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 56 of Risk Parity Radio. Today on 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 are going to focus on our Portfolio of the Week, which is the Golden Ratio Portfolio. But just taking a look at what the markets did this week for comparison purposes, if we look at the S&P 500, that was up 1.23% for the week. The NASDAQ was up 1.73% for the week. Gold was up 0.53% for the week. Long-term treasury bonds represented by the ETF TLT were down 0.66%. REITs were a big performer. If you look at the ETF REET, which we use to monitor those, they were up 3.7%. Commodities represented by the ETF PDBC were up 2.73% also. a top performer and preferred shares represented by the ETF PFF were down 0.42%. What this resulted in were nice advances for pretty much all of these risk parity style portfolios. And just starting with the most conservative one, the All Seasons portfolio, this is the one that is 30% in stocks represented by the VTI, the Vanguard Total Stock Market Fund, and then it's got 55% in treasury bonds divided into 40% in long-term treasuries and 15% in intermediate-term treasuries, and then that remaining 15% is in gold and commodities divided equally amongst those two. PBDC and GLDM are the funds we use for those. And this one was up 0.63% for the week. It is up 4.85% since inception. It is our most conservative portfolio and is really here just as a reference, but you can see it is holding its own. This is in the past eight months that it's been in operation. Now moving to the next portfolio. This is the Golden Butterfly. This is one of our base portfolios. And it is composed of 40% in stocks divided into VTI, the Total Stock Market Fund, and VIOV, the Vanguard Small Cap Value Fund. And then 40% is in treasury bonds divided into long-term treasuries represented by TLT and short-term treasuries represented by SHY. And then it's got 20% in gold represented by GLDM. and this one was up 1.2% for the week. It is up 15. 3% since inception last July, and right now is our best performing portfolio, mainly due to its allocation to the small cap value fund, which has done really well over the past six months. Our next portfolio is the Golden Ratio Portfolio, which is our portfolio of the week, so we'll be talking about this a little bit more later. It was up 1.13% for the week. It is up 13.07% since inception last July, and it went to 11,000. It's nice to see the 11 in front of this. These all started with about $10,000, by the way, if you're keeping score at home. And the next portfolio we have is our Risk Parity Ultimate portfolio. this is our most complex portfolio. It is out of 12 funds in it is roughly 40% in stocks, 25% in long-term treasuries, 12.5% in preferred shares, 10% in REITs, 10% in gold, and then it's got 2.5% in a volatility fund VXX. It was up 0.97% for the week. It is up 12.09% since inception last July. And now moving to our two experimental portfolios that involve these leveraged funds. And they are experimental. But our first one here is the Accelerated Permanent Portfolio. This one is comprised of 27.5% TMF, which is a leveraged treasury fund, 25% UPRO, a leveraged stock fund, 25% in PFF, the preferred shares fund, and then 22.5% in gold represented by GLDM. It was up 0.63% for the week. It is up 10.92% since inception last July. And our final portfolio, which is usually our most volatile but wasn't too volatile this week, it is the aggressive 50/50. this one is comprised of 33% in that leveraged stock fund, UPRO, 33% in the leveraged bond fund, TMF, and then the remaining ballast is in PFF, the preferred shares fund, at 17% and 17% in an intermediate treasury bond fund, VGIT. It was up 1.03% for the week. It is up 12.45% since inception. last July. And so you can see all these portfolios are performing very well and they are certainly holding their own as far as being able to pay out their distributions, which is really what we're focused on in this podcast, is constructing lower volatility portfolios that perform very well in terms of being able to pay out distributions and not suffering big drawdowns. What you notice if you look at all these portfolios is you can see how the stocks are performing well and at the same time the long-term treasuries for the past several months have been going down in value. And that is the normal way you would expect this to work because those assets are negatively correlated. Now it still results in a positive overall performance. particularly when you add in the other alternatives in these portfolios such as the preferred shares and the gold and the REITs. But what you will expect to see then is at some point when the stock market decides it's going to have some trouble, those long-term treasuries will generally kick in around then and go up in value thus reducing the overall volatility of the portfolio which will you will expect to see it go down, but not go down nearly as much as a standard portfolio that's composed only of stocks or stocks and a total bond fund instead of a treasury bond fund. And now it is time to talk about our portfolio of the week, which is the golden ratio portfolio. Now this portfolio is based on the ancient golden ratio, which is represented by the Greek letter phi, and is approximately 1.61, and that is the proportions of the various parts of this portfolio. So the largest part of this portfolio is composed of stocks at 42%, divide that by 1. 6, you get to the long-term treasuries, which is the next part of the portfolio at 26%, divide that by 1.6 or fee, and you get to the next part of the portfolio, which is the gold at 16%, divide that by 1.6, you get to the next part of this portfolio, which we have in our sample portfolios as REITs at 10%, and then you divide that again by 1.6 and you get to 6%, which we have as cash in the sample portfolio. Now, this is also related to what are known as the Fibonacci numbers. And for you math nerds such as myself, it's always pleasing to see things that are arranged around Fibonacci numbers. Those are the numbers when you add them together, they equal the next number. So the Fibonacci sequence goes 1, 1, and then 1 plus 1 is 2. So it's 1, 1, 2, then 3, then 5, then 8, then 13, then 21. These proportions that are in this portfolio actually match up to the Fibonacci numbers 3, 5, 8, 13, and 21. And if you multiply those by two, you get the percentages that are in this Golden Ratio Portfolio. Now, this portfolio shows a lot of robustness. It is best to compare it to a standard 60/40 portfolio. What you'll find is that it performs a little better with less risk is what it's designed to do. Now, what's nice about this, and we talked about this in our last episode when we were talking about Jordan's question, and he was asking, well, you know, what kind of portfolio should I use as this intermediate fund portfolio to borrow against? And I said, you could use a version of the golden ratio. Because what you can do with this golden ratio portfolio is you can keep those three largest components, the stocks, the long-term treasuries, and the gold, which are the 42, 26, and 16%. And then you can vary the portfolio by changing what's in that remaining 16%. And so what I thought we would do today is look at a couple of variations on that in some portfolio analysis at Portfolio Visualizer so you can get a feel for how this portfolio is very flexible and you can adjust it or tweak it to make it either more conservative or more aggressive depending on what else you want to put in there besides the base of the US stocks, long-term treasuries, and the gold. This portfolio was also discussed in two prior episodes, episodes 6 and 38. If you go to episode 6, you'll get an even lengthier explanation of the math behind this and some long-term tests of it using portfolio charts that go back 50 years. So just taking a look at this portfolio analysis that we did at Portfolio Visualizer, and I will be linking to this in the show notes, we basically constructed three variations of this portfolio. First we have the golden ratio that we're using as as the sample portfolio, which has as its smaller components 10% in REITs and 6% in cash. And then we did another variation, which is more conservative. And this is the SHY or short-term Treasury bond variation, which I had talked about in the last episode in response to Jordan's question. And this one, instead of having 10% of one thing and 6% of another, we just took that extra 16% and made that all short-term treasuries, which makes it look a little bit more like, say, the golden butterfly, but also is a dampener on it makes it a more conservative portfolio. And then we also wanted to look at something that would be a more aggressive version of this portfolio. So I made an emerging markets variation of this, and in this variation we have 42% in the US stock market, still 26% in long-term treasuries and 16% in gold, which is common to all these. And then tweaking that last 16%, we took 8% and put that in REITs, and then we took 8% and we put that in emerging markets to see how this would perform. Now, we were able to run this on an analysis going back to 1995. That was the data they have there. So it's a 25-year analysis. And then we also compared it to the Vanguard Wellington Fund, which is kind of a standard 60/40 portfolio. Now, what you'll see in this is that these portfolios all performed very similarly, but the drawdowns or risk for the golden ratio were much less than for the Vanguard Wellington Fund, which is really what makes it desirable. So just taking a look at the portfolio returns results from this analysis, we see that the original golden ratio for this period had a compounded annual growth rate of 9.26%. The conservative SHY variation had a compounded annual growth rate of 8.67%, and then this emerging markets variation had a compounded annual growth rate of 9.64%. The Vanguard Wellington itself was slightly higher at 9.76%, but these are all really within the same range. But then if you look at the worst years getting an idea of how much pain you would go through to hold these things, the original golden ratio only had a worse year of -12.53%, which I believe was in 2008. That SHY variation, the short term with the short-term treasuries in it, its worst year was only down 7.85%, so it was very much asleep well at night portfolio. Even the emerging markets, which is more aggressive, had a worst year of -16.1%. And you can compare that with the Vanguard Wellington. The Vanguard Wellington's worst year was -22.3%, so it's significantly larger than the the other portfolios here, which is why the golden ratio variations are superior to it. And this is also reflected in what is known as the Sharpe ratio, which is a risk reward measure. Before I get to that, I should say looking at the maximum drawdowns, you see this also reflected that the original golden ratio had a maximum drawdown of 24%. SHY had a maximum drawdown of 16%, the emerging markets variation maximum drawdown of 28%, and then the Vanguard Wellington, that 60/40 portfolio had a maximum drawdown of 32.5%. So particularly when you compare something like that SHY variation, it's just half as volatile as the Vanguard Wellington 60/40. certainly is well within the range as far as returns are concerned. And that's what you're really trying to get here. If you took leverage, as Jordan was thinking about in his question a few days ago, you could obviously make the SHY variation perform better than the Vanguard Wellington fund with less risk. this is reflected in the sharp ratios. The original golden ratio has a sharp ratio of 0.84 for this period. The SHY variation, which had the lowest return, has the highest sharp ratio because it may have a little less reward, but it's got a lot less risk in it. And so that sharp ratio is 0.89. And then the emerging markets variation has a sharp ratio of 0.79. and then you get to the Vanguard Wellington with the lowest of the four at 0.78. And again, that reflects the total risk reward of these portfolios looking at them. You can also see the correlation of these portfolios is less to the total stock market in each case. It is 0. 82 for the original one, 0.79 for the S&P 500 variation, 0.85 for the emerging markets. and then that Vanguard Wellington is 90% correlated with the stock market. And then we also just wanted to look at another metric here, the trailing returns. And what you can see by this is that these golden ratio portfolios actually in the past few years have outperformed this 60/40 portfolio, except for the last three months. The last three months, the Vanguard Wellington was at 8.5 compared to 6.5, 5.4 and 7.6 for the Golden Ratio variance. The year to dates, well, they're all down a little over a percent, so that's not very interesting. You look at one year, though, which included that big drawdown we had last March, and you see how the Golden Ratio portfolios just performed much better through that bad period. and so the original golden ratio has a one-year trailing return of 12. 17% that SHY is actually at 13.24% and the emerging markets variations at 14.18% and that compares to the Vanguard Wellington at 8.95% which gives you that the idea or the perception that when you have bad times these golden ratio portfolios are really going to do you much better better than a standard 60/40 style portfolio. Looking at the three year, it's also similarly arranged. The original golden ratio has a three year annualized return of 10.28. The SHY variation is at 10.03. The emerging markets variation is at 10.3, but the Vanguard Wellington is at 7.93. You only see the Vanguard Wellington look better after you get back about 10 years. And the reason that is, is because you had that period from about 2010 to 2015 where the stock market was performing very well, whereas certain components of this golden ratio portfolio, mainly the gold, which went up and then went down sharply in that period. would have changed that performance. The long-term treasuries that are in these portfolios also were up and down, as were the REITs for the ones that contained the REITs. But then you can also look at the annualized volatility, which is also represented here, and you see that it is lower for the golden ratio variations. At three years, the original golden ratio has an annualized volatility of 9.7%, The SHY variation, it's 8.3, merging markets variation is at 10.5, but the Vanguard Wellington was up there at 11.9, so it's much higher. So what you should get out of this is that this is a very good portfolio to start with, to work with if you want to construct your own variation of a risk parity style portfolio. because it allows some flexibility and some movement of different components that you can put in there that you may be interested in. Maybe you have an interest in having some municipal bonds or something like that, or some preferred shares, or, you know, utilities is another possibility. You could stick in there in that 16% and then, you know, you can also put as much cash as you feel you need for the year. in essentially a cash allocation in that portfolio, which is what we've done in the sample portfolio. And you can see it's very easy to manage that sample portfolio, the golden ratio that's in the sample portfolio because it's got that 6% cash. So each month we don't have to sell anything in that portfolio. We just take out of that 6%. Some dividends go into that. It does get drawn down a bit through the year. It's still Even, you know, two-thirds of the way through the year, it still has most of it left in there. When we get to rebalancing, then that is the time we'll move things around, replenish the cash, and it'll be ready to go for the next year. But if you were drawing down on a large portfolio and you wanted to have that cash bucket, this would be a nice way to set that up. But now I see our signal is beginning to fade. I want to thank you all for tuning in. We're well over 6,000 downloads right now, which is very nice to see. I've seen a lot of interest in the Dragon Portfolio episode a few episodes ago. It was also the one I ranted in, and some people really like to hear that one as well. We will be picking up this week with more discussion of that managed futures fund that we were talking about. in episode 55, and that should be interesting as it also is one of those components that you could put into a Dragon Portfolio or any Risk Parity Style Portfolio to the extent we think it's a good idea, and we'll find that out this week. If you have comments or questions, please send them by email 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 will get your message that way. Thank you again 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 [23:06]

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