Golden Butterfly Portfolio

[LazyInvestor]

Using your portfolio finder tool

-10.81 I-VAL   I-SML LTT 5-T GLD 6.59

[Tyler]

So, can you please backtest it with the Simplified Ultimate Buy and Hold

I'll take a look.  In the meantime, you can also test it for yourself. 

[LazyInvestor]

Thanks, missed the calculator, I'll check it out  awesome website!

[MachineGhost]

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.

'Cuz the value effect is bullshit.  It only exists in uninvestable microcaps and quality triumphs value traps.  Almost all value funds are overinvested in way too many securities to capture the effect anyway.

The proper way to stock pick is to focus on quality and then from there focus on value and then on growth.  The value vs growth vs momentum distrinction then become meaningless.

[MachineGhost]

Well you guys are certainly giving me something to think about. Don't get me wrong - I LOVE the way those allocations backtest. But it's hard for me to commit to that as a strategy when according to Larrys article the premium only existed for 6 out of the last 21 years and I'm not sure there's a real fundamental economic reason they would outperform consistently going forward. Choices choices...

May I suggest spending more time investigating other Prosperity subasset classes and less on tilting a turd?  Stocks are currently priced to deliver 0% returns 10-12 years out.

[Tyler]

Today I officially pulled the trigger and started my Golden Butterfly. 

After lots of research, I personally settled on small cap blend (VB) to complement my TSM fund (VTI) and to best fit my neutral Harry Browne outlook.  As I said when I first proposed the idea, I like how it's really just a Permanent Portfolio with a complementary prosperity tilted VP.  Value stocks were tempting but ultimately unnecessary to meet both my needs and my personality. 

I'm happy to be the guinea pig, and I'll report back how it goes.

[MachineGhost]

I'm happy to be the guinea pig, and I'll report back how it goes.

So why smallcap instead of microcap?   If you have such conviction about the size effect, why not really target where the effect was and may be in the future?

http://www.business.unr.edu/faculty/liu ... t_1980.pdf

And how do you plan to weight your smallcap blend with VTI in terms of marketcap percentages?  I like the idea of a barbell approach.

[Tyler]

It's not so much that I have conviction that small is superior to large.  If anything, I lack conviction that large is superior to small and don't like how a total market fund is less diversified than it seems.  IMHO, the numbers support the idea that equal weight is a good idea in the long run and I like your idea of diversifying that way. 

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. 

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That it accomplishes this with a balanced barbell is nice for rebalancing and fits well in the overall portfolio concept from a simplicity perspective.  I'm currently 25% VTI and 15% VB purely because I'm carefully managing my taxes and avoiding unnecessary capital gains, but an even split is my long-term goal. 

If you wanted to add a micro cap fund like IWC, I wouldn't see a problem with that.  Just keep an eye on the ER and turnover. 

[MachineGhost]

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. 

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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.

[MachineGhost]

I've crunched the numbers for a equal weight size, value and growth portfolio: http://gyroscopicinvesting.com/forum/pe ... msg125648/

[Tyler]

New start-date-independent analysis, same tune:



Actually, nearly all of those portfolios to the right are based in some kind of Permanent Portfolio methodology.  Consistency is an attractive quality. 

[Jpeizie]

Very cool! Thanks again Tyler. Your site has been a huge influence on how I look at portfolios and has taught me a lot.

I decided to take Ochtona's advice from a couple posts back re: my own portfolio. I'm going to be allocating into a GB style portfolio but instead of 20% large cap and 20% small, I'm just going to put 40% into a single extended market fund to get exposure to small and mid caps and call it a day.

Cheers!

[Dieter]

Very cool! Thanks again Tyler. Your site has been a huge influence on how I look at portfolios and has taught me a lot.

I decided to take Ochtona's advice from a couple posts back re: my own portfolio. I'm going to be allocating into a GB style portfolio but instead of 20% large cap and 20% small, I'm just going to put 40% into a single extended market fund to get exposure to small and mid caps and call it a day.

Cheers!

Extended market leaves out stocks in the S&P 500 - that your intent, or were you looking for a TotL Stock Market index?

In the GB, get some big, some small, some growth (Large Balanced is more growth I believe), and value....

[sophie]

Today I officially pulled the trigger and started my Golden Butterfly. 

After lots of research, I personally settled on small cap blend (VB) to complement my TSM fund (VTI) and to best fit my neutral Harry Browne outlook.  As I said when I first proposed the idea, I like how it's really just a Permanent Portfolio with a complementary prosperity tilted VP.  Value stocks were tempting but ultimately unnecessary to meet both my needs and my personality. 

I'm happy to be the guinea pig, and I'll report back how it goes.

I'll be waiting to hear!  I'm thinking a bit about this myself (ok, surprises everybody).  But it's NOT because of recent (post-2009) outperformance of stocks.  I've been thinking instead that the PP is geared towards protecting against the actions of central banks, who tweak interest rates and money supply with the goal of pushing up the stock market.  Because that's the goal, the effects of central bank actions are going to achieve that more often than if their actions were simply random.

On the other hand, rest assured that the moment I increase my stock allocation to 40%, the market will crash :-).

[barrett]

I feel like a broken record because I am always bringing up Japan and their stock woes over the last 25-27 years. Isn't there just a point beyond which central banks are powerless to influence the stock market? Or maybe the Nikkei would be even crappier without the BOJ trying to prop it up?

That all being said, I am hoping to start a Roth this year for our daughter because she now has some earned income. I am leaning toward a GB approach for that. It's a relative bet on prosperity but still PP'ish enough that I'm hoping it will teach her a bit about investing beyond the usual "stocks go up over time."

[jafs]

Doesn't the Fed's involvement work both ways?

They lower rates to stimulate the economy/stock market, and raise them to dampen those, don't they?

So, their effect on the stock market would depend on which they're doing, I would think.

[MachineGhost]

Sigh, I feel like a broken record too.  You guys still don't get it.  It's NOT the central bank that decides anything -- it's the private sector.  No confidence == no borrowing == no economic growth == no stock buying.  It's just that simple!  All a central bank does is put or take off lipstick on a pig.  The pig is always master and commander.

[barrett]

Sigh, I feel like a broken record too.  You guys still don't get it.  It's NOT the central bank that decides anything -- it's the private sector.  No confidence == no borrowing == no economic growth == no stock buying.  It's just that simple!  All a central bank does is put or take off lipstick on a pig.  The pig is always master and commander.

So the Fed's moves have no effect ever? Volcker raising the fed funds rate to 20% in 1981 was lipstick on a pig?

I agree that the bullets have basically run dry for the Fed at this point, but there are also times when they can move markets, IMHO.

[MachineGhost]

Sigh, I feel like a broken record too.  You guys still don't get it.  It's NOT the central bank that decides anything -- it's the private sector.  No confidence == no borrowing == no economic growth == no stock buying.  It's just that simple!  All a central bank does is put or take off lipstick on a pig.  The pig is always master and commander.

So the Fed's moves have no effect ever? Volcker raising the fed funds rate to 20% in 1981 was lipstick on a pig?

I agree that the bullets have basically run dry for the Fed at this point, but there are also times when they can move markets, IMHO.

There's no direct transmission mechanism from the Fed to the real economy.  It's all psychological.  It's like color of law.  My point is don't treat color of law as the law.

[jafs]

Interest rates have an effect on people, even if there's no direct transmission (I assume that means that money the Fed gives to bank reserves doesn't get into circulation) from the Fed to the economy.

That's the whole point of changing interest rates based on economic conditions, isn't it?

I think that's the way most people understand the Fed's actions and effects, as an indirect one, based on how people react to them.

[MachineGhost]

Interest rates have an effect on people, even if there's no direct transmission (I assume that means that money the Fed gives to bank reserves doesn't get into circulation) from the Fed to the economy.

That's the whole point of changing interest rates based on economic conditions, isn't it?

I think that's the way most people understand the Fed's actions and effects, as an indirect one, based on how people react to them.

It's why the Fed attempts to manage "inflation expectations" and not inflation.  For some reason, people have been conditioned to look towards the Fed as the great and powerful Wizard of Oz that controls the gears and levers of the economy.  It would be hilarious if it weren't so unreal.

[sophie]

The Fed may not affect markets directly, but it certain does so indirectly and in ways that may be hard to predict.  Notice what happened the last several years each time the Fed did something like raise/lower the funds rate, or establish QE<X>?  But if the Fed doesn't see the results it wants, it will just keep tinkering.

If you buy that the end result of this tinkering results in improved stock market health compared to what would happen if the Fed's actions were completely random (like the proverbial monkey at a typewriter), then there is an inherent bias toward prosperity, which would favor the Golden Butterfly over the PP.

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.

Those are the rationales that would push me towards the GB.  A question Tyler:  what would you use for rebalance bands?

[Tyler]

A question Tyler:  what would you use for rebalance bands?

30/10 is a nice round number.  It's more instinct than science, but it seems reasonable. 

[MachineGhost]

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.

The PP isn't meant to be a growth portfolio and trying to get that 25%-30% allocation to do the job certainly inspires creative tinkering out of desperation!  What really gets to me is the downside risk is so darn outsized vs the relatively meager return of being an all weather portfolio.  Even when normalizing each asset's risk contribution, it doesn't help reduce the downside risk very much at all.  That is frustrating.  This must ultimately mean there is some other "force majeure" jack-booting the face of the PP that would otherwise nearly destroy other portfolios.

[Kbg]

It's called negatively and weakly correlated assets. The risk mitigation is organically built in not externally derived. I continue to be dumbfounded at the focus on the PPs individual pieces.

The only thing that makes sense to me is a "factor" tilt of some kind. For someone younger I can easily see altering the stock component up to 30 or 35% by taking from gold/LTTs/both. Of course volatility will go up a bit, but not a ton.

Lastly, the portfolio performance profile is entirely visible in the historical returns...stock market strong bull the PP is not fun. Flat to down the PP is awesome. Hit rinse cycle and repeat. Over very long periods of time the results are comparable but WAY more predictable with the PP.