Mostly Voices [0:00]

A foolish consistency is the hobgoblin of little minds, adored by little statesmen and philosophers and divines.

Mostly Mary [0:15]

If a man does not keep pace with his companions, perhaps it is because he hears a different drummer. A different drummer. And now, coming to you from dead center on your dial, welcome to Risk Parity Radio, where we explore alternatives and asset allocations for the do-it-yourself investor. Broadcasting to you now from the comfort of his easy chair, here is your host, Frank Vasquez.

Mostly Uncle Frank [0:37]

Thank you, Mary, and welcome to episode 10 of Risk Parity Radio. It is time for our weekly portfolio review. And then after that we'll be spending some time talking about the aggressive 50/50 portfolio in our sample portfolios. These portfolios can be seen at the website www.riskparityradio.com/portfolios or go from the home page to the portfolios page and you will see a description of each portfolio along with its current results for the week. And going through the portfolios now, the first one is our most conservative one, the All Seasons Portfolio. This portfolio was up 1% last week and is showing its stability. It is up 1.55% since inception last month. And you can see it as you'll see for all of the more conservative portfolios in this group how it does have very low volatility, for instance, on Friday, It was up 0.17%, which is typical for these sorts of portfolios. The next portfolio is the Golden Butterfly. And this one was up 0.4% for the week. It is up 4.62% since inception last month. And again, on Friday it was down 0.18%. and looks very stable. The next portfolio is the Golden Ratio Portfolio, which is one of the ones that I use. It was up 0.2% for the week and is up 4.77% since inception last month. It was down $3.01 or 0.03% on Friday as an example. Of its six components, three were up, three were down. The fourth portfolio is the Risk Parity Ultimate, our most complex portfolio and most diversified. It was up 0.55% for the week. It is up 4.21% since inception and as an example on Friday it was up 0.13% that day over $13. 87 cents. So all four of those core conservative portfolios are good examples of how these kind of risk parity portfolios work in practice to reduce volatility with a stable return. And now we get to the two experimental portfolios. The first one, the Accelerated Permanent Portfolio, that one was up 2.25% last week. It has leverage in it, so it is more comparable to a total stock market portfolio. It is up 7.12% since inception last month led by the leveraged stock fund in it, which is up 16.66% since last month. And the sixth portfolio is the aggressive 50/50, which we will be talking about more in just a few minutes here. This one was up 3.85% last week. It is up 6.51% since inception last month. And its best performer is also the leveraged stock fund in it, UPRO, which is up 16.7% since last month. So you can see how these two experimental portfolios have increased risk and increased reward. And we're going to go through some stats for the aggressive 5050 in a moment here. And now that I've got my stat sheets here, let's take a closer look at that aggressive 5050 portfolio. First, the genesis of this portfolio was a discussion I had with my friend Matthias Richter at FinCon last year who suggested that Perhaps I could use leveraged funds to construct more aggressive risk parity style portfolios. And this was one of the two that I came up with. This one is comprised of four funds. It has a leveraged S&P 500 fund called UPRO, a leveraged treasury bond fund called TMF, and then a fund of preferred shares, which is PFF, and one of intermediate term bonds, which is VGIT. And the proportions in this portfolio are it is one-third UPRO, one-third TMF, one-sixth PFF, and one-sixth VGIT. Due to the leverage in the portfolio, It performs as if it were 85% UPRO and TMF and only 15% PFF and VGIT, which act kind of as the ballast in the portfolio. The portfolio is really driven by those two leveraged funds. This portfolio is the most volatile of the portfolios, and I think that part of the reason for that is I intentionally did not include anything like gold in it. which would have reduced its volatility because I wanted to have at least one of these sample portfolios without gold in it to see how it would compare with other portfolios. If I were to use something like this in practice, I probably would put some gold into it or some other volatility reducing factor. But it is comparable in volatility to a total stock market portfolio, so I ran a comparison of the aggressive 50/50 portfolio with the total stock market portfolio VTIVTI@portfoliovisualizer.com and we had data going back to December 2009. So it's December 2009 to July 2020 is for the dates for this comparison. It's not enough data to say that it is Definitely something you want to invest in, but it's very interesting all the same. I should tell you why this is named the aggressive 50/50 portfolio. Fundamentally, it is a 50% stocks, 50% bond portfolio. You have 33% TMF and 17% VGIT. Those are bond funds. And you have 33% UPRO and 17% PFF. And those are stock funds, although the PFF, that preferred shares fund, functions a lot like a bond fund. So you could also think of this portfolio as similar to the very conservative all seasons portfolio in that it really has about 40% weighted of pure stock funds and then the remaining 60% is really fixed income instruments which include all the bond funds and the PFF. So getting to the comparisons with a total stock market fund, you can see from my analysis that the standard deviations are about the same, which is a measure of volatility. The aggressive 5050 is slightly more volatile than a total stock market fund. The comparison is 15.11% to 14.3%. What's extraordinary is the comparison of the performance in terms of compounded annual growth rate. The compounded annual growth rate for the aggressive 5050 since 2009 is 23.47% annually. and that compares to 12.86% annually for the total stock market portfolio. So that is about 1.9 times the performance of a total stock market portfolio with about the same volatility or risk. Over the period, the maximum drawdown for the total stock market portfolio was actually more than than the aggressive 5050. For the total stock market, it was minus 20.84% maximum drawdown for the aggressive 5050. It was minus 15.59% maximum drawdown. And so this gets you to sharp ratios, which are also a measure of performance, reward versus risk. and the total stock market portfolio has a sharp ratio of 0.88 whereas the aggressive 50/50 portfolio has a sharp ratio of 1.44 which is much better than the total stock market portfolio. Looking at some other metrics we see that the monthly volatility for the Aggressive 5050 is 4.36% compared to 4.13% for the Total Stock Market Portfolio. So those are comparable with the Aggressive 5050 being a little bit more volatile on a monthly basis. The correlations with the US Stock Market, obviously the Total Stock Market has a correlation of 1 because it is what we're talking about. The Aggressive 5050 Portfolio is only 0.55% correlated with the Stock Market. so it does move differently at different times. Looking at a comparison of safe withdrawal rates or perpetual withdrawal rates, and these are not usable because the time period is too short, but what the analysis kicked out was that the safe withdrawal rate for the aggressive 50/50 portfolio was 18.53% versus 10.4% for the total stock market portfolio for this limited period of time. You shouldn't use those numbers as viable safe withdrawal rates because the period is too short. But the comparison is valid that for this period the aggressive 5050 allows a safe withdrawal rate that is 1.8 times higher than the total stock market portfolio. So in practice, this is why we are taking a very aggressive approach in our sample portfolios to removing income from this portfolio and we're removing it at a rate of 8% annualized, which we're doing every month. And we'll see how it holds up to that stress over a period of time. But judging on its Past performance over the decade, it should do quite well. Now the reason this portfolio performs so well has a lot to do with how well diversified it is, even though it only has four funds. If you take a look at the correlations between the components of this, you see that they are negatively correlated in half the circumstances. So The leveraged stock fund, the UPRO, is negatively correlated with the leveraged bond fund and negatively correlated with the intermediate bond fund. The preferred stock fund, PFF, has about zero correlation with the two bond funds, but is correlated at about 0.67 with the total stock market fund. that kind of spread will give you a lot better performance for the volatility or risk that you're putting into the portfolio. Now we talked about those sharp ratios before and this is very interesting. If you look at the individual sharp ratios of the five funds that we're talking about here including the Total Stock Market Fund, you see sharp ratios for The Leverage Stock Fund is 0.78, for the Leverage Bond Fund is 0.62, for the Preferred Shares Fund it's 0.7, for the Intermediate Bond Fund, VGIT, it's 0.91, and for the Total Stock Market Fund it's 0.88. Now all of those are very similar Sharpe ratios, they're very similar risk reward metrics. But when you combine those four funds, the UPRO, the TMF, the PFF, and VGIT into this aggressive 50/50 portfolio, all of a sudden you see an explosion of the benefits of this kind of risk parity diversification. And that's why you end up with a Sharpe ratio that goes up from less than one to 1.44. and you're not going to see that kind of sharp ratio with almost any other kind of portfolio that you're going to construct because it won't have the necessary diversification unless you are following some principles like risk parity to have the least amount of correlation you can have with your performing assets. But now I see our signal is beginning to fade. So thank you for tuning in. to this episode of Risk Parity Radio. I hope it was informative and that you enjoy following the portfolios on the website. If you have any questions for me, you can input them at the website or you can email them to me at frank@riskparityradio.com that is frank@riskparityradio. com I'll be taking off this week for a little vacation and to take a child to college, but we will be back next weekend with another portfolio review and a discussion of the Risk Parity Ultimate Portfolio, that is one of the sample portfolios on the website. This is Frank Vasquez for Risk Parity Radio. Signing off. The Risk Parity Radio Show is hosted by Frank Vasquez.

Mostly Mary [15:36]

The content provided is for entertainment and informational purposes only and does not constitute financial, investment, tax, or legal advice. Please consult with your own advisors before taking any actions based on any information you have heard here, making sure to take into account your own personal circumstances.