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 [0:38]

Thank you, Mary, and welcome to episode 24 of Risk Parity Radio. It is time for our weekly portfolio review of the sample portfolios that you can find at www.riskparityradio.com. on the portfolios page. It was a fairly uneventful week in the markets and an uneventful week for these portfolios. But just going through this little review here, we see that the S&P was up 0.19%, the NASDAQ was up 0.79%, gold was down 1.72%, and long-term treasury bonds represented by the ETF Tlt were up 0.63% translated into our risk parity style portfolios looking at our most conservative portfolio first the all seasons portfolio which is mostly bonds that one was up 0. 22% this week and then going to our main reference portfolios the golden butterfly was down 0.22% this week, probably due largely to the gold component in there. And then we go to the Golden Ratio portfolio, and that one was down 0.49% this week. I should say that looking at these since inception in July, the all seasons is up 1.08%, the golden butterfly is up 4.99% and the golden ratio is up 4.83% since July. Moving to the next portfolio, the Risk Parity Ultimate. That one was down 0.33% this past week. It is up 3.94% since inception in July. And then going to our two experimental portfolios with the leveraged bond and stock funds in them. The accelerated permanent portfolio was up 0. 14% this past week and is up 5.96% since inception in July. And the aggressive 5050 portfolio, which is our portfolio of the week, was up 0.73% this past week. leading the pack, as to say, and is up 5.76% since inception in July. So overall, this is kind of what we'd like to see out of our risk parity style portfolios, a bland performance week to week that allows us to remove drawdown money every month at a steady clip. which we will be doing again in a couple weeks here. And now moving to our portfolio of the week, which is the aggressive 5050. It is called that because it is roughly 50% stocks and 50% bonds. On the stock side of it, it has 33% in UPRO, which is a leveraged stock fund, and it has 17% in preferred shares, the fund PFF. And on the bond side, it has 33% in TMF, which is a leveraged long-term treasury fund, and 17% in intermediate treasury bonds, which is represented by VGIT in the sample page. Now this portfolio is designed to carry approximately the same risk as a 100% stock fund portfolio and get superior returns overall. And what we decided to do this week is compare this to 200% stock portfolios that are Dave Ramsey style portfolios. These are the portfolios that Dave Ramsey talks about and have been recreated in a couple different guises. What we did is we went to Portfolio Visualizer and created three portfolios. The first one is the aggressive 50/50 and the second one is a Dave Ramsey style portfolio that is from the White Coat Investor website and that one is comprised of a Vanguard Value Index Fund, VIVIX, a Vanguard Mid Cap Growth Fund, VGMGX, a Vanguard Small Cap Index Fund, VSCIX, and a Vanguard Total International Stock Index Fund, VGTSX. And there's 25% of each one of those in this portfolio. And then to make a little more aggressive version of this, as Dave Ramsey always calls for using lots of growth funds in his portfolios, we created another portfolio, portfolio number three, which is comprised of four funds equally weighted 25% each. The Vanguard Mid-Cap Growth Fund, VMGRX, the Vanguard Growth and Income Fund, fund VGIAx, the Vanguard Small Cap Growth Fund, VSGIX, and the Vanguard International Growth Fund, VWIGX. And when we ran the comparison of the three portfolios, we see that the aggressive 5050 is superior to both of them looking at the returns for the data available and this only goes back to 2009, so we need to take it with somewhat of a grain of salt, but it's a good comparison period. For that period the Aggressive 5050 had a compounded annual growth rate of 21.68% compared with the first Dave Ramsey style portfolio which had a compounded annual growth rate of 11.55%, and the second one did a little better with a compounded annual growth rate of 14.34%. Looking at the maximum drawdowns, we see that the aggressive 5050 was less volatile than both of the other two portfolios. So the maximum drawdown for the aggressive 5050 over this period was 16.71% versus 25. 07% for the Dave Ramsey 1 portfolio. from White Coat Investor and the other portfolio is down 21.43% for its maximum drawdown. This translates into sharp ratios which are an overall measure of the risk to reward of a portfolio of 1.34 for the aggressive 50/50, 0.76 for the first Dave Ramsey style portfolio and 0.90 for the second Dave Ramsey style portfolio. So you can see that this is a much better outcome in terms of risk and reward for these portfolios. If you took an initial balance of $10,000, the aggressive 5050 would have a final balance of $90,959. whereas the first Dave Ramsey style portfolio would only have a final balance of $34,206 and the second one comes in at $45,159. So you can see the power of compounding even over this short period gives you two or three times the amount of money in the aggressive 50/50 as compared to these two all stock growth portfolios. Looking at the trailing returns for the periods, we see some interesting divergences here. The aggressive 50/50 portfolio is actually the laggard for the past three months, but year to date has a return of 13.6% and then you get out to one year and it's 18.43%. And then it takes off for three, five and 10 years and gets better as the time frame gets longer. Whereas if you look at the two Dave Ramsey style portfolios, they have better performances recently. 6.95% for the past three months for portfolio number two there and 10. 67% for the more aggressive growth portfolio, which is portfolio three in this analysis, which I am linking to in the show notes. Year to date though, that first Dave Ramsey style portfolio is down 2.17%, whereas the other one is up 14.3%. And as the time frame goes out longer, you see that the portfolios tend to get closer and the first Dave Ramsey style portfolio actually gets a little better, and the second Dave Ramsey style portfolio actually gets a little worse over the three, five and 10 year time frames. But neither one of those, as we talked about, comes anywhere close to the aggressive 50/50 returns over this period. And looking at a few other metrics here, we see that the Two Dave Ramsey style portfolios are highly correlated with the US stock market as you would expect since they are 100% equity. So they have a 98% correlation with the total stock market, whereas the aggressive 5050 has an actually a low correlation with the stock market of only 0.42 as you might expect from something that is half bonds and half stocks. Now looking at the perpetual withdrawal rates for this period, which you should also take with a grain of salt since they're very large for this period, but we can see in relative comparison that the aggressive 5050 is much better than the other two portfolios. The two Dave Ramsey style portfolios have perpetual withdrawal rates for this period of 9.05% and 11.32%, compared with the aggressive 5050, which is all the way at 16.79%. And again, that is reflected in that sharp ratio. And the reason for the superior performance of the aggressive 5050 is not only the leverage in the funds, but the fact that there is a very low correlation and in fact a negative correlation between the stock and bond components in that portfolio. So if you look at the correlation coefficients between TMF and UPRO, for example, it's negative 0.45 and between the intermediate Treasury bond fund and the stock fund, the main stock fund, it's a negative correlation of negative 0.44. Whereas if you look at the components of the two Dave Ramsey style portfolios, they are all highly correlated with one another, which leads you to that less diversification means greater drawdowns and greater volatility for the risk that is taken. And as we have seen from all of these analyses that we have been doing, it is that negative correlation, those low correlations, between the components of these risk parity style portfolios that really drive their overall reward to risk as being much higher than standard stock portfolios or standard portfolios that involve stocks and bonds that are correlated with stocks. But that is all I have for you today. It is time for me to go outside and ride a bike around for a little while. It's a nice day outside. I did receive an interesting email this weekend about sector funds and I thought that we would have a show this coming week about sector funds and how you might look at them or use them. And so we will be doing that on Wednesday or Thursday. If you have any questions, comments, and like would like to email me you can send them to Frank@riskparadioradio.com that's Frank@riskparadioradio.com or you can go to the website and fill out the little contact form and I will get your message that way. But now I see our signal is beginning to fade and it is time for me to say goodbye. Thank you for listening in.

Mostly Mary [14:16]

This is Frank Vasquez with Risk Parity Radio signing off. 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.