Golden Butterfly Portfolio: Everything Investors Should Know

Everything Investors Need to Know About the Golden Butterfly Portfolio

Investing is a long game. If you're looking to create positive growth on your money and build savings over time, you need to make smart investments that hedge against changing economic conditions. There are several investment strategies that can help you achieve these goals, and a popular one is through diversifying your portfolio, dividing your investments among balanced asset classes that can insulate you against recessions and drawdowns.

There are more than a few different approaches to building such a long-term, low-risk portfolio. One of the more popular strategies is known as the Golden Butterfly Portfolio, a unique strategy that takes lessons learned from other successful long-term portfolios to create an investing approach that has shown plenty of promise. Here’s everything you’ll need to get started.

What is the Golden Butterfly Portfolio? 

The Golden Butterfly is an investment portfolio approach that focuses on diversifying investments equally amongst five different asset types. Created by Tyler from PortfolioCharts.com and based on Harry Browne's Permanent Portfolio, the Golden Butterfly has grown popular since its inception as an alternative.

Portfolios like the Golden Butterfly are designed to be a simple, diversified investment approach that has the ability to perform well in a variety of economic conditions. This is possible because the assets chosen for the Golden Butterfly portfolio are selected to provide growth during not just times of economic prosperity but also situations like inflation, recession, and others. 

Proponents of the Golden Butterfly Portfolio tout its ability to weather a variety of economic conditions as its chief strength. Additionally, because the asset allocation of the Golden Butterfly remains unchanged over time, it's also advantageous for Investors who are interested in low-risk, long-term strategies that require little in the way of maintenance.

Five specific asset classes comprise the Golden Butterfly Portfolio, each in equal amounts:

• 20% Total Stock Market

• 20% Small Cap Value

• 20% Long Term Bonds

• 20% Short Term Bonds

• 20% Gold

 Pros and Cons of the Golden Butterfly Portfolio

The Golden Butterfly Portfolio approach isn't perfect, but it offers several advantages over other approaches. As always, there are downsides to every upside, so let's take a closer look at the pros and cons to this approach.

Pros: The advantages of the Golden Butterfly rely squarely in its all-season approach to investing and its beauty lies in its simplicity. Investing in stocks provides opportunities for growth during times of economic expansion, while diversifying into long term and short term bonds provides hedges against deflation and recession respectively. Meanwhile, investing in gold is a traditional approach to fighting against the effects of inflation. Finally, the small cap value stock asset allocation provides additional diversification and supplements expected returns.

Cons: Perhaps the largest drawback to the Golden Butterfly is that it's a very long-term investment strategy. If you're an investor looking for a positive risk-adjusted return over decades, this type of portfolio will deliver; however, if you're not risk averse and you're looking at facing some possible opportunity costs because of the asset allocation preventing you from investing more heavily in asset classes that provide a higher potential rate of return than gold, for example. 

Golden Butterfly vs Permanent Portfolio vs All Weather Portfolio

Golden Butterfly vs Permanent Portfolio

As it's inspired by the Permanent Portfolio, it's only natural to compare the Golden Butterfly Portfolio to its predecessor in terms of performance. Both portfolios perform admirably when compared to historical data, but when subjected to backtesting, it turns out that the Golden Butterfly slightly but significantly outperforms the Permanent Portfolio on CAGR and risk-adjusted return. However, the tradeoff is that there is slightly more volatility and larger drawdown with the Golden Butterfly than with the Permanent Portfolio, meaning that choosing the former is accepting slightly more risk for a commensurate increase in return.

Golden Butterfly vs All Weather Portfolio

Another similar approach that begs to be compared to the Golden Butterfly is the All-Weather Portfolio. Like both the Golden Butterfly and the Permanent Portfolio, the All-Weather was created to stand the test of time through different economic conditions. Many of the asset classes in each portfolio are identical, such as treasury bonds, gold, and stocks, but the allocation percentages are much different. Yet the historical performance of both portfolios is very close, perhaps even closer than the Golden Butterfly and the Permanent Portfolio. The Golden Butterfly edges out a slight victory for the same reasons it does over the Permanent Portfolio - better returns in exchange for more risk - but the All Weather's asset allocation performs better in times of economic uncertainty, possibly making it a better choice for nervous investors.

The Golden Butterfly's historic performance showcases two of the biggest draws for this investment approach: it's both very consistent and highly competitive. When compared to historical data dating from 1972 through 2014, compound real returns are nearly identical to returns from the total stock market for the same period. The major difference, however, is that the Golden Butterfly exhibits much less volatility than stocks, a testament to the power of diversifying assets with an eye towards weathering bad economic weather. 

Returns are reliable for the Golden Butterfly. By the numbers, year-to-date returns from December 20, 2022 are up with a 5.66 percent annualized rate of return over a period of 10 years, even with a 13.6 percent loss year-to-date. This shows clearly that while there may be short-term drawdowns, the Golden Butterfly delivers reliable results in the longer term to help you protect your investments against potential losses and provide growth opportunities.

Drawdowns are a fact of life for investment portfolios, and the Golden Butterfly is no different. The largest drawdown the portfolio has experienced was recorded on October 19, 2022 at a loss of 19.59 percent. As of December 20, 2022, the portfolio has yet to recover. The second largest drawdown was a loss of 15.83 percent on March 17, 2020, which the portfolio recovered from by June 2nd of that year. Eight other drawdowns occurred during this period, all with fully recovered losses of 8.27 percent or less.

Volatility is lower with the Golden Butterfly Portfolio than in general, which is indicative that the strategy it employs is a successful one. In exchange for a more modest rate of return, the volatility of this portfolio strategy is, upon this writing, stands at 15.90 percent. In comparison, the current volatility of the S&P 500 is 18.92 percent - and, as always with volatility, a smaller number indicates less volatility.

Variations of the Golden Butterfly 

There are also variations on the Golden Butterfly Portfolio that you can use if you so choose depending on your investment goals. One popular choice is the so-called "Modified Golden Butterfly Portfolio", which emerged in 2017. The variation offers a greater range of diversification including:

• 20% Total World Stock Market 

• 20% Total World Small Cap Value

• 20% Long-Term Bonds

• 20% Short-Term Bonds

• 10% TIPS (Treasury Inflation-Protected Securities)

• 10% REITs (Real Estate Investment Trusts)

Another variation, known unofficially as the Leveraged Golden Butterfly Portfolio, begins by replacing the 20% in small cap value and total stock value assets into one 40% position to track the S&P 500. Additionally, you can reconfigure the long-term and short-term bond positions to a single intermediate-bond position at 40% as well. The remainder of the asset spread can be devoted to gold; for a larger proportion, many investors drop their 40% allocations to 36% each and transfer the additional 8 percentage points to gold for a 36-36-28 split. The benefits of reconfiguring the Golden Butterfly Portfolio in this manner offers higher returns with minimal additional volatility, trading a slight increase in risk for a solid increase to returns.

How to Build the Golden Butterfly with Composer 

Using trading platforms to automate and streamline your investment activity is an excellent way to make trading easier - and you can configure these platforms for building a Golden Butterfly Portfolio in no time at all. Building a Golden Butterfly Portfolio in Composer is easy given the platform's user-friendly interface. Using the dropdown menu, simply add equal weight assets in the form of Vanguard's Total Stock Market Index (VTI), a small cap value ETF (VBR), long-term Treasury bonds (TLH), short-term Treasury bonds (SHY), and SPDR Gold Shares (GLD). Then, simply change the trading threshold setting to 5 percent. This will trigger an automatic portfolio rebalancing if any of your assets exceed 25 percent of the total. 

The Golden Butterfly Portfolio is an excellent long-term trading strategy, as it relies on diversified assets that are chosen to weather all sorts of economic conditions. All-season portfolios like the Golden Butterfly (and related ones like the Permanent Portfolio and the All-Weather Portfolio) demonstrate consistent returns over time while backtesting with historical data, limit drawdowns, and suffer from less volatility in general, which is the perfect combination for risk-averse investors looking to take a long-term approach to their trading returns.