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 [0:36]

Thank you, Mary, and welcome to episode 26 of Risk Parity Radio. Today on Risk Parity Radio, we are doing our weekly portfolio review of the six sample portfolios that you can find at www.riskparityradio.com. on the Portfolios page. And then we are doing a little analysis of our Portfolio of the Week, which is the All Seasons Portfolio. But before I get to that, just a couple of notes. One is we are adding a feature to the Portfolios page at www.riskparityradio.com, which will be a matrix of monthly returns for the six sample portfolios along with three reference funds for comparison purposes. And those reference funds will be VTSAX to represent 100% equities, the Vanguard Wellington Fund, VWNFX, to represent a managed 60/40 portfolio that a financial advisor might put someone in as a basic retirement portfolio. And then a conservative option, the Vanguard Wellesley Fund, VWIAX, which is essentially a 30 to 35% stocks, 65 to 70% bonds conservative portfolio as a reference. We only have two and a half months of data there right now, so it's not terribly interesting, but we will start talking about it beginning next month in the monthly reviews. And then we, as it builds out, I think it'll be a lot more interesting. The second thing I wanted to mention is that as I listen to other podcasts, I do see that Risk parity is catching on and you see it in or hear it in various ways. Most recently I heard a interview of Larry Swedroe on the White Coat Investor podcast, which is well worth listening to and I will link to in the show notes. But a couple of things that he said there are very consistent with what we are trying to do here. The first thing he said was he was asked whether he had made changes to his portfolio over the years, and he said in fact that he was moving it towards a risk parity style portfolio. And I think that's interesting that the personal portfolios of these very well respected fund managers and theorists in the area do seem to be moving in this direction, Even if they don't come out and say flat out that the risk parity style portfolio is the kind of portfolio that somebody ought to be in, they are doing it personally. We also saw this with Rick Ferri last month when he mentioned that he was using preferred stocks as part of his bond allocation in his personal portfolio. The other thing that Larry Swedroe mentioned in this interview was that in considering what kinds of bonds or fixed income that one should have in their portfolio, that one should really be focused on Treasuries because of that lack of correlation or negative correlation with equities. And he said it's a really big problem for portfolio constructors or users if they have corporate bonds in there as their bond allocation, these high yield corporate bonds, for example, that are correlated with the stock market, and then the thing goes down and the bonds go down with the stocks. And so it defeats the purpose of having bonds that you can then sell and rebalance into the stocks. And so that's why you should have treasury bonds as your primary bond allocation for these portfolios. And then he was asked about alternative asset classes and they talked a lot about these things and he had previously recommended commodities. He wasn't so sure about that now. He went off and talked about some very esoteric investments in funds that are essentially reinsurance companies, which I thought was interesting. I have not had a chance to look at them very closely other than to see that they might only be available to institutional investors or high net worth investors. The way they are structured now, they seemed a little bit strange. However, I'm more familiar with the reinsurance companies that you can simply buy on the stock market and there are ETFs that invest in those kinds of companies. And so perhaps we will come back and talk about those in a future episode as an alternative investment. But moving to our portfolio review this week, first we'll take a look at what the baseline markets did. The S&P 500 was down 0.53%, the Nasdaq was down 1. 06% last week. Gold was up all of 0.03% last week, essentially flat. And treasury bonds represented by TLT The ETF was down 1.3% last week. As a consequence of having both bonds and stocks down, you'll find out that all of our risk parity style portfolios were down for the week. This doesn't happen that often, but it does happen. It's not a terrible cause of concern, but obviously in most circumstances we want to be seeing stocks and the treasury bonds going in opposite directions. You do see from all of the risk parity style portfolios right now that the components that are down in each of the portfolios happen to be the bond components because the past few months have been more favorable to stocks than for bonds. But that is actually sort of what you would expect as the normal performance for these portfolios that you have some things going up at the same time that other things are going down. So that is actually what you want to see. but going through each of these portfolios, the All Seasons portfolio, which we will talk about a little bit more later in the episode, it was down 1.03% last week and that is actually the biggest move I've seen out of that in a week. In the past few months it does not move more than about 1.6% in a month typically, but that is our most conservative portfolio. the next portfolio, the Golden Butterfly, and I should say that that portfolio is now up 0.05% since inception in July, so it is basically flat from where it started. The next portfolio is the Golden Butterfly, and that was down 0.01% last week, and it is up 4.98% since inception in July. So it really didn't move. The golden ratio, the next portfolio, is down 0. 34% last week and it is up 4.49% since inception in July. And you see these portfolios are basically not moving a whole lot, at least these intermediate ones in the middle that we are really looking at as our base portfolios. The Risk Parity Ultimate Portfolio, which is our most diversified portfolio, is down 0.54% last week and is up 3.40% since inception in July. And then we get to our two experimental portfolios, and these do show how much more volatile they are than the base portfolios. The Accelerated Permanent Portfolio I was down 1.82% in the past week and is up 4.12% since July. And then the aggressive 50/50 was actually down 2.48% last week and is up 3.28% since July. And that is our most volatile portfolio as it only has stocks and bonds in it without any other alternative investments. which tends to account for that volatility. And now let's turn to our portfolio of the week, the All Seasons Portfolio. As a review, this portfolio is constructed based on Tony Robbins' interview of Ray Dalio and coming up with a conservative version of what Ray Dalio described as his all-weather portfolio. and this has been renamed as the All Seasons Portfolio. And what is in it is 30% stocks represented by the Total Stock Market Fund, VTI, 40% long-term treasury bonds represented by the ETF TLT, 15% medium-term or intermediate-term treasury bonds represented by the fund VGIT, and then as the alternative investments we have gold and commodities. And those are two funds represented by GLDM or GLD for the gold, 7.5% of that, and PDBC as a general commodities ETF, which is also 7.5% of the fund. Now this is our most conservative portfolio. It is a reference portfolio and is probably about as conservative as you would want to go. To compare this to something that you may have heard about or has been out there for quite a while, we took a look to compare this to the Vanguard Wellesley Fund. Now the Vanguard Wellesley Fund is a conservative fund designed for late retirees, people in their 70s or 80s who are looking for very conservative allocation and it is approximately 35% stocks and 65% bonds. The stocks in it are very stable large companies often paying dividends and the bonds are kind of a total mix of Treasuries and high grade corporates. But this is a comparable portfolio to the All Seasons in terms of composition And so that's why we picked it for comparison purposes. And we ran a back test portfolio analysis for these two portfolios, the Vanguard Wellesley against the All Seasons portfolio. Now, due to the composition of the All Seasons portfolio in this variation, the data available only goes back to 2014. So this is only a partial analysis. but I think it gives a pretty good idea of how these two portfolios match up. And if we look at the returns over this period, we see that the compounded annual growth rate for the Vanguard Wellesley was 6.09% for this period of time, and the compounded annual growth rate for the All Seasons was 6.97%, or about 0.9% more close to 1% more over that time period. And looking at the two standard deviations, we do see that the standard deviation for the Wellesley was less than the All Seasons at 5.83% versus 6.23%. What this translates to is sharp ratios of 0.88 for the Wellesley and 0.96 for for the All Seasons which shows that the All Seasons has a better risk reward ratio for this period of time. If you look at the maximum drawdowns, you can also see that the Vanguard Wellesley was down 8.59% as its maximum drawdown and the All Seasons was only down 6.67% for this period of time. And that is fairly indicative of these very conservative portfolios that they don't have very much variation here. They not only will help you sleep at night, they will probably put you to sleep at night. Looking at a few other metrics in this analysis, we see that the monthly volatility is very low for both of these portfolios. It's 1.68%. for the Vanguard Wellesley and 1.80% for the All Seasons. And then going to the perpetual withdrawal rate, and again take this with a grain of salt since it's for a relatively short period of time, but we see that it is 4.63% for the Vanguard Wellesley and 5.53% for the All Seasons portfolio. And so you can see that the All Seasons portfolio is a better option for this period of time. And it probably is most likely due to the fact that it does have these alternative asset classes in it, the gold and the commodities. But it is also due to the fact that The bonds in the All Seasons are all Treasury bonds and all, not all, but mostly on the longer end, which gives you that negative or inverse correlation with the stock market, which results in better rebalancing opportunities when those come along. Then you might see in a Vanguard, Wellesley or a portfolio structured like a Vanguard Wellesley Fund. So what you should get out of this is that if you are looking for an extremely conservative fund in the range of a 30-70 kind of portfolio that I would recommend to somebody that was not involved in the stock market and wanted to take some risk but really didn't want to expose themselves to stock market risk. this is the kind of portfolio that would be recommended for them, and this version of that kind of portfolio does hold up well against the standards in the industry. But with that, now I see our signal is beginning to fade. If you have questions or comments, please send them to me at my email, which is frank@riskparityradio.com that's frank@riskparityradio. com or you can go to the website www.riskparityradio.com and fill out the contact form there and I will get your message that way. We will be picking up again this week. I think we will continue with a more detailed analysis of the utilities sector fund as an alternative investment or possibility for your risk parity style portfolio and look at that in a little bit more detail. Be looking for that on Wednesday or Thursday of this week. Thank you for tuning in. This is Frank Vasquez with Risk Parity Radio, signing off.

Mostly Mary [17:10]

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.