We cannot prevent the ups and downs of the market. There will always be bull and bear runs, whether we like it or not. But what we can do is to prepare adequately for these moments. One of the most solid plans any investor can make to weather the storm in difficult market moments is to go with a portfolio that performs relatively well in all situations.
That is where lazy portfolios like the Golden Butterfly Portfolio come in. This portfolio is carefully designed to provide decent returns irrespective of the market conditions. So, even if you have no time to keep up with trades, you can always count on this portfolio to deliver.
This guide discusses all you need to know about the Golden Butterfly Portfolio. Join me as we try to find out how ‘golden’ this portfolio is.
Key Takeaways
This is a comprehensive but enjoyable guide to Golden Butterfly Portfolio. However, if you do not have the time to go all the way to the end, you can go through the key takeaways.
- The Golden Butterfly Portfolio is a lazy portfolio created by Tyler of the popular Portfolio Charts website.
- The portfolio is a modification of the traditional 50/50 portfolio. It adopts insights from another popular portfolio – the Permanent Portfolio by Harry Browne.
- The Golden Butterfly Portfolio comprises 40% stocks, 40% bonds, and 20% gold. The last asset class brings about the ‘Golden’ in the portfolio title.
- This portfolio has recorded gains similar to 100% stock portfolios over time. It also fares averagely well against the popular S&P 500.
- It is great for investors looking to play the long-term buy-and-hold strategy, those who are open to moderate risks, and those who have a bias for gold as an asset.
- Investors can customize the portfolio to alter its holdings in each of the asset classes it covers.
The Golden Butterfly Portfolio Overview
The Golden Butterfly Portfolio was created by Tyler, the author of Portfolio Charts, a mechanical engineer, investing researcher, and spreadsheet enthusiast. According to Tyler, the portfolio is an idea born of his ongoing exploration.
The “Golden Butterfly” is an interesting name for any portfolio. But it is not coincidental. In fact, it is rather intentional. The portfolio comprises one-fifth of five different asset types, including two types of stocks and two types of bonds. It is ‘golden’ because gold is one of these five asset types.
Therefore, plotting the asset types and allocation on a pie chart creates the appearance of a butterfly with two equity wings. The first wing is for the stocks – the total and small-cap stocks, while the other is for bonds – long-term and short-term bonds. The antenna represents the gold part of the asset class. All of these translate into a graphical representation of a Golden Butterfly.
The Golden Butterfly Portfolio is specifically designed to thrive in just about any market condition away from the name concept. As a result, investors can expect decent returns for the year, irrespective of what the market is saying. The portfolio achieves this by focusing on two crucial things – diversification and risk-weighted return.
In terms of diversification, it comprises five different asset types and three different asset classes, ensuring you are far from putting all your eggs in one basket. In addition, the excellent risk-weighted return in this portfolio provides a balance between how much risk you are taking and the returns you have recorded.
The creators believe this portfolio will perform at all times, whether in a period of economic recession, economic expansion, deflation, or inflation. How accurate is this? We will find out shortly. But before then, let’s discuss the investment strategy of this portfolio.
The Golden Butterfly Portfolio Investment Strategy
The investment strategy of this portfolio is an interesting one. As mentioned earlier, there are five assets in this portfolio, all of which have been carefully chosen to ensure diversification. Bonds and stocks are common features in most lazy portfolios, but we cannot say the same for gold. However, Tyler’s defense for adopting gold as an investment vehicle is that it offers a hedge against inflation – a take many experts have opposed.
Asides from gold, there are long-term treasury bonds and short-term treasury bonds. While long-term treasury bonds are known for their high volatility, they add some stability to the portfolio. The portfolio even enjoys more stability from the short-term treasury bonds, which justify their inclusion despite their relatively low returns.
There are also small-cap value stocks – a subject of constant debate among investors and opinion leaders in the industry. While these stocks are unpredictable in terms of future performance, historical performance has shown that they outperform the overall market in the previous years.
These asset classes are similar to what obtains in the Permanent Portfolio (a detailed comparison later) and a few other lazy portfolios out there. However, this portfolio’s slight heaviness on the stock market sets it apart. It takes advantage of the fact that there has been more economic growth than recession or stagnation over the years.
Overall, it is all about gathering the right unconventional assets and balancing them to arrive at a diversified portfolio an investor can always count on. It deviates from the conventional investing wisdom.
Tyler has a comprehensive explanation of the Golden Butterfly investment strategy here.
The Golden Butterfly Portfolio Asset Allocation
We can group the five asset classes in this portfolio into three different asset classes: stocks, bonds, and gold.
Stocks
Stocks account for 40% of the overall portfolio: 20% Total U.S. Stock Market Stocks and 20% U.S. Small-Cap Value Stocks.
The total U.S. Stock Market section comprises assets invested in the entire stock market of the United States. These include ETFs covering all sectors and market caps. They are known for their high diversity and are the most preferred option for domestic stock investments.
The U.S. Small-Cap Value Stocks are known for their value characteristics. The assets in this class invest in stocks within the bottom 10% of the capitalization of the United States equity market. In addition, they have historically delivered high dividend yields over low price ratios in the past years.
Bonds
Bonds also account for another 40% of the overall portfolio – 20% Short-Term Treasuries and 20% Long-Term Treasuries.
Short-Term Treasury Bonds are assets that invest in short-term obligations of the United States government or its agencies. The inflation risk is low, but so are the returns. However, they keep things steady during difficult market situations.
Long-Term Treasury Bonds – like their short-term counterparts, long term bonds offer decent stability, especially during bull runs. They are assets invested in long-treasury bonds and other debt securities of the United States treasury.
Gold
Gold, also accounting for 20% of the entire portfolio, is most likely the odd one out of the five asset classes on this list. That’s no surprise, considering several investors do not see gold as a viable long-term investment vehicle. However, statistics suggest otherwise. Gold has proven time and again to be a safe hedge against inflation and a substantial store value during challenging market runs.
Here is a summary of the asset classes in the Golden Butterfly portfolio:
- 20% Total U.S. Stock Market
- 20% U.S. Small-Cap Value
- 20% Long-Term Treasuries
- 20% Short-Term Treasuries
- 20% Gold
The Golden Butterfly Portfolio Historical Returns
We cannot extensively discuss a portfolio without touching on its performance. Therefore, this section looks closely at how the Golden Butterfly has fared in the past years. We will be using the S&P 500 as the comparison benchmark throughout for ease of understanding.
Portfolio Growth
Let’s assume you invested $10,000 in both Golden Butterly and S&P 500 in January 2010; you would have $25,014 and $35,073 in both portfolios, respectively. These numbers translate to a 150.14% increase in the Golden Butterfly investment and a 250.73% increase in the S&P 500 portfolio. So, essentially, the Golden Butterly performs well but not better than the benchmark regarding returns over time.
Annualized Return
The annualized return of both portfolio types paints a slightly different picture. The Golden Butterfly has 7.26% and 6.72% annualized returns in the last five and ten years. The S&P 500 recorded 10.63% and 11.67%, respectively, within the same timeframes. Again, the S&P 500 is the better performer here.
Dividend Yield
If we look at how much the portfolio has paid out to investors in dividends during the trailing 12-month period related to its value – the Dividend Yield, the Golden Butterfly investors have pocketed 1.08%. Interestingly, the highest dividend yield in the last ten years was recorded in 2018 – 1.71%.
Drawdowns
The drawdown of any portfolio refers to the maximum decline from its peak price in the last ten years. In the case of the Golden Butterfly portfolio, its worst drawdown since January 2010 was 15.83%, and that was in March 2020. The portfolio eventually recovered in June of the same year.
Volatility
One of the metrics where the Golden Butterly outshined the S&P 500 is volatility, which describes the price swings in either direction. In the last five years, the Golden Butterfly Portfolio has managed volatility of 6.28%, far lower than the S&P 500’s 32.32%. This considerably lower volatility means the Golden Butterfly is less risky than the S&P 500. But, again, we can attribute this to its conservative asset allocation that prioritizes diversification over other characteristics.
The Golden Butterfly Portfolio vs. The Permanent Portfolio
As mentioned earlier, there is a close relationship between the Golden Butterfly and the Permanent Portfolio. Therefore, distinguishing between both often requires a closer look.
The Permanent Portfolio developed by investment advisor Harry Browne is also the advocate of the free market, is the Golden Butterfly Portfolio but without the small-cap value equities in its assets mix. Therefore, there are only three asset classes and four asset types in the permanent portfolio.
- Stocks:
- 25% Total Stock Market
- Commodities:
- 25% Cash
- 25% Gold
- Bonds:
- 25% Long-Term Bonds
Like the Golden Butterfly, the Permanent Portfolio also seeks to balance volatility risk between assets. Hence, it chose stocks as a source of prosperity, cash as a hedge against recession, gold as a hedge against inflation, and long-term treasuries as a hedge against deflation. In contrast, the Permanent Portfolio did not include the small-cap value because of its perceived high risk.
Both portfolios are flexible and built for the long term. The asset allocation is equal across all asset classes in both cases. They are easy to set up, and investors can replicate them using suitable exchange-traded funds (ETFs). In addition, investors may replace the ‘cash’ asset allocation with short-term treasury bills in the Permanent Portfolio for even more variation.
So, in summary, the Permanent Portfolio is more balanced with an equal focus on inflation, deflation, recession, and prosperity. On the other hand, the Golden Butterfly favors prosperity over other aspects, which is why it has included small-cap value stocks due to their track history of impressive returns over time.
Let’s discuss the advantages and disadvantages of the Golden Butterfly portfolio.
The Golden Butterfly Portfolio Pros and Cons
If you are a regular investor, you will realize that no lazy portfolio is perfect. Even when the investment philosophies are similar, the exact approach adopted to arrive at the end goal is always different. Furthermore, these portfolios usually have strong and weak points, and the Golden Portfolio is not an exception.
Below, I have provided reasons you may want to consider the Golden Butterfly (or not):
Pros
Here are the pros of this portfolio:
1. Less Volatility
The Golden Butterfly is less volatile as a portfolio compared to portfolios that tilt 100% toward stocks. It gets even better when you realize that you still get returns close to that of the traditional market despite taking lesser risks. With this portfolio, you can expect lower dips and returns that rival conventional stock market portfolios. Oh! There is also gold in the mix – a known inflation hedge.
2. Lower Expense Ratio
The expense ratio in this portfolio is one of the lowest you will find around. It achieves this by targeting gold and bonds – two asset classes with lower expense ratios than the regular stocks. Spending less on expenses on your portfolio means you can maximize returns.
3. Exposure to Small-Cap Value Stocks
Records have shown that the small-cap stocks with value characters are better performers than the general market. With 50% of this portfolio’s investment going into stocks and half of that going into small-cap value stocks, investors are most likely to generate higher returns than the conventional portfolios that comprise only large-cap stocks.
4. Suitable for Long-Term Play
This should be your go-to portfolio if you want to play the long-term game. It is also perfect for the lazy approach because you do not need to be actively involved in managing the portfolio. You also need basic knowledge to set it up, and once that is properly done, you can hold it for long periods without worries.
5. Customization
Investors are more likely to opt for portfolios they can play around with or tweak to reflect their investment preferences. You are investing in a few funds with very clear criteria.
Cons
Now to the cons.
1. Conservative Gains
A portfolio that allocates 60% of its assets to gold and treasury debt securities, and the other 40% to stocks, will most likely not return massive gains. It is clear that the focus here is stability, so investors may not expect significant returns over time from the Golden Butterfly portfolio. The short-term treasuries are less likely to deliver impressive yields as well.
2. Inclusion of Gold
There is no doubt about the suitability of gold as a hedge against inflation and long-term storage of value. But that is all about it. History has shown that it is more volatile than other safe-haven investment vehicles. It is also not the strongest hedge against inflation in the market. With this portfolio putting 20% of its allocation into this particular asset, there is a high chance of opportunity cost.
3. Inclusion of Short-Term Treasury Bonds
Most investors consider short-term treasury bonds as cash equivalents, and for the right reasons. However, the current interest rate environment in the United States suggests that investment vehicles associated with short-term treasury will most likely return little or nothing in terms of gains. The portfolio is also more likely to grow slower than the inflation rate, which means investors must be prepared for a possible drop in purchasing power.
Recreating The Golden Butterfly Portfolio using ETFs
One of the advantages of this portfolio, like other lazy portfolios out there, is that you can easily replicate it using suitable exchange-traded funds (ETFs). In most cases, all you need are five quality ETFs, and you have a traditional Golden Butterfly Portfolio ready in no time. So, let’s see how it’s done.
To create the traditional Golden Butterfly Portfolio, combine these four low-cost Vanguard funds and an iShare Gold fund as follows;
- 20% Total U.S. Stock Market:
- Vanguard Total Stock Market Index Fund ETF (VTI) – this total stock market fund invests in the entire U.S. stock market and offers exposure across all market caps and sectors.
- 20% U.S. Small-Cap Value:
- Vanguard Small-Cap Value Index Fund ETF(VBR) – the fund invests in small-cap value stocks, including those high-value stocks listed on the S&P 500.
- 20% Long-Term Treasuries:
- Vanguard Long-Term Treasury Index Fund ETF (VGLT) – the fund invests in several long-term treasury debt securities, including notes and bonds.
- 20% Short-Term Treasuries:
- Vanguard Short-Term Treasury Index Fund ETF (VGSH) – the fund invests in a wide range of short-term treasury bonds.
- 20% Gold:
- iShares Gold Trust (IAU) – a fund that invests only in gold. It takes up the one-fifth gold allocation of this portfolio.
The above is the traditional Golden Butterfly investment portfolio allocation. However, investors can tweak the setup to either add some international exposure or to take gold out of the picture. For example, a modified Golden Butterfly Portfolio designed for international exposure can comprise the following mix of low cost index funds and ETFs:
- 20% Stock:
- Vanguard Total World Stock Index Fund ETF (VT)
- 20% Small-Cap Value:
- 10% Vanguard Small-Cap Value Index Fund (VBR)
- 10% WisdomTree International SmallCap Dividend ETF (DLS)
- 40% Treasuries:
- 20% Vanguard Long-Term Treasury Index Fund ETF (VGLT)
- 20% Vanguard Short-Term Treasury Index Fund ETF (VGSH)
- 20% Gold:
- iShares Gold Trust (IAU)
Similarly, if you are not a fan of gold, you can remodify the above to give you another modified Golden Butterfly approach without the ‘gold.’
- 20% Stock:
- Vanguard Total World Stock Index Fund ETF (VT)
- 20% Small-Cap Value:
- 10% Vanguard Small-Cap Value Index Fund (VBR)
- 10% WisdomTree International Small-Cap Dividend ETF (DLS)
- 40% Treasuries:
- 20% Vanguard Long-Term Treasury Index Fund ETF (VGLT)
- 20% Vanguard Short-Term Treasury Index Fund ETF (VGSH)
- 20% Gold:
- 10% in Vanguard Real Estate Index Fund ETF (VNQ)
- 10% in iShares TIPS Bond ETF (TIP)
The gold allocation in the traditional portfolio has been replaced by TIPs Bond and Real Estate Funds, which are both safe-haven investments.
To Wrap Things Up,
So far, we have established that the Golden Butterfly is an excellent overall portfolio, provided you have no issues having gold in your asset mix. As historical records have shown, it is an averagely good performer, especially for its relatively low volatility. The portfolio is also easy to modify, which means you can replace the ‘golden’ component without altering its overall investment strategy.
Should You Adopt the Golden Butterfly Portfolio?
The answer to this question will be ‘yes’ if you fall into any of these three groups of investors. The first groups are investors who prefer to put their money into lazy strategies that require little or no maintenance over long periods. That way, you can still earn decent returns without investing time and effort into deep research.
The second group comprises investors who have no issues taking moderate risks. This portfolio is not a high-risk, high-reward arrangement, considering its large allocations to treasuries and gold. If you have a larger appetite for risks, you should consider portfolios that tilt heavily toward stocks.
The third and last group of investors who will find this portfolio suitable are the fans of gold as an investment vehicle. The GOLDEN Butterfly Portfolio is more about the gold than the butterfly. So, if you are serious about investing in that precious metal, you get decent exposure with this portfolio.
Finally, like every other lazy or automatic portfolio out there, I advise that you take some time to look closely at the portfolio and understand how the assets it invests in will affect your returns and your investment plans and expectations.
If you find this article informative and enjoyable, please feel free to check out even more portfolio reviews here.
Good luck!