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 [0:38]

Thank you, Mary, and welcome to episode 36 of Risk Parity Radio. Today on Risk Parity Radio, we are going to have our weekly portfolio review of the portfolios that you can find on the Portfolios page at www.riskparityradio.com. riskparadioradio.com and then we are going to talk about our featured portfolio, the Golden Butterfly portfolio, and compare that with a Rick Ferri Core 4 style portfolio. But before I get to that, I wanted to tell you that this podcast has reached 3,000 downloads. in only a few months here, and I very much appreciate everybody that's listening. It looks like we have about three dozen loyal listeners, which is more than I expected to have, and I'm very grateful to each and every one of you who listens to this and shares it with friends or family who may be also interested in it. If there's one thing you could do for me, it would be to Leave a review at Apple Podcasts or wherever you listen to this podcast. I see that I've got several up there already. They're very nice reviews and I thank you for those. But if you haven't left one, please go ahead and do that when you get a chance. Thank you very much for that. So, looking at our portfolios this week, our sample portfolios, Let's first review what the basic markets did over the week. It was not that stellar of a week unless you were invested in Bitcoin, which was down 10 or 15% towards the end of the week. But we don't have any of that. So what we have here is the S&P was up 1.58% and NASDAQ was up 2.5. 3% this week. Gold was our big loser of the week. It was down 4.22%. The long-term treasury bonds represented by the ETF TLT were down 0.79%. And then a few more of our alternative asset classes REITs represented by our EET were up 0.65%. Commodities represented by the ETF PDBC were up 3.2% and our preferred shares stock fund PFF was up 0.7%. So you can see that these components were kind of all over the map, but the way they combine into our risk parity style portfolios yield small advances pretty much for each one of them on the week, which is really what you want to see in terms of dampening of volatility and combination of these assets that are going different ways at different times. So looking at our first portfolio, the most conservative one, this is our all seasons portfolio. This one is only 30% stocks. It is 40% in long term treasuries, another 15% in intermediate term treasury bonds, and then small portions of gold and commodities and 7. 5% each of those. It was up 0.5% on the week. It is up 3%, 3.0% since inception in July, and it is holding steady as it always seems to do. Now we'll move to our more baseline portfolios that we would expect someone to actually use. The first one of those is the Golden Butterfly, which is our Portfolio of the week and this one is created by the founder of portfolio charts and you can find it there and a lot of discussion about it there, but it is 20% in the total stock market represented by VTI 20% in small cap value fund, which we're using VIOV for that 20% in long-term treasuries, TLT, 20% in short-term treasuries, that's SHY, and 20% in gold. We use GLDM for that. And it was up 0.63% on the week. It is up 9% since inception doing quite well and performing pretty much as advertised with very high returns for a Portfolio that is only 40% invested in the stock market. The next one is our golden ratio portfolio. This is the one that is 42% stocks divided into USMV, which is a low volatility fund that tracks the S&P 500, VIoV, which is a small cap value fund, VUG, which is a large cap growth fund. and then we have 26% in bonds represented by TLT, 16% in gold represented by GLDM, 10% in REITs represented by REET, which covers both US and international REITs, and then 6% in cash. And this one was up 0.42% last week, is up 8.2% since inception in July. Now moving to our most complicated fund, our Risk Parity Ultimate Portfolio. This has 12 funds in it, but roughly speaking it is 40% in stocks, stock funds, it is 25% in long-term treasury funds and zero coupon funds. and then it is 12.5% in PFF, the preferred shares fund, 10% in gold, GLDM, 10% in REITs, R-E-E-T, and 2.5% in a volatility fund, VXUS, which is the worst performer by far of the funds here. Thankfully, it is only 2.5% of the fund. The highest flyers in this fund are UPRO, which is up 40% since inception, and VIOLV, which is the small cap value fund that is up 33% since inception. So overall, last week this was up 0.64% for the week. It is up 7. 9% since inception in July. And now moving to our two experimental portfolios that involve the leverage funds. First we have the Accelerated Permanent Portfolio. This is 27% TMF, 27.5 rather, which is a leveraged long-term treasury fund. 25% UPRO, which is a leveraged S&P fund. And then 25% PFF, the preferred stock fund. And 22.5% GLDM, which is the Preferred. I'm sorry, it's not preferred. It's just a gold fund. Anyway, this was up 0.65% for the week and is up 9% since inception. We saw in the other experimental portfolio last month and did have a rebalancing event. This one may have a rebalancing event coming up. We'll see if the UPRO continues to perform. It is almost getting outside of its 25% band and is pushing up towards 32%. If it is over 32.5% by the middle of next month, we will be rebalancing this portfolio, but we'll wait and see. And now moving to the last one, our aggressive 50/50, which is our most volatile portfolio. It is also leveraged. It has 33% in UPRO, that S&P 500 leveraged fund, 33% in TMF, the leveraged long-term Treasuries, 17% in PFF, the preferred stock fund, and 17% in VGIT, which is intermediate term Treasury bonds. This one is up 1.5% last week, our leader. It has benefited from that rebalancing it had a couple of weeks ago, and it is up 11.1% since inception in July. So it is performing similarly to a total stock market fund with about the same volatility. It should outperform the total stock market fund long term, but we will see how that plays out. since we've only been talking about these going on for the last four months or so. We are getting towards the end of November now, so after Monday's close we will be calculating the distributions from each of the portfolios for December, and that information will be put up on the website and we will talk about it during our portfolio review next week. But now we are going to focus on the Portfolio of the Week, which is the Golden Butterfly Portfolio. Now as I mentioned, this portfolio is the brainchild of the founder of Portfolio Charts, a man named Tyler, and he writes about this portfolio there and how he constructed it by looking at 50 years years worth of data and trying to come up with a simple portfolio that represented several different asset classes and so ended up with 40% in stocks divided between a total stock market fund and a small cap value fund, 40% in bonds divided between long-term treasuries and short-term treasuries, and 20% in gold. Of our sample portfolios, this is the one that has the most gold in it, if you look at the percentages with the leverage out of the experimental funds. And so, it's the most dependent on that. Interestingly, though, although gold performed well at the beginning of these portfolios, it has performed very poorly recently. But this portfolio is still doing quite well simply because other asset classes have sort of stepped up into that gap. including most specifically the small cap value aspect of this has had a really good November. And it's a good example of how different parts of this portfolio will perform differently at different points in time, which will smooth out the overall performance of the portfolio. And as I mentioned, it's up 9% since inception in July, so is doing quite well in terms of being able to support the distributions we are taking out. five percent annualized from that portfolio. Now, what we're going to compare it to today, and we ran a portfolio analysis over at Portfolio Visualizer, we decided to compare it to a Rick Ferri style Core Four portfolio. The version of this we used in there are several versions is kind of one of the classic versions which we also took from the Portfolio Charts website and what this is comprised of is 80% in stocks and 20% in bonds. Specifically, it has 40%, 48% in the US stock market, 24% in international stocks outside of the US, 8% in REITs, and that comprises the 80% in stocks and then it is 20% intermediate term treasuries. So we ran this portfolio analysis between these two portfolios. The data that they had available goes back to January 1994. So we are looking at 26 years of data in comparison these two portfolios. I will be linking to this analysis in the show notes if you want to take a look at it later yourself. And so what did we come up with when we ran this analysis? These portfolios performed actually quite similarly over this time period. The Golden Butterfly had a compounded annual growth rate of 7.88%, and the Rick Ferri Core Four portfolio had a compounded annual growth rate of slightly more at 7.97%. And if you look at the graph between the two of them, on portfolio growth, you see them intersecting and crossing each other many times over the course of that period. The Golden Butterfly was much less volatile than the Rick Ferri Core 4, as you can imagine since we're talking about a portfolio that has only 40% stocks compared to one with 80% stocks in it. And so the Rick Ferri Core 4 performed much more in line with the stock market itself. The standard deviation for the Golden Butterfly was 7.26% versus the standard deviation for the Rick Fery Core 4 of 11.56%. So you can see that's a considerable difference in volatility. You see this more starkly when you look at the drawdowns or worst years involved here. The best years are fairly similar 21.86 for the golden butterfly and 28. 06 for the Rick Ferri core four but then when you look at those worst years the worst year for the golden butterfly was it was only down seven percent I believe that was in 2008 and the worst year for the Rick Ferri core four though was negative 28.66 and so it was down a lot more at its worst. You look for the absolute maximum drawdowns on the monthlies. The golden butterfly had a maximum drawdown over this 26 year period of 16.64%, which is pretty darn good. The Rick Ferri Core Four was more similar to the stock market in that its maximum drawdown was 43.3%, which I believe was in 2008. And so you can see how much more volatile it would have been to ride that one as opposed to the Golden Butterfly. This translates into sharp ratios or the risk reward measures of 0.76 for the Golden Butterfly versus 0.52 for the Rick Fery Core 4. And that really shows the difference in terms of overall performance and volatility particularly on that downside. The correlation with the US market, you can also see here is relevant that the Rick Ferri Core Four is almost totally correlated with the US market. You would expect that since it's about 80% stocks. And so that correlation coefficient is 0.97 with the stock market, whereas the Golden Butterfly only has a correlation with the stock market of 0.77 and that is an indication that it is just has many fewer stocks in it. If you go to the the bar chart annual returns for this analysis from Portfolio Visualizer, you can see those drawdowns and it really looks starkly when you look at 2008 where you see the Golden Butterfly down a little and the Rick Ferri Core 4 down a lot. The other metrics show that in good years the Rick Ferri portfolio outperforms the Golden Butterfly by a bit, but in down years that is when the Golden Butterfly really shines and often has a positive year when the Rick Ferri Core 4 is showing a negative year for a number of those years, particularly in the early 2000s. Year to date, as you can imagine, the Golden Butterfly has done pretty well with good performances in gold and the long-term treasury. So year to date, the Golden Butterfly is up 6.43% compared with 0.18% for the Rick Ferri Core Four. because the REITs and those international stocks really have not recovered in the same way as some of the US stocks have at this point in time. Just looking at a few more metrics, we see that the volatility monthly for the Golden Butterfly was 2.1%, whereas the Rick Fery Core 4 was 3.34%. Again, that is a similar indication to the annualized volatility that the Golden Butterfly is just much less volatile than the Rick Fery Core 4 here. And then we go to the safe withdrawal rates. And the safe withdrawal rate for the Rick Fery Core 4 for this period is actually higher than the Golden Butterfly at 7.84% versus 7.42% and that most likely has to do with the fact that with more stocks in it, the Rick Ferri Core 4 does perform a little bit better overall. The perpetual withdrawal rates are almost the same, Rick Ferri at 5.53% and Golden Butterfly at 5.45%. And the last statistic, I'll just read off here, the gain loss ratio, which just is, How much are they gaining versus how much are they losing? For the Golden Butterfly, it's 1.14 and that ratio for Rick Ferri is 0.90 for these two portfolios. So what you really get out of this, considering all of this data, is that you can have a portfolio with fewer stocks and less volatility that performs pretty much the same as a portfolio that is comprised only of stocks and bonds, but has a much higher stock component within it. And that is really the point of these risk parity style portfolios is to get higher performance with less risk. But again, I will link to that analysis in the show notes so you can poking around with it at your leisure if you are so inclined. I think it is worthwhile to take a look at those kind of analyses you can generate out of Portfolio Visualizer and Portfolio Charts. Put your own portfolio in there to get really a sense of what holding that over some period of decades might look like in your own personal circumstances. But now I see our signal is beginning to fade. I want to thank you once again for listening in here if you have questions or comments they are invited send them by email to frank@riskparityradio.com that's frank@riskparityradio.com or you can go to the website www.riskparityradio.

Mostly Mary [21:14]

com and fill out the contact form there thank you for tuning in 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.