Golden Butterfly Portfolio

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MachineGhost
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Re: Golden Butterfly Portfolio

Post by MachineGhost » Sun Apr 10, 2016 12:17 pm

barrett wrote:
MachineGhost wrote: 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.
There's no direct transmission mechanism from the Fed to the real economy.  It's all psychological.  It's like color of law.  My point is don't treat color of law as the law.
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Re: Golden Butterfly Portfolio

Post by jafs » Sun Apr 10, 2016 1:46 pm

Interest rates have an effect on people, even if there's no direct transmission (I assume that means that money the Fed gives to bank reserves doesn't get into circulation) from the Fed to the economy.

That's the whole point of changing interest rates based on economic conditions, isn't it?

I think that's the way most people understand the Fed's actions and effects, as an indirect one, based on how people react to them.
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Re: Golden Butterfly Portfolio

Post by MachineGhost » Sun Apr 10, 2016 6:01 pm

jafs wrote: Interest rates have an effect on people, even if there's no direct transmission (I assume that means that money the Fed gives to bank reserves doesn't get into circulation) from the Fed to the economy.

That's the whole point of changing interest rates based on economic conditions, isn't it?

I think that's the way most people understand the Fed's actions and effects, as an indirect one, based on how people react to them.
It's why the Fed attempts to manage "inflation expectations" and not inflation.  For some reason, people have been conditioned to look towards the Fed as the great and powerful Wizard of Oz that controls the gears and levers of the economy.  It would be hilarious if it weren't so unreal.
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Re: Golden Butterfly Portfolio

Post by sophie » Mon Apr 11, 2016 8:25 pm

The Fed may not affect markets directly, but it certain does so indirectly and in ways that may be hard to predict.  Notice what happened the last several years each time the Fed did something like raise/lower the funds rate, or establish QE<X>?  But if the Fed doesn't see the results it wants, it will just keep tinkering.

If you buy that the end result of this tinkering results in improved stock market health compared to what would happen if the Fed's actions were completely random (like the proverbial monkey at a typewriter), then there is an inherent bias toward prosperity, which would favor the Golden Butterfly over the PP.

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.

Those are the rationales that would push me towards the GB.  A question Tyler:  what would you use for rebalance bands?
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Re: Golden Butterfly Portfolio

Post by Tyler » Mon Apr 11, 2016 10:23 pm

sophie wrote: A question Tyler:  what would you use for rebalance bands?
30/10 is a nice round number.  It's more instinct than science, but it seems reasonable. 
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Re: Golden Butterfly Portfolio

Post by MachineGhost » Mon Apr 11, 2016 10:35 pm

sophie wrote: 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.
The PP isn't meant to be a growth portfolio and trying to get that 25%-30% allocation to do the job certainly inspires creative tinkering out of desperation!  What really gets to me is the downside risk is so darn outsized vs the relatively meager return of being an all weather portfolio.  Even when normalizing each asset's risk contribution, it doesn't help reduce the downside risk very much at all.  That is frustrating.  This must ultimately mean there is some other "force majeure" jack-booting the face of the PP that would otherwise nearly destroy other portfolios.
Last edited by MachineGhost on Mon Apr 11, 2016 10:37 pm, edited 1 time in total.
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Re: Golden Butterfly Portfolio

Post by Kbg » Wed Apr 20, 2016 10:33 am

It's called negatively and weakly correlated assets. The risk mitigation is organically built in not externally derived. I continue to be dumbfounded at the focus on the PPs individual pieces.

The only thing that makes sense to me is a "factor" tilt of some kind. For someone younger I can easily see altering the stock component up to 30 or 35% by taking from gold/LTTs/both. Of course volatility will go up a bit, but not a ton.

Lastly, the portfolio performance profile is entirely visible in the historical returns...stock market strong bull the PP is not fun. Flat to down the PP is awesome. Hit rinse cycle and repeat. Over very long periods of time the results are comparable but WAY more predictable with the PP.
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Re: Golden Butterfly Portfolio

Post by sophie » Thu Apr 21, 2016 6:49 am

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??
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Re: Golden Butterfly Portfolio

Post by Tyler » Thu Apr 21, 2016 10:05 am

sophie wrote: 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. 
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Re: Golden Butterfly Portfolio

Post by MachineGhost » Thu Apr 21, 2016 1:41 pm

sophie wrote: 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.
I don't think equalizing your size, value and growth exposure with the GB concept is an increased bet on Prosperity.  It's just distributing the Prosperity risk less concentrated into Mega Caps.  It's all a matter of degree.  Tyler's version is less precise than mine.
Last edited by MachineGhost on Thu Apr 21, 2016 1:43 pm, edited 1 time in total.
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Re: Golden Butterfly Portfolio

Post by ILoveMoney » Thu Apr 21, 2016 11:53 pm

MachineGhost wrote: I don't think equalizing your size, value and growth exposure with the GB concept is an increased bet on Prosperity.  It's just distributing the Prosperity risk less concentrated into Mega Caps.  It's all a matter of degree.  Tyler's version is less precise than mine.
Agreed. My view on this also. It's a simple solution to the flawed tilt that makes sense in my book.
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Re: Golden Butterfly Portfolio

Post by Gabe » Sat Apr 30, 2016 9:51 am

I'd like to make the transition to a GB, but stocks seem high right now. Seeing as I'm already 100% PP, there doesn't seem to be much risk in trying to time the move. If you were in a similar position, what event(s) or price level would you wait for before pulling the trigger?
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Re: Golden Butterfly Portfolio

Post by ochotona » Sat Apr 30, 2016 10:36 am

Gabe wrote: I'd like to make the transition to a GB, but stocks seem high right now. Seeing as I'm already 100% PP, there doesn't seem to be much risk in trying to time the move. If you were in a similar position, what event(s) or price level would you wait for before pulling the trigger?
Since you'd be going from 25% stock to 40% stock, why not just move 1% a month over the next 15 months? You'd not even notice the shift.
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Re: Golden Butterfly Portfolio

Post by MachineGhost » Sat Apr 30, 2016 11:45 am

ochotona wrote: Since you'd be going from 25% stock to 40% stock, why not just move 1% a month over the next 15 months? You'd not even notice the shift.
I must have overlooked the memo that the GB was a 40% allocation to equity and not a crude factor equalization?!!

Stocks are currently priced to deliver 0% nominal returns out 10-12 years, so its not the ideal time to be buying.  What this means is that you are completely relying on T-Bonds and/or Gold to pick up the slack when stocks do decline.  If you start overweighting stocks from 25% to 40% without also proportionately increasing T-Bonds and Gold, you are destroying the PP symmetry.  The other risk is that T-Bonds may not perform as expected since confidence in government is rapidly collapsing with negative rates, so you risk a double whammy and Iceland-style losses at the worst.  So think carefully about what kind of risk you can handle.
Last edited by MachineGhost on Sat Apr 30, 2016 11:50 am, edited 1 time in total.
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Re: Golden Butterfly Portfolio

Post by MachineGhost » Sat Apr 30, 2016 12:11 pm

MangoMan wrote: So if stocks are not a good buy and LTT are at historic low rates, what do you suggest?  50/50 gold/cash?
Find other sources of Prosperity to invest it.  The difference between buying overvalued assets and undervalued assets is the size of the maximum drawdown you experience during the inevitable downturn.  All animals are equal.  But some animals are more equal than others. ;D
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Re: Golden Butterfly Portfolio

Post by ochotona » Sat Apr 30, 2016 4:48 pm

MG means "invest in a Colorado grow business"
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Re: Golden Butterfly Portfolio

Post by Kevin K. » Mon Jul 25, 2016 4:13 pm

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.
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Re: Golden Butterfly Portfolio

Post by curlew » Mon Jul 25, 2016 5:11 pm

Kevin K. wrote:Not sure if this is a dead thread since I see the last post was in April.
Maybe this thread is dead but interest in the Golden Butterfly isn't. There was even a thread about it not long ago on Bogleheads (https://www.bogleheads.org/forum/viewtopic.php?t=189431)

I adopted it at the start of this year. According to Tyler's charts it actually has a higher CAGR with the same volatility and max DD. "Past performance is no guarantee of future success", of course, but how many of us would be investing in the PP right now if it didn't test well historically against other portfolios? It doesn't guarantee future success, of course, but is there a better guarantee of future success? I mean apart from your own or somebody else's ability to read the tea leaves? My own ability in predicting the future doesn't have a good track record.

And for me it solves the Bernstein warning in the foreword to Craig and MT's book about being able to stick with the plan "when gold and bonds are under performing which they inevitably will". So far this year, it's beating the vanilla PP slightly. I'm happy with it and plan to stick with it.
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Re: Golden Butterfly Portfolio

Post by Kevin K. » Mon Jul 25, 2016 7:44 pm

curlew wrote:
Kevin K. wrote:Not sure if this is a dead thread since I see the last post was in April.
Maybe this thread is dead but interest in the Golden Butterfly isn't. There was even a thread about it not long ago on Bogleheads (https://www.bogleheads.org/forum/viewtopic.php?t=189431)

I adopted it at the start of this year. According to Tyler's charts it actually has a higher CAGR with the same volatility and max DD. "Past performance is no guarantee of future success", of course, but how many of us would be investing in the PP right now if it didn't test well historically against other portfolios? It doesn't guarantee future success, of course, but is there a better guarantee of future success? I mean apart from your own or somebody else's ability to read the tea leaves? My own ability in predicting the future doesn't have a good track record.

And for me it solves the Bernstein warning in the foreword to Craig and MT's book about being able to stick with the plan "when gold and bonds are under performing which they inevitably will". So far this year, it's beating the vanilla PP slightly. I'm happy with it and plan to stick with it.
ac
Yeah, I'd read that thread on Bogleheads. As is usually the case most of the posters just can't get their minds around any allocation that isn't 100% stock and bond index funds.

Back when I was doing the Merriman-style DFA backtested-to-within-an-inch-of-its-life slice & dice thing I was fortunate to access those funds through these folks, still one of the smartest (and lowest cost) FA's out there. Scroll through this (though the whole article is worthwhile) to the discussion of gold for an impartial assessment of its value:

http://www.evansonasset.com/?Page=18
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Re: Golden Butterfly Portfolio

Post by Kbg » Mon Jul 25, 2016 11:02 pm

I posted some information about small cap value in the PP Section where FF9900 is looking at PP vs. All-Weather ports. In short, beware historical results when it comes to small caps and value.
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Re: Golden Butterfly Portfolio

Post by MachineGhost » Tue Jul 26, 2016 10:01 am

Kevin K. wrote: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 PP is robust but I would not draw strong conclusions about breaking away from it using Tyler's site as the data it uses is not very high quality (it's not his fault).

HB is a genius only because so much of the academic and practitioner community are caught up in the jungle of Modern Portfolio Theory and can't see the forest for the trees that it is fundamental economic drivers from the "wisdom of the crowds", not return-risk correlations that provide a truly robust portfolio. They're all overlaying their cognitive biases onto their preferred portfolios which is why they totally suck during the 70's or more or less the last 16 years.

I view the Golden Butterfly as sort of a red herring since it is essentially the PP but with a bit better return and risk by including Small Cap Value. It would do just as well to split the 25% PP allocation, though maybe the effect is more muted with a smaller size. And it would be even better to diversify out of stocks and focus on other Prosperity investments that don't suffer from poor "baked in the cake" future returns.

Keeping the strategic allocation fixed at 25% keeps life simple and also keeps the rebalancing band thresholds simple if you don't use other market timing methods. The Golden Butterfly is also relying on annual rebalancing which is equivalent to a bit over 5% threshold bands on the PP, which is not standard dogma so not a fair comparison.
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Re: Golden Butterfly Portfolio

Post by ochotona » Tue Jul 26, 2016 12:04 pm

I marvel at MG's ability to make up terms like "prosperity investments", then his anger at no one understanding what the fu** he means. Marijuana growing operations, right?
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Re: Golden Butterfly Portfolio

Post by MachineGhost » Tue Jul 26, 2016 12:17 pm

ochotona wrote:I marvel at MG's ability to make up terms like "prosperity investments", then his anger at no one understanding what the fu** he means. Marijuana growing operations, right?
I'm not sure what you're talking about in regards to anger (seriously). But go to my Resort thread and look at my pyramid.
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Re: Golden Butterfly Portfolio

Post by Kevin K. » Wed Jul 27, 2016 2:52 pm

I've been spending some more time looking at the GB and various iterations and am wondering why Desert's variation hasn't gotten more discussion. With the obvious caveat that backtesting only goes so far when I run the numbers comparing the GB with Desert's version the latter comes out well ahead on the risk:return scale. Here's one set of numbers from 1975-2015:

https://www.portfoliovisualizer.com/bac ... 0&Gold2=10

Since it's essentially a gold-enhanced version of one of Larry Swedroe's "No Fat Tails" portfolios I played around with substituting other stock allocations and also removing the gold entirely and didn't do nearly as well. I also substituted the intermediate-term treasuries that make up 60% of his allocation for the bond barbell in the GB and it made no difference to the returns, though obviously from a practical rebalancing and/or retiree perspective having 20% of the allocation in SHY or cash makes for greater ease.

Backtesting aside, I'm looking at the 30% highly-diversified stocks, 60% highest-quality bonds of optimum duration in terms of risk:reward sweet spot and just enough gold for (as Desert puts it) some modest SHTF insurance but not enough to be a hassle to own and wondering why this isn't a significant improvement on the GB, especially in retirement.
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Re: Golden Butterfly Portfolio

Post by Kevin K. » Wed Jul 27, 2016 9:56 pm

Thanks for making the time to reply Desert, and for sharing your insights on this forum. I really appreciate it!
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