Golden Butterfly Portfolio

[Cortopassi]

Wow, Tyler, this is definitely worthy of charging people somehow.  I feel like I am taking advantage.  Great work!

[lordmetroid]

Whooaaaaa *Clap, Clap, Clap, Clap, Clap, Clap*

This is an awesome tool. You are a god of the future robo-advising industry!

[dualstow]

Interesting, over the last 10 years, a PP with small cap blend has had higher CAGR than one with large cap blend or small cap value.

Cool, b/c I took over my own finances ~ 2004 and a large part of my equities has been Vanguard's small cap index fund.

[ochotona]

I'd like to know what is directly to the RIGHT of the PP! Now I can find out

[Jpeizie]

This tool is awesome! Thanks yet again Tyler.

What I've learned so far is that its not just the GB - there's a whole family of portfolios that devote two parts to prosperity (some combo of stocks and maybe REITs) along with one part each of LTT, STT, and gold, that all have expected returns around 5.5-6% and expected worst years around -9-10%. Loving it! Definitely helping reinforce my thinking about my own portfolio.

To ochotona - I'm definitely giving some thought to your suggestion about how to split up the stock portion of my portfolio. I think something GB-like has plenty of juice for me even though I'm relatively young. I'm hoping to FIRE so my savings rate is going to swamp portfolio gains while I'm accumulating anyway, and I really like these portfolios for the retirement phase.

[Tyler]

What I've learned so far is that its not just the GB - there's a whole family of portfolios that devote two parts to prosperity (some combo of stocks and maybe REITs) along with one part each of LTT, STT, and gold, that all have expected returns around 5.5-6% and expected worst years around -9-10%. Loving it! Definitely helping reinforce my thinking about my own portfolio.

I noticed that, too.  I find it reassuring that there's nothing particularly magical about SCV that makes the Golden Butterfly work.  It's more about the overall structure of the portfolio, and there are several nice alternatives following the same theme. 

[LazyInvestor]

Tyler, what you are suggesting is something half way towards Merriman's portfolio for the equity portion of PP. So, can you please backtest it with the Simplified Ultimate Buy and Hold

https://www.bogleheads.org/forum/viewtopic.php?t=38374

That is, instead of allocating 40% to 20/20 LB/SV, can you do it with 12.5% allocated to each of LB,SV,ILV,IS

[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.