The ultimate goal of every investor is to create a portfolio that can whether any economic conditions. Asset allocation however is one of the most mentally exhausting aspects of investing. While we all want to ensure you maximum returns, there’s also need to consider the risk aspect of your investments.
This is where modern portfolios like the Golden Butterfly Portfolio comes in play. Combined with proper research and contextual data, these portfolios provides a template to better structured your investment portfolio.
Understanding The Golden Butterfly Portfolio
The Golden Butterfly Portfolio is built to handle different economic environment. It’s a medium-risk portfolio that combines some of the best features of other asset allocations to create a stable investment strategy for accumulation and retirement. The Golden Butterfly Portfolio incorporates the characteristics of other lazy portfolios, most notably the All Whether portfolio introduced by hedge fund manager Ray Dalio, and made popular by Tony Robbins in his book ‘MONEY Master the Game- 7 Simple Steps to Financial Freedom.’
The goal is to grow and achieve similar returns to a broad US equity portfolio with substantially lower volatility.
In other words, the Golden Butterfly Portfolio targets the same results like a regular equity portfolio but with lower up and downs and losses.
It’s called the Golden Butterfly Portfolio because, it has two wings dedicated to bonds and stocks, and at the head it has the head of gold.
Asset Breakdown
The Golden Butterfly Portfolio goes against conventional investing wisdom in it’s assets allocation. The portfolio is divided into 5 segments.
Stocks:
- 20% Total US Stock Market
- 20% US Small Cap Value
Bonds:
- 20% Long-Term Treasury Bonds
- 20% Short-Term Treasury Bonds
Real Assets:
- 20% Gold
Do These Assets Make Good Investments?
When you look at the assets that make up the Golden Butterfly portfolio one at a time, it can be considered risky.
Let’s take Gold for instance; I’m personally not a fan of Gold. Many personal finance advisors don’t recommend Gold an investment because it’s a risky asset class which is only considered safe during a market downturn. It’s much more volatile than bonds, and is not a value producing asset, rather a store of wealth.
Short-term treasury bonds offer a high degree of negative correlation to stocks, which make it the best hedge for a stock crash.
Long-term treasury equity also comes with a whole lot of uncertainty, and the risk of losing significant value in the future. With the current market outlook short-term treasuries is like a waste of money.
Small Caps Value on the other hand has historically always beaten large caps. However, it has higher volatility and individual companies are likely to go bankrupt than larger firms.
So basically, moat of the assets that comprise of the Golden Butterfly portfolio are unpopular. However When you look at all the assets combined, and check the correlation, things begin to look clearer.
results show something entirely different.
Analysis of Portfolio components
The Golden Butterfly portfolio is structured to handle different market cycles.
- Market prosperity: Stocks and equity – 40%
- Recession: Fixed Income – 40%
- Inflation: Gold – 20%
Structure
- Market prosperity: Stocks and equity – 40%
- Recession: Fixed Income – 40%
- Inflation: Gold – 20%
What this means is that during a market boom, the portfolio will perform well due to the 40% exposure in equity. Also the 40% investment in fixed income component will ensure you still have a balanced portfolio during a recession. Fixed income has done well during this period, and will offset any loses in the equity component during a recession.
Lastly, there’s the 20% exposure in gold, which is a good hedge against inflation.
Analysis of Performance
Portfolio Analysis
Retirement: The golden butterfly portfolio offers a short term diversification benefit which makes for safe withdrawal for retirement. Since it’s structured for less volatility, it’s an ideal option as you move towards retirement. Even if any asset within the portfolio is affected, the other asset components will provide a balance that will keep your investment afloat.
Accumulation: Adopting the Golden Butterfly Portfolio may also be a good move if your goal is to accumulate your investment over time. It offers diversification that ensures long-term stability, and considerable lower losses to your investments.
Another glaring problem with this portfolio is that it only uses US assets, and offers no international exposure. Taking the stock global can enhance performance. Most investors adopting the Golden portfolio create a modified version of it which diversifies into international stocks.
Performance Against The Vanguard Total Stock Market
In an analysis by Brandon Beavis, he compared the Golden Butterfly using the Vanguard U.S stock market fund (VTI). In one side he placed a 100% VTI ETF, and on the other side a variety of ETF structured to accommodate all the components of the Golden butterfly.
Analyzing the performance, the Golden Butterfly did well to keep up with the broader U.S market. In comparing the annual growth rate, VTI grew at 8.66%, while the Golden Butterfly grew at 7.59%.
In the worst year, which both portfolios performed the worst happened to be 2009 which was during the financial crisis. During this period, the VTI has a loss of -36.98%, while the Golden portfolio had a loss of -4.12%.
In another analysis by portfoliotrust.com that compares the U.S total market to the Golden butterfly portfolio for a longer term dating back to 1972. In the long-term compound annual growth rate was 5.9% for VTI and 5.7 for Golden butterfly.
For the best year,
And as expected, in the worst year, the VTI had a loss of -37.1%, compared to -11.2% for the Golden butterfly with a drawdown period of 13 years and 2 years respectively.
Is The Golden Portfolio Ideal For Me?
Investing with the golden butterfly portfolio is quite straightforward. The strategy is ideal for anyone that falls into the following categories.
- You are hate the heavy swings in the market.
- You are willing to give up a little bit of gain for long-term investment security
- If you are conservative investor who’s not too comfortable with the market.