Golden Butterfly Portfolio

[murphy_p_t]

comparing VBR to VTI over, say, 10 years...charts overlay very closely. Shouldn't we attribute the outperformance of the Golden Butterfly vs the PP *mostly* to more $$ invested, kinda like a leveraged PP of 30/30/30/10?

[Tyler]

comparing VBR to VTI over, say, 10 years...charts overlay very closely. Shouldn't we attribute the outperformance of the Golden Butterfly vs the PP *mostly* to more $$ invested, kinda like a leveraged PP of 30/30/30/10?

The 30/30/30/10 results still don't really match the GB in returns or withdrawal rate, and fall below both the GB and PP in downside protection.  So IMHO it's not simply about reducing cash, but also about where that money is placed.  I personally think there might be something to be said for the large/small cap split, as well as for tilting a little more towards prosperity.  But to be honest those are just guesses, and I prefer to let the data speak for itself rather than to speculate on market "logic" too much. 

[lordmetroid]

Why do Small Cap Value make such a great suppelemt in the golden butterfly and why doesn't Small Cap Growth, Blend or Micro Caps do that same?

[koekebakker]

The most basic answer is because SCV outperformed the other asset (sub)classes and on top of that its correlation with the general market was relatively low. Adding SCV would help any backtested portfolio over this timeframe.

Wether the small/value premium persists going forward is a whole different question. There are an insane amount of threads about this on the bogleheads forum.

[MachineGhost]

Wether the small/value premium persists going forward is a whole different question. There are an insane amount of threads about this on the bogleheads forum.

Value actually has to be value to outperform.  The median stock is now more overvalued than in 2000.  Is there still pockets of undervaluedness by buying the bottom 20%-30% by price/book and the kitchen sink?

[Kbg]

My apologies for not remembering the details but I believe the latest academic research shows there is a small cap value premium but only for top decile value stocks in terms of quality measures. And what those are is what I can't remember.

[Cortopassi]

Desert,

Just looking back through some older trails involving Tyler's portfolios, and I see the allocation below from one of your posts.  What is Int Tr?

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

I am liking the Golden Butterfly allocation and results, and the reason for all this is I finally got some time to look more in depth at Tyler's site starting with the latest Merriman portfolio, which is a bit too complex for me to want to pursue.  But the GB looks like a reasonable way to diversify past the PP (in my opinion).

Tyler, thanks for all the great work. 

[Cortopassi]

Tyler, at the risk of hijacking your thread here, I've been thinking more about the portfolio in my previous post:

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. 

Again, I recognize the hazards of backtesting, e.g., identifying mere artifacts in the historical returns through hindsight bias.  But this portfolio appears to provide some of the same things the HBPP does, but with a much larger prosperity bet, and with a Larry-style heavy tilt to higher risk equities. 

Thoughts?

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.

[ochotona]

If you get rid of your cash, your LTTs alone will expose you to rate risk. Consider 10 year Treasuries.

[mathjak107]

that is the issue spending down from the pp.

all well and good you have 25% cash but now that you spent it down  below your rebalance point you have to rebalance and refill selling volatile assets . it may be  no different from leaving the cash and spending it down equally from the  other parts  right from the get go ..

in a typical bucket system you exhaust the cash , then refill from short and  intermediate term bonds which are no where near as volatile as stocks would be like long term bonds are. finally many years later sell equity's to refill bonds and cash

so instead of refilling from short and intermediate term  bonds which may be down a little you are selling long term bonds which are  something as volatile as the stocks  or selling stocks or gold which run an equal chance of being down as much you are trying to avoid selling at a bad time .

with the pp you do not really have a non volatile 2nd line of defense to draw from if rates rise . .

i think anyone spending down from the pp has to examine this and find away to provide a secondary source for spending without selling assets as volatile as stocks are .

perhaps an income annuity may add time to allow other assets to  at least recover before they are needed  and prolong rebalancing to cash .

i don't know , how it would shake out as i never looked at the pp in that regard .

[Cortopassi]

I have probably 17 years till retirement.  I understand the spend down problem, but do you guys think that's something I even need to consider at this point?  Assuming I have a decent rainy day cash reserve outside of the this modified PP and will figure out spend down changes as I get closer to retirement?

[mathjak107]

not a thought for you yet .

[Tyler]

i think anyone spending down from the pp has to examine this and find away to provide a secondary source for spending without selling assets as volatile as stocks are .

I don't think I still have the spreadsheet, but I looked at this once.  A 1972 retiree using the PP with a 4% SWR and the 15-35 rebalancing bands would have rebalanced something like 8-10 times over the years (I don't remember the exact number).  Less than half of those times would it have been because cash dropped below 15%,  The rest were because stocks, gold, or LTTs all exceeded 35%. 

A PP retiree typically turns off automatic reinvestment of dividends and interest and uses that first for expenses before selling assets.  That usually does not completely cover expenses unless the portfolio is very large, but it definitely slows the rate of drawing down cash beyond what you'd initially think.  And when it does sell volatile assets, it only sells the highest ones as part of a normal rebalance.  I don't see that as a bad thing at all. 

In any case, that's the academic method and there are other good ways to approach it.  Personally, my PP drawdown method is sorta hybrid anyway.  I first live off of the dividends and interest, which funds almost half of my needs.  Each year, I rebalance as close to 4x25 as I can get while staying in the 0% tax bracket for capital gains and skim off enough in the process to cover the rest of my expenses.  That's a free rebalance most years, with tax-free funds coming from appreciated assets rather than cash.  In years where it is beneficial (like markets are struggling or there's a tax benefit to sitting tight) the cash is there to support me for years if necessary.  Cash is just one tool of many in the arsenal.  It just happens to be a highly flexible one. 

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 first hit is always free.    Thanks for the donate button idea.  I'll look into that.

[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?