Golden Butterfly Portfolio

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

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Cortopassi
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Re: Golden Butterfly Portfolio

Post by Cortopassi » Wed May 31, 2017 11:03 am

I only post this as informative in nature, please don't draw any conclusions...

One other aspect of gold, if held in physical form, not GLD at a broker, is it is effectively off the grid as much as you are willing to take it. I have yet to have any local coin dealer fill out forms when buying or selling gold.
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Re: Golden Butterfly Portfolio

Post by stuper1 » Wed May 31, 2017 11:44 am

Exactly, so if there is a solar flare or electromagnetic weapon in the next war that knocks out the power for months, or some kind of financial shenanigans or hacker that erases everybody's brokerage accounts, you still have your physical gold. The calculations above show that you can hold as much as 20% physical gold and still get almost the same CAGR as somebody who holds no gold, plus it lowers the volatility of returns. I sure feel better holding physical gold and having insurance against the possible black swan events.
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Desert
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Re: Golden Butterfly Portfolio

Post by Desert » Wed May 31, 2017 4:23 pm

stuper1 wrote:Exactly, so if there is a solar flare or electromagnetic weapon in the next war that knocks out the power for months, or some kind of financial shenanigans or hacker that erases everybody's brokerage accounts, you still have your physical gold. The calculations above show that you can hold as much as 20% physical gold and still get almost the same CAGR as somebody who holds no gold, plus it lowers the volatility of returns. I sure feel better holding physical gold and having insurance against the possible black swan events.
Yeah, that's my main conclusion as well. An allocation of 0-20% gold has been essentially neutral since 1975, not having a significant effect on standard deviation, drawdown or CAGR. As you stated, this is an excellent argument in support of holding physical gold, since it provides disaster insurance. On the other hand, people who don't want to hold gold are probably going to do just fine also (minus the insurance).

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.
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Re: Golden Butterfly Portfolio

Post by Tyler » Wed May 31, 2017 4:29 pm

Desert wrote: 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.
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Desert
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Re: Golden Butterfly Portfolio

Post by Desert » Wed May 31, 2017 8:23 pm

Tyler wrote:
Desert wrote: 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.
I suspect that's true, but I wonder how we can quantify it. I would think it would show up in the max withdrawal rate, which is essentially a measure of the consistency and level of CAGR.
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Re: Golden Butterfly Portfolio

Post by Desert » Wed May 31, 2017 8:49 pm

barrett wrote: 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 to 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!
Barrett, assuming your assets are sufficient, it sounds like you're in great shape for retirement. You'll be able to access any of your accounts penalty-free at age 59.5. I would start by withdrawing from IRA's up to the point fed tax would apply, then fund the remaining expenses from taxable accounts. Depending on level of assets, you may want to push withdrawals up into the lowest federal tax bracket, to reduce RMD's later. I agree with waiting until age 70 to take SS. It sounds like we're on the same page regarding order of withdrawals.

Regarding gold's performance in the 2000's, I agree it can't be ignored, and was quite impressive. It was a nice 10+ year bull market. I don't have any great explanation for it, and I doubt anyone else does either. In general, there was significant economic uncertainty at times during the decade, but there was in other decades as well with no similar long bull market in gold. The last time I looked at correlation data, it appeared that gold was essentially uncorrelated with equities; its performance looks pretty random to me. It took about 30 years for gold to match it's early 80's peak. Who knows what the cycle will look like in the future. But as I said in a previous post, I intend to hold gold; I just don't feel strongly enough about it to recommend it to others, unless they have the understanding of gold's price history that will give them the mental fortitude to hold it long term.
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Tyler
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Re: Golden Butterfly Portfolio

Post by Tyler » Wed May 31, 2017 9:02 pm

Desert wrote: I suspect that's true, but I wonder how we can quantify it. I would think it would show up in the max withdrawal rate, which is essentially a measure of the consistency and level of CAGR.
Yes, SWRs are a pretty good indicator.

Lots of charts on the site illustrate it from different perspectives. But if you're looking for a single way to quantify it, play around with the Start Date Sensitivity calculator with and without gold. Here's a walkthrough that includes an example directly relevant to this conversation: https://portfoliocharts.com/2016/05/15/ ... an-others/
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Re: Golden Butterfly Portfolio

Post by sophie » Thu Jun 01, 2017 7:23 am

The problem with backtesting is that the results are going to be skewed depending on the prevalence of the different economic environments. If you started in 1980, you skipped past the inflation of the 1970s and are looking at mostly prosperity with a few years of deflation, plus a long, slow run-down in bond interest rates in the 1980s that could be regarded as an aftereffect of the 1970s inflation. So your backtesting won't be valid if another inflation comes along. Also, you could regard the 1980s hyper-prosperity as an artifact of post-inflation and thus not likely to be repeated. Bottom line, I don't trust backtests anymore.

It's true that there's not much you can turn to for advice on gold. Most writings are a mix of cherry-picked back-tests and highly biased opinion. Which is true of this little missive also, I guess :-). I arrived at my conclusions by examining the long history of gold and its function as an internationally and cross-culturally recognized store of value. I also spent time watching daily market movements of gold, long bonds, and stocks. Whenever stocks went down, either gold or long bonds (sometimes both) would go up. The opposite would happen when stocks went up. Despite the existence of other asset classes, gold and Treasury bonds are fundamental assets that are the main recipients of money that doesn't go into stocks or cash. Other asset classes can be regarded as linear combinations of the fundamental assets. For example, I tested corporate bonds against stocks and cash, and found that they track stocks so closely that I decided they're not worth holding as they provide no actual diversification.

There's also quite a lot of intelligent discussion about gold in the epic PP thread on the Bogleheads forum. It's worth reading through if you haven't already. Maybe it would be worth putting it into one long document and posting somewhere!
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Desert
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Re: Golden Butterfly Portfolio

Post by Desert » Thu Jun 01, 2017 9:59 am

Sophie, thanks for your post. I agree that backtesting is not sufficient when figuring out the right portfolio. As you said, interest rates are in a completely different place now, than they were back in the 70's and 80's. Equities are widely held, index funds are everywhere, gold isn't pegged to the dollar, gold ETF's exist, Emerging Markets are different, etc. I think backtesting can help us discard some truly bad choices, but the world is so much different now that it gives us at best a cloudy view of the future.

Just to clear up a couple things: I actually really like gold. Somehow I tend to get on the anti-gold side of discussions around here at times, I think because I'm continually testing my own views on gold as an investment component. But I always end up choosing to continue to hold gold, even though I may not have the conviction to heartily recommend it to someone else.

Tyler, I haven't had a chance to look at your link yet. I'll check it out a bit later. Thanks.

Edited to add: Sophie, I love the new pic! Marie Curie?
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Tyler
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Re: Golden Butterfly Portfolio

Post by Tyler » Thu Jun 01, 2017 10:57 am

Desert wrote: Just to clear up a couple things: I actually really like gold. Somehow I tend to get on the anti-gold side of discussions around here at times, I think because I'm continually testing my own views on gold as an investment component. But I always end up choosing to continue to hold gold, even though I may not have the conviction to heartily recommend it to someone else.
Those who think critically of their investments and who question their own assumptions are the best types of investors! I always fully respect when a decision is well thought out and not simply an act of faith. Your points about the early performance of gold are all true and something worth considering. I just believe that even with those timeframes excluded portfolios with gold are appealing for their demonstrable consistency.
sophie wrote:The problem with backtesting is that the results are going to be skewed depending on the prevalence of the different economic environments. If you started in 1980, you skipped past the inflation of the 1970s and are looking at mostly prosperity with a few years of deflation, plus a long, slow run-down in bond interest rates in the 1980s that could be regarded as an aftereffect of the 1970s inflation. So your backtesting won't be valid if another inflation comes along. Also, you could regard the 1980s hyper-prosperity as an artifact of post-inflation and thus not likely to be repeated. Bottom line, I don't trust backtests anymore.
IMHO, a wise investor should seek two pieces of information: 1) how a portfolio worked and will continue to work, and 2) evidence that it really did perform as advertised even in the least favorable timeframe. I think backtesting has developed a bad name because too many people cherry-pick data either intentionally or not and simply don't understand how uncertainty and sequence of returns works. But with the right mindset and the right tools, it doesn't have to be that way. I can't force people to think differently, but at least I can contribute to the tool chest.
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Re: Golden Butterfly Portfolio

Post by sophie » Fri Jun 02, 2017 7:48 am

Agree, backtesting helps you prove that a portfolio worked as it should during a given economic condition. I remember once toying around with inventing a way to backtest fairly by setting up a fictitious timeline with all economic conditions equally represented, using results from years in which each condition dominated. Or, set up multiple tests each focusing on one economic condition.

One thing that has always struck me is how every portfolio that doesn't hold gold got hammered in the 1970s. Since my goal is to preserve my assets even during the drawdown phase, I got very interested in this time period as the ultimate test of a portfolio's staying power in difficult long-term conditions. I tested to see if lowering gold to 10% would be enough to keep a portfolio afloat, and it's not. The minimum is just over 20%. If Desert is right and gold gains were artificially increased in the 1970s by relaxing of ownership rules, then you'd need even more. So it's not that I'm taking gold on blind faith.

Desert, great guess - it is indeed Marie Curie. Is your avatar Ben Franklin?
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Re: Golden Butterfly Portfolio

Post by Desert » Fri Jun 02, 2017 4:36 pm

sophie wrote:Agree, backtesting helps you prove that a portfolio worked as it should during a given economic condition. I remember once toying around with inventing a way to backtest fairly by setting up a fictitious timeline with all economic conditions equally represented, using results from years in which each condition dominated. Or, set up multiple tests each focusing on one economic condition.

One thing that has always struck me is how every portfolio that doesn't hold gold got hammered in the 1970s. Since my goal is to preserve my assets even during the drawdown phase, I got very interested in this time period as the ultimate test of a portfolio's staying power in difficult long-term conditions. I tested to see if lowering gold to 10% would be enough to keep a portfolio afloat, and it's not. The minimum is just over 20%. If Desert is right and gold gains were artificially increased in the 1970s by relaxing of ownership rules, then you'd need even more. So it's not that I'm taking gold on blind faith.

Desert, great guess - it is indeed Marie Curie. Is your avatar Ben Franklin?
One clarification, regarding my view of gold's performance in the 1970's: Gold's price was artificially set (pegged to the dollar) for decades, prior to 1972. Then it was de-pegged from the dollar. This led to a massive "reset" of gold prices, followed by a speculative bubble that achieved a price peak that wasn't seen again for more than 20 years. My view is that this un-pegging was a one-time event that understandably drove massive increases in the price of gold (like uncorking a bottle of champaign). Now, if we could ensure a similar un-pegging the next time staglation occurs, I'd feel more confident in gold's ability to repeat that sort of performance. The legalization of ownership that was completed in 1975 probably had an effect as well, but I view the un-pegging as the primary driver.

My avatar is Blaise Pascal. The pic does look a bit like Franklin though!
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