Comparison Of Two Strategic Portfolio Allocations

We compare the performances of Golden Butterfly and Price Action Lab Diversified Portfolio strategic allocations. Despite any apparent differences, the performances of the portfolios are statistically indistinguishable.

On all charts below, Portfolio 1 is the Golden Butterfly portfolio and Portfolio 2 is the Price Action Lab Diversified Portfolio.

The allocation mix is shown below:


Portfolio 1 equally weighs large caps blend, small cap value, long-term Treasuries, Short-term Treasuries and gold.

Portfolio 2 invests half of equity in large cap value, 30% in long-term Treasuries, 10% in gold and 10% in commodities.

Both portfolios are re-balanced annually. Backtests do not include commissions.

Performance comparison

The performances of the two portfolios and of S&P500 TR since 1987 are shown in the chart below:


The Golden Butterfly portfolio (1) trades-off return for lower drawdown. Specifically, Portfolio 1 has much less drawdown than Portfolio 2 but this comes with nearly 100 basis points of reduction in annualized return.

Both portfolios underperform the S&P 500 total return (yellow line) by a significant margin but at much lower drawdown and as a result their performance is superior on a risk-adjusted basis.

It is important to notice that the correlation of both portfolios to US Market is comparable, 0.75 for Portfolio 1 and 0.79 for Portfolio 2. I will not go into the math details but it can be shown that the statistical null hypothesis that the Sharpe ratios of the two portfolios are equal cannot be rejected. Therefore, the performance of the two portfolios is statistically indistinguishable.

The key point to realize is that charts and backtests reveal a single possible path in the time domain. Sharpe ratios are about the state-space domain. This fancy terminology basically means that in the future the paths may have different characteristics and Portfolio 1 may have higher return and drawdown as compared to Portfolio 2. Unfortunately, most professional advisers, book authors and financial bloggers do not consider these details.

Below is the performance of the two portfolios using ETFs. First the allocation is shown below:


Below is the portfolio performance:


Portfolio 1 has lower return (CAGR) but at lower maximum drawdown. Sharpe ratios are close and the correlation to US market does not differ significantly. Although Portfolio 1 appears to have the smooth returns conservative strategic investors prefer, this is only one possible path manifested by particular market conditions. In reality, the performances of the two portfolios are statistically indistinguishable and future performance cannot be inferred from the past.

Both portfolios have outperformed buy and hold since 2007. In case there is another correction in stocks, it is highly probable that both portfolios will offer some degree of protection against a large drawdown. However, nothing is certain and advisers and investors should be prepared for conditions where everything fails. How to deal with that possibility may be the subject of another article but I will only mention that situations where everything fails are considered unique opportunities for certain aggressive investors with proper background and psychology.

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Backtesting and analysis was performed with Portfolio Visualizer

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