I went shoe shopping today for the first time in a while, and I forgot just how frustrating it can be.  Finding a nice pair of shoes seems like it should be a pretty simple task these days, but the number of options makes it much more difficult than you’d think! It’s kinda surreal to walk through aisles and aisles of shoes and immediately dislike about 90% of them for one reason or another, and even the ones you like may not be that comfortable once you try them on.  Buying shoes can be a real pain.

Well if you think about it, finding a good portfolio is a similar experience — there are lots of good options but very few easy answers.  I do my best to curate some of the best options to avoid the cheap knockoffs likely to wear a hole in the sole on the first walk, but just like there’s no one pair of shoes for every person there’a also no single best portfolio for every investor.  So you’ve gotta try them on for yourself.

I once knew a guy who was really into woodworking.  One of the more fascinating things about him was that he not only made his own furniture but also was quite proud of his collection of hand-made woodworking tools.  I once asked him why he preferred those tools to mass-produced alternatives.  Among several reasons, “They do what I want”.

Some casual investors may wonder why I spend so much time investigating things like modeling mid caps and figuring out how to measure the error of older international bond data in backtesting calculations.  While I certainly find this kind of information intellectually interesting, I admit that it sometimes becomes a chore and I can see why most people steer clear.  The upside to all the groundwork, however, is that it expands my collection of tools and allows me to do what I want — explore interesting portfolios previously off limits simply due to lack of data.

Like, for example, the 7Twelve Portfolio.

In the late first century, a Latin poet named Juvenal described something thought to be unlikely as “a rare bird in the lands and very much like a black swan”.  At the time, black swans were thought to not exist at all and the idea was preposterous.  The clever turn of phrase was both memorable and descriptive, and by the 16th century “black swan” was a common expression in London to describe the idea of impossibility.  Of course there was a looming problem with this saying, and in 1697 Dutch explorers discovered that black swans really do exist in western Australia.  What once was used to describe something impossible quickly changed meaning to connote ideas thought to be impossible that are later discovered to be real.

Perhaps because of how prominently it features in the Portfolio Finder, I’ve noticed a great deal of questions and conversations about the Golden Butterfly portfolio of late.  Rather than scatter my thoughts around the internet, I realized it might be best to provide a centralized synopsis of how and why it works so that everyone can benefit.

One of the most common mental hurdles to overcome when researching asset allocation is the siren call of maximum returns.   Nobody likes the feeling of leaving potential money on the table.  Combine that with a bit of accurate but out-of-context historical data, misinterpretation of assumptions, and “common knowledge” that glosses over the details, and you naturally see a strong bias towards the stock market in most investment circles.  Raise your hand if you’ve heard these before:

The stock market has the highest returns over the long run.

Higher risk, higher reward.

The implied conclusions are that diluting your portfolio with non-stocks must also dilute the return, and that the accompanying stock volatility is the unavoidable price to pay for better long-term returns.

Both are simply inaccurate.