Golden Butterfly Portfolio

[ppnewbie]

On another note. I just checked my GB 401k (which I converted a year ago) and the off kilter gyroscope is still gyrating. Year to Date it's up 14%. Thanks for the reply Tyler.

[TrickPony]

I just noticed that my VBR is down about 14% for the year, about twice as bad as my large cap VTI. This type of market seems like a good test for the "Golden Butterfly". Still marginally up for the year...Yea.
Kurt

[pmward]

So far in 2020 both small caps and value in general have been exceptionally weak. This drought for both is indeed pretty crazy, and I don't think anyone would be silly for questioning both small caps and value at this point. I think 40% VTI would not be unreasonable at all if anyone does not have faith in SCV going forward. I've also done some looking into ways to use momentum trend here on the other 20% stock bucket...

[sophie]

So far in 2020 both small caps and value in general have been exceptionally weak. This drought for both is indeed pretty crazy, and I don't think anyone would be silly for questioning both small caps and value at this point. I think 40% VTI would not be unreasonable at all if anyone does not have faith in SCV going forward. I've also done some looking into ways to use momentum trend here on the other 20% stock bucket...

Otherwise known as buying high and selling low. This is how you screw up your portfolio returns. The drop in small caps is a buying opportunity, not an indication to sell them. I suspect they are harder hit than large companies by the chaos in Chinese manufacturing.

[pmward]

So far in 2020 both small caps and value in general have been exceptionally weak. This drought for both is indeed pretty crazy, and I don't think anyone would be silly for questioning both small caps and value at this point. I think 40% VTI would not be unreasonable at all if anyone does not have faith in SCV going forward. I've also done some looking into ways to use momentum trend here on the other 20% stock bucket...

Otherwise known as buying high and selling low. This is how you screw up your portfolio returns. The drop in small caps is a buying opportunity, not an indication to sell them. I suspect they are harder hit than large companies by the chaos in Chinese manufacturing.

I'm not making any changes personally. I mainly meant that it wouldn't be unreasonable for someone to give up hope in both small cap and value at this point. But who knows, with all this craziness, value and small caps might finally get a chance to shine once the market starts to rebound. It certainly could be a very good environment for both to shine.

[Kevin K.]

The SCV underperformance vs. TSM is indeed dramatic and has been for years now.

Tyler's comment on his site about the theory behind the GB:

"The large/small barbell works well for this but other options are also fine. The permanence of the value premium is also debatable, but it is not central to the portfolio and other options like small cap blend or a broad international fund also work."

I still think tilting towards prosperity by having 40% equities vs. 25% makes sense. But I must admit I've been thinking that 10% in SCV or SCB might be enough after seeing the SCV crater the overall performance vs. the PP. Of course I'm writing this on a day when stocks, LTT's and gold all tanked in unison so maybe down is up and I'd better not do any tweaking or rebalancing anytime soon.

[Tyler]

The SCV underperformance vs. TSM is indeed dramatic and has been for years now.

That's true. But if SCV always outperformed TSM nobody would invest in large caps anymore.

I hear ya, though. SCV is certainly painful right now, and there's no way around it. I definitely wouldn't change your AA because of the events of a few weeks or even years, as for all we know SCV will come roaring back and leave TSM in the dust once the recovery starts. But I have no problem with people using days like today to take a hard look at their own risk tolerance and think about what that means to their long-term investing strategy. Just be sure to look at the big picture and not single assets in isolation.

BTW, even I am a little personally conflicted between SCV or SCB in my own portfolio. It has nothing to do with recent performance, though, and you'll see some of that thought process if you re-read this thread. I just philosophically relate to the Browne idea of diversifying investments across economic conditions more than I relate to the factor investing mindset of filtering for the most profitable investments. The former distributes risk, while the latter concentrates it. I absolutely appreciate the cap diversification of a small cap fund when paired with a large cap fund, but I can see both sides on the value premium. Long story short, even a guy like me who invented the GB is willing to tweak ideas to my own needs and preferences when necessary.

So no matter how you invest, my best advice is to pick a reasonably-diversified portfolio you're comfortable sticking with and piling more money into even in times like now. Do that, and in the long run you'll be set for life.

[dragoncar]

The SCV underperformance vs. TSM is indeed dramatic and has been for years now.

Tyler's comment on his site about the theory behind the GB:

"The large/small barbell works well for this but other options are also fine. The permanence of the value premium is also debatable, but it is not central to the portfolio and other options like small cap blend or a broad international fund also work."

I still think tilting towards prosperity by having 40% equities vs. 25% makes sense. But I must admit I've been thinking that 10% in SCV or SCB might be enough after seeing the SCV crater the overall performance vs. the PP. Of course I'm writing this on a day when stocks, LTT's and gold all tanked in unison so maybe down is up and I'd better not do any tweaking or rebalancing anytime soon.

I use SCB instead of SCV and hold SC because, as Tyler pointed out, the barbell gives you something approximating a nice equal-weight in all the boxes of a morningstar-style grid

[Kevin K.]

Thanks Tyler, thanks dragoncar!

I'm not ready to make any changes to the GB and it's always good during times like these to review the careful thought that went into creating it.

As always I'm grateful for the discussion and in times like these especially appreciate your pioneering work Tyler. Harry Browne would be very proud of the multiple ways you've taken his work to the next level and made it available to another generation (or two).

[vnatale]

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 .

Regarding the three bolded items...

1) The more things change the more....

2) I don't recall you writing much more here regarding annuities so I'm assuming that you have still not purchased any?

3) I've read every post in this Topic and I don't believe you ever reported back. Do you recall what their recommendations were and if you implemented any of them?

Vinny

[vnatale]

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...

Have I yet asked you if you followed through this this? And, if so, how you have since evaluated that decision.

Vinny

[vnatale]

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.

Is there some place I can go to see the Forum Awards for the year 2015 to see if this thread DID win the coveted "Thread of the Year" Award?


Vinny

[vnatale]

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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08 09 13
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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.

Tyler you really did something to elicit such a response from the oft-critical MachineGhost!

By the way, can anyone tell me what EWMC means?

And, I stop here to say for new people coming to the forum the use of similar abbreviations can be quite confusing and of mysterious meaning to the reader.

Vinny

[D1984]

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. 

12 12 13
08 09 13
12 12 12

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.

Tyler you really did something to elicit such a response from the oft-critical MachineGhost!

By the way, can anyone tell me what EWMC means?

And, I stop here to say for new people coming to the forum the use of similar abbreviations can be quite confusing and of mysterious meaning to the reader.

Vinny

I think it means "equal weighted by market cap" i.e. 1/5th megacap, 1/5th large cap, 1/5th mid cap, 1/5th small cap, and 1/5th microcap since IIRc MachineGhost talked about his stock allocation portion being something similar to that. I could be wrong though....maybe it means "equal weighted mid cap" or something else.

[vnatale]

We discussed this at the meetup.  I felt strongly that the Golden Butterfly backtests well for the simple reason that prosperity dominated during the backtest period.  It is essentially a PP modification with a tilt toward prosperity.  It's similar in that respect to PRPFX, which was conceived at a time when inflation and iffy stock market performance had been the dominant recent experience.

It may well be that there are inherent reasons to expect that prosperity will continue to dominate, and that's what I was wondering about in my last post in this thread - and if a case could be made, that would be a reason to consider switching to the GB.  But right now I don't see how this is the case.  There are too many forces at work, like massive debt, uncontrolled mass importing of a new and large underclass (aka "new immigrants"), and shifting of large segments of the economy to places with cheap labor, that don't bode well for continued prosperity.  Tyler??

Who knows -- you may be right.  If your primary interest is to protect yourself equally no matter what happens, then you can't beat the Permanent Portfolio.  But if you want to account for the fact that prosperity has generally been the most likely economic condition of the four while still protecting yourself quite well for the other outcomes, then the Golden Butterfly may appeal to you.  I don't pretend to know whether that will continue to hold true in the future on your personal investing timeframe.

BTW, there's a reason most of my charts are designed to focus on the worst times -- it helps you see through potentially deceptive averages and see portfolios in their least flattering light.  The GB returns were comparable to the PP even during the 70's and 2000's when stocks were terrible.  Yes, it tilts a little more towards prosperity.  But a portfolio with 40% stocks isn't exactly a heavily concentrated bet by most standards.

There's also the fact that the PP's assets are a bit overweighted in gold & bonds.  The PP performs best when the stock market tanks, and does poorly when it does well.  That's a bit frustrating.

Anecdotally, since I first started playing with the GB last September, I updated my stock tracking app to also show small caps.  Purely psychologically, I've found that seeing two parts stocks and two parts bonds/gold has felt more "balanced" most days.  When stocks do well and the defensive assets struggle, I feel good.  When stocks do poorly and the defensive assets surge, I feel good.  And when I ever have doubts, cash always has my back.    Now I may feel different when stocks tank hard, but so far I appreciate the mindset.

In any case, I love the PP.  Sticking with the plan is still a terrific option that will serve people well. 

Stocks HAVE now done as you describe above. What is the feeling today after all we have been through? From reading what you've recently written I'm going to guess the feeling is that you still are feeling the love for the Permanent Portfolio?

Vinny

[vnatale]

Not sure if this is a dead thread since I see the last post was in April.

I want to belatedly add my voice to the chorus of heartfelt "thank-you's" to Tyler for his amazing web site. I have been "down the rabbit hole" for days not only playing with Portfolio Charts calculators and articles, but also catching up on the epic-length threads on both the PC site and Golden Butterfly portfolio on this forum, Mr. Money Mustache's and Early Retirement Extreme's.

There was a bit of discussion about Williams Bernstein's "Deep Risk: How History Informs Portfolio Design" on this forum when the book came out about 3 years ago. I was surprised there wasn't more, not only because clearly conversations between Mr. Bernstein and Craig Rowland were the foundation of the book, but also because of Bernstein's informed critique of the PP.

The dovetail with Tyler's work as I see it (and I may well be mistaken as my number-crunching chops and overall investing savvy are pretty lightweight compared to many posters here) is that Bernstein says (summarizing and paraphrasing):

It's silly to allocate equal amounts of the portfolio to protect against threats that are anything but equally likely to occur. Specifically, inflation is very likely and you need a diversified stock portfolio with international, small-cap and value exposure to protect against it. Deflation is rare so a full 25% in long treasuries is very expensive insurance against the improbable. Confiscation is unlikely and also largely impossible to defend against, devastation ditto. And - last not least - gold is NOT inflation protection (his data on this claim are quite convincing) as Mr. Browne claimed, but some allocation to it (certainly not 25%) makes sense due to its performance in flights to safety and its truly uncorrelated-to-anything status. You also need a boatload of liquidity (meaning cash and/or IT Treasuries) to ride out the volatility of the equities - especially in retirement.

So....from that point of view 40% in stocks isn't overweighting at all, but rather allocating enough to the category to offer meaningful growth as well as meaningful protection against the most likely threat. I'm also reminded that Mr. Browne himself said that 4 x 25% was somewhat arbitrary and convenient, not iron-clad.

I'm well aware that the classic 4 x 25 has performed very well and that some regard messing with it as just as heretical as Bogleheads do when you dare to bring up the four-letter word "gold," but as Desert pointed out much earlier in this thread the nature of investable assets themselves continues to change. Would Mr. Browne have ever imagined a world where Congress was willing to undermine "full faith and credit" and cause a downgrade of U.S. Treasury Bond ratings? Or one where "paper" gold with dubious amounts of actual gold underlying it would come to constitute "the" gold market? Or - for that matter - one where 30 year Treasuries returned less than CPI inflation?

On the other hand, when I look at those questions or quibbles with the PP and then look at the utter dominance of PP-inspired iterations among the best portfolios on Tyler's site I have renewed appreciation for HB's genius.

The above brings up a question which I remember seeing it recently being discussed-- though it may well have amidst the flurry of posts we've been having here.

Which of the four economic climates are we in? I'd say we are headed toward recession. But it's all happened so sudden could we say we are officially in an ex-four climate known as surreal a/k/a Panic?

And, in hindsight can each time period be described as fitting into one of the four economic climates? Or, it can more oftentimes be a combination? I seem to remember reading the latter but it's not dear to me. It seems that for the last several years (or longer) we have definitely been in the Prosperity economic climate. Today? Tomorrow?

Vinny

[Kevin K.]

Things are changing so fast it's hard to really know but my best guess in what are clearly early days for this pandemic is that we're already in recession and quite possibly headed towards something much more like the Great Depression. Even Mnuchin, who seems even more out of his depth than usual now that things are getting real, told Republicans the other day they were looking at 20% unemployment without massive aid. That's a number that's closer to the 25% during the Great Depression than it is to the 10% level we reached during the 2008 market crisis.

Personally I don't see a better "bunker" to ride this out than the PP though I can see good reason for ditching the Treasury bond barbell in favor of IT Treasuries leavened with loads of cash given the Fed's unprecedented decision to go with 0% rates way early in the game. The only other allocation I've seen that seems similarly defensive is the so-called https://portfoliocharts.com/portfolio/larry-portfolio/ but its exotic stocks are sure to take a beating too.

[vnatale]

I agree. They are evidence based but you can debate about how strong the evidence is.
I even believe in Small/Value having a higher expected return than a cap-weighted index. I also believe however, that the level of out-performance of small/value in all those backtest-tools is not likely to be repeated. The difference in CAGR between TSM and SCV is almost 3% a year from 1972-2015! I think it's fair to warn people not to get too excited by all those nice backtested graphs...
Bernstein himself expects the value premium to be much, much lower going forward.

Yes. Getting excited about backtesting at the expense of tactical asset allocation is something that Mr. Browne, Craig R and many others here have truly cured me from - at least most days!

I've posted the link below in another context but I think it might bear re-posting here for a couple of reasons. The author is the principal at one of the most savvy advisory firms through whom one can access DFA funds on a fixed fee rather than % of assets basis. There's a lot of great info on their web site, including the best explanation I've seen on the decisive differences between the DFA funds (which are not index funds) and their counterparts in the retail investing world. The points of interest in this particular article, it seems to me, are looking at how truly diversified equity allocations have performed during market crises, and (further on in the piece) a robust defense of gold that ought to be required reading for a lot of folks over on Bogleheads .

http://www.evansonasset.com/?Page=18

I just clicked on the provided link. Then went to their home page.

They really don't seem to have anything there to entice a non-client. They seem to be more oriented towards existing clients. From going to various other pages on the web site it seems like almost all of them are a year older or more. The last analysis only goes through December 2018. I was fully expecting the home page to be directly addressing what is now going on. You writing that they offer a fixed fee is what made me go there in the first place. But for me to recommend to someone to use them (a someone who does not want to go Permanent Portfolio) I'd need to see right upfront their thoughts on today, more current writings, who they are, in other words far more effort / information / sell to turn a non-client into a client.

Vinny

[Tyler]

Stocks HAVE now done as you describe above. What is the feeling today after all we have been through? From reading what you've recently written I'm going to guess the feeling is that you still are feeling the love for the Permanent Portfolio?

Yep.

There's no hiding from the turmoil right now, but it's really hard to find something better suited to weather the storm than the Permanent Portfolio. And I've also gained a renewed appreciation for the role of cash in a portfolio when everything else is struggling.

[vnatale]

Stocks HAVE now done as you describe above. What is the feeling today after all we have been through? From reading what you've recently written I'm going to guess the feeling is that you still are feeling the love for the Permanent Portfolio?

Yep.

There's no hiding from the turmoil right now, but it's really hard to find something better suited to weather the storm than the Permanent Portfolio. And I've also gained a renewed appreciation for the role of cash in a portfolio when everything else is struggling.

I was going to go stronger in my statement above but I did not want to put you too much on the spot.

But now after you have responded I can now fully say...."And, I'd fully expect no other answer from Resolute Tyler!"

You are one of the ones here who keep me on my path towards Permanent Portfolio (which I WILL achieve some day!).



Vinny

[vnatale]

Stocks HAVE now done as you describe above. What is the feeling today after all we have been through? From reading what you've recently written I'm going to guess the feeling is that you still are feeling the love for the Permanent Portfolio?

Yep.

There's no hiding from the turmoil right now, but it's really hard to find something better suited to weather the storm than the Permanent Portfolio. And I've also gained a renewed appreciation for the role of cash in a portfolio when everything else is struggling.

I was going to go stronger in my statement above but I did not want to put you too much on the spot.

But now after you have responded I can now fully say...."And, I'd fully expect no other answer from Resolute Tyler!"

You are one of the ones here who keep me on my path towards Permanent Portfolio (which I WILL achieve some day!).



Vinny

I also want to add that early on in this Topic you were lamenting that you thought your Topic had been hijacked. However, here we are nearly five years later and with 40 pages of posts dedicated to it. I think you created a winner in more ways than one!

Vinny

[pmward]

I actually like Ray Dalio's 4 environments as a correlary to HB's. They are both really saying the same thing but where HB names each, Dalio describes the underlying trends. Basically Dalio says that in any period of time inflation is either increasing or decreasing, and growth is either increasing or decreasing. So right now both inflation and growth are decreasing. This translates to what HB would call a deflation. Also, oil is plummeting, US dollar is running like it stole something, there are rampant liquidity issues causing turmoil in the markets, ETF's are basically broken right now (I mean BND, one of the largest and most liquid ETF's in the world, was tradings at a 6% discount to NAV this week!). These are all other hints that we are in a deflation.

[sophie]

Vinny - let me suggest a simple exercise. Go to the etfreplay site and click on "backtest" for free. Backtest the different PP components during mid 2008 to end 2009.

What you'll see is that gold and bonds did indeed react after the stock market tanked, but those three events occurred MONTHS apart. Now imagine yourself going through that time, with no knowledge of what was about to happen. You'd be tying yourself up in knots just like you are now, probably.

If I were you I'd focus on more important things right now, and just hang back and wait. Rebalancing as per your set bands is probably your best move.

[LittleDinghy]

I"m sharing below our GB allocation percentages; it would be interesting to compare with others' GB (and PP) portfolios.

I had gotten into the habit of checking our allocation percentages at the end of every month, and Jan 31 was our highest total portfolio value since starting the GB last June with 20% in each asset. So these are our results since Jan 31, checked on 1/31, 2/29, 3/12, 3/16 and today 3/21. I also show the re-balance bands we have tentatively decided to use; we haven't yet reached them.

[Kevin K.]

Nice charts!

I’m curious about why you choose different rebalancing bands for stocks.