Author Topic: Portfolio Charts - The Golden Butterfly  (Read 254256 times)

Retire-Canada

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Re: Portfolio Charts - The Golden Butterfly
« Reply #500 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. :)

Kevin K.

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Re: Portfolio Charts - The Golden Butterfly
« Reply #501 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

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.

AlmstRtrd

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Re: Portfolio Charts - The Golden Butterfly
« Reply #502 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.

Classical_Liberal

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Re: Portfolio Charts - The Golden Butterfly
« Reply #503 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 tastesÖ.  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 govít would likely be slow and steady, rather than an overnight black swan event (I donít think barbarians are at the gate just yet).
 
Personally, Iím in a different situation as Iím still accumulating at a rather fast pace.  Iím 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.  Iím certainly an amateur, but I believe itís the international equity markets that deserve most of my inflows in the current situation. 

Kevin K.

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Re: Portfolio Charts - The Golden Butterfly
« Reply #504 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!

JohnnyRingo

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Re: Portfolio Charts - The Golden Butterfly
« Reply #505 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?

talltexan

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Re: Portfolio Charts - The Golden Butterfly
« Reply #506 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.

AdrianC

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Re: Portfolio Charts - The Golden Butterfly
« Reply #507 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?

talltexan

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Re: Portfolio Charts - The Golden Butterfly
« Reply #508 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.

DrF

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Re: Portfolio Charts - The Golden Butterfly
« Reply #509 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.

Classical_Liberal

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Re: Portfolio Charts - The Golden Butterfly
« Reply #510 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.

Radagast

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Re: Portfolio Charts - The Golden Butterfly
« Reply #511 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

Classical_Liberal

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Re: Portfolio Charts - The Golden Butterfly
« Reply #512 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.

talltexan

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Re: Portfolio Charts - The Golden Butterfly
« Reply #513 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

Radagast

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Re: Portfolio Charts - The Golden Butterfly
« Reply #514 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).




Radagast

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Re: Portfolio Charts - The Golden Butterfly
« Reply #515 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).

Classical_Liberal

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Re: Portfolio Charts - The Golden Butterfly
« Reply #516 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 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.

Radagast

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Re: Portfolio Charts - The Golden Butterfly
« Reply #517 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.

DrF

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Re: Portfolio Charts - The Golden Butterfly
« Reply #518 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

The article you linked is missing the concept of inflation-treasury correlation.

https://www.investopedia.com/articles/bonds/09/bond-market-interest-rates.asp

dragoncar

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Re: Portfolio Charts - The Golden Butterfly
« Reply #519 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?
« Last Edit: January 02, 2018, 01:25:22 PM by dragoncar »

mintleaf

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Re: Portfolio Charts - The Golden Butterfly
« Reply #520 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!

AdrianC

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Re: Portfolio Charts - The Golden Butterfly
« Reply #521 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.

DrF

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Re: Portfolio Charts - The Golden Butterfly
« Reply #522 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.

Classical_Liberal

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Re: Portfolio Charts - The Golden Butterfly
« Reply #523 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!!

Telecaster

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Re: Portfolio Charts - The Golden Butterfly
« Reply #524 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. 

Classical_Liberal

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Re: Portfolio Charts - The Golden Butterfly
« Reply #525 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.

Classical_Liberal

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Re: Portfolio Charts - The Golden Butterfly
« Reply #526 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.

« Last Edit: January 03, 2018, 10:58:01 PM by Classical_Liberal »

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Re: Portfolio Charts - The Golden Butterfly
« Reply #527 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.

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Re: Portfolio Charts - The Golden Butterfly
« Reply #528 on: January 04, 2018, 04:11:22 AM »
Thanks everyone, and especially drf for the links which I hadnít 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 itís at for financial programming and I love to learn new stuff)

Yes as exhaustively discussed, backtesting is mostly useful to tell you what ideas didnít work historically.  Still a valuable exercise

Iím amazed that anyone here has the impression that i ďknow moreĒ.  Iíve been seeing your names show up more and more in very well reasoned and articulated discussions.  I really appreciate your insights

Iím 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.  Iím happy with a high equity value as long as the portfolio value is also high :-)
« Last Edit: January 04, 2018, 04:13:24 AM by dragoncar »

DrF

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Re: Portfolio Charts - The Golden Butterfly
« Reply #529 on: January 04, 2018, 08:11:35 AM »
Thanks everyone, and especially drf for the links which I hadnít 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 itís at for financial programming and I love to learn new stuff)

Yes as exhaustively discussed, backtesting is mostly useful to tell you what ideas didnít work historically.  Still a valuable exercise

Iím amazed that anyone here has the impression that i ďknow moreĒ.  Iíve been seeing your names show up more and more in very well reasoned and articulated discussions.  I really appreciate your insights

Iím 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.  Iím 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.

talltexan

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Re: Portfolio Charts - The Golden Butterfly
« Reply #530 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.

dragoncar

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Re: Portfolio Charts - The Golden Butterfly
« Reply #531 on: January 05, 2018, 12:03:06 PM »
Thanks everyone, and especially drf for the links which I hadnít 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 itís at for financial programming and I love to learn new stuff)

Yes as exhaustively discussed, backtesting is mostly useful to tell you what ideas didnít work historically.  Still a valuable exercise

Iím amazed that anyone here has the impression that i ďknow moreĒ.  Iíve been seeing your names show up more and more in very well reasoned and articulated discussions.  I really appreciate your insights

Iím 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.  Iím 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?
« Last Edit: January 05, 2018, 12:09:38 PM by dragoncar »

Interest Compound

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Re: Portfolio Charts - The Golden Butterfly
« Reply #532 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




And with a $40,000 a year withdrawal:



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.

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Re: Portfolio Charts - The Golden Butterfly
« Reply #533 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.

AdrianC

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Re: Portfolio Charts - The Golden Butterfly
« Reply #534 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.

steveo

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Re: Portfolio Charts - The Golden Butterfly
« Reply #535 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.


talltexan

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Re: Portfolio Charts - The Golden Butterfly
« Reply #536 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?

steveo

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Re: Portfolio Charts - The Golden Butterfly
« Reply #537 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.

dragoncar

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Re: Portfolio Charts - The Golden Butterfly
« Reply #538 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!
« Last Edit: January 14, 2018, 01:19:57 AM by dragoncar »

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Re: Portfolio Charts - The Golden Butterfly
« Reply #539 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)

dragoncar

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Re: Portfolio Charts - The Golden Butterfly
« Reply #540 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)

Thereís 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 didnít do it wil some gold in the mix

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Re: Portfolio Charts - The Golden Butterfly
« Reply #541 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.

AdrianC

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Re: Portfolio Charts - The Golden Butterfly
« Reply #542 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.

jpeizie

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Re: Portfolio Charts - The Golden Butterfly
« Reply #543 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.

Tyler

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Re: Portfolio Charts - The Golden Butterfly
« Reply #544 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.

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Re: Portfolio Charts - The Golden Butterfly
« Reply #545 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%.

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Re: Portfolio Charts - The Golden Butterfly
« Reply #546 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?

Tyler

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Re: Portfolio Charts - The Golden Butterfly
« Reply #547 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


AdrianC

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Re: Portfolio Charts - The Golden Butterfly
« Reply #548 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.

AdrianC

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Re: Portfolio Charts - The Golden Butterfly
« Reply #549 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.

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.