Mostly Mary [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 Voices [0:22]

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 18 of Risk Parity Radio. It is time for our weekly portfolio review, and we'll be reviewing the six sample portfolios that you can find at the Risk Parity Radio website. www.riskparadioradio.com and just click on the portfolios page and you will see the six portfolios right there. Just for reference in the markets this week the S&P was down about 0.6%, the NASDAQ was up about 1%, relevant to these portfolios gold was down about 4.75%, and we'll be discussing that. And long-term bonds represented by TLT were flat for the week. So what you'll see in these portfolios this week is that the ones with the most gold in them did suffer the most in terms of going down. And it also is a good illustration as to why you don't want too much of something like gold in your portfolio, because it is quite volatile, even though uncorrelated with either stocks or bonds. You want to make sure you're not over-weighting that. So looking at the six portfolios, the first one is the All Seasons portfolio, and that is our most conservative portfolio. And it was down 0.6%, which is about the same as the stock market last week. Not a whole lot to report there. The Golden Butterfly Portfolio, which does have 20% gold in it, which is the sample portfolio with the most gold in it, relatively speaking, was down 2.2% last week, and that is largely due to its gold component. Moving to the Golden Ratio Portfolio, that one was down 1.9%. last week. It has about 16% gold in it, so it was less than the others. Really, the stocks and bonds last week were almost flat and didn't do a whole lot in these portfolios. They're relatively stable. Moving to the next portfolio, which is actually our portfolio of the week, the Risk Parity Ultimate Portfolio. Now that one only has 10% gold in it, and it was down 1.3% last week with it being mostly stocks and bonds, some REITs and preferreds, it is otherwise very stable and we'll be discussing that more after we finish this portfolio review. Now moving to one of our experimental portfolios, the first one is the Accelerated Permanent Portfolio. Now this one is technically 22.5% gold so has technically the most gold in it, but it has two leveraged funds in it, the TMF, which is the leveraged bond fund, and the UPRO, which is the leveraged S&P 500 fund. And so, relatively speaking, the gold component acts as if it's only about 10% in this portfolio. And so it was down 1.1% last week. And then we move to the last one, which has no gold in it, the aggressive 5050. And not surprisingly, it was flat for the week. It was down 0.01%. But we can see that as far as stocks and bonds were concerned, they more or less balanced each other out, particularly if you bring in the preferred stock funds, which are doing decently these days, tends to balance everything out. And so that is our review of the six portfolios. Not terribly exciting this week. Next week we will be looking at a drawdown for the month of October and we will calculate that on September 30th and then review those next week to see where the drawdowns come from for each portfolio. So we're going to be taking from in most cases, the best performing asset class in the portfolio. The amount will be different for each portfolio, and we'll see how these things stack up. What you'll find is interesting is that as different asset classes rotate and are the best performers, you see the money coming out of different asset classes. So a couple months ago, when gold was doing quite well for most portfolios we were taking out of the gold fund, Now that that is down, we essentially had sold high there, and now that it is down we'll be taking out of something else in each of the portfolios. And now it's time to move to our portfolio of the week, the Risk Parity Ultimate portfolio. We're going to review briefly what is in that portfolio and then do a comparison of that portfolio to a Bogleheads 3-Fund portfolio, and we are using the analysis tools@portfoliowizard.com for that, and we'll link to that in the show notes. So in the Risk Parity Ultimate Portfolio, overall it is 40% stock funds, 25% long-term treasuries, 12. 5% preferred stocks, 10% gold, 10% REITs, and 2.5% in a volatility fund. that is designed to dampen the activity of the entire portfolio overall. Now we've divided each of those into a few other funds so that the portfolio actually has 12 funds in it. So in the stock portion you'll see some large cap growth funds, some small cap value stocks, an S&P 500 fund, and a small portion of the leveraged S&P 500, the UPRO fund. There are three funds in the bond section of this. We have most of it comprised of TLT at 15%, and then there's 5% EDV, which is a Vanguard Extended Duration Treasury Bond Fund, and then there is 5% also devoted to the leveraged bond fund known as TMF. And then in the other sections, 12. 5% of the preferred shares is in a fund called PFF that we have reviewed in a past episode and I can link to in the show notes. 10% of it is in a gold fund, GLDM, and 10% are in REITs we're using in the sample portfolio, the REIT fund R E E T because that includes both international REITs and domestic REITs. We'll actually be talking more about REITs later this week in our midweek episode, but we'll save that for that point in time. Now, if you look at the sample portfolio, you'll see that all of these funds have varying performances since July. In the stock area, the best performer is the leveraged fund, UPRO, which is right now up 6.36% and the preferred shares fund is also performing well at plus 3.55. Gold is still up 3.18% since inception even though it was down last week. The laggard here is actually that VXX, that volatility fund, it only comprises 2. 5% of the portfolio, but it is down 20% and that that is an insurance policy. We would expect that if the rest of the portfolio is performing well that will actually do fairly badly and it is there just in case everything else goes to pot and then you might see that increase in value by multiples as it did in March of this year. And so that's why it's there. By itself it's not a great investment. There are other ways to invest in volatility, but generally they involve options that are more complicated. So we chose this single fund VXX for that purpose since it's only 2.5% of the portfolio. Now moving on to the comparison with a Bogleheads three fund portfolio from Portfolio Visualizer. And that fund, just for reference, is comprised of 40% Vanguard Total Stock Market Fund, 40% a Vanguard Total Bond Market Fund, and we used an international fund for the remaining 20%, which is the Vanguard Total International Stock ETF. Now, if we look at this comparison and the data for this only goes back to 2011 for this particular combination of funds, we see that the Risk Parity Ultimate Portfolio performed better overall in almost every metric. So if we look at the compounded annual growth rate, the CAGR for the Risk Parity Ultimate was 9.97% for the period compared to 8.56% for the Bogleheads 3 Fund. The worst year for the Risk Parity Ultimate was less than the worst year for the Bogleheads 3 fund. So you're not only getting a better return, you're also getting lower volatility, which is really the ultimate goal of these style of portfolios. So the worst year for the risk parity ultimate was negative 3.88% versus negative 5. 02% for the Bogleheads 3 fund. If you look at the maximum drawdowns for this period, you see For Risk Parity Ultimate it's -8.71% compared to -12.42% for the Bogleheads 3 Fund. And this translates into Sharpe ratios, which is a measure of risk reward of a significantly higher one for the Risk Parity Ultimate at 1.21 Sharpe ratio. And the Sharpe ratio for the Bogleheads 3 Fund for this period was 0.98, so it's about 20% better in terms of risk reward. And if we look at the trailing returns for these two portfolios, we can see that the Risk Parity Ultimate is better than the Bogleheads 3-Fund over almost any period you look at. The only period it's not better is the last three months. In the last three months, the Risk parity ultimate was up 7. 78% versus the Bogleheads 3 fund at 9.02%. But then if you look at year to date, risk parity up 13.63% versus 5.86% for Bogleheads 3 fund. One year, it's 5.88% versus 13.01. Three years, it's 12.05% for risk parity ultimate. versus 8.3% annualized for the Bogleheads 3 Fund. In the five-year category, it's 10.76% annualized for Risk Parity Ultimate versus 8.59% and then for the entire period, as I stated before, it's 9.97% for Risk Parity Ultimate versus 8.56 for Bogleheads 3 Fund. So looking over just about any period here, you get a better performance out of Risk Parity Ultimate than the Bogleheads 3 Fund, which is a typical 60/40 portfolio. And looking at just a couple other metrics here, we talked about the annualized volatility, but the monthly volatility for Risk Parity Ultimate was also less than the Bogleheads 3 Fund coming in at 2.18% expected volatility. or actually I realized volatility, excuse me, and the Bogleheads 3 fund was at 2.31% for the period. And finally looking at a couple other metrics here, market correlation, the Bogleheads 3 fund was 0.96 correlated with the stock market. So when the stock market was going up that was going up, when the stock market was going down it was going down. By contrast, the Risk Parity Ultimate, and this is an interesting statistic for it, is only correlated at 0.6 with the market. So it really is only going up with the market or going down with the market 0.6% of the time. And this is also reflected in what is known as the beta for this combination. It's only 0. 34 for the Risk Parity Ultimate, which is showing that it has a low volatility characteristic overall, even though it has some very high volatility components to it compared with a beta of 0.58 for the Bogleheads 3 Fund. And then finally looking at the perpetual withdrawal rate for this period, and these are a bit exaggerated since it was a fairly good period for the stock market that this is dealing with going back to 2011. But we see that the perpetual withdrawal rate for the Risk Parity Ultimate was 8.21% versus 6.92% for the Bogleheads 3 Fund. So that is a 1.3% improvement over the Bogleheads 3 Fund for this portfolio. And you would expect those kind of comparisons to apply to longer periods that you will have a higher projected safe withdrawal rate overall for this portfolio, which is its ultimate goal. And with that, I see our signal is beginning to fade, so tune in later this week, Wednesday or Thursday, when we will be discussing publicly traded REITs, the good, the bad, and the ugly of them. In the meantime, if you have any Comments or questions, you can send them to me at frank@riskparityradio.com that's frank@riskparityradio.com There is also a group page on Facebook if you wanted to put a comment there or you can go to the website and fill in the contact form as the other alternative. As I mentioned, the portfolios we have reviewed are at the website on the Portfolios page, and you will also see in the links to this the Portfolio Visualizer analysis that we discussed in this episode. Thank you for tuning in. This is Frank Vasquez with Risk Parity Radio, signing off.

Mostly Voices [15:59]

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.