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 [0:38]

Thank you, Mary, and welcome to episode 47 of Risk Parity Radio. Today on Risk Parity Radio, it is time for our weekly portfolio reviews of the six sample portfolios that you can find at www.riskparityradio.com. on the Portfolios page. And we will also be looking at our Portfolio of the Week, which will be the All Seasons Portfolio. Now just going through what the markets did last week, it was kind of a violent week. Sometimes you get those at the beginning or end of years, and this one was no exception with lots of things moving a lot. So Looking at the key components, the S&P was up 1.83%. The Nasdaq was up 2.43% for the week. Long-term Treasury bonds represented by TLT were down 4.0% last week. Gold was down 2.73%. REITs represented by the International or Global Fund, REET, were down 1.6%. four percent, commodities represented by the ETF PDBC were up four percent, the leaders, and preferred shares represented by PFF were down 1.7%. So as you can see, there were some big moves in a number of components here. But when you put them all together in these risk parity style portfolios, you'll see that the moves were a lot muted in the portfolios, which is what you want. It's a purpose of diversification to reduce that volatility. So looking at these portfolios, first the all seasons, which we will talk about more later, that was down 0.67% for the week. It is up 3.9% since inception in July. Going to the next portfolio, of our standard portfolios. This is the Golden Butterfly, and this one is 40% in stocks divided into a total stock market fund, VTI, and a small cap value fund, VIOV. And then it's got 40% in treasury bonds divided into the short term SHY and the very long term TLT, and then 20% in gold represented by the fund GLDM. Now this one was up 0.82% for the week. It is up 12.9% since inception in July. And it's very interesting the reason this portfolio has been doing so well is primarily due to that small cap value fund which is up 46.58% since inception, which is kind of Ridiculous for a half a year, but sometimes things like that happen. So you never know what is going to perform the best. That particular style of fund or factor of funds has not performed well over the past 10 years, but now seems to be enjoying some kind of renaissance. But again, that's not something you can predict, but you can see looking at the sheet there online, that it is actually up more than 20% over the total stock market fund VTI, which is up 22.47% since inception, not too shabby. And then looking at the other treasury funds are down 0.24% and 8.73%, which you would expect because they are negatively correlated with the stock market. and gold is up 2.42% and enjoyed a big run and has pulled back since August really. Now going to the next portfolio, this is the Golden Ratio Portfolio and this one is composed of 42% in stocks. It's also got 14% of that in the small cap value fund. It's got 26% in treasury bonds represented by Tlt and it's got 16% in gold represented by GLDM and 10% in global rates represented by REET, the ETF. This one was down 0. 06% for the week, so it didn't move, which is, you know, interesting and shows how even when the markets are a bit violent, these portfolios are often very stable. It was up 10.9% since inception in July. I should also add that this portfolio has 6% in cash, which also acts as a damper on it. The next portfolio is our most complex portfolio. It is the Risk Parity Ultimate, and I won't go through these 12 funds, but it's got approximately 40% in stocks, 25% in long-term treasury bonds, 10% in gold, 10% in REITs, 12.5% in a preferred shares fund PFF, and then 2.5% in a volatility fund VXX. And this also showed a very moderated performance last week. It was down 0.4%. It is up 10.1% since inception in July. And now moving to our two experimental portfolios, which are more volatile than the other portfolios. In both cases, kind of a reversal from the prior week. So if you took the two weeks together, you'd end up pretty flat or close to it. But anyway, our first one here is the Accelerated Permanent Portfolio. And this one has a leveraged stock fund, UPRO, representing 25%, a leveraged bond fund, TMF, representing 27.5%. Then it's got 25% in the preferred shares fund, PFF, and 22.5% in gold, GLDM. And it was down 1.4% for the week, primarily on those treasury bonds which pulled it back. And since it does not have a particular small cap value focus, it did not benefit from that, although the UPRO fund that is in it is up 62%. since inception in July with the leverage. So this one overall is up 11.6% since inception in July. And moving to our last fund, the most volatile one is the aggressive 5050. This is the one that is 33% UPRO, the leveraged stock fund, 33% TMF, the leveraged bond fund, 17% preferred shares, PFF, and 17% intermediate treasuries represented by VGIT, and it was down 1.9% for the week on those treasuries, and it is up 11.5% since inception in July. I should say it does look like the accelerated permanent portfolio is going to be due for a rebalancing. Next week after the 15th is when we look at it, but right now it is showing the UPRO fund with 35% of the account, which is well over the amount required for rebalancing at 32.5%. In addition, the leveraged bond fund is down now in that account to 18.43%, which also would trigger a rebalancing. given the rebalancing rules we're following there. And now it's time to discuss our portfolio of the week, the All Seasons Portfolio. This is our most conservative sample portfolio. It is a reference portfolio. This is based on Tony Robbins book called Money Master the Game. And in it he tried to come up with a portfolio based on the advice that Ray Dalio gave to him. People often think this is the all-weather portfolio of Bridgewater. This is actually not the all-weather portfolio of Bridgewater. It is just Tony Robbins' interpretation of it. And so what is in this thing is it's got 30% in stocks represented by the Vanguard Total Stock Market Fund, VTI, and then it's got 40% in long-term treasuries, which is by far the largest component of long-term treasuries in any of the sample portfolios. And that is represented by TLT, the ETF, and then it's got 15% in intermediate treasuries represented by VGIT, which are kind of more ballast in there. And then the remaining 15% is divided into gold and commodities represented by GLDM at 7.5% in PBDC for the commodities at 7.5%. And those commodities were up 4% last week. Then if you look at this portfolio, it does have the least volatility of all the sample portfolios and the lowest performance, but it does hold its own. And I'm always surprised at how well this portfolio actually does if you look at it over long periods of time. And what I decided to do today was to compare it with another portfolio that just appeared on the Portfolio Charts website, which collects a lot of sample portfolios that are popular. And just talking about what that is, and I will link to this in the show notes, this is called the Global Market Portfolio. And this Global Market Portfolio is designed to try to capture the entire world, the world of stocks and bonds. So the idea being that it's only going to be about half of the stocks in the US and the rest of them outside the US. And similarly for the bonds will cover the global spectrum of bonds. So I thought, well, why don't we line this up against the All Seasons Portfolio and do a little comparison analysis over there at Portfolio Visualizer. and I'll also link to this in the show notes. But anyway, what that looks like is the global market portfolio is comprised of 23% in the US stock market, 22% in international developed markets, and that'd be like Europe and Japan. And then it's got 5% in emerging markets, and those are all the stocks. It also has 44% in global bonds. I used the US dollar hedged version over there because it made this portfolio perform a little better. Then it gives 4% for REITs and 2% for gold. Just recall the comparison. The all-seasons portfolio is 30% stocks, 40% long-term treasuries, 15% intermediate-term treasuries. We had to go with 15% gold in this version of it for the comparison purposes because the commodities data just didn't go very far back and we did want to go back as far as possible. And this analysis does have data going back to January 1999 and so it's a 20-year analysis or a 21-year analysis. And so looking at what happened there when we ran these through, we actually see they're pretty similar, which I was kind of surprised since the All Seasons has just much less in stocks there. But the compounded annual growth rate over this period for the Global Market Portfolio was 7%, but the compounded annual growth rate for the All Seasons Portfolio was actually higher than that at 7.73%. Then looking at the standard deviation, you see the All Seasons Portfolio is a better portfolio over this period because the standard deviation is lower. which is the opposite of what you would figure given the relative performance. And really that's a result of these drawdowns that this global market portfolio sustained that the All Seasons did not given its diversification. The worst year for the global market portfolio was down 22.66% in this period, whereas the All Seasons only had a worst year of negative 2. 4.8%, so about 10 times less in terms of a drawdown or worst year. The max drawdown was negative 32.86% for the Global Market Portfolio, but only 12.66% for the All Seasons. So he would have slept pretty well at night since this period did include the crashes of 2000 and 2008, and also the most recent one in 2020. So, where that gets you is to the Sharpe ratios. The Sharpe ratio for the Global Market Portfolio was 0.61 compared with the All Seasons, which is 0. 89, which you see is just a much better performance over this period. I think part of this has to do with the relative lagging of international stocks over the past 20 years compared to US stocks that was not true in prior decades and whether it will continue to be true is an open question, but I'm not in the prediction business, so I don't know the answer. As Clint Eastwood says, man's got to know his limitations. And now just looking at a couple more metrics for these portfolios in this analysis, we go to the safe withdrawal rate and perpetual withdrawal rate. We see the global market comes in it. 6.93% as a safe withdrawal rate for this 20-year period, but the all seasons is a little bit higher there at 7.12%. And it's similar with the perpetual withdrawal rate. Remember, the perpetual withdrawal rate is the rate at which you could withdraw from this portfolio and still have the total never going below what you started with. and for that the global market perpetual withdrawal rate was 4.55%, but the All Seasons perpetual withdrawal rate for this 20-year period was 5.2%, so a significant improvement again, which is consistent with the other data that we just went over. So what this tells you is that This All Seasons portfolio is indeed a very strong portfolio, despite how conservative it is. You're not going to expect it to perform like a stock market portfolio. It's going to be a percent or two less, but on the other hand, the drawdowns are going to be much less. And so it is similar to something like a 3070 portfolio. that a conservative investor or retiree would put their money into. And I just had one more thought or point here. One of the reasons that the global market portfolio, I think, has a problem is these global bonds. Because if you take a look at the correlation matrix for international bonds, you'll find that those are actually positively correlated with the stock market. I think that's because of the US dollar issue that when the US dollar is strong both global bonds tend to go down in value as well as stocks. That really is not the kind of diversification you want. You'd probably be better off with just US bonds, treasury bonds in that category simply because you get the diversification that you see in the All Seasons Portfolio that is not present in the Global Bonds Portfolio. And that correlation analysis is also provided in the Portfolio Visualizer analysis if you click through the tabs there. If you want to take a look at the correlation matrix for bonds overall, the different kinds of bonds, both domestic and international, Go back to the bond episodes 14 and 16 earlier, well, last year now, and you can have a look at that and see how these international bonds are actually positively correlated with both international stocks and domestic stocks. But now I see our signal is beginning to fade. I want to thank everybody who sent me messages and comments and questions. If you'd like to send me a message, send it to frank@riskparadioradio.com that's frank@riskparadioradio.com or you can go to the website www.riskparadioradio.com and fill out the contact form and I'll get your message that way. If you have a moment, I would appreciate it if you went to Apple Podcast or Stitcher or wherever you get your podcast and and put in a five star review or any star review would be great. We now seem to have a steady listenership of 60 or 70 loyal pairs of ears and I want to thank each and every one of you for tuning in to this. It's gratifying that others care about this. But now it is time for me to say goodbye. Thank you for tuning in. This is Frank Vasquez with Risk Parity Radio.

Mostly Mary [18:49]

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.