Golden Butterfly Portfolio

[vnatale]

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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08 09 13
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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  I dare say this has now superseded the EWMC.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.

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

[D1984]

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  I dare say this has now superseded the EWMC.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.

[vnatale]

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

[vnatale]

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

[Kevin K.]

Things are changing so fast it's hard to really know but my best guess in what are clearly early days for this pandemic is that we're already in recession and quite possibly headed towards something much more like the Great Depression. Even Mnuchin, who seems even more out of his depth than usual now that things are getting real, told Republicans the other day they were looking at 20% unemployment without massive aid. That's a number that's closer to the 25% during the Great Depression than it is to the 10% level we reached during the 2008 market crisis.

Personally I don't see a better "bunker" to ride this out than the PP though I can see good reason for ditching the Treasury bond barbell in favor of IT Treasuries leavened with loads of cash given the Fed's unprecedented decision to go with 0% rates way early in the game. The only other allocation I've seen that seems similarly defensive is the so-called https://portfoliocharts.com/portfolio/larry-portfolio/ but its exotic stocks are sure to take a beating too.

[vnatale]

I agree. They are evidence based but you can debate about how strong the evidence is.
I even believe in Small/Value having a higher expected return than a cap-weighted index. I also believe however, that the level of out-performance of small/value in all those backtest-tools is not likely to be repeated. The difference in CAGR between TSM and SCV is almost 3% a year from 1972-2015! I think it's fair to warn people not to get too excited by all those nice backtested graphs...
Bernstein himself expects the value premium to be much, much lower going forward.

Yes. Getting excited about backtesting at the expense of tactical asset allocation is something that Mr. Browne, Craig R and many others here have truly cured me from - at least most days!

I've posted the link below in another context but I think it might bear re-posting here for a couple of reasons. The author is the principal at one of the most savvy advisory firms through whom one can access DFA funds on a fixed fee rather than % of assets basis. There's a lot of great info on their web site, including the best explanation I've seen on the decisive differences between the DFA funds (which are not index funds) and their counterparts in the retail investing world. The points of interest in this particular article, it seems to me, are looking at how truly diversified equity allocations have performed during market crises, and (further on in the piece) a robust defense of gold that ought to be required reading for a lot of folks over on Bogleheads .

http://www.evansonasset.com/?Page=18

I just clicked on the provided link. Then went to their home page.

They really don't seem to have anything there to entice a non-client. They seem to be more oriented towards existing clients. From going to various other pages on the web site it seems like almost all of them are a year older or more. The last analysis only goes through December 2018. I was fully expecting the home page to be directly addressing what is now going on. You writing that they offer a fixed fee is what made me go there in the first place. But for me to recommend to someone to use them (a someone who does not want to go Permanent Portfolio) I'd need to see right upfront their thoughts on today, more current writings, who they are, in other words far more effort / information / sell to turn a non-client into a client.

Vinny

[Tyler]

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?

Yep.

There's no hiding from the turmoil right now, but it's really hard to find something better suited to weather the storm than the Permanent Portfolio. And I've also gained a renewed appreciation for the role of cash in a portfolio when everything else is struggling.

[vnatale]

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?

Yep.

There's no hiding from the turmoil right now, but it's really hard to find something better suited to weather the storm than the Permanent Portfolio. And I've also gained a renewed appreciation for the role of cash in a portfolio when everything else is struggling.

I was going to go stronger in my statement above but I did not want to put you too much on the spot.

But now after you have responded I can now fully say...."And, I'd fully expect no other answer from Resolute Tyler!"

You are one of the ones here who keep me on my path towards Permanent Portfolio (which I WILL achieve some day!).



Vinny

[vnatale]

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?

Yep.

There's no hiding from the turmoil right now, but it's really hard to find something better suited to weather the storm than the Permanent Portfolio. And I've also gained a renewed appreciation for the role of cash in a portfolio when everything else is struggling.

I was going to go stronger in my statement above but I did not want to put you too much on the spot.

But now after you have responded I can now fully say...."And, I'd fully expect no other answer from Resolute Tyler!"

You are one of the ones here who keep me on my path towards Permanent Portfolio (which I WILL achieve some day!).



Vinny

I also want to add that early on in this Topic you were lamenting that you thought your Topic had been hijacked. However, here we are nearly five years later and with 40 pages of posts dedicated to it. I think you created a winner in more ways than one!

Vinny

[pmward]

I actually like Ray Dalio's 4 environments as a correlary to HB's. They are both really saying the same thing but where HB names each, Dalio describes the underlying trends. Basically Dalio says that in any period of time inflation is either increasing or decreasing, and growth is either increasing or decreasing. So right now both inflation and growth are decreasing. This translates to what HB would call a deflation. Also, oil is plummeting, US dollar is running like it stole something, there are rampant liquidity issues causing turmoil in the markets, ETF's are basically broken right now (I mean BND, one of the largest and most liquid ETF's in the world, was tradings at a 6% discount to NAV this week!). These are all other hints that we are in a deflation.

[sophie]

Vinny - let me suggest a simple exercise. Go to the etfreplay site and click on "backtest" for free. Backtest the different PP components during mid 2008 to end 2009.

What you'll see is that gold and bonds did indeed react after the stock market tanked, but those three events occurred MONTHS apart. Now imagine yourself going through that time, with no knowledge of what was about to happen. You'd be tying yourself up in knots just like you are now, probably.

If I were you I'd focus on more important things right now, and just hang back and wait. Rebalancing as per your set bands is probably your best move.

[LittleDinghy]

I"m sharing below our GB allocation percentages; it would be interesting to compare with others' GB (and PP) portfolios.

I had gotten into the habit of checking our allocation percentages at the end of every month, and Jan 31 was our highest total portfolio value since starting the GB last June with 20% in each asset. So these are our results since Jan 31, checked on 1/31, 2/29, 3/12, 3/16 and today 3/21. I also show the re-balance bands we have tentatively decided to use; we haven't yet reached them.

[Kevin K.]

Nice charts!

I’m curious about why you choose different rebalancing bands for stocks.

[LittleDinghy]

I’m curious about why you choose different rebalancing bands for stocks.

Since the GB basically "tilts the [PP] portfolio slightly towards Prosperity" ( https://portfoliocharts.com/2016/04/18/ ... butterfly/), our thought is that the re-balancing band for stocks should reflect the combined stock allocation. For the lower limit we decided to just keep it equivalent to the PP, that is, 15/25 = 24/40, yielding the lower limit value of 24%. For the upper limit we just decided we'd never want our stock percentage to be greater than half our portfolio.

Would love others' thoughts on our reasoning.

[Kevin K.]

I'd saved this from earlier in this now epically-long thread:

"Per the quote below, and others from the thread,Sophie recommends 30% re-balancing bands [20% plus or minus 30% of 20% (=6%), meaning a range of 14% - 26%]. You might wonder, as I did, why she did not recommend a 40% re-balancing band, such as used with the PP (meaning a range of 15%-35% for the PP and 12%-28% for the GB). My current understanding of her reasoning is that she does not want the percentage of any asset to go significantly below the lower limit for the PP's 40% re-balancing band, which equals 15%. 14% is only 1% below 15% and conforms to a nice round number of a 30% rebalancing band. My sense at this point is that this is her reasoning."

Earlier still Tyler himself suggested a simple 10/30% rebalancing trigger for the GB.

I must admit I'm tempted to permit myself a further tweak which I guess you could call the Tortoise Pulling His Head Into His Shell rebalance. Since the GB tilts to prosperity and we're going through what surely seems like a prolonged period where such sunny skies aren't in the forecast I've thought about just treating the GB as a PP and reverting to the 4 x 25% stock:gold:bond:cash targets.

[ppnewbie]

Interesting Kevin. I’ve thought about rebalancing closer to the HBPP as well, instead of doubling down on stocks at this moment.

[LittleDinghy]

"Per the quote below, and others from the thread,Sophie recommends 30% re-balancing bands [20% plus or minus 30% of 20% (=6%), meaning a range of 14% - 26%]. You might wonder, as I did, why she did not recommend a 40% re-balancing band, such as used with the PP (meaning a range of 15%-35% for the PP and 12%-28% for the GB). My current understanding of her reasoning is that she does not want the percentage of any asset to go significantly below the lower limit for the PP's 40% re-balancing band, which equals 15%. 14% is only 1% below 15% and conforms to a nice round number of a 30% rebalancing band. My sense at this point is that this is her reasoning."

Earlier still Tyler himself suggested a simple 10/30% rebalancing trigger for the GB.

I must admit I'm tempted to permit myself a further tweak which I guess you could call the Tortoise Pulling His Head Into His Shell rebalance. Since the GB tilts to prosperity and we're going through what surely seems like a prolonged period where such sunny skies aren't in the forecast I've thought about just treating the GB as a PP and reverting to the 4 x 25% stock:gold:bond:cash targets.

Yeah, I'm pretty sure I wrote that explanation of my understanding of Sophie's thinking. That was when my wife and I were less sure what bands to use. Another way of thinking about the GB that has been mentioned is as "a PP with a VP of small cap value stocks" (quote from memory). Re-balance limits for the PP portion would then be 15% and 35% for each portion, which in terms of the whole portfolio, would be 12% and 28%. And one would want to keep the VP portion aligned, so might as well use 12% and 28% for that too. But then, I think somewhere on gyroscopic investing, someone mentioned that HB thought no one asset should ever comprise less than 15% of one's PP, which makes sense to me. So maybe the lower bounds of 12% should be raised to 15%. Then the lower bands for each of the five assets would be 15% and the upper band for each would be 28%. However, this allows for the possibility of the stock portion to get up to almost 56%. If one wanted to limit the total stock percentage to less than 50%, one could set limits on each stock portion to 25%. Or, alternatively, just limit the sum of the two stock portions to 50%. Thus, one arrives again at the limits we are using, with the exception that our lower limit for stocks is not 30%, but rather 24%. We arrived at 24% because, in alignment with the statement that the GB "tilts the [PP] slightly towards prosperity" (https://portfoliocharts.com/2016/04/18/ ... butterfly/) we use 24% for our lower limit for the full 40% stock portion because 24/40 = 15/25.

[sophie]

Yes, that was my thinking: I didn't want percentages to drop too far below the PP's safety zone, which is an asset comprising less than 15% of the portfolio. The GB is really a PP in which stocks are kept at the upper end of their "safety" range and the other assets at the lower end.

There was a discussion at some point about the 10% gold that the Desert Porfolio uses. While this is OK under most conditions and certainly was better than no gold in the 1970s, backtests during that period shows that 10% is inadequate and you needed at least 15% - which coincidentally is what Harry Browne determined for the PP. He said as much on an episode of his radio show - a caller said he had less than 15% in one of the assets, I think gold, and Harry Browne told him he didn't have a PP anymore.

There's nothing wrong with using 12-28% bands, it's just that for bonds and gold especially I don't want them dropping below 15%. I guess I'm still not entirely sold on the GB, but I was convinced that it makes sense to overweight stocks because we expect prosperity to dominate over the other economic conditions over long periods of time.

[vnatale]

You and barrett drinking a lot of covfefe today, eh?

Anyway, I continue to be curious why people want to discount the gold runups of the 1970s and late 2000's

Well, you're so right, Sophie.
I would start by saying that I don't think Harry Browne made an error. There are smart people who like gold and smart people who don't like it. When you're playing with your own money, it leads to a lot more hand-wringing than merely reading a book and thinking, hmm, gold looks neat.

And while it's true that you could say the same about other assets, I suppose this has something to do with herd mentality. It's hard to shake the feeling that 10,000 Bogle fans can't be wrong. All those 60/40 portfolios that completely avoid gold and seem to be fine. (Yes, they might experience some pain in the future. One never knows). How many people have the converse, have gold and neither stocks nor bonds? Well, there's our Libertarian666. (sound of crickets)...and...a handful of people who aren't on the internet.

Let's say I did somebody wrong and my punishment is to sell everything and start a portfolio of pure treasuries. No problem. I could do that today, even knowing that inflation would probably ruin my plans. Same scenario, all stocks: hmm, a little bit harder, but I'd probably thank whoever's forcing me to do this in the long run. Like that movie in which Bette Midler's character thanks her captors for kidnapping her, because she finally lost weight exercising while chained up in their basement. All gold: yikes. I don't know.

(Could you answer my t-bill question now? :-)
Never mind, Tyler got it.)

Might?


Vinny

[vnatale]

Note: If one backtests starting in 1970, the conclusion will be that gold improves the portfolio significantly. If the backtesting starts in 1980, the opposite conclusion would be reached.

The way I look at it, you can always find a better or worse choice over a specific timeframe but gold improves the consistency of a portfolio across all economic environments.

A Tyler "gem" that deserves to be brought back to the forefront.


Vinny

[vnatale]

Why couldn't there have been fundamental reasons?

In 1978, US inflation (December -> December CPI) was 9% (average 7.6%). The 3 month Treasury bill was paying 6-7%. In 1979, inflation went up to 13% by CPI (average 11%). The 3 month Treasury bill in that year spent most of the year at 9%, and went up to 12% by the end of the year. At the time, several European countries had much lower inflation rates.

That sounds to me like the exact scenario (rising inflation to > 10% with cash interest slow to catch up) that would cause investors to switch from buying Treasuries to gold. You're forgetting also that while gold may have been controlled in the US earlier in the decade, it was not in many other countries, and they collectively have a lot of power to influence the gold price with investment choices. The US was big at the time, but most certainly not the only player in the world gold market.

Seriously...you don't think 1978-Jan 1980 wasn't a speculative bubble? I may give you 1978, but no way after that. Pretty much the definition of a bubble is up 400% in a year (79) and down by half the following year (80). Going near vertical in 2 months on a price chart is a pretty good tell as well.

Nope. Why would a bubble be defined purely from price movements, ignoring the conditions that may have triggered it? And still less, why do you attribute the gold gains in this period to something that happened almost a decade earlier? There was a lot going on in 1980 that I don't have time to research at the moment - maybe you should?

Gold and treasuries rose after the 2008 financial shock as well. Treasuries rose ~30% in a very short time in 2008. Was that a "speculative bubble", or a logical result of what was going on in the markets at the time? Regardless of the term you use, those events are precisely why you hold gold and treasuries. People holding PP's in 2008 were calmly rebalancing and reaping the gains from these drastic price movements, while everyone else was in shock at watching their retirement account balances almost cut in half. I'm HAPPY to know that gold can move that fast in the right conditions. That's the whole point of owning it as part of a balanced portfolio.

In 2029 I wonder what people will be writing about what Permanent Portfolio holders did in 2020 and what gold did during the year....

Vinny

[PP67]

My simplistic way of potentially dealing with rebalancing a GB (which is just a HBPP + 20% VB for me) was to track the HBPP portion separately and when the HBPP portion hits a 15%/35% limit on any of the HBPP assets I would rebalance everything back to a GB allocation (20% in all 5 assets). My rational is that whatever environment caused one of the HBPP components to trigger a rebalance would probably hold true for a GB allocation as well.

I currently have 18.4% VTI, 27.2% TLT, 21.9% GLD and 32.5% "cash" in my HBPP portion which is getting close to the 35% limit. My GB allocation currently works out to be 16.7% VTI, 9% VB, 24.7% TLT, 20% GLD and 29.6% "cash". If my HBPP "cash" portion hits 35%, I would try to rebalance everything back to 20% each in a GB allocation (or as reasonably close).

Am I missing something or Is that too simplistic?

Appreciate any input!

Thanks!

[LittleDinghy]

My simplistic way of potentially dealing with rebalancing a GB (which is just a HBPP + 20% VB for me) was to track the HBPP portion separately and when the HBPP portion hits a 15%/35% limit on any of the HBPP assets I would rebalance everything back to a GB allocation (20% in all 5 assets). My rational is that whatever environment caused one of the HBPP components to trigger a rebalance would probably hold true for a GB allocation as well.
...
Am I missing something or Is that too simplistic?

Thank you! I really like how your rebalancing approach aligns so nicely with the HBPP rebalancing approach. It is so rational and simple. My wife and I will probably adopt it. I'm wondering what others on this thread think of your approach.

Below are our portfolio dynamics since Jan 31 (the peak value it has had when I have checked it). GB allocation percentages are top left and HBPP portion percentages are top right. We haven't yet hit a rebalancing limit in either case.

20200331e_GldnBttrflyDynmcs.png (105.36 KiB) Viewed 18056 times

[frugal]

Hello !

The annual % profit on GBis bigger and the drawdowns are lower than PP

... how is this possible?

Please let me know your thoughts.

[ppnewbie]

Here is a post from Tyler regarding recent drawdowns if the GB and HBPP.

https://portfoliocharts.com/2020/03/23/ ... ful-month/

My Modified GB went down around 9%.