Mostly Voices [0:00]

A foolish consistency is the hobgoblin of little minds, adored by little statesmen and philosophers and divines. If a man does not keep pace with his companions, perhaps it is because he hears a different drummer.

Mostly Mary [0:17]

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 11 of Risk Parity Radio. It is time for our weekly portfolio review of the six portfolios on the Portfolios page at www.riskparityradio.com. It was a relatively quiet week in risk parity portfolio land. We saw most of these portfolios advance slightly with low volatility, which is what you're really looking for out of these portfolios. And most weeks you'll see action like this. Going through them one at a time, the All Seasons portfolio, our most conservative portfolio, was up all of 0.01% last week, or just a few bucks put it that way. And it's being led these days by the stock component in it, the Vanguard Total Stock Market Fund. The followers are the Commodities Fund and the Gold Fund with the bonds lagging these days. The next portfolio is the Golden Butterfly portfolio. and that one was up 0.9% last week. It is up 5.51% since inception. It is being led these days by the small cap value fund VIoV, which is up 12.25% since inception, and it sees the bond component as the lagging component down 2.81%. since inception. Moving to the next portfolio, it is the Golden Ratio portfolio, and that one is up 1% last week. It is up 5.74% since inception, and it is also being led by the small cap value fund that is in it with the large cap growth fund and the gold fund following on those two things. and the next portfolio is our featured portfolio today which we'll be discussing in more detail after this review. It is the Risk Parity Ultimate portfolio. It is up 0.7% last week and is up 4.91% since inception last month. It is being led by one of its smallest components, the UPRO leverage stock fund is up 29. 5.6% since inception. Meanwhile, another tiny component, the Volatility ETF fund is down 20% since last month. Now those are each comprised only 2.5% of this portfolio, so it does not have a big impact on them. But other than that, you can see that the stock funds are up, the REITs are up, the gold is up, the preferred shares are up, and the only things down are the bonds and the volatility index. And moving to our fifth portfolio, one of our experimental portfolios, the Accelerated Permanent Portfolio that we discussed in detail a couple of weeks ago. It is up 0.9% in the past week. It is up 7.99% since inception last month. And what is interesting about this portfolio is we see a switch between the leaders in the month of July, the bonds were up and we took our distribution out of the bonds for August. This month we see that the leveraged stock fund, UPRO, is up a total of 28.4% since inception and so we will be taking out of that this next week for our distribution for September. And finally, the last portfolio, the aggressive 50/50 portfolio that we discussed in detail last week was up 0.9% last week it is up 7.43% since Inception last month and it is also led by its leverage stock component up 28.44% since Inception the bond fund that was healthily up at the end of July is now down 8.7 4% since inception. But these two things are designed that way so they balance each other out. So when one goes up, the other one usually goes down and it allows for nice rebalancing and nice taking from whatever is on the high side that month as far as the distribution is concerned. So all six of these portfolios are functioning quite well and we will be taking the distributions on Tuesday. after the end of the month on Monday, and then we'll be reviewing those distributions next week in our portfolio review next weekend. And now it is time to discuss our featured portfolio this week. It is the Risk Parity Ultimate Portfolio. This is our most complex and most diversified of our sample portfolios. It has 12 different funds in it. in several different asset classes and we'll just go through them here. On the macro side of it, it is 40% stock funds, 25% bond funds, and then the remaining 35% in alternative assets. Looking at the stock component of this portfolio, it is comprised of five funds. we see a 12.5% allocation to the Vanguard Large Cap Growth Fund, a 12.5% allocation to the Vanguard Small Cap Value Fund, and then we have two low volatility funds, which are USMV and SPLV, which are structured slightly differently, but both tend to track the S&P 500 with lower volatility than the S&P 500. And those two funds comprise 12.5% total, so they're 6.25% each. Now what's nice about those four funds is they tend to have a lower correlation overall. Those four funds tend to be correlated only about .77, which is pretty low for stock funds when you consider it. And then the remaining fund is this small allocation to UPRO, which is 2. 5%, and that rounds out the 40%. And that gives a little kick to this part of the portfolio. Looking at the bond component of this portfolio, the 25% we see that it is composed of 15% TLT, which is the 20-year Treasury Bond fund. It is composed of 5% EDV, which is an extended duration Treasury Bond fund from Vanguard, and it is composed of 5% TMF, which is a leveraged Treasury Bond fund similar to UPRO, and those are the two main components in our experimental portfolios. But again, this is a small allocation to this fund. Now going to the alternative investments, we have four. The first one by percentage is PFF, the preferred shares fund. That comprises 12.5% of the portfolio. Then we're looking at Gold, GLDM, which comprises 10% of the portfolio. We have REITs as another 10% of the portfolio. We're using REET for that, which has both domestic and international REITs in it. We wanted to keep it simple and have it all in one fund. And then we have our most interesting fund here, or asset class, which is Volatility. And this is only 2.5% of the portfolio, but it is a fund called VXX. and this is a little bit of an experiment here because VXX is negatively correlated with everything, seriously, when the stock market crashed in March, VXX went up by multiples. It was four to five times what it started at in February. So it is very volatile. It is also a fund that has a negative expected value, which is unusual and is not something you would ordinarily put in a fund. But we wanted to have this have some insurance in this fund because this fund is designed to be the least volatile of the golden ratio, the golden butterfly, and this one. And the idea behind having a little bit of this volatility fund in it is to get you that smoothing out when the stock market is going down, when the dollar is strong, when you're having the kind of situation you're having in March, and it'll give a pop there and smooth out the overall performance of the fund. The other way you see volatility being handled in risk parity funds run by hedge funds is to use options. Now that is a little bit beyond what we would expect a DIY investor to be able to do, and so that's why we have gone with the VXX as the volatility component here. It is not ideal because it is composed of options that tend to decay over time, but it is probably the best simple solution that you can have if you do want to include a volatility component in a risk parity style portfolio, as we've done here. It's important not to have too much of it in there, and a very small percentage, like our 2.5% or 3% or 4%, is probably the max you would ever want to have of that fund in your risk parity style portfolio. It is negatively correlated with just about everything else in the portfolio, and the most negatively correlated with the stocks. Now comparing this fund, we will compare it to a 60/40 fund because it is similar in risk profile and we want to see how it would compare in a drawdown scenario to the standard 60/40 stock bond portfolio. So we did an analysis on portfolio visualizer. which you can find at www.portfoliowisualizer.com and did a back test for the past about 10 years because that's all you can get using all of these different funds. And looking at that, we see that the compounded annual growth rate for the Risk Parity Ultimate portfolio was 10.5% annually for that period. compares with 9.84% for the 60/40 portfolio. The worst year for this portfolio was not very bad at all. It was down 2.61% and its maximum drawdown was only 8.86%. So those components that are negatively correlated with the stock market really came through compared with the 60/40 portfolio. It had a max drawdown of 12.29%. If we look at sharp ratios, which is another ratio of reward to risk and performance, the 60/40 portfolio had a sharp ratio of 1.12. The risk parity ultimate portfolio had a sharp ratio of 1.31, which is very high for a do-it-yourself portfolio. Another interesting feature of this portfolio, it is only 0. 51 correlated with the stock market. So it does not move the same way the stock market moves. It only moves that way about half the time. The 6040 portfolio on the other hand is 0.99 correlated with the stock market. So it basically moves when the stock market moves. And that is simply because it is dominated by its stock component. and the bond component in that portfolio is a total bond fund, which is a mix of all kinds of bonds and it really doesn't move around too much due to the balance of corporate and treasuries in it. Looking at just another statistic here, if we focus on the perpetual withdrawal rate, we see that it is higher for the Risk Parity Ultimate portfolio than the 60/40 portfolio. It's an 8.6% to 8%. difference. Now that is only over this 10-year period that we're monitoring for so that is not a 30-year safe withdrawal rate for either of these portfolios. Looking at one more statistic, the gain loss ratio, we see that the Risk Parity Ultimate Portfolio has a gain loss ratio of 1.4 whereas the gain loss ratio for the 60/40 is only 0.84, and that is another demonstration that the gains you would see are more consistent for the Risk Parity Ultimate portfolio. And if you compare the Risk Parity Ultimate portfolio to the other sample portfolios that are similar in risk profile, you do see that they are all clustered around the same type of return around 5% more or less, the other ones are doing a little bit better these days, primarily because they have more gold in them. But I would expect that this portfolio will perform just about as well as those other portfolios and be less volatile overall. But the proof will be in the pudding, as we say. And now I see our signal is beginning to fade. So it's time to say goodbye again. You may want to tune in later this week. We'll be talking about investments in gold on a podcast that will come out Wednesday or Thursday this week. If you have any questions, please send them to frank@riskparityradio.com that's frank@riskparityradio.com and again you can find the website www.riskparityradio.com radio.com where you'll see the podcasts and the sample portfolios and a few other things. This is Frank Vasquez for Risk Parity Radio, signing off.

Mostly Mary [15:57]

The Risk Parity Radio show is hosted by Frank Vasquez. 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.