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Golden Butterfly 2017 - 2021

A helpful place to also put any annual reports etc, of your own portfolios
1nvest
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Golden Butterfly 2017 - 2021

#471539

Postby 1nvest » January 9th, 2022, 12:59 pm


1nvest
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Re: Golden Butterfly 2017 - 2021

#471543

Postby 1nvest » January 9th, 2022, 1:22 pm

Many might say holding some long dated gilts to be mad at present with such low yields/rising inflation. However the same might have been said for gold back in 1980 when the Dow/Gold ratio was down at 1.0 levels (suggesting gold was very expensive). Using US data as a example however and from the start of 1980 with a $2620 initial investment into a Golden Butterfly, that would have held 1 ounce of gold ($524/ounce gold price). By the end of 1999 that portfolio had grown to $19,144 and held over 13 ounces of gold. In effect have accumulated ounces of gold at a over 13% annualised rate. Subsequently gold rose from $291/ounce at the end of 1999 to over $1800/ounce in 2011.

The same sort of cost-averaging could occur for long dated gilts in forward time. Gains from assets in a Bull phase being top-sliced to buy more long dated gilts in a Bear phase, that sooner or later turns around. The alternative is to try and time exit and re-entry, having to be right twice and that often works out worse than simple averaging.

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Re: Golden Butterfly 2017 - 2021

#471723

Postby vand » January 10th, 2022, 11:14 am

I'm not sure that the FTSE250 is a good proxy for the SCV element of the Golden Butterfly in your version of the GB... though that said it's returns have been stellar for a long time now, just as good as the US large cap.

I don't see the fixed income element being anything but a drag on performance over the next cycle (say 10-15 years) unless there is a bond market crash to eventually drive interest rates higher and bring bonds back to being positive real. The economic conditions we face today and the price of bonds are almost diametrically opposite to what it was in 1982. Back then we were transitioning from an inflationary to disinflationary environment, with bonds priced as if the inflation was going to remain high. Today it looks like we are transitioning from a disinflationary environment to at least a more inflationary environment, whilst bonds are still price like inflation is going to remain below 2%.

If that does happen then it's more likely imo that bonds will undergo a period where they lose a huge amount of purchasing power as they did in the early 1900s and again between 1960-80.

That may not, however be a reason to remove them from the GB portfolio, as any portfolio's characteristics are defined by all of its components, not just the best performing ones, and bonds will play a diversifying and rebalancing role.

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Re: Golden Butterfly 2017 - 2021

#471896

Postby 1nvest » January 10th, 2022, 10:39 pm

Comparing BGSC (BMO's global small cap investment trust) to that of FT250 and broadly they've compared. Other choices could however be applied, but for simplicity iShares VMID performance referencing sits well alongside their IGLS, IGLT, SGLN and CSPX funds. In practice I favour Vanguards VMID to iShares MIDD, but the reporting is more misaligned.

Bond wise and yes there's broad opinion of being 'over-priced', "one way to go". However the same might have been said for gold in the early 1980's. Continuing to hold and rebalancing subsequently saw multiple more ounces of gold being accumulated i.e. the portfolio did a reasonable job of cost-averaging gold, that subsequently paid dividends. The alternative is to try and time both exit and re-entry, two opportunities to foul up and/or miss-the-boat. I suspect it will be much the same with long dated gilts - may prove better to have averaged-in rather than having tried to time. It may appear easy to time when you look back over history, but when it comes to reality more often fear or greed human emotions result in regret.

The GB is 80/20 Permanent Portfolio and small cap value. The PP assume that one asset more often will be in a Bear phase, in Harry's words lose 10, 20, 30, 40 or maybe even 50%, but be offset by another asset in a Bull phase, that gains 100, 200% or more. Over the next decade it could very well be long dated gilts that lose the 10, 20 ... whereas the 100, 200+ might be gold or stocks. But that's unpredictable. Who knows, long dated gilts might halve quickly, with losses offset by the other assets, and over the subsequent decade prove to be the best performing asset.

Smooth/consistent performance, even if 0% real, better supports SWR, sequence of returns risk is a significant risk factor that smoothing negates. 0% consistent real and 25 years of 4% inflation adjusted withdrawals are supported. A little over 1% real and that extends out to 30 year. Even with one of the assets performing poorly the GB has reasonable prospects to cover SWR, and historically more often comfortably accommodated SWR (4% or higher real gains relatively consistently/smoothly).

Another factor is that long dated gilt yields aren't as volatile as shorter dated gilts. 1959 lows of 3.9% 20 year gilt yields rising to 6.9% at the end of 1979 type changes. The yields (prices) are set to what is opined the likely average yield over 20 years and less in reflection of short dated yields/interest rates. But yes a recent 1.4% 20 year yield that rose to hitting 7% would see a near -60% price decline. At that 7% level however that's a pretty bleak 20 year average forecast for inflation/interest rates. More reasonably I suspect 5% (and a -45% price decline) is perhaps the upper level. Within Harry's one asset losing 10, 20, .. 50% indication, offset in part by both short and long dated interest rates also having risen. If both short and long dated gilts are paying 5% interest then that is like a 10% dilution of bond price declines from just those two assets alone. One asset weighted 20% losing a third total return (loss) = -7% of the total portfolio value, another three assets (stocks, SCV stocks, gold) each rising 10% the same year and the long dated gilt loss was in effect negated, and where rebalancing has you buying a large chunk of additional long dated gilts at what might be relatively low prices/high yields.

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Re: Golden Butterfly 2017 - 2021

#472266

Postby vand » January 12th, 2022, 8:07 am

Yes gold lost 80% of its real value between 1980 and 1999. Then gained 700% in the following decade. Markets do go through large valuation over a full cycle.. but it is a cycle and it needs to go out of favour first to set up the next growth phase. Bonds would need to adjust down first before they have any chance of delivering substantial growth.. and stocks too, imo.

With the Dow/gold ratio currently at 20, Gold is more likely to be the asset that sees a large upswing that could carry the portfolio over the next phase, though SCV is also quite underpriced too as value in general has been out of favour for a long while and could also do part of the heavy lifting.

Just my 2p about what the individual components are likely to do over the next cycle.

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Re: Golden Butterfly 2017 - 2021

#472429

Postby 1nvest » January 12th, 2022, 3:54 pm

Somewhat oddly, house prices are also relatively good value and I agree that over the next cycle pushed to placing a bet and I think house/SCV/gold to be a reasonable choice.

Set house prices as 'inflation' and assets of stock/gold and whilst broadly that zig-zags around a flat/central line stock/gold have zigged (up) in real (house price adjusted) terms.

Perhaps indicative of wages rising ahead of relatively high/modest inflation, whilst bonds (and broader stocks) relatively lag.

Owning a home, some FT250 index fund, some gold, land/business/cash-in-hand (gold was money back then) aligns to ancient Talmud advice.

Rather than such a bet however, the GB is basically a 40/60 stock/bond asset allocation where stocks are split 50/50 broad index and small cap value, and bonds are a short/long dated treasury/gilt barbell combined with some gold. Broadly that worked well historically, is somewhat like a US Wellesley 40/60 stock/bond allocation that has provided reasonable rewards with pretty low ongoing negative side volatility (rarely loses more than 5% in any one year).


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