Three Fund Vs Butterfly Fund or other

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NearlyRetired
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Re: Three Fund Vs Butterfly Fund or other

Post by NearlyRetired » Mon Dec 02, 2019 11:27 am

Amadis_of_Gaul wrote:
Mon Dec 02, 2019 6:12 am
NearlyRetired wrote:
Mon Dec 02, 2019 4:12 am

Whilst struggling to keep up with the many very interesting points being raised here, it is true, I am not particularly focusing on Gold per-se, rather noting there appear to be other mixes of portfolios out there the look like they could produce higher returns for lower risk. This is what I am looking to explore and understand better.
Additionally, an asset that appears to outperform in a particular time frame may simply have risks that haven't shown up yet, which inevitably will show up the day after you buy in. :)
Well that raises an interesting question for me, which is "how long a time frame is required to make a backtest valid?" This tool uses data back to 1970, but that is nigh-on 50 years of results. Okay it doesn't cover the great depression of the 30's, but from what I can make out it still covers some "interesting" periods over the past half a century :D . Is the feeling that a data dump of this size, is not sufficient enough? If so, what is a valid size.
To err is to be human, to really mess up, use a computer

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Re: Three Fund Vs Butterfly Fund or other

Post by willthrill81 » Mon Dec 02, 2019 11:41 am

NearlyRetired wrote:
Mon Dec 02, 2019 11:27 am
Amadis_of_Gaul wrote:
Mon Dec 02, 2019 6:12 am
NearlyRetired wrote:
Mon Dec 02, 2019 4:12 am

Whilst struggling to keep up with the many very interesting points being raised here, it is true, I am not particularly focusing on Gold per-se, rather noting there appear to be other mixes of portfolios out there the look like they could produce higher returns for lower risk. This is what I am looking to explore and understand better.
Additionally, an asset that appears to outperform in a particular time frame may simply have risks that haven't shown up yet, which inevitably will show up the day after you buy in. :)
Well that raises an interesting question for me, which is "how long a time frame is required to make a backtest valid?" This tool uses data back to 1970, but that is nigh-on 50 years of results. Okay it doesn't cover the great depression of the 30's, but from what I can make out it still covers some "interesting" periods over the past half a century :D . Is the feeling that a data dump of this size, is not sufficient enough? If so, what is a valid size.
Those are extremely important questions, and they don't just apply to gold. Many claim that we don't have enough non-overlapping periods of data on an asset class like stock, asserting that we only have 3-4 independent 30 year periods, which is true in the strictest sense, although I think that it belittles how much sequence of returns risk there has been within those periods. The problem is that we cannot manufacture more data than we have now, nor can we wait 3,000 years until we have 100 more independent 30 year periods before we decide what to do. As Bogle said, "invest we must."

Many, including me, believe that the past has tended to 'rhyme' with the future, and at the same time I also believe that the more recent past is more relevant to the future than the more distant past (e.g. the last 40 years of data is more relevant than the 40 years prior to that).

Back to the issue at hand, I reiterate that the heat map produced by Portfolio Charts is an extremely useful tool for visually examining how a portfolio performed across different time periods. What you quickly see in the heat map for the Golden Butterfly portfolio is that it has had remarkably consistent performance across the entire dataset spanning almost 50 years. Removing or ignoring the early 1970s from the heat map wouldn't change this at all. The sensitivity analysis tool on that site is also very useful, and it clearly indicates that this portfolio was much less sensitive to the investor's specific time frame than most other portfolios, including the 3-fund.

That being said, I have not adopted this portfolio for myself, and I cannot deny that it is largely the product of backtesting (i.e. data mining). That doesn't make it invalid or inappropriate, but it should make those interested in it justifiably wary.
“It's a dangerous business, Frodo, going out your door. You step onto the road, and if you don't keep your feet, there's no knowing where you might be swept off to.” J.R.R. Tolkien,The Lord of the Rings

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Re: Mr. Bogle and Gold ?

Post by abuss368 » Mon Dec 02, 2019 12:30 pm

Taylor Larimore wrote:
Mon Dec 02, 2019 10:45 am
fredflinstone wrote:I've read elsewhere on this site that Jack had 5 percent of his personal assets in gold.
fredflinstone:

Wherever you read it was wrong. His published portfolio's never contained gold. Mr. Bogle has repeatedly said and written that gold is a poor investment.

Best wishes
Taylor
Jack Bogle's Words of Wisdom: "Gold is largely a rank speculation."
I would agree with this assessment. Let's step back and look at the wide range of advice, interviews, books, and clips, that Mr. Bogle provided for investors benefit and education. The claim of one, and only one interview, that Mr. Bogle may have perhaps recommended gold is weak at best. There are no other recommendations. In fact all other mentions of gold from Mr. Bogle (like Mr. Buffet) is that it is speculation and should be avoided.
John C. Bogle - Two Fund Portfolio: Total Stock & Total Bond. "Simplicity is the master key to financial success."

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Re: Three Fund Vs Butterfly Fund or other

Post by abuss368 » Mon Dec 02, 2019 2:09 pm

We invested in Vanguard's Precious Metals fund a long time ago and only held it for a short period of time as we became better educated investors.
John C. Bogle - Two Fund Portfolio: Total Stock & Total Bond. "Simplicity is the master key to financial success."

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Re: Three Fund Vs Butterfly Fund or other

Post by fredflinstone » Mon Dec 02, 2019 2:54 pm

snailderby wrote:
Mon Dec 02, 2019 10:54 am
From https://youtu.be/KlhT07G8zGs?t=118 (August 2011):

"[Is gold at these levels a wise investment for the average investor?] Well, I think 'no,' and the reason I say 'no' is gold is not an investment at all. Gold, to go back to where we started, Poppy, is a speculation. It has absolutely no underlying intrinsic value.... But if you are really are bitten by the gold bug, ... and if you wanted to speculate, then you know maybe 1 or 2 or 3 or even 5% of your assets in gold is not the worst idea in the world. But I wouldn't do it myself, and I wouldn't advise most investors to do it."

From https://youtu.be/3uJbHREmUs4?t=3420 (May 2018):

"And then, against two contingencies, just in case, I put 5% in [an] emerging markets index and --- I hope you're sitting down --- 5% in gold ... [as a] hedge against some type of catastrophe."
Thanks for digging up the video clips.

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Re: Mr. Bogle and Gold ?

Post by willthrill81 » Mon Dec 02, 2019 3:18 pm

abuss368 wrote:
Mon Dec 02, 2019 12:30 pm
The claim of one, and only one interview, that Mr. Bogle may have perhaps recommended gold is weak at best.
A single case is sufficient to demonstrate that Bogle was not 100% opposed to gold in all situations. That may not affect many here much, but it's irrefutable and undeniable.

Had Bogle been as closed-minded as many (not necessarily saying you) are here about new or different ways of thinking about investing, he would never have started Vanguard at all.
“It's a dangerous business, Frodo, going out your door. You step onto the road, and if you don't keep your feet, there's no knowing where you might be swept off to.” J.R.R. Tolkien,The Lord of the Rings

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Re: Three Fund Vs Butterfly Fund or other

Post by pepys » Mon Dec 02, 2019 3:27 pm

Tyler9000 wrote:
Sun Dec 01, 2019 6:49 pm
pepys wrote:
Sun Dec 01, 2019 6:16 pm
The OP asked about the default one. The default one does not mention anywhere that gold was illegal to hold pre-1975. I thought that was useful information, because using 1970-1975 data greatly overstates the results for any portfolio that includes gold.
To be fair, the OP did not mention gold at all and simply pointed to a site that contains data for many types of portfolios and how they compare to the three-fund portfolio. Some include gold, while most do not. I hear that you really don't like any portfolio analysis that includes gold in the early 1970s. I disagree, but I'm not here to argue about it. I support your choice to be skeptical of that data, and I hope you find all of the other information useful to study a portfolio you do like. Cheers!
The OP didn't mention any part of the portfolios, but I don't know how anyone can answer the question without commenting on what the portfolios are made of. Gold was a part of the least risky and highest return ones, up to 25%. I also talked about long-term treasuries and small/value. I don't think there's much disagreement that these components make up the large majority of the difference between the three-fund and the better performing ones. Multiple other people have mentioned gold separate from my comments. So I'm not sure what your "to be fair" is referring to.

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Re: Three Fund Vs Butterfly Fund or other

Post by Uncorrelated » Mon Dec 02, 2019 3:40 pm

NearlyRetired wrote:
Mon Dec 02, 2019 11:27 am
Amadis_of_Gaul wrote:
Mon Dec 02, 2019 6:12 am
NearlyRetired wrote:
Mon Dec 02, 2019 4:12 am

Whilst struggling to keep up with the many very interesting points being raised here, it is true, I am not particularly focusing on Gold per-se, rather noting there appear to be other mixes of portfolios out there the look like they could produce higher returns for lower risk. This is what I am looking to explore and understand better.
Additionally, an asset that appears to outperform in a particular time frame may simply have risks that haven't shown up yet, which inevitably will show up the day after you buy in. :)
Well that raises an interesting question for me, which is "how long a time frame is required to make a backtest valid?" This tool uses data back to 1970, but that is nigh-on 50 years of results. Okay it doesn't cover the great depression of the 30's, but from what I can make out it still covers some "interesting" periods over the past half a century :D . Is the feeling that a data dump of this size, is not sufficient enough? If so, what is a valid size.

Suppose that we have an asset with a real return of 3.5% and annual volatility of 21% (similar to gold). You need approximately 200 years of data before crossing the 95% confidence threshold that the underlying returns are not zero. This is generally the minimum accepted for scientific publications.

Suppose that instead of gold, you are looking at the returns of gold, platina, silver, oil, cattle, and a few others. Suppose that all of those have a underlying return of exactly zero. After 200 years, there is a good chance at least one of them has a statistical confidence higher than 95% that the returns are different from zero. Just by chance. In that case, much more than 200 years of data are needed to account for the fact that you're investigating multiple assets.

I mentioned before that we have much higher statistical confidence in factor investing than in gold. I can understand the argument for commodities in small quantities as a source of independent volatility with zero return, but not for gold specifically.

The reason we can be confident in factors even though there is less than 200 years of data available is that the premium is higher and the standard deviation is lower. The higher the premium and the lower the standard deviation, the less data is needed to be confident that the factor exists. We also have out-of-sample tests of factor premia in individual countries and emerging markets that we simply don't have for gold.

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Re: Three Fund Vs Butterfly Fund or other

Post by pepys » Mon Dec 02, 2019 4:48 pm

I think the most convincing responses to the argument that governments were engaging in price control in the 1970-1978 period and that gold was illegal to buy in the US until 1975 are:
1) That gold could be purchased in many countries outside the US during this period.
2) That gold still helped a lot later on (specifically, the 00s).

Regarding (1), gold could also be purchased in other countries from 1933-1970. But gold declined in real terms by well-over 50% during this period. In 1970, gold seems to have been at its lowest real value in US history, while the nominal value had hardly changed at all. Then, from 1970-1975, it over tripled in value, and has been incredibly volatile ever since. I think price control clearly had a massive effect. Gold might have increased a lot in the 70s regardless, but it's impossible to say how much. If we're including the gains from ending price fixing and lifting restricting on investing, then we should also include those risks.

Regarding (2), I think this is the best argument for owning some gold. But one major fluke is much more likely than two major flukes, so I think excluding the 70s results makes it much less certain that owning higher amounts (like 25%!) won't be significantly harmful. I recall reading that gold's real CAGR over the past 200 years has been about 0.5%; with such high volatility, zero or negative returns in the next several decades are very possible (we're still below the 1980 real price). The negative correlation is key. Still, something like 5-10% seems very reasonable.

I do not find the currency argument convincing (that gold certificates which could be exchanged for gold pre-1934 could be used as a proxy for gold from 1970-1975) or the argument that this has no affect on the returns/risk shown in the original link (as far as I can tell, nobody is taking this position anymore).

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Re: Three Fund Vs Butterfly Fund or other

Post by pdavi21 » Mon Dec 02, 2019 5:13 pm

All of the portfolios are pretty arbitrary and silly (even the Boglehead 3 fund has its peculiarities)...but they'll get the job done if you can't decide on one for yourself.

As a funny aside, I recently compared my portfolio to all of the portfolios stored in portfolio visualizer, and it beat all of them over the years I have been using it. I should name it and write a book. Then it can tank terribly AFTER I make my book deal money.
"We spend a great deal of time studying history, which, let's face it, is mostly the history of stupidity." -Stephen Hawking

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Re: Three Fund Vs Butterfly Fund or other

Post by Tyler9000 » Mon Dec 02, 2019 6:59 pm

Tyler9000 wrote:
Sun Dec 01, 2019 5:40 pm
While physical gold was prohibited for individual investors through 1972, gold certificates were perfectly legal to trade in the US starting in 1964. Think of them as an early predecessor to modern ETFs. So none of the portfolios were illegal to hold in 1970.
I've done a bit of research today on the history of gold in the US, and here's the full timeline:

- The US banned private ownership of gold bullion in 1934 and fixed the price of gold to devalue the dollar and stop the financial bleeding during the Great Depression. The US is the only country I'm aware of that banned gold ownership.

- Bretton Woods was an international monetary agreement signed in 1944 that, among other things, pegged many currencies to the dollar which was in turn was pegged to gold. The end result is that it basically fixed the gold price globally. It took a while to fully implement but was up and running by 1958.

- The US re-legalized gold certificates in 1964, but I was wrong in my above statement in how they were traded at that time. The legalization simply allowed holders who never turned them in to collect or exchange them for their face value in dollars with no legal repercussions.

- The US quit the gold standard in 1971, effectively killing Bretton Woods. As a result, the gold price rapidly rose 190% between 1972-1974 as prices corrected to the true market rates. The initial spike also ended relatively quickly, as gold fell 24% in 1975 and 4% in 1976.

- Gold bullion was fully legalized for private US investors in 1975 about the same time that prices normalized.

So it's true that private portfolios containing gold bullion were illegal to hold in the US prior to 1975. It's also true that they were perfectly legal elsewhere, and that small amounts of gold in things like watches and jewelry were still widespread even in the US. And regardless of the legalities of portfolio construction, the end of Bretton Woods fundamentally changed how gold is priced and unquestionably caused a brief but large spike in the price globally.

One can interpret this information any way they like. You can completely dismiss gold data before 1975 and ignore the results over that timeframe for any portfolios containing gold. You can study portfolios in their historical context and note their behavior before and after 1975 to see how it affected the results. Or you could think of the repeal of Bretton Woods as something similar to the Black Monday crash, dot-com bubble, or any number of crazy unexpected things that inevitably happened over many decades of investing data that drove the spread of real-world results way wider (both high and low) than the simple long-term average would make you think. I provide plenty of data to study it from many different perspectives, and I'll reiterate that Portfolio Charts is specifically designed to study the big picture beyond a single average return that might otherwise be heavily influenced by a unique asset bubble. Sure, some charts are better at that than others. So look around!

Sorry for the long-winded post, but I'm more than happy to admit when I'm wrong and provide as much information as possible so that people can make informed decisions. And I'll end by pointing out that only 4 of the 18 portfolios I track contain any gold at all. So even if you personally hate gold or simply find this entire conversation confusing, don't let it distract you from some really great options.

Cheers! :beer
Last edited by Tyler9000 on Tue Dec 03, 2019 2:27 am, edited 14 times in total.

Bnjneer
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Re: Three Fund Vs Butterfly Fund or other

Post by Bnjneer » Mon Dec 02, 2019 7:40 pm

Great information, Tyler. Thank you for providing this information to us and for the tools and information you have provided on your web site.

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Re: Three Fund Vs Butterfly Fund or other

Post by NearlyRetired » Tue Dec 03, 2019 2:36 pm

Uncorrelated wrote:
Mon Dec 02, 2019 3:40 pm
NearlyRetired wrote:
Mon Dec 02, 2019 11:27 am
Amadis_of_Gaul wrote:
Mon Dec 02, 2019 6:12 am
NearlyRetired wrote:
Mon Dec 02, 2019 4:12 am

Whilst struggling to keep up with the many very interesting points being raised here, it is true, I am not particularly focusing on Gold per-se, rather noting there appear to be other mixes of portfolios out there the look like they could produce higher returns for lower risk. This is what I am looking to explore and understand better.
Additionally, an asset that appears to outperform in a particular time frame may simply have risks that haven't shown up yet, which inevitably will show up the day after you buy in. :)
Well that raises an interesting question for me, which is "how long a time frame is required to make a backtest valid?" This tool uses data back to 1970, but that is nigh-on 50 years of results. Okay it doesn't cover the great depression of the 30's, but from what I can make out it still covers some "interesting" periods over the past half a century :D . Is the feeling that a data dump of this size, is not sufficient enough? If so, what is a valid size.

Suppose that we have an asset with a real return of 3.5% and annual volatility of 21% (similar to gold). You need approximately 200 years of data before crossing the 95% confidence threshold that the underlying returns are not zero. This is generally the minimum accepted for scientific publications.
Interesting - I wasn't aware of that relationship - without understanding how return and SD mix together over a period of time to get to a certain confidence level, this does make sense. How would I calculate this then, if I were looking at returns and SD to understand the confidence level a particular time-span would provide?
The reason we can be confident in factors even though there is less than 200 years of data available is that the premium is higher and the standard deviation is lower. The higher the premium and the lower the standard deviation, the less data is needed to be confident that the factor exists. We also have out-of-sample tests of factor premia in individual countries and emerging markets that we simply don't have for gold.
By premia/premium, do you mean return (real or otherwise)?
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Re: Three Fund Vs Butterfly Fund or other

Post by Uncorrelated » Tue Dec 03, 2019 3:30 pm

NearlyRetired wrote:
Tue Dec 03, 2019 2:36 pm
Uncorrelated wrote:
Mon Dec 02, 2019 3:40 pm
NearlyRetired wrote:
Mon Dec 02, 2019 11:27 am
Amadis_of_Gaul wrote:
Mon Dec 02, 2019 6:12 am
NearlyRetired wrote:
Mon Dec 02, 2019 4:12 am

Whilst struggling to keep up with the many very interesting points being raised here, it is true, I am not particularly focusing on Gold per-se, rather noting there appear to be other mixes of portfolios out there the look like they could produce higher returns for lower risk. This is what I am looking to explore and understand better.
Additionally, an asset that appears to outperform in a particular time frame may simply have risks that haven't shown up yet, which inevitably will show up the day after you buy in. :)
Well that raises an interesting question for me, which is "how long a time frame is required to make a backtest valid?" This tool uses data back to 1970, but that is nigh-on 50 years of results. Okay it doesn't cover the great depression of the 30's, but from what I can make out it still covers some "interesting" periods over the past half a century :D . Is the feeling that a data dump of this size, is not sufficient enough? If so, what is a valid size.

Suppose that we have an asset with a real return of 3.5% and annual volatility of 21% (similar to gold). You need approximately 200 years of data before crossing the 95% confidence threshold that the underlying returns are not zero. This is generally the minimum accepted for scientific publications.
Interesting - I wasn't aware of that relationship - without understanding how return and SD mix together over a period of time to get to a certain confidence level, this does make sense. How would I calculate this then, if I were looking at returns and SD to understand the confidence level a particular time-span would provide?
The reason we can be confident in factors even though there is less than 200 years of data available is that the premium is higher and the standard deviation is lower. The higher the premium and the lower the standard deviation, the less data is needed to be confident that the factor exists. We also have out-of-sample tests of factor premia in individual countries and emerging markets that we simply don't have for gold.
By premia/premium, do you mean return (real or otherwise)?
I use this calculator to determine the statistical confidence: https://www.ifa.com/articles/calculatio ... tatistics/. It turns out that the correct figure for gold (assuming 3.5% return, 21% stddev) is 144 years.

With factor premia I mean the excess return of the long leg of the factor minus the short leg of the factor, commonly referred as factor premium. For the size factor (SmB = small minus big), it means going long all small stocks and shorting all large stocks. On the period 1926 to 1991, the annual size premium is 1.8% per year and standard deviation of 11% which is not statistically significant (the original study was criticized for this). The annual value premium (HmL = high minus low) on the same period is 3.48% per year with a standard deviation of 12%, which is becomes statistically significant after "only" 47 years.

This doesn't mean that the premium will continue to exist in the future, just that we are confident the premium has existed in the past. I don't have that confidence for gold.

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Re: Three Fund Vs Butterfly Fund or other

Post by pepys » Tue Dec 03, 2019 3:45 pm

Tyler - I enjoyed your post and I almost entirely agree with your analysis. Thanks for looking more into that. A few comments (out of order):
Tyler9000 wrote:
Mon Dec 02, 2019 6:59 pm
And I'll end by pointing out that only 4 of the 18 portfolios I track contain any gold at all.
And you give the ability to change portfolios in that heat map, which I've had a lot of fun with, and I think is very useful. But the reason I talked so much about gold in the first place was because the portfolios containing gold did by far the best in the link from the OP. To any casual observer, owning large amounts of gold probably seems like a great deal.
Tyler9000 wrote:
Mon Dec 02, 2019 6:59 pm
The US quit the gold standard in 1971, effectively killing Bretton Woods. As a result, the gold price rapidly rose 190% between 1972-1974 as prices corrected to the true market rates. The initial spike also ended relatively quickly, as gold fell 24% in 1975 and 4% in 1976.
I wouldn't consider Bretton Woods effectively killed until 1973. That is also where the IMF puts the date for its effective end, because it is when most major international countries switched to floating exchange rates. In retrospect, the end of the gold pool in 1968 seems like an obvious sign that things were about to end.

But I think the "corrected to the true market rates" from 1972-1974 is the only part I really disagree in your post. This seems as speculative as the gold certificate idea. It's worth looking into why the price declined from late 1974 to late 1976, and changes to the monetary system/gold that were still to come. After November 1974:

- December 1974: The US Treasury announced that it intended to auction off large quantities of gold. First auction began in January 1975. The intention was to keep the price of gold down:
The Treasury had embarked on its program of regular sales in an effort to reduce the attractiveness of gold as an alternative to dollars among currency speculators. The sales were intended to check the rapid rise in gold prices.
https://www.nytimes.com/1979/04/19/arch ... lving.html

- January 1975: Gold officially legal to speculate in again

- August 1975: The IMF announces its (almost) monthly gold auctions, to begin in June 1976. The highest would be in December 1976.

- January 1976: The official end of the Bretton Woods system (the Jamaica Accords).

- October 1976: The US officially ends the dollar's connection to gold.

- April 1978: The end of price fixing for gold and its mandatory use for exchanges between central banks:
The Second Amendment to the Articles of Agreement passed April 1978 fundamentally changed the role of gold in the international monetary system by eliminating its use as the common denominator of the post-World War II exchange rate system and as the basis of the value of the Special Drawing Right (SDR). It also abolished the official price of gold and ended its obligatory use in transactions between the IMF and its member countries. It also required the IMF, when dealing in gold, to avoid managing or fixing its price.
https://www.imf.org/en/About/Factsheets ... in-the-IMF

- October 1979: The US Treasury ends its gold auctions (was heavily reduced starting April 1979)

- May 1980: The IMF has its last monthly-ish gold auction.

I don't think there's any disagreement that these attempts to keep down the price of gold were successful at first (for example: https://www.nytimes.com/1976/09/16/arch ... unces.html). And I don't think that gold can be considered at a market rate when the US Treasury and IMF are actively trying to keep the price down and there is a fixed price that all IMF member countries were required to use.

I don't want to take this too far. Switzerland didn't fully go off the gold standard until 2000 and lots of central banks hold and treat gold in a way they don't for precious metals to this day.

So going back to your main point:
Tyler9000 wrote:
Mon Dec 02, 2019 6:59 pm
One can interpret this information any way they like. You can completely dismiss gold data before 1975 and ignore the results over that timeframe for any portfolios containing gold. You can study portfolios in their historical context and note their behavior before and after 1975 to see how it affected the results. Or you could think of the repeal of Bretton Woods as something similar to the Black Monday crash, dot-com bubble, or any number of crazy unexpected things that inevitably happened over many decades of investing data that drove the spread of real-world results way wider (both high and low) than the simple long-term average would make you think. I provide plenty of data to study it from many different perspectives, and I'll reiterate that Portfolio Charts is specifically designed to study the big picture beyond a single average return that might otherwise be heavily influenced by a unique asset bubble. Sure, some charts are better at that than others. So look around!
I believe 1970 was the lowest inflation-adjusted gold price in US history. By starting the data in 1970, you get the result of eliminating price fixing and restricted trading, but not the decades of decline from those things existing in the first place. You agree that the end of Bretton Woods "fundamentally changed how gold is priced", but the chart only includes the benefits from ending such a system, not the risks of it occurring. It isn't the full picture. In other words, in order to end price fixing again, we need to begin price fixing in the first place, a scenario that is not shown in this data. If the 1970s data is to be used at all, I think it should include a footnote. Right now, 25% in gold looks very reasonable there, but I think investors knowing the information you laid out in your post would make people much more hesitant to go that far in. More information and context can't hurt.

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Re: Three Fund Vs Butterfly Fund or other

Post by NearlyRetired » Thu Dec 05, 2019 12:55 pm

Amadis_of_Gaul wrote:
Mon Dec 02, 2019 6:12 am

I use this calculator to determine the statistical confidence: https://www.ifa.com/articles/calculatio ... tatistics/. It turns out that the correct figure for gold (assuming 3.5% return, 21% stddev) is 144 years.
Great site - thanks for the link. If I look at the T-Stat for the portfolio as per Portfolio Charts, the Avg Return = 4.8%, SD = 7.3% and n = 48 years (1970 to now). That produces a T-Stat of 4.6. Is this method valid then, for portfolios, or only for single/component assets?
To err is to be human, to really mess up, use a computer

Uncorrelated
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Re: Three Fund Vs Butterfly Fund or other

Post by Uncorrelated » Thu Dec 05, 2019 1:55 pm

NearlyRetired wrote:
Thu Dec 05, 2019 12:55 pm
Amadis_of_Gaul wrote:
Mon Dec 02, 2019 6:12 am

I use this calculator to determine the statistical confidence: https://www.ifa.com/articles/calculatio ... tatistics/. It turns out that the correct figure for gold (assuming 3.5% return, 21% stddev) is 144 years.
Great site - thanks for the link. If I look at the T-Stat for the portfolio as per Portfolio Charts, the Avg Return = 4.8%, SD = 7.3% and n = 48 years (1970 to now). That produces a T-Stat of 4.6. Is this method valid then, for portfolios, or only for single/component assets?
I wouldn't use nominal returns for this kind of stuff. Ideally you would use the return minus the risk free rate. But that's a minor detail.

The portfolio as a whole obviously has returns statistically different from zero. But that is not very interesting since the portfolio consists of 40% equities and 40% bonds, which obviously have positive returns. What you really want to know is whether adding gold improves the portfolio, in that case you need to look at the returns of gold individually or at the difference between two portfolio's. The former is much easier.

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firebirdparts
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Re: Three Fund Vs Butterfly Fund or other

Post by firebirdparts » Thu Dec 05, 2019 2:30 pm

I hate the idea of "investing" in gold, I really hate it. Gold seems to do unusually well in this data set, as was mentioned in the first 5 minutes. That is what the data tell you. It had two big runups which cover about half the last 50 years. Will this be useful in the future? I don't know.
A fool and your money are soon partners

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Re: Three Fund Vs Butterfly Fund or other

Post by willthrill81 » Thu Dec 05, 2019 3:23 pm

firebirdparts wrote:
Thu Dec 05, 2019 2:30 pm
I hate the idea of "investing" in gold, I really hate it.
But you (or at least your hero) seem to be alright with skiing down it. :wink:
“It's a dangerous business, Frodo, going out your door. You step onto the road, and if you don't keep your feet, there's no knowing where you might be swept off to.” J.R.R. Tolkien,The Lord of the Rings

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Re: Three Fund Vs Butterfly Fund or other

Post by lazyday » Thu Dec 05, 2019 3:27 pm

Uncorrelated wrote:
Thu Dec 05, 2019 1:55 pm
What you really want to know is whether adding gold improves the portfolio, in that case you need to look at the returns of gold individually or at the difference between two portfolio's. The former is much easier.
Can't an asset improve a rebalanced portfolio even if the asset has negative long run return, provided correlations are low enough?

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willthrill81
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Re: Three Fund Vs Butterfly Fund or other

Post by willthrill81 » Thu Dec 05, 2019 3:57 pm

lazyday wrote:
Thu Dec 05, 2019 3:27 pm
Uncorrelated wrote:
Thu Dec 05, 2019 1:55 pm
What you really want to know is whether adding gold improves the portfolio, in that case you need to look at the returns of gold individually or at the difference between two portfolio's. The former is much easier.
Can't an asset improve a rebalanced portfolio even if the asset has negative long run return, provided correlations are low enough?
That's what a lot of ex-U.S. bond holders, who are getting negative real yields and have for a while, must be banking on right now.
“It's a dangerous business, Frodo, going out your door. You step onto the road, and if you don't keep your feet, there's no knowing where you might be swept off to.” J.R.R. Tolkien,The Lord of the Rings

Uncorrelated
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Re: Three Fund Vs Butterfly Fund or other

Post by Uncorrelated » Thu Dec 05, 2019 4:07 pm

lazyday wrote:
Thu Dec 05, 2019 3:27 pm
Uncorrelated wrote:
Thu Dec 05, 2019 1:55 pm
What you really want to know is whether adding gold improves the portfolio, in that case you need to look at the returns of gold individually or at the difference between two portfolio's. The former is much easier.
Can't an asset improve a rebalanced portfolio even if the asset has negative long run return, provided correlations are low enough?
Possibly. But then you get into the question whether the correlations are statistically significant. According to this paper they are not. The only gold correlations that are statistically significant are with silver and with the t-bill, both of which are completely useless.

If you actually want to use correlations then you can run a mean variance analysis. But that type of analysis is known for it's extreme sensitivity to parameter estimation errors.
willthrill81 wrote:
Thu Dec 05, 2019 3:57 pm
lazyday wrote:
Thu Dec 05, 2019 3:27 pm
Uncorrelated wrote:
Thu Dec 05, 2019 1:55 pm
What you really want to know is whether adding gold improves the portfolio, in that case you need to look at the returns of gold individually or at the difference between two portfolio's. The former is much easier.
Can't an asset improve a rebalanced portfolio even if the asset has negative long run return, provided correlations are low enough?
That's what a lot of ex-U.S. bond holders, who are getting negative real yields and have for a while, must be banking on right now.
Due to interest rate parity theory, investing in negative interest rates foreign bonds nets you close to the rate on treasury bills with similar duration. If that wasn't the case you could make free money with arbitrage.

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Re: Three Fund Vs Butterfly Fund or other

Post by Dick D » Thu Dec 05, 2019 4:17 pm

I like the simplicity of the three fund and that fact that I no longer have to spend time thinking about adding this or subtracting that.

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Re: Three Fund Vs Butterfly Fund or other

Post by abuss368 » Fri Dec 06, 2019 12:27 pm

Dick D wrote:
Thu Dec 05, 2019 4:17 pm
I like the simplicity of the three fund and that fact that I no longer have to spend time thinking about adding this or subtracting that.
The Three Fund Portfolio is an excellent choice. Any additional simplicity would be Jack Bogle & Warren Buffett's Two Fund Portfolio. Both strategies work. Good choice!
John C. Bogle - Two Fund Portfolio: Total Stock & Total Bond. "Simplicity is the master key to financial success."

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