Golden Butterfly: Inside The Best Risk-Adjusted Stock Portfolio

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The golden butterfly portfolio is a fairly simple investment portfolio:

20% Total Stock Market
20% Small cap value stocks
20% Long term bonds
20% Short term bonds
20% Gold

However despite its simplicity, the golden butterfly portfolio is one of the best risk-adjusted asset allocations you can have in a portfolio. Put simply, it has generated consistent returns without significant volatility or price drawdowns.

For comparison if you were 100% in the index, you needed to be mentally prepared to stomach price declines of nearly 50%, and seeing periods of no price growth for up to 13 years. Maybe you can handle that, but given the poor historical performance of individual investors, most people probably can’t.

To solve this, the traditional financial advice has been to add bonds to your portfolio to help reduce the risk. A 60% stock, 40% bond split between the portfolio being most common.

However even with a traditional 60/40 portfolio, you still should expect to endure a portfolio drawdown of 34% in any given year, and it could take up to 12 years to recover. So yes, while it is technically lower risk, it is not by much.

Only when you incorporate a portfolio with a more balanced risk management approach, like the golden butterfly, do you see meaningful reductions in risk. In fact, it is in a completely different league. In 50 years, the worst portfolio drawdown from the golden butterfly has been 11% and has lasted just over 2 years.

If seeing steady, low volatility returns appeals to you, then you might consider incorporating a portfolio similar to the golden butterfly or exploring some portfolio allocations like it.

That is what we will be doing in this video as we’ll look at several modifications to the golden butterfly portfolio that can be made to better suit your investment goals.

DISCLAIMER: This video is a resource for educational and general informational purposes and does not constitute actual financial advice. No one should make any investment decision without first consulting his or her own financial advisor and/or conducting his or her own research and due diligence. There is no guarantee or other promise as to any results that may be obtained from using this content. Investing of any kind involves risk and your investments may lose value.

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Michael Jay - Value Investing

[jambohomeventures]

I think this is one of the most underrated channels on YouTube. You really put out great content. I just started my channel in April and I love the community here. hopefully, you blow up and get the recognition you deserve. Thanks for your inspiration.

[jedflett]

Thanks so much for this video man! Your Ray Dalio all-weather portfolio led me here, wicked content! You spreadsheets are insane

[RobT]

I set my portfolio similar to the Golden Butterfly, it fits with my goals and risk tolerance. I came up with my strategy after doing some thinking and glad to have some kind of name to call it now. Times change and we have to adept our portfolios with the changing world economy we live in. Appreciate you bro.

[theoracle]

Excellent video. One point about long term bonds. I agree that in 2020 yields were artificially low due to the Fed. Now in March of 2022, the Fed is starting to normalize rates, and yields have already risen significantly prior to the 1st Fed rate hike. The 20 year treasury is now around 2.5% and the 10 year over 2%. Once long term treasuries like TLT normalize higher, then they better serve their long term objective in the Butterfly of offsetting stock market sell offs, i.e. the flight to safety into bonds (bond prices up as yields fall) when stocks sell off. That's how the Butterfly avoids big draw downs. The gold, long and short term bonds offset the downside risk of the 40% in stocks. Just my two cents. Gold is also valuable again as an inflation hedge.

[klittlet]

Havent even started the video yet. Just glad you're back

[eljuancho]

I use the all weather portfolio from Ray Dalio, I took out commodities and kept 30% stocks 40% 20 year tbond 3-7% short tbond and 15% gold.

[WMichaelDeJonge]

On the plain Golden Butterfly, how often and when do you reallocate your portfolio for the best return and drawdowns? Do you rebalance once per year or per quarter, or do you use a percentage max/min for each component such as 25/15 and rebalance any time one of the components exceeds that band? Thanks!

[jennifergonzalez]

I would love for you to show these videos with an attachment on how you created them if you can!
Your spreadsheet tutorials are super handy

[makchunfoherman]

Hello michael, is it possible to do the tech golden butterfly and see how it compares with the normal golden butterfly for the returns? Thank you

[Eveproguides]

My main concern with it is that Bonds are in a place they've never been in. A backtest over 50 years never sees Bonds in the situation they are in now. They have been in a bull market for the entire time almost.

[TomlynAdvisors]

Nice job Michael. Very factual and objective. Keep up the great work.

[jcav]

If you look at the holdings of VYM, VOO, and QQQ, I believe the best diversification would be with qqq and VYM. Less overlap between the holdings. But love the overall strategy. Thank you for sharing!

[michaelalderson]

Hi Michael, thanks for such well-timed wisdom, you were sorely missed! I was wondering if you see the tech sector bubble bursting within this year? I imagine that would change the order of performance of the portfolios you describe. Thank you and saludos from Peru!

[fuufii]

Excellent video. Thank you. Keep it up, I love your content!

[rafaelbarbosa]

Ray Dalio said recently you’d be crazy to own bonds...

[ryanburkitt]

Great info!!
Does the strength/weakness of these portfolios change dollar cost averaging purchases?

[kman]

What site did you use for the drawdown charts?

[skinnymoonbob]

Is there a Golden Butterfly ETF that gives you this exposure?

[osoner]

So good to see new videos ! Thank you so much for your work Michael 🙏
I have a question about gold. What is you POV regarding how to invest in gold. In you golden butterfly you present an ETF. Do you think it is as safe as physical gold ? What about gold miners ? Would love to know what you think. Have a great day !

[mariansorin]

You are making amazing videos. Thank you. One question, where can we download the spreadsheet from?