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 [0:18]

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 Risk Parity Radio. If you have just stumbled in here, you will find that this podcast is kind of like a dive bar of personal finance and do-it-yourself investing. Expect the unexpected. It's a relatively small place. It's just me and Mary in here. And we only have a few mismatched bar stools and some easy chairs. We have no sponsors, we have no guests, and we have no expansion plans.

Mostly Voices [1:10]

I don't think I'd like another job.

Mostly Uncle Frank [1:14]

What we do have is a little free library of updated and unconflicted information for do-it-yourself investors.

Mostly Voices [1:24]

Now who's up for a trip to the library tomorrow?

Mostly Uncle Frank [1:29]

So please enjoy our mostly cold beer served in cans, and our coffee served in old chipped and cracked mugs, along with what our little free library has to offer.

Mostly Voices [1:51]

But now onward, episode 310.

Mostly Uncle Frank [1:55]

Today on Risk Parity Radio, Happy New Year. It's time for our annual portfolio reviews of the seven sample portfolios you can find at www.riskparityradio.com/PortfolioReviews.

Mostly Voices [2:14]

on the portfolio's page. Stranger, I feel drowsy. It's only mid-afternoon, huh? Well, I took the liberty of putting away something in your tea. What are you talking about? I'm putting you to sleep. You old fool. Is there an antidote? Of course there is. Right here. Well, it'll cost you a guinea.

Mostly Uncle Frank [2:41]

But before we get to that, I just wanted to recount a delightful experience that Mary and I just had over the past weekend, where one of our listeners, Nick from Michigan, came through and stopped for dinner with his wife and two daughters who are aged four and nine. And we had a wonderful dinner and got to know them a bit better. Show the Inquisition!

Mostly Voices [3:07]

Wanna show the Inquisition? Here we go.

Mostly Uncle Frank [3:11]

And we also learned that the only parts of this podcast that the foreign nine-year-old like to hear are in fact the sound bites. Oh hey, I think I know what that means. That's one of those sentence enhancers. Sentence enhancers?

Mostly Voices [3:31]

You use it when you want to talk fancy. You just sprinkle it over anything you say and a wobble. You got yourself a spicy setting sandwich. Oh, I get it. Let me try.

Mostly Uncle Frank [3:47]

And that the most favorite sound bite of the four year old was in fact Daniel Day Lewis from There Will Be Blood, which you know as And I have a straw. There it is. That's a straw, you see.

Mostly Voices [4:01]

Watch it. And my straw reaches across the room and starts to drink your milkshake. I drink your milkshake. I drink it up.

Mostly Uncle Frank [4:26]

But we always knew there were two kinds of people that liked this podcast.

Mostly Voices [4:33]

Now, didn't we? You are talking about the nonsensical ravings of a lunatic mind.

Mostly Uncle Frank [4:37]

But anyway, we had lots of fun and we hope to see them at some point in the future. I don't care about their children.

Mostly Voices [4:44]

I just care about their parents' money. Now, getting to these portfolio reviews.

Mostly Uncle Frank [4:49]

and comparisons with some reference kind of portfolios. Just starting from some broad observations, in many respects, 2023 was simply a reversal of what happened in 2022, because a lot of the things that did very poorly in 2022 did very well in 2023 and vice versa. That was particularly noticeable if you looked at the various sectors of the stock market. So while growth stocks were up substantially in 2023, our large cap growth fund, VUG, was up about 45%. Value stocks were fairly mediocre and were more in the 0 to 10% returns range. There were three sectors that were negative for the year in the stock market. Those were energy consumer staples and utilities with utilities being down about eight or nine percent. That's a big contrast from 2022 when you saw things like energy were up 60% and a lot of things did very kind of average to mediocre like real estate was up 10% which was not nearly as much as it was down in 2022. We saw managed futures be One of the worst performers in 2023 when they were one of the best performers in 2022. Bonds were looking horrible most of the year but ended up positive. And commodities were down for the year but were up in 2022. Overall, when you look at this, what you see is that any portfolio that had a larger exposure to what they call the Magnificent Seven or large cap growth tended to outperform other portfolios. Having some alternative assets like gold were important in 2023. Gold was up over 13%.

Mostly Voices [6:48]

I love gold.

Mostly Uncle Frank [6:55]

The dollar was much weaker in 2023, and that basically helped everything. The dollar wrecking ball was not wrecking everything. And that's the way. I like it.

Mostly Voices [7:02]

Casey and the Sunshine Band.

Mostly Uncle Frank [7:07]

But mostly what you learned is that if you basically had a static strategy through 2022 and 2023, you probably did okay. If you look at the years together collectively, not much actually happened in markets. And most portfolios were either slightly up or slightly down over the two-year period. You were also aided if you did rebalancing, particularly if you bought bonds before their big surge, which just occurred in the last couple of months of 2023. Looking at the main components of many portfolios, the S&P 500 was up 26.19% for the year. The Nasdaq was up 54.85% for the year. It's a big winner.

Mostly Voices [7:55]

Winner, winner, chicken dinner.

Mostly Uncle Frank [8:00]

Small cap value represented by the fund VIOV was up 15.36% for the year. Gold was up 13.04% for the year. This is gold, Mr. Bond. Long-term treasury bonds represented by the fund VGIT were up 3.29% for the year. REITs represented by the fund REET were up 10.31% for the year. Commodities represented by the fund, PTDBC, were down 6.27% for the year. Preferred shares represented by the fund, PFF, were up 9.2% for the year. And managed futures represented by the fund, DBMF, were down 8.72% for 2023. All right, now let's look at some of these sample portfolios and compare them with Some reference portfolios that you can find out there in the marketplace. Let's first take the All Seasons, which is kind of a classic reference risk parity style portfolio that adheres to the old Ray Dalio idea that was published by Tony Robbins and Money Master the Game. That portfolio is only 30% in stocks in A total stock market fund, it's got 55% in treasury bonds with 40% in long term and 15% in intermediate term, and the remaining 15% divided into gold and commodities. In 2022, that portfolio had one of its worst years ever. I think its worst year ever was down 19.28% for the year, but in 2023, it was up 10.42% for the year. which is somewhat of a recovery, but certainly not a full recovery. That's why we use this only as a reference portfolio. If we look at commercial preparations of risk parity style portfolios, this All Seasons portfolio actually did much better than they did. So the two that are kind of the most popular ones out there these days, RPAR and UPAR, which are both leveraged commercially prepared risk parity portfolios. RPAR has a leverage of 1.2 to 1. UPAR has a leverage of about 1.8 to 1. So RPAR in 2022 was down 22.8% and last year in 2023 it was up 6.03%. UPAR was down 33.3% in 2022, and it was up 6.74% in 2023. So you can see those structures did not do very well and did not recover very well. And if you look inside them, you can kind of see why just because of the structural choices that have been made in those portfolios that instead of relying heavily on gold, for example, They rely more heavily on companies in the stock market that produce natural resources, so like energy companies and mining companies. And those tended not to have a very good year in 2023, even though gold itself was up over 13%. Their reliance on TIPS funds also didn't really help them any. Now, it's possible that what these funds are experiencing is just what is known as tracking error, which is that any group of funds with different allocations in them, even if they're kind of the same, are going to perform differently and have disparities over short periods of time. In a short period of time in this context is up to five years, really. You certainly saw some of that with respect to stock market returns themselves, because neither 2023 nor 2022 were normal in terms of having various sectors of the stock market be negatively correlated. Usually they're all positively correlated around a mean and not some having 50% returns and some having negative 8% returns. But I think that was a factor here. This does go to show you a good example though of what we call the simplicity principle that this All Seasons portfolio is a very simplified version of a classic risk parity portfolio. and does not have any leverage in it. And that tended to work towards its advantage in environments like we've seen in the past couple of years when compared to these commercial preparations. All right, now let's move on to our next two sample portfolios, the Golden Butterfly and the Golden Ratio. Both of these are more akin to kind of standard retirement kind of portfolios. without any leverage in them using kind of basic funds to construct them with and with equity allocations between 40 and 60%. So the Golden Butterfly had been down 13.54% in 2022 and was up 12.41% in 2023. The Golden Ratio was down 18.94% in 2022 but was up 14.18% in 2023. Now if we compare that to a standard 60/40 portfolio like VBIAx, that one was down 16.9% in 2022. It was up 17. 58% in 2023. Another portfolio like that, the Vanguard Wellington, that was down 14.26% in 2022 and up 14.41% in 2023. So basically just recovered. And most of these look kind of like this. The Vanguard Wellesley Fund, which is more conservative, was down 9.01% in 2022 and up 7.08% in 2023. looking at a couple hedge fund style portfolios with lots more diversification in them. And these are from AQR. One is AQR IX. That was down 10.52% in 2022 and up 11.13% in 2023. There's another kind of Avant Guard portfolio over there called QDSIX, which has a lot more alternative asset classes in it that had actually been up 14.69% in 2022 and was also up 8.88% in 2023. That's a rare example of something that was up in both years. But there were some assets like that. I can tell you that, for instance, I have an allocation to property and casualty insurance companies. If you look at a fund like KBWP, that was up about 10% in 2022 and about six or seven percent in 2023. So unicorns out there do exist. Something with poison in it, I think, with poison in it, but attractive to the eye and soothing to the smell. But if you look at the performance of these all these portfolios overall, you do see that the major difference has to do with just how much exposure they had to large cap growth versus value stocks. So the standard Vanguard 6040 portfolio did better than the Vanguard Wellington or the Vanguard Wellesley in net terms simply because the Vanguard Wellesley and Vanguard Wellington have more of a value tilt towards them. And so had less exposure to the Magnificent Seven. The same is kind of true if you look at the Golden Butterfly and the Golden Ratio Portfolio, particularly this version of the Golden Ratio Portfolio, the 42% in stocks that are in it. Only one third of that is devoted to large cap growth. The other two thirds of it are allocated to value. And that portfolio also suffered because of its exposure to a REIT, and REITs did not recover nearly as much as they fell in 2022. The true test of these things is going to come after we go through an entire economic cycle, which we haven't been through yet because we haven't had a recession since I began this podcast.

Mostly Voices [16:52]

Don't be saucy with me, Bernaise. But it will be interesting to see how those play out.

Mostly Uncle Frank [16:57]

Now going to these other four sample portfolios, which all have some aspect of leverage in them, which did not do them any favors. They also have more exposure to value, some exposure to international, and some exposure to small caps. in the form of a Russell small cap index exposure in one of them. And all of those things hurt you last year when compared with the large cap and large cap growth exposures. So the Risk Parity Ultimate was down 24.73% in 2022. It recovered 13.04% in 2023. That one has the least leverage of these. Part of the problem there was the exposure to Chinese stocks. which did not help that portfolio at all. And the REITs and the exposure to USMV, which is a large cap, low volatility fund that is basically a large cap value fund, also tended to hold that back from recovery in 2023. And then when we go to these portfolios that involve the leveraged funds, the first one is the Accelerated Permanent Portfolio that was down 42.44% in 2022. It recovered 20.24% in 2023, and so still has quite a ways to go. The aggressive 5050, which is this experimental portfolio that only involves a levered stock fund and a levered bond fund for the most part, that had been down 51.04% in 2022. It was up 18.37% in 2023. Again, a rather anemic recovery, but both of those portfolios are extremely volatile and went up or down up to 10% in a week in many of those circumstances. If you would use them as an accumulation portfolio, you might find them a lot more palatable since you would have been buying at the lows and seen a big recovery from there, but they still are not performing as they had in recent historical times. It'll be interesting to see how long they take to recover since they had started out and when we went through 2021 as the best performers of all these portfolios and are now the worst performers of all these portfolios. And then finally looking at this levered golden ratio portfolio, that one was down 27.09% in 2022. It recovered but only about halfway 13.04% in 2023. And that was largely due to its large exposure to that Russell Index of small caps in a levered form, because the Russell 2000 Index peaked in November of 2021 and it has not got near that peak again. It's still down about 20% from that peak, unlike the S&P 500 or the Dow even. And again, in theory, that is probably just mostly tracking error because you would expect most parts of the stock market to converge over time. But this does really illustrate the highly risky nature of these levered portfolios that we're experimenting with. You have a gambling problem. And that they are probably not something to use unless you have a very thick stomach and a very long time frame and are probably in some kind of accumulation mode. Well, you have a gambling problem. But I know some of you out there are having great success in experimenting with them, so more power to you.

Mostly Voices [20:49]

You can't handle the gambling problem.

Mostly Uncle Frank [20:53]

As for our personal portfolios, we will stick to more things that look more like the golden ratio portfolio with some additions and modifications, such as the addition of those property and casualty insurance companies I talk about from time to time. which I've been pleasantly surprised at. Inconceivable. But hey, with a name like Chubb, it's gotta be good. Hmm, who's that goat legged fellow? I like the cut of his jib. Prince of Darkness, sir. He's your 11 o'clock. As I mentioned last year, around this time when we were watching Managed Futures perform so well in 2022 that I thought we should transition a couple of these portfolios to add exposures to those, but that it did not make sense to do that, given they were essentially at highs compared to the things we'd be replacing them for, which were the REITs. And true to form, managed futures did fall last year while REITs went up. They still have not really crossed or got back up to a level that I would consider making those exchanges for. Those are going to be in the Golden Ratio Portfolio and in the Levered Golden Ratio Portfolio, which we did add a small amount of those to there, but we're not really completed with yet. I'm thinking when we do make a transition on the Levered Golden Ratio Portfolio, we should probably also really replace some of the exposure to TNA, which is that Russell 2000 leveraged fund with some additional exposure to small cap value, which would be a better choice. But again, we're not going to do that until we see a recovery in that portfolio, which I do anticipate in the future. Small caps actually did go on a huge run in November and December and outperformed large cap stocks by a large amount. But whether that continues, we shall see. For you experimenters out there, I have been looking at other variations on portfolios involving levered funds and managed futures that might be better over time. One idea that I've looked at in the past year or so is having a portfolio that looks something like 15% in UPRO, 15% in in TMF and then 15% in a managed futures fund like KMLM or DBMF and then 25% each in a small cap value fund, probably one with a little more kick to it like AVUV or XSVM and then 25% in gold. And then you can use that remaining 5% to either just distribute amongst those five funds or put in whatever else you might want, maybe cash if you want to have a cash portion of it. But something like that seems to have some better diversification properties than some of these experiments we've been running here. But anyway, 2023 was a good recovery year, and I would expect more of that even if we do have some kind of recession in the next 12 months here, at least for these kinds of portfolios. All this information has been updated at the website at www.riskparityradio.com on the Portfolios page. And I was able to update all of the monthlies as suggested by a listener and also the graphs. Oh, the graphs I had from Fidelity look different than the graphs that Fidelity used to provide. At least the best ones I could find there. But hopefully that's helpful. We've also done our distributions for January this week. They all came out of cash for all of the portfolios because of the end of the year distributions. So I'm not going to go through those, but they were also recorded at the website. So you can see that too.

Mostly Voices [24:58]

Smithers, this isn't rocket science, it's brain surgery.

Mostly Uncle Frank [25:01]

But now I see our signal is beginning to fade. If you have comments or questions for me, please send them to frank@riskparityraider.com that email is frank@riskparityraider.com or you can go to the website www.riskparityraider.com and put your message into the contact form and I'll get it that way. If you haven't had a chance to do it, please go to your favorite podcast provider and like, subscribe, give me some stars, a review. That would be great. M'kay. And make sure you consult a four-year-old before you do so. Why? What have children ever done for me?

Mostly Voices [25:39]

Thank you once again for tuning in.

Mostly Uncle Frank [25:43]

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

Mostly Voices [25:47]

Why is it whenever I'm having fun, it's wrong? Have you gone off that deep end? There's gonna be a few changes around here. Every time I catch you two goofing off, I'm gonna charge you for it. 18, 19, and 20. Here you go, Mr. K. I think this should cover all my nonsense. Oh, and here's an extra 50 cents for when I was tying my shoe.

Mostly Mary [26:11]

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.