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, and welcome to episode 44 of Risk Parity Radio. Today on Risk Parity Radio we are going to have a listener inspired show. The listener in question is Mark B. And we will be looking at something that he asked about in a few minutes here. But first, I wanted to give you a couple links and resources of things that you may find interesting in diving into risk parity and risk parity style portfolios. One is we had, if you may recall, our episode number 31, we discussed a fund called RPAR, which is a risk parity style ETF and how that performed. There's a nice episode of the Investors Podcast, episode 328 that I'll link to in the show notes where they interview the fund managers from that fund, Damien Bisserbe and Alex Shahidi, if I did not mispronounce their names. And they discuss risk parity principles, which you also may find in our episodes 3, 5, and 7 for Principles and Basics. But if you listen to that episode, you'll find that they're talking about many of the same things that we talk about here, just from their perspective of fund managers. And then I also want to direct you or tell you about a nice site that I was directed to by Dr. Bill, one of our listeners, and the site is called optimizedportfolios.com that's optimizedportfolios. com and that site is run by a man named John Williamson and it has lots and lots of portfolio analyses from portfolio visualizer and lots of variations on some of our favorite portfolios like the the golden butterfly, and they talk about the all weather, and he's got a lot of incorporation of leveraged portfolios using some of the same funds that that we used. And I'll also link to that in the show notes because he's got a nice huge mega portfolio page of all kinds of lazy portfolios from all kinds of famous portfolio constructors. And if you want to take a look at that, and he's got variations on it, I thought it was a very useful and interesting website. If I had a website more than a podcast, it would probably look something like that. But I've got the podcast and he's got the website. We do have our own website, www.riskparadioradio.com, but it is limited in scope to really this podcast and our sample portfolios. And now getting to our main topic of today, One of our listeners, Mark B, sent me a message and I'm paraphrasing here, but he said, Do you remember when Warren Buffett challenged hedge fund managers to beat the S&P for the next 10 years? And that 10-year period was between January 2008 and the end of 2017. And he was wondering how would the sample risk parity style portfolios have performed in that time period? And I thought it was an interesting question. I mean, you don't want to use this as the basis for choosing something, but sometimes it is nice to go back and think about, well, if I held this at a certain time period, what would have that been like? And what would that have felt like? And he also graciously sent us his variation on the golden butterfly, which he calls the golden six, and we were running that one alongside these other ones for that time period. And so we constructed three portfolio analyses at Portfolio Visualizer, which we'll link to in the show notes to cover all six of the sample portfolios from the www.riskparadioradio.com portfolios page. And I'll just run through them, not all the details, but you'll get the gist of it pretty quickly. In the first analysis, we have lined up the Golden Butterfly portfolio, the Golden Ratio portfolio, and Mark B's Golden Six portfolio. We put all the Golden portfolios in one place. And just briefly, the Golden Butterfly is the portfolio that is 40% stocks divided into Vanguard Total Stock Market and a small cap value fund. 40% bonds divided into 20% treasuries and sorry, long-term treasuries and 20% short-term treasuries and then 20% gold. The Golden Ratio portfolio is 42% stocks, it is 26% long-term treasuries, 16% gold, 10% REITs, and 6% in cash, which we just stuck in a short-term bond fund for the purpose of this. analysis. And then Mark B's Golden Six portfolio is a variation on the Golden Butterfly. What he's got in there is three stock funds, Vanguard Total Stock Market at 1/6 of the portfolio, or 16.6, the QQQ NASDAQ ETF, which is also 1/6 of the portfolio, and small cap value fund, we're using IJS for this, which is also one sixth of the portfolio. And then he's got two bond funds. One is a long-term treasury fund that we commonly use, TLT, and another one is a municipal bond fund, MUB, which is going to be useful for those who have tax issues and are looking for something that generates income but not taxes in terms of the income that is received, particularly if in one of those states where this would help you out. And then it's got 1/6 in gold, 16.6%. And so we ran these portfolios against the Vanguard 500 Index Investor for this period that Warren Buffett was talking about. And what we get are very similar performances. the stock market itself had a compounded annual growth rate of 8.37%, but it had a maximum drawdown of 48%. If you look at the Golden Butterfly, the compounded annual growth rate was 7.06%, the golden ratio is 8.43%, so slightly higher than the stock market, and Mark B's Golden Six was up there at 8.94%, undoubtedly benefiting from that holding in QQQ as this was a good period for that between January 2008 and December 2017. The drawdowns are really the big difference here for the most part. The total stock market was just much more volatile having a drawdown of 48% back in 2008 where the drawdowns for the golden butterfly were only 15%, golden ratio 22%, Mark B's Golden Six was 19.79% and that translates into sharp ratios of 0.87 for the Golden Butterfly, 0. 86 for the Golden Ratio, 0.96 for the Golden Six, but only 0.59 for the total stock market, S&P 500. And so you can see from this that all three of these Risk Parity Style Portfolios are really much better risk reward choices for this period. And two of the portfolios in fact outperformed in terms of compounded annual growth rate as well. Which is surprising because they're not designed for that. But in this particular 10 year period with that big drop in 2008, that can happen over a reasonably long period of time. And if we look at the safe withdrawal rate and perpetual withdrawal rates for this period for these portfolios for the Vanguard 500 Index Investor, it was 10.5 for the safe withdrawal rate, 6.2 for the perpetual withdrawal rate. The Golden Butterfly was better on the safe withdrawal rate at 12.8, slightly less at 5. 09 on the perpetual. The Golden Ratio is better on both metrics at 13.4% on the safe withdrawal and 6.28 on the perpetual withdrawal. And then Mark B's golden six was up there at 13.52 for the safe withdrawal rate and 6.72 for the perpetual withdrawal rate. That is commensurate with what we just discussed in terms of the returns and Sharpe ratios. Moving on to two of our other sample portfolios. One is the Risk Parity Ultimate and the other is the All Seasons or All Weather Portfolio in this analysis. And the Risk Parity Ultimate is the one that has a lot of funds that is essentially 40% stocks, 25% long-term treasury bonds, And then some other alternatives, including 10% in REITs, 10% in gold, 12.5% in preferred shares, and 2.5% in a volatility index fund. We could not duplicate that exactly for the period in question, but we tried as best as we could. The other thing that we did, because it's got a couple of leveraged funds in there, One of the interesting things you can do at Portfolio Visualizer is simulate leverage by making your cash allocation negative. So in this case, we made the cash allocation in negative 12.5 to reflect that the leverage being taken in two of these funds. And that then allows us to add additional percentages to add it up to 100 in terms of the other funds in it. And you can see that at the website if this explanation doesn't make any sense to you. I learned this little trick from that Optimize Portfolios page because I was not really aware that you could simulate leverage in that manner. And then if you look at the other portfolio, which is our most conservative portfolio, that one is 30% stocks, 55% treasury bonds with 40% long term and 15% in intermediate, and then it's got 7.5% in commodities and 7.5% in gold. And looking at to see how those things performed, the Risk Parity Ultimate was actually up there at 9.99% for this period, it's almost 10% compounded annual growth rate. The all-weather was at 7%, which is extremely Respectable given how conservative it is, and that is comparing to 8.37% for the total stock market. So that translates into Sharpe ratios of 0.87 for the Risk Parity Ultimate, 0.86 for the All-Weather, and the total stock market, or Vanguard 500, is down there at 0.59 on the Sharpe ratio for that. And looking at the safe withdrawal rate, perpetual withdrawal rate comparison, the Vanguard 500 again was at 10.5 for the safe withdrawal rate for that period and 6. 2 for the perpetual withdrawal rate for that period again take these with a grain of salt there for comparison purposes only but for that period the all weather was actually up there at 13.1 for the safe withdrawal rate and 5.04 for the Perpetual withdrawal rate and then the risk parity ultimate was at 14.16 for the safe withdrawal rate in 7. for the perpetual withdrawal rate. Again, also reflecting the other statistics and sharp ratios that we just talked about. And now going to our two experimental portfolios, the accelerated permanent portfolio and the aggressive 5050. Now these hold funds that did not exist all the way back to January 2008. So I did use that little trick of negative cash allocation to simulate leverage in these two analyses. And so I used the regular funds, increased the percentages, and then I used the cash to net that out. So looking at what this translates into for the Accelerated Permanent Portfolio is a 75% allocation to the Vanguard Total Stock Market, an 81.5% allocation to long-term treasuries and then 25% for PFF preferred shares and 22.5% for the Gold Fund. And then you subtract out 104% for the cash allocation. And then for the aggressive 5050, that one looks like 99% in The Vanguard Total Stock Market, 99% in the total bond market, 17% in preferred shares, PFF and 17% in a intermediate term treasury bond fund. It's represented by IEF in this analysis. So that the cash allocation is a negative 132 to simulate the leverage in the actual funds that we're monitoring. those leverage funds are UPRO for the stock portion of it and TMF for the bond portion of it. But there was really no comparison in this time frame between these performances. The Accelerated Permanent Portfolio at a compounded annual growth rate for this period of 16.42%. The Aggressive 50/50 had a compounded annual growth rate of 19.17% in the Vanguard 500 or Total Stock Market fund index had a compound annual growth rate again of 8.37%. So this is more than double or double of these things. What's more interesting is if you look at that worst year for the Accelerated Permanent Portfolio was only 6.54% and 6.9% for the aggressive 5050 they did recover extremely quickly in 2008 whereas the total stock market fund was down 37.02% for that year. The maximum drawdowns you would think that they would have a higher maximum drawdown than the total stock market they actually had a lower maximum drawdowns of 37. 5 for the Accelerated Permanent Portfolio 42% for the Aggressive 5050 with the Vanguard 500 Index Investor at -48.47. Translating into sharp ratios of 0.89 for the Accelerated Permanent Portfolio, 0.92 for the Aggressive 5050, and 0.59 again for the Total Stock Market Portfolio. And again, a large improvement over those. And then looking at these final statistics for the Safe Withdrawal Rate and Perpetual Withdrawal Rates, Again, for the Vanguard 500 Index Investor it was 10.54. For the safe withdrawal rate in 6.23 for the perpetual withdrawal rate for this period. The other ones have much more gaudy numbers. The Accelerated Permanent Portfolio is at 18.19 for the safe withdrawal rate and 12.72 for the perpetual withdrawal rate. And for the aggressive 5050 it's 18.8. for the safe withdrawal rate and 14. 7 for the perpetual withdrawal rate, again reflecting how much better these are in terms of risk and reward. And that concludes our little exercise. I thought it was kind of amusing and interesting, and when I get questions like this, I love to go off and fiddle around with the analyzers just to see what pops out. I think what's most salient or the takeaway from this is if you look at our risk parity style portfolios, they all just have a significantly better risk reward ratio regardless of the amount of risk taken. So even the lowest yielding of the portfolios has a sharp ratio that is about one and a half times the sharp ratio of the total stock market. And that just is a reflection of the diversification and much lower drawdowns that you see in these kinds of portfolios and what makes them as good as they are. I want to thank Mark B. Again for that suggestion. That was fun. I hope you're enjoying your holidays. But I do see now that our signal is beginning to fade and it's time for me to say goodbye. If you have comments or questions, you can send them to Frank@riskparityradio.com that's frank@riskparityradio.com or you can go to the website www.riskparityradio.com and there is a contact form there and you can send me a message and I'll get it that way. We'll be picking up next time with our weekly portfolio reviews and we'll also be discussing the distributions for January since it'll be time for that. and we'll be doing that this weekend. In the meantime, thank you as always for tuning in. This is Frank Vasquez with Risk Parity Radio, signing off.

Mostly Mary [19:24]

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.