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 [0:36]

Thank you, Mary, and welcome to episode 48 of Risk Parity Radio. It is time for our weekly portfolio review of the six sample portfolios that you can find at www.riskparityradio.com on the portfolios page. And then we're going to be spending a little bit more time with our portfolio of the week, which is the accelerated permanent portfolio. And it is the portfolio of the week because it is going to be rebalanced. Exciting. But let's just take a look at what the markets did this week for reference. And you'll see as we go forward that the risk parity style portfolios are just much less volatile than what we see in the markets. But anyway, the S&P was down 1.48% last week. The Nasdaq was down 1.54% last week. Long-term treasury bonds represented by the ETF TLT were up 0.5%. Gold was down 1.19%. REITs represented by the Global REIT Fund, R E E T, were up 1.15%. Commodities represented by the ETF PDBC were flat, and preferred shares represented by the ETF PFF were up 0.45%. Now, when you take a look at the risk parity style portfolios, most of them didn't move a whole lot except for the experimental ones, which are much more volatile. But going to the most conservative one, this is the All Seasons portfolio. and this is the one that is only 30% stocks represented by VTI, the Vanguard Total Market Fund, and then it's got 40% in long-term treasuries represented by TLT, 15% in intermediate treasuries represented by VGIT, and then the remaining 15% is split between Gold, GLDM, and Commodities, PBVC. And this one was down a whopping 0.32% last week. It is up 3. 6% since inception, so it's not moving around a whole lot, but that's just how it's designed. Moving to the second portfolio, which is one of our sort of baseline portfolios. The three in the middle are the baseline that you'd be likely to use something like this in your retirement portfolio. And this is the Golden Butterfly. This is the one that is 20% Vanguard Total Market Index Fund, 20% small cap value, 20% long-term treasuries, 20% short-term treasuries, and 20% gold. And it was up 0.2% last week. It is up 13.1% since inception in July. It is interesting that this fund is actually leading the way amongst all of the portfolios on our sample page right now, but that's primarily due to this stunning performance of small cap value in the past four or five months, which has not been the case for about the past 10 years. But it just goes to show you that you never know which segments of these portfolios are going to do well at one time. and that's the point that you don't have to predict if you have a sufficiently diversified portfolio across many assets, there's likely to be one that's outperforming at any given time while other ones are not doing as well. Moving to the next portfolio, this is our Golden Ratio portfolio, and this one is 42% stocks divided into a large cap growth fund, a small cap value fund, and a low volatility fund. And then it's got 26% in long-term treasuries represented by TLT, 16% in gold represented by GLDM, 10% in REITs, R-E-E-T, to cover the globe, and 6% in cash. And this one was down a whopping 0.18% last week. It is up 10.7% since inception in July. and it's having a nice boring week. You'll find that most of these portfolios don't do much in most weeks, which is pretty much how you want it. You just want them to continue to move forward consistently, and that's exactly what this portfolio does. The next one is our most complicated portfolio, the Risk Parity Ultimate. This one is approximately 40% stocks, and I won't go through all of those funds. It is 25% long-term treasuries, 10% gold, 10% in the Global Reit Fund, and then 12.5% in preferred shares, PFF, and it's also got 2.5% in a volatility fund, VXN. And this one moved very little last week. It was down 0.12%. is up 9.9% since inception in July and again is showing how these very well diversified portfolios dampen the volatility and don't move around too much but move up steadily over time so that they can cover their distributions. Now the next portfolio is one of our two experimental portfolios that use leveraged funds in them. That's the Accelerated Permanent Portfolio that we'll be talking a lot more about in a few minutes here, and it is comprised of 27.5% TMF, a leveraged long-term treasury fund, 25% UPRO, a leveraged S&P 500 fund, 25% PFF, those are preferred shares, and 22.5% gold represented by GLDM. This one was down 1.6% last week, is up 9.9%. since inception in July, and we'll be talking about it more and it's rebalancing in a few minutes here. And our last portfolio, another experimental portfolio, the aggressive 5050. This is our most volatile portfolio, and it is 33% the leveraged S&P 500 Fund, UPRO, 33% the leveraged Treasury Bond Fund, TMF, with 17% in PFF, the preferred shares fund, and 17% in a intermediate term treasury fund. We are using VGIT, the Vanguard version for that. And it was down 1.5% last week. It is up 9.9% since inception in July. And you can see that these two experimental portfolios do have the same kind of volatility as the total stock market, but they are historically outperforming the stock market by about one and a half times what it performs. They haven't been doing that recently, but we've only been going at this six months. They are still up about 10% in that time frame as they go up and down and get rebalanced. And so now let's talk about our portfolio of the week, the Accelerated Permanent Portfolio. as I said, it has reached a point where it needs to be rebalanced. Now we previously talked about rebalancing in episode 32 if you want to go back and listen to that. This portfolio is being rebalanced in the same manner as the aggressive 5050 that we rebalanced back in November. And how that works for this is that we are using rebalancing bands. So if any component of the portfolio in this case, moves more than 7.5% from its original allocation that gives us a signal to rebalance. We only look at this once a month on the 15th of each month to avoid end of month movements. Here we see that the UPRO component of this has gone from 25% and it is up at 34.23% as of the 15th, whereas the long-term treasury fund in this TMF has gone down from 27.5% to 18.87%. And so that triggers our rebalancing for this portfolio. And so what will happen in this portfolio is that we will be selling $975 worth of UPRO and we will be buying $912 worth of TMF, and then we'll leave the rest of that money in cash for the next distribution, which is about $60. I should say that's $917 we're actually buying of. The other ones, GLDM and PFF, the other components in here, really haven't moved that much off of their targets. PFF was targeted at 25% and is currently at 25.1%. The GLDM is targeted at 22.5% and is currently about 21.5%. So I didn't see any reason to really mess with those for a few dollars. This does not need to be exact. What's interesting about this portfolio, if you look back, it's only got about 11 years of history or 12 years of history, but it seems to, on this schedule, rebalance about twice a year on average. And so has rebalanced historically on this rebalancing schedule 24 times since it was possible to construct it since UPRO and TMF only became available in 2009. Now we did discuss this Portfolio in prior episodes 8, 20 and 41, if you want to hear more about it. It is based on the original permanent portfolio that Harry Brown came up with back in the late 70s and 1980s, and that was discussed in episode three when we were going through the history of various portfolio constructions. Now, the original permanent portfolio was 25% Stocks, 25% long-term treasuries, 25% short-term treasuries, and 25% gold. It really is a pretty stable but very unexciting portfolio and probably has too little stocks in it for something that you'd want to consider. So it's mainly of use for historical reference. The gold component also seems to dominate. So the portfolio does well when gold is doing well and does not do well when gold is doing poorly. because the gold seems to be the most volatile of those components, having 25% in there is really not balanced in terms of volatility. You'll notice that the Golden Butterfly is actually that same portfolio, but with another component, a small cap value fund, which tends to increase the amount of stocks in it up to 40% and correspondingly reduces the impact of gold, which goes from 25% to 20%. But we wanted to take a leveraged version of this. Now, let's just talk about leverage in risk parity style portfolios. When hedge funds have constructed risk parity style portfolios, typically they add some leverage, they add some way of borrowing money to improve the overall returns of the portfolio. Because what happens is when you create a risk parity style portfolio, you are creating a very dampened portfolio with very low volatility. And oftentimes the returns will go down because of that. Now, the idea is you want to make your volatility shrink by a lot more than your returns. So you'll see that in most of our risk parity style portfolios, the volatility is generally reduced by about half. but the returns from the total stock market are only reduced 1% or 2%. So then what hedge fund managers will do is then add leverage or they'll borrow more money and put it into the portfolio to get the returns back up, but keep the volatility within a reasonable range. And so you'll see many of them are done in that way. Now for a do-it-yourself investor, this is a risky strategy. And so that is why these are experimental portfolios. There are a couple different ways of adding leverage to a portfolio. One is simply to trade on margin and you could go and open an account at one of the low margin places like Interactive Brokers or M1 Finance. I probably would use Interactive Brokers if you were thinking of doing this because then you can borrow money at around 1% or 2% these days. and add that to a standard risk parity style portfolio and you could apply leverage to it in that way. The other way that we've come up with here is to use these leveraged funds. And in this case we are using two leveraged funds, the leveraged fund UPRO, which is an S&P 500 based fund, and the leveraged fund TMF, which is a long-term treasury bond based fund. and each of those are designed to produce three times the movement in the fund as in the underlying index. So for UPRO each day if the S&P moved 1% in one direction you would expect UPRO to move 3% in that direction and the same for TMF. Now what's interesting about these funds is they're really not designed for what we're doing with them. They are really intended for short-term traders, and it's kind of surprising that they actually work for the purpose that we've put them to, because a lot of the leveraged funds in the space, if you look at leveraged commodity funds and other things, have a tendency to blow up. They're very risky because they are based on underlying futures contracts and so are difficult to manage. But these two seem to be more stable than a lot of the other leveraged funds. And I don't know why that is, perhaps because these are two of the most liquid markets in the world. That Treasury bond fund is probably the most liquid market in the world, at least for long-term Treasuries. And then the S&P 500 market index is also a very liquid fund. So they have performed even longer term pretty well, even though they're not designed to perform long term well. We've been looking at them since 2009 when they were instituted, and if you look at this fund or over that time period, you see that they don't vary too much from what they're supposed to do, and so you can use them and we have used them to produce that leverage. Now whether they will continue to have this kind of reasonable performance going forward is an open question. You wouldn't want to put too much money in a portfolio that is based on this just because it does not have the kind of track record that you would want to have to be putting most of your retirement savings in. And I should mention that another place you can find a lot of portfolios based around these leveraged funds is at the site optimized portfolios, and I'll link to that in the show notes. The gentleman there has taken these funds and applied them to a number of different standard portfolios to see how they would affect various ideas in that realm. He's probably got about 10 or 20 on that site of various kinds. We've only got two here, but probably two is enough for exemplary purposes. Now in order to take a closer look at this, we did do an analysis of the portfolio on Portfolio Visualizer for all the data that was available, and we also matched it up with the standard or original permanent portfolio, the one that was designed by Harry Brown, just to see how they compared in the time period. And you'll see just how much different they are in terms of overall volatility and returns. And it's also compared with the total stock market just for a reference point. So if you look at these portfolios going from July 2009 forward, you see that the Accelerated Permanent Portfolio has a compounded annual growth rate of 21.54%. which is much better than a total stock market. The total stock market at the same time had a compounded annual growth rate of 15.21%. But you can also see that their standard deviations or their volatility are very similar. The Accelerated Permanent Portfolio has a standard deviation of 14.55 compared to 14.02 for the total stock market. The maximum drawdown for the Accelerated Permanent Portfolio is actually less than the total stock market. It was only 13.88% over this period compared to the total stock market had a max drawdown of 19.63%. So you can see that this kind of portfolio is a way to take stock market like risk but get superior returns. And that's really what these are designed to do. But if you also compare to the original permanent portfolio, you can see how conservative that portfolio is. Over this same time period at a compounded annual growth rate of 8.33%, but its standard deviation was only 6.34%, which is extremely low, and its maximum drawdown was only -6.18% over the time period, which is also extremely low. So if you wanted to have something extremely conservative and sleep at night, But knowing that it's going to grow slowly but steadily, that kind of portfolio might be something you'd be interested in. Part of that is because it's got that large component, 25% in the short-term treasuries, which is essentially like holding cash when you look at it these days. In our accelerated permanent portfolio, we basically substituted PFF for that component. PFF is a preferred shares fund and so is generating more of an income has about half of the volatility of the stock market, but is certainly more dynamic than that short-term treasury bond fund. The other two ways we varied in that, besides replacing the standard total stock market fund and long-term treasury funds with leveraged versions of those, We bumped up the percentage of the long-term treasury funds in the Accelerated Permanent Portfolio to 27. 5 and that was only because it seemed to balance out the volatility between the stock component and the bond component there. The stock component is just a little bit more volatile in the leveraged version of this than the bond component. And then we just filled that out with 22.5% in gold. which compares with 25% in the original permanent portfolio. Another way of looking at the proportions in this accelerated permanent portfolio is to think about if you were to multiply out the proportions for the leverage funds by three and then add the other components, it is essentially acting as if it had 205% of the total for a regular permanent portfolio. And of that 205%, only about 10 or 11% would be allocated to gold, unlike the permanent portfolio, which has a quarter of that allocated to gold. Similarly, the PFF component is only about 12 or 13% of that compared with 25% of the SHY component in the original permanent portfolio. So you can see that doing that gives you going to have more volatility, but also more returns because the returns can be driven more by the long-term treasury bonds and of course the stock fund. Now just looking at some more metrics here, the Sharpe ratio, which measures risk reward for the accelerated permanent portfolio for the time period we have it. is 1.39, which is higher than the permanent portfolio itself at 1.21, but also higher than the total stock market index at 1.05. And there's a nice graph there showing the accelerated permanent portfolio growing from $10,000 to $94,000 in this time period. If you let it run, the permanent portfolio would have only gone from $10,000 to $25,000. and the total stock market went from $10,000 to about $51,000. So you can see how that compounding at that rate over that period of time really makes a huge difference. It's interesting if you go to the trailing returns page on this, the Accelerated Permanent Portfolio has actually underperformed the stock market in the past three months as 9.72% to 12.1 for the total stock market, which is also reflected in our sample portfolios, where you see that the experimental portfolios are actually underperforming some of the ordinary risk parity style portfolios that we have. But as you go out, you see that much, it's much different. For one year, the accelerated permanent portfolio is up 34.73% compared with the total stock market at 18%. and a three year it's 23% versus 14%, five year it's 22% versus 15, 10 year it's 19% versus 14, and the total period it's 21 versus 15. So the Accelerated Permanent Portfolio is actually underperforming its historical performance over the past three months, even though it's still up about 10%. And then finally, just looking at the safe withdrawal rates and perpetual withdrawal rates in this period. And you need to take these with a grain of salt because it's not long enough a period to really calculate those. But for the safe withdrawal rate for the Accelerated Permanent Portfolio was actually 22.43% for the period compared with the total stock market at 17 and the Permanent Portfolio at 12. The perpetual withdrawal rates were similar. in proportion with the accelerated permanent portfolio being at 15.74% compared to the total stock market at 11.3% and the regular permanent portfolio at 5.92%. And those really should only be taken for comparison purposes given the time frame. The analysis we did, we also set it to rebalance in the same manner that we are rebalancing this portfolio in our sample portfolios, except it does the rebalancing at the end of the month in the Portfolio Visualizer analysis. And you can click on the Rebalancing tab and see each rebalancing event. There are 24 of them that date back to December of 2009 and they do seem to average about two per year. It's interesting looking at the past year though with all of the volatility this portfolio would have actually rebalanced at the end of February, then again at the end of March, then again at the end of May, and then again at the end of November, the way it's set up for month end rebalancing. And so it would have basically picked up all of those swings in the market, which is probably one of the reasons it does so well. It's getting an additional boost out of selling high and buying low essentially as the market swings back and forth. And with those leverage funds you do get just much larger swings more often. By comparison purposes, the permanent portfolio, the original one, only rebalanced three times on a rebalancing band basis going all the way back to 2009, once in 2011, once in 2013, and once in 2016. and believe it or not, it would not have rebalanced in the past year, even with all the volatility that had occurred. And you will be able to take a look at that for yourselves in the show notes, should you be so inclined. But now I see our signal is beginning to fade. Sorry I wasn't able to get to another episode earlier this week. We went out for a hike instead, which was A very good use of our time, I will tell you that. I do have a few questions piling up and we will have some listener questions to go through midweek this week, including an interesting one about having to do a fast drawdown from an inherited IRA using a risk parity style portfolio. as the base holding. If you'd like to contact me, please do. You can send your comments or questions to frank@riskparityradio.com that email is frank@riskparityradio.com or you can go to the website www.riskparityradio.com and fill out the form on that page and I will get your message that way. I think we might cross 5,000 downloads for this podcast this next week, which would be a nice milestone to reach. Looks like we have 60 or 70 loyal listeners, which is very gratifying. And I want to thank you all for tuning in. This is Frank Vasquez with Risk Parity Radio signing off.

Mostly Mary [27:51]

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.