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 [0:36]

Thank you, Mary. Today on Risk Parity Radio, we are going to have our weekly portfolio review, and then we're going to talk about our portfolio of the week, which is the aggressive 50/50. And these are the sample portfolios you can find at www.riskparityradio.com. that's www.riskparityradio.com on the portfolios page. And I do apologize for my voice today. I've got a bit of a cold. Anyway, so looking at what the markets did this week, they didn't do very much. And our risk parity radio sample portfolios reflect that as well. The S&P was down 0.16%, NASDAQ was up. 0.38%. Long-term treasury bonds represented by the ETF TLT were up 0.65%. Gold was down 0.33%. And then REITs represented by our Global REIT Fund, REET, were up 0.6%. Commodities represented by the ETF PDBC were up 1.1%. and preferred shares represented by the ETF PFF were flat. Now what that translated into for most of our Risk Parity Style portfolios is that nice kind of advancement, what I call the Bernie Madoff kind of return that is just right for both in keeping low volatility and keeping the portfolio advancing. And the reason I call that is because it's unrealistic to expect that every week as Bernie Madoff had promised to his victims. But anyway, looking at the All Seasons portfolio, this is our most conservative portfolio. It's really just there for a reference. And it is 30% in stocks represented by VTI and then it's 55% in treasury bonds split into some long-term treasuries, TLT with 40% of the portfolio and 15% in intermediate treasuries represented by VGIT in this portfolio. And then with the remaining 15% that goes to the alternative assets of gold and commodities, 7.5% each represented by GLDM for gold and PBDC for the commodities. And this portfolio is down a whopping 0.03% for the week. So it's essentially flat and it is up 3.8% since inception last July. Looking at our next portfolio, the Golden Butterfly, this is the one that is 40% stocks divided into a total stock market fund, VTI, and a small cap value fund, VIOV. And then it's got 40% in bonds divided into long-term Treasuries, TLT, and short-term Treasuries, SHY. with the remaining 20% in the Gold Fund GLDM. This one was up 0.26% for the week and is up 11. 1% since inception in July, benefiting a lot from the small cap value fund which is up nearly 40% since inception of this portfolio. The next Portfolio is our golden ratio portfolio. And this one was up 0.2% for the week and is up 10.1% since inception in July. This one has 42% stocks, 26% long-term treasuries, 16% gold, 10% in REITs, and 6% in cash. And now moving to our next portfolio, it is the risk parity ultimate. this one has about 12 funds in it. It is essentially 40% in stocks, 25% in long-term treasuries, then 12.5% in preferred shares, 10% in REITs, 10% in gold, and then it's got a volatility fund VXX, which covers the remaining 2.5%. This portfolio was up 0. 11% for the week and is up 9.3% since inception in July. You'll notice this portfolio lags the other two, that it's similar to the golden butterfly and golden ratio, and that is in large part due to that volatility fund, which makes the portfolio less volatile but is down essentially half of its value. So it's down like 1.25% and if you were to add that back into this portfolio obviously it would look a lot like the other two portfolios that are similar to it in risk profile. But that makes the whole portfolio less volatile overall which makes it a good test and a good way to experiment with things. Now our next portfolio is one of our Experimental portfolios, one of our two leveraged portfolios. This is the Accelerated Permanent Portfolio, and this one is 27. 5% in the Leverage Bond Fund, TMF, 25% in the Leveraged Stock Fund, UPRO, and then it's got two alternative investments in there, 25% in PFF, the Preferred Shares Fund, and 22.5% in GLDM. This one was up 0.28% for the week and is up 11.1% since inception in July. It is getting close again to a rebalancing. The stock fund is up to about 32% of the value of the entire portfolio. and if it is over 32.5% the next time we look at it in the middle of January we will be conducting a rebalancing of this portfolio back to its original allocations. And now looking at our last sample portfolio, another leveraged portfolio, the aggressive 50/50. This one is 33% leveraged stock fund, UPRO, 33% leveraged bond fund, TMF. and then 17% each of PFF and VGIT. It is our most volatile portfolio and is at the moment leading the way again. It is up 0.31% for the week, is up 11.4% since inception in July, and we did rebalance this portfolio back in November. And so overall it was another good week for our sample risk parity style portfolios demonstrating resilience and stability due to their diversification. And now we are going to focus on our portfolio of the week, which is our aggressive 50/50 portfolio. Now, I just described what was in this portfolio, but if you expand out the leverage, you can think of this portfolio as actually having 100% in stocks through that UPRO fund, which is three times leveraged, and then it would be another 100% in the long-term treasuries through the TMF fund, which is also three times leveraged. And then you have those two funds, alternative funds that form the ballast in this portfolio, which are VGIT, Intermediate term treasuries, which are more bonds, and there's 17% in those and PFF, which are preferred shares, and there's 17% in those. So overall, that comes out to a portfolio that behaves as if it had 233% of what a ordinary portfolio like that would look like. Now, we also discussed this portfolio at some length in episodes 10 and 24. If you want to go back and see how it shapes up against other aggressive portfolios, you can take a look at that. What I thought we would do for a little analysis today is just compare it to what a baseline 50/50 portfolio, how that would perform. Now a 50/50 portfolio, I'm talking stocks and bonds only. and I constructed a sample portfolio there, the standard 5050 of 50% in the Vanguard Total Stock Market Fund and then 50% in intermediate term Treasuries. And this is the kind of portfolio that you would see analyzed in all of those 4% rule studies and those sorts of things. It is basically slightly more conservative than what most financial advisors would recommend for a retiree, the standard portfolio being that 60/40. But our aggressive style 50/50 is also 50% stocks and 50% bonds. If you think about the preferred shares as being other stocks, and they are, and then you think about the intermediate treasury fund adding to the leverage bond fund that is in there. So we did another analysis over at our favorite analysis place Portfolio Visualizer and we'll be linking to that in the show notes. Now this is limited in time back to July of 2009 because that's when these two leverage funds came into existence, UPRO and TMF. And so the data we have just goes back to that time frame and this time frame was very good for stocks obviously. and we can see that how it's reflected in these returns. But we compared the aggressive 50/50 to a standard 50/50 and then also threw in just a plain old total stock market fund portfolio to take a look at how these things performed. And you'll see that this leverage really makes this portfolio kind of explode upward in this time period. So looking at these three portfolios and the portfolio returns, we see the compounded annual growth rate for a standard 50/50 was 10.19% for the total stock market for this period. It was 15.18%. It was a good period for the stock market. But then you go over to the aggressive 50/50, and even though it's got all those bonds in there, due to the leverage, the compound annual growth rate is up at 21.65%. So that is substantially better than the total stock market portfolio. The standard deviations do reflect the higher volatility here. a standard 50/50 retirement portfolio had standard deviation only 6.45% compared with the aggressive 50/50 up at 15.57% and the total stock market at 14.6%. So you would say it's got a slightly more volatile character to it than the total stock market. And partially that is because it is just a stock and bond portfolio, you could improve on this in terms of lowering its volatility if you added some alternative assets like that's in the accelerated permanent portfolio. And you could break this out. I've experimented with other kinds of portfolios. What seems to work pretty nice if you're trying to construct one of these aggressive experimental portfolios is to have 26% in UPRO, 26% in TMF, and then you can divide up that remaining 48% into three or four other funds that might include things like small cap value, the preferred shares, some gold, and some additional bonds. And if you do that, you'll see it perform better than the stock market, but also have a lower risk profile and standard deviation on these things. and so I've actually done one of those in one of our smaller Roth accounts that we don't plan on ever touching and will hopefully be left over for our kids, but hopefully it will grow at an accelerated rate for a few decades. We'll see how that turns out. I'm still, I think the jury is still out as to how well these leveraged Stock and bond funds will perform over time. They did perform essentially as advertised during the crash in March. It would be nice to see another crash scenario to see how they behave in those time periods because you really want them to behave as advertised as being three times their index. And if they deviate from that significantly, that's how you could end up with problems in this kind of portfolio. So anyway, going back to these returns, the best year for the standard 5050 was 19.35%. The best year for the total market was 33.45% and the aggressive 5050 was all the way up at 49.3% as its best year in this period. The worst year is not very bad for any of these portfolios. It was just a very good period for the stock market until March of this year. and so the standard 50/50 was only down 2.11% as the worst year, the total stock market was only down 5.21%, the aggressive 50/50 was down 12.55% as its worst year during this period. Interestingly though, the maximum drawdown for this aggressive 50/50 was less than the total stock market, the maximum drawdown was only 16. 71% compared to 20.4% for the total stock market during this period. And then you get to sharp ratios, which do measure that risk reward component or comparison, and is the way you can compare these over the time period. The total stock market was the lowest one in this time period. It's a sharp ratio of 1.01. The aggressive 50/50 was up at 1.31. And the standard 50/50 actually had the highest sharp ratio during this period of 1.46, probably because it is actually so conservative over the time period and only had a worse year of 2.11%. Then if we have a look at the trailing returns for this portfolio, we see that the aggressive 50/50 was not as good over the past few months or the past year, but is much better over the longer time frame. So in the last three months, the standard 50/50 was up 2. 48%, the aggressive 50/50 was only up 0.75%, and the total stock market fund was up 5.74%. If you go to the year-to-date, that's when the aggressive 50/50 is actually higher at 17.07%. One year it's 17% versus 18% for the total stock market. Then you get out to three, five, and 10 years, and the aggressive 50/50 is at 16.3 for three years, 16.7 for five years, and 20.42 for a 10-year period compared with 13.15 for the total stock market at three years, five-year trailing return 13.9, 10-year trailing return total stock market of 14.02, and for the standard 50/50, the trailing returns for those periods were all about 9.3 to 9.9%. And then just looking at a couple more statistics from this analysis, we're looking at the safe withdrawal rate and perpetual withdrawal rate for these three portfolios. These you need to take with a grain of salt because this was such a good period for performance and so these are all gaudy numbers for these percentages. But the standard 5050 had a safe withdrawal rate for this period of 14.39% compared with the total stock market at 18.09%. But the aggressive 5050 was all the way up at 24.8%. 2-3%, so you would not have run out of money even taking out almost a quarter of this fund or this portfolio every year. The perpetual withdrawal rate, which reflects keeping the portfolio at level as its lowest point, has the standard 50/50 for this of 8.02% compared to total stock market of 12.15%. and then the aggressive 50/50 is all the way up there at 17%. So in this period, you could have removed 17% of this portfolio annually and still have what you started with at the end, which is kind of extraordinary when you think about it. But it was a good decade for the stock market. But now I see our signal is beginning to fade. I do want to thank all of our loyal listeners. We crossed 4,000 downloads for this little podcast. this past week, and it's very gratifying that people are interested in listening. I've got a couple of nice comments and suggestions from a couple of our listeners that we'll be using to construct our next couple during the week episodes over the next couple of weeks here. And you'll probably hear that next one coming out on Wednesday. If you'd like to send me a message, the easiest ways are to send an email to frank@riskparityradio.com, that's frank@riskparityradio.com, or you can send a message on the website itself. There's a contact form there, www.riskparityradio.com, and I'll get your message that way. Thank you for tuning in. This is Frank Vasquez with Risk Parity Radio signing off.

Mostly Mary [19:57]

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.