Author Topic: Portfolio Charts - The Golden Butterfly  (Read 275096 times)

Daniel S

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Re: Portfolio Charts - The Golden Butterfly
« Reply #300 on: October 11, 2016, 07:17:33 AM »
That's interesting. How is your conservative made to be conservative, and aggressive made to be aggressive? Is it by different % of stocks vs bonds?

AdrianC

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Re: Portfolio Charts - The Golden Butterfly
« Reply #301 on: October 11, 2016, 07:18:10 AM »
Here's an interesting test using the Bogleheads back-testing spreadsheet (same data Tyler uses at Portfoliocharts):

1985-2015

Starting allocation
LCB 20%
SCV 20%
LTGB 20%
TBills 20%
GLD 20%

Annual rebalance:
CAGR real 5.59%
Start $10,000
End $53,976

Never rebalance:
CAGR real 6.13%
Start $10,000
End $63,251

Ending allocation
LCB 34%
SCV 37%
LTGB 20%
TBills 4%
GLD 4%

For comparison:
60/40
Annual rebalance:
CAGR real 6.69%
Start $10,000
End $74,392

Never rebalance:
CAGR real 6.79%
Start $10,000
End $76,715

Ending allocation
TSM 82.5%
TBM 18.5%

It would be really interesting to run back-tests like this over other timeframes and with varying rebalancing frequency and timing.

EDIT: added never rebalanced numbers for 60/40.
« Last Edit: October 11, 2016, 10:50:06 AM by AdrianC »

mathjak107

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Re: Portfolio Charts - The Golden Butterfly
« Reply #302 on: October 11, 2016, 07:26:42 AM »
That's interesting. How is your conservative made to be conservative, and aggressive made to be aggressive? Is it by different % of stocks vs bonds?

my conservative model is about 30% equity and 70% assorted bond funds , not all which are interest rate sensitive .  the equity funds tend to be lower beta rated funds . beta on this portfolio  is 63% less than the s&p 500    ytd return 5.47%

the more aggressive is a 70/30 growth and income model . ytd 6.10%   30% less than the s&p 500

i  am retired now and i am also at the point where i don't need a whole lot of volatility in my life . but i did spend my accumulation years 100% in growth models  growing my money  with no hedging or bonds
« Last Edit: October 11, 2016, 07:31:20 AM by mathjak107 »

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Re: Portfolio Charts - The Golden Butterfly
« Reply #303 on: October 11, 2016, 07:47:27 AM »
For comparison:
60/40
CAGR real 6.69%
Start $10,000
End $74,392

Interesting, thanks.

It didn't specify--did your final 60/40 comparison rebalance annually, or not?  Why not do the same thing with it that you did with the GB: a rebalance and a not (and on the one that's not, give the final AA).  Would be worth going back and editing that in, IMO.  :)
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Radagast

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Re: Portfolio Charts - The Golden Butterfly
« Reply #304 on: October 11, 2016, 08:33:43 AM »
The hope is that an annual rebalance captures price fluctuations between the assets to make up for their poor underlying returns. Will it? Why? Just because it did in this relatively short back-test?

An annual rebalance seems arbitrary. Why not have some timing scheme for the rebalancing and make it even better?

Actually no, you are missing the point of GB.

The point of the GB, as I understand it, is to achieve reasonable returns (and good withdrawal rates) with low portfolio volatility by combining asset classes that zig and zag differently (negative correlation). Is that correct?

Say you're aiming for a 4% real return over the long term.

40% of GB (stocks) should achieve that.
60% of GB (bonds, gold) likely will not.

To achieve 4% there has to be some other factor, and there is. It's the selling of one asset that has a relative increase in price (capital gain) and the buying of another that has a relative reduction in price. The rebalancing process.

What am I missing?

So why rebalance once a year on December 31st? Is that optimal?

Has a back test been done to try rebalancing at other times? More frequently? Less frequently? Why not?
The permanent portfolio rebalances tbe entire portfolio when ever a 40% band is crossed for any of the slices. I expect with the GB the same thing would be done whenever one of the slices exceeded 12% or 28%.

Classical_Liberal

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Re: Portfolio Charts - The Golden Butterfly
« Reply #305 on: October 11, 2016, 09:20:02 AM »
Here's an interesting test using the Bogleheads back-testing spreadsheet (same data Tyler uses at Portfoliocharts):

1985-2015

Starting allocation
LCB 20%
SCV 20%
LTGB 20%
TBills 20%
GLD 20%

Annual rebalance:
CAGR real 5.59%
Start $10,000
End $53,976

Never rebalance:
CAGR real 6.13%
Start $10,000
End $63,251

Ending allocation
LCB 34%
SCV 37%
LTGB 20%
TBills 4%
GLD 4%

For comparison:
60/40
CAGR real 6.69%
Start $10,000
End $74,392

It would be really interesting to run back-tests like this over other timeframes and with varying rebalancing frequency and timing.

That is interesting thanks for the #'s!  It does not surprise me that CAGR is higher without rebalance.  However, it does not take into account drawdown impacts.

The appeal of a GB like portfolio (for me) is the relative stability during drawdown.  Since treasuries have such little upside at this moment in time, I feel like diversifying into other noncorrelaters  is more appealing to this goal vs a traditional 60/40.  In other words, I do not necessarily feel US stocks and Treasuries will remain as uncorrelated in the future as they have been in the past and am willing to look at another asset class to achieve my goals.  Will it negative impact returns? Probably, but to make a portfolio last 40 years on 4%WR I don't really need very good returns, as long as those returns stay relatively stable.  This is why I feel Tyler's charts are so valuable despite the limited data.  In other words, a lower CAGR with more stability can support a higher WR than a higher CAGR with higher volatility.  The question becomes, is a golden butterfly (or similar) portfolio the way to do that?  This I agree is debatable, but I am impressed enough with what I have seen to start heading that direction given the current economic climate.

AdrianC

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Re: Portfolio Charts - The Golden Butterfly
« Reply #306 on: October 11, 2016, 10:15:03 AM »
Interesting, thanks.

It didn't specify--did your final 60/40 comparison rebalance annually, or not?  Why not do the same thing with it that you did with the GB: a rebalance and a not (and on the one that's not, give the final AA).  Would be worth going back and editing that in, IMO.  :)

Done.

I found a better way than the clunky spreadsheet, not sure why I never tried it before:
https://www.portfoliovisualizer.com/

If I can figure out how to post pictures I'll put up my morning's fun.

AdrianC

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Re: Portfolio Charts - The Golden Butterfly
« Reply #307 on: October 11, 2016, 10:49:33 AM »
So why rebalance once a year on December 31st? Is that optimal?

Has a back test been done to try rebalancing at other times? More frequently? Less frequently? Why not?
The permanent portfolio rebalances tbe entire portfolio when ever a 40% band is crossed for any of the slices. I expect with the GB the same thing would be done whenever one of the slices exceeded 12% or 28%.

Interesting. All portfolios at portfoliocharts.com are rebalanced annually.

AdrianC

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Re: Portfolio Charts - The Golden Butterfly
« Reply #308 on: October 11, 2016, 11:47:58 AM »
That is interesting thanks for the #'s!  It does not surprise me that CAGR is higher without rebalance.  However, it does not take into account drawdown impacts.

I see Portfolio Visualizer can take withdrawals into account.

https://www.portfoliovisualizer.com/backtest-portfolio

I ran a few scenarios:

Set 'Annual Adjustment' to 'Withdraw fixed amount' and set 'Inflation Adjusted' to 'Yes'.
$1M. $40K/year WR adjusted for inflation. Rebalance annually.

1980-2015 (36 years)
GB final balance $6,653,754 CAGR real 2.16%
60/40 final balance $17,597,328 CAGR real 4.96%

1990-2015 (26 years)
GB final balance $2,847,564 CAGR real 1.62%
60/40 final balance $4,174,807 CAGR real 3.13%

2000-2015 (16 years)
GB final balance $1,678,436 CAGR real 1.12%
60/40 final balance $932,181 CAGR real -2.53%

Iím ignoring the 1970ís because I think the 1970's gold data is garbage. Gold was on a tear in the 1970ís. From 1972 through 1979 gold went up over 1,000%, with a 25.4% real CAGR.

effigy98

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Re: Portfolio Charts - The Golden Butterfly
« Reply #309 on: October 11, 2016, 12:40:55 PM »
It is interesting the 2000-15 set of years GB is so much better. Wonder if the trend will continue.

Radagast

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Re: Portfolio Charts - The Golden Butterfly
« Reply #310 on: October 11, 2016, 01:57:34 PM »
So why rebalance once a year on December 31st? Is that optimal?

Has a back test been done to try rebalancing at other times? More frequently? Less frequently? Why not?
The permanent portfolio rebalances tbe entire portfolio when ever a 40% band is crossed for any of the slices. I expect with the GB the same thing would be done whenever one of the slices exceeded 12% or 28%.

Interesting. All portfolios at portfoliocharts.com are rebalanced annually.
A couple tips from an experienced backtester :)

Portfolio visualizer can back test using 5/25 rebalancing bands, which are similar to those used in the Permanent Portfolio but a little tighter. The problem is that this is only available using actual fund symbols, which constrains the dates. Especially if you want to include gold, the GLD ticker only goes to 2004. Link to an example using 5/25 bands and monthly withdrawals:
https://www.portfoliovisualizer.com/backtest-portfolio?s=y&timePeriod=4&startYear=1985&firstMonth=1&endYear=2016&lastMonth=12&endDate=10%2F10%2F2016&initialAmount=1000000&annualOperation=2&annualAdjustment=4000&inflationAdjusted=true&annualPercentage=0.0&frequency=2&rebalanceType=5&showYield=false&reinvestDividends=true&benchmark=%5ESPXTR&symbol1=VTSMX&allocation1_1=40&allocation1_2=20&allocation1_3=33&symbol2=VBMFX&allocation2_1=60&allocation2_3=34&symbol3=VGTSX&allocation3_3=33&symbol4=VISVX&allocation4_2=20&symbol5=GLD&allocation5_2=20&symbol6=VUSTX&allocation6_2=20&symbol7=VFISX&allocation7_2=20

I found that backtests avoid doohickeys if you start and end in years with 5s. '75, '85,'95,'05,'15 were all pretty boring years. Gold loses a lot of glitter even if you start at '75. It perks up again over the most recent decade or two.

Classical_Liberal

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Re: Portfolio Charts - The Golden Butterfly
« Reply #311 on: October 11, 2016, 07:09:42 PM »

I see Portfolio Visualizer can take withdrawals into account....

Those are indeed interesting numbers and again thanks for taking the time.  I understand why you want to leave out the 70's for gold.  GB aficionados are often criticized for cherry picking the data due to that period.  I would argue completely ignoring that period is a worse offence of the same.  One could easily say stock data from 1997-1999 was garbage because P/E's should never get that high, except that they did.

That being said, these three examples indicate what I expect. When stocks shine the 4% rule provides ridiculous amounts of unneeded surplus.  When they do not, gold helps close the gap when extra help actually is needed.  Personally I'd rather have a larger chance of having enough, by sacrificing my chances to have way too much.

Two other important nuances that I would be interested in...

1)How low does the portfolio go in a 60/40 vs GB when stocks arent kick'en it?  Even if it rebounds later, is sleep lost for a more conservative person?

2) What if you increased the WR a bit... to say 4.5% or 5%.  Then which portfolio has greater survivability chances?  Afterall, we know 4%WR is pretty damn safe, as long as there is some stock component.

Daniel S

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Re: Portfolio Charts - The Golden Butterfly
« Reply #312 on: October 12, 2016, 04:29:00 AM »
2) What if you increased the WR a bit... to say 4.5% or 5%.  Then which portfolio has greater survivability chances?  Afterall, we know 4%WR is pretty damn safe, as long as there is some stock component.

The link from Radagast has the withdrawal rate at $4000 per month = $48000 annually on start of $1M, so already 4.8% annualized. But the link looks like it sets 40% stocks, 60% bonds. Correcting this getting results below:

2005 - 2016, Start $1M, Withdraw $4k monthly, Rebalance at limits 5%/25%

GB finishes at 0.73% real CAGR
60/40 finishes at -1.05% real CAGR

(edited to add results)

Daniel S

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Re: Portfolio Charts - The Golden Butterfly
« Reply #313 on: October 12, 2016, 04:39:07 AM »
That is interesting thanks for the #'s!  It does not surprise me that CAGR is higher without rebalance.  However, it does not take into account drawdown impacts.

I see Portfolio Visualizer can take withdrawals into account.

https://www.portfoliovisualizer.com/backtest-portfolio

I ran a few scenarios:

Set 'Annual Adjustment' to 'Withdraw fixed amount' and set 'Inflation Adjusted' to 'Yes'.
$1M. $40K/year WR adjusted for inflation. Rebalance annually.

1980-2015 (36 years)
GB final balance $6,653,754 CAGR real 2.16%
60/40 final balance $17,597,328 CAGR real 4.96%

1990-2015 (26 years)
GB final balance $2,847,564 CAGR real 1.62%
60/40 final balance $4,174,807 CAGR real 3.13%

2000-2015 (16 years)
GB final balance $1,678,436 CAGR real 1.12%
60/40 final balance $932,181 CAGR real -2.53%

Iím ignoring the 1970ís because I think the 1970's gold data is garbage. Gold was on a tear in the 1970ís. From 1972 through 1979 gold went up over 1,000%, with a 25.4% real CAGR.

What symbol did you use for gold allocation?

AdrianC

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Re: Portfolio Charts - The Golden Butterfly
« Reply #314 on: October 12, 2016, 05:32:30 AM »
What symbol did you use for gold allocation?

My bad, I gave the wrong link. Should be:

https://www.portfoliovisualizer.com/backtest-asset-class-allocation

Gold is one of the Asset Allocations listed.

« Last Edit: October 12, 2016, 06:19:46 AM by AdrianC »

AdrianC

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Re: Portfolio Charts - The Golden Butterfly
« Reply #315 on: October 12, 2016, 06:17:57 AM »
It is interesting the 2000-15 set of years GB is so much better. Wonder if the trend will continue.

We can make it even better:

2000-2015 (16 years) w/4% WR
GB final balance $1,678,436 CAGR real 1.12%
60/40 final balance $932,181 CAGR real -2.53%

20% Small Cap Value & 80% Long term treasuries
final balance $2,299,574 CAGR real 3.12%

I think we can be fairly sure that this performance will not continue.

We can see better performance than the GB with a more stock heavy portfolio, but keeping the gold:

US Stock Market 20.00%
Small Cap Value 20.00%
Intl Stock Market 10.00%
Intl Small Cap Stocks 10.00%
Total Bond 20.00%
Gold 20.00%

final balance $1,741,321 CAGR real 1.35%
« Last Edit: October 12, 2016, 07:54:31 AM by AdrianC »

AdrianC

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Re: Portfolio Charts - The Golden Butterfly
« Reply #316 on: October 12, 2016, 06:29:43 AM »
[I understand why you want to leave out the 70's for gold.  GB aficionados are often criticized for cherry picking the data due to that period.  I would argue completely ignoring that period is a worse offence of the same.  One could easily say stock data from 1997-1999 was garbage because P/E's should never get that high, except that they did.

You know the argument: gold in the 70's was a one-time event that isn't likely to ever happen again. Stocks bubble and crash often. The Golden Butterfly relies on cycles like that, where investors flock to treasuries and gold, then back to stocks.

Daniel S

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Re: Portfolio Charts - The Golden Butterfly
« Reply #317 on: October 12, 2016, 07:12:27 AM »
Real CAGR 5 years after the crashes (withdraw 48k/yr. rebalance yearly)

1972 GB 0.05%, 60/40 -8.44%. GB wins.  http://tinyurl.com/hozu2r5
1987 GB -1.33%, 60/40 2.59%. GB loses. http://tinyurl.com/ztwjvag
2000 GB 0.30%, 60/40 -5.76%. GB wins. http://tinyurl.com/j63tdj2
2008 GB 0.72%, 60/40 -0.74%. GB wins: http://tinyurl.com/zonlgxl

If you used GB starting 1987, you didn't see positive real CAGR until 1997 (came close in 1993 with -0.23% and in 1995 with -0.03%)

Daniel S

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Re: Portfolio Charts - The Golden Butterfly
« Reply #318 on: October 12, 2016, 07:27:16 AM »
Should have used 1973:

GB -1.76%, 60/40 -11.2%. GB wins. http://tinyurl.com/jxte64j

GB goes positive 1979, six years after.

AdrianC

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Re: Portfolio Charts - The Golden Butterfly
« Reply #319 on: October 12, 2016, 07:46:44 AM »
If you look at the graphs you'll see those are 6 year returns.

GB did relatively well during stock market crashes, relatively poorly (but adequately) during stock market booms.

But...going forward...long term treasuries will suck, cash will suck, US stocks will likely be blah, gold is a wildcard. When mixed together...who knows? That's the point I tried to make: who knows? No one knows. Perhaps it's better to be in productive assets (stocks, real estate) and be globally diversified. That's my bet.

Daniel S

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Re: Portfolio Charts - The Golden Butterfly
« Reply #320 on: October 12, 2016, 07:52:57 AM »
How long will they suck though? If your time horizon is 10-20 years, then maybe not GB, but if 30-40 years then I think you'll appreciate it. Or maybe 10-20 years of stock-heavy, then switch to GB?

Daniel S

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Re: Portfolio Charts - The Golden Butterfly
« Reply #321 on: October 12, 2016, 07:56:36 AM »
Sorry, I should mention I'm biased towards the retirement phase, not accumulation.

AdrianC

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Re: Portfolio Charts - The Golden Butterfly
« Reply #322 on: October 12, 2016, 02:11:49 PM »
I was out riding my bike this morning and thought about this: would anyone have picked the GB 30 years ago?

Itís the end of 1985 and youíre about to FIRE. You look at the alternative portfolios and come across the Golden Butterfly. Hereís the data:

1972-1985 (14 years)
GB CAGR real 6.13%
60/40 CAGR real 2.80%

The Golden Butterfly looks great. You put your $1M in and plan to draw $40K a year plus inflation ($86,559 in 2015).

How did you do?

1986-2015 (30 years)
GB final balance $4,059,788 CAGR real 2.12%
60/40 final balance $7,110,707 CAGR real 4.05%

You did just fine. But your neighbor who went with a simple 60/40 and rode out the extra volatility did quite a bit better. The GB gave a smoother ride, but quite a lot less money.

steveo

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Re: Portfolio Charts - The Golden Butterfly
« Reply #323 on: October 12, 2016, 03:32:39 PM »
Adrian - the problem with all portfolios is that none of us know how they will turn out in the longer term. I don't see the point in over thinking portfolio management.

I honestly reckon a simple split between bonds & stocks is the way to go because you are more likely to get an average return.

Tyler

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Re: Portfolio Charts - The Golden Butterfly
« Reply #324 on: October 12, 2016, 03:33:01 PM »
The discussion has been really great lately.  I especially enjoy some of the comments explaining how personal goals influence portfolio preferences.  I find that really informative.

Anyways, I just wanted to point out that there is a new tool on the site that directly studies a few of the recent points accounting for retirement withdrawals:

Retirement Spending /// Illustrates the effects of a variety of different withdrawal methods on both spending levels and account balances in retirement

Note that this looks at every available start year simultaneously, which allows you to see both the best and worst outcomes at a glance.  That will save you the effort of running dozens of backtests for every portfolio option.  Also note that the withdrawal method you choose may affect what type of portfolio looks most appealing for your personal needs.

No matter what portfolio you prefer (there's more than one good way to invest!), hopefully you'll find the information helpful.
« Last Edit: October 12, 2016, 10:42:58 PM by Tyler »

Daniel S

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Re: Portfolio Charts - The Golden Butterfly
« Reply #325 on: October 13, 2016, 07:04:55 AM »

How did you do?

1986-2015 (30 years)
GB final balance $4,059,788 CAGR real 2.12%
60/40 final balance $7,110,707 CAGR real 4.05%

You did just fine. But your neighbor who went with a simple 60/40 and rode out the extra volatility did quite a bit better. The GB gave a smoother ride, but quite a lot less money.

Stress of 20% draw-downs takes it's toll, and in the 31st year, your neighbor dies. The good news is that he can afford a custom-made gold coffin. His family buys the gold  from my portfolio. Gold is proved to have intrinsic value after all!


Daniel S

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Re: Portfolio Charts - The Golden Butterfly
« Reply #326 on: October 13, 2016, 07:24:11 AM »
@Tyler

Portfolio Charts are amazing and I've been having all kinds of weird fun using the calculators. You're incredibly kind to share this resource with the world.

Is this ERE thread your preferred place for feedback? http://forum.earlyretirementextreme.com/viewtopic.php?f=3&t=6635

AdrianC

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Re: Portfolio Charts - The Golden Butterfly
« Reply #327 on: October 13, 2016, 07:26:56 AM »
Stress of 20% draw-downs takes it's toll, and in the 31st year, your neighbor dies. The good news is that he can afford a custom-made gold coffin. His family buys the gold  from my portfolio. Gold is proved to have intrinsic value after all!

But even after the 20% drawdown your neighbor has way more money than you.

If you go with an offbeat portfolio like the GB, will you be able to stick with it during the periods of poor performance? In our 1985-2015 example (including a 4% WR, remember) it was lagging after 3 years and never catches up. That's 27 years of poor performance.

Daniel S

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Re: Portfolio Charts - The Golden Butterfly
« Reply #328 on: October 13, 2016, 08:04:19 AM »
@AdrianC

Yes, you're right. Somebody else brought this up in a discussion (maybe this one?), asking how would it feel when everyone else is getting 30%+ returns and you are stuck with a measly single digit return. It's definitely something that has to be overcome if you choose a GB type of portfolio.

Personally I'm willing to give up those extra gains for lower volatility and as long as boom-bust and fear/greed cycles continue I think the GB will continue to provide it's smoother ride. I'll be putting my faith in bonds and gold remaining as destinations considered safer than equities (rightly or wrongly).

Tyler

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Re: Portfolio Charts - The Golden Butterfly
« Reply #329 on: October 13, 2016, 10:24:37 AM »
Is this ERE thread your preferred place for feedback? http://forum.earlyretirementextreme.com/viewtopic.php?f=3&t=6635

I don't really have a preferred place.  Different internet communities have different types of feedback, and I appreciate the diversity of perspectives.  The most direct route is to contact me through the site. 

mathjak107

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Re: Portfolio Charts - The Golden Butterfly
« Reply #330 on: October 13, 2016, 10:41:14 AM »
@AdrianC

Yes, you're right. Somebody else brought this up in a discussion (maybe this one?), asking how would it feel when everyone else is getting 30%+ returns and you are stuck with a measly single digit return. It's definitely something that has to be overcome if you choose a GB type of portfolio.

Personally I'm willing to give up those extra gains for lower volatility and as long as boom-bust and fear/greed cycles continue I think the GB will continue to provide it's smoother ride. I'll be putting my faith in bonds and gold remaining as destinations considered safer than equities (rightly or wrongly).

i still track the permanent portfolio i tried about a year and a 1/2 ago . compared to my conventional portfolio based on my time frames i started tracking them the permanent portfolio is the one  behind  after all the volatility we had .  it went up more and fell more .

on a ytd bases the pp is still aheah by 2% but if we include the last few years it is well behind .  i don't see that much less volatility in the pp this year  than my conventional model  and in fact the pp fell  quite a bit more  the last few months .

with TLT AND GLD getting slammed the last 90 days volatility has been high . gld is down 6% and tlt is down 5.00% . those are some pretty steep drops for the pp.

« Last Edit: October 13, 2016, 11:18:13 AM by mathjak107 »

effigy98

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Re: Portfolio Charts - The Golden Butterfly
« Reply #331 on: October 13, 2016, 07:57:58 PM »
I'm sticking with GB for short term money I want to draw the first 5 years of ER and 90/10 for the old man money. The wild card is what to do for the 3rd portfolio from 5 to 20 years.

Radagast

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Re: Portfolio Charts - The Golden Butterfly
« Reply #332 on: October 13, 2016, 08:17:01 PM »
I'm sticking with GB for short term money I want to draw the first 5 years of ER and 90/10 for the old man money. The wild card is what to do for the 3rd portfolio from 5 to 20 years.
This seems pretty complicated. If you are starting with the GB, why not just follow a rising equity glide path until you are at 85/5/5/5? You could accomplish this by living on yields and dividends and selling the non-stock assets to make up any shortfall. It is basically a conceptually similar version of what you are proposing. Disclaimer: I am not an expert on rising equity glide paths, you'll have to do more research to be sure it is a good idea.

arebelspy

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Re: Portfolio Charts - The Golden Butterfly
« Reply #333 on: October 13, 2016, 08:20:33 PM »


I'm sticking with GB for short term money I want to draw the first 5 years of ER and 90/10 for the old man money. The wild card is what to do for the 3rd portfolio from 5 to 20 years.
This seems pretty complicated. If you are starting with the GB, why not just follow a rising equity glide path until you are at 85/5/5/5?

Same reason you'd use it in the first place. Psychology.
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Daniel S

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Re: Portfolio Charts - The Golden Butterfly
« Reply #334 on: October 14, 2016, 04:59:39 AM »
Would anybody care to speculate how GB would have done for a Japanese investor i.e Replace TSM for Nikkei?, SCV and treasuries for Japanese equivalents?
« Last Edit: October 14, 2016, 05:29:02 AM by MrNotRobot »

mathjak107

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Re: Portfolio Charts - The Golden Butterfly
« Reply #335 on: October 14, 2016, 07:52:58 AM »
why buy Japanese stocks just because you may live there ?    i would never buy in a country i wasn't happy with market or economic wise .

Daniel S

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Re: Portfolio Charts - The Golden Butterfly
« Reply #336 on: October 14, 2016, 08:05:04 AM »
I suppose I'm of the opinion that any economy could "turn Japanese" at some point in the future. Anything's possible, right?

I could rephrased the question:

Would anybody care to speculate how GB would have done in an environment matching the Japanese one of the last ~50 years i.e what might have happened if we replace TSM for Nikkei?, SCV and treasuries for Japanese equivalents?

My guess is that the re-balancing would become a very important factor that might save some pain, but I really don't know enough about the Japanese economic history to be able to make any call on it. I'm hoping someone else might have a better idea.

Daniel S

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Re: Portfolio Charts - The Golden Butterfly
« Reply #337 on: October 14, 2016, 09:41:58 AM »
why buy Japanese stocks just because you may live there ?

I didn't really answer your question. There are a few reasons I could think of: currency risk, tax implications, broker limitations, counter-party risk, restrictions by local law. I don't know how significant any of these are to the Japanese.

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I would never buy in a country i wasn't happy with market or economic wise .

I think the Japanese economy started going pear-shaped around 1990. If you already had your Japanese portfolio for a few years before this, how long would you hold it before thinking it might be time to look elsewhere? I wonder how long each of the various portfolio proponents would have held? Would they still be holding today in total faith that their longer term views would prevail? Would they have prevailed?

I'm new to this stuff, but I'm surprised that back-testing these portfolios against globally diverse markets isn't a bigger thing, but it might just be because of the difficulty accessing data or that I haven't been researching long enough. Or maybe most people construct their portfolios using US instruments even from outside the US? This is significant to me because I am in Australia. But I feel like I'd get more benefit from looking at the Japanese market than the Australian one. I feel that if back-testing a portfolio can show it to be consistent across diverse global markets then it would add more confidence.

I read that Tyler is looking for data for a number of non-US markets and I hope he finds it.

Classical_Liberal

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Re: Portfolio Charts - The Golden Butterfly
« Reply #338 on: October 14, 2016, 01:14:25 PM »
2) What if you increased the WR a bit... to say 4.5% or 5%.  Then which portfolio has greater survivability chances?  Afterall, we know 4%WR is pretty damn safe, as long as there is some stock component.

The link from Radagast has the withdrawal rate at $4000 per month = $48000 annually on start of $1M, so already 4.8% annualized. But the link looks like it sets 40% stocks, 60% bonds. Correcting this getting results below:

2005 - 2016, Start $1M, Withdraw $4k monthly, Rebalance at limits 5%/25%

GB finishes at 0.73% real CAGR
60/40 finishes at -1.05% real CAGR

(edited to add results)

Totally missed that!  I was thinking 40K a year for some reason.  Thanks for pointing it out.

Stress of 20% draw-downs takes it's toll, and in the 31st year, your neighbor dies. The good news is that he can afford a custom-made gold coffin. His family buys the gold  from my portfolio. Gold is proved to have intrinsic value after all!

This made me LOL!  I began thinking "humm, plus the family better purchase grave robbing insurance".  We had better include that in the final totals as well.  If only the Egyption pharaohs had such foresight!

Classical_Liberal

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Re: Portfolio Charts - The Golden Butterfly
« Reply #339 on: October 14, 2016, 01:24:42 PM »
I think lack of data is a big reason we donít have the info MrNotRobot is hoping to find.  A second (potentially more significant) reason is simply lack of demand for this info.  I believe Areblespy is correct in that AA is a very psychologically based.  These are nonscientific numbers, but think of it this wayÖ.
 
Maybe 5% of the developed industrialized world has even come across the concept of funding an early retirement.  Of those, only a certain segment is really focused on AA.  Again, for your enjoyment or mockery, I present a lifecycle observation.  This time, instead of an AA lifecycle, of my anecdotal experience of actual/potential early retiree's thought processes.

1) 5-10+ years from FIRE, focused on increasing savings rate (or debt reduction) through combination of efficient spending and increases in income.  Focus is also more on personal and global sustainability through acquisition of knowledge and skills, a practice which continues for life.  AA is not as seriously considered, any reasonable plan will see great progress.
 
2) > 5yr to FIRE, to maybe 2 years post FIRE.  These are the folks (me included) that start to really consider AA.  The idea of losing our income stream is within reach and we want to know how quickly we can hit the right number.  We want specifics about AA & how to meet our goals.  IOTW, which AA is most likely to succeed given our circumstances and how much do we actually need.  This is the ONLY real target audience of the data MrNotRobot seeks and is very small (exception being true financial nerds).
 
3)2-8 years post FIRE.  These folks have gotten/are getting over the psychological factors Arebelspy talks about.  Mindset has changed; worries about AA diminish as they see plans are working out.  If things arenít looking great, they have found making minor required changes to ďthe planĒ are easily tolerated and fears of worst case scenario have all but disappeared.
 
4) 8+ years post fire.  What likely started as a 3.5-5% WR is now down to 3% or less.  Multiple other income streams, cost cutting measures, and sustainability skills/knowledge have come into play over the years, most of which were totally unexpected.  ďThe planĒ is so secure that they absolutely cannot understand what those up in number 2 are so concerned about.  Managing AA is for hobby or legacy concerns only.
 
Obviously, everyone is a special snow flake and can be in different areas of the spectrum no matter where they are in the FIRE lifecycle; this just covers most of the folks with which Iíve had contact.  Also obvious, where each person resides can really impact the intercourse.  If the idea of early retirement continues to expand, we may see more data and tools available.  For example, Tylerís Portfolio Charts are a great expansion to what was available even just a couple of years ago (Thanks again Tyler!!!).  MMM had to do it without even Cfiresim!  Imagine that!

mathjak107

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Re: Portfolio Charts - The Golden Butterfly
« Reply #340 on: October 14, 2016, 04:27:32 PM »
I would be very careful today looking at back testing.  Since brexit gold and long term bonds have been getting pummeled. Both are down about 7 or 8%.  That is hardly a low volatility portfolio.

I still track my permanent portfolio from when i decided to not go that route.  Based on my time frame the pp fell  45% since hitting its high  a few months ago.

My portfolio i use is now well ahead . I am not convinced thst going forward long term treasury's and a heavy gold position are the place to be.

With the expected returns of stocks expected to be tepid at best i would not want to have heavy counter weights pulling what ever gains stocks can muster back.

I think there are better ways to match money to time frames without permanently reducing long term gains .especially since the low volatility claimed to be the reason for having the gb or pp does not seem to be holding today.

steveo

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Re: Portfolio Charts - The Golden Butterfly
« Reply #341 on: October 14, 2016, 05:16:31 PM »
mathjak107 - I think the point is that we really have no idea what the performance of a given portfolio is going to be in the future. The GB though has some positive points because it has uncorrelated assets but thinking that you can backtest something and have it work in the future I think is crazy.

If you want the best possible long term returns then have 100% stocks. If you want to smooth out the ride add some bonds. If you want to add more uncorrelated assets go for it but don't expect significantly different results compared to a stock/bond portfolio.

mathjak107

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Re: Portfolio Charts - The Golden Butterfly
« Reply #342 on: October 14, 2016, 05:45:49 PM »
As john templeton said the 4 most expensive words in the english language is this time is different.

Odds are rates will start to rise on bonds and gold will stall if rates rise so that really leaves the usual contender ,stocks to do the lifting.

I think weighing a portfolio down in the near term with long term bonds and heavy gold positions will prove to be a mistake.

We had a 35 year bull run in bonds with just some speed bumps along the way. That can be a game changer for long term bond heavy portfolios. Just look at the permanent portfolios slide the last 90 days. The swings were far greater than  the 50/50 mix i use for comparison
« Last Edit: October 14, 2016, 05:47:31 PM by mathjak107 »

bryan

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Re: Portfolio Charts - The Golden Butterfly
« Reply #343 on: October 14, 2016, 06:48:38 PM »
but thinking that you can backtest something and have it work in the future I think is crazy.
If you want the best possible long term returns then have 100% stocks.

This reasoning doesn't make sense to me. How do we know stocks will outperform X long term if not by back-testing?

arebelspy

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Re: Portfolio Charts - The Golden Butterfly
« Reply #344 on: October 14, 2016, 07:19:37 PM »
but thinking that you can backtest something and have it work in the future I think is crazy.
If you want the best possible long term returns then have 100% stocks.

This reasoning doesn't make sense to me. How do we know stocks will outperform X long term if not by back-testing?

It's not possible to know the future.  Just make our best guess.

Our best guess doesn't have to come solely from back testing.

Business ownership (via equities, in this case) is fundamentally different than gold ownership.  While I can come up with circumstances where 100% gold beats 100% stocks, they're much less likely than vice-versa.

Where you choose your mix for your AA relies on a number of things (including the ever important psychology); backtesting is merely one of these things.  It shouldn't be the only thing, or you get an overfitted portfolio that's almost guaranteed to UNDERperform.
We are two former teachers who accumulated a bunch of real estate, retired at 29, and now travel the world full time with two kids.
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We (rarely) blog at AdventuringAlong.com. Check out our Now page to see what we're up to currently.

bryan

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Re: Portfolio Charts - The Golden Butterfly
« Reply #345 on: October 14, 2016, 07:33:12 PM »
good reply @arebelspy. Thanks.

Just trying to navigate around the dogma..

Daniel S

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Re: Portfolio Charts - The Golden Butterfly
« Reply #346 on: October 14, 2016, 10:36:56 PM »
A second (potentially more significant) reason is simply lack of demand for this info.

It's a shame there isn't more demand even from within the US. It looks like international studies provide very valuable stuff.

From this paper:
"From an international perspective, a 4 percent real withdrawal rate is surprisingly risky. Even with some overly optimistic assumptions, it would have only provided "safety" in 4 of the 17 countries. A fixed asset allocation split evenly between stocks and bonds would have failed at some point in all 17 countries."

I would really like to see back-test results for GB, especially for Japan. I'll keep trying to work something out to simulate it. 100% Nikkei would definitely not have been good in say 1985. That much is certain.

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2) < 5yr to FIRE, to maybe 2 years post FIRE.  These are the folks (me included) that start to really consider AA

I fit in here too. I'm grateful that there are some in 3) and 4) (I think) commenting here.

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Thanks again Tyler!!!

From me too

Daniel S

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Re: Portfolio Charts - The Golden Butterfly
« Reply #347 on: October 14, 2016, 10:49:21 PM »
Just look at the permanent portfolios slide the last 90 days.

I might be wrong, but I don't think any of the back-testing tools most commonly referenced necessarily show up bad intra-year draw-downs, which is something to be aware of.

Daniel S

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Re: Portfolio Charts - The Golden Butterfly
« Reply #348 on: October 14, 2016, 11:03:54 PM »
It's not possible to know the future.  Just make our best guess.

Our best guess doesn't have to come solely from back testing.

Business ownership (via equities, in this case) is fundamentally different than gold ownership.  While I can come up with circumstances where 100% gold beats 100% stocks, they're much less likely than vice-versa.

Where you choose your mix for your AA relies on a number of things (including the ever important psychology); backtesting is merely one of these things.  It shouldn't be the only thing, or you get an overfitted portfolio that's almost guaranteed to UNDERperform.

Thanks, I agree with all of this.

I'd say that my own current tendency towards a GB-like allocation isn't solely based on back-testing. It is more based on my belief that diversification is a good thing and will remain a good thing.


MustacheAndaHalf

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Re: Portfolio Charts - The Golden Butterfly
« Reply #349 on: October 15, 2016, 01:23:45 AM »
A couple people include 1972-1974 or say it's a mistake to leave it out.  Years before that U.S. currency was backed by gold.  During those years, the U.S. had just stopped backing the U.S. dollar by gold.  That one time transition off the "gold standard" can't happen twice.  If you use that data, how do you filter out the one time event that cannot repeat?