Golden Butterfly: Inside The Best Risk-Adjusted Stock Portfolio

The golden butterfly portfolio is one of the best risk-adjusted asset allocations for an investment portfolio. We look at some variations of the golden butterfly and how the portfolios performed in 2020 and in the past. Subscribe here for more content: bit.ly/Subscrib...
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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 KZbin. 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.

[@fuufii2300]

100% agree!

[@Someone-lc6dc]

@@fuufii2300 I agree. I just wonder if the channel is still alive...

[@fuufii2300]

@@Someone-lc6dc Wow, just realized it's been 7 months since the last update.

[@jpbredenkamp5091]

Finally he’s back!

[@MetalBum]

He’s a rock star

[@jedflett1073]

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

[@antoniobandears-topic3124]

There are so many overvalued stocks right now, so it's best to stay out of stocks whose PE is above 30, I use a financial advisor Mrs Lyra holt dean My F.A got my $250k invested in TESLA, NVR, SEB AAPL ,NVAX, NASDAQ I've gotten 40% return, although I'll keep holding to see where it goes.

[@marcanthony7958]

what could be the future hence it's not predictable, what if the correction come earlier? well this is so insightful because there was a earlier correction led to this stage. I will check his program out and see what i can acquire thanks in advance.

[@antoniobandears-topic3124]

@James 20 Watts you can look her name up..you would see all you need to know info@lyraholtdean. com

[@testimonialblessings8058]

I've been unsure about the market due to volatility, at the same time I still feel it's the right time to make profit because of the price decrease, there's no better time to invest than now...

[@warnerrecordsvault5869]

i feel the big money strategy will never be uploaded on here but kept to ones self. if i had the secret formula, i won't share it i'd help people out for a price, that is why i always advise getting professional guidance

[@fredlucas6360]

@@antoniobandears-topic3124 Wow..Mrs Lyra Holt Dean ...a colleague of mine just put me on with this lady....pleased to see this

[@RobT192]

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.

[@eljuancho2]

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.

[@theoracle10]

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.

[@osoner94]

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 !

[@michaelalderson5171]

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!

[@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!

[@shannonoliver7992]

I would treat it as you would the permanent portfolio, and rebalance any time one of the components exceeds the band as you have already stated. some people rebalance at 25/15, not going over 30% in any component before a rebalance.

[@jcav3232]

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!

[@darthdigital3789]

Bonds present a huge conundrum for me. I'm approaching retirement, but I've seen what happens to my bond funds every time the interest rates go up (even by just a little): they drop in a big hurry. Why? Because each fund's portfolio is now worth less because they hold all "old" (lower-yielding) bonds. Sure, over time, those funds will theoretically do better as the oldest bonds drop off the index and newer, higher-yielding bonds replace them. But what happens when interest rates rise yet again, as they're bound to do? At this point, interest have pretty much nowhere to go but up now. In the coming few years, I just can't see any bond funds doing well. Even when interest rates remain stable, the return on bonds is so pitiful that it seems silly to own any bond funds. I feel as though it's better just to keep that money in cash and be ready to scoop up stocks after the next big correction (which, at the time of this writing, can't be too far away). If any of you see anything other than a bear bond market for the next few years, I'd love to know your thoughts on the matter.

[@jennifergonzalez6431]

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

[@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.

[@ryanburkitt424]

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

[@makchunfoherman6644]

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

[@MetalBum]

I been waiting for this one 🦋 gooooold. This is exactly what I was thinking of is GB and relation to current situation I was wondering how TLT and long term bonds would do in next few years. If the interest rates raise these will drop right? What if we go into negative interest rates? Then TLT and BLV Make sense eighth? Thx man

[@charlesgripp343]

That’s right. Being long bonds is weird right now because interest rates cannot go much lower. Interest rates in Japan have been very low for a long long time. So buying bonds right now could be a sideways bet at best if we become like japan and a drawdown at worst of inflation starts hitting hard.

[@sunnyho7962]

Thanks for the content ! I am just about to start constructing my very own ETF portfolio. Based on the SUPER OVER valuation of the current market, can I pick your brain a little ? 1) May I know why did you remove VTI and putting VOO instead ? While I understand small cap value has underperformed for the last decade, don't you think it's good to include small cap value/small cap blend - IJS/IJR for the long term horizon of 10-20 years (according to fama and french model) ? Taking into consideration markets are cyclical, it makes me wonder if it is still worth going heavy on large cap growth stocks now ? 2) My main problem is this : Is there an alternative to replace short term bonds ? I agree with you that interest rates will eventually go up, making long term bonds unfavourable. But I am also not based in US - meaning that with the unlimited QE, rising inflation and devaluation of the USD, it might not be wise to be holding on to any US treasury bonds short or long, as the gradual rise in interest rates in the future plus currency conversions will negate whatever gains I have. Will be great to hear your suggestions and advice. Thanks in advance Michael

[@klittlet005]

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

[@MitchellPhillips]

What is the overall performance of the Tech Butterfly portfolio over the last 50 years?

[@mariansorin12]

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

[@skinnymoonbob]

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

[@MetalBum]

How about a dragon portfolio 🐉 What simple etfs could I use? GLD gold SPY stocks and bitcoin BND bonds DBC COMMODITIES??? VXX Or is there something better VOLATILITY?? Any other ETFs that would work?

[@tomsettles6873]

Thanks for the great analysis on the GB allocation. If you were investing all 5 slices into a Taxable Account, what would you substitute for short-term and long-term bonds to make it more tax efficient? Possibly a muni etf (like VTEB or SHM) and long term treasuries? THANKS !!

[@ryanbrown5058]

You can’t focus on one year. When you actually test this has under performed the S&P with nearly the same risk level. Yes it out performed during Covid. But that’s it.

[@u105524]

This is my favorite channel on KZbin..The way Michael explains is incredible. I have heard you talk about Golden butterfly before but not sure where it is coming from.Is this you invention.Has it been tested in reality? It's very appealing but could you please provide some background?

[@ratipati2007]

Your comparison of various portfolio is not complete. You show real rate if return, but it would helpful if you also show standard deviation (risk) of each portfolio.

[@johanwesthuyzen7422]

Another great video, thank you. Is it possible that you can do a video about the next 6 months? It would be great to hear what you think will happen and what to look out for

[@orpheusepiphanes2797]

How frequently or under what circumstances do you rebalance?

[@fuufii2300]

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

[@juancutina4424]

Great data. How would the Golden Butterfly compare to All Weather portfolio from Ray Dalio or permanent portfolio from Harry Browne? Cheers!

[@CaseyBurnsInvesting]

Definitely looking to duck some assets into some safe/hedge asset classes if the stock market and money printers keep roaring.

[@kman2324]

What site did you use for the drawdown charts?

[@kyle7574]

He’s back

[@krihanek117]

I don't think the date ranges chosen are going to last the test of time. Gold sucks, how is he getting such high returns for gold when it's historic yield is 5%?

[@MetalBum]

Hey would you add bitcoin small hedge like 2-10% and or cryptos? How about emerging markets. Seems like bonds aren’t that great but still some small allocation for any weather? Let’s do some updates miss ya man

[@TomlynAdvisors]

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

[@anistar002]

How does this portfolio compares with the Permanent portfolio which this portfolio is based on ?

[@IsaacWendt]

Hey Michael, another great video. Can I ask where you get all the data for backtesting? Even better if you could do a detailed video about it. Thanks again for everything you do.

[@LearnWithMike]

I very much the video and comparison but I would compare different period e.g. 2000-2010 when the Tech stocks valuations decreased by 80% than you would have completely different results. For me today's valuations of tech companies are out of wack similar to 2000/2001 so I think they will reverse to mean - which will will have significant negative impact on tech golden portfolio

[@sandpiperbf9767]

My modified golden butterfly: 20% global markets with best valuation metrics relative to growth (russia, singapore, turkey, brazil, uk, etc) 20% gold/silver 20% cryptocurrency 20% emerging market bonds 20% global individual value stocks

[@charlesgripp343]

This isn’t a modified golden butterfly. This is an idiosyncratic portfolio.

[@sandpiperbf9767]

@@charlesgripp343 haha, fair enough. Inspired by golden butterfly at least. And many of the components have low correlation to eachother, similar to the golden butterfly. The issue I take with the golden butterfly is many of the components are unattractive by themselves (short term us bonds certainly, long term us bonds currently, and often gold too). Gold seems like the only one of those with good enough expected future returns. Emerging market bonds have comparatively large yields, although their correlation vs stocks is higher than treasuries.

[@wesfarmer83]

Do you have a recommendation of which gold etf or fund to invest in?

[@mbabcock111]

The only investing free lunch is the low cost, globally diversified ETF portfolio.

[@spartacuspro88]

@John Doe Global diversification can be good for currency risk. My American assets has lost ~15% in my local currency in a few months due to the US$ rate going down.

[@Jeff-cz3pj]

Dalio and Bridgewater are suggesting inflation linked bonds, seems like a smart play. Could you do a video on those, including ETF's you would recommend. Love your content, thanks

[@ferdinandguggenberger9882]

Is there a way to hedge this when EUR is the base currency to invest from?

[@fabianstoll]

Interesting portfolio, but there are other low risk portfolios. 50%-50% total stock market and long term gov. bonds has a similar risk level with higher returns. Even a portfolio with 50% total stock market, 20% gold and 30% long term gov. bonds has a higher return with a similar risk level.

[@cemen777]

Good stuff, thanks a lot! I was not aware of SGOL, I chose iShares Gold Trust (IAU). I think they are similar. Yes? No?

[@rafaelbarbosa9833]

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

[@luisdelgado5374]

Why did he say that?

[@rafaelbarbosa9833]

Cause interest rates are extremely low and might go negative

[@Kingdia97]

The cash portion are treasuries right? What ticket would tht be?

[@CallumWaring]

I wonder how these portfolio’s performed in 2022?

[@stevekrause5931]

Great stuff, Michael, thanks!

[@xandermichels8336]

how do you get your hands on historical stock data?

[@Mdon100]

Michael, I enjoyed your video, I was getting ready to build the Golden Monkey Portfolio in my brokerage account when I saw your video appear in my feed. Just curious how does the GMP compare to Ray Dalio's All-Weather Portfolio. I'd be fascinated to see a comparison.

[@MetalBum]

Golden monkey 🐵 hidden dragon! 🦵 Crouching butterfly attack 🤜!!

[@Sinnombrefs]

I think this revolutionized my life as someone who wants to be hands off with portfolio since I am so busy and you explained it in such a digestible way. Right now with the current situation (since I just started to save to invest) and with the global outlook of the economy being meek. Would you recommend to learn on the parts of the portfolio that are at a discount? Example - vym

[@michielpro]

Aren’t bonds bad to buy right now cuz of the low interest rates?

[@HumbleTrader001]

Yeah, isn't Ray Dalio saying bonds are trash?

[@ShivamSingh-jw8ey]

What about 80% Small Cap Value and 20% Long Term Bonds? It has the highest Sharpe Ratio out of all portfolios in the past 50 years!

[@mihu02]

Interesting too see a 65% qqq / 35% gld in the same time period

[@albertbryant1403]

Hey Michael. Good info.....definitely need to modify my portfolio.

[@brianasamuels]

I think bonds going forward will be very different (bad) .

[@roym1444]

Do you make your own visual graphs

[@javierjimenez978]

Great video. Definitely something to consider. Subscribed and Liked 🥃

[@hunterjarolimek9700]

Great video! Can you do one on Craig Israelsen’s 7 Twelve portfolio?

[@higurashianduminekoconnect1702]

I have to give a laugh about this since technically what comes to mind when I think of Golden Butterfly I think the umineko when they cry

[@TheAndrewLopezFinancePodcast]

Very interesting portfolio, very diversified which gives you very good downside risk

[@g0ndal]

where can i ge the excell link ?

[@hsingholee1058]

Maybe nowadays the twenty percent gold be broken down into gold, silver, and bitcoin.

[@stephentomaszewski8501]

while your content is good this type of analysis is classic survivorship bias and overfitting the data. The author of this portfolio basically came out and said he fit the portfolio to the data. Not to mention 10 years of data in a 10 year bull market is nothing close to statistically significant. Lastly, I've tried to verify the data in the author of the golden butterfly uses for "50 years of data" as most indexes didn't start until the 1990s but could not find the data. "Past performance is no guarantee of future performance"

[@charlesgripp343]

The indexes have been recreated for the sake of backtesting. The portfolio makes sense logically, it isn’t just a case of torturing the data

[@stephentomaszewski8501]

@@charlesgripp343 I highly doubt some individuals went back and recreated market cap indexes back to the 70's when that would take a massive amount of time and also data that isn't freely available to retail investors. Also comparing gold before the standard change severely skews the performance of gold in any portfolio pre 1976. Furthermore, this portfolio takes survivorship bias is skewing to small cap value. The farma data is inconsistent and cannot be validated that small cap value has ever outperformed. There are huge inconsistencies during the post great depression era. Regardless if it outperformed in the past does not mean it will in the future. There's no free lunch and everything gets arbitraged out. The portfolio also tilts to long term bonds that we are approaching the tail-end of the 30 pr bond market. We are in an artificially low-interest period for the foreseeable future. In summary, this portfolio takes an active tilt into small cap value and long term bonds that severely deviate from the true market cap of each asset class.

[@charlesgripp343]

Stephen Tomaszewski “I highly doubt”. Why? If people think there’s money to be made they’ll do the work. I agree about the gold, that’s why I like the dragon portfolio which has been backtested 100 years. Perhaps the data for scv isn’t as far reaching as we’d like but scv still makes sense logically. This portfolio is not a case of fitting the data. There is a philosophy behind it. I agree the bond market looks shitty but the point of this portfolio is so people don’t have to think about that. Even if bonds spike down the portfolio will be okay.

[@charlesgripp343]

Stephen Tomaszewski I would argue the data is under fitted

[@eyalzifman5856]

And here i thought you were a value investor going only with stocks...

[@conduit242]

50% QQQ 30% EDV 20% Gold You’re welcome 😉

[@MichaelJayValueInvesting]

I'm personally not a fan of long term bonds with rates so low so I would vote 30% weight to gold :) But odds are that portfolio will do quite well long term with lower volatility than the S&P500.

[@atomicbeing]

I have 150k sitting in a bank account, I have no debt, I would like to retire in 5 years. what and where should I put this cash so it could grow and have little risk? THANKS for any help or advice.

[@abelfandosjonsson4029]

Look up - Ray Dalio All-Weather portfolio

[@sedisvacantia8581]

Watch what your bonds are going to do when inflation returns ... do you really think they are a safe investment in 2021?

[@Project2013B]

Problem with these simulations and "track records" is that it includes the Bond bull market that lasted from 1982 to 2019. With rates near zero, the long-term bond section of this portfolio is FOOLISH.

[@fabianstoll]

It would be interesting to see the portfolio during a time of rising interest rates.

[@charlesgripp343]

The dragon portfolio has been back tested 100 years through different monetary regimes. Check that out

[@Project2013B]

@@charlesgripp343 100 years ago we did not have electronic trading, front running, daytraders, and everyday Joes buying stocks from their phones.

[@charlesgripp343]

Johnny Ancich those don’t play a big role in secular themes

[@charlesgripp343]

Your confusing “risk” with volatility.

[@ezshon]

Indeed

[@MetalBum]

How do what you mean? Elaborate?

[@charlesgripp343]

Metal Bum risk is the potential for permanent loss of capital. If a stock goes up and down in price, that doesn’t mean I am permanently gaining or losing capital. I only gain or lose when I sell the stock.

[@stephentomaszewski8501]

@@MetalBum people use volatility as an approximate or quasi equivalent to risk when in reality risk is incredibly hard to calculate/understand which is why most people use volatility vs the us equity market as a barometer for risk. For instance, risk is when you are reaching for yield on junk bonds and 1/20 of your bonds are in companies that go bankrupt and become worthless.

[@MrAsianman987]

Why don't you use excel?

[@peanut5669]

i came here from ur comment in 'wait...........what

[@hnSforthewin]

tldw: tech has been doing well this year

[@stellz8254]

Replace gold w bitcoin and ur rich

[@yuritarded7529]

no u

[@PietroSperonidiFenizio]

Ulcer Index, LOL

[@trickyrat483]

"Gold is NOT an INVESTMENT!" John Bogle. Your cherry-picked charts show gold only in it's 20 year BOOM period. Try showing it over 60-70 years, the typical investment lifetime of an proper investor. You'll then see gold went literally nowhere in an entire lifetime from the early 1930s to the 2000s, hence making it a terrible "investment". I guess the next video will be on ramping Bitcoin. Oh, well.