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. Thank you, Mary, and welcome to episode 65 of Risk Parity Radio.

Mostly Uncle Frank [0:44]

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. And then we will talk a little bit about rebalancing because one of the portfolios got rebalanced this week. But first, I'm going to have a little dip into the mailbag and we'll answer this question. This comes from Zach L. Zach L writes, hi, I've been listening through your catalog from episode number one. and am on number 10. I'm hoping you addressed this question in a future episode, but I got impatient and waiting. What is the purpose of holding cash in some of these portfolios? Doesn't that effectively just de-leverage and de-risk the returns? Or am I misinterpreting the colloquial cash and you actually mean to hold short duration bonds or money market? Or is this non-USD currencies? Thanks. Well, thank you for asking that question, Zach. Yes, the cash in these portfolios is in money markets, is where those are held. Actually, there's only one of the sample portfolios, the Golden Ratio portfolio, that actually has an allocation to cash. The cash in the other portfolios has accumulated through the payment of dividends over time. And what you'll find out if you listen to more of the podcast is what we are doing with these portfolios is drawing down on them. So they either have to have some cash or sell assets to generate cash so we can take those drawdowns out, which we are taking out every month. The other portfolio that has Something like cash is the golden butterfly portfolio, and that has an allocation to short term treasury bonds represented by the fund SHY. And so that portfolio does have that kind of modeling. I think really, if you thought about, for instance, if you have that golden ratio portfolio, if you wanted to get rid of the cash, you would simply add, it has six percent cash or in a money market in it. You would take two percent and add that to the stocks, two percent add that to the long-term treasury bonds, and you could add one percent to each of REITs and gold. And then you would have a similar portfolio without the cash in it. The advantage to having that is when you're talking about a drawdown portfolio, the nice thing about that portfolio is We don't have to sell anything all year long to draw out of that portfolio. It's already built into the money market component there. And so that portfolio just draws out of that and then we'll get to the annual rebalancing, which will happen this July. We will replenish that and go forward like that. And a lot of people that have retirement portfolios want to have What is sometimes called a cash bucket, you can call it a cash bucket, you can call it a cash allocation. It's really the same thing. Calling it a bucket is, to me, it's a form of mental accounting. So you might as well think of it as part of your overall portfolio that you are living off of. And so you do need to think about, and most people drawing down off a portfolio are going to hold at least a year's worth in cash or cash equivalents for that purpose. A year's worth of expenses is what I'm talking about. And if you're following the 4% rule, that's 4% of the portfolio. So I hope that answers your question, but if it doesn't, feel free to follow up and we can talk more about it. But now we're going to our weekly portfolio reviews, and first we will review the basic components of the markets to see how they performed and then compare that to our risk parity sell sample portfolios. So the S&P 500 was down 0.77% last week. The Nasdaq was down 0.79% last week. Gold was actually up. It was the big winner for the week, up 1.08%. Treasury bonds, long-term treasury bonds represented by the ETF TLT were down 1%. REITs represented by the Global REIT Fund, REET, were down 1.2%. Commodities represented by the fund, PDBC, were down 3.64%, which is like the first week they've been down in most of the year. I think they're up over 15% for the year or more so far. And then PFF preferred shares were down 0.21%. last week. And now going to our sample portfolios, the first one is the All Seasons portfolio. This is the one that is very conservative, probably a bit too conservative. It is comprised of 30% stocks represented by VTI, the Vanguard Total Stock Market Fund, and then it's got 55% in Treasury bonds, which is 40% in the long-term treasuries, TLT and 15% in intermediate-term treasuries, VGIT. Then the remaining 15% is divided into gold and commodities represented by GLDM and PDBC, those two ETFs for those two things. This one was down 1% last week. It is up 1.26% since inception last July, so It is holding on. It usually doesn't move too much, but it has been struck down, if you will, or struck at by the poor performance of bonds in the past six months or so, really since November is when the bonds started performing badly. But it is interesting. This, I read an article saying that the performance of bonds since the beginning of the year is like the fourth worst since 1830 or some crazy statistic like that. And if that's the fourth worst coming off of a pandemic, then I actually feel pretty good about where these things are in comparison. But the rates on treasury bonds have essentially gone back to where they were prior to the pandemic and are more likely to follow basic economic cycles going forward. If you're interested in nerding out on economic cycles, interest rates, and all those sorts of things, there's a nice series of interviews done this week by the people at hedgeye.com that I can link to in the show notes. And they interviewed nine people from Charles Schwab and various hedge funds and all sorts of people of that nature who spend all their time looking at this stuff for a living and guessing about it. And you'll find that most of them say these days that, yeah, things are going to pick up because of the end of the pandemic, but towards the end of the year they may go back down or, you know, people don't know. In any event, we don't need to do that here. And that's the point of having these portfolios. structured the way they are is that we even in the worst of the worst for some of the portfolio, in this case the bonds, the other parts of the portfolio tend to hold up and do well and take care of any problem that is existing in one aspect of the portfolio. So we're not caught guessing about which aspect of which portfolio is going to do the best next. So going into now our three main risk parity style portfolios that you might consider holding or a variation thereof in a retirement portfolio. We look at the Golden Butterfly and this one is the one that is 20% total stock market, 20% small cap value, 20% Treasuries represented by TLT, And then it's got 20% short term treasuries. I should say there's long term treasuries and short term treasuries. And then the remaining 20% is in gold. It's in GLDM. This one was down 1.24% last week. It is up 16.09% since inception last July. It is our best performer these days, primarily because it's got all that small cap value. fund in it, although I do note that the small cap value fund that we're using VIoV was actually down 2.87% last week, which is it might be the first time it's been down for the week during the year. I think it's up about 30% since the beginning of the year, which is ridiculous, but we'll take it. And it just shows you how diversified that fund is from the Treasury bond funds that it thrives in these more sort of reflationary or inflationary environments. And so it gives you that diversification that you're looking for. And now we're going to the Golden Ratio Portfolio. This is the one that is 42% in stocks, 26% in long-term Treasuries represented by TLT. 16% in gold, GLDM, 10% in a global reit fund we're using for this for simplicity purposes, and that is REET. And then this is the one with the 6% in cash, which is in the Fidelity Government Money Market, which these days is paying something like 0.1% that's noted as SPAX. SPAXX as a ticker symbol. And so this one was down 1.22% for the week. It is up 12.12% since inception last July, and so is doing just fine. And now we're going to the Risk Parity Ultimate Portfolio. This is the one that has the most complicated number of funds with 12 of them. It's got About 40% in bonds, I'm sorry, that's 40% in stock funds, 25% in treasury bond funds, 10% in gold, 10% in the REIT fund, R-E-E-T, and then we've also got 12.5% in the preferred shares fund, PFF, and then the remaining 2.5% is in a volatility fund. called VXX, which is, yes, the worst performer in the bunch, down 60% since inception last July. Fortunately, we have things like VIOLV, which are up 76% since last July, and UPRO, a leveraged stock fund, is up 72% since last July. So it is interesting looking at these things performing over a year and seeing the the great diversification in performance and the volatility that you would have if you were to hold some of these funds individually is canceled out effectively by the way these perform. So this is similar to the other funds, it is down 1.28% for the week. It is up 10.31% since inception last July and it is doing what it's supposed to do, it is less volatile overall than the previous two because it's got more diversification into it. And now we're getting to our two experimental portfolios, and they are not looking well these days. These involve leveraged funds, and so they are a lot more volatile than the standard three portfolios, but we want to see what these sorts of things also look like and how they survive or don't under a stressful withdrawal rate of 8% per annum done monthly. So the first one is the Accelerated Permanent Portfolio. This one is comprised of 25% in a leveraged stock fund, UPRO, 27.5% in a leveraged bond fund, TMF, 22. 5% in gold GLDM and the remainder is in a preferred shares fund PFF which is also 25% of the portfolio. This one was down 1.24% last week that's kind of a theme everything's down 1.2 something it is up 2.95% since inception last July. You can see this fund is or this portfolio is suffering a bit since it does not have the small cap value that some of the other portfolios have, which would give it a little more diversification from a strictly total stock market fund, which is what UPRO really represents, or an S&P 500 fund is what it's based upon. And then we get to our last portfolio, our most volatile one is the aggressive 50/50. This one is comprised of 33% in the leveraged stock fund UPRO, 33% in the leveraged bond fund TMF, and the remaining 34% is divided 17 to PFF, a preferred shares fund, and 17 to VGIT, a Vanguard intermediate term treasury bond fund, and those two funds act as ballast for the leveraged ones. This one was down 1.86% for the week. It is up 4.53% since inception last July. This portfolio was actually rebalanced and it's been rebalanced for the second time in its existence. Now to rebalance you might have two kinds of rebalancing rules. and four of our portfolios are following the annual rebalance rule, which is a kind of a typical base way of doing rebalancing for ordinary portfolios. So the first four portfolios follow that. We have two other portfolios, the experimental portfolios that follow a rebalancing schedule on bands. and so with those we look at them every 15th of the month and if the initial allocations have gone out of whack in at least one of the components by 7.5% or more we will rebalance that and so in this case we sold about $1,100 or $1,143 I believe of UPRO out of that aggressive 50/50 portfolio and then bought the bonds TMF to balance that out and put it back to where it was originally. Now we had talked about rebalancing previously in episode 32, if you want to go back and listen to that, because I've also linked to a nice article by Michael Kitces there about rebalancing schemes and whether rebalancing by calendar or rebalancing through bands is the best kind of rebalancing. There has not been a whole lot of work done in this really, considering, you know, how long the idea has been around. We do know for almost certain that rebalancing any less than one year if you're doing it on a calendar basis really doesn't do anything for you. It doesn't make too much of a difference and in fact could be more complicated or work not in your favor. There is some suggestion recently, notably by Bill Bengen, who is the father of the 4% rule, that perhaps portfolios do not need to be rebalanced even on a one-year calendar basis. Perhaps it is multi-years that we should be looking at for rebalancing portfolios. I'm not aware of any research that's actually been done on that. But the other alternative is the more mathematical approach, which is to use rebalancing bands. And if you read that Kitces article, what the research has come up with is Somewhere around 20% difference from the initial allocation in a portfolio seems to be about the right amount. So if you have a portfolio with an allocation of 25% to something 20% of 25% is 5%. So you would consider rebalancing the portfolio if that allocation moved above 30% or below 20% and hopefully that makes sense. But now I see our signal is beginning to fade and we will pick up next time later this week furthering our discussion from episode 64 about the difference between risk and uncertainty and how we can deal with some of that by using rules of thumb. If you have questions or comments for me, I welcome them. You can send them by email to frank@riskparityradio.com that's frank@riskparityradio.com or you can go to the website www.riskparityradio.com and then you can fill out a contact form there and I will get your message that way. I want to thank all of our listeners, all of especially all of our old listeners and now a lot of our new listeners since our audience seems to have jumped by about five-fold and we've gone from 7,000 downloads of this podcast to over 11,000 in just a week. It's gratifying to see that I'm still hoping that I can answer most of the messages I get either directly or through podcasts because that seems to be the nice way to build community here. And I would almost prefer that the podcasts not get too big because it's just me doing this. But if you would like, it would be nice and helpful if you would go to iTunes and leave a five star review, or however many stars you'd like to give me there to give the podcast some more publicity. I got some email spam from somebody who said that our podcast was up to number 143 of all business podcasts, which I guess just goes to show you how the listenership of podcast is arranged on power laws and that Most of them have almost no listeners. And if you garner, you know, a few thousand, all of a sudden you're getting into the hundreds. But if you wanted to get, you know, the top, I'm sure you would need to have millions of downloads because that's the way it works. Thank you again for listening in. This is Frank Vasquez with Risk Parity Radio. Signing off.

Mostly Mary [21:44]

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.