Author Topic: Portfolio Charts - The Golden Butterfly  (Read 275089 times)

Tyler

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Re: Portfolio Charts - The Golden Butterfly
« Reply #200 on: June 03, 2016, 09:02:47 AM »

It's my suspicion that this is how all slice-n-dice portfolios are created. So, I set out to do the opposite. Let's find a portfolio which makes perfect sense, but drastically UNDERperformed! Then let's find a portfolio which makes perfect sense, backtested well, THEN after that point in time, drastically UNDERperformed!


I do sorta like your idea for automating that kind of start date dependency analysis.  I'll have to think about that.


FYI -- I appreciate the thought process and was serious about liking this idea.  I've created a tool that does this exact analysis, and you can modify the AA to study any portfolio you like and compare alternatives.  Playing with it makes it clear that some portfolios are more trustworthy than others

Here's a reference chart pertinent to this thread.  An explanation can be found at the above link, as well as similar charts for other portfolios and a calculator that crunches the numbers for any portfolio you might be considering.



No matter how you invest, hopefully you find this helpful.

Cheers!
« Last Edit: June 03, 2016, 09:04:21 AM by Tyler »

wienerdog

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Re: Portfolio Charts - The Golden Butterfly
« Reply #201 on: June 03, 2016, 10:22:25 AM »
Thanks for the new tool Tyler and the continuing improvements that you let us use.  So I guess that illustrates why the higher withdraw rate compared to the 60/40 on the site.  I understand how you got the % on the start date sensitivity but having a hard time putting the actual number into English.  Also interesting to see how 100% TSM has long periods of exceeding expectations then it falls short for a long period.

Tyler

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Re: Portfolio Charts - The Golden Butterfly
« Reply #202 on: June 03, 2016, 11:06:49 AM »
I understand how you got the % on the start date sensitivity but having a hard time putting the actual number into English.

Yeah, the final number is a little tricky to communicate without reading the full context.  Think of it as measuring the difference in happiness between the most satisfied and least satisfied customers in the portfolio's history (since 1972).  So smaller numbers represent a more consistent portfolio less likely to severely disappoint because of recency bias and poor timing. 
« Last Edit: June 03, 2016, 11:22:04 AM by Tyler »

k9

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Re: Portfolio Charts - The Golden Butterfly
« Reply #203 on: June 04, 2016, 03:41:15 PM »
Hah, I really love your calculators, Tyler. That start-date-sensitivity-calculator is by far the hardest to understand, but it's also probably one of the most useful. I like to think of it as the "don't drink too much kool aid" calculator. Recency bias is one of the most underlooked ennemies of investors.

Classical_Liberal

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Re: Portfolio Charts - The Golden Butterfly
« Reply #204 on: June 04, 2016, 09:29:56 PM »
Very nice tool tyler, Thanks.

I have to admit, I have followed many discussions regarding the GB and PP in this forum and done a ton of research myself.  I have always kept a small percentage (like 2-4%) of my assets in gold, but I have kept it in physical gold eagles.  My rationale was always as a small hedge against all hell breaking loose (ie the prepper in me) or figured in a 2009 like scenario when fear had gold booming I could sell a few coins to minimize stock drawdowns.  The tax implications, the transaction/holding costs, along with the unknowns of the underlying fundamentals of its value have scared me away from serious investing. 

The more I research, the more I think it has a bigger place in my portfolio. I'm still not comfortable to the point of having 25 percent in gold, but I am seriously considering a change.  I'm basically a three fund guy, my domestic stocks are slightly mid/small cap titled.  I also keep a small percentage of my bonds in TIP's, I think recency bias has most investors not fearing inflation enough.  With my roth contributions over the next 2-3 years I was thinking about adding REIT.  I wanted more REIT than total market provides since they don't totally correlate with large stock movements, Fed rate hikes might make them more of a bargain, and hoping the core real estate of these companies could act as another buffer to possible inflation. Frankly, I think I may go GLD instead. Over time try to bring my total in gold to a 10 percent figure.  The evidence of it balancing a portfolio just seems to be mounting in my mind.  I just wish there was longer term data without gov't manipulation.  I suppose though, 5000 years of human history shows it will always have some value.

PS do you recommend something other than SPDR's GLD?  Thanks again!

Tyler

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Re: Portfolio Charts - The Golden Butterfly
« Reply #205 on: June 04, 2016, 10:01:05 PM »
PS do you recommend something other than SPDR's GLD?  Thanks again!

Your gold eagles are a nice option, and the three most popular ETFs are GLD, IAU, and SGOL.  I personally use IAU, which has the lowest ER of the group.
« Last Edit: June 05, 2016, 09:39:19 AM by Tyler »

phwadsworth

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Re: Portfolio Charts - The Golden Butterfly
« Reply #206 on: June 06, 2016, 06:39:18 AM »
My rationale was always as a small hedge against all hell breaking loose (ie the prepper in me) or figured in a 2009 like scenario when fear had gold booming I could sell a few coins to minimize stock drawdowns.
Did you own gold in 2009, and if so, did you sell as planned and buy stocks near the bottom?

Classical_Liberal

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Re: Portfolio Charts - The Golden Butterfly
« Reply #207 on: June 06, 2016, 01:10:39 PM »
Did you own gold in 2009, and if so, did you sell as planned and buy stocks near the bottom?

Yes and no because I wasn't and still am not in a drawdown phase.  During accumulation I reallocate by adjusting what I purchase.  If I had been in drawdown, with an extended market downturn that had corresponding increases in gold I definitely would sell to rebalance in tac advantaged accounts.   Honestly, in 2009 I wasn't a wise investor, I couldn't even tell you what my AA was at that time. Now, I stay relatively disciplined, but like with everything in life I stay open and flexible when new information presents itself and take it into consideration for change.

Classical_Liberal

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Re: Portfolio Charts - The Golden Butterfly
« Reply #208 on: June 29, 2016, 12:50:37 PM »
I’m posting a quick update in this thread because reading through its entirety a month ago was an extremely useful educational experience and it had an impact on my investment policy statement. Thanks again to all the contributors.

After thorough research, I did increase my gold position to about 10 percent and may eventually go higher.  I decided not to replicate a GB or PP, my personal opinion is the bond postions of those portfolios are too large.  Currently bonds have very little mid term upside and a high potential downside with eventual “normalization” of interest rates. As a matter of fact, it was this downside to bonds that caused me to look at gold as an alternative noncorrelating  asset to my majority stock position.  Again my opinion, but Gold is a zero real growth asset whose only contribution to a portfolio is its wild noncorrelation to other assets (as shown with Tylers tools in all available data). The Brexit market blip that took place over the past week has reinforced that this was the correct decision for me.  Having some gold in the AA offset equity losses, provided some net worth stability, and peace of mind.  Once in a withdrawal phase, I feel the potential for a sequence of returns issue is decreased by having gold and is well worth the potential loss of long term real returns. Also, it makes me feel happier & more comfortable with my portfolio.  If rates “normalize” I may revisit this in future years.  I'm now a three fund with gold guy, right or wrong this is my plan.

@Tyler, IAU was the lowest ER with high volume for trades, thanks!

Kevin K.

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Re: Portfolio Charts - The Golden Butterfly
« Reply #209 on: July 21, 2016, 08:50:08 PM »
Thanks to all for the epic thread with lots of great insights.

I hereby nominate Tyler for sainthood for so consistently offering so much forbearance and great information to often-loquacious thread participants who have all-too-obviously failed to head his advice to READ Craig Rowland's book and other key sources so as to have an understanding of what it means to construct a portfolio that uses truly noncorrelated asset classes.

One thing that I'm surprised has gone unmentioned given the rather epic length of this thread is William Bernstein's book(let) "Deep Risk: How History Informs Portfolio Design." It is very much a meditation on, and thoughtful response to, the PP and its more recent iterations as proposed by Tyler, Craig Rowland and others.

Bernstein appreciates the PP bunker while showing quite convincingly (IMHO) that allocating 25% each to dire economic situations that are anything but equally likely to occur is ill-advised. Moreover - and even more decisively - he shows that gold has never been a good hedge against inflation (that's what equities are for).

If we learn nothing else from Tyler's wonderful tools we at least ought to learn that portfolios solely comprised of broad indexes of stocks and bonds are almost certain to provide a far rockier ride and little or no protection during market crises when compared to combinations of assets that are truly uncorrelated and have proven themselves so when the shit hits the fan.


arebelspy

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Re: Portfolio Charts - The Golden Butterfly
« Reply #210 on: July 21, 2016, 09:15:16 PM »
Bernstein appreciates the PP bunker while showing quite convincingly (IMHO) that allocating 25% each to dire economic situations that are anything but equally likely to occur is ill-advised.


I agree with this.

Moreover - and even more decisively - he shows that gold has never been a good hedge against inflation (that's what equities are for).

While this is true, I don't see how it matters at all.

Like, it ruins the "story" of the PP, but no one should be buying into the story at this point anyways.

There's no "story" for the GB, other than "these assets have historically been uncorrelated over my backtesting period, and I believe they will continue to be so in the future."

Gold may not be a good inflation hedge, equities might be, so if you were building a portfolio based on a story, and hedging against inflation, you might include equities and not gold.

But if you're building a portfolio where assets are uncorrelated, you might include gold anyways, and not care a whit that it's not a good inflation hedge, because all that fact does is ruin some story that you don't care about.
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steveo

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Re: Portfolio Charts - The Golden Butterfly
« Reply #211 on: July 21, 2016, 10:10:33 PM »
Moreover - and even more decisively - he shows that gold has never been a good hedge against inflation (that's what equities are for).

While this is true, I don't see how it matters at all.

Like, it ruins the "story" of the PP, but no one should be buying into the story at this point anyways.

There's no "story" for the GB, other than "these assets have historically been uncorrelated over my backtesting period, and I believe they will continue to be so in the future."

Gold may not be a good inflation hedge, equities might be, so if you were building a portfolio based on a story, and hedging against inflation, you might include equities and not gold.

But if you're building a portfolio where assets are uncorrelated, you might include gold anyways, and not care a whit that it's not a good inflation hedge, because all that fact does is ruin some story that you don't care about.

Some good points here. I think I posted a while back that gold isn't a good hedge against inflation despite the common belief.

A key part of asset allocation though is to have a uncorrelated assets within your portfolio.

k9

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Re: Portfolio Charts - The Golden Butterfly
« Reply #212 on: July 22, 2016, 02:40:13 AM »
I do like the golden butterfly, for the very reason that it holds lots of uncorrelated assets. The fact that it worked so well and with so little volatility in the last 40 years is a side effect, for me. My own asset allocation is a mix of this and Meb Faber's portfolio (20% "regular" stocks, 20% volatile stocks, 20% REITs, 20% STT, 20% gold), and without Tyler's work I probably wouldn't be so confident with it, so thanks again, Tyler.

Now, I won't bet that it will work as well as it did in the last decades, but I feel the same for stock-heavy portfolios, so...

AdrianC

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Re: Portfolio Charts - The Golden Butterfly
« Reply #213 on: July 22, 2016, 03:49:08 AM »
One thing that I'm surprised has gone unmentioned given the rather epic length of this thread is William Bernstein's book(let) "Deep Risk: How History Informs Portfolio Design." It is very much a meditation on, and thoughtful response to, the PP and its more recent iterations as proposed by Tyler, Craig Rowland and others.

Bernstein appreciates the PP bunker while showing quite convincingly (IMHO) that allocating 25% each to dire economic situations that are anything but equally likely to occur is ill-advised. Moreover - and even more decisively - he shows that gold has never been a good hedge against inflation (that's what equities are for).

Discussion of the Bernstein booklet:

https://www.bogleheads.org/forum/viewtopic.php?t=122363

https://www.bogleheads.org/forum/viewtopic.php?f=10&t=120512&p=1761508

What I got from the above was:
* Inflation is by far the most likely deep risk
* "That the cheapest way (that is, the way that sacrifices returns the least) to insure against severe inflation is a diversified global stock portfolio, with TIPS and a soupcon of precious metals and natural resource stocks"
* This exposes us to shallow risk (volatility), so "have plenty of liquidity so you can keep your head, and perhaps buy cheap, during the bad times".
* "deflation risk, that's really a non-issue, since any sane investor sits on a large hoard of cash anyway, and cash (or, if you like, even short-intermediate high-quality bonds) will do fine with deflation."

"Large hoard":
"1) Pre-retirement: The smaller of a) 25% of your portfolio (short bonds count) or b) 5 years living expenses"
"2) Retirement: Residual *basic* living expenses (after SS + pensions) for 20 years."


arebelspy

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Re: Portfolio Charts - The Golden Butterfly
« Reply #214 on: July 22, 2016, 04:28:02 AM »
One thing that I'm surprised has gone unmentioned given the rather epic length of this thread is William Bernstein's book(let) "Deep Risk: How History Informs Portfolio Design." It is very much a meditation on, and thoughtful response to, the PP and its more recent iterations as proposed by Tyler, Craig Rowland and others.

Bernstein appreciates the PP bunker while showing quite convincingly (IMHO) that allocating 25% each to dire economic situations that are anything but equally likely to occur is ill-advised. Moreover - and even more decisively - he shows that gold has never been a good hedge against inflation (that's what equities are for).

Discussion of the Bernstein booklet:

https://www.bogleheads.org/forum/viewtopic.php?t=122363

https://www.bogleheads.org/forum/viewtopic.php?f=10&t=120512&p=1761508

What I got from the above was:
* Inflation is by far the most likely deep risk
* "That the cheapest way (that is, the way that sacrifices returns the least) to insure against severe inflation is a diversified global stock portfolio, with TIPS and a soupcon of precious metals and natural resource stocks"
* This exposes us to shallow risk (volatility), so "have plenty of liquidity so you can keep your head, and perhaps buy cheap, during the bad times".

Everything to this point, I totally agree with.

Quote
* "deflation risk, that's really a non-issue, since any sane investor sits on a large hoard of cash anyway, and cash (or, if you like, even short-intermediate high-quality bonds) will do fine with deflation."

"Large hoard":
"1) Pre-retirement: The smaller of a) 25% of your portfolio (short bonds count) or b) 5 years living expenses"
"2) Retirement: Residual *basic* living expenses (after SS + pensions) for 20 years."

And now you've lost me.  If inflation is our #1 risk, keeping such a huge amount in case just exposes you further to it.  I think you have to pick your poison.

You can hedge against inflation, you can hedge against deflation, or you can do both, but by working much, much longer.

20 YEARS of basic living expenses in cash?  When the 4% rule says you need only 25x of your basic living expenses total?  That means 20/25, or 80%, of your portfolio is in cash?  Inflation, the deep risk, will eat you alive.  So I'm sure he doesn't mean keep 80% in cash... which means he has you save SO MUCH.. 20 years in cash, and then what, another 40 years in equities?  So cash is only 1/3 off your portfolio?  Still seems super high, and at that point your WR would only be 1.7% (60 years expenses saved).  Why would you even need cash at that point, you'd have so much saved up, you can easily withstand any downturn.

20 years living expenses in cash is absurd.  That means you'll be working so long to save up what, 50, 60x your living expenses, instead of the basic 25x of the 4% WR?

Definitely hedge against inflation via a diversified portfolio of stocks.  Have two years in cash if it makes you happy.  Longer than that is getting silly. Past 5 years would just be paranoid. 

You can never, ever be 100% safe.  If you're willing to trade years, and years of your life for slightly more safety, whatever. It's your life.  But realize even then you won't ever hit 100% safe.  And advocating for other people, who might not know better, to save up that much cash is just bad advice, IMO.
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Retire-Canada

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Re: Portfolio Charts - The Golden Butterfly
« Reply #215 on: July 22, 2016, 05:53:51 AM »

20 years living expenses in cash is absurd.  That means you'll be working so long to save up what, 50, 60x your living expenses, instead of the basic 25x of the 4% WR?

Yes. This is why it's such a cunning strategy. You work so long that you'll either die while saving or have a very short retirement to fund....either way your risk of portfolio failure in FIRE is greatly reduced. Of course there are some obvious downsides.... ;)

arebelspy

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Re: Portfolio Charts - The Golden Butterfly
« Reply #216 on: July 22, 2016, 06:14:41 AM »

20 years living expenses in cash is absurd.  That means you'll be working so long to save up what, 50, 60x your living expenses, instead of the basic 25x of the 4% WR?

Yes. This is why it's such a cunning strategy. You work so long that you'll either die while saving or have a very short retirement to fund....either way your risk of portfolio failure in FIRE is greatly reduced. Of course there are some obvious downsides.... ;)

Heh, good point.

So, okay, the numbers do get stupid once you hit FI and your portfolio is compounding (with no withdrawals, plus your annual additions still going in)... I got curious just how much longer this scenario would take.

I just calculated that if I wanted to hit 20 years in cash, and have cash only be 25% of my portfolio (aka 80x annual expenses), it would have only taken another 7 years of working.  I'd be at a 1.25% WR, and with 20 years cash no need to actually sell stock and make a withdrawal for a decade or so (depending on inflation, how long that "20 years cash" actually lasts).  Still ERing before 40, but gosh.. 7 years of life?  It doesn't seem worth it to trade 7 years of life for a measly few million bucks, once you have enough.

GCC recently calculated their 4 years of ER has cost them at least 5MM already.  5MM for 4 years of life in your prime at age 30, when you already can fund a lavish lifestyle without working?  Seems like a bargain.

But, I mean, if you want to save up 20 years in cash on top of a healthy portfolio of index funds, more power to you.  It's your life you're selling, not mine.  :)
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AdrianC

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Re: Portfolio Charts - The Golden Butterfly
« Reply #217 on: July 22, 2016, 07:25:22 AM »

"Large hoard":
"1) Pre-retirement: The smaller of a) 25% of your portfolio (short bonds count) or b) 5 years living expenses"
"2) Retirement: Residual *basic* living expenses (after SS + pensions) for 20 years."


20 YEARS of basic living expenses in cash?

Nah! That's nuts for us.

I'd guess by "retirement" Bernstein means over age 67 (he says "after SS + pensions"). That still seems ultra conservative. He doesn't get asked about it in that old Bogleheads thread.

The "pre-retirement" hoard is reasonable and I'll bet is what many here already do. Five years living expenses is 20%, so 80/20 or 75/25. That's reasonable.

k9

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Re: Portfolio Charts - The Golden Butterfly
« Reply #218 on: July 22, 2016, 07:25:41 AM »
Quote
* "deflation risk, that's really a non-issue, since any sane investor sits on a large hoard of cash anyway, and cash (or, if you like, even short-intermediate high-quality bonds) will do fine with deflation."

"Large hoard":
"1) Pre-retirement: The smaller of a) 25% of your portfolio (short bonds count) or b) 5 years living expenses"
"2) Retirement: Residual *basic* living expenses (after SS + pensions) for 20 years."

And now you've lost me.  If inflation is our #1 risk, keeping such a huge amount in case just exposes you further to it.  I think you have to pick your poison.

You can hedge against inflation, you can hedge against deflation, or you can do both, but by working much, much longer.

20 YEARS of basic living expenses in cash?  When the 4% rule says you need only 25x of your basic living expenses total?  That means 20/25, or 80%, of your portfolio is in cash?

You read too fast. It's not 20 years of expenses, it's 20 years of *basic* and *residual* (ie after any pension or SS or annuities of some kind). Even for an efficient mustachian, basic expenses cover at most, say, 80% of total expenses, and SS will cover 75% of that amount (yeah, I made up the numbers, but that's the idea). So you will only need 20 years of 20% of expenses, i.e 4 years, i.e 16% of your retirement 25-year-portfolio in cash/STT. YMMV.

EDIT: I made up the numbers, but I tried to stick to realistic values and didn't reverse engineer the 16% result, but, as a matter of fact, that 16% is cleary between Buffet's stock-heavy 90/10 portfolio and PP's cash-heavy 25% allocation, and close to the GB allocation, so that sounds neither too conservative nor too agressive, even if you play with the numbers a little. That's sound advice, and I like how Bernstein is one of the few who both mentions cash allocations as a percentage of the portfolio *and* as a number of years of expenses.
« Last Edit: July 22, 2016, 07:32:18 AM by k9 »

arebelspy

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Re: Portfolio Charts - The Golden Butterfly
« Reply #219 on: July 22, 2016, 07:37:00 AM »
I understand what he's saying.

I will get 0 social security.  I imagine there's plenty of Mustachians who don't have enough quarters worked.

All my expenses are basic.  If I had surplus expenses, I wouldn't spend on it.

20 years expenses in cash is crazy.
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AdrianC

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Re: Portfolio Charts - The Golden Butterfly
« Reply #220 on: July 22, 2016, 07:51:02 AM »
20 years expenses in cash is crazy.

Sure it is. I'm sure Bernstein would agree.

Bernstein's concern is that many cannot handle stock market volatility and sell at the wrong time, so

"have plenty of liquidity so you can keep your head, and perhaps buy cheap, during the bad times".

k9

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Re: Portfolio Charts - The Golden Butterfly
« Reply #221 on: July 22, 2016, 08:49:16 AM »
I understand what he's saying.

I will get 0 social security.  I imagine there's plenty of Mustachians who don't have enough quarters worked.

All my expenses are basic.  If I had surplus expenses, I wouldn't spend on it.
I guess you're more the exception than the rule, though, even in this community (many mustachians love traveling, for instance).
As for SS, since I'm not from the US, I don't know how the system works over there, so maybe I made bold asumptions. Anyway, sure, Bernstein's advice doesn't work in your case, but that's because you're such a unique person ;)

Tyler

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Re: Portfolio Charts - The Golden Butterfly
« Reply #222 on: July 22, 2016, 09:21:23 AM »
I highly respect Dr. Bernstein and his investing opinions, and there are two portfolios of his on Portfolio Charts:

No-Brainer Portfolio
Coward's Portfolio 

The No-Brainer Portfolio has demonstrated a 40-year Sustainable WR (that never diminished inflation-adjusted principal even in the worst case) of about 4% (25 years of savings).  The Coward's Portfolio is just under 5% (20 years of savings).  The long-term sustainable rate is even more conservative than the traditional 30-year SWR, so 20 years of cash is definitely not necessary for retirement success.  As others have pointed out, I suspect that particular piece of advice requires a bit of context to be properly understood. 

I do think his observation that shallow risk (volatility) is particularly dangerous from an investment psychology perspective is astute, and I agree that investors should consider ways to mitigate it.  Loading up on cash to balance risky stocks is one method (favored by people like Bernstein and Swedroe).  Balancing a portfolio with uncorrelated volatile assets is another (favored by people like Faber and Browne).  The Golden Butterfly takes the latter approach. 

The Golden Butterfly acknowledges Dr. Bernstein's insight about the likelihood of the various deep risks by tilting the Permanent Portfolio towards stocks, and I believe its track record stacks up favorably to his alternative recommendations.  But different people have different preferences, and there are good portfolios for all types. 
« Last Edit: July 23, 2016, 08:31:43 AM by Tyler »

Kevin K.

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Re: Portfolio Charts - The Golden Butterfly
« Reply #223 on: July 22, 2016, 09:21:40 PM »
I believe it's still quite vivid in Dr. Bernstein's mind how many of his followers - who'd read all of his books and done their risk tolerance profiles and signed on to stay the course with their asset allocations - threw in the towel during the '08-09 market meltdown and sold significant chunks of equities at or near the bottom.

He's not talking about 20-25 years in cash but rather in short-intermediate bonds (most likely Treasuries and TIPS given his stated preference for them). Here again looking at Tyler's phenomenally-useful charts tells the tale about what it is like to actually live through huge stock market losses that go on for years. Very few can stay the course, and based on my own experience having ER'd in 2002 and lived through the '08 crash with a very sophisticated slice-and-dice DFA portfolio (Bob Clyatt's RIP) that backtesting showed "couldn't" lose more than ~8% but actually lost ~25% (this with only 40% in equities mind you) I have a great deal of appreciation for the PP, Golden Butterfly, Swedroe's most recent Reduced Fat Tails approach, etc.

Just in case it's of interest, John Greaney, pretty much the "old dog" of early retirement finance writers, has an excellent update of his periodic real life retiree returns series here:
 
http://www.retireearlyhomepage.com/reallife16.html

The whole article is worthwhile, but IMHO the most interesting comment is pretty far down where he points out that if you'd retired in 2000 rather than 1994 as Greaney himself did:


"If you happened to retire in January 2000, the last sixteen years haven't been pleasant. Only the Warren Buffett portfolio has a value appreciably exceeding its $100,000 starting balance. The 100% fixed income portfolio is underwater while the MPT portfolio, Larry Swedroe Portfolio, Harry Browne Portfolio, and Harry Dent Portfolio are all 8% to 14% in the black. The other two portfolios both show losses. The worst performer was the 75% S&P500/25% fixed income portfolio which is now less than two-thirds of its starting value."

Getting back to Golden Butterfly, the PP and non-correlated assets, Craig Rowland (co-author of the essential book on the PP and source for a lot of the material in  the Deep Risk pamphlet) flatly states that no portfolio composed only of stocks and bonds can be said to contain uncorrelated assets, and the behavior of the PP, GB and other such portfolios during the '08 crisis lends a great deal of credibility to such views (as Treasuries and to a lesser extent gold saved them while complex slice-and-dice MPT porfolios saw all of their noncorrelated assets suddenly correlate and tank in unison).

Re: arebelspy's point about gold as an inflation hedge not mattering, I think it DOES matter that Harry Browne was dead wrong about allocating 25% of his portfolio to something that doesn't work to combat the exact problem it was included to address while failing to offer a sophisticated, internationally diversified, small cap and value tilted equity allocation that is the actual tool for the job in question.
While I followed the PP myself for about 4 years and was lucky to have done so timing-wise I came to see that pretty much all of the components of that allocation deserve to be revisited due to changes in the investing landscape since Browne's time.

Paper gold, much of which isn't backed by bullion, along with behind-the-scenes manipulation of gold prices are a far cry from keeping your gold coins and bullion in your bunker along with your MRE's and firearms, as Browne and many of his followers surely envisioned. It isn't just that gold has no inherent value nor rate of return: it's that paper gold isn't gold.

Half the portfolio is in Treasury Bonds, but I don't think Browne ever envisioned not only 30 year Treasuries offering yields below CPI inflation rates and - more importantly - a Congress composed of sociopaths who would willingly cause "full faith and credit" to be called into question and cause credit downgrades for the sake of political brinksmanship. Treasuries may still be (in the inimitable words of Rowland's co-author J.M. Lawson) "the best horse at the glue factory" when it comes to bonds, but the allocation of half the portfolio to them is so obviously outdated that even PP loyalists at least tweak the cash portion.

Tyler's own tweaking of the PP stock allocation is a welcome breath of MPT fresh air, but when I look at constructing portfolios from truly non-correlated asset classes I'm a lot more intrigued by Larry Swedroe's more recent iterations (in "Reducing Black Swans") of the so-called Larry Portfolio, in which a 30-35% equity allocation is made up entirely of such volatile exotica as International Small Cap Value and Emerging Markets Small.

A last comment since it's getting late is that I find it interesting how all of the "sweet spot" (risk:real return) on Tyler's site are pretty much iterations of the classic retiree 40:60 equity:bond allocation but with gold thrown into the mix. And meanwhile Vanguard's Wellesley Fund - actively managed, 35:65, and owning only a relative handful of mostly corporate bonds and dividend stocks - has outperformed most if not all of these backtested wonders for decades. If nothing else this certainly suggests that if you're going to have a bond-heavy portfolio (and I realize few on this board are likely to do so) bonds are the one are, given the size and relative illiquidity of the market, where professionals can actually deliver alpha. Wellesley's 9.95% CAGR 1970 to the present (and only ~18% drawdown during the '08 crisis) puts it in a league of its own among managed funds.

arebelspy

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Re: Portfolio Charts - The Golden Butterfly
« Reply #224 on: July 22, 2016, 11:53:40 PM »
Just in case it's of interest, John Greaney, pretty much the "old dog" of early retirement finance writers, has an excellent update of his periodic real life retiree returns series here:
 
http://www.retireearlyhomepage.com/reallife16.html

The whole article is worthwhile, but IMHO the most interesting comment is pretty far down where he points out that if you'd retired in 2000 rather than 1994 as Greaney himself did:


"If you happened to retire in January 2000, the last sixteen years haven't been pleasant. Only the Warren Buffett portfolio has a value appreciably exceeding its $100,000 starting balance. The 100% fixed income portfolio is underwater while the MPT portfolio, Larry Swedroe Portfolio, Harry Browne Portfolio, and Harry Dent Portfolio are all 8% to 14% in the black. The other two portfolios both show losses. The worst performer was the 75% S&P500/25% fixed income portfolio which is now less than two-thirds of its starting value."

The most interesting comment to me was the next paragraph.

Quote
But even someone with a fairly pedestrian 60% S&P500/40% fixed income portfolio, who retired in 2000 at the market top, still has more than 90% of his starting value after 15 years of inflation-adjusted withdrawals, the bursting of the stock market and housing bubbles, and the economic collapse in the waning days of the Bush Admininstration [sic]. Pretty amazing.

You retire at the market top in 2000.  Tech bubble crashes the stock market.  Then housing market bubble. Then stock market crashes again in 08-09.  All the while you keep taking your withdrawals, and increasing them each year with inflation.  Finally, 15 years later, you have 90% of your initial stache still?  That's * amazing.  And people are worried about a 4% WR.  :P
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AlmstRtrd

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Re: Portfolio Charts - The Golden Butterfly
« Reply #225 on: July 23, 2016, 04:38:14 AM »
Re: arebelspy's point about gold as an inflation hedge not mattering, I think it DOES matter that Harry Browne was dead wrong about allocating 25% of his portfolio to something that doesn't work to combat the exact problem it was included to address while failing to offer a sophisticated, internationally diversified, small cap and value tilted equity allocation that is the actual tool for the job in question.
While I followed the PP myself for about 4 years and was lucky to have done so timing-wise I came to see that pretty much all of the components of that allocation deserve to be revisited due to changes in the investing landscape since Browne's time.

Just wanted to jump in to say that from what I heard Harry Browne say on one of his radio shows, he expected gold to do well in times of serious inflation. He specifically said "6% or higher" IIRC. That's probably not a number we're likely to see any time soon. What I am trying to figure out about gold - and I do run a PP - is the moves that are clearly not related to actual inflation. So we have the big run up in the 2000s (a reaction to the expectation of inflation is the best explanation I have heard, but I would also add that I think there was a bit of a heard mentality going on toward the top). And then there are moves like what we have seen recently (up roughly 30% from its 2015 low) which are usually explained as 1) the result of real negative rates, or 2) a reaction to all the money creation going on around the world.

Sometimes it seems like gold is just acting uncorrelated on its own accord which can do wonders for sequence of returns risk but can drive holders of the asset a but nuts.

Carry on. Excellent discussion of the GB.

Frs1661

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Re: Portfolio Charts - The Golden Butterfly
« Reply #226 on: July 23, 2016, 05:32:50 AM »
Just in case it's of interest, John Greaney, pretty much the "old dog" of early retirement finance writers, has an excellent update of his periodic real life retiree returns series here:
 
http://www.retireearlyhomepage.com/reallife16.html

The whole article is worthwhile, but IMHO the most interesting comment is pretty far down where he points out that if you'd retired in 2000 rather than 1994 as Greaney himself did:


"If you happened to retire in January 2000, the last sixteen years haven't been pleasant. Only the Warren Buffett portfolio has a value appreciably exceeding its $100,000 starting balance. The 100% fixed income portfolio is underwater while the MPT portfolio, Larry Swedroe Portfolio, Harry Browne Portfolio, and Harry Dent Portfolio are all 8% to 14% in the black. The other two portfolios both show losses. The worst performer was the 75% S&P500/25% fixed income portfolio which is now less than two-thirds of its starting value."

The most interesting comment to me was the next paragraph.

Quote
But even someone with a fairly pedestrian 60% S&P500/40% fixed income portfolio, who retired in 2000 at the market top, still has more than 90% of his starting value after 15 years of inflation-adjusted withdrawals, the bursting of the stock market and housing bubbles, and the economic collapse in the waning days of the Bush Admininstration [sic]. Pretty amazing.

You retire at the market top in 2000.  Tech bubble crashes the stock market.  Then housing market bubble. Then stock market crashes again in 08-09.  All the while you keep taking your withdrawals, and increasing them each year with inflation.  Finally, 15 years later, you have 90% of your initial stache still?  That's * amazing.  And people are worried about a 4% WR. 
Note that he seems to be talking about nominal dollars here (he switches a couple of times which is a bit confusing). Adjusting for inflation,  100k in 2000 had the same buying power as ~140k today. So if they have 90k today they are down about 36% in real terms. Not a great start, but there is still time for the market to save them!




arebelspy

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Re: Portfolio Charts - The Golden Butterfly
« Reply #227 on: July 23, 2016, 05:59:55 AM »
Good catch, thanks for the clarification.

Still, even with that terrible start, they're down 36%, but halfway through (a 30-year ER run).  That's pretty encouraging, to me.  :)
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k9

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Re: Portfolio Charts - The Golden Butterfly
« Reply #228 on: July 23, 2016, 06:53:12 AM »
I have a great deal of appreciation for the PP, Golden Butterfly, Swedroe's most recent Reduced Fat Tails approach, etc.
Haven't heard of that. What is the difference with "older" implementations of min fat tails ?

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Re: Portfolio Charts - The Golden Butterfly
« Reply #229 on: July 23, 2016, 09:17:47 AM »
I have a great deal of appreciation for the PP, Golden Butterfly, Swedroe's most recent Reduced Fat Tails approach, etc.
Haven't heard of that. What is the difference with "older" implementations of min fat tails ?

From what I recall of Larry's postings on this over on Bogleheads there's no one "Larry Porfolio" but rather it describes an approach of minimizing fat tails by offsetting a large slug of ultra-safe (typically IT Treasuries, sometimes with TIPs added) in the 60-70% range with the most volatile, highest-expected-return equities. In his most recent book on reducing the risk of Black Swans, he specifically calls for the stock holdings to be limited to "small value in the U.S. and developed international markets and to value in emerging markets. This means there is no allocation to U.S. and int'l. developed markets of small-cap, mid-cap and large-cap growth companies, and no holding of mid-cap and large-cap value. And in emerging markets there are no growth stocks, just value stocks." (Chapter 4)

Further on, he points out:

"Thus while a Total Stock Market fund is more diversified when you think about diversification across asset classes, the LP is more diversified when looking at exposures to risk factors. A TSM fund has all of its eggs in one risk basket - beta - while the LP diversifies its risk across three stock risk baskets - beta, size and value, and the term factor of the bond holdings as well. The LP is also just as diversified in terms of economic and geopolitical risk across countries. "

The book is if anything an even quicker read than Bernstein's and worthwhile IMO so you can see not so much the backtested performance but the logic of its construction. Essentially you're getting the returns of a plain vanilla 50:50 Total Stock/Total Bond portfolio with far less downside risk but a boatload more tracking error (the latter being true of GB, the PP and any of the other top performing portfolios from Tyler's site).



Kevin K.

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Re: Portfolio Charts - The Golden Butterfly
« Reply #230 on: July 23, 2016, 09:31:14 AM »
And speaking of Mr. Swedroe, he just posted this piece over on Bogleheads:

http://www.etf.com/sections/index-investor-corner/swedroe-declining-or-rising-equity-strategy-retirement

I think this underlines the value of the GB and other defensive portfolios that are the winners in Tyler's studies, especially for retirees, while demolishing pretty decisively the rising equity % in retirement recommendations of Wade Pfau.

k9

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Re: Portfolio Charts - The Golden Butterfly
« Reply #231 on: July 23, 2016, 02:54:07 PM »
Thanks a lot Kevin. Hmm, too bad it's too hard to access SCV and emerging value stocks here in France. I like tilted portfolios. I guess I'll have to stick with small *or* value *or* emerging.

wienerdog

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Re: Portfolio Charts - The Golden Butterfly
« Reply #232 on: July 23, 2016, 05:11:54 PM »
"If you happened to retire in January 2000, the last sixteen years haven't been pleasant. Only the Warren Buffett portfolio has a value appreciably exceeding its $100,000 starting balance."

Merriman's ended up at $160,078 over the same time period ~$5000 less than Buffet's.  He is just not looking at the right portfolios.  :>)

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Re: Portfolio Charts - The Golden Butterfly
« Reply #233 on: July 24, 2016, 04:55:03 PM »
"If you happened to retire in January 2000, the last sixteen years haven't been pleasant. Only the Warren Buffett portfolio has a value appreciably exceeding its $100,000 starting balance."

Merriman's ended up at $160,078 over the same time period ~$5000 less than Buffet's.  He is just not looking at the right portfolios.  :>)

Not only do I agree with you, but Tyler's overview of Merriman's Ultimate Buy & Hold does as well:

https://portfoliocharts.com/portfolio/merriman-ultimate/

Of course the analysis on Portfolio Charts is from 1972 and includes a lot more depth. From what I can tell Merrimans is the only gold-free allocation to post this kind of performance. That said, it's drawdowns and downside risks are considerably higher than the Golden Butterfly while its CAGR is barely higher. Still it does speak very highly not so much of Merriman per se but of the value of the Fama-French research and the particularly sophisticated slice-and-dice that DFA funds make possible. That said, you've gotta pay 1% to an FA to even access those funds, and if you try to duplicate them with ETFs the rebalancing costs alone will probably cause you to underperform GB and other fewer-moving-parts allocations on the site.

wienerdog

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Re: Portfolio Charts - The Golden Butterfly
« Reply #234 on: July 24, 2016, 05:57:17 PM »
Yea Tyler uses Merriman's "Moderate" portfolio on his site which is loaded with 40% bonds.  Tyler has mentioned on here before that in the real world the taxes would probably hurt the returns with so many different funds.  If you look at Merriman's aggressive portfolio it supports closer to a 6% WR.  Even with the moderate using 40% bonds 5% WR is really good. 

mathjak107

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Re: Portfolio Charts - The Golden Butterfly
« Reply #235 on: July 25, 2016, 12:42:37 PM »
Good catch, thanks for the clarification.

Still, even with that terrible start, they're down 36%, but halfway through (a 30-year ER run).  That's pretty encouraging, to me.  :)

according to michael kitces the y2k retiree 16 years in has a balance  comparable with the 1929 retiree . still passing but not in great shape

"Arguably, the case of the 2000 retiree is perhaps somewhat concerning, given a 6.2% current withdrawal rate for what is still a 15-year retirement time horizon (as a 65-year-old couple in 2000 would be turning 80 this year) built on a base of currently high market valuations and currently low yields. It wouldn’t be surprising to me to see the year-2000 retiree end out pushing the limits of the 4% rule"

" the 2000 retiree is still only at a 6.2% withdrawal rate today (with just 15 years to go), while the 1966 retiree was over a 10% withdrawal rate at this point. And in the case of a 2008 retiree, the withdrawal rate is already right back at the 4% initial withdrawal rate the retiree began with (after already doing 6 years’ worth of retirement spending!). "

https://www.kitces.com/blog/how-has-the-4-rule-held-up-since-the-tech-bubble-and-the-2008-financial-crisis/#more-7856
« Last Edit: July 25, 2016, 12:44:58 PM by mathjak107 »

DrF

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Re: Portfolio Charts - The Golden Butterfly
« Reply #236 on: July 26, 2016, 07:47:52 AM »
Maybe I'm missing something, but in the article all the retirees start out with $1,000,000 and they are taking 4% in the first year, then increasing that every year based on the inflation of the previous year, right? Why no calculation of social security? I mean, even a very meager social security check of $800-1000 a month would be a huge cushion for retirees. It would increase their yearly income 20+% if they decided to still use all 4% from their nest egg. Conversely, it could replace some amount used from personal accounts and allow that money to stay invested every year which would cause the personal retirement funds to balloon as the retiree got older. 4% is rock solid and if you had any other stream of income from part time work, or a personal business, or social security, or a pension, or a rental property you would be in pristine condition.

mathjak107

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Re: Portfolio Charts - The Golden Butterfly
« Reply #237 on: July 26, 2016, 10:56:44 AM »
Maybe I'm missing something, but in the article all the retirees start out with $1,000,000 and they are taking 4% in the first year, then increasing that every year based on the inflation of the previous year, right? Why no calculation of social security? I mean, even a very meager social security check of $800-1000 a month would be a huge cushion for retirees. It would increase their yearly income 20+% if they decided to still use all 4% from their nest egg. Conversely, it could replace some amount used from personal accounts and allow that money to stay invested every year which would cause the personal retirement funds to balloon as the retiree got older. 4% is rock solid and if you had any other stream of income from part time work, or a personal business, or social security, or a pension, or a rental property you would be in pristine condition.

social security , pension and annuity income are subtracted off  your draw first since that part of your expenses are covered and do need the portfolio  for that part . the term  safe withdrawal rate  apply's to only that part of your income that has to come from your portfolio .

so if my budget was 100k and  60k came from social security and an annuity then my portfolio has to produce 40k .  i would need a 4% withdrawal rate  for a 1 million dollar portfolio or 8% if all i had was 500k.

if  my budget was 80k a year total then only 20k would have to come from the portfolio .

for a 1 million dollar portfolio the first case would be a 4% draw , the second case only a 2% draw

so it is only that part of your income that has to be generated by your portfolio .


here is a nice chart of success rates based on allocations .    but again , this is only for what is left over and falls on what your portfolio has to supply to the pot .

« Last Edit: July 26, 2016, 11:27:49 AM by mathjak107 »

AZryan

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Re: Portfolio Charts - The Golden Butterfly
« Reply #238 on: July 26, 2016, 11:08:33 AM »
Why no calculation of social security?

Because it needlessly complicates the issue of your investments surviving or failing the 4% rule. A typical retiree retires at around the same time as they start pulling Soc.Sec., so they can just factor that income out before they look at how much more they have to spend from their investments.

Say they 'need' $50K a year, and they expect to get ~$10K from Soc.Sec. That means they need to come up with another $40K from investments, so the 4% rules says you need about $1M and that ought to last you ~30yrs. (by which time you'll probably be in your mid 90's and dead).

If you only need ~$40K a year, and expect ~$10K from Soc.Sec., and you have ~$1M in investments, then you 'probably' saved too much and shoulda' already been retired. Or you can now spend ~$10K more than you think you really 'need'. But the 4% rule isn't trying to factor in having any extra bonus cash to burn.

Of course, when talking about 'early' retirement here, the timeframe of 30yrs. for the 4% rule could easily not be long enough to take on full faith, and the idea of having to wait several decades to start pulling from Soc.Sec. makes that payment a far greater unknown that shouldn't be counted on so assuredly.

mathjak107

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Re: Portfolio Charts - The Golden Butterfly
« Reply #239 on: July 26, 2016, 11:13:43 AM »
what i don't like about the gb is unlike the permanent portfolio which uses cash to barbell the long term bonds  the gb will have the brunt of rising bond rates when they happen in all their fury .

it is all fun in a flat or down trend in rates but those long term bonds with no opposing cash or short term bonds can get hit pretty hard . the bond portion does not average out somewhere in the intermediate range like the pp does .

at this stage i would rather bet on the pp then the gb  if i had to pick one ..

don't forget the last 45 years have been a down trend in rates with a few speed bumps  in the road . 

i wouldn't care what  driving and looking in the rear view mirror back tested like in this case .


« Last Edit: July 26, 2016, 11:58:43 AM by mathjak107 »

Classical_Liberal

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Re: Portfolio Charts - The Golden Butterfly
« Reply #240 on: July 26, 2016, 12:43:02 PM »
Maybe I'm missing something, but in the article all the retirees start out with $1,000,000 and they are taking 4% in the first year, then increasing that every year based on the inflation of the previous year, right? Why no calculation of social security? I mean, even a very meager social security check of $800-1000 a month would be a huge cushion for retirees. It would increase their yearly income 20+% if they decided to still use all 4% from their nest egg. Conversely, it could replace some amount used from personal accounts and allow that money to stay invested every year which would cause the personal retirement funds to balloon as the retiree got older. 4% is rock solid and if you had any other stream of income from part time work, or a personal business, or social security, or a pension, or a rental property you would be in pristine condition.

Not only this, but I question the need for CPI inflation adjusted increases for someone who is retired.  Particularly mustachian retired. Obviously there will have to be some increases over time, but probably not nearly as much as the CPI lends us to believe.  A standard consumer family spends upward of 50 percent of income on  housing and transportation alone, so yes, inflation year over year on these items has a HUGE impact on future spending for consumer Joe & Jane.  This is because they feel the need to replace vehicles and upgrade housing every few years. But a retiree with a paid off house, one old car, or maybe just a bike and bus pass is probably only spending 10-20 percent of retirement income on these "needs".  The bigger part of our budgets will be things like food, leisure, travel, ect.  These are items which can be much more easily substituted/modified to minimize inflationary effects over time. Of course, the wild card to this theory is medical costs.

DrF

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Re: Portfolio Charts - The Golden Butterfly
« Reply #241 on: July 26, 2016, 12:50:45 PM »
Not only this, but I question the need for CPI inflation adjusted increases for someone who is retired.  Particularly mustachian retired. Obviously there will have to be some increases over time, but probably not nearly as much as the CPI lends us to believe.  A standard consumer family spends upward of 50 percent of income on  housing and transportation alone, so yes, inflation year over year on these items has a HUGE impact on future spending for consumer Joe & Jane.  This is because they feel the need to replace vehicles and upgrade housing every few years. But a retiree with a paid off house, one old car, or maybe just a bike and bus pass is probably only spending 10-20 percent of retirement income on these "needs".  The bigger part of our budgets will be things like food, leisure, travel, ect.  These are items which can be much more easily substituted/modified to minimize inflationary effects over time. Of course, the wild card to this theory is medical costs.

This is exactly what my semi-mustachian FIL always says to me, "inflation is only a problem for people who buy a lot of shit". If you have a paid off house, buy most of your food from a grocery store, drive used cars, and vacation modestly, there's a very real possibility that you'd never have to increase your yearly spend until you were in late stages of retirement with medical/assisted living obligations.

arebelspy

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Re: Portfolio Charts - The Golden Butterfly
« Reply #242 on: July 26, 2016, 05:23:04 PM »
As we've discussed elsewhere, that's based on a misunderstanding of inflation.  You already have the fact that you aren't buying new vehicles in your ER budget.  So of course inflation for those won't hit you.  You will see inflation on what you do spend, and since it's a percent, not dollar amount, you'll see roughly the same inflation everyone else will on those categories. 
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Classical_Liberal

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Re: Portfolio Charts - The Golden Butterfly
« Reply #243 on: July 26, 2016, 06:21:07 PM »
As we've discussed elsewhere, that's based on a misunderstanding of inflation.  You already have the fact that you aren't buying new vehicles in your ER budget.  So of course inflation for those won't hit you.  You will see inflation on what you do spend, and since it's a percent, not dollar amount, you'll see roughly the same inflation everyone else will on those categories.

I do not misunderstand inflation. Nor would I say anyone is immune to it.  My argument is that a retiree, particularly a mustachian early retiree, is more resistant to it. This is due to substitution bias and a retirees ability to maximize it through; increased capital availability, increased self reliance, and an increase in the most valuable commodity, time.  While overall inflationary pressure will increase prices on most things in the long term (assuming the keynesian model continues), a retiree has signifcantly more opportunities to avoid inflationary pressure in certain areas of the CPI basket. If budgeted rental costs increase at a high rate, pay cash for a home instead (or use low interest rates to leverage the purchase).  If you budget for domestic travel costs and they increase dramatically, use a strong dollar to travel to Europe that year instead. If the price of produce doubles due to climate change, use time to grow a garden. 

I'm not saying someone should ignore inflation and never increase spending over 50 years, I'm saying that an early retiree can parlay his/her advantages better than a typical consumer for whom the CPI was created. As a result, an early retiree experiences less inflationary pressure than the average person.  This is an additional margin of safety for WR.  If a retiree can limit inflationary increases of withdrawals to say 50 or 75 percent of CPI over a period of years, it can significantly increase portfolio survivability. The two biggest factors in portfolio failure are sequence of returns (which things like the GB, PP and glide path try to address) and poor long term returns coupled with high inflation. IMO the latter may be less of an issue than we think due to the above.






arebelspy

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Re: Portfolio Charts - The Golden Butterfly
« Reply #244 on: July 26, 2016, 06:31:02 PM »
Not gonna drag this more off topic, but I'll just say I disagree, and if you want to go find one of the threads where we've discussed it, read it, and add your thoughts, I'd be happy to engage you.  But it's not super relevant to the GB, IMO.  :)
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Radagast

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Re: Portfolio Charts - The Golden Butterfly
« Reply #245 on: July 26, 2016, 11:52:15 PM »
Now gonna drag this post back on topic, so I'll just say...
Attached below are three graphs I put together two years ago using the Monte Carlo Simulator on Portfolio Visualizer, I doubt the past two years changed the results much. The first two charts show median (top pair of lines) and "worst case" (bottom pair of lines) outcomes for investing in a US total stock market index compared against either total bond market, or equally weighted long term bonds and gold.

The top chart shows a simulated investment of $30,000 per year for ten years. My take away from this clumsy analysis is
1. Equally weighted long term US government bonds and gold were far more effective than a total bond index fund at minimizing the odds of a bad out come.
2. On average, 10% to each gold and long term bonds produced roughly the best outcome.
3. The Golden Butterfly, with 20% in each of these assets plus "cash", is generally more conservative than the optimal portfolio. On average you will end up with less money.
4. However, the GB does offer strong protection against the worst case.



The next chart shows a simulated investment of $10,000 per year for 30 years. My take away from this chart is that:
1. Total bond index was highly detrimental to a 100% stock portfolio in almost all cases. In the very worst cases for the simulated stock market a 20% bond allocation was useful.
2. A 10% allocation to each of gold and long term treasuries was beneficial in all but the best cases for stocks, and was clearly beneficial for cases where stocks had median or lower returns.
3. I expect the GB with its 20% to each of these plus cash is too conservative for most cases of accumulating over a 30 year period.


Finally, a comparison of various stock allocations compared with various diversifiers using a 5% withdrawal rate over 50 years (based on 40 years of past data...right...) My conclusions:
1. There was little difference between a 0% and 30% allocation to total bond index. It was not a useful diversifier for retirees, but on the other hand it did not hurt either, at least not in small amounts.
2. Every possible combination of US and foreign stocks achieved its optimal outcome in retirement by including 20% each to gold and long term treasuries, exactly the same as the amounts in the GB.
3. Including a Total International Stock Index Fund had little impact on returns either way.
4. Tilting towards "factors" and the riskier corners of the world markets resulted in a positive outcome.
5. The Permanent Portfolio is not effective for either accumulators or retirees (notice the tense change here, it still isn't).


Global Conclusions: Based on randomized returns from 1972-2013, the Golden Butterfly was near the optimum portfolio for retirees. However, in most cases it was too conservative for accumulators. It seems that the GB may benefit from the addition of either emerging markets or international small cap stocks as another slice with high volatility and less correlation. I've made comments along these lines before, but this is where I got my reasons :).
« Last Edit: July 27, 2016, 12:05:43 AM by Radagast »

mathjak107

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Re: Portfolio Charts - The Golden Butterfly
« Reply #246 on: July 27, 2016, 03:01:28 AM »
the biggest issue i have with all this hedging and opposing asset classes is this :

if you have a long time frame like a typical accumulation period which spans decades then adding asset classes like bonds as an example are a short term answer to a temporary problem  that permanently ,  can and likely will,  reduce long term gains permanently . especially if bond rates rise which becomes a double whammy .

trying to protect against a short term  temporary condition like a down turn ends up usually permanently reducing a lifetime of gains .

unless you have time restraints like a retiree does or you just lack pucker factor the logic does not make a whole lot of sense .

you are also making equal bets on outcomes happening that  have  a pretty slim chance of playing out equally .
« Last Edit: July 27, 2016, 03:04:20 AM by mathjak107 »

talltexan

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Kevin K.

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Re: Portfolio Charts - The Golden Butterfly
« Reply #248 on: August 02, 2016, 01:40:27 PM »
http://www.res.org.uk/details/mediabrief/9633291/GOLD-HAS-NEVER-BEEN-A-GREAT-HEDGE-AGAINST-BAD-ECONOMIC-TIMES-Evidence-from-decad.html?platform=hootsuite

New academic study out about incorporating gold into a portfolio

Interesting article but hardly the definitive proof of gold note being a worthwhile asset class to hold in some percentage. I don't know of anyone who recommends gold purely as a hedge against bad economic times. One of the reasons so much misinformation is spread about gold is that its returns are so utterly uncorrelated with other asset classes. Another is that it's easy to hate on if you're invested in the idea of stocks and bonds being the only worthwhile asset classes to hold - and that bias would include Wall Street, the major brokerages and most of the financial press.

Have a look at the discussion of gold in this piece on alternative assets by Steven Evanson. The information is eye-opening and the arguments in favor of a modest (~10-15%) allocation to gold in many portfolios is pretty compelling, IMHO:

http://www.evansonasset.com/?Page=64

BattlaP

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Re: Portfolio Charts - The Golden Butterfly
« Reply #249 on: August 02, 2016, 02:59:20 PM »
The difference is that the article that talltexan references is about an academic study based on evidence and data, whereas the article you referenced is an argument based on words, with very few actually numbers relating specifically to golds' commonly stated uses.