Golden Butterfly Portfolio

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Tyler
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Re: Golden Butterfly Portfolio

Postby Tyler » Mon May 29, 2017 9:36 pm

Desert wrote:Tyler, I've been thinking more about your GB portfolio. The more I look at it, the more I like it. The 20% gold & 40% equity combination have performed really well throughout many varying periods since 1970. I believe you decided to go with the GB for your entire ERE portfolio, is that correct?


Yes, although I personally went with small cap blend instead of small cap value. I went back and forth on that for a while and eventually decided on the more "neutral" approach to evenly fill out the Morningstar 3x3 grid using VTI and VB. Either way, the results are pretty similar.

Good point about bullets vs barbells, as that's definitely a reasonable iteration for those with limited bond options. And it's funny -- I also ran the numbers for 80% VWINX and 20% gold a while back and really liked it!
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Re: Golden Butterfly Portfolio

Postby Tyler » Mon May 29, 2017 9:44 pm

barrett wrote:Desert, I have a question for you. I get what you are saying about the 1970s but to what do you attribute gold's outperformance in the 2000s? The USD was clearly weaker during that period but I'm not sure if that accounts for a seven-fold rise in gold's price. It's not a trick question... it just seems to be something that people on this forum skirt around quite a bit. I remember (I hope correctly!) that Medium Tex felt gold had gone up so much during that decade because people's expectation was for high inflation. I get how that could push the price up but I don't find that answer totally satisfying. The gain was too sustained and dramatic for that to be the only factor. Any ideas? Thanks.


IMHO, the simple answer is that gold is negatively correlated to US stocks. Read the example in the middle of this article, and pay particular attention to the side-by-side heat maps. https://portfoliocharts.com/2016/01/25/ ... at-a-time/
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Re: Golden Butterfly Portfolio

Postby mathjak107 » Tue May 30, 2017 2:39 am

a shift to small cap growth now may be a good idea . it looks like value peaked out after it's big run up .
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Re: Golden Butterfly Portfolio

Postby Desert » Tue May 30, 2017 10:16 am

Tyler wrote:
Desert wrote:Tyler, I've been thinking more about your GB portfolio. The more I look at it, the more I like it. The 20% gold & 40% equity combination have performed really well throughout many varying periods since 1970. I believe you decided to go with the GB for your entire ERE portfolio, is that correct?


Yes, although I personally went with small cap blend instead of small cap value. I went back and forth on that for a while and eventually decided on the more "neutral" approach to evenly fill out the Morningstar 3x3 grid using VTI and VB. Either way, the results are pretty similar.

Good point about bullets vs barbells, as that's definitely a reasonable iteration for those with limited bond options. And it's funny -- I also ran the numbers for 80% VWINX and 20% gold a while back and really liked it!


That makes sense, regarding small cap blend. It's funny that we both ran the Wellesley case ... it would be a nice portfolio, but I don't think I have enough faith in the active management to continue the strategy untouched in the future.

Back the GB .. I totally agree with your decision to change to GB from the HBPP, particularly at your relatively young age.

One additional question: Have you considered a slice of international, for diversification? I realize that past returns show it's always been a return-reducer (with the exception of very high risk EM).
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Re: Golden Butterfly Portfolio

Postby Desert » Tue May 30, 2017 10:30 am

barrett wrote:Thanks for all that, Desert. My wife and I are so close to retirement that I'm hoping not to fiddle with percentages too much. But, gosh, it sure is tempting sometimes. One of the things that I DO like about holding, say, 10% in a gold ETF in retirement accounts, is that it should help smooth out how much one can withdraw from those accounts. Make sense?

Desert, I have a question for you. I get what you are saying about the 1970s but to what do you attribute gold's outperformance in the 2000s? The USD was clearly weaker during that period but I'm not sure if that accounts for a seven-fold rise in gold's price. It's not a trick question... it just seems to be something that people on this forum skirt around quite a bit. I remember (I hope correctly!) that Medium Tex felt gold had gone up so much during that decade because people's expectation was for high inflation. I get how that could push the price up but I don't find that answer totally satisfying. The gain was too sustained and dramatic for that to be the only factor. Any ideas? Thanks.


Barrett, if I remember correctly, you and I are at somewhat similar points in life, though your daughter is much closer to college than my son. But you and I might end up retiring around the same time (hopefully soon!). I've been studying up on the best ways to cash flow retirement, pre-SS. Tyler probably knows far more about this than I do, since he's already doing it and much earlier than me. Due to some odd past opportunities to stash money in pre-tax accounts, we have an unusually high percentage of our savings in traditional IRA's. So my focus on cash flow is getting funds out of those accounts with zero penalties and very low income taxes. It's going to be interesting. Anyway, back to your first point regarding gold ETF's in the IRA ... I agree that some gold in the IRA should reduce volatility/drawdowns of those accounts. I still always try to look at my entire portfolio as one, so I personally don't care that much about the volatility of any single account. Does that make sense?

Regarding gold's performance in the 2000's, I need to geek out on Tyler's article on correlation and then reply later.
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Re: Golden Butterfly Portfolio

Postby Tyler » Tue May 30, 2017 11:12 am

Desert wrote:One additional question: Have you considered a slice of international, for diversification? I realize that past returns show it's always been a return-reducer (with the exception of very high risk EM).


I've looked into it several times, and have yet to find a convincing evidence-based reason to add international stocks to a US-based PP. The biggest proponents of international diversification generally cite the very reasonable assumption that US stocks won't always perform so well and you'll need something else to pick up the slack. I completely agree, but the data indicates that gold already fills that role particularly well which is why adding international never seems to improve the numbers. And in the GB, the small caps also pitch in by greatly diversifying away from the relatively small number of large caps that drive returns of a total market fund due to how the index is weighted. There's more to stock performance than the country it's domiciled in.

I'll note, however, that due to macroeconomic forces the negative correlation of gold to stocks is more pronounced in the US than in other countries. If I was a PP investor outside of the US, international investing would look more appealing. And if gold ownership is ever outlawed again in the future or if an individual investor simply has a mental block on owning gold, international stocks are a logical backup choice to fill that role in a portfolio.
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Re: Golden Butterfly Portfolio

Postby Desert » Tue May 30, 2017 7:05 pm

Tyler, thanks for the response regarding International allocations. With the size and dominance of the U.S. economy, I can see your point. And of course John Bogle agrees with you. And I also agree that gold and international stocks can be a bit correlated, due to inverse behavior relative to the strength of the dollar. Watching day-to-day moves with my present allocation with 10% gold and 10% EM, it often behaves a bit like 20% gold.

Barrett, regarding portfolios with varying amounts of gold allocation: Using Simba's spreadsheet, I looked at three scenarios, all starting in 1975:
GB - 20% gold
GB10 - 10% gold, with the balance in IT (20 TSM,20 SCV, 50 IT, 10 GLD)
GB0 - 0% gold with the balance in IT

From 1975 through 2016, the results were as follows:
GB: 6.08% real CAGR; 7.40% max drawdown; 6.80% max withdrawal rate
GB10: 6.21% real CAGR; 6.61% max drawdown; 6.85% max withdrawal rate
GB0 6.28% real CAGR; 5.82% max drawdown; 6.79% max withdrawal rate

Of course all these scenarios include the great run-up in gold in the 2000's. The first thing to realize is that these three portfolios were extremely similar. The key factor was having 40% equity with a small and value tilt, with the bulk of the balance in treasuries. If you try to pick the winner, you probably have to go with the GB10 or GB0, with the slightly higher CAGR and equivalent or higher max withdrawal rate.

Now for the qualifying statements:
1. If you start the backtesting in '72, the results are roughly reversed. I start in '75 since that was the first year gold was legal to own in the U.S. But all results above include the fabulous gold returns in the last 70's/early 80's, along with the great run in the 2000's.
2. We don't know if the above will repeat (stating the obvious, of course).

Generally, I find these results to be great news, for everyone: If one wants to hold a large 20% allocation to gold, the past penalty was negligible. That's great news, since gold brings some great disaster insurance. Likewise, if one hates gold or finds it too difficult to mess with, a zero percent allocation performed just fine. I am inclined to split the difference and stick with the 10% (mostly physical) allocation that brings the best of both worlds in my unique situation.
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Re: Golden Butterfly Portfolio

Postby Tyler » Tue May 30, 2017 8:20 pm

Good info, Desert.

Desert wrote:I start in '75 since that was the first year gold was legal to own in the U.S.

I just wanted to point out that this is only partially true. 1975 was the first year that Americans could own or trade physical gold, but gold certificates were legal for individual investors since 1964. People just couldn't personally redeem those certificates for the physical product. Think of it as a simple version of modern gold ETFs.

https://en.wikipedia.org/wiki/Gold_Reserve_Act
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Re: Golden Butterfly Portfolio

Postby Desert » Tue May 30, 2017 8:42 pm

Tyler wrote:Good info, Desert.

Desert wrote:I start in '75 since that was the first year gold was legal to own in the U.S.

I just wanted to point out that this is only partially true. 1975 was the first year that Americans could own or trade physical gold, but gold certificates were legal for individual investors since 1964. People just couldn't personally redeem those certificates for the physical product. Think of it as a simple version of modern gold ETFs.

https://en.wikipedia.org/wiki/Gold_Reserve_Act


Thanks Tyler, I hadn't noticed that before. From the wiki Tyler linked:

A year earlier, in 1933, Executive Order 6102 had made it a criminal offense for U.S. citizens to own or trade gold anywhere in the world, with exceptions for some jewelry and collector's coins. These prohibitions were relaxed starting in 1964 – gold certificates were again allowed for private investors on April 24, 1964, although the obligation to pay the certificate holder on demand in gold specie would not be honored. By 1975 Americans could again freely own and trade gold.


At the risk of beating a dead horse, my main issue with depending too heavily on 1970's gold performance in backtesting, is the fact that gold was "depegged" from the dollar in '72, resulting in what I would call a massive reset followed by a speculative bubble. Such a de-pegging of course won't happen again.
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Re: Golden Butterfly Portfolio

Postby barrett » Wed May 31, 2017 7:53 am

Desert wrote:Barrett, if I remember correctly, you and I are at somewhat similar points in life, though your daughter is much closer to college than my son. But you and I might end up retiring around the same time (hopefully soon!). I've been studying up on the best ways to cash flow retirement, pre-SS. Tyler probably knows far more about this than I do, since he's already doing it and much earlier than me. Due to some odd past opportunities to stash money in pre-tax accounts, we have an unusually high percentage of our savings in traditional IRA's. So my focus on cash flow is getting funds out of those accounts with zero penalties and very low income taxes. It's going to be interesting. Anyway, back to your first point regarding gold ETF's in the IRA ... I agree that some gold in the IRA should reduce volatility/drawdowns of those accounts. I still always try to look at my entire portfolio as one, so I personally don't care that much about the volatility of any single account. Does that make sense?

Regarding gold's performance in the 2000's, I need to geek out on Tyler's article on correlation and then reply later.


Desert, You remember correctly. I will be 59 in September (still have the body of a 57-year-old!) and our daughter just finished her first year of college. Semi-retirement/part time work is already here for me through a combination of factors. And, yes, it does make sense what you are saying about looking at your portfolio as a whole. In our situation, my wife and I will hit retirement with a fairly even split between tIRAs and taxable (but with a very high cost basis on the taxable). Adding to the confusion is that we both have Roth accounts which we intend to let grow until age 70.5 (early 2029 for me and 2037 for her). Plus we have a big (for us) stash of savings bonds that are keepers until maturity. Maybe this is TMI but I just lay it all out because, for us, almost as important as how much we have saved is what order we draw from the accounts. My plan is to draw from taxable and tIRAs first to avoid the worst of RMD consequences and then, starting in 2029, withdraw from my Roth while starting to collect SS.

That's all a long way of saying that I'd like for our tIRAs and taxable accounts to perform more or less the same so that I don't have to be concerned about "selling low" in either of them. But maybe I am just over thinking things.

And I get what you are saying about gold's price from 1972 through 1980. We can never know for sure how much of the run up was due to depegging, how much was due to speculation and how much was due to financial uncertainty/inflation. To Tyler's credit, his site has the start-date sensitivity info so we can discount the 1970s if we want to. But the run up during the 2000s can't be ignored. In general, people who seem to have strong feelings about the 1970s, seem to be less sure about how to frame gold's performance during the 2000s. I think understanding that period beyond Tyler's "lack of correlation to stocks" is important for those of us who want to hold a chunk of gold. Maybe it's all been hashed out on here in other threads before I arrived in early 2014. I just haven't seen a satisfying discussion of it.

I think I got a little over-caffeinated this morning. Sorry about that!
Last edited by barrett on Wed May 31, 2017 8:58 pm, edited 1 time in total.
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Re: Golden Butterfly Portfolio

Postby sophie » Wed May 31, 2017 10:07 am

dualstow wrote:My main struggle is whether to make the pp a larger part of my total, which effectively means a bet on gold, buying more gold. What if I load up the truck and gold doesn't come back in my lifetime? What if I don't load up, and merely break even when gold soars once again?


This is from the other gold thread (the one where I was hoping kick off a discussion of the wisdom of holding a ton of gold in ETFs), but it better belongs here I think.

It's a really good question. You could of course ask the exact same question about any other asset. Stocks can be down or flat for periods up to 20 years, which can qualify as "lifetime" for some of us. And let's not even start about bonds! You own gold and bonds because you don't want to bet on stocks - right? It's like buying insurance against market downturns. I guess if you're not worried about downturns (i.e. if 2009 happened again you'd sleep just fine at night) you don't need them.

Anyway, I continue to be curious why people want to discount the gold runups of the 1970s and late 2000's, as the gold performance in those periods is exactly what one would expect given what was happening at the time: stagflation in the 1970s, and market uncertainty in the late 2000s. Looked at another way, if you think gold's performance in the 1970s was entirely due to relaxing restrictions on ownership, then you are saying that Harry Browne's view of the role of gold is completely wrong. If he made that big an error, then you probably don't want to get anywhere near the PP, as presumably that wouldn't have been his only mistake.

Also, I'm not sure the backtests about the returns of intermediate treasuries being a good enough substitute for gold are valid going forward. Rates were a lot higher in the past, and for long periods cash beat inflation - which it is not now, and may not for a long time. Incidentally, I also think that this is a big reason for the runup in stocks. People are buying stocks because the S&P 500 dividend yield beats CD interest rates, and gets better tax treatment. I wonder what's going to happen when interest rates rise and that's no longer the case.

Anyway just some (also over-caffeinated) thoughts....
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Re: Golden Butterfly Portfolio

Postby dualstow » Wed May 31, 2017 10:26 am

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 technovelist. (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.)

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