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I listened to Money Matters Podcast "Ray Dalio's All Weather Portfolio vs. the Golden Butterfly Portfolio" and heard them claim that using an approach like this will lower the sequence of return risk as compared to something like an all market fund. I would love to see a critical review of this as it pertains to safe withdraw rates from one of the wizards that is on this site. What do you think? Is there any merit to this?
https://www.listenmoneymatters.com/all-weather-golden-butterfly/
(or maybe this has already been touched on somewhere and I missed it)
Please see Part 34 of my SWR Series: https://earlyretirementnow.com/2020/01/08/gold-hedge-against-sequence-risk-swr-series-part-34/
In historical simulations, both the All-Weather portfolio and the Golden Butterfly portfolio would have made Sequence Risk worse, if measured by the historical fail-safe rate.
Not sure how the people who made this claim measured their "Sequence Risk", but if you do it my way (fail-safe WR, the failure probability of the 4% rule, etc.), I'd stay away from those two portfolios. I suspect they didn't measure anything at all. Or maybe only the monthly volatility, which can be very misleading when measuring Sequence Risk.
PortfolioCharts.com has all sorts of analysis on these two portfolios, and recommends them based on (1) 15y baseline returns and (2) volatility, the key elements to optimize per Modern Portfolio Theory.
Link to Blog Post: Most Efficient Portfolios
The caveat is that they're measuring since 1970, before gold investments were even widely available, and on the cusp of a momentous change in monetary policy - the transition of the USD from a gold-backed to a pure fiat currency. Of course gold is going to look good in that timeframe, but it's also not particularly valid to look at timeframes earlier than the mid-1970s when gold was not considered an investment and the world's markets functioned completely differently.
In addition to my suspicions about gold - long duration treasuries seem like a particularly bad idea at the moment. There is technically zero chance they'll perform as well for the next 40 years as they've done since the 1980s. So why call them a key ingredient to an ideal portfolio in today's time?
I suppose these critiques are "this time is different" counterpoints to any historical analysis, but to me these specific portfolios seem particularly cherry-picked.
One thing that bothers me about these kind of analyses is that very few people are just buy and hold investors, they're either investing more while working or withdrawing from their portfolio in retirement. If they're still working and will be a buyer of stocks for many years to come, volatility is their friend as they can buy stocks on sale like they could in Mar 2020. On the other hand, those entering retirement are mostly concerned about how much they can safely withdraw that will sustain them for X amount of years so an approach like ERN's SWR is much more practical advice than using sharpe ratios or "ulcer indexes" like is this portfoliocharts blog post.
Trying to optimize a portfolio to minimize volatility/drawdowns might feel warm and fuzzy but most of time it will make many more working years to get to financial independence. If you're someone who struggles with the volatility of the stock market then maybe just stick your money in a target date fund.
