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 [0:20]

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 20 of Risk Parity Radio. We have a jam-packed episode for you today. We have our second monthly rant to start off with, and then we'll be doing our weekly portfolio review. of the six sample portfolios you can find at www.riskparadioradio.com and the portfolios page. And then we will be doing a focused analysis of the Accelerated Permanent Portfolio, our portfolio of the week, and comparing it to two Dave Ramsey style portfolios. But before I get to that, I wanted to just thank my loyal listeners. This podcast has only been going for about two and a half months and it crossed 1,000 downloads last week. I thought at the beginning that perhaps I would have 10 loyal listeners. It turns out I have at least 30 loyal listeners and I appreciate each and every one of you. Some of you have already gone to your favorite podcast rating service on the Apple one or other ones and put in a five star rating and made a comment. If you haven't done that and you'd like to, I would really appreciate it. And hopefully this podcast will continue to grow. It is a niche podcast and I know it will not have a broad following, but I think it will be helpful and useful to those people who are particularly interested in do-it-yourself portfolios for their drawdown phases. Now going to the weekly rant. I should say our monthly rant. The rant this month is about Portfolio selection based on management teams or fund selection based on management teams, I should say. I was watching a YouTube video of one of the prominent fund rating services, which shall go unmentioned here. And they were going through a few funds and the presenter was saying, one thing I like about this fund is that it has a, quote, Great management team. I like it that the manager can buy whatever they want. Now how should you interpret that? Well, the first thing you should realize is when somebody says a fund has a great management team, it's probably pretty expensive in terms of the expense ratio and other fees. And the funds that were being discussed here did have expense ratios of 0.6 to 1.6%. And they were bond funds, believe it or not. They were bond funds, which when you think about it is ridiculous considering that these funds were only going to yield 3, 4, 5% anyway in the best of circumstances. But what else is wrong with attempting to pick a fund by its great management team? Well, first of all, you have no way of knowing or monitoring whether the management team is great, what way they are great, and whether they will continue to stay great in the long term. The second problem is no matter how great they are, they don't know the rest of what you're holding. in your portfolio, how is this great management team going to make decisions that are good for your portfolio when they don't even know what else is in your portfolio? You cannot rely on a great management team. And that gets you to this third point where it was said that they liked this fund because the manager could buy whatever the manager wanted. That's a really horrible thing. What you want when you buy a fund is to know what is being bought there. Because when you know what's being bought there, you'll know and I have an idea both of how it's going to perform and how it's going to perform in your portfolio because you will know how well it is correlated or not correlated to the rest of your things in your portfolio. So the fact that a manager can buy whatever they want is a Big drawback to buying a fund. A big drawback. You should stay away from a fund where the manager can buy whatever they want because it may not be useful for you. When you go to a store and you buy a chocolate cake, you want a chocolate cake. You don't want to go home and find out it's a vanilla cake or worse yet, it's a pie. But this is basically what is being recommended here. Now where does this come from? Where does this idea that a great management team is something to be desired? This comes out of the past. If we consider the history of fund allocations and the financial services industry. If we think of this in broader historical terms, prior to 1970, you could consider that the stone age of financial services. There wasn't much out there for the ordinary investor, and it wasn't very good. It was all essentially guesswork. Modern portfolio theory had just been invented, but it hadn't really been applied. Now you get to the period between about 1970 through the 1990s and you might consider that to be the Bronze Age. And what did we find out in the Bronze Age? We found out that, well, you could construct this thing called a 60/40 portfolio, which was probably the best we could do with the tools we had at the time. Now in that era the idea that Great fund managers could consistently beat indexes was the way to go. That's where this comes from. This is a bronze era idea. Now that idea with the implementation of index funds has been proven to be false. It's been proven to be false time and time again. Most managers cannot beat indexes. and they can't do it consistently. So year upon year, the top managers will rotate because a lot of what they're doing is just random and has more to do with the particulars of what kind of fun they have, or what kind of things they are investing in, than anything to do with their skills. The other thing that is deceiving about the fund world is that when a manager or a fund doesn't perform, it goes away. A company might start out with 10 funds, the five that do badly in the first few years, they'll just get rid of them. So all you'll be left with is, quote, great management funds. Add to that that the management changes, And really when you hear that description of a fund, it has a great management team, you should run screaming away from that. It is something from the past. It is primitive technology that you don't want to use. Now I was listening to another podcast this week. It was an interview of Burton Malkiel who wrote A Random Walk Down Wall Street. It was very interesting. This was on Animal Spirits podcast. And he was talking about how the industry has evolved in the past 25 years. And the way it's evolved is to get away from this idea that the purpose of getting into a fund is to pick some kind of great fund management. And that the better idea, the idea that we should be using today, is that you should be picking index funds of the things that you want to invest in and keeping it low cost and as simple as possible. And he noted that, you know, prior to the 1990s, that index fund investing barely existed and that Jack Bogle's original index fund was a failure from the get-go because the industry rejected the idea that index fund investing was better. But we have learned since then, we hopefully have learned something since then, so we are not repeating the same mistakes of the past. That we've gone from the bronze age of looking for great fund managers to the iron age of index funds. And now hopefully we're getting to the age of steel, where do-it-yourself investors are using the finest tools in the industry that used to be only available to hedge fund managers. And finally, one more point on that is that great fund managers and great stock pickers don't hang around managing ETFs and mutual funds for the most part. They go off to hedge funds where they can make 2% plus 20% of the profits, or the best ones simply kick everybody out of their hedge fund and only manage it for themselves. So don't expect to find magic beans or magic buttons with any fund managers from a great management team. A couple other tidbits of misfinancial wisdom I heard last month. One was you should buy gold as an inflation hedge, which gold is actually not a very good inflation hedge. It is an inflation hedge. But other things are inflation hedges too. The stock market is an inflation hedge. You shouldn't buy gold as an inflation hedge. You should buy gold because it's uncorrelated with other things in your portfolio. Let's be clear on that. You're not buying gold because you can tell a story about gold, about what might happen in the future. You're buying it because it's a useful thing in a risk parity style portfolio that is uncorrelated with stocks and bonds. Next bit of Miss Wisdom. If you like less volatility in your portfolios, you should buy short-term bonds and not long-term bonds. That's true in a vacuum, and that is the problem of looking at funds in a vacuum. If you look at funds in a vacuum, you won't understand what they do for your portfolio. As we learned in the bond episodes, which I can link to in the show notes. If you buy long-term treasury bonds and put them in a portfolio with stocks, you will reduce the overall volatility of the portfolio because you have negatively correlated assets. It is very true that short-term bonds are less volatile than long-term bonds, but it is not true that putting those in your portfolio will result in a lower volatility overall. than if you were to use the negatively correlated assets as opposed to short-term bonds, which generally have zero correlation or zero volatility. And finally, I heard last month that you should buy a stock because it was splitting. Now this confuses correlation with causation and the causation arrow. The reason stocks split is because they've gone up, and the reason they've gone up is because they've been performing well in one way or the other. So it is the great performance in the past that causes a stock to split. The causation error works that way. The splitting is the effect, not the cause. So the splitting of the stock is not going to cause the stock to go up if it's going to go up anymore. It's gonna go up because it's performing well in other ways and people like it for other reasons, not because it's splitting. It's bad enough when people confuse mere correlation with causation, but it's even worse when they get the causal arrow wrong as to which direction it points. You don't want to be one of those people. And now after the excessively long rant, which I apologize for if you did not appreciate, we will be Moving to our portfolio reviews of the six sample portfolios on the RiskParity.com website. Should say the RiskParityRadio.com website, so you go to the right place. First looking at some metrics for last week, the S&P 500 was up about 1.52%, the NASDAQ was positive about 1.48%, Gold was up even more, it was up 2.16%, and long-term bonds were down 1.35%, which is a typical performance. You see the negative correlation there between the bonds and the stocks. Also of interest to our portfolios is that REITs were up 2.9% last week. It was a very good week for them, and you never know when they are going to go up or down in a way that is significantly different from the stock market. But last week was an example of that and it did have a positive impact on our risk parity style portfolios that include REITs. Now looking at the six portfolios, our most conservative one, the All Seasons portfolio, was actually flat last week and it is down 0.17% since inception last July. We've been removing or taking drawdowns from it at a rate of 4% monthly. So for October we'll be taking out $34 from that portfolio and we'll be taking it from the stock fund VTI. That'll be a total of $104 since inception. We've taken $69 from VTI and $35 from the gold fund that is in there. Moving to the next portfolio, the Golden Butterfly. Now this one was up 1.74% last week. It is up 3.15% since inception about three months ago. We are removing $42 from the cash component of this for the month of October. It has accumulated that through the dividends coming out of its bond and stock funds there. So we will have taken a total of $129 out of this since inception. $44 from VIoV, the small cap growth fund, I'm sorry, the small cap value fund.$43 from the gold fund GLDM and $42 from cash since inception. The next portfolio is the Golden Ratio portfolio and it is up 3.36% since inception. It was up 1.84% last week, largely on the strength of the REITs and gold that comprise about 25% of it added together. We'll be taking out $42 from this fund, which is at a 5% annualized withdrawal rate. We have taken out $129 total from it since inception. It comes out of cash in this fund because the fund has a 6% cash allocation, which is just in a simple money market fund at Fidelity. It is notable also that this fund has $73 in income since inception, which also goes into the cash. So this makes it a very easy fund to manage because you you always have enough cash that is existing that you can take your drawdowns from if you're going to take them monthly. And then it only needs to be rebalanced or replenished once a year. Moving to the fourth portfolio in the risk parity style portfolios, we have the risk parity ultimate. It was up 1.53% last week and is up 2.67% since inception. We are removing drawdown money from this at an annualized rate of 6%. So we're taking out $51 for the month of October. We'll take out $155 total since inception. And we have taken out $52 from the small cap value fund, VIoV, $51 from the large cap growth fund. It's coming out for October, which is VUG and $42 from the Gold Fund GLDM over the past three months. And you can see how as each different part of this portfolio tends to outperform, that becomes the one that we are taking out of for that month in effectively selling high when it comes to selling and will make it rebalancing much easier at the end of the year when we go to take care of that. Now the next portfolio is one of our experimental portfolios. It is the Accelerated Permanent Portfolio and it is our featured portfolio of this week. It was up 0.88% last week, is up 3.32% since inception. We are taking out of this at an accelerated rate of 8% annualized. to see how it performs. And so that means we are taking out $68 for the month of October. And I should say that all of these portfolios are based on a $10,000 starting amount. And so we've taken out $211 total in the past three months from this. And it's come 140 from UPRO, including this month. and that is the leveraged stock fund in there, and then $71 from the leveraged bond fund, TMF. And then finally the other experimental portfolio, the aggressive 5050, that was up 0.48% last week. It is up 2.27% since inception, and we are also taking $68 out of that at an 8% annualized rate. that comes from the leveraged stock fund, UPRO. And we have taken out $209 total since inception. That is $139 from the leveraged stock fund UPRO and $70 from the TMF when that one was performing so well a couple months ago. Looking at the grand totals of what we've been Doing with these risk parity style portfolios for the past three months since inception, we have removed $937 from them and they started with $60,200 in them total. So if you look at the percentages, we have taken out 1.56% of the starting total, which would be over 6% annualized. Now, I'm not doing that because I'm recommending that you draw down on your portfolio at a 6% annualized rate, but only to show that these style of portfolios can support that kind of abusive drawdowns that are well beyond the 4% annualized that is the recommended drawdowns for retirement style portfolios. and they are all still positive since inception. The only one that is under the weather is the All Seasons Portfolio, also derived from the All Weather Portfolio. And I think that's because it is just a little bit too conservative and could probably use a few more stocks in it than the 30% that is allocated to that. But it is there as a reference point. portfolio so that you can see how that works in comparison with the others. Again, you can look at all of these portfolios on the portfolios page at www.riskparadioradio.com and it has all of this information that I've been giving to you orally so you can study it at your leisure. And now it is time to focus on our portfolio of the week, which is the Accelerated Permanent Portfolio. And we are going to compare this to two Dave Ramsey style portfolios, all stock portfolios, and see how they stack up over the data that we have for them, which we have brought from portfoliovisualizer.com and we will be linking to in the show notes so you can check out the analyses for yourself. Just by way of review, the Accelerated Permanent Portfolio is based on the original permanent portfolio. The original permanent portfolio developed by Harry Brown back in the 1970s and 80s consisted of 25% stocks, 25% short-term bonds, 25% long-term bonds, and 25% gold. Our modernized version of this incorporates leverage into it. And so it has 25% in a leveraged stock fund called UPRO, 27.5% in a leveraged bond fund called TMF, it has 25% in a standard gold fund, GLDM is the ticker symbol for that, and we put 25% in a preferred stock fund, PFF. And the gold and the preferred stocks act as kind of ballast for the other two funds, which are much more volatile and tend to move in multiples of how you see the stock market moving every week. But they do balance each other out. I should say I misspoke that the gold in this fund is only 22.5% and not 25%. The reason we have a little bit more leveraged bond fund than leveraged stock fund is just because the volatility balances out better that way. Now what are we going to compare this accelerated permanent portfolio to this week? We've gone and looked at the Dave Ramsey style portfolio. Now nobody's quite sure what is exactly supposed to be in one of these portfolios. When you look online there's lots of debates on this because Dave Ramsey does not define them in a way that is conducive to you being able to actually pick funds. He is really trying to direct people to his advisor network who you will pay exorbitant fees to get into some kind of mix of these types of funds. But others have attempted to figure out what these things are. It's supposed to be a four fund portfolio, 25% in growth and income, 25% in growth, 25% in a aggressive growth and 25% in an international stock index or stock fund. So I went to the white coat investor who has done an analysis of this style of portfolio and he had identified four funds as the likely candidates for this. He picked a Vanguard Value Fund Index, a Vanguard Mid Cap Growth Index, Vanguard Small Cap Index, and a Vanguard Total International Stock Index. And those as ticker symbols are VI VIX, VMGRX, VSCIX, and VGTSX. And these are reflected in the analysis that we are going to link to. Now I wanted to give this fund a, I'm sorry, this portfolio a break or a boost. I made a more aggressive version of it that might perform a little better in the time frame that we're talking about. And in that one I created a portfolio, which I'm calling Ramsey 2, as Vanguard Mid Cap Growth, Vanguard Growth and Income, Vanguard Small Cap Growth Index, and the Vanguard International Growth Fund. So it's even more focused on growth. and that sample portfolio is VMGRX, VGIAAX, VSGIX, and VWIGX as the four funds in that 25% each. And we are comparing that to our Accelerated Permanent Portfolio. Now this analysis only goes back to 2009 because that is what we have the data for from portfoliovisualizer.com, no data has been excluded. And if we look at the performance of these three portfolios, we see that the Accelerated Permanent Portfolio had a compounded annual growth rate since then of 17.57%. Now that compares with the Ramsey 1 portfolio of 9.88% and the Ramsey 2 portfolio of 12.81%, which are both significantly lower. But then when we look at the standard deviations, we see that the Accelerated Permanent Portfolio had a lower standard deviation, meaning a lower volatility than the other two. And so the standard deviation for the Accelerated Permanent Portfolio was 13.41% compared with 15.1% for Ramsey 1 and 15.75% for Ramsey 2. The maximum drawdowns comparison, Accelerated Permanent Portfolio was maximum drawdown of 16.65%, Ramsey 1 maximum drawdown of 25.07%, Ramsey 2 maximum drawdown of 21.43%. So again, the Accelerated Permanent Portfolio is much better than the other two there. And this is reflected in the Sharpe ratios. which are a nice measure of risk and reward. The Sharpe Ratio of the Accelerated Permanent Portfolio is 1.24, which is twice, two times the Sharpe Ratio for the Ramsey 1 portfolio, which is 0.66, and for the Ramsey 2 it's 0.81. And so it's about one and a half times the Sharpe ratio for that portfolio. What's also interesting is if you look at the market correlation that the Accelerated Permanent Portfolio only has a market correlation of 0.39%. So it is not following the stock market very much at all or only about 40% of the time. Meanwhile, the two Ramsey style portfolios are obviously very, they're 100% stocks. and so their market correlations are 0.98% each and they are very much tied to the performance of the stock market. If we look at the trailing returns for these portfolios, we see that the Accelerated Permanent Portfolio is better than the other two in every time period except for the last three months. In the last three months, the Accelerated Permanent Portfolio only yielded 5.98%, whereas Ramsey 1 was 6.95 and Ramsey 2 was 10.67. But when we look at the year to date, Accelerated Permanent Portfolio is up 15.63% compared to Ramsey 1 which is down 2.17 and Ramsey 2 which is up 14.3. One year, the Accelerated Permanent Portfolio is up 20% compared with the Ramsey 1, which is up 5.62%. Ramsey 2 is the best performer there with 25.36%. And then you get to three years, five years, 10 years in the full period, and the Accelerated Permanent Portfolio exceeds the performance of the other two portfolios in every one of those time periods. There's really no contest there. And then finally, just looking at a couple other metrics, if we look at the monthly volatility, we had talked about the annualized volatility before. The monthly volatility of the accelerated permanent portfolio is 3.87% compared with 4.36% and 4.55% for the RAMZI 1 and 2 portfolios. the lower number is the better number. The Accelerated Permanent Portfolio shows it to be less volatile than the other two with a better performance. And then finally, if we look at the perpetual withdrawal rates, which are actually not perpetual withdrawal rates because they are limited by the time period for which this analysis was done, but we see that the perpetual withdrawal rates for this time period for the Accelerated Permanent Portfolio was 14.4%. That compares with 7.94% for Ramsey 1 and 10.5% for Ramsey 2. So again, this accelerated permanent portfolio is just better on all fronts than either of these Ramsey style portfolios. And as I mentioned, there is a link to this analysis in the show notes. If you would like to take a look at it for yourself, and I hope that you will because using the tools that we have at Portfolio Visualizer and Portfolio Charts is what we want to do as do-it-yourself investors for whatever portfolios we are considering. But now I see our signal is beginning to fade and so it is time for me to say goodbye. This is a longer episode than I anticipated. I don't like to listen to long podcasts, so I don't like to make long podcasts. But thank you for listening. If you have any comments, questions, you can send them to me at frank@riskparadioradio.com that's frank@riskparadioradio.com or go to the website and fill out the little contact form there and the message will get to me. I want to thank my loyal listeners again, all 30 of you strong. It is very gratifying to be able to create something that others find useful. Thank you for tuning in. This is Frank Vasquez with Risk Parity Radio, signing off.

Mostly Mary [33:23]

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.