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 15 of Risk Parity Radio. It is time for our weekly portfolio review of the sample portfolios that you can find at the website, riskparityradio.com, and if you click on the portfolios page, you'll see these portfolios there. Now, just taking a look at what went on in the financial markets this week to give us some perspective, we are basically having a typical September in the markets, which is typically bad. So the S&P 500 was down 2.5% last week, the NASDAQ was down 4.1% last week. Looking at some of the alternative investments though, the long-term treasury bonds were actually up about 1% last week and gold was flat. So you'll see that the risk parity portfolios tended to lose some but not nearly as much as the markets except for the experimental portfolios which are similar to what the markets did. so looking at the first of our portfolios, the All Seasons portfolio, this was down 0.5% last week. It remains the most stable of our portfolios and relatively uninteresting. The bonds in it are keeping it afloat pretty well. Going on to the next portfolio, and this is going to be our portfolio of the week this week, the Golden Butterfly. which we are going to compare to a Bogleheads style three fund portfolio. But taking a look at this, it was down 1.2% last week. It is up 3.28% since inception in July. And you can see on the website that it is Friday was kind of a typical day for this week. It was down 0.21%. so it is about half as volatile as the S&P 500, which is what we would expect out of this portfolio. The next portfolio is the Golden Ratio portfolio, and that was down 1.3% this past week, again about half as much as the S&P 500. It is also at plus 3.28% since inception in July, which is exactly the same as the Golden Butterfly portfolio by coincidence. But these portfolios are relatively similar, the biggest difference being that the Golden Butterfly has a little bit more gold in it and a little bit fewer long-term treasury bonds. And the Golden Ratio has some REITs in it. Moving to the next portfolio, that is the Risk Parity Ultimate, which is the most complex of our Risk Parity Style Sample Portfolios. It was down 1.5% last week and is up 2.5% since inception in July. We can see in this portfolio that the real laggard is the insurance policy part of this, which is the Volatility Fund VXX, which is down 20% since July. It's only 2.5% of the portfolio, but is accounting for the lagging nature of it. This will perform quite well if there is a stock market crash. If we are not predicting that, we are just looking at these to see how they perform in various different scenarios. Going to the next portfolio, which is one of our experimental portfolios, the Accelerated Permanent Portfolio. Now that was down 1.5% last week. which is a little bit surprising. You would expect it to be more similar to the volatility of the stock market or the NASDAQ even. It has a relatively high expected return. So the fact that it is down only 1. 5% when the stock market is down between 2 and 4 shows how robust it is. Even though it's only got four elements to it, the gold, the Preferred shares and the two leveraged funds, TMF, the long-term treasuries, and the UPRO, the leveraged S&P 500 fund. So this one is still up 4.26% since inception in July and is our best performer at the moment. And looking at our last portfolio, another experimental portfolio, the aggressive 50/50, now this one only has stocks and bonds in it, and it was down 2.1% last week it is up 2.92% since inception. This one also has similar volatility characteristics to the stock market, so the fact that it's down less than the stock market is a pretty good sign for it. It is interesting to compare this one to the Accelerated Permanent Portfolio, since this one does not have any gold in it. You can see that this one tends to fluctuate actually a lot more over time than that Accelerated Permanent Portfolio. which is a little bit more balanced overall. And that concludes our review of the six sample portfolios. And now it is time to move on and talk about our portfolio of the week, which is the Golden Butterfly Portfolio. Now to review what the Golden Butterfly Portfolio is, it is 20% gold, 20% small cap value stocks, 20% total US stock market, and then 40% in Treasuries divided into long-term Treasury bonds and short-term Treasury bonds of 20% each. Now I thought we would compare this to a portfolio with similar characteristics as far as return is concerned that's popular among many, and this portfolio that we decided to compare it Two is the Bogleheads 3-Fund Portfolio, and that is composed of 60% stocks divided into 40% in the US stock market and 20% in the global ex-US stock market or international market. And then it also has 40% in the total US bond market. Now this is a venerable portfolio that has worked very well for many people. But what we decided to do this week is compare this using the Analyzers at Portfolio Visualizer and do a little back test to see how these performed over time for the data available. And the data available for these two portfolios goes back to 1987. And so that's what we looked at and we will have a link to this in the show notes so you can take a look at the analysis yourself. Looking at these two portfolios, you can see that they were very similar in their compounded annual growth rate over time. The Golden Butterfly portfolio has a compounded annual growth rate since 1987 of 8.39%, and the Bogleheads 3 fund has a compounded annual growth rate of 8.13%. So that looks relatively similar, but if you take a look at the volatility and drawdowns, there you see the biggest difference and why you would prefer the Golden Butterfly portfolio over the Bogleheads 3-Fund. If you look at the worst year, the Golden Butterfly portfolio was only down 7% in its worst year over the past 33 years. Now the Bogleheads 3 fund was down 21.6% as its maximum worst year performance. If you look at the maximum drawdown, the difference is even a little bit more stark. The maximum drawdown for the Golden Butterfly portfolio was 16.64% over the past 33 years and the maximum drawdown for the Bogleheads 3 fund was 32.64% and those drawdowns did occur during the financial crisis in 2008. What would have buoyed the Golden Butterfly in particular then would have been the long-term treasury bonds and then gold coming in after that on the rebound. So if you look at the two Sharpe ratios, which is a risk reward measure designed to capture all of what I've been talking about here. You see the Sharpe Ratio of the Golden Butterfly was 0.73 over the past 33 years, and the Sharpe Ratio for the Bogleheads 3 Fund was 0.57, which is a substantial difference in the risk reward ratio of those two. Looking at just another statistic or two here, we do see the volatility on a monthly basis for the Golden Butterfly was 2.08% compared to 2.64% of the Bogleheads 3 Fund. And on an annualized basis, the volatility of the Golden Butterfly was 7.2% compared to 9.15% for the Bogleheads 3 Fund. And again, that is a reflection of the superior risk reward characteristics of the Golden Butterfly portfolio over the past 33 years. Now we will be continuing these sorts of comparisons between risk parity style portfolios and standard portfolios as we go forward if you are interested in having a particular kind of portfolio compared to our risk parity style portfolios. Please send me an email at frank@riskparityradio.com that's frank@riskparityradio.com or you could put the message in at the website on the contact form and we'll be happy to run some of those comparisons to show how these risk parity portfolios have performed over time and how they might be useful for you in your retirement or drawdown phases. But now I see that our signal is beginning to fade and it is time for me to say goodbye. We will be continuing this week with part two of our bond analysis, which we started last week in episode 14. And we'll have that coming out should be on Wednesday or Thursday of this week. Thank you for tuning in. This is Frank Vasquez with Risk Parity Radio, signing off.

Mostly Mary [12:09]

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.