Golden Butterfly Portfolio Overview
Background and Philosophy
The Golden Butterfly Portfolio is a variation of the Permanent Portfolio, originally conceptualized by Harry Browne in the 1980s. The Permanent Portfolio was designed to perform well in any economic environment (prosperity, inflation, recession, or deflation) by allocating assets across four key categories: stocks, bonds, cash, and gold. The Golden Butterfly builds on this foundation by introducing small-cap value stocks (via IJS) and adjusting allocations to enhance returns while maintaining diversification.
The philosophy behind the Golden Butterfly is to achieve steady, low-volatility returns by balancing assets that perform well under different market conditions. The inclusion of small-cap value stocks (IJS) adds a growth component, while the 20% allocation to gold (GLD) acts as a hedge against inflation and economic uncertainty.
Asset Allocation and Holdings
The portfolio is equally weighted (20% each) across five asset classes:
- GLD (Gold): Acts as a hedge against inflation and currency devaluation.
- IJS (iShares S&P Small-Cap 600 Value ETF): Provides exposure to small-cap value stocks, which historically outperform over long periods.
- SHY (iShares 1-3 Year Treasury Bond ETF): Short-term bonds for stability and liquidity.
- TLT (iShares 20+ Year Treasury Bond ETF): Long-term bonds for deflation protection and income.
- VTI (Vanguard Total Stock Market ETF): Broad exposure to the entire U.S. equity market.
Diversification and Risk Level
The Golden Butterfly is highly diversified across asset classes, reducing reliance on any single market condition. Its risk level is moderate, as it balances volatile assets (stocks, gold) with stable ones (bonds). The inclusion of gold and long-term bonds helps mitigate equity market downturns, while small-cap value stocks and total market equities provide growth potential.
Pros and Cons
Pros:
- Performs well in all economic environments.
- Low correlation between assets reduces volatility.
- Simple to implement and rebalance.
Cons:
- Gold and long-term bonds may underperform during strong bull markets.
- Small-cap value stocks can be volatile in the short term.
- Requires periodic rebalancing (e.g., annually).
Application for Retirement Accounts (401(k) and IRA)
Investors can adapt the Golden Butterfly for their 401(k) or IRA by selecting funds that closely match the portfolio’s holdings. Here’s how:
- GLD (Gold): Many 401(k) plans lack commodity funds. If unavailable, allocate this portion to stocks (e.g., large-cap or international equities).
- IJS (Small-Cap Value): Look for a small-cap value index fund in the plan. If unavailable, use a broader small-cap fund.
- SHY (Short-Term Bonds): Use a short-term bond fund or a stable value fund.
- TLT (Long-Term Bonds): Substitute with a long-term Treasury bond fund or a general bond fund.
- VTI (Total Stock Market): Replace with an S&P 500 index fund or a large-cap blend fund.
If exact matches aren’t available, investors can approximate the allocations by grouping into broader categories (e.g., stocks, bonds). For IRAs, where fund choices are more flexible, the exact ETFs can often be purchased directly.
Note: Investors should review their 401(k) plan’s investment options and consult a financial advisor if needed to ensure alignment with their risk tolerance and goals.