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 54 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 then we will be having a Portfolio of the Week this week. The Golden Butterfly will be our Portfolio of the Week, and we'll be talking about a little analysis of that, comparing it to a David Swenson Portfolio. But looking at the markets last week, just for reference, it was a good day or a good week for the markets, unlike the week prior. and so everything seems to have reversed itself. The S&P was up 4.65% last week. The Nasdaq was up 6.01%. Gold was down 1.87%. Long treasury bonds represented by the ETF TLT were down 2.53%. REITs represented by the Global REIT Fund R E E T were up 3.02%. Commodities represented by the fund PDBC were up 5.67%. 71% and preferred shares represented by the ETF PFF were up 0.85%. And as you can see from this, that there were significant divergences amongst these asset classes. And if you hold each one of those, you experience some volatility. But if you put them together in these risk parity style portfolios, you see that the volatility is very muted, and so they're up just a little bit, unlike the components, which are all over the place, up and down. But looking at these risk parity style portfolios, first we'll look at our reference portfolio, the most conservative one, the All Seasons portfolio. And this is the one that is 30% stocks represented by VTI, and then it is 55% Treasury bonds being 40% in TLT and 15% in the intermediate Treasury bond fund, VGIT, and then the remaining 15% of this portfolio is comprised of gold and commodities at 7.5% each. It was up 1.18% last week, mostly on the strength of the stocks and the commodities in there. It is up 4.29% since inception last July and it is performing okay, but it's extremely conservative and we just keep it around as a reference portfolio. Going to our base portfolios, the next three of them, which are really the ones that we focus on. The next one is the Golden Butterfly, which is our portfolio of the week, and that one was up 1.6% last week, reversing the downturn it had the week prior and it is up 14% since inception last July, largely on the strength of the small cap value fund, the IOV, which comprises 20% of it. Going to our next portfolio, the Golden Ratio. This one is 42% in stocks, 26% in long-term treasuries represented by TLT, 10% in REITs, R-E-E-T, and then 16% in gold, GLDM, and 6% in cash. It is up 1.61% last week and is up 11.84% since inception in July, also showing its lower volatility by combining these more volatile asset classes that were up and down. a lot more than 1.61%. And going to our next portfolio, the Risk Parity Ultimate, this one has 12 funds in it, and it is about 40% in stocks, 25% in long-term treasuries, and then it's got preferred shares at 12.5%, gold at 10%, REITs represented by REET at 10%, and then it's also got 2.5% in a Volatility Fund VXX, and it was up 1.54% for the week and is up 11. 04% since inception in July. So a nice rebound from the prior week and showing that low volatility that we like to have in a risk parity style portfolio. And now we'll take a look at our two experimental portfolios with the leveraged funds in them. The first one is the Accelerated Permanent Portfolio. This one is comprised of 27% in a leveraged stock fund, I should say 27.5%, it's in TMF. It has 25% in UPRO, a leveraged stock fund, I'm sorry, TMF is the leveraged bond fund, I'm confusing myself here. And we have 25% in PFF, the preferred shares fund, and 22.5% in gold, GLDM. This one was up 1.4% for the week. the stocks were up, the gold was down, the bonds were down, the preferred shares were up, and it comes out to 1.4% to the positive. It is up 10.25% since inception last July. And then our final portfolio, which is our most volatile portfolio, the aggressive 5050. This one is 33% in that leveraged stock fund, UPRO, 33% in the leveraged bond fund, TMF. and then as it's ballast, it has 17% in PFF, the preferred shares fund, and 17% in VGIT, the intermediate treasury fund. So it ends up being 50% stocks and 50% bonds. It was up 3.35% for the week. It is up 11.35% since inception in July, and this one does move around in proportions that are more similar to what you see in the stock market. and now we are about to get to our portfolio of a week, the golden butterfly. But before that, I wanted to point out that we are also tracking the monthlies for these sample portfolios on the site. If you go to the portfolios page, you'll see near the introduction a tracking of the monthly returns for all six of these portfolios and then compared to three reference funds, one being VTSAX, which is the Total Stock Market Fund. Then there is the Vanguard Wellington Fund, which is a 60/40 portfolio, and then the Vanguard Wellesley, which is a 35/65 portfolio as a conservative example. And what you see is pretty interesting actually. You can see how over time that these risk parity style portfolios generally have lower volatility But also they tend to do well or better than these standard portfolios. So just looking at January, I think is a good example. In that month, the VTSAX total stock market was down 0.33%. The Vanguard Wellesley was down, I'm sorry, the Wellington was down 1.15% and the Wellesley was down 1.28%. If you look at our baseline risk parity style portfolios, the Golden Butterfly, Golden Ratio, and Risk Parity Ultimate, you see the Golden Butterfly was actually up last month 0. 25%, and then Golden Ratio was down 0.77%, and Risk Parity Ultimate was down 0.95%. So it's doing better than the really the comparison portfolio, which is that Wellington Fund. or portfolio. And that's generally what you will see over time with these kind of portfolios, where they really come out ahead is in the bad months generally, that the diversification or added diversification of them tends to smooth out those downturns, if you will, and that's ultimately why they succeed. And you'll see this also in the analysis or running of the Golden Butterfly today. And now turning to that analysis, we decided to take the Golden Butterfly and compare it to a David Swenson portfolio. We took this portfolio off of portfolio charts and it comes out of a book written by David Swenson. David Swensen is the manager of the Yale Endowment Fund, so he is a very experienced practitioner and constructor of portfolios. This is a portfolio that he recommends for individuals in a book, which is also identified on that website. I will link to that in the show notes so you can take a look at what it says there about that portfolio. But that portfolio is comprised of 30% stocks. We used VTI for that, 15% international stocks, and we're using VGT for that in our analysis. It's got 5% in emerging markets. That's V-E-I-E-X, the Vanguard Emerging Markets Fund we're using for that. And then it's also got 20% in REITs. We're using VNQ for that, and that is 70% essentially in stocks or stock related kinds of funds. And then it's got the remaining 30% in bond funds. And that's divided into TIPS, 15% in that, TIP, and 15% in intermediate treasuries represented by the fund IEF. Now we are comparing that to our golden butterfly portfolio. Our golden butterfly portfolio is 40% stocks, 40% bonds, and 20% in gold. In the stock portion of that, it is 20% in the total stock market fund VTI and then 20% in a small cap value fund. We're using IJS for that in this, or we usually use VIoV, but IJS has a longer history. They are based on the same index of small cap value. And then on the bond side of this, It is divided into 20% long-term treasuries represented by TLT and 20% short-term treasuries represented by SHY, which are very cash-like in their performance. So we went ahead and ran an analysis of this over at Portfolio Visualizer, which we will link to in the show notes just to compare these two portfolios. Now, the data we had available only goes back to 2004 for these two portfolios. So, you know, this does tend to favor actually the Golden Butterfly in this circumstance simply because those international funds have not had a good time over the past 15 or 16 years. But I think this is instructive for a couple of other reasons. Just looking at the basic portfolio returns analysis here, The compounded annual growth rate for the Golden Butterfly over this period since 2004 was 8.03% with a standard deviation of 7.53%. You compare that to the Swenson individual portfolio. The compounded annual growth rate was lower, it was 7.79%, but the standard deviation was higher, meaning it's more volatile at 11.5%. And you can see that also the volatility reflected in the best and worst years for these portfolios for the Golden Butterfly the best year was 18.03%, the worst year was -4.18%. For the Swenson Individual Portfolio that was a best year of 24.34%, but a worst year of -25.06%. So you can see that's a big difference in volatility between these two portfolios. The maximum drawdown for the Golden Butterfly was only 14.8%, 81% and that occurred in 2008. You compare that to the Swensen Individual Portfolio, which is a typical kind of 70/30 portfolio, that was down at a maximum drawdown of 40.64%. So you can see it holding that kind of portfolio is a much bumpier ride than something like the Golden Butterfly, which is better diversified. And that's reflected then again in these sharp ratios. which is a risk reward measure for this period. The Sharpe ratio for the Golden Butterfly was 0.90 and the Sharpe ratio for the Swenson was 0.60. So it's a significantly better performance there. The Sortino ratio was also in favor of the Golden Butterfly, 1.46 for the Golden Butterfly and 0.86 for the Swenson individual. and that is really the Sortino ratio is more focused on the downside of these portfolios in terms of volatility. The market correlations just for reference for the golden butterfly is only 0.76%, so it's not moving with the stock market, but only about 70% of the time or 75% of the time for this one's an individual it is much more geared towards the general stock market at 0.93 for the correlation for that. I think what's most interesting about these portfolios is that if you look at the 17 years that are analyzed here and you go year by year, the Swenson portfolio actually outperformed the Golden Butterfly Turf for 10 of those 17 years. So what we're talking about here is really kind of a hare and a tortoise race. where these risk parity style portfolios are the tortoises in these sorts of races. And when they do outperform, it is usually in the down years. And in this case, it was really 2008 that made that huge difference because the Swenson portfolio was down 20 to 30%, whereas the Golden Butterfly was only down about 5% in that. same time period. But looking at the returns over those periods of time, you see that the Golden Butterfly does better in the bad years, and that makes all the difference over time. And that's why it performs better. Looking at the annualized returns on the trailing returns, you see that the Swenson is actually outperforming the Golden Butterfly in recent periods. For the last three months, the Swensen outperformed the golden butterfly 11.22% to 7.8%. Year to date, the golden butterfly is down 0.18%, and Swensen is only down 0.09%. But then as you go out for longer periods of time, on the one year, the golden butterfly outperforms the Swensen 12 to 10, three years outperforms at eight to seven, five years actually the Swenson's doing better there at 9.9 compared to 9.63 for the golden butterfly then you get out to 10 the Swenson's ahead there because we had a good decade four stocks and so it is eight percent for the Swenson and 7.8% for the golden butterfly but then you get out to that full period which includes that big downturn in 2008 and the golden butterfly is ahead of the Swenson 8% to 7.79% and over that period the golden butterfly is less volatile than the Swenson for basically the entire time. And then just looking at a couple more metrics here if we look at the safe withdrawal rate and perpetual withdrawal rate for this period for these two portfolios you see for the golden butterfly that safe withdrawal rate is 8.91% compared to 8. 53% for the Swenson and it is 5.37% of the perpetual withdrawal rate for the Golden Butterfly versus 5.17% for the Swenson. And again, you see the Golden Butterfly is better on that metric simply because it is less volatile and hangs in better there in the bad periods like in 2008. So I think that that is an interesting example. The Swenson portfolio is very typical of what is recommended in retirement portfolios, a kind of 70/30 kind of portfolio, but it does not perform as well as something that is really designed for lower correlations amongst the components. But you also see that in periods like now, where the stock market is generally doing well, these types of standard portfolios do tend to outperform the risk parity style portfolios. A lot of that comes into play because you see that these bonds that the risk parity style portfolios are holding, the long-term treasuries in particular, tend to go down. in value when the stock market is going up, and that is because they have this negative correlation. So when you see them going down and the stock market's going up, you actually should be satisfied, if not happy, that that's occurring because it means that the portfolio is working the way it is designed to work. And you know that when the stock market is going to have those downturns, those treasuries will kick in and they will go up in value and even out the performance of the portfolio overall, which gives you those nice characteristics of lower volatility, which translates into higher projected safe withdrawal rates and higher perpetual safe withdrawal rates, which is what we are really trying to accomplish here by constructing these kinds of portfolios. But now I see our signal is beginning to fade. I wanted to thank you all for tuning into these. We have over 70 people now that seem to listen to this regularly, which is many more than I expected in the beginning. If you have questions or comments, I am always happy to entertain them. You can send them by email to frank@riskparityradio.com that's frank@riskparityradio.com www.riskparadioradio.com or you can go to the website www.riskparadioradio.com and fill out the contact form there and I will get your message that way. Thank you for tuning in. This is Frank Vasquez with Risk Parity Radio signing off. The Risk Parity Radio show is hosted by Frank Vasquez.

Mostly Mary [20:43]

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