The Golden Butterfly Portfolio

[Fred]

Without re-balancing my portfolio seems to be naturally progressing into this portfolio as featured on Tyler's excellent website....

http://portfoliocharts.com/portfolio/golden-butterfly/

Looks basically identical to the PP but with 40% stocks and the rest of the PP split into 20% allocations.

The interesting thing is it has the same maximum drawdown but a better CAGR, two things very important to me nearing retirement.

Looking at Tyler's charts I'm inclined to continue letting my portfolio go in the direction it seems to want to go right now.

Any comments?

[Pointedstick]

Yes, same here. Seems like it would be an easy thing to do if you simply decline to rebalance when stocks hit 35%.

[mathjak107]

modifying  harry's original perfect road map ?    do you guys realize what you are doing .

this will be reported  to the pp police .

[Pointedstick]

modifying  harry's original perfect road map ?    do you guys realize what you are doing .

this will be reported  to the pp police .

You realize you are talking to the people you consider to be the PP police, right?

[mathjak107]

i demand an internal investigation then .

[frugal]

Hello,

what are the advantages and disadvantages of this portfolio comparing with PP?

It seems better 

Tyler your site is very nice and clean, fantastic.


Thank you.

[frommi]

Now is probably the worst possible time to switch from the PP to another asset allocation. Do it when gold and LTT were the top performer and stocks had a 30-50% DD. Bull markets don`t last forever and this bull is in its last leg.

[sophie]

Now is probably the worst possible time to switch from the PP to another asset allocation. Do it when gold and LTT were the top performer and stocks had a 30-50% DD. Bull markets don`t last forever and this bull is in its last leg.

This is exactly my concern about how the discussions on the forum of late are affecting people.

Over a long enough time horizon, your choice of allocation matters far less than your ability to stick with it.  If you are constantly jumping from allocation to allocation based on how you think the winds are blowing, you are going to end up losing out unless you're just plain lucky - because predictions are wrong more often than they're right.  And it's worse than that even:  human perception being what it is, you're most likely to hate the fund you're in when it's doing poorly, so you'll be selling low and buying high most of the time.

In other words, this might actually be the BEST time to buy into the PP, and the WORST time to sell it.  It seems like many forum members are selling or shifting allocations (see upcoming poll).  If you repeat this behavior enough, and then track your performance over time, I think you'll find you've not been doing so well even though it looked like you were making some winning trades at the time.  I discovered exactly this when I was doing the same thing years ago, which is why I'm so adamantly against market timing.  I thought I was beating the market when in fact I was underperforming it!!!!!

Just some food for thought.

[Fred]

If you are constantly jumping from allocation to allocation based on how you think the winds are blowing, you are going to end up losing out unless you're just plain lucky - because predictions are wrong more often than they're right.  And it's worse than that even:  human perception being what it is, you're most likely to hate the fund you're in when it's doing poorly, so you'll be selling low and buying high most of the time.

In my case, I'm not actually having to jump from allocation to allocation to adopt this portfolio. As I pointed out it seems to be a natural occurrence, especially with most of my new contributions going into 401k's which means heavy on stocks.

It was just nice to know from Tyler's charts that the winds are blowing me into a portfolio that appears to be just as safe as the PP with a slightly better return. I was especially impressed that it had the same max DD as the PP even with a 40% stock allocation.

[ochotona]

Now is probably the worst possible time to switch from the PP to another asset allocation. Do it when gold and LTT were the top performer and stocks had a 30-50% DD. Bull markets don`t last forever and this bull is in its last leg.

Switching to "another" allocation typically would mean ditching most of one's precious metals, shortening bond durations, and increasing equity allocations.

Is it a good time to shorten bond durations? The answer really is "no one knows". The Fed wants to raise ST rates, it may or may not be able to do so, and anyway this may not have much effect on the long end of the yield curve. What is the difference in coupon between 30 year and 10 year Treasuries? It's 0.75%. Is that enough of a premium to subject oneself to huge bond price swings? Personally, for me, no.

Is this a good time to increase equity allocations? Probably not.

Is it a good time to ditch gold? Step one is to forget how much you paid for your gold; whatever you paid, that cash is gone. "Ignore sunk costs". So what is the point-forward outlook for gold? Still below 200 day moving average, and this average is still pointing down, has not leveled. Gold still at a moderately high multiple of CPI-U on a historic basis. The strong US dollar may persist, forcing gold, silver, copper, oil, other global commodities down. If the FED raises interest rates, that would be another headwind. It will bottom eventually and head back up, though.

I think on balance, it's something of a draw, whether to enter or exit the PP. Generally, I think it's wise to be cash heavy, equity light, take a lower-risk approach to Treasury bond durations (shorten from 20-30 years down to 10 years), and monitor the gold price and buy very slowly on dips, and plan to accelerate if there is a capitulation event which knocks the price down below $1000, and especially if it reaches the $500 range, buy the full allocation immediately.

I know this isn't a truly "lazy" approach, but once you get in, I think you really can go to lazy mode, because it's more likely you're starting in positive real CAGR territory on Tyler's Hurricane chart for the PP. Three years is a long time to be in the hole for a new entrant to any allocation, if you happen to get in at a bad time. The PP is something very good to aspire to.

[finster869]

This is exactly my concern about how the discussions on the forum of late are affecting people.

Over a long enough time horizon, your choice of allocation matters far less than your ability to stick with it.  If you are constantly jumping from allocation to allocation based on how you think the winds are blowing, you are going to end up losing out unless you're just plain lucky - because predictions are wrong more often than they're right.  And it's worse than that even:  human perception being what it is, you're most likely to hate the fund you're in when it's doing poorly, so you'll be selling low and buying high most of the time.

In other words, this might actually be the BEST time to buy into the PP, and the WORST time to sell it.  It seems like many forum members are selling or shifting allocations (see upcoming poll).  If you repeat this behavior enough, and then track your performance over time, I think you'll find you've not been doing so well even though it looked like you were making some winning trades at the time.  I discovered exactly this when I was doing the same thing years ago, which is why I'm so adamantly against market timing.  I thought I was beating the market when in fact I was underperforming it!!!!!

Just some food for thought.

+1 on Sophie's excellent post.  Capitulation often marks the turning point for a change in trend, and there is an awful lot of capitulation taking place on this board.

[ochotona]

+1 on Sophie's excellent post.  Capitulation often marks the turning point for a change in trend, and there is an awful lot of capitulation taking place on this board.

Some kind of change is in the air, that is for sure.

[Fred]

In William Bernstein's review of the permanent portfolio he said there was nothing wrong with it but that he questioned if investors would be able to stick with it when gold and bonds were under-performing which they inevitably would.

Well, we are there and it appears that he is right.

It isn't really a "permanent portfolio" if it makes you uncomfortable and you can't stick with it, is it?

So here's a portfolio that appears to have all the advantages of the Permanent Portfolio but might provide a greater level of comfort during the times of "under-performance" in bonds and gold. I would be interested to hear what anybody has to say about the fundamentals of the strategy. 

Call it "capitulation" if you want but I don't see it that way. I see it as the continuing search for the all-weather portfolio that gives me decent returns and lets me sleep at night.

And another thing that adds to the beauty of it is that I can still claim to be a PP purist because  I have 80% of my money in the pure PP and 20% in a VP if I want to.

+1 on Sophie's excellent post.  Capitulation often marks the turning point for a change in trend, and there is an awful lot of capitulation taking place on this board.

Some kind of change is in the air, that is for sure.

[mathjak107]

bill in his  newer book deep risk said the problem with  the PP is  the  4 x 25% allocation attempts to insure equally against economic conditions that are anything but equally likely to occur.

[Libertarian666]

I think on balance, it's something of a draw, whether to enter or exit the PP. Generally, I think it's wise to be cash heavy, equity light, take a lower-risk approach to Treasury bond durations (shorten from 20-30 years down to 10 years), and monitor the gold price and buy very slowly on dips, and plan to accelerate if there is a capitulation event which knocks the price down below $1000, and especially if it reaches the $500 range, buy the full allocation immediately.

I think for safety's sake, you should wait at least until it gets down to $50, so that you can't lose when buying Eagles at face value!

[ochotona]

I think for safety's sake, you should wait at least until it gets down to $50, so that you can't lose when buying Eagles at face value!

great idea

[dutchtraffic]

This has no cash, and no smallcaps (if you plug in any other etf than smallcap value you get wildly different results in the g. butterfly setup so i wouldn't bet my money on that happening again..)

This is a bit more volatile than the PP, but acceptable, for me at least.
I wouldn't jump into this right now, but after some serious stock/bond massacre this could be nice though if you want to spice up returns.

[MachineGhost]

It was just nice to know from Tyler's charts that the winds are blowing me into a portfolio that appears to be just as safe as the PP with a slightly better return. I was especially impressed that it had the same max DD as the PP even with a 40% stock allocation.

Did you verify this with the peak2trough backtester?

[MachineGhost]

bill in his  newer book deep risk said the problem with  the PP is  the  4 x 25% allocation attempts to insure equally against economic conditions that are anything but equally likely to occur.

Easy enough to fix.  Presenting the Clive Probability Portfolio:

Code: Select all

Stocks		40.00%
LT Bonds	32.00%
Gold		17.00%
ST Bonds	11.00%

[I Shrugged]

Is probability weighted by magnitude?

[MachineGhost]

Is probability weighted by magnitude?

Occurence.

[Kriegsspiel]

bill in his  newer book deep risk said the problem with  the PP is  the  4 x 25% allocation attempts to insure equally against economic conditions that are anything but equally likely to occur.

Easy enough to fix.  Presenting the Clive Probability Portfolio:

Code: Select all

Stocks		40.00%
LT Bonds	32.00%
Gold		17.00%
ST Bonds	11.00%

What is the origin of this allocation?

[I Shrugged]

Is probability weighted by magnitude?

Occurence.

That's what I figured.  Doesn't that seem to miss the point, too, then?  I see it as we would want an expected value type calcuation.    The probability of the occurrence times the impact of the occurrence. with some sort of adjustment thrown in.

If something has a 1% probability, but wipes out 90% of the value, that's a bigger deal than something that has a 20% probability and stands to wipe out 10% of the value.  In the end it would probably take some serious actuarial-style math to come up with it.  And we here could probably do well enough with our experience and intuition, using just the probabilities as givens, and adjusting from there.

Do Clive's numbers have some relation to the occurrences of inflation, deflation, prosperity, and tight money?

[MachineGhost]

What is the origin of this allocation?

Clive who no longer frequents here.  I forgot why he left.  I think he got banned or threatened to get banned for questioning the PP.  He also had all his posts deleted one by one.

[I Shrugged]

I want to extend my remarks.

Statistical analysis for investing has become a false god.  Just because we can calculate something does not mean it is actionable.  But, some of it is!

The real art today is deciding which info is high quality, and which is not. 
And then, what to do about it.

This is a real problem for left brained people.  (Most of the people on forums like this.)

HB's 4x25 is obviously imperfect, simply on the face of it.  But it is a lovely combination of science and art.  I do think it can be improved upon.  But not with numbers alone.  At some point you simply have to make some intuitive (artistic) decisions based on what you know, feel, and think, tempered with an open-mindedness and humility about your personal beliefs and biases.

I think the artistry we need is to decide on the importance of risks to us.  Over decades and cycles, how likely is inflation, deflation, tight money?  Confiscation?  National economic devastation?  (Straight out of Bill Bernstein's booklet Deep Risk.)  How bad will it likely be?  How bad could it be?  What does it cost to cover the risk?  Is it worth it?  When you see what's involved, the 4x25 is pretty darn good.  Certainly it's a great starting point, and is good enough for most.

Should you modify your answers to fit your particular investing lifetime?  (Yes, imo.)

Anyway, I've wandered off here.  Don't be a slave to numbers based on financial history.  Come up with your estimates.  They're as likely to be right as anything you can crunch up.  Then fill out your AA.  I'd love to hear your numbers and conclusions.