Author Topic: Portfolio Charts - The Golden Butterfly  (Read 740202 times)

AdrianC

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Re: Portfolio Charts - The Golden Butterfly
« Reply #700 on: February 02, 2021, 07:04:55 AM »
The metric of interest should be maximum SWR.  CAGR and final portfolio value don't tell you how much you can withdraw every year; i.e., your standard of living in retirement.

So far, VT is doing better than GB with a 4% withdrawal, as shown above.

GB 30 year SWR is 6.4%.
https://portfoliocharts.com/portfolio/golden-butterfly/

Let's try it:

Portfolio Analysis Results (Sep 2015 - Dec 2020)

With a $64,000 a year withdrawal (adjusted for inflation):
Portfolio 1 Final Balance $1,259,215  CAGR 4.42% (VT)
Portfolio 2 Final Balance $1,044,569  CAGR 0.82% ("Golden Butterfly")

The inflation adjusted final balance for VT is $1,152,097, and for the GB is $955,510.

To be clear, I don't believe anyone here thinks a 6.4% withdrawal rate would be a good idea.

Tyler

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Re: Portfolio Charts - The Golden Butterfly
« Reply #701 on: February 02, 2021, 09:47:32 AM »
I'm interested in tracking this, and here is a good place to do it.

I appreciate your dedication to keeping up with the Golden Butterfly! For those new to the thread who haven't read all 700 replies, I'll simply point out that Portfolio Charts already follows the historical returns of all types of portfolios, metrics, and investing timeframes so you don't have to. ;)

To add to the annual data discussion, here's how the various portfolios handled the COVID chaos last February, how they performed in the subsequent rebound, and how they finished out the year. Add it all up, and it was a pretty good year for the Golden Butterfly in both absolute and relative terms. But it's just one of 19 portfolios I currently study and I will continue to update the data no matter what. I'm in it for the portfolio education, not to push a single way to invest.

So keep tracking the data in any way you like, but don't let a narrow comparison distract you from the big picture. There are lots of good portfolios for all types of investors, and the most important thing is not to "win" a race since 2015 but to find an asset allocation you believe in that you can stick with in both good times and bad. Neither the Golden Butterfly nor 100% VT works for everyone. Regardless of what you personally choose to grow and protect your life savings, my hope is simply to provide the ideas and evidence to help you do it with confidence.

Cheers!
« Last Edit: February 02, 2021, 08:04:47 PM by Tyler »

AdrianC

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Re: Portfolio Charts - The Golden Butterfly
« Reply #702 on: February 04, 2021, 07:48:40 AM »
I'm interested in tracking this, and here is a good place to do it.
I appreciate your dedication to keeping up with the Golden Butterfly! For those new to the thread who haven't read all 700 replies, I'll simply point out that Portfolio Charts already follows the historical returns of all types of portfolios, metrics, and investing timeframes so you don't have to. ;)
We know the Golden Butterfly looks great in back-testing.

How did it perform out-of-sample, compared to easily investible alternatives?

I don't see how to get that info from your site.

Tyler

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Re: Portfolio Charts - The Golden Butterfly
« Reply #703 on: February 04, 2021, 09:52:42 AM »
How did it perform out-of-sample, compared to easily investible alternatives?

If you're looking for out-of-sample data, Portfolio Charts is pretty unique in its ability to account for assets, inflation, and currency outside of the United States. The easiest way to explore this is to open the Portfolio Matrix and play with the home country setting. You can even put 90% WLD-DEV and 10% EM into the calculator to model VT on the same the list.
« Last Edit: February 04, 2021, 11:30:20 AM by Tyler »

dragoncar

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Re: Portfolio Charts - The Golden Butterfly
« Reply #704 on: February 05, 2021, 02:13:22 AM »
How did it perform out-of-sample, compared to easily investible alternatives?

If you're looking for out-of-sample data, Portfolio Charts is pretty unique in its ability to account for assets, inflation, and currency outside of the United States. The easiest way to explore this is to open the Portfolio Matrix and play with the home country setting. You can even put 90% WLD-DEV and 10% EM into the calculator to model VT on the same the list.

Nothing is out of sample when all data is sampled

AdrianC

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Re: Portfolio Charts - The Golden Butterfly
« Reply #705 on: February 05, 2021, 01:26:31 PM »
How did it perform out-of-sample, compared to easily investible alternatives?

Let's call it post-discovery, then, to avoid confusion.

Golden Butterfly first published September 2015.

How did it perform post-discovery, compared to easily investible alternatives?

Interest_Compound's thesis was: "After 30 years it'll likely look just like the Permanent Portfolio looks now (losing to 100% bonds since inception)..."

Well, after 5 years the investor in Golden Butterfly is doing fine. Smoother ride, lower but perfectly adequate returns.

kenmoremmm

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Re: Portfolio Charts - The Golden Butterfly
« Reply #706 on: March 29, 2021, 09:34:22 PM »
Is this summary of ETFs accurate for compiling the GB?

http://www.lazyportfolioetf.com/allocation/golden-butterfly/

vand

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Re: Portfolio Charts - The Golden Butterfly
« Reply #707 on: October 29, 2023, 07:31:40 AM »
I thought it'd be interesting to do some MMM data mining to dug up this old thread, which was one of the more interesting threads for a long time...

Here we are in Q4 2023, what do people think of the multi-asset strategies such as the Golden Butterfly and Permanent Portfolio... they are both undergoing their worst 3 year stretch in the commonly backtested history:

https://portfoliocharts.com/portfolios/golden-butterfly-portfolio/
https://portfoliocharts.com/portfolios/permanent-portfolio/

Not to detract from Tyler's sterling work, of which I am a big fan, but its worth again pointing out how the "I'll just add some SCV to juice my returns" line of thinking has actually had the opposite effect for a long time now.  We can data-mine all we like and come up with stats that show how SCV has historically outperformed, but the very fact that this sort of knowledge is now out there and known means that its less likely to persist in the future.

And people who were able to exercise their own judgement and deem that the long term bond portion of many of these fixed-income heavy portfolios was not worth the risk have had that paid off

Multi-asset portfolios are great, and I am still a big proponent of them and believe that for most investors its worth giving up 1-2% long term growth for a much more predictable and less risky portfolio, but they also open the door to over-fitting of past data and long held assumptions that may be less true in today's investing landscape
« Last Edit: October 29, 2023, 07:36:18 AM by vand »

VanillaGorilla

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Re: Portfolio Charts - The Golden Butterfly
« Reply #708 on: October 29, 2023, 09:22:50 AM »
they also open the door to over-fitting of past data and long held assumptions that may be less true in today's investing landscape
I agree. Backtesting to 1972 fails to include any of the worst historical cohorts, meaning that any SWR calculated since 1972 is going to be fit to not the worse case scenarios. The only cohort since 1972 which challenged the 4% WR is 1973, which lasted for 30 years successfully and failed after 40ish. The only other cohort that might fail 4% is 2000 and obviously we don't have the data to make a conclusion yet.

When considering that there were only half a dozen failures of the 4% WR over the last 150 years, any sort of portfolio analysis is by definition overfit. Restricting the analysis to the last 50 years means you're fitting to an n of  (arguably less than) 1. Optimizing your analysis on post-1972 data means optimizing for 1973. Unless you have a time machine and are planning to retire in 1973, that's of little value.

ERN did a nice analysis.

After consider this topic over the last several years, I've concluded that any sort of withdrawal rate analysis is fundamentally suspect on the basis of the rule of small numbers. While it's fun to play with all sorts of historical maxima, if you want to extrapolate the past to the future, you can only do so painting with the broadest of brushes. E.g. for some reasonable combination of 10 year treasuries and total market equities, 4% WR is pretty safe, 3% is quite safe, portfolios that have decreased to 60% or so after ten years are the ones likely to fail. Buying the total market and holding is a very reasonable strategy assuming you have the stomach for volatility.

The rest is just noise. SCV, long vs short duration bonds, commodities, TIPS, whatever. It's all overfit, particularly when you consider that every big economic crash had very unique causes and effects.

As many people have shown, your path to FI is governed far more by your savings rate than your asset allocation, so overthinking the latter isn't very productive. Of course it also means that arguing about asset allocation on the internet isn't a great use of my time, but here I am. I suppose discussing asset allocation is marginally better than arguing with all the market timers that have sprung up around these parts recently.
« Last Edit: October 29, 2023, 09:27:01 AM by VanillaGorilla »

Tyler

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Re: Portfolio Charts - The Golden Butterfly
« Reply #709 on: October 30, 2023, 11:02:50 AM »
Multi-asset portfolios are great, and I am still a big proponent of them and believe that for most investors its worth giving up 1-2% long term growth for a much more predictable and less risky portfolio, but they also open the door to over-fitting of past data and long held assumptions that may be less true in today's investing landscape

I appreciate how you kept this topic in mind, and I think you raise a fair point. I'd simply add that single-asset portfolios are even more susceptible to weakness in any one investing landscape than multi-asset options. "Over-fitting" for max returns is what gets people in the most trouble and leads to trading in and out of trendy assets. Seeking consistency generally leads to more robust solutions, even if no portfolio can account for every possible fat tail situation.

In any case, the best portfolio is generally whatever someone is comfortable sticking with not only when times are great but also when times are tough. I offered the Golden Butterfly concept as one option to consider for those like me who were searching for dependable solutions beyond old-school stocks and bonds. It has worked very well for me, but I recognize that everyone has different preferences. It's why I run an entire site dedicated to educating people on all types of portfolios well beyond the Golden Butterfly. :)

I agree. Backtesting to 1972 fails to include any of the worst historical cohorts, meaning that any SWR calculated since 1972 is going to be fit to not the worse case scenarios. The only cohort since 1972 which challenged the 4% WR is 1973, which lasted for 30 years successfully and failed after 40ish. The only other cohort that might fail 4% is 2000 and obviously we don't have the data to make a conclusion yet.

FYI -- I cover these issues (and more) here: https://portfoliocharts.com/withdrawal-rates-faq/

As many people have shown, your path to FI is governed far more by your savings rate than your asset allocation, so overthinking the latter isn't very productive.

I'm totally with you there. Don't forget, I was a MMM fan well before I got heavily into portfolio theory. Portfolio Charts is my FIRE project! Take it from me -- the #1 thing you can do to help yourself towards FI is to focus on spending less and saving more. But once you get that part down, I do think that proper asset allocation can make things a lot easier down the road.
« Last Edit: October 30, 2023, 03:23:03 PM by Tyler »

ChpBstrd

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Re: Portfolio Charts - The Golden Butterfly
« Reply #710 on: October 30, 2023, 01:47:04 PM »
SCV, long vs short duration bonds, commodities, TIPS, whatever. It's all overfit, particularly when you consider that every big economic crash had very unique causes and effects.
I've been diving deeper into this line of thought.

Each of the worst times to be a retiree investor have looked different from any other time. If  you loaded up on bonds in the 1960s to hedge the risk of another Great Depression, you got destroyed by the stagflation of the 1970s. If in the 1980s you loaded up on gold to hedge the stagflation scenario, you had dead money for decades, harming your SWR. If you said f*** it I'm going YOLO with stocks in the late 1990s you got bashed by the massive 2000-2003 dot-com correction. And then you went into housing / mortgages in the mid-2000's, which had never before experienced a wave of defaults or housing deflation and that seemed historically safe!

I'm sure at each step of the process, portfolio optimizers were thinking of all the ways things went sideways in the past, and considered this set of info to represent the full universe of ways things could go sideways in the future. Yet, each time, markets found a new way to destroy portfolios which had hedged heavily against the previous scenario. 

So what are we doing today? Looking at the past 150+ years of stock and bond data to determine what can possibly go wrong, and applying the hedging strategies that would have worked in the past!

We're doing this even though the strategy has never worked before, no scenario has ever replicated itself exactly, and markets have always surprised us with a new way to fail that invalidated the earlier approach. We're calculating portfolio failure odds in the low single digit percentages with decimals, as if the entire universe of things-which-could-happen-but-haven't-yet doesn't exist.

For example, who is hedging against a 30%+ U.S. dollar devaluation? None of us.

If you don't have that one on your bingo card, that's because it's never happened. If you were a British, Turkish, Argentine, or Russian investor, OTOH, such an event is with living memory. How about the downfall of democracy, and the institution of a one-party state that limits your ability to invest internationally? What about a decade-long reversal in productivity? Again, it's never happened to U.S. investors, but it has happened multiple times to others, so maybe we all need to be thinking about currency diversification and offshore accounts/exchanges.

The problem when you start imagining a diversification strategy that spans countries, currencies, and exchanges, is finding a lot more failure modes in this broader historical dataset. More ways to fail leads to a perception that the SWR is much lower by following such a strategy. Yet what we're doing here is arguably uncovering more about what could go wrong, and what any portfolio's actual odds are. It doesn't make sense not to model a 30% currency depreciation in a totally USD account, but to model it if your account includes other currencies.

Expanding horizons is the opposite of fishing for a low SWR in a subset of data from one country (the most economically successful one), one currency (the one which became global reserve currency but did not lose that status during the sampling period, as all prior reserve currencies did), and with only the sorts of assets that were available long ago and also have long data series (i.e. not rent houses, black market precious metals, options or futures for hedging, cryptos, annuities, life insurance policies, iBonds, target date funds, or TIPS).

The counter-argument is that civilizations are slow to change, and the U.S's policies favoring business, technology, education, a strong currency, and social stability are unlikely to be modified in the next 30-40 years, so future crises will be comparable to the past.

vand

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Re: Portfolio Charts - The Golden Butterfly
« Reply #711 on: October 31, 2023, 03:18:47 AM »
Multi-asset portfolios are great, and I am still a big proponent of them and believe that for most investors its worth giving up 1-2% long term growth for a much more predictable and less risky portfolio, but they also open the door to over-fitting of past data and long held assumptions that may be less true in today's investing landscape

I appreciate how you kept this topic in mind, and I think you raise a fair point. I'd simply add that single-asset portfolios are even more susceptible to weakness in any one investing landscape than multi-asset options. "Over-fitting" for max returns is what gets people in the most trouble and leads to trading in and out of trendy assets. Seeking consistency generally leads to more robust solutions, even if no portfolio can account for every possible fat tail situation.


1000% agree here too.

Case in point, many "risk adverse"  boomers are getting the shock of their life as they come up to normal retirement and find their pension funds are in the middle of catastrophic drawdowns:

https://www.thisismoney.co.uk/money/pensions/article-12682773/amp/How-safe-pension-fund-plummet-30-year-retire.html

(NB: a regular UK "pension" is like a variable 401k pot, not a US fixed-payment style pension, although we do have those too)

We've talk about this extensively before on various threads, how bonds owners could be in for a very nasty realisation if there is a rate spike.. my heart does go out to these sort of normal retirees - they put their trust into financial advisors and the marketing around low/med/high risk and yet because they don't necessarily understand finance well enough to know any better, and then they get smashed when they can least afford it becausethey couldn't have know what the obvious risk was. You don't necessarily feel too sorry if someone's equity portfolio drops 30%-40% because that's considered higher risk and it goes with the territory, but if so called "safe" funds are smashed like this what the hell else was he supposed to do...

VanillaGorilla

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Re: Portfolio Charts - The Golden Butterfly
« Reply #712 on: October 31, 2023, 08:19:07 AM »
FYI -- I cover these issues (and more) here: https://portfoliocharts.com/withdrawal-rates-faq/

That's a good disclaimer! Just recognize that it's a little challenging to reconcile disparate views in common sources. For example, your disclaimer links to another page where you wrote the following:
Quote
I provide data that shows that the Permanent Portfolio has supported a safe withdrawal rate closer to 5%.

When I first came across your descriptions of the Permanent Portfolio I was shocked at how good the performance appeared. Several years later I saw Karsten Jeske's analysis that suggests the Permanent Portfolio's safe withdrawal rate for a 30 year period is 2.6%. What an incredible discrepancy - nearly a full factor of 2!

My conclusion now is that the PP did ok since 1970. It did ok in the early 70s and it did well in 2000, though not tremendously better than a 60/40. However, it did extremely poorly over a larger set of historical data. This sort of nuance is important and I feel like it's important to present accurately. Naively the Permanent Portfolio looks like a silver bullet, but a more jaundiced eye recognizes the very significant caveats.

Quote
So what are we doing today? Looking at the past 150+ years of stock and bond data to determine what can possibly go wrong, and applying the hedging strategies that would have worked in the past!
Within reason ;) . The other day I saw someone pointing out that with current TIPS rates you could fund a 30 year retirement entirely off a TIPS ladder, which is only possible with the current specific environment. I believe Your Money Or Your Life suggested funding oneself entirely off bonds, which might have been possible in the late 80s but certainly not 10 years ago. Humans and markets are not static creatures.

Tyler

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Re: Portfolio Charts - The Golden Butterfly
« Reply #713 on: October 31, 2023, 09:15:30 AM »
That's a good disclaimer! Just recognize that it's a little challenging to reconcile disparate views in common sources.

...

When I first came across your descriptions of the Permanent Portfolio I was shocked at how good the performance appeared. Several years later I saw Karsten Jeske's analysis that suggests the Permanent Portfolio's safe withdrawal rate for a 30 year period is 2.6%. What an incredible discrepancy - nearly a full factor of 2!

My conclusion now is that the PP did ok since 1970. It did ok in the early 70s and it did well in 2000, though not tremendously better than a 60/40. However, it did extremely poorly over a larger set of historical data. This sort of nuance is important and I feel like it's important to present accurately. Naively the Permanent Portfolio looks like a silver bullet, but a more jaundiced eye recognizes the very significant caveats.

Yeah, I understand that reading about these types of things from multiple sources can be confusing. And I agree 100% that nuance is important to present accurately. So here's the full context. :)

The discrepancy between my PP numbers and those from ERN is largely due to the effect of the gold standard on the data (which legally fixed the gold return to 0% nominal for hundreds of years prior to 1971). Most of ERN's data is under the gold standard, while only one year of mine is. Limiting the return of an asset to a flat 0% obviously would depress withdrawal rates, so the delta is not surprising.

Karsten does great work, and different perspectives are always welcome. Speaking for myself, I think my number is more realistic for investors today because the old gold standard system no longer exists and gold behavior is completely different now. That said, I do understand the desire for more years of data. It's just that to do it correctly for portfolios containing gold, I think it would require some careful hybrid backtests with substitute data assumptions that neither of us have attempted. I wrote about it at length here: https://portfoliocharts.com/2020/08/21/metal-money-and-the-measurable-value-of-gold/#backtest

In the absence of such an analysis, a reasonable approach would be to assume that with an extended applicable history the true SWR would be somewhere between our numbers.

In any case, make of that what you will. I'm not trying to push anyone into buying gold or anything. Just to provide proper context so that people can make an educated choice.
« Last Edit: October 31, 2023, 04:00:52 PM by Tyler »

AdrianC

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Re: Portfolio Charts - The Golden Butterfly
« Reply #714 on: October 31, 2023, 09:26:59 AM »
Not to detract from Tyler's sterling work, of which I am a big fan, but its worth again pointing out how the "I'll just add some SCV to juice my returns" line of thinking has actually had the opposite effect for a long time now.  We can data-mine all we like and come up with stats that show how SCV has historically outperformed, but the very fact that this sort of knowledge is now out there and known means that its less likely to persist in the future.
Adding SCV did help the Golden Butterfly beat the Permanent Portfolio since the GBs publication:

Sep 2015 - Sep 2023, Real CAGR:
PP 1.3%
GB 2.1%
VT 5.1%
VTI 8.0%
VBR 4.7% (SCV)
BRK.B 9.1%

https://www.portfoliovisualizer.com/backtest-portfolio?s=y&sl=3jeEOYIb06iTEvTIHDJRwX

But yeah, wow.

vand

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Re: Portfolio Charts - The Golden Butterfly
« Reply #715 on: October 31, 2023, 02:47:46 PM »
Not to detract from Tyler's sterling work, of which I am a big fan, but its worth again pointing out how the "I'll just add some SCV to juice my returns" line of thinking has actually had the opposite effect for a long time now.  We can data-mine all we like and come up with stats that show how SCV has historically outperformed, but the very fact that this sort of knowledge is now out there and known means that its less likely to persist in the future.
Adding SCV did help the Golden Butterfly beat the Permanent Portfolio since the GBs publication:

Sep 2015 - Sep 2023, Real CAGR:
PP 1.3%
GB 2.1%
VT 5.1%
VTI 8.0%
VBR 4.7% (SCV)
BRK.B 9.1%

https://www.portfoliovisualizer.com/backtest-portfolio?s=y&sl=3jeEOYIb06iTEvTIHDJRwX

But yeah, wow.

Yes it did beat the PP but not due to the SCV per se, just due to the higher equity weighting overall -  my comment was in comparison to just going with global all cap weighting for your equity allocation than trying to juice your returns with SCV.

AdrianC

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Re: Portfolio Charts - The Golden Butterfly
« Reply #716 on: November 01, 2023, 05:53:41 AM »
Yes it did beat the PP but not due to the SCV per se, just due to the higher equity weighting overall -  my comment was in comparison to just going with global all cap weighting for your equity allocation than trying to juice your returns with SCV.
Sure, I should have included a wink.

Adding SCV did help the Golden Butterfly beat the Permanent Portfolio since the GBs publication ;-)