As much as economists, pundits, and analysts may try, no one can ever perfectly predict what is coming next for the global markets. Recessions may come without warning, as can inflation, deflation, and soaring bull markets. Rather than trying to divine the next turn of the financial tides, the Golden Butterfly portfolio offers a different approach: preparing for them all.
This approach to portfolio-building is deceptively simple. By splitting its investments equally between five pockets, it seeks reliable growth and limited losses in any market. Let’s examine how it aims to pull off this impressive feat and whether it’s the best allocation for your portfolio.
What Is the Golden Butterfly Portfolio?
The Golden Butterfly portfolio is an investment methodology designed by Tyler of portfoliocharts.com. According to Portfolio Charts, the Golden Butterfly “prioritizes consistently desirable investment growth by balancing economic conditions with an eye towards prosperity.”
In other words, the portfolio aims to handle any market landscape without entirely setting aside the possibility for growth.
Like Ray Dalio’s all-weather portfolio, from which the Golden Butterfly takes inspiration, the latter strategically selects its holdings to match up directly with various market conditions. Therefore, no matter the weather, it’s ready and brought everything it needs.
Ideology and Methodology
In the same way that many index funds and ETFs seek broad diversification by buying many holdings within one sector, the Golden Butterfly spreads its investments across several sectors.
The thinking that drives this strategy is quite similar, too. Index investing adheres to the tenet that rather than try to predict individual winners and losers, investors should buy the metaphorical haystack and find their needle that way. The Golden Butterfly portfolio is similarly agnostic of any specific market predictions. It commits evenly to a range of asset classes, intending to build stability to face any type of market. Whatever conditions may come, the portfolio will have exposure to a productive vehicle in those times.
The only thing every investor knows for sure about the future is that there will be high times and low; moments of soaring optimism and windows of cautious apprehension. While we may spend endless time trying to predict, no one ever knows for certain what is around the corner.
Many portfolios attempt to invest aggressively while the sun shines and then fight for outsized returns amid an economic storm. Passive investing, such as with the Golden Butterfly portfolio, cedes this attempt at control in favor of simplicity, stability, and often better growth.
Golden Butterfly Portfolio Allocation
The allocation of the Golden Butterfly portfolio is quite simple, and that’s part of its strength. It invests assets equally between five components, as follows:
- 20% Total stock market
- 20% Small cap value
- 20% Long-term bonds
- 20% Short-term bonds
- 20% Gold
One thing you may quickly notice about this allocation is that it is relatively light on equities. Where many investment portfolios invest in stocks at an 80:20 or even 90:10 ratio to bonds, the Golden Butterfly’s two stock investments comprise only 40% of the portfolio. This placement puts equity on even footing with debt securities, owing to the 40% of the portfolio allotted to bonds. The remaining 20% goes into gold, a commodity many investment portfolios overlook entirely.
So how does this simple allocation account for every type of market? The strategy is as straightforward as the split.
If you think of the financial markets as broadly operating in four types of cycles — inflation, deflation, bull markets, and bear markets — the Golden Butterfly always has you covered:
- Stock and gold protect your capital against rising inflation
- Bonds act as a hedge against deflation
- Stock helps capitalize on bull markets
- Bonds and gold offer capital preservation and growth in bear markets
The goal is that in any conditions, rain or shine, at least 40% of this portfolio has room to thrive and capitalize on past gains of the other parts.
Golden Butterfly vs. All-Weather Portfolio
Let’s look at how the Golden Butterfly portfolio stacks up against its inspiration and forebear, the Ray Dalio all-weather portfolio. The all-weather portfolio has a similar five-component, three-sector allocation:
- 30% Total stock market
- 40% Long-term US bonds
- 15% Intermediate-term US bonds
- 7.5% Diversified commodities
- 7.5% Gold
Rather than by individual holdings, it may be clearest to compare the two options by their asset class allocations:
|Golden Butterfly Portfolio||All Weather Portfolio|
Both strategies aim to cover any market situation, though the two set different weights to different conditions. At just 30% allocated to equities, one could argue that all weather is the more conservative portfolio, preparing more heavily for hostile conditions like deflation and bear markets than for the long-term growth potential of stocks.
Golden Butterfly vs. Permanent Portfolio
The permanent portfolio from Portfolio Charts’ Harry Browne is another spiritual relative of the Golden Butterfly portfolio. It combines the asset-agnostic approach of the Golden Butterfly with the more conservative strategy of the all-weather portfolio. It divides its assets evenly across four categories:
- 25% Total stock market
- 25% Long-term bonds
- 25% Cash
- 25% Gold
Adding the permanent portfolio to the asset-class comparison above gives the following:
|Golden Butterfly Portfolio||All Weather Portfolio||Permanent Portfolio|
With this comparison, the most significant distinction that jumps out about the permanent portfolio is the inclusion of cash as one of its primary holdings. Neither of the other portfolios we’ve looked at take that step.
The permanent portfolio allocates three of its four equal holdings to historically conservative asset classes: bonds, commodities, and cash. On a field of cautious portfolios, this one might be the most geared towards protecting capital in unfavorable market conditions. However, this approach may come at the cost of significant gains in favorable markets.
Ideology and allocation strategy can only get us so far in evaluating a portfolio. At the end of the day, the core question will always be, how does it perform? Let’s investigate with a look at how each of these portfolios performed with a $10,000 initial investment over the 10-year period concluding with 2022, using a standard S&P 500 ETF as a baseline:
Data source: calculations and charts from portfoliovisualizer.com with author’s input
The cumulative growth for each portfolio over that time period would have been 79.5% for the Golden Butterfly, 67.6% for the all-weather, and 58.4% for the permanent portfolio. The S&P baseline yielded a 222% return over that same period, drastically outperforming on overall growth.
Somewhat unsurprisingly, these four options performed in reverse order of conservativeness. The permanent portfolio, the most focused on capital preservation, showed the least growth. The 100% stock ETF, the most aggressive option, yielded by far the most growth, albeit with greater volatility along the way.
As is often the case in the investing markets, lower volatility seems likely to come at the cost of long-term potential in this case. However, that doesn’t mean the Golden Butterfly isn’t a valid option. As the chart above shows, the Golden Butterfly fully lives up to its intention of remaining steady amid storms and volatility. For those investors for whom stability outweighs long-term growth, such as those at or nearing retirement, the Golden Butterfly can make an excellent safe haven strategy.
How to Invest in the Golden Butterfly
The Golden Butterfly portfolio is a high-level strategy more than a manifest of specific investments. As such, implementing that strategy can vary based on factors like investor preference and location.
However, for investors in the US, Portfolio Charts suggests the following five ETFs for building a Golden Butterfly portfolio:
- iShares Core S&P Total US Stock Market ETF (ITOT)
- Vanguard Small-Cap Value Index Fund ETF (VBR)
- Vanguard Long-Term Treasury ETF (VGLT)
- Vanguard Short-Term Treasury ETF (VGSH)
- iShares Gold Trust Micro (IAUM)
Investing in equal 20% portions between these funds is one way to implement the Golden Butterfly. However, some investors may prefer similar alternatives to any or all of these funds. For instance, one might opt for Vanguard’s VTI as their total stock market holding rather than iShares. Investors outside the US might also choose local, non-US options for their stock and bond offerings.
There are many ways to build this portfolio, but the even distribution across its five asset classes is the essential through-line of the strategy.
Is the Golden Butterfly Your Golden Goose?
When a heavy storm comes, you don’t want to lose sleep wondering if the roof over your head will survive the night. Nor do you likely want to waste a beautiful sunny day hiding inside in fear of possible rain. These same truths apply to the typical investor. Where cautious preparation meets enthusiastic optimism, therein lies opportunity.
The Golden Butterfly portfolio is one way for investors to strike this balance. By diversifying equally between a wide array of asset classes, it aims to protect investors in any type of market. While this conservative approach may lower gains during bull markets, it still offers steady long-term growth in a house built to weather any storm.
Sam is the founder of the personal finance and self-improvement blog Smarter and Harder. His mission is to start exciting new conversations that empower people to improve their work, lives, and money, and hopefully have a fantastic time doing it. In all things, he strives to lead with positivity, understanding, and more than a bit of enthusiasm.