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. Thank you, Mary, and welcome to episode 58 of Risk Parity Radio.

Mostly Uncle Frank [0:45]

Today on Risk Parity Radio, it is time for our weekly portfolio review, and then we will do a little focusing on the risk parity ultimate portfolio as the portfolio of the week. Just looking at what the markets did last week for reference, the S&P 500 was down 0.71%, the NASDAQ was down 1.57%, gold was down 2.29%, it's kind of a theme here. Long-term treasury bonds represented by TLT, the ETF, were down 3.72% for the Bigest loser last week. And then we had REITs represented by the Global REIT Fund, REET, we're down 0.04%. So really flat. Commodities seem to be the only thing that were up. That's PDBC is what we're using to represent those. And it was up 1.24%. And then preferred shares represented by the fund PFF were down 0.73%. You'll see what this translated to were modest losses in most of the sample portfolios that you'll find at the portfolios page at www.riskparitario.com. But we're going to go through those right now. We look at our most conservative portfolio, the All Seasons portfolio. This one is 30% in stocks, 55% in treasury bonds, which is divided into 40% long term and 15% intermediate, and then it's got the remaining 15% divided into gold and commodities represented by the funds GLDM and PDVC. This one was down 1.26% last week, largely on the drop in the treasury bonds. It is up 3.56% since inception last July. It is very conservative, but it's doing what it's supposed to do. Not moving much, but doing okay for taking out 4% a year. It'll just make it. Now we'll get to our main three portfolios that you might think about actually using or a variation thereof. And the first one is the Golden Butterfly, and that one is 40% stocks divided into a total stock market fund VTI and a small cap value fund VIoV. Then it's got 40% in treasury bonds, which are split between long-term treasuries, TLT and short-term treasuries, SHY, which are a lot like cash. And then we have 20% in gold represented by GLDM. This one was down 0.77% last week, so It didn't move very much. It is up 14.44% since inception last July, led on the strength of this small cap value fund, which is up nearly 60% since last July. Very surprising performance, but you never know. This goes to show you that having a diversified portfolio will get you nice returns, but you're not ever sure where exactly they're going to come from. in any given year. Now going to our next portfolio, the Golden Ratio. This one is 42% in stock funds, 26% in long-term treasuries represented by TLT, 16% in gold represented by GLDM, 10% in REITs represented by R E E T in this sample, and 6% in cash. This one was down 1.23% last week. Again, largely due to the treasuries in it. It is up 11.72% since inception last July. But you'll see that these portfolios, even though they're moving a little over 1%, that is much less volatile than the components that we talked about up at the top of the episode. And now moving to the Risk Parity Ultimate, and we'll be talking about this more following this summary, and this one was down 1.44% last week. It is up 10. 53% since inception last July. This is our most complicated portfolio, sample portfolio. And now moving to our two experimental portfolios, these did have a lot of volatility last week as you might expect because they have leveraged funds in them. The Accelerated Permanent Portfolio is 27.5% TMF, which is a leveraged treasury bond fund, 25% UPRO, a leveraged stock fund, and then it's got 25% in preferred shares represented by PFF and 22.5% in gold represented by GLDM. This one was down 3.15% last week. It is up 7.58% since inception last July. These are interesting in one respect that they're not doing as well as our standard risk parity style portfolios, but they have such large volatility they can swing by just as much as the most volatile stock or bonds in any given week. So that's why you do see them move so much more and that is due to the leverage in them. And our last one, our other experimental portfolio is the aggressive 50/50. This one is 33% in the leveraged stock fund UPRO pro 33% in the leveraged bond fund TMF and it's got 17% in preferred shares PFF and 17% in intermediate treasury bonds represented by VGIT this one was down 3.02% for the week it is up 9.2% since inception last July and now let's focus in on our portfolio of the week which is this Risk Parity Ultimate Portfolio. This sample portfolio is designed to incorporate essentially the kitchen sink into it, even though it doesn't quite have the kitchen sink into it yet. I'll tell you what it's got in it and then a couple of the modifications that we are likely to make to it when we rebalance it next July just to include everything as an example of how you might diversify out a portfolio into its maximum diversification. So what is going on, and what we have in this right now, is about 40% in stock funds, and that is divided into 12.5% in a Vanguard large cap growth fund, VUG, 12.5% in a small cap value fund, VIoV, and then it's got 12.5% that is in two low volatility funds and it's divided into SPLV and USMV and those are designed to essentially track the S&P 500 but with lower volatility in them. It's also got 2.5% in UPRO, that leveraged stock fund, to round out the main stock components. And then moving on to the bond components, it's got three things in this, all long-term treasury related. 15% of it is in TLT, the long-term treasury bond fund. 5% is in EDV, which is a Vanguard Extended Duration Treasury Fund, and then 5% is in TMF, which is the Leveraged Long-Term Bond Fund. So that comprises 25% of this portfolio. And the remaining parts of it are divided into gold at 10%, real estate REITs at 10%, and then we have the remaining 15% is PFF preferred shares at 12.5% and the 2.5% remaining goes into a volatility fund which is VXX in there right now. And that acts kind of like an insurance policy because it usually does not perform very well But whenever there is a stock market crash, it will spike upward. Now this portfolio probably is a little bit more complicated than it needs to be. It kind of violates our simplicity principle, but it is a sample portfolio. And it is also, I believe, our most robust sample portfolio. And what I mean by that is in the context that Nassim Taleb talks about robustness, fragility, and anti-fragility in his books Antifragile, the Black Swan, fooled by randomness, and even going back to his book called Dynamic Hedging, which was all about options and is difficult to read unless you understand a lot of mathematical formulas. But anyway, I think the analogy here that we can think about is A recent event in Texas, we all know those big ice storms struck and had a terrible effect on their electricity grid. Now, if you look and see how that electricity grid was designed, that is an example of what Nassim Taleb would call a fragile system. And it's fragile because it's efficient. It was designed to be as efficient as possible. so that in most circumstances it would deliver electricity at as cheap of prices as possible. It is analogous to say an 100% equity portfolio that usually delivers the highest returns over something that is more diversified into bonds or other things. But then you see the downside of focusing only on efficiency is that when something bad happens, it has a really bad result. And in the circumstance of that electricity grid, it was not hooked up to other grids, and it was not winterized. It does not have all of the bells and whistles that you would see on power grids in northern places like Minnesota or Iowa or Indiana, which ordinarily get that kind of weather and are set up to deal with it. And since it did not have those protections, when it collapsed, it really collapsed big and hard. And so this portfolio, this Risk Parity Ultimate portfolio, is more like an electricity grid with lots of backups to it and lots of protections for bad weather and other things that may happen to it. And so it's got some of those anti-fragile components, that volatility fund in it really is something that is anti-fragile because it only does well in a crisis and it does not do well when there's not a crisis. Now we took this portfolio and just did a little analysis of it. Unfortunately, because it's got so many different funds in it, we can only go back about 10 years to analyze it on Portfolio Visualizer. If you took out various pieces of it, you could analyze it much further back, but some of these are of more recent vintage. But I think it's instructive just to take a look at that, and I will link to this analysis in the show notes. And what you see when you look at this is it gives a very smooth ride over time. and just looking at this from 2011 until now, it had a compounded annual growth rate of 9.91%, which is very good and certainly large enough to sustain a large safe withdrawal rate. Its best year was 24.64%. Its worst year it was only down 4.25% if you can believe that, and the maximum drawdown was actually only 8.75% during that entire period. This gives it a sharp ratio of risk reward of 1.12. The other notable factor about this portfolio is that it's not very correlated to the US market. It has a correlation of 0.65, which means that it can often be going up or going sideways when the market is going down or sideways. They're not moving together at the same time. And where you see this, if you look at the portfolio growth, you see how steady it was. And then we went ahead and looked at the drawdown history of it. And looking at this drawdown, what's interesting about this is its biggest drawdown was not last year, as you would expect for most portfolios. Last year, its drawdown was only 7.41% when the stock market was crashing. And so you can see how holding this kind of thing is going to make you very happy when the stock market is crashing. Because it also, if you looked back at the components of this into the bad decade, the decade before that, it also held up well. its components did during that decade. So the maximum drawdown actually occurred between August 2016 and November of 2016, a four-month drawdown of 8.75%. It recovered in one year and one month. The next one was from February 2015 to September 2015. That was an eight-month drawdown and it recovered in six months. The next big drawdown, or you can call it a big drawdown of 7.48% was in September through December of 2018, which was four months down. It recovered in three months after that. And then you go to February 2020 to March 2020, that two-month drawdown, it was only down 7.41% in that time period, and it recovered within two months. so you can see that holding something like this is going to make you feel pretty good overall going forward that it's going to weather all kinds of ice storms and tornadoes and hurricanes and anything else that may arrive. If you compare it to a 60/40 portfolio, it is performing about the same for this particular period from 2011 through 2021 now. And that's a good sign because this was actually a very good decade for the stock market and a very good decade for 60-40 portfolios overall. But this portfolio, because it's not correlated with the stock market like a 60-40 portfolio is, a 60-40 portfolio is about 90% correlated with stock market. This portfolio, since it's much less correlated, is much more robust in terms of dealing with all kinds of situations and not just situations where the market is basically just going up in a bull market. And now let's talk about what this portfolio is missing in terms of the kitchen sink and what we may be adding to it when we come back. in July, we want to do this in an orderly manner, come up with a modification to our investor policy statement, and then move judiciously into a modified version of this. And there are a couple of things that are missing here. One is international stocks. And I think that if we take part of these low volatility ETFs, we have two of them in here, if we remove one of those and then put in some international stocks that would diversify that component of it. I think we really need to be careful about which international funds we do go after and we'll be looking at a number of them. But we want to find something that actually has a low correlation to US stocks. Many international funds actually have a relatively high correlation and so it defeats the purpose we want to find. something with a low correlation to US stocks. And I'm thinking something that holds a lot of domestic Chinese stocks is likely to be something like that or some other domestic economy. We want to try to avoid things that are sort of purely international or international banks because they tend to be correlated with the US stock market. Another thing we're missing in here is cryptocurrency and there are now funds coming online to make it much more easy for us to invest in that in a portfolio. We're not going to get the FOMO and jump in right now just because it's all going up at once, but we could add and I think it's most likely we'll just take a little piece off of the preferred shares fund. We've got 12.5% in that if we took maybe 2.5% of that and moved it into cryptocurrencies that would balance that out. The other thing we're missing here that we see in some of our other portfolios is a straight commodities fund. And I think if we take a little bit off of the bonds that are in this portfolio, we could add a few percentages of PDVC or another fund. like that. So that is sort of what I've got on the radar to build this out and to make it not because I would expect anybody would really want to hold all of these things, but in terms of having a sample portfolio that spans the globe, if you will, in terms of investments, I think that'd be a good thing to have and a good thing to watch and invest in. We also probably will sell out of the current Volatility Fund and look for a different one for two reasons. One, because we can tax loss harvest out of that and that will be convenient at that time. And secondly that I'm really not very satisfied with the ETF options for investing in volatility. There are a number of them and none of them seem to be that great, but we'll do the best we can. with what we've got and see what we can do. But that's all coming in the future. For now, I see our signal is beginning to fade. I do want to apologize to listener Jason, who I referred to as Jordan several times on some of the podcasts in the past couple of weeks here. Thought I only did that with my children, but evidently I do it with more people. But anyway, if you have comments or questions there, welcome. You can send them to frank@riskparityradio.com that's frank@riskparityradio.com or you can go to the website www.riskparityradio. com where you can look at the sample portfolios and you can fill out a contact form and submit your question or comment that way. If you hadn't had a chance to, you could go to Stitcher or iTunes or wherever you get this podcast and leave me a little review. That would be very much appreciated. Thank you for tuning in. This is Frank Vasquez with Risk Parity Radio signing off.

Mostly Mary [21:26]

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.