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. A different drummer.

Mostly Mary [0:19]

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 Risk Parity Radio. This is episode 17. And it is time for our weekly portfolio review of the sample portfolios you will find at the website www.riskparityradio.com. .com and click on the portfolios page and you'll see the six sample portfolios. This was a fairly uneventful week in risk parity land, but let's just take a look at what the markets were doing themselves. It was another down week in September for the markets. The S&P was down 0.7%. The NASDAQ was down 0.6%. Gold was down 0.2% and the long-term treasury bonds were down 0.9%, so really just kind of noise in the market this week and no real big moves. And we see in the risk parity portfolios that they had similarly bland results looking at the All Seasons portfolio first, our most conservative portfolio, it was up 0.1% this week, probably due to the commodities which did pretty well this week. Moving on to the golden butterfly, that was up all of 0.3% this week, and that is comprised of 20% gold, 20% short-term bonds, 20% long-term treasury bonds. 20% small cap value and 20% total market. And then we go on to the Golden Ratio Portfolio. Now this is our portfolio of the week and we will be spending a little bit more time discussing it after this short review. The Golden Ratio Portfolio is also featured in episode six. If you're more interested in it, you can go back to that. and take a look at and listen to how it was constructed originally. But for this week, it was up all of 0.15%. And so it is just as steady as always. Now moving to the Risk Parity Ultimate Portfolio. This is our most complex portfolio and our most diversified. It was down 0.07% last week, so it barely moved at all. And now we get to the two experimental portfolios. These did move a little bit more than our others. The accelerated permanent portfolio, which is based on the original permanent portfolio. This one has gold preferred stocks, long-term treasury bonds, and a leveraged fund, and the S&P 500 in a leveraged fund. and it was down 0.7% last week similar to what the markets were down. Now the last one is our aggressive 50/50. This is our most volatile portfolio and it was down 1.1% last week. It is comprised of preferred stocks, medium term treasury bonds, and then the two leveraged funds in long-term Treasuries and the stock market. It seems to be more volatile than the others because it is actually less diversified than the others. It does not have any gold or commodities or REITs in it. But overall, our risk parity style portfolios are performing in a nice boring way, which is what we really want out of them, with low volatility and steady returns. And now we're going to turn to the portfolio of the week, which is the Golden Ratio portfolio, and that was also featured in episode six. I thought we would do what we did last week and compare this portfolio to the Bogleheads 3-Fund portfolio, because both have similar risk profiles. Now the Golden Ratio portfolio is comprised of 42% stock funds, 26% long-term treasury funds, 16% gold funds, 10% REITs, and 6% in cash, which makes it a nice thing to be able to draw down from. It's kind of got a natural buffer or bucket strategy incorporated into it. Now in this version of it, we divided the stocks into large cap growth, small cap value, and a global ex-US stock market fund to make it similar in comparison to the Bogleheads 3 fund. It's not exactly the same thing we have on the website, but it is similar enough. The Bogleheads 3 fund portfolio for reference is comprised of 40% US stock market, 20% global ex-US stock market or international, and 40% total US bond market, which includes both Treasury and corporate bonds. And we did an analysis at the Portfolio Visualizer site that you can find www.portfoliowizard.com and did a back test. We had data going back to 1994. so that is a 26 year time period. And we will link to that analysis in the show notes if you're interested in looking at it in more detail. Now looking at these two portfolios, we can see that the compounded annual growth rate for the Golden Ratio Portfolio was almost exactly 1% higher than the compounded annual growth rate for the Bogleheads 3 fund. And so it was 8.48% annualized versus 7.48% annualized for the Bogleheads 3 Fund. The standard deviation, which you would expect to be higher for the higher compounded annual growth rate, is actually lower for the Golden Ratio Portfolio, which is the advantage of these styles of portfolios. So the Golden Ratio Portfolio had a standard deviation over that time period of 8.48%. and the Bogleheads 3-Fund had a standard deviation of 9.02%. This comes across more starkly when you look at some of the other statistics here. The worst year for the Golden Ratio in this time period was down 13%, and that is not too bad. The worst year for the Bogleheads 3-Fund was down 21.61%. which is similar to what you would find in most stock-based portfolios. Now, the maximum drawdown for the Golden Ratio Portfolio was 25.5% and that happened during the Great Financial Crisis. In contrast, the Bogleheads 3-Fund Portfolio was down 32.64% at the same time. What this ultimately gets you, if you look at the Sharpe Ratio, which is a risk reward ratio, the higher the better. The Sharpe ratio for the Golden Ratio Portfolio in this time period was 0.73 and the Sharpe ratio for the Bogleheads 3 Fund was 0.59 and that reflects the fact that the Golden Ratio Portfolio not only has a higher return but it has lower volatility. So it is better than the Bogleheads 3 Fund on both of those scores which gives it the higher Sharpe ratio. And now if we look at the trailing returns over time, we can see that the Golden Ratio Portfolio is superior to the Bogleheads 3-Fund over virtually any time period within this period since 1994. So over three months it was slightly higher at 9.03% versus 9% for the Bogleheads year to date the golden ratio is up 10.96% versus 5.87% for the Bogleheads. One year 14.11 versus 12.87, three years 9.36 versus 8.2, five years 9.24 versus 8.48, 10 years 8.69 versus 8.54, and then for the full period 8.48 versus 7.48. So you see that it is just better overall for any time period you can think of. What is nice about this portfolio is that over the past 50 years it has a maximum drawdown period of only three or three and a half years. So it makes it a very good portfolio not only for a retirement scenario but also if you are saving for something on a medium term basis. if you have a three-year, five-year, seven-year time period, oftentimes people struggle with figuring out, well, what am I going to invest that money in? Because the options are usually given as put it in a savings account for short term or put it in some highly stock biased portfolio for long term. Neither one of those really gets you into that medium term with a limited drawdown period, which is what you're really looking for for the medium term. So the Golden Ratio Portfolio does fulfill that role very nicely. If you were saving for that house in five to seven years, this would be a good place to put that down payment money, at least for the first three or four years. And then you can see as you get closer, you would move it back into the savings accounts when you're about to use it and you know you're about to use it. And looking at just one more comparison statistic here, we see that the perpetual withdrawal rate for this period for the Golden Ratio Portfolio was 5.95% versus 5.06% for the Bogleheads 3 Fund. So again, you're seeing a better performance in terms of being able to withdraw from this portfolio, and it really is down to the fact that a risk parity style portfolio that includes treasury bonds and not corporate bonds has some gold, has some REITs, has some other things in it is just going to be better diversified and it's just going to hold up much better than any kind of stock bond mix that you would typically see or be talking about. whether it's this Bogleheads 3 fund or any kind of 60/40 or basic stock bond mix. And that is really what we are trying to do here with these risk parity style portfolios. But now I see our signal is beginning to fade and so it's going to be time for me to say goodbye. I'll be taking this week off so you will not hear from me again for another week until the next portfolio review next Sunday. In the meantime, if you have any questions or comments, you can email them to me at frank@riskparityradio.com that's frank@riskparityradio.com or you can just go to the website and fill out that contact form. This has only been going on for a few months, but the downloads are picking up, I see, and it's very gratifying for an amateur podcaster such as myself to see that going on, and it encourages me to keep going with this. Thank you for tuning in. This is Frank Vasquez with Risk Parity Radio, signing off.

Mostly Mary [13:04]

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.