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 [0:37]

Thank you, Mary, and welcome to episode 41 of Risk Parity Radio. Today on Risk Parity Radio, it is time for our weekly portfolio review of the six sample portfolios that you can find at the website www.riskparityradio.com. on the Portfolios page. And then we'll be taking a closer look at our Portfolio of the Week, which is the Accelerated Permanent Portfolio, one of our experimental portfolios. But looking at the markets for last week before we get into the portfolios, the S&P 500 was up 1.25% the Nasdaq was up 3.05%. Long-term treasury bonds represented by TLT, the ETF, were down 1.34%. Gold was up 2.35%. REITs represented by the Global Fund R E E T were up 1.06%. Commodities represented by the ETF PDBC were up 4.8% and preferred shares represented by the ETF PFF were up 0.8%. So as you can see from these things we had a lot of movement and things were all over the map. But when we look into what our risk parity style portfolios did we will see that they had a much more moderated performance what I called the Bernie Madoff performance last week where they go up a fraction of a percent, which is kind of ideal, unrealistic for it to happen every week, but when it does you feel like you've accomplished your goal of having a diversified portfolio that grows at a steady rate. But going to the portfolios, let's take a first look at the All Seasons portfolio, which is our very conservative reference portfolio. This one is 30% in stocks in the Vanguard ETF VTI, and then it's got 55% in treasury bonds, most of it in long-term treasuries represented by TLT, and then a smaller portion in intermediate treasuries represented by the ETF Fiji T, and then 15% of this portfolio is devoted to gold and commodities split equally, and that's taken care of by GLDM as the gold shares and PBDC as the commodities fund. That PBDC was the most successful fund of the week, up that 4.8%. And what that translated into though here for the entire portfolio was that it advanced 0.4% for the week and has been up 3.8% since inception in July. Moving next to the Golden Butterfly portfolio, and this is the one that is 40% in stocks divided into the total stock market fund VTI and a small cap value fund VIoV. And then it's got 40% bonds divided into Long-term Treasuries represented by TLT and short-term Treasuries represented by SHY. And then it's got 20% in gold represented by GLDM. And this one was up 0.7% for the week and is up 10.9% since inception in July. And so is also doing quite well. Moving next to the Golden Ratio portfolio. and this is the one that is 42% stocks, 26% long-term treasuries, 16% gold, and 10% REITs, and also 6% in cash. And it was up 0.8% for the week and is up 9.8% since inception in July. Moving to our next portfolio, the Risk Parity Ultimate, this was our portfolio of the week last week where we discussed it in depth. It is our most complicated portfolio with about 12 funds in it, but it is roughly 40% in stocks, 25% in bonds, and the rest in some alternatives such as REITs, preferreds, and gold. And so it was up 0.7% for the week and is up 9. 2% since inception in July. And again, you see in this portfolio some things are going up and some things are going down at any given time, and usually it will translate into a small advance on a weekly or monthly basis. And now turning to our two experimental portfolios. The first one is our portfolio of the week, the Accelerated Permanent Portfolio. and we'll be discussing this in more depth, but it was our leader for the week. It was up 1.4% for the week. It is up 10.8% since inception in July, and it has a couple of leverage funds in it that we'll be talking about more in a minute here. And then our last portfolio, another one of our experimental portfolios, and this one is usually our most volatile portfolio. It is the aggressive 50/50. and this one is 33% in UPRO, a leveraged S&P 500 fund, 33% in TMF, a leveraged long-term treasury fund, and then 17% in PFF, preferred shares, and 17% in an intermediate treasury bond fund, VGIT, from Vanguard. And it was up 0.7% for the week and is up 11.0% since inception in July. So all of these portfolios had a decent week and have had a decent month and have been pretty decent since inception as they are designed to be. They're easily covering their distributions. And now turning to our portfolio of the week, our accelerated permanent portfolio. Now this portfolio is based on the old permanent portfolio constructed back in the 70s and 80s by Harry Brown and we discussed that portfolio in our history of asset allocations, which you can find in episodes three and five of this podcast. from a few months back. But anyway, in that original permanent portfolio, it was 25% in stocks, 25% in long-term treasury bonds, 25% in gold, and 25% in short-term treasuries, or cash these days is what it would translate to given what short-term treasuries tend to do. And that portfolio, while it has some decent characteristics, tends to be a bit too conservative that it doesn't have enough oomph coming from its stock funds. And it also tends to be captive to the gold component of it because it's got so much gold in there. And so it tends to go up or down with the price of gold. So as a decent risk parity style portfolio, it really did not fit the bill and is mostly of historical interest, although some people still do use it. But what we decided to do to update that in this accelerated permanent portfolio is add some leverage to it to see how that would affect its performance. Now, adding leverage is one way that hedge funds who construct risk parity style portfolios typically do it simply because a lot of risk parity style portfolios are so conservative in their construction they really don't have very high returns. They just have a lot of stability. But by adding some leverage you get a higher return while retaining a lot of the stability in this type of a portfolio. So what this accelerated permanent portfolio looks like is that it has 25% in a leveraged S&P 500 fund, UPRO, and then it's got 27.5% in a leveraged long-term treasury bond fund that's TMF and then it's got 25% in a preferred share stock fund PFF and 22.5% in a gold fund GLDM. Now only those first two funds are leveraged. So what that ends up effectively being is as if it has 200% of what a portfolio would have because those two funds, the UPRO acts like instead of 25%, it acts like a 75% holding. The TMF acts as if it had an 81% holding because of the leverage that are in those funds. You add all these things up, and what this thing performs like is if it had 100% in stocks, 80% in bonds, and 20% in gold approximately. And so what that gives you is a fund that is competitive or better than a total stock market fund given the leverage that's in it. And to do a comparison, we went over to Portfolio Visualizer, our favorite place for analyzing various portfolios. And we did a portfolio analysis of the original permanent portfolio to see what that would be like the accelerated permanent portfolio that I just described. And then we also threw in a total stock market fund, VTI, just for comparison purposes. Now, I will link to this in the show notes. It is limited in its scope. It only goes back to July of 2009, simply because that's when those leveraged funds became available. And so the data is limited to go back to July 2009, which is kind of unfortunate because one of the places where this permanent portfolio and its offshoots performs actually well is in bad markets like you saw between 2000 and 2008. But we don't have that data for this particular analysis. I should also mention that we first discussed this portfolio in more depth in episode eight if you want to go back to that. and hear more about it. But just looking at this analysis of these three portfolios, if you look at the returns for the original permanent portfolio, the compounded annual growth rate for this since 2009 has been 7.67%, that's the original one. And you can see how conservative it was. In its worst year it was down 3.01%. its maximum drawdown was only 6.95%, but its best year was only 16.19%, so it does not have a high standard deviation for it. It's only 6.22, which is really low, so it was quite conservative. What's also interesting about it is it has a very low correlation with the total US stock market of only 0. 38, so you can expect and it did perform much differently than the stock market in any given year, which is not surprising given that only 25% of it is in stocks. Now comparing that to the Accelerated Permanent Portfolio with that leverage, once you stick that leverage in there you get a much higher return and obviously some much higher standard deviations and risk characteristics, but the compounded annual growth rate of the Accelerated Permanent Portfolio since 2009 was 18.75%, and that is actually higher than the Total Stock Market Fund, which was at 15.18% for comparison, which is Portfolio 3 in this analysis. And then you look at the standard deviations, and it's very similar to the Total Stock Market Fund. So the standard deviation of the Accelerated Permanent Portfolio was 14. versus 14.62%, and that gives you a good idea of the volatility of these funds over that time period. And you can see that comparing that to the original permanent portfolio, which was only 6.22%, that those are both twice as volatile essentially as the original one. The best year for the Accelerated Permanent Portfolio was 43%, and the best year for the Vanguard Total Stock Market was 33% in this time period. This was a very good period for stocks, so the worst year is only 10.9 for the Accelerated Permanent Portfolio and 5.2 for the Vanguard Total Stock Market. The maximum drawdowns were 16% and 20% for this period. But you get over to the Sharpe Ratio and you can see how this is just a better Risk Reward Portfolio than a total stock market portfolio. The Sharpe Ratio, which measures that, was only 1.01 for the Vanguard Total Stock Market, which is actually pretty high for that. If you looked at it over a much longer period of time, it would be more like 0.7 or 0.8. But the Accelerated Permanent Portfolio had a Sharpe Ratio of 1.27. which is significantly better than the total stock market. And even the original permanent portfolio has a sharp ratio of 1.14, which is also better than the total stock market. And looking at that correlation issue, obviously the total stock market fund is 100% correlated with the stock market, but the accelerated permanent portfolio only was correlated at a rate of 0.44. So only about 44% of the time was it moving in the same directions at the same time as a total stock market. And just looking at another couple of data points in this analysis, which you can also look at because it'll be linked to, but the original permanent portfolio had a monthly volatility of 1.8%, which compares to the Accelerated Permanent Portfolio 4.04%, which is very similar to the total stock market, which has a monthly volatility of 4.22% for this time period. And then you can go down and look at these safe withdrawal rates and perpetual withdrawal rates. And these are very unrealistic for this time period. So you need to take them with a grain of salt. The safe withdrawal rate for the permanent portfolio for this time period was 12.63%. And that compares with safe withdrawal rate of 22% for the accelerated permanent portfolio and 18% for the total stock market. This was in a period when the stock market was doing well except for this past year. And so that's why these numbers are so high. The perpetual withdrawal rate, though, you can see that it was only 5.78% for the original permanent portfolio. And that's because its compounded annual growth rate just wasn't that high compared with the others. for the Accelerated Permanent Portfolio is up at 14.89% and for the total stock market for this period was 12.15%. And again, that just shows that this Accelerated Permanent Portfolio is something that in theory and in the past, in the recent past, has been able to outperform the stock market portfolio with a lower amount of risk associated with it or a very similar amount of risk associated with it. And finally, if we go back to our portfolios page, we can see that this Accelerated Permanent Portfolio is up about 10.8% since inception in July, which is actually less than the total stock market has been up since the total stock market has been on a tear, but it's quite a good performance. And it also demonstrates or illustrates that this portfolio is kind of uncorrelated with the total stock market, at least, or has a low correlation, and so will not be moving in the same direction at the same time. One other interesting note about this portfolio is that it almost had a rebalancing this past week. It is set to rebalance if any of its components move more than 7.5% from their original allocations. And right now this has its stock component, the UPRO, up to 32.12% of the portfolio from its original 25. It didn't quite make it there at the middle of the month when we checked this, but if it is still that high or continues higher in January, it will have a rebalancing. and you can also see how varied the performance of these components were. If you look at this record that is on the website, that the UPRO is actually up 47.7% since inception of this portfolio, while the bond fund is down 18.46% and that's how you would expect them to move in opposite directions. And then the other two components are just up. a more moderate amount the gold is at 4.02% and the preferred shares are up 9.16%. And so those act as the ballast in this portfolio, but they also have been performing decently in the recent past. And the other point of interest for a portfolio like this in a drawdown scenario is also on the website there. We are actually Distributing out of this portfolio at an 8% annual rate just to put it through its paces. It hasn't had no trouble keeping up with that in any given month. But you can see from the where the distributions have come that different components of it perform well at different times because we take from the best performer at the particular time. So in this circumstance, most of the money, $210, has come out of UPRO in the monthly distributions, but $71 has come out of the bond fund, which performed well earlier. And then $65 has come out of the preferred shares fund, which was the selection in that bad month of October for most things. And that also shows the value of having a very widely diversified portfolio that will have different components performing well at different times so you can remove distributions from the better performers. But now I see our signal is beginning to fade and so it is time for me to say goodbye. If you'd like to help out this podcast you could do it by leaving a review at iTunes or Stitcher or wherever you pick it up. that's helpful for getting the word out there. I think I'm up to something like 60 loyal listeners, it appears from the statistics, and I thank each and every one of you, especially those who have put in comments and suggestions for podcasts and other issues. If you'd like to contact me with your comments or suggestions, you can send them by email to frank@riskparityradio.com that's frank@riskparityradio.com riskparadioradio.com, or you can also go to the website and fill out the contact form there, and I will get your message that way. Thank you for tuning in.

Mostly Mary [21:57]

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.