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Learning, Sharing, and Teaching => Investor Alley => Topic started by: yoda34 on April 12, 2016, 12:12:09 PM

Title: Portfolio Charts - The Golden Butterfly
Post by: yoda34 on April 12, 2016, 12:12:09 PM
https://portfoliocharts.com/portfolio/golden-butterfly/ (https://portfoliocharts.com/portfolio/golden-butterfly/)

Have any of you looked at the Golden Butterfly over at Portfolio Charts? It's intriguing me....

It goes against most of my investing philosophy, is heavy on treasuries and gold, and yet has pretty decent returns with a much lower std than the market as measured by many of the benchmarks.

I've run independent back test with CapIQ and other data sets using different start years and it is remarkably consistent over the past 15-20 years.

Because of the lower volatility it supports a little bit higher SWR - which has all kinds of benefits for FIRE.

Just wondering if other folks have looked at it, what your thoughts are, and if anyone is actually investing using this allocation.
Title: Re: Portfolio Charts - The Golden Butterfly
Post by: wienerdog on April 12, 2016, 04:22:55 PM
I think Tyler created that portfolio as he is a fan of the Permanent Portfolio and was trying something a little different but spun off of the PP.  You can read his commentary below.  The gold portion doesn't sit well with people here so you probably won't find anyone using it.

https://portfoliocharts.com/2015/09/22/catching-a-golden-butterfly/

The portfolio charts website isn't is an excellent tool and we are lucky to have people like Tyler here.  I am sure he will chime in.

Edit: Changed isn't to is.  Sorry Tyler.  LOL
Title: Re: Portfolio Charts - The Golden Butterfly
Post by: workathomedad on April 12, 2016, 05:48:01 PM
Portfolio Charts is awesome!

Tyler independently verified how awesome the Permanent Portfolio / Golden Butterfly is with his Portfolio Finder tool:

https://portfoliocharts.com/portfolio/portfolio-finder/

You punch in a desired historical CAGR and it gives you the portfolio with the lowest volatility / risk, which is *exactly* what you, as an early retiree, need and want! Lower volatility / drawdowns translates directly into a higher Safe Withdrawal Rate over longer terms.

Almost any number you punch in <10% independently comes up with a "Golden Butterfly" type portfolio.

I didn't know it was a forum member's website. Thank you for the amazing tools!
Title: Re: Portfolio Charts - The Golden Butterfly
Post by: AdrianC on April 12, 2016, 06:44:31 PM
You punch in a desired historical CAGR and it gives you the portfolio with the lowest volatility / risk, which is *exactly* what you, as an early retiree, need and want! Lower volatility / drawdowns translates directly into a higher Safe Withdrawal Rate over longer terms.

Portfolio charts is very good and Tyler has done excellent work. However...just remember that we are looking at a back-test.

"Past Performance is Not Necessarily Indicative of Future Results".




Title: Re: Portfolio Charts - The Golden Butterfly
Post by: Tyler on April 12, 2016, 07:37:12 PM
I'm glad you guys find the site helpful!

Wienerdog is correct -- I've been a Permanent Portfolio fan for a while, and the Golden Butterfly is an offshoot of the same theory.  Anyone interested in the Golden Butterfly might also be interested in reading the books supporting the Permanent Portfolio (https://portfoliocharts.com/portfolio/permanent-portfolio/).  While past performance does not guarantee future returns, it does verify that the GB has worked as designed and done quite well in all types of economic conditions including ones where other portfolios have really struggled.

Also, Workathomedad correctly observes that the specific funds are up for personal interpretation.  There's a big cluster of similar portfolios around the Golden Butterfly in the Portfolio Finder that have two parts stocks, two parts bonds, and one part commodities/gold/REITs.  So don't let one asset you struggle with (most commonly gold or SCV) deter you from the concept altogether.  Buy the strategy, not the assets.   

I recently pulled the trigger and transitioned from the Permanent Portfolio to a slightly modified Golden Butterfly.  The only real difference is that I chose a combination of total stock market and small cap blend over large cap blend and small cap value (I already owned VTI, and I liked VB as its natural complement).  I believe that different people require different portfolios, so I'm not at all suggesting that everyone should do the same.  I'm happy to be the guinea pig and report back how it goes. 
Title: Re: Portfolio Charts - The Golden Butterfly
Post by: Interest Compound on April 12, 2016, 08:33:44 PM
It goes against most of my investing philosophy, is heavy on treasuries and gold, and yet has pretty decent returns with a much lower std than the market as measured by many of the benchmarks.

...

Because of the lower volatility it supports a little bit higher SWR - which has all kinds of benefits for FIRE.

Tyler. This is why you got so much flak in your other thread. (http://forum.mrmoneymustache.com/investor-alley/the-case-against-100-stocks-%28and-what-to-do-about-it%29/50/) This kind of information lures financial amateurs in like a moth to the flame. Your Golden Butterfly page has quotes like, "match or beat the total stock market in long-term real CAGR with fewer stocks and lower volatility". What could possibly go wrong? While you're experienced enough to understand the inherent risks, the vast majority of people reading this information simply aren't.

Yoda34, do you understand the inherent risks of Retiring Early with a portfolio of 40% stocks, 40% treasuries, and 20% a single commodity?

Do you?

I'm genuinely not sure what you can do about this Tyler, as the disclaimers on your site are pretty clear. I just don't think your readers can responsibly handle the information you're giving them.
Title: Re: Portfolio Charts - The Golden Butterfly
Post by: JZinCO on April 12, 2016, 09:19:48 PM
I give Tyler the utmost respect for the caution he advises.

In my mind his entire website is not an optimization tool but an uncertainty tool. A user mining the data to find 'the best' portfolio is no more edified than one that picks the mutual fund with the highest YTD return in their 401K.

He presents the data in a way that makes the investor face uncertainty head on, but instead of leaving with paralysis the user can use Tyler's tools to understand the distribution of outcomes from a strategy in order to improve his/her investment planning and really understand what risk means. I think Tyler's intent comes across with every single commentary post so I cannot put an ounce of blame on his shoulders should someone misuse his tools.

edit: Ironically I follow the 'ultimate' portfolio of which Merriman, sensu Tyler, 'tries to sell you a one-size-fits-all portfolio' and is 'probably doing...a disservice'. I'm more comfortable holding the position now that I've ran through Tyler's tools (while still acknowledging Tyler doesn't elucidate all uncertainty) as opposed to just reading a two-page summary from Merriman. Not because it allowed me to confirm Merriman's claims but because I can understand the distribution and probability of potential realities during working and retired phases rather than just an one estimate of CAGR and standard deviation.
Title: Re: Portfolio Charts - The Golden Butterfly
Post by: Tyler on April 12, 2016, 10:27:15 PM
Tyler. This is why you got so much flak in your other thread. This kind of information lures financial amateurs in like a moth to the flame. Your Golden Butterfly page has quotes like, "match or beat the total stock market in long-term real CAGR with fewer stocks and lower volatility". What could possibly go wrong? While you're experienced enough to understand the inherent risks, the vast majority of people reading this information simply aren't.

Yoda34, do you understand the inherent risks of Retiring Early with a portfolio of 40% stocks, 40% treasuries, and 20% a single commodity?

Do you?

I'm genuinely not sure what you can do about this Tyler, as the disclaimers on your site are pretty clear. I just don't think your readers can responsibly handle the information you're giving them.

I hear what you're saying, but I give people more credit than that.  If factual data that focuses on the big picture gets people excited about learning more about asset allocation, I consider that a success.   As JZinCO points out, a major goal of the site is to help visualize what uncertainty and risk really look like so that people can compare alternatives and make educated decisions. 

FWIW, I'm personally comfortable enough with the Golden Butterfly as an early retirement portfolio that I'm investing that way with my own money.  YMMV.

Title: Re: Portfolio Charts - The Golden Butterfly
Post by: Interest Compound on April 13, 2016, 12:01:43 AM
I've run independent back test with CapIQ and other data sets using different start years and it is remarkably consistent over the past 15-20 years.

Of course it has been remarkably consistent. Why else do you think it's on your radar? Why else do you think this portfolio, out of the almost infinite possibilities of portfolios, caught your eye? A specific portfolio being remarkably consistent should not surprise you. If it wasn't this one, it'd be some other random portfolio. With a large enough dataset, it is expected to find outliers, but don't be confused...that doesn't mean anything can be learned from these outliers.

Here's a fun example. Imagine yourself in 1972. Doing this same analysis. You're about to choose a similar slice-n-dice portfolio that looked remarkably consistent over the previous ~60 years (1915-1972).

 

Now for some data (last 100 years):

The Golden Butterfly is 40% bonds. Let's see how bonds were doing in the years before 1972:

(https://i.sli.mg/kCeGAG.png)

The Golden Butterfly is 20% gold. Let's see how gold was doing in the years before 1972:

(https://i.sli.mg/CVV57W.png)

Do you believe the 1972 version of you would've chosen these two assets for 60% of your Early Retirement portfolio?

I'm not sure what you'll conclude from this example, but to me it's quite clear. There is essentially 0 chance I would've chosen this portfolio, so nothing can be learned from studying an outlier like The Golden Butterfly.
Title: Re: Portfolio Charts - The Golden Butterfly
Post by: MustacheAndaHalf on April 13, 2016, 12:15:46 AM
Gold should not be back tested in 1973-1974 without a large disclaimer: it tripled in those years, earning over 70% per year.  Back testing assumes the past did not have one off events, but does anyone expect gold to triple again in a 2 year period?

How much did gold beat inflation 1972-2015?  About 2.9% ("all the available data", or 44 years)
How much did gold beat inflation 1976-2015?  About 1.0% ("the last 40 years")
https://www.portfoliovisualizer.com/backtest-asset-class-allocation
Title: Re: Portfolio Charts - The Golden Butterfly
Post by: yoda34 on April 13, 2016, 07:20:51 AM
I've run independent back test with CapIQ and other data sets using different start years and it is remarkably consistent over the past 15-20 years.

Of course it has been remarkably consistent. Why else do you think it's on your radar? Why else do you think this portfolio, out of the almost infinite possibilities of portfolios, caught your eye? A specific portfolio being remarkably consistent should not surprise you. If it wasn't this one, it'd be some other random portfolio. With a large enough dataset, it is expected to find outliers, but don't be confused...that doesn't mean anything can be learned from these outliers.

Here's a fun example. Imagine yourself in 1972. Doing this same analysis. You're about to choose a similar slice-n-dice portfolio that looked remarkably consistent over the previous ~60 years (1915-1972).

  • What kind of portfolio do you think you would've ended up with? Do you think it would've looked anything like The Golden Butterfly?
  • How would that have done over the next 40 years?
  • The 1972 version of yourself had access to millions of different portfolios, what are the chances you would've been successful if they employed this same logic?
 

Now for some data (last 100 years):

The Golden Butterfly is 40% bonds. Let's see how bonds were doing in the years before 1972:

(https://i.sli.mg/kCeGAG.png)

The Golden Butterfly is 20% gold. Let's see how gold was doing in the years before 1972:

(https://i.sli.mg/CVV57W.png)

Do you believe the 1972 version of you would've chosen these two assets for 60% of your Early Retirement portfolio?

I'm not sure what you'll conclude from this example, but to me it's quite clear. There is essentially 0 chance I would've chosen this portfolio, so nothing can be learned from studying an outlier like The Golden Butterfly.


Wow.  Not sure where to begin with that. First, I don't see anywhere that I said I was putting my entire FIRE Portfolio into that allocation (or even a single dollar). I simply asked what other members thought of that allocation and thoughts. The point of this forum is to discuss these things, correct? I didn't realize that certain topics were censored or would generate such strong response.

A couple of thoughts about back testing. We all know that past results don't make any kind of performance guarantee on the future, but people seem to forget that it works both ways. A common mistake in backtesting (beyond the normal survivor bias, mispricing etc) is the tendency to forget that the economic environment, political environment etc was vastly different in the past than today. Let's take your Gold chart above for a few moments (bear in mind that I hate gold as an asset and most likely will never put any significant portion of my portfolio in gold). Does how Gold performed in the 1920s have any bearing on gold today? Are there perhaps massive changes in the way we tie gold into our financial system that could change the way it performs in the market. Are there perhaps not several international agreements, wars, and perhaps a shock in1971 that totally changed the way gold performs in the market?

It's the basic problem with backtesting. Too little and you don't have enough information to be meaningful at all, too long (especially with a single asset commodity such as gold) and you include data that is nonsensical in the context in which you are trying to review.

Finally, I appreciate your concern about all the amateurs on the site but I think I'll be just fine. I passed the 7 and the 66, I've worked in the industry for several years, and yes I know how to calculate a CAGR appropriately
Title: Re: Portfolio Charts - The Golden Butterfly
Post by: Tyler on April 13, 2016, 07:33:03 AM
I'm not sure what you'll conclude from this example, but to me it's quite clear. There is essentially 0 chance I would've chosen this portfolio, so nothing can be learned from studying an outlier like The Golden Butterfly.

I gather you don't care for backtesting and prefer your own investment method.  I admire your confidence, and I encourage you to keep doing what you're doing.  Others find value in looking at how portfolios have performed in both good times and bad to compare options and to learn from history.  We can only work with the data we have available, but what else are we supposed to go on?  To each his own.  I choose to agree to disagree rather than argue point by point. 

Gold should not be back tested in 1973-1974 without a large disclaimer: it tripled in those years, earning over 70% per year.  Back testing assumes the past did not have one off events, but does anyone expect gold to triple again in a 2 year period?

How much did gold beat inflation 1972-2015?  About 2.9% ("all the available data", or 44 years)
How much did gold beat inflation 1976-2015?  About 1.0% ("the last 40 years")
https://www.portfoliovisualizer.com/backtest-asset-class-allocation

Your gold disclaimer is now included on its asset page (https://portfoliocharts.com/portfolio/gld/). 

The Golden Butterfly information linked in the OP also displays all of the timeframes beginning after 1974, including the worst case for gold beginning in 1980 when it lost over 80% if its value over the next 20 years.  One can easily see the impact of start dates and draw their own conclusions on how important certain years are to a portfolio, which may perform much differently than the individual underlying assets by design (https://portfoliocharts.com/2016/01/25/how-to-build-a-portfolio-one-asset-at-a-time/).  IMHO, the Golden Butterfly stands up quite well.  But I agree that it (as originally described) is a poor choice for individuals with a strong distaste for gold. 
Title: Re: Portfolio Charts - The Golden Butterfly
Post by: AZryan on April 13, 2016, 11:36:35 AM
Quote from: yoda34
-I don't see anywhere that I said I was putting my entire FIRE Portfolio into that allocation (or even a single dollar).-

Right. But being highly intrigued does kinda imply you're seriously looking into going this direction, and that's pretty much how I saw the counterpoint presented to you. Seemed fair.

Quote from: yoda34
I didn't realize that certain topics were censored or would generate such strong response.

Nothing got censored. You're over-reaching in your defensiveness. And yeah, it got a strong response because I.C. sees some pretty major warning signs in this portfolio. Just the sort of thing that gets strong responses. Again... pretty fair.

Quote from: yoda34
Finally, I appreciate your concern about all the amateurs on the site but I think I'll be just fine. I passed the 7 and the 66, I've worked in the industry for several years, and yes I know how to calculate a CAGR appropriately

Again... pretty overly defensive IMO. Usually it's amateurs that are still sorting out what their basic overall asset allocations are -as you seemed to imply. But post information can be useful to others who are just reading and not directly participating, so it doesn't mean it's all about you.
Also... what the hell does 'I passed my 7 and the 66' mean? And 'I've worked in the industry for several years' is terribly vague if it's meant to show how you know stuff people don't know you know, ya' know?
Title: Re: Portfolio Charts - The Golden Butterfly
Post by: wienerdog on April 13, 2016, 11:52:52 AM
Ahhhh the three Gs creating forum posts daily.

I think OP is referencing  Series 7 and Series 66 licenses.
Title: Re: Portfolio Charts - The Golden Butterfly
Post by: AZryan on April 13, 2016, 11:57:35 AM
Tyler,
It seems beyond dispute that the Golden Butterfly is a tremendously intriguing portfolio. The debate, of course, is whether it's sensible for the future. And I see the issue coming down almost entirely to being a question about GOLD.
Would you disagree?
Would I.C. disagree?

Beyond gold, it's just the extreme ends (most and least volatile) of basically stocks and bonds (treasuries).

I don't know a lot about gold, but it seems like it has had some radically crucial changes to it compared to the ups and downs of stocks/bonds, so it's backtesting appears to be awful for projecting the future -unlike the usefulness that stock/bond backtesting 'seems' to have.

Maybe you need to present a good argument for holding gold in the future? The backtesting doesn't seem to make that argument at all IMO. If it did, I'd be all in on the golden butterfly.

Quote from: Tyler
But I agree that it (as originally described) is a poor choice for individuals with a strong distaste for gold.

Why? You word it like a tautology -'gold is bad for people who don't like gold'?

Would you say that 'vaccines are a poor choice for anti-vaxxer parents' whose beliefs are based on unscientific nonsense? No. Their judgment is demonstrably wrong. Their opinion doesn't matter.

I think gold's a bad choice for me, but that doesn't mean it actually is. I could simply be totally wrong, and I might be much better off with 20% gold in my portfolio as a uniquely excellent diversifier.
Title: Re: Portfolio Charts - The Golden Butterfly
Post by: AZryan on April 13, 2016, 12:06:34 PM
Quote from: wienerdog
Ahhhh the three Gs creating forum posts daily.

What's that mean?

Quote from: wienerdog
I think OP is referencing  Series 7 and Series 66 licenses.

Ah, the old rhetorical trick of referencing the most obscure insider jargon-type words or phrases without any explanation of the point.

The trick is to have the least amount of people understand you, in the hope that this will make more people believe you have super special/secret/advanced knowledge on a subject that implies their actual questionable points are somehow better reasoned than they might actually be.

I saw this a lot on high end audio forums. Pure B.S. 9 times outta 10.
Title: Re: Portfolio Charts - The Golden Butterfly
Post by: MustacheAndaHalf on April 13, 2016, 12:22:14 PM
Tyler - I appreciate the disclaimer of gold's unique 1973-1974 performance.
Title: Re: Portfolio Charts - The Golden Butterfly
Post by: wienerdog on April 13, 2016, 12:32:13 PM
What's that mean?

God, Guns and Gold they always run the post count up.


Ah, the old rhetorical trick of referencing the most obscure insider jargon-type words or phrases without any explanation of the point.

The trick is to have the least amount of people understand you, in the hope that this will make more people believe you have super special/secret/advanced knowledge on a subject that implies their actual questionable points are somehow better reasoned than they might actually be.

I saw this a lot on high end audio forums. Pure B.S. 9 times outta 10.

Don't blame me I only have a drivers license.  Look at the software he used to back test.  Didn't look like something the average joe would have access to.
Title: Re: Portfolio Charts - The Golden Butterfly
Post by: workathomedad on April 13, 2016, 12:35:27 PM
Wow, I can't believe how upset people get at showing backtest results from a portfolio different than their favorite allocation.

I've read and seen a lot about portfolio allocation, and it's pretty easy to beat a classic 60/40 portfolio in either drawdown, volatility, or returns by adding additional diversification into commodities, real estate, gold, international, etc.

http://mebfaber.com/2013/07/31/asset-allocation-strategies-2/

No portfolio allocation is sacrosanct, and no portfolio allocation will replicate it's backtesting results... including whatever you chose.

What's super cool about the Permanent Portfolio types is just how amazingly well they have down in reducing volatility and drawdown, which is uniquely beneficial for early retirees. They certainly are not designed to optimize return, which almost everyone agrees would require a higher stock allocation. When that stock allocation is down >50% though, if you're expecting a higher SWR, you may need to adjust your spending during those years or face earlier portfolio depreciation.
Title: Re: Portfolio Charts - The Golden Butterfly
Post by: Tyler on April 13, 2016, 01:19:04 PM
Maybe you need to present a good argument for holding gold in the future? The backtesting doesn't seem to make that argument at all IMO. If it did, I'd be all in on the golden butterfly.

That's where we may have a fundamentally different perspective.  I do not recommend any asset for its projected performance in the future.  I prefer to evaluate asset allocations by first assuming that I'm really unlucky and to check what the worst times have been for such a portfolio, and the site tools intentionally show all of the best and worst times side by side (for as many years as I can get my hands on).  Now that doesn't mean the future won't be the new worst case, but IMHO it's a reasonable place to start and a healthy application of backtesting.  Truly diverse portfolios that don't bet so heavily on one asset (including stocks) naturally rise to the top, and gold can be an important ingredient in some of these options.  My best succinct explanation to date is in this link (https://portfoliocharts.com/2016/01/25/how-to-build-a-portfolio-one-asset-at-a-time/). 

I understand that my neutral-outlook mentality runs counter to the typical value investing approach.  I'm heavily influenced by the writings of Harry Browne (Ray Dalio is also on the same page), so reading his books (I recommend this (http://www.amazon.com/Fail-Safe-Investing-Lifelong-Financial-Security/dp/031226321X/ref=sr_1_1?ie=UTF8&qid=1440015625&sr=8-1&keywords=fail+safe+investing)) will help you understand my perspective.  It's deserving of its own full-length post to do the topic justice -- thanks for the idea! 

Quote from: Tyler
But I agree that it (as originally described) is a poor choice for individuals with a strong distaste for gold.

Why? You word it like a tautology -'gold is bad for people who don't like gold'?

Would you say that 'vaccines are a poor choice for anti-vaxxer parents' whose beliefs are based on unscientific nonsense? No. Their judgment is demonstrably wrong. Their opinion doesn't matter.

If you don't get vaccines, you could die.  If you don't invest in gold, there are other good portfolio options (https://portfoliocharts.com/portfolios/) that don't require it. 

A better metaphor might be cooking.  Imagine gold is like cinnamon.  In the right proportions, I find cinnamon to be a delicious addition to certain baked sweets.  But it's completely inedible (https://www.youtube.com/watch?v=KZ6bzrqjo4M) on its own, and anyone suggesting that cinnamon is a universally bad ingredient that nobody should use because they once tried it on their favorite sandwich and didn't like the results would be rightly mocked.  Still, many people genuinely dislike cinnamon even when it's used properly.  Who am I to tell them that cinnamon cookies are unquestionably the best choice when other options make them much happier and are clearly tasty in their own right?  Some recipes work better with different ingredients, and some people prefer different recipes. 

While I do believe the facts support that gold can play an important role in certain portfolios (including the Golden Butterfly), I am practical about it and concede that far more important than owning gold is owning a portfolio that you believe in and are comfortable with.  A portfolio you can't hold for the long run often does more harm than good. 
Title: Re: Portfolio Charts - The Golden Butterfly
Post by: yoda34 on April 13, 2016, 05:01:51 PM
Quote from: wienerdog
Ahhhh the three Gs creating forum posts daily.

What's that mean?

Quote from: wienerdog
I think OP is referencing  Series 7 and Series 66 licenses.

Ah, the old rhetorical trick of referencing the most obscure insider jargon-type words or phrases without any explanation of the point.

The trick is to have the least amount of people understand you, in the hope that this will make more people believe you have super special/secret/advanced knowledge on a subject that implies their actual questionable points are somehow better reasoned than they might actually be.

I saw this a lot on high end audio forums. Pure B.S. 9 times outta 10.

You're right, perhaps I was a bit defensive. I shouldn't have posted in between meetings when I just had read the thread and got irritated, so my apologies for that.

A few points - saying I'm intrigued about something, at least to me, doesn't mean that I'm rushing to invest or even need you to explain it to me. I asked simply for a discussion of the portfolio. This forum has some pretty smart folks, and in general, I value what people have to say - that's why I read it. Some appropriate responses could have been a discussion of the bond barbell with long and short term treasuries. I think the discussion about not liking gold could is also appropriate if you just turned down the attitude a bit. That's what I'm looking for - reasoned discussion about the pros and cons of an idea. I admit I over reacted, but I still do not believe that's what IC did.

I also get irritated when people post misleading backtests to make a point (either for or against an allocation). The fact that our approach to currency and gold fundamentally changed in 1971 is well known - using charts in 1920 is a form of twisting data to make your point stronger and yes, it irritates me.

While I really appreciate you calling me a liar or full of BS, the Series 7, 65, 66, CFA I II III etc are not obscure or some secret thing. They are literally the tables stakes to have any job in financial services for a broker, RIA firm, or analyst. If you don't know what they are, or didn't recognize it, then you truly do not have any clue about the industry. It's not my fault that you're ignorant of the subject matter. If you want to call BS because you don't understand that's fine *shrug*

This thread was not intended to be about Gold. It was about a specific allocation including long term bonds, short term bonds, total stock market, value funds, and yes some gold. The fact that we can't have a conversation about it is kinda sad. Regardless this thread will clearly not accomplish what I had hoped and my post here is wildly off topic so I'm done with this discussion and this thread. Hope everyone has a good night.
Title: Re: Portfolio Charts - The Golden Butterfly
Post by: AZryan on April 13, 2016, 05:25:48 PM
Tyler,

I don't consider big index funds, esp. the Total Stock Market, to be reasonably called 'one asset'. One asset class, sure. But it's super diversified on it's own, and it pretty much beats most other allocations divided among various other types of asset classes. You know this. We're both working with the exact same facts.

I don't think your cooking with cinnamon analogy works in reference to gold because neither of us are talking about using gold/cinnamon as their only investment/ingredient. We both agree it would be horrible.
And that some people don't like how cinnamon tastes doesn't correlate to the actual value of a gold investment. It only works if you're talking about how gold might make people scared (and you are). But that fear aspect is not what I'm talking about. I'm only talking about the actual value gold brings to a portfolio.

So, like vaccines, you could be an irrational anti-vaxxer, but happens you and your kids don't get sick and die. Most of these dummies don't because of herd immunity. But it doesn't change the fact that the vaccines do provably work if you do use them properly and contact the thing they guard against.
Meaning...
Getting 'scared and changing your portfolio' should NOT be a factor in evaluating an asset's real or potential performance within that portfolio.

And again... it really does seem that ~20% gold is the main factor that makes the Golden Butterfly so unique and kick ass. Yes, there are other portfolios that can get similar results, but there really isn't anything that you can swap gold for to get similar results in the Golden Butterfly, right? And it seems that shoving ~20% gold into damn near any other mix of stuff has turned out great because it was so uncorrelated to anything else.
Title: Re: Portfolio Charts - The Golden Butterfly
Post by: AZryan on April 13, 2016, 05:55:36 PM
Yoda34,

It seems like you really haven't decided if you were being too defensive or not.

I didn't call you a liar or full of BS, but yeah... posting 'I passed the 7 and 66' is a pretty obscure reference. Has it EVER been referenced before in the literally thousands upon thousands of posts in this entire forum? It smacked of the 'argument from authority' logical fallacy.

It's like me saying you used a comma wrong because I'm a published author. It's a daffy way to argue.

Who cares if I know jack about 'the industry'!? I never claimed to, and it doesn't matter to any of this. Think you need to 'turn down the attitude'.

Just go back to the actual investment topics at hand.

"-This thread was not intended to be about Gold. It was about a specific allocation including long term bonds, short term bonds, total stock market, value funds, and yes some gold.-"

Gold is the one very particular, unique, equally large, and highly questionable aspect of this portfolio.
Literally everyone except you appears basically fine with the discussion and the meaningful tangents flowing from it.

You're free to post about other aspects, and that's fine, too. No need to take your toys and storm off.
Title: Re: Portfolio Charts - The Golden Butterfly
Post by: wienerdog on April 13, 2016, 07:07:00 PM
Regardless this thread will clearly not accomplish what I had hoped and my post here is wildly off topic so I'm done with this discussion and this thread. Hope everyone has a good night.

I think if you stick around you'll realize the ones that preach tolerance are usually the most intolerant.  It's never fun coming to a thread and getting called amateur and then the BS card called on your credentials.  A quick google of your CapIQ program would have easily turned the sure 90% bet into realizing they were in the 10%.  Anyway enjoy your evening.  Sorry your post turned into this.   
Title: Re: Portfolio Charts - The Golden Butterfly
Post by: Tyler on April 13, 2016, 07:10:19 PM
And again... it really does seem that ~20% gold is the main factor that makes the Golden Butterfly so unique and kick ass. Yes, there are other portfolios that can get similar results, but there really isn't anything that you can swap gold for to get similar results in the Golden Butterfly, right? And it seems that shoving ~20% gold into damn near any other mix of stuff has turned out great because it was so uncorrelated to anything else.

Dropping the analogies, gold does have a demonstrably positive effect on many portfolios.  That includes the Golden Butterfly, as it complements the other assets quite well.  A lot of it does come down to correlations, as it's rare to find an asset negatively correlated to both stocks and bonds.  But gold isn't inherently magical and other assets can also help. 

It's never fun coming to a thread and getting called amateur and then the BS card called on your credentials. ... Anyway enjoy your evening.  Sorry your post turned into this.   

+1
Title: Re: Portfolio Charts - The Golden Butterfly
Post by: arebelspy on April 13, 2016, 07:18:30 PM
Don't let a single poster or two, on a forum of thousands, drive you off.  The internet can be a rough place sometimes, but it's worth it; if you want discussion, stick around.  :)
Title: Re: Portfolio Charts - The Golden Butterfly
Post by: arebelspy on April 13, 2016, 07:20:28 PM
I'm not sure what you'll conclude from this example, but to me it's quite clear. There is essentially 0 chance I would've chosen this portfolio, so nothing can be learned from studying an outlier like The Golden Butterfly.

I gather you don't care for backtesting and prefer your own investment method.  I admire your confidence, and I encourage you to keep doing what you're doing.  Others find value in looking at how portfolios have performed in both good times and bad to compare options and to learn from history.  We can only work with the data we have available, but what else are we supposed to go on?

I do think Interest Compound makes a good point, in that if you were picking a portfolio based on backtesting, at the point in time of, say, 1970, you probably wouldn't pick anything close to the Golden Butterfly.
Title: Re: Portfolio Charts - The Golden Butterfly
Post by: Tyler on April 13, 2016, 07:31:21 PM
I do think Interest Compound makes a good point, in that if you were picking a portfolio based on backtesting, at the point in time of, say, 1970, you probably wouldn't pick anything close to the Golden Butterfly.

That may be true, especially since investing in gold made no logical sense prior to 1971 because of Bretton Woods.  But the average investor in the 70's wouldn't exactly be beating down the door for stocks, either.  Nobody can see the future.

http://www.crestmontresearch.com/docs/Stock-Matrix-Tax-Exempt-Real3-11x17.pdf

In any case, I think that's a red herring.

I'm not at all suggesting that anyone should make their investing decisions (Golden Butterfly or otherwise) based simply on backtesting.  As I've said elsewhere, relying solely on good backtested numbers with no understanding of why a portfolio worked (and may continue to work) is a bad idea.  But making decisions based solely on dogma while ignoring history (or assuming the data that contradicts your beliefs must somehow be misleading) is similarly shortsighted.  Wise investors use both theory and history together as complementary pieces to the puzzle.

For the theory beyond the attractive backtests, I've already recommended a few supporting books. 
Title: Re: Portfolio Charts - The Golden Butterfly
Post by: wienerdog on April 13, 2016, 08:04:25 PM
And again... it really does seem that ~20% gold is the main factor that makes the Golden Butterfly so unique and kick ass. Yes, there are other portfolios that can get similar results, but there really isn't anything that you can swap gold for to get similar results in the Golden Butterfly, right?

Nope

Read the other thread Monkey Uncle summarizes it very well:

Rather, there are a few principles that seem to be emerging:

1. Focus the core of the portfolio on high-return, high-risk asset classes.
2. Those high-risk, high-return assets should be un-correlated as much as possible to balance out the ups and downs (i.e., don't just divide everything among various categories of u.s. small caps, for example). 
4. Some exposure to real estate and commodities seems to be a recurring theme.
3. Keep about a third of the portfolio in low-risk bonds to further cushion the downs during major melt downs when panic-selling impacts almost all equity-type asset classes (e.g., 2008).

Substitute REIT in for gold.  A little higher return than the GB but the std dev is up 4% so the of course the Sustainable WR is down from 5.2% to 4.6%
Title: Re: Portfolio Charts - The Golden Butterfly
Post by: YoungInvestor on April 13, 2016, 08:32:38 PM
I have no interest for Treasuries with current interest rates. Their superb performance over the last 40 years is simply due to ever-decreasing rates. Gold has similar circumstances.

40% global stocks, 20% short-term bonds, 20% reits and 20% self-directed equity investments makes sense.(edit: to me, it makes sense, for my own situation).
Title: Re: Portfolio Charts - The Golden Butterfly
Post by: MustacheAndaHalf on April 14, 2016, 12:22:11 AM
Meb Faber, in his book "Global Asset Allocation" claims all portfolios do the same because he makes them into the same thing.  He literally can't tell the difference between the S&P 500 and Berkshire Hathaway: his book calls the S&P 500 the Buffet portfolio.  I happen to like Larry Swedroe - who Faber represents by removing small/value stocks!  So get another source if you've been convinced by Meb Faber that all portfolios are similar.

If someone invests in gold after back testing for 40 years (1976-2015), so be it.  To me the disclaimer Tyler agrees with is the whole story: know what happened with gold, and decide with knowledge either way.

If you're in retirement and need "downturn insurance", you could consider gold.  During a sharp stock price drop, gold tends to move opposite.  If you need to pull money out when that happens, you can sell gold to cover expenses or to rebalance.  Personally I decided not to do this since gold has no expected rate of return - it requires someone else to buy at a higher price.  But gold does work differently than bonds or stocks, and could improve draw downs if that's important to you.
Title: Re: Portfolio Charts - The Golden Butterfly
Post by: bryan on April 14, 2016, 02:26:06 AM
If I were to be serious about gold, I would probably modify the data to smooth out the jump due to the unlocking of the official exchange price from the market price. Similar story to other mispriced currencies or assets today.

wouldn't a value investor back in ~1970 be piling into gold?Seeing how expensive it was in India, Hong Kong, etc?
Title: Re: Portfolio Charts - The Golden Butterfly
Post by: Tyler on April 14, 2016, 11:12:56 AM
Wise investors use both theory and history together as complementary pieces to the puzzle.

I wrote this in response to a PM and figured it would also be good to share.  Here's a high-level overview of the theory behind the GB.

The Golden Butterfly is certainly unintuitive and goes against conventional investing wisdom.  The natural instinct of many people is to immediately seek out any possible outlying data that they assume must make it look so good (bond tailwind since '81, the gold switch in '71, etc.).  But they miss the fact that it also did very well when treasuries were crushed as interest rates skyrocketed in the 70's, when gold lost 80% of its value in the 80's and 90's, and when stocks lost money for more than a decade starting in 2000.  So clearly there's something more fundamental backing the consistent returns than a few great years.

(https://portfoliocharts.files.wordpress.com/2016/02/golden-butterfly-pixel-2016-b.jpg)

For comparison:

(https://portfoliocharts.files.wordpress.com/2016/02/total-stock-market-pixel-2016-b.jpg)

As I mentioned earlier, the Golden Butterfly is built upon the same foundation of the Permanent Portfolio.  So to understand how it works we first need to talk about the PP. 

The basic theory of the Permanent Portfolio is to select assets that do particularly well in the four possible economic environments. Generally speaking:

Prosperity: stocks
Recession: cash
Inflation: gold
Deflation: long term treasuries

As an aside, some people like to argue about how well gold truly tracks inflation.  That's fine, but gold has other benefits as well -- especially how it is negatively correlated to stocks and bonds.  So even if its inflation-fighting properties aren't as direct as some people claim, it's still a valuable component to protect the portfolio when stocks and bonds are both struggling.  Think of the 2000's when stocks went sideways for a decade with low inflation, but gold still responded and did great. 

Harry Browne liked to explain how the PP protects your money from market turmoil by referring to the four very different assets as having "firewalls" between them.  So even if gold does terribly for a while, the damage is isolated only to a small portion of the portfolio.  And because the assets are selected based on economic conditions, when gold is struggling that usually means that at least one other asset is doing great and more than making up the difference.  Importantly, it works the same way when bonds do terribly and when stocks inevitably crash.  This outlook-neutral approach that doesn't try to predict the future but instead protects you and grows your money no matter what the future holds is the core idea that makes it tick.

The GB follows the same philosophy -- invest in volatile uncorrelated assets that cover every economic condition, and you'll do pretty well with limited downside no matter what happens in the markets.  The difference is that it tilts the portfolio slightly towards prosperity, the most common of the four conditions.  And it does so by intentionally selecting an additional stock asset that complements the normal Permanent Portfolio stock index fund for rebalancing purposes and higher overall returns.  The large/small barbell works well for this but other options are also fine.  The permanence of the value premium is also debatable, and as I mentioned I personally punted and deferred to my neutral Harry Browne mindset by using small cap blend. 

Of course any short summary like this will over-simplify certain issues.  If you want to learn more, read the two books listed here (https://portfoliocharts.com/portfolio/permanent-portfolio/).  You also may disagree with some of the theory and methods, and that's fine.  Different portfolios approach investing in different ways. 
Title: Re: Portfolio Charts - The Golden Butterfly
Post by: pka222 on April 14, 2016, 09:43:53 PM
Tyler- Great work- I've really enjoyed using and learning from your tools. 
I've got a portfolio currently mostly in TSM (VTSAX) now but will be deploying enough to totally revamp my allocation.
Due to your tools I'm finally seeing the value in gold- I still don't like it much but damn it does have an amazing effect, even at relatively low  proportions of a assets allocation.
I'm now looking at a 5 fund portfolio weighted toward prosperity and value and using gold and LLT for a bit of downside protection.  It back tests well having a max 4 year draw down (-19%) with an average CAGR of 8.2%.
Based on my time line (still accumulating) I can let this portfolio grow for another 10 years before needing more stability.
Cheers

TSM 30%
SCV 20%
EM  15%
LLT 25%
GOld 10% 

 
Title: Re: Portfolio Charts - The Golden Butterfly
Post by: Monkey Uncle on April 15, 2016, 04:30:32 AM
The GB follows the same philosophy -- invest in volatile uncorrelated assets that cover every economic condition, and you'll do pretty well with limited downside no matter what happens in the markets.

That's the whole topic in a nutshell.

Now, off to find some REIT and bond exposure to balance my stock-heavy portfolio...
Title: Re: Portfolio Charts - The Golden Butterfly
Post by: Interest Compound on April 15, 2016, 12:27:20 PM
But they miss the fact that it also did very well when treasuries were crushed as interest rates skyrocketed in the 70's, when gold lost 80% of its value in the 80's and 90's, and when stocks lost money for more than a decade starting in 2000.  So clearly there's something more fundamental backing the consistent returns than a few great years.

Therein lies the critical flaw. There does not necessarily need to be a fundamental backing. This seems to be the thought process, please correct me if I'm wrong:
Or maybe it's the opposite:
It's my suspicion that this is how all slice-n-dice portfolios are created. So, I set out to do the opposite. Let's find a portfolio which makes perfect sense, but drastically UNDERperformed! Then let's find a portfolio which makes perfect sense, backtested well, THEN after that point in time, drastically UNDERperformed! Your Portfolio Finder (https://portfoliocharts.com/portfolio/portfolio-finder/) seems perfect for this, but it only shows me the BEST portfolios given a set of parameters. How can I find the WORST?

While this wouldn't fully get me there, as it won't include:
...etc

I think it'll get me close enough.
Title: Re: Portfolio Charts - The Golden Butterfly
Post by: Tyler on April 15, 2016, 02:05:43 PM

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


Interesting idea. 

The Heat Map (https://portfoliocharts.com/portfolio/heat-map/) is a pretty good tool for what you're looking for, although it requires a bit of individual legwork.  Let's say that an investor did a lot of research and decided that putting all of their money in VTSAX makes perfect sense.  They could enter 100% total stock market into the Heat Map and get this:

(https://portfoliocharts.files.wordpress.com/2016/02/total-stock-market-pixel-2016-b.jpg)

Using your method, let's put ourselves in the shoes of an investor at the end of 1999 evaluating that portfolio.  Backtesting the stock market to 1972, the inflation adjusted CAGR was a whopping 8%! (Look at the 1972 row, and follow it to the right to year 28).  I'd definitely classify that as backtesting extremely well!  After buying in, the stock market proceeded to immediately dive underwater and not emerge for 13 years.  From 2000 to today, the real CAGR is only 2.3%.  (Look at the 2000 row and follow it all the way to the right).  I'd also classify that as drastically underperforming relative to expectations.

(Please understand I'm not picking on anyone who invests that way nor am I suggesting it's a bad idea.  A 100% TSM portfolio is included on the site because I believe that's a perfectly good portfolio for many investors.  I'm just using it as an example).

Using the same methodology, one thing I like about the Golden Butterfly his how it really doesn't matter what year you pick for the same analysis.  (Although if you're curious, the numbers for the same reference date are 6.5% before and 5.3% after). 

(https://portfoliocharts.files.wordpress.com/2016/02/golden-butterfly-pixel-2016-b.jpg)

No matter what start year you choose, it's more or less just as blue after that as it was before.  Now that doesn't mean it will always be that way and it can't be taken as a guarantee, but it's still a positive quality and it makes me want to look deeper. 

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

Quote
Transaction costs (including taxes) with rebalancing equally weighted assets. Transaction costs may have been prohibitively high for many of these portfolios.

For reference, the returns do include expense ratios for the underlying low-cost Vanguard funds.  Before those funds existed, previous returns are discounted by the same ER to make the analysis fair.  Using the base assumption that you rebalance once a year, I consider the brokerage trading fees ($8 per trade at Fidelity, for example) to be negligible.  It's absolutely true that taxes are a big consideration, but individual circumstances (income, state, filing status, tax deferred accounts, tax-loss harvesting, etc) are so different that calculating one "after tax" number is mostly worthless.  Depending on their circumstances, one person using just VTSAX with no rebalancing required may still owe a sizable tax bill on dividends, while another with the complex Merriman portfolio may owe nothing.  Also, tracking 44 years of ever-changing tax law in a calculator like this is something that just doesn't sound very fun.  ;)

That said, I completely agree that some portfolios may be better than others tax-wise depending on your situation.  Always make that part of your decision making process.    [/list]
Title: Re: Portfolio Charts - The Golden Butterfly
Post by: Mrs. Healthywealth on April 15, 2016, 02:14:00 PM
Tyler,
Thank you for all the hard work you put into building your website and wanting to help others.  I've been reading your responses to other people, and you're really great about being respectful and patient.

Been staying up late for the past few nights absorbing all this information and reading Portfolio Charts and learning about the other options.  The calculators are great, and are making me consider a little less volatility to my current allocation which is a 3-fund portfolio of 70/10/20 (stock/international/bond). I have a pension which is why i'm so aggressive in my allocation, but going thru your website makes me realize there are other potential options to get me to the same place with less volatility. 

Looking at the heat table for TSM and gold is amazing, given their negative correlation regardless of the issues surrounding gold.  I read so many negative things about gold, but this makes me reconsider it.  I'm looking to FIRE in 8yrs, and I had already planned to tone down the stocks in the portfolio. No intentions to make any quick decisions, and I will be reading some of the books you recommended.

The Golden Butterfly does get me excited, but so does the latest Tesla...will take deep breaths and research before jumping into anything--which I hear you saying.
Title: Re: Portfolio Charts - The Golden Butterfly
Post by: Interest Compound on April 15, 2016, 04:21:06 PM
Unfortunately, the Heat Map won't get me there. Let me explain a different way. Here's what I noted in the other thread (http://forum.mrmoneymustache.com/investor-alley/the-case-against-100-stocks-(and-what-to-do-about-it)/msg1005293/#msg1005293), then titled, "The Case Against 100% Stocks (and what to do about it)":

Out of 83,000 total portfolios, about half of them did better than TSM in terms of risk/reward. So that means about half of them worse. Isn't that the point of just buying the whole stock market? I understand you're looking at many asset classes which aren't composed of stocks, but that's the most interesting part. Despite looking at so many different asset classes, that dynamic was still in play! Buy the whole stock market, and you'll get average returns.

Buy the whole stock market, and you'll get average returns. Looking at your charts, there seems to be an invisible Invisible horizontal barrier at the Total Stock Market level. Only 1 of the super-portfolios surpassed it. As is a common theme around here, beating the average seems to be a tough nut to crack:

(https://i.sli.mg/qcxGKT.png)

When you deviate from the average, you could end up as any one of the little dots on this chart. As you didn't comment on your thought process, I'll assume my suspicions are correct, and it's the first one:

(https://i.sli.mg/HffU4H.png)

Don’t you see? You're making the same mistake everyone else did when creating their slice-n-dice portfolio, they were just using different data. I'm sure at some point all those other portfolios looked just as amazing, and now look at them. Seemingly randomly-distributed dots, almost all comfortably under the invisible line of Average. Perhaps the Golden Butterfly will end up being closer to the Permanent Portfolio in a few years, after-all, they have a similar story.

This is a dangerous game to play, and I believe this is what's being lost on your readers. You can either take your average returns, or you can play the "choose a dot" game. The problem is, there's no way of knowing where the dot will slide, for your specific timeline! What if it moves down here, next to the Permanent Portfolio?

(https://i.sli.mg/4C8vYS.png)

What if it moves further down, close to the Desert Portfolio?

(https://i.sli.mg/btvJp3.png)

What if it moves further down still?

(https://i.sli.mg/laYpVv.png)

When you play the "choose a dot" game, you can end up anywhere. While you talk a lot about volatility risk, I believe this risk is underplayed. This doesn't leave much wiggle-room for unexpected expenses in retirement, or sub-par investment returns. While I'm sure you understand this, I don't believe it's coming across clearly. You have enough data to play with this. "If you played this game on a 10 year time frame, what are the chances you’d end up with a bad dot after 10 more years? What about a 15 year time frame? 20? 30?

Based on this, if you decide to play this game on a ~40 year time frame (data from 1972), what are the statistical chances of picking a bad dot? If so, what are the consequences?

It wouldn't be perfect, and there's only so much you can do with limited data, so maybe you can come up with a better idea? ¯\_(ツ)_/¯

In any case, maybe you can give me a list of some of the worst portfolios (not assets) in the chart above? This might go a long way in uncovering why it's believed there *needs* to be a fundamental backing to what seems to be just another ordinary dot.
Title: Re: Portfolio Charts - The Golden Butterfly
Post by: Tyler on April 15, 2016, 04:43:19 PM

If you played this game on a 10 year time frame, what are the chances you’d end up with a bad dot after 10 more years? What about a 15 year time frame? 20? 30?


Well, you're using an old chart and I've already done this.  The Portfolio Finder has since been updated (https://portfoliocharts.com/2016/04/06/the-portfolio-finder-just-got-a-little-smarter/) to look at all 15-year rolling timeframes and only report the worst one for each portfolio.  So now all of the dots are shown at their lowest CAGR points from a start-date independent perspective, which helps you evaluate whether the portfolio would have met your needs even in its least flattering light.  Notice how it really flattens the chart.

(http://i65.tinypic.com/nzovvs.jpg)

With that said, I'd like to respect the OP and keep this thread about the Golden Butterfly.  There's another one dedicated to the Portfolio Finder if you still want to discuss that further.

On that note, you seem to misunderstand how the Golden Butterfly was created.  Note that I posted it (https://portfoliocharts.com/2015/09/22/catching-a-golden-butterfly/) nearly six months before I created the Portfolio Finder.  I've explained how the concept is based on the Permanent Portfolio, which I believe was first proposed by Harry Browne in the early 80's and has held up very nicely.  Yes I used back testing to help me find the one extra asset, but I don't believe that's unreasonable.  The Portfolio Finder independently verified after the fact that it is a very consistent portfolio compared to almost any other option.  It was not at all the result of pure data mining. 

BTW, your conclusions regarding withdrawal rates are also over-simplified.  A portfolio can have a lower return than the stock market and still have a higher SWR depending on the volatility.  But there are other threads and posts about that, too.
Title: Re: Portfolio Charts - The Golden Butterfly
Post by: Interest Compound on April 15, 2016, 05:21:10 PM

If you played this game on a 10 year time frame, what are the chances you’d end up with a bad dot after 10 more years? What about a 15 year time frame? 20? 30?


Well, you're using an old chart and I've already done this.  The Portfolio Finder has since been updated (https://portfoliocharts.com/2016/04/06/the-portfolio-finder-just-got-a-little-smarter/) to look at all 15-year rolling timeframes and only report the worst one for each portfolio.  So now all of the dots are shown at their lowest CAGR points from a start-date independent perspective, which helps you evaluate whether the portfolio would have met your needs in its least flattering light.  Notice how it really flattens the chart.

(http://i65.tinypic.com/nzovvs.jpg)

With that said, I'd like to respect the OP and keep this thread about the Golden Butterfly.  There's another one dedicated to the Portfolio Finder if you still want to discuss that further.

On that note, you seem to misunderstand how the Golden Butterfly was created.  Note that I posted it (https://portfoliocharts.com/2015/09/22/catching-a-golden-butterfly/) nearly six months before I created the Portfolio Finder.  I've explained how the concept is based on the Permanent Portfolio, which I believe was first proposed by Harry Browne in 1983 and has held up very nicely.  Yes I used back testing to help me find the one extra asset, but I don't believe that's unreasonable.  The Portfolio Finder independently verified after the fact that it is a very consistent portfolio compared to almost any other option.  It was not at all the result of pure data mining. 

BTW, your conclusions regarding withdrawal rates are also over-simplified.  A portfolio can have a lower return than the stock market and still have a higher SWR depending on the volatility.  But there are other threads (http://forum.mrmoneymustache.com/investor-alley/asset-allocation-and-safe-withdrawal-rates/) and posts (https://portfoliocharts.com/2015/11/17/how-safe-withdrawal-rates-work/) about that, too.

The dollar amounts I gave (half the amount saved, and one third the amount saved), from the Permanent Portfolio and the Desert Portfolio were taken directly from modeling those portfolios with a 4% withdrawal rate. It was not a simplification. Since I don't know what the other portfolios consist of (which is what I've been asking for), I picked a few that were identified.

It seems my posts still aren't clear, so I'll be more brief and direct.

(https://i.sli.mg/70nVFn.png)

This is very much related to The Golden Butterfly.
Title: Re: Portfolio Charts - The Golden Butterfly
Post by: Tyler on April 15, 2016, 05:28:54 PM
The dollar amounts I gave (half the amount saved, and one third the amount saved), from the Permanent Portfolio and the Desert Portfolio were taken directly from modeling those portfolios with a 4% withdrawal rate. It was not a simplification. Since I don't know what the other portfolios consist of (which is what I've been asking for), I picked a few that were identified.

I was only referencing your chart that showed a horizontal line at the TSM and seemed to imply that anything below that is "almost guaranteed portfolio wipe at the 4% rule".  That's not necessarily true, but after re-reading your post I believe I misunderstood your intent to show "what if" the GB went lower than a 4% CAGR.  In any case, I've already provided data for just how low all of the portfolios have gone so there's no need to guess.

It seems my posts still aren't clear, so I'll be more brief and direct.

This is very much related to The Golden Butterfly.

One of the worst examples is a portfolio with 100% gold. Others around that are things like 50% gold and 50% cash.  Most of the ones at the bottom of your bounded box are portfolios with nothing but various bonds.  The closest one marked on your chart is the TSM.  I'll leave it to you whether that sounds as plausible as the Golden Butterfly.

I disagree that this is related to the Golden Butterfly.  If you want to start another thread discussing your opinion on the best way to select a portfolio, I'm sure that would be an interesting topic in its own right. 
Title: Re: Portfolio Charts - The Golden Butterfly
Post by: Interest Compound on April 15, 2016, 06:58:40 PM
The dollar amounts I gave (half the amount saved, and one third the amount saved), from the Permanent Portfolio and the Desert Portfolio were taken directly from modeling those portfolios with a 4% withdrawal rate. It was not a simplification. Since I don't know what the other portfolios consist of (which is what I've been asking for), I picked a few that were identified.

I was only referencing your chart that showed a horizontal line at the TSM and seemed to imply that anything below that is "almost guaranteed portfolio wipe at the 4% rule".  That's not necessarily true, but after re-reading your post I believe I misunderstood your intent to show "what if" the GB went lower than a 4% CAGR.  In any case, I've already provided data for just how low all of the portfolios have gone so there's no need to guess.

It seems my posts still aren't clear, so I'll be more brief and direct.

This is very much related to The Golden Butterfly.

One of the worst examples is a portfolio with 100% gold. Others around that are things like 50% gold and 50% cash.  Most of the ones at the bottom of your bounded box are portfolios with nothing but various bonds.  The closest one marked on your chart is the TSM.  I'll leave it to you whether that sounds as plausible as the Golden Butterfly.

I disagree that this is related to the Golden Butterfly.  If you want to start another thread discussing your opinion on the best way to select a portfolio, I'm sure that would be an interesting topic in its own right.

Agreed, those portfolios don't see to make much sense. While I'm sure there are some that do, I'll just go with what I see:

(https://i.sli.mg/Et1B47.png)

I'd expect The Golden Butterfly to gravitate back towards the average, just like all the other similar-minded portfolios which were created at a time when they were a similar out-performing dot on the chart. The Permanent Portfolio, on which The Golden Butterfly is based, was created in 1982. From 1972 to 1982 The Permanent Portfolio looked even better on the charts than The Golden Butterfly does today! But had you gone all-in back then, you would've underperformed even 100% bonds.

TL:DR, unless you're comfortable with the very real possibility of getting about 4.5% inflation-adjusted returns for the long term, don't invest in The Golden Butterfly. That's the risk you take when trying to remove volatility from your portfolio. The, "match or beat the total stock market in long-term real CAGR with fewer stocks and lower volatility" description of The Golden Butterfly is not a realistic expectation. Don't bet your life-savings on it, there is no free lunch.
Title: Re: Portfolio Charts - The Golden Butterfly
Post by: Tyler on April 15, 2016, 08:25:16 PM
TL:DR, unless you're comfortable with the very real possibility of getting about 4.5% inflation-adjusted returns for the long term, don't invest in The Golden Butterfly.

The start-date-independent chart makes your point very well.  It also shows that if you expect more than 4.5% real from any portfolio any time soon, history shows there's a good chance you'll be disappointed.  As you said, there's no free lunch.  But if you wait long enough and have both the tolerance and capacity to weather prolonged droughts, then sure -- there are higher earning long-term options than the Golden Butterfly.  Maximizing returns is not its primary purpose. 

(http://i65.tinypic.com/nzovvs.jpg)

I respect your opinion.  Clearly we have different perspectives, and I'm happy to agree to disagree.  Different people like different portfolios, and by reading both sides I'm confident others can come to their own conclusions.  We've said enough -- Let's give them space to do that.  :)
Title: Re: Portfolio Charts - The Golden Butterfly
Post by: Interest Compound on April 15, 2016, 11:09:54 PM
TL:DR, unless you're comfortable with the very real possibility of getting about 4.5% inflation-adjusted returns for the long term, don't invest in The Golden Butterfly.

The start-date-independent chart makes your point very well.  It also shows that if you expect more than 4.5% real from any portfolio any time soon, history shows there's a good chance you'll be disappointed.  As you said, there's no free lunch.  But if you wait long enough and have both the tolerance and capacity to weather prolonged droughts, then sure -- there are probably higher earning long-term options than the Golden Butterfly.  Maximizing returns is not its primary purpose. 

(http://i65.tinypic.com/nzovvs.jpg)

I respect your opinion.  Clearly we have different perspectives, and I'm happy to agree to disagree.  Different people like different portfolios, and by reading both sides I'm confident others can come to their own conclusions.  We've said enough -- Let's give them space to do that.  :)

That's a good chart for someone planning for 15 years of retirement. A 75-80 year old perhaps. Early Retirement is typically much longer, MrMoneyMustache is planning for a 70 year retirement, most of us here are probably planning for 50 years. I don't believe a 15 year chart, spanning 43 actual years of data, is really that useful for people on this forum.

The Minimum Real 50-year CAGR for stocks is about 5%.
The Minimum Real 70-year CAGR for stocks is about 6%.

This moves TSM up to the 5-6% range for an Early Retiree:

(https://i.sli.mg/Y6WoeE.png)

The Minimum Real 50 year CAGR for 40/60 stocks/bonds is about 2%
The Minimum Real 70 year CAGR for 40/60 stocks/bonds is about 3%

This is about what I'd expect from The Golden Butterfly. The conservative 40/60 stocks/bonds portfolio has seen more than a few 50 year time periods where it hit a 5% yearly CAGR. But it would be silly to expect anything close to that on average. That's exactly what we're seeing with The Golden Butterfly. To the newbies exploring this portfolio, don't make the mistake of expecting it to continue coming anywhere near the returns of 100% stocks. As Tyler said, maximizing returns is not The Golden Butterfly's primary purpose. It's stability. Hence why I don't think it's wise to believe such a portfolio would stay anywhere near stocks for the long-term.

Especially when all the portfolios like it, indeed even the portfolio it was based on, is exhibiting this behavior. Consider this, the Minimum Real 50 year CAGR for The Permanent Portfolio (substituting Long-Term Bonds with Intermediate Bonds for more data), has a Minimum Real 50 year CAGR of 1%. That's a big shift:

(https://i.sli.mg/2bT7Dr.png)

Maybe it looks better with Long-Term Bonds. In any-case, one thing is clear. These portfolios are not an appropriate allocation for someone looking to Retire Early with the 4% rule.

We've said enough indeed, thanks again for the analysis and all the tools Tyler!
Title: Re: Portfolio Charts - The Golden Butterfly
Post by: arebelspy on April 16, 2016, 12:33:05 AM
Awesome discussion.

I got a lot out of it.  Thanks to both of you.
Title: Re: Portfolio Charts - The Golden Butterfly
Post by: WerKater on April 16, 2016, 05:27:21 AM
Awesome discussion.

I got a lot out of it.  Thanks to both of you.
Seconded. I love this forum for discussing this kind of stuff. I just read through this without a break.
Title: Re: Portfolio Charts - The Golden Butterfly
Post by: dandypandys on April 16, 2016, 01:05:55 PM
me too, it sure is interesting.
Title: Re: Portfolio Charts - The Golden Butterfly
Post by: josstache on April 17, 2016, 11:40:43 PM
I think the larger risk you assume with gold is that it is a single asset, and so the entire 20% of your portfolio is subject to certain risks.  I have a similar problem with US treasuries, which make up another 40% of the golden butterfly.

For instance, if you have 60% of your portfolio in US treasuries and gold, what happens if the US government has a fiscal crisis, in response to which it defaults on its debt, goes back onto the gold standard and forces a sale (https://en.wikipedia.org/wiki/Gold_Reserve_Act) on unfavorable terms of all privately held gold.

60% of your portfolio would have its value significantly impaired (or even reduced to 0) by the actions of a single government.  Obviously stocks and other types of bonds would also have extreme volatility in response to such an event, but it's not clear that they would actually be similarly impaired.
Title: Re: Portfolio Charts - The Golden Butterfly
Post by: Radagast on April 18, 2016, 12:37:07 AM
I think the larger risk you assume with gold is that it is a single asset, and so the entire 20% of your portfolio is subject to certain risks.  I have a similar problem with US treasuries, which make up another 40% of the golden butterfly.

For instance, if you have 60% of your portfolio in US treasuries and gold, what happens if the US government has a fiscal crisis, in response to which it defaults on its debt, goes back onto the gold standard and forces a sale (https://en.wikipedia.org/wiki/Gold_Reserve_Act) on unfavorable terms of all privately held gold.

60% of your portfolio would have its value significantly impaired (or even reduced to 0) by the actions of a single government.  Obviously stocks and other types of bonds would also have extreme volatility in response to such an event, but it's not clear that they would actually be similarly impaired.
If you strictly followed the PP gold would be kept in New Zealand or somewhere to avoid that. In my opinion Tyler should change that 20% small company to instead be either total international or even emerging markets to help offset issues that affect only the US.
Title: Re: Portfolio Charts - The Golden Butterfly
Post by: Seppia on April 18, 2016, 02:31:11 AM
Terrific discussion, thanks to the great Tyler and IC for the debate.
Title: Re: Portfolio Charts - The Golden Butterfly
Post by: effigy98 on April 18, 2016, 10:36:24 AM
I am very happy with Tyler's golden butterfly and his backtesting charts gave me a new perspective on the way I was investing. I have changed up the asset allocation a little by splitting the large cap to include some international and also went for blend small cap as that has a stronger return. I have read many books on the subject and the lack of volatility with a little less returns is exactly what I want since I work in an industry that tends to do massive layoffs anytime the economy tanks, I cannot stomach my portfolio dropping like a rock at the time I may need to do some draw downs and I will trade a little potential gains so I will not stress out as much when SHTF. I am a flawed human and I sold at the dotcom crash and partially in the 2008 crash as seeing my portfolio drop by half or more at the time you get a layoff notice is a huge shock, I'm hoping the next crash I can re-balance, smile, and ignore it this next time around.
Title: Re: Portfolio Charts - The Golden Butterfly
Post by: Tyler on April 18, 2016, 01:11:07 PM
Inspired by this conversation, I just published a new post to help outline the Golden Butterfly theory in a central spot.  You'll recognize some of the text from earlier in this thread, but I've also expanded on it a bit. 

https://portfoliocharts.com/2016/04/18/the-theory-behind-the-golden-butterfly/

Thanks again for the discussion.  I think the post best summarizes my thoughts on this topic, so I'll give other people space to also contribute.
Title: Re: Portfolio Charts - The Golden Butterfly
Post by: AdrianC on April 21, 2016, 07:23:29 PM
I have no interest for Treasuries with current interest rates. Their superb performance over the last 40 years is simply due to ever-decreasing rates. Gold has similar circumstances.

Indeed. It makes all LTT heavy portfolios look good in a back-test. But what about the future?

For the PP and GB the combined investment returns of the underlying assets, left alone, is likely to be far less than a 4% real return going forward. Stocks, maybe 4%, long term treasuries 2%, cash 1% and gold 1% over the long term.

The investor hopes that three of the four assets will fluctuate in a non-correlated way and a yearly or twice yearly rebalance will capture enough of the fluctuation to make up for the low underlying returns. This is far from certain. I think it’s quite risky.
Title: Re: Portfolio Charts - The Golden Butterfly
Post by: Monkey Uncle on April 22, 2016, 04:40:39 AM
I have no interest for Treasuries with current interest rates. Their superb performance over the last 40 years is simply due to ever-decreasing rates. Gold has similar circumstances.

Indeed. It makes all LTT heavy portfolios look good in a back-test. But what about the future?

For the PP and GB the combined investment returns of the underlying assets, left alone, is likely to be far less than a 4% real return going forward. Stocks, maybe 4%, long term treasuries 2%, cash 1% and gold 1% over the long term.

The investor hopes that three of the four assets will fluctuate in a non-correlated way and a yearly or twice yearly rebalance will capture enough of the fluctuation to make up for the low underlying returns. This is far from certain. I think it’s quite risky.

I encourage you to read the article that Tyler linked above.  He addressed the fact that each of the individual asset classes is likely to experience long periods of underperformance.  But during past periods of single asset underperformance, the portfolio continued to produce stable returns:

"But thinking this way misses the fact that it also did very well when treasuries were crushed as interest rates skyrocketed in the 70’s, when gold lost 80% of its value in the 80’s and 90’s, and when stocks lost money for more than a decade starting in 2000.  So clearly there’s something more fundamental backing the consistent returns than a few great years."

The assets did indeed fluctuate in a non-correlated way.  Will they continue to do so in the future?  Who knows?  But I think that assumption is just as valid as the widely held assumption that stocks always outperform other asset classes in the long run.  That conviction also is based largely on past performance.

Personally, I'm too squeamish to put 20% of my net worth in a single asset like gold.  To me that's akin to putting a huge chunk in a single stock.  Similarly, the huge weighting in treasuries gives me pause due to the concentration in debt from a single issuer, even if that issuer is one of the most stable governments in the developed world.  But the basic principle of dividing a portfolio among uncorrelated assets has great appeal.  Use the withdrawal rate calculator to play around with various divisions among stocks, bonds, commodities, and real estate.  No one knows if any particular portfolio is going to match the CAGR of 100% stocks over the long run.  Likewise, no one knows if 100% stocks will match the CAGR of a more balanced portfolio over the long run.  But I'd wager that the balanced portfolio will be more stable, and thus is likely to have a higher safe withdrawal rate.  Of course, you won't know for sure until you either die broke or bequeath a multi-million dollar estate to your heirs.  But to me, the probabilities seem to favor a more balanced approach.
Title: Re: Portfolio Charts - The Golden Butterfly
Post by: AdrianC on April 22, 2016, 06:08:39 AM
I encourage you to read the article that Tyler linked above.  He addressed the fact that each of the individual asset classes is likely to experience long periods of underperformance.  But during past periods of single asset underperformance, the portfolio continued to produce stable returns...

Sure, it did.

Looking at the last 30 years, using Tyler's excellent heat map tool:
Total Stock Market 7.3%
Long Term Treasuries 5.5%
Short Term Treasuries 2.3%
Gold 0.94%

Average of returns 4%
Permanent Portfolio (25% of each) 4.7%

So rebalancing achieved an extra 0.7%. A free-lunch.

Now look at prospective real returns (and if you don't agree that's fine, but give your reasons why): Stocks 4%, long term treasuries 2%, cash 1% and gold 1%.

Average of returns 2%
Permanent Portfolio (25% of each) 2.7% ?

A 2.7% long term return does not give a 4% sustainable withdrawal rate.

Add small cap value to make the Golden Butterfly, 7.8%

Average of returns 4.8%
Golden Butterfly (20% of each) 5.5%

Same 0.7% rebalancing free-lunch.

Going forward:
Average of returns 2.4%
Golden Butterfly (20% of each) 3.1% ?
Title: Re: Portfolio Charts - The Golden Butterfly
Post by: arebelspy on April 22, 2016, 08:06:59 AM
Even if all the rest is correct, this statement is overly broad:

A 2.7% long term return does not give a 4% sustainable withdrawal rate.

No?  It sure does for 30 years.

In fact, if you had a guaranteed 2.7% real return, you could take out an inflation-adjusted 4% for 40 years before running out of money.

That has a 100% success rate for 30-40 years, whereas a 4% WR with a 75/25 AA has a 90-95% success rate for 30-40 years.

Your 3.1% you mention for the GB would have lasted 45 years.  If you had waited one more year to FIRE, and then got a fixed 3.1% real return, it would have lasted 49 years.  If you're 40, thinking about ERing, and decide to wait one year, do the GB, to get low volatility, it could last you until you're 90.

Yes, you're guaranteed to be left with nothing, and yes, you better hope you don't live longer, but you have no volatility along the way.

It comes with a price, but if you're aware of that price.

We have to talk about timeframes when we talk about sustainable withdrawal rates.

And we have to talk about risk tolerance.  There are people that have hundreds of thousands in cash, because they're so uncomfortable with stock market gyrations.  They're guaranteed to lose, with that AA.  They know if they put it in the market, they'll sell low, because they've done it before, and can't handle the swings.

If the lower volatility of the GB gets them to invest, and they're aware of the drawbacks and lower return (and thus shoot for a lower WR), I'd rather that, than them just using cash.

The investor themselves matter quite a bit to deciding the AA.

One other thing:
Quote
Now look at prospective real returns (and if you don't agree that's fine, but give your reasons why): Stocks 4%, long term treasuries 2%, cash 1% and gold 1%.
...
A 2.7% long term return does not give a 4% sustainable withdrawal rate.

If this is the case, a 4% stock return won't offer a 4% sustainable withdrawal rate either, as you'll hit a sequence of returns risk somewhere along the way, depending on the timeframe of your ER, and without the higher returns that are typical to buffer your portfolio first, you'll hit ER fail.

You're talking valuations where a 4% WR isn't sustainable.  It may be MORE sustainable with a 3.1% real return of GB, and low volatility, than a 4% real return of stocks, and much higher volatility.
Title: Re: Portfolio Charts - The Golden Butterfly
Post by: Interest Compound on April 22, 2016, 12:11:04 PM
I encourage you to read the article that Tyler linked above.  He addressed the fact that each of the individual asset classes is likely to experience long periods of underperformance.  But during past periods of single asset underperformance, the portfolio continued to produce stable returns:

"But thinking this way misses the fact that it also did very well when treasuries were crushed as interest rates skyrocketed in the 70’s, when gold lost 80% of its value in the 80’s and 90’s, and when stocks lost money for more than a decade starting in 2000.  So clearly there’s something more fundamental backing the consistent returns than a few great years."

Of course. When you base your selection on backtesting, you always end up with a portfolio that continues to produce stable returns during periods of single asset underperformance. The Golden Butterfly is weighted towards assets which performed well during the specified time period. Looking at these results, then declaring there must be a fundamental backing for it, is illogical. It's one of the worst investing mistakes you can make. As discussed earlier in the thread, Tyler's posts indicate this is the selection process:
The more I look at it, the less surprising the results are.

(https://i.sli.mg/s1SdhC.png)
(https://i.sli.mg/kCeGAG.png)
(https://i.sli.mg/CVV57W.png)

Digging deeper into the "fundamentals", let's look at the evolution of this. It started with the Permanent Portfolio, which is made to perform well in these 4 conditions:
 
Prosperity
Recession
Inflation
Deflation

Great idea! Now let's fill it out with assets:

Prosperity: Stocks
Recession: Cash (or commonly short term treasuries)
Inflation: Gold
Deflation: Long term treasuries

Wait what? Gold? Why not TIPS? The one and only asset guaranteed to track inflation, by the same entity that prints the money? Looking at the data, which one seems to track inflation better?

(https://i.sli.mg/f6VbMh.png)

Hmm, let's fact-check that. Here's 1980-2001:

(https://i.sli.mg/UEAz0B.png)

Here's 2001-2012:

(https://i.sli.mg/9kQFHR.png)

Tips, unsurprisingly, track inflation much better than gold. Hmm, now I'm starting to doubt the whole story! Let's do this analysis over, but this time following the story as-stated:

(https://i.sli.mg/t3ffUt.png)
(https://i.sli.mg/lvkmml.png)

This is more along the lines of what I'd expect from a portfolio like The Golden Butterfly. It's the price you pay for stability. Again, if you aren't comfortable with a portfolio with an expected return in this range (inflation-adjusted 3.99%), you should not use The Golden Butterfly. Comparing this against a commonly recommended standard portfolio, gives you a good idea of the risks here:

(https://i.sli.mg/bLZqoL.png)
(https://i.sli.mg/aiJjOo.png)

When you take a portfolio based on actual fundamentals, then swap in assets which did well during the specified time period, you end up with The Golden Butterfly. The Golden Butterfly portfolio page says (direct quote):

"match or beat the total stock market in long-term real CAGR with fewer stocks and lower volatility"

Perhaps the real lesson is:

"If you're looking for performance like this, weight your portfolio towards assets which are about to outperform."
Title: Re: Portfolio Charts - The Golden Butterfly
Post by: Monkey Uncle on April 23, 2016, 04:42:41 AM
I agree with you that gold isn't really an inflation hedge.  It's more of a "crap hitting the fan, what do I do now, better find a hard asset" type of play.  Or at least that's how some investors use it.  Hence the big spikes when stocks were underperforming in the 1970s and 2000s.  So the creator of the permanent portfolio got a piece of the story wrong, and Tyler perpetuated that error in the fundamental explanation when he created the golden butterfly.

In light of that, your pure story portfolio that substitutes TIPS for gold is not really equivalent.  You've transformed it from a 60% volatile asset portfolio to a 25% volatile asset portfolio.  So I disagree that the pure story portfolio represents the expected return of the golden butterfly and permanent portfolios going forward.  But it's worth noting that your pure story portfolio and a total stock market portfolio produced the exact same 3.8% safe withdrawal rate for a 40 year period (using Tyler's safe withdrawal rate calculator).

As I said before, I'm not a big fan of the golden butterfly because of the high concentration in single assets like gold and treasuries.  But I think the basic idea of dividing a portfolio among volatile, uncorrelated assets has an appeal that is more than just the lucky result of data mining.
Title: Re: Portfolio Charts - The Golden Butterfly
Post by: Monkey Uncle on April 23, 2016, 04:45:07 AM
Now look at prospective real returns (and if you don't agree that's fine, but give your reasons why): Stocks 4%, long term treasuries 2%, cash 1% and gold 1%.

What's the source of your prospective real returns?
Title: Re: Portfolio Charts - The Golden Butterfly
Post by: steveo on April 23, 2016, 05:14:52 AM
This is a great thread. I'm a big fan of at least thinking about asset allocation. I think in Jim Collins terms "smoothing out the ride" makes a lot of sense. At the same time I really think that it is inherently risky to use the tools that Tyler provides with the corresponding data to work out your asset allocation.

This is a dangerous game to play

This is my thought on the subject. I think that you are playing with fire trying to micro-manage your asset allocation.

Personally, I'm too squeamish to put 20% of my net worth in a single asset like gold.  To me that's akin to putting a huge chunk in a single stock.

This really comes back to my point regarding using the data and tools that state that the golden butterfly or the PP will work in the future.

My take is that the tools and data that Tyler provides are fantastic but they just show that a diversified portfolio can hold up a lot better than a single asset class portfolio. They do also provide some pointers.

So there are some broad asset classes:-

1. Stocks
2. Commodities
3. Bonds (& I will include cash in this bucket)
4. Real estate

I think if you then work out where you stand on these asset classes and then get a really broad index fund within that asset class and pay the minimal fees with regards to managing your assets then that gives you the diversification that you require.

Some people though don't want diversification. IC I think goes 100% into stocks via an index fund. That should work. Tyler goes into the PP (or now modified golden butterfly) and I think it should work although I personally wouldn't put that much money into gold (I'd go a broad commodity fund) and I wouldn't split my stock index or bond/cash portfolio as per those recommendations. I think you'd be better off just buying the entire market. I don't put any money into real estate but I own my house and it will for a while be at least 50% of my portfolio. I don't think that is ideal but it's my personal situation. I won't put a cent into real estate other than indirectly via the stock market. I also don't put a cent into commodities however the stock index that I own will own commodity companies. I also think commodities will tend to underperform stocks over the long term and I intend to FIRE on greater than a 4% WR so I personally don't want to take the risk of purchasing a commodity index. If though everything turns out well for me and I have too much money I would definitely think about purchasing commodities.
Title: Re: Portfolio Charts - The Golden Butterfly
Post by: Monkey Uncle on April 23, 2016, 07:59:34 AM
This really comes back to my point regarding using the data and tools that state that the golden butterfly or the PP will work in the future.

My take is that the tools and data that Tyler provides are fantastic but they just show that a diversified portfolio can hold up a lot better than a single asset class portfolio. They do also provide some pointers.

So there are some broad asset classes:-

1. Stocks
2. Commodities
3. Bonds (& I will include cash in this bucket)
4. Real estate

I think if you then work out where you stand on these asset classes and then get a really broad index fund within that asset class and pay the minimal fees with regards to managing your assets then that gives you the diversification that you require.

Good summary, Steveo.  That's the basic concept I've been trying to get at, but you said it more clearly.
Title: Re: Portfolio Charts - The Golden Butterfly
Post by: AdrianC on April 23, 2016, 08:49:58 AM
Now look at prospective real returns (and if you don't agree that's fine, but give your reasons why): Stocks 4%, long term treasuries 2%, cash 1% and gold 1%.

What's the source of your prospective real returns?

They were from memory. Looking up specifics:

Total Stock Market ETF VTI Yield 2% plus assumed 2% corporate growth, or CAPE of about 25 giving earnings yield of 4%, or listen to Bogle (but don't listen to Rob Arnott)
Long-Term Government Bond ETF VGLT Yield 2.4%
Short-Term Government Bond ETF VGSH Yield 0.66%
Gold 0.94% for the last 30 years.

So I was a bit low on LTT and high on STT, it's a wash.
Title: Re: Portfolio Charts - The Golden Butterfly
Post by: AdrianC on April 23, 2016, 09:01:01 AM
Even if all the rest is correct, this statement is overly broad:

A 2.7% long term return does not give a 4% sustainable withdrawal rate.

No?  It sure does for 30 years.

In fact, if you had a guaranteed 2.7% real return, you could take out an inflation-adjusted 4% for 40 years before running out of money.

Sure, but that's not a sustainable withdrawal rate.

I'm using Tyler's definition of sustainable withdrawal rate: "Max WR that sustained initial principal in worst case".

You're talking about a safe withdrawal rate: "Max WR that did not run out of money in worst case".

https://portfoliocharts.com/portfolio/withdrawal-rates/



Title: Re: Portfolio Charts - The Golden Butterfly
Post by: arebelspy on April 23, 2016, 09:20:44 AM
Sure.  With that definition, it's not sustainable.

It is a safe withdrawal rate for many timeframes, with much lower volatility, which is what some may be looking for.
Title: Re: Portfolio Charts - The Golden Butterfly
Post by: Monkey Uncle on April 23, 2016, 12:07:48 PM
Now look at prospective real returns (and if you don't agree that's fine, but give your reasons why): Stocks 4%, long term treasuries 2%, cash 1% and gold 1%.

What's the source of your prospective real returns?

They were from memory. Looking up specifics:

Total Stock Market ETF VTI Yield 2% plus assumed 2% corporate growth, or CAPE of about 25 giving earnings yield of 4%, or listen to Bogle (but don't listen to Rob Arnott)
Long-Term Government Bond ETF VGLT Yield 2.4%
Short-Term Government Bond ETF VGSH Yield 0.66%
Gold 0.94% for the last 30 years.

So I was a bit low on LTT and high on STT, it's a wash.

I suppose your crystal ball is as good as anyone else's, but I wouldn't necessarily assume that it's predictions are going to come true.
Title: Re: Portfolio Charts - The Golden Butterfly
Post by: steveo on April 23, 2016, 06:25:58 PM
I suppose your crystal ball is as good as anyone else's, but I wouldn't necessarily assume that it's predictions are going to come true.

This is the whole point. I'd state it's extremely unlikely that past returns and volatility parameters will be repeated in the future.
Title: Re: Portfolio Charts - The Golden Butterfly
Post by: Indexer on April 23, 2016, 07:15:32 PM
It has been beaten to death, but just to kick the dead horse a few more times...  it needs to be dead. I don't want new investors actually thinking this is a magical portfolio that defies the normal rules of risk and return.

This portfolio relies heavily on treasury bond and gold performance which have been good much of the past 30 years. The problem is that you don't see that trend really anywhere else in history. With interest rates where they are bonds don't have a lot of room to appreciate thanks to rates dropping like they did most of the past 30 years. The opposite is actually more likely, and bonds probably won't have high performance the next 30 years. I'm not saying they will be BAD. I'm just saying bond returns in the 1-3% range are probably more likely than bond returns in the 4-6% range like we have seen in the past.
Title: Re: Portfolio Charts - The Golden Butterfly
Post by: effigy98 on April 25, 2016, 03:37:18 PM
The back and forth is so confusing. So what is the consensus? What provides the best, safest 4% withdrawal rate and is still good for accumulation? Having total stock market 100% and scared of gold, real estate, 5% in each asset class and every country? What? There are so many crazy opinions here a new investor and even an old school one feels like they have a lottery ticket when it comes to these portfolios and they just have to gamble. Bonds are bad, stocks are bad, small value was good, probably now bad, interest rates going to negative 10% so fed can keep steeling from us... bad. Schiller PE bad, however, staying in cash bad. What is good? Is anything good. The only thing I get from this thread is it is probably better to stay working for 1 more year (every year) because the future is so bleak and uncertain.
Title: Re: Portfolio Charts - The Golden Butterfly
Post by: Interest Compound on April 25, 2016, 04:04:33 PM
The back and forth is so confusing. So what is the consensus? What provides the best, safest 4% withdrawal rate and is still good for accumulation? Having total stock market 100% and scared of gold, real estate, 5% in each asset class and every country? What? There are so many crazy opinions here a new investor and even an old school one feels like they have a lottery ticket when it comes to these portfolios and they just have to gamble. Bonds are bad, stocks are bad, small value was good, probably now bad, interest rates going to negative 10% so fed can keep steeling from us... bad. Schiller PE bad, however, staying in cash bad. What is good? Is anything good. The only thing I get from this thread is it is probably better to stay working for 1 more year (every year) because the future is so bleak and uncertain.

That's why the majority of people on this forum, and the majority of people over at Bogleheads, are in the 3-fund portfolio. You ignore the noise, and accept market returns.

Jack Bogle, Vanguard founder: "The beauty of owning the market is that you eliminate individual stock risk, you eliminate market sector risk, and you eliminate manager risk. -- There may be better investment strategies than owning just three broad-based index funds but the number of strategies that are worse is infinite."

Bill Bernstein, author of The Four Pillars of Investing: "Does this (three fund) portfolio seem overly simplistic, even amateurish? Get over it. Over the next few decades, the overwhelming majority of all professional investors will not be able to beat it."

Mark Balasa, CPA, CFP: "That three-pronged approach is going to beat the vast majority of the individual stock and bond portfolio that most people have at brokerage firms. There is a certain elegance in the simplicity of it."

Christine Benz, Morningstar Director of Personal Finance: "By buying total-market index funds--one for U.S. stocks, one for foreign stocks, and one for bonds--investors can gain exposure to a huge swath of securities in three highly economical packages."

Rick Ferri, Forbes columnist and author of six investment books: "The older I get, the more I believe the 3-fund portfolio is an excellent choice for most people. It's simple, cheap, easy to maintain, and has no tracking error that would cause emotional abandonment to the strategy."

Kiplinger's Retirement Report: "You'll beat most investors with just three funds that cover the vast majority of global stock and bond markets: Vanguard Total Stock Market; Vanguard Total International Stock Index and Vanguard Total Bond Market Index."

Prof. Burton Malkiel, author of Random Walk Down Wall Street: "I recommend a total-maket index fund--one that follows the entire U.S. stock market. And I recommend the same approach for the U.S. bond market and international stocks."

Anna Pryor Wall Street Journal writer: "A simple portfolio of 3 funds. It may sound counter-intuitive, but for the average individual investor, less is actually more."

Dan Solin, author of The Smartest Portfolio You'll Ever Own: "You can get as simple or as complicated as you'd like. You can keep it very simple by owning just three mutual funds that invests in domestic stocks, foreign stocks, and bonds. That's precisely what I recommend in my model portfolios."

Prof. Meir Statman, author of What Investors Really Want: "It makes sense to have those three funds. What makes it hard is that it seems too simple to actually be a winner."

John Woerth, Vanguard director of public relations:
"We would agree that this three-fund approach offers most investors a prudent, well-balanced, diversified portfolio at a low cost."

Warren Buffett, famed investor: "There seems to be some perverse human characteristic that likes to make easy things difficult."

https://www.bogleheads.org/forum/viewtopic.php?t=88005
Title: Portfolio Charts - The Golden Butterfly
Post by: Seppia on April 25, 2016, 05:12:08 PM
Also do not forget there is a lot of nitpicking here.
PERSONALLY I prefer the idea of total world stock market and not only USA for example.
Others have a preference for total USA.

But reality is if you buy very broad indexes you are still doing infinitely better compared to those who do not invest at all, or even worse spend all available income.

So go 80-20, 60-40, 60-20-20, 50-30-20, whatever.

This is to say: don't let the search for the absolute best prevent you from action, because that would be the only disastrous choice.

You're much better off going 100% "total stock Europe" than keeping all your money in cash (hyperbolic but not false)
Title: Re: Portfolio Charts - The Golden Butterfly
Post by: Interest Compound on April 25, 2016, 05:26:13 PM
Also do not forget there is a lot of nitpicking here.
PERSONALLY I prefer the idea of total world stock market and not only USA for example.
Others have a preference for total USA.

But reality is if you buy very broad indexes you are still doing infinitely better compared to those who do not invest at all, or even worse spend all available income.

So go 80-20, 60-40, 60-20-20, 50-30-20, whatever.

This is to say: don't let the search for the absolute best prevent you from action, because that would be the only disastrous choice.

You're much better off going 100% "total stock Europe" than keeping all your money in cash (hyperbolic but not false)

Agreed. After speaking with hundreds of people about investing, I've come to the same conclusion. I recommend Vanguard's automatic accounts:

(https://i.sli.mg/cbeIM9.png)

You have two amazing options:

1. "I want Vanguard's experts to do everything for me. I'll just tell them my age and they'll put it in the appropriate Target Retirement Fund (https://investor.vanguard.com/mutual-funds/target-retirement/#/)"

(https://i.sli.mg/KrJEFx.png)

2. "I want Vanguard's experts to do everything for me. I'll just tell them how much risk I want, and they'll put it in the appropriate LifeStrategy Fund (https://investor.vanguard.com/mutual-funds/lifestrategy/#/)"

(https://i.sli.mg/sra52t.png)

Then forget about it.
Title: Re: Portfolio Charts - The Golden Butterfly
Post by: Tyler on April 25, 2016, 05:40:25 PM
That's why the majority of people on this forum, and the majority of people over at Bogleheads, are in the 3-fund portfolio. You ignore the noise, and accept market returns.

Of course Bernstein (https://portfoliocharts.com/portfolio/bernstein-portfolio/), Ferri (https://portfoliocharts.com/portfolio/rick-ferri-core-four/), and Buffett (http://finance.yahoo.com/q?s=BRK-A) all discuss their own alternative portfolios as well and have written books on the matter.  While all of them agree that the three-fund portfolio is an excellent option (as do I (https://portfoliocharts.com/portfolio/three-fund-portfolio/)), I don't believe any of them uses the three-fund portfolio themselves. 

Malkiel recently said (http://www.cnbc.com/2013/11/26/lk-down-dangers-in-diversification.html) that the 60/40 portfolio he pioneered is "downright dangerous" and is now suggesting REITs, dividend growth stocks, and emerging market bonds.  His direct quote -- "Investors who let go of oversimplification and embrace a slightly more complex but still low-cost portfolio will be better prepared to meet changes in their lives and the economy."

Bogleheads (including me) all agree that low-cost index investing is the way to go, but opinions differ greatly on exactly which indices to buy.  Heck -- even their namesake Jack Bogle doesn't see the point (http://time.com/money/3991717/vanguard-jack-bogle-investing-foreign-markets/) of international stocks in a three-fund portfolio.   Larry Swedroe is one of the most prolific contributors there and a staunch advocate for small cap value stocks.

So what is an individual investor to make of it all? 

The most important takeaway is that there's no such thing as a single perfect portfolio that works best for everybody.  That includes the Golden Butterfly.  There are many good ways to invest and even more opinions on the matter, and to expect consensus is not realistic, necessary, or productive.  "Best" means different things to different people. 

That's why the Golden Butterfly is only one of fourteen portfolios (https://portfoliocharts.com/portfolios/) on my site spanning many different good ideas including a 100% Total Stock Market (https://portfoliocharts.com/portfolio/total-stock-market/) portfolio and the Three-Fund (https://portfoliocharts.com/portfolio/three-fund-portfolio/) portfolio.  All use the Bogleheads approach of buying low-cost index funds and rebalancing once a year while ignoring the markets.  Rather than waste too much energy debating universal superiority, the far more productive activity is to find the method that works for you, tune out the noise, and enjoy your life!
Title: Re: Portfolio Charts - The Golden Butterfly
Post by: Interest Compound on April 25, 2016, 06:47:12 PM
That's why the majority of people on this forum, and the majority of people over at Bogleheads, are in the 3-fund portfolio. You ignore the noise, and accept market returns.

Of course Bernstein (https://portfoliocharts.com/portfolio/bernstein-portfolio/), Ferri (https://portfoliocharts.com/portfolio/rick-ferri-core-four/), and Buffett (http://finance.yahoo.com/q?s=BRK-A) all discuss their own alternative portfolios as well and have written books on the matter.  While all of them agree that the three-fund portfolio is an excellent option (as do I (https://portfoliocharts.com/portfolio/three-fund-portfolio/)), I don't believe any of them uses the three-fund portfolio themselves. 

Malkiel recently said (http://www.cnbc.com/2013/11/26/lk-down-dangers-in-diversification.html) that the 60/40 portfolio he pioneered is "downright dangerous" and is now suggesting REITs, dividend growth stocks, and emerging market bonds.  His direct quote -- "Investors who let go of oversimplification and embrace a slightly more complex but still low-cost portfolio will be better prepared to meet changes in their lives and the economy."

Bogleheads (including me) all agree that low-cost index investing is the way to go, but opinions differ greatly on exactly which indices to buy.  Heck -- even their namesake Jack Bogle doesn't see the point (http://time.com/money/3991717/vanguard-jack-bogle-investing-foreign-markets/) of international stocks in a three-fund portfolio.   Larry Swedroe is one of the most prolific contributors there and a staunch advocate for small cap value stocks.

So what is an individual investor to make of it all? 

The most important takeaway is that there's no such thing as a single perfect portfolio that works best for everybody.  That includes the Golden Butterfly.  There are many good ways to invest and even more opinions on the matter, and to expect consensus is not realistic, necessary, or productive.  "Best" means different things to different people. 

That's why the Golden Butterfly is only one of fourteen portfolios (https://portfoliocharts.com/portfolios/) on my site spanning many different good ideas including a 100% Total Stock Market (https://portfoliocharts.com/portfolio/total-stock-market/) portfolio and the Three-Fund (https://portfoliocharts.com/portfolio/three-fund-portfolio/) portfolio.  All use the Bogleheads approach of buying low-cost index funds and rebalancing once a year while ignoring the markets.  Rather than waste too much energy debating universal superiority, the far more productive activity is to find the method that works for you, tune out the noise, and enjoy your life!

You're still operating under the assumption that newbie investors know what's best for them. They don't. Effigy98's post is evidence of that. He/She read the thread, presumably read your article on The Golden Butterfly, and seems more confused than ever. This is why MrMoneyMustache recommends an automatic portfolio for his readers. Psychologically it makes sense. It takes the newbie's decision making out of the equation, as they put their portfolio in the hands of an expert. And what better expert than Vanguard? The only investment firm that's legally obligated to act in our best interests? You'll have the most diverse portfolio possible, with 21,600+ individual holdings across the world, and Vanguard takes care of everything for you.

Yes, for a newbie, this single portfolio objectively works best.

Telling newbies "there is no best, just look at my 14 options and make a decision for your life's savings that will impact you and your family's well-being for generations to come", just doesn't work. As I said in the beginning of the thread, I just don't think your readers can responsibly handle the information you're giving them.
Title: Re: Portfolio Charts - The Golden Butterfly
Post by: dandypandys on April 25, 2016, 06:51:54 PM
Actually, this thread is beyond helpful.. I love hearing the debate on it and it helps me see it from all angles.
I decided to go with a 3 fund portfolio and keep it simple- this was after reading and reading and reading over the last 2 months- ..I rec all newbs to do the same if you can.  Tyler's site is really cool and i like how he shows a ton of great options.
Title: Re: Portfolio Charts - The Golden Butterfly
Post by: Tyler on April 25, 2016, 09:15:38 PM
Yes, for a newbie, this single portfolio objectively works best.

...

As I said in the beginning of the thread, I just don't think your readers can responsibly handle the information you're giving them.

I respectfully disagree on both points.  Investing is more diverse and interesting than an easy one-size-fits-all solution implies, and people deserve to hear multiple perspectives and opinions. 
Title: Re: Portfolio Charts - The Golden Butterfly
Post by: Interest Compound on April 25, 2016, 09:29:16 PM
Actually, this thread is beyond helpful.. I love hearing the debate on it and it helps me see it from all angles.
I decided to go with a 3 fund portfolio and keep it simple- this was after reading and reading and reading over the last 2 months- ..I rec all newbs to do the same if you can.  Tyler's site is really cool and i like how he shows a ton of great options.

Great choice! After months of "reading and reading and reading" you are no longer a newbie :)

For those of you who still are, choosing a Vanguard automatic account is effectively like saying, "Hey Vanguard. Will you manage that 3-fund portfolio for me that I keep hearing so much about?" These accounts:
The 3 fund portfolio is the manual version of Vanguard's automatic accounts. Either way your investments are the same, you just have more control. Both are great choices.
Title: Re: Portfolio Charts - The Golden Butterfly
Post by: steveo on April 25, 2016, 11:56:37 PM
That's why the majority of people on this forum, and the majority of people over at Bogleheads, are in the 3-fund portfolio. You ignore the noise, and accept market returns.

Of course Bernstein (https://portfoliocharts.com/portfolio/bernstein-portfolio/), Ferri (https://portfoliocharts.com/portfolio/rick-ferri-core-four/), and Buffett (http://finance.yahoo.com/q?s=BRK-A) all discuss their own alternative portfolios as well and have written books on the matter.  While all of them agree that the three-fund portfolio is an excellent option (as do I (https://portfoliocharts.com/portfolio/three-fund-portfolio/)), I don't believe any of them uses the three-fund portfolio themselves. 

Malkiel recently said (http://www.cnbc.com/2013/11/26/lk-down-dangers-in-diversification.html) that the 60/40 portfolio he pioneered is "downright dangerous" and is now suggesting REITs, dividend growth stocks, and emerging market bonds.  His direct quote -- "Investors who let go of oversimplification and embrace a slightly more complex but still low-cost portfolio will be better prepared to meet changes in their lives and the economy."

Bogleheads (including me) all agree that low-cost index investing is the way to go, but opinions differ greatly on exactly which indices to buy.  Heck -- even their namesake Jack Bogle doesn't see the point (http://time.com/money/3991717/vanguard-jack-bogle-investing-foreign-markets/) of international stocks in a three-fund portfolio.   Larry Swedroe is one of the most prolific contributors there and a staunch advocate for small cap value stocks.

So what is an individual investor to make of it all? 

The most important takeaway is that there's no such thing as a single perfect portfolio that works best for everybody.  That includes the Golden Butterfly.  There are many good ways to invest and even more opinions on the matter, and to expect consensus is not realistic, necessary, or productive.  "Best" means different things to different people. 

That's why the Golden Butterfly is only one of fourteen portfolios (https://portfoliocharts.com/portfolios/) on my site spanning many different good ideas including a 100% Total Stock Market (https://portfoliocharts.com/portfolio/total-stock-market/) portfolio and the Three-Fund (https://portfoliocharts.com/portfolio/three-fund-portfolio/) portfolio.  All use the Bogleheads approach of buying low-cost index funds and rebalancing once a year while ignoring the markets.  Rather than waste too much energy debating universal superiority, the far more productive activity is to find the method that works for you, tune out the noise, and enjoy your life!

You're still operating under the assumption that newbie investors know what's best for them. They don't. Effigy98's post is evidence of that. He/She read the thread, presumably read your article on The Golden Butterfly, and seems more confused than ever. This is why MrMoneyMustache recommends an automatic portfolio for his readers. Psychologically it makes sense. It takes the newbie's decision making out of the equation, as they put their portfolio in the hands of an expert. And what better expert than Vanguard? The only investment firm that's legally obligated to act in our best interests? You'll have the most diverse portfolio possible, with 21,600+ individual holdings across the world, and Vanguard takes care of everything for you.

Yes, for a newbie, this single portfolio objectively works best.

Telling newbies "there is no best, just look at my 14 options and make a decision for your life's savings that will impact you and your family's well-being for generations to come", just doesn't work. As I said in the beginning of the thread, I just don't think your readers can responsibly handle the information you're giving them.

I'd make a couple of points:-

1. The information that Tyler provides is great. I think that it can be part of an investing education.
2. I think a simple portfolio has the best chance to work over the longer term. So I completely disagree with Malkiel's ideas within Tylers earlier post.
3. I think people in general (and maybe this applies to Malkiel) tend to value their investing knowledge too highly. So they look at Tyler's information (or any other information on investing) and then think I'm smart and I can look at this information and come up with a better than average portfolio. They forget that part of this whole investing field is about predicting the future which you simply can't do.

Summing all of this up I use a simple 3 fund portfolio. I recommend to my parents (people with no idea regarding investing) that they use a Vanguard all in one fund. I reckon over time very few people will beat these options and I doubt my 3 fund portfolio will beat the Vanguard all in one portfolio. I just choose the 3 fund portfolio because I use ETF's and I'm Australian and this provides the lowest fee options.
Title: Re: Portfolio Charts - The Golden Butterfly
Post by: steveo on April 26, 2016, 12:03:56 AM
Yes, for a newbie, this single portfolio objectively works best.

...

As I said in the beginning of the thread, I just don't think your readers can responsibly handle the information you're giving them.

I respectfully disagree on both points.  Investing is more diverse and interesting than an easy one-size-fits-all solution implies, and people deserve to hear multiple perspectives and opinions.

Honestly I don't think so or maybe better put a simple 3 fund portfolio can cater for most investing needs. So if you are risk averse increase the amount of bonds in your portfolio. That is the first question to ask yourself and I don't think it's easy but it's not hard from a technical perspective. Then you need to look at the domestic/international split. If you are from the US I think going 100% US would be fine. You can though choose whatever you are comfortable with. As I'm from Australia I use 50% domestic and 25% international however over time I may increase my international.

The concern I have with all these different portfolios is that people may think that a portfolio like "The Golden Butterfly" can insulate them from the the risk/reward or better put maximum possible returns/volatility trade off. I don't think it can. By choosing a portfolio like "The Golden Butterfly" you are assuming risk in the form of assuming that the future performance of that portfolio as a whole will approximate historical returns. I personally think that is extremely unlikely.
Title: Re: Portfolio Charts - The Golden Butterfly
Post by: steveo on April 26, 2016, 12:04:57 AM
Actually, this thread is beyond helpful.. I love hearing the debate on it and it helps me see it from all angles.
I decided to go with a 3 fund portfolio and keep it simple- this was after reading and reading and reading over the last 2 months- ..I rec all newbs to do the same if you can.  Tyler's site is really cool and i like how he shows a ton of great options.

Great choice! After months of "reading and reading and reading" you are no longer a newbie :)

For those of you who still are, choosing a Vanguard automatic account is effectively like saying, "Hey Vanguard. Will you manage that 3-fund portfolio for me that I keep hearing so much about?" These accounts:
  • Don't require advanced knowledge of the market to invest (anybody can do it with a few button pushes)
  • Are professionally managed automatically, by the only company which generates just enough profit to cover its costs, and with no outside owners (they are owned by people like you who invest with them) truly operates with your best interests in mind.
  • Relieve you of the burden of choosing your own asset allocation, and does so with no tracking error. Reducing behavioral mistakes and possible emotional abandonment to the strategy, the biggest risk to your portfolio.
  • Automatically rebalance.
  • Gradually get less risky as you age (TargetRetirement).
  • Keep you from tinkering with your portfolio.
  • Let you easily schedule automatic contributions while keeping your allocation balanced ($500 a paycheck automatically invested for example).
  • Let you easily schedule automatic distributions while keeping your allocation balanced ($4000 a month automatically deposited to your bank account for example).
  • Let you "Set it and forget it". You can literally login once, schedule automatic contributions, and come back 30 years later knowing everything has been taken care of for you.
  • Reinvest dividends automatically.
  • Don't try to beat the market by adding 10% of this and 5% of that. The aim is not to separate winners from losers, but rather to hold the entire market.
  • Give you the most diverse portfolio possible, with 21,600+ individual holdings across the world.
  • Allow you to easily invest money separately based on goals. Short-term money vs long-term money vs retirement money, for example.
The 3 fund portfolio is the manual version of Vanguard's automatic accounts. Either way your investments are the same, you just have more control. Both are great choices.

I love Vanguard. It just takes all the stress or drama out of investing.
Title: Re: Portfolio Charts - The Golden Butterfly
Post by: arebelspy on April 26, 2016, 12:55:14 AM
The back and forth is so confusing. So what is the consensus? What provides the best, safest 4% withdrawal rate and is still good for accumulation? Having total stock market 100% and scared of gold, real estate, 5% in each asset class and every country? What? There are so many crazy opinions here a new investor and even an old school one feels like they have a lottery ticket when it comes to these portfolios and they just have to gamble. Bonds are bad, stocks are bad, small value was good, probably now bad, interest rates going to negative 10% so fed can keep steeling from us... bad. Schiller PE bad, however, staying in cash bad. What is good? Is anything good. The only thing I get from this thread is it is probably better to stay working for 1 more year (every year) because the future is so bleak and uncertain.

(Emphasis added.)

The only we we can answer that is with a crystal ball.

Tyler's site provides a lot of information, but as IC points out, it's probably not the place to start learning.  It's a place to go to become more sophisticated, specifically around the asset allocation selection part of investing.

If you aren't there yet, something simple and straightforward is probably best.  But there will never be a consensus on what's "best," because:
1) We don't know the future, and
2) Different investors have different criteria

If the Golden Butterfly worked as well for the next 45 years as the last 45, it would be a great option, IMO.  It's debatable (obviously) if it will.

You have to choose to either educate yourself, and choose what's right for you, or not bother, and go with something simple/straightforward where someone else does the thinking for you (this is not necessarily a bad thing), like a target date fund.

And there's always Wellington/Wellesley.
Title: Re: Portfolio Charts - The Golden Butterfly
Post by: Seppia on April 26, 2016, 01:04:42 AM
I reckon over time very few people will beat these options and I doubt my 3 fund portfolio will beat the Vanguard all in one portfolio. I just choose the 3 fund portfolio because I use ETF's and I'm Australian

I visualized you in front of the screen trying to buy the all in one fund.

*click*

Pop up appears

"We are sorry, you cannot purchase the selected fund: you're Australian"

Some sort of racist bias by vanguard :D

That said, I love Tyler's work and one day I will probably contact him to ask authorization to translate his posts in Italian, but I do understand why IC fears the info could backfire to the superficial newbie.

Counter point to consider: the info provided is not super simple to process.
If I fed the site to my wife (she doesn't touch anything about investing) she would not understand a single thing.
So I guess Tyler's readers are on average knowledgeable enough to handle the provided info with care.

Title: Re: Portfolio Charts - The Golden Butterfly
Post by: jpeizie on April 26, 2016, 02:28:19 AM
Hi all,

I almost never post here, but I just can't resist. I have a GB-style portfolio and I feel like folks are missing its key benefits specifically for early retirees. So let me take you through some of my own thought process and you can decide for yourself. This is basically a defense of the ideas behind the GB and the Harry Brown Permanent Portfolio its based on; you can play with the specific allocations to your hearts content. What convinced me to use a GB-style portfolio as opposed to a classic 3 fund portfolio is that it significantly reduces real-world risks during accumulation and during withdrawal phases. As someone looking to FIRE, you need to be concerned with finding a balance between volatility and returns. You cannot focus only on long term returns. Here's a look at the FIRE time charts from portfoliocharts.com:

Classic 3 Fund:
(http://i.imgur.com/Hv1Vr6E.jpg)

GB:
(http://i.imgur.com/BO0ebNU.jpg)

Notice how in the best case scenario, you've got about 12 or 13 years of working until you retire using either portfolio at a 50% savings rate. Maybe you think returns will be lower in the future, so maybe that pushes it out to 15 years. But because of GB's lower volatility, you have a far smaller risk that a stock market crash during your accumulation phase will force you to work for 18 or 20 years until you're ready to FIRE. Thats a huge risk you're taking if you choose to use the classic 3 fund portfolio. The lower volatility of the GB directly supports retiring earlier. Same applies to the Permanent Portfolio, it just doesn't have as much juice as the GB because it has a lower stock allocation.

Next, look at expected withdrawal rates:

Three fund:
(http://i.imgur.com/ykLB9YA.jpg)

GB:
(http://i.imgur.com/x7bQAar.jpg)

Notice that across all timeframes, the GB supports a higher sustainable withdrawal rate. Don't worry about the actual rates here, my point is that in any time frame you like, the GB supports a higher rate than the classic 3 Fund. Again, this is directly because of the 3 Fund's higher volatility. With the 3 Fund, you are running the risk of knee-capping your portfolio by being forced to withdraw from it during a severe market crash, and that may cause your portfolio to fail before you die. GB significantly reduces this risk.

Lets step through each asset:

20% TSM and 20% SCV: I'm not going to specifically defend Small Cap Value here because I don't want to get sidetracked with it. The reason the GB works is because it devotes a significant portion of its assets to indexing the stock market. Maybe you decide to slice and dice it the way Tyler has with the GB, maybe you just do 40% TSM. Whatever. The point of this portion is to participate in the gains of all the value-producing goodness of the stock market. There's really nothing controversial about that.

20% Long Term Treasuries: These are here specifically because they are the most volatile type of bond, and specifically because they tend to spike in value when the stock market crashes. It happens almost like clockwork because there are fundamental economic reasons that there is a flight to safety during a market crash. The fact that long term treasuries tend to spike in value during market crashes is not particularly controversial according to anything that I've read, and no one is claiming it's a mirage based on backtesting. The point of this portion is to dampen the volatility of your stock market allocation. I personally like a ratio of 2 parts stock market to 1 part LTT, but your mileage may vary. Now, I will grant you that GB historical returns are juiced a little bit because of the famous 30 year bond tailwind that long term treasuries have experienced. That has meant that this portion was contributing something meaningful to the portfolio returns during the long stretches between market crashes. And I'll grant you that its not going to repeat itself going forward, and if you want to project the GB's returns going forward you should probably knock a little off the top for this reason (same applies to any other portfolio that holds Government bonds). But that's not the point of holding them in the GB. Its a defensive asset that reduces downside volatility, and remember, as an early retiree, no matter if you're accumulating or FIRE'd, volatility is not your friend.

20% Gold: This is also controversial. People say it doesn't produce any value, doesn't "really" track inflation, whatever. The point of holding gold is that its a highly volatile asset that doesn't correlate with either of the two above assets. So sometimes, regardless of what the other two are doing, gold will shoot through the roof and you'll get to reap some of that benefit. Other times it will tank for long periods of time. Thats ok. It allows you to buy lots of gold cheaply and reap even greater benefits the next time it shoots through the roof. It's a wild card and that's the point. As for the keeping-up-with-inflation argument, eh... I don't know. Over long enough time periods it looks like it roughly keeps up with inflation, but maybe you don't think it does. That's ok. The point is the wild swings that you get to take advantage of. Additionally, this portion should give you a little peace of mind during those SHTF times when people are losing faith in the stock market and the US Government at the same time. When that happens, gold is virtually guaranteed to turn into a gusher and this portion will be the key thing that is able to reduce your downside volatility while everyone else's portfolio is in the toilet. I invite you to look at any backtesting tool you like using any non-gold portfolio you like. Then modify that portfolio to add a 10%, 15%, or 20% slice of gold. The portfolio that adds the "non-performing" asset virtually always outperforms the one that leaves it out. That's because its highly volatile and doesn't correlate with the others. Its counter-intuitive, but that helps boost your portfolio returns while making it less volatile.

20% Cash (or short term treasuries): You have an emergency fund, right? The point of your emergency fund is to help you ride out the bad times without having to sell other assets at a disadvantageous time. The only thing the GB and PP do is include your emergency fund as part of your overall portfolio and give you some guidelines for when to balance into and out of it to the benefit of your overall portfolio. I fail to see anything controversial about that, in fact it makes a lot of sense to me. If you don't like 20% of your portfolio sitting in cash, that's fine, feel free to reduce it to a level you like and put the rest to work. But that's all the GB is doing here.

Hope this helps add to the debate. I think if you're reading this forum and have enough interest in your portfolio to poke around on Tyler's site and consider different allocations, then you are by definition not a newbie (or at any rate, you won't be for long) and are capable of understanding these points and making a choice based on what's best for you and your own temperament. But as a site dedicated to FIRE'ing, you've got to understand the risks volatility brings concretely to your life in the form of potential longer working career and potential portfolio failure in retirement, and the GB is just one of many options to reduce those risks.
Title: Re: Portfolio Charts - The Golden Butterfly
Post by: arebelspy on April 26, 2016, 02:51:30 AM
As someone looking to FIRE, you need to be concerned with finding a balance between volatility and returns.

I personally think volatility is not the main concern for an early retiree.  Or rather, it is, but it shouldn't be.  It's flashy and scary, but inflation is the silent, deadly killer.  The best way to beat inflation is high real returns.  Not a single commodity that you hope hedges against it, but in actuality tends to have a 0% real return.

Next, look at expected withdrawal rates

The issue with your whole post is encapsulated in this one sentence.  Those are not expected withdrawal rates.  Those are historical withdrawal rates.  The people arguing against the GB are saying that it had those withdrawal rates, historically, as a matter of coincidence.  Data mining found the portfolio, but if the GB hadn't performed that well over the last 45 years, the same process would have found a different portfolio that did perform that well.  And you would be posting, arguing that THAT AA was really good, and here's why, and take a look at these "expected" withdrawal rates.

It's a potential survivorship bias problem.

I haven't yet decided if I believe this, or not, but there is the fundamental disconnect between your post and the arguments against: all of your posts were historically true for the last 45 years (but not before it), but won't necessarily hold true for the next 45 years.
Title: Re: Portfolio Charts - The Golden Butterfly
Post by: steveo on April 26, 2016, 03:11:15 AM
I reckon over time very few people will beat these options and I doubt my 3 fund portfolio will beat the Vanguard all in one portfolio. I just choose the 3 fund portfolio because I use ETF's and I'm Australian

I visualized you in front of the screen trying to buy the all in one fund.

*click*

Pop up appears

"We are sorry, you cannot purchase the selected fund: you're Australian"

Some sort of racist bias by vanguard :D

That said, I love Tyler's work and one day I will probably contact him to ask authorization to translate his posts in Italian, but I do understand why IC fears the info could backfire to the superficial newbie.

Counter point to consider: the info provided is not super simple to process.
If I fed the site to my wife (she doesn't touch anything about investing) she would not understand a single thing.
So I guess Tyler's readers are on average knowledgeable enough to handle the provided info with care.

There is Vanguard Australia. I don't have enough money to use the all in one fund at a lower fee so I went the ETF route. I really like the all in one option though. I just tried to minimise the fees. The Australian thread goes into this discussion a bit and I don't think anyone can say which option is the right way.

I don't think people using Tyler's site are the type to think that there is a perfect portfolio and be beginner investors. I do think though that people that are educated are more likely to deceive themselves that their portfolio will hold up pretty similarly in the future to what it has in the past. I see asset allocation as being similar to picking individual stocks in that going for a simple approach is more likely to ensure you get average returns and therefore outperform most people over time.
Title: Re: Portfolio Charts - The Golden Butterfly
Post by: steveo on April 26, 2016, 03:28:34 AM
I have a GB-style portfolio and I feel like folks are missing its key benefits specifically for early retirees. So let me take you through some of my own thought process and you can decide for yourself. This is basically a defense of the ideas behind the GB and the Harry Brown Permanent Portfolio its based on; you can play with the specific allocations to your hearts content. What convinced me to use a GB-style portfolio as opposed to a classic 3 fund portfolio is that it significantly reduces real-world risks during accumulation and during withdrawal phases. As someone looking to FIRE, you need to be concerned with finding a balance between volatility and returns. You cannot focus only on long term returns.

This is exactly the type of approach that concerns me. I'm not stating that your logic or reasoning is incorrect but I think that you are at risk of choosing an asset allocation that works well via back-testing but the future will be different to the past and the performance achieved in the past won't be anything like future performance.

My concern with this approach is:-

1. Gold may end up a dud asset over time. It will have a couple of up moments but overall it will probably have a high holding cost and underperform most asset classes over time. I do think it will decrease your volatility because it's up periods will probably happen when the world is in a crisis and stocks will tank but will that help you over the longer period. I'm honestly not sure.
2. Treasuries may suffer from an extended period of low returns.
3. The combination of the above 2 points may mean that 60% of your portfolio delivers poor returns over time and therefore your WR will need to be lower.

I think most lower volatility portfolios suffer from the need for a lower safe WR. Personally I would put more money into asset classes that are not correlated to the stock market if I had a lower WR because I think the the performance hit is probably worth the decreased volatility.

In stating all of that no one can predict the future and we might lurch from one economic problem to the next and everyone will run for gold for the next 30 years.

The issue with your whole post is encapsulated in this one sentence.  Those are not expected withdrawal rates.  Those are historical withdrawal rates.  The people arguing against the GB are saying that it had those withdrawal rates, historically, as a matter of coincidence.  Data mining found the portfolio, but if the GB hadn't performed that well over the last 45 years, the same process would have found a different portfolio that did perform that well.  And you would be posting, arguing that THAT AA was really good, and here's why, and take a look at these "expected" withdrawal rates.

It's a potential survivorship bias problem.

I just quoted this because it's the same issue that I am concerned with.

Personally I'm not willing to take the risk that the historical performance will be the same or really similar to the future returns.
Title: Portfolio Charts - The Golden Butterfly
Post by: Seppia on April 26, 2016, 03:30:44 AM

I see asset allocation as being similar to picking individual stocks in that going for a simple approach is more likely to ensure you get average returns and therefore outperform most people over time.


In fact, I tend to agree as I hold a very simple 100% stocks allocation, plus some cash.
I just think Tyler's work is amazingly interesting and very useful.
To me, it proved what I suspected already and what I really, really think is the important message to be sent to the non-investing, non-mustachian masses:

Invest!

This is the first, major hurdle that many, many people never overcome.
for these people, even a paltry 1% net annual return would be a massive improvement versus their current AA, which is
- cash
- sometimes an owned home

I feel this issue especially, because here in Italy where I live the financial illiteracy rate is through the roof

Only 2% of Italians responded correctly to these 5 questions

http://www.oecd.org/pisa/test/financialliteracytest/

TWO PERCENT!
Title: Re: Portfolio Charts - The Golden Butterfly
Post by: steveo on April 26, 2016, 04:28:02 AM

I see asset allocation as being similar to picking individual stocks in that going for a simple approach is more likely to ensure you get average returns and therefore outperform most people over time.


In fact, I tend to agree as I hold a very simple 100% stocks allocation, plus some cash.
I just think Tyler's work is amazingly interesting and very useful.
To me, it proved what I suspected already and what I really, really think is the important message to be sent to the non-investing, non-mustachian masses:

Invest!

This is the first, major hurdle that many, many people never overcome.
for these people, even a paltry 1% net annual return would be a massive improvement versus their current AA, which is
- cash
- sometimes an owned home

I feel this issue especially, because here in Italy where I live the financial illiteracy rate is through the roof

Only 2% of Italians responded correctly to these 5 questions

http://www.oecd.org/pisa/test/financialliteracytest/

TWO PERCENT!

I think Tyler's work is great as well. I'm just not sure if basing your asset allocation on the tools and information available from Tyler is the right approach.
Title: Re: Portfolio Charts - The Golden Butterfly
Post by: jpeizie on April 26, 2016, 04:34:54 AM
Quote
I personally think volatility is not the main concern for an early retiree.  Or rather, it is, but it shouldn't be.  It's flashy and scary, but inflation is the silent, deadly killer.

I think that's fair enough and inflation is a real concern. I think the GB is fairly well protected from inflation by having 40% in stocks but people are different and that might not be enough for others. I'm not living the ER life just yet, but I think what would keep me up at night is the volatility more so than the inflation.

Quote
The issue with your whole post is encapsulated in this one sentence. Those are not expected withdrawal rates.  Those are historical withdrawal rates.  The people arguing against the GB are saying that it had those withdrawal rates, historically, as a matter of coincidence.  Data mining found the portfolio, but if the GB hadn't performed that well over the last 45 years, the same process would have found a different portfolio that did perform that well.  And you would be posting, arguing that THAT AA was really good, and here's why, and take a look at these "expected" withdrawal rates.

OK, you got me on my bad word choice. My intent wasn't to draw your attention to the withdrawal rates themselves, but the fact that the GB's withdrawal rate has been consistently higher than the 3-Fund's and that much of that difference is due to similar returns combined with much lower volatility. Future returns probably won't match past returns, and of course that applies to the 3-Fund portfolio as well. What won't change is the systematic difference in volatility. The difference in volatility is a result of specific assets being chosen to complement each other. The specific proportions of the 20/20/20/20/20 allocation? Yeah, that's data mining to an extent. But you can play around with those and see what makes you feel comfortable. My point wasn't really to defend the GB per se, just the thinking behind it and the PP in general, which I find sound. I'm not sure how that is a result of data mining any more than the 3-Fund portfolio itself is.

Quote
1. Gold may end up a dud asset over time.

It might! In fact, you can look back at long periods of GB backtesting and see where gold sucked. But the GB was fine during those periods. Mostly because if people don't want to own gold, they probably have a lot of faith in the stock market and the US Government, so your other assets are doing well.

Quote
2. Treasuries may suffer from an extended period of low returns.

They might! In fact I'll even go farther and say that they will! But the point of holding the long term treasuries is not that they'll provide high returns in and of themselves. The point is that they'll spike when the stock market crashes. I agree with the criticisms that the GB probably won't have as high returns/withdrawal rates in the future as it had in the past for this reason.

Quote
Personally I'm not willing to take the risk that the historical performance will be the same or really similar to the future returns.

Honest question, and maybe I'm putting words in your mouth here, but why does this concern you about the GB but not the 3-Fund?
Title: Re: Portfolio Charts - The Golden Butterfly
Post by: steveo on April 26, 2016, 05:39:07 AM
Honest question, and maybe I'm putting words in your mouth here, but why does this concern you about the GB but not the 3-Fund?

It's a good question.

My concerns with the PP or the GB are as follows:-

1. Gold and treasuries have had some periods of exceptional growth in the past that may not be replicated in the future. Stocks suffer from this as well however I would expect stocks to outperform gold and treasuries over time more consistently.
2. Assuming returns of gold and treasuries revert to a lower mean then I would expect that a lower WR would be required in retirement.
3. I think you are invested too much in specific assets i.e. gold instead of a broad commodity index and treasuries instead of a broad bond index. What if oil is the outperformer within the commodities pool or silver or coal or coffee. I would also prefer a broad stock index rather than the large cap and small cap blend. These are all examples in my opinion of over-optimisation that leads to a less robust model or in this case portfolio. You are basically over-fitting the data rather than taking from the data the key lessons that they are providing.

I do think that uncorrelated assets within a portfolio can really work well and if I was prepared to have a lower WR I would definitely purchase a commodity index. If my portfolio increases to a reasonable size I may even choose to do this.

The second question is why am I not concerned about a 3 fund portfolio. I suppose that this comes down in my opinion to not over-fitting the data and taking the key lessons from the past. So I use broad bond and stock indexes. I don't try and pick the specific sector that may outperform. I also think that the bond section of my portfolio is a good enough hedge against the stock market crashing or falling or going through an extended downturn.

I should add on this point that I am concerned about a 3 fund portfolio or maybe better put a stock heavy asset allocation. I'm taking that risk though because I can downsize my house to obtain additional cash (this is like a hidden part of my asset allocation), I still have some assets within bonds but mostly because I want to have a higher WR which I think is more likely to work out over the longer term with a stock heavy portfolio.
Title: Re: Portfolio Charts - The Golden Butterfly
Post by: Interest Compound on April 26, 2016, 07:08:48 AM
Hope this helps add to the debate. I think if you're reading this forum and have enough interest in your portfolio to poke around on Tyler's site and consider different allocations, then you are by definition not a newbie (or at any rate, you won't be for long) and are capable of understanding these points and making a choice based on what's best for you and your own temperament.

I genuinely thank you for posting this, as it highlights the issue. Please spend some time digesting Arebelspy's response.
Title: Re: Portfolio Charts - The Golden Butterfly
Post by: JZinCO on April 26, 2016, 07:22:33 AM

I haven't yet decided if I believe this, or not, but there is the fundamental disconnect between your post and the arguments against: all of your posts were historically true for the last 45 years (but not before it), but won't necessarily hold true for the next 45 years.


Just commenting to say I am appreciating this discussion.

I italicized ARB's statement as it he hit the nail on the fundamental divergence between proponents and opponents of GB. Here's the way I see it; keep in mind I don't follow GB, and tend to be merriman-ish (slice and dice the 3 fund to achieve a small cap and value tilt):
I've seen the comment made that data supporting the GB span only a 'few' years. Few meaning about at least a third of the entire stock market history. It hardly seems the product of recency bias. It spans ALL of the years that gold has been able to float. Tyler has discussed at length that GB has performed over a slew of market and economic conditions. Given that, the onus really is on opponents to make a very solid case against GB.
Consider this example: I sample some thing and get values of 0.5, 0.25, and 0.66. If someone says 'hey now, the real population of values going forward are much more likely to be different, say around either 0.1 or 1.0', they've got to prove beyond some doubt that the alternative should be accepted over the null. Given that the null hypothesis is informed by the only observations we have, the likelihood that the alternative is true without some very compelling evidence is lower. Hence the burden of proof is on the alternative.

In other words, as a casual reader of this discussion I do not view pro/op-onnets of opponents of GB equally a priori. I've been sitting back, eating popcorn waiting for opponents to tell me why GB will perform dramatically different going forward.

I'm not yet accepted the alternative hypothesis.
Title: Re: Portfolio Charts - The Golden Butterfly
Post by: Interest Compound on April 26, 2016, 07:29:31 AM
Quote
Personally I'm not willing to take the risk that the historical performance will be the same or really similar to the future returns.

Honest question, and maybe I'm putting words in your mouth here, but why does this concern you about the GB but not the 3-Fund?

My answer is similar to Steveo's. This is why it's so hard to stay the course. During your investment horizon, you'll see a thousand and one different "Golden Butterfly's". Keep your head down, keep investing in Total Market Index Funds, and you'll be mathematically guaranteed to beat or match over half of all dollars invested in the market, with no worry of ever underperforming.

It's not:

"The 3-fund portfolio performed well in the past, therefore I expect it to perform well in the future."

Which is what you're basing the entirety of your analysis on. It's:

"Total Market Index Funds beat or matched half of all invested dollars in the past, I do not expect mathematical laws to change, so I expect it to beat or match half of all invested dollars in the future."

Passive investing has a deep humility at its core--the aim is not to separate winners from losers, but rather to hold the entire market.
Title: Re: Portfolio Charts - The Golden Butterfly
Post by: Interest Compound on April 26, 2016, 07:50:03 AM

I haven't yet decided if I believe this, or not, but there is the fundamental disconnect between your post and the arguments against: all of your posts were historically true for the last 45 years (but not before it), but won't necessarily hold true for the next 45 years.


Just commenting to say I am appreciating this discussion.

I italicized ARB's statement as it he hit the nail on the fundamental divergence between proponents and opponents of GB. Here's the way I see it; keep in mind I don't follow GB, and tend to be merriman-ish (slice and dice the 3 fund to achieve a small cap and value tilt):
I've seen the comment made that data supporting the GB span only a 'few' years. Few meaning about at least a third of the entire stock market history. It hardly seems the product of recency bias. It spans ALL of the years that gold has been able to float. Tyler has discussed at length that GB has performed over a slew of market and economic conditions. Given that, the onus really is on opponents to make a very solid case against GB.
Consider this example: I sample some thing and get values of 0.5, 0.25, and 0.66. If someone says 'hey now, the real population of values going forward are much more likely to be different, say around either 0.1 or 1.0', they've got to prove beyond some doubt that the alternative should be accepted over the null. Given that the null hypothesis is informed by the only observations we have, the likelihood that the alternative is true without some very compelling evidence is lower. Hence the burden of proof is on the alternative.

In other words, as a casual reader of this discussion I do not view pro/op-onnets of opponents of GB equally a priori. I've been sitting back, eating popcorn waiting for opponents to tell me why GB will perform dramatically different going forward.

I'm not yet accepted the alternative hypothesis.

Survivorship Bias - the single greatest fallacy in investing (http://forum.mrmoneymustache.com/investor-alley/survivorship-bias-the-single-greatest-fallacy-in-investing-35417/)

When we are pouring over the data to determine why a particular backtested strategy outperformed over a specific time period...we are implicitly making an assumption...that this strategy is special. After all, almost all of the other strategies failed, why did this one win? There must be some special property it exploited.

This assumption is a logical fallacy.

A Random Walk Down Wall Street has a relevant example. Take a large number of people, and ask them to flip a coin. If they flip heads they win, tails and they're eliminated from the game. After the first flip, about half the people will be eliminated. Then ask them to flip again, and again, and again. After 10 flips, only a select few people will be left. Are these people "lucky"? Are they "skilled". Would anything be gained by spending time studying their coin flipping strategy?

In other words, considering the large initial sample size, studying any one particular backtested strategy, and trying to peel out the "why" behind its results, is an effort in futility. This is especially silly with The Golden Butterfly, as even the stated story behind it's performance doesn't make sense, as highlighted earlier in the thread. Think about that for a moment. Even the person who discovered this portfolio can't explain it.

That said, I explained it pretty clearly in comment #57 (http://forum.mrmoneymustache.com/investor-alley/portfolio-charts-the-golden-butterfly/msg1060919/#msg1060919): When you take a portfolio based on actual fundamentals, then swap in assets which did well during the specified time period, you end up with The Golden Butterfly.
Title: Re: Portfolio Charts - The Golden Butterfly
Post by: Tyler on April 26, 2016, 08:15:00 AM
Think about that for a moment. Even the person who discovered this portfolio can't explain it.

Just because the explanation doesn't make sense to you does not mean that a thorough one has not been offered (https://portfoliocharts.com/2016/04/18/the-theory-behind-the-golden-butterfly/) or that it does not make sense to others.
Title: Re: Portfolio Charts - The Golden Butterfly
Post by: JZinCO on April 26, 2016, 08:25:09 AM
I do understand what you are say InCo. But I only have past performance of the assets to use. I'm not at all saying GB is special. Or that it outperformed. (as an aside outperformed what? It's simple the sum of it's parts + rebalancing. It should match the indices it is composed of. I'm not going to take the leap that it outperformed an all equity of 60/40 portfolio because that's apples and oranges.) I'm just saying that we can only make decisions based on what we can observe. We can observe the distribution of returns from a portfolio as well as the failures of portfolios to account for survivorship.

Why do you think GB, long-term, will perform much differently than it has? If I was a betting man, I would say that only .098% of people would be left after 10 coin flips. I would put my money on that every time. And I would put my money on GB having a 5.8% real return (+/- whatever standard deviation in the data set) unless I have compelling evidence to tell me that the future will be different than the past.

Given that we cannot observe all possible universes of performance of GB, why should we expect that a non-observed performance is more likely to occur than the performance that we have seen?

Not to go on a tangent, but this is why I tilt and favor stocks over bonds. Do small caps perform better historically because of greater risk or because of market inefficiences? Folks like Malkiel aren't convinced on what the mechanism is. But we have observed a small cap premium over time so I'm going to hedge my bets that a small cap tilt will perform better than a strict market cap allocation of stocks. Likewise I am >90% stocks. I understand the mechanism of why stocks should perform better than bonds, but we can catch observations of stocks and bonds on the tails of return distributions (the 20-oughts is a great example). Sure stocks have returned ~6.5% real over the span of observations we have. I'm not naive to think I will achieve that CAGR but I ca say with a quantifiable degree of confidence that I am more likely to achieve 6.55% than 1% or 10%.
Title: Re: Portfolio Charts - The Golden Butterfly
Post by: Interest Compound on April 26, 2016, 09:44:42 AM
Think about that for a moment. Even the person who discovered this portfolio can't explain it.

Just because the explanation doesn't make sense to you does not mean that a thorough one has not been offered (https://portfoliocharts.com/2016/04/18/the-theory-behind-the-golden-butterfly/).

Sorry Tyler. I appreciate your work here as much as anyone, but you gave no explanation for why Gold fits in the "Inflation" field. You acknowledged the issue, then brought up correlation as a justification to keep it in the portfolio anyway. You know what other asset has a similar correlation, and does track inflation? TIPS.

Your explanation for the inclusion of Small Cap Value was similar. You acknowledged the issue, then said other options like Total International also work.

Let's do the investigation again:

(https://i.sli.mg/7vkKBt.png)
(https://i.sli.mg/ELxHkY.png)

This is more along the lines of what I'd expect from a portfolio like The Golden Butterfly. It's the price you pay for stability. Again, if you aren't comfortable with a portfolio with an expected return in this range (inflation-adjusted 4.5%), you should not use The Golden Butterfly. Comparing this against a commonly recommended standard portfolio, gives you a good idea of the risks here:

(https://i.sli.mg/bocU1u.png)
(https://i.sli.mg/YFLgix.png)

Inflation Adjusted Final Balance:

Pure Story 2: $547,471
Global Cap-Weighted Stocks: $3,086,771
Conservative 3-Fund Portfolio: $1,027,390

When you remove the ability to predict the future, this is what you end up with. In other words, when you take a portfolio based on actual fundamentals, then swap in assets which you already know did well during the specified time period, you end up with The Golden Butterfly. The Golden Butterfly portfolio page says (direct quote):

"match or beat the total stock market in long-term real CAGR with fewer stocks and lower volatility"

Perhaps the real lesson is:

"If you're looking for performance like this, weight your portfolio towards assets which are about to outperform."
Title: Re: Portfolio Charts - The Golden Butterfly
Post by: Interest Compound on April 26, 2016, 09:59:16 AM
Why do you think GB, long-term, will perform much differently than it has? If I was a betting man, I would say that only .098% of people would be left after 10 coin flips. I would put my money on that every time. And I would put my money on GB having a 5.8% real return (+/- whatever standard deviation in the data set) unless I have compelling evidence to tell me that the future will be different than the past.

Don't you see?

The equivalent of:

"only .098% of people would be left after 10 coin flips"

Is not:

"GB having a 5.8% real return"

When you're betting on GB having a 5.8% real return, you're betting that GB will be one of the 0.098% of portfolios that are left.
Title: Re: Portfolio Charts - The Golden Butterfly
Post by: Tyler on April 26, 2016, 10:15:48 AM
Whether or not you agree with the reasoning for why the GB works, Gold and TIPS are very different assets with wildly different behaviors.  To blindly substitute one for the other is misleading. 

(http://i67.tinypic.com/2j0gmpv.jpg)

I respect your conviction, and we all understand your position.  There's no need to filibuster or start repeating yourself.  It's ok to disagree! :)  I value this forum for the diverse perspectives.
Title: Re: Portfolio Charts - The Golden Butterfly
Post by: DrF on April 26, 2016, 10:28:21 AM
The devil is in the details. If you are going to use an asset class that is supposed to hedge against inflation and you choose gold, why can't you substitute TIPS and get the exact same result? It's precisely because they do behave differently on backtesting which your software found. I think the crux of IC's arguement is that you contend that you chose all of your asset classes to hedge against a particular market cycle, where in fact what you really did was have the algorithm give you the equal weight of 5 asset classes that historically have given you low volatility and relatively high CAGR. It would possibly work in your favor, or at least appease pedantic types, to say simply "I have included asset classes which historically show some degree of uncorrelated behavior that backtest well". Which I think is what you've done.
Title: Re: Portfolio Charts - The Golden Butterfly
Post by: effigy98 on April 26, 2016, 01:38:33 PM
I have a GB-style portfolio and I feel like folks are missing its key benefits specifically for early retirees. So let me take you through some of my own thought process and you can decide for yourself. This is basically a defense of the ideas behind the GB and the Harry Brown Permanent Portfolio its based on; you can play with the specific allocations to your hearts content. What convinced me to use a GB-style portfolio as opposed to a classic 3 fund portfolio is that it significantly reduces real-world risks during accumulation and during withdrawal phases. As someone looking to FIRE, you need to be concerned with finding a balance between volatility and returns. You cannot focus only on long term returns. Here's a look at the FIRE time charts from portfoliocharts.com:

This is exactly the way I have interpreted it and one reason I like the idea of the Golden Butterfly. I am not new to investing, have been investing for over a decade, but I suck at it overall (5% return average), so I just want the safest, highest return possible. Every time I think I get it right, more information makes me doubt. This debate is one of those, I enjoy a debate about most things, however, this subject scares me as I hate work so very much that the possibility to retire early in just 6 more years is the only thing that keeps me going with this fake corporate smile. This is just one area in my life I would like to actually get right.
Title: Re: Portfolio Charts - The Golden Butterfly
Post by: Tyler on April 26, 2016, 02:25:08 PM
This is exactly the way I have interpreted it and one reason I like the idea of the Golden Butterfly. I am not new to investing, have been investing for over a decade, but I suck at it overall (5% return average), so I just want the safest, highest return possible. Every time I think I get it right, more information makes me doubt. This debate is one of those, I enjoy a debate about most things, however, this subject scares me as I hate work so very much that the possibility to retire early in just 6 more years is the only thing that keeps me going with this fake corporate smile. This is just one area in my life I would like to actually get right.

Hi Effigy.  I understand your confusion and frustration. 

This is a point where I do agree with Interest Compound.  If anyone finds themselves confused by the details of this discussion and overwhelmed by all of the options, then IMHO the best first step is to invest in the Classic 60-40 (https://portfoliocharts.com/portfolio/classic-60-40/) portfolio (or something similar).  It has been around forever, and while it does have its tradeoffs (as all portfolios do) there are huge support communities (https://www.bogleheads.org/) to help you stay the course.  And if you choose to build on it later, those two funds will be the foundation of almost any future portfolio you'll grow into.  Don't let the search for the "perfect" portfolio stop you from getting off the starting line.  Investing is a journey, not a switch. 

If after getting comfortable you decide you want to learn more about alternative assets and how they might augment your portfolio performance in some way then that's great.  Research and learn, but don't act hastily -- take it one step at a time.  A common next step is to look at international stocks (like the three-fund (https://portfoliocharts.com/portfolio/three-fund-portfolio/) portfolio).  After that, some people like Rick Ferri (https://portfoliocharts.com/portfolio/rick-ferri-core-four/) add a fourth uncorrelated asset like REITs.  Others like Bill Schultheis (https://portfoliocharts.com/portfolio/coffeehouse-portfolio/) take it a step further and subdivide the stocks a bit.  You get the idea -- many portfolios that look very different on the surface are actually built on the same foundation and are easy steps from where you started.

But importantly, while some of the more sophisticated portfolio concepts are definitely interesting and have a lot of smart people backing them, none of those extra steps are required!  I'm a full believer that one should never invest in anything they do not understand.  Just sticking with the broad stock and bond markets is a perfectly valid investing method suitable for many people. 

Regarding your frustration with work, I also totally empathize.  I've been there.  In my experience, looking to the markets to make you happy will always let you down no matter how you invest.  The solution for that is a lot bigger than asset allocation.  That's what MMM is all about!
Title: Re: Portfolio Charts - The Golden Butterfly
Post by: jpeizie on April 26, 2016, 06:36:02 PM

It's not:

"The 3-fund portfolio performed well in the past, therefore I expect it to perform well in the future."

Which is what you're basing the entirety of your analysis on.

Sorry for the misunderstanding, but that is not what I'm basing my analysis on. I'm basing it on lower volatility, which reduces sequence of return risks in accumulation phase and in retirement.
Title: Re: Portfolio Charts - The Golden Butterfly
Post by: Interest Compound on April 26, 2016, 06:57:01 PM

It's not:

"The 3-fund portfolio performed well in the past, therefore I expect it to perform well in the future."

Which is what you're basing the entirety of your analysis on.

Sorry for the misunderstanding, but that is not what I'm basing my analysis on. I'm basing it on lower volatility, which reduces sequence of return risks in accumulation phase and in retirement.

Yes. Performance doesn't just have to mean returns. For you it means risk-adjusted returns.
Title: Re: Portfolio Charts - The Golden Butterfly
Post by: josstache on April 26, 2016, 09:25:12 PM
Walmart is also somewhat uncorrelated from the US market.  What happens if we substitute it for gold? I give you the People of Walmart Portfolio:

(http://i.imgur.com/GcR7Lx6.png)

How bout them risk-adjusted returns? 

Can we expect this portfolio have risk-adjusted returns that are superior to the golden butterfly?  Why or why not?

Disclaimers: Only goes back to 1988. Also, I had to modify the golden butterfly (40% large cap blend instead of 20 and 20 small cap value, money market instead of short term treasury) because portfolio visualizer doesn't have data going back very far for most asset classes.
Title: Re: Portfolio Charts - The Golden Butterfly
Post by: AdrianC on April 26, 2016, 10:06:52 PM
That's why the majority of people on this forum, and the majority of people over at Bogleheads, are in the 3-fund portfolio. You ignore the noise, and accept market returns.

Of course Bernstein (https://portfoliocharts.com/portfolio/bernstein-portfolio/), Ferri (https://portfoliocharts.com/portfolio/rick-ferri-core-four/), and Buffett (http://finance.yahoo.com/q?s=BRK-A) all discuss their own alternative portfolios as well and have written books on the matter.  While all of them agree that the three-fund portfolio is an excellent option (as do I (https://portfoliocharts.com/portfolio/three-fund-portfolio/)), I don't believe any of them uses the three-fund portfolio themselves. 

Malkiel recently said (http://www.cnbc.com/2013/11/26/lk-down-dangers-in-diversification.html) that the 60/40 portfolio he pioneered is "downright dangerous" and is now suggesting REITs, dividend growth stocks, and emerging market bonds.  His direct quote -- "Investors who let go of oversimplification and embrace a slightly more complex but still low-cost portfolio will be better prepared to meet changes in their lives and the economy."

Buffett wouldn't agree that the three-fund portfolio is an excellent option going forward.

Buffett:
“You shouldn’t be 40% in bonds…I would have productive assets. I would favor those enormously over fixed dollar investments now, and I think it’s silly to have some ratio like 30 or 40 or 50% in bonds. They’re terrible investments now…” Warren Buffett on CNBC May 2013

"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." Warren Buffett on CNBC May 2015

And from your linked article, here's Malkiel:
"The investor in bonds is, I think, very likely to get badly hurt by sticking with the 60/40."

Title: Re: Portfolio Charts - The Golden Butterfly
Post by: Interest Compound on April 26, 2016, 10:11:29 PM
That's why the majority of people on this forum, and the majority of people over at Bogleheads, are in the 3-fund portfolio. You ignore the noise, and accept market returns.

Of course Bernstein (https://portfoliocharts.com/portfolio/bernstein-portfolio/), Ferri (https://portfoliocharts.com/portfolio/rick-ferri-core-four/), and Buffett (http://finance.yahoo.com/q?s=BRK-A) all discuss their own alternative portfolios as well and have written books on the matter.  While all of them agree that the three-fund portfolio is an excellent option (as do I (https://portfoliocharts.com/portfolio/three-fund-portfolio/)), I don't believe any of them uses the three-fund portfolio themselves. 

Malkiel recently said (http://www.cnbc.com/2013/11/26/lk-down-dangers-in-diversification.html) that the 60/40 portfolio he pioneered is "downright dangerous" and is now suggesting REITs, dividend growth stocks, and emerging market bonds.  His direct quote -- "Investors who let go of oversimplification and embrace a slightly more complex but still low-cost portfolio will be better prepared to meet changes in their lives and the economy."

Buffett wouldn't agree that the three-fund portfolio is an excellent option going forward.

Buffett:
“You shouldn’t be 40% in bonds…I would have productive assets. I would favor those enormously over fixed dollar investments now, and I think it’s silly to have some ratio like 30 or 40 or 50% in bonds. They’re terrible investments now…” Warren Buffett on CNBC May 2013

"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." Warren Buffett on CNBC May 2015

And from your linked article, here's Malkiel:
"The investor in bonds is, I think, very likely to get badly hurt by sticking with the 60/40."

Nothing in your post contradicts the 3 fund portfolio.
Title: Re: Portfolio Charts - The Golden Butterfly
Post by: Radagast on April 26, 2016, 11:44:13 PM
That's why the majority of people on this forum, and the majority of people over at Bogleheads, are in the 3-fund portfolio. You ignore the noise, and accept market returns.

Of course Bernstein (https://portfoliocharts.com/portfolio/bernstein-portfolio/), Ferri (https://portfoliocharts.com/portfolio/rick-ferri-core-four/), and Buffett (http://finance.yahoo.com/q?s=BRK-A) all discuss their own alternative portfolios as well and have written books on the matter.  While all of them agree that the three-fund portfolio is an excellent option (as do I (https://portfoliocharts.com/portfolio/three-fund-portfolio/)), I don't believe any of them uses the three-fund portfolio themselves. 

Malkiel recently said (http://www.cnbc.com/2013/11/26/lk-down-dangers-in-diversification.html) that the 60/40 portfolio he pioneered is "downright dangerous" and is now suggesting REITs, dividend growth stocks, and emerging market bonds.  His direct quote -- "Investors who let go of oversimplification and embrace a slightly more complex but still low-cost portfolio will be better prepared to meet changes in their lives and the economy."

Buffett wouldn't agree that the three-fund portfolio is an excellent option going forward.

Buffett:
“You shouldn’t be 40% in bonds…I would have productive assets. I would favor those enormously over fixed dollar investments now, and I think it’s silly to have some ratio like 30 or 40 or 50% in bonds. They’re terrible investments now…” Warren Buffett on CNBC May 2013

"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." Warren Buffett on CNBC May 2015

And from your linked article, here's Malkiel:
"The investor in bonds is, I think, very likely to get badly hurt by sticking with the 60/40."

Nothing in your post contradicts the 3 fund portfolio.
Nothing you've posted in this thread contradicts Tyler's portfolio.
Title: Re: Portfolio Charts - The Golden Butterfly
Post by: steveo on April 27, 2016, 01:17:52 AM
Nothing you've posted in this thread contradicts Tyler's portfolio.

The thing is that there is no right portfolio.

Option 1 - a PP or GB portfolio
Advantages
Disadvantages

Option 2 - a 3 fund portfolio
Advantages
Disadvantages

I said this earlier but I'll repeat it. Personally I much prefer a 3 fund portfolio in my situation or any situation where you are looking to retire for a longer time period or on a higher WR. If you have a lower WR I think a portfolio like the PP or GB would work but I would make it broader within each asset class. So a broad stock index, a broad commodity index, a broad bond index (I would include cash in this) and a broad REIT (however if you own your own house I wouldn't get too concerned with this). If you choose the broad indexes you wouldn't get caught out if gold for instance never performs as it has in the past or underperforms commodities when commodities rally.
Title: Re: Portfolio Charts - The Golden Butterfly
Post by: Interest Compound on April 27, 2016, 06:20:35 AM
Nothing you've posted in this thread contradicts Tyler's portfolio.

I see there's some confusion, so I'll explain. AdrianC's post contains quotes bashing high allocations to bonds. With "high" meaning anything over 30%. The 3 fund portfolio does not have a fixed allocation to bonds. The Golden Butterfly, however, does. It contains 40% bonds. Plus an additional 20% in "unproductive assets" (gold). So you see, AdrianC's post directly applies to The Golden Butterfly, but not the 3 fund portfolio.
Title: Re: Portfolio Charts - The Golden Butterfly
Post by: AdrianC on April 27, 2016, 05:57:40 PM
Nothing you've posted in this thread contradicts Tyler's portfolio.

I see there's some confusion, so I'll explain. AdrianC's post contains quotes bashing high allocations to bonds. With "high" meaning anything over 30%. The 3 fund portfolio does not have a fixed allocation to bonds. The Golden Butterfly, however, does. It contains 40% bonds. Plus an additional 20% in "unproductive assets" (gold). So you see, AdrianC's post directly applies to The Golden Butterfly, but not the 3 fund portfolio.

What's the typical bond allocation in the three fund portfolio? I'm guessing it's in the 30% range.

"I think it’s silly to have some ratio like 30 or 40 or 50% in bonds. They’re terrible investments now…”

What is your allocation, if you don't mind sharing?

More Buffett:
http://fortune.com/2012/02/09/warren-buffett-why-stocks-beat-gold-and-bonds/

"Right now bonds should come with a warning label."
Title: Re: Portfolio Charts - The Golden Butterfly
Post by: AdrianC on April 27, 2016, 06:16:53 PM
The believer in the PP or GB might say: "Yes, the average returns of the individual assets is relatively low, but we get to sell high and buy low through rebalancing between these non-correlated assets, and we make up for the low returns". Something like that.

Does it work?

I looked at the last 30 years for the PP and GB. Rebalancing all those non-correlated assets annually produced an extra 0.7% per year before taxes. Nice and well worth doing, but not earth shattering. Over some long periods rebalancing produced worse overall returns. And we have no idea if it will work during an investors' holding period.

Rebalancing is important, but it's not primarily to sell high and buy low. We rebalance to maintain the portfolio risk profile.
Title: Re: Portfolio Charts - The Golden Butterfly
Post by: Interest Compound on April 27, 2016, 07:42:15 PM
Nothing you've posted in this thread contradicts Tyler's portfolio.

I see there's some confusion, so I'll explain. AdrianC's post contains quotes bashing high allocations to bonds. With "high" meaning anything over 30%. The 3 fund portfolio does not have a fixed allocation to bonds. The Golden Butterfly, however, does. It contains 40% bonds. Plus an additional 20% in "unproductive assets" (gold). So you see, AdrianC's post directly applies to The Golden Butterfly, but not the 3 fund portfolio.

What's the typical bond allocation in the three fund portfolio? I'm guessing it's in the 30% range.

"I think it’s silly to have some ratio like 30 or 40 or 50% in bonds. They’re terrible investments now…”

What is your allocation, if you don't mind sharing?

More Buffett:
http://fortune.com/2012/02/09/warren-buffett-why-stocks-beat-gold-and-bonds/

"Right now bonds should come with a warning label."

The typical bold allocation in the 3 fund portfolio changes with age:

(http://i68.tinypic.com/1zwc2sh.jpg)

I'm 100% stocks, global cap-weighted. Explanation here:

Revisiting the asset allocation question - The case for 100% stocks (http://forum.mrmoneymustache.com/investor-alley/revisiting-the-asset-allocation-question-the-case-for-100-stocks/)
Title: Re: Portfolio Charts - The Golden Butterfly
Post by: Tyler on April 27, 2016, 08:07:28 PM
The typical bold allocation in the 3 fund portfolio changes with age:

To be clear, the chart is from a Bogleheads survey that does not specify what portfolio the person uses.  It only displays the percentage of stocks of any type, and not every dot is a three-fund portfolio. For all we know a few on the 40% line are Golden Butterflies.  ;)

https://www.bogleheads.org/forum/viewtopic.php?t=180480
Data from here: https://www.bogleheads.org/forum/viewtopic.php?t=154364

Interesting chart, though -- thanks for sharing.  I always find it fascinating how different people decide to invest.  Out of 1146 responses, the average percentage of stocks was 67%.  7% held nothing but stocks.  About one-in-four had 50% stocks or less.  Boglehead-style investing is a lot more diverse than many people realize. 
Title: Re: Portfolio Charts - The Golden Butterfly
Post by: Radagast on April 27, 2016, 09:00:21 PM
The typical bold allocation in the 3 fund portfolio changes with age:

https://www.bogleheads.org/forum/viewtopic.php?t=180480
Data from here: https://www.bogleheads.org/forum/viewtopic.php?t=154364

Interesting chart, though -- thanks for sharing.  I always find it fascinating how different people decide to invest.  Out of 1146 responses, the average percentage of stocks was 67%.  I personally find the trend line a lot less interesting then the true scatter.  Boglehead-style investing is a lot more diverse than many people realize.
Does this mean your next calculator will do glide paths ;)?
Title: Re: Portfolio Charts - The Golden Butterfly
Post by: Tyler on April 27, 2016, 09:12:04 PM
Does this mean your next calculator will do glide paths ;)?

:)

I've looked at that, but I guess I'm struggling with what a helpful glide path calculator might look like.  Send me a PM with a proposal of what inputs and outputs you'd find most helpful, and I'll be happy to give it a try!
Title: Re: Portfolio Charts - The Golden Butterfly
Post by: Interest Compound on April 27, 2016, 09:13:55 PM
The typical bold allocation in the 3 fund portfolio changes with age:

To be clear, the chart is from a Bogleheads survey that does not specify what portfolio the person uses.  It only displays the percentage of stocks of any type, and not every dot is a three-fund portfolio. For all we know a few on the 40% line are Golden Butterflies.  ;)

https://www.bogleheads.org/forum/viewtopic.php?t=180480
Data from here: https://www.bogleheads.org/forum/viewtopic.php?t=154364

Interesting chart, though -- thanks for sharing.  I always find it fascinating how different people decide to invest.  Out of 1146 responses, the average percentage of stocks was 67%.  7% held nothing but stocks.  About one-in-four had 50% stocks or less.  Boglehead-style investing is a lot more diverse than many people realize.

You're right, I should've mentioned that. I assume the 3 fund portfolio Boglehead investors follow the same trend, but it's just that. An assumption.
Title: Re: Portfolio Charts - The Golden Butterfly
Post by: Radagast on April 27, 2016, 09:15:23 PM
Nothing you've posted in this thread contradicts Tyler's portfolio.

I see there's some confusion, so I'll explain. AdrianC's post contains quotes bashing high allocations to bonds. With "high" meaning anything over 30%. The 3 fund portfolio does not have a fixed allocation to bonds. The Golden Butterfly, however, does. It contains 40% bonds. Plus an additional 20% in "unproductive assets" (gold). So you see, AdrianC's post directly applies to The Golden Butterfly, but not the 3 fund portfolio.
There is no reason Tyler's selected assets need to be equally weighted. They could just as easily be 35/35/10/10/10 to get 70% stock, or anything in between or more extreme. AdrianC's "bashing" of a particular asset or portfolio is as likely to be accurate as yours.
Title: Re: Portfolio Charts - The Golden Butterfly
Post by: Radagast on April 27, 2016, 09:22:25 PM
Does this mean your next calculator will do glide paths ;)?

:)

I've looked at that, but I guess I'm struggling with what helpful glide path calculator might look like.  Send me a PM with a proposal of what inputs and outputs you'd find most helpful, and I'll be happy to give it a try!
I have not been thinking about investing recently, but I'll have a look at the charts you thought of so far. Maybe I can find one that can be easily changed to work with glide paths.
Title: Re: Portfolio Charts - The Golden Butterfly
Post by: Interest Compound on April 27, 2016, 09:25:17 PM
Nothing you've posted in this thread contradicts Tyler's portfolio.

I see there's some confusion, so I'll explain. AdrianC's post contains quotes bashing high allocations to bonds. With "high" meaning anything over 30%. The 3 fund portfolio does not have a fixed allocation to bonds. The Golden Butterfly, however, does. It contains 40% bonds. Plus an additional 20% in "unproductive assets" (gold). So you see, AdrianC's post directly applies to The Golden Butterfly, but not the 3 fund portfolio.
There is no reason Tyler's selected assets need to be equally weighted. They could just as easily be 35/35/10/10/10 to get 70% stock, or anything in between or more extreme. AdrianC's "bashing" of a particular asset or portfolio is as likely to be accurate as yours.

Sorry, changing the asset allocation of The Golden Butterfly changes it's intended goal. While the 3 fund portfolio is intended to be flexible. This is not a valid comparison.
Title: Re: Portfolio Charts - The Golden Butterfly
Post by: Radagast on April 27, 2016, 09:48:04 PM
Nothing you've posted in this thread contradicts Tyler's portfolio.

I see there's some confusion, so I'll explain. AdrianC's post contains quotes bashing high allocations to bonds. With "high" meaning anything over 30%. The 3 fund portfolio does not have a fixed allocation to bonds. The Golden Butterfly, however, does. It contains 40% bonds. Plus an additional 20% in "unproductive assets" (gold). So you see, AdrianC's post directly applies to The Golden Butterfly, but not the 3 fund portfolio.
There is no reason Tyler's selected assets need to be equally weighted. They could just as easily be 35/35/10/10/10 to get 70% stock, or anything in between or more extreme. AdrianC's "bashing" of a particular asset or portfolio is as likely to be accurate as yours.

Sorry, changing the asset allocation of The Golden Butterfly changes it's intended goal. While the 3 fund portfolio is intended to be flexible. This is not a valid comparison.
I tried to reduce quotes in quotes but it is too hard on a phone.

What is the goal of TGB and what is the new goal if it is weighted more towards stocks? Is an investor not allowed to adjust risk and reward to taste with any portfolio other than the 3 fund portfolio? It seems like false and unnecessary dogma. Especially when you consider TGB already did exactly that to the permanent portfolio dogma.

Title: Re: Portfolio Charts - The Golden Butterfly
Post by: steveo on April 27, 2016, 09:48:09 PM
Nothing you've posted in this thread contradicts Tyler's portfolio.

I see there's some confusion, so I'll explain. AdrianC's post contains quotes bashing high allocations to bonds. With "high" meaning anything over 30%. The 3 fund portfolio does not have a fixed allocation to bonds. The Golden Butterfly, however, does. It contains 40% bonds. Plus an additional 20% in "unproductive assets" (gold). So you see, AdrianC's post directly applies to The Golden Butterfly, but not the 3 fund portfolio.
There is no reason Tyler's selected assets need to be equally weighted. They could just as easily be 35/35/10/10/10 to get 70% stock, or anything in between or more extreme. AdrianC's "bashing" of a particular asset or portfolio is as likely to be accurate as yours.

What is the goal of TGB and what is the new goal if it is weighted more towards stocks? Is an investor not allowed to adjust risk and reward to taste with any portfolio other than the 3 fund portfolio? It seems like false and unnecessary dogma. Especially when you consider TGB already did exactly that to the permanent portfolio dogma.

Those portfolio's though have that set allocation. The key point is that is what made them successful utilising historical data.

Once you change the allocation's between different asset classes the performance (volatility and returns) will change. A 3 fund portfolio is more likely to be aligned to your risk profile or maybe better put your propensity to emotionally handle drawdowns. The 3 fund portfolio isn't trying to get the best return (again risk compared to volatility). The 3 fund portfolio is more like stating all you need is these 3 funds. Assess your risk profile and invest accordingly.

The flexibility of the 3 fund portfolio is why I think it's more likely to provide the best average return over time. Other portfolios will beat it. The point is we don't know what those portfolio's will be in the future.

Title: Re: Portfolio Charts - The Golden Butterfly
Post by: Interest Compound on April 27, 2016, 10:02:47 PM
What is the goal of TGB and what is the new goal if it is weighted more towards stocks?

Your posts show a lack of understanding. Both of The Golden Butterfly, and The 3 fund portfolio. I recommend doing some more reading. I suspect you'll soon find your answers.
Title: Re: Portfolio Charts - The Golden Butterfly
Post by: Radagast on April 27, 2016, 10:06:23 PM
Quote from: steveo link=topic=53966.msg1067148#msg1067148
Those portfolio's though have that set allocation. The key point is that is what made them successful utilising historical data.
Lol. Can't argue with that.

However it could be adjusted to individual desire for risk as easily as any other portfolio.
Title: Re: Portfolio Charts - The Golden Butterfly
Post by: arebelspy on April 27, 2016, 10:10:22 PM
At what point is it no longer GB though?  What if I did 96%/1%/1%/1%/1%?
Title: Re: Portfolio Charts - The Golden Butterfly
Post by: arebelspy on April 27, 2016, 10:12:44 PM
The believer in the PP or GB might say: "Yes, the average returns of the individual assets is relatively low, but we get to sell high and buy low through rebalancing between these non-correlated assets, and we make up for the low returns". Something like that.

Does it work?

I looked at the last 30 years for the PP and GB. Rebalancing all those non-correlated assets annually produced an extra 0.7% per year before taxes. Nice and well worth doing, but not earth shattering. Over some long periods rebalancing produced worse overall returns. And we have no idea if it will work during an investors' holding period.

Rebalancing is important, but it's not primarily to sell high and buy low. We rebalance to maintain the portfolio risk profile.

This is interesting. Because that IS the key argument of the PP (and GB, by extension).

Take non-correlated assets that each do well in different environments, and then real ancestors between them, and you'll do well in all environments!

If the last few decades of good returns from PP/GB aren't from that rebalancing though, but from their assets just doing well, that's more problematic to the story.
Title: Re: Portfolio Charts - The Golden Butterfly
Post by: Interest Compound on April 27, 2016, 10:18:06 PM
The believer in the PP or GB might say: "Yes, the average returns of the individual assets is relatively low, but we get to sell high and buy low through rebalancing between these non-correlated assets, and we make up for the low returns". Something like that.

Does it work?

I looked at the last 30 years for the PP and GB. Rebalancing all those non-correlated assets annually produced an extra 0.7% per year before taxes. Nice and well worth doing, but not earth shattering. Over some long periods rebalancing produced worse overall returns. And we have no idea if it will work during an investors' holding period.

Rebalancing is important, but it's not primarily to sell high and buy low. We rebalance to maintain the portfolio risk profile.

This is interesting. Because that IS the key argument of the PP (and GB, by extension).

Take non-correlated assets that each do well in different environments, and then real ancestors between them, and you'll do well in all environments!

If the last few decades of good returns from PP/GB aren't from that rebalancing though, but from their assets just doing well, that's more problematic to the story.

The Golden Butterfly (1972 - 2015) rebalanced annually:

(https://i.sli.mg/ixLrp3.png)

Never rebalanced:

(https://i.sli.mg/uirX1V.png)
Title: Portfolio Charts - The Golden Butterfly
Post by: arebelspy on April 27, 2016, 10:26:09 PM
So rebalancing lowered the returns, but also the volatility (and worst return, etc.).  Not surprising, based on the PP results.

But it again indicates, to me, that the high return was due to the assets themselves performing well.  The rebalancing just lowered the volatility.

If you had assets that performed poorly, it would likewise perform poorly, just with lower volatility.

So you're banking on those assets performing well in the future.  And the story of "one will perform well in all environments and we'll capture that via rebalancing" seems less true when not rebalancing performs even better, CAGR-wise.

So if it is the case that those assets happened to do well over the last 30-40 years, and were found partially with data-mining, it seems less likely they will outperform in the future.
Title: Re: Portfolio Charts - The Golden Butterfly
Post by: Radagast on April 27, 2016, 10:32:35 PM
What is the goal of TGB and what is the new goal if it is weighted more towards stocks?

Your posts show a lack of understanding. Both of The Golden Butterfly, and The 3 fund portfolio. I recommend doing some more reading. I suspect you'll soon find your answers.
I have done more than enough reading on these topics. I'd like to hear an argument about why the three fund portfolio can be flexible but TGB cannot be. It might not strictly fit Tyler's named allocation, but it could be modified to an individual tolerance for risk vs return.
Title: Re: Portfolio Charts - The Golden Butterfly
Post by: steveo on April 27, 2016, 10:46:06 PM
Quote from: steveo link=topic=53966.msg1067148#msg1067148
Those portfolio's though have that set allocation. The key point is that is what made them successful utilising historical data.
Lol. Can't argue with that.

However it could be adjusted to individual desire for risk as easily as any other portfolio.

Then though it's not those portfolios and you won't get that warm fuzzy feeling from stating it did well in the past. In stating that I reckon if people were doing that and using principles to guide their investment decisions they would have a more robust portfolio with a greater chance of doing well in the future.

In data mining/statistical analysis my understanding is that typically you get a data-set. You then split that data-set and come up with models on one sub-set of the data. You then test those models against the other data-set. The reason you do that is because you have a tendency to over-fit the model. I reckon that is exactly what people that use these portfolios are doing. They don't really understand what the analysis shows them.

So if they said something like these portfolios show that uncorrelated assets across multiple asset classes should provide greater diversification and therefore robustness across different economic conditions and then built a portfolio on that basis then I wouldn't feel that they were getting themselves into potential problems.
Title: Re: Portfolio Charts - The Golden Butterfly
Post by: steveo on April 27, 2016, 10:51:15 PM
Take non-correlated assets that each do well in different environments, and then real ancestors between them, and you'll do well in all environments!

This is a good argument though. It makes sense.

If the last few decades of good returns from PP/GB aren't from that rebalancing though, but from their assets just doing well, that's more problematic to the story.

Exactly. The problem is though you don't know what assets are going to do well in the future. What if it's coffee or sugar. What if it's not treasuries but long term municipal bonds. What if it's growth stocks.

I think the key is stating - I don't have a clue what is going to do well but if I buy a broad index I will get average returns. If I minimise my fees I should beat the average investor who gets charged above average fees and probably will underperform and overperform the market over time but the overperformance typically won't compensate for the underperformance plus additional fees.

Then you can have a discussion about the asset classes - i.e. commodities, bonds, stocks and real estate and figure out what works for you.
Title: Re: Portfolio Charts - The Golden Butterfly
Post by: steveo on April 27, 2016, 10:58:15 PM
So rebalancing lowered the returns, but also the volatility (and worst return, etc.).  Not surprising, based on the PP results.

But it again indicates, to me, that the high return was due to the assets themselves performing well.  The rebalancing just lowered the volatility.

If you had assets that performed poorly, it would likewise perform poorly, just with lower volatility.

So you're banking on those assets performing well in the future.  And the story of "one will perform well in all environments and we'll capture that via rebalancing" seems less true when not rebalancing performs even better, CAGR-wise.

So if it is the case that those assets happened to do well over the last 30-40 years, and were found partially with data-mining, it seems less likely they will outperform in the future.

I basically agree with your points but I think it's just as likely those assets outperform again. It's like flipping a coin 10 times and it comes up heads 9 times it's still a 50% chance to be heads the next flip.

We don't know what will outperform over the next 50 years.
Title: Re: Portfolio Charts - The Golden Butterfly
Post by: Radagast on April 27, 2016, 11:08:06 PM
Quote from: steveo link=topic=53966.msg1067148#msg1067148
Those portfolio's though have that set allocation. The key point is that is what made them successful utilising historical data.
Lol. Can't argue with that.

However it could be adjusted to individual desire for risk as easily as any other portfolio.

Then though it's not those portfolios and you won't get that warm fuzzy feeling from stating it did well in the past. In stating that I reckon if people were doing that and using principles to guide their investment decisions they would have a more robust portfolio with a greater chance of doing well in the future.

In data mining/statistical analysis my understanding is that typically you get a data-set. You then split that data-set and come up with models on one sub-set of the data. You then test those models against the other data-set. The reason you do that is because you have a tendency to over-fit the model. I reckon that is exactly what people that use these portfolios are doing. They don't really understand what the analysis shows them.

So if they said something like these portfolios show that uncorrelated assets across multiple asset classes should provide greater diversification and therefore robustness across different economic conditions and then built a portfolio on that basis then I wouldn't feel that they were getting themselves into potential problems.
I can't tell whether you are arguing that Tyler's portfolio is an anomaly of backtesting, or whether you are arguing that it is based on a reasonable theory and thus is likely to be reasonably succesful in the future, or both. I could probably agree with both.
Title: Re: Portfolio Charts - The Golden Butterfly
Post by: Tyler on April 27, 2016, 11:49:50 PM
It sounds like we're coming back around to a common theme of being worried about "outperforming" based on looking at only one timeframe.  I understand the temptation to simplify numbers in your head, but single CAGRs don't tell the whole story.  For reference, here's the Heat Map that shows every timeframe:

(https://portfoliocharts.files.wordpress.com/2015/09/golden-butterfly-heat-map-2016.jpg?w=1100)

For comparison, here's the Three-Fund portfolio:

(https://portfoliocharts.files.wordpress.com/2015/09/three-fund-portfolio-heat-map-2016.jpg?w=1100)

Which one has historically been more consistent?

Now one may genuinely believe that the future may be very different, and your opinion on that is as good as mine.  One may also not understand how or why a portfolio worked so well and fear that it is just a fluke.  I'd argue that it's easy to get lucky over a single timeframe but it's exceedingly difficult to stay lucky over the 990 timeframes, and that's reasonable evidence that the Golden Butterfly has hit on something pretty interesting whether it makes immediate sense to you or not.  But I recognize that others may not find that convincing.  To each his own.

One is free to prefer another portfolio if they choose.  But it's important to recognize that any alternatives are no more certain to repeat the past. It's also important to understand that some portfolios do fundamentally have better risk-adjusted returns than others.  That's the core concept of asset allocation, and it's about much more than just luck.


Title: Re: Portfolio Charts - The Golden Butterfly
Post by: arebelspy on April 27, 2016, 11:54:09 PM
So rebalancing lowered the returns, but also the volatility (and worst return, etc.).  Not surprising, based on the PP results.

But it again indicates, to me, that the high return was due to the assets themselves performing well.  The rebalancing just lowered the volatility.

If you had assets that performed poorly, it would likewise perform poorly, just with lower volatility.

So you're banking on those assets performing well in the future.  And the story of "one will perform well in all environments and we'll capture that via rebalancing" seems less true when not rebalancing performs even better, CAGR-wise.

So if it is the case that those assets happened to do well over the last 30-40 years, and were found partially with data-mining, it seems less likely they will outperform in the future.

I basically agree with your points but I think it's just as likely those assets outperform again. It's like flipping a coin 10 times and it comes up heads 9 times it's still a 50% chance to be heads the next flip.

We don't know what will outperform over the next 50 years.

No, it's like rolling a 20 sided dice and getting a 15 and thinking you're equally likely to get 15 next time.

Only the number of different asset classes is a lot higher than 20.

What makes you think those assets are 50/50 to outperform?  If I took 100 assets, and each had a 20% chance to outperform, and I then took the 20 that did, and looked at which of those outperformed the next year, I'd be left with 4 assets.

But to then say "each of these has a 50/50 chance to outperform next year" is wrong. They only had a 20% chance to begin with, and that didn't change just because they were left due to survivorship bias.  The underlying odds is what's important, and those odds aren't improved because they did well in the past.

Unless you have reason to believe they will outperform, them doing so in the past is not necessarily indicative of the future, or of them even being a coin flip to do so.
Title: Re: Portfolio Charts - The Golden Butterfly
Post by: Radagast on April 27, 2016, 11:59:52 PM
I just looked and noted that US stocks, gold, and long term treasuries have had negative or low correlations for the past two years in addition to typical volatility. I first became aware of the PP two years ago, so 2014 me feels this data supports the underlying theory, though 2016 me still claims to be unable to predict the future.
Title: Re: Portfolio Charts - The Golden Butterfly
Post by: arebelspy on April 28, 2016, 12:17:09 AM
It sounds like we're coming back around to a common theme of being worried about "outperforming" based on looking at only one timeframe.

I don't think it's that simple.  In fact, the latest criticism has nothing to do with timeframes at all.

It's more about looking at outperforming based on the fact that the rebalancing story didn't actually cause the good returns, but rather the low volatility.

I would expect the GB to have low volatility in the future, but not necessarily high return.  This is because the high return came from the assets themselves outperforming, rather than from the rebalancing. 

If the assets have low returns in the future, the GB will have low returns (with a low volatility).

The GB (and PP) idea of rebalancing between assets so no matter what environment you're in only works if you're rebalancing between assets that have high returns.

And how do you know those particular assets will have high returns in the future?

If it was merely a "they don't need to, cause rebalancing" that would be neat. But it's not, the GB relies on the assets having a high return (and the rebalancing causes low volatility).

But to go to the timeframe stuff, since you brought it up:
Quote
For reference, here's the Heat Map that shows every timeframe

That's just one set of correlated timeframes.  Not 900 independent timeframes.

Quote
But it's important to recognize that any alternatives are no more certain to repeat the past.

Indeed. So why do you think the GB will?

Quote
It's also important to understand that some portfolios do fundamentally have better risk-adjusted returns than others. 

They do, but can we predict which ones will, in the future?
Title: Re: Portfolio Charts - The Golden Butterfly
Post by: Tyler on April 28, 2016, 12:33:16 AM
I would expect the GB to have low volatility in the future, but not necessarily high return.  This is because the high return came from the assets themselves outperforming, rather than from the rebalancing. 

If the assets have low returns in the future, the GB will have low returns (with a low volatility).

The GB (and PP) idea of rebalancing between assets so no matter what environment you're in only works if you're rebalancing between assets that have high returns.

This may help visualize the assets.  Compare the red zones in each asset to the consistency of the total portfolio.

(http://i65.tinypic.com/2n8mwwl.jpg)
(https://portfoliocharts.files.wordpress.com/2015/09/golden-butterfly-heat-map-2016.jpg?w=1100)

To believe that the Golden Butterfly had high returns simply because its more unusual assets like short term treasuries and gold did particularly well misses the fact that they drastically underperformed stocks over a big part of this period by design.  (I'll concede that SCV outperformed traditional stocks, and Fama-French have done tons of research on that if you're interested). 

A rebalanced portfolio is more than just the sum of its assets.  Gold, long term treasuries, and short term treasuries work so well in the GB not because they're great investments on their own (they're obviously not) but because they complement stocks so well, picking up the slack and carrying the portfolio specifically when the stock market inevitably struggles.  It's not simple random correlations that may disappear.  The assets are picked based on economic conditions and flow with the markets. 

The "C" in CAGR stands for "compound", which benefits tremendously from that lower total volatility.  So it's more than just averaging the long-term averages and adding an extra rebalancing bonus.  Portfolio theory is a lot more sophisticated than that, and I admit it's highly unintuitive.  I find that fascinating and empowering, but it makes other people very uncomfortable.  Not that there's anything wrong with that reaction -- it's just human nature.

To answer your last question, the Golden Butterfly has generated very consistent risk-adjusted returns no matter what period you look at using as much data as we have access to -- 44 years spanning all kinds of economic environments that have made most other portfolios look very bad at times.  I have no idea if it will continue to do that in the future, but I'm personally more confident in its outlook-neutral approach and highly consistent track record than I am with alternative options. 

Most importantly, I'm not trying to champion this portfolio over all others.  Lacking a crystal ball, every investing decision ultimately requires a personal leap of faith.  We all have to make that choice for ourselves and be comfortable with it.
Title: Re: Portfolio Charts - The Golden Butterfly
Post by: steveo on April 28, 2016, 12:51:36 AM
I can't tell whether you are arguing that Tyler's portfolio is an anomaly of backtesting, or whether you are arguing that it is based on a reasonable theory and thus is likely to be reasonably succesful in the future, or both. I could probably agree with both.

I think the portfolio may be an anomaly of backtesting but if people looked at why it was successful they might get some insights to help them build a portfolio that works for them.

It might just have been successful because the underlying assets performed better than expected. It might be that uncorrelated assets do create a more stable portfolio - i.e. lower volatility. At the same time I think having 60% allocated to gold and treasuries is really risky over the long term.
Title: Re: Portfolio Charts - The Golden Butterfly
Post by: steveo on April 28, 2016, 01:11:05 AM
I'll just state that this is a really interesting discussion and what is interesting is that I can see and agree with the different points of view.

If it was merely a "they don't need to, cause rebalancing" that would be neat. But it's not, the GB relies on the assets having a high return (and the rebalancing causes low volatility).

I agree. The thing is though that commodities do tend to have massive upticks. Stocks definitely do. Bonds/Cash/Treasuries tend to be much more stable. Commodities including gold also tend to have returns that are uncorrelated to stocks.

A rebalanced portfolio is more than just the sum of its assets.  Gold, long term treasuries, and short term treasuries work so well in the GB not because they're great investments on their own (they're obviously not) but because they complement stocks so well, picking up the slack and carrying the portfolio specifically when the stock market inevitably struggles.  It's not simple random correlations that may disappear.  The assets are picked based on economic conditions and flow with the markets. 

The "C" in CAGR stands for "compound", which benefits tremendously from that lower total volatility.  So it's more than just averaging the long-term averages and adding an extra rebalancing bonus.  Portfolio theory is a lot more sophisticated than that, and I admit it's highly unintuitive.

I also agree with these points.

I come back though to not liking choosing specific commodities and specific stocks and specific bond/cash assets. I also think over a longer time frame you may better off with more stocks in your portfolio however this is more of a risk profile type question. Personally I think over the longer term especially with people that FIRE you may be taking on more risk in that your portfolio has a greater chance of failing if you have too many defensive assets. When you add to that the concern about using tilts that have previously outperformed but may not outperform in the future I think it's risky.

I wonder if a broad portfolio with something like 30% domestic stocks, 30% international stocks, 20% commodities & 20% bonds would be more likely to achieve the results that those that utilise the GB and the PP are trying to achieve. You could adjust your stock allocation down or up as required.
Title: Re: Portfolio Charts - The Golden Butterfly
Post by: Tyler on April 28, 2016, 01:14:02 AM

I come back though to not liking choosing specific commodities and specific stocks and specific bond/cash assets. I also think over a longer time frame you may better off with more stocks in your portfolio however this is more of a risk profile type question. Personally I think over the longer term especially with people that FIRE you may be taking on more risk in that your portfolio has a greater chance of failing if you have too many defensive assets. When you add to that the concern about using tilts that have previously outperformed but may not outperform in the future I think it's risky.

I wonder if a broad portfolio with something like 30% domestic stocks, 30% international stocks, 20% commodities & 20% bonds would be more likely to achieve the results that those that utilise the GB and the PP are trying to achieve. You could adjust your stock allocation down or up as required.

Good point.  The Golden Butterfly idea is actually not unique, and the Ivy (https://portfoliocharts.com/portfolio/ivy-portfolio/) and Swensen (https://portfoliocharts.com/portfolio/swensen-portfolio/) portfolios operate on similar principles.  For those who like the idea of the Golden Butterfly but don't care for the individual assets or simply want a different perspective other than mine, check them out.  You can also read the books for way more information on the subject than I can do justice. 
Title: Re: Portfolio Charts - The Golden Butterfly
Post by: steveo on April 28, 2016, 01:53:21 AM

I come back though to not liking choosing specific commodities and specific stocks and specific bond/cash assets. I also think over a longer time frame you may better off with more stocks in your portfolio however this is more of a risk profile type question. Personally I think over the longer term especially with people that FIRE you may be taking on more risk in that your portfolio has a greater chance of failing if you have too many defensive assets. When you add to that the concern about using tilts that have previously outperformed but may not outperform in the future I think it's risky.

I wonder if a broad portfolio with something like 30% domestic stocks, 30% international stocks, 20% commodities & 20% bonds would be more likely to achieve the results that those that utilise the GB and the PP are trying to achieve. You could adjust your stock allocation down or up as required.

Good point.  The Golden Butterfly idea is actually not unique, and the Ivy (https://portfoliocharts.com/portfolio/ivy-portfolio/) and Swensen (https://portfoliocharts.com/portfolio/swensen-portfolio/) portfolios operate on similar principles.  For those who like the idea of the Golden Butterfly but don't care for the individual assets or simply want a different perspective other than mine, check them out.  You can also read the books for way more information on the subject than I can do justice.

The thing with asset allocation is that there isn't really a right or wrong answer however one of the theories is that diversification across asset classes is basically a free ride. At the same time I can see the advantage of a 100% stock allocation.
Title: Re: Portfolio Charts - The Golden Butterfly
Post by: BattlaP on April 28, 2016, 02:12:23 AM
One point I've not seen adequately responded to is the question raised about gold being used a deflation hedge. Isn't that like a data non-sequitur, in that the two things have nothing to do with each other?

(http://i65.tinypic.com/2n8mwwl.jpg)

Doesn't this graph show gold as just going on random walks that have nothing to do with inflation at the time? It seems like the actual reason for choosing gold in the portfolio is "because it makes the graph look like this!"
Title: Re: Portfolio Charts - The Golden Butterfly
Post by: steveo on April 28, 2016, 02:35:11 AM
BattlaP - it's a good question to ask. When does gold actually perform well ? I'm honestly not sure.
Title: Re: Portfolio Charts - The Golden Butterfly
Post by: josstache on April 28, 2016, 03:42:13 AM
Gold is one asset (woah lack of diversification if it's 20% of your portfolio), and its price is subject to extreme speculation-driven swings.

If you bought gold around 1980-1981, you are still significantly in the red in real terms after fees or storage costs. By way of contrast, if you bought US stocks just before Black Tuesday in 1929, you made it back into positive territory in real terms during 1944.

I think most people agree that gold's intrinsic value hasn't changed, and foreseeably won't change, much.  Indeed, that's why it's called a "store of value", "inflation hedge", etc.  If that's the case, then what does it tell us when its market value is nearer to historic highs than to the long-term average, as it is now?  Perhaps we're in another speculative bubble?

http://graphics.thomsonreuters.com/11/07/CMD_GLDNFLT0711_VF.html

Stocks, we can feel comfortable buying even if it's possible they're currently overvalued because, as long as we hold onto them and society continues to function, we should eventually get a positive real return.  People (and their descendants) who bought gold around 1980-1981 might never see a positive real return for the remainder of human history, though I'd be glad to hear arguments to the contrary.
Title: Re: Portfolio Charts - The Golden Butterfly
Post by: arebelspy on April 28, 2016, 03:53:02 AM
I'll just state that this is a really interesting discussion and what is interesting is that I can see and agree with the different points of view.

Me too.  I keep going back and forth.  :)
Title: Re: Portfolio Charts - The Golden Butterfly
Post by: BattlaP on April 28, 2016, 04:01:39 AM
I think most people agree that gold's intrinsic value hasn't changed, and foreseeably won't change, much.

What does that actually mean? Who agrees? What value are they agreeing on?

Indeed, that's why it's called a "store of value", "inflation hedge", etc.

I get that it is called that, sure. But doesn't the data absolutely fly in the face of that? I don't believe them. Gold's price seems to wildly swing based on nothing except human emotion.
Title: Re: Portfolio Charts - The Golden Butterfly
Post by: josstache on April 28, 2016, 04:35:16 AM
The price of stocks swing wildly based mostly on human emotion, but over very long periods of time we should see total real return be positive. 

I was suggesting gold's long term trend line should be flat.  The existence of speculative bubbles doesn't really say anything one way or the other about what the long-term trend line looks like.  Nor do people need to agree on a specific value for gold in order to agree with the proposition that its trend line is flat.  After fees, then, it would not be possible for gold to give you a positive return other than changes in value due to speculation.

Rebalancing complicates things, because in the PP or GB, you rebalance into gold after a catastrophic crash, and that gold allocation eventually rises in value.  I think the fundamental flaw in understanding these portfolios is due to the short sample.  Is there any reason we should expect gold's speculative bubbles to be timed and shaped such that they smooth out the portfolio's returns?  They did in recent history, but that doesn't mean they will continue to do so.

And, as I pointed out earlier in the thread, you have political risk with gold that governments will decide to directly mess with its value.
Title: Re: Portfolio Charts - The Golden Butterfly
Post by: BattlaP on April 28, 2016, 04:59:26 AM
Ok, a flat trend-line. That makes a lot more sense.

However wouldn't this be true of other commodities that retain their usefulness over long timespans? I'm thinking other metals, fuels, wood, grains, livestock, etc. Why just gold and not a mix of these things? Seems like golds complicated history as and with currency, and also political complications as you suggest, would actually make it less appropriate as a logical choice for a large chunk of a portfolio.
Title: Re: Portfolio Charts - The Golden Butterfly
Post by: steveo on April 28, 2016, 06:45:38 AM
Indeed, that's why it's called a "store of value", "inflation hedge", etc.
I get that it is called that, sure. But doesn't the data absolutely fly in the face of that? I don't believe them. Gold's price seems to wildly swing based on nothing except human emotion.

This is the issue isn't it. My gut feel is that gold does exactly what you are stating. I'd like to see the data that shows when it spikes and some analysis of why. I don't think it's a good store against inflation. I think stocks will handle that scenario a lot better.
Title: Portfolio Charts - The Golden Butterfly
Post by: Seppia on April 28, 2016, 06:55:34 AM
Objectively speaking I believe there's no other possible idea of gold than Buffett's

It's an inanimate object that does not produce anything and has no use whatsoever (other than maybe some vague aesthetic virtue).
It's not even the rarest of things.

Why would one own gold?

Well, for some reason, it seems to be a "refuge" in panic times, that's the most immediate explanation I would give to the fact that it's value seems to go up when everything else goes down (and vice versa).

If we were certain that this virtue of its would be kept in the future, then it could very well serve a purpose.

Personally, in case of a very dramatic turn of events I would rather own guns, ammo and some farmland.

So here's my projected FIRE portfolio
 
70% stocks
15% AK 47s and ammo
15% peach trees (I love peaches)

Main issue seems to be poor winter time returns.

:)
Title: Re: Portfolio Charts - The Golden Butterfly
Post by: steveo on April 28, 2016, 06:58:28 AM
Ok, a flat trend-line. That makes a lot more sense.

However wouldn't this be true of other commodities that retain their usefulness over long timespans? I'm thinking other metals, fuels, wood, grains, livestock, etc. Why just gold and not a mix of these things? Seems like golds complicated history as and with currency, and also political complications as you suggest, would actually make it less appropriate as a logical choice for a large chunk of a portfolio.

This is my point. It's like buying a single stock and hoping that stock is the one with the best performance for what you require.
Title: Re: Portfolio Charts - The Golden Butterfly
Post by: Tyler on April 28, 2016, 07:50:16 AM
When does gold actually perform well ? I'm honestly not sure.

It's true that "gold is an inflation hedge" is an over-simplification that hides a ton of other factors.  But the common statement that it's "just a piece of metal" depending on another greater fool to buy it at a higher price neglects economic history and how money works.  Honestly it's a complicated macroeconomic topic that I'm not sure I'm capable of doing justice.

You know how people have pointed out that gold really spiked in 1972 after the US changed the law?  Well it wasn't really a law but a treaty.  Bretton Woods (https://en.wikipedia.org/wiki/Bretton_Woods_system) was an economic system set up in WWII where all the world superpowers agreed to price their currencies in dollars, and that the US dollar would be backed by a certain amount of physical gold.  The entire system was put together by various central banks to protect individual currencies from relative pricing discrepancies (simply put -- relative currency inflation).  Breaking Bretton Woods and letting the dollar float relative to gold so that the government can print whatever they please started the "fiat money" era, but gold remains highly connected to global monetary policy.  There's a reason the largest holders of gold are still the central banks. 

However, with that change in policy and rapidly increasing globalization, other factors also started to play very important roles in the gold price.  I think I read somewhere that the International Monetary Fund estimates that these days gold is driven about 50% by inflation and 50% by other factors.  I won't even try to explain all of that.  For those interested, this link (https://snbchf.com/gold/gold-silver-prices/) is very thorough and balanced.  But be warned that the topic is complicated.

So yes, gold responds to inflation because of its special place in the world monetary system.  Critics who note that the gold data relative to US inflation levels doesn't always indicate that are also correct, as there are many other factors that also influence the price.  It's better to think of gold as a complex alternative world currency where inflation is only one piece of the puzzle. IMHO portfolios can still benefit from that. 

Does that all sound way too complicated and make your eyes glaze over?  That's why most people stick to the inflation story when explaining it to others.  ;)  It's the easiest part to understand.

However wouldn't this be true of other commodities that retain their usefulness over long timespans? I'm thinking other metals, fuels, wood, grains, livestock, etc. Why just gold and not a mix of these things?

Good point!

Any cursory Google search will show you that gold is a highly controversial topic, and if it makes you uncomfortable that's fine.  As I mentioned before -- check out the Ivy (https://portfoliocharts.com/portfolio/ivy-portfolio/) and Swensen (https://portfoliocharts.com/portfolio/swensen-portfolio/) portfolios.  They mirror the way the Harvard and Yale endowments invest.  They still follow a lot of the same basic theory of the Golden Butterfly but use commodities and REITs instead of gold. 
Title: Re: Portfolio Charts - The Golden Butterfly
Post by: Seppia on April 28, 2016, 08:30:22 AM
I still like peaches better but thank you Tyler for the awesome post - as usual.
One can agree or disagree but the work you do is truly amazing.
Title: Re: Portfolio Charts - The Golden Butterfly
Post by: Radagast on April 28, 2016, 09:34:27 AM

Ok, a flat trend-line. That makes a lot more sense.

However wouldn't this be true of other commodities that retain their usefulness over long timespans? I'm thinking other metals, fuels, wood, grains, livestock, etc. Why just gold and not a mix of these things? Seems like golds complicated history as and with currency, and also political complications as you suggest, would actually make it less appropriate as a logical choice for a large chunk of a portfolio.

If you think about logistics you narrow it down to precious metals pretty quickly. How many cows would you need to have $750,000? What is the shelf life of fuel? Even silver needs a room to hold the value of gold that can be stored in a safe deposit box. Specifically right now a liter of gold is worth $750,000, but you need 130 liters of silver to store that much. How many silos of grain?

Correlation throws out other precious metals because the primary uses are industrial, and thus well correlated with the economy, which makes them poor diversifiers. The primary uses of gold are not rational and thus poorly correlated with other investments.

So you arrive at gold through a process of elimination.
Title: Re: Portfolio Charts - The Golden Butterfly
Post by: arebelspy on April 28, 2016, 09:46:08 AM
70% stocks
15% AK 47s and ammo
15% peach trees (I love peaches)

Unless you're very ERE, that's a LOT of peach trees.

Also rebalancing is a *.

:)
Title: Re: Portfolio Charts - The Golden Butterfly
Post by: JZinCO on April 28, 2016, 10:14:19 AM
70% stocks
15% AK 47s and ammo
15% peach trees (I love peaches)

Unless you're very ERE, that's a LOT of peach trees.

Also rebalancing is a *.

:)
But if you're peaches are too high in value you can rebalance with some target practice...
Title: Re: Portfolio Charts - The Golden Butterfly
Post by: Interest Compound on April 28, 2016, 10:59:21 AM
This is why it's so hard to stay the course. There's always a hook. For someone new to investing, as I suspect many people on this forum are, you might not have seen how these stories typically play out:

-------------------------------------
"Investing is risky, you have Inflation, Deflation, Prosperity, and Recession, and you never know which one is coming next. Therefore you should dedicate portions of your portfolio to each of these phases, by buying X, Y, Z, and V."
-------------------------------------

That's a great story. The trouble comes when choosing your X, Y, Z, and V. I've been reading about portfolios like this for years, and they always have one thing in common, they backtest well. Very well. Is this a coincidence? Could it be that only the portfolios which perform very well in backtesting, also have an interesting story behind them? Or is it possible that almost every portfolio has a market-beating story......it just has to beat the market first before you pay any attention to it.

It is easy to fall victim to the Survivorship Bias.  After any process that leaves behind survivors, the non-survivors are often destroyed or muted or removed from your view. If failures becomes invisible, then naturally you will pay more attention to successes. Not only do you fail to recognize that what is missing might have held important information, you fail to recognize that there is missing information at all. Here are some possible options for each phase you may have missed:

Prosperity:
Inflation:
(There are arguments for each one of these.)

Deflation:

Recession:
Now for the fun part. No matter which combination of these (including those I didn't mention) ends up winning, there will be an enticing story behind it all, explaining why there must be a fundamental reason behind such success! We finally got an answer to why Gold fits in the "Inflation" bucket, despite the data showing it clearly does not track inflation, and the answer is "it's complicated". We're told that Gold and Small Cap Value aren't necessary components, yet without these components the portfolio under-performs the average.

What if I read some similar articles, and choose this portfolio in 1972, based on the same "fundamentals" here? These are reasonable choices, and from the perspective of the 1972 investor, make perfect sense. Growth has been beating Value for almost a decade, showed no signs of slowing up, and every article you could find was singing the praises of Growth.

(https://i.sli.mg/Vltbav.png)
(https://i.sli.mg/oyDyD5.png)

Had it gone well, we'd be seeing articles about The Growth Butterfly, not The Golden Butterfly. Instead I'm broke at 70 years old, cursing some article I read over 30 years ago.

The scariest part? This portfolio doesn't look so bad in backtesting:

(https://i.sli.mg/mrIKmI.png)

It's squarely in the box of all the other portfolios with a similar philosophy:

(https://i.sli.mg/ei4GxP.png)

Indeed, these hooks can seem promising, even exciting. But they clearly fall flat here. If you choose such a portfolio, acknowledge that it's based purely on backtesting, as the story simply doesn't check out. And if choosing a portfolio based purely on backtesting doesn't start ringing red alarm bells in your head...you really shouldn't be investing in a portfolio like this at all.

My advice to any newbies in this thread, don’t fall into the trap. You buy the market not because it backtested well during a specific phase, and will make you rich in the process. You buy the Total Stock Market Index, simply because you want to capture the market. You want a percentage ownership of all available companies across the globe. You want your share of the world's collective profits/production. Again, indexing beat or matched half of all invested dollars in the past, I do not expect mathematical laws to change, so I expect it to beat or match half of all invested dollars in the future.

You don’t buy the Total Bond Market Index because it was less volatile in the past, but because bonds are a written contract, where you are paid periodic interest payments, and in the end you get your full investment back. In most cases (70% of VBTLX) the contract is guaranteed by the government. This makes it a relatively safe place to put your money.

These aren't stories based on how it performed in the past. You won't get confused about why these options are included in the portfolio at all, when the story doesn't seem to follow reality, only to get an "it's too complicated so I'll just tell you inflation" answer from the expert. It's a simple definition of what these components are.

Sol put it perfectly in another thread:
-------------------------------------
People don't choose indexing because it backtests well against an index.  They choose indexing because they want to get market returns, good or bad, without taking on any additional risk by trying to beat the system.  I choose indexing because I'm prepared to play the game straight and accept average returns the same as everyone else is getting, at the lowest cost to me.  I'm not trying to win at anyone else's expense.
-------------------------------------

As did Brooklynguy:
-------------------------------------
If you use backtesting alone, you have proven nothing more than the fact that the strategy has worked in the past.  It is textbook survivorship bias to draw a conclusion solely from backtesting, because you are ignoring the infinite number of conceivable and backtestable strategies that failed to work in the past.  If you backtest enough strategies, you are bound to find one that worked through random chance alone.
-------------------------------------

My advice to any newbies would be to steer clear. Survivorship bias is the single greatest fallacy in investing (http://forum.mrmoneymustache.com/investor-alley/survivorship-bias-the-single-greatest-fallacy-in-investing-35417/), and it’s better to find out now, than after 16 years of under-performance. I will reiterate this for the newbies of the thread looking for a "consensus". I don't think newbies can responsibly handle the information on Tyler's site. Once you consider yourself an expert, have read a few books, and have watched your own portfolio in the market for a few years to know how you'll react, come back and see what you think.

You must remind yourself that when you start to pick apart winners and losers, successes and failures, the living and dead, that by paying attention to one side of that equation you are always neglecting the other. If you are thinking about opening a restaurant because there are so many successful restaurants in your hometown, you are ignoring the fact that only successful restaurants survive to become examples. Maybe on average 90 percent of restaurants in your city fail in the first year. You can’t see all those failures because when they fail they also disappear from view.

As Nassim Taleb writes in his book The Black Swan, “The cemetery of failed restaurants is very silent.” Of course the few that don’t fail in that deadly of an environment are wildly successful because only the very best and the very lucky can survive. All you are left with are super successes, and looking at them day after day you might think it’s a great business to get into when you are actually seeing evidence that you should avoid it.
Title: Re: Portfolio Charts - The Golden Butterfly
Post by: Tyler on April 28, 2016, 11:30:04 AM
(Lots of talk about different assets not part of the portfolio)

Indeed, these hooks can seem promising, even exciting. But they clearly fall flat here. If you choose such a portfolio, acknowledge that it's based purely on backtesting, as the story simply doesn't check out.

Sorry, changing the asset allocation of The Golden Butterfly changes it's intended goal.

I disagree with your first comment, and agree with the second one.  ;)

I do also agree that it's absolutely not necessary to hold such a portfolio, that new investors might first want to consider starting simpler, and even that many experienced investors find it best to stay simpler.  The three-fund portfolio is a lot easier to understand and has worked well for many people.  As you can see from the other thread (http://forum.mrmoneymustache.com/investor-alley/revisiting-the-asset-allocation-question-the-case-for-100-stocks/) you linked earlier, I also support your personal decision to invest in 100% stocks.  Choosing an asset allocation does not require that one must dismiss all other portfolio options as not based in a valid investing strategy. 

As Nassim Taleb writes in his book The Black Swan, “The cemetery of failed restaurants is very silent.” Of course the few that don’t fail in that deadly of an environment are wildly successful because only the very best and the very lucky can survive. All you are left with are super successes, and looking at them day after day you might think it’s a great business to get into when you are actually seeing evidence that you should avoid it.

"Abiding by his own "skin in the game" rule, Taleb detailed some of his personal investments (http://www.advisorperspectives.com/articles/2013/05/14/nassim-taleb-on-the-anti-fragile-portfolio-and-the-benefits-of-taking-risks/3) for the audience. He said his portfolio includes gold, silver, commodities, Treasury bills, euros, income properties and stocks. ... By accepting the natural fluctuations in the economy and seeking out investments that benefit from them, it is possible to construct a more antifragile portfolio, he said."
Title: Re: Portfolio Charts - The Golden Butterfly
Post by: arebelspy on April 28, 2016, 12:05:46 PM
The growth butterfly has done so poorly, it's due to perform well. And the story is great. I'm going all in!
Title: Re: Portfolio Charts - The Golden Butterfly
Post by: Interest Compound on April 28, 2016, 01:25:08 PM
(Lots of talk about different assets not part of the portfolio)

Indeed, these hooks can seem promising, even exciting. But they clearly fall flat here. If you choose such a portfolio, acknowledge that it's based purely on backtesting, as the story simply doesn't check out.

Sorry, changing the asset allocation of The Golden Butterfly changes it's intended goal.

I disagree with your first comment, and agree with the second one.  ;)

I do also agree that it's absolutely not necessary to hold such a portfolio, that new investors might first want to consider starting simpler, and even that many experienced investors find it best to stay simpler.  The three-fund portfolio is a lot easier to understand and has worked great for many people.  As you can see from the other thread (http://forum.mrmoneymustache.com/investor-alley/revisiting-the-asset-allocation-question-the-case-for-100-stocks/) you linked earlier, I also support your personal decision to invest in 100% stocks.  Choosing an asset allocation does not require that one must dismiss all other portfolio options as not based in a valid investing strategy. 

As Nassim Taleb writes in his book The Black Swan, “The cemetery of failed restaurants is very silent.” Of course the few that don’t fail in that deadly of an environment are wildly successful because only the very best and the very lucky can survive. All you are left with are super successes, and looking at them day after day you might think it’s a great business to get into when you are actually seeing evidence that you should avoid it.

"Abiding by his own "skin in the game" rule, Taleb detailed some of his personal investments (http://www.advisorperspectives.com/articles/2013/05/14/nassim-taleb-on-the-anti-fragile-portfolio-and-the-benefits-of-taking-risks/3) for the audience. He said his portfolio includes gold, silver, commodities, Treasury bills, euros, income properties and stocks. ... By accepting the natural fluctuations in the economy and seeking out investments that benefit from them, it is possible to construct a more antifragile portfolio, he said."

Please understand, I'm not looking for personal validation that my investing strategy is the best. The fact that I'm 100% stocks has nothing to do with my argument. I'm simply warning the newbies who see portfolios like The Golden Butterfly, that things aren't as rosy as they seem. The, "match or beat the total stock market in long-term real CAGR with fewer stocks and lower volatility" description of The Golden Butterfly is a very dangerous message to impart on financial newbies.

Note the scary links I supplied in my 100% stocks thread:

What was the 2008 crash like in real time? (https://www.bogleheads.org/forum/viewtopic.php?f=10&t=168261)
http://www.livingafi.com/2014/05/drawdown-part-1-the-basics/
http://forum.mrmoneymustache.com/investor-alley/why-would-i-be-in-anything-other-than-100-stocks/msg541017/#msg541017
http://forum.mrmoneymustache.com/investor-alley/why-would-i-be-in-anything-other-than-100-stocks/msg541078/#msg541078

If you included The Growth Butterfly at the bottom of your Golden Butterfly page to explain the risks involved, your readers would be much better off.
Title: Re: Portfolio Charts - The Golden Butterfly
Post by: Tyler on April 28, 2016, 01:56:20 PM
The, "match or beat the total stock market in long-term real CAGR with fewer stocks and lower volatility" description of The Golden Butterfly is a very dangerous message to impart on financial newbies.

You have mentioned this several times, and I appreciate your concern.  I believe your heart is in the right place, and you truly want to help people not get the wrong idea.  I support that.  In the spirit of your effort, I recognize that verb tense matters and I just edited the original post (https://portfoliocharts.com/2015/09/22/catching-a-golden-butterfly/) on my website to read (emphasis added):

"...the Portfolios section here contains several good portfolios that matched or surpassed the total stock market in long-term real CAGR with fewer stocks and lower volatility."

I'll simply point out that based on the best data we have available, this statement is factually correct.  It also applies to many more portfolios than just the Golden Butterfly, including more traditional ones like the Ferri Core Four (https://portfoliocharts.com/portfolio/rick-ferri-core-four/) and Coffeehouse (https://portfoliocharts.com/portfolio/coffeehouse-portfolio/). 

One should absolutely not assume they will continue to be that way in the future, but IMHO one should also not dismiss them all out of hand as if there's nothing to learn from them about asset allocation.  Doing that effectively does require wisdom, and new investors should proceed carefully.

If you included The Growth Butterfly at the bottom of your Golden Butterfly page to explain the risks involved, your readers would be much better off.

A more appropriate disclaimer that I can get behind is that blindly substituting assets may have unintended consequences.  That applies to all portfolios.

BTW, I totally agree that leaning too heavily on backtesting can give you a false sense of security and should be avoided.  You can't see what will work by testing the past.   However, you can absolutely test the past to see what did not (withdrawal rates that failed, drawdowns that exceeded your investing horizon, etc.).  Neither theory nor backtesting can sustainably succeed without the other. 
Title: Re: Portfolio Charts - The Golden Butterfly
Post by: Stache it Away on April 28, 2016, 03:52:37 PM
It sounds like we're coming back around to a common theme of being worried about "outperforming" based on looking at only one timeframe.

I don't think it's that simple.  In fact, the latest criticism has nothing to do with timeframes at all.

It's more about looking at outperforming based on the fact that the rebalancing story didn't actually cause the good returns, but rather the low volatility.

I would expect the GB to have low volatility in the future, but not necessarily high return.  This is because the high return came from the assets themselves outperforming, rather than from the rebalancing. 

If the assets have low returns in the future, the GB will have low returns (with a low volatility).

The GB (and PP) idea of rebalancing between assets so no matter what environment you're in only works if you're rebalancing between assets that have high returns.

And how do you know those particular assets will have high returns in the future?

If it was merely a "they don't need to, cause rebalancing" that would be neat. But it's not, the GB relies on the assets having a high return (and the rebalancing causes low volatility).


I think Arebelspy put it together nicely.  I'm in the investment profession and I am constantly looking for assets that are not correlated to stocks to help reduce volatility which bonds and gold have certainly done in the past.  I don't think anyone is disputing that fact.  However, even though 40 years of data seems like a large span of time, the majority of that time we had lowering interest rates and a booming commodity super cycle which helped both gold and long-term Treasuries rise to the cream of the crop when back-testing. 

A portfolio that adds gold (or other commodities) and bonds is very likely to have lower volatility, but there is a very good chance that bonds especially will not perform over at least the next decade as they have over the past 30 or 40 years.  Gold is anyone's guess.  As with most arguments that I've see the answer can lie somewhere in the middle.  My take on this is that I'm fine with 100% stocks now (in the accumulation phase) but when we retire we might want to have a certain amount of money set aside so that if the market goes down for a while we don't have to pull from stocks at that time.  Most people I think allocate this to cash.  If we instead allocated this portion to lower correlated assets (though also likely lower returns as well) it might be better than keeping such a large amount in cash.  Just a thought I had to how we might handle the volatility in retirement. 


As a side note:  Tyler you've done some really cool work here that I'm going to spend some time looking at. 
Title: Re: Portfolio Charts - The Golden Butterfly
Post by: Radagast on April 28, 2016, 08:18:35 PM
If you included The Growth Butterfly at the bottom of your Golden Butterfly page to explain the risks involved, your readers would be much better off.

Perhaps the Large Cap Growth index should be substituted for the entire stock allocations of all portfolios to remind investors to diversify.

Now I agree with your basic points that simplicity is likely to be better than complexity for most investors, and that reliance on backtesting and survivorship bias may badly mislead people (pretty much everyone still uses it though, including Vanguard). I also agree that stock indices should be considered the primary source of growth for all portfolios, and I do not own any gold except incidental amounts in electronic devices. But your own advice looks just as bad if one uses your own method to discredit it. How can you recommend 100% stocks or a 3-fund portfolio when substituting large growth stocks causes them to fail or perform poorly? Let's not have a double standard.

(http://i63.tinypic.com/23lgohs.jpg)
Title: Re: Portfolio Charts - The Golden Butterfly
Post by: Interest Compound on April 28, 2016, 09:01:33 PM
If you included The Growth Butterfly at the bottom of your Golden Butterfly page to explain the risks involved, your readers would be much better off.

Perhaps the Large Cap Growth index should be substituted for the entire stock allocations of all portfolios to remind investors to diversify.

Now I agree with your basic points that simplicity is likely to be better than complexity for most investors, and that reliance on backtesting and survivorship bias may badly mislead people (pretty much everyone still uses it though, including Vanguard). I also agree that stock indices should be considered the primary source of growth for all portfolios, and I do not own any gold except incidental amounts in electronic devices. But your own advice looks just as bad if one uses your own method to discredit it. How can you recommend 100% stocks or a 3-fund portfolio when substituting large growth stocks causes them to fail or perform poorly? Let's not have a double standard.

(http://i63.tinypic.com/23lgohs.jpg)

The whole point of the 3 Fund portfolio, is to own the entire market. It has a deep humility at its core--the aim is not to separate winners from losers, but rather to hold the entire market. Large Cap Growth is not the entire market, therefore it could never be included in the 3 Fund portfolio. In contrast, The Golden Butterfly is reliant on picking tomorrow's outperformer. If Large Cap Growth were the top performer between 1972-today, it almost assuredly would be included in The Golden Butterfly, and you'd better hope that outperformance continues.

Again, if you understood the distinct difference between a portfolio like The Golden Butterfly, and The 3 Fund portfolio, you wouldn't be asking this. If you think the logic behind my method is "blindly replace the stock allocation with Large Cap Growth, and if it fails your portfolio is bad", you're seriously missing the point.
Title: Re: Portfolio Charts - The Golden Butterfly
Post by: Radagast on April 28, 2016, 09:20:31 PM
The whole point of the 3 Fund portfolio, is to own the entire market. It has a deep humility at its core--the aim is not to separate winners from losers, but rather to hold the entire market. Large Cap Growth is not the entire market, therefore it could never be included in the 3 Fund portfolio. In contrast, The Golden Butterfly is reliant on picking tomorrow's outperformer. If Large Cap Growth were the top performer between 1972-today, it almost assuredly would be included in The Golden Butterfly, and you'd better hope that outperformance continues.

Again, if you understood the distinct difference between a portfolio like The Golden Butterfly, and The 3 Fund portfolio, you wouldn't be asking this. If you think the logic behind my method is "blindly replace the stock allocation with Large Cap Growth, and if it fails your portfolio is bad", you're seriously missing the point.
In that case you should have substituted assets representing the total market and said "look I made it better" instead of eliminating the TSM slice and saying "not so pretty now!". Saying owning everything is preferable and then going and removing the aspect that contained everything (at least in terms of US stocks) as a form of critique is a double standard. Perhaps you could have said "here's a way to really own everything: all world index!"
Title: Re: Portfolio Charts - The Golden Butterfly
Post by: Interest Compound on April 28, 2016, 09:58:13 PM
The whole point of the 3 Fund portfolio, is to own the entire market. It has a deep humility at its core--the aim is not to separate winners from losers, but rather to hold the entire market. Large Cap Growth is not the entire market, therefore it could never be included in the 3 Fund portfolio. In contrast, The Golden Butterfly is reliant on picking tomorrow's outperformer. If Large Cap Growth were the top performer between 1972-today, it almost assuredly would be included in The Golden Butterfly, and you'd better hope that outperformance continues.

Again, if you understood the distinct difference between a portfolio like The Golden Butterfly, and The 3 Fund portfolio, you wouldn't be asking this. If you think the logic behind my method is "blindly replace the stock allocation with Large Cap Growth, and if it fails your portfolio is bad", you're seriously missing the point.
In that case you should have substituted assets representing the total market and said "look I made it better" instead of eliminating the TSM slice and saying "not so pretty now!". Saying owning everything is preferable and then going and removing the aspect that contained everything (at least in terms of US stocks) as a form of critique is a double standard. Perhaps you could have said "here's a way to really own everything: all world index!"

Huh? I'm sorry Radagast, but you're so far off base here the only way to respond would be to explain everything again from the beginning. Maybe someone else can help you understand.
Title: Re: Portfolio Charts - The Golden Butterfly
Post by: Interest Compound on April 28, 2016, 10:22:00 PM
The, "match or beat the total stock market in long-term real CAGR with fewer stocks and lower volatility" description of The Golden Butterfly is a very dangerous message to impart on financial newbies.

You have mentioned this several times, and I appreciate your concern.  I believe your heart is in the right place, and you truly want to help people not get the wrong idea.  I support that.  In the spirit of your effort, I recognize that verb tense matters and I just edited the original post (https://portfoliocharts.com/2015/09/22/catching-a-golden-butterfly/) on my website to read (emphasis added):

"...the Portfolios section here contains several good portfolios that matched or surpassed the total stock market in long-term real CAGR with fewer stocks and lower volatility."

I'll simply point out that based on the best data we have available, this statement is factually correct.  It also applies to many more portfolios than just the Golden Butterfly, including more traditional ones like the Ferri Core Four (https://portfoliocharts.com/portfolio/rick-ferri-core-four/) and Coffeehouse (https://portfoliocharts.com/portfolio/coffeehouse-portfolio/). 

One should absolutely not assume they will continue to be that way in the future, but IMHO one should also not dismiss them all out of hand as if there's nothing to learn from them about asset allocation.  Doing that effectively does require wisdom, and new investors should proceed carefully.

If you included The Growth Butterfly at the bottom of your Golden Butterfly page to explain the risks involved, your readers would be much better off.

A more appropriate disclaimer that I can get behind is that blindly substituting assets may have unintended consequences.  That applies to all portfolios.

BTW, I totally agree that leaning too heavily on backtesting can give you a false sense of security and should be avoided.  You can't see what will work by testing the past.   However, you can absolutely test the past to see what did not (withdrawal rates that failed, drawdowns that exceeded your investing horizon, etc.).  Neither theory nor backtesting can sustainably succeed without the other.

Great! I think we're on the same page :)
Title: Re: Portfolio Charts - The Golden Butterfly
Post by: Monkey Uncle on April 30, 2016, 04:41:56 AM
I think Arebelspy put it together nicely.  I'm in the investment profession and I am constantly looking for assets that are not correlated to stocks to help reduce volatility which bonds and gold have certainly done in the past.  I don't think anyone is disputing that fact.  However, even though 40 years of data seems like a large span of time, the majority of that time we had lowering interest rates and a booming commodity super cycle which helped both gold and long-term Treasuries rise to the cream of the crop when back-testing. 

A portfolio that adds gold (or other commodities) and bonds is very likely to have lower volatility, but there is a very good chance that bonds especially will not perform over at least the next decade as they have over the past 30 or 40 years.  Gold is anyone's guess.  As with most arguments that I've see the answer can lie somewhere in the middle.  My take on this is that I'm fine with 100% stocks now (in the accumulation phase) but when we retire we might want to have a certain amount of money set aside so that if the market goes down for a while we don't have to pull from stocks at that time.  Most people I think allocate this to cash.  If we instead allocated this portion to lower correlated assets (though also likely lower returns as well) it might be better than keeping such a large amount in cash.  Just a thought I had to how we might handle the volatility in retirement. 

I've seen several comments in this thread similar to the bolded passage.  "Based on current conditions, asset X seems set to underperform for the foreseeable future."  You could have said the same thing about bonds in '70s when interest rates were rising.  And bonds did indeed tank for a while.  But then interest rates started falling, and bonds had good performance for 30+ years.  No one can accurately predict all the round trips that various assets are going to make over the next 4 decades.  That's why you practice asset allocation instead of just picking what you think is set to outperform in the near term.
Title: Re: Portfolio Charts - The Golden Butterfly
Post by: Monkey Uncle on April 30, 2016, 05:22:05 AM

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.
Title: Re: Portfolio Charts - The Golden Butterfly
Post by: dandypandys on April 30, 2016, 06:19:54 AM
This is why it's so hard to stay the course. There's always a hook. For someone new to investing, as I suspect many people on this forum are, you might not have seen how these stories typically play out:

-------------------------------------
"Investing is risky, you have Inflation, Deflation, Prosperity, and Recession, and you never know which one is coming next. Therefore you should dedicate portions of your portfolio to each of these phases, by buying X, Y, Z, and V."
-------------------------------------

That's a great story. The trouble comes when choosing your X, Y, Z, and V. I've been reading about portfolios like this for years, and they always have one thing in common, they backtest well. Very well. Is this a coincidence? Could it be that only the portfolios which perform very well in backtesting, also have an interesting story behind them? Or is it possible that almost every portfolio has a market-beating story......it just has to beat the market first before you pay any attention to it.

It is easy to fall victim to the Survivorship Bias.  After any process that leaves behind survivors, the non-survivors are often destroyed or muted or removed from your view. If failures becomes invisible, then naturally you will pay more attention to successes. Not only do you fail to recognize that what is missing might have held important information, you fail to recognize that there is missing information at all. Here are some possible options for each phase you may have missed:

Prosperity:
  • Total US Stock Market
  • Large Cap Value
  • Large Cap Growth
  • Large Cap Blend
  • Mid Cap Value
  • Mid Cap Growth
  • Mid Cap Blend
  • Small Cap Value
  • Small Cap Growth
  • Small Cap Blend
  • Micro Cap
  • Total International Stock Market
  • Emerging Market
  • Pacific Market
  • Europe Market
  • International Value
  • International Small
  • S&P 500
  • Dividend Appreciation
  • High Dividend
  • Value Index
  • Growth Index
  • FTSE Social Index
  • Extended Market
Inflation:
  • Short Term Tips
  • Long Term Tips
  • Gold?
  • REITS?
  • Silver?
  • Coal?
  • Platinum?
  • Diamonds?
  • Oil?
  • Natural Gas?
  • Coffee?
  • Sugar?
  • Copper?
  • Wheat?
  • Cotton?
(There are arguments for each one of these.)

Deflation:
  • Long Term Bond Index
  • Long Term Treasuries
  • Long Term Government Bonds
  • Long Term Corporate Bonds
  • Long Term Municipal Bonds

Recession:
  • Money Market
  • Short Term Bond index
  • Short Term Treasuries
  • Short Term Tips
  • Ultra Short Term Bonds
  • CDs
  • Savings accounts
Now for the fun part. No matter which combination of these (including those I didn't mention) ends up winning, there will be an enticing story behind it all, explaining why there must be a fundamental reason behind such success! We finally got an answer to why Gold fits in the "Inflation" bucket, despite the data showing it clearly does not track inflation, and the answer is "it's complicated". We're told that Gold and Small Cap Value aren't necessary components, yet without these components the portfolio under-performs the average.

What if I read some similar articles, and choose this portfolio in 1972, based on the same "fundamentals" here? These are reasonable choices, and from the perspective of the 1972 investor, make perfect sense. Growth has been beating Value for almost a decade, showed no signs of slowing up, and every article you could find was singing the praises of Growth.


Had it gone well, we'd be seeing articles about The Growth Butterfly, not The Golden Butterfly. Instead I'm broke at 70 years old, cursing some article I read over 30 years ago.


Indeed, these hooks can seem promising, even exciting. But they clearly fall flat here. If you choose such a portfolio, acknowledge that it's based purely on backtesting, as the story simply doesn't check out. And if choosing a portfolio based purely on backtesting doesn't start ringing red alarm bells in your head...you really shouldn't be investing in a portfolio like this at all.

My advice to any newbies in this thread, don’t fall into the trap. You buy the market not because it backtested well during a specific phase, and will make you rich in the process. You buy the Total Stock Market Index, simply because you want to capture the market. You want a percentage ownership of all available companies across the globe. You want your share of the world's collective profits/production. Again, indexing beat or matched half of all invested dollars in the past, I do not expect mathematical laws to change, so I expect it to beat or match half of all invested dollars in the future.

You don’t buy the Total Bond Market Index because it was less volatile in the past, but because bonds are a written contract, where you are paid periodic interest payments, and in the end you get your full investment back. In most cases (70% of VBTLX) the contract is guaranteed by the government. This makes it a relatively safe place to put your money.

These aren't stories based on how it performed in the past. You won't get confused about why these options are included in the portfolio at all, when the story doesn't seem to follow reality, only to get an "it's too complicated so I'll just tell you inflation" answer from the expert. It's a simple definition of what these components are.

Sol put it perfectly in another thread:
-------------------------------------
People don't choose indexing because it backtests well against an index.  They choose indexing because they want to get market returns, good or bad, without taking on any additional risk by trying to beat the system.  I choose indexing because I'm prepared to play the game straight and accept average returns the same as everyone else is getting, at the lowest cost to me.  I'm not trying to win at anyone else's expense.
-------------------------------------

As did Brooklynguy:
-------------------------------------
If you use backtesting alone, you have proven nothing more than the fact that the strategy has worked in the past.  It is textbook survivorship bias to draw a conclusion solely from backtesting, because you are ignoring the infinite number of conceivable and backtestable strategies that failed to work in the past.  If you backtest enough strategies, you are bound to find one that worked through random chance alone.
-------------------------------------

My advice to any newbies would be to steer clear. Survivorship bias is the single greatest fallacy in investing (http://forum.mrmoneymustache.com/investor-alley/survivorship-bias-the-single-greatest-fallacy-in-investing-35417/), and it’s better to find out now, than after 16 years of under-performance. I will reiterate this for the newbies of the thread looking for a "consensus". I don't think newbies can responsibly handle the information on Tyler's site. Once you consider yourself an expert, have read a few books, and have watched your own portfolio in the market for a few years to know how you'll react, come back and see what you think.

You must remind yourself that when you start to pick apart winners and losers, successes and failures, the living and dead, that by paying attention to one side of that equation you are always neglecting the other. If you are thinking about opening a restaurant because there are so many successful restaurants in your hometown, you are ignoring the fact that only successful restaurants survive to become examples. Maybe on average 90 percent of restaurants in your city fail in the first year. You can’t see all those failures because when they fail they also disappear from view.

As Nassim Taleb writes in his book The Black Swan, “The cemetery of failed restaurants is very silent.” Of course the few that don’t fail in that deadly of an environment are wildly successful because only the very best and the very lucky can survive. All you are left with are super successes, and looking at them day after day you might think it’s a great business to get into when you are actually seeing evidence that you should avoid it.

This post above made a lot of sense to me. Thanks Interest Compound.
I have been following this thread very carefully and have read the huge 3-fund portfolio thread by Tayler Larimore over on Bogleheads forum. 3 fund is what i have chosen for my 403b - or as close as i can get, but i also have 20k of physical gold and silver that i have held on to since 2008-11. Reading this thread, i have gone back and forth on the value of keeping it and having that further diversification to my 3-fund or selling it finally paying off my condo in full. Many of you have said do the sell. I didn't blindly ignore the advice- as I did sell half of the original 40 and dump it into my 5.9% condo loan but still hesitating on selling the final 20k- pretty much because of this thread and going back and forth with the arguments.

Currently my 403b is as close to a 3 portfolio as possible with:

14% Standard Stable Asset Fund II
4% Vanguard Long-Term Treasury Admiral
67% Vanguard Total Stock Mkt Idx Adm
14% Vanguard Dvlp Mrkts Indx Admrl
1% Vanguard Emerging Mkts Stock Idx Adm

future contributions: 80/20   -( as a 41 year old perhaps a little high on stocks not sure yet)
20% Standard Stable Asset Fund II
60% VTSAX
15% VTMGX
5% VEMAX

Then that 20k gold and silver-  what to do - what to do.
Title: Re: Portfolio Charts - The Golden Butterfly
Post by: phwadsworth on April 30, 2016, 06:54:50 AM
This thread is great, thank you, loving the discussion and learning tons!
Title: Re: Portfolio Charts - The Golden Butterfly
Post by: Interest Compound on April 30, 2016, 10:01:20 AM

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.

Pure Story 1:

Prosperity = US Stock Market
Inflation = TIPS
Deflation = Long Term Treasuries
Recession = Short Term Treasuries

Pure Story 2:

Prosperity = US Stock Market
Prosperity x2 = International Stock Market
Inflation = TIPS
Deflation = Long Term Treasuries
Recession = Short Term Treasuries

I fail to see how these portfolios were "cherry-picked to make the GB look bad". Tyler specifically said options like Total International also work. If your issue is with putting TIPS, the one and only asset guaranteed to track inflation, in the Inflation box, I don't think that's a very strong argument :)

Now The Growth Butterfly (Pure Story 3) was definitely cherry-picked to make GB look bad:

Prosperity = Large Cap Growth
Prosperity x2 = Large Cap Growth
Inflation = TIPS
Deflation = Long Term Treasuries
Recession = Short Term Treasuries

Only to highlight how the portfolio is reliant on picking tomorrow's outperformer. Choose wrong, and you're in trouble.
Title: Re: Portfolio Charts - The Golden Butterfly
Post by: Interest Compound on April 30, 2016, 10:06:05 AM
5.9% condo loan

If there were an asset guaranteeing a 5.9% return, with no volatility, would you put your money there, or in Gold/Silver?

If there were an asset guaranteeing a 5.9% return, with no volatility, would you put your money there, or in Bonds?

To me it's an easy answer. Pay off the loan :)
Title: Re: Portfolio Charts - The Golden Butterfly
Post by: Tyler on April 30, 2016, 10:43:38 AM
Tyler specifically said options like Total International also work. If your issue is with putting TIPS, the one and only asset guaranteed to track inflation, in the Inflation box, I don't think that's a very strong argument :)

For the record, I said that one can replace some assets like SCV with things like total international and get similar (but not identical) results.  I also offered portfolios that use things like REITs and commodities instead of gold.  I did not say that all assets can be interchanged with whatever sounds sorta similar to you with no consequences, and I encourage people to explore those consequences by testing their assumptions using my tools and other resources before proceeding.  Many assets are more complicated than what you see on the surface. 

For example, TIPS funds are not guaranteed to track inflation.  If they did, they'd always have a positive real return.  They don't.

(https://portfoliocharts.files.wordpress.com/2016/01/tips.jpg?w=1100)

Just like gold is affected by more than just inflation, TIPS are too.  They are bonds and their value responds inversely to interest rates.  TIPS will track inflation very well provided one holds them all the way to maturity and ignores the price changes along the way.  TIPS index funds, however, do not hold the individual bonds all the way to maturity.  They sell them early to maintain the target average maturity of the fund, and when they do the value of the bond will have changed and the fund may make or lose money.  If you want TIPS to perfectly track inflation you need to buy them directly and never sell any to rebalance.  Otherwise, you're really just adding a slightly boosted version of intermediate bonds.

(http://i68.tinypic.com/2vv48y8.jpg)

Basically, if you want to add TIPS to the Golden Butterfly the more appropriate slot is the long term treasuries, not gold.  Try it out in the calculators and you'll see what I mean. This is also how the Swensen and Swedroe portfolios use TIPS -- it's part of the bond allocation. 
Title: Re: Portfolio Charts - The Golden Butterfly
Post by: Tyler on April 30, 2016, 11:32:20 AM
5.9% condo loan

If there were an asset guaranteeing a 5.9% return, with no volatility, would you put your money there, or in Gold/Silver?

If there were an asset guaranteeing a 5.9% return, with no volatility, would you put your money there, or in Bonds?

To me it's an easy answer. Pay off the loan :)

+1!
Title: Re: Portfolio Charts - The Golden Butterfly
Post by: Interest Compound on April 30, 2016, 01:26:51 PM
Basically, if you want to add TIPS to the Golden Butterfly the more appropriate slot is the long term treasuries, not gold.

Is it your position that gold protects against inflation better than a TIPS fund?

(https://i.sli.mg/7t3xxS.png)

I did not say that all assets can be interchanged with whatever sounds sorta similar to you with no consequences.

That's the crux of my argument. This is exactly what I intended to highlight. While the choices might seem similar, if you choose the wrong one there will be big consequences. The success of the Golden Butterfly is reliant on picking tomorrow's outperformer.
Title: Re: Portfolio Charts - The Golden Butterfly
Post by: Tyler on April 30, 2016, 02:18:16 PM

Is it your position that gold tracks inflation better than a TIPS fund?


No.  I simply pointed out that your statement that TIPS are "guaranteed to track inflation" is factually incorrect and that there is a far more important factor in the price movement that is shared by all other bond funds.  Just because TIPS and gold are both sensitive to inflation does not mean they are interchangeable, and casually substituting TIPS for gold without recognizing the difference between a bond and a commodity is not a reasonable comparison.
 
That's the crux of my argument. This is exactly what I intended to highlight. While the choices might seem similar, if you choose the wrong one there will be big consequences. The success of the Golden Butterfly is reliant on picking tomorrow's outperformer.

The idea behind the Golden Butterfly is exactly the opposite -- to not attempt to guess tomorrow's outperformer and to intelligently diversify so that you're prepared for any outcome.  In Taleb's terms: "By accepting the natural fluctuations in the economy and seeking out investments that benefit from them, it is possible to construct a more antifragile portfolio."  The assets for this type of strategy are not arbitrarily chosen by backtesting with no wisdom nor by dogma with no evidence.  But don't take my word for it.  If one takes the time to read the books behind the Permanent portfolio, Swensen portfolio, and Ivy portfolio they can explore the concept in depth from multiple perspectives.

Even if you find my personal arguments unconvincing, there are many other people way more knowledgeable than me who suggest a variety of good asset allocations beyond just buying the whole market and hoping things work out for the best.  You've actually quoted many of them in this thread (Bernstein, Malkiel, Taleb, etc), so I assume you value their ideas.  Rather than tearing down the portfolios that do not resonate with you, seek out the ones that do. 

Now if you simply reject modern portfolio theory and believe all of those people writing books on asset allocation are wrong, that's fine.  But at that point the objection is really more fundamental than the specifics of the Golden Butterfly, and I suggest we start a new thread for that. 

Title: Re: Portfolio Charts - The Golden Butterfly
Post by: Monkey Uncle on April 30, 2016, 03:08:13 PM

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.

Pure Story 1:

Prosperity = US Stock Market
Inflation = TIPS
Deflation = Long Term Treasuries
Recession = Short Term Treasuries

Pure Story 2:

Prosperity = US Stock Market
Prosperity x2 = International Stock Market
Inflation = TIPS
Deflation = Long Term Treasuries
Recession = Short Term Treasuries

I fail to see how these portfolios were "cherry-picked to make the GB look bad". Tyler specifically said options like Total International also work. If your issue is with putting TIPS, the one and only asset guaranteed to track inflation, in the Inflation box, I don't think that's a very strong argument :)

Now The Growth Butterfly (Pure Story 3) was definitely cherry-picked to make GB look bad:

Prosperity = Large Cap Growth
Prosperity x2 = Large Cap Growth
Inflation = TIPS
Deflation = Long Term Treasuries
Recession = Short Term Treasuries

Only to highlight how the portfolio is reliant on picking tomorrow's outperformer. Choose wrong, and you're in trouble.

You totally ignored the point of my post.  How do you explain the fact that a non-data-mined, non-cherry-picked, diversified portfolio of broad indexes beat the pants off of the total stock market, 60/40, and 3-fund portfolios?
Title: Re: Portfolio Charts - The Golden Butterfly
Post by: Interest Compound on April 30, 2016, 05:03:08 PM

Is it your position that gold tracks inflation better than a TIPS fund?


No.  I simply pointed out that your previous statement that TIPS are "guaranteed to track inflation" is factually incorrect.  Both gold and TIPS can be used for inflation protection in different types of portfolios.  But neither solely track inflation, and they are not interchangeable in every portfolio.  There are good reasons the PP and GB do not use TIPS instead of gold, and it has nothing to do with backtesting. 
 
That's the crux of my argument. This is exactly what I intended to highlight. While the choices might seem similar, if you choose the wrong one there will be big consequences. The success of the Golden Butterfly is reliant on picking tomorrow's outperformer.

The idea behind the Golden Butterfly is exactly the opposite -- to not attempt to guess tomorrow's performer and to intelligently diversify so that you're prepared for any outcome.  In Taleb's terms: "By accepting the natural fluctuations in the economy and seeking out investments that benefit from them, it is possible to construct a more antifragile portfolio." 

The assets are not arbitrarily chosen by backtesting nor by dogma with no evidence.  If one actually reads the books behind things like the Permanent portfolio, Swensen portfolio, and Ivy portfolio they'll understand this and avoid common pitfalls like casually substituting TIPS for gold in a portfolio that already holds 40% bonds. 

Some people avoid poor decisions by educating themselves on the topic.  Others do so by deferring to the wisdom of people they trust.  Even if you don't trust the Golden Butterfly in the slightest, there are many other people way smarter and more knowledgeable than me who suggest a variety of good asset allocations beyond just buying the whole market and hoping things work out for the best.  Rather than tearing down the ones that do not resonate with you, seek out the ones that do.

TIPS are guaranteed to track inflation. A TIPS fund will approach this guarantee as we get closer to the average effective maturity date of the fund. This is exactly what we see in the charts in my last post. Tangent aside, you don't seem to be claiming that Gold protects against Inflation better than TIPS, so let's not get off track.

We seem to be going in circles now. Yes, the story is great. Just as great as all the other similar stories which were all amazing outperformers in their day (more so than the Golden Butterfly for their time period), only to move back down to Average (red box) as time went on.

(https://i.sli.mg/Et1B47.png)

I'll continue tearing it down, along with any other portfolio which misleads financial newbies into believing they've found the Holy Grail, only to end up losing everything. They don't see it for what it is. They don't see that it's a competition. Tell someone they can beat Michael Jordan in a game of basketball, and they will laugh in your face...but give them a sales pitch for "one weird trick" to beat the market, and people will line up to give you money.

For the newbies in the thread, it's important to understand this next point.  When someone claims you can beat the market (matching average returns, with 1/5th the volatility) over the long term, they're saying you can beat over half of all money invested in the market this year, then again next year, and again the year after that...for as long as they live.  All by using a published, widely known strategy, that the other market participants (the people they claim to be beating) are aware of.  This is essentially the claim:

---------------------------------------------
"<Insert Strategy Here> beat over half of all invested dollars in the past.  While this information is public, I do not expect the losers to adopt my published strategy, or change to a better strategy, so I expect it to continue beating over half of all invested dollars in the future."
---------------------------------------------

This isn't just someone saying, "I can beat Lebron James in a 1 on 1 basketball game, you can too!"

It's,

---------------------------------------------
"I can beat Lebron James in a 1 on 1 basketball game, every single year, and he knows exactly what I'm going to do each time, and he doesn't copy my strategy or figure out a way to beat me, so I expect I will continue beating him in the future, you can too!"
---------------------------------------------

Compared to:

---------------------------------------------
"Indexing beat or matched half of all invested dollars in the past, I do not expect mathematical laws to change, so I expect it to beat or match half of all invested dollars in the future."
---------------------------------------------

While Tyler is very careful to state the future is unknowable, financial newbies just can't responsibly handle this information. They don't understand the risks. They hear him say, "The idea behind the Golden Butterfly is exactly the opposite -- to not attempt to guess tomorrow's performer", but they don't realize the story is irrelevant. It's not the story that got them excited about the Golden Butterfly. It's the results. The backtested results. The possibility of matching the performance of 100% stocks, but with 1/5th the volatility. This success, is very much reliant on picking tomorrow's outperformer.

The Permanent Portfolio, on which The Golden Butterfly is based, was created in 1982, and it's a great example of the consequences when you don't pick tomorrow's outperformer. From 1972 to 1982 The Permanent Portfolio looked even better on the charts than The Golden Butterfly does today! But had you gone all-in back then, you would've underperformed even 100% bonds:

(https://i.sli.mg/hpVJby.png)

The scary part? It didn't move that far on the graph. If you look at The Permanent Portfolio now, it doesn't look so bad...because the backtesting includes the data from before it was created! Does no one else see a problem with this?? Of course the portfolio is going to backtest well before it was created, that's why it was created!

(https://i.sli.mg/ILdIZf.png)

And Tyler, don't underestimate yourself. :) All those other big names came up with their outperforming portfolios the same way you did. You're just as smart as them. You could write a "Golden Butterfly" book right now, earn millions from all the same financial newbies who bought all those other books, then watch as they proceed to underperform.
Title: Re: Portfolio Charts - The Golden Butterfly
Post by: Interest Compound on April 30, 2016, 05:07:58 PM
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.

Sorry, I only debate one market-beating portfolio at a time. And even then, only when it seems to be misleading financial newbies. Make a new thread, and maybe I'll jump in with my thoughts once I'm done here. :)
Title: Re: Portfolio Charts - The Golden Butterfly
Post by: steveo on April 30, 2016, 05:41:43 PM
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.

This to me is the sort of information that analysis on portfolios like "The Golden Butterfly" should be utilised for. A diversified asset allocation does have certain advantages. Having some commodities in your portfolio gives you an asset that can go on long bull runs and it should be uncorrelated to stocks.
Title: Re: Portfolio Charts - The Golden Butterfly
Post by: Interest Compound on April 30, 2016, 05:46:59 PM
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.

This to me is the sort of information that analysis on portfolios like "The Golden Butterfly" should be utilised for. A diversified asset allocation does have certain advantages. Having some commodities in your portfolio gives you an asset that can go on long bull runs and it should be uncorrelated to stocks.

Until you realize that a large portion, probably about half, of those portfolios underperform. If you only look at the winners, you fail to realize there's any missing information at all.
Title: Re: Portfolio Charts - The Golden Butterfly
Post by: steveo on April 30, 2016, 05:51:31 PM
The idea behind the Golden Butterfly is exactly the opposite -- to not attempt to guess tomorrow's outperformer and to intelligently diversify so that you're prepared for any outcome.

In my opinion this is exactly what modern asset allocation is about. I just think dropping the tilts makes portfolio's much more about intelligently diversifying. So just use broad indexes. Ideally all world stock market (I personally think domestic is required because of currency risk), all commodities, all bonds and a REIT (dependent on how much your house is worth if you own it). I wonder how a 25% each portfolio would go. Assuming that stocks will tend to outperform all other asset classes then make stocks 50% and split amongst the other asset classes.

I should add that this approach is very similar to a 3 fund portfolio. You could just make it a 4 fund portfolio by adding some commodities and then choose your weightings.
Title: Re: Portfolio Charts - The Golden Butterfly
Post by: steveo on April 30, 2016, 05:59:44 PM
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.

This to me is the sort of information that analysis on portfolios like "The Golden Butterfly" should be utilised for. A diversified asset allocation does have certain advantages. Having some commodities in your portfolio gives you an asset that can go on long bull runs and it should be uncorrelated to stocks.

Until you realize that a large portion, probably about half, of those portfolios underperform. If you only look at the winners, you fail to realize there's any missing information at all.

I think though underperforming is a subjective concept because it is about the return to volatility trade off. The point in my opinion is to have a diversified portfolio across different asset classes and not tilt within those asset classes.

I definitely think that half the portfolios will underperform and that is why you don't tilt and you choose the asset allocation that works for you. It could still be 100% stocks for instance. In that case you are just stating that you are okay with significant volatility because over the long term you expect stocks to outperform. It could be 100% bonds. It could be 25% between each asset class. Something like 25% international stocks, 25% domestic, 25% bonds & 25% commodities would probably work pretty well. You can cut it though anyway you like.

I don't like the idea of picking the GB or the PP because of the tilts but the concept behind a diversified set of assets working together I think is solid.
Title: Re: Portfolio Charts - The Golden Butterfly
Post by: wienerdog on April 30, 2016, 07:01:24 PM

The Permanent Portfolio, on which The Golden Butterfly is based, was created in 1982, and it's a great example of the consequences when you don't pick tomorrow's outperformer. From 1972 to 1982 The Permanent Portfolio looked even better on the charts than The Golden Butterfly does today! But had you gone all-in back then, you would've underperformed even 100% bonds:



What are you using for bonds?  I show it does better than 100% bonds from 82 to 15.
Title: Re: Portfolio Charts - The Golden Butterfly
Post by: Interest Compound on April 30, 2016, 07:24:14 PM
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.

This to me is the sort of information that analysis on portfolios like "The Golden Butterfly" should be utilised for. A diversified asset allocation does have certain advantages. Having some commodities in your portfolio gives you an asset that can go on long bull runs and it should be uncorrelated to stocks.

Until you realize that a large portion, probably about half, of those portfolios underperform. If you only look at the winners, you fail to realize there's any missing information at all.

I think though underperforming is a subjective concept because it is about the return to volatility trade off. The point in my opinion is to have a diversified portfolio across different asset classes and not tilt within those asset classes.

I definitely think that half the portfolios will underperform and that is why you don't tilt and you choose the asset allocation that works for you. It could still be 100% stocks for instance. In that case you are just stating that you are okay with significant volatility because over the long term you expect stocks to outperform. It could be 100% bonds. It could be 25% between each asset class. Something like 25% international stocks, 25% domestic, 25% bonds & 25% commodities would probably work pretty well. You can cut it though anyway you like.

I don't like the idea of picking the GB or the PP because of the tilts but the concept behind a diversified set of assets working together I think is solid.

Agreed. The concepts are definitely solid. If you don't go into it thinking you're going to get all of the return, without any of the risk, you'll probably be fine.

That said, I'd love to participate in a new thread analyzing commodities. Ibbotson published some research in 2006 suggesting a commodities allocation could improve a portfolio and it quickly became a sort of fad. Oddly enough, right after the research was published, commodities developed a high correlation with stocks and ceased to be a good diversifier. Funny how things like that happen.

Before:

(https://i.sli.mg/CXEwrp.png)

After:

(https://i.sli.mg/A5rkyN.png)

And this is before looking at their high expense ratio (0.50% - 0.75%) and high annual turnover (75% - 125%).
Title: Re: Portfolio Charts - The Golden Butterfly
Post by: Interest Compound on April 30, 2016, 07:28:44 PM

The Permanent Portfolio, on which The Golden Butterfly is based, was created in 1982, and it's a great example of the consequences when you don't pick tomorrow's outperformer. From 1972 to 1982 The Permanent Portfolio looked even better on the charts than The Golden Butterfly does today! But had you gone all-in back then, you would've underperformed even 100% bonds:



What are you using for bonds?  I show it does better than 100% bonds from 82 to 15.

(https://i.sli.mg/Y8CBCb.png)
(https://i.sli.mg/sSOYZe.png)
Title: Re: Portfolio Charts - The Golden Butterfly
Post by: Radagast on April 30, 2016, 07:29:23 PM
There actually is a little bit of theory behind this, which is volatility and correlation to the US stock market, and it looks a little something like this:

(http://i67.tinypic.com/10qj4ax.jpg)

For as long as one correlation is negative and the other is close to zero the future is likely to be similar to the past for these three assets. There is nothing magic here.
Title: Re: Portfolio Charts - The Golden Butterfly
Post by: wienerdog on April 30, 2016, 08:10:21 PM
I thought Browne only used US treasury bills for his cash portion?
Title: Re: Portfolio Charts - The Golden Butterfly
Post by: steveo on April 30, 2016, 08:22:46 PM
Agreed. The concepts are definitely solid. If you don't go into it thinking you're going to get all of the return, without any of the risk, you'll probably be fine.

I agree, This is my concern with following these portfolios blindly. I think all they offer are example portfolios and then you go out and choose your own portfolio. You shouldn't though be thinking my portfolio is special and I'll beat the market. You could but it's unlikely. It's the same issue I have with picking individual stocks. It's going to come down to luck and why take that risk on.

That said, I'd love to participate in a new thread analyzing commodities. Ibbotson published some research in 2006 suggesting a commodities allocation could improve a portfolio and it quickly became a sort of fad. Oddly enough, right after the research was published, commodities developed a high correlation with stocks and ceased to be a good diversifier. Funny how things like that happen.

....
And this is before looking at their high expense ratio (0.50% - 0.75%) and high annual turnover (75% - 125%).

I'd like to see something on commodities because I'd like to have some but when I look at ETF's that offer this they return basically nothing and have a high expense ratio. I've said previously if I had a lot of money - i.e. a low WR than I would consider purchasing some commodities but I don't have a low WR now and I don't intend to retire on a low WR.
Title: Re: Portfolio Charts - The Golden Butterfly
Post by: Interest Compound on April 30, 2016, 08:26:02 PM
I thought Browne only used US treasury bills for his cash portion?

In the book, "The Permanent Portfolio: Harry Browne's Long-Term Investment Strategy", he says:

(https://i.sli.mg/7TmDRn.png)

Then continues to show these returns for that asset in 1981:

(https://i.sli.mg/OvGpZT.png)

https://books.google.com/books?id=AQK6HbG7LtUC&pg=PT113&source=gbs_selected_pages&cad=3#v=onepage&q&f=false

This matches perfectly with the Cash/MoneyMarket asset in PortfolioVisualizer for 1981:

(https://i.sli.mg/n2br9r.png)
Title: Re: Portfolio Charts - The Golden Butterfly
Post by: wienerdog on April 30, 2016, 09:17:02 PM
Your pictures or whatever you posted didn't work.  Not sure what you were linking to in the google book as a cartoon came up but if you go to the chapter 8 on Cash. 

"Because the stability of cash is so important, the Permanent Portfolio holds its cash in ultra-safe U.S. Treasury (T-Bills) with maturity of 12 months or less.  The reasons why T-Bills are preferred over the other options will be discussed in the chapter"

Switch to short term treasuries and see if your 100% bond statement holds true.

The Permanent Portfolio looked even better on the charts than The Golden Butterfly does today! But had you gone all-in back then, you would've underperformed even 100% bonds:

(https://i.sli.mg/hpVJby.png)


Not defending the PP as it is way too conservative for me but it seems like you're using the wrong data to prove your point.  Maybe it was an honest mistake?  I don't think I have seen anywhere that uses a money market or cash for the cash position.  IE (SPY, TLT, IAU, SHY)
Title: Re: Portfolio Charts - The Golden Butterfly
Post by: Interest Compound on April 30, 2016, 09:43:39 PM
Your pictures or whatever you posted didn't work.  Not sure what you were linking to in the google book as a cartoon came up but if you go to the chapter 8 on Cash. 

"Because the stability of cash is so important, the Permanent Portfolio holds its cash in ultra-safe U.S. Treasury (T-Bills) with maturity of 12 months or less.  The reasons why T-Bills are preferred over the other options will be discussed in the chapter"

Switch to short term treasuries and see if your 100% bond statement holds true.

The Permanent Portfolio looked even better on the charts than The Golden Butterfly does today! But had you gone all-in back then, you would've underperformed even 100% bonds:

(https://i.sli.mg/hpVJby.png)


Not defending the PP as it is way too conservative for me but it seems like you're using the wrong data to prove your point.  Maybe it was an honest mistake?  I don't think I have seen anywhere that uses a money market or cash for the cash position.  IE (SPY, TLT, IAU, SHY)

I've uploaded the post for you here as an attachment. 1982 matches as well, 10.5%. The data is accurate.
Title: Re: Portfolio Charts - The Golden Butterfly
Post by: Radagast on April 30, 2016, 09:49:00 PM
Portfolio visualizer defaults to that option, and it is not really wrong. I think that short term treasuries are 2 years or something for portfolio visualizer, which is recommended only with caution. I believe a treasury-only money market is recommended for the PP.
Title: Re: Portfolio Charts - The Golden Butterfly
Post by: wienerdog on April 30, 2016, 09:55:55 PM
I thought the rule was to have 1 year of expenses in Tbills for harsh market down turns and rest in short term which normally is 1 to 3 years?  Could be wrong but seems like an awfully large amount to hold in a moneyy market or cash.
Title: Re: Portfolio Charts - The Golden Butterfly
Post by: arebelspy on April 30, 2016, 11:06:07 PM
I don't really buy the LeBron comparison, but this was really powerful, to me:

The Permanent Portfolio, on which The Golden Butterfly is based, was created in 1982, and it's a great example of the consequences when you don't pick tomorrow's outperformer. From 1972 to 1982 The Permanent Portfolio looked even better on the charts than The Golden Butterfly does today! But had you gone all-in back then, you would've underperformed even 100% bonds:

(https://i.sli.mg/hpVJby.png)

The scary part? It didn't move that far on the graph. If you look at The Permanent Portfolio now, it doesn't look so bad...because the backtesting includes the data from before it was created! Does no one else see a problem with this?? Of course the portfolio is going to backtest well before it was created, that's why it was created!

That's 32 years of underperformance, since it was created, if you ignore the backtesting data used to create it?

That's a fairly long timeframe, to me, on the length of many people's retirement, even if they ER in their 40s.

(Less volatile, yes, but not less volatile than bonds, which it also lost to--and the 40/60 max drawdown isn't that high anyways.)

Data like this is cooler, to me, than stilted comparisons to LeBron or admonishments about newbies.

If the GB behaves similarly, because of a similar story, we end up with the situation described earlier in this thread: stable, low returns.  Good if you're paranoid of the market, not so good if you want your money to last a long time.

But if you're expecting a higher WR due to having a GB/PP portfolio, and those assets DON'T outperform (as the PP assets didn't, over the last 32 years), you're in trouble.

I can definitely see someone ERing on 5%+ WR due to seeing the "safe WR" graphs on Tyler's site, despite disclaimers.
Title: Re: Portfolio Charts - The Golden Butterfly
Post by: Tyler on April 30, 2016, 11:49:09 PM

That's 32 years of underperformance, since it was created, if you ignore the backtesting data used to create it?

That's a fairly long timeframe, to me, on the length of many people's retirement, even if they ER in their 40s.

Well, another way to look at it is that the period starting in 1982 is the single most favorable start year for stocks and bonds.  The PP line actually sets more reasonable expectations than the others and is far more consistent over other timeframes.  "Underperforming" in this example doesn't mean it wasn't an excellent choice in terms of overall risk adjusted returns. 

The issue of how one can identify a good portfolio ahead of time among all of the uncertainty and competing information is an interesting topic, and to limit it to debating this one portfolio does not do it justice.  I've started a new thread (http://forum.mrmoneymustache.com/investor-alley/what-gives-you-confidence-in-a-portfolio/) on that and hope everyone contributes. 
Title: Re: Portfolio Charts - The Golden Butterfly
Post by: AdrianC on May 03, 2016, 06:36:53 PM
The "C" in CAGR stands for "compound", which benefits tremendously from that lower total volatility.  So it's more than just averaging the long-term averages and adding an extra rebalancing bonus.  Portfolio theory is a lot more sophisticated than that, and I admit it's highly unintuitive.

Take the last 30 years:

Total Stock Market  7.31
Small Cap Value  7.76
Long Term Treasury  5.52
Short Term Treasury  2.32
Gold  0.94
Permanent Portfolio  4.66
Golden Butterfly  5.51
No Gold  6.33

Those are compound annual growth rates. It doesn't look like the lower volatility of the PP and GB improved CAGR tremendously.
Title: Re: Portfolio Charts - The Golden Butterfly
Post by: AdrianC on May 03, 2016, 06:50:28 PM
[The Golden Butterfly idea is actually not unique, and the Ivy (https://portfoliocharts.com/portfolio/ivy-portfolio/) and Swensen (https://portfoliocharts.com/portfolio/swensen-portfolio/) portfolios operate on similar principles.  For those who like the idea of the Golden Butterfly but don't care for the individual assets or simply want a different perspective other than mine, check them out.  You can also read the books for way more information on the subject than I can do justice.

I just finished Swenson's book (Unconventional Success) and thought it was worth the time. You can skip about half of it where he's just railing on Wall Street. The explanation of the core asset classes and how they work together is very good.

I did notice that he never mentions gold... ;-)
Title: Re: Portfolio Charts - The Golden Butterfly
Post by: Tyler on June 03, 2016, 09:02:47 AM

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


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


FYI -- I appreciate the thought process and was serious about liking this idea.  I've created a tool that does this exact analysis, and you can modify the AA to study any portfolio you like and compare alternatives.  Playing with it makes it clear that some portfolios are more trustworthy than others (https://portfoliocharts.com/2016/05/15/some-portfolios-are-more-trustworthy-than-others/). 

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

(https://portfoliocharts.files.wordpress.com/2016/05/golden-butterfly-start-date-sensitivity-2016.jpg?w=1100)

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

Cheers!
Title: Re: Portfolio Charts - The Golden Butterfly
Post by: wienerdog on June 03, 2016, 10:22:25 AM
Thanks for the new tool Tyler and the continuing improvements that you let us use.  So I guess that illustrates why the higher withdraw rate compared to the 60/40 on the site.  I understand how you got the % on the start date sensitivity but having a hard time putting the actual number into English.  Also interesting to see how 100% TSM has long periods of exceeding expectations then it falls short for a long period.
Title: Re: Portfolio Charts - The Golden Butterfly
Post by: Tyler on June 03, 2016, 11:06:49 AM
I understand how you got the % on the start date sensitivity but having a hard time putting the actual number into English.

Yeah, the final number is a little tricky to communicate without reading the full context.  Think of it as measuring the difference in happiness between the most satisfied and least satisfied customers in the portfolio's history (since 1972).  So smaller numbers represent a more consistent portfolio less likely to severely disappoint because of recency bias and poor timing. 
Title: Re: Portfolio Charts - The Golden Butterfly
Post by: k9 on June 04, 2016, 03:41:15 PM
Hah, I really love your calculators, Tyler. That start-date-sensitivity-calculator is by far the hardest to understand, but it's also probably one of the most useful. I like to think of it as the "don't drink too much kool aid" calculator. Recency bias is one of the most underlooked ennemies of investors.
Title: Re: Portfolio Charts - The Golden Butterfly
Post by: Classical_Liberal on June 04, 2016, 09:29:56 PM
Very nice tool tyler, Thanks.

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

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

PS do you recommend something other than SPDR's GLD?  Thanks again!
Title: Re: Portfolio Charts - The Golden Butterfly
Post by: Tyler on June 04, 2016, 10:01:05 PM
PS do you recommend something other than SPDR's GLD?  Thanks again!

Your gold eagles are a nice option, and the three most popular ETFs are GLD, IAU, and SGOL.  I personally use IAU, which has the lowest ER of the group.
Title: Re: Portfolio Charts - The Golden Butterfly
Post by: phwadsworth on June 06, 2016, 06:39:18 AM
My rationale was always as a small hedge against all hell breaking loose (ie the prepper in me) or figured in a 2009 like scenario when fear had gold booming I could sell a few coins to minimize stock drawdowns.
Did you own gold in 2009, and if so, did you sell as planned and buy stocks near the bottom?
Title: Re: Portfolio Charts - The Golden Butterfly
Post by: Classical_Liberal on June 06, 2016, 01:10:39 PM
Did you own gold in 2009, and if so, did you sell as planned and buy stocks near the bottom?

Yes and no because I wasn't and still am not in a drawdown phase.  During accumulation I reallocate by adjusting what I purchase.  If I had been in drawdown, with an extended market downturn that had corresponding increases in gold I definitely would sell to rebalance in tac advantaged accounts.   Honestly, in 2009 I wasn't a wise investor, I couldn't even tell you what my AA was at that time. Now, I stay relatively disciplined, but like with everything in life I stay open and flexible when new information presents itself and take it into consideration for change.
Title: Re: Portfolio Charts - The Golden Butterfly
Post by: Classical_Liberal on June 29, 2016, 12:50:37 PM
I’m posting a quick update in this thread because reading through its entirety a month ago was an extremely useful educational experience and it had an impact on my investment policy statement. Thanks again to all the contributors.

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

@Tyler, IAU was the lowest ER with high volume for trades, thanks!
Title: Re: Portfolio Charts - The Golden Butterfly
Post by: Kevin K. on July 21, 2016, 08:50:08 PM
Thanks to all for the epic thread with lots of great insights.

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

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

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

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

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


I agree with this.

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

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

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

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

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

But if you're building a portfolio where assets are uncorrelated, you might include gold anyways, and not care a whit that it's not a good inflation hedge, because all that fact does is ruin some story that you don't care about.
Title: Re: Portfolio Charts - The Golden Butterfly
Post by: steveo on July 21, 2016, 10:10:33 PM
Moreover - and even more decisively - he shows that gold has never been a good hedge against inflation (that's what equities are for).

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

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

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

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

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

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

A key part of asset allocation though is to have a uncorrelated assets within your portfolio.
Title: Re: Portfolio Charts - The Golden Butterfly
Post by: k9 on July 22, 2016, 02:40:13 AM
I do like the golden butterfly, for the very reason that it holds lots of uncorrelated assets. The fact that it worked so well and with so little volatility in the last 40 years is a side effect, for me. My own asset allocation is a mix of this and Meb Faber's portfolio (20% "regular" stocks, 20% volatile stocks, 20% REITs, 20% STT, 20% gold), and without Tyler's work I probably wouldn't be so confident with it, so thanks again, Tyler.

Now, I won't bet that it will work as well as it did in the last decades, but I feel the same for stock-heavy portfolios, so...
Title: Re: Portfolio Charts - The Golden Butterfly
Post by: AdrianC on July 22, 2016, 03:49:08 AM
One thing that I'm surprised has gone unmentioned given the rather epic length of this thread is William Bernstein's book(let) "Deep Risk: How History Informs Portfolio Design." It is very much a meditation on, and thoughtful response to, the PP and its more recent iterations as proposed by Tyler, Craig Rowland and others.

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

Discussion of the Bernstein booklet:

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

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

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

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

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

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

Discussion of the Bernstein booklet:

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

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

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

Everything to this point, I totally agree with.

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

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

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

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

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

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

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

You can never, ever be 100% safe.  If you're willing to trade years, and years of your life for slightly more safety, whatever. It's your life.  But realize even then you won't ever hit 100% safe.  And advocating for other people, who might not know better, to save up that much cash is just bad advice, IMO.
Title: Re: Portfolio Charts - The Golden Butterfly
Post by: Retire-Canada on July 22, 2016, 05:53:51 AM

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

Yes. This is why it's such a cunning strategy. You work so long that you'll either die while saving or have a very short retirement to fund....either way your risk of portfolio failure in FIRE is greatly reduced. Of course there are some obvious downsides.... ;)
Title: Re: Portfolio Charts - The Golden Butterfly
Post by: arebelspy on July 22, 2016, 06:14:41 AM

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

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

Heh, good point.

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

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

GCC recently calculated their 4 years of ER has cost them at least 5MM already (http://www.gocurrycracker.com/retirement-has-already-cost-us-at-least-5-million/).  5MM for 4 years of life in your prime at age 30, when you already can fund a lavish lifestyle without working?  Seems like a bargain.

But, I mean, if you want to save up 20 years in cash on top of a healthy portfolio of index funds, more power to you.  It's your life you're selling, not mine.  :)
Title: Re: Portfolio Charts - The Golden Butterfly
Post by: AdrianC on July 22, 2016, 07:25:22 AM

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


20 YEARS of basic living expenses in cash?

Nah! That's nuts for us.

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

The "pre-retirement" hoard is reasonable and I'll bet is what many here already do. Five years living expenses is 20%, so 80/20 or 75/25. That's reasonable.
Title: Re: Portfolio Charts - The Golden Butterfly
Post by: k9 on July 22, 2016, 07:25:41 AM
Quote
* "deflation risk, that's really a non-issue, since any sane investor sits on a large hoard of cash anyway, and cash (or, if you like, even short-intermediate high-quality bonds) will do fine with deflation."

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

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

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

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

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

EDIT: I made up the numbers, but I tried to stick to realistic values and didn't reverse engineer the 16% result, but, as a matter of fact, that 16% is cleary between Buffet's stock-heavy 90/10 portfolio and PP's cash-heavy 25% allocation, and close to the GB allocation, so that sounds neither too conservative nor too agressive, even if you play with the numbers a little. That's sound advice, and I like how Bernstein is one of the few who both mentions cash allocations as a percentage of the portfolio *and* as a number of years of expenses.
Title: Re: Portfolio Charts - The Golden Butterfly
Post by: arebelspy on July 22, 2016, 07:37:00 AM
I understand what he's saying.

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

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

20 years expenses in cash is crazy.
Title: Re: Portfolio Charts - The Golden Butterfly
Post by: AdrianC on July 22, 2016, 07:51:02 AM
20 years expenses in cash is crazy.

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

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

"have plenty of liquidity so you can keep your head, and perhaps buy cheap, during the bad times".
Title: Re: Portfolio Charts - The Golden Butterfly
Post by: k9 on July 22, 2016, 08:49:16 AM
I understand what he's saying.

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

All my expenses are basic.  If I had surplus expenses, I wouldn't spend on it.
I guess you're more the exception than the rule, though, even in this community (many mustachians love traveling, for instance).
As for SS, since I'm not from the US, I don't know how the system works over there, so maybe I made bold asumptions. Anyway, sure, Bernstein's advice doesn't work in your case, but that's because you're such a unique person ;)
Title: Re: Portfolio Charts - The Golden Butterfly
Post by: Tyler on July 22, 2016, 09:21:23 AM
I highly respect Dr. Bernstein and his investing opinions, and there are two portfolios of his on Portfolio Charts:

No-Brainer Portfolio (https://portfoliocharts.com/portfolio/no-brainer-portfolio/)
Coward's Portfolio (https://portfoliocharts.com/portfolio/cowards-portfolio/) 

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

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

The Golden Butterfly acknowledges Dr. Bernstein's insight about the likelihood of the various deep risks by tilting the Permanent Portfolio towards stocks, and I believe its track record (https://portfoliocharts.com/portfolio/golden-butterfly/) stacks up favorably to his alternative recommendations.  But different people have different preferences, and there are good portfolios for all types. 
Title: Re: Portfolio Charts - The Golden Butterfly
Post by: Kevin K. on July 22, 2016, 09:21:40 PM
I believe it's still quite vivid in Dr. Bernstein's mind how many of his followers - who'd read all of his books and done their risk tolerance profiles and signed on to stay the course with their asset allocations - threw in the towel during the '08-09 market meltdown and sold significant chunks of equities at or near the bottom.

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

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

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


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

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

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

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

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

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

A last comment since it's getting late is that I find it interesting how all of the "sweet spot" (risk:real return) on Tyler's site are pretty much iterations of the classic retiree 40:60 equity:bond allocation but with gold thrown into the mix. And meanwhile Vanguard's Wellesley Fund - actively managed, 35:65, and owning only a relative handful of mostly corporate bonds and dividend stocks - has outperformed most if not all of these backtested wonders for decades. If nothing else this certainly suggests that if you're going to have a bond-heavy portfolio (and I realize few on this board are likely to do so) bonds are the one are, given the size and relative illiquidity of the market, where professionals can actually deliver alpha. Wellesley's 9.95% CAGR 1970 to the present (and only ~18% drawdown during the '08 crisis) puts it in a league of its own among managed funds.
Title: Re: Portfolio Charts - The Golden Butterfly
Post by: arebelspy on July 22, 2016, 11:53:40 PM
Just in case it's of interest, John Greaney, pretty much the "old dog" of early retirement finance writers, has an excellent update of his periodic real life retiree returns series here:
 
http://www.retireearlyhomepage.com/reallife16.html (http://www.retireearlyhomepage.com/reallife16.html)

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


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

The most interesting comment to me was the next paragraph.

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

You retire at the market top in 2000.  Tech bubble crashes the stock market.  Then housing market bubble. Then stock market crashes again in 08-09.  All the while you keep taking your withdrawals, and increasing them each year with inflation.  Finally, 15 years later, you have 90% of your initial stache still?  That's * amazing.  And people are worried about a 4% WR.  :P
Title: Re: Portfolio Charts - The Golden Butterfly
Post by: AlmstRtrd on July 23, 2016, 04:38:14 AM
Re: arebelspy's point about gold as an inflation hedge not mattering, I think it DOES matter that Harry Browne was dead wrong about allocating 25% of his portfolio to something that doesn't work to combat the exact problem it was included to address while failing to offer a sophisticated, internationally diversified, small cap and value tilted equity allocation that is the actual tool for the job in question.
While I followed the PP myself for about 4 years and was lucky to have done so timing-wise I came to see that pretty much all of the components of that allocation deserve to be revisited due to changes in the investing landscape since Browne's time.

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

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

Carry on. Excellent discussion of the GB.
Title: Re: Portfolio Charts - The Golden Butterfly
Post by: Frs1661 on July 23, 2016, 05:32:50 AM
Just in case it's of interest, John Greaney, pretty much the "old dog" of early retirement finance writers, has an excellent update of his periodic real life retiree returns series here:
 
http://www.retireearlyhomepage.com/reallife16.html (http://www.retireearlyhomepage.com/reallife16.html)

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


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

The most interesting comment to me was the next paragraph.

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

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



Title: Re: Portfolio Charts - The Golden Butterfly
Post by: arebelspy on July 23, 2016, 05:59:55 AM
Good catch, thanks for the clarification.

Still, even with that terrible start, they're down 36%, but halfway through (a 30-year ER run).  That's pretty encouraging, to me.  :)
Title: Re: Portfolio Charts - The Golden Butterfly
Post by: k9 on July 23, 2016, 06:53:12 AM
I have a great deal of appreciation for the PP, Golden Butterfly, Swedroe's most recent Reduced Fat Tails approach, etc.
Haven't heard of that. What is the difference with "older" implementations of min fat tails ?
Title: Re: Portfolio Charts - The Golden Butterfly
Post by: Kevin K. on July 23, 2016, 09:17:47 AM
I have a great deal of appreciation for the PP, Golden Butterfly, Swedroe's most recent Reduced Fat Tails approach, etc.
Haven't heard of that. What is the difference with "older" implementations of min fat tails ?

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

Further on, he points out:

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

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


Title: Re: Portfolio Charts - The Golden Butterfly
Post by: Kevin K. on July 23, 2016, 09:31:14 AM
And speaking of Mr. Swedroe, he just posted this piece over on Bogleheads:

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

I think this underlines the value of the GB and other defensive portfolios that are the winners in Tyler's studies, especially for retirees, while demolishing pretty decisively the rising equity % in retirement recommendations of Wade Pfau.
Title: Re: Portfolio Charts - The Golden Butterfly
Post by: k9 on July 23, 2016, 02:54:07 PM
Thanks a lot Kevin. Hmm, too bad it's too hard to access SCV and emerging value stocks here in France. I like tilted portfolios. I guess I'll have to stick with small *or* value *or* emerging.
Title: Re: Portfolio Charts - The Golden Butterfly
Post by: wienerdog on July 23, 2016, 05:11:54 PM
"If you happened to retire in January 2000, the last sixteen years haven't been pleasant. Only the Warren Buffett portfolio has a value appreciably exceeding its $100,000 starting balance."

Merriman's ended up at $160,078 over the same time period ~$5000 less than Buffet's.  He is just not looking at the right portfolios.  :>)
Title: Re: Portfolio Charts - The Golden Butterfly
Post by: Kevin K. on July 24, 2016, 04:55:03 PM
"If you happened to retire in January 2000, the last sixteen years haven't been pleasant. Only the Warren Buffett portfolio has a value appreciably exceeding its $100,000 starting balance."

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

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

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

Of course the analysis on Portfolio Charts is from 1972 and includes a lot more depth. From what I can tell Merrimans is the only gold-free allocation to post this kind of performance. That said, it's drawdowns and downside risks are considerably higher than the Golden Butterfly while its CAGR is barely higher. Still it does speak very highly not so much of Merriman per se but of the value of the Fama-French research and the particularly sophisticated slice-and-dice that DFA funds make possible. That said, you've gotta pay 1% to an FA to even access those funds, and if you try to duplicate them with ETFs the rebalancing costs alone will probably cause you to underperform GB and other fewer-moving-parts allocations on the site.
Title: Re: Portfolio Charts - The Golden Butterfly
Post by: wienerdog on July 24, 2016, 05:57:17 PM
Yea Tyler uses Merriman's "Moderate" portfolio on his site which is loaded with 40% bonds.  Tyler has mentioned on here before that in the real world the taxes would probably hurt the returns with so many different funds.  If you look at Merriman's aggressive portfolio it supports closer to a 6% WR.  Even with the moderate using 40% bonds 5% WR is really good. 
Title: Re: Portfolio Charts - The Golden Butterfly
Post by: mathjak107 on July 25, 2016, 12:42:37 PM
Good catch, thanks for the clarification.

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

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

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

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

https://www.kitces.com/blog/how-has-the-4-rule-held-up-since-the-tech-bubble-and-the-2008-financial-crisis/#more-7856
Title: Re: Portfolio Charts - The Golden Butterfly
Post by: DrF on July 26, 2016, 07:47:52 AM
Maybe I'm missing something, but in the article all the retirees start out with $1,000,000 and they are taking 4% in the first year, then increasing that every year based on the inflation of the previous year, right? Why no calculation of social security? I mean, even a very meager social security check of $800-1000 a month would be a huge cushion for retirees. It would increase their yearly income 20+% if they decided to still use all 4% from their nest egg. Conversely, it could replace some amount used from personal accounts and allow that money to stay invested every year which would cause the personal retirement funds to balloon as the retiree got older. 4% is rock solid and if you had any other stream of income from part time work, or a personal business, or social security, or a pension, or a rental property you would be in pristine condition.
Title: Re: Portfolio Charts - The Golden Butterfly
Post by: mathjak107 on July 26, 2016, 10:56:44 AM
Maybe I'm missing something, but in the article all the retirees start out with $1,000,000 and they are taking 4% in the first year, then increasing that every year based on the inflation of the previous year, right? Why no calculation of social security? I mean, even a very meager social security check of $800-1000 a month would be a huge cushion for retirees. It would increase their yearly income 20+% if they decided to still use all 4% from their nest egg. Conversely, it could replace some amount used from personal accounts and allow that money to stay invested every year which would cause the personal retirement funds to balloon as the retiree got older. 4% is rock solid and if you had any other stream of income from part time work, or a personal business, or social security, or a pension, or a rental property you would be in pristine condition.

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

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

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

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

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


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

(https://photos.smugmug.com/photos/i-SSMXJ5L/0/O/i-SSMXJ5L.jpg)
Title: Re: Portfolio Charts - The Golden Butterfly
Post by: AZryan on July 26, 2016, 11:08:33 AM
Why no calculation of social security?

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

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

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

Of course, when talking about 'early' retirement here, the timeframe of 30yrs. for the 4% rule could easily not be long enough to take on full faith, and the idea of having to wait several decades to start pulling from Soc.Sec. makes that payment a far greater unknown that shouldn't be counted on so assuredly.
Title: Re: Portfolio Charts - The Golden Butterfly
Post by: mathjak107 on July 26, 2016, 11:13:43 AM
what i don't like about the gb is unlike the permanent portfolio which uses cash to barbell the long term bonds  the gb will have the brunt of rising bond rates when they happen in all their fury .

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

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

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

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

(https://photos.smugmug.com/photos/i-TV9D5Xw/0/O/i-TV9D5Xw.png)
Title: Re: Portfolio Charts - The Golden Butterfly
Post by: Classical_Liberal on July 26, 2016, 12:43:02 PM
Maybe I'm missing something, but in the article all the retirees start out with $1,000,000 and they are taking 4% in the first year, then increasing that every year based on the inflation of the previous year, right? Why no calculation of social security? I mean, even a very meager social security check of $800-1000 a month would be a huge cushion for retirees. It would increase their yearly income 20+% if they decided to still use all 4% from their nest egg. Conversely, it could replace some amount used from personal accounts and allow that money to stay invested every year which would cause the personal retirement funds to balloon as the retiree got older. 4% is rock solid and if you had any other stream of income from part time work, or a personal business, or social security, or a pension, or a rental property you would be in pristine condition.

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

This is exactly what my semi-mustachian FIL always says to me, "inflation is only a problem for people who buy a lot of shit". If you have a paid off house, buy most of your food from a grocery store, drive used cars, and vacation modestly, there's a very real possibility that you'd never have to increase your yearly spend until you were in late stages of retirement with medical/assisted living obligations.
Title: Re: Portfolio Charts - The Golden Butterfly
Post by: arebelspy on July 26, 2016, 05:23:04 PM
As we've discussed elsewhere, that's based on a misunderstanding of inflation.  You already have the fact that you aren't buying new vehicles in your ER budget.  So of course inflation for those won't hit you.  You will see inflation on what you do spend, and since it's a percent, not dollar amount, you'll see roughly the same inflation everyone else will on those categories. 
Title: Re: Portfolio Charts - The Golden Butterfly
Post by: Classical_Liberal on July 26, 2016, 06:21:07 PM
As we've discussed elsewhere, that's based on a misunderstanding of inflation.  You already have the fact that you aren't buying new vehicles in your ER budget.  So of course inflation for those won't hit you.  You will see inflation on what you do spend, and since it's a percent, not dollar amount, you'll see roughly the same inflation everyone else will on those categories.

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

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





Title: Re: Portfolio Charts - The Golden Butterfly
Post by: arebelspy on July 26, 2016, 06:31:02 PM
Not gonna drag this more off topic, but I'll just say I disagree, and if you want to go find one of the threads where we've discussed it, read it, and add your thoughts, I'd be happy to engage you.  But it's not super relevant to the GB, IMO.  :)
Title: Re: Portfolio Charts - The Golden Butterfly
Post by: Radagast on July 26, 2016, 11:52:15 PM
Now gonna drag this post back on topic, so I'll just say...
Attached below are three graphs I put together two years ago using the Monte Carlo Simulator on Portfolio Visualizer, I doubt the past two years changed the results much. The first two charts show median (top pair of lines) and "worst case" (bottom pair of lines) outcomes for investing in a US total stock market index compared against either total bond market, or equally weighted long term bonds and gold.

The top chart shows a simulated investment of $30,000 per year for ten years. My take away from this clumsy analysis is
1. Equally weighted long term US government bonds and gold were far more effective than a total bond index fund at minimizing the odds of a bad out come.
2. On average, 10% to each gold and long term bonds produced roughly the best outcome.
3. The Golden Butterfly, with 20% in each of these assets plus "cash", is generally more conservative than the optimal portfolio. On average you will end up with less money.
4. However, the GB does offer strong protection against the worst case.
(http://forum.mrmoneymustache.com/index.php?action=dlattach;topic=53966.0;attach=23850;image)


The next chart shows a simulated investment of $10,000 per year for 30 years. My take away from this chart is that:
1. Total bond index was highly detrimental to a 100% stock portfolio in almost all cases. In the very worst cases for the simulated stock market a 20% bond allocation was useful.
2. A 10% allocation to each of gold and long term treasuries was beneficial in all but the best cases for stocks, and was clearly beneficial for cases where stocks had median or lower returns.
3. I expect the GB with its 20% to each of these plus cash is too conservative for most cases of accumulating over a 30 year period.
(http://forum.mrmoneymustache.com/index.php?action=dlattach;topic=53966.0;attach=23856;image)

Finally, a comparison of various stock allocations compared with various diversifiers using a 5% withdrawal rate over 50 years (based on 40 years of past data...right...) My conclusions:
1. There was little difference between a 0% and 30% allocation to total bond index. It was not a useful diversifier for retirees, but on the other hand it did not hurt either, at least not in small amounts.
2. Every possible combination of US and foreign stocks achieved its optimal outcome in retirement by including 20% each to gold and long term treasuries, exactly the same as the amounts in the GB.
3. Including a Total International Stock Index Fund had little impact on returns either way.
4. Tilting towards "factors" and the riskier corners of the world markets resulted in a positive outcome.
5. The Permanent Portfolio is not effective for either accumulators or retirees (notice the tense change here, it still isn't).
(http://forum.mrmoneymustache.com/index.php?action=dlattach;topic=53966.0;attach=23854;image)

Global Conclusions: Based on randomized returns from 1972-2013, the Golden Butterfly was near the optimum portfolio for retirees. However, in most cases it was too conservative for accumulators. It seems that the GB may benefit from the addition of either emerging markets or international small cap stocks as another slice with high volatility and less correlation. I've made comments along these lines before, but this is where I got my reasons :).
Title: Re: Portfolio Charts - The Golden Butterfly
Post by: mathjak107 on July 27, 2016, 03:01:28 AM
the biggest issue i have with all this hedging and opposing asset classes is this :

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

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

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

you are also making equal bets on outcomes happening that  have  a pretty slim chance of playing out equally .
Title: Re: Portfolio Charts - The Golden Butterfly
Post by: talltexan on August 02, 2016, 09:31:34 AM
http://www.res.org.uk/details/mediabrief/9633291/GOLD-HAS-NEVER-BEEN-A-GREAT-HEDGE-AGAINST-BAD-ECONOMIC-TIMES-Evidence-from-decad.html?platform=hootsuite

New academic study out about incorporating gold into a portfolio
Title: Re: Portfolio Charts - The Golden Butterfly
Post by: Kevin K. on August 02, 2016, 01:40:27 PM
http://www.res.org.uk/details/mediabrief/9633291/GOLD-HAS-NEVER-BEEN-A-GREAT-HEDGE-AGAINST-BAD-ECONOMIC-TIMES-Evidence-from-decad.html?platform=hootsuite

New academic study out about incorporating gold into a portfolio

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

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

http://www.evansonasset.com/?Page=64 (http://www.evansonasset.com/?Page=64)
Title: Re: Portfolio Charts - The Golden Butterfly
Post by: BattlaP on August 02, 2016, 02:59:20 PM
The difference is that the article that talltexan references is about an academic study based on evidence and data, whereas the article you referenced is an argument based on words, with very few actually numbers relating specifically to golds' commonly stated uses.
Title: Re: Portfolio Charts - The Golden Butterfly
Post by: Kevin K. on August 02, 2016, 05:17:00 PM
The difference is that the article that talltexan references is about an academic study based on evidence and data, whereas the article you referenced is an argument based on words, with very few actually numbers relating specifically to golds' commonly stated uses.

Actually the article I referenced is based on a great deal more diverse and detailed evidence and data than the very short and misleading study talltexan cited, which as I said doesn't account for the multitude of roles gold has historically played but instead ONLY looks at gold as a supposed "hedge" against economic crises.

Here are a few key quotes from the article:

"The primary argument for the ownership of gold is that over long time frames it tracks inflation closely and protects against the erosion of purchasing power fiat money always produces.  In terms of portfolio design, it also offers an asset uncorrelated with equity and fixed investments.  From 1802-1997, gold turned in a virtually identical number to inflation.  Its returns, like all asset classes, can veer upwards or downwards for long periods of time.  From 1972-1982 gold returned an  inflation adjusted 11.4% per year, more than 10% above all other asset classes.  From 1982-2000 gold varied up and down between about $250 and $400 an ounce.   From 2000-2015, gold gained about 430%, far outdistancing all other asset classes even though the official inflation rate for that period was only 2.4% annually and 30.3% for the total period."

"It is essential to note that very long term return numbers for gold are misleading and very likely significantly understate its performance in US dollars.  Priced in US dollars, US gold price was fixed by the US government from 1900-1971 and thus gave no return.  From 1972 through 2011 gold increased about 50 times in value (5000%), about the same as the S&P 500 equity index with dividends invested for that 40 year period."

"Ibbotson conducted a study of the benefits of precious metals diversification covering the 1971-2004 period (Idzorek, CFA, Ibbotson Associates, 2005).  Of particular note is their finding that precious metals tend to do best when traditional asset classes like equities and fixed income have negative returns.  Ibbotson recommends the following allocations to gold: 7.1% for conservative portfolios, 12.5% for moderate portfolios, and 15.7% for aggressive portfolios, as defined by equity/fixed allocations.   A World Gold Council study published in Forbes in August 2007 found a -.03 correlation, very low, for gold with other asset classes including equities, fixed, commodities, and REIT’s for 2000-2010 and "no stable positive correlation between gold and oil prices.  Dimson et al (Credit Suisse Global Investment Returns Yearbook, 2012) anlyzed gold returns from 1900-2011 across 19 countries and found that  gold was the only asset class with a positive correlation to inflation, 0.20%, while all others had negative correlations including -.52 for equities and -.74 for bonds.  And, for much of that period gold's price was fixed by government in the US and other countries". 
Title: Re: Portfolio Charts - The Golden Butterfly
Post by: BattlaP on August 02, 2016, 06:27:43 PM
Where you see 'diverse and detailed' I see deliberately non-specific and cherrypicking. If you find the article convincing, then enjoy. If you would like me to pick at the quotes you selected I definitely can, just at a glance there is several glaring problems. I'm not going to bother if you've already made up your mind. Not trying to be a jerk, just saving my breath for where it will actually count.
Title: Re: Portfolio Charts - The Golden Butterfly
Post by: k9 on August 09, 2016, 06:56:32 AM
BattlaP, I can find any evidence either in the "gold has never been an edge" either. It mentions an article yet fails to give actual numbers (and the actual article, as far as I can tell, cannot be read for free). I'm not really convinced gold didn't outperform german bonds in the 1920s, for instance, or French francs in the period from 1914 to 1980 (sic). Or Russian bonds/stocks after communism came in until a few years after its fall. Or any asset for jews in 1930's Germany. Or bonds in 2000's Argentina. Or <insert list of dozens of sovereing defaults in the last 150 years around the world>.

Sure, in the US, gold, when taken in isolation, was not a wonderful asset. I guess not losing a war ever (heck, you didn't even have to *fight* a war on your own soil, ever) helped a bit. So, I have to somewhat agree with the article, I guess:

if you have nothing to hedge against, gold is a bad hedge.

The thing is, gold isn't only a hedge. Its absence of correlation with stocks makes it a good diversifier, unless you disagree with modern portfolio theory (and since you tend to cite academic papers and dismis non-academic ones, I'm pretty sure that's not your position).
Title: Re: Portfolio Charts - The Golden Butterfly
Post by: tommie on August 09, 2016, 07:42:33 PM
Long thread, took an hour or two to read.

To chime in i would never invest in something without using a moving average. I find it slighly insane to suggest one would invest in a 'buy and hold' forever like if asset A, B, C always would have negative correlation just because it used to 20 years ago. I even find data that is too old to be highly suspicious and portfolios that proove themselves by using age-old data to be poor examples. The most obvious problem is that if one backtest enough one will of course find a strategy that always outperforms all others in some way or the other.

Like this:
https://goo.gl/HbVEug

Image from the above:
(http://i.imgur.com/lewn8DO.png)

It's a case where the backtest is basically created to produce a favorable outcome for already known data. It would be easy to improve it further but the more optimizations the less it would matter since the optimizations would basically try to beat history, something that isn't hard to do at all and becomes less and less relevant (in my opinion) the farther way back in history we go.

But i do believe in trends. Trends are everywhere and is a constant in every field imaginable. It's something that has occured for much, much ... longer then there has been a stock market.

Using a moving average (and sticking with it!) is often (in my liftetime at least) a better hedge against bad times then any sort of asset class in itself. However i do believe past data has some (note: some) validity and it's slighly funny how gold actually did go quite well during the recent, and on-going(?), market crisis due to what is commonly called 'Brexit'. That's not to say it always will -- who knows. That's where a MA comes in; if asset is under longer trend 'X' (or we use a golden cross etc) invest in something "safer". It's simple and at least we will have some sort of indicator and not blindly investing in something that was great to invest in between the year 1971-2016 and that someone on the internet wrote something compelling about.

Another thing that seem to be overlooked in this thread is that some of you seem to ignore timing in general. The aggressive 100% stock alternative might be great in the long run but it would hardly be great for someone investing 100% of their funds in say the year 2000 or 2007 and wanting (for some reason) to exit a couple of years later. But if you always can time the market, good for you.
Title: Re: Portfolio Charts - The Golden Butterfly
Post by: steveo on August 10, 2016, 02:09:45 AM
tommie - have you ever traded with a moving average. It's not so simple. You can get washed around all over the place. What if stocks go up and down and hang around a certain price all the time you are selling and buying at a loss and not getting dividends. On top of that you are taking a tax hit.

What if you then start tweaking things so that you only buy if it goes up a certain amount and then you end up buying late and then it corrects or being too scared to buy because you think you've missed the uptick but it keeps going.

I've traded (I use foreign currencies) and I will continue to do so but not with my FI assets. In my opinion it's basically gambling. I checked my big trade that I made about a year ago today. It's down about 2%. When I put my position in I was sure I was right. I wasn't. I'll hang on for longer because I've learnt not to bet the house and for me it's easier to hold something rather than sell at a loss but those mechanical trading rules probably would have had me at a real loss right now.

I should add that trading has taught me that mechanical trading and modern trading theory (always use a stop loss etc) doesn't work very well at all.

At the same time I'm confident that if I put my money into a reasonable asset allocation and hold it for the long term I'll come out of it more than okay.
Title: Re: Portfolio Charts - The Golden Butterfly
Post by: tommie on August 10, 2016, 04:33:52 AM
tommie - have you ever traded with a moving average. It's not so simple. You can get washed around all over the place. What if stocks go up and down and hang around a certain price all the time you are selling and buying at a loss and not getting dividends. On top of that you are taking a tax hit.

What if you then start tweaking things so that you only buy if it goes up a certain amount and then you end up buying late and then it corrects or being too scared to buy because you think you've missed the uptick but it keeps going.

I've traded (I use foreign currencies) and I will continue to do so but not with my FI assets. In my opinion it's basically gambling. I checked my big trade that I made about a year ago today. It's down about 2%. When I put my position in I was sure I was right. I wasn't. I'll hang on for longer because I've learnt not to bet the house and for me it's easier to hold something rather than sell at a loss but those mechanical trading rules probably would have had me at a real loss right now.

I should add that trading has taught me that mechanical trading and modern trading theory (always use a stop loss etc) doesn't work very well at all.

At the same time I'm confident that if I put my money into a reasonable asset allocation and hold it for the long term I'll come out of it more than okay.

Yes.

Yes, it's simple. The hard part has to do with the human using it.
One will get 'washed around' using stocks. Stocks, as you say, go up and down so no matter what one gets 'washed around'. If one think being 'washed around' is a problem one shouldn't invest in stocks (or anything) to begin with. The trend is our friend, the noise our enemy.

The beauty of the trend is the same sort of beauty found with the GB style portfolio. The smoothing out of the curve. It's the same basic fundamentals that the old school 60/40 portfolio is based on and tries to achieve. It's all about smoothing since a smoother curve is a great hedge against irrational human behaviour and emotion. We don't just fight with the index (the averages), we also fight with ourselves and our emotions. It's a war on two fronts. I don't like to fight wars in my spare time so any sort of smoothing that can be done and turn the war from a two front one to a single front one is great in my book.

I don't understand what you mean with taxes. This would be true if trading for short term gains, not if trading on broader index funds with say 1 check per month against longer trends in some different asset classes. I'm from Sweden, we got something called 'ISK' with a fixed 0.2% tax per year if only trading funds. The fee part mostly becomes a problem if trading high frequence with things that comes with fees such as international ETF's. Basically a non-problem with things such as index funds. Please don't make this a thread about taxes, yes they're important but ... it's a huge topic. :-)

That you're down only 2% for something you refer to as pure gambling really doesn't seem too bad.
It's ok to hang on if you can base that 'hanging on' on something tangible.

Never selling from a loss in say 2008 would cause you to loose 30-40% instead of around 10% for a longer MA like SMA200. But yes -- you would sell based on a exit strategy. It's fine if you don't believe in trends. You seem to be one of the few to argue against having an exit strategy based on something tangible. If that works for you -- great.

You also seem to read my post as if one should apply a trending strategy on short term gains and high frequence trading. This thread is about a GB style portfolio and not about high frequency trading. The example i provided is definately more high frequency due to the 2 month MA, but it was just an example of optimizing for historical data not as a template for using trends (i would never use a short 2 month MA).
Title: Re: Portfolio Charts - The Golden Butterfly
Post by: steveo on August 10, 2016, 04:58:01 AM
Yes, it's simple. The hard part has to do with the human using it.

Are you prepared to risk your financial independence on this ?

One will get 'washed around' using stocks. Stocks, as you say, go up and down so no matter what one gets 'washed around'. If one think being 'washed around' is a problem one shouldn't invest in stocks (or anything) to begin with. The trend is our friend, the noise our enemy.

Personally I disagree with this premise. How do you handle being washed around ? Why have that problem ? Your point about the trend being your friend and the noise the enemy is true but how do you know this at that point in time. Are you prepared to risk your financial independence on squiggly lines on a chart ?

The beauty of the trend is the same sort of beauty found with the GB style portfolio. The smoothing out of the curve. It's the same basic fundamentals that the old school 60/40 portfolio is based on and tries to achieve. It's all about smoothing since a smoother curve is a great hedge against irrational human behaviour and emotion. We don't just fight with the index (the averages), we also fight with ourselves and our emotions. It's a war on two fronts. I don't like to fight wars in my spare time so any sort of smoothing that can be done and turn the war from a two front one to a single front one is great in my book.

I think you are stating that trend following is easier. I don't believe this. I think it's easier to buy and just sit there.

Please don't make this a thread about taxes, yes they're important but ... it's a huge topic. :-)

I think it's important to recognise this and I'll give an example why. I made something like $25k on one big trade years ago. I had an account of about $10K. Sounds great right ? I was a genius. I traded that thing with balls of steel and a great feel. I saw the trend, I waited for a pull back and I went in and in and in and held that until close to the end. I also got taxed half of that because I pay capital gains taxes on profits. The next year I lost something like $10k. Was I up $15k ? No - I was up $5k.

That you're down only 2% for something you refer to as pure gambling really doesn't seem too bad.

It's okay but my point is that I'm not betting my financial independence assets on some trend following theory. There are thousands of these theories out there. It's easier to see them with hindsight than it is to trade them consistently.

You seem to be one of the few to argue against having an exit strategy based on something tangible. If that works for you -- great.

I tell you how I learned that. I read all the books on trading. They all said have a stop loss. I know a guy who was a big trader. We are talking forex positions of $20 million of his own money. That is leveraged but every cent movement on that position is about $200k. He said if you have a stop loss you just get washed out and that you need to have balls to hold a position for a long time if you want to make money.

What professionals do and what you read are two different things.

You also seem to read my post as if one should apply a trending strategy on short term gains and high frequence trading. This thread is about a GB style portfolio and not about high frequency trading. The example i provided is definately more high frequency due to the 2 month MA, but it was just an example of optimizing for historical data not as a template for using trends (i would never use a short 2 month MA).

It's the same thing. It's just a mechanical set of trading rules based on squiggly lines on a chart.

I've highlighted the key point here though. It's an optimised solution that worked great in the past.

I'll tell another story. When I was trading I said okay I know how to use MS Access and I know trading. I'll come up with a system. It looked good but it didn't work. The same guy I'm talking about was bankrolled to do the same thing. They had a trader, some computer programmer and probably a tonne of money. It didn't work.

The guy I'm talking about is a multi-millionaire and he got there via trading. He has also done I think pretty well on his own account. At the same time he knows he loses money all the time and it's basically a gamble. I think most of his money was made trading other peoples money and getting paid a fortune to do it and then investing in a housing boom in which he simply bought low and held on for years.

I know another guy from school. He decided to get into trading. He got a job in it. He told one of my friends I've got a system. You bankroll me and we'll split the profits. He had all the data to state this is going to work. He lost all the money.

Another one to wrap up the longest post ever. The same guy I know who has a lot of money did the same thing. He took money off people and said I'm starting my own hedge fund. It failed. He was wealthy enough and had enough integrity to pay everyone back the lost money but the point is professional successful traders still lose money hand over foot.

Do you really think your edge is following a simple trend following system ? My edge is really simple - I realise that I can't predict the future and I use low cost index funds in a real simple asset allocation because I know that although I won't win the game I also won't lose it.
Title: Re: Portfolio Charts - The Golden Butterfly
Post by: mathjak107 on August 10, 2016, 06:22:22 AM
anyone remember fabian and his moving average system . you know the drill , you give up the bottom 10% and top 10% and you keep everything in the middle .

well if you were around in the fabian days you know that worked well -until it didn't .

just a little tweaking was all it needed they said , so putting their own money on the line and letting us track the new tweaked moving average system we all got to see it fail again and the dollars evaporate . the market volatility picked up and the swings greater then ever and the system just reacted to slowly to get in or out .

eventually the fabian system went away as it only worked as planned until your money was invested and on the line .
Title: Re: Portfolio Charts - The Golden Butterfly
Post by: tommie on August 10, 2016, 06:25:09 AM
Do you really think your edge is following a simple trend following system ? My edge is really simple - I realise that I can't predict the future and I use low cost index funds in a real simple asset allocation because I know that although I won't win the game I also won't lose it.

Yes and no.
I think trends + asset allocation is a sound strategy, not an edge that will "win".
I don't believe in winning, i believe in not losing.

Funny enough we seem to have the same idea on investing and share the "I won't win the game, but i also won't lose it".
The only difference being that i use long trends for my individual assets (that is in low cost index funds).

The basic point i wanted to make and to contribute with in this thread was that a basic trend is a very time proven strategy but that over optimization is a very time proven fallacy of trading, the example i gave in my first post in this thread is in line with your stories and in line with what i call over optimization and "unsimplification". Your examples of people having the "greatest" algorithms is the same sort of thing (thank you for the examples).

Why i like trends is because it's something that occur everywhere (not just in the stock market) and isn't something made up by the stock market or guys pushing the ultimate "Golden Butterfly" in books or on blogs. Long trends naturally occur everywhere and is a long proven fact or as near a fact that we possibly can hope something to be. It's as true as the earth not being flat (but of course some will argue that this could only be in our imagination and off we go again with a 1000 page thread). If someone believes the earth is flat and trends do not occur, great for them.
Title: Re: Portfolio Charts - The Golden Butterfly
Post by: mathjak107 on August 10, 2016, 06:39:17 AM
personally if it is very  long term money ,  i have never ever seen the need to mitigate short term temporary drops and permanently give up long term gains.   that goes for using bonds , trading systems and hedging .

all protect against short term temporary events . but odds are not just leaving that money alone in equity's will permanently hurt long term performance .

all this stuff comes in to play when short term volatility is a problem because the money really is not  all long term money .  i can see mitigating short term drops when the money does not have a few decades left before use  but even at 65 we still have money we will not eat with for 30 years hopefully .

personally i think it is easier and more reliable to just match the type of  investments to the time frame you want to spend the money . you will likely have a better outcome too  by not mitigating drops that have no meaning on the longer term money .

smetimes you have to take a step back , get back to basics and just question the logic behind doing certain things .

yeah i get it , not every one has a pucker factor for the swings on the long term money  and that is fine . but you do have quite a few investors that do have this pucker factor but do not think of the logic behind what they do .
Title: Re: Portfolio Charts - The Golden Butterfly
Post by: steveo on August 10, 2016, 07:06:02 AM
If someone believes the earth is flat and trends do not occur, great for them.

I don't think you are getting it. Yes trends occur. That is why investing in the stock market is a great long term investment. It's the asset class that should increase over time better than most other asset classes.

The point is that you believe that you can jump in and out and time the trend to increase your returns. I'm stating that is really really hard. Very few people do this consistently especially over your investing career. You have to put this into perspective - you believe that over the course of your say 10 year saving timeframe and then say 30 year retirement that you can maximise your returns via a simple trend following system. In my experience you'd be better off just doing this off gut feel. Say the market looks to high and you are 80/20 stocks/bonds and then you revert back to 50/50 stocks/bonds.

I watched an interview with Jack Bogle recently and he said basically exactly the same thing but he was hesitant about even suggesting reverting back to the 50/50 scenario mainly because it's so hard to pick the right time.
Title: Re: Portfolio Charts - The Golden Butterfly
Post by: steveo on August 10, 2016, 07:07:26 AM
eventually the fabian system went away as it only worked as planned until your money was invested and on the line .

Exactly. It looks great when you backtest it. The problem is you can't make money of it.
Title: Re: Portfolio Charts - The Golden Butterfly
Post by: tommie on August 10, 2016, 10:41:45 AM
If someone believes the earth is flat and trends do not occur, great for them.

I don't think you are getting it. Yes trends occur. That is why investing in the stock market is a great long term investment. It's the asset class that should increase over time better than most other asset classes.

Long term? Please define 'Long term', what is the exit for this 'long term' period?
That it should increase over time is a very broad assumption to make. There are several periods in time where 100% stocks equals 100% suck.
I really don't understand or grasp the concept of using undefined timelines or what it would be good for.

Quote
The point is that you believe that you can jump in and out and time the trend to increase your returns.

No, i don't believe i will beat the index in this mythical period called 'long term'. :-)

Quote
I'm stating that is really really hard.

I completely agree.

Quote
Very few people do this consistently especially over your investing career.

Yes, we agree. Just like i wrote in a previous post.

Quote
You have to put this into perspective - you believe that over the course of your say 10 year saving timeframe and then say 30 year retirement that you can maximise your returns via a simple trend following system.

No, I don't believe in maximing returns as an idea or concept.

Quote
In my experience you'd be better off just doing this off gut feel. Say the market looks to high and you are 80/20 stocks/bonds and then you revert back to 50/50

If it works for you, great!

Quote
I watched an interview with Jack Bogle recently and he said basically exactly the same thing but he was hesitant about even suggesting reverting back to the 50/50 scenario mainly because it's so hard to pick the right time.

I would go so far to say it's impossible to time anything so it isn't even worth trying. Using your "gut feel" as you explain is exactly that though -- you're trying to time the market by using your emotions. :-)
Title: Re: Portfolio Charts - The Golden Butterfly
Post by: k9 on September 26, 2016, 02:38:14 AM
You EMH people should know that even if an asset has a low, or even zero return, it can help the efficiency of a portfolio.
...or even negative return (after fees and taxes), actually, since you're talking about gold.

But many people aren't EMH fans here, hence the controversies in this thread, between GB proponents (which is a pure product of EMH) and stock-heavy proponents (Bogle fans who only play whith the total stocks/bonds cursor, where more stocks = more returns = more risk and that's pretty much it, works from Fama&French being considered "data mining" at best). Trying to praise the virtues of gold to EMH believers is a waste of time : they already know. And total-market-only guys won't listen. If you show them results from portfoliocharts, they will tell you the time frame is too short. And if you show results from cfiresim's 160-years-long dataset, they will tell you the time frame is too long because it includes periods when gold ownership was forbidden/tied to dollar.

The only thing on which EMH and Bogle fans agree on, though, is on the fact that trend following is evil, so maybe yur post will finaly make they agree on something ;) Which is kinda funny, IMHO, because the highly-praised act of rebalancing *is* a variation on trend-following (the belief that the current trend will revert; the only way I can imagine a permanent portfolio to blow off is through excessive rebalancing; imagine what happened to poor PP investor in 1923's Germany, when he "kept the course" and kept buying and buying and buying Weimar bonds to keep his allocation constant).
Title: Re: Portfolio Charts - The Golden Butterfly
Post by: arebelspy on September 26, 2016, 02:59:52 AM
I'm not sure you're interpreting EMH within any understanding I've ever heard.

From my understanding:
EMH states assets are fairly priced by the market.

It has nothing to say about different assets being worthwhile, or not, as far as I know.

I don't see that EMH has anything to say about the GB portfolio versus TSM portfolio, at all.

In fact, I'd argue someone who strongly believes in EMH would be more likely to buy a lot of random things, reflecting the overall nature/composition of ALL assets.  GB is a very carefully selected subset of that.  TSM (or Bogleheads) is even more so.  But again, one can believe in EMH and invest just in TSM; the EMH has nothing to say about GB vs TSM.

The best argument against the GB, IMO, is the fact that it's data fitting via back testing.  If the GB hadn't performed so well over these past 30 years, some other portfolio would have, and this thread would be about that portfolio.  That, combined with the fact that past performance doesn't guarantee future results means we have to say we don't know if the GB will be any better going forward than one of those other portfolios, so there's no compelling reason to use it, IMO (over a portfolio that makes more "sense," for example).

None of this has anything to do with EMH, FWIW.  :)
Title: Re: Portfolio Charts - The Golden Butterfly
Post by: k9 on September 26, 2016, 03:23:30 AM
My bad, I'm conflating EMH with MPT. Ah, acronyms. Well, while the opposite is true, EMH does *not* need MPT to hold, so forget what I said. Or, better, replace EMH with MPT everywhere.
Title: Re: Portfolio Charts - The Golden Butterfly
Post by: arebelspy on September 26, 2016, 04:01:44 AM
My bad, I'm conflating EMH with MPT. Ah, acronyms. Well, while the opposite is true, EMH does *not* need MPT to hold, so forget what I said. Or, better, replace EMH with MPT everywhere.

Ah, I follow, and yeah, your posts totally holds with MPT replacing EMH.  If I'd have thought of it, I'd have asked "Do you mean MPT?," but I was just thinking you were confused on EMH (or that I was), rather than using accidentally using the wrong acronym.  :)

My main problem of backfitting remains the same.
Title: Re: Portfolio Charts - The Golden Butterfly
Post by: deeshen13 on September 26, 2016, 10:29:54 AM
Special thanks to 'Interest Compound' for his insights and contribution to the first few pages of this thread. Heck of a lot of value for the Early Retireee.

Thanks much.
Title: Re: Portfolio Charts - The Golden Butterfly
Post by: Daniel S on October 08, 2016, 06:54:29 PM
Thanks for the great thread, particularly both Interest Compound and Tyler for their amazing input.

It turns out that I've been ready to FIRE for a while, but I had absolutely no idea until I started reading (very recently) about Bogleheads, MPT, 4% and related stuff. So with this realization, I've decided that the next step is to take my money out of cash and get it working. I've been in cash for years, being too afraid to do anything with it.

The next step for me is to decide asset allocation, and that's where this discussion has been really helpful, but also kind of concerning, to me.

Interest Compound has concerns that novices will be attracted to GB due to back-testing results and he's right - I'm definitely a novice at AA, and I'm very much attracted to GB due to it's past performance, which show's it's historically low volatility.

My questions are:

1. I accept that GB might not perform the same way in the future as it does in back-testing. But if you take this stance, then does back-testing have any value at all? What other tools or techniques are there to compare different AAs?

2. In my case I want to achieve a minimum SWR and I don't care if I under-perform other AAs in terms of the end balance. I only care that my money lasts until death no matter what the markets might throw at us. Is that the same as saying that risk adjusted returns are more important to me than total returns? My feeling is that GB might be a safer choice for this purpose rather than stock-heavy, or less diversified alternatives. But GB would probably not be the best choice for accumulators. Would people agree?

3. People have said that bonds are likely to under-perform from here, given where interest rates are right now. Would adjusting GB to cater for this be a good thing, or would that be considered market timing and something to be avoided?

4. Not specifically related to GB, but there seems to be a perception that the current environment is very different to any ever seen in history and that the dangers are greater than ever. Do people here generally agree with this, or is there a chance that it could possibly be put down to media scaremongering? Or perhaps many of today's circumstances have been seen before, but lost or forgotten in time?

5. Would it be fair to say that 40 years of historical analysis is better than 100 years, because 40 years ago is closer to today's reality than 100 years ago was?

My apologies if my questions display my naivety. Any responses will be greatly appreciated.
Title: Re: Portfolio Charts - The Golden Butterfly
Post by: Classical_Liberal on October 08, 2016, 08:42:39 PM
@Mrnotrobot (nice name)

I’m by no means the most advanced investor here & am probably not qualified, but I feel like typing so I’ll give your questions a shot.

Preface: I was sitting on the figurative fence you are on regarding how to proceed with AA about six months ago, although I’m only about halfway to FIRE and was not all cash.


Before you make a decision keep researching and reading, not just on internet forum :).  If you are not comfortable with your AA, you’re more likely to not stick with it when it matters most.  You’ve probably spent years to become competent at your job, which has supplied you with income for living up to this point.  Now you’ll be dependent on your savings to generate that income.  It makes sense to spend at least a small percentage of your time now to learn how you're gonna generate income from here forward… Right?

A couple of threads from another forum regarding this & related topics I found helpful:
 
http://forum.earlyretirementextreme.com/viewtopic.php?f=3&t=7798
http://forum.earlyretirementextreme.com/viewtopic.php?f=3&t=6635

Congrats on FIRE and good luck!  Start a journal here and tell us how you did it!  Likely we have much to learn from you as well!
Title: Re: Portfolio Charts - The Golden Butterfly
Post by: arebelspy on October 08, 2016, 09:44:32 PM
A couple of threads from another forum regarding this & related topics I found helpful:
 
http://forum.earlyretirementextreme.com/viewtopic.php?f=3&t=7798
http://forum.earlyretirementextreme.com/viewtopic.php?f=3&t=6635

Make sure you read counter-arguments, too.

Reading only gold bugs will make you think it's the greatest investment since the automatic bread slicer.  Not everyone agrees.  And yes, there are a few people on ERE that don't favor gold, but they don't tend to put forth rigorous arguments on why, because they tend to get steamrolled since the majority over there love it--sort of the opposite of here.  So don't just read here, don't just read there, but get multiple sources.
Title: Re: Portfolio Charts - The Golden Butterfly
Post by: Radagast on October 08, 2016, 11:43:05 PM
1. I accept that GB might not perform the same way in the future as it does in back-testing. But if you take this stance, then does back-testing have any value at all? What other tools or techniques are there to compare different AAs?
It may have value. But, in 1975 would you have been able to pick the portfolio that you now think was best over the past 40 years? I would not have.

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2. In my case I want to achieve a minimum SWR and I don't care if I under-perform other AAs in terms of the end balance. I only care that my money lasts until death no matter what the markets might throw at us. Is that the same as saying that risk adjusted returns are more important to me than total returns? My feeling is that GB might be a safer choice for this purpose rather than stock-heavy, or less diversified alternatives. But GB would probably not be the best choice for accumulators. Would people agree?
I think it does not have enough stock for accumulators or retirees, unless you are very scared of stocks. Stocks have similar or even less "deep" risk compared to bonds or gold, but over time generate a lot more returns. I recommend keeping at least 60% in stocks unless you mentally cannot. I suggested 70% stocks and 10% each in the other three earlier in the thread. Perhaps as low as 50% stocks in retirement.

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3. People have said that bonds are likely to under-perform from here, given where interest rates are right now. Would adjusting GB to cater for this be a good thing, or would that be considered market timing and something to be avoided?
Avoid. The best guess of the entire world is the current market price. You might want to increase stock ownership, as above.

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4. Not specifically related to GB, but there seems to be a perception that the current environment is very different to any ever seen in history and that the dangers are greater than ever. Do people here generally agree with this, or is there a chance that it could possibly be put down to media scaremongering? Or perhaps many of today's circumstances have been seen before, but lost or forgotten in time?
Which was more different and dangerous: Lydians invented coins? Mongols conquered China, Russia, and the Mid East? Magellan's crew sailed around the world? The Turks invaded Austria? The US and Soviets contemplated ending the world any minute now? Stock and bond markets had high prices in 2016? Every time in all of history was completely different from the time before, and often eerily similar to earlier events. Now is different from any in recent US history, but there may be parallels from other places or times. Read books by Ben Bernstein, for example "The Four Pillars of Investing" and then his booklet "Deep Risk". In general people consider the world to be a safer place than it was a few decades ago, so they are willing to risk sending more income to their future selves. This makes prices on everything higher. The real question going forward is, are they/we correct that the world is now permanently safer? If yes prices will continue up, if not, prices will fall.

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5. Would it be fair to say that 40 years of historical analysis is better than 100 years, because 40 years ago is closer to today's reality than 100 years ago was?
1000 years is better for generalities, 30 or 10 recent years is better for little details. 100 and 40 are ok for things that fall between the two.
Title: Re: Portfolio Charts - The Golden Butterfly
Post by: Daniel S on October 09, 2016, 03:10:18 AM
Understanding why each asset class is chosen is probably more important than any back testing.

If GB inherits the AA reasoning behind the permanent portfolio, then I think I understand it well enough.

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IMHO, AA should be reconsidered during different parts in the lifecycle of a portfolio.

I agree. In my case I'll be jumping straight into the later phase and I'm hoping to never have a need to alter again. It would be prudent for me to get it right the first time.

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Personal, I absolutely “tinker” with AA based on current economic conditions.  Is this market timing?  Yes!

Given my novice level, I'll be trying to avoid it.

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Who knows? Long term ZIRP is a new development, but what will it do?  Everyone always thinks that they are special, or this time is different.  Maybe it is?

Yeah, this "feeling" that something is going to happen probably always exists and never leaves.

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hence more possible economic situations.

Good point. You can always choose to ignore the earlier information, but it probably doesn't hurt to have it there in case it shows something.

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Before you make a decision keep researching and reading, not just on internet forum :).  If you are not comfortable with your AA, you’re more likely to not stick with it when it matters most.  You’ve probably spent years to become competent at your job, which has supplied you with income for living up to this point.  Now you’ll be dependent on your savings to generate that income.  It makes sense to spend at least a small percentage of your time now to learn how you're gonna generate income from here forward… Right?

Definitely! And because you really should stick with it, the initial allocations become seriously important. One of the most compelling reasons that GB appeals is because of the low 2 year longest draw-down period (historically speaking, of course). How anyone could stay the course through a 10 year draw-down period is beyond me.

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A couple of threads from another forum regarding this & related topics I found helpful:
 
http://forum.earlyretirementextreme.com/viewtopic.php?f=3&t=7798
http://forum.earlyretirementextreme.com/viewtopic.php?f=3&t=6635

Congrats on FIRE and good luck!  Start a journal here and tell us how you did it!  Likely we have much to learn from you as well!

Thanks!
Title: Re: Portfolio Charts - The Golden Butterfly
Post by: Daniel S on October 09, 2016, 03:39:32 AM
1. I accept that GB might not perform the same way in the future as it does in back-testing. But if you take this stance, then does back-testing have any value at all? What other tools or techniques are there to compare different AAs?
It may have value. But, in 1975 would you have been able to pick the portfolio that you now think was best over the past 40 years? I would not have.

In 1975 did funds offer choices along the lines of conservative, balanced and aggressive? If they did, then does this suggest that the fund managers thought they could pick well enough? Were they right? Don't know.
Technology has improved a lot since 1975, combined with a much wider choice of trading instruments and better data quality, you'd think we would have a better chance these days that back-testing might be more telling of the future.

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2. In my case I want to achieve a minimum SWR and I don't care if I under-perform other AAs in terms of the end balance. I only care that my money lasts until death no matter what the markets might throw at us. Is that the same as saying that risk adjusted returns are more important to me than total returns? My feeling is that GB might be a safer choice for this purpose rather than stock-heavy, or less diversified alternatives. But GB would probably not be the best choice for accumulators. Would people agree?
I think it does not have enough stock for accumulators or retirees, unless you are very scared of stocks. Stocks have similar or even less "deep" risk compared to bonds or gold, but over time generate a lot more returns. I recommend keeping at least 60% in stocks unless you mentally cannot. I suggested 70% stocks and 10% each in the other three earlier in the thread. Perhaps as low as 50% stocks in retirement.

I think the "mentally cannot" will come into play with me. I couldn't tolerate anything like a 10 year draw-down period, probably not even a 5 year one, unless 20+ successful years had already passed by.

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3. People have said that bonds are likely to under-perform from here, given where interest rates are right now. Would adjusting GB to cater for this be a good thing, or would that be considered market timing and something to be avoided?
Avoid. The best guess of the entire world is the current market price. You might want to increase stock ownership, as above.
Sorry, are you saying avoid bonds, or avoid adjusting?

Title: Re: Portfolio Charts - The Golden Butterfly
Post by: Radagast on October 09, 2016, 01:33:06 PM
1. I accept that GB might not perform the same way in the future as it does in back-testing. But if you take this stance, then does back-testing have any value at all? What other tools or techniques are there to compare different AAs?
It may have value. But, in 1975 would you have been able to pick the portfolio that you now think was best over the past 40 years? I would not have.
In 1975 did funds offer choices along the lines of conservative, balanced and aggressive? If they did, then does this suggest that the fund managers thought they could pick well enough? Were they right? Don't know.
Technology has improved a lot since 1975, combined with a much wider choice of trading instruments and better data quality, you'd think we would have a better chance these days that back-testing might be more telling of the future.
The thing with liquid markets is that to predict the future is to change the future. If everyone has backtesting results to tell them future, the future will be different because of their actions.

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2. In my case I want to achieve a minimum SWR and I don't care if I under-perform other AAs in terms of the end balance. I only care that my money lasts until death no matter what the markets might throw at us. Is that the same as saying that risk adjusted returns are more important to me than total returns? My feeling is that GB might be a safer choice for this purpose rather than stock-heavy, or less diversified alternatives. But GB would probably not be the best choice for accumulators. Would people agree?
I think it does not have enough stock for accumulators or retirees, unless you are very scared of stocks. Stocks have similar or even less "deep" risk compared to bonds or gold, but over time generate a lot more returns. I recommend keeping at least 60% in stocks unless you mentally cannot. I suggested 70% stocks and 10% each in the other three earlier in the thread. Perhaps as low as 50% stocks in retirement.
I think the "mentally cannot" will come into play with me. I couldn't tolerate anything like a 10 year draw-down period, probably not even a 5 year one, unless 20+ successful years had already passed by.
I agree that the stocks/long term bonds/gold triangle is probably your best shot at three uncorrelated assets. Still, don't expect things to play out as nicely in the future as they did in the 70's.

I suggest that you not consider gold as a replacement for stocks. If you would otherwise be considering a 40% stock / 60% bond portfolio, then sure the GB may be for you. (Personally I think that is too conservative, and more likely to work against you than for you.) If you would otherwise be thinking of a 64/36 portfolio, then keep the 64% stocks and if you want gold then take it from the bond side. Either way I suggest that you should include international stocks.

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3. People have said that bonds are likely to under-perform from here, given where interest rates are right now. Would adjusting GB to cater for this be a good thing, or would that be considered market timing and something to be avoided?
Avoid. The best guess of the entire world is the current market price. You might want to increase stock ownership, as above.
Sorry, are you saying avoid bonds, or avoid adjusting?
Avoid thinking you can outguess the bond market.
Title: Re: Portfolio Charts - The Golden Butterfly
Post by: Classical_Liberal on October 09, 2016, 02:20:18 PM

I suggest that you not consider gold as a replacement for stocks. If you would otherwise be considering a 40% stock / 60% bond portfolio, then sure the GB may be for you. (Personally I think that is too conservative, and more likely to work against you than for you.) If you would otherwise be thinking of a 64/36 portfolio, then keep the 64% stocks and if you want gold then take it from the bond side. Either way I suggest that you should include international stocks.


I believe this is a wise statement and is what I have done.  Shifting towards a 60/40 portfolio due to realizing my real risk tolerance & getting closer to FI. I want to limit sequence risk when I get there.  When I decided to add gold beyond a small SHTF amount, I pulled it from my "bond" side allocation.  This is partially due to the limited upside/low EV of bonds in the current economic climate.

I also like international stocks, particularly at the moment because they seem to be a better value.  Of the 60% stock allocation I'm aiming for 30% US large cap, 10% US small cap and 20% international.  Realize this important point though; international stocks tend to be much more correlated to gold than US stocks. I'm only holding 10% gold, so this does not concern me.  If one has closer to a GB portfolio with only 40% stocks and 20% gold, that person should be cautious holding a large percentage of their equity allocation in international as it could very well destroy the underlying theory of that portfolio.

One last important distinction of someone choosing a GB-like portfolio, particularly one which is slightly more equity heavy.  Be diligent in understanding why the bond allocation is not a total bond market, but rather a split between cash and longer term treasuries. I've played with Tyler's calculators and with backtesting it doesn't seem to make a big difference (TBM vs LTT).  However, in theory (if you believe in the underlying theory), it could in the future.

Edit: spelling and grammar
Title: Re: Portfolio Charts - The Golden Butterfly
Post by: Radagast on October 09, 2016, 02:51:16 PM
Realize this important point though; international stocks tend to be much more correlated to gold than US stocks. I'm only holding 10% gold, so this does not concern me.  If one has closer to a GB portfolio with only 40% stocks and 20% gold, that person should be cautious holding a large percentage of their equity allocation in international as it could very well destroy the underlying theory of that portfolio.
Do you think this is mostly because of fluctuations in the value of the dollar? Either way I agree that including a large allocation to international stocks will probably reduce the utility of gold.
Title: Re: Portfolio Charts - The Golden Butterfly
Post by: mathjak107 on October 09, 2016, 02:52:33 PM
my feeling is i would be very careful with both long term bonds and gold .

there is a good chance stock returns may be weak for a while .

so far rising bond rates have seen TLT the long treasury bond fund fall 6% in 90 days and gld gold fall 8% in 90 days . with rates more inclined to rise than fall i think any extra drag from this stuff will keep whatever traction equity's manage to gain from taking hold .

i do speculate in gold and bought gld again friday  for likely the 7th or 8th time this year , but these are for just quick hits .


Title: Re: Portfolio Charts - The Golden Butterfly
Post by: steveo on October 09, 2016, 03:21:05 PM
Avoid thinking you can outguess the bond market.

I have a small amount of bonds in my portfolio but I'm starting to think it's going to be a good spot to be based on the massive negativity around bonds.
Title: Re: Portfolio Charts - The Golden Butterfly
Post by: Classical_Liberal on October 09, 2016, 03:50:27 PM
Realize this important point though; international stocks tend to be much more correlated to gold than US stocks. I'm only holding 10% gold, so this does not concern me.  If one has closer to a GB portfolio with only 40% stocks and 20% gold, that person should be cautious holding a large percentage of their equity allocation in international as it could very well destroy the underlying theory of that portfolio.
Do you think this is mostly because of fluctuations in the value of the dollar? Either way I agree that including a large allocation to international stocks will probably reduce the utility of gold.

Full understanding of gold prices are beyond my scope. Obviously I dont subscribe to only invest in what you completely understand. :)  I'm still learning, but I do see its benefit as a non correlator to my largest holding (us stocks).

My best answer: Yes partially currency related, partially related to emerging and developing markets being heavily tied to commodity prices.  Partially related to a trade imbalance with the US.

Whenever I try to wrap my head around gold movement that seems to be counter intuitive and I want a quick brush up, I read something like this:

https://snbchf.com/swissgold/gold/gold-silver-prices/
Title: Re: Portfolio Charts - The Golden Butterfly
Post by: arebelspy on October 09, 2016, 06:28:14 PM
Avoid thinking you can outguess the bond market.

I have a small amount of bonds in my portfolio but I'm starting to think it's going to be a good spot to be based on the massive negativity around bonds.

Were you going for unintentional irony, quoting something and then saying the opposite of its advice?  ;)
Title: Re: Portfolio Charts - The Golden Butterfly
Post by: steveo on October 10, 2016, 12:24:33 AM
Avoid thinking you can outguess the bond market.

I have a small amount of bonds in my portfolio but I'm starting to think it's going to be a good spot to be based on the massive negativity around bonds.

Were you going for unintentional irony, quoting something and then saying the opposite of its advice?  ;)

No. My take of the initial comment is that trying to pick the bond market isn't going to work. I'm not second guessing myself at all but all the negativity surrounding bonds to me means that bonds might actually do well.
Title: Re: Portfolio Charts - The Golden Butterfly
Post by: Daniel S on October 10, 2016, 01:19:22 AM
Thanks for some very good advice. I'm definitely learning a lot from this exchange and thinking about some things that never occurred to me before.

Taking everything on board so far, I'm considering something along the lines of:

25% Total Stock Market
25% International Small
18% Long Treasuries
17% Short Treasuries
15% Gold

This increases overall stock exposure, slightly reduces the less predictable impacts of gold, and adds international. I think it still maintains the fundamental foundations of GB.

There's still plenty of research ahead of me though, and I'm not in too much of a hurry.

The above looks pretty good using Tylers calculators with longest draw-down of 3 years, worst year of -15.1%, 40yr worst case SWR around 6.0%. CAGR compared to GB increases as to be expected. I'll be trying for an initial WR around 3.5% so there's a decent buffer for me. With luck I might even achieve perpetuity.
Title: Re: Portfolio Charts - The Golden Butterfly
Post by: Daniel S on October 10, 2016, 01:38:04 AM
The thing with liquid markets is that to predict the future is to change the future. If everyone has backtesting results to tell them future, the future will be different because of their actions.

We have the marketing of trading your way to riches on our side. They're pretty good at it.

Title: Re: Portfolio Charts - The Golden Butterfly
Post by: mathjak107 on October 10, 2016, 02:25:11 AM
if greenspan is correct and we are headed in to what appears to be a period of stagflation long term bonds are a poor place to be . i happen to notice wellesley income shed about 1/2 their long term bond position the last 3 months ,same with the permanent portfolio fund , they have none .
Title: Re: Portfolio Charts - The Golden Butterfly
Post by: k9 on October 10, 2016, 07:36:32 AM
1. I accept that GB might not perform the same way in the future as it does in back-testing. But if you take this stance, then does back-testing have any value at all? What other tools or techniques are there to compare different AAs?

There's none. All you can do is reason about the past, understand why good/bad outcomes happened and try to make an educated guess about the future.

Both AA are based on different sets of beliefs and knowledge. Both allocations suffer a survivorship bias. GB seems amazing because it performed well and, after the fact, you can make a story about why it performed well and why it should keep performing well. The very same can be said about the 100% total stock allocation, although they pretend the opposite. You don't believe me ? Then have a look  at all the 100% investors, and ask them how many actually replicate a total stock market. Most of them will actually tilt their allocation to favor US stocks, or even (gasp!) only own US stocks (a total stock allocation should be about 45% US, 40% developed non-US, 15% emerging), and most of them will have a compelling story about why they did so ("oh, it's easier" (jlcollinsnh), "oh, the rest of the world is crap, US rulez" (John Bogle), etc.) but the truth is they think "oh, over the last x decades, this asset class/allocation performed very well, so I except it will keep the same". There are not many 100% stocks proponents in the rest of the world (especially Japan and many countries in Europe), and there's a good reason for that. Survivorship bias and retrofitting here, despite what everybody pretends.

Meb Faber, in one of his last books, made an interesting point, though. He observed dozens of very different ETF-based asset allocations and concluded that, in theory, all of them produced the same annualised return over the last 45 years, more or less 1%. And his conclusion is that, more than the actual AA, the important point lies in fees/taxes.

I think he is right and I would add you need to take into consideration behavioral aspects : are you sure you will be ready to rebalance when needed ? If not, you should probably go all in stocks, with just one fund (whether it is 100% US or worldwide). Do you want to never care about where you next money-to-invest should go ? Same thing. Do you feel uncomfortable lending all your money to one single company ? Then don't put all your money in VTSAX or anything. Do you feel uncomfortable having only financial assets ? Then buy a house / earn some gold bullions. Etc. Now this is up to you, only *you* can answer these questions. Don't listen to all those fairy tales about why allocation x or y is the best and is guaranteed to succeed in the future. Nobody knows, despite what they pretend.

So, read all those opinions and make you own. Only you can tell if you should implement a 100% TSM, a GB or anything else.
Title: Re: Portfolio Charts - The Golden Butterfly
Post by: arebelspy on October 10, 2016, 07:49:36 AM
The very same can be said about the 100% total stock allocation, although they pretend the opposite. You don't believe me ? Then have a look  at all the 100% investors, and ask them how many actually replicate a total stock market. Most of them will actually tilt their allocation to favor US stocks, or even (gasp!) only own US stocks (a total stock allocation should be about 45% US, 40% developed non-US, 15% emerging), and most of them will have a compelling story about why they did so ("oh, it's easier" (jlcollinsnh), "oh, the rest of the world is crap, US rulez" (John Bogle), etc.) but the truth is they think "oh, over the last x decades, this asset class/allocation performed very well, so I except it will keep the same".

I find it odd, and rather rude, that you are claiming to read the minds of many different people, and are calling all of them liars.

I don't agree with your assessment that everyone who is 100% TSM is doing it because of past results, and no other reason, and if they say otherwise, they're lying.
Title: Re: Portfolio Charts - The Golden Butterfly
Post by: Daniel S on October 10, 2016, 08:46:30 AM
@k9

I believe that diversification (across and within asset classes) increases the chances of success and it's a comfort that back-testing supports this historically. 100% TSM is out of the question in my mind, especially given that I am not in accumulation stage.

Regarding Faber's 1% claim? What does the "in theory" part mean? If this applies to ETFs, then would managed funds be even worse than 1%? Does he propose an alternative?

Good points about counter-party risks. What is the general consensus on this? I was thinking of implementing using only Vanguard wholesale. Maybe too off topic for this thread.
Title: Re: Portfolio Charts - The Golden Butterfly
Post by: AdrianC on October 10, 2016, 09:23:29 AM
Avoid thinking you can outguess the bond market.

The bond market is not a "free" market. Base interest rates are not set by the market.

You can lose real money in long term bonds. The GB portfolio holder knows this, but is betting on negative correlation and subsequent  rebalancing. It seems to me this is more of a speculation than an investment. It has worked. It might work again. I see no reason to be sure that it will work.
Title: Re: Portfolio Charts - The Golden Butterfly
Post by: Daniel S on October 10, 2016, 09:30:20 AM
I see no reason to be sure that it will work.

Can't the same be said of anything?
Title: Re: Portfolio Charts - The Golden Butterfly
Post by: k9 on October 10, 2016, 03:52:06 PM
I find it odd, and rather rude, that you are claiming to read the minds of many different people, and are calling all of them liars.

I don't agree with your assessment that everyone who is 100% TSM is doing it because of past results, and no other reason, and if they say otherwise, they're lying.
Sorry for seeming rude. Not my intention. I was trying to be sarcastic (and questioning the main opinion in this community, too). English is not my native language.

Regarding Faber's 1% claim? What does the "in theory" part mean? If this applies to ETFs, then would managed funds be even worse than 1%? Does he propose an alternative?
By "in theory', I mean "when you only consider raw performance of indexes/asset classes", i.e without considering fees & taxes. His conclusion was something like "do not spend too much time tinkering the perfect AA, anyway, on the very long term they all provide similar returns. Instead, focus on reducing fees & taxes, because this is where you can loose most of your money".

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Good points about counter-party risks. What is the general consensus on this? I was thinking of implementing using only Vanguard wholesale. Maybe too off topic for this thread.
The general consensus is that almost nobody really cares. I do, but I tend to be an exception. Even the PP doomers implement their 25% of gold with ETFs rather than bullion, more often than not. Don't worry too much about that.
Title: Re: Portfolio Charts - The Golden Butterfly
Post by: Daniel S on October 10, 2016, 05:05:39 PM
@k9

Re Faber, like this right?

"all of them produced the same annualised return over the last 45 years, more or less within 1% of each other"
Title: Re: Portfolio Charts - The Golden Butterfly
Post by: AdrianC on October 10, 2016, 06:14:25 PM
I see no reason to be sure that it will work.

Can't the same be said of anything?

Sure, but we can assign rough probabilities to various allocations. 

A globally diversified portfolio of stocks is likely to generate decently positive real returns over the long term. Say 3-5%.

60% of the GB portfolio's assets are not likely to generate decently positive real returns over the long term. Maybe 1%. Does anyone believe otherwise?

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?
Title: Re: Portfolio Charts - The Golden Butterfly
Post by: Classical_Liberal on October 10, 2016, 08:03:24 PM

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.
Title: Re: Portfolio Charts - The Golden Butterfly
Post by: arebelspy on October 10, 2016, 08:34:02 PM

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.

I agree.  There are plenty of valid critiques for the GB.  I'm not sure this is one.  MPT is worth researching if you think it is, IMO.
Title: Re: Portfolio Charts - The Golden Butterfly
Post by: Radagast on October 10, 2016, 08:54:42 PM
Avoid thinking you can outguess the bond market.

The bond market is not a "free" market. Base interest rates are not set by the market.

You can lose real money in long term bonds. The GB portfolio holder knows this, but is betting on negative correlation and subsequent  rebalancing. It seems to me this is more of a speculation than an investment. It has worked. It might work again. I see no reason to be sure that it will work.
The treasury sells bonds at auction to the highest bidder, and they trade freely on the market after that. Others (the Fed) can try to influence that, but nobody has to pay attention. It's like saying the bailout of GM means stocks are not traded in a "free" market anymore. For example, rates have been much lower ever since the Fed raised rates. Japan has been trying to raise rates for decades but they keep dropping anyhow.

The duration of the bonds in the PP/GB is a little more than 9 years right now, which is longer than most commonly recommended bond funds, but not outrageously longer. It is hard to say 9 years is speculation but 6 years is safe. Or perhaps you are just arguing against owning any bonds, in which case I think you will most likely be 60% to 100% correct.

60% of the GB portfolio's assets are not likely to generate decently positive real returns over the long term. Maybe 1%. Does anyone believe otherwise?

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?
OK sure. But compare to Vanguard's 40/60 Lifestrategy Conservative Growth fund. In real terms, it has 40% in US bonds (+1%), 20% in international bonds (-0.5%) and 40% in global stocks (+3% to +5%). Is that really any better? It looks to me like Lifestrategy has the lower expected return. And that fund can't expect a significant rebalancing bonus. I agree the GB is conservative (too much so for me), but for people who want a conservative portfolio and can tolerate the strange components it seems fine.
Title: Re: Portfolio Charts - The Golden Butterfly
Post by: Radagast on October 10, 2016, 09:20:38 PM
Of the 60% stock allocation I'm aiming for 30% US large cap, 10% US small cap and 20% international.  Realize this important point though; international stocks tend to be much more correlated to gold than US stocks. I'm only holding 10% gold, so this does not concern me. 
I find myself an admirer of both Interest Compound's 50% Total US Stock Market/50% Total International Stock Market, and Tyler's Golden Butterfly. Maybe the best thing is to follow my old motto "when in doubt, do both." This would give
35% US TSM
25% Int. TSM
10% small cap value
10% long term bonds
10% short term bonds
10% gold
which is pretty much exactly what you have. This addresses my concerns of the GB being too conservative and the all-stock portfolio seeming to "float around" too much. I can't convince myself to own gold right now, but if I change my mind later when I have enough money to bother I hope to do something similar.
Title: Re: Portfolio Charts - The Golden Butterfly
Post by: Daniel S on October 11, 2016, 05:51:41 AM
An annual rebalance seems arbitrary. Why not have some timing scheme for the rebalancing and make it even better?

Definitely possible for somebody that wants to do it. But finding a good indicator to signal the timing of the re-balance would probably involve back-testing. Then this may apply to the chosen indicator:

Quote
It has worked. It might work again. I see no reason to be sure that it will work.

I like the scheduled re-balance idea because it is mechanical and emotionless, unlike my many failed attempts at trading equities and forex over the years.
Title: Re: Portfolio Charts - The Golden Butterfly
Post by: AdrianC on October 11, 2016, 06:50:10 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?
Title: Re: Portfolio Charts - The Golden Butterfly
Post by: mathjak107 on October 11, 2016, 07:11:43 AM
if you are a long term investor hedging reduces temporary short term dips at the expense of  permanently hurting long term gains. that logic never made much sense to me.

unless you have shorter term needs which require matching investments to a shorter time frame  adding all these other things to run counter  may not be a great idea .

i run two separate portfolio's being retired . i have a conservative income model which provides money for eating in the near term and holds investments appropriate for that time frame but then i hold a much more aggressive portfolio for eating in 20 or 30 years .

no one really knows how a safe withdrawal rate actually would work out with portfolio's that holds a fair amount of  gold since you cannot stress test against the time frames the worst case scenario's are based on .



Title: Re: Portfolio Charts - The Golden Butterfly
Post by: Daniel S 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?
Title: Re: Portfolio Charts - The Golden Butterfly
Post by: AdrianC 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.
Title: Re: Portfolio Charts - The Golden Butterfly
Post by: mathjak107 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
Title: Re: Portfolio Charts - The Golden Butterfly
Post by: arebelspy 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.  :)
Title: Re: Portfolio Charts - The Golden Butterfly
Post by: Radagast 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%.
Title: Re: Portfolio Charts - The Golden Butterfly
Post by: Classical_Liberal 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.
Title: Re: Portfolio Charts - The Golden Butterfly
Post by: AdrianC 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.
Title: Re: Portfolio Charts - The Golden Butterfly
Post by: AdrianC 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.
Title: Re: Portfolio Charts - The Golden Butterfly
Post by: AdrianC 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%

I’m ignoring the 1970’s because I think the 1970's gold data is garbage. Gold was on a tear in the 1970’s. From 1972 through 1979 gold went up over 1,000%, with a 25.4% real CAGR.
Title: Re: Portfolio Charts - The Golden Butterfly
Post by: effigy98 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.
Title: Re: Portfolio Charts - The Golden Butterfly
Post by: Radagast 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.
Title: Re: Portfolio Charts - The Golden Butterfly
Post by: Classical_Liberal 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.
Title: Re: Portfolio Charts - The Golden Butterfly
Post by: Daniel S 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)
Title: Re: Portfolio Charts - The Golden Butterfly
Post by: Daniel S 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%

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

What symbol did you use for gold allocation?
Title: Re: Portfolio Charts - The Golden Butterfly
Post by: AdrianC 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.

Title: Re: Portfolio Charts - The Golden Butterfly
Post by: AdrianC 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%
Title: Re: Portfolio Charts - The Golden Butterfly
Post by: AdrianC 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.
Title: Re: Portfolio Charts - The Golden Butterfly
Post by: Daniel S 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 (http://tinyurl.com/hozu2r5)
1987 GB -1.33%, 60/40 2.59%. GB loses. http://tinyurl.com/ztwjvag (http://tinyurl.com/ztwjvag)
2000 GB 0.30%, 60/40 -5.76%. GB wins. http://tinyurl.com/j63tdj2 (http://tinyurl.com/j63tdj2)
2008 GB 0.72%, 60/40 -0.74%. GB wins: http://tinyurl.com/zonlgxl (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%)
Title: Re: Portfolio Charts - The Golden Butterfly
Post by: Daniel S 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.
Title: Re: Portfolio Charts - The Golden Butterfly
Post by: AdrianC 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.
Title: Re: Portfolio Charts - The Golden Butterfly
Post by: Daniel S 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?
Title: Re: Portfolio Charts - The Golden Butterfly
Post by: Daniel S on October 12, 2016, 07:56:36 AM
Sorry, I should mention I'm biased towards the retirement phase, not accumulation.
Title: Re: Portfolio Charts - The Golden Butterfly
Post by: AdrianC 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?

It’s the end of 1985 and you’re about to FIRE. You look at the alternative portfolios and come across the Golden Butterfly. Here’s 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.
Title: Re: Portfolio Charts - The Golden Butterfly
Post by: steveo 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.
Title: Re: Portfolio Charts - The Golden Butterfly
Post by: Tyler 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 (https://portfoliocharts.com/portfolio/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.
Title: Re: Portfolio Charts - The Golden Butterfly
Post by: Daniel S 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!

Title: Re: Portfolio Charts - The Golden Butterfly
Post by: Daniel S 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 (http://forum.earlyretirementextreme.com/viewtopic.php?f=3&t=6635)
Title: Re: Portfolio Charts - The Golden Butterfly
Post by: AdrianC 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.
Title: Re: Portfolio Charts - The Golden Butterfly
Post by: Daniel S 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).
Title: Re: Portfolio Charts - The Golden Butterfly
Post by: Tyler 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 (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 (https://portfoliocharts.com/contact/) through the site. 
Title: Re: Portfolio Charts - The Golden Butterfly
Post by: mathjak107 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.

Title: Re: Portfolio Charts - The Golden Butterfly
Post by: effigy98 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.
Title: Re: Portfolio Charts - The Golden Butterfly
Post by: Radagast 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.
Title: Re: Portfolio Charts - The Golden Butterfly
Post by: arebelspy 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.
Title: Re: Portfolio Charts - The Golden Butterfly
Post by: Daniel S 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?
Title: Re: Portfolio Charts - The Golden Butterfly
Post by: mathjak107 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 .
Title: Re: Portfolio Charts - The Golden Butterfly
Post by: Daniel S 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.
Title: Re: Portfolio Charts - The Golden Butterfly
Post by: Daniel S 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.

Quote
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.
Title: Re: Portfolio Charts - The Golden Butterfly
Post by: Classical_Liberal 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!
Title: Re: Portfolio Charts - The Golden Butterfly
Post by: Classical_Liberal on October 14, 2016, 01:24:42 PM
I think lack of data is a big reason we don’t 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 way….
 
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 aren’t looking great, they have found making minor required changes to “the plan” 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.  “The plan” 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 I’ve 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, Tyler’s 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!
Title: Re: Portfolio Charts - The Golden Butterfly
Post by: mathjak107 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.
Title: Re: Portfolio Charts - The Golden Butterfly
Post by: steveo 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.
Title: Re: Portfolio Charts - The Golden Butterfly
Post by: mathjak107 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
Title: Re: Portfolio Charts - The Golden Butterfly
Post by: bryan 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?
Title: Re: Portfolio Charts - The Golden Butterfly
Post by: arebelspy 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.
Title: Re: Portfolio Charts - The Golden Butterfly
Post by: bryan on October 14, 2016, 07:33:12 PM
good reply @arebelspy. Thanks.

Just trying to navigate around the dogma..
Title: Re: Portfolio Charts - The Golden Butterfly
Post by: Daniel S 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: (https://papers.ssrn.com/sol3/papers.cfm?abstract_id=1699526)
"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.

Quote
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.

Quote
Thanks again Tyler!!!

From me too
Title: Re: Portfolio Charts - The Golden Butterfly
Post by: Daniel S 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.
Title: Re: Portfolio Charts - The Golden Butterfly
Post by: Daniel S 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.

Title: Re: Portfolio Charts - The Golden Butterfly
Post by: MustacheAndaHalf 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?
Title: Re: Portfolio Charts - The Golden Butterfly
Post by: Daniel S on October 15, 2016, 02:13:24 AM
I think if that I were worried about it, and if it were at all possible, I would do two sets of analysis - one with those years included and one without. I would then base any conclusions on the worst case out of the two.
Title: Re: Portfolio Charts - The Golden Butterfly
Post by: mathjak107 on October 15, 2016, 02:28:01 AM
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.

the right diversification is a good thing . the wrong diversification can hurt you permanently over the long term . being a long term investor that is what hedging does .  it gives you temporary relief from short term events that may mean nothing in the long term , but cuts your compounding over the long term .

diversification in to all sectors like financials ,healthcare ,consumer staples ,etc is a good thing .

just buying bonds or gold can be a bad thing performance wise over the long term  .it always has . we are starting to see bond rates rise after 35 years . that can be a heavy weight with long term bonds . bonds got hit hard again yesterday . it has been a blood bath for the permanent portfolio the last 3 months which is similar to the gb .

i mean a 45% drop is a lot since it peaked at brexit. that is just the thing it is not supposed to do .
Title: Re: Portfolio Charts - The Golden Butterfly
Post by: Daniel S on October 15, 2016, 03:44:39 AM
it has been a blood bath for the permanent portfolio the last 3 months which is similar to the gb .

i mean a 45% drop is a lot since it peaked at brexit. that is just the thing it is not supposed to do .

A quick check of some charts and I can't see how a 45% drop was possible for PP in the last 3 months. Looks like more like 6% or 7% might have happened.
Title: Re: Portfolio Charts - The Golden Butterfly
Post by: mathjak107 on October 15, 2016, 03:59:27 AM
well the portfolio i still track was up 135k  90 days ago . it is now up only 74k

that value has fallen by 45%. going from being up 15 or 16% to only up 7% or so , that  drop represents a 45% fall  in dollars  . is that low volatility to you ? 
Title: Re: Portfolio Charts - The Golden Butterfly
Post by: Daniel S on October 15, 2016, 04:05:42 AM
Those values look like profit, rather then total portfolio value.
Title: Re: Portfolio Charts - The Golden Butterfly
Post by: mathjak107 on October 15, 2016, 04:07:14 AM
yes , but a 45% drop in your gains is a lot for that model . we are talking almost  a 70k fall . it got hit pretty hard .on the other hand my conventional model is still ahead of the pp by 25k  using same starting amount .

you would think with all the volatility this year the pp would have been the better choice  but the assets playing against each other are doing more harm than good and that is my point  . trying to hedge your bets is working against the portfolio and not for it .

we seem to be duplicating what we see in times of tight money even though that is not the case. that is not good for models like the  pp or gb .

unlike equity's , interest rate cycles and gold cycles can be out of favor for very long periods of time . it took interest rates 35 years to get to these levels, who knows how long it will take going up . . gold has never had an extended long term time frame where something else did not do better .

if you bought your gold the first year gold traded here in 1975 for 175 an ounce today a 1 month t-bill rolled over did better .

my opinion is i think going forward these long term treasury /gold heavy portfolio's are not going to be the low volatility models they were .

i still think a diversified mix of equity's and a dynamic bond portfolio that is ready to shift to different kinds of bond funds as the big picture unfolds is the way to go .

buy and die was a lot easier when rates were falling for decades . taking a 17% hit in TLT  with just a 1 point rise in rates is going to be quite painful to those models that use long term bonds if we have the meager stock returns that are anticipated  .


(https://photos.smugmug.com/photos/i-TV9D5Xw/0/O/i-TV9D5Xw.png)
Title: Re: Portfolio Charts - The Golden Butterfly
Post by: Daniel S on October 15, 2016, 04:26:05 AM
trying to hedge your bets is working against the portfolio and not for it .

I think this is to be expected at times for any portfolio with more than one asset class in it.

Quote
if you bought your gold the first year gold traded here in 1975 for 175 an ounce today a 1 month t-bill rolled over did better

In terms of total return, but that's not the most important thing for a lot of people. It is for some though.
Title: Re: Portfolio Charts - The Golden Butterfly
Post by: Daniel S on October 15, 2016, 04:33:07 AM
Quote
taking a 17% hit in TLT  with just a 1 point rise in rates is going to be quite painful to those models that use long term bonds

I think re-balancing will help to soften the blow.

I wonder if more frequent re-balancing in more uncertain times is a way to help lower the perceived risks without upsetting the longer term success or asset allocations of the portfolio? It could probably work both ways. It's also been discussed in another thread no doubt.
Title: Re: Portfolio Charts - The Golden Butterfly
Post by: mathjak107 on October 15, 2016, 04:59:09 AM
rebalancing under these circumstances just ends up sending good money after bad . more often than not rebalancing cuts the gains and adds to the losers . 70% of the time equity's go up . that has you betting against the house .

you are also taking money out of equity's which have always been the long term winner and putting them in assets that over the long term have never out performed equity's .

for rebalancing to really work you need to be a good market timer .

kitces looked at the effects of rebalancing and found long term it actually hurt more than helped .

but in this case i think it  is the fact that we have never had a situation with rates this low and stocks this high . that means we can have slow growth in equity's and poor conditions for bonds and gold .

i still say taking the most likely horse in the race , your equity's and strapping the weight of long term bonds and gold to them will not allow them to gain any traction . the wild card would be betting on long term bonds going forward to do the heavy lifting .

you would have to bet on a long term disaster to the markets . i think if not then all these portfolio's that attempt to hedge will have more volatility than those using them would want . the last 3 months may be an indication of the new normal for the pp and gb .
Title: Re: Portfolio Charts - The Golden Butterfly
Post by: steveo on October 15, 2016, 05:19:48 AM
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.

This is to me a principle that you can follow. A well diversified asset allocation gives you a good chance of having lower but more stable returns. I think the principle is important rather than any back-testing.

Still you have to look at the down side of this type of allocation. Your greatest chance of success over the long term is probably with a 100% stock allocation.
Title: Re: Portfolio Charts - The Golden Butterfly
Post by: Daniel S on October 15, 2016, 06:36:40 AM
If you had of said this, then I would be in 100% agreement:

"Still you have to look at the down side of this type of allocation. Your greatest chance of success better returns over the long term is probably with a 100% stock allocation."
Title: Re: Portfolio Charts - The Golden Butterfly
Post by: mathjak107 on October 15, 2016, 07:02:37 AM
the problem is that conditions today have turned non correlated assets into correlated ones and not only are they correlated but the volatility in the opposite asset classes you typically need to add ballast  which have plenty of ooomph , now work against you making the supposedly  non volatile portfolio even more volatile .

you take something like the pp with long term bonds and gold  and those volatile investments can add far more swings and volatility when  teaming up  than a conventional stock fund  with  short to intermediate term bond funds will . that is why the pp is now worth less than my conventional model  after it was much ahead .
Title: Re: Portfolio Charts - The Golden Butterfly
Post by: arebelspy on October 15, 2016, 07:17:09 AM
If you had of said this, then I would be in 100% agreement:

"Still you have to look at the down side of this type of allocation. Your greatest chance of success better returns over the long term is probably with a 100% stock allocation."

In the short run, volatility is a better predictor of success.

In the long run, returns are a better predictor of success.

A portfolio with higher returns is likelier to last longer, even with sequence of returns risks.  This is doubly true if you can be flexible about spending (because being flexible about spending early, temporarily, during a crash is much easier than permanently reducing spending forever due to eroded purchasing power due to lower returns).
Title: Re: Portfolio Charts - The Golden Butterfly
Post by: mathjak107 on October 15, 2016, 07:30:40 AM
i have mixed feelings about volatility being a measure of success unless you have a low pucker factor  but if that is the case i wouldn't call being gun shy a success .. if it is long term money then volatility should not be an issue in the short term  . if it is shorter term money than perhaps you are mis-matching time frames  and investments and hoping the portfolio does not fall to much if you need the money in the shorter term .  in that case hope is the strategy .

i think we have to forget about what was for the most part as driving and looking in the rear view mirror on a road we have never been before does little good .

we have never had all asset classes over valued at the same time before .even when rates were low in the 1930's in real return they were very high since the cpi fell 18%
Title: Re: Portfolio Charts - The Golden Butterfly
Post by: arebelspy on October 15, 2016, 07:35:37 AM
I said predictor, not measure.
Title: Re: Portfolio Charts - The Golden Butterfly
Post by: mathjak107 on October 15, 2016, 07:36:37 AM
i am not even sure i would say that about the short term .
Title: Re: Portfolio Charts - The Golden Butterfly
Post by: arebelspy on October 15, 2016, 07:56:31 AM
i am not even sure i would say that about the short term .

I certainly would.

In the short term, return won't do much for you.  It's decades of compounding that have the big impact.

Volatility can do a lot against you though.

That's why different investments are recommended for shorter term time horizons, more conservative investments.
Title: Re: Portfolio Charts - The Golden Butterfly
Post by: mathjak107 on October 15, 2016, 07:59:20 AM
but as i said the models like the pp and gb which are heavy in to long term bonds and gold have been proving to be more volatile in the short term today. just look at the last 3 months since there was just a scent of inflation and rate increases in the air .

the strong pulls from those assets that are supposed to be in  the opposite direction are teaming up and pulling things down instead of up .

that is my point ,under different circumstances what was less volatile can end up more volatile and we are seeing that now  in any portfolio's that use heavy positions in long term bonds and gold . . 6 or 7% in gains evaporated in 90 days time  from the pp. if you just started in the pp , how would you feel about its short term volatility being down 7%  in 3 months time  ? my conventional model is down less than 2% the last 3 months from where it was .
Title: Re: Portfolio Charts - The Golden Butterfly
Post by: Classical_Liberal on October 15, 2016, 11:10:06 AM
If you had of said this, then I would be in 100% agreement:

"Still you have to look at the down side of this type of allocation. Your greatest chance of success better returns over the long term is probably with a 100% stock allocation."

In the short run, volatility is a better predictor of success.

In the long run, returns are a better predictor of success.

A portfolio with higher returns is likelier to last longer, even with sequence of returns risks.  This is doubly true if you can be flexible about spending (because being flexible about spending early, temporarily, during a crash is much easier than permanently reducing spending forever due to eroded purchasing power due to lower returns).

The idea "well, if returns are bad for a few years, I'll get some part time work or cut back spending", is a repeated sentiment on these forums.  I would agree that it is generally predictable when a portfolio is in trouble and these are workable solutions.  However, it's a solution outside of the portfolio and not necessarily the only one available. 

Sacrificing returns in the first 10-15 years of drawdown to minimize volatility is also a viable solution.  One that does not require working or spending reduction (or softens the need for these things).  Why not choose the best AA for whatever your goals are in a specific period of life?  If someone's "goal" in the beginning of drawdown is to minimize sequence risk, why choose a portfolio with historical and theoretical high volatility?  It seems counter productive.  I can see why someone would argue GB's historical performance may not repeat, but the theory is sound (in my mind).  Then, once sequence risk is overcome, one could move back towards a equity heavier portfolio to combat the next issues, long term compounding inflation and maybe legacy.

I also think Mathjack107 is correct in one account, that it is wise to watch macroeconomic conditions and make adjustments.  Not that anyone can precisely predict the future, rather get a general idea of long term trends.  Put another way, when sitting at the beach I can't predict when the next big wave will hit, but I can watch the tide coming in and slightly adjust my lawn chair to avoid the oncoming water.
Title: Re: Portfolio Charts - The Golden Butterfly
Post by: mathjak107 on October 15, 2016, 12:08:57 PM
i am retired and have toned my portfolio down in volatility  considerably . but i do not use long term treasury's at this stage nor gold as a fixed position . i do own gld  as a trading vehicle for quick profits .

at this stage i would keep neither of those as a permanent part of the portfolio  if i wanted to tame volatility for the reasons i mentioned . going forward they may make the portfolio more volatile and not less volatile if the last 3 months are an indication .

not only will you hinder long term gains permanently but you will do more damage volatility wise in the short term then you hoped for . that could be a double whammy going forward .


Title: Re: Portfolio Charts - The Golden Butterfly
Post by: Classical_Liberal on October 15, 2016, 12:30:56 PM
@ mathjack107  I understand your position on these investments, particularly LTT's as they have little upside and large downside at this moment in time. IMO gold has more upside than LTT. Be cautious on short term predictions. As Europe & Japan has shown, zero or negative yields on treasuries are not out of the question, even if the Fed makes a small rate hike.  Three months is a wave, not the tide.
Title: Re: Portfolio Charts - The Golden Butterfly
Post by: mathjak107 on October 15, 2016, 12:50:58 PM
i agree , there is a remote chance rates can go lower . but if someone is that concerned about their portfolio volatility in the short term it would not make a lot of sense making a heavy bet on the flyer .
Title: Re: Portfolio Charts - The Golden Butterfly
Post by: steveo on October 15, 2016, 05:04:08 PM
If you had of said this, then I would be in 100% agreement:

"Still you have to look at the down side of this type of allocation. Your greatest chance of success better returns over the long term is probably with a 100% stock allocation."

I hear what you are stating but I think those statements are pretty close to the same thing if we are talking a long period of retirement. If you have a long period of retirement which maybe greater than 30 years your greatest chance of success is probably going to align with the greatest chance of maximum returns. Low returns over a long period will get you through shorter time periods but not longer time periods.

Personally I'm a little volatility averse because I want to ensure my portfolio holds up under the short term as well. I have some bonds in my portfolio and I intend to keep them there. I also intend to draw down on bonds at the start of my retirement assuming stocks aren't going gang busters. That is my safety net. At the same time I think that in most situations high equity allocations will give you the greatest chance of success over the longer term.
Title: Re: Portfolio Charts - The Golden Butterfly
Post by: steveo on October 15, 2016, 05:05:23 PM
the problem is that conditions today have turned non correlated assets into correlated ones and not only are they correlated but the volatility in the opposite asset classes you typically need to add ballast  which have plenty of ooomph , now work against you making the supposedly  non volatile portfolio even more volatile .

you take something like the pp with long term bonds and gold  and those volatile investments can add far more swings and volatility when  teaming up  than a conventional stock fund  with  short to intermediate term bond funds will . that is why the pp is now worth less than my conventional model  after it was much ahead .

The problem with this statement is that who knows what the future will bring. It's all guess work. You might be right for the next 2 years and then wrong for the next 30 years.
Title: Re: Portfolio Charts - The Golden Butterfly
Post by: steveo on October 15, 2016, 05:07:04 PM
If you had of said this, then I would be in 100% agreement:

"Still you have to look at the down side of this type of allocation. Your greatest chance of success better returns over the long term is probably with a 100% stock allocation."

In the short run, volatility is a better predictor of success.

In the long run, returns are a better predictor of success.

A portfolio with higher returns is likelier to last longer, even with sequence of returns risks.  This is doubly true if you can be flexible about spending (because being flexible about spending early, temporarily, during a crash is much easier than permanently reducing spending forever due to eroded purchasing power due to lower returns).

Exactly. You make another critical point. If you can be flexible that also gives you added security.
Title: Re: Portfolio Charts - The Golden Butterfly
Post by: steveo on October 15, 2016, 05:10:54 PM
Sacrificing returns in the first 10-15 years of drawdown to minimize volatility is also a viable solution.  One that does not require working or spending reduction (or softens the need for these things).  Why not choose the best AA for whatever your goals are in a specific period of life?  If someone's "goal" in the beginning of drawdown is to minimize sequence risk, why choose a portfolio with historical and theoretical high volatility?  It seems counter productive.

I agree with this premise but I also look at the counter point that arebelspy and I made. I think looking at your downside to a certain degree is smart but I personally wouldn't take it as far as implementing a GB type portfolio. That seems way to extreme if all you are worried about is the first 5 or so years of sequence of return risk.
Title: Re: Portfolio Charts - The Golden Butterfly
Post by: lordmetroid on October 15, 2016, 05:28:55 PM
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?

I live in Sweden and was interested in the Permanent Portfolio so I back-traded that portfolio to see how it worked in Sweden and also in Japan as a case study. Turns out the results are greatly different. USA is a unique market because your currency, the Dollar.

For instance, gold behaves totally different. First of all gold is traded in USD so you have to add your own currency-volatility to the asset and second when their is stock market panic outside of US. It has no effect on gold whatsoever.

Getting your hands on government bonds and bills can also be rather tricky. In Sweden for instance only wholesalers can buy them from the state and they do not sell retail. The only bonds you can get is through mutual funds that have a mix of different kinds of bonds/bills. State, municipal, corporate and mortgages.

So the permanent portfolio isn't so permanent outside of USA.
Title: Re: Portfolio Charts - The Golden Butterfly
Post by: lordmetroid on October 15, 2016, 05:29:33 PM
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 .

To avoid the currency-risk.
Title: Re: Portfolio Charts - The Golden Butterfly
Post by: mathjak107 on October 16, 2016, 04:07:18 AM
the problem is that conditions today have turned non correlated assets into correlated ones and not only are they correlated but the volatility in the opposite asset classes you typically need to add ballast  which have plenty of ooomph , now work against you making the supposedly  non volatile portfolio even more volatile .

you take something like the pp with long term bonds and gold  and those volatile investments can add far more swings and volatility when  teaming up  than a conventional stock fund  with  short to intermediate term bond funds will . that is why the pp is now worth less than my conventional model  after it was much ahead .

The problem with this statement is that who knows what the future will bring. It's all guess work. You might be right for the next 2 years and then wrong for the next 30 years.

actually you have to be pretty right in the beginning. the first 5 years have a big effect and the first 15 determine the entire outcome . after a run up you can pretty much get by with doing anything . but it is the beginning years that need a whole lot of being right more

you just have to much heavy exposure with pp and gb if assets move together as they have been as rates rise  in this new normal . but that is my opinion . i won't do either one today . to much short term  volatility  risk now and to much gain cutting later . i think you would  be   buying the worst outcome's most likely in both situations .
Title: Re: Portfolio Charts - The Golden Butterfly
Post by: Daniel S on October 16, 2016, 06:01:20 AM
Everything does seem expensive right now.

I think what I finally end up going with will only be GB-like rather than the pure original. It will be customized to have a larger share component of at least 50% and smaller in both bonds and gold. I posted what it might look like a few days ago.

Title: Re: Portfolio Charts - The Golden Butterfly
Post by: mathjak107 on October 16, 2016, 06:45:53 AM
i can see doing that .

the usual long term driver is prosperity to put it in harry's terms . so with that potential somewhat dim you don't want to much grabbing your equity's by the collar and yanking them backwards . cutting some of those  volatile other positions that may not move opposite much going forward may be a good thing .

at this point my bond position is very flexible . it has changed much over the last 2 years . it has reduced it's position in total bond funds and corporate bond funds to go in to other more productive segments of the bond market .

high yield bonds was a great proxy for stocks too . my high yield fund has had double digit returns with only half the volatility of the s&p 500. as the party ends there that bond money will find other types of area's in the bond universe .

what i wouldn't do anymore is buy and die with long bonds or just a total bond fund which really has nothing total about it . total bond funds are about 1/2 treasury and gov't bonds as well as are missing so many segments of the  bond market .
Title: Re: Portfolio Charts - The Golden Butterfly
Post by: Daniel S on October 16, 2016, 10:21:23 AM
If you had of said this, then I would be in 100% agreement:

"Still you have to look at the down side of this type of allocation. Your greatest chance of success better returns over the long term is probably with a 100% stock allocation."

I hear what you are stating but I think those statements are pretty close to the same thing if we are talking a long period of retirement. If you have a long period of retirement which maybe greater than 30 years your greatest chance of success is probably going to align with the greatest chance of maximum returns. Low returns over a long period will get you through shorter time periods but not longer time periods.

Personally I'm a little volatility averse because I want to ensure my portfolio holds up under the short term as well. I have some bonds in my portfolio and I intend to keep them there. I also intend to draw down on bonds at the start of my retirement assuming stocks aren't going gang busters. That is my safety net. At the same time I think that in most situations high equity allocations will give you the greatest chance of success over the longer term.

I think success being subjective is the issue here. If the portfolio doesn't meet my objectives then I wouldn't be inclined to call it a success. One of my objectives is to not only minimize the size of draw-downs but also minimize the length of those draw-downs. I'm even more afraid of longer draw-downs than larger ones because it would likely make me lose faith and not stick to the plan. One arguable advantage of GB is that you may find out it isn't working to plan sooner.
Title: Re: Portfolio Charts - The Golden Butterfly
Post by: Daniel S on October 16, 2016, 10:35:35 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?

I live in Sweden and was interested in the Permanent Portfolio so I back-traded that portfolio to see how it worked in Sweden and also in Japan as a case study. Turns out the results are greatly different. USA is a unique market because your currency, the Dollar.

when their is stock market panic outside of US. It has no effect on gold whatsoever.

Getting your hands on government bonds and bills can also be rather tricky. In Sweden for instance only wholesalers can buy them from the state and they do not sell retail. The only bonds you can get is through mutual funds that have a mix of different kinds of bonds/bills. State, municipal, corporate and mortgages.

So the permanent portfolio isn't so permanent outside of USA.

I hadn't considered the lesser effects of gold for non-US stock markets. I'm in Australia and there is a possibility of Australia-only issues ahead due to extremely high private debt and expensive housing. The super-heavy market cap weightings of our banks doesn't help the case for our stock market at all.

There are very limited exchange traded bond options here too.

Do you remember any of the specifics of your back-testing results?

Thanks for the insights.
Title: Re: Portfolio Charts - The Golden Butterfly
Post by: tommie on October 16, 2016, 10:56:03 AM
i still think a diversified mix of equity's and a dynamic bond portfolio that is ready to shift to different kinds of bond funds as the big picture unfolds is the way to go .

If you think you need some sort of 'dynamic allocation' for bonds i wonder how you imagine this 'dynamic' part to work and i also wonder why this dynamic part isn't included for your other asset types.

I previously outlined and talked about something a bit more dynamic; about that a GB-style portfolio isn't the 100% way to go due to the fact that we simply do not know the future and first och foremost do not know the correlations of different assets in the future. It could however be a base for something else and what it highlights can, in my opinion, be of some use (it highlights that diversification and keeping track of negative correlations isn't the most stupid idea in the world).

In my mind it's also a tad insane to justify a strategy based on data that includes the 70's like todays globalized economy resembles the one in the 70's. More current data should of course carry a lot more weight, else one can simply create portfolios that is optimized for historical data. If you check my post history you'll find that i outlined such a strategy as an example of overoptimizing for historical data.

Personally i do this:
1. Broad diversification (<asset class A, B, C, D...>)
2. $UNRATE + MA12 (12 month average)
3. MA10 for all assets if $UNRATE > MA12 @ $UNRATE

As of october 2016 $UNRATE (https://fred.stlouisfed.org/series/UNRATE) is above its MA12 average (unemployment is higher then usual for the current 12m period) so my MA10 is set to on for each asset class. This does not mean that i sell everyting, it's basically just something that raises a flag. It's a basic parent -> child relationship.
Title: Re: Portfolio Charts - The Golden Butterfly
Post by: Radagast on October 16, 2016, 02:15:00 PM
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?

I live in Sweden and was interested in the Permanent Portfolio so I back-traded that portfolio to see how it worked in Sweden and also in Japan as a case study. Turns out the results are greatly different. USA is a unique market because your currency, the Dollar.

when their is stock market panic outside of US. It has no effect on gold whatsoever.

Getting your hands on government bonds and bills can also be rather tricky. In Sweden for instance only wholesalers can buy them from the state and they do not sell retail. The only bonds you can get is through mutual funds that have a mix of different kinds of bonds/bills. State, municipal, corporate and mortgages.

So the permanent portfolio isn't so permanent outside of USA.

I hadn't considered the lesser effects of gold for non-US stock markets. I'm in Australia and there is a possibility of Australia-only issues ahead due to extremely high private debt and expensive housing. The super-heavy market cap weightings of our banks doesn't help the case for our stock market at all.

There are very limited exchange traded bond options here too.

Do you remember any of the specifics of your back-testing results?

Thanks for the insights.
If you are in Australia I'd say that definitely changes things. For one, I would guess you'd want more like 30% Australian / 70% international stocks. For another, gold is relatively big in Australia along with other minerals which behave somewhat similarly to gold. The nation's economic fortune is already tied more to the price of gold than it is in many places, especially the US. This might change the relationships between the asset classes quite a bit, but I couldn't tell you what they should be be as I haven't studied investing in Oz.
Title: Re: Portfolio Charts - The Golden Butterfly
Post by: mathjak107 on October 17, 2016, 01:58:34 AM
i still think a diversified mix of equity's and a dynamic bond portfolio that is ready to shift to different kinds of bond funds as the big picture unfolds is the way to go .

If you think you need some sort of 'dynamic allocation' for bonds i wonder how you imagine this 'dynamic' part to work and i also wonder why this dynamic part isn't included for your other asset types.

I previously outlined and talked about something a bit more dynamic; about that a GB-style portfolio isn't the 100% way to go due to the fact that we simply do not know the future and first och foremost do not know the correlations of different assets in the future. It could however be a base for something else and what it highlights can, in my opinion, be of some use (it highlights that diversification and keeping track of negative correlations isn't the most stupid idea in the world).

In my mind it's also a tad insane to justify a strategy based on data that includes the 70's like todays globalized economy resembles the one in the 70's. More current data should of course carry a lot more weight, else one can simply create portfolios that is optimized for historical data. If you check my post history you'll find that i outlined such a strategy as an example of overoptimizing for historical data.

Personally i do this:
1. Broad diversification (<asset class A, B, C, D...>)
2. $UNRATE + MA12 (12 month average)
3. MA10 for all assets if $UNRATE > MA12 @ $UNRATE

As of october 2016 $UNRATE (https://fred.stlouisfed.org/series/UNRATE) is above its MA12 average (unemployment is higher then usual for the current 12m period) so my MA10 is set to on for each asset class. This does not mean that i sell everyting, it's basically just something that raises a flag. It's a basic parent -> child relationship.

like nudging a  big ship to keep it on course there is no bond fund type that is appropriate in advance anymore like it used to be .  as the bigger picture unfolds different types of bond funds will be swapped out
Title: Re: Portfolio Charts - The Golden Butterfly
Post by: steveo on October 17, 2016, 03:48:03 AM
If you had of said this, then I would be in 100% agreement:

"Still you have to look at the down side of this type of allocation. Your greatest chance of success better returns over the long term is probably with a 100% stock allocation."

I hear what you are stating but I think those statements are pretty close to the same thing if we are talking a long period of retirement. If you have a long period of retirement which maybe greater than 30 years your greatest chance of success is probably going to align with the greatest chance of maximum returns. Low returns over a long period will get you through shorter time periods but not longer time periods.

Personally I'm a little volatility averse because I want to ensure my portfolio holds up under the short term as well. I have some bonds in my portfolio and I intend to keep them there. I also intend to draw down on bonds at the start of my retirement assuming stocks aren't going gang busters. That is my safety net. At the same time I think that in most situations high equity allocations will give you the greatest chance of success over the longer term.

I think success being subjective is the issue here. If the portfolio doesn't meet my objectives then I wouldn't be inclined to call it a success. One of my objectives is to not only minimize the size of draw-downs but also minimize the length of those draw-downs. I'm even more afraid of longer draw-downs than larger ones because it would likely make me lose faith and not stick to the plan. One arguable advantage of GB is that you may find out it isn't working to plan sooner.

I basically completely agree with your comments here however there is an additional point in that if you are going to be drawing down for a long period of time you will need to have good returns over the lifetime of the portfolio. If you get subpar returns but low drawdowns over 50 years your portfolio might go to nothing and then your screwed.

On your other point I'm also Australian and I just follow the 4% rule and invest in Australia. I use Vanguard ETF's outside of super. At the moment I'm 50% Australian stocks, 25% Bonds and 25% International stocks. Super is 90/10 stocks/bonds/cash with 50% of the stock being international. The outside Super stock allocation is what I intend to draw down at the start of FIRE so I support I want some buffer there. I also own my house which to me is a massive buffer.

For international readers most of our stock market is made up of Banks. I think we are more at risk if our financial sector goes bust rather than the resource sector although the resource sector tanking could impact the financial sector.

Personally I'm not that worried. I can't see Australia going bust unless the rest of the world is also screwed. We didn't really get hit by the GFC for instance. We are too freaken small.
Title: Re: Portfolio Charts - The Golden Butterfly
Post by: Daniel S on October 18, 2016, 06:11:05 AM
I just want to get a sanity check about these withdrawal rates:

(http://i.imgur.com/CirKRCs.png)

The PWR shows the worst case maximum withdrawal to end up with at least the same amount as you started with, after adjustment for inflation.

So looking at the chart, with the start test year being 1972 and ending year being 2015, that would mean that in ANY of the years from 1972 and 2005 you could have withdrawn 3.6% and end up 10 years later having at least your same balance after inflation (ignoring tax and fees), but quite possibly you could have withdrawn a lot more if you were lucky to have had a good starting year. That's 33 starting years tested! Quite incredible isn't it? Unless I'm interpreting it incorrectly.

Another observation about this chart is that as you move further to the right and look at longer time periods, these results must be based on less tests. For example for the years ranging from 1972 to 2015 there are only 4 tests possible which have a length of 40 years. They are starting 1972, 1973, 1974 and 1975. So to interpret this chart correctly you cannot assume that the better PWRs are solely because of a longer holding period, because they could just look better because of the more limited number of tests, which didn't necessarily start during a bad year. Is that a fair statement?

I've checked all of the portfolios and GB has the highest 10 year PWR of all of them. Quite a few, including TSM, have a negative 10 year PWR. But it needs to be remembered that this is worst case. No doubt there were specific years that would have given much better than GB's 3.6%. How much would people read into this? Would you consider the 10 year PWR a pretty good comparative measure between the portfolios? I suppose it is may only be a comparison of volatility.
Title: Re: Portfolio Charts - The Golden Butterfly
Post by: AdrianC on October 18, 2016, 06:13:31 AM
I spent a little time today looking at alternative portfolios. I wondered if a portfolio much heavier in stocks could beat the GB over long time periods while making 4% withdrawals. Portfolio 1 below is GB. Portfolio 2 is 80% stock/20% total bond. Portfolio 3 is the same stock but with 10% total bond and 10% gold (for the gold bugs).

Data from https://www.portfoliovisualizer.com/backtest-asset-class-allocation
   
Portfolio 1 – Golden Butterfly
Large Cap Blend   20.00%
Small Cap Value   20.00%
Long Term Treasuries   20.00%
Short Term Treasuries 20.00%
Gold   20.00%

Portfolio 2 – Global 80/20
Large Cap Value   10.00%
Large Cap Blend   10.00%
Mid Cap Blend   10.00%
Small Cap Value   10.00%
REIT   10.00%
Intl Stock Market 10.00%
Intl Small Cap Stocks   10.00%
Emerging Markets 10.00%
Total Bond   20.00%

Portfolio 3 – Global 80/10 Total Bond/10 Gold

$1M, withdraw an initial $40K adjusted for inflation, annual rebalancing.

Real CAGR GB vs Global 80/20 vs 80/10/10

1972-2015   3.35% vs 5.46% vs 6.22%
1986-2015   2.65% vs 6.11% vs 5.80%
1996-2015   1.82% vs 2.97% vs 2.92%
2001-2015   1.61% vs 1.81% vs 2.49%
2006-2015   1.51% vs 0.36% vs 0.91%

The global 80/20 beats the GB in all cases except the last 10 years. Surprisingly, the 80/20 was better even when starting in 1972, though it didn’t begin to power ahead until 1984.
Title: Re: Portfolio Charts - The Golden Butterfly
Post by: AdrianC on October 18, 2016, 06:26:25 AM
I've checked all of the portfolios and GB has the highest 10 year PWR of all of them. Quite a few, including TSM, have a negative 10 year PWR. But it needs to be remembered that this is worst case. No doubt there were specific years that would have given much better than GB's 3.6%. How much would people read into this? Would you consider the 10 year PWR a pretty good comparative measure between the portfolios? I suppose it is may only be a comparison of volatility.

Why is the 10 year PWR so important? Why not 5 year or 15 year? On the 15 year the GB isn't so special.
Title: Re: Portfolio Charts - The Golden Butterfly
Post by: Daniel S on October 18, 2016, 06:39:31 AM

Real CAGR GB vs Global 80/20 vs 80/10/10

1972-2015   3.35% vs 5.46% vs 6.22%
1986-2015   2.65% vs 6.11% vs 5.80%
1996-2015   1.82% vs 2.97% vs 2.92%
2001-2015   1.61% vs 1.81% vs 2.49%
2006-2015   1.51% vs 0.36% vs 0.91%

The global 80/20 beats the GB in all cases except the last 10 years. Surprisingly, the 80/20 was better even when starting in 1972, though it didn’t begin to power ahead until 1984.

Yes, the GB is beaten. But looking at the results between both 80/20 portfolios, I would say that the small gold allocation has a good effect compared to the 80/20 with no gold.
Title: Re: Portfolio Charts - The Golden Butterfly
Post by: Daniel S on October 18, 2016, 06:41:14 AM
I've checked all of the portfolios and GB has the highest 10 year PWR of all of them. Quite a few, including TSM, have a negative 10 year PWR. But it needs to be remembered that this is worst case. No doubt there were specific years that would have given much better than GB's 3.6%. How much would people read into this? Would you consider the 10 year PWR a pretty good comparative measure between the portfolios? I suppose it is may only be a comparison of volatility.

Why is the 10 year PWR so important? Why not 5 year or 15 year? On the 15 year the GB isn't so special.

Because the 10 year is based on a greater number tests than the 15 year. The 5 year would be great to see, but it is not provided.
Title: Re: Portfolio Charts - The Golden Butterfly
Post by: arebelspy on October 18, 2016, 06:42:37 AM
I spent a little time today looking at alternative portfolios. I wondered if a portfolio much heavier in stocks could beat the GB over long time periods while making 4% withdrawals. Portfolio 1 below is GB. Portfolio 2 is 80% stock/20% total bond. Portfolio 3 is the same stock but with 10% total bond and 10% gold (for the gold bugs).

Data from https://www.portfoliovisualizer.com/backtest-asset-class-allocation
   
Portfolio 1 – Golden Butterfly
Large Cap Blend   20.00%
Small Cap Value   20.00%
Long Term Treasuries   20.00%
Short Term Treasuries 20.00%
Gold   20.00%

Portfolio 2 – Global 80/20
Large Cap Value   10.00%
Large Cap Blend   10.00%
Mid Cap Blend   10.00%
Small Cap Value   10.00%
REIT   10.00%
Intl Stock Market 10.00%
Intl Small Cap Stocks   10.00%
Emerging Markets 10.00%
Total Bond   20.00%

Portfolio 3 – Global 80/10 Total Bond/10 Gold

$1M, withdraw an initial $40K adjusted for inflation, annual rebalancing.

Real CAGR GB vs Global 80/20 vs 80/10/10

1972-2015   3.35% vs 5.46% vs 6.22%
1986-2015   2.65% vs 6.11% vs 5.80%
1996-2015   1.82% vs 2.97% vs 2.92%
2001-2015   1.61% vs 1.81% vs 2.49%
2006-2015   1.51% vs 0.36% vs 0.91%

The global 80/20 beats the GB in all cases except the last 10 years. Surprisingly, the 80/20 was better even when starting in 1972, though it didn’t begin to power ahead until 1984.

You are too focused on CAGR.

The trinity study demolished CAGR as the measurement for ER success, due to sequence of returns risk. 

The CAGR may be 7% over a time frame, for example, but if bad returns hit early when you're withdrawing, the portfolio may never recover.  This is why looking at returns in conjunction with withdrawals is super important (e.g. cFIREsim scenarios).

Just CAGR, as you've done, is great for accumulation, when there's no withdrawals (and, in fact, extra volatility is likely good in accumulation).  So heavy stocks in accumulation is almost definitely the way to go, if you can stick with it during down markets and not sell.

But that isn't necessarily true in ER.

I have other issues with the GB, but it having a bit lower CAGR isn't one of them, as the point of it isn't the highest CAGR, but the highest safe withdrawal rate, which takes into account both CAGR and sequence of returns.
Title: Re: Portfolio Charts - The Golden Butterfly
Post by: Daniel S on October 18, 2016, 06:51:44 AM
Imagine a scenario your retirement is 50 years, but the last 10 years of your life just happened to be a very poor 10 years for your portfolio. You are no longer caring that over the long term things will work out great.

Personally, if a portfolio were to provide a worst-case PWR of 3.6% over my entire retirement period I would be be over the moon. (Not that anything is guaranteed, as we know)
Title: Re: Portfolio Charts - The Golden Butterfly
Post by: Daniel S on October 18, 2016, 06:57:12 AM

Why is the 10 year PWR so important? Why not 5 year or 15 year? On the 15 year the GB isn't so special.

Because the 10 year is based on a greater number tests than the 15 year. The 5 year would be great to see, but it is not provided.

Also, the most recent 15 year test would have been the year 2000, whereas the most recent 10 year test would have been 2005. Personally I think there is a case for giving slightly more credence to more recent tests.
Title: Re: Portfolio Charts - The Golden Butterfly
Post by: AdrianC on October 18, 2016, 08:49:54 AM
You are too focused on CAGR.
...

The data I gave included an initial 4% WR indexed for inflation.

The 80/20 *usually* beats the GB while using a 4% SWR.
Title: Re: Portfolio Charts - The Golden Butterfly
Post by: Daniel S on October 18, 2016, 09:52:53 AM
Maybe we could start looking at this from another angle. If the GB gave 3.6% PWR for over 3 decades, what type of scenarios could cause it not to in the future. A bond market crash is one possibility.

P.S. I appreciate all posts being made here :) I can clearly see in my posts I am biased towards the point of view of the retirement years and I am selfishly looking at it from that perspective (for me this means I want lower volatility... and I'm willing to pay for it)
Title: Re: Portfolio Charts - The Golden Butterfly
Post by: Daniel S on October 18, 2016, 11:55:35 AM
Would you consider the 10 year PWR a pretty good comparative measure between the portfolios? I suppose it is may only be a comparison of volatility.

I have other issues with the GB, but it having a bit lower CAGR isn't one of them, as the point of it isn't the highest CAGR, but the highest safe withdrawal rate, which takes into account both CAGR and sequence of returns.

So a low-length worst-case PWR/SWR could actually reflect sequence of returns risk, rather than broader volatility?
Title: Re: Portfolio Charts - The Golden Butterfly
Post by: k9 on October 18, 2016, 03:54:32 PM

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.
But then the guy who went all in on emerging markets made about 11% CAGR ! Who wants to make only 4% when you can earn an amazing 11% per year ?
I'm sarcastic yet a little serious. If you answer this question seriously (and ignore the fact I'm semi-trolling) you'll probably end up with arguments that answer the question "why would one choose GB instead of 60/40 ?" (or any mix of assets, anyway)
Title: Re: Portfolio Charts - The Golden Butterfly
Post by: k9 on October 18, 2016, 03:57:48 PM
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 .
And then, the question is "what event would make you turn away from US stocks, and how would you know you're not just selling at the worst possible moment ?" Were you happy with US market/economy in 2008 ?
Title: Re: Portfolio Charts - The Golden Butterfly
Post by: AdrianC on October 19, 2016, 06:05:09 AM
But then the guy who went all in on emerging markets made about 11% CAGR ! Who wants to make only 4% when you can earn an amazing 11% per year ?
I'm sarcastic yet a little serious. If you answer this question seriously (and ignore the fact I'm semi-trolling) you'll probably end up with arguments that answer the question "why would one choose GB instead of 60/40 ?" (or any mix of assets, anyway)

Please, give us the answer to your question: "why would one choose GB instead of 60/40 ?"

Title: Re: Portfolio Charts - The Golden Butterfly
Post by: k9 on October 19, 2016, 01:59:35 PM
Because one might prefer reduced volatility over a potential better return ? Because there are less "worse case scenarios" (ie a higher SWR) with GB than with 60/40 ?

(Please note that I don't especially consider the GB to be superior per se to any other AA. Both GB and 60/40 have advantages and defaults. I am not implementing the GB myself (nor the 60/40, nor the 100% emerging portfolios).)
Title: Re: Portfolio Charts - The Golden Butterfly
Post by: mathjak107 on October 19, 2016, 05:58:01 PM
we don't know if the gb has a higher swr . it can't be back tested against the specific time frames a swr is based on since gold was not freely traded  before 1975 .

the term safe withdrawal rate is based on 1926,1937,`1965,1966

today the gb is showing more volatility just like the permanent portfolio is than a 60/40 . gold and 30 year Treasury's got pummeled the last 90 days . if this is the new normal as rates rise those two portfolio's may show more volatility while permanently reducing long term gains in comparison because of the hedging . .
Title: Re: Portfolio Charts - The Golden Butterfly
Post by: k9 on October 20, 2016, 02:45:49 AM
Well, no, the term SWR is not based on specific dates. It is based on the worse case scenario for a given period of time (eg all 30-year periods starting from year x). As a matter of fact, the SWR for stock-heavy portfolios was determined on bad periods for stocks, which are the years you mentioned.

You can determine a SWR for asset allocations starting from 1972, as Tyler does in his tools, but those SWR values are rather high as they only include a small timeframe.

Volatility on a 90-day period is totally irrelevant, because on such a period you withdraw very little money.

As for the last part of your message: I agree it can have bad consequences on the GB, precisely because of the hedging. But don't forget it is also somewhat anti-hedged with its SCV component; if stocks skyrocket and LT bonds slowly die, it should be okay. A 20% TSM - 20%SCV - 20%LTT is generally almost functionally equivalent to a 60% TSM, in terms of returns.
Title: Re: Portfolio Charts - The Golden Butterfly
Post by: mathjak107 on October 20, 2016, 02:56:09 AM
nope , the term is based on the worst case scenario's which were if you retired in the years i listed . if you are testing any later time frames than you are not comparing apples to apples .

it is not just picking time frames out of a hat that you think are examples . any guesses at what gold did pre 1975 is just that , a guess and no one knows for sure what would have happened if it traded freely as it does today . sorry i don't accept tylers 1972  comparisons, we had that discussion when he was claiming  the same thing for the permanent portfolio .

don't forget a comparison has to take in to consideration the balance's left over  too , not just the draw rate . while a 4% safe withdrawal rate with a 60/40 mix has a high success rate over 30 years the fact is 90% of the time it left you with more than you started with 30 years prior and 67% more than 2x what you started with ,so it is not just about a daw rate not failing . .

tyler made the claim the pp was capable of a higher draw rate but  he never compared the same time frames nor compared balances left when we had that discussion last year ..

if we eliminated the time frames listed from the equation and started at a later date after 1966 the safe withdrawal rate for a 60/40 mix would be 6.50% and it still would have a considerable balance left  . it is cut back to 3.60% in practice to clear 1965/1966 . but if we forget about the worst case dates and go to 4% , then that  gives you about a 95% success rate ,not 100% .

to have a 100% success rate the gb by comparison would have to clear 1965/1966 and we have no idea what gold would have done .


as michael kitces stated

https://www.kitces.com/blog/what-returns-are-safe-withdrawal-rates-really-based-upon/
Title: Re: Portfolio Charts - The Golden Butterfly
Post by: Tyler on October 20, 2016, 09:24:21 AM
All of this is covered in the withdrawal rates FAQ (https://portfoliocharts.com/withdrawal-rates-faq/). And terminal portfolio values in retirement are studied in the new Retirement Spending (https://portfoliocharts.com/portfolio/retirement-spending/) tool.

Title: Re: Portfolio Charts - The Golden Butterfly
Post by: mathjak107 on October 20, 2016, 11:08:42 AM
i  read it but going back to 1972 does not get the gold estimate any more correct nor does it mean it passed the worst case scenario's either . worst time frames ever were the first 15 years if you retired in 1965/1966  . if we remove that time frame we would be calling it a 6.50% rule .
Title: Re: Portfolio Charts - The Golden Butterfly
Post by: steveo on October 20, 2016, 03:07:05 PM
i  read it but going back to 1972 does not get the gold estimate any more correct nor does it mean it passed the worst case scenario's either . worst time frames ever were the first 15 years if you retired in 1965/1966  . if we remove that time frame we would be calling it a 6.50% rule .

This is one of the reasons I don't like relying on Tyler's site to pick an asset allocation and why I think some people who use it may not realise what they are doing.

The flip side of this is that I don't believe that there is anyway to pick a perfect asset allocation because the data isn't perfect and the future will be different from the past.

If people use Tyler's site to get ideas about asset allocations and just use it as a guide I think that is cool. They shouldn't think because of the past performance of the GB that it will work out that way in the future.
Title: Re: Portfolio Charts - The Golden Butterfly
Post by: mathjak107 on October 20, 2016, 05:38:33 PM
i agree ,it is useful . it just has it's faults when folks try to draw conclusions about safe withdrawal rates and portfolio's heavy in gold . i have seen folks say the permanent portfolio has a higher draw rate and then test from 1975 on  or they forget about the balances left over from a 60/40  . as long as you understand you cannot do safe withdrawal rates without stress testing 1965 and 1966 as starting years or you are not comparing apples to apples
Title: Re: Portfolio Charts - The Golden Butterfly
Post by: Daniel S on October 20, 2016, 06:04:23 PM
In the case of any portfolio with gold, it makes sense to exclude any pre-1970's data back to the early 1930's, doesn't it? It wasn't legal to own gold so you would never choose such a portfolio. If gold ownership were to be banned again, then anybody that has a gold allocation would be forced to choose another portfolio without a gold allocation.

It's interesting that gold had a massive run between 1929 and the year of the ownership ban. This coincided with the 1929 crash. To me it suggests that if gold were not banned, then it is likely an allocation to gold in a portfolio would have had the desired effect throughout the entire 100 past years.

http://www.macrotrends.net/1333/historical-gold-prices-100-year-chart (http://www.macrotrends.net/1333/historical-gold-prices-100-year-chart)
Title: Re: Portfolio Charts - The Golden Butterfly
Post by: arebelspy on October 20, 2016, 06:06:44 PM
In the case of any portfolio with gold, it makes sense to exclude any pre-1970's data back to the early 1930's, doesn't it? It wasn't legal to own gold so you would never choose such a portfolio. If gold ownership were to be banned again, then anybody that has a gold allocation would be forced to choose another portfolio without a gold allocation.

Sure, but then you're also excluding the worst years to retire, so it's difficult/impossible to gauge how good a portfolio with gold would have been then, and you aren't comparing apples to apples.
Title: Re: Portfolio Charts - The Golden Butterfly
Post by: Daniel S on October 20, 2016, 06:31:11 PM
I see it as being not possible to compare apples with apples during the ban years.
Title: Re: Portfolio Charts - The Golden Butterfly
Post by: arebelspy on October 20, 2016, 07:56:54 PM
I see it as being not possible to compare apples with apples during the ban years.

Sure, and that's fine, but then talking about a 4% WR isn't even a valid concept at that point, as without those years, as MJ pointed out, it would be a 6.5% WR (haven't confirmed the math, but assuming it's correct).

We simply don't know how the GB would have performed in the truly bad 30-year timeframes.  We've only seen it in mostly good timeframes.
Title: Re: Portfolio Charts - The Golden Butterfly
Post by: Tyler on October 20, 2016, 09:11:03 PM
Sure, and that's fine, but then talking about a 4% WR isn't even a valid concept at that point, as without those years, as MJ pointed out, it would be a 6.5% WR (haven't confirmed the math, but assuming it's correct).

It's not correct.  The Withdrawal Rates FAQ gives multiple examples (https://portfoliocharts.com/withdrawal-rates-faq/) directly comparing numbers calculated since 1972 to those since 1926 and even 1870 from various retirement studies.  The difference is only about 0.3%.

The quoted 6.5% number is simply the average SWR since 1870 from the previously linked Kitces study (https://www.kitces.com/blog/what-returns-are-safe-withdrawal-rates-really-based-upon/).  But using the average SWR rather than the worst is not the correct fallback when more years of data is not available.  You simply use the worst year you do have access to.  And you can see in the charts Kitces and Pfau independently provide that 1973 wasn't much better for a retiree than 1966.
Title: Re: Portfolio Charts - The Golden Butterfly
Post by: arebelspy on October 21, 2016, 12:28:54 AM
Thanks for that, Tyler. You're absolutely correct.
Title: Re: Portfolio Charts - The Golden Butterfly
Post by: mathjak107 on October 21, 2016, 01:35:18 AM
Sure, and that's fine, but then talking about a 4% WR isn't even a valid concept at that point, as without those years, as MJ pointed out, it would be a 6.5% WR (haven't confirmed the math, but assuming it's correct).

It's not correct.  The Withdrawal Rates FAQ gives multiple examples (https://portfoliocharts.com/withdrawal-rates-faq/) directly comparing numbers calculated since 1972 to those since 1926 and even 1870 from multiple retirement studies.  The difference is only about 0.3%.

The quoted 6.5% number is simply the average SWR since 1870 from the previously linked Kitces study (https://www.kitces.com/blog/what-returns-are-safe-withdrawal-rates-really-based-upon/).  But using the average SWR rather than the worst is not the correct fallback when more years of data is not available.  You simply use the worst year you do have access to.  And you can see in the charts Kitces and Pfau independently provide that 1973 wasn't much better for a retiree than 1966.

i only  agree if the portfolio does not use gold .   you sill do not know what  the wild card  GOLD pre 1975 would have done  .   any predictions about the permanent portfolio  and gb that involves 1965 ,1966 or 1973 are going to be wrong .

i doubt very much when it comes to passing through those specific worst case time frames the the gb had a higher draw rate than a 60/40 mix and balance  . which is the comment i objected to . my point is we just can't tell for sure so that comment about the gb doing that  is false . it can't be accurately known .

the gb with i think 10% gold won't be that far off but something like the pp is so gold heavy it  would totally be off in left field somewhere if you wanted to stress test it for comparison over those worst time frames .

Title: Re: Portfolio Charts - The Golden Butterfly
Post by: k9 on October 21, 2016, 02:24:22 AM
nope , the term is based on the worst case scenario's which were if you retired in the years i listed . if you are testing any later time frames than you are not comparing apples to apples .

it is not just picking time frames out of a hat that you think are examples . any guesses at what gold did pre 1975 is just that , a guess and no one knows for sure what would have happened if it traded freely as it does today . sorry i don't accept tylers 1972  comparisons, we had that discussion when he was claiming  the same thing for the permanent portfolio .

Nowhere in the original trinity study was the SWR ("SAFEMAX") defined as "the rate at which you could deplete your portfolio if you retired on years x, y, z, or w". It was defined as (my wording as I can't find the paper back) "the maximum rate one could use to safely withdraw from his portfolio without depleting it in a given timeframe, no matter what the starting date". The fact that the worse years (those which defined SAFEMAX) were the ones you listed is a result of the study, not a definition.

As for the apples to apples, and thanks to the above definition, nothing forbids you to calculate SWR on smaller timeframes if that's all you've got, to compare different AAs. Now, sure, you cannot compare 1926-present's SWR for a 60/40 with a 1972-present SWR for GB. You have to adapt the timeframes, obviously, and be aware the longer the timeframe, the safest the SAFEMAX.

Quote
don't forget a comparison has to take in to consideration the balance's left over  too , not just the draw rate .
Once again, you're wrong. The SWR does not care about balance left. But I agree that has to be taken into consideration when looking at the whole picture. The Trinity study is just that, an academic study, and it's been stated many times that nobody does actually that : spend x% (inflation adjusted) of the original value of the portfolio, no matter what, and consider that dying with $0 left is as much a success as dying with millions.
Title: Re: Portfolio Charts - The Golden Butterfly
Post by: mathjak107 on October 21, 2016, 03:05:42 AM
the SAFEMAX withdrawal rate is the highest sustainable withdrawal rate in the worst-case historical scenario. that would be 1965/1966 as a starting point . as kitces calculated not only is it 1965/1966 as a starting point but it is specifically the first 15 years of that period that make it the absolute worst case and the reference point that safemax had to be brought down to to clear ..
Title: Re: Portfolio Charts - The Golden Butterfly
Post by: mathjak107 on October 21, 2016, 03:09:29 AM
here are your worst case scenario's . there are no worse time frames .





suppose you were so unlucky to retire in one of those worst time framess ,what would your 30 year results look like :

1907 stocks returned 7.77% -- bonds 4.250-- rebalanced portfolio 7.02- - inflation 1.64--

1929 stocks 8.19% - - bonds 1.74%-- rebalanced portfolio 6.28-- inflation 1.69--

1937 stocks 10.12 - - bonds 2.13 - rebalanced portfolio -- 7.24 inflation-- 2.82

1966 stocks 10.23 - -bonds 7.85 -- rebalanced portfolio 9.56- - inflation 5.38

for comparison the 140 year average's were:

stocks 8.39--bonds 2.85%--rebalanced portfolio 6.17% inflation 2.23%

so what made those time frames the worst ? what made them the worst is the fact in every single retirement time frame the outcome of that 30 year period was determined not by what happened over the 30 years but the entire outcome was decided in the first 15 years.

so lets look at the first 15 years in those time frames determined to be the worst we ever had.

1907--- stocks minus 1.47%---- bonds minus .39%-- rebalanced minus .70% ---inflation 1.64%

1929---stocks 1.07%---bonds 1.79%---rebalanced 2.29%--inflation 1.69%

1937---stocks -- 3.45%---bonds minus 3.07%-- rebalanced 1.23%--inflation 2.82%

1966-stocks minus .13%--bonds 1.08%--rebalanced .64%-- inflation 5.38%

it is those 15 year horrible time frames that the 4% safe withdrawal rate was born out of since you had to reduce from what could have been 6.50% as a swr down to just 4% to get through those worst of times.


so what it boils down to is any time you fall below a 2% real return average over the first 15 years you run the danger of 4% not holding. but even a 1/2% cut in spending will make you whole again over the next 15 years or longer.

Title: Re: Portfolio Charts - The Golden Butterfly
Post by: Daniel S on October 21, 2016, 04:24:23 AM
As long as a person is aware that using Tyler's tools don't cover periods prior to 1972, I don't see what the problem is. If they want to go back further in history, they simply need to go elsewhere. If they are assessing any portfolio with a gold allocation between the early 1930's and 1971, then it would be highly advisable to acknowledge that gold was not traded freely on the markets and ownership was restricted during these years.

I myself am looking for an asset allocation today, when gold ownership is not restricted. I'm more than happy to exclude the periods of history when this was not the case. I have a smaller subset of data for back-testing and that's ok with me. I don't consider 43 years (1972 - 2015) a small time period anyway.
Title: Re: Portfolio Charts - The Golden Butterfly
Post by: mathjak107 on October 21, 2016, 04:28:58 AM
i agree 100% with you . my only objection was the claim that the gb had a higher swr rate than a 60/40 mix and by definition of the worst case scenario's that claim can not be confirmed . it holds even more truer for the pp with it's big allocation to gold .

personally i think going forward will be nothing like the last 35 years . we have only known rates to go down except for a few short term speed bumps .

we never had bond rates with such low real returns and high stock valuations before .

i think anything with long term bonds will be nothing like the back testing of the past . sure there is a chance we can see rates go negative but odds are as the last 90 days have shown us we are more inclined to go up then down.

except for some  short term speed bumps in the road we have been in a bond bull market for 35 years .

i think any back testing that involves back testing with long term bonds will be very different going forward .

i am a big believer that like steering a big ship we will have to nudge our portfolio's to keep them on course and the old buy and die with some rebalancing may be a poor way to go . better to adjust as things unfold to fit the big picture . i have been doing just that for 30 years now . but i think going forward for at least the next 10 years that may be the order of battle .

i use assets and investments when it is their time in the sun and when the big picture changes on to different types of funds .


unconventional  times may call for unconventional investing  .

when i think back to how many things looked like a given 40 years ago but were not even close to playing out that way .

who ever thought we would be paying less income taxes and 100k would soon be in the 15% bracket , or when inflation was soaring that 40 years later deflation is a bigger issue . the 5% passbook savings account was a joke . who ever thought we would sell our kids to get 5% risk free . 40 years later .

the bottom line is be careful looking in the rear view mirror when driving . back testing and thinking you are safe today can be pretty wrong .  especially when you have never been on this road before .

even back in the 1930's when rates were low ,  in real return they were quite high . the cpi  plunged 18% so even 2% was a huge return .

not the case today so we have no history to really go by in the past .

Title: Re: Portfolio Charts - The Golden Butterfly
Post by: Daniel S on October 21, 2016, 05:43:15 AM
I'm not too clued up on bonds, but would diversifying bond allocation internationally be likely to help? It looks like emerging market interest rates are still comparatively high.

http://www.global-rates.com/interest-rates/central-banks/central-banks.aspx
Title: Re: Portfolio Charts - The Golden Butterfly
Post by: AdrianC on October 21, 2016, 06:37:26 AM
Please, give us the answer to your question: "why would one choose GB instead of 60/40 ?"

Because one might prefer reduced volatility over a potential better return ?

Fair enough.

Because there are less "worse case scenarios" (ie a higher SWR) with GB than with 60/40 ?

Only if we include the 1970's, when gold went up over 1,000% (125% in 1979 alone).

Since 1980:
GB SWR 6.4% $0 remaining
60/40 SWR 8.5% $0 remaining

Last 30 years:
GB SWR 6.9% $0 remaining
60/40 SWR 8.5% $0 remaining
Title: Re: Portfolio Charts - The Golden Butterfly
Post by: mathjak107 on October 21, 2016, 07:10:54 AM
pretty much the results i would expect . not the gb out performing in swr .   thanks for the math .
Title: Re: Portfolio Charts - The Golden Butterfly
Post by: Daniel S on October 21, 2016, 07:51:07 AM
Please, give us the answer to your question: "why would one choose GB instead of 60/40 ?"

Because one might prefer reduced volatility over a potential better return ?

Fair enough.

Because there are less "worse case scenarios" (ie a higher SWR) with GB than with 60/40 ?

Only if we include the 1970's, when gold went up over 1,000% (125% in 1979 alone).

Since 1980:
GB SWR 6.4% $0 remaining
60/40 SWR 8.5% $0 remaining

Last 30 years:
GB SWR 6.9% $0 remaining
60/40 SWR 8.5% $0 remaining

1980 scenario:

This back-test (http://tinyurl.com/jz37y65) shows a large amount left over for both GB and 60/40 with a withdrawal rate of 6.4%, although it does show 60/40 having a considerably higher end balance.

This back-test (https://www.portfoliovisualizer.com/backtest-asset-class-allocation?s=y&mode=2&startYear=1980&endYear=2015&initialAmount=1000000&annualOperation=3&annualAdjustment=0&inflationAdjusted=true&annualPercentage=6.4&rebalanceType=1&portfolio1=Custom&portfolio2=Custom&portfolio3=Custom&TotalStockMarket1=60&TotalStockMarket2=20&SmallCapValue2=20&TotalBond1=40&LongTermBond2=20&TwoYearTBills2=20&Gold2=20) shows a lesser, but still very significant amount left over for both GB and 60/40 with a withdrawal rate of 8.5%, although again it does show 60/40 having a considerably higher end balance.

Last 30 Year scenario: Same situation i.e. significant money left for both percentage withdrawals.

You are probably right that SWR is better for 60/40 over the time periods you have mentioned, but I'm not sure on those figures.

(Edited to correct global bonds to total bonds)
Title: Re: Portfolio Charts - The Golden Butterfly
Post by: mathjak107 on October 21, 2016, 07:55:40 AM
of course from this point on ,as i said things can be very different . as rates rise a portfolio heavy in long term treasury's vs a 60/40 mix with combo of short term and intermediate bonds will likely see very different results . especially if stocks move ahead but  in the single digits .

i see what happens to the permanent portfolio i track . every time stocks get traction the powerful pull from bonds and gold suck the portfolio  right back down again

if we turned the corner on bond rates then all that history on these hedged portfolio's will go out the window .

right now the supposed low volatility permanent portfolio is seeing greater swings than conventional models .
Title: Re: Portfolio Charts - The Golden Butterfly
Post by: Daniel S on October 21, 2016, 08:14:50 AM
Sorry @AdrianC, I've just realized that you are talking about worst case for any start year rather than those specific times being the start years.

But I still can't seem to find a year where balance would end at zero for those percentages, using these back-tests.
Title: Re: Portfolio Charts - The Golden Butterfly
Post by: Daniel S on October 21, 2016, 09:47:26 AM
I've checked all of the portfolios and GB has the highest 10 year PWR of all of them. Quite a few, including TSM, have a negative 10 year PWR. But it needs to be remembered that this is worst case. No doubt there were specific years that would have given much better than GB's 3.6%. How much would people read into this? Would you consider the 10 year PWR a pretty good comparative measure between the portfolios? I suppose it is may only be a comparison of volatility.

Why is the 10 year PWR so important? Why not 5 year or 15 year? On the 15 year the GB isn't so special.

Because the 10 year is based on a greater number tests than the 15 year. The 5 year would be great to see, but it is not provided.

This got me interested in what the 5 year PWR might look like and I think the Retirement Spending (https://portfoliocharts.com/portfolio/retirement-spending/) calculator might be able to answer the question.

I'm pretty sure the lower band on the Range of Account Balances show the worst case scenario for the number of years, for the withdrawal rate entered. So I played around with the percentages until the 5 year coincided with the worst case balance returning to the starting balance of $1M (marked with the red arrow). I think the percentage when this becomes the case is the equivalent of the PWR.

Assuming that I'm correctly interpreting this calculator's results then GB has a 5 year PWR around 2.4% and the 5 year point on these charts would be based on 38 possible start years (1972 - 2010). This is definitely not an exact method of determining the 5 year PWR, but I think it gives a good indication.

(http://i.imgur.com/ltv3njY.png)

(http://i.imgur.com/yrhJTfv.png)
Title: Re: Portfolio Charts - The Golden Butterfly
Post by: Tyler on October 21, 2016, 10:11:16 AM
Assuming that I'm correctly interpreting this calculator's results then GB has a 5 year PWR around 2.4% and the 5 year point on these charts would be based on 38 possible start years (1972 - 2010). This is definitely not an exact method of determining the 5 year PWR, but I think it gives a good indication.

It's technically 40 possible start years (1972 - 2011, and '72 counts as year 1 not 0), but your interpretation of the charts is correct.  :)
Title: Re: Portfolio Charts - The Golden Butterfly
Post by: Classical_Liberal on October 21, 2016, 12:47:39 PM
Because the 10 year is based on a greater number tests than the 15 year. The 5 year would be great to see, but it is not provided.

This is an excellent look!  Not only does it have more data, the reduction in shorter term volatility shows exactly why the GB shines in early drawdown!

As mathjak107 continually points out, portfolios fail because of poor performance early on. Each successive year in drawdown sequence risk is reduced.  With only 20 years left to fund, one doesn't even need positive real returns for 4% WR success, the only real threat is runaway inflation.  This is why I repeatedly go back to goals.  The portfolio should evolve overtime. If goal is only portfolio success,  IMO the only legit argument against GB in early drawdown is the missing data & that can't be changed.  Either believe the data we do have, or dont.  If the goal is "how to die the richest no matter what", obviously there are better choices.

Any argument that "this time it's different" (ie high PE/10 and ZIRP) is only debatable in theory.  I get the theory, if I were to FIRE tomorrow it would be of concern.  However, this would only serve to further fuel my desire to add alternative asset classes that have better potential to not underperform and/or underperform, but with reduced volatility.  GB does this with gold (different class) and cash/bonds (reduced volatility).
Title: Re: Portfolio Charts - The Golden Butterfly
Post by: mathjak107 on October 21, 2016, 12:56:24 PM
well like i said if the last 3 months are any indication of what is going to be as rates rise and we mimic a tight money situation  even though we are not in one look out for the volatility in the GB AND PP .

with gold and long term bonds pulling down in the same direction you will likely see a volatility range far exceeding a 60/40 mix  . especially if the 60/40 mix is a dynamic mix like i use and all the bonds are not in very interest sensitive bond funds

Title: Re: Portfolio Charts - The Golden Butterfly
Post by: steveo on October 21, 2016, 07:06:56 PM
Because the 10 year is based on a greater number tests than the 15 year. The 5 year would be great to see, but it is not provided.

This is an excellent look!  Not only does it have more data, the reduction in shorter term volatility shows exactly why the GB shines in early drawdown!

As mathjak107 continually points out, portfolios fail because of poor performance early on. Each successive year in drawdown sequence risk is reduced.  With only 20 years left to fund, one doesn't even need positive real returns for 4% WR success, the only real threat is runaway inflation.  This is why I repeatedly go back to goals.  The portfolio should evolve overtime. If goal is only portfolio success,  IMO the only legit argument against GB in early drawdown is the missing data & that can't be changed.  Either believe the data we do have, or dont.  If the goal is "how to die the richest no matter what", obviously there are better choices.

Any argument that "this time it's different" (ie high PE/10 and ZIRP) is only debatable in theory.  I get the theory, if I were to FIRE tomorrow it would be of concern.  However, this would only serve to further fuel my desire to add alternative asset classes that have better potential to not underperform and/or underperform, but with reduced volatility.  GB does this with gold (different class) and cash/bonds (reduced volatility).

The problem with 30 year periods between 1972 and 2010 is that there aren't a lot of them is there. I assume that once you get past 1980 then it's not really considering a 30 year period but it still calls it a success.

Looking at shorter time periods makes things a little more interesting because you get more time periods to test.

I think a key point to consider for all of us is what do we want when it comes to portfolio returns. For me personally I couldn't care less about becoming the richest person that I can be. I'm much more interested in my success in remaining free of paid work that I don't want to do.

So having some defensive assets or a holding uncorrelated assets actually becomes fairly important for someone like myself.
Title: Re: Portfolio Charts - The Golden Butterfly
Post by: mathjak107 on October 22, 2016, 01:40:40 AM
when it comes down to it , all we need is 1 period to stress test with . 1966 .  if your portfolio passed starting in 1966 you are good to go . that is the worst time frame to date .

that is our hurricane sandy as a new yorker would say . if i built my house to standards that withstood sandy odds are pretty good i am at least starting out with a house that has a reasonably good chance of survival . it does not mean we can't have a more powerful storm one day . we can , but odds are pretty low .

it does not matter if we have a thousand more sample dates if they are not worse  . pass 1966 and you are at 100% .

to stand up to 4% draw rates you need at least a 2% real return average the first 15 years .  that is easy enough to monitor as you go go towards the 15 year mark . if 5 years in you are under that ,there is your red flag you need to react .
Title: Re: Portfolio Charts - The Golden Butterfly
Post by: steveo on October 22, 2016, 05:42:15 PM
when it comes down to it , all we need is 1 period to stress test with . 1966 .  if your portfolio passed starting in 1966 you are good to go . that is the worst time frame to date .

I don't see the point in this. It's catering for the very worst scenario which means in the vast majority of situations you will be working too long. Is that what you want to do. If things look bad you could just return to work in the very very rare situation where you retire in the worst possible year.

to stand up to 4% draw rates you need at least a 2% real return average the first 15 years .  that is easy enough to monitor as you go go towards the 15 year mark . if 5 years in you are under that ,there is your red flag you need to react .

This would be a good thing to monitor but it's really what most people I assume are going to do. If things are looking bad you can react though in so many ways. Spend less, go back to work, downsize your house etc.

Title: Re: Portfolio Charts - The Golden Butterfly
Post by: mathjak107 on October 22, 2016, 06:32:37 PM
how long you want to work is up to you as well as the draw rate you are comfortable with .  i went for 100% success rate but i didn't chose to work longer , i sniped the budget by 1/2% and will play it by ear .

if we do better then worst case i got some nice raises coming over time

but i will leave you with this :

if you think working longer at 40 or 50 is miserable or finding a job at 40-50 is difficult , try it at 80  if you have to .  just something to keep in the back of your mind when you start reducing the security blanket  for the awe craps in life .
Title: Re: Portfolio Charts - The Golden Butterfly
Post by: Frs1661 on October 23, 2016, 06:08:14 AM


when it comes down to it , all we need is 1 period to stress test with . 1966 .  if your portfolio passed starting in 1966 you are good to go . that is the worst time frame to date .

... {snip}

Just because 1966 was the worst start year for a 60/40 equity/bonds portfolio doesn't mean it would be the worst for alternative GB. For example, the worst start year for a 50/50 cash/bonds portfolio was 1973.

Nothing magic about 1966 once you add other asset classes. No reason a stock/bonds portfolio couldn't see conditions worse than 1966 in the future either.

Back testing is just a guide anyway. There are less data available for back testing the GB and that's something you have live with if you choose to use it. No matter the portfolio we choose we will all likely have to be a little flexible at some point to make it work, and that's OK.
Title: Re: Portfolio Charts - The Golden Butterfly
Post by: mathjak107 on October 23, 2016, 07:04:11 AM
i still see the worst start year for 50/50 as 1966 because all the damage is done in the first 15 years in every worst case scenario time frame . you can not look at 30 or 40 year results . they were all not bad  going out longer but the failure's were in the first 15 years when assets were so depleted that even having the greatest bull market in history in the 1966 time frame could not salvage it .

so the bottom line is we do not know how other assets would have stress tested in those early years , especially gold   . by the time 1973 came that 50/50 mix if you retired in 1966 was very depleted
Title: Re: Portfolio Charts - The Golden Butterfly
Post by: Classical_Liberal on October 23, 2016, 09:13:38 AM
if you think working longer at 40 or 50 is miserable or finding a job at 40-50 is difficult , try it at 80  if you have to .  just something to keep in the back of your mind when you start reducing the security blanket  for the awe craps in life .

to stand up to 4% draw rates you need at least a 2% real return average the first 15 years .  that is easy enough to monitor as you go go towards the 15 year mark . if 5 years in you are under that ,there is your red flag you need to react .

Given that the vast majority of people on this forum plan to retire in their 30's and 40's, how do you reconcile this fear of finding work at 80 given your often repeated sentiment that portfolio failure is evident in the first 15 years?
Title: Re: Portfolio Charts - The Golden Butterfly
Post by: mathjak107 on October 23, 2016, 10:59:15 AM
at a 4% draw rate or close  there was barely enough money left in every worst case scenario to sustain even 30 years  of life .if your retirement is 40 years or more and you cut your draw you may make it  .   but you could also find yourself in to your late 70's or early 80's  under those same conditions and running low on dough and have to deal with that . if you got a fair amount of discretionary income you can cut back , but if everything is a need and not a want you may be in trouble and need to work again ..

so that is why i would only stress test against those acknowledged worst case time frames .

it is all going to be about your draw rate and how well a duplication of time frames like 1965 ,1966  pan out
Title: Re: Portfolio Charts - The Golden Butterfly
Post by: Classical_Liberal on October 23, 2016, 11:23:06 AM
@ mathjack107

That still makes no sense.  If a 40 year old retiree sees at 50 or 55 a worse case scenario playing out, I doubt that person is going to think, "Well, this sucks!  Walmart greeter and cat food at 70, I guess".  More likely that person will correct the situation in one of a multitude of ways, choosing whichever means is most pleasent to that individual.  OTOH, if the scenario is within two standard deviations of mean, there is no problem and discussions of AA will be virtually meaningless.

Either way, no ones looking for a job at 80.  That's just fear mongering.

Forgive my off topic rant.

Title: Re: Portfolio Charts - The Golden Butterfly
Post by: mathjak107 on October 23, 2016, 11:32:13 AM
regardless , if you end up having to go back to work down the road in   most cases it is going to get harder and harder both to work and or find work the older you are when you realize you have to do it . ..

unless you have the discretionary income to cut back  you will have few options .


not everyone who retires that young has that much slack in the plan  built in so it can be easy to hit trouble if you have no room to start slashing things ..
Title: Re: Portfolio Charts - The Golden Butterfly
Post by: lordmetroid on October 23, 2016, 05:06:27 PM
Retirement is for wussies. I will never retire!
However, having FU-money and paid off mortgage and then some saving will allow me to do awesome adventures.
Title: Re: Portfolio Charts - The Golden Butterfly
Post by: AdrianC on October 24, 2016, 06:02:18 AM
Sorry @AdrianC, I've just realized that you are talking about worst case for any start year rather than those specific times being the start years.

But I still can't seem to find a year where balance would end at zero for those percentages, using these back-tests.

I was talking about those specific start years (1980 & 1986). I didn't do every year from 1980 onwards. Would be an interesting exercise, though.

You had PorfolioVisuallizer set for "Withdraw fixed percentage". You're drawing 6.4% of portfolio balance each year. If you look at the annual returns tab you'll see in the final year, 60/40 withdraws $209,350 and GB withdraws $134,514. Not apples to apples.

I'm using "Withdraw fixed amount" adjusted for inflation, withdrawing an initial $64,000. This is the usual method for SWR.

For 1980-2015:
6.4% SWR
Final year withdrawal is $197,365.
Year end balances are: 60/40 $8,286,066, GB $0.
60/40 could support a higher SWR (8.5%).

(No doubt in my mind that these SWRs will not be seen in the next 30 years. Plan accordingly.)
Title: Re: Portfolio Charts - The Golden Butterfly
Post by: effigy98 on October 24, 2016, 01:01:54 PM
Every article I read spells doom and gloom for LTT. Nobody likes gold, so I try to kind of ignore the hate around gold as I do not see a good alternative for this wildcard asset and why would banks hold so much of it if it did not matter??

So the question for LTT, is there an alternative for this asset class in a rising interest rate environment that will cover deflation? Is cash just better (or safer)? Or should we just stick with LTT if we believe in the GB?
Title: Re: Portfolio Charts - The Golden Butterfly
Post by: mathjak107 on October 24, 2016, 01:14:54 PM
why  not stay dynamic and roll with the bigger picture . it isn't like you have to marry an asset before it is close to time . sure you may miss a bit of the gains early on  but if you are wrong about it being a trend you will be in better shape  . right now it appears the trend will be up in rates . no need to act yet and sell bonds , especially interest rate sensitive ones but the red flag should be up in my opinion
Title: Re: Portfolio Charts - The Golden Butterfly
Post by: Daniel S on October 25, 2016, 12:43:08 AM
Sorry @AdrianC, I've just realized that you are talking about worst case for any start year rather than those specific times being the start years.

But I still can't seem to find a year where balance would end at zero for those percentages, using these back-tests.

I was talking about those specific start years (1980 & 1986). I didn't do every year from 1980 onwards. Would be an interesting exercise, though.

You had PorfolioVisuallizer set for "Withdraw fixed percentage". You're drawing 6.4% of portfolio balance each year. If you look at the annual returns tab you'll see in the final year, 60/40 withdraws $209,350 and GB withdraws $134,514. Not apples to apples.

I'm using "Withdraw fixed amount" adjusted for inflation, withdrawing an initial $64,000. This is the usual method for SWR.

For 1980-2015:
6.4% SWR
Final year withdrawal is $197,365.
Year end balances are: 60/40 $8,286,066, GB $0.
60/40 could support a higher SWR (8.5%).

(No doubt in my mind that these SWRs will not be seen in the next 30 years. Plan accordingly.)

Yep, that's where I went wrong. But there are other periods where GB had a higher SWR:

2000-2015
GB: 9.4% Link (https://www.portfoliovisualizer.com/backtest-asset-class-allocation?s=y&mode=2&startYear=2000&endYear=2015&initialAmount=1000000&annualOperation=2&annualAdjustment=94000&inflationAdjusted=true&annualPercentage=6.4&rebalanceType=1&portfolio1=Custom&portfolio2=Custom&portfolio3=Custom&TotalStockMarket2=20&SmallCapValue2=20&LongTermBond2=20&TwoYearTBills2=20&Gold2=20)
60/40: 6.8% Link (https://www.portfoliovisualizer.com/backtest-asset-class-allocation?s=y&mode=2&startYear=2000&endYear=2015&initialAmount=1000000&annualOperation=2&annualAdjustment=68000&inflationAdjusted=true&annualPercentage=6.4&rebalanceType=1&portfolio1=Custom&portfolio2=Custom&portfolio3=Custom&TotalStockMarket1=60&TotalStockMarket2=20&SmallCapValue2=20&TotalBond1=40&LongTermBond2=20&TwoYearTBills2=20&Gold2=20)

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.
Title: Re: Portfolio Charts - The Golden Butterfly
Post by: mathjak107 on October 25, 2016, 02:31:33 AM
it is  really an extended down turn not in tight money where the pp or gb may do better . even a bad drop like 2008 , which was short lived would not do as well for the gb over a 60/40 .

a modest extended down turn is harmful . a v-shaped drop likely a non event . 2008 to a retiree who just retired is a non event in the scheme of things .

all in all you would really be betting against the house counting on the gb to do better , especially if rates go up and that is the reason stocks lag .

when it gets down to singling out a time frame to have a particular asset or portfolio shine why not just forget everything else and show 30 year treasury bonds for 2000-2015  for that matter .  it beat them all .
Title: Re: Portfolio Charts - The Golden Butterfly
Post by: effigy98 on October 25, 2016, 09:23:49 AM
During rising interest rates from 77-81 the PP (similar) did better than 60/40. I see a lot of articles arguing against 60/40 in a rising interest rate environment as well. Maybe everyone is just pessimistic.

http://seekingalpha.com/article/1546002-the-permanent-portfolio-during-rising-interest-rates-heres-what-happens
Title: Re: Portfolio Charts - The Golden Butterfly
Post by: mathjak107 on October 25, 2016, 09:31:54 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 .
Title: Re: Portfolio Charts - The Golden Butterfly
Post by: effigy98 on October 25, 2016, 09:39:28 AM
3 months is very short term, plus if you re-balanced after the drop of brexit not down by much. I like to re-balance after big swings especially with fidelity commission free trades. I have multiple portfolios including GB and 60/40. They are still pretty close to each other in total gains/loss this year.
Title: Re: Portfolio Charts - The Golden Butterfly
Post by: mathjak107 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 .

Title: Re: Portfolio Charts - The Golden Butterfly
Post by: Tyler 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%
Title: Re: Portfolio Charts - The Golden Butterfly
Post by: mathjak107 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 ,.



Title: Re: Portfolio Charts - The Golden Butterfly
Post by: arebelspy 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.
Title: Re: Portfolio Charts - The Golden Butterfly
Post by: AdrianC 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
Title: Re: Portfolio Charts - The Golden Butterfly
Post by: arebelspy 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.
Title: Re: Portfolio Charts - The Golden Butterfly
Post by: AlmstRtrd 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
Title: Re: Portfolio Charts - The Golden Butterfly
Post by: arebelspy 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.  :)
Title: Re: Portfolio Charts - The Golden Butterfly
Post by: Daniel S 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.
Title: Re: Portfolio Charts - The Golden Butterfly
Post by: AlmstRtrd 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?
Title: Re: Portfolio Charts - The Golden Butterfly
Post by: mathjak107 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 .
Title: Re: Portfolio Charts - The Golden Butterfly
Post by: AdrianC 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.)"






Title: Re: Portfolio Charts - The Golden Butterfly
Post by: mathjak107 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
Title: Re: Portfolio Charts - The Golden Butterfly
Post by: AdrianC 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
Title: Re: Portfolio Charts - The Golden Butterfly
Post by: AdrianC 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.
Title: Re: Portfolio Charts - The Golden Butterfly
Post by: mathjak107 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 .
Title: Re: Portfolio Charts - The Golden Butterfly
Post by: Daniel S 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.
Title: Re: Portfolio Charts - The Golden Butterfly
Post by: Daniel S 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.
Title: Re: Portfolio Charts - The Golden Butterfly
Post by: AdrianC 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.
Title: Re: Portfolio Charts - The Golden Butterfly
Post by: mathjak107 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  . .
Title: Re: Portfolio Charts - The Golden Butterfly
Post by: k9 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.
Title: Re: Portfolio Charts - The Golden Butterfly
Post by: Tyler 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.
Title: Re: Portfolio Charts - The Golden Butterfly
Post by: Bicycle_B 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.
Title: Re: Portfolio Charts - The Golden Butterfly
Post by: robartsd 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 (http://portfoliocharts.com).
Title: Re: Portfolio Charts - The Golden Butterfly
Post by: arebelspy 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...

;)
Title: Re: Portfolio Charts - The Golden Butterfly
Post by: Classical_Liberal 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.
Title: Re: Portfolio Charts - The Golden Butterfly
Post by: Tyler 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. 
Title: Re: Portfolio Charts - The Golden Butterfly
Post by: Monkey Uncle 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.
Title: Re: Portfolio Charts - The Golden Butterfly
Post by: mathjak107 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 ..


(https://photos.smugmug.com/photos/i-SSMXJ5L/0/O/i-SSMXJ5L.jpg)
Title: Re: Portfolio Charts - The Golden Butterfly
Post by: Daniel S 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.
Title: Re: Portfolio Charts - The Golden Butterfly
Post by: mathjak107 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 ..

 
Title: Re: Portfolio Charts - The Golden Butterfly
Post by: Monkey Uncle 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.
Title: Re: Portfolio Charts - The Golden Butterfly
Post by: mathjak107 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 .

Title: Re: Portfolio Charts - The Golden Butterfly
Post by: Monkey Uncle 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.
Title: Re: Portfolio Charts - The Golden Butterfly
Post by: mathjak107 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

(https://photos.smugmug.com/photos/i-cjrvftJ/0/O/i-cjrvftJ.jpg)
Title: Re: Portfolio Charts - The Golden Butterfly
Post by: Monkey Uncle 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

(https://photos.smugmug.com/photos/i-cjrvftJ/0/O/i-cjrvftJ.jpg)

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.
Title: Re: Portfolio Charts - The Golden Butterfly
Post by: mathjak107 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 .
Title: Re: Portfolio Charts - The Golden Butterfly
Post by: Monkey Uncle 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.
Title: Re: Portfolio Charts - The Golden Butterfly
Post by: steveo 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.
Title: Re: Portfolio Charts - The Golden Butterfly
Post by: k9 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?
Title: Re: Portfolio Charts - The Golden Butterfly
Post by: mathjak107 on October 31, 2016, 01:37:52 PM
really , well double check the results yourself using the same investments .


(https://photos.smugmug.com/photos/i-WpkXRpT/0/O/i-WpkXRpT.png)

(https://photos.smugmug.com/photos/i-FbsN3LW/0/O/i-FbsN3LW.png)


http://awealthofcommonsense.com/2014/04/whats-worst-10-year-return-5050-stockbond-portfolio/
Title: Re: Portfolio Charts - The Golden Butterfly
Post by: arebelspy 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/ (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.
Title: Re: Portfolio Charts - The Golden Butterfly
Post by: mathjak107 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 .
Title: Re: Portfolio Charts - The Golden Butterfly
Post by: arebelspy 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.
Title: Re: Portfolio Charts - The Golden Butterfly
Post by: MustacheAndaHalf 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?
Title: Re: Portfolio Charts - The Golden Butterfly
Post by: mathjak107 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

Title: Re: Portfolio Charts - The Golden Butterfly
Post by: k9 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.
Title: Re: Portfolio Charts - The Golden Butterfly
Post by: arebelspy 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.
Title: Re: Portfolio Charts - The Golden Butterfly
Post by: Radagast 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.
Title: Re: Portfolio Charts - The Golden Butterfly
Post by: Retire-Canada 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. :)
Title: Re: Portfolio Charts - The Golden Butterfly
Post by: Kevin K. on November 26, 2016, 09:00:54 AM
Maybe I'm wrong, but I get the impression that a fair number of those commenting here haven't really spent much time digesting the info on Tyler's "Portfolio Charts" web site, and that perhaps fewer still have read William Bernstein's "Deep Risk" or "The Permanent Portfolio" by Rowland and Lawson. In my opinion Tyler's site is a phenomenal and in many ways unprecedented resource for looking at what it's like to actually live with the returns from any number of portfolios, and is particularly valuable for folks living off of their assets who aren't in a position to weather long drawdowns.

As for the books, the PP book is essential for understanding the logic behind the approach, while that particular very short Bernstein book reflects his lengthy conversations with Mr. Rowland and is a very well-reasoned critiuque of the PP. The Golden Butterfly effectively addresses one of those criticisms, namely that the PP's 4 x 25% approach allocates equal percentages of assets to address threats that are anything but equally likely to occur.

Like a lot of other posters here (not to mention Bogle, Bernstein and of course damn near everyone over on Bogleheads) I personally don't like owning gold, but pretty much all of the optimium risk:reward portfolios on Tyler's site include it.

As an early retiree myself who's lived through the '01-'02 tech bust and the '08-09 crash I've experienced the effects of seeing an extremely diversified, tilted (a la DFA and Merriman), internationally-diversified "conservative" (40% equities) slice-and-dice portfolio nosedive by 25% when backtesting "proved" its worst posssible loss was 8% so I'm well aware of the limitations of the kind of backtesting Tyler's site provides, but one thing it also shows conclusively is what an unnecessarily rough ride anyone who holds only stock and bonds is in for.

An alternative approach that I do find quite compelling is Larry Swedroe's ("Reducing the Risk of Black Swans") wherein a very large slug of bonds (~70% - either pure IT Treasuries or those leavened with some TIPS) are offset with a small dose of only the most volatile, highest-expected-return stocks (international small cap value, emerging markets). Swedroe makes the case pretty compellingly (with plenty of historical data as well as forecasts based on current valuations) in the aforementioned book. Essentially you get a CAGR that's close to a plain vanilla 50:50 allocation but with a much, much smoother ride. One of the PP guys, who goes by the monker of Desert, has implemented a PP-influenced version of the Larry portfolio that (on paper, of course!) looks nearly ideal for a risk-averse retiree who can't stomach large drawdowns:

https://www.portfoliovisualizer.com/backtest-asset-class-allocation?s=y&mode=2&startYear=1975&endYear=2015&initialAmount=10000&annualOperation=0&annualAdjustment=0&inflationAdjusted=true&annualPercentage=0.0&rebalanceType=1&portfolio1=Custom&portfolio2=Custom&portfolio3=Custom&TotalStockMarket1=10&SmallCapBlend1=10&EmergingMarket1=10&FiveYearTBills1=60&Gold1=10 (https://www.portfoliovisualizer.com/backtest-asset-class-allocation?s=y&mode=2&startYear=1975&endYear=2015&initialAmount=10000&annualOperation=0&annualAdjustment=0&inflationAdjusted=true&annualPercentage=0.0&rebalanceType=1&portfolio1=Custom&portfolio2=Custom&portfolio3=Custom&TotalStockMarket1=10&SmallCapBlend1=10&EmergingMarket1=10&FiveYearTBills1=60&Gold1=10)

Last thought on all of this for now without getting unduly mired in politics is that the PP, its GB variation, the Larry Portoflio and many others are all built around the assumption that U.S. Treasuries will continue to be (in J.M. Lawson's inimitable phrase) "the best horse at the glue factory" when it comes to bonds and will reliably protect during flights to safety/market panics as they did during '08, Brexit, etc. We have, however, seen lots of willing flirting with default as well as downgrading of Treasury bond ratings due to Congressional antics and have now added a Commander in Chief who's on record as supporting such tactics going forward. If such behavior undermines "full faith and credit" and/or the U.S. dollar's reserve currency status it seems to me that all of these "bunker" alternative portfolios are out the window and would need to be replaced by the most broadly diversified, total world market (for both bonds and equities) allocations available.

I appreciate the many thoughtful posters here and look forward to your thoughts.
Title: Re: Portfolio Charts - The Golden Butterfly
Post by: AlmstRtrd on November 26, 2016, 12:31:27 PM
Enjoyed your post, Kevin K. I am going to have to read Deep Risk as I keep seeing it referenced.

Tyler's site is extremely valuable in that it allows us to look back and see how different economic scenarios affected different asset allocations. While it shouldn't be used as a predictive tool for future returns, Portfolio Charts can definitely show when certain mixes suffered. And it will only get better with time as more years are taken into account.

The other thing that I think we all appreciate about Tyler is that he never tries to force anyone to adopt a certain way of investing. He regularly points out that staying the course is likely more important than what AA someone choses.
Title: Re: Portfolio Charts - The Golden Butterfly
Post by: Classical_Liberal on November 26, 2016, 02:14:22 PM
@ Kevin K

Good post and I agree with much of your analysis.  The idea of risk parity in the PP, equal weighting to all macro economic conditions seemed foolish to me as well.  Given that certain economic conditions are far more likely (historically speaking) than others, it is probably wise to adjust portfolios to match not only the risks, but also the potential for those risks to actually happen. Of course, one can always utilize leverage to help manage risks and/or black swans, for some reason this is a bit frightening and counter to the "sleep well at night" portfolio Im looking for.   The portfolio you posted has the feeling of a barbell approach to risk management.

(S Cap/Emerging)||---------(L Cap)---------(I. Bonds)--------|| (Gold)

My concern with such a portfolio is that bonds have (until a few weeks ago?) been in a long term bull that will likely not occur again.  However, that is the same argument many have made against the PP/GB.  I am a fan of the a GB-like portfolio with a bit less gold/cash and some international weighting to suit my tastes….  but who knows.   Your concern about the potential future problem with US treasuries and dollar is noted, but I feel any change to world reserve currency or credit worthiness of the US gov’t would likely be slow and steady, rather than an overnight black swan event (I don’t think barbarians are at the gate just yet).
 
Personally, I’m in a different situation as I’m still accumulating at a rather fast pace.  I’m moving towards my preferred RE portfolio (which I posted earlier) through contributions.  This is happening in a value-centric way, purchasing the pieces I feel are priced the most favorably as I lump sum average.  I’m certainly an amateur, but I believe it’s the international equity markets that deserve most of my inflows in the current situation. 
Title: Re: Portfolio Charts - The Golden Butterfly
Post by: Kevin K. on November 26, 2016, 03:38:29 PM
Thanks to both of you for your thoughtful comments.

Real estate is a great way to go and I wish I had heeded the advice I read long ago about it being much better suited as an investment for many than the stock and bond markets. It's certainly a great diversifier in any case.

Regarding your comments about international Classical_Liberal I thought this comment from Larry Swedroe from over on the Bogleheads forum two days ago might be of interest (on a thread where for the nth time someone was asking why bother with international given how poorly it's been doing vs. U.S. in recent years):

" There are obvious reasons to expect international to have significantly different performance, at least today. The reason is simple. Valuations matter and valuations are dramatically lower in non US markets. Now that is likely reflective of higher risk perceptions. But that still means that non US has higher EXPECTED (not guaranteed returns). Real expected returns in US about 4%, non US developed about 7.5%, and EM about 9.5%. Those are huge differences and the more international one holds the lower the overall equity allocation needs to be, reducing the tail risk and exposure to global systemic shocks. So it matters a lot IMO."

Certainly if I were in the accumulation phase I'd be doing something like Paul Merriman's Ultimate Buy & Hold (interestingly the single highest-returning portfolio on Tyler's site) or something else along those lines that's hugely diversified across asset classes with little or no home country bias.

And AlmstRtrd I really liked your comments about Tyler. I, too, am pretty amazed at his ability to present ideas that deeply challenge the conventional wisdom without being doctrinaire or rigid in the least, or pushing anything on anybody. Now if I could just magically acquire 30 or so more IQ points maybe I could keep up with some of what he's doing!
Title: Re: Portfolio Charts - The Golden Butterfly
Post by: JohnnyRingo on December 11, 2017, 07:39:45 AM
Sorry to resurrect an old thread, but I have been doing some research into the Golden Butterfly and think it is an excellent portfolio.

I have a question though...

I live in the UK. In order to match the portfolio summarised here: https://portfoliocharts.com/portfolio/golden-butterfly/

I'd need to invest in the following (which are available through my UK broker, Interactive Investor):
- SHY
- TLT
- VB / VBR (depending upon whether I pursue just small-cap, or small-cap value)
- VTI
- Gold (I'd buy physical gold)

Living in the UK (as a British citizen with no plans to move abroad any time soon), what are the downsides (if any) to investing in a US portfolio like this?
Title: Re: Portfolio Charts - The Golden Butterfly
Post by: talltexan on December 11, 2017, 08:35:45 AM
I, too, have been pondering the Golden Butterfly lately because of the ascendency of Bitcoin. What would your reaction be to replacing the long-term bonds portion with it?

My thinking: Fed policy most likely thing to screw over LT bond holders, so replace LT Bonds with something we *really* know the Fed doesn't like.
Title: Re: Portfolio Charts - The Golden Butterfly
Post by: AdrianC on December 11, 2017, 11:17:35 AM
I, too, have been pondering the Golden Butterfly lately because of the ascendency of Bitcoin. What would your reaction be to replacing the long-term bonds portion with it?

My first reaction was LOL!

Then it occurred to me that maybe you aren't joking?
Title: Re: Portfolio Charts - The Golden Butterfly
Post by: talltexan on December 11, 2017, 02:28:42 PM
From what I recall, the most controversial dimension of the Golden Butterfuly is the inclusion of gold. That was fully litigated, and it was determined that the same negative correlation that justifies gold can also justify ST bonds (basically, cash).

But LT bonds leave a lot of exposure to interest rate increases, and we know those are coming, so they seem like the most problematic asset class in Golden Butterfly.

That by itself does not prove Bitcoin > LT Bonds.
Title: Re: Portfolio Charts - The Golden Butterfly
Post by: DrF on December 11, 2017, 03:13:25 PM
Talltexan:

Let's replace the word bond with the word treasury, as it makes more sense to what you're implying.

You're incorrect in saying that LT treasuries have "a lot of exposure to interest rate increases". In fact, ST treasuries have the most exposure to rising interest rates (the shorter the treasury the greater the exposure), while LT treasuries are more tied to inflation. If inflation stays low, LT treasuries don't change a whole lot. We're seeing this over the last year as the yield curve has become flatter, due to ST treasury yields increasing (and prices falling) with little change in LT treasury yields/prices.

Yes, the Fed tries to increase inflation by raising interest rates, but it has to trickle up the treasury food chain to reach LT treasuries.
Title: Re: Portfolio Charts - The Golden Butterfly
Post by: Classical_Liberal on December 11, 2017, 03:35:42 PM
I don't hold an exact golden butterfly;  similar, but home-made for my risks and goals. 

I have switched the LTT to ITT to help offset what I believe will be rising interest rates/inlfation over the short & medium term.  If I am wrong, well, at least I still have ITT.

Re Gold.  Physical gold is expensive to hold and buy/well (due to the margins on each transaction, fee for storage, ect).  I keep a little physical gold for SHTF, but why not use ETF's for the majority?  It'll save a ton in costs.
Title: Re: Portfolio Charts - The Golden Butterfly
Post by: Radagast on December 11, 2017, 07:48:24 PM
Sorry to resurrect an old thread, but I have been doing some research into the Golden Butterfly and think it is an excellent portfolio.

I have a question though...

I live in the UK. In order to match the portfolio summarised here: https://portfoliocharts.com/portfolio/golden-butterfly/

I'd need to invest in the following (which are available through my UK broker, Interactive Investor):
- SHY
- TLT
- VB / VBR (depending upon whether I pursue just small-cap, or small-cap value)
- VTI
- Gold (I'd buy physical gold)

Living in the UK (as a British citizen with no plans to move abroad any time soon), what are the downsides (if any) to investing in a US portfolio like this?
Harry Browne and Craig Rowland (the inventor and the author/promoter of the Permanent Portfolio, which is the theoretical basis for the Golden Butterfly) both say that the country in which you live should be the basis for your portfolio, certainly for the bond side and not as strongly for the stock side. So both of the bond slices and at least one of the stock slices should be based in the UK. The big reason is currency volatility, but also because your government make manipulate bond prices based on the performance of the country's economy, which may give your own stocks and bonds a more negative correlation than those of somewhere else.

This brings up my long-standing criticism of both the PP and GB, which is that they are underweight stocks (historically the asset class which returns the most, most often) and fail to diversify internationally (a great source of growth and stability during periodic times when your country does uniquely poorly for a while). Even more so for the UK because gold price tends to react more to the US stock and bond prices simply because they are bigger, so you should diversify by investing both in the UK and the rest of the world. I suggest you take the opportunity to add a additional slices to your portfolio to expand internationally, for example, a UK fund, a Europe/Asia fund, an Emerging markets fund, and a US fund (not necessarily those exactly). Based on history, having 4/7 or more in stocks is all but certain to give higher returns and safer withdrawals than any combination with less than 50% stocks.

Finally, because of government price setting, the 1970's make gold look like rose gold, and this unjustifiably rosy view is amplified by the way most Portfolio Charts calculators work.
https://forum.mrmoneymustache.com/investor-alley/gold-price-and-the-hazards-of-backtesting/msg1676150/#msg1676150
Title: Re: Portfolio Charts - The Golden Butterfly
Post by: Classical_Liberal on December 12, 2017, 07:53:34 AM
@ Radagast

I agree with this sentiment and thoughts on diversification. 

Finally, because of government price setting, the 1970's make gold look like rose gold, and this unjustifiably rosy view is amplified by the way most Portfolio Charts calculators work.
https://forum.mrmoneymustache.com/investor-alley/gold-price-and-the-hazards-of-backtesting/msg1676150/#msg1676150

This statement makes important point though, and not just about gold (Note: I personally believe gold will behave in a similar fashion in similar economic circumstances going forward, albeit with less drastic climbs; just to note to where I stand).  The more important general point is that the are a myriad of factors that influence asset prices, gold is not alone here.  For example, before digital trading and index funds there were fundamental barriers to stock ownership which no longer exist, before the SEC there was a ton of outright fraud.  Some would argue riskier ventures are now use mostly private capital due to the relative safety of more regulated, index-smoothed markets.

It's important to realize why these portfolios back tested well, not that they do back test well.  Trying to mimic the perfect portfolio for yesteryear will likely result in failure (less than expected returns).  Whereas designing your own portfolio to meet your own personal finance goals should take into account the interplay between non-coorleated assets. IOW, have reason(s) why you are buying an asset class. Hint; the reason should not only be because they performed well in the past.
Title: Re: Portfolio Charts - The Golden Butterfly
Post by: talltexan on December 12, 2017, 02:13:13 PM
Talltexan:

Let's replace the word bond with the word treasury, as it makes more sense to what you're implying.

You're incorrect in saying that LT treasuries have "a lot of exposure to interest rate increases". In fact, ST treasuries have the most exposure to rising interest rates (the shorter the treasury the greater the exposure), while LT treasuries are more tied to inflation. If inflation stays low, LT treasuries don't change a whole lot. We're seeing this over the last year as the yield curve has become flatter, due to ST treasury yields increasing (and prices falling) with little change in LT treasury yields/prices.

Yes, the Fed tries to increase inflation by raising interest rates, but it has to trickle up the treasury food chain to reach LT treasuries.

I'm not sure I follow. How would I reconcile what you've said with what is printed here:

https://www.investopedia.com/ask/answers/05/ltbondrisk.asp (https://www.investopedia.com/ask/answers/05/ltbondrisk.asp)
Title: Re: Portfolio Charts - The Golden Butterfly
Post by: Radagast on December 12, 2017, 09:33:26 PM
I think he means that shorter term government bonds are most sensitive to Federal Reserve interest rate policy. Long term bonds prices are highly sensitive to changes in their own interest rates, but those changes may be out of sync with Fed policy for years (but in the long run I imagine that Fed rates may win out, similar to how stock prices can get far out of line with underlying values for many years, but eventually fall back in line).

To see this look at government bond funds of various lengths over the past three months. The short and intermediate term funds have been steadily losing value to match anticipated future Fed rates, like you would expect. The long term bonds however are bouncing around to their own music, and the longest term have even gone slightly up (in a volatile sort of way).
(http://i64.tinypic.com/143gmd0.jpg)


Title: Re: Portfolio Charts - The Golden Butterfly
Post by: Radagast on December 12, 2017, 09:54:22 PM
This statement makes important point though, and not just about gold (Note: I personally believe gold will behave in a similar fashion in similar economic circumstances going forward, albeit with less drastic climbs; just to note to where I stand).  The more important general point is that the are a myriad of factors that influence asset prices, gold is not alone here.
If you read the thread, gold actually is uniquely misrepresented by the 1970-1976 period. It's not just that there were no gold ETF's or that the only way to own it was through a piece of paper saying you had something, maybe, in Ft. Knox which you could never see whose value could be adjusted by the gov't at any time and had been losing to inflation for several decades. The governments of the world actually spent a considerable effort to fix the price of gold to likely the lowest real value in the history of human civilization. Then, beginning in 1970 (precisely when Portfolio Charts starts) they gave it up as a bad idea over the next five years, first adjusting the price fix, then letting it float in between nations, and then entirely turning gold over to the markets by some time in 1975. Needless to say, it returned to a historically reasonable market value very quickly. That is unique among backtested assets I have seen, and an analogy might be buying shares of Soviet companies in 1989 and assuming that the fall of communism could happen again (even if you somehow managed gain ownership over a part of a Soviet company).
Title: Re: Portfolio Charts - The Golden Butterfly
Post by: Classical_Liberal on December 12, 2017, 10:20:35 PM
I agree that golds value during that particular period had a particularly unique change due to decades of government interference in free markets.  In fact, I argued that understanding why this happened is much more important than seeing the portfolio back-tested well. On this point we agree.  Once returned to free market value, gold has taken the role of non-correlation to stocks.

My point of potential contention is this "one off" event for gold is not unique to gold, even in recent times.  Government manipulation of assets based on policy happens all the time.  Look at the US federal Reserves balance sheet (https://www.brookings.edu/wp-content/uploads/2017/08/es_20170818_hutchinsbalancesheet1.png) since 2008.  Any policy manipulation of asset valuation going on?  What created this monetized mortgage crisis/real estate bubble to begin with? (hint: government policy)

It's important to keep a finger on the pulse of macro economic events, along with policy to make a wise decisions regarding asset allocation.  This coupled with near/mid-term personal goals is a better tool than back-testing alone.  This is because back-testing is full of "one-off" events in various asset classes.
Title: Re: Portfolio Charts - The Golden Butterfly
Post by: Radagast on December 12, 2017, 10:49:28 PM
I see. I agree it is definitely an example of how government policy can cause serious mispricings compared to what might happen if the government subsequently relaxes that policy. I've thought about the topic quite a bit in recent months, partly wondering about changes in tax policy. I think gold still may be the most extreme example in recent history for the US government, but I do not have a lot of knowledge of other examples. If you have any links I would be interested to have more to consider.
Title: Re: Portfolio Charts - The Golden Butterfly
Post by: DrF on December 13, 2017, 08:51:51 AM
I'm not sure I follow. How would I reconcile what you've said with what is printed here:

https://www.investopedia.com/ask/answers/05/ltbondrisk.asp (https://www.investopedia.com/ask/answers/05/ltbondrisk.asp)

The article you linked is missing the concept of inflation-treasury correlation.

https://www.investopedia.com/articles/bonds/09/bond-market-interest-rates.asp
Title: Re: Portfolio Charts - The Golden Butterfly
Post by: dragoncar on January 02, 2018, 01:21:53 PM
Just read this entire thread.  It's incredibly frustrating to read some of the aforementioned misinformation, knowing that I can't reasonably reply to a year-old comment, then gratifying to see it called out.  Thanks to all for the opposing viewpoints.

I'm currently in a modified PP, and have been contemplating the GB for a while.  I was kind of hoping for a down market in which I could sell off gold and treasuries to increase my equity position, but it just hasn't happened.  Since I FIRED last year I'm actually ready for more risk.  One reason I chose the PP for accumulation was that I recognized that my job security was inversely correlated with stock performance.  In a recession, I'd lose my job and wanted assets that could protect me in that event.  The way it actually played out was that the up market gave me tons of employment income to achieve a high SR.  It's painful to look at my "alternate universe where I B&H S&P500" spreadsheet column, but the truth is that the PP only cost me an extra year of working, but gave me the confidence to throw all my cash into investments.  It's possible I paid too much for this "insurance."  Similar reasoning can apply to the GB.

I think 7 years in this AA is long enough to prove to myself that I'm not simply trend following.  I don't think I experience excessive FOMO from my underperformance vs 100% equities -- it's annoying, but doesn't keep me up at night.  However, I do want to increase my equity exposure over time, if I can mitigate sequence of returns risk.  My VP has done well enough that I could sell it off now and invest in SC to complete my GB, but I'm still worried I'll do it at just the wrong moment.  I know, don't market time, just lump sum, etc.  I'm hoping I can get some encouragement from this crowd.  If the GB detractors here hate the GB so much, surely they hate the PP more and would generally agree with increasing equity exposure vs. my current AA.

So my general plan now is to trade my VP for SC and then draw down the bond/gold positions over time to increase my total stock %.  In a flat market, that will give my 15 years of expenses from those assets.  If all goes well (6% real) by that time the 40% equities would return to my starting stache (100%).  If all goes really well (I don't expect to spend a full 4% every year) I'll have even more.

On the flip side, what if gold and bonds tank?  I'd be selling them on the way down.  I might allow their % to just drift down without selling.

Any comments on the plan would be appreciated.  To keep the thread on topic, perhaps the most pressing issue is whether there is an issue entering the GB when stocks are on a tear.  I understand start date sensitivity was historically low, is that enough to ignore current valuations?
Title: Re: Portfolio Charts - The Golden Butterfly
Post by: mintleaf on January 02, 2018, 08:03:57 PM
Any comments on the plan would be appreciated.  To keep the thread on topic, perhaps the most pressing issue is whether there is an issue entering the GB when stocks are on a tear.  I understand start date sensitivity was historically low, is that enough to ignore current valuations?

Hi dragoncar: It sounds like we have some similar experiences. I'm also currently using a 'modified PP', but looking to add more stocks to increase risk+returns for the long term. Not sure exactly what AA you're using, but it definitely feels a bit weird to have overall growth on days when stocks are down, and vice versa. After all, even in a conservative portfolio, the stocks should still end up being the primary driver of value.

Anyway, in order to soothe my fears about market timing (poorly), I'm finding it helpful to implement a glide path. Basically decide on your final AA and a comfortable timeframe (say, 1 year). Then set up a series of calendar reminders at 3 month intervals. On each of those days, you rebalance a fraction of the way there. For example, going from 35% equities to 45%, I'm doing 4 steps of 2.5% each.

Like DCA, it's just a psychological trick, but it's been pretty effective so far. It helps put you in a long-term mindset, and spreads the change out over a longer time period, which reduces the worry about one bad event setting you back. Good luck!
Title: Re: Portfolio Charts - The Golden Butterfly
Post by: AdrianC on January 03, 2018, 07:14:52 AM
So my general plan now is to trade my VP for SC and then draw down the bond/gold positions over time to increase my total stock %.  In a flat market, that will give my 15 years of expenses from those assets.  If all goes well (6% real) by that time the 40% equities would return to my starting stache (100%).  If all goes really well (I don't expect to spend a full 4% every year) I'll have even more.

On the flip side, what if gold and bonds tank?  I'd be selling them on the way down.  I might allow their % to just drift down without selling.

Any comments on the plan would be appreciated.  To keep the thread on topic, perhaps the most pressing issue is whether there is an issue entering the GB when stocks are on a tear.  I understand start date sensitivity was historically low, is that enough to ignore current valuations?

What is "VP"? Variable annuity?

You're clearly more risk-averse than most around here say they are. Knowing yourself is key to a successful investment strategy. I think you have that part down.

IMHO, 6% real from US stocks is just not going to happen over the next 15 years. That doesn't mean we shouldn't be in stocks, I think we should, we just need to have realistic expectations. Since returns from all asset classes are likely to be low it's even more important to own more risky, productive assets like stocks.

So, yes, I agree you should ramp up your equity exposure. But small cap? US only? Why? Why no international? Why no emerging markets? International valuations are still lower than US.
Title: Re: Portfolio Charts - The Golden Butterfly
Post by: DrF on January 03, 2018, 09:10:17 AM
Dragoncar:

Glidepaths seem the way to go. Big ERN has done some great modeling of optimal glidepaths you should look at.
https://earlyretirementnow.com/2017/09/13/the-ultimate-guide-to-safe-withdrawal-rates-part-19-equity-glidepaths/
https://earlyretirementnow.com/2017/09/20/the-ultimate-guide-to-safe-withdrawal-rates-part-20-more-thoughts-on-equity-glidepaths/

You look to be sufficiently low on equity in your AA. I'd start to ratchet up your equity AA over the next 5 years or so.
Title: Re: Portfolio Charts - The Golden Butterfly
Post by: Classical_Liberal on January 03, 2018, 06:55:43 PM
Glidepaths seem the way to go. Big ERN has done some great modeling of optimal glidepaths you should look at.

The problem with existing glidepath/reverse glidepath models & research is they tend to focus almost exclusivity on a total market (or large cap) US stock/bond split.

It provides relatively little help to those of us interested in more varied AA's (ie gold, international exposure, income). 

@dragoncar
Congrats on reaching FI!!
Title: Re: Portfolio Charts - The Golden Butterfly
Post by: Telecaster on January 03, 2018, 08:39:15 PM
I agree that golds value during that particular period had a particularly unique change due to decades of government interference in free markets.  In fact, I argued that understanding why this happened is much more important than seeing the portfolio back-tested well. On this point we agree.  Once returned to free market value, gold has taken the role of non-correlation to stocks.

There were two other things that happened at that same time:  Secular stagnation in the stock market and a period of unusually high inflation (a subset of this was a couple decades worth of juice to bonds).  All three of those things have never happened at the same time before.  And unless we go back onto the gold standard and then back off, one of them can't happen again. 

The non-correlation of gold to stocks is surely a good thing as we saw in 2009, but there is *no way* bonds go on a tear like they did from the 80s through the early 2000s.  At least not for a long, long time.  Bottom line is the GB backtest is quite short, and the conditions that made it successful are unlikely to be replicated any time soon. 
Title: Re: Portfolio Charts - The Golden Butterfly
Post by: Classical_Liberal on January 03, 2018, 09:35:35 PM
I agree that golds value during that particular period had a particularly unique change due to decades of government interference in free markets.  In fact, I argued that understanding why this happened is much more important than seeing the portfolio back-tested well. On this point we agree.  Once returned to free market value, gold has taken the role of non-correlation to stocks.

There were two other things that happened at that same time:  Secular stagnation in the stock market and a period of unusually high inflation (a subset of this was a couple decades worth of juice to bonds).  All three of those things have never happened at the same time before.  And unless we go back onto the gold standard and then back off, one of them can't happen again. 

The non-correlation of gold to stocks is surely a good thing as we saw in 2009, but there is *no way* bonds go on a tear like they did from the 80s through the early 2000s.  At least not for a long, long time.  Bottom line is the GB backtest is quite short, and the conditions that made it successful are unlikely to be replicated any time soon.

Very good points!  Exactly what I mean in understanding macro economic conditions.  The "juice" to bonds really played out early 1980's - early 1990's as rates/inflation dropped dramatically.  At the same time we saw a bull in equities for many reasons. 

Another interesting point in this era. Real Estate, in the form of single family homes, adjusted for size/inflation actually remained relatively stable despite ridiculously high mortgage rates in the late 70's early 80's.  At the time many mortgages were assumable.  Meaning people were taking on the previous owners mortgage at a much lower rate. This option is almost never available now.

Regarding gold specifically and personally, I see no reason to hold more than 10%.  That 10% is multi-purposed; it not only acts as a noncoorelator, but owning part of the allocation in physical(with higher holding cost) satisfies my itch to have some form of portable wealth for SHTF.   Others may not care for this at all.

My person major concern with PP or GB at this moment in time... I believe we are in for an era in which all asset classes under-perform in real terms over the next decade.  Knowing that equities are the largest driving factor of portfolio growth, it could be a dangerous play opting for a low allocation if other previous non-correlators (bonds) don't pick up the slack of low performance.  OTOH, there is a lot of play in the "tail", particularity with LTT.  Also, a situation of low real equity returns, higher inflation, and rising interest rates sounds eerily similar to the 1970's, just less dramatic. 

How would a PP/GB work without a "yuge" bump for gold in the beginning and end with a "yuge" bump for bonds?  Rather, just getting modest increases in the same fashion.

Noting the difference with Real Estate above, the best value play of the 2020's may be to become a non-leverage landlord?  or at least eliminate housing expense (for those of us otherwise not planning to do so) with some value priced real estate.  It's gonna be in the back of my mind, for sure.

If you cant tell, I'm still undecided.  :)  One thing I do know for sure, gold has a small place in my portfolio.
Title: Re: Portfolio Charts - The Golden Butterfly
Post by: Classical_Liberal on January 03, 2018, 10:52:22 PM
@dragoncar
I was hesitant to respond directly because a) I think you know more than me and b) I don't like giving investment advice.

Since you're lacking in responses and I think you're funny as hell; here it goes anyway...

You spent seven years in the PP for employment insurance and because you believed in it to such a degree, it allowed you to invest when you otherwise wouldn't have.  You werent even bothered by an equity tear that will likely go down in history as one of the biggest bulls.

Now you're FI and equities are, in the very least, high-end valued.   Look, I'm completely, 100%, for changing a portfolio based on life circumstances and goals.  However, the PP shines in it's historical ability to minimize start date sensitivity and sequence risk.  Here you are, at the maximum risk point for sequence issues and now you want to make a big move into equities?

I realize your bond yields are sucking fat ass, gold is an "x" factor, but now, seems to me, like the worst time to make any major moves into equities.  If your gonna do this, go slow and draw down the gold/bonds for living expenses, let the equities grow (maybe).  If there is a serendipitous opportunity point in the next few years and you still want to adjust, do it then.  If it never materializes, your still at a sub 4% WR in a portfolio that can historically handle it.  All the while slowing adjusting into more equities reverse glide-path style.

Title: Re: Portfolio Charts - The Golden Butterfly
Post by: Radagast on January 04, 2018, 12:27:54 AM
I'll add one, though I agree that you may know more than I on this topic.

I agree that a slow organized glide path is the best bet to move to a new allocation. That way you will only be selling things gradually as they actually go up.

As for allocation, "golden butterfly + VSS" is conceptually the lowest equity target I could really agree with. Having that international slice could be useful, and it also bumls up to 50% equities. I think a one time glide path between two reasonable allocations is reasonable, especially when the one you are gliding toward actually supports higher withdrawals in back testing and theory.
Title: Re: Portfolio Charts - The Golden Butterfly
Post by: dragoncar on January 04, 2018, 04:11:22 AM
Thanks everyone, and especially drf for the links which I hadn’t previously read (incidentally, my dad is also a drf so eat your heart out doxxers). 

I agree that AFAIK we need to do independent research to see how glide paths fare with gold.  Intuitively, we would do just as well lumping gold with the bonds but since I have time on my hands I might just fire up the old terminal and run some sims.  I am not an experienced backtester so any tips on  data sources and programming languages would be appreciated (I could pound it out in perl easily but heard r is where it’s at for financial programming and I love to learn new stuff)

Yes as exhaustively discussed, backtesting is mostly useful to tell you what ideas didn’t work historically.  Still a valuable exercise

I’m amazed that anyone here has the impression that i “know more”.  I’ve been seeing your names show up more and more in very well reasoned and articulated discussions.  I really appreciate your insights

I’m going to think more on this and hopefully run some contributory simulations before I decide, but at this point it seems like the question is more how to implement the glide path exactly.  I’m happy with a high equity value as long as the portfolio value is also high :-)
Title: Re: Portfolio Charts - The Golden Butterfly
Post by: DrF on January 04, 2018, 08:11:35 AM
Thanks everyone, and especially drf for the links which I hadn’t previously read (incidentally, my dad is also a drf so eat your heart out doxxers). 

I agree that AFAIK we need to do independent research to see how glide paths fare with gold.  Intuitively, we would do just as well lumping gold with the bonds but since I have time on my hands I might just fire up the old terminal and run some sims.  I am not an experienced backtester so any tips on  data sources and programming languages would be appreciated (I could pound it out in perl easily but heard r is where it’s at for financial programming and I love to learn new stuff)

Yes as exhaustively discussed, backtesting is mostly useful to tell you what ideas didn’t work historically.  Still a valuable exercise

I’m amazed that anyone here has the impression that i “know more”.  I’ve been seeing your names show up more and more in very well reasoned and articulated discussions.  I really appreciate your insights

I’m going to think more on this and hopefully run some contributory simulations before I decide, but at this point it seems like the question is more how to implement the glide path exactly.  I’m happy with a high equity value as long as the portfolio value is also high :-)

Big ERN has posted an entire data set of stock and bond prices on his website in a google sheet.
Title: Re: Portfolio Charts - The Golden Butterfly
Post by: talltexan on January 04, 2018, 08:33:53 AM
I know people are worried that stocks have been on a tear, but if you're already on PP, then you're really just trying to add a slug of Small cap, which didn't gain as much during 2017. It seems like that transition would be not as bad.
Title: Re: Portfolio Charts - The Golden Butterfly
Post by: dragoncar on January 05, 2018, 12:03:06 PM
Thanks everyone, and especially drf for the links which I hadn’t previously read (incidentally, my dad is also a drf so eat your heart out doxxers). 

I agree that AFAIK we need to do independent research to see how glide paths fare with gold.  Intuitively, we would do just as well lumping gold with the bonds but since I have time on my hands I might just fire up the old terminal and run some sims.  I am not an experienced backtester so any tips on  data sources and programming languages would be appreciated (I could pound it out in perl easily but heard r is where it’s at for financial programming and I love to learn new stuff)

Yes as exhaustively discussed, backtesting is mostly useful to tell you what ideas didn’t work historically.  Still a valuable exercise

I’m amazed that anyone here has the impression that i “know more”.  I’ve been seeing your names show up more and more in very well reasoned and articulated discussions.  I really appreciate your insights

I’m going to think more on this and hopefully run some contributory simulations before I decide, but at this point it seems like the question is more how to implement the glide path exactly.  I’m happy with a high equity value as long as the portfolio value is also high :-)

Big ERN has posted an entire data set of stock and bond prices on his website in a google sheet.

Thanks, but that doesn't have 30 year treasury data.  Of course that data doesn't exist for a lot of years.

Looks like Simba is only annual data... is that right?
Title: Re: Portfolio Charts - The Golden Butterfly
Post by: Interest Compound on January 05, 2018, 03:53:45 PM
I don't have the patience, or the inclination to go through and update all my old posts with working images. If you've gotten this far, read all the text from my posts, and are still interested, there's nothing more I can say that will convince you otherwise.

Instead, I'll simply bump this thread every once in a while, with the live results. After 30 years it'll likely look just like the Permanent Portfolio looks now (losing to 100% bonds since inception), but by then I'm sure everyone will have moved on to the next hot thing, and will have long forgotten about their losses in this thread.

Starting value: $1,000,000

(https://i.imgur.com/ivMqCIO.png)
(https://i.imgur.com/8h6pKus.png)

And with a $40,000 a year withdrawal:

(https://i.imgur.com/7DdQzEU.png)

Note, in both instances you would've been better off with a 60/40 stock/bond portfolio than the Golden Butterfly, but I'm keeping it simple for now.
Title: Re: Portfolio Charts - The Golden Butterfly
Post by: steveo on January 06, 2018, 12:37:03 AM
Interest Compound - I think you stated one point incorrectly. You compared the PP to 100% bonds but the chart clearly states  100% stocks.

I personally don't see the validity of that comparison especially when it comes to having the most money at the end. The point of a diversified portfolio is to manage risk. I just read McClung's living off your money and he makes really good points in relation to having a decent (large on this forum) percentage of bonds in your portfolio as well as how to manage your portfolio in retirement.

I'm not a fan of the PP or the GB but I think to do them justice you need to have a fairer comparison point. Personally I am a fan of a simple stock/bond portfolio and owning your own house when that makes sense.
Title: Re: Portfolio Charts - The Golden Butterfly
Post by: AdrianC on January 06, 2018, 04:10:34 PM
https://www.portfoliovisualizer.com/backtest-asset-class-allocation

PP inception was 1982?

1982 through 2017, CAGR (real returns):
PP 4.83%
US Stocks 8.36%
10 Year Treasury 5.39%

Since inception the PP is losing to 100% 10-year treasuries.
Title: Re: Portfolio Charts - The Golden Butterfly
Post by: steveo on January 06, 2018, 09:19:51 PM
https://www.portfoliovisualizer.com/backtest-asset-class-allocation

PP inception was 1982?

1982 through 2017, CAGR (real returns):
PP 4.83%
US Stocks 8.36%
10 Year Treasury 5.39%

Since inception the PP is losing to 100% 10-year treasuries.

That is a long time to underperform.  I'm not a fan of gold in a portfolio unless it's for diversification purpose once you've won the game. In my opinion though this makes no sense. If you have a 4% or less WR then so long as you have enough stocks you should be good. If you have a higher WR than 4% than that having gold in my opinion is a massive risk. The PP and the BG to me have a lot of downside. High gold percentages and high bonds and cash. That is risky over a longer retirement period.

I still haven't really seen a better option than a simple stock/bond portfolio. I don't agree intuitively with 100% stocks and after reading McClung's living off your money I think that there is a quantitative basis not to go 100% stocks.

Still we don't know what the next 20-40 years will entail. It's all about coming up with a portfolio that you feel comfortable with assuming you take into account all the risks. Bernstein does a great job in explaining these risks in his books.

I should add I'm also not a fan of fine tuning your stock allocation with multiple stock index options.

Title: Re: Portfolio Charts - The Golden Butterfly
Post by: talltexan on January 08, 2018, 10:51:18 AM

I should add I'm also not a fan of fine tuning your stock allocation with multiple stock index options.

Can you go into more detail on this?
Title: Re: Portfolio Charts - The Golden Butterfly
Post by: steveo on January 08, 2018, 03:39:49 PM

I should add I'm also not a fan of fine tuning your stock allocation with multiple stock index options.

Can you go into more detail on this?

My opinion is that you can't predict the future and all you are doing is trying to hope that certain sectors average out over time. I figure just buy a broad based stock index. I live in Australia so I have Australian bonds and then 50% domestic stocks and 50% International stocks. I've though about getting into emerging markets with a small percentage but I just can't be bothered.

I prefer simple approaches which I figure are more robust because you aren't getting into constructing a portfolio based on data mining for the optimal result.
Title: Re: Portfolio Charts - The Golden Butterfly
Post by: dragoncar on January 14, 2018, 01:11:44 AM
Well spending down the "hated" assets first, with no rebalancing, is looking super hot.  6.7% WR based on backtesting.  Unfortunately, I need to thoroughly debug the code.  If interested, check it out here: https://github.com/dragoncar4real/glidepath

Please excuse my terrible coding.  Just chose python because I happened to have it installed for something else and I decided I might as well learn the language.  So far, I'm really not loving all the typecasting I have to do vs. perl.  And I switched from notepad to a real IDE halfway through and now every change creates a spaces/tabs error... grrr.

This is based on the same data as portfolio charts so starts in 1970.  Starting in 1975 actually boosts the outcome.  I'm sure I have a terrible bug in there that's messing up my results so bear with me on this.

And yes, backtesting doesn't predict future results.  But I was already leaning towards this strategy, so it helps ease my mind if it isn't "broken" by backtesting.


PS I can't believe someone alreadyd had "dragoncar" on github.  I thought I was a unique snowflake!
Title: Re: Portfolio Charts - The Golden Butterfly
Post by: mintleaf on January 14, 2018, 08:19:41 AM
Well spending down the "hated" assets first, with no rebalancing, is looking super hot.  6.7% WR based on backtesting.  Unfortunately, I need to thoroughly debug the code.  If interested, check it out here: https://github.com/dragoncar4real/glidepath

Thanks for the code link! I like simulations as a way of exploring the space.

Unilaterally drawing down a single asset class creates a bias toward specific economic scenarios, which is probably why you're seeing particularly good outcomes with the backtesting. Gold spiked in the 70s, so of course it made sense to sell that first -- it locked in profits from the appreciated asset class, which is the goal. But the next 40 years will not look exactly like that, so be careful about expecting similar performance. (FWIW I do think having some gold is worthwhile, with the right proportions and the right expectations)
Title: Re: Portfolio Charts - The Golden Butterfly
Post by: dragoncar on January 14, 2018, 12:44:22 PM
Well spending down the "hated" assets first, with no rebalancing, is looking super hot.  6.7% WR based on backtesting.  Unfortunately, I need to thoroughly debug the code.  If interested, check it out here: https://github.com/dragoncar4real/glidepath

Thanks for the code link! I like simulations as a way of exploring the space.

Unilaterally drawing down a single asset class creates a bias toward specific economic scenarios, which is probably why you're seeing particularly good outcomes with the backtesting. Gold spiked in the 70s, so of course it made sense to sell that first -- it locked in profits from the appreciated asset class, which is the goal. But the next 40 years will not look exactly like that, so be careful about expecting similar performance. (FWIW I do think having some gold is worthwhile, with the right proportions and the right expectations)

There’s always an explanation, but other start dates seem to work well, too.  ERN already convinced me that this kind o glide path is a good idea with bonds, but he didn’t do it wil some gold in the mix
Title: Re: Portfolio Charts - The Golden Butterfly
Post by: jpeizie on January 26, 2018, 07:59:12 AM
https://www.portfoliovisualizer.com/backtest-asset-class-allocation

PP inception was 1982?

1982 through 2017, CAGR (real returns):
PP 4.83%
US Stocks 8.36%
10 Year Treasury 5.39%

Since inception the PP is losing to 100% 10-year treasuries.

Using the portfoliocharts.com FI calculator...

100% stocks has supported a 4.0% perpetual withdrawal rate, and in accumulation phase the spread on how long your working career needs to be is 10-20 years.

100% intermediate bonds has supported a 2.0% PWR, and accumulation phase is 25 to 30+ yrs.

PP has supported a 3.7% PWR and accumulation phase is 17-19 yrs. Stocks have more upside to get you to FI faster, but the worst case PP accumulation phase is actually better than the worst case 100% stocks accumulation phase.

GB has supported a 5.3% PWR and accumulation phase is 12 - 14 yrs.

These are the kinds of numbers I looked at when making my IPS. I'm not in the PP or GB - just saying this is the lens that was most important to me. I get it that PP and GB may have less juice in the future than they did in the past. But everyone seems to think the same thing about 100% stocks too.
Title: Re: Portfolio Charts - The Golden Butterfly
Post by: AdrianC on January 26, 2018, 10:38:50 AM
Using the portfoliocharts.com FI calculator...

100% stocks has supported a 4.0% perpetual withdrawal rate, and in accumulation phase the spread on how long your working career needs to be is 10-20 years.

100% intermediate bonds has supported a 2.0% PWR, and accumulation phase is 25 to 30+ yrs.

PP has supported a 3.7% PWR and accumulation phase is 17-19 yrs. Stocks have more upside to get you to FI faster, but the worst case PP accumulation phase is actually better than the worst case 100% stocks accumulation phase.

GB has supported a 5.3% PWR and accumulation phase is 12 - 14 yrs.

Over what time period?

A caution: everything's done fine over the last 30 years (except the PP, that is), but a 40/60 US stocks/bonds beat the GB, even with your 5.3% WR.
Title: Re: Portfolio Charts - The Golden Butterfly
Post by: jpeizie on January 26, 2018, 10:55:53 AM
Believe the way it works is the PWR is a worst case number based on all potential start years since 1970. The accumulation phase spread is the difference between the best-case historical data at getting to FI, and the worst case.

But perhaps Tyler could chime in and explain it himself? I probably have not done a very good job.
Title: Re: Portfolio Charts - The Golden Butterfly
Post by: Tyler on January 26, 2018, 12:32:48 PM
Believe the way it works is the PWR is a worst case number based on all potential start years since 1970. The accumulation phase spread is the difference between the best-case historical data at getting to FI, and the worst case.

But perhaps Tyler could chime in and explain it himself? I probably have not done a very good job.

You understand it perfectly.  :)  The calculations are start-date-independent and express the full range of historical outcomes based on all the data we have available.
Title: Re: Portfolio Charts - The Golden Butterfly
Post by: jpeizie on January 26, 2018, 01:23:02 PM
Thanks Tyler.

Adrian - not sure what you mean that a 40/60 stock/bonds beat the GB? The PWR I'm seeing using the FI calculator on PortfolioCharts is 3.4%.
Title: Re: Portfolio Charts - The Golden Butterfly
Post by: AdrianC on January 26, 2018, 02:42:56 PM
Believe the way it works is the PWR is a worst case number based on all potential start years since 1970. The accumulation phase spread is the difference between the best-case historical data at getting to FI, and the worst case.

OK, so what was the start year that gave the worst case number for the GB?
Title: Re: Portfolio Charts - The Golden Butterfly
Post by: Tyler on January 26, 2018, 03:32:33 PM
OK, so what was the start year that gave the worst case number for the GB?

That depends on the metric you're referencing.  For withdrawal rates it's 1973 followed closely by 1987 and 1980.  For accumulation it's a close race between 1990, 1996, and 2005.  The GB is pretty consistent, so the band of results is pretty tight in either set of calculations. 

For comparison, the same worst case start dates for a traditional 60/40 portfolio are: SWR -- 1973, 1970, and 1972.  Accumulation -- 1991, 1994, 2001.  The band of results is much wider, as a 60/40 portfolio is much more sensitive to start date (https://portfoliocharts.com/2016/05/15/some-portfolios-are-more-trustworthy-than-others/). 

Title: Re: Portfolio Charts - The Golden Butterfly
Post by: AdrianC on January 29, 2018, 08:09:13 AM
Adrian - not sure what you mean that a 40/60 stock/bonds beat the GB? The PWR I'm seeing using the FI calculator on PortfolioCharts is 3.4%.

Sorry, I didn't see this.

I wrote: "A caution: everything's done fine over the last 30 years (except the PP, that is), but a 40/60 US stocks/bonds beat the GB, even with your 5.3% WR."

My example was over the last 30 years. Portfoliovisualizer has total bond market data from 1987 onward. From 1987 till now 40/60 beats the GB while taking a 5.3% initial WR indexed to inflation. You will say this is cherry-picking a start date and I agree. It's just the data that is openly available. Different start years give different results, of course. As you say, Portfoliocharts uses all potential start years since 1970, which is great as long as you understand what went on with gold in the '70's.
Title: Re: Portfolio Charts - The Golden Butterfly
Post by: AdrianC on January 29, 2018, 08:12:32 AM
OK, so what was the start year that gave the worst case number for the GB?

That depends on the metric you're referencing.  For withdrawal rates it's 1973 followed closely by 1987 and 1980.  For accumulation it's a close race between 1990, 1996, and 2005.  The GB is pretty consistent, so the band of results is pretty tight in either set of calculations. 

For comparison, the same worst case start dates for a traditional 60/40 portfolio are: SWR -- 1973, 1970, and 1972.  Accumulation -- 1991, 1994, 2001.  The band of results is much wider, as a 60/40 portfolio is much more sensitive to start date (https://portfoliocharts.com/2016/05/15/some-portfolios-are-more-trustworthy-than-others/).

We were talking about PWR, so it was withdrawal rates. Thanks for that. Is that information (worst start years) available on the site? I couldn't see it.
Title: Re: Portfolio Charts - The Golden Butterfly
Post by: AdrianC on January 29, 2018, 08:26:50 AM
Here's what William Bernstein wrote in his review on Amazon of 'The Permanent Portfolio: Harry Browne's Long-Term Investment Strategy', September 10, 2012:

First, I need to get my own personal biases out in the open: I think that the Harry Browne Permanent Portfolio (HBPP) is a highly unconventional but effective low-risk, low-return portfolio.

I also believe that very few of its new fans will have the long-term discipline to stick with it when two of its riskiest and least conventional components, long Treasuries and gold, underperform, as they inevitably must at some point.


You need a strong contrarian streak to stick with the PP or GB. I haven't got it. Too much FOMO.
Title: Re: Portfolio Charts - The Golden Butterfly
Post by: Tyler on January 29, 2018, 10:14:22 AM
We were talking about PWR, so it was withdrawal rates. Thanks for that. Is that information (worst start years) available on the site? I couldn't see it.

All of the results are displayed on the Withdrawal Rates (https://portfoliocharts.com/portfolio/withdrawal-rates/) chart and you can infer the general age of the start date by the length and shade of the line, but the associated start years for each line are not labeled.  I'm happy to look under the hood and find that info for anyone who contacts me directly. 
Title: Re: Portfolio Charts - The Golden Butterfly
Post by: dragoncar on January 29, 2018, 12:56:04 PM

You need a strong contrarian streak to stick with the PP or GB. I haven't got it. Too much FOMO.

Have you tried buying the dip?
Title: Re: Portfolio Charts - The Golden Butterfly
Post by: AdrianC on January 29, 2018, 02:23:14 PM
Have you tried buying the dip?

No, I been ridin' the mo-mo gravy train. You?
Title: Re: Portfolio Charts - The Golden Butterfly
Post by: dragoncar on January 29, 2018, 08:11:35 PM
Have you tried buying the dip?

No, I been ridin' the mo-mo gravy train. You?

I'm using a logistical asset allocation myself
Title: Re: Portfolio Charts - The Golden Butterfly
Post by: khawk on May 23, 2019, 01:18:40 PM
In general the Permanent Portfolio will have lower drawdowns than the Golden Butterfly due to its cash position. 

If we are backtesting for performance then what you guys really want is the "Four Season Gold Hawk" which has higher returns than the Golden Butterfly and lower drawdowns.  The asset mix is:

42.5% Small Cap Value
25% Long Term bonds
12.5 % Intermediate bonds
15% Gold
5% Commodities

There it is!
Title: Re: Portfolio Charts - The Golden Butterfly
Post by: RWD on May 23, 2019, 02:14:08 PM
what you guys really want is the "Four Season Gold Hawk"
I assume you are completely unbiased, khawk?
Title: Re: Portfolio Charts - The Golden Butterfly
Post by: khawk on May 23, 2019, 02:28:38 PM
Lol completely.  I figured as the inventor I get to name it after myself.  Run the asset mix on portfoliocharts and see if it doesn't perform better than the Golden Butterfly.
Title: Re: Portfolio Charts - The Golden Butterfly
Post by: AdrianC on May 24, 2019, 06:57:27 AM
I don't have the patience, or the inclination to go through and update all my old posts with working images. If you've gotten this far, read all the text from my posts, and are still interested, there's nothing more I can say that will convince you otherwise.

Instead, I'll simply bump this thread every once in a while, with the live results. After 30 years it'll likely look just like the Permanent Portfolio looks now (losing to 100% bonds since inception), but by then I'm sure everyone will have moved on to the next hot thing, and will have long forgotten about their losses in this thread.

Starting value: $1,000,000

(https://i.imgur.com/ivMqCIO.png)
(https://i.imgur.com/8h6pKus.png)

And with a $40,000 a year withdrawal:

(https://i.imgur.com/7DdQzEU.png)

Note, in both instances you would've been better off with a 60/40 stock/bond portfolio than the Golden Butterfly, but I'm keeping it simple for now.

I miss Interest Compound. Wonder why they don't post anymore?

Plugging the same funds from above into Portfolio Visualizer, and adding the new one:

Portfolio Analysis Results (Sep 2015 - Apr 2019)

Portfolio 1 Final Balance $14,290  CAGR 10.22% (VT)
Portfolio 2 Final Balance $12,527  CAGR 6.34% ("Golden Butterfly")
Portfolio 3 Final Balance $12,331  CAGR 5.88% ("Four Season Gold Hawk")

Title: Re: Portfolio Charts - The Golden Butterfly
Post by: talltexan on May 24, 2019, 07:18:59 AM
Growth has outperformed Value lately, so you'd expect the 4-season Gold Hawk to underperform in recent history with that SCV position.
Title: Re: Portfolio Charts - The Golden Butterfly
Post by: dragoncar on May 24, 2019, 02:08:37 PM
I'd like to introduce the Golden Dragon Portfolio.  On January 1, simply invest in the top returning asset class for the next 12 months. 
Title: Re: Portfolio Charts - The Golden Butterfly
Post by: khawk on May 24, 2019, 06:46:11 PM
I don't have the patience, or the inclination to go through and update all my old posts with working images. If you've gotten this far, read all the text from my posts, and are still interested, there's nothing more I can say that will convince you otherwise.

Instead, I'll simply bump this thread every once in a while, with the live results. After 30 years it'll likely look just like the Permanent Portfolio looks now (losing to 100% bonds since inception), but by then I'm sure everyone will have moved on to the next hot thing, and will have long forgotten about their losses in this thread.

Starting value: $1,000,000

(https://i.imgur.com/ivMqCIO.png)
(https://i.imgur.com/8h6pKus.png)

And with a $40,000 a year withdrawal:

(https://i.imgur.com/7DdQzEU.png)

Note, in both instances you would've been better off with a 60/40 stock/bond portfolio than the Golden Butterfly, but I'm keeping it simple for now.

I miss Interest Compound. Wonder why they don't post anymore?

Plugging the same funds from above into Portfolio Visualizer, and adding the new one:

Portfolio Analysis Results (Sep 2015 - Apr 2019)

Portfolio 1 Final Balance $14,290  CAGR 10.22% (VT)
Portfolio 2 Final Balance $12,527  CAGR 6.34% ("Golden Butterfly")
Portfolio 3 Final Balance $12,331  CAGR 5.88% ("Four Season Gold Hawk")

If you look over a longer time frame you will see the outperformance of the Four Season Gold Hawk.  As talltexan mentioned, growth has outperformed value lately.  But over the long run...
Title: Re: Portfolio Charts - The Golden Butterfly
Post by: bacchi on May 24, 2019, 06:53:56 PM
I'd like to introduce the Golden Dragon Portfolio.  On January 1, simply invest in the top returning asset class for the next 12 months.

I follow this portfolio. It's returned 19% CAGR since 2010.
Title: Re: Portfolio Charts - The Golden Butterfly
Post by: khawk on May 24, 2019, 08:08:04 PM
To be honest I still think the Permanent Portfolio is best.  The whole idea behind it is that you can sleep easy at night knowing you are covered no matter what happens - inflation, deflation, recession, or prosperity.  When you start to skew the portfolio holdings heavier towards one of those conditions, you put yourself at risk of that condition not occurring in the future as much as it has in the past.  Best to take an equal bet on any outcome - no one can predict the future.
Title: Re: Portfolio Charts - The Golden Butterfly
Post by: khawk on May 24, 2019, 08:18:13 PM
I'd like to introduce the Golden Dragon Portfolio.  On January 1, simply invest in the top returning asset class for the next 12 months.

So you were 100% in Bitcoin/crypto in 2018?
Title: Re: Portfolio Charts - The Golden Butterfly
Post by: Andy R on May 24, 2019, 08:34:42 PM
To be honest I still think the Permanent Portfolio is best.  The whole idea behind it is that you can sleep easy at night knowing you are covered no matter what happens - inflation, deflation, recession, or prosperity.  When you start to skew the portfolio holdings heavier towards one of those conditions, you put yourself at risk of that condition not occurring in the future as much as it has in the past.  Best to take an equal bet on any outcome - no one can predict the future.

Firstly, the results for LT treasuries are based on a period where interest rates came down from 20% to 0%, so for that to work again, interest rates would need to go down to -20%
As a consequence, going forward, your expected return with either Golden Butterfly or the Permanent Portfolio will be so low that this portfolio would only work for those wanting to withdraw sub 2% (ie you have over 50x your yearly spend), and if you are willing to work another decade and a half to reach that point, then sure this seems like a suitable portfolio.

Title: Re: Portfolio Charts - The Golden Butterfly
Post by: Tyler on May 24, 2019, 10:50:23 PM
Firstly, the results for LT treasuries are based on a period where interest rates came down from 20% to 0%, so for that to work again, interest rates would need to go down to -20%

Everyone has different preferences and I'm always interested in hearing a wide variety of portfolio opinions, but for the sake of accuracy I think it's important to point out that this is not how bond returns work.  Bond convexity is a complicated topic, but here's a pretty good no-math explanation (https://www.youtube.com/watch?v=2XdDlSSSGRI).  One benefit of long term treasuries in a portfolio is how their high convexity provides good returns even at low rates.
Title: Re: Portfolio Charts - The Golden Butterfly
Post by: Classical_Liberal on May 25, 2019, 01:04:51 AM
I'd like to introduce the Golden Dragon Portfolio.  On January 1, simply invest in the top returning asset class for the next 12 months.

I'd be willing to pay a 2% load and 2% annual ER for this portfolio.  Screw indexing!
Title: Re: Portfolio Charts - The Golden Butterfly
Post by: dragoncar on May 25, 2019, 01:56:47 AM
I'd like to introduce the Golden Dragon Portfolio.  On January 1, simply invest in the top returning asset class for the next 12 months.

I'd be willing to pay a 2% load and 2% annual ER for this portfolio.  Screw indexing!

Actually, my fund has 100% correlation with it's benchmark index (GDI)
Title: Re: Portfolio Charts - The Golden Butterfly
Post by: khawk on May 25, 2019, 10:33:39 AM
Firstly, the results for LT treasuries are based on a period where interest rates came down from 20% to 0%, so for that to work again, interest rates would need to go down to -20%

Everyone has different preferences and I'm always interested in hearing a wide variety of portfolio opinions, but for the sake of accuracy I think it's important to point out that this is not how bond returns work.  Bond convexity is a complicated topic, but here's a pretty good no-math explanation (https://www.youtube.com/watch?v=2XdDlSSSGRI).  One benefit of long term treasuries in a portfolio is how their high convexity provides good returns even at low rates.

Excellent commentary Tyler, I was hoping you would chime in on this thread again.

What are your thoughts on the Four Season Gold Hawk vs the Golden Butterfly?
Title: Re: Portfolio Charts - The Golden Butterfly
Post by: Tyler on May 25, 2019, 11:58:53 AM
What are your thoughts on the Four Season Gold Hawk vs the Golden Butterfly?

The numbers are certainly impressive, and I can see why you like it.  That said, I might suggest flipping the country to the new Japan setting to temper expectations a little.  That advice applies to all portfolios, BTW.

Contrary to what people might think from only skimming this very long thread about the Golden Butterfly, it is definitely not my goal to advocate for a single way to invest suitable for all people.  Everyone is different, and I just want to help them understand the many different portfolio options out there and supply good data so that they can make an informed choice.  The Golden Butterfly (https://portfoliocharts.com/portfolio/golden-butterfly/) is one suggestion of my own creation, the Pinwheel Portfolio (https://portfoliocharts.com/portfolio/pinwheel-portfolio/) is another, and I have an open mind to all kinds of ideas for building an effective and sustainable asset allocation.  I'll also point out that my tools (https://portfoliocharts.com/calculators/) have changed a lot in the three years since this thread first started, including at least one designed specifically based on feedback (https://forum.mrmoneymustache.com/investor-alley/portfolio-charts-the-golden-butterfly/msg1107216/#msg1107216) from this discussion.  So please take the time to visit Portfolio Charts (https://portfoliocharts.com/) if you haven't in a while, even if it's just to check in on your own portfolio and remind yourself why you're very happy with your choice.  :)

As an aside, I'm totally bookmarking the Golden Dragon Portfolio for future inclusion on the site.  My biggest regret is that I didn't learn about Dragoncar's masterpiece before April 1st. 
Title: Re: Portfolio Charts - The Golden Butterfly
Post by: khawk on May 25, 2019, 01:57:58 PM
I'd like to introduce the Golden Dragon Portfolio.  On January 1, simply invest in the top returning asset class for the next 12 months.

Are you saying invest in the top performing asset class (from the previous 12 months) for the next 12 months?
Title: Re: Portfolio Charts - The Golden Butterfly
Post by: khawk on May 25, 2019, 02:13:03 PM
What are your thoughts on the Four Season Gold Hawk vs the Golden Butterfly?

The numbers are certainly impressive, and I can see why you like it.  That said, I might suggest flipping the country to the new Japan setting to temper expectations a little.  That advice applies to all portfolios, BTW.


Yes, I ran the numbers on Japan as well.  It's somewhat similar to the Golden Butterfly in terms of drawdowns etc.
Title: Re: Portfolio Charts - The Golden Butterfly
Post by: dragoncar on May 25, 2019, 03:50:59 PM
I'd like to introduce the Golden Dragon Portfolio.  On January 1, simply invest in the top returning asset class for the next 12 months.

Are you saying invest in the top performing asset class (from the previous 12 months) for the next 12 months?

No, that’s some kind of traditional momentum play.  I’m more interested in forward Momentum, or “FOMO”
Title: Re: Portfolio Charts - The Golden Butterfly
Post by: Telecaster on May 25, 2019, 04:06:19 PM
How do you know what the best performing assets will be for the next 12 months? 
Title: Re: Portfolio Charts - The Golden Butterfly
Post by: less4success on May 25, 2019, 04:32:34 PM
dragoncar was making a joke (or is perhaps from the future).
Title: Re: Portfolio Charts - The Golden Butterfly
Post by: dragoncar on May 25, 2019, 06:46:43 PM
dragoncar was making a joke (or is perhaps from the future).

Sorry, sometimes I forget that not all creatures think fourth-dimensionally (https://www.youtube.com/watch?v=CUcNM7OsdsY)
Title: Re: Portfolio Charts - The Golden Butterfly
Post by: Andy R on May 25, 2019, 08:07:42 PM
Firstly, the results for LT treasuries are based on a period where interest rates came down from 20% to 0%, so for that to work again, interest rates would need to go down to -20%

Everyone has different preferences and I'm always interested in hearing a wide variety of portfolio opinions, but for the sake of accuracy I think it's important to point out that this is not how bond returns work.  Bond convexity is a complicated topic, but here's a pretty good no-math explanation (https://www.youtube.com/watch?v=2XdDlSSSGRI).  One benefit of long term treasuries in a portfolio is how their high convexity provides good returns even at low rates.

Thanks for the link.
So does that mean that if you have 20 year bonds and interest rates go up 1%, that you would not expect a 20% drop in the value of the bonds, and that the percentage drop would be different from 20% interest rates going to 19% vs 2% interest rates going to 1%? From the video, it looks like it would be different but I am wondering exactly what the numbers would be. Do you know a resource where I could see what it should be?
Title: Re: Portfolio Charts - The Golden Butterfly
Post by: Tyler on May 25, 2019, 08:58:07 PM
Thanks for the link.
So does that mean that if you have 20 year bonds and interest rates go up 1%, that you would not expect a 20% drop in the value of the bonds, and that the percentage drop would be different from 20% interest rates going to 19% vs 2% interest rates going to 1%? From the video, it looks like it would be different but I am wondering exactly what the numbers would be. Do you know a resource where I could see what it should be?

A change in rates on a 20 year bond (with annual coupon payments) from 2% to 1% will have have a capital appreciation of 17%.  From 20% to 19% it will have a capital appreciation of only 5%.  The numbers are also dependent on the bond maturity, as the longer the maturity the more convex the curve.  I won't pretend to understand the inner workings of how all of that works, but you can easily calculate it for yourself in Excel using the formula here: https://portfoliocharts.com/bond-index-calculator/
Title: Re: Portfolio Charts - The Golden Butterfly
Post by: Classical_Liberal on May 25, 2019, 10:51:47 PM
@Tyler
Since most people here tend to index.  If someone holds a LTT index with average maturity of, say 20 years.  And LTT rates drop (say 20-19, or 2 to 1 like in previous example), is it a reasonable assumption to use that formula with the average maturity date of the fund for estimates of fund value increases in those scenarios?  Or is this a bad assumption and I'm missing something?
Title: Re: Portfolio Charts - The Golden Butterfly
Post by: Tyler on May 25, 2019, 11:15:19 PM
Since most people here tend to index.  If someone holds a LTT index with average maturity of, say 20 years.  And LTT rates drop (say 20-19, or 2 to 1 like in previous example), is it a reasonable assumption to use that formula with the average maturity date of the fund for estimates of fund value increases in those scenarios?  Or is this a bad assumption and I'm missing something?

Good question.  The yield curves make the calculations a little complicated, but I believe using the weighted average maturity of the fund should provide a reasonable estimate. 

I'm realizing this could be a good topic for a post of its own.  You guys are always good for inspiration.  ;)
Title: Re: Portfolio Charts - The Golden Butterfly
Post by: effigy98 on May 27, 2019, 01:40:10 PM
Here is my modification:

20% IETC (VGT for backtesting)
20% VDC
20% IJS
20% TLT
20% GLDM (GLD for backtesting)

- Adding more risk to get a potentially higher return using VDC (consumer staples) in place of cash. The drawdowns on this asset class during the last couple recessions are impressively low. My only fear is some of the companies are killing their customers over time which is not good for profits. They are being replaced by stoner company acquisitions though.
- Instead of total stock market, going cloud and automation. Working in the industry, I know that companies are getting rid of most of their IT staff and infrastructure and moving to the top companies in IETC at a rapid pace. This is also one of the most profitable businesses out there, like a modern day toll road for data and with moats with alligators in them. There are also theories that during a downtown this will even accelerate as a cost cutting measure.
Title: Re: Portfolio Charts - The Golden Butterfly
Post by: Tyler on May 27, 2019, 09:48:19 PM
I'm realizing this could be a good topic for a post of its own.  You guys are always good for inspiration.  ;)

Done.  :)

https://portfoliocharts.com/2019/05/27/high-profits-at-low-rates-the-benefits-of-bond-convexity/

I don't want to derail this Golden Butterfly thread with unrelated bond talk, but feel free to PM me if you have any questions. 
Title: Re: Portfolio Charts - The Golden Butterfly
Post by: Classical_Liberal on May 28, 2019, 03:21:13 AM
I'm realizing this could be a good topic for a post of its own.  You guys are always good for inspiration.  ;)

Done.  :)

https://portfoliocharts.com/2019/05/27/high-profits-at-low-rates-the-benefits-of-bond-convexity/

I don't want to derail this Golden Butterfly thread with unrelated bond talk, but feel free to PM me if you have any questions.

Great article! 
Title: Re: Portfolio Charts - The Golden Butterfly
Post by: vand on May 28, 2019, 05:01:39 AM
A article from a fairly mainstream outlet also advocating for a diversified multi-asset portfolio:

https://www.marketwatch.com/story/this-investing-strategy-gives-you-a-little-less-return-but-a-lot-less-risk-2019-04-03

""Most idiots have an 80/20 portfolio (80% stocks/20% bonds) or a 90/10 portfolio or even a portfolio that is 100% stocks."

 

"How about a 35/55/3/3/4 portfolio? That’s 35% stocks, 55% bonds, 3% broad commodities, 3% gold, and 4% REITs. If you think about what this is, it’s a stock/bond portfolio with a really good inflation hedge.

Want to know the risk/return of that portfolio? It gives you almost the return of the 80/20 portfolio with half the risk."

Title: Re: Portfolio Charts - The Golden Butterfly
Post by: talltexan on May 28, 2019, 06:52:3