Golden Butterfly Portfolio

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

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Tyler
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Golden Butterfly Portfolio

Post by Tyler » Tue Sep 22, 2015 12:21 pm

I mentioned in another thread that I've been tinkering with my spreadsheets and have been studying an interesting PP variant.  Short story -- by adding just one new asset, it has the same long-term real CAGR as the total stock market but with the low volatility of the PP. 

http://portfoliocharts.com/2015/09/22/c ... butterfly/

Quick disclaimer -- I am currently 100% PP and this is just an idea I came across when looking for alternatives for cash in my IRA.  I'm tempted to move some money into SCV by the end of the year, and since the rest of the portfolio is basically a pure PP I consider it a VP idea.  But I'm not committed to anything.

Thoughts?
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koekebakker
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Re: Golden Butterfly Portfolio

Post by koekebakker » Tue Sep 22, 2015 1:08 pm

Well, any backtested portfolio will look a lot better if you add some SCV...

I'm pretty sceptical about the value premium going forward. So if I would add a fifth part to the vanilla PP it would be a broad international stocks fund or etf.

The risk adjusted return of a 40/20/20/20 portfolio has been really good over the last 40 years or so!
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Re: Golden Butterfly Portfolio

Post by dualstow » Tue Sep 22, 2015 1:27 pm

I just read through the page, very interesting.

I've been thinking about moving the small cap value (SCV) portion out of of my pp and into my vp, replacing it with something that will get my other cobbled-together pp equity holdings closer to total market. The main reason for this would be to just never sell the SCV, to only buy more.

Looking at the Golden Butterfly, which is probably also the name of some lethal Bruce Lee move, I have to rethink that move.

The monarch butterfly may go extinct 👣
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Re: Golden Butterfly Portfolio

Post by iwealth » Tue Sep 22, 2015 2:23 pm

I think a prosperity tilted VP is a great idea. Given nearly guaranteed government/central bank intervention when things get rough, it's tough to see how the US stock market can stay down for too long. Millions of workers are depositing money into their 401k's every single paycheck. Most of it goes to stocks. Equity bull market tailwinds are strong.

But I agree with koekebakker. Whether or not small cap value outperforms like it has in the past...impossible to say. I do wonder if the machines have eliminated much if not all of the small value premium. Consider that it is EASY to create stock screens using historical data that obliterate the performance of the S&P 500 or any other index benchmark. For a couple decades momentum trading blew everything away. But those anomalies are getting more and more difficult to exploit.
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Tyler
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Re: Golden Butterfly Portfolio

Post by Tyler » Tue Sep 22, 2015 4:36 pm

Small and Mid Cap Blend work almost as well.  Even if the "value" premium is a thing of the past, it still seems like there might be value in broadening exposure beyond large cap funds that are influenced by fewer companies than their high-level index count implies.  Even large cap international funds just don't have the same effect. 

But that's just an observation based on the data and not on any theory behind the asset class.  I'm curious if anyone disagrees. 
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koekebakker
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Re: Golden Butterfly Portfolio

Post by koekebakker » Tue Sep 22, 2015 11:58 pm

This was the case over the last 40 years. Small/Mid/Value outperformed Large.
It's highly unlikely that those asset classes keep outperforming on that same level. Just take a quick look at the current valuations of small cap stocks...

The main advantage I see of over-weighting small/midcap is the possible diversification benefit. Even though correlation with the general stock market is very high the magnitude of the returns can be very different between large-caps and small-caps. During the 'lost decade' for example for stocks small-caps did relatively well.

The higher volatility of small-caps could be another advantage when adding it to the stock portion of the PP. Small-caps tend to follow the general market very closely but with higher ups and downs. Sounds perfect :).

I would split the equity part of my PP 50/50 between large-cap blend and small/mid blend if there was a single decent Euro or global small-cap fund. But so far I haven't found one...

Great site btw!
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Re: Golden Butterfly Portfolio

Post by lordmetroid » Wed Sep 23, 2015 3:00 am

Well, I am convinced. Going to get me some of those nice mid term bonds(2-10 years seems better compared to less than 1 year, past 10 years had no years of no negative returns which is good enough for me) and small cap growth(Could not find any small cap value fund with a low fee)
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Re: Golden Butterfly Portfolio

Post by dragoncar » Wed Sep 23, 2015 5:01 am

How about 20% private equity?
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Re: Golden Butterfly Portfolio

Post by Drewskers » Wed Sep 23, 2015 11:37 am

lordmetroid wrote: (Could not find any small cap value fund with a low fee)
VBR .09%
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Re: Golden Butterfly Portfolio

Post by lordmetroid » Wed Sep 23, 2015 2:50 pm

Drewskers wrote:
lordmetroid wrote: (Could not find any small cap value fund with a low fee)
VBR .09%
Sorry, I should have been more detailed.
I can not find any small cap value fund with a low fee in SEK on the swedish market.
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Re: Golden Butterfly Portfolio

Post by Desert » Sat Sep 26, 2015 1:55 pm

Tyler wrote: I mentioned in another thread that I've been tinkering with my spreadsheets and have been studying an interesting PP variant.  Short story -- by adding just one new asset, it has the same long-term real CAGR as the total stock market but with the low volatility of the PP. 

http://portfoliocharts.com/2015/09/22/c ... butterfly/

Quick disclaimer -- I am currently 100% PP and this is just an idea I came across when looking for alternatives for cash in my IRA.  I'm tempted to move some money into SCV by the end of the year, and since the rest of the portfolio is basically a pure PP I consider it a VP idea.  But I'm not committed to anything.

Thoughts?
Tyler, I've been studying this portfolio, and comparing it with my present portfolio, which consists of:

10% TSM
10% SCV
10% EM
60% Int Tr
10% Gold

The backtested results are remarkably similar for the two portfolios.  The Butterfly performed better in the 70's, but a bit lower in the following decades.  The overall CAGR and volatility is nearly identical for the two portfolios since 1972. 

Hmmm.... choices, choices. 

By the way, how did you decide on large cap blend rather than TSM?  I assume just keeping small and large cap separate for rebalancing opportunities?
Our greatest fear should not be of failure, but of succeeding at something that doesn't really matter. 
- D.L. Moody

Diversification means always having to say you're sorry.
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Tyler
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Re: Golden Butterfly Portfolio

Post by Tyler » Sat Sep 26, 2015 6:10 pm

Desert wrote: By the way, how did you decide on large cap blend rather than TSM?  I assume just keeping small and large cap separate for rebalancing opportunities?
One of the ideas I wanted to communicate is that large cap and small cap are two different stock indices that track different things, and that having some of both can be helpful.  Since a TSM fund also contains small caps, choosing large cap blend for the example was less likely to trip someone up.  Practically speaking, because of the way TSM funds are market weighted they act a lot like LCB anyway and substituting one for the other makes very little difference in this particular example. 

Very nice portfolio, BTW.  I can see why you like it.  One can apply good investing principles in a variety of productive ways. 
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