Golden Butterfly Portfolio: Best Funds For Long-Term Wealth

The Golden Butterfly Portfolio is a medium-risk investment strategy designed to provide consistent returns in various market conditions. It is a modified version of the Permanent Portfolio, with an additional focus on small-cap value stocks. The portfolio typically consists of 40% stocks, 40% bonds, and 20% commodities, although there are variations.

The Golden Butterfly Portfolio can be implemented using various funds, including ETFs from providers such as Vanguard and iShares. Some of the specific funds that can be used to build this portfolio include:

- Vanguard Total Stock Market (VTI)

- iShares S&P Small-Cap 600 Value (IJS)

- iShares 1-3 Year Treasury Bond (SHY)

- iShares 20+ Year Treasury Bond (TLT)

- SPDR Gold Trust (GLD)

The portfolio aims to balance economic conditions and provide steady investment growth over the long term, making it suitable for investors seeking a more diversified and balanced approach to their investments.

Stocks, bonds, and commodities

The Golden Butterfly Portfolio is a medium-risk portfolio, similar to Ray Dalio's All-Weather Portfolio. It is built on the idea of economic risk parity, balancing economic conditions with an eye towards prosperity. The portfolio is as follows:

20% Total US Stock Market

20% US Small Cap Value

20% Long-Term Treasury Bonds

20% Short-Term Treasury Bonds

Stocks, also known as equities, are securities that represent the ownership of a fraction of the issuing corporation. Units of stock are called shares, which entitle the owner to a proportion of the corporation's assets and profits equal to how much stock they own. Stocks are generally bought and sold electronically through stock exchanges, with the New York Stock Exchange (NYSE) and the National Association of Securities Dealers (NASDAQ) being the two primary exchanges in the United States.

Bonds differ from stocks in several ways. Bondholders are creditors to the corporation and are entitled to interest as well as repayment of the principal invested. In the event of bankruptcy, creditors are given legal priority and will be repaid first if a company is forced to sell assets. Conversely, shareholders often receive nothing in such cases, making stocks inherently riskier investments than bonds.

Commodities refer to basic goods that are interchangeable with other similar goods, such as agricultural products and natural resources. Examples of commodities include gold, oil, natural gas, and corn. Commodities are often traded on an exchange, such as the Chicago Mercantile Exchange (CME) or the London Metal Exchange (LME).

The Golden Butterfly Portfolio includes stocks and bonds in the allocations mentioned above. While it does not directly include commodities, investors can choose to modify the portfolio to include them.

Small-cap value stocks

• 20% Total US Stock Market
• 20% US Small Cap Value
• 20% Long-Term Treasury Bonds
• 20% Short-Term Treasury Bonds

The Golden Butterfly Portfolio tilts towards economic expansion and adds small-cap value, which is a move that I am a fan of. This makes it comparatively more "aggressive" than the Permanent Portfolio, but we're still talking about a relatively low-volatility, all-seasons portfolio.

• IJS – iShares S&P SmallCap 600 Value ETF
• SLYV – SPDR S&P 600 Small Cap Value ETF
• VIOV – Vanguard S&P Small-Cap 600 Value ETF
• AVUV – Avantis U.S. Small Cap Value ETF
• DFSV – Dimensional US Small Cap Value ETF
• IWN – iShares Russell 2000 Value ETF
• VTWV – Vanguard Russell 2000 Value ETF
• VBR – Vanguard Small-Cap Value ETF
• ISCV – iShares Morningstar Small-Cap Value ETF
• DLS – WisdomTree International SmallCap Dividend Fund
• AVDV – Avantis International Small Cap Value ETF
• DGS – WisdomTree Emerging Markets SmallCap Dividend Fund
• AVES – Avantis Emerging Markets Value ETF

Long-term bonds

In the context of the Golden Butterfly Portfolio, long-term bonds serve as a hedge against stock market crashes. When the stock market experiences a downturn, long-term bond prices often increase as investors seek the safety of government-backed securities. This negative correlation between stocks and long-term bonds provides a measure of protection for investors during economic downturns.

Additionally, long-term bonds offer secured investment benefits such as cash flow, dividends, and interest income. They are also more accessible to a broader range of investors due to their lower minimum investment requirements compared to physical gold or gold-backed financial products.

When considering long-term bonds as part of the Golden Butterfly Portfolio, it's important to note that their performance can be influenced by interest rate changes. During periods of low-interest rates, long-term bonds may offer lower returns, impacting the overall performance of the portfolio. However, in a rising interest rate environment, long-term bonds can provide more attractive returns.

In summary, long-term bonds play a crucial role in the Golden Butterfly Portfolio by offering diversification benefits, potential hedging against stock market crashes, and providing a steady stream of income. They are well-suited for investors seeking to balance risk and return, particularly those with a long investment horizon or those in retirement.

Short-term bonds

When considering short-term bond funds for the Golden Butterfly Portfolio, it is important to pay attention to the fund's expense ratio or fee. A lower expense ratio is generally preferable as it results in higher returns for the investor. Here are some specific examples of short-term bond funds that can be considered:

• SPDR Portfolio Short-Term Corporate Bond ETF (SPSB): Tracks the performance of the Bloomberg U.S. 1-3 Year Corporate Bond Index, offering exposure to U.S. corporate bonds with maturities between one and three years. It had an SEC yield of 4.33% and an expense ratio of 0.04% as of September 27, 2024.
• IShares 1-5 Year Investment Grade Corporate Bond ETF (IGSB): Aims to track the performance of an investment-grade corporate bond index with maturities between one and five years. Holdings include bonds issued by Bank of America, JPMorgan Chase, and Microsoft. It had an SEC yield of 4.38% and an expense ratio of 0.04% as of September 27, 2024.
• Schwab 1-5 Year Corporate Bond ETF (SCHJ): Seeks to track the total return of an index measuring the performance of the short-term U.S. corporate bond market. The fund holds corporate bonds with remaining maturities between one and five years. It had an SEC yield of 4.34% and an expense ratio of 0.03% as of September 27, 2024.
• Vanguard Short-Term Bond ETF (BSV): Aims to track the performance of a market-weighted bond index comprising investment-grade bonds with a dollar-weighted average maturity of 1-5 years. The fund invests in government, high-quality corporate, and international dollar-denominated bonds. It had an SEC yield of 3.84% and an expense ratio of 0.04% as of September 27, 2024.
• Fidelity Short-Term Bond Fund (FSHBX): Seeks to produce a high level of current income while preserving capital. Typically, at least 80% of its assets are invested in investment-grade debt, with a dollar-weighted average maturity of three years or less. It had an SEC yield of 4.23% and an expense ratio of 0.30% as of September 27, 2024.

It is important to note that while short-term bond funds offer lower risk compared to high-yield bonds or the stock market, they are not entirely risk-free. Investors seeking even lower risk may consider money-market funds as an alternative.

Gold

However, gold has been criticised for its volatility and for not being a value-producing asset with a real expected return of zero. It has also been argued that gold has not been a reliable hedge against inflation historically.

• Diversification: Gold is uncorrelated to stocks and bonds, which helps to lower the portfolio's overall volatility and risk.
• Inflation Hedge: While gold's effectiveness as an inflation hedge is debated, some argue that it can hedge against currency devaluation, making for safer withdrawal rates in retirement.
• Criticisms: Gold has been criticised for its volatility and for not being a value-producing asset. Some argue that it creates an opportunity cost for young investors with a long time horizon and a high tolerance for risk, as they could potentially achieve greater returns by investing in stocks instead.
• Economic Conditions: The Golden Butterfly Portfolio is designed to balance economic conditions, including prosperity, recession, inflation, and deflation. Gold is included to hedge against inflation, though its effectiveness in this role is questioned by some.
• Portfolio Performance: The addition of gold to the Golden Butterfly Portfolio may result in sacrificing some return for a lower risk profile. This trade-off may be desirable for risk-averse investors.
• Monetary Policy: Views on gold can depend on one's perspective on monetary policy. Some argue that monetary policy in the US has changed since the 1970s, reducing the need for gold as an inflation hedge.
• Alternative Options: Some modified versions of the Golden Butterfly Portfolio replace gold with other assets, such as TIPS (Treasury Inflation-Protected Securities) and REITs (Real Estate Investment Trusts), which are direct inflation hedges.
• Leveraged Portfolios: In a leveraged version of the Golden Butterfly Portfolio, gold can be included with 2x leverage to balance the exposure to other assets.
• Risk Considerations: Using leverage with gold or any other asset increases the potential for greater returns but also the potential for greater losses.
• Disclaimer: It's important to note that the information provided is not financial advice and that investing in gold or any other asset carries risks.

Frequently asked questions