Author Topic: Portfolio Charts - The Golden Butterfly  (Read 275087 times)

mathjak107

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Re: Portfolio Charts - The Golden Butterfly
« Reply #450 on: October 25, 2016, 09:47:31 AM »
there is a whole lot of if's we can come up with . but the point is i think anyone who thinks at this point in time that the gb or pp are going to offer lower volatility going forward will be in for a surprise .

mimicking tight money conditions which is what we seem to be doing can be very painful for long bonds and gold .

i know i would not touch either model right now  , nor perhaps for a very long time .

it took rates 35 years to get this low , it can take decades back too .

the old buy and die portfolio's where you basically married them i think will not be the best way to go . my guess is you will need flexibility to stay ahead of the curve we will have going forward .

these are pretty unconventional times and unconventional times may call for unconventional investing . especially if you are retired and need to secure an income stream .

i know at some point we may add a base income from laddered spia's  to our investing . but the sweet spot for those will be close to 70 in my opinion . it is really to secure things better for my wife .

« Last Edit: October 25, 2016, 10:00:27 AM by mathjak107 »

Tyler

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Re: Portfolio Charts - The Golden Butterfly
« Reply #451 on: October 25, 2016, 10:08:35 AM »
well just look at the last 3 months . pp fell almost  6 or 7 %  as bond and gold investors got a sniff of the corner being turned . someone  seeking the low volatility of the pp after brexit lost 7% of their investment while 60/40 is up .. i would not trust back testing under today's conditions nor set a path i wasn't ready to alter .

One is free to dislike the PP and GB and to prefer other portfolios looking forward.  But if we're going to use recent short-term returns as a reference point, let's at least use the most accurate ones available.  From etfreplay.com:

Last 3 months
GB -1.8%
PP -2.1%
60/40 +0.1%

Since Brexit (June 23)
GB +1.4%
PP +1.1%
60/40 +0.8%

YTD
GB +9.7%
PP +9.8%
60/40 +5.2%
« Last Edit: October 25, 2016, 10:13:46 AM by Tyler »

mathjak107

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Re: Portfolio Charts - The Golden Butterfly
« Reply #452 on: October 25, 2016, 10:15:04 AM »
i think if you look at those high's after brexit the pp hit it fell a lot more .

of course if we include  the last few years the pp is  behind as well even with where it is today  . all that really counts is your own time frames and what it means to you .  .

looking at my  fidelity insight models ytd i show my income model up 5.60% beta = .36 /  my growth and income model up 6.25%  beta .69.

i run a mix of the 2 .   i think the last negative year was 2008 for either model . but the real test is going forward if rates continue to rise . anything with long term bonds will do well when rates go down so back testintg really does not mean to much .

the stagflation we seem to be hitting is not going to pan out well for us regardless but some things will do worse than others ,.



« Last Edit: October 25, 2016, 10:33:26 AM by mathjak107 »

arebelspy

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Re: Portfolio Charts - The Golden Butterfly
« Reply #453 on: October 26, 2016, 05:30:28 AM »
Mathjak, that's the second time in about a week that Tyler's called out your numbers, and they've just been flat out wrong.

Please do not spread misinformation.
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AdrianC

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Re: Portfolio Charts - The Golden Butterfly
« Reply #454 on: October 26, 2016, 07:03:53 AM »
I think it shows that if you are unlucky enough to FIRE at the start of a bad equity bear run, then you are much better off with GB, and vice-versa if you are lucky enough to FIRE at the start of an equity bull run.

Who knows, really?

It's been said before; the thing with an odd-ball allocation like the GB is knowing yourself- knowing that you can stick with it when everyone else is doing so much better. In 2013 when the S&P500 was up 32% the GB made less than 6%. If you can deal with that and are cognizant of the risks of holding long term treasuries*, gold and so much in cash, and believe in the back-tests, and believe in the one time a year rebalance (Why once? Why Dec 31st? What happens if the rebalance is a different date?)...

Has anyone ever seen the Golden Butterfly in any well regarded investment book? I've read investing books by Bogle, Bernstein, Ferri, Graham, Greenblatt, Malkiel, Swedroe, Swenson, Siegel, Shiller, Solin and others. How come none of these investing greats have noticed the Golden Butterfly?

*Warren Buffett on CNBC May 2015
"If I had an easy way, and a non-risk way, of shorting a whole lot of 20- or 30-year bonds, I'd do it," he said. "But that's not my game, and it can't be done in the kind of quantity that would make sense for us," he said. "But I think that bonds are very overvalued. I'll put it that way."
http://www.cnbc.com/2015/05/04/buffett-stocks-vs-bonds-dividends-vs-buybacks.html

arebelspy

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Re: Portfolio Charts - The Golden Butterfly
« Reply #455 on: October 26, 2016, 08:50:52 AM »
Has anyone ever seen the Golden Butterfly in any well regarded investment book? I've read investing books by Bogle, Bernstein, Ferri, Graham, Greenblatt, Malkiel, Swedroe, Swenson, Siegel, Shiller, Solin and others. How come none of these investing greats have noticed the Golden Butterfly?

Because it was created via backtesting by Tyler within the last two years.

The closest mainstream portfolio is the PP, which it's based off of.
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AlmstRtrd

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Re: Portfolio Charts - The Golden Butterfly
« Reply #456 on: October 26, 2016, 06:59:25 PM »
Has anyone ever seen the Golden Butterfly in any well regarded investment book? I've read investing books by Bogle, Bernstein, Ferri, Graham, Greenblatt, Malkiel, Swedroe, Swenson, Siegel, Shiller, Solin and others. How come none of these investing greats have noticed the Golden Butterfly?

Because it was created via backtesting by Tyler within the last two years.

The closest mainstream portfolio is the PP, which it's based off of.

Tyler can clarify if he cares to but I believe he was using the PP as an investment philosophy, and just trying to give it a bit of a slant toward prosperity which has been a more common scenario than rampant inflation or outright deflation. The backtesting merely confirmed that it's been a great mix of assets for the last 40+ years. Ray Dalio has certainly believed for a long time that gold and long duration bonds are good things to hold. For his basic take, have a look at 47:00 to 52:00 on this link:

https://www.youtube.com/watch?v=UQgD5yMScvs

arebelspy

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Re: Portfolio Charts - The Golden Butterfly
« Reply #457 on: October 26, 2016, 07:09:09 PM »
Sure. My point is that Tyler created it based off of the PP, and fairly recently.  You can find literature on the PP going back decades (Browne, originally).  The GB has nothing around it as it's new, created by a non-academic/well known personality.  Maybe some day.  :)
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Daniel S

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Re: Portfolio Charts - The Golden Butterfly
« Reply #458 on: October 26, 2016, 07:57:21 PM »
an odd-ball allocation like the GB

In comparison to 60/40, 33% of stock allocation is moved to gold. Stock and bond allocations are barbelled and end up having broader diversification. Why call this odd-ball? I'd call it strategic.
« Last Edit: October 26, 2016, 08:15:22 PM by MrNotRobot »

AlmstRtrd

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Re: Portfolio Charts - The Golden Butterfly
« Reply #459 on: October 27, 2016, 04:25:43 AM »
It's been said before; the thing with an odd-ball allocation like the GB is knowing yourself- knowing that you can stick with it when everyone else is doing so much better. In 2013 when the S&P500 was up 32% the GB made less than 6%. If you can deal with that and are cognizant of the risks of holding long term treasuries*, gold and so much in cash, and believe in the back-tests, and believe in the one time a year rebalance (Why once? Why Dec 31st? What happens if the rebalance is a different date?)...

*Warren Buffett on CNBC May 2015
"If I had an easy way, and a non-risk way, of shorting a whole lot of 20- or 30-year bonds, I'd do it," he said. "But that's not my game, and it can't be done in the kind of quantity that would make sense for us," he said. "But I think that bonds are very overvalued. I'll put it that way."
http://www.cnbc.com/2015/05/04/buffett-stocks-vs-bonds-dividends-vs-buybacks.html

Looks like that quote by Buffett was on 5/5/15 when the long bond was at 2.87%. With a bet against rates staying low, he would have made money for a couple of months until the long bond peaked at 3.25% in June of last year. Then he would have lost big time as it sunk to 2.11% earlier this year. Look, I think Buffett is great but low rates are the current reality all over the world. Japan and Europe are often talked about but even the rate on the Chinese 30-year bond is only 3.15% (while they are supposedly still growing at 6% - 7%, but I digress). The philosophy behind the PP is that one just doesn't know what is going to happen next. Buffett believes - as do most on here - that prosperity wins out over the long term. Fair enough.

Regarding your first point, it IS hard to see other portfolios outperforming whatever you are holding. I personally run a PP-style portfolio and, yes, it can be challenging to sit tight when stocks are soaring. It's a problem of having no one to commiserate with. But there are times when a PP or GB mix will outperform stock/bond mixes. Holding gold and cash have had a moderating effect on returns over time. The highs are lower and the lows are higher in general. That is the bargain that one has to be willing to make... I'll kinda just sit here in the middle and accept that the price to pay in exchange for missing the painful lows is to also miss the euphoric highs.

As for rebalancing, bands can be used with both the PP and GB. Some people choose to rebalance annually just so they don't spend much time paying attention to their portfolio. Or they can do so for tax reasons. Others will wait until a band has been breached (usually 20/30 or 15/35 for the PP). Historically, when a PP investor rebalances hasn't made a whole lot of difference in returns. Rebalancing is generally seen as lowering risk, and, yes, in the short term that can come at the expense of missing out on gains.

Ultimately though the GB or PP are just personal choices. As someone who is getting closer to retirement, I'm unwilling to put all my money in the stock basket. Others have the stomach (and wherewithal) to do so and ride out the lows. As Tyler is constantly pointing out, there are many different ways to invest effectively. One's choice should probably come down to temperament and age. Which roller coaster do I prefer to be on at this point?

mathjak107

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Re: Portfolio Charts - The Golden Butterfly
« Reply #460 on: October 27, 2016, 05:03:33 AM »
i am retired and don't have all my money in stocks  but i don't need to . i just need the money for eating the next 20-30 years in stocks .

but to me certain assets now make sense at this point and some don't .  the one that i think will be more harmful then needs to be is holding long term treasury's when the party is close to shifting . gold is a wild card too  if rates turn a corner .

in short i would advise caution here as the same assets that worked to help the pp and gb 
now have a huge chance of working against you with some powerful swings .

but everyone has to do what they feel right with . i am just voicing my opinion as to why i do not feel right with either the pp or gb and i would never drive today via looking in the rear view mirror  with all this back testing of what was .
« Last Edit: October 27, 2016, 05:06:00 AM by mathjak107 »

AdrianC

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Re: Portfolio Charts - The Golden Butterfly
« Reply #461 on: October 27, 2016, 06:47:21 AM »
Has anyone ever seen the Golden Butterfly in any well regarded investment book? I've read investing books by Bogle, Bernstein, Ferri, Graham, Greenblatt, Malkiel, Swedroe, Swenson, Siegel, Shiller, Solin and others. How come none of these investing greats have noticed the Golden Butterfly?

Because it was created via backtesting by Tyler within the last two years.

Well, quite!

Of course, I mean I haven't seen this asset allocation discussed by the investing greats. I just pulled Swenson's book from the library to re-check and he doesn't even mention precious metals as an investment.

Quote
The closest mainstream portfolio is the PP, which it's based off of.

Sure. The GB is 80% Permanent Portfolio and 20% Small Cap Value.

I did find a Bernstein article on the PP. It's a good read:

http://www.efficientfrontier.com/ef/0adhoc/harry.htm

"And therein lies the real problem with the TPP [Permanent Portfolio]: because of its huge tracking error relative to more conventional portfolios, it attracts assets and adherents during crises, then sheds them in better times. There's nothing wrong with Harry's portfolio, nothing at all, but there's everything wrong with his followers, who seem, on average, to chase performance the way dogs chase cars.

Investment success accrues not so much to the brilliant as to the disciplined, and the nature of the chosen strategy contributes mightily to this calculus. The very worst place an investor can find herself is, in the words of Mark Kritzman, "wrong and alone"; this is a near certainty at some point given the TPP's huge tracking error relative to that of the overall market portfolio, approximated by a 60/40 mix of stocks and bonds. Thus, it will be nigh-impossible for even the most disciplined investors to adhere to the TPP in the long run. (And lord knows, most investors are unable to stick to even a 60/40 portfolio.)"







mathjak107

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Re: Portfolio Charts - The Golden Butterfly
« Reply #462 on: October 27, 2016, 07:06:15 AM »
the main problem with the permanenant portfolio is it weights all asset classes evenly  between scenario's that have had as  an unequal chance of playing out as can be

AdrianC

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Re: Portfolio Charts - The Golden Butterfly
« Reply #463 on: October 27, 2016, 07:13:00 AM »
an odd-ball allocation like the GB

In comparison to 60/40, 33% of stock allocation is moved to gold. Stock and bond allocations are barbelled and end up having broader diversification. Why call this odd-ball? I'd call it strategic.

It's not a mainstream allocation. It's different. You won't find it in most investment guide books. Vanguard won't recommend it. It's oddball.

A thought on gold: My grandfather, if he'd ever had any, probably thought of gold as a store of value. My father might have inclinations that way, but as far as I know has a conventional stock/bond portfolio. I don't consider gold an investment at all and don't consider it a store of value. It's just a shiny metal with some industrial uses and some decorative uses. More gets dug up each year. Could the thinking on gold be changing? We don't know. We do know it's quite highly priced:

http://www.macrotrends.net/1333/historical-gold-prices-100-year-chart

AdrianC

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Re: Portfolio Charts - The Golden Butterfly
« Reply #464 on: October 27, 2016, 07:14:21 AM »
the main problem with the permanenant portfolio is it weights all asset classes evenly  between scenario's that have had as  an unequal chance of playing out as can be

The Golden Butterfly tilts towards prosperity (stocks). An argument in it's favor.

mathjak107

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Re: Portfolio Charts - The Golden Butterfly
« Reply #465 on: October 27, 2016, 07:24:04 AM »
it does , but the flip side is at this stage there may be far  to much weight in long term bonds and gold to repeat the past . both the gb and pp may end up with the worst of possibility's since they may prove to have  a more volatile downside if gold and  long term bonds pull together in the wrong direction.

 as well as the trying to mitigate the short term temporary swings may permanently reduce the long term gains too . kind of a double whammy ,which at this point does have pretty good odds of happening . i think since their highs a few months ago both gld and tlt fell about 7% . looks like TLT   bonds are down almost another 1.50 % today as i type , phew !  . the 10 year is at it's highest since june but of course the drop in the 10 year is only a fraction of what the long bonds saw .
« Last Edit: October 27, 2016, 08:25:23 AM by mathjak107 »

Daniel S

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Re: Portfolio Charts - The Golden Butterfly
« Reply #466 on: October 27, 2016, 07:26:54 AM »

I did find a Bernstein article on the PP. It's a good read:

http://www.efficientfrontier.com/ef/0adhoc/harry.htm

"And therein lies the real problem with the TPP [Permanent Portfolio]: because of its huge tracking error relative to more conventional portfolios, it attracts assets and adherents during crises, then sheds them in better times. There's nothing wrong with Harry's portfolio, nothing at all, but there's everything wrong with his followers, who seem, on average, to chase performance the way dogs chase cars.

Investment success accrues not so much to the brilliant as to the disciplined, and the nature of the chosen strategy contributes mightily to this calculus. The very worst place an investor can find herself is, in the words of Mark Kritzman, "wrong and alone"; this is a near certainty at some point given the TPP's huge tracking error relative to that of the overall market portfolio, approximated by a 60/40 mix of stocks and bonds. Thus, it will be nigh-impossible for even the most disciplined investors to adhere to the TPP in the long run. (And lord knows, most investors are unable to stick to even a 60/40 portfolio.)"


The article appears very positive about the PP, but not so positive about the followers of the imperfect PP-tracking PRPFX fund. I wonder where the hoards of followers came from and went to, and why?

I think it's already been acknowledged in this thread that the PP and GB are not suitable for those chasing maximum performance (based on returns).

Quote
A thought on gold: My grandfather, if he'd ever had any, probably thought of gold as a store of value. My father might have inclinations that way, but as far as I know has a conventional stock/bond portfolio. I don't consider gold an investment at all and don't consider it a store of value. It's just a shiny metal with some industrial uses and some decorative uses. More gets dug up each year. Could the thinking on gold be changing? We don't know. We do know it's quite highly priced

I don't think of gold as an investment either. I think of it as a place that people move their money to in times of turmoil, perceived or real. And that's why I want some in my portfolio. To me its only the price movement relative to market emotion that matter. It's tangible benefits or properties are of little relevance.
« Last Edit: October 27, 2016, 07:52:45 AM by MrNotRobot »

Daniel S

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Re: Portfolio Charts - The Golden Butterfly
« Reply #467 on: October 27, 2016, 07:40:08 AM »

It's not a mainstream allocation. It's different. You won't find it in most investment guide books

...not yet. It is new.

Quote
We do know it's quite highly priced:

http://www.macrotrends.net/1333/historical-gold-prices-100-year-chart

We also know that other asset classes are, or have been, highly priced.

AdrianC

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Re: Portfolio Charts - The Golden Butterfly
« Reply #468 on: October 27, 2016, 10:27:40 AM »

It's not a mainstream allocation. It's different. You won't find it in most investment guide books

...not yet. It is new.


It's 80% Permanent Portfolio and 20% Small Cap Value. I'm not sure how "new" that is. How many investment books include the Permanent Portfolio? I don't remember seeing it in the ones I've read.

Swenson writes about having assets in your portfolio that you are fairly sure you can stick with, no matter what, similar to the Bernstein article above. It's good advice. Gold and long term treasuries don't do it for me. The rest is fine, except that it's too much in cash. YMMV.

mathjak107

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Re: Portfolio Charts - The Golden Butterfly
« Reply #469 on: October 27, 2016, 10:48:03 AM »
the truth  is humans hate losing money more than they like making it and morningstar investor returns show this to be true regardless of aggressiveness .

investor returns as a group lag the funds the investors were in pretty much across the board . you would think more conservative funds do better as investors would be more inclined to stay the course . but that is not what the numbers show .

losing money has the same effect regardless .  you can be sure if long term bonds  and gold continue getting hammered there will be many pp users throwing in the towel .

gold getting hammered while bonds and stocks were soaring was not a problem . but just about every day when i look at the pp model i track it is going down and down .  after being up so nicely you can be sure  many users of the pp and balanced funds   will flee as they always do when the going gets tough .

most of us here have never been in a bear bond market . we only had some speed bumps in the long term downward trend the last 35 years . we have not really experienced a trend up that lasted for years in bonds in the 30 years i have been investing  . .
« Last Edit: October 27, 2016, 01:07:11 PM by mathjak107 »

k9

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Re: Portfolio Charts - The Golden Butterfly
« Reply #470 on: October 28, 2016, 06:22:01 AM »
It's 80% Permanent Portfolio and 20% Small Cap Value. I'm not sure how "new" that is. How many investment books include the Permanent Portfolio? I don't remember seeing it in the ones I've read.
Meb Faber mentions it in his last book (and considers it an outlier, as it strongly underperformed all other asset allocations he studied). I'm pretty sure Bernstein deals with it a lot in his "deep risk" book. Obviously, I'm not mentioning the recent "permanent portfolio" book by Craig Rowland and MediumTex. There are probably others, but, for sure, this is considered an unacademic asset allocation, as much as the 100% stocks allocation (which is often considered only as a theoretical extreme on the stock/bond continuum, but generally not something one should implement).

Well, it looks like this thread deals mainly with non-academic asset allocations, but this forum's crowd is also very non-traditional, so that makes sense. Remember the arguments an ordinary retiree should consider does often not apply to very early retirees (for instance, while annuities and considering SS make sense for someone retiring at 65, it does hardly make sense for someone retiring in his 40s). So maybe popularity of an AA in the average investment book is not a good metric for mustachians.

Tyler

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Re: Portfolio Charts - The Golden Butterfly
« Reply #471 on: October 28, 2016, 08:26:12 AM »
In modern academic terms, the Permanent Portfolio would qualify as a simple unleveraged "risk parity" portfolio.  So if you're looking for more information or an alternative approach to the same fundamental idea of balancing portfolio risk in all economic conditions, I would search for that term.

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Re: Portfolio Charts - The Golden Butterfly
« Reply #472 on: October 28, 2016, 08:38:43 AM »
I think it shows that if you are unlucky enough to FIRE at the start of a bad equity bear run, then you are much better off with GB, and vice-versa if you are lucky enough to FIRE at the start of an equity bull run.

Who knows, really?

It's been said before; the thing with an odd-ball allocation like the GB is knowing yourself- knowing that you can stick with it when everyone else is doing so much better. In 2013 when the S&P500 was up 32% the GB made less than 6%. If you can deal with that and are cognizant of the risks of holding long term treasuries*, gold and so much in cash, and believe in the back-tests, and believe in the one time a year rebalance (Why once? Why Dec 31st? What happens if the rebalance is a different date?)...

Has anyone ever seen the Golden Butterfly in any well regarded investment book? I've read investing books by Bogle, Bernstein, Ferri, Graham, Greenblatt, Malkiel, Swedroe, Swenson, Siegel, Shiller, Solin and others. How come none of these investing greats have noticed the Golden Butterfly?

*Warren Buffett on CNBC May 2015
"If I had an easy way, and a non-risk way, of shorting a whole lot of 20- or 30-year bonds, I'd do it," he said. "But that's not my game, and it can't be done in the kind of quantity that would make sense for us," he said. "But I think that bonds are very overvalued. I'll put it that way."
http://www.cnbc.com/2015/05/04/buffett-stocks-vs-bonds-dividends-vs-buybacks.html


Thanks for posting this.  I hadn't seen it.

robartsd

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Re: Portfolio Charts - The Golden Butterfly
« Reply #473 on: October 28, 2016, 02:36:49 PM »
Lots of talk here about the gold portion of the Golden Butterfly. I think gold has pretty much performed as expected - long term match inflation, short term negative correlation with stocks. I fully expect it to continue this performance because I attribute the inflation tracking to intrinsic value and the negative correlation with emotional investor reactions. For the accumulating investor, I see a small allocation of gold as gambling with your dry powder where the odds are in your favor. I think the Golden Butterfly holds too much gold, but I think it can be a very useful asset class.

My big concern in the Golden Butterfly is the allocation to long term treasuries. A few have pointed out the trend of long term rates declining over most of the back test period. This trend obviously can't be sustained. I'm not sure how much this adds to the GB performance, but going forward I see the LLT portion as more of a drag than it has been in the past.

Thanks Tyler for the tools you've created on portfoliocharts.com.

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Re: Portfolio Charts - The Golden Butterfly
« Reply #474 on: October 28, 2016, 06:25:19 PM »
My big concern in the Golden Butterfly is the allocation to long term treasuries. A few have pointed out the trend of long term rates declining over most of the back test period. This trend obviously can't be sustained. I'm not sure how much this adds to the GB performance, but going forward I see the LLT portion as more of a drag than it has been in the past.

Yeah.

Everyone has their own part of the portfolio they dislike.  :P

Tweaking the PP like that sort of defeats the purpose.  You buy into the philosophy or you don't. And often, even when you do, then you start tweaking and go down the rabbit hole... Then you end up with the GB.  Then you decide LTTs are no good...

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Classical_Liberal

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Re: Portfolio Charts - The Golden Butterfly
« Reply #475 on: October 28, 2016, 08:47:14 PM »
In modern academic terms, the Permanent Portfolio would qualify as a simple unleveraged "risk parity" portfolio.  So if you're looking for more information or an alternative approach to the same fundamental idea of balancing portfolio risk in all economic conditions, I would search for that term.

This is somewhat of a dangerous rabbit hole to enter, as it's one I jumped in when first considering a PP/GB-like portfolio.  Risk parity is highly dependant on what one is considering to be the risk... Volatility, varying macroeconomic conditions, or something else? 

Different risks can be correlated and also have a higher or lower chance, historically speaking, of actually happening (ie which happens more often for US equities, bull or bear markets?).  So all things being (not) equal, this must be considered as well when determining what true parity is.  Frankly, the complexity goes past my pay grade.

Tyler

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Re: Portfolio Charts - The Golden Butterfly
« Reply #476 on: October 28, 2016, 10:17:34 PM »
Frankly, the complexity goes past my pay grade.

Very true.  Mine, too.  ;)

Yes, many risk parity analyses quickly degenerate into increasing levels of complexity that I don't recommend.  However, read a high-level overview of the Bridgewater All-Weather fund (one of the largest hedge funds in the world) and how the assets are selected for the four economic "seasons" (growth, recession, inflation, and deflation) and that should sound very familiar to anyone who has read about the Permanent Portfolio.

I'm definitely not recommending that anyone dive into the risk parity deep end.  I only meant to offer an example of the new term used for the classic idea for those who struggle to see how the core Permanent Portfolio concept is still very relevant among modern academics and fund managers. 
« Last Edit: October 28, 2016, 11:07:18 PM by Tyler »

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Re: Portfolio Charts - The Golden Butterfly
« Reply #477 on: October 29, 2016, 04:31:24 AM »
Well, this thread has been quite the ride.  I think we've reached the point of re-hashing a lot of the same points about whether diversifying into uncorrelated assets is good or bad, and whether the GB, PP, and other 'balanced' portfolios backtest well simply because they were built through data mining.  Here's where I was on all this back on page 4, and it still sums up my views.  Basically, if history is any guide, a portfolio that is diversified across uncorrelated assets is more stable than a simple US large cap-heavy portfolio, and that stability produces a higher safe withdrawal rate over long periods of time.  Just use broad indices instead of cherry-picking boutique assets that happen to backtest particularly well.



Much of the discussion in this thread focuses on the apparent fact that the GB is the result of data mining, therefore it can't be expected to outperform in the future as it has in the past.  There have been various attempts to substitute other assets to prove this point, but it seems that those substitutions have been cherry-picked to make the GB look bad.  If we substitute in the closest appropriate index for each data-mined asset, that should remove the data mining effect without being biased toward a particular point of view.

Let's divide the stock allocation among US, international, and all of the available market caps.  So that 40% of the portfolio becomes 8% each in LCB, MCB, SCB, ID, and EM.  Why not just use the TSM and TI?  Because those are cap weighted, and thus biased heavily toward large caps.

The 40% in treasuries all goes in TBM.  No issues with cap weighting in that index.

The 20% gold allocation goes in commodities instead.

Using Tyler's calculators, this portfolio produced a 40-yr SWR of about 5.2%.  Lower than the GB's 5.9%, but still considerably better than the 3.9% produced by TSM, the 4% produced by 60/40, and the 4.4% produced by a typical 3-fund portfolio (equal parts TSM, TI, and TBM).

Long term CAGR was 5.7%, slightly lower than GB's 5.8%.  It was more volatile than the GB, with a worst down year of -23.4% (vs. -8.8 for GB) and longest drawdown of 4 yrs (vs. 2).  Interestingly, the worst year was about the same as the 60/40 and 3-fund portfolios, but the longest drawdown for 60/40 and 3-fund was much longer (10 yrs for both).  TSM was the most volatile of all with a -37% worst year and 13 yr draw down.

So it appears that data mining contributed some to the GB's attractive return/volatility profile.  But the more generic diversified portfolio was still less volatile and produced a higher withdrawal rate than 100% TSM, 3 fund, or 60/40.

So in my mind, the GB does have some data mining artifacts that aren't likely to be repeated, but there is something to the diversification effect.  Sure, no one knows for sure whether that effect will be repeated going forward, but given that it occurred using broad indexes in place of cherry-picked assets indicates that something was going on besides data mining.
« Last Edit: October 29, 2016, 04:33:23 AM by Monkey Uncle »

mathjak107

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Re: Portfolio Charts - The Golden Butterfly
« Reply #478 on: October 29, 2016, 07:58:21 AM »
not all of the above would be true . a 50/50 mix of equity and bonds had a higher success rate  than 100% equity out to 30 years at 4%  .  going out longer to 40  years  100% stocks did better . also above a 4% draw 100% equity's did better again . diversifying in to assets with less growth potential  usually ends up with both a lower draw and lower success rates .

interesting too was the fact the longer bond maturity's went out the lower the draw rate . bengan used 5 year treasury's and got a 4.16% draw rate clearing all worst case scenarious . the trinity used longer term corporates and over the same time frame did a bit worse and 4% did not quite make it through all time frames .

so being diversified does not always produce a higher draw than 100% equity's would have nor higher success rates ..


« Last Edit: October 29, 2016, 08:34:23 AM by mathjak107 »

Daniel S

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Re: Portfolio Charts - The Golden Butterfly
« Reply #479 on: October 29, 2016, 09:38:30 AM »
@mathjak107

The problem with your table is does not compare by diversification, only by percentage allocation. Every row is composed of only SP500 stocks and/or intermediate bonds.

I see your point about retirement duration affecting draw-down, but I don't think it relates to the same point that Monkey Uncle was making, which was questioning whether cherry picking assets for improved back-testing results was a valid criticism of GB.

My own final conclusion is that in terms of lower volatility and higher sustainable withdrawal rates it pays well to diversify within and across asset classes, and that some amount of gold in your portfolio is very likely to reduce draw-downs when globally significant events occur.

If I were to adjust anything in GB, adding international diversification would be my highest priority.

mathjak107

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Re: Portfolio Charts - The Golden Butterfly
« Reply #480 on: October 29, 2016, 11:15:49 AM »
anything you diversify in to the short term , unless you are a good market timer that has proven to be lessor of a performer over the long haul will only take away not add to draw rate and success rate .


over the long haul spanning decades  gold and even long term bonds have never equaled stocks returns . so anything we do to mitigate temporary dips in the short term will always permanently hurt long term performance and success rate  .

the problem is as long as opposing assets oppose you will mitigate but if like now opposing assets team up and move together you will get more volatility .

gold and bonds have both started moving together with both gld and tlt down a lot since their highs .

in the end what you may be buying is a pile of very volatile assets that hurt more than help .

time will tell , but i would not automatically think in the new normal that any back testing in these portfolio's with powerful opposing asset classes  means low volatility and the performance you get cherry picking time frames will play out ..

 
« Last Edit: October 29, 2016, 11:19:36 AM by mathjak107 »

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Re: Portfolio Charts - The Golden Butterfly
« Reply #481 on: October 29, 2016, 07:00:23 PM »
anything you diversify in to the short term , unless you are a good market timer that has proven to be lessor of a performer over the long haul will only take away not add to draw rate and success rate .

The information you posted two posts up directly contradicts this statement.  Go play around with Tyler's tools...you'll see there are numerous diversification scenarios that prove this statement false.

mathjak107

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Re: Portfolio Charts - The Golden Butterfly
« Reply #482 on: October 30, 2016, 02:32:22 AM »
actually it doesn't . 50/50 at 30 years  4% was an out flier . a 50/50 mix just happened to be the only allocation that never lost money in a 10 or 20 year period .

it did over the 15 year .  so there is one particular draw and time frame that happened to beat 100% equity . which by the way should be diversified in to all market segments

all other time frames and draw rates using bonds did not do as well as to go futher out or draw more .


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Re: Portfolio Charts - The Golden Butterfly
« Reply #483 on: October 30, 2016, 03:46:53 AM »
actually it doesn't . 50/50 at 30 years  4% was an out flier . a 50/50 mix just happened to be the only allocation that never lost money in a 10 or 20 year period .

it did over the 15 year .  so there is one particular draw and time frame that happened to beat 100% equity . which by the way should be diversified in to all market segments

all other time frames and draw rates using bonds did not do as well as to go futher out or draw more .

Please go back and re-read your own table.  At a 4% WR, 75% beat 100% for all time periods from 25 through 40 years.  50% beat 100% for the 25, 30, and 35 year time periods.

But as MrNotRobot noted, the table you posted doesn't really address diversified portfolios, as it only consider various mixes of US large-cap stocks and intermediate government bonds.  Before you make more unsubstantiated statements, please go to Tyler's web site (or portfolio visualizer, or something similar) and evaluate portfolios that are truly diversified across multiple asset classes.

mathjak107

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Re: Portfolio Charts - The Golden Butterfly
« Reply #484 on: October 30, 2016, 04:27:58 AM »
interesting if we switch from intermediate  gov't to longer term  corporate bonds results are worse for 30 years with 50/50 than 100% equity


Monkey Uncle

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Re: Portfolio Charts - The Golden Butterfly
« Reply #485 on: October 30, 2016, 08:31:23 AM »
interesting if we switch from intermediate  gov't to longer term  corporate bonds results are worse for 30 years with 50/50 than 100% equity



And 75/25 beat 100% at both a 4 and 5% WR over 30 years.  So the data that you provided does not support your statement that "anything you diversify in to the short term , unless you are a good market timer that has proven to be lessor of a performer over the long haul will only take away not add to draw rate and success rate."

And you keep missing the point of diversification by posting data that is just a varying mix of two indices.

mathjak107

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Re: Portfolio Charts - The Golden Butterfly
« Reply #486 on: October 30, 2016, 08:35:02 AM »
looking at the very few times 100% equity's was not the highest success rate would you want to bet against those odds if you had to ?  i know i wouldn't . not that i would be 100% in equity's at retirement but if we had to pick i know which i would choose .

well time will tell us who is right . so far since rates on bonds shifted about 3 months ago    bonds , especially long term ones  and gold have gotten pummeled .

both TLT and gld are off about 6-7 % since hitting there recent highs .  i think this is just the beginning . i think they will just weigh to heavy on equity's as equity's are trying to squeak out gains from here .

profits are falling and are lower than last year and odds are rates increasing will deteriorate that further .

we will likely resemble a tight money scenario or stagflation for a while . not sure how long but nothing i would want to bet gold and long term bonds on at this point . i do not think the gb or pp will do so well .

but time will tell us .
« Last Edit: October 30, 2016, 08:44:56 AM by mathjak107 »

Monkey Uncle

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Re: Portfolio Charts - The Golden Butterfly
« Reply #487 on: October 30, 2016, 11:38:12 AM »
looking at the very few times 100% equity's was not the highest success rate would you want to bet against those odds if you had to ?  i know i wouldn't . not that i would be 100% in equity's at retirement but if we had to pick i know which i would choose .

well time will tell us who is right . so far since rates on bonds shifted about 3 months ago    bonds , especially long term ones  and gold have gotten pummeled .

both TLT and gld are off about 6-7 % since hitting there recent highs .  i think this is just the beginning . i think they will just weigh to heavy on equity's as equity's are trying to squeak out gains from here .

profits are falling and are lower than last year and odds are rates increasing will deteriorate that further .

we will likely resemble a tight money scenario or stagflation for a while . not sure how long but nothing i would want to bet gold and long term bonds on at this point . i do not think the gb or pp will do so well .

but time will tell us .

I think we can agree that neither of us wants to be in the GB or PP, although for different reasons.  You don't like those portfolios because you think future conditions will not favor gold and long-term treasuries.  You may be right about that, but I generally shy away from trying to predict the future.  I don't like GB and PP because they were created by data mining, which leads to heavy concentration in a few narrow assets that happened to have performed particularly well over the backtesting period.

But you are simply wrong about 100% equities having the highest success rate.  Go run the numbers on cFiresim - it will take you about a minute to use the default $1,000,000 portfolio/4% spend option to run simulations of 100%, 75/25, and 60/40 portfolios.  I'll save you the trouble - 75/25 is the winner by a small margin, and 60/40 was essentially equivalent to 100%.

And that's just a simple US equities/total bond split.  Go over to portfolio charts where you can throw a bunch of other asset classes into the mix.  I'll save you the trouble again - see my post from yesterday - 60/40 did a little better than 100% US equities, the three fund portfolio (US equities, international equities, and bonds) did better still, and a more broadly diversified portfolio did even better, with a SWR that beat 100% equities by 1.3%. 

Now one could argue that you shouldn't bet on history repeating itself, and I think that is a valid argument when you are talking about short time frames or specific assets like gold and long-term treasuries.  But if multi-decadal historical patterns in broad asset classes have no value, then we are all just pissing in the wind and we may as well allocate our portfolios randomly.

steveo

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Re: Portfolio Charts - The Golden Butterfly
« Reply #488 on: October 30, 2016, 03:02:05 PM »
I generally shy away from trying to predict the future.  I don't like GB and PP because they were created by data mining, which leads to heavy concentration in a few narrow assets that happened to have performed particularly well over the backtesting period.

I like the idea of following certain principles:-

1. You need a reasonable level of equities in your portfolio because they tend to outperform other asset classes.
2. A diversified asset portfolio should lead to more stable returns over time (this may not be the next 3 months but it should hold true over the long term). This should increase your effective SWR and lower the chances of stressing because your portfolio is getting hammered. Your portfolio shouldn't in theory get hammered as much.

I also don't like data mining as a method to derive a portfolio but maybe it is a valid approach. No one can predict the future.

k9

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Re: Portfolio Charts - The Golden Butterfly
« Reply #489 on: October 31, 2016, 01:13:02 PM »
a 50/50 mix just happened to be the only allocation that never lost money in a 10 or 20 year period .
This is just plain wrong. Could you please stop propagating false information to support your point of view?

mathjak107

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Re: Portfolio Charts - The Golden Butterfly
« Reply #490 on: October 31, 2016, 01:37:52 PM »
really , well double check the results yourself using the same investments .







http://awealthofcommonsense.com/2014/04/whats-worst-10-year-return-5050-stockbond-portfolio/
« Last Edit: October 31, 2016, 01:41:48 PM by mathjak107 »

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Re: Portfolio Charts - The Golden Butterfly
« Reply #491 on: November 01, 2016, 03:59:05 AM »
1) Those are nominal.  One should use real returns, IMO.

He posted real returns here, which are, in fact, negative:
http://awealthofcommonsense.com/2014/04/worst-5050-stockbond-real-returns/

2) Even if we say, okay, nominal returns, that doesn't justify this statement, specifically the bold part:

Quote
a 50/50 mix just happened to be the only allocation that never lost money in a 10 or 20 year period .

You're telling me a 49/51 and a 51/49 allocation both lost money (nominally) but a 50/50 didn't?

The most extraordinary part of your claim was that it was the only one not to do that.  The second most extraordinary part was the not losing money, and that came with a caveat that it did lose money in real terms.
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mathjak107

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Re: Portfolio Charts - The Golden Butterfly
« Reply #492 on: November 01, 2016, 04:47:53 AM »
correct ,no claims can be made for real returns . i only said that about 50/50 because i do not have data to support the other allocations close to it . but once you get to 60/40 in nominal terms i don't think you can make that claim .

arebelspy

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Re: Portfolio Charts - The Golden Butterfly
« Reply #493 on: November 01, 2016, 04:50:58 AM »
i only said that about 50/50 because i do not have data to support the other allocations

Then why did you say 50/50 was the only one, if you have no data on the others?  =/

From earlier:
Mathjak, that's the second time in about a week that Tyler's called out your numbers, and they've just been flat out wrong.

Please do not spread misinformation.

That's number 3.
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Re: Portfolio Charts - The Golden Butterfly
« Reply #494 on: November 01, 2016, 05:46:58 AM »
mathjak107 - Reading the recent posts here, you seem to be spamming until you draw the conversation onto your own mistakes.  That's a pattern here, of you posting incorrect figures and pure speculation passed along as fact.  I would classify you as a spammer, because you do not produce valuable posts and insist on posting often.

I say this partly to reinforce the moderator who is warning you to stop it.  What I see here is lots of people correcting your false statements - which is the same interaction I had with you some time back.   Would you put more thought in your posts if you could only post once a day?

mathjak107

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Re: Portfolio Charts - The Golden Butterfly
« Reply #495 on: November 01, 2016, 06:42:17 AM »
the data is fact , i posted it . 50/50 has not lost money in any 10 year or 20 year period in nominal terms . .if that is spamming to  you ,good luck  believing your own bull-sh*t .

i have called tyler out quite a few times as well  in other forums  in his not comparing apples to apples trying to use pre 1975 dates for portfolio's  with gold  as well as making claims about certain portfolio's having a higher safe withdrawal rate when he did not consider the balance's left over initially as well as the fact he was not originally comparing apple to apple time frames when comparing safe withdrawal rates . all of that led to tyler improving certain things he now shows .

but that is going to happen as we all only know what we know and we  never consider the aspects to things we don't know . that is the beauty of forums because there is information passed  that we all don't consider .
not drinking the koolaid at times is certainly not spamming

« Last Edit: November 01, 2016, 06:50:08 AM by mathjak107 »

k9

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Re: Portfolio Charts - The Golden Butterfly
« Reply #496 on: November 01, 2016, 05:23:15 PM »
If we're talking nominal returns, then there's an asset allocation that never lost any money, no matter what the time frame, from one day to a hundred years : pure cash. Yep, just plain old banknotes. Just to remind you that "not losing facial value" is a useless metric.

arebelspy

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Re: Portfolio Charts - The Golden Butterfly
« Reply #497 on: November 01, 2016, 05:33:04 PM »
If we're talking nominal returns, then there's an asset allocation that never lost any money, no matter what the time frame, from one day to a hundred years : pure cash. Yep, just plain old banknotes. Just to remind you that "not losing facial value" is a useless metric.

Well, sometimes currency stops being accepted, and goes to a value of $0.

But your point is a good one.  Real returns > nominal, for this very reason.
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Re: Portfolio Charts - The Golden Butterfly
« Reply #498 on: November 24, 2016, 12:22:14 AM »
Investors who use the golden butterfly (all ten of them (-; ) must be feeling pretty smug right now. Permanent portfolio investors have been having a tough time the past two weeks as gold and long term bonds get hammered at the same time. Meanwhile, the small cap value slice in the GB has been soaring.

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Re: Portfolio Charts - The Golden Butterfly
« Reply #499 on: November 24, 2016, 07:01:54 AM »
Investors who use the golden butterfly (all ten of them (-; ) must be feeling pretty smug right now. Permanent portfolio investors have been having a tough time the past two weeks as gold and long term bonds get hammered at the same time. Meanwhile, the small cap value slice in the GB has been soaring.

The 100% equities folks are also feeling pretty good. :)