Golden Butterfly Portfolio
Achieving the right balance in one’s investment portfolio is considered by many to be important for long-term financial success.
The Golden Butterfly Portfolio is an investment strategy designed to provide stability, growth, and a hedge against inflation while lowering risk.
This article will look at the allocation, advantages, and disadvantages of the Golden Butterfly Portfolio, and compare it to other popular investment strategies like the All Weather Portfolio and the Harry Browne Permanent Portfolio.
Key Takeaways – Golden Butterfly Portfolio
- The Golden Butterfly Portfolio is a diversified strategy that aims to provide stability, growth, and a hedge inflation while lowering overall risk.
- The Golden Butterfly Portfolio has advantages such as diversification, resilience, inflation protection, and simplicity.
- But it also has drawbacks like lower potential returns, imprecise balance, and limited exposure to international markets.
- We ran a test to see how its performed over time and compared it with similar strategies.
Golden Butterfly Portfolio Allocation
The Golden Butterfly Portfolio is an asset allocation strategy that consists of five equally-weighted asset classes:
- 20% large-cap stocks
- 20% small-cap value stocks
- 20% long-term bonds
- 20% short-term bonds, and
- 20% gold
This allocation is intended to provide exposure to various economic conditions and risk factors.
Large-cap stocks and small-cap value stocks offer growth and capital appreciation, while long-term and short-term bonds provide income and stability.
Gold serves as a hedge against inflation and currency debasement (in the long run), as well as a store of value more generally.
Golden Butterfly Portfolio Advantages
There are several advantages to the Golden Butterfly Portfolio strategy:
Diversification
With exposure to a variety of asset classes, the Golden Butterfly Portfolio reduces the risk associated with investing in a single asset type.
Resilience
The balanced allocation is designed to perform well in various economic conditions, making it more resilient to market fluctuations and downturns.
Inflation protection
Gold has historically been a reliable store of value during times of currency devaluation and inflation (long-term, not necessarily in the short-run), providing a hedge against the eroding effects of rising prices on an investor’s wealth.
Simplicity
The equal allocation of assets makes it easy to understand and maintain, requiring minimal management.
Golden Butterfly Portfolio Disadvantages
Despite its advantages, the Golden Butterfly Portfolio also has some drawbacks:
Lower potential returns
The conservative allocation may result in lower returns compared to more aggressive, equity-heavy strategies.
Gold volatility
Gold prices can be volatile, and relying on a single commodity as a hedge against inflation and crises may introduce additional risk.
More modern approaches will generally look to lower the gold allocation and diversify more of it into other currencies and commodities that are also less growth-sensitive (e.g., non-commodity currencies, agriculture).
Limited exposure to international markets
The focus on US stocks and bonds may limit potential gains from international investments.
Individuals are, of course, free to put their own spin on their portfolio to have it better align with their goals, time horizon, and risk tolerance.
Golden Butterfly Portfolio vs. All Weather Portfolio
The All Weather Portfolio also aims to provide a balanced investment strategy that performs well in various economic conditions.
However, it allocates assets based on risk parity, which generally has a heavier focus on bonds to help balance out the equity risk.
(Stocks have structurally higher volatility due to the theoretically perpetual nature of their cash flows while bonds typically have a fixed-duration element to them.)
As we mentioned in the article on the Harry Browne Permanent Portfolio, one popular version is that the All Weather Portfolio allocates:
- 30% to stocks
- 40% to long-term bonds
- 15% to intermediate-term bonds
- 7.5% to gold, and
- 7.5% to commodities
While both portfolios aim to minimize risk, the Golden Butterfly Portfolio may be more appealing to those who desire a simpler allocation and a hedge against inflation through gold exposure.
Golden Butterfly Portfolio vs. Harry Browne Permanent Portfolio
The Harry Browne Permanent Portfolio is another investment strategy designed for long-term stability and growth.
It has a similar allocation to the Golden Butterfly Portfolio, with 25% in stocks, 25% in long-term bonds, 25% in cash, and 25% in gold.
The main difference is the allocation of cash instead of short-term bonds and small-cap value stocks.
While the Harry Browne Permanent Portfolio may be more conservative, the Golden Butterfly Portfolio offers greater potential for growth due to its exposure to small-cap value stocks.
Performance of the Golden Butterfly vs. Other Approaches
Here are the performance results, running from 1985 to today:
| Portfolio | Initial Balance | Final Balance | CAGR | Stdev | Best Year | Worst Year | Max. Drawdown | Sharpe Ratio | Sortino Ratio | Market Correlation |
|---|---|---|---|---|---|---|---|---|---|---|
| Harry Browne Permanent Portfolio | $10,000 | $143,054 | 7.19% | 6.25% | 20.51% | -12.03% | -15.58% | 0.64 | 1.04 | 0.60 |
| All Weather | $10,000 | $255,608 | 8.82% | 8.13% | 27.55% | -20.01% | -23.21% | 0.70 | 1.10 | 0.66 |
| Golden Butterfly | $10,000 | $212,089 | 8.29% | 7.45% | 23.90% | -11.51% | -17.28% | 0.69 | 1.04 | 0.83 |
We can see that the Golden Butterfly did relative well over this period and performed roughly in line with the others in terms of the risk-adjusted metrics.
It does have greater correlation to the stock market due to its 40% allocation to equities versus just 30% for the All Weather mix used here and the 25% mix as used in the Harry Brown Permanent Portfolio.
We have some more detailed summary statistics below.
Summary Statistics
| Metric | Harry Browne | All Weather | Golden Butterfly |
|---|---|---|---|
| Arithmetic Mean (monthly) | 0.60% | 0.73% | 0.69% |
| Arithmetic Mean (annualized) | 7.39% | 9.18% | 8.59% |
| Geometric Mean (monthly) | 0.58% | 0.71% | 0.67% |
| Geometric Mean (annualized) | 7.19% | 8.82% | 8.29% |
| Standard Deviation (monthly) | 1.80% | 2.35% | 2.15% |
| Standard Deviation (annualized) | 6.25% | 8.13% | 7.45% |
| Downside Deviation (monthly) | 1.00% | 1.38% | 1.32% |
| Maximum Drawdown | -15.58% | -23.21% | -17.28% |
| Stock Market Correlation | 0.60 | 0.66 | 0.83 |
| Beta(*) | 0.24 | 0.34 | 0.40 |
| Alpha (annualized) | 4.39% | 4.86% | 3.71% |
| R2 | 35.48% | 42.97% | 68.10% |
| Sharpe Ratio | 0.64 | 0.70 | 0.69 |
| Sortino Ratio | 1.04 | 1.10 | 1.04 |
| Treynor Ratio (%) | 16.77 | 16.56 | 12.97 |
| Calmar Ratio | 0.14 | -0.03 | 0.31 |
| Active Return | -3.62% | -1.99% | -2.51% |
| Tracking Error | 12.84% | 11.91% | 10.29% |
| Information Ratio | -0.28 | -0.17 | -0.24 |
| Skewness | -0.25 | -0.37 | -0.80 |
| Excess Kurtosis | 1.62 | 1.68 | 2.91 |
| Historical Value-at-Risk (5%) | -2.21% | -3.16% | -2.68% |
| Analytical Value-at-Risk (5%) | -2.37% | -3.12% | -2.85% |
| Conditional Value-at-Risk (5%) | -3.31% | -4.74% | -4.54% |
| Upside Capture Ratio (%) | 31.25 | 42.82 | 45.08 |
| Downside Capture Ratio (%) | 13.94 | 24.55 | 31.56 |
| Safe Withdrawal Rate | 6.26% | 8.72% | 7.46% |
| Perpetual Withdrawal Rate | 4.14% | 5.59% | 5.13% |
| Positive Periods | 297 out of 460 (64.57%) | 298 out of 460 (64.78%) | 305 out of 460 (66.30%) |
| Gain/Loss Ratio | 1.29 | 1.23 | 1.16 |
| * US stock market is used as the benchmark for calculations. Value-at-risk metrics are based on monthly values. | |||
FAQs – The Golden Butterfly Portfolio
Why is the Golden Butterfly Portfolio called “Golden”?
The name “Golden Butterfly” comes from its inclusion of gold as a significant portion of the portfolio allocation.
Gold has historically been considered a safe-haven asset during times of financial turmoil and a hedge against inflation over the long-term, which adds stability to the portfolio.
How often should I rebalance my Golden Butterfly Portfolio?
Rebalancing your portfolio ensures that your asset allocation stays in line with your desired risk level.
Typically, you should rebalance your Golden Butterfly Portfolio at least once a year or when the allocations deviate significantly from the intended 20% target.
For more on rebalancing a portfolio, we cover that in more detail here.
Can I invest in the Golden Butterfly Portfolio using ETFs?
Yes, you can implement the Golden Butterfly Portfolio using exchange-traded funds (ETFs) that track the performance of each asset class.
For example, you can use ETFs that represent large-cap stocks, small-cap value stocks, long-term bonds, short-term bonds, and gold.
Is the Golden Butterfly Portfolio suitable for all investors?
The Golden Butterfly Portfolio may be suitable for investors seeking a balanced investment strategy that minimizes risk while providing growth and inflation protection.
However, individual risk tolerance, investment goals, and time horizons vary, so we generally think it’s a good idea to consult with a financial advisor before implementing any investment strategy.
How does the Golden Butterfly Portfolio perform during a recession?
While no investment strategy can guarantee positive returns during a recession, the Golden Butterfly Portfolio’s diversified allocation is designed to provide resilience in various economic conditions.
The combination of stocks, bonds, and gold allows the portfolio to potentially weather downturns better than more aggressive, equity-heavy strategies.
How does the Golden Butterfly Portfolio compare to a traditional 60/40 stock/bond allocation?
The traditional 60/40 stock/bond allocation is more heavily weighted toward stocks, which may result in higher potential returns but also higher volatility.
In contrast, the Golden Butterfly Portfolio’s equal allocation across asset classes seeks to minimize risk and provide stability in various market conditions, although it may result in lower overall returns compared to a 60/40 allocation.
Is the Golden Butterfly Portfolio tax-efficient?
The tax efficiency of the Golden Butterfly Portfolio depends on the specific investments you choose and the tax laws in your jurisdiction.
However, ETFs and index funds can be more tax-efficient than actively managed funds due to their lower turnover.
In cases involving taxes, it’s best to consult with a tax professional for personalized advice on your situation.
Conclusion
The Golden Butterfly Portfolio is a well-balanced investment strategy that seeks to provide stability (e.g., bonds and cash allocation), growth (e.g., stocks allocation), and long-term protection against inflation and currency devaluation (e.g., gold allocation).
By comparing its allocation, advantages, and disadvantages to other popular portfolios, investors can make informed decisions about the best approach to meet their long-term financial goals.