Golden Butterfly Portfolio

[mathjak107]

no one knows what to expect this  time around . these are uncharted times with things right now so i would trust nothing but real time monitoring .

could we have a decade of rising rates back to the historic norms ?  could stocks be dead another 15 years and could gold go no where but down with rising rates ?

all very possible so any spending down plan needs a plan B .  WHICH MEANS Access to another level of just slightly more volatile assets once cash runs low . .

i wouldn't want plan b to have to decide whether to take a beating on gold , stocks or those long term volatile treasury's .

more and more i like what i see when running simulations with the various types of income annuty's as a base . but we are still a bit to young and rates to low for laddering them .

the new fidelity retirement planner has simulations you can add with various annuity types .

if someone is not retiring today or in the short term , this may all go away and resolve . but with the first 5 years of ones retirement being especially crucial  before the cushion of a run up there are no do overs if things do not go as planned  .

i had a very comprehensive consultation with my team at fidelity on monday and gave them lots of homework .  they are running all kinds of simulations for me with various social security points , pulling from  different  types of accounts and using various annuity products . 

we were supposed to meet again  on monday but they needed more time so i will report back .

[Jack Jones]

no one knows what to expect this  time around . these are uncharted times with things right now so i would trust nothing but real time monitoring .

this time is different rarely works .

in the end all ends okay and if  someone thinks other wise and is always  going  to think this time is different then investing isn't  for them .

those types of chicken little's to date here have ended up quite a lot poorer by never committing  .

so does it really make as much sense to bet...thinking this time is different .

perhaps to some it does but i think that is a question you really need to ask yourself  without the visions in your head .

Visions in your head, indeed.

[mathjak107]

investing stays the same .  the portfolio is the same as it always is .  odds are things will not be any different then we have seen before .

but only a fool has no plan b  when their entire retirement hinges on it  early in the game .

once you have a good up cycle the pressure is off  but until that point you better monitor things  and have that plan b . what happens in the first 5 years influences the entire retirement with the first 5 years determining 100% of the outcome .

so yes ,this is a vision in my head.  hope is never a plan .

[Tyler]

Annuities are a great option for someone over 60.  In my 30's, not so much.   

My Plan B probably looks a lot different than yours.  Everyone is different. 

[Xan]

Jack Jones called you out pretty well on your "this time it's different" flip-flops.  It also seems that you don't know what you believe (despite believing it very strongly) about bucket systems.  First they don't work, they're an illusion, they do nothing but kill returns.  And now suddenly you need TWO LAYERS of buckets!

[mathjak107]

i would say to start laddering at 70 is the sweet spot .

[ochotona]

Tyler, in the "global butterfly" I see you have some emerging markets... if not you, someone on this thread put "EM" in. Why EM and not International Developed, or International Developed Small Cap Value?

There's a big difference between an undervalued small company with potential in Europe or Australia, for example, versus... Petrobras. Yet, if you buy EM, you get Petrobras, Rosneft, Lukoil, Chinese equities of quality, etc.

[mathjak107]

Jack Jones called you out pretty well on your "this time it's different" flip-flops.  It also seems that you don't know what you believe (despite believing it very strongly) about bucket systems.  First they don't work, they're an illusion, they do nothing but kill returns.  And now suddenly you need TWO LAYERS of buckets!

bull sh*T.

bucketizing  does not matter compared to pulling from the same assets in a systematic withdrawal from all parts equally  but that does not mean your choice of assets work well


having buckets of cash in bucket 1 and volatile long term treasuries in bucket 2 is very different from having pretty non volatile short term and intermediate term bonds in bucket 2 .

it wouldn't matter whether i buckertized  or not in the 2nd option .

with the pp in either case you need to hit volatile assets next if bucketizing  or if you pull equally  . you have no middle ground  if bucketizing , they are not the same case .

[Jack Jones]

It also seems that you don't know what you believe (despite believing it very strongly) about bucket systems.  First they don't work, they're an illusion, they do nothing but kill returns.  And now suddenly you need TWO LAYERS of buckets!

It's really more of a two pail system.

[Tyler]

Tyler, in the "global butterfly" I see you have some emerging markets... if not you, someone on this thread put "EM" in. Why EM and not International Developed, or International Developed Small Cap Value?

There's a big difference between an undervalued small company with potential in Europe or Australia, for example, versus... Petrobras. Yet, if you buy EM, you get Petrobras, Rosneft, Lukoil, Chinese equities of quality, etc.

Emerging Markets weren't part of my original suggestion.  I think that's a Cortopassi idea. 

[mathjak107]

It also seems that you don't know what you believe (despite believing it very strongly) about bucket systems.  First they don't work, they're an illusion, they do nothing but kill returns.  And now suddenly you need TWO LAYERS of buckets!

It's really more of a two pail system.

bucket systems are usually 3.

a typical plan is about 6 or 7 years withdrawals in  cash  which is about the same as the pp would have , bucket 2 is short and intermediate term bonds  and bucket 3 is all stocks .  that is about a 50/50 mix of equity's and bonds/cash  to start but as you spend down equity's allocation is rising  until you refill .  pulling equally yearly has no allocation change like bucketizing does .

rebalancing with buckets is by years of money , rebalancing with equal parts of the pie are by performance  but study's show at the end of the day  the rising stock level bucketizing equals out close to maintaining a constant stock allocation .

buckets one and 2 can go up to 15 years before equity's need to be sold and volatile assets hit .    or you can take the whole pie , maintain the allocations and pull equally , but you never have to worry if bonds and stocks are down that the  mix of short and intermediate term bonds will take the same pounding equity's would .

results would be about the same in either case .

not so with the pp . the bucket system has no non volatile bucket 2 next in line ..

[Xan]

So two layers of buckets are okay, and zero layers of buckets are okay, but the absolute worst is one layer, which happens to be what the PP has.  Right?

[mathjak107]

no the pp is 3 buckets too .

cash , bonds and gold/stocks .  bucket 3 is traditionally the volatile bucket . it can be equity's , commodity's , gold , private equity deals , reits  etc.  it is where your big risks and volatility  are .

the issue with the pp is the next layer ,  bucket 2 can be as volatile as bucket 3 .

if i owned TLT  it would b a bucket 3 investment .

[Tyler]

So you're complaining that using the PP cash is a negative for a retiree, and then argue for having the same proportion of cash in other portfolios? 

I actually think I understand the disconnect.  You appear to be thinking in terms of "volatile" stocks and "stable" bonds being the only two options.  With that paradigm, the bucket system makes perfect sense, and I can see why you'd want protection from being forced to sell your one volatile asset when that particular market tanks. 

The PP has three volatile uncorrelated assets.  It's extremely rare for all three to be down at the same time.  So when you do need to touch them, you're never forced to sell any of them low.  The PP achieves the same end of avoiding selling a volatile asset at a market bottom not by adding more low-volatility assets but by diversifying the volatile ones. 

[mathjak107]

from a stand point of spending down the risk is the next  group of assets can all be down together and if they are they can't counted on to be just down a little bit . rising rates may  hurt  stocks , gold and long term treasury's  , we don't know .

on the other hand short term bonds and intermediate term bonds will still provide a pretty low volatile income flow for  another 7 years in the example .

[Tyler]

from a stand point of spending down the risk is the next  group of assets can all be down together and if they are they can't counted on to be just down a little bit . rising rates may  hurt  stocks , gold and long term treasury's  , we don't know ..

on the other hand short term bonds and intermediate term bonds will still provide a pretty low volatile income flow for quite a few years .

...Which is why the PP has 25% short term bonds! 

[mathjak107]

no it does not . it has 25%cash or  short term bonds . it is either or and once either or is spent there is no conservative bucket 2 .  it is the same  25% no matter how you divvy it up .

it is not 6 or 7 years cash , plus 6-7 years short -intermediate term bonds .  there is no 15 year time frame before volatile assets have to be hit .  there are few time frames any asset couldn't be sold 15 years later at a profit to refill.

most folks refill whenever markets are up and don't actually wait . but the more often you refill the more you hurt performance since you are never giving  bucket 3  that rising glide path .

[Tyler]

For most people here cash = short term treasuries. 

If you're arguing that a second bucket is required to mitigate the risk of Stocks, LTTs, and Gold all falling for more than 6 consecutive years, then I respectfully disagree with your pessimism.  In that economic scenario, no portfolios will be doing well and buckets will be the least of your worries. 

But hey, do what you think makes sense to you.  Just realize there are other approaches that also work well for many people. 

[mathjak107]

you could go 15 years depleting buckets 1 and 2 .  i know of only about 3 or 4  time frames  in history where you couldn't sell at a profit and refill  at some point over a 15  year period .  that is an awful lot of time frames where you would have sold at a profit . most of  those failed time frames did have interim high years where you could refill so more than likely we never had a point you couldn't refill at a profit .

[Tyler]

I think the bucket system makes perfect sense for your particular portfolio.  That does not mean it makes sense for every portfolio.

In any case, maybe we can take this topic somewhere else?  This thread is getting majorly sidetracked. 

[mathjak107]

but to some extent that is how the pp is used . you have the same 6 years in cash which you hear folks here say all the time gives them that cushion  when spending down . but  there is no 2nd level to provide a non volatile level of income  so your only choice is sell volatile assets that  can all be down and down a lot since they are so volatile at refill or rebalance time .

not a problem in the accumulation stage but a big issue when spending down .

personally if i used the pp i would want to have somewhere a less volatile source of funds  if needed

[mathjak107]

yes , great topic and worthy of its own discussion .

i am headed off on a hunting trip in the morning and back saturday night so we can kick it off then .

[Cortopassi]

Golden Butterfly is

    20% Large Cap Blend
    20% Small Cap Value
    20% Long Term Treasuries
    20% Short Term Treasuries
    20% Gold

No emerging markets or any international until we started modifying it.  The mix I listed was from Desert, on page two of this thread:

-------------------------------
25% Gold
25% LTT
50% Equity, split equally between TSM, SCV and EM

This portfolio is essentially a hybrid between Larry's Minimize Fat Tails portfolio and the PP.  And, in case it looks like these returns were merely a result of historical excess returns from equity tilts that have long since disappeared, this mix returned 10% over the last 10 years.  Tilting even smaller, by substituting mid cap blend for TSM, bumped the CAGR to 12.6%.  Your withdrawal rate calculator shows one could have withdrawn more than 7% from this portfolio over the past 40 years. 

-------------------------------
I mentioned that appealed to me because I already have 25% in gold, 25% in TLT, and 25% in TSM.  All I need to do is drop the TSM down to 17% and with those proceeds and cash buy into 17% SCV and 16% EM.  Appealing for the limited # of trades, the small cap and international exposure, and the higher equity exposure, which I have been convinced is a good thing to do.

I understand it will likely come at the expense of higher drawdowns with the int'l and SCV, but I am prepared to live with that. 

Mathjak has convinced me that there is a bit too much tied up in "safe" portions of the PP with the bonds and cash.  And gold even.  If cash was paying 5% like the past, and bonds much higher as well, I don't think I'd even be considering this.  I think it is time to skew a little more on equity...cue massive stock market drop in 3/2/1...

[Tyler]

Been playing all night with Tyler's calculators (put a donate button up, I WILL donate!), and this 17/17/16/25/25 TSM/SCV/EM/LTT/Gold really is shining for me.  I like the additional risk/reward of the stock split, while keeping my gold level to where I really like it (20-25%)

The only thing that is obvious in all these mixes is that there is no money market/cash component.  I need to mentally adjust for that, and just separate out a rainy day cash reserve separate from this.

I think Jan 1 I will start rebalancing to this allocation.  I also am open to thoughts.  I have no specific loyalty to the PP, it is still better than what I was doing, and this setup allows a lot of my current holdings to remain similar without having to trade out.

I can see why you like that AA.  Not bad at all!

Personally, I would first recommend to stay unquestionably loyal the PP.    Now that I've gotten that out of the way...

Even if you don't want to keep 25% cash, I still really like the general advice to keep a minimum of one year of expenses in cash.  Or maybe find a middle ground you're comfortable with.  Good money management is about a lot more than squeezing the last tenth of a percent out of your returns. 

BTW, I do like your plan to sleep on it until January.  Swapping funds impulsively is kinda like a one-night-stand.  Seems great and exciting at first, but sometimes you wake up the next morning and wonder what the hell you've done, with a clingy stranger now in your home rearranging the furniture and sizing up the curtains. 

[dragoncar]

my portfolio is buckets all the way down