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.

Mostly Mary [0:18]

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 [0:37]

Thank you, Mary, and welcome to episode 39 of Risk Parity Radio. Today on Risk Parity Radio, it is time for our weekly portfolio reviews of the portfolios that you can find at www.riskparityradio.com. on the Portfolios page. And then we are also going to focus on our Portfolio of the Week, which is the Risk Parity Ultimate and run a little simulation or back test against a Rick Ferri style Core 4 portfolio. But before we get to that, I would like to thank you all my listeners. We are over 3500 downloads on this amateur podcast, and I appreciate everyone who listens in. There are, it looks like approximately 50 lawyer listeners to this podcast now. I'd also like to thank the boys over at Choose FI who have mentioned me in a couple of their podcasts recently. Those are episodes 275 and 277 if you want to check those out. And I had also done a podcast with them last year, podcast number 194 in their catalog if you want to listen to that. That is about bonds. There are a couple of episodes earlier in this series about bonds that cover the same material in a little more organized fashion, but both are worth listening to if you were interested in different kinds of bonds and how they behave. All right now getting to this portfolio review just taking a look at what the markets did last week. This was a fairly boring week for most of the markets. The S&P 500 was down 0.96%, the NASDAQ was down 0.69%, Long-term treasury bonds were up though, they were up 2. 2% as reflected by the ETF TLT. Gold was up 0.08%, so essentially flat. REITs represented by the ETF R EET were down 2.1%. Preferred shares represented by the ETF PFF were flat. And commodities represented by the ETF PDVC were up 1.4% last week. What that all resulted in for our risk parity style portfolios was what I would like to call the Bernie Madoff kind of performance. Now, the reason Bernie Madoff was able to get away with his Ponzi scheme for so long was that he promised only a 12% return, which is a nice return, but he also promised a 12% return without volatility, which translates into a portfolio going up 1% a month or about 0. 23% for a week. Now that is impossible to do, but when you have these risk parity style portfolios, they often perform kind of in that manner with the diversification that they have. So while the components are going up one or two percent, oftentimes what you'll see in these portfolios like we did last week is that they will be up a fraction of a percent, which leads to a very smooth return and very smooth performance when you're talking about withdrawing from them. So looking at the six portfolios now, the All Seasons portfolio is our most conservative one. Oddly enough, it was also the one that went up the most this week. It was up 0.8% due in large part to the performance of the bonds and the commodities that are in this portfolio. It is up 3.4% since inception in July. Now going to the next portfolio, the Golden Butterfly. This is the one that is 40% stocks divided into a total stock market ETF VTI and a small cap value ETF VIOV. And then it's 40% bonds divided into a long-term treasury bond fund TLT and a short-term treasury bond fund SHY. that functions a lot like cash or a savings account. And then it's also got 20% in gold represented by the ETF GLDM. Now this one was up a whopping 0.2% last week, right in that Bernie Madoff return category. And it is up 10.2% since inception in July. It's actually our best performer of all these portfolios in the time period we're talking about. largely due to the performance of the small cap value fund in this, which is up over 35% in just that short period of time. Moving to the next portfolio, this is the Golden Ratio Portfolio, which is 42% stocks, 26% long-term treasuries, 16% gold, 10% REITs and 6% in cash. This one was even less volatile than the other two. It was up 0.07% for the week. It is up 9% since inception in July and is doing very nicely. Going to the next portfolio, which is our most complicated portfolio, the Risk Parity Ultimate, which has about 12 different funds in it. We'll be talking about this a little more later in this program. But it was up 0.25% for the week. Again, a Bernie Madoff-like return. And it is up 8.7% since inception in July. And then we're going to our two experimental portfolios that take on leverage in these leveraged funds. The first one is the Accelerated Permanent Portfolio. and that one is 27. 5% long-term treasuries in a leveraged fund, 25% UPRO, which is the S&P in a leveraged form. It also is 25% PFF, which are preferred shares, and 22.5% gold represented by the ETF GLDM. This one was up 0.33% last week. It is up 9.4% since inception in July. This one might get rebalanced next week. The leveraged stock fund is now 31.4% of this portfolio. If at the end of December 15th it is over 32.5%, we will rebalance it. the next day in accordance with our portfolio policy statement, which you can also find there on the website in the description of the portfolio. So going to our last portfolio, the aggressive 5050. This one is 33% in the leveraged stock fund, UPRO, 33% in the leveraged bond fund, TMF, and then as ballast we have 17% in PFF the Preferred Shares Fund and 17% in the Vanguard Intermediate Term Treasury Fund. That's VGIT. And so this one was up 0.76% for the week, not quite as much as the All Seasons portfolio that we started with, but it is also up 10.3% since inception in July and was rebalanced in November. All right, now let us turn to our portfolio of the week, which is the Risk Parity Ultimate Portfolio. This one is a little bit overcomplicated, but I did want to have a sample portfolio that had a full gamut of different assets and different funds. But this breaks down to essentially 40% in stocks, 25% in long-term treasuries in three different funds, and then the rest of it is in alternatives. There are a couple of missing alternatives that we may put into this when it comes around for its rebalancing next July. I'm toying with putting some international stocks since it doesn't have any international stocks in it now. I also see that there is an ETF for Bitcoin that we could add a little bit of that and may add one or two percent as an idea if that ETF in fact works to follow that market accurately. That was only put online last week so we'll be looking at it over the next six months to see whether it's something worth putting something into it. This portfolio also does not have a commodity component, although it has a gold component, and so we might add some of those, but all of those are just ideas and we will not be acting on them until we have watched this perform for an entire year. But anyway, going through what is actually in this, on the stock side of it we are looking at five funds. There is a 12.5% component that is VUG which is the Vanguard growth ETF, large cap growth, and then to balance that we have VIOV, which is the Vanguard Small Cap Value Fund. So those are in opposite ends of the spectrum and seem to balance each other out well. And then we took another 12.5% and put it in some low volatility funds that track the S&P 500. that don't move a whole lot and do tend to keep the volatility of the portfolio down. And those are USMV and SPLV, and there's 6.25% in each one of those. And looking at these stock funds, well, we have our final stock fund is a little sliver of UPRO, which is that leveraged stock fund I mentioned before. There's 2.5% of that in this portfolio. So if we look at the performances of these funds, you can see that they were all over the place, but all positive for the period that this has been in existence since July, just going down the run down here. The best performer in this period was actually the UPRO, not surprisingly since it's leveraged. It's been up 43.73%. since inception in July. That is followed closely on its heels actually by the small cap value fund, VIoV, which is up 35.98% since inception in July. And then we're looking at the Vanguard Large Cap Growth Fund, which is up 13.54% in that time period. And then we get down to the much less volatile SPLV and USMV. and those are up 8.35% for SPLV and 8.49% for USMV for that period. As I mentioned, one thing that's missing in terms of diversification here would be an international fund, and that is something that I will probably be adding after this has gone for a year running. Now, turning to what is in the bond part of this portfolio. Basically, we have a long-term treasury fund and then two other funds that are even further out on the duration, if you will, so are more volatile than the long-term treasury fund. That long-term treasury fund is TLT and there's 15% of this portfolio is in TLT. and then for those two extenders we have five percent in the Vanguard Extended Duration Treasury Fund, that is ticker symbol EDV, and then we also have five percent in a leveraged treasury fund, TMF. Now these are all negatively correlated with those stock funds and so you can see if you look at the sheet for this week on the site that all of them are down since inception. They were all up at the beginning of this back in July and August and then as the stock market has picked up they have declined which you would expect for negatively correlated assets. Now if you go back to March when these portfolios were not in existence yet, at least not in these forms, you would have seen those bond funds go up substantially and they were up between 20 and 30% during the firestorm in March for the year. But looking at them right now, we see that TLT is down 4.27% since inception in July. The extended duration value fund EDV is down 5.28% since inception in July, and the leveraged long-term bond fund TMF is down 15.17% since inception in July and is one of the worst performers in this portfolio. But they are doing what they are supposed to do, believe it or not. They are supposed to be negatively correlated with those stock funds. You just don't want to have too much of this in your portfolio because the main driver is those stock funds and that's why there's 40% in those and only 25% in these bond funds. And now let's take a look at these alternative investments that we've also got going on in here. We have 10% of this portfolio is in gold represented by the fund GLDM. and that had a big run early and has cooled off since then and is up a whopping 1.78% since inception in July. It's actually that fund is up about 20% for the year, but it's had a pretty wild ride this year going down, going up and then going back down again. It has a zero correlation though, really, with the stock funds and the bond funds that we just discussed, which is why it's a good holding to have in there at 10%. Then we have 10% that is in a global REIT fund that's R-E-E-T and this is positively correlated with the stock market. It is actually a component of the stock market and does actually have a little bit of international component for us. That one is up 11.84% since inception in July. It's been doing alright and also paying decent returns. I believe the return on that is currently between six and seven percent. So it is a big return driver in terms of generating income, which gets put in the cash bucket and then distributed when it gets large enough for to cover a distribution. Now, the other components we have here, the first one is PFF, which is a preferred shares fund. It is also correlated with the stock funds, but at a rate of about 0.5 on a scale from negative 1 to 1. And it also has had a good year and is very stable. It is up 8.32% since inception in July. It pays a return of over 5% well, it might be less than 5% now since it's been going up in value, but it's around that. It pays a monthly dividend that is also a qualified dividend for tax purposes and so is good for a stable income generator in these sorts of portfolios. And then finally we have our most experimental fund, which is only 2.5% of this portfolio, and it is invested in a volatility fund called VXX, which tracks the VIX volatility index. And that one is doing terrible because the stock market is doing well. It is down 44% since inception in July, and so it's lost almost half of its value, but, you know, it only started as a $250 out of $10,000 in this fund, and its real purpose is to shoot up as it did by multiples if you have something that happened like it happened in March. So we don't expect that to do much. We do expect to perform as a kind of insurance. What's also interesting about this portfolio is because we have those two leverage funds in here, TMF and UPRO. This is effectively giving us instead of a 100% investment, the equivalent of having something that is 115% invested due to the leverage in those two funds. And you'll see how this contributes to the return in the backtest that we just did that I'm about to describe. So looking at this backtest, we did a backtest using the tools at Portfolio Visualizer and we wanted to compare this fund. We had to modify it slightly to make it fit in the parameters, but it's almost the same thing as what I described and what's on the website. So we took this portfolio, this Risk Parity Ultimate portfolio, and we compared it to a Rick Ferri Core Four style portfolio. And what is in that is 48% total US stock market represented by VTI, 24% in an international stock ETF represented by VXUS, and then it has 8% in REITs represented by VNQ. So a total of 80% in the stock market and then it's got 20% in intermediate treasury bonds. So it's really an 80/20 kind of portfolio. If you look at the overall exposure to the stock market of the Risk Parity Ultimate portfolio, you would take the stock component, which is 40%, and then add the correlated funds, which are the REITs and the PFF fund. And so that adds to about 62.5% exposure to types of stocks or things that are related to the stock market. So really what that portfolio looks like if you want to break it down into its biggest components is it's got 62.5% in the stock market. 25% in bonds, of course there's some leverage going on there, and then it's got 10% in gold and that 2.5% in the Volatility Index Fund. So we ran these two portfolios together. There are restricted, the data available was only from February 2011 to November 2020. So it's not a lot of data to go on and you wouldn't want to draw too many conclusions from this, but it was an interesting comparison all the same. And looking at the portfolio returns, what we saw is the risk parity ultimate for this period had a compounded annual growth rate of 10.4% and that compares with 9.25% for the Rick Ferri Core Four style portfolio. The standard deviation, so the volatility was reversed, that the Risk Parity Ultimate only has a standard deviation of 7.4%, so it's less volatile than the Rick Ferri Core Four, which has a standard deviation of 10.58%. The best years were very similar. Risk Parity Ultimate, it was 23.55%, Ryk FERRY Core 4 was 23.86%. The worst years were also relatively similar given this period was very good for stocks overall. The worst year for the Risk Parity Ultimate though was only -4.05%. It was -6.25% for the Ryk FERRY Core 4. In the maximum drawdown category it was only 8.49% over this period for the Risk Parity Ultimate Portfolio, it was almost double that 15.7% for the Rick Ferri Core Four, which I believe happened just this past year for these portfolios. This all translates into the Sharpe Ratio, which is a reward to risk measure, and it is substantially higher for the Risk Parity Ultimate Portfolio. I will be putting a link to this analysis in the show notes, as well as links to some of those other podcasts and things that I mentioned at the beginning of this episode. But now I see our signal is beginning to fade and it's time for me to say goodbye. I don't know if we'll have another episode this week as I need to do a little bit more traveling again, so you might only hear me coming in next weekend for the next portfolio review. I do have a couple of interesting episodes lined up or in mind, the next one being about gold as suggested by one of our listeners. If you'd like to reach me with comments or questions or ideas, you can send them to frank@riskparadioradio. com that email address is frank@riskparadioradio.com or you can also go to the website www.riskparadioradio.com and fill out the contact form there and I'll get your message that way. Thank you again for tuning in.

Mostly Mary [24:42]

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.