Mostly Voices [0:00]

A foolish consistency is the hobgoblin of little minds, adored by little statesmen and philosophers and divines.

Mostly Mary [0:14]

If a man does not keep pace with his companions, perhaps it is because he hears a different drummer. A different drummer. 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 eight of Risk Parity Radio. Today's episode is our weekly portfolio review, and then we will be talking in depth about one of our experimental portfolios, the Accelerated Permanent Portfolio. Going to the portfolios, we see this is really the first week of declines for these portfolios since they were instituted about a month ago, and each one of them declined in some way, primarily due to the break in gold prices and also to lower Treasury bond prices. So looking at the All Seasons portfolio, the most conservative and first one in our bucket we can see it is down 1.6% this week. These are also reflected in the website www.riskparadioradio.com on the portfolios page. You can follow along and see these results for yourself. So the All Seasons is down 1.6% for the week, is still up half a percent since inception. the next portfolio is the golden butterfly and that is down 1.2% for the week it is up nearly 5% since inception and the golden ratio portfolio the third one is down 1.8% for the week and up 4.54% over the past month since inception you can see here that Friday is a pretty typical day for these portfolios. And this one was down $13.61 or 0.13%. It is fairly usual for these portfolios not to move a whole lot most days because they have a reduced volatility as compared to your regular stock portfolios. The next portfolio is the Risk Parity Ultimate, and that was down 1.4% past week. It is up 3.86% since inception. And this one shows a lot of more dampening because it is the most diverse of the portfolios. So it is going to move in either direction a lot less. It's designed to be somewhere between the all seasons and the golden butterfly. And that's kind of where you find it. The next portfolio is the Accelerated Permanent Portfolio. This is one of our experimental portfolios with a higher risk reward profile and it was down 3.6% last week. It is still up 4.87% since inception last month and we'll be talking about it more in a few minutes here. And then the final portfolio, the aggressive 50/50, also one of our experimental portfolios that carries a higher risk reward ratio to it. It is more volatile. It was down 3.1% last week. It is up 3.65% since inception last month. And now turning to our portfolio of the week. It is the Accelerated Permanent Portfolio, one of our experimental portfolios. Now this portfolio has four components. It has a gold component, a preferred shares component, and those are represented by GLDM and PFF as the exchange traded funds. And then it also has two additional components, TMF and UPRO. TMF is a leveraged long-term treasury bond fund. UPRO is a leveraged S&P 500 fund. They are the proportions that they are in this portfolio is The UPRO and the PFF are 25% each of the portfolio. The TMF is 27.5% of the portfolio, and the GLDM is the remaining 22.5% of the portfolio. This portfolio has an interesting history. Let me just tell you about it. The idea for this actually came out of a conversation I had at in Con last year when it was came to the local area in the DC area where we live. And so I went to a happy hour there that was sponsored by the Finlit Facebook group and the what's Up Next podcast. And while I was there, I met a nice gentleman named Matthias Richter, who hails from Switzerland originally, but lives with his family in Asia right now who is from the banking sector and knew a lot about a lot of different things. And I was talking to him about the style of investing that I prefer, the risk parity style. And he inquired whether I had tried to use any of the leveraged funds that are available now in the ETF world that are commonly traded. These leveraged funds tend to move in multiples of their underlying indexes. So for instance, UPRO is designed to be three times more volatile than the S&P 500 and go up about three times when the S&P 500 advances. TMF, our Treasury Bond fund is designed to be about three times more volatile than its underlying index or TLT. I said I had not attempted to do anything like that. But it sounded like an interesting idea. If you could balance them out in an appropriate way, the problem with these types of funds is their incredible volatility on their own does not make them good long-term holdings. They are really designed for short-term traders. So I went off after that conversation and thought about it some more and then put together a portfolio that I thought might work. And this is one of those portfolios. This is taken from the original permanent portfolio that I discussed in episode three, which was an invention from the 1970s and 80s by Harry Brown. And in that original portfolio, that was 25% gold, 25% long-term treasury bonds, 25% stock market and 25% short-term Treasuries or T-Bills. As I discussed in episode three, it really was a kind of primitive attempt at a risk parity style portfolio and didn't work all that well because the gold was so volatile and so such a large portion of it that it kind of dominated the portfolio. So it ended up being a portfolio with too much gold in it and too much cash in it. And so what I did to create this accelerated or modern version of a permanent portfolio is I started with those basic one quarter each kind of grouping or division among the portfolios. But because the TMF and UPRO funds in this are so much more volatile and move so much more, It really has an effect of being more like a portfolio that is 40% stocks, 40% long-term treasuries, and then 10% of the two other components. So that kind of division gives us more of a portfolio that actually behaves a lot like the all-seasons portfolio, the most conservative one, but has extra leverage in it. So it is much more volatile and has a much higher potential reward to it. And then I adopted still the gold from the permanent portfolio and instead of T-Bills I picked a preferred shares fund, now a preferred shares fund. This one is relatively stable. It has about half of the volatility of the stock market, but it pays a dividend of over 5%. So those types of funds are very good if you are looking for something that's between a stock and a bond that's going to pay you a high rate of interest. And in fact, if you are interested in dividend stocks, you probably would be a lot better off with a fund like PFF for income because you're really getting the most income you can out of the stock market and it also pays as a qualified dividend, so it has favorable tax treatment if you compare that to, say, high yield bonds, which is something you would compare it to. And I have heard this particular fund being used more often by more people, particularly Rick Ferri. I heard him last week just say that he uses PFF in his personal portfolio to take up part of what he would have ordinarily put into bonds because it has these nice characteristics and pays a lot better than most bond funds do these days. So in the end, I ended up with a portfolio that is almost a quarter each. I increased the holding in TMF to 27.5%, mostly so it would balance out the volatility of the stock portion of this, the Upro portion of this, it needed to be a little bit more than the stock portion. And so that's why it is a little bit more. I just took that off off of the gold section, but it is very similar in makeup to the original permanent portfolio. Now, if we take a look at how it's been performing, you can see the big differences since last month. The gold is up 7.52%. The preferred shares are up 3.96%. The bonds were up, but now are down almost 5%. The UPRO, the stock portion of this, is up 14% in the past month. And so you can see how those leverages work in this kind of portfolio and really make the components move a lot. Fortunately, because they're balanced, they're moving in opposite directions and that dampens down the overall volatility of the portfolio. Now, I ran a comparison of this portfolio to a total stock market portfolio because this portfolio does in fact have about the same level of volatility as a total stock market portfolio. So I felt it appropriate to compare the two of them to see how each one performed. So the comparison I ran over at Portfolio Visualizer was between this accelerated permanent portfolio and a portfolio that is comprised of VTI or VTSAX, the Vanguard Total Stock Market Fund. The data we have for this only goes back to 2009, so we are limited by that. But the results are fairly impressive comparing the Accelerated Permanent Portfolio to the Total Stock Market Portfolio. In particular, the compounded annual growth rate for the Accelerated Permanent Portfolio since mid-2009 is 18.43% annually, and that compares to 12.86% for the Total Stock Market Fund. So in effect, you're getting one and a half times the return out of this accelerated permanent portfolio than the total stock market fund. The maximum drawdown during that time is actually greater for the total stock market fund. It is 20.8%. The maximum drawdown for the accelerated permanent portfolio was only 16.65%. So again, that is also an improvement there. Taking a look at some of the other metrics that came out of this analysis, the volatility of each of these portfolios is very similar. So you're looking at the same kind of risk profile. The Accelerated Permanent Portfolio has a slightly less volatile presentation. It is 13.4% compared to 14.3% for the total stock market portfolio. As I mentioned, the maximum drawdown for the Accelerated Permanent Portfolio was 20% less than the total stock market portfolio. If you are interested in sharp ratios, which is also a measurement of risk reward, the total stock market portfolio had a sharp ratio during that period of 0.88. and the Accelerated Permanent Portfolio had a Sharpe Ratio of 1.29. So again, you can see that it is about that 50% better in terms of the ratio, and that also goes to the return. Another measure of how these portfolios perform is something called skewness. Now skewness is measuring how far down does it go when it's going down versus how far up is it going when it's going up. And so when you have a negative skewness, it means that it is taking some big dives. So the total stock market has a negative skewness of negative 0.49. The accelerated permanent portfolio is very close to zero, meaning its ups and downs are fairly equal. It is only negative 0.13. So again, that is a measure of how volatile the experience would be to hold each of these two portfolios. And then finally, another measure of volatility or risk is called value at risk. And the Accelerated Permanent Portfolio has a lower risk profile than the Total Stock Market Portfolio. the value at risk for the Accelerated Permanent Portfolio is -5.02% and for the Total Stock Market Portfolio was -5.69%. So they are similar risk with the Accelerated Permanent Portfolio being slightly less risky. Now looking at the perpetual withdrawal rates, and these are not accurate for these two portfolios because the time frame is too short, to actually calculate a good safe withdrawal rate. But what you can see from it is that the projected safe withdrawal rate for the accelerated permanent portfolio is about 40% higher or better than the total stock market portfolio. So if you had planned to hold a total stock market portfolio in retirement, this portfolio would give you probably 40% more that you could expect to take out of it in terms of projected safe withdrawal rate. Now, because this is an experimental portfolio, we don't have enough data to really hang our hat on it. So I have not incorporated it in any significant way into our own holdings. I have about 5% of our holdings in a portfolio like this just to see how it will do. But if these recent returns over the past decade are any indication, this kind of portfolio is going to have much superior returns to a similar portfolio that is composed only of stocks because it has a lot less risk for the reward that it's getting. And the rewards are substantial if they continue to be over 15% as they have been projected in the recent past. And now I see our signal is beginning to fade and so it is time to say goodbye. Thank you for tuning in to Risk Parity Radio. If you have comments or questions, I'd be happy to entertain them. You can put them in at the website, which is www.riskparadioradio.com, or you can simply email me and my email address is also on the website. It is frank@riskparadioradio.com. riskparadioradio.com that's frank@riskparadioradio.com and I will be happy to entertain them and we can talk about them in the podcast. This is Frank Vasquez for Risk Parity Radio, signing off.

Mostly Mary [17:35]

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.