Finance 201: What is the Golden-Butterfly Portfolio?

Hi friends,

Today I shall be talking about something that is similar to the All-Weather portfolio, and one that is compared to the All-Weather by other financial writers. This portfolio has a higher exposure to stocks as compared to the All-weather. It is supposed to have a similar return as the US stock market but with lower volatility. 

This portfolio was constructed by the founder of Portfoliocharts.com, Tyler (Who is a mechanical engineer *hint* *hint*). I aim to be like him one day, even though my field of study isn't in finance, I would want to correct information to my readers for them to make the correct financial decisions in their lives.

This portfolio was an extension of the permanent portfolio, which is designed to do well in the four possible economic conditions (Prosperity - Stocks, Recession - Bonds, Inflation - Gold, Deflation - Stocks and Gold)

Golden-Butterfly Portfolio:
Stocks: 40% (20% Small-Cap IJS, 20% Total Stock Market VTI)
Bonds: 40%  (20% Long-Term Treasury Bond TLT, 20% Short-Term Treasury Bond SHY)
Commodities: 20% (20% Gold Trust GLD)

Backtest of data:
Using data from lazyportfolioetf.com
Assuming all dividends reinvested, rebalanced at the start of every year




This is a really interesting return, as we can see that in 15 years rolling returns, the average annual return is 9.34%, and the worse possible case is 7.09%. I would say that I would want 20-years rolling returns ... so...

But there is a need for you to understand that it doesn't mean that you will not experience losses, there is still a standard deviation of 8.28%. It just means that over a long period, there is a lowered chance of you ending up losing money.

Thoughts and comments:

I would say that I can understand the appeal of this portfolio, as it has a higher exposure to safer assets and hence, would have a more consistent return. It would be suitable for investors who do not want to see too big a drop in their portfolio and would let their emotions take control of their investment approach.

I would say that if you can stomach the fluctuations of the market, you can consider sticking to a more risky portfolio. But yes, you should always try to understand your risk appetite.



Sources:
https://www.theoptimizingblog.com/golden-butterfly-portfolio/
https://portfoliocharts.com/2016/04/18/the-theory-behind-the-golden-butterfly/
http://www.lazyportfolioetf.com/allocation/golden-butterfly/
https://www.thesimpledollar.com/investing/retirement/why-i-chose-this-controversial-all-weather-portfolio-for-my-life-savings/
https://portfoliocharts.com/portfolio/golden-butterfly/

Read More

Finance 101: What is a portfolio?

Hi friends, 

I bet that you have heard of it before. "I have a portfolio of blah blah blah", or "How big is your portfolio?" So... What is this "portfolio" that everyone who is investing/ planning their finances is talking about? Today I shall be tackling this question:

Definition:
A portfolio is a grouping of financial assets such as stocks, bonds, commodities, currencies and cash equivalents, as well as their fund counterparts, including mutual, exchange-traded and closed funds. A portfolio can also consist of non-publicly tradable securities, like real estate, art, and private investments. - Investopedia

A portfolio refers to a collection of investments or financial assets held by an individual, investment company, financial institution or hedge fund. This grouping of financial assets can include everything from gold and property to stocks, bonds, and cash equivalents. In essence, an investment portfolio acts as a big briefcase-carrying all of these financial assets. - Capital

These are the essential points.

1. Group of financial assets (Financial instruments that can be anything that we discussed and more, like real estates, arts, whiskey, etc)

2. Held by an individual, company, funds. 

For today, we will be talking about your individual portfolio. As per the definition, your portfolio is a combination of the different financial instruments that you are holding. A portfolio is also something that you should build based on your preferences. It should be in line with your investment beliefs and your risk appetite

Here are some of the things you should consider before setting off to build your portfolio:

1. What is your risk tolerance? 

How much gain/loss are you able to tolerate? Are you ok with a portfolio that can give you large returns and losses?

2. What is your time horizon?

A longer time horizon would mean that you can create a portfolio that has a higher potential for appreciations. 

3. What assets are you comfortable/ familiar with?

If you are competent and have a lot of experience with a particular financial instrument, you can consider having more of your portfolio allocation to the instrument that you are familiar with. 

Here are some of the financial instruments that you can have in your portfolio. We have actually gone through the majority of them in the other Finance 101 articles:

1. Stocks, etfs, mutual funds, index funds, Reits 

2. Bonds, bond funds

3. Gold, precious metals

4. Crypto (Bitcoin, ethereum)

5. Real estates 

6. Other financial instruments like alcohol, art, etc

7. Commodities like copper, steel, oil

8. Insurance

As we are talking about the personal portfolio, in which I would assume that you do not have the need to invest in commodities, alcohol, art etc. We will focus on 1,2,3,4,5,8 I will analyse it from the POV of a) Aggressive investors (with a long time horizon) b) Conservative investor (with a shorter time horizon) c) Investor who is looking to pass intergenerational wealth d) ultra-aggressive investor

Do note that the allocations are just for example. You should do your own research. 

a) Aggressive Investor (For those who wants :

1. Stocks (85% in etf, individual stocks)

2. Bonds (0%)

3. Precious metals (4% in gold)

4. Crypto (1%, treat it as a gamble)
5. Real Estates (5%)

8. Insurance (5%, to protect against sudden events)

b) Conservative Investor (For those who wants to have some returns but cannot take too many losses)

1. Stocks (20% in etfs, and reits etfs)

2. bonds (60% in bond funds)

3. Precious metals (5% in gold)

4. Crypto (0%)

5. Real Estates (5%)

8. Insurance (10%)

c) Generational Wealth Investors (For those who wishes to pass to their offsprings without incurring taxes)

We do not have inheritance tax in Singapore. But do know that if you pass on properties, your offsprings might need to pay property taxes on it, or pay for the maintenance fees. 

Hence, you might want to consider holding on to stocks and bonds. 

d) Ultra-aggressive Investors (me, with about 30-40 years of investing)

1. Stocks (95% in etf, individual stocks/ reits)

2. Bonds (0%)

3. Precious metals (0%)

4. Crypto (0%)
5. Real Estates (0%)

8. Insurance (5%, to protect against sudden events)

I will reiterate this again. Your portfolio would be reflective of your investment beliefs. Your portfolio should be tailored to your needs. Of course, with a portfolio, you should always look at it every now and then to rebalance it. The rebalancing would allow your portfolio realigned with your chosen allocations. This rebalancing should be around once per 3 months. 

As always, do take note that the allocations are just examples, you should always do your own research before making any financial decisions. 

Also, now that we have settled a majority of the financial instruments, I will be moving on to the most famous financial portfolios that are held by famous investors like Warren Buffett, Ray Dalios, etc. It will be named "Finance 201". I am an Engineer for goodness sake. How creative do you think I am :')  Don't worry. Finance 101 series will still run on, just keep sending in request so that I know to explain some of the basic terms that I have used in my posts

With that, 

I end today's topic

Stay vested, Stay frugal my friends,

Dionysius

Sources:
https://capital.com/portfolio-definition
https://www.investopedia.com/terms/p/portfolio.asp

Read More

Finance 101: What is Gold?

Hi friend,

Today I shall be looking at Gold as a financial instrument. From ancient times, Gold has been an extremely sought-after object, from the ancient Egyptians to wall street investors. Gold has always been perceived as a form of luxury and riches. Even though Gold has few practical usages outside of industrial applications, and there are metals that are rarer than Gold on Earth, Gold is the highest-priced rare metal.

This concept of Gold having a high perceived value is important to us. As it would mean that Gold has value because we believe that it has value collectively. With that understanding, let us move onto the definitions:

Gold is often looked at as a store of value, but it's also a highly speculative asset linked to currencies and interest rates. - Investopedia

Erm... This is the first time where Investopedia's answer is not comprehensive. 

Allow me to explain the Unique-Selling-Point (USP) of Gold:

1. Function as a store of value - Gold is widely accepted in the world. This is important in countries where the currency is unstable. 

2. Negatively correlate to the market in times of volatility - Example would be during a financial crisis, Investors would flock to Gold due to its relatively stable prices. 

#I will be doing a study to look at the correlation of different financial instruments with stocks. #

3. Limited supply - Has a tendency to increase in value

"That's great! How do I invest in it?"

Woah. Wait, let me go through the advantages and disadvantages. 

Advantages:

1. Acceptable form of currency everywhere

2. Hedge against inflation and a down market (When the market is fearful)

3. Easy to buy and well-established financial institutions that regulate Gold

4. It makes you happy when you physically touch it. 

Disadvantages:

1. Large spread and fees if you were to buy it

2. Storing physical Gold is troublesome

3. Gold can still have fluctuations in prices

4. If your country does not have establishments that allow you to liquidate Gold at a fair price, it will be useless to have Gold. 

How to buy Gold?
1. Physical Gold (In Singapore, you can purchase it from UOB, or Gold retailers, or Gold Jewellery) 
2. Gold Certificates (These certificates allow you to exchange for cash or Gold readily)
3. Gold Savings Accounts (UOB has this. It saves you the hassle of finding a place to store the physical Gold)
4. Gold ETFs or other funds (SPDR Gold Shares ETF)
5. Buying Gold-related companies (like K92 Mining Inc. (KNT) - Gold Mining Companies)

Thoughts and Comments:
I cannot deny that looking at a pile of glittering Gold invokes an irrational sense of joy in me (I have never seen it before. If you have, I would like to see it please). There is a reason why we would want Gold in our portfolio as well. It can serve as a damper to it, especially in times of market volatility. 

However, Gold does not produce any value by itself. It is just that; Gold. Warren Buffett does not believe in it as it does not create value to itself and its speculative nature. There is not much practical usage to Gold, hence, we cannot rely on market demands in our investment strategy. I do appreciate the value that Gold brings to our portfolio and it is included in Ray Dalio's all-weather portfolio. You can also see that Gold underperforms the S&P 500 in the picture below

Essentially: If you want to incorporate Gold into your portfolio, sure. But it should not be all of it. 

With that, I hope that you have a better understanding of Gold as a financial instrument. 

Till next time, 
Stay vested, stay frugal my friends. 

Dionysius

Blue line is the Dow Jones Industrial Average (30 most influential stocks in the US) and the Orange line is Gold.


Sources:
https://www.investopedia.com/gold-4689769
https://www.thegoldbullion.co.uk/the-advantages-and-disadvantages-of-investing-in-gold/
https://www.thebalance.com/pros-and-cons-of-owning-assets-like-gold-1290619
https://thecollegeinvestor.com/12481/the-pros-and-cons-of-investing-in-gold/
https://blog.moneysmart.sg/invest/investing-gold-singapore/
https://blog.seedly.sg/how-to-invest-in-gold-singapore/
https://www.fool.com/investing/does-warren-buffett-invest-in-gold.aspx
https://www.marottaonmoney.com/since-1979-the-sp-500-grew-13-5-times-greater-than-the-price-of-gold/
https://www.macrotrends.net/2608/gold-price-vs-stock-market-100-year-chart

Read More