Why I Chose this Controversial ‘All-Weather Portfolio’ for My Life Savings

I had a brief foray into stock market investing back in 2010. I was fresh out of college and earning my first real paycheck. I started reading about investing in earnest, and I quickly latched onto a “Bogleheads” style strategy. Those folks are followers of John Bogle, the man who created Vanguard and popularized the low-cost index fund. Due to my young age, I settled on a very aggressive, 100% stock portfolio.

I had read that the stock market is a wild ride, but if you can hold on in the tough times, you’ll reap the highest possible returns.

I scoffed at the notion that I might bail when times got tough. I was resilient! I was a professional athlete! I ate risk for breakfast!

For a while, the market rose and rose, and I felt invincible. Then, in the summer of 2011, it tanked. People thought Greece would default on its debt. The U.S. had its credit rating downgraded for the first time ever. It was scary.

I immediately forgot all of my training. I was like someone who played a lot of the video game “Call of Duty,” and then naively thought I’d be prepared if a real war broke out and I was called into action.

Everything I’d read about the importance of riding out the tough times went out the window. That was all theoretical. I was losing large amounts of real money, every day.

I knew I wasn’t supposed to read the financial press, but I did. It felt like things were only going to get worse. My imagination ran wild. I envisioned Greece collapsing, the EU collapsing, world famines, great depressions, dust bowls. I needed to get out while I could, hoard cash, and buy nonperishable food.

I sold, pretty much exactly at the bottom of the dip. Fast forward to the present day, and I have missed out on spectacular stock market returns over the last six years because of my panicked decision.

Enter the Golden Butterfly

Recently, I started poking my head around the investing landscape again. I was looking for something much less volatile than 100% stocks. I quickly zeroed in on the site PortfolioCharts to help me with my research. The site makes it easy to test out any portfolio and see how it would have performed in terms of historical returns, volatility, start date sensitivity, and pretty much any other metric you can imagine.

My favorite part of the site is the “portfolios” section, which explains 17 classic, frequently used portfolios. You can select any one of them and learn about their components and their historical performance. I was drawn to a particular portfolio, one that was actually designed by the website’s founder, Tyler. He’s a mechanical engineer with a strong math background and an interest in finance. He nicknamed his masterpiece “The Golden Butterfly.”

The Golden Butterfly, or GB for short, consists of 20% small-cap value stocks, 20% large-cap stocks, 20% long-term Treasury bonds, 20% cash, and 20% gold. It’s constructed around the principle that there are four general economic conditions, and a certain asset class tends to do well in each of them:

Prosperity = Stocks
Recession = Cash
Inflation = Gold
Deflation = Long-term Treasurys

If you’re familiar with Harry Browne’s “Permanent Portfolio,” you’ll note the similarities. The difference is that the GB has a larger chunk invested in stocks, as prosperity has historically been the most common economic condition.

The historical performance of the GB is impressive. Tyler analyzed the GB’s performance versus a 100% total stock market portfolio over the last 43 years, and found that “the Golden Butterfly had a nearly identical long-term real compound annual growth rate, but with 60% less volatility, a single worst year of only -11%, and a longest drawdown of only two years.”

Those historical returns, plus a lack of volatility, were very appealing to me.

Defending the Weirdness: A Q&A With Tyler, Founder of PortfolioCharts

This is a controversial portfolio. Three of the four assets are not predicted to generate huge returns, which makes it look a little wonky. Tyler himself was generous enough to answer some of my questions, and to give more insight into the Golden Butterfly Portfolio as a whole:

Q: Why is it so important to look at the entirety of the GB portfolio, as opposed to each component in isolation?

A: “Some people think of investing like making their own trail mix. They taste every individual ingredient, judge it on its own merits, and only include their favorites in the bag. But asset allocation requires thinking like a baker with a sense of chemistry. Individual spoonfuls of sugar, flour, butter, eggs, and baking soda may taste terrible on their own, but combine them in the right proportions and you get awesome cookies shaped like butterflies.”

Q: How do you handle the criticism that the GB only looks good because of overfitting and cherry picking data?

A: “I strongly believe it’s important to make evidence-based investing decisions using good data. To counter the temptation to over-fit and cherry pick that has given backtesting a bad name, I always evaluate portfolios based on not only the most favorable time frames but also the worst ones. The Golden Butterfly is appealing to a lot of people not because it outperformed over some specific time frame that may never repeat, but because it posted remarkably consistent returns in both good times and bad.”

Q: A lot of people hate gold. Can you give the shiny metal some love?

A: “Regardless of your personal biases one way or the other, the data clearly show that gold can be an extremely helpful ingredient in a well-balanced portfolio to carry the day when both stocks and bonds struggle. I don’t believe anyone should invest in something they hate, but you owe it to yourself to model how a bit of gold might improve the consistency of your own portfolio.”

Q: Many investors would say that the GB is too conservative for a person of my age (30). What do you make of that assumption?

A: “It’s all a matter of perspective. Is the Golden Butterfly too conservative because it only holds 40% stocks, or too aggressive because it holds 60% small-cap value, long-term treasuries, and gold? Personally, I think it appeals most to investors who understand labels are irrelevant because wise investing is not about maximizing tolerable risk but about meeting your important life goals with minimum uncertainty.”

Q: How do you mentally cope with missing out on the ‘stock party’ (a huge bull market)?

A: “Everyone loves a good party until they experience a few hangovers. After my own stock learning experiences, I chose to pivot to a consistent portfolio I knew I could depend on to accomplish my goals with minimum stress and effort. I still love a good party, but I embrace investing sobriety.”

Q: How long have you used the Permanent Portfolio, and do you now use the GB?

A: “I became a Permanent Portfolio investor around 2011, and it has served me very well both financially and emotionally. Depending on how you look at it, today I’m either 80% PP or 100% GB (with minor modifications based on my personal situation). But everybody is different, and there’s no one portfolio to rule them all. Know thyself, and invest accordingly!”

Summing Up

I have slowly transitioned my savings into the Golden Butterfly, and it has given me peace of mind. I’ll make sure to let everyone know how I react to the next bear market, but I can guarantee one thing: As long as I’m invested in this portfolio, I won’t panic, predict the end of the world, scream, and run for the hills.

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