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 [0:37]

Thank you, Mary, and welcome to episode 38 of Risk Parity Radio. Today on Risk Parity Radio, it is time for our weekly portfolio reviews of the sample portfolios that you can find at www.riskparityradio.com on the Portfolios page. And then after that we're going to focus on our portfolio of the week, which is the Golden Ratio Portfolio, and talk about an analysis we ran comparing that with a Rick Ferri Core 4 style portfolio, which should be pretty interesting. But let's go through the review now. and just looking at what the markets were doing for comparison purposes, the S&P was up 1.67% last week, the Nasdaq was up 2.12% last week, gold was up 2.86%, long-term treasuries represented by the ETF TLT were down 2. 9%, REITs represented by the REET were up 2.1%, Commodities represented by the fund, PBDC were flat, and preferred shares represented by the fund PFF were flat. So you can see each of these components went up or down more than 1%, but when we look through what the Risk Parity Style Portfolios did, you can see that they had a much dampened or muted response in either direction and most of them are up or down only a fraction of a percent. I should note that we also crossed the end of the month for these portfolios, so we took distributions from each of them this past week and we can review their total distributions. So going to the portfolios, the most conservative we want to have here is the All Seasons portfolio that is only 30% stocks and mostly bonds with a little bit of gold and commodities mixed into that. That was down 0. 47% last week, mostly on the treasuries, I would guess. It is up 2.52% since inception. Now we took out and we are removing from this portfolio at a rate of 4% annually divided by month. So we took out $34 in cash from it for the month of December. Since inception in July, we've taken out $171 total. And that amounts to $65 from VTI, the stock fund there, $35 from the Gold Fund GLDM that's in there, $33 from the Intermediate Treasury Fund that is there, and $34 in cash. and you can see that it's based on the fact that different segments of this portfolio were performing the best at different times. And so that's why we have the money coming out of different portions of it on a monthly basis. Now moving to our next portfolio, the Golden Butterfly, and this is the one that is 20% Vanguard Total Stock Market Fund, 20% Vanguard small cap value fund, 20% in TLT, the long-term treasuries, 20% in short-term treasuries, and 20% in the gold fund GLDM. This one was up 0.9% last week and is up 10% since inception in July. For this month, the best performing part of it was the small cap value fund, so he took $44 from that. We are pulling out of this at an annualized 5% rate. Since inception, we have pulled out $215 total, and that is from $130 from VIoV, the small cap value fund, $43 from Gold, GLDM, and $42 in cash. All of this information is also on the website if you want to go look it up. at your leisure. And then moving to our next portfolio, which is our portfolio of the week, the Golden Ratio Portfolio. And this is the one that is 42% stocks in three different funds, 26% long-term treasuries, 16% gold, GLDM, and 10% in REITs. REET is the fund we're using for that. It covers the entire world and then it's got 6% in cash where the distributions are coming from and we are taking out of this portfolio also at the rate of 5% annualized on a monthly basis. So this one was up 0.64% last week. It is up 8.9% since inception in July and we have taken $44 in cash out for the month of December. a total of 215 total from cash since inception in July in this fund, and it's got plenty of cash there, so we'll just be pulling from that for the entire year until it gets rebalanced next year. Our next portfolio is the Risk Parity Ultimate. This is our most complex portfolio, but it is roughly 40% in stock funds, 25% in long-term treasury funds and related types of funds, 10% in gold, 10% in REITs, 12.5% in a preferred shares fund called PFF, and then 2.5% in a volatility fund called VXX. And for this one, it was up 0.3% for the week. It is up 8.2% since inception in July. We are removing distributions from this fund at the rate of 6% annually. Going a little harder on this one. So we took out $53 from VIoV, the Small Cap Value Fund, which was the best performer recently for December. For the lifetime of the portfolio, we've taken out $257 and that came out of 105 from VIoV, that small cap value fund. $51 came from VUG, which is a large cap growth fund.$52 came out of the gold fund GLDM, and $49 came out of cash that was accumulated through dividends and other distributions. Now looking at our two experimental portfolios, which are a bit more volatile, usually, not so much this week, at least for the first one. So we're looking first at the Accelerated Permanent Portfolio, and this one has a leveraged stock fund, a UPRO, a leveraged bond fund, TMF, in proportions of 25% and 27.5% respectively, and then also GLDM, a gold fund at 22.5%. and PFF, the preferred stock fund, at 25%. This one was actually just flat for the week. It is up 9% since inception in July, and for the month of December we removed $70 from UPRO. Now we are taking from this fund at the accelerated rate of 8% annually, so a lot of money is coming out of this fund as we distribute from it. For this portfolio, we have removed seven, I'm sorry, $346 total since inception in July. $210 came out of UPRO, the leveraged stock fund. $71 came out of TMF, the leveraged bond fund. And $65 came out of PFF, the preferred shares fund. And those were all performing well or worse at different points in time. Now, this one may be approaching a rebalancing this month. We'll have to wait and see because our rebalancing rules for this one say that we look at it in the middle of the month. And if a allocation in this portfolio has moved more than 7.5% from its starting value, then we will rebalance the entire portfolio this one's getting close because the UPRO, the stock portion of this, is up to 32.45% right now. And so if that exceeds 32.5% in the middle of the month, we will rebalance it at that time. So we'll just have to wait and see how that plays out. Now, moving to our last fund, the aggressive 50/50. Now, this is the one that was rebalanced. last month because it hit the rebalancing bands. This one was actually down 1.5% last week and it is up 9.5% since inception. It is the most volatile of the portfolios. It was up, I think, 14.4% actually last month. So looking at this from a distribution perspective, we have $72 that we took out of cash from this fund that was partially sold out of UPRO from the rebalancing in November. And there is a total of $344 that we have removed from it since inception in July with $139 from UPRO, $70 from TMF, the Leverage Bond Fund, $63 from PFF, the Preferred Shares Fund, and now $72 in cash that has been removed from it. You will also see on the portfolios page a summary of the monthly returns for all of these portfolios, and we've updated that for November as well as including some reference funds. The reference funds are VTSAX to represent the total stock market, the Vanguard Wellington Fund VWENX to represent a 60/40 portfolio, and the Vanguard VWIAX, the Wellesley Fund, to represent a conservative 3565 type portfolio. And what you'll see from there is looking across, you can see how the different portfolios have different volatility based on their makeup. So the All Seasons being that most conservative portfolio was up 4.6% last month. the golden butterfly was up 5.61%, the golden ratio up 6.33%, the risk parity ultimate up 6.78%, the golden butterfly golden ratio and risk parity ultimate all have similar profiles as far as risk is concerned. And then when you go out to the experimental portfolios you see much more larger variations. The accelerated permanent portfolio was up 9.76% last month. which was a very good month for the stock market. And the aggressive 50/50 was actually up 14.4% last month, which is more than the stock market. The stock market was up 12.2%, one of the best months in decades, I believe. And that 60/40 representative was up 7.49% and the 35/65 portfolio was up 5.73%. So what you see from this growing out is that the risk parity style portfolios are always going to be dampened for the most part, except for those experimental ones in comparison to stock markets and the ordinary style of portfolio. And so one of the things you have to get used to if you hold one of these portfolios is that when the stock market is doing gangbusters, your portfolio will not perform as well as the stock market. But the point of it is, is when the stock market is not doing well, your portfolio will not do nearly as bad as the stock market. And when the stock market is going sideways, oftentimes your portfolio may be increasing 'cause particularly these baseline portfolios, the golden butterfly, golden ratio, and risk parity ultimate don't really have as much correlation with the stock market as an ordinary portfolio might have. So being that they're uncorrelated, they can move differently at different times. Sometimes I think this is difficult for people to grasp or feel good about, but having these things be very dampened, as you saw last week with everything, all the components moving around 2% or more, but the portfolios themselves moving less than a percent is actually what you want for long-term distributions or withdrawals coming out of these things because that leads you to having a higher projected safe withdrawal rate for these types of portfolios. And now let's go to a discussion of our portfolio of the week, the Golden Ratio Portfolio. Now we described this portfolio in a lot more detail in episode six. So I'm not going to repeat all that information here, but the way we've constructed this is 42% stocks, 26% long-term treasuries, 16% gold, 10% in REITs, and 6% in cash. And as we discussed in episode six, all of those proportions are proportioned by the golden ratio, which is approximately 1.618. 618. And so the ratio of stocks to bonds is the golden ratio, the ratio of bonds to gold is the golden ratio, the ratio of gold to REITs is the golden ratio, and the ratio of REITs to cash is the golden ratio. And they all add up magically to 100 as they have to. Now, as we also discussed in episode six, This portfolio works very well, not only as a retirement style portfolio, but also as kind of an intermediate fund style portfolio. So if you were in your accumulation phase and you were putting most of your money in your retirement accounts into, say, a hundred percent equity portfolio to make it grow, But you also wanted to save some money to buy a house in five or seven years, or had some other large purchase in mind in an intermediate time frame. This kind of portfolio would be very good for that kind of savings because it has had the characteristics of drawdowns being only a maximum of about three years and a maximum of only about 16% at least over the past 50 years. So if you have this portfolio, you can pretty much count on it not dropping too much or for too long, which is really one of its big advantages. So what we wanted to do this week was to compare it with a Rick Ferri style Core 4 portfolio. And there are several variations of this. We used one of the classic ones, which you can also find at Portfolio Charts as one of the sample portfolios. And this is comprised of 48% in the US stock market, 24% in the global stock market, XUS or international, 8% in REITs, and 20% in intermediate term Treasury bonds. And so it is essentially an 80/20 portfolio if you count the REITs as part of the stocks, and they are a component of the stock market. And that compares with a stock exposure for the Golden Ratio portfolio of only about 52%. And we're adding to make that happen, the stock component plus the REIT component is 42 plus 10, which adds to the 52. And then if you looked at what the bond component is, you'd really want to add the long-term treasuries and the cash, which adds to 32%, and then you have left the gold, which is the 16%. So you could also think about this portfolio as 52% stocks, 32% in bonds, and 16% in gold. So we went to Portfolio Visualizer to run a comparison of these and we will link to that in the show notes as well as episode 6 and a couple other links about the Golden Ratio Portfolio. But we wanted to do this comparison to these two portfolios using all the data available there. Now it is limited because the REIT data they have only goes back to 1994. so we're talking about a 26 year history or comparison from 1994 to 2020. That's a reasonable amount of time, even if it's not all the time we would like to have. So we ran the comparison of these two portfolios, assuming you started with $10,000 and rebalanced them every year, and we see that the Risk Parity Core 4 style portfolio has a compounded annual growth rate during that period of 8.31%. The golden ratio has a larger or bigger compounded annual growth rate of 9.07%, so it did better there. More importantly, looking at the next metrics, the standard deviation for the Risk Parity Core 4 is 11.6%. whereas the standard deviation for the golden ratio is less. So you get a higher return with less of a standard deviation. The standard deviation for golden ratio being 8.47%. Their best years are similar. The Rick Ferri had the best year of 28% during this period. The golden ratio had a best year of 24%. The worst year though is starkly different. The worst year for the Rick Ferri Core 4 style portfolio, which I believe was 2008, was down 28.66%. For the golden ratio, it was only down 12.01%. So that is less than 50% of the drawdown experienced by that core for portfolio was the drawdown experienced by the golden ratio then. Which gets you to other statistics of a maximum drawdown for Risk Parity Radio, Frank Vasquez, risk parity, risk, parity, Frank, Vasquez in the audio. So it did take a big hit back then in 2008 and also recently, whereas the golden ratio, the maximum drawdown for that was 24.11% over this time period. Where that gets you finally is to the Sharpe ratio, which is a measure of reward to risk. And for the RIC VaR Core 4, the Sharpe ratio is 0.54% or 0.54 for this period. For the golden ratio, the Sharpe ratio is 0.79, which is significantly better. And that is really a consequence of these much lower drawdowns through this period. The Sortino ratio, which is another measure of risk to reward that focuses more on the risk or the downside of it, I believe. Sometimes I get this wrong. But it was the Sortino ratio for the Rick Ferri Core 4 was 0.78 for this period, whereas for Golden Ratio it was 1.2. So again, it was much better for the Golden Ratio. And you look at how the correlation with the US stock market and the Rick Ferri Core 4 being 80% stocks is 97% correlated with the stock market, whereas the Golden Ratio is only 82% or 0.82 correlated with the US stock market for this period. You can see from the annual return bar graph data there that what happened was that the Rick Ferri portfolio really had a hard time in the early 2000s when it dropped essentially three years in a row and then had that huge drawdown in 2008, whereas the Golden Ratio portfolio in the early 2000s actually was positive those years and had a much lower drawdown in the annual return in 2008. And for each of the years you can look at it and you can see that in most years the golden ratio portfolio has less volatility. So in years that they are down together, the golden ratio is down much more. The golden ratio is usually not performing as well as the risk Rick Ferri portfolio in up years. And that is a result or effect of having much less exposure to the stock market. So looking at the trailing returns, year to date Rick Ferri Core 4 is 9.8%, golden ratio is 13.9%, over one year, it's 12.48 for Rick Ferri, 15.22 for Golden Ratio, three years, 8.66 for the Rick Ferri Core 4, 10.44% for the Golden Ratio, and then in five and ten years, the 10-year return actually is higher for the Rick Ferri Core 4 portfolio. But if you look at the entire set of data going back to 26 years, it is higher for the golden ratio. But again, both these portfolios are performing well and within the same kind of limits in terms of their compounded annual growth rate. It's just that the golden ratio has so much more or less risk being taken on it. And then just taking a look at a couple more metrics here, we'll look at the safe withdrawal rate and the perpetual withdrawal rate. The safe withdrawal rate is the safe withdrawal rate over the period not to run out of money. It's 7.84 for the Rick Ferri Core 4 over this time period and 8.11% for the golden ratio over this time period. Again, you should look at these as relative metrics and not absolute metrics, because of the limited timeframe we're talking about. The perpetual withdrawal rate under which you would not have suffered a loss of any of your capital for the Rick Ferri Core Four, it was 5. 86% for this period. And for the Golden Ratio, it was 6.53%. This is also reflected the superior performance in the gain-loss ratio For the Rick Ferri Core 4, it came in at 0.91 and for the Golden Ratio it came in at 1.05. Now astute listeners may go back and compare this to the Golden Butterfly that we looked at last week in comparison with this Rick Ferri Core 4 portfolio. What you'll see from that is that the Golden Ratio actually outperforms the Golden Butterfly over this period. But the Golden Butterfly outperforms the Golden Ratio if you go all the way back to 1970. And a lot of that has to do with the performance of gold during the 1970s because the Golden Butterfly portfolio has a lot more gold in it, well, significantly more gold in it, the 20% versus 16% for the Golden Ratio. But that's also a interesting comparison to look at. But now I see our signal is beginning to fade, so it will be time for me to say goodbye here pretty soon. We will not have another episode this week, doing a little bit of traveling, but we will pick this up next weekend with another portfolio review. I want to thank all of the people who have been Sending me emails and comments, they've been very useful reconstructing some additional episodes out of some of those suggestions. I also had some nice inquiries about somebody who is thinking of moving to a golden butterfly looking portfolio and wanted some additional information, which I happily provided based on what I have. If you'd like to connect with me, you can send an email to frank@riskparityradio.com That's frank@riskparadYradio.com or you can go to the website www.riskparadYradio.com and fill out the contact form there and I will get your message that way. I hope you all had a good week. Thank you for tuning in.

Mostly Mary [26:54]

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.