
Location: Massachusetts
Contact:

Re: Golden Butterfly Portfolio

Post by vnatale » Tue Mar 17, 2020 7:48 pm

mathjak107 wrote:
Thu Nov 19, 2015 8:56 am
no one knows what to expect this  time around . these are uncharted times with things right now so i would trust nothing but real time monitoring .

could we have a decade of rising rates back to the historic norms ?  could stocks be dead another 15 years and could gold go no where but down with rising rates ?

all very possible so any spending down plan needs a plan B .  WHICH MEANS Access to another level of just slightly more volatile assets once cash runs low . .

i wouldn't want plan b to have to decide whether to take a beating on gold , stocks or those long term volatile treasury's .

more and more i like what i see when running simulations with the various types of income annuty's as a base . but we are still a bit to young and rates to low for laddering them .

the new fidelity retirement planner has simulations you can add with various annuity types .

if someone is not retiring today or in the short term , this may all go away and resolve . but with the first 5 years of ones retirement being especially crucial  before the cushion of a run up there are no do overs if things do not go as planned  .

i had a very comprehensive consultation with my team at fidelity on monday and gave them lots of homework .  they are running all kinds of simulations for me with various social security points , pulling from  different  types of accounts and using various annuity products . 

we were supposed to meet again  on monday but they needed more time so i will report back .
Regarding the three bolded items...

1) The more things change the more....

2) I don't recall you writing much more here regarding annuities so I'm assuming that you have still not purchased any?

3) I've read every post in this Topic and I don't believe you ever reported back. Do you recall what their recommendations were and if you implemented any of them?

Vinny
"I only regret that I have but one lap to give to my cats."
User avatar
vnatale
Executive Member
Executive Member
Posts: 3669
Joined: Fri Apr 12, 2019 8:56 pm
Location: Massachusetts
Contact:

Re: Golden Butterfly Portfolio

Post by vnatale » Wed Mar 18, 2020 6:25 pm

Cortopassi wrote:
Thu Nov 19, 2015 10:43 am
Golden Butterfly is

    20% Large Cap Blend
    20% Small Cap Value
    20% Long Term Treasuries
    20% Short Term Treasuries
    20% Gold

No emerging markets or any international until we started modifying it.  The mix I listed was from Desert, on page two of this thread:

-------------------------------
25% Gold
25% LTT
50% Equity, split equally between TSM, SCV and EM

This portfolio is essentially a hybrid between Larry's Minimize Fat Tails portfolio and the PP.  And, in case it looks like these returns were merely a result of historical excess returns from equity tilts that have long since disappeared, this mix returned 10% over the last 10 years.  Tilting even smaller, by substituting mid cap blend for TSM, bumped the CAGR to 12.6%.  Your withdrawal rate calculator shows one could have withdrawn more than 7% from this portfolio over the past 40 years. 

-------------------------------
I mentioned that appealed to me because I already have 25% in gold, 25% in TLT, and 25% in TSM.  All I need to do is drop the TSM down to 17% and with those proceeds and cash buy into 17% SCV and 16% EM.  Appealing for the limited # of trades, the small cap and international exposure, and the higher equity exposure, which I have been convinced is a good thing to do.

I understand it will likely come at the expense of higher drawdowns with the int'l and SCV, but I am prepared to live with that. 

Mathjak has convinced me that there is a bit too much tied up in "safe" portions of the PP with the bonds and cash.  And gold even.  If cash was paying 5% like the past, and bonds much higher as well, I don't think I'd even be considering this.  I think it is time to skew a little more on equity...cue massive stock market drop in 3/2/1... :D
Have I yet asked you if you followed through this this? And, if so, how you have since evaluated that decision.

Vinny
"I only regret that I have but one lap to give to my cats."
User avatar
vnatale
Executive Member
Executive Member
Posts: 3669
Joined: Fri Apr 12, 2019 8:56 pm
Location: Massachusetts
Contact:

Re: Golden Butterfly Portfolio

Post by vnatale » Wed Mar 18, 2020 6:33 pm

Reub wrote:
Sun Dec 27, 2015 1:35 pm
Can I nominate this for the thread of the year? One question, Tyler. If the Golden Butterfly outperforms the PP then why aren't you investing in it? Just curious.
Is there some place I can go to see the Forum Awards for the year 2015 to see if this thread DID win the coveted "Thread of the Year" Award?


Vinny
"I only regret that I have but one lap to give to my cats."
User avatar
vnatale
Executive Member
Executive Member
Posts: 3669
Joined: Fri Apr 12, 2019 8:56 pm
Location: Massachusetts
Contact:

Re: Golden Butterfly Portfolio

Post by vnatale » Wed Mar 18, 2020 6:55 pm

MachineGhost wrote:
Mon Apr 04, 2016 6:13 pm
Tyler wrote: The thing I like about small cap blend funds (specifically VB -- others may vary) is that when you picture the typical Morningstar 9-segment style box it's basically an inverse of a TSM fund.  It has a few mid caps as well, and when you split the two 50/50 you get a nicely even distribution across all categories that doesn't bet on any one sector. 

12 12 13
08 09 13
12 12 12
That is simply genius!  I wish I had thought of that first instead of size alone.  I dare say this has now superseded the EWMC.  Just need to throw in some MicroCap and you're golden over several factors.
Tyler you really did something to elicit such a response from the oft-critical MachineGhost!

By the way, can anyone tell me what EWMC means?

And, I stop here to say for new people coming to the forum the use of similar abbreviations can be quite confusing and of mysterious meaning to the reader.

Vinny
"I only regret that I have but one lap to give to my cats."
D1984
Executive Member
Executive Member
Posts: 438
Joined: Tue Aug 16, 2011 7:23 pm

Re: Golden Butterfly Portfolio

Post by D1984 » Wed Mar 18, 2020 8:00 pm

vnatale wrote:
Wed Mar 18, 2020 6:55 pm
MachineGhost wrote:
Mon Apr 04, 2016 6:13 pm
Tyler wrote: The thing I like about small cap blend funds (specifically VB -- others may vary) is that when you picture the typical Morningstar 9-segment style box it's basically an inverse of a TSM fund.  It has a few mid caps as well, and when you split the two 50/50 you get a nicely even distribution across all categories that doesn't bet on any one sector. 

12 12 13
08 09 13
12 12 12
That is simply genius!  I wish I had thought of that first instead of size alone.  I dare say this has now superseded the EWMC.  Just need to throw in some MicroCap and you're golden over several factors.
Tyler you really did something to elicit such a response from the oft-critical MachineGhost!

By the way, can anyone tell me what EWMC means?

And, I stop here to say for new people coming to the forum the use of similar abbreviations can be quite confusing and of mysterious meaning to the reader.

Vinny
I think it means "equal weighted by market cap" i.e. 1/5th megacap, 1/5th large cap, 1/5th mid cap, 1/5th small cap, and 1/5th microcap since IIRc MachineGhost talked about his stock allocation portion being something similar to that. I could be wrong though....maybe it means "equal weighted mid cap" or something else.
User avatar
vnatale
Executive Member
Executive Member
Posts: 3669
Joined: Fri Apr 12, 2019 8:56 pm
Location: Massachusetts
Contact:

Re: Golden Butterfly Portfolio

Post by vnatale » Fri Mar 20, 2020 6:49 pm

Tyler wrote:
Thu Apr 21, 2016 10:05 am
sophie wrote: We discussed this at the meetup.  I felt strongly that the Golden Butterfly backtests well for the simple reason that prosperity dominated during the backtest period.  It is essentially a PP modification with a tilt toward prosperity.  It's similar in that respect to PRPFX, which was conceived at a time when inflation and iffy stock market performance had been the dominant recent experience.

It may well be that there are inherent reasons to expect that prosperity will continue to dominate, and that's what I was wondering about in my last post in this thread - and if a case could be made, that would be a reason to consider switching to the GB.  But right now I don't see how this is the case.  There are too many forces at work, like massive debt, uncontrolled mass importing of a new and large underclass (aka "new immigrants"), and shifting of large segments of the economy to places with cheap labor, that don't bode well for continued prosperity.  Tyler??
Who knows -- you may be right.  If your primary interest is to protect yourself equally no matter what happens, then you can't beat the Permanent Portfolio.  But if you want to account for the fact that prosperity has generally been the most likely economic condition of the four while still protecting yourself quite well for the other outcomes, then the Golden Butterfly may appeal to you.  I don't pretend to know whether that will continue to hold true in the future on your personal investing timeframe.

BTW, there's a reason most of my charts are designed to focus on the worst times -- it helps you see through potentially deceptive averages and see portfolios in their least flattering light.  The GB returns were comparable to the PP even during the 70's and 2000's when stocks were terrible.  Yes, it tilts a little more towards prosperity.  But a portfolio with 40% stocks isn't exactly a heavily concentrated bet by most standards.
There's also the fact that the PP's assets are a bit overweighted in gold & bonds.  The PP performs best when the stock market tanks, and does poorly when it does well.  That's a bit frustrating.
Anecdotally, since I first started playing with the GB last September, I updated my stock tracking app to also show small caps.  Purely psychologically, I've found that seeing two parts stocks and two parts bonds/gold has felt more "balanced" most days.  When stocks do well and the defensive assets struggle, I feel good.  When stocks do poorly and the defensive assets surge, I feel good.  And when I ever have doubts, cash always has my back.  ;)  Now I may feel different when stocks tank hard, but so far I appreciate the mindset.

In any case, I love the PP. 
Sticking with the plan is still a terrific option that will serve people well. 


Stocks HAVE now done as you describe above. What is the feeling today after all we have been through? From reading what you've recently written I'm going to guess the feeling is that you still are feeling the love for the Permanent Portfolio?

Vinny
"I only regret that I have but one lap to give to my cats."
User avatar
vnatale
Executive Member
Executive Member
Posts: 3669
Joined: Fri Apr 12, 2019 8:56 pm
Location: Massachusetts
Contact:

Re: Golden Butterfly Portfolio

Post by vnatale » Fri Mar 20, 2020 7:02 pm

Kevin K. wrote:
Mon Jul 25, 2016 4:13 pm
Not sure if this is a dead thread since I see the last post was in April.

I want to belatedly add my voice to the chorus of heartfelt "thank-you's" to Tyler for his amazing web site. I have been "down the rabbit hole" for days not only playing with Portfolio Charts calculators and articles, but also catching up on the epic-length threads on both the PC site and Golden Butterfly portfolio on this forum, Mr. Money Mustache's and Early Retirement Extreme's.

There was a bit of discussion about Williams Bernstein's "Deep Risk: How History Informs Portfolio Design" on this forum when the book came out about 3 years ago. I was surprised there wasn't more, not only because clearly conversations between Mr. Bernstein and Craig Rowland were the foundation of the book, but also because of Bernstein's informed critique of the PP.

The dovetail with Tyler's work as I see it (and I may well be mistaken as my number-crunching chops and overall investing savvy are pretty lightweight compared to many posters here) is that Bernstein says (summarizing and paraphrasing):

It's silly to allocate equal amounts of the portfolio to protect against threats that are anything but equally likely to occur. Specifically, inflation is very likely and you need a diversified stock portfolio with international, small-cap and value exposure to protect against it. Deflation is rare so a full 25% in long treasuries is very expensive insurance against the improbable. Confiscation is unlikely and also largely impossible to defend against, devastation ditto. And - last not least - gold is NOT inflation protection (his data on this claim are quite convincing) as Mr. Browne claimed, but some allocation to it (certainly not 25%) makes sense due to its performance in flights to safety and its truly uncorrelated-to-anything status. You also need a boatload of liquidity (meaning cash and/or IT Treasuries) to ride out the volatility of the equities - especially in retirement.

So....from that point of view 40% in stocks isn't overweighting at all, but rather allocating enough to the category to offer meaningful growth as well as meaningful protection against the most likely threat. I'm also reminded that Mr. Browne himself said that 4 x 25% was somewhat arbitrary and convenient, not iron-clad.

I'm well aware that the classic 4 x 25 has performed very well and that some regard messing with it as just as heretical as Bogleheads do when you dare to bring up the four-letter word "gold," but as Desert pointed out much earlier in this thread the nature of investable assets themselves continues to change. Would Mr. Browne have ever imagined a world where Congress was willing to undermine "full faith and credit" and cause a downgrade of U.S. Treasury Bond ratings? Or one where "paper" gold with dubious amounts of actual gold underlying it would come to constitute "the" gold market? Or - for that matter - one where 30 year Treasuries returned less than CPI inflation?

On the other hand, when I look at those questions or quibbles with the PP and then look at the utter dominance of PP-inspired iterations among the best portfolios on Tyler's site I have renewed appreciation for HB's genius.
The above brings up a question which I remember seeing it recently being discussed-- though it may well have amidst the flurry of posts we've been having here.

Which of the four economic climates are we in? I'd say we are headed toward recession. But it's all happened so sudden could we say we are officially in an ex-four climate known as surreal a/k/a Panic?

And, in hindsight can each time period be described as fitting into one of the four economic climates? Or, it can more oftentimes be a combination? I seem to remember reading the latter but it's not dear to me. It seems that for the last several years (or longer) we have definitely been in the Prosperity economic climate. Today? Tomorrow?

Vinny
"I only regret that I have but one lap to give to my cats."
Post Reply