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Golden Butterfly Portfolio – Guide to Asset Allocations, Pros & Cons


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Investing can be a cumbersome, and often risky, process. Choosing which assets to hold in your portfolio often takes quite a lot of research, and creating a proper balance takes a bit of practice.

As a result, many investors look toward prebuilt portfolios as a way to templatize the process, taking some of the mental work out of the equation.

One of the most popular of these prebuilt portfolios is known as the Golden Butterfly Portfolio. The Golden Butterfly is a “lazy” portfolio, designed to bring simplicity to the investing process and give consumers access to various corners of the stock market while hedging their bets with safe havens like gold and treasury debt securities.

What is the Golden Butterfly Portfolio and how can you recreate it yourself? Read on to find out.

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What Is the Golden Butterfly Portfolio?

The Golden Butterfly Portfolio is a stock market portfolio designed for the buy-and-hold investor. Developed by the author from known only by the moniker Tyler, it appears to be derived from the Permanent Portfolio developed by American writer, politician, and investment advisor Harry Browne.

The Golden Butterfly is a portfolio comprising five exchange-traded funds (ETFs), all equally weighted, which gives investors diverse exposure to three major asset classes.

The Golden Butterfly and Permanent Portfolio strategies were both designed to perform in different phases of economic conditions. Much like Ray Dalio’s All Weather Portfolio, the Golden Butterfly Portfolio includes assets chosen for their performance during periods of inflation, deflation, economic expansion, and economic recession.

The biggest difference between the Golden Butterfly Portfolio and the Permanent Portfolio is that Tyler mixed in small-cap value stocks.

Value stocks have a strong track record of outperforming other types of stocks over the long term, and small-cap stocks have a long history of outperforming their large-cap peers because they have more room to grow.

Essentially, the Golden Butterfly is a portfolio designed to provide exposure to gains when markets are running with the bulls and protect you from volatility when the bears take hold.

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Portfolio Asset Allocation

The Golden Butterfly practices diversification by evenly spreading the portfolio’s assets across five different types of assets in three different asset classes. Here’s how the portfolio’s asset allocation breaks down:

  • Total U.S. Stock Market. One-fifth of the assets in the Golden Butterfly are invested in the overall U.S. stock market. ETFs that cover the total stock market address all sectors and market caps, making them among the most diversified investments possible when investing domestically.
  • U.S. Small-Cap Value. One-fifth of the assets in the portfolio are invested in U.S. small-cap stocks that come with value characteristics. This is what sets the Golden Butterfly apart from the Permanent strategy.
  • Long-Term Treasuries. Another one-fifth of the portfolio’s assets are invested in long-term Treasury bonds and other United States Treasury debt securities. These are safe-haven assets that provide stability during bear markets by offsetting declines in stocks.
  • Short-Term Treasuries. Short-term Treasury bonds offer the same stability that long-term bonds do, but come with less inflation risk and lower returns. The portfolio invests 20% of the assets in these bonds.
  • Gold. Finally, 20% of the portfolio’s value is invested in gold. Historically, gold has been used as a hedge against inflation and a safe haven for investors looking for a strong store of value in bear markets.

The Investment Thesis Behind the Golden Butterfly Portfolio

The Golden Butterfly portfolio goes against conventional investing wisdom for several reasons, according to its creator Tyler.

  • Gold. First and foremost, Tyler explains that plenty of investors hate gold as an investment. However, he maintains that the heavy allocation to gold provides a hedge against inflation and is a must when taking part in this strategy. However, many experts believe otherwise (more on that later).
  • Long-Term Treasury Bonds. Tyler also points to the relatively high volatility of long-term Treasury bonds compared to other types of bonds. Nonetheless, these long-term Treasury bonds offer stability in the portfolio.
  • Small-Cap Value. Tyler points to the constant debate that surrounds small-cap value assets and whether one can count on their future performance. On the other hand, small-cap value stocks are part of several expert portfolios because they have a history of outperforming the overall market.
  • Short-Term Treasury Bonds. Tyler acknowledges that, at current rates, short-term Treasury bonds don’t offer much of a return. However, these assets are important because they offer further stability.

By this argument, four out of five assets involved in the portfolio go against conventional investing wisdom, but in total, the portfolio isn’t especially unorthodox.

Small-cap value stocks may be hotly debated, but they have historically generated significant returns. Short- and long-term Treasury bonds are commonly first-choice safe-haven assets among investors looking to fight against volatility in their portfolios.

The only asset here that actually challenges conventional investing wisdom may be gold. In recent years, gold has displayed high levels of volatility and hasn’t worked as a great hedge against inflation, leading many investors to ditch the asset or use it minimally in their portfolios.

Nonetheless, the investment thesis behind the Golden Butterfly Portfolio is that by balancing these “unconventional” assets, you’ll create a diversified portfolio that’s poised to perform whether markets are going up or down, which is essentially what every investor strives for.

Pros and Cons of the Golden Butterfly Portfolio

Any time you make investment decisions, it’s important to consider the pros and cons of the decision you’re making. When it comes to deciding to go with the Golden Butterfly strategy, you should consider the following:

Golden Butterfly Portfolio Pros

This portfolio has become an incredibly popular one within the investing community. Here’s why:

  1. Lazy Approach. Most retail investors don’t have the time, knowledge, or even desire to take an active approach to investing. Instead, they’d rather make investments in assets that can be held for long periods of time. This portfolio fits that bill.
  2. Small-Cap Value Exposure. Small-cap stocks with value characteristics have a history of outperforming the market as a whole. This portfolio allocates half of its stock allocation to these types of opportunities, giving you the ability to generate higher returns than traditional portfolios that focus on large-cap exposure.
  3. Easy Customization. The Golden Butterfly strategy is a relatively simple one to follow, requiring you to invest only in a few different funds. This makes the portfolio relatively easy to customize to fit your needs.

Golden Butterfly Portfolio Cons

There are plenty of reasons to be excited about this portfolio, but like any other investing approach, there are a few drawbacks to consider:

  1. Heavy Gold Allocation. Gold has long been used as a safe haven and hedge against inflation. However, historically, it has displayed more volatility than other safe-haven investments, and at times has proven to be fairly weak in terms of hedging against inflation. The portfolio’s heavy allocation to gold can result in opportunity cost because other safe havens like bonds are likely to perform better.
  2. Short-Term Treasury Bonds. Considering the interest rate environment in the U.S., short-term Treasury-related investments offer little to nothing by way of returns and are often considered cash equivalents. Heavy allocation to these assets could result in the portfolio’s value growing slower than the inflation rate, resulting in a loss of buying power.
  3. Massive Gains Are Unlikely. With 60% of the portfolio being allocated to gold and a mix of short- and long-term Treasury debt securities, only 40% of the portfolio is exposed to stocks. As a result, while the portfolio offers quite a bit of stability, you shouldn’t expect to generate significant returns overall.

How to Duplicate the Golden Butterfly Portfolio

The Golden Butterfly is very easy to duplicate, using just five quality ETFs.

Although many find value in duplicating the portfolio exactly, several variations of the Golden Butterfly have been developed in order to meet the needs of a larger group of investors.

Below are the three most common variations, including the traditional Golden Butterfly, the portfolio with an international twist, and what has become popularized as the Modified Golden Butterfly. Here’s how they all work.

1. The Traditional Golden Butterfly Portfolio

It’s possible to duplicate the Golden Butterfly in a traditional sense using a series of mostly low-cost Vanguard funds.

Keep in mind that when duplicating the portfolio, you’ll want to invest evenly across all assets with a 20% allocation to each. These funds include:

  • 20% in Vanguard Total Stock Market Index Fund ETF (VTI). One-fifth of the traditional portfolio should be invested in the U.S. stock market as a whole. A great way to gain exposure to these assets is the VTI fund, which invests in U.S. stocks across all sectors and market caps.
  • 20% in Vanguard Small-Cap Value Index Fund ETF (VBR). The Golden Butterfly portfolio invests 20% in small-cap value stocks, which is where the VBR fund comes in. It’s built up of small-cap stocks listed on the S&P 500 that come with value characteristics.
  • 20% in Vanguard Long-Term Treasury Index Fund ETF (VGLT). The VGLT is a diversified list of long-term Treasury debt securities, like bonds and notes. To replicate the Golden Butterfly Portfolio, you should invest 20% in a fund like this that invests in long-term Treasuries.
  • 20% in Vanguard Short-Term Treasury Index Fund ETF (VGSH). Next up, the VGSH is a diversified group of short-term Treasury bonds. These bonds make up another 20% of the portfolio.
  • 20% in iShares Gold Trust (IAU). Finally, the iShares Gold Trust, or IAU, is a fund focused on investments in gold. This is the most controversial asset involved in the Golden Butterfly strategy, but if you plan on duplicating the traditional portfolio, you should put 20% of your portfolio in this or a similar fund that tracks the price of gold.

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2. The Golden Butterfly With an International Twist

Some investors find value in domestic investments but believe the best way to diversify your portfolio is by investing in both domestic and international stocks. In fact, including a mix of domestic and international investments is a key concept of the popular Ultimate Buy-and-Hold Portfolio developed by Paul Merriman.

If you’d like to add a bit of an international twist to the Golden Butterfly Portfolio, consider investing in the following way:

  • 20% in Vanguard Total World Stock Index Fund ETF (VT). The VT fund offers exposure to a diversified group of stocks, both domestic and international. The stocks within the fund span all sectors, market caps, and several regions, representing one of the most diversified global funds on Wall Street today. In an international Golden Butterfly, the allocation to the VT fund should be 20%.
  • 10% in Vanguard Small-Cap Value Index Fund (VBR). As with the traditional Golden Butterfly, the VBR fund plays a crucial role in the asset allocation of the international variant. 10% of your portfolio should be invested in this fund.
  • 10% in WisdomTree International SmallCap Dividend ETF (DLS). The DLS fund is an ex-U.S. small-cap value fund, meaning it primarily invests in international stocks (excluding U.S. companies) in the small-cap category that come with value characteristics. As the name of the fund suggests, many of these stocks also pay dividends, offering access to the potential growth that comes with small-cap value stocks as well as income. 10% of your portfolio should be invested in this fund.
  • 20% in each of VGLT, VGSH, and IAU. As with the traditional portfolio, an international Golden Butterfly portfolio will have 60% of its assets allocated to safe-haven investments, including 20% each in the VGLT fund, VGSH fund, and IAU trust (described above).

3. The Modified Golden Butterfly Portfolio

One of the biggest and most valid arguments against the traditional Golden Butterfly is its heavy allocation to gold, an asset that has become hotly debated in recent times. Investing pros have found a solution to that issue, known as the “Modified” Golden Butterfly Portfolio, popularized in the Bogleheads Forum in 2017.

This modified version of the traditional Golden Butterfly Portfolio takes on the international exposure outlined above while completely cutting gold out of the equation.

Instead, real estate investment trusts (REITs), and Treasury inflation-protected securities (TIPS), take the allocation that would be given to gold in the other versions of the portfolio.

Here’s how you can build a Modified Golden Butterfly Portfolio:

  • 20% in Vanguard Total World Stock Index Fund (VT). As with the international Golden Butterfly, in this take on the portfolio, the VT is used to provide widespread exposure to stocks around the world across various sectors and market caps. In this rendition of the portfolio, 20% of assets should be allocated to the VT.
  • 10% in Vanguard Small-Cap Value Index Fund (VBR). 10% of the portfolio allocation in this version of the Golden Butterfly should be invested in the VBR, a fund made up of small-cap value stocks in the U.S.
  • 10% in WisdomTree International SmallCap Dividend ETF (DLS). The DLS makes an appearance in this rendition as well, providing access to international small-cap value stocks that are known for paying dividends. 10% of your portfolio’s assets should be invested in this fund.
  • 20% in each of VGLT and VGSH. Like in the other iterations of the portfolio, the VGLT and VGSH are important investments to include. To follow this model, 20% of your portfolio’s assets should be invested in each of these funds.
  • 10% in iShares TIPS Bond ETF (TIP). This rendition of the portfolio uses TIPS in the place of gold as a hedge against inflation. The TIP fund provides the exposure to TIPS required to make this adjustment, and 10% of the Modified Golden Butterfly Portfolio is allocated to this fund.
  • 10% in Vanguard Real Estate Index Fund ETF (VNQ). This version of the portfolio also uses real estate to replace gold as its inflation hedge. The VNQ is an index of publicly traded REITs and accounts for 10% of the allocation in this modified form of the Golden Butterfly.

Keep Your Portfolio Balanced

Rebalancing is an important part of investing. This portfolio was developed to provide specific amounts of exposure to specific assets. Over time, some assets will grow at a faster rate than others, causing your portfolio to become unbalanced.

The good news is that this is a buy-and-hold portfolio — a so-called lazy portfolio — meaning that it was designed to provide maximum returns with minimal effort. Nonetheless, it is important to rebalance your portfolio at least once every quarter.

To do so, simply review your portfolio and make sure that the allocation percentages are still in line with the strategy, whether you choose the traditional, international, or modified Golden Butterfly.

For example, if you’re following the traditional strategy and find that your VTI holdings have grown to represent 25% of your total investing dollars, but IAU now only represents 15%, you’d sell some VTI and add to IAU to bring your portfolio back into balance.

Who Should Take Advantage of the Golden Butterfly Portfolio?

There’s no such thing as a one-size-fits-all portfolio. Different investors have varying goals, levels of risk tolerance, and time horizons. It’s important that when you invest, you follow a strategy that fits your unique needs.

This portfolio was designed for:

  • Investors Who Want a Lazy Strategy. As a buy-and-hold strategy, the Golden Butterfly doesn’t require much maintenance, giving you the ability to invest without devoting significant time to research and rebalancing.
  • Investors Who Accept Moderate Risk. With such heavy weightings to gold and Treasuries, the risk level here is fairly moderate. If you’re looking for a high-risk, high-reward portfolio, you’ll want to look elsewhere. However, if you’re looking for a portfolio that maintains balance and offers reasonable growth with minimal risk, this is the way to go.
  • Investors Who Believe in the Value of Gold. The traditional Golden Butterfly was named because of its heavy allocation to gold. While this is a controversial move, many believe gold to be significantly undervalued. If you’re under this assumption, the heavy exposure to the precious metal, balanced by equities and Treasuries, might be just what you’re looking for.

Final Word

All told, the Golden Butterfly is a solid strategy for most buy-and-hold investors. Although it’s likely best to customize the portfolio to reduce its holdings in gold, the portfolio has a consistent history of generating stable returns.

As always, before investing in this or any model portfolio, it’s best to do a bit of research to get an understanding of how the underlying assets will play a role in the risks you take and the returns you can expect to generate. You can always adjust the portfolio’s holdings to fit your unique needs.

Joshua Rodriguez has worked in the finance and investing industry for more than a decade. In 2012, he decided he was ready to break free from the 9 to 5 rat race. By 2013, he became his own boss and hasn’t looked back since. Today, Joshua enjoys sharing his experience and expertise with up and comers to help enrich the financial lives of the masses rather than fuel the ongoing economic divide. When he’s not writing, helping up and comers in the freelance industry, and making his own investments and wise financial decisions, Joshua enjoys spending time with his wife, son, daughter, and eight large breed dogs. See what Joshua is up to by following his Twitter or contact him through his website, CNA Finance.