The Golden Butterfly originated from Tyler’s Portfolio Charts and is often considered as a derivative of Harry Browne´s Permanent Portfolio which I looked at in a previous post. Like the permanent Portfolio is comprises of 4 asset types:-
- Equities
- Short term government bonds bonds
- Long term government bonds
- Gold
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THE GOLDEN BUTTERFLY |
Whereas the Permanent Portfolio has equal weightings of each asset, the Golden Butterfly aims for higher growth by allocating 40% to equities split evenly between Total Market and Small Cap Value and equal allocations to short term government bonds, long term government bonds and gold.
As with the Permanent Portfolio the idea is to have four asset classes to deal with all likely market conditions – equities provide growth in expansionary markets, gold in inflationary markets, long term bonds during deflationary periods bonds and short term government bonds/cash provide protection during market crashes.
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ASSET CLASS PERFORMANCE |
The Golden Butterfly provides more growth potential by allocating 40% to equities rather than 25% and an allocation of 50% of the equities to Small Cap Value (see Paul Merriman for more information about Small Cap Value). The higher equity allocation results in higher volatility than The Permanent Portfolio but an average growth rate more than 2.5 percentage points higher.
Many people will be wary of this portfolio. Gold is not a well liked asset class and many investors will be wary of investing in long term bonds with interest rates at historic lows. A further problem is that there are only around 50 years of data available on some of the asset classes so we have no knowledge of how the portfolio would have performed during the late 60s and early 70s when there were 2 market crashes close to one another. However, the out performance of this portfolio and the rational behind the asset allocation makes it a very attractive option.
My Golden Butterfly Portfolio
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GOLDEN BUTTERFLY PORTFOLIO
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ASSET
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%
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CASH
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20%
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Ishares Gilts 0-5yr
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TOTAL STOCK MARKET
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20%
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iShares Core MSCI World ETF
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SMALL CAP UK
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10%
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BlackRock Throgmorton IT
Standard Life UK Smaller Companies
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SMALL CAP GLOBAL
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10%
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Edinburgh Worldwide IT
Smithson IT
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LONG TERM GILTS
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20%
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Vanguard Long Duration UK Gilt Fund
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GOLD
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20%
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iShares Physical Gold ETF
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I have chosen 4 Investment Trusts for the 20% small cap segment of the portfolio, 2 UK based and 2 global and have taken a risk in choosing Smithson but I did the same when Fundsmith launched and that gamble certainly paid off. Opting for 4 trusts to represent the small cap sector makes portfolio balancing more complicated but reduces the risk of being dependent upon one trust and one manager but without doubt more monitoring will be required than for an index fund.
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Manager
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Unit Name
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% of Portfolio
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1 Year Perf.
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iShares
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20.0
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-1.5
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Vanguard Investments UK
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20.0
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28.8
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iShares
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20.0
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1.8 | |
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iShares
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20.0
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27.8
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Fundsmith
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5.0
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6.4
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Baillie Gifford & Co Ltd
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5.0
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1.2
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Standard Life Investments
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5.0
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14.3
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BlackRock Investment Management
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5.0
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12.3
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Total Portfolio
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Total Portfolio
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100.0
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12.7
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Selected Benchmark
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FTSE All Share
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-10.7
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Manager
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Unit Name
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% of Portfolio
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5 Year Perf.
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iShares
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20.0
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48.5
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Vanguard Investments UK
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20.0
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62.9
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iShares
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iShares UK Gilts 0-5yr ETF GBP
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20.0
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5.2
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iShares
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20.0
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63.6
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Baillie Gifford & Co Ltd
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10.0
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105.6
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Standard Life Investments
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5.0
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89.6
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BlackRock Investment Management
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5.0
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110.8
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Total Portfolio
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Total Portfolio
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100.0
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50.9
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Selected Benchmark
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FTSE All Share
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11.6
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The portfolio has higher growth and lower volatility than the FTSE All Share:-
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Performance Analysis
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Growth Rate %
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Volatility
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Alpha
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Beta
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Sharpe
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Info Ratio %
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Portfolio
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8.8
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6.5
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7.4
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0.4
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0.8
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0.6
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Benchmark – FTSE All Share
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3.6
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10.7
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0.0
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1.0
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0.0
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0.0
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Monte Carlo Simulation
A 5 year performance history is a good indicator of relative performance but only tells a small part of the story. A Monte Carlo simulation is more useful as it analyses a portfolio of similar asset classes over a large number of historical and simulated scenarios. I have used the Timeline simulation tool to compare the Golden Butterfly with a conventional 60/40 and permanent Portfolio. An exact replication wasn´t possible as Timeline do not have long term gilt or intermediate gilt asset classes, their nearest approximation being UK Aggregate Bonds.
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ASSETS
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60/40
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PERMANENT PORTFOLIO
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GOLDEN BUTTERFLY
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Cash
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25%
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20%
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UK Aggregate bonds
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40%
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25%
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20%
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UK Equities
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60%
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25%
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UK Small Cap
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10%
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Global Equities
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20%
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Global Small cap
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10%
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Gold
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25%
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20%
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OUTCOMES
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60/40
EQUITY/BOND
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PERMANENT PORTFOLIO
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GOLDEN BUTTERFLY
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Success Rate
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88%
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83%
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98%
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Longevity
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93 years
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92 years
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95 years
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Legacy
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£0
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£0
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£278.2k
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Lifetime Income
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£1.13m
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£1.12m
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£1.2m
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Another useful means of comparing performance using historical actual data is through Portfolio Charts. Again the exact asset classes are not available but using the best approximations does provide a means of comparing portfolios.
- Max. Drawdown: Maximum decline in value
- Recovery Time. How long to recover from a downturn
- Average Return: Average Inflation Adjusted Return
- Safe Withdrawal Rate: The initial withdrawal rate that ensures not running out of money during a 30 year retirement with annual withdrawals increasing by the rate of inflation
- Perpetual Withdrawal rate: The initial withdrawal rate that ensures never running out of money with annual withdrawals increasing by the rate of inflation
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PORTFOLIO CHARTS COMPARISON
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Max. Drawdown
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Recovery Time
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Average Return
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Safe Withdrawal Rate
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Perpetual Withdrawal Rate
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60/40 Equity/Bond
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57%
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12yrs
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6.1%
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4.0%
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3.2%
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Permanent Portfolio
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9%
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5yrs
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4.7%
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5.3%
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3.7%
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Golden Butterfly
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22%
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5yr
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5.3%
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5.7%
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4.3%
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The Golden Butterfly permits the highest Safe and Perpetual Withdrawal rates at 5.7% and 4.3%, with a much reduced maximum drawdown and faster recovery time than a 60/40 portfolio. The Permanent Portfolio offers the lowest maximum drawdown but lower withdrawal rates than the Golden Butterfly.
Conclusion
Using both historical data and Monte Carlo Simulation the Golden Butterfly is the top performing portfolio for retirement drawdown. There are some caveats: some historical data is limited, some investment products have been in existence less than a decade and whilst is is relatively easy to simulate a US portfolio, the UK investor can only approximate to the ideal Golden Butterfly due to the absence of a UK Small Cap value class and of course finally – the past is no accurate predictor of the future.
Really interesting article, I was looking for some starting points for a UK variation having found the US original on portfoliocharts.com I look forward to an update on the anniversary.
Glad you found the post useful. I´ll be posting an update in a few week's time. I´m currently researching the effect of gold on UK portfolio volatility and SWR – and will be posting next week – if the Golden Butterfly has drawn your attention you will find it interresting.
I'm looking at possibly implementing a version of this portfolio in my SIPP. I plan to base my withdrawals on the ideas in Michael McClung's book.
For the purposes of implementing McClung's Prime harvesting strategy and EM withdrawal strategy, would you attribute the Gold allocation in this portfolio to the equities or to the bonds side of the equation?