Three Fund Vs Butterfly Fund or other

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NearlyRetired
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Three Fund Vs Butterfly Fund or other

Post by NearlyRetired » Sat Nov 30, 2019 12:40 pm

Hi All

I came across a thread on this site (which I can't for the life of me remember which one it was) which made reference to and talked about Portfolio Charts (https://portfoliocharts.com/).

Looking at this site, it would suggest that there could be other portfolio mixes than the 3 fund portfolio with potentially higher returns and lower risk (Ulcer Index), see here.

I think a lot of people on this forum pivot towards a 3 or 4-fund portfolio (as per Jack Bogle), but as there are a lot of clever people on this site, I wondered what peoples thoughts are on these other alternatives?

I'm not looking to change funds or anything, but am interested in peoples thinking/observations as it furthers my knowledge of this whole investment area.
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Re: Three Fund Vs Butterfly Fund or other

Post by Tdubs » Sat Nov 30, 2019 12:51 pm

I'll poke the bear.

The two "best" portfolios have gold in them. Interesting.

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Re: Three Fund Vs Butterfly Fund or other

Post by JoMoney » Sat Nov 30, 2019 1:07 pm

There will always be some portfolio or another that past history shows could have been better. The problem is nobody knows in advance what will be best... but broad-market indexing will ensure you get the markets return, which in aggregate is all the markets will return. Paying fees and expenses for 'special' funds and/or managers is certain to detract from returns. You should be skeptical of anyone who tries to persuade you that they can deliver "above average" returns at lower risk. It's impossible in aggregate for a majority to be "above average", and the field of securities investments is extremely competitive. Empirical evidence shows most active managers fail to deliver, especially with any kind of consistency. Over larger periods of time very few show any additional performance. In aggregate professional managers under-perform by about the amount of their aggregate fees, simple math shows us that HAS TO BE THE CASE. Most investors are also prone to behavioral mistakes when trading things.

Jack Bogle frequently recommended the Vanguard Balanced Index Fund. Which is simply a 60/40 allocation to Total Stock Market/Total Bond Market. Mr. Bogle was (and still is) frequently criticized for his belief that U.S. investors don't need an allocation to International stocks (but if they do, no more than 20% of the equity allocation).
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Re: Three Fund Vs Butterfly Fund or other

Post by KyleAAA » Sat Nov 30, 2019 1:07 pm

They could turn out to have a better risk and return profile, but they could also turn out to be worse. There are many ftiters and factor investors here, including me. You could certainly do worse.
Last edited by KyleAAA on Sat Nov 30, 2019 1:24 pm, edited 1 time in total.

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Taylor Larimore
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Re: Three Fund Vs Butterfly Fund or other

Post by Taylor Larimore » Sat Nov 30, 2019 1:23 pm

NearlyRetired wrote:
Sat Nov 30, 2019 12:40 pm
Hi All

I came across a thread on this site (which I can't for the life of me remember which one it was) which made reference to and talked about Portfolio Charts (https://portfoliocharts.com/).

Looking at this site, it would suggest that there could be other portfolio mixes than the 3 fund portfolio with potentially higher returns and lower risk (Ulcer Index), see here.

I think a lot of people on this forum pivot towards a 3 or 4-fund portfolio (as per Jack Bogle), but as there are a lot of clever people on this site, I wondered what peoples thoughts are on these other alternatives?

I'm not looking to change funds or anything, but am interested in peoples thinking/observations as it furthers my knowledge of this whole investment area.
NearlyRetired:

There are always superior portfolios (before tax). It is nearly always because that specific portfolio took more risk and won during that specific period.

Using past performance to select funds is one of the most stupid things investors can do. Read what experts say:

viewtopic.php?f=10&t=156573&newpost=2349057

Best wishes.
Taylor
Jack Bogle's Words of Wisdom: "The biggest mistake investors make is looking backward at performance and thinking it’ll recur in the future."
"Simplicity is the master key to financial success." -- Jack Bogle

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Re: Three Fund Vs Butterfly Fund or other

Post by abuss368 » Sat Nov 30, 2019 2:16 pm

Taylor Larimore wrote:
Sat Nov 30, 2019 1:23 pm
There are always superior portfolios (before tax). It is nearly always because that specific portfolio took more risk and won during that specific period.
The more I learn about investing over the years, the more I appreciate this fact.
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 » Sat Nov 30, 2019 2:19 pm

NearlyRetired wrote:
Sat Nov 30, 2019 12:40 pm
I think a lot of people on this forum pivot towards a 3 or 4-fund portfolio (as per Jack Bogle), but as there are a lot of clever people on this site, I wondered what peoples thoughts are on these other alternatives?
Hi NearlyRetired -

Jack Bogle recommends a simple but sophisticated Two Fund Portfolio that include Total Stock and Total Bond. Warren Buffett has recommended a Two Fund Portfolio of S&P 500 and Treasury bonds.

You can read more about this here: viewtopic.php?f=10&t=188176
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 klaus14 » Sun Dec 01, 2019 4:00 am

NearlyRetired wrote:
Sat Nov 30, 2019 12:40 pm
Hi All

I came across a thread on this site (which I can't for the life of me remember which one it was) which made reference to and talked about Portfolio Charts (https://portfoliocharts.com/).

Looking at this site, it would suggest that there could be other portfolio mixes than the 3 fund portfolio with potentially higher returns and lower risk (Ulcer Index), see here.

I think a lot of people on this forum pivot towards a 3 or 4-fund portfolio (as per Jack Bogle), but as there are a lot of clever people on this site, I wondered what peoples thoughts are on these other alternatives?

I'm not looking to change funds or anything, but am interested in peoples thinking/observations as it furthers my knowledge of this whole investment area.
there is consensus in the forum about these 3 asset classes. some people argue you can do better. there is no consensus about this part. so you have to research and see what you find convincing.

- I am personally convinced that adding gold is a good idea for risk reduction. against risks like trade war getting worse. But I think more than 10% is too much.
- Longer duration treasuries are more efficient to achieve risk parity.
- I think factor investing (like overweighting small cap value) makes sense. I bought early this year. Underperformed so far.

There are also other tilts that I bought in, not reflected in golden butterfly: emerging bonds, minimum volatility funds, overweighting emerging stocks...

But 3 funds is the baseline. If you are going to diverge from that, make sure you understand the reasoning and trade offs.

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Re: Three Fund Vs Butterfly Fund or other

Post by nisiprius » Sun Dec 01, 2019 7:48 am

Nobody knows. Nobody can tell you. Anyone who says they can should be doubted.

If you look seriously at the past data for any portfolio containing a reasonable amount of stocks, what you will see is that the variation in the past is enormous. For example, even averaged over periods of time as long as ninety years, the historic return of the stock market (S&P 500 and predecessors) was anywhere from 8.92% to 11.35% depending on how you select your endpoints. That is to say, wider than 10%±1.

11.35% (1926-1999 inclusive)
10.45% (1922-2018 inclusive)
9.87% (1926-2010 inclusive)
8.92% (1929-2008 inclusive)

In other words, the crash of 1929 was so huge that it is still able to drag down the average of any time period that includes it. And the bull market of 2010-present is so spectacular that it is able to lift the average of any time period that includes it.

The same problem affects comparisons of portfolio and mutual fund returns. There are trends that persist for five or ten years or so, and then change or vanish. So if you look at, let's say, twenty years of data, you aren't looking at twenty individual numbers, you're looking at a tiny handful of five-and-ten-year trends.

The data is bursty. A fund or portfolio that outperforms doesn't usually do it steadily; the outperformance comes in short, intense bursts. (Often the underperformance does, too).

For example, you will see endless debates in the forum about the value of a small-cap value tilt. But the reality is pretty simple, and it all depends on endpoints. Since the publication of the Fama-French three-factor model in 1992 and 1993, and the creation of funds allowing investment in them, small-cap value experienced one spectacular success around 2000-2002. Over that period of time, an investment in the DFA US Small-Cap Value fund went up about 50% while the broad stock market was doing down about 40%. Wow! Alas, it did not repeat that performance in 2008-2009. You can pretty much tell what the result of any comparison of small-cap value and Total Stock will be. If it includes 2000-2002, the whole period will show the portfolio with small-cap value outperforming total market. If it doesn't, the benefit is not seen. The people who followed books published in the late 1990s that advisied small-cap value tilts, really got something worthwhile. For anybody who got in after about 2003, the benefit has been small. For anyone who got in after 2009, it has been nonexistent.

My point is not to attack small-cap value. My point is that it's awfully hard to tell. It has had one supernova moment in 25 years. Factor enthusiasts are very confident that there will be more, someday. But even if there are, how long do you need to be prepared to wait?

Arguments based on long-term data assume an investor who is able to stay committed for that long. If a strategy delivers in bursts, you need to hang on long enough to capture one of those bursts. This isn't easy to do if your portfolio has been underperforming for more than five years. Even if the strategy works, you may have to hang in there for a decade or more to catch the next burst, and all that time you will not know for sure that there really ever will be one.

The Boglehead philosophy is to follow John C. Bogle's maxim, "stay the course." Not everybody agrees with that. In fact the predominant philosophy in the investing world is probably one of market timing, trend spotting, getting into today's hot categories. There is a good deal of evidence in favor of staying the course, but you need to decide what you are going to do.

If you believe in staying the course, a good argument in favor of simplicity is that a) you can't prove that the fancier strategies are better, and b) they are harder to stick to.

Backtesting is really of limited use because of the "burstiness" problems I mentioned. Shuffling through lists of performance numbers covering ten, or fifteen, or twenty years looking for the big ones is a recipe for disappointment. The Legg Mason Value Trust outperformed the S&P 500 in 1991, 1992, 1993, 1994, 1995, 1996, 1997, 1998, 1999, 2000, 2001, 2002, 2003, 2004, and 2005, and then it collapsed and within three years lost back all of its accumulated gains over the index.
Last edited by nisiprius on Sun Dec 01, 2019 4:27 pm, edited 1 time in total.
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Re: Three Fund Vs Butterfly Fund or other

Post by firebirdparts » Sun Dec 01, 2019 9:20 am

Great post nisi! I really like portfolio charts. The creator is a participant in this forum. If I remember correctly, the dataset goes back to 1970. I suppose that the gold-including portfolios do well in the beginning of the data set, but I am just making that up. The important thing is that the “winners” as always depend on the data you have and especially timing.
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Re: Three Fund Vs Butterfly Fund or other

Post by bgf » Sun Dec 01, 2019 1:01 pm

nisiprius wrote:
Sun Dec 01, 2019 7:48 am
Nobody knows. Nobody can tell you. Anyone who says they can should be doubted.

If you look seriously at the past data for any portfolio containing a reasonable amount of stocks, what you will see is that the variation in the past is enormous. For example, even averaged over periods of time as long as ninety years, the historic return of the stock market (S&P 500 and predecessors) was anywhere from 8.92% to 11.35% depending on how you select your endpoints. That is to say, wider than 10%±1.

11.35% (1926-1999 inclusive)
10.45% (1922-2018 inclusive)
9.87% (1926-2010 inclusive)
8.92% (1929-2008 inclusive)

In other words, the crash of 1929 was so huge that it is still able to drag down the average of any time period that includes it. And the bull market of 2010-present is so spectacular that it is able to lift the average of any time period that includes it.

The same problem affects comparisons of portfolio and mutual fund returns. There are trends that persist for five or ten years or so, and then change or vanish. So if you look at, let's say, twenty years of data, you aren't looking at twenty individual numbers, you're looking at a tiny handful of five-and-ten-year trends.

The data is bursty. A fund or portfolio that outperforms doesn't usually do it steadily; the outperformance comes in short, intense bursts. (Often the underperformance does, too).

For example, you will see endless debates in the forum about the value of a small-cap value tilt. But the reality is pretty simple, and it all depends on endpoints. Since the publication of the Fama-French three-factor model in 1992 and 1993, and the creation of funds allowing investment in them, small-cap value experienced one spectacular success around 2000-2002. Over that period of time, an investment in the DFA US Small-Cap Value fund went up about 50% while the broad stock market was doing down about 40%. Wow! Alas, it did not repeat that performance in 2008-2009. You can pretty much tell what the result of any comparison of small-cap value and Total Stock will be. If it includes 2000-2002, the whole period will show excellent outperformance for the portfolio including small-cap value. If it doesn't, the benefit doesn't show up. The people who followed books published in the late 1990s (I wasn't one of them), advising small-cap value tilts, really got something worthwhile. For anybody who got in after about 2003, the benefit has been small. For anyone who got in after 2009, it has been nonexistent.

My point is not to attack small-cap value. My point is that it's awfully hard to tell. It has had one supernova moment in 25 years. Factor enthusiasts are very confident that there will be more, someday. But even if there are, how long do you need to be prepared to wait?

Arguments based on long-term data assume an investor who is able to stay committed for that long. If a strategy delivers in bursts, you need to hang on long enough to capture one of those bursts. This isn't easy to do if your portfolio has been underperforming for more than five years. Even if the strategy works, you may have to hang in there for a decade or more to catch the next burst, and all that time you will not know for sure that there really ever will be one.

The Boglehead philosophy is to follow John C. Bogle's maxim, "stay the course." Not everybody agrees with that. In fact the predominant philosophy in the investing world is probably one of market timing, trend spotting, getting into today's hot categories. There is a good deal of evidence in favor of staying the course, but you need to decide what you are going to do.

If you believe in staying the course, a good argument in favor of simplicity is that a) you can't prove that the fancier strategies are better, and b) they are harder to stick to.

Backtesting is really of limited use because of the "burstiness" problems I mentioned. Shuffling through lists of performance numbers covering ten, or fifteen, or twenty years looking for the big ones is a recipe for disappointment. The Legg Mason Value Trust outperformed the S&P 500 in 1991, 1992, 1993, 1994, 1995, 1996, 1997, 1998, 1999, 2000, 2001, 2002, 2003, 2004, and 2005, and then it collapsed and within three years lost back all of its accumulated gains over the index.
nisiprius' term "burstiness," is another description for the phenomenon that Taleb describes as "extremistan," in contrast to "mediocristan."

these terms are used to describe that nonintuitive concept that a short period of time, small amount of data, or single rare event can drastically affect the average taken of the entire sample when it comes to financial markets and financial performance.

if you measure the heights of 1000 people at random in the airport, you'll find your results generally fall around the average. no one person, even the tallest in the world, will have much of an effect on the average height. --> not bursty, mediocristan

if you take the same 1000 people and record their net worths, then you will find that a very small number of people drastically affect the "average wealth" of the sample. in fact, its not difficult to imagine a scenario in which one single person has more wealth than the other 999. --> bursty, extremistan

people too often forget that when looking at historical financial data they are dealing with latter situation, not the former.
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Re: Three Fund Vs Butterfly Fund or other

Post by klaus14 » Sun Dec 01, 2019 2:22 pm

firebirdparts wrote:
Sun Dec 01, 2019 9:20 am
Great post nisi! I really like portfolio charts. The creator is a participant in this forum. If I remember correctly, the dataset goes back to 1970. I suppose that the gold-including portfolios do well in the beginning of the data set, but I am just making that up. The important thing is that the “winners” as always depend on the data you have and especially timing.
You can see performances starting from any year in PC. they still look good for portfolios containing gold.

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Re: Three Fund Vs Butterfly Fund or other

Post by pepys » Sun Dec 01, 2019 2:44 pm

This site starts portfolios with gold in it in 1970, when it was illegal to buy gold as an investment. Gold was not legal to buy in this way until 1975. Gold had effectively not changed in its nominal price for decades. As the US dropped off the gold standard and finally re-legalized trading in gold, the price of gold obviously shot up. So this site is using gold at a price that would be illegal to implement at and, had it been legal, would have been impossible to get. Even the late 70s are questionable for gold, since central banks were still required to trade at the official price until 1978, many countries were still on the gold standard, and there was still a lot of uncertainty on whether the new system would last. None of these same circumstances exist today.

Another thing these portfolios tend to do is lean toward long term bonds. I like long term bonds. But interest rates have been dropping during almost this entire period, and now sit at historic lows, without much room for them to drop more. It's possible that rates will drop a bit more, or at least stay steady. But expecting the same returns from them as we got since 1970 is probably unrealistic.

Then there are small and value stocks. There has been a ton of discussion on this forum over these. I think there's probably some benefit to overweighting them a bit.

I think this shows the danger of backtesting more than anything. The three portfolios with the lowest risk and the two with the highest returns all have a lot of gold (up to 25%). These numbers are basically fake. Excluding these, the three-fund does not do too badly, and is not reliant on factors like small and value.
"Give me enough leverage and a fund on which to place it, and I shall move the world"

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Re: Three Fund Vs Butterfly Fund or other

Post by Tyler9000 » Sun Dec 01, 2019 3:16 pm

pepys wrote:
Sun Dec 01, 2019 2:44 pm
This site starts portfolios with gold in it in 1970...
That's only partially true. More accurately, Portfolio Charts starts portfolios in every year since 1970. It charts the best start dates, worst start dates, and everything in between simultaneously. So for example, it does not just show the results of the Permanent Portfolio starting in 1970 before gold spiked coming off the gold standard, but also starting in 1980 before gold lost 80% of its value. The same goes for treasuries before and after the interest rate peak in 1980, and for stocks on either side of the massive bubble in the 80s and 90s.

Long story short, Portfolio Charts is specifically designed to avoid cherry picking of start dates and to illustrate the consistency of portfolios in all economic conditions. Even if you're naturally skeptical of backtesting, try setting aside your normal objections and giving it a deeper look. It's not your typical single-run backtesting site, and the data may surprise you.
Last edited by Tyler9000 on Sun Dec 01, 2019 3:43 pm, edited 3 times in total.

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Re: Three Fund Vs Butterfly Fund or other

Post by White Coat Investor » Sun Dec 01, 2019 3:17 pm

NearlyRetired wrote:
Sat Nov 30, 2019 12:40 pm
I think a lot of people on this forum pivot towards a 3 or 4-fund portfolio (as per Jack Bogle), but as there are a lot of clever people on this site, I
Why do people think Jack was a proponent of the "three fund portfolio?" He didn't even like international stocks. Are people mistaking Jack for Taylor, the author of the three fund book?
1) Invest you must 2) Time is your friend 3) Impulse is your enemy | 4) Basic arithmetic works 5) Stick to simplicity 6) Stay the course

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Re: Three Fund Vs Butterfly Fund or other

Post by Smith1776 » Sun Dec 01, 2019 3:29 pm

I won't pick on anyone specifically, but I just want to chime in and point out something here:

"Using past performance to select funds is one of the most stupid things investors can do."

Sure, but it's awfully funny that the recent superior performance of U.S. large cap is EXACTLY the argument many people on this forum are using to justify an all market weight or 3 fund portfolio. And it's also the reasoning used to bash SCV (because it has underperformed in recent history).

It makes me furious that people don't see the self contradiction here. People just use the argument that supports their chosen strategy without basic adherence to logic.

1) if someone else's strategy outperforms, they just say "past performance doesn't guarantee etc."
2) if someone inquires about factor tilts (for example), they simply say "look at how much my market weight/3 fund has outperformed SCV, so clearly you shouldn't tilt."

You can't just flip flop and choose the most convenient line to parrot and still have a coherent argument.

:oops: :oops: :oops: :oops: :oops:

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Re: Three Fund Vs Butterfly Fund or other

Post by Taylor Larimore » Sun Dec 01, 2019 3:53 pm

White Coat Investor wrote:
Sun Dec 01, 2019 3:17 pm
Why do people think Jack was a proponent of the "three fund portfolio?" He didn't even like international stocks. Are people mistaking Jack for Taylor, the author of the three fund book?
Bogleheads:

Mr. Bogle wrote the Forward to my The Three-Fund Portfolio Book. In one of our discussions he said to me "In my opinion, a portfolio with 20% international stocks is acceptable."

Best wishes.
Taylor
Jack Bogle's Words of Wisdom (2017): “Since then (1993) the S&P 500 is up 700 percent and non-U.S. up 300 percent, a huge difference. I’ve been right, but maybe I’m wrong now, after all those years lagging around the world. Maybe now is the time to step up international.”
"Simplicity is the master key to financial success." -- Jack Bogle

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Re: Three Fund Vs Butterfly Fund or other

Post by pepys » Sun Dec 01, 2019 4:19 pm

Tyler9000 wrote:
Sun Dec 01, 2019 3:16 pm
pepys wrote:
Sun Dec 01, 2019 2:44 pm
This site starts portfolios with gold in it in 1970...
That's actually not true. Portfolio Charts starts portfolios in every year since 1970. It charts the best start dates, worst start dates, and everything in between simultaneously. So for example, it does not just show the results of the Permanent Portfolio starting in 1970 before gold spiked coming off the gold standard, but also starting in 1980 before gold lost 80% of its value. The same goes for treasuries before and after the interest rate peak in 1980, and for stocks on either side of the massive bubble in the 80s and 90s.

Long story short, Portfolio Charts is specifically designed to avoid cherry picking of start dates and to illustrate the consistency of portfolios in all economic conditions. Even if you're naturally skeptical of backtesting, try setting aside your normal objections and giving it a deeper look. It's not your typical single-run backtesting site, and the data may surprise you.
I don't know why you got the impression that saying they start in the year 1970 means that the only 15 year period (for example) was 1970-1985, but that was certainly not my point.

If you accept that the 1970-1975 data (at the very least) cannot be used, then using 1970 data for gold overstates the "long-term compound return", which is what was linked by the OP, and what I was referring to by "return", and was presumably what they were referring to by "return". Using 1970 data for gold would also overstate the "composite measure of drawdown depth, length, and frequency" (the Ulcer index), which again is what was linked by the OP, and was what I was referring to by "risk", and what they said they were referring to by risk. The three worst ten-year rolling real CAGR periods for the three-fund portfolio were pre-1975 according to this site. So this period seems fundamental for these portfolios' incredible out-performance.

If you do think the 1970-1975 data represents a legitimate "economic condition", fine. Let's go with the language of starting portfolios "every year" and illustrating "all economic conditions". That includes 1970, 1971, 1972, 1973, and 1974. So five 15 year periods where these portfolios would have the risk of 10 years in a federal prison. That is 14% of periods. My understanding is that the Ulcer Index does not include that risk, but still, I am unwilling to risk the economic condition (which apparently occurs 14% of the time) where my gold is seized and I end up in prison.

Including high returns from a massive risk being lifted but not including the actual risk is going to lead to absurd results, which is exactly what this site does.
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Re: Three Fund Vs Butterfly Fund or other

Post by Smith1776 » Sun Dec 01, 2019 4:30 pm

pepys wrote:
Sun Dec 01, 2019 4:19 pm
Tyler9000 wrote:
Sun Dec 01, 2019 3:16 pm
pepys wrote:
Sun Dec 01, 2019 2:44 pm
This site starts portfolios with gold in it in 1970...
That's actually not true. Portfolio Charts starts portfolios in every year since 1970. It charts the best start dates, worst start dates, and everything in between simultaneously. So for example, it does not just show the results of the Permanent Portfolio starting in 1970 before gold spiked coming off the gold standard, but also starting in 1980 before gold lost 80% of its value. The same goes for treasuries before and after the interest rate peak in 1980, and for stocks on either side of the massive bubble in the 80s and 90s.

Long story short, Portfolio Charts is specifically designed to avoid cherry picking of start dates and to illustrate the consistency of portfolios in all economic conditions. Even if you're naturally skeptical of backtesting, try setting aside your normal objections and giving it a deeper look. It's not your typical single-run backtesting site, and the data may surprise you.
I don't know why you got the impression that saying they start in the year 1970 means that the only 15 year period (for example) was 1970-1985, but that was certainly not my point.

If you accept that the 1970-1975 data (at the very least) cannot be used, then using 1970 data for gold overstates the "long-term compound return", which is what was linked by the OP, and what I was referring to by "return", and was presumably what they were referring to by "return". Using 1970 data for gold would also overstate the "composite measure of drawdown depth, length, and frequency" (the Ulcer index), which again is what was linked by the OP, and was what I was referring to by "risk", and what they said they were referring to by risk. The three worst ten-year rolling real CAGR periods for the three-fund portfolio were pre-1975 according to this site. So this period seems fundamental for these portfolios' incredible out-performance.

If you do think the 1970-1975 data represents a legitimate "economic condition", fine. Let's go with the language of starting portfolios "every year" and illustrating "all economic conditions". That includes 1970, 1971, 1972, 1973, and 1974. So five 15 year periods where these portfolios would have the risk of 10 years in a federal prison. That is 14% of periods. My understanding is that the Ulcer Index does not include that risk, but still, I am unwilling to risk the economic condition (which apparently occurs 14% of the time) where my gold is seized and I end up in prison.

Including high returns from a massive risk being lifted but not including the actual risk is going to lead to absurd results, which is exactly what this site does.
Legitimate concerns.

I will add that there are many investors, including myself, that are outside the U.S. however. I think the data is still valuable.

There can be additional levies against other asset classes too that have not been discussed. For instance, we often talk the long term returns of stocks, but we neglect to mention that Bogle's first index fund didn't start until 1975 either. Curiously, the same year it became legal to own gold again in the U.S.

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Re: Three Fund Vs Butterfly Fund or other

Post by willthrill81 » Sun Dec 01, 2019 4:39 pm

firebirdparts wrote:
Sun Dec 01, 2019 9:20 am
Great post nisi! I really like portfolio charts. The creator is a participant in this forum. If I remember correctly, the dataset goes back to 1970. I suppose that the gold-including portfolios do well in the beginning of the data set, but I am just making that up. The important thing is that the “winners” as always depend on the data you have and especially timing.
I don't know how to post it here due to its size, but a quick glance at a heat map of a portfolio on the Portfolio Charts site easily demonstrates how period-specific a given portfolio's performance has been since 1970. Using this tool, the Golden Butterfly portfolio has had a positive inflation-adjusted return in every three year or longer rolling period since 1970 (i.e. after three years with the portfolio, you would have at least beaten inflation on a pre-tax basis). Compare that to a 3-fund portfolio with even amount in U.S. and ex-U.S. stock, where there were two 10-year periods with negative real returns and three other periods 5 years or longer with negative real returns. And the GB earned a 1% higher average return to boot. Further, the start date sensitivity of the 3-fund portfolio was much greater than that of the GB.
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Re: Three Fund Vs Butterfly Fund or other

Post by Tyler9000 » Sun Dec 01, 2019 4:41 pm

pepys wrote:
Sun Dec 01, 2019 4:19 pm
If you accept that the 1970-1975 data (at the very least) cannot be used, then using 1970 data for gold overstates the "long-term compound return", which is what was linked by the OP, and what I was referring to by "return", and was presumably what they were referring to by "return". Using 1970 data for gold would also overstate the "composite measure of drawdown depth, length, and frequency" (the Ulcer index), which again is what was linked by the OP, and was what I was referring to by "risk", and what they said they were referring to by risk. The three worst ten-year rolling real CAGR periods for the three-fund portfolio were pre-1975 according to this site. So this period seems fundamental for these portfolios' incredible out-performance.
The chart linked in the OP uses "baseline return" as the default measured return. It's the 15th percentile 15-year return for each individual portfolio. So the particularly attractive 1970-1975 data for portfolios containing gold is already completely excluded from the results. And the Ulcer Index is based on the worst case scenarios, so any unrealistically high performance also doesn't factor in. The chart does the same start-date-independent conservative returns analysis for all portfolios, so it's really not about one timeframe.

Of course, if you really don't like gold then just ignore the portfolios that use it! There are many good options for all types of investors. But I do encourage people to keep an open mind and not reflexively dismiss all portfolios other than your favorite. It's not a competition. It's a learning process.

Smith1776 wrote:
Sun Dec 01, 2019 4:30 pm
I will add that there are many investors, including myself, that are outside the U.S. however. I think the data is still valuable.
Be sure to try changing the Home Country setting. I also have data for Australia, Canada, Germany, Japan, and the UK. And the charts automatically translate the calculations to local assets, currency, and inflation.

BTW, for those not aware in addition to being a happy Boglehead I'm also the author of Portfolio Charts. So I can speak with some authority on how it works. :D I don't want to sidetrack a good thread, but feel free to PM me if you have any questions.
Last edited by Tyler9000 on Sun Dec 01, 2019 5:09 pm, edited 2 times in total.

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Re: Three Fund Vs Butterfly Fund or other

Post by Smith1776 » Sun Dec 01, 2019 4:45 pm

Tyler9000 wrote:
Sun Dec 01, 2019 4:41 pm

Be sure to try changing the Home Country setting. I also have data for Australia, Canada, Germany, and the UK. And the charts automatically translate the calculations to local assets, currency, and inflation.

BTW, for those not aware in addition to being a happy Boglehead I'm also the author of Portfolio Charts. So I can speak with some authority on how it works. :D I don't want to sidetrack a good thread, but feel free to PM me if you have any questions.
Your work is amazing!

Much preferred over Portfolio Visualizer... at least in my book!

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Re: Three Fund Vs Butterfly Fund or other

Post by pepys » Sun Dec 01, 2019 4:56 pm

Smith1776 wrote:
Sun Dec 01, 2019 4:30 pm
pepys wrote:
Sun Dec 01, 2019 4:19 pm
Tyler9000 wrote:
Sun Dec 01, 2019 3:16 pm
pepys wrote:
Sun Dec 01, 2019 2:44 pm
This site starts portfolios with gold in it in 1970...
That's actually not true. Portfolio Charts starts portfolios in every year since 1970. It charts the best start dates, worst start dates, and everything in between simultaneously. So for example, it does not just show the results of the Permanent Portfolio starting in 1970 before gold spiked coming off the gold standard, but also starting in 1980 before gold lost 80% of its value. The same goes for treasuries before and after the interest rate peak in 1980, and for stocks on either side of the massive bubble in the 80s and 90s.

Long story short, Portfolio Charts is specifically designed to avoid cherry picking of start dates and to illustrate the consistency of portfolios in all economic conditions. Even if you're naturally skeptical of backtesting, try setting aside your normal objections and giving it a deeper look. It's not your typical single-run backtesting site, and the data may surprise you.
I don't know why you got the impression that saying they start in the year 1970 means that the only 15 year period (for example) was 1970-1985, but that was certainly not my point.

If you accept that the 1970-1975 data (at the very least) cannot be used, then using 1970 data for gold overstates the "long-term compound return", which is what was linked by the OP, and what I was referring to by "return", and was presumably what they were referring to by "return". Using 1970 data for gold would also overstate the "composite measure of drawdown depth, length, and frequency" (the Ulcer index), which again is what was linked by the OP, and was what I was referring to by "risk", and what they said they were referring to by risk. The three worst ten-year rolling real CAGR periods for the three-fund portfolio were pre-1975 according to this site. So this period seems fundamental for these portfolios' incredible out-performance.

If you do think the 1970-1975 data represents a legitimate "economic condition", fine. Let's go with the language of starting portfolios "every year" and illustrating "all economic conditions". That includes 1970, 1971, 1972, 1973, and 1974. So five 15 year periods where these portfolios would have the risk of 10 years in a federal prison. That is 14% of periods. My understanding is that the Ulcer Index does not include that risk, but still, I am unwilling to risk the economic condition (which apparently occurs 14% of the time) where my gold is seized and I end up in prison.

Including high returns from a massive risk being lifted but not including the actual risk is going to lead to absurd results, which is exactly what this site does.
Legitimate concerns.

I will add that there are many investors, including myself, that are outside the U.S. however. I think the data is still valuable.

There can be additional levies against other asset classes too that have not been discussed. For instance, we often talk the long term returns of stocks, but we neglect to mention that Bogle's first index fund didn't start until 1975 either. Curiously, the same year it became legal to own gold again in the U.S.
Yes, that is a good point - although the US (and a few other countries, I believe) banning gold speculation still heavily limited the market. The price-fixing issue still holds though, even internationally.

If stocks had been fixed by almost every major government for decades (basically no real returns), suddenly went through a 5 year period where they were shifted back to market pricing and had explosive returns, and then had more typical returns for the next few decades, would it really be reasonable to start right before the 5 year period? That doesn't seem like "all environments" to me, rather "best" and "typical".

I think 1978 and later is an entirely new environment for gold, but if we're going to backtest gold before that, I think it needs to start much earlier than 1970, especially when comparing portfolios.
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Re: Three Fund Vs Butterfly Fund or other

Post by Uncorrelated » Sun Dec 01, 2019 5:19 pm

The big problem with gold, other than the aforementioned gold standard, is that it is just one asset. We have around 40-50 years of data available since the gold standard was abandoned. Since then, gold has been highly volatile and has seen mediocre returns compared to it's volatility. From a statistical point of view, the returns of gold are indistinguishable from zero, and the correlation of gold vs anything else is also statistically indistinguishable from zero.

Why does this matter? There are many assets like gold. Silver, platina, oil, cattle, other commodities. Does anyone ever recommend those assets? Why not? Does gold do anything that is special compared to other commodities, and warrants higher return? How do we know gold's returns aren't a case of survivorship bias? We don't.

Bonds and equities don't have this problem due to the much larger scale of data available. If you dig hard enough you can find data back to the 1800's. You can run out of sample tests with other economies other than the US. We don't have this luxury for gold. Actually that is not true, we also have centuries of data available for gold and it plainly displays nonsignificant returns and correlations.

We have much higher statistical confidence that the size and value premium are positive, than that gold returns are positive. I'd say that is sufficient reason to avoid gold. If you really want to add uncorrelated volatility to your portfolio, buy commodities. You will still get poor returns, but at least your view won't be clouded by survivorship bias. IMO there is no rational reason to expect gold to perform better than any other commodity.

I also have serious issues with the usage of long term bonds in many of these portfolio's, but that is a story for another time.

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Re: Three Fund Vs Butterfly Fund or other

Post by pepys » Sun Dec 01, 2019 5:25 pm

Tyler9000 wrote:
Sun Dec 01, 2019 4:41 pm
pepys wrote:
Sun Dec 01, 2019 4:19 pm
If you accept that the 1970-1975 data (at the very least) cannot be used, then using 1970 data for gold overstates the "long-term compound return", which is what was linked by the OP, and what I was referring to by "return", and was presumably what they were referring to by "return". Using 1970 data for gold would also overstate the "composite measure of drawdown depth, length, and frequency" (the Ulcer index), which again is what was linked by the OP, and was what I was referring to by "risk", and what they said they were referring to by risk. The three worst ten-year rolling real CAGR periods for the three-fund portfolio were pre-1975 according to this site. So this period seems fundamental for these portfolios' incredible out-performance.
The chart linked in the OP uses "baseline return" as the default measured return. It's the 15th percentile 15-year return for each individual portfolio. So the particularly attractive 1970-1975 data for portfolios containing gold is already completely excluded from the results. And the Ulcer Index is based on the worst case scenarios, so any unrealistically high performance also doesn't factor in. The chart does the same timeframe-independent conservative returns analysis for all portfolios, so it's really not about one timeframe.

Of course, if you really don't like gold then just ignore the portfolios that use it! There are many good options for all types of investors. But I do encourage people to keep an open mind and not reflexively dismiss all portfolios other than your favorite. It's not a competition. It's a learning process.
Tyler, you're missing the point. Gold from 1970-1975 (really 1978) unfairly makes those periods less bad for portfolios that use gold. Portfolios like the three-fund have to use up exclusions during these years. Portfolios that use enough gold can exclude different years. Gold's price increase during this period is very important to the end results for returns. Excluding outrageous performance also doesn't matter for this. Even if you exclude all of the 1970-1975 years, it changes what would count as outrageous performance. In reality, none of these contain enough gold for all of those years to be considered outrageous performance, so some of those years are definitely counted.

And for the Ulcer Index, you say that it is based on "the worst case scenarios", which clearly supports my point. The three worst periods for the three-fund seem to be in the 1970s. If you add a bit of gold, you greatly improve the worst cases by greatly raising returns during that period. I never mentioned "unrealistically high performance" when discussing risk, I said it would reduce "drawdown depth, length, and frequency". As best I can tell, you agree with that.

You say to keep an open mind, but you have not yet directly addressed my complaint that it was illegal to buy gold pre-1975 in the United States. You seem to agree that it affects the Ulcer Index, but I can't tell if you think this matters. You seem to disagree that it affects the returns the OP linked to, although I disagree.

It isn't a matter of me not liking these portfolios or gold, it's a matter of them being illegal to implement in the US during 14% of the periods. My fundamental question is this: If you think it doesn't matter, then why not start it in 1975 (or 1978) instead of 1970? If you think it does matter, then why isn't it misleading to start in a period where it was illegal to buy gold and the price was fixed arbitrarily low?
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Re: Three Fund Vs Butterfly Fund or other

Post by Tyler9000 » Sun Dec 01, 2019 5:40 pm

pepys wrote:
Sun Dec 01, 2019 5:25 pm
It isn't a matter of me not liking these portfolios or gold, it's a matter of them being illegal to implement in the US during 14% of the periods. My fundamental question is this: If you think it doesn't matter, then why not start it in 1975 (or 1978) instead of 1970? If you think it does matter, then why isn't it misleading to start in a period where it was illegal to buy gold and the price was fixed arbitrarily low?
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.
Edit: I was wrong! Here's the full story: viewtopic.php?f=10&t=296331&p=4869281#p4869281

I hear what you're saying. The problem with excluding the early 1970s because it's the best time for gold is that it's also the worst time for stocks. Will that really help people make educated decisions? And if we're cutting out unrepeatable bubbles, we should probably also cut out the stock bubble in the 80's and 90's. It's funny how people just take those returns for granted.

My approach is to not pick and choose what data you should and should not see. Instead, I provide easy and intuitive methods to see every timeframe simultaneously and prioritize or exclude any timeframe you like. Like Willthrill81 mentioned, check out the Heat Map. The information is all there for people who want to see things differently and learn about investing from a new perspective.
Last edited by Tyler9000 on Mon Dec 02, 2019 7:03 pm, edited 1 time in total.

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Re: Three Fund Vs Butterfly Fund or other

Post by klaus14 » Sun Dec 01, 2019 5:53 pm

Portfolio Charts provides very flexible tools. For example, in this thread i collected the performances for worst 18 year windows of portfolios (because almost always it's 2000-2018).

With that window too, GOLDEN BUTTERFLY was the best. So, saying PC is misleading because 1970s is really unfair.

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Re: Three Fund Vs Butterfly Fund or other

Post by pepys » Sun Dec 01, 2019 6:16 pm

Tyler9000 wrote:
Sun Dec 01, 2019 5:40 pm
pepys wrote:
Sun Dec 01, 2019 5:25 pm
It isn't a matter of me not liking these portfolios or gold, it's a matter of them being illegal to implement in the US during 14% of the periods. My fundamental question is this: If you think it doesn't matter, then why not start it in 1975 (or 1978) instead of 1970? If you think it does matter, then why isn't it misleading to start in a period where it was illegal to buy gold and the price was fixed arbitrarily low?
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.
Your link says 1975, not 1972, which is the correct date: "By 1975 Americans could again freely own and trade gold"

Gold certificates were not like an ETF at all. First, there was no way to be sure they would actually be connected to the gold price. They could not be exchanged for gold, as noted at your link. Second, they were legalized as collector items. There were none printed since 1933.

Do you know if they were closely linked to the gold price at all? Intuitively, I have no idea. Maybe people did own them as a gold proxy, and then they collapsed in value when gold was legalized. Maybe they really did follow the gold price (with a slight premium, perhaps). Maybe they acted completely separately, as a collector item. But it seems wildly speculative to treat them like a gold etf.
Tyler9000 wrote:
Sun Dec 01, 2019 5:40 pm
I hear what you're saying. The problem with excluding the early 1970s because it's the best time for gold is that it's also the worst time for stocks. Will that really help people make educated decisions? And if we're cutting out unrepeatable bubbles, we should probably also cut out the stock bubble in the 80's and 90's. It's funny how people just take those returns for granted.
I'm not excluding it because it's the best time for gold, but because gold was a completely different asset then. It was price-fixed and the market was heavily restricted. When those two things were lifted, the price adjusted accordingly. It is thus misleading to include it without a warning.

I think gold doing so well during the 2000s is very important. I am not excluding that period and would not exclude that period if it had done 10x better.
Tyler9000 wrote:
Sun Dec 01, 2019 5:40 pm
My approach is to not pick and choose what data you should and should not see. Instead, I provide easy and intuitive methods to see every timeframe simultaneously and prioritize or exclude any timeframe you like. Like Willthrill81 mentioned, check out the Heat Map. The information is all there for people who want to see things differently and learn about investing from a new perspective.
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.
"Give me enough leverage and a fund on which to place it, and I shall move the world"

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Re: Three Fund Vs Butterfly Fund or other

Post by pepys » Sun Dec 01, 2019 6:24 pm

klaus14 wrote:
Sun Dec 01, 2019 5:53 pm
Portfolio Charts provides very flexible tools. For example, in this thread i collected the performances for worst 18 year windows of portfolios (because almost always it's 2000-2018).

With that window too, GOLDEN BUTTERFLY was the best. So, saying PC is misleading because 1970s is really unfair.
I never said or implied it was misleading for every circumstance (nor did anyone else here). That insinuation is itself very unfair. If the 1970-1975 data has no impact on the results, then it isn't misleading. This was not the case in the OP. I'm glad PC provides useful tools for you.
"Give me enough leverage and a fund on which to place it, and I shall move the world"

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Re: Three Fund Vs Butterfly Fund or other

Post by klaus14 » Sun Dec 01, 2019 6:28 pm

pepys wrote:
Sun Dec 01, 2019 6:24 pm
If the 1970-1975 data has no impact on the results, then it isn't misleading. This was not the case in the OP.
Why not the case? OP links to ulcer index vs baseline return. 1970-1975 does not help GB in this chart (because baseline is the 15th percentile)

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Re: Three Fund Vs Butterfly Fund or other

Post by pepys » Sun Dec 01, 2019 6:33 pm

klaus14 wrote:
Sun Dec 01, 2019 6:28 pm
pepys wrote:
Sun Dec 01, 2019 6:24 pm
If the 1970-1975 data has no impact on the results, then it isn't misleading. This was not the case in the OP.
Why not the case? OP links to ulcer index vs baseline return. 1970-1975 does not help GB in this chart.
Are you claiming that an index that is a "composite measure of drawdown depth, length, and frequency" during the early 1970s does not affect the comparison between three-fund (with three of its worst ten-year rolling real CAGR periods during the early 70s) and Golden Butterfly? I don't know how to use PC to get the results without 1970-1975, but I have serious doubts that this is the case.
"Give me enough leverage and a fund on which to place it, and I shall move the world"

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Re: Three Fund Vs Butterfly Fund or other

Post by klaus14 » Sun Dec 01, 2019 6:42 pm

pepys wrote:
Sun Dec 01, 2019 6:33 pm
klaus14 wrote:
Sun Dec 01, 2019 6:28 pm
pepys wrote:
Sun Dec 01, 2019 6:24 pm
If the 1970-1975 data has no impact on the results, then it isn't misleading. This was not the case in the OP.
Why not the case? OP links to ulcer index vs baseline return. 1970-1975 does not help GB in this chart.
Are you claiming that an index that is a "composite measure of drawdown depth, length, and frequency" during the early 1970s does not affect the comparison between three-fund (with three of its worst ten-year rolling real CAGR periods during the early 70s) and Golden Butterfly? I don't know how to use PC to get the results without 1970-1975, but I have serious doubts that this is the case.
I guess i cannot claim that.
But you can change ulcer index to deepest drawdown, longest drawdown or start date sensitivity in that chart. In all of these, GB and Pinwheel is the best. I think deepest/longest drawdown of 3-fund should be in 2000s. (actually not so sure)

Or you could go to the heat map and ignore 1970s. There too, GB and Pinwheel has the shortest sequence of red boxes, in any decade.

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Re: Three Fund Vs Butterfly Fund or other

Post by Tyler9000 » 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!

Back to the OP, you may find it interesting that Portfolio Charts contains data for many different popular portfolios whose authors participate here on the Bogleheads forum. Of course there's the Three-Fund Portfolio championed by Taylor Larimore, the No-Brainer Portfolio and Cowards Portfolio both by Bill Bernstein, the Larry Portfolio by Larry Swedroe, the Rick Ferri Core Four, and many more. So there are more portfolio ideas represented here on the forum than it may feel like sometimes, and you might try searching for posts by those authors for different perspectives.

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Re: Three Fund Vs Butterfly Fund or other

Post by Smith1776 » Sun Dec 01, 2019 7:01 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!

Back to the OP, you may find it interesting that Portfolio Charts contains data for many different popular portfolios whose authors participate here on the Bogleheads forum. Of course there's the Three-Fund Portfolio promoted by Taylor Larimore, the No-Brainer Portfolio and Cowards Portfolio both by Bill Bernstein, the Larry Portfolio by Larry Swedroe, the Rick Ferri Core Four, and many more. So there are more portfolio perspectives represented here on the forum than it may feel like sometimes, and my goal is simply to provide good data to add context to those conversations.
I really do think the Golden Butterfly is where it's at in terms of the optimal "default" choice for people getting into investing. The ideal starting point that people can deviate from as they wish. A sort of centre of gravity for portfolio composition.

It's got all the elements of, in my opinion, the most sound arguments that have been made on this board and the broader investing world:

1) low cost indexing
2) risk parity
3) alternative/hard assets
4) factor diversification
5) asset class diversification
6) allocation based on economic conditions
7) modern portfolio theory
8) passive buy and hold approach
9) No credit risk on bond side (uncompensated risk via Swedroe)

I'm sure there's more, but that's just off the top of my head. No other portfolio allocation integrates all of the soundest thinking quite like the GB IMHO.
Pretty much all of the other popular portfolios misses the mark on at least one of the above points.

My only very minor nitpick is that I think the equities should have an international component by default. That may be down to personal taste, to be fair.
Last edited by Smith1776 on Sun Dec 01, 2019 7:16 pm, edited 2 times in total.

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Re: Three Fund Vs Butterfly Fund or other

Post by pepys » Sun Dec 01, 2019 7:03 pm

klaus14 wrote:
Sun Dec 01, 2019 6:42 pm
pepys wrote:
Sun Dec 01, 2019 6:33 pm
klaus14 wrote:
Sun Dec 01, 2019 6:28 pm
pepys wrote:
Sun Dec 01, 2019 6:24 pm
If the 1970-1975 data has no impact on the results, then it isn't misleading. This was not the case in the OP.
Why not the case? OP links to ulcer index vs baseline return. 1970-1975 does not help GB in this chart.
Are you claiming that an index that is a "composite measure of drawdown depth, length, and frequency" during the early 1970s does not affect the comparison between three-fund (with three of its worst ten-year rolling real CAGR periods during the early 70s) and Golden Butterfly? I don't know how to use PC to get the results without 1970-1975, but I have serious doubts that this is the case.
I guess i cannot claim that.
But you can change ulcer index to deepest drawdown, longest drawdown or start date sensitivity in that chart. In all of these, GB and Pinwheel is the best. I think deepest/longest drawdown of 3-fund should be in 2000s.

Or you could go to the heat map and ignore 1970s. There too, GB and Pinwheel has the shortest sequence of red boxes, in any decade.
Yes, I have been enjoying playing around with the heat map.

I don't disagree that owning a bit of gold has been protective since the late 70s, and may continue to do so. But I think the extent to which it was shown in the main link is not relevant for the future, and was not able to be done in practice at the time in the US.
"Give me enough leverage and a fund on which to place it, and I shall move the world"

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Re: Three Fund Vs Butterfly Fund or other

Post by klaus14 » Sun Dec 01, 2019 7:10 pm

pepys wrote:
Sun Dec 01, 2019 7:03 pm
Yes, I have been enjoying playing around with the heat map.

I don't disagree that owning a bit of gold has been protective since the late 70s, and may continue to do so. But I think the extent to which it was shown in the main link is not relevant for the future, and was not able to be done in practice at the time in the US.
the risk in general with backtesting is overfitting. That's why one must understand how the asset behaves. Gold is a unique asset. Even this year, every time Trump escalated the trade war, gold jumped. How much gold is a more difficult question. 5%-10% seems to be what most people recommend nowadays.

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Re: Three Fund Vs Butterfly Fund or other

Post by snailderby » Sun Dec 01, 2019 7:26 pm

Smith1776 wrote:
Sun Dec 01, 2019 7:01 pm
I really do think the Golden Butterfly is where it's at in terms of the optimal "default" choice for people getting into investing. The ideal starting point that people can deviate from as they wish. A sort of centre of gravity for portfolio composition.

It's got all the elements of, in my opinion, the most sound arguments that have been made on this board and the broader investing world:

1) low cost indexing
2) risk parity
3) alternative/hard assets
4) factor diversification
5) asset class diversification
6) allocation based on economic conditions
7) modern portfolio theory
8) passive buy and hold approach
9) No credit risk on bond side (uncompensated risk via Swedroe)

I'm sure there's more, but that's just off the top of my head. No other portfolio allocation integrates all of the soundest thinking quite like the GB IMHO.
Pretty much all of the other popular portfolios misses the mark on at least one of the above points.

My only very minor nitpick is that I think the equities should have an international component by default. That may be down to personal taste, to be fair.
+1

I too would prefer to add some international stocks. I question whether the SCV component will add THAT much of a premium going forward. And there are special tax issues to be aware of with gold.

But for someone in the decumulation stage looking for a set it and forget it portfolio with relatively shallow drawdowns and different asset classes for different economic conditions, the Golden Butterfly has a lot to recommend it, and it arguably should be mentioned more often than it is around here. Maybe not as the default choice for everyone but as one of several portfolios to consider for investors in the decumulation stage.
Last edited by snailderby on Sun Dec 01, 2019 8:30 pm, edited 1 time in total.

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Re: Three Fund Vs Butterfly Fund or other

Post by John Z » Sun Dec 01, 2019 7:52 pm

OP,

Thought someone by now would have referenced you to:

https://www.whitecoatinvestor.com/150-p ... han-yours/

which gives a great universe of mostly index funds proposed by the White Coat Investor who posted earlier but didn't include his great list.

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Re: Three Fund Vs Butterfly Fund or other

Post by NearlyRetired » Mon Dec 02, 2019 4:12 am

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.
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.
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 fredflinstone » Mon Dec 02, 2019 5:44 am

White Coat Investor wrote:
Sun Dec 01, 2019 3:17 pm
NearlyRetired wrote:
Sat Nov 30, 2019 12:40 pm
I think a lot of people on this forum pivot towards a 3 or 4-fund portfolio (as per Jack Bogle), but as there are a lot of clever people on this site, I
Why do people think Jack was a proponent of the "three fund portfolio?" He didn't even like international stocks. Are people mistaking Jack for Taylor, the author of the three fund book?
I've read elsewhere on this site that Jack had 5 percent of his personal assets in gold.

I own gold. It is 9 percent of my portfolio at the moment, and I will be boosting this to 10 percent very shortly. Here is why:

1) In back tests during virtually any long period of time, adding gold to a portfolio improves risk-adjusted returns and (relatedly) stabilizes a portfolio in times of duress. Looking backward definitely doesn't prove anything about the future. But since we can't know the future, historical data are the best data we have.
2) Both stocks and bonds have had exceptionally high returns during the last 100 years. For reasons I can't get into here (discussions of political topics are prohibited on this forum), I believe returns may be much lower going forward -- perhaps even negative. For this reason, adding a different asset class to my portfolio -- one that is believed to perform relatively well in bear markets -- is appealing.
3) Some gold critics say gold will have a long-term real return of about zero. That is only 0.5 percentage points lower than the return from 30-year TIPS. Not bad!
4) To the extent that there is inflation, it is my understanding that TIPS are less tax efficient than gold.
5) Adding an asset to my portfolio that is uncorrelated with equities and bonds increases the chance that I will be able to harvest capital losses. Capital losses would make it easier for me to balance my portfolio properly due to unrealized stock and bond market gains.

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Re: Three Fund Vs Butterfly Fund or other

Post by Amadis_of_Gaul » 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.
I would be very, very suspicious of any approach that appears to offer higher risk-adjusted returns. For one thing, I don't think it's correct (even though it's commonly done) to equate variance with risk. Variance only captures one facet of the complexity of risk (and fundamentally, the only risk I care about is the risk of running out of money before I run out of heartbeats!). 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. :) Finally, if you're smart enough to study the backtest and spot the outperforming assets, why don't you think that other investors are smart enough to do the same until the asset no longer outperforms?

Like many on here, I have spent a great deal of time backtesting and evaluating historical returns (using Tyler's excellent site, among others). I know just how I would invest if it were 1972. Sadly, it is not 1972, and though I know that there is an optimal portfolio for December 2019, I don't have the foggiest what it is. I think the simplest and most prudent approach is to accept that I can't beat the market and take what the market gives, paying as little as possible in expenses and fees. I probably won't become rich, but I'm not likely to spend my old age in poverty either. On the other hand, many have become poor by chasing superior risk-adjusted returns.

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Re: Three Fund Vs Butterfly Fund or other

Post by fredflinstone » Mon Dec 02, 2019 8:56 am

Amadis_of_Gaul wrote:
Mon Dec 02, 2019 6:12 am
I think the simplest and most prudent approach is to accept that I can't beat the market and [not include gold in my portfolio].
I agree your approach is simple, but I don't think it is the most prudent approach. You are betting all your money on two horses whereas those of us who include gold in our portfolios (a group that reportedly included Jack Bogle when he was still alive) are betting on three.

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Re: Three Fund Vs Butterfly Fund or other

Post by Uncorrelated » Mon Dec 02, 2019 9:05 am

fredflinstone wrote:
Mon Dec 02, 2019 8:56 am
Amadis_of_Gaul wrote:
Mon Dec 02, 2019 6:12 am
I think the simplest and most prudent approach is to accept that I can't beat the market and [not include gold in my portfolio].
I agree your approach is simple, but I don't think it is the most prudent approach. You are betting all your money on two horses whereas those of us who include gold in our portfolios (a group that reportedly included Jack Bogle when he was still alive) are betting on three.
Total stock market isn't betting on one horse. It's betting on thousand horses.

Why not bet on silver and platina, and oil, and TIPS? What about bitcoin? If three horses is better than two, then surely 10 horses are even better?

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Re: Three Fund Vs Butterfly Fund or other

Post by fredflinstone » Mon Dec 02, 2019 9:10 am

Uncorrelated wrote:
Sun Dec 01, 2019 5:19 pm
There are many assets like gold. Silver, platina, oil, cattle, other commodities. Does anyone ever recommend those assets? Why not? Does gold do anything that is special compared to other commodities, and warrants higher return?
I have no objection to holding assets such as silver and platinum. Gold, however, has been used throughout history as money. That is something that can perhaps be said of silver but it cannot be said about oil and cattle. Central banks hold a lot of gold. They do not hold oil and cattle and for the most part it is my understanding that they do not hold silver or platinum. There are low-cost gold ETFs that track the price of gold. It is slightly more expensive for retail investors to invest in other commodities. I have no reason to believe that gold will provide a higher return than the other assets you listed. That doesn't mean it is a bad investment.

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Re: Three Fund Vs Butterfly Fund or other

Post by fredflinstone » Mon Dec 02, 2019 9:12 am

Uncorrelated wrote:
Mon Dec 02, 2019 9:05 am
fredflinstone wrote:
Mon Dec 02, 2019 8:56 am
Amadis_of_Gaul wrote:
Mon Dec 02, 2019 6:12 am
I think the simplest and most prudent approach is to accept that I can't beat the market and [not include gold in my portfolio].
I agree your approach is simple, but I don't think it is the most prudent approach. You are betting all your money on two horses whereas those of us who include gold in our portfolios (a group that reportedly included Jack Bogle when he was still alive) are betting on three.
Total stock market isn't betting on one horse. It's betting on thousand horses.

Why not bet on silver and platina, and oil, and TIPS? What about bitcoin? If three horses is better than two, then surely 10 horses are even better?
Equities as an asset class is one horse. Stocks tend to be correlated with each other more than they are with completely separate asset classes such as gold or bonds. I addressed your question about silver and platinum and oil above. As for TIPS, yes, I love them and I own them. I have no opinion one way or the other about bitcoin because I know little about it.

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Re: Three Fund Vs Butterfly Fund or other

Post by Uncorrelated » Mon Dec 02, 2019 9:34 am

fredflinstone wrote:
Mon Dec 02, 2019 9:10 am
I have no reason to believe that gold will provide a higher return than the other assets you listed. That doesn't mean it is a bad investment.
Uhh. Yes it does. You can buy silver ETF's at expense ratio's similar to those of gold ETF's. If you believe in alternative assets, you should absolutely make use of the free diversification lunch that other commodities provide. An investment in gold (instead of a basket of commodities) only makes sense if you believe gold will outperform other commodities.

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Mr. Bogle and Gold ?

Post by Taylor Larimore » 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."
"Simplicity is the master key to financial success." -- Jack Bogle

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Re: Mr. Bogle and Gold ?

Post by willthrill81 » Mon Dec 02, 2019 10:52 am

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.
And yet in one situation, he specifically recommended a 5% allocation to gold. That's undeniable. So apparently he thought that gold was useful in at least some situations.
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Re: Three Fund Vs Butterfly Fund or other

Post by snailderby » 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."
Last edited by snailderby on Mon Dec 02, 2019 11:00 am, edited 3 times in total.

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Re: Three Fund Vs Butterfly Fund or other

Post by willthrill81 » Mon Dec 02, 2019 10:56 am

Smith1776 wrote:
Sun Dec 01, 2019 7:01 pm
It's got all the elements of, in my opinion, the most sound arguments that have been made on this board and the broader investing world:

1) low cost indexing
2) risk parity
3) alternative/hard assets
4) factor diversification
5) asset class diversification
6) allocation based on economic conditions
7) modern portfolio theory
8) passive buy and hold approach
9) No credit risk on bond side (uncompensated risk via Swedroe)
That is an interesting list.

If the Golden Butterfly portfolio had no gold, it wouldn't raise many eyebrows here at all. Gold really brings out strong opinions in people.

Some claim that its expected real return is 0%, making it useless. Others point to the last ~50 years of data and demonstrate that 10-20% allocation was quite robustly helpful. The first crowd replies that that is merely a statistical anomaly, and the second crowd says that it isn't. Etc., etc.
“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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