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 [0:21]

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 100 of Risk Parity Radio. Episode 100. Nope, nope, there won't be any ranting this time. Maybe later.

Mostly Voices [0:58]

That question will be answered this Sunday night! Cena that rings the bell! Listen up, WWE Super Slams! Instead, I'm intrigued by this. How you say, emails. First off.

Mostly Uncle Frank [1:16]

And first off, we have an email from Randy B. And Randy B writes, message. Hello, Frank. I've listened to your podcast and I'm catching up. I'm now on episode 51. I have a few newbie questions for you about withdrawal slash drawdown. Every month you take X percent from each portfolio for the best part of the portfolio. Question one, best performing since when? Since inception or since the last month or some other time variable. Question two, percentage of what number? from the initial amount you put in from what it was at the beginning of the year as it was an annualized percent or percent from right now. Probably easy questions, but every time I hear you taking money out, I'm trying to figure this out. I'll improve on your methods. Thank you, Randy. Okay, so the rules for withdrawal are actually on the portfolios page and you can look them up to see how that works, but we take out the money from the best performing, really, since rebalancing is what we're looking at. So we're looking at what's been the best for most of them. It is since inception, since we haven't rebalanced them yet, but we're really looking at which one is kind of the highest in terms of its difference between where it is now and its ordinary allocation. And so that's what we're looking at. It's not rocket science. I just eyeball them and pick the one that looks right. Do I feel lucky? Do I feel lucky? All right, in terms of what the percentage is, it's the percentage of the current balance on the date of the withdrawal. So we look at the balance at the end of the month and calculate it based on if it's 5%, we take 5% of that, divide it by 12 for 12 months, and that is the amount of the withdrawal. It is a variable withdrawal rate.

Mostly Voices [3:13]

Yes!

Mostly Uncle Frank [3:17]

And really the reason we use monthly withdrawals here is more for illustration purposes than anything else. I think most people in their real lives are probably going to use an quarterly withdrawal or an annual withdrawal.

Mostly Voices [3:32]

For scrying, healing, and meditation.

Mostly Uncle Frank [3:36]

But however you want to do it is fine. That would be great. Okay. You'll note that we have one portfolio, the golden ratio, where we are just withdrawing from the cash portion. So that literally is set up the cash portion at the beginning of the year when we rebalance the beginning of our year is in July and then just take the money out of that. And since it's a six percent of the portfolio is the allocation and The withdrawal rate is 5% annualized. Chances are you're just going to be taking out of cash for the whole year because there is some income going in there as well. If you look at that right now, it's down to around 2% of the portfolio, but we're going to be rebalancing into cash. And so we'll have that for that portfolio. But that would is a good example of a portfolio that is really adjusted annually and you're just taking out the cash. on an annual basis, even though it's physically sitting there in the portfolio. It's really not doing anything other than being withdrawn.

Mostly Voices [4:39]

You see, most most blokes are gonna be playing at 10, you're on 10 here, all the way up, all the way up, all the way up. Where can you go from there? Where? I don't know. Nowhere, exactly. What we do is if we need that extra push over the cliff, you know what we do? Put it up to 11. Exactly. All right, question two comes from Mike B.

Mostly Uncle Frank [5:00]

Mike B writes, Message, I am a new listener and I've enjoyed your podcast. I'm about 90% invested in stocks and two to five years from retirement and know I need to diversify, but the timing of buying long-term treasury scares me with the risk of rates going up. I am okay with the small cap value and gold moves. How do you justify investing in bonds or treasuries right now? Danger, Will Robinson.

Mostly Voices [5:23]

Danger. Well, the reason is I'm really not concerned about right now.

Mostly Uncle Frank [5:27]

These go to 11. I'm concerned about the next 10, 20, 30, 40 years. And so we need to look at this as an overall portfolio. I want to have a portfolio that performs well in all kinds of weather. You need somebody watching your back at all times. If you go back and look at the theory behind risk parity, and I think this is what you really need to understand, is that it's based on a theory of looking at the kind of economic weather you could possibly have in the world. And those things are characterized by inflation and growth on the two axes. So you can have rising growth and rising inflation at the same time. We have that right now. You can have declining growth and declining inflation. You saw that in 2000, you saw that in 2008, you saw that in March of 2020. Or you can have slowing growth or falling growth and rising inflation or falling inflation and rising growth. There are different kinds of assets that perform well in each of those quadrants or in each of those kinds of weather. If you will, real wrath of God type stuff.

Mostly Voices [6:45]

Exactly. Fire and brimstone coming down from the sky.

Mostly Uncle Frank [6:48]

And long term treasuries are there to perform well in those environments that are declining growth and declining inflation. Dogs and cats living together, mass hysteria. But you can't predict exactly when that's going to occur. So the idea is you always have a set of assets that's going to keep you safe, regardless of what quadrant you end up in next.

Mostly Voices [7:14]

If I could analogize this to the weather, you are talking about the nonsensical ravings of a lunatic mind.

Mostly Uncle Frank [7:22]

If you think about the weather, there are two things that are really important in the weather. One is the temperature. It could be high, it could be low. And the other one is the level of dryness, whether it's wet or dry. Because when it's wet, you could be getting precipitation, when it's dry, you could be having other problems, maybe fires or things like that. Fire, fire, fire, fire, fire. But the idea is you will have appropriate clothing, if you will, and shelter to withstand whatever kind of weather comes your way because you live in a place that is subject to all kinds of different kinds of weather. Like I did when I was growing up. I lived in Iowa. Yeah, baby, yeah! Now, the fixation with right now means that you are looking at crystal balls.

Mostly Voices [8:14]

You can actually feel the energy from your ball by just putting your hands in and out. And I don't believe in crystal balls.

Mostly Uncle Frank [8:21]

I don't have a crystal ball, and I don't use a crystal ball. Forget about it. Expect the unexpected.

Mostly Voices [8:29]

Forget about it.

Mostly Uncle Frank [8:33]

Now, if you're going to use a crystal ball, I think you need to look at the pedigree of the crystal ball. How long has this person with this crystal ball been saying what they've been saying? In most cases, you will find that people who are anti-Treasury bond and anti-long-term Treasury bond have been saying interest rates are going up for 15 or 20 years.

Mostly Voices [8:55]

Do you think anybody wants a roundhouse kick to the face while I'm wearing these bad boys?

Mostly Uncle Frank [8:58]

And while they've been saying that, they've been wrecking your portfolios. They've been wrecking your portfolios because they've been giving you bad advice. They've been telling you to invest in things like tips that went into the toilet in 2008. So I have to ask you, if you're going to listen to those people, why? Why would you listen to somebody who is wrong over and over and over and over again? You keep using the word.

Mostly Voices [9:24]

I do not think it means what you think it means.

Mostly Uncle Frank [9:28]

I would suggest that you stop doing that, stop looking for crystal balls.

Mostly Voices [9:31]

That's not how it works. That's not how any of this works.

Mostly Uncle Frank [9:35]

And start thinking about a long-term portfolio construction.

Mostly Voices [9:39]

We had the tools, we had the talent.

Mostly Uncle Frank [9:43]

As for really right now, you should have been investing in long-term treasury bonds three months ago in March. That was the time to do it when the interest rates were the highest and people were saying, oh, the interest rates are going up, the interest rates are going up. Well, guess what happened? The interest rates went down, long-term treasuries are up on 7-8%, the leveraged funds up 23% or something like that. And that's really what happens with these things. They go up and down. They don't go in one direction all the time. That's not how any of this works. They go up and down with economic cycles and economic conditions. In reality, the best crystal ball is the long-term Treasury rates because it has a better track record of forecasting what the future is going to be like than any other crystal ball I've ever seen.

Mostly Voices [10:34]

Does that make you different than most everybody else? And the answer is yes.

Mostly Uncle Frank [10:38]

That's why when you see things like an inverted yield curve where the long-term Treasury rate is lower than shorter term treasury rates, that is usually a sign that something bad is going to happen in the next six to 18 months. It's really not that precise. We don't know.

Mostly Voices [10:58]

What do we know? You don't know. I don't know. Nobody knows. But the last time you saw that was 2019.

Mostly Uncle Frank [11:05]

And by 2020, even before the pandemic, The price of treasuries was going through the roof, the economy was slowing down, and everything that people say is not going to happen was happening. Like it has over and over and over again. But if you're going to be a forecaster, you can't half do this. You need to go do it yourself.

Mostly Voices [11:46]

You need somebody watching your back at all times.

Mostly Uncle Frank [11:50]

You need to go and look at that raw data yourself and have a mechanism of analyzing it. Because watching the TV or reading something is not going to get you anywhere. Forget about it.

Mostly Voices [12:01]

It's proven time and time again to be the worst way of

Mostly Uncle Frank [12:05]

investing. The worst way of investing is looking at right now and trying to say, this is the right investment for right now.

Mostly Voices [12:12]

That's not an improvement.

Mostly Uncle Frank [12:15]

If you do that, you're gonna suffer. That's the truth.

Mostly Voices [12:19]

You can't handle the truth.

Mostly Uncle Frank [12:23]

Here I said I wasn't gonna do a rant. All right, our next email is from Edward T. And Edward T. Writes, hello, Uncle Frank, you have great information. I discovered you, thank goodness, from the 2% Five podcast. I've since listened through episode 84. Having never heard of risk parity, I did other research and my head nearly exploded. My inside voice says, duh, no kidding, risk parity makes obvious sense. So a heartfelt thanks to you.

Mostly Voices [12:56]

Am I right or am I right or am I right? Right, right, right.

Mostly Uncle Frank [13:00]

I'd appreciate any suggestions you have on my next steps in our financial journey. My bride and I are 47, no kids and although we're still working, we've reached our FI number. $80,000 in annual expenses, 2 million in retirement accounts, 500,000 in real estate, net asset value of 150k after mortgages, 180,000 in cash, and 25,000 in after-tax total stock market index. We're too heavy in equities and very light in bonds about 9010. Detail below, I plan to move to risk parity portfolio to preserve these assets and limit volatility. And the breakdown of the 2 million, I'm not going to read through all of this, it's basically a bunch of standard kind of fidelity funds like FS KAX and other ones that are diversified across the main large asset classes. or subclasses, I should say. And then he writes, For a risk parity portfolio, I'm thinking of 30% VTI, 10% IJS instead of VIoV, 45% TLT, 5% SHY, and 10% GLDM using GLD for portfolio analysis. It looks solid across all metrics, max drawdown, CAGR, that's compounded annual growth rate, worst year, standard deviation, Sharpe, etc. compared with other risk parity portfolios, but it just feels so conservative. What's your take? Can I do better? I'm fine with risk, as you can see from my current holdings, but not sure it's necessary and/or advantageous. Also, regarding asset rebalancing other than the effort, is monthly rebalancing a bad idea? I often hear you and others mention either annual rebalancing or percentage rebalancing. My thought is to lock in any/all gains and buy when the losing assets are lower, even if it's a 1% fluctuation from goals. Many thanks and keep the great info coming. Ed T. All right, just looking at that portfolio you put together, I think it is too high in the TLT. That's probably too much in long-term treasuries for anyone. And what I think you need to do, it looks like you've been using the calculators at Portfolio Visualizer, which are great because they have lots and lots of different asset classes, but they just don't go back as far as you can get, say, on portfolio charts. Now, if you take this portfolio and go back into portfolio charts, you'll see that that style of portfolio had a really rough ride in the 1970s. And for about six years between 1973 and the end of the decade, it was down most years. That's not an improvement. And so it declined as much as about 30% and stayed down really between five and seven years, depending on how you look at it. So I would take less in long-term treasuries, really. That's why when you look at the portfolios like the golden butterfly and the golden ratio, the percentage of long-term treasuries is really 20, 26% or 30%, depending on what else you've got in that. Portfolio, but that kind of range for that asset class tends to work pretty well in most environments, even the environments that are bad for that asset class. So I'd make some adjustments along those lines, but other than that, it looks like a pretty good portfolio to me. Ain't nothing wrong with that. All right, the second question about more often rebalancing. Well, the Studies that have been done show that if you're doing rebalancing on a calendar basis, doing it more than annually doesn't help you. I've linked to a article from Michael Kitces about some studies about optimized rebalancing. I'll link to it again in the show notes and you can read it. And what it basically says is that monthly or quarterly does not improve your returns over annually. It does suggest that the better practice is the percentage kind of rebalancing. Where I see it as having a difference is if you're using a portfolio with leveraged funds that are likely to move a lot compared to unleveraged funds. With those, then you will be getting some real bang for your buck by rebalancing things because they're going to go low or high more often essentially. And if you look at both the experimental portfolios and the sample portfolios, aggressive 50/50 in the accelerated permanent portfolio. They have both benefited from that kind of rebalancing because one of them rebalanced in March, I think, and that was when the bond fund was at its lowest point and now it's up like 22% since then. So you can see how that kind of action justifies more frequent rebalancing. I know Bill Bengen, the author of the 4% rule, seems to think that less often than annually might be a better way to rebalance, but there haven't been any real studies on that showing what would be a more optimal period than annually. But thank you for that email. All right, the next email comes from Javen S and Javen S writes, hi Frank, still enjoying your podcast. I've learned a lot from you. I wonder if you would be willing to do an analysis of the AGFIQ U.S. Market Neutral Anti-Beta ETF ticker symbol BTAL, using David Stein's 10 Questions to Master Investing. BTAL is an ETF that is short high beta equities and long low beta equities. Portfolio Visualizer asset correlation tool shows BTAL is negatively correlated with the total stock market, uncorrelated with gold and only somewhat positively correlated with long-term treasuries. I wonder if this might be one way to add diversification to a risk parity portfolio. Thank you for your thoughts. Yeah, it might be. I will do that analysis sometime in the near future. It should be interesting. But be forewarned that all of these kinds of strategies, including the basic volatility funds like VXX, the main problem with them is they have a negative expectation overall. So in fact they are functioning like an insurance contract that in any given year you figure I'm probably going to lose money on this. But when something really bad happens, then it's gonna leap into action and save my breakfast, if you will. And I think we're likely to find the same thing with this, but we'll analyze it and see where it comes out. Bow to your sensei. Bow to your sensei. All right, next email is from Boone B. Boone B writes, Frank, thanks for the podcast. I'm about 10 episodes of being caught up, but started with episode one. I have a question about your withdrawal strategy. It goes back to the idea that a company or industry has options on how to make use of profits over time. Growth companies usually reinvest back into the company for expansion, REITs and dividend stocks send that back to the investor as cash. But the profits are really fungible. The company made a profit and either reinvested in itself or distributed cash to the shareholder. So if O or REIT or V and Q had a mediocre year, they're still going to be giving out cash which will be withdrawn. If for example, VIOV was the start of the year, you might sell off some of the fund to buy more of the worst producer, say GLDM, or convert it to cash to withdraw. You would be using some of the dividend profits from O or REET or VNQ. They weren't the best in the world, just mediocre, but you still withdrew the profits from that asset class. Wouldn't the better strategy be to reinvest all dividends in all asset classes and redistribute or withdraw strictly from the sale of shares only? I realize this is really only a good idea in a tax sheltered account. you might not want to make a sale for the sake of a redistribution in a taxable account. And the answer is, well, possibly. I haven't modeled it. I think it would be very difficult to model this. But I think what you're likely to find is it's going to be trivial or insignificant. And the reason I say that is because the distributions compared to the entire portfolio are relatively small. And in most cases, for most assets, the distributions are going to be a small part of its performance for that year, that it's likely to go up much more or down much more than the dividend rate it's paying. I think for example, our EET is up something like 30% in the past year. So its dividend rate is not that significant in that calculation. So just thinking about it in terms of orders of magnitude, I would not think it would be that significant or worthwhile, but you're welcome to try it out or be able to model it and see what happens.

Mostly Voices [21:54]

You have a gambling problem. I don't think the difference will be that much.

Mostly Uncle Frank [21:57]

Thank you for that email. All right, next email comes from Jamie E. Jamie E writes, hi Frank, thoughts on small exposure to VXX or UVXY as a tool in your risk parity portfolio. Thanks, Jamie. Well yes, we do have some VXX in the risk parity ultimate sample portfolio. And the struggle I always have with these things, as I mentioned, In one of the past questions is that they seem to have a negative expectation. In most years, most times, they will decline in value and then spring into life when the stock market is crashing because they are volatility instruments. So you have to expect to lose money most of the time on them and then have them help you out only when everything else is going badly. What this causes is an issue with how much to actually use. I mean, how much insurance do you actually want? I think it's going to be a very small percentage if you're going to use VXX or UXY. It could be a larger percentage if you're using one of those funds like BTAL, I think has a lower volatility than these volatility funds, and that will play into it. But I do not have a magic formula for using these things. They are a actually a kind of a source of frustration for me to try and figure out what is the best use of them and how do we get the most out of them without suffering too big of losses because of their nature.

Mostly Voices [23:31]

I think I've improved on your methods a bit too. I employed some Kiara Scurro shading. Thank you for that email.

Mostly Uncle Frank [23:39]

And the next email comes from Glen H. And Glen H. writes：I have VUSUX at Vanguard has an expense ratio of 0.10%. TLT has an expense ratio of 0.15%. I already have an account at Vanguard and could buy either. Any reason not to buy VUSUX other than it's a traditional mutual fund versus an ETF? Well, no, as I've said before, the sample portfolios are designed to have the most popular or a most popular selection for these ETFs, but there are more coming online all the time and oftentimes the expense ratios are lower for the newer ones. And so at Vanguard, I think your best choice is going to be VGTLT, which is the ETF that invests in long-term treasuries, and it has an expense ratio of 0.05. There's a Schwab long-term treasury ETF, SCHQ, that also has an expense ratio of 0.05. Those are both newer than the venerable TLT, so you can use those. And if you're already there, you might as well. But thank you for that email. But now I see our signal is beginning to fade. Forget about it. I'd like to give you a prize or a star if you've listened to all 100 episodes. That was weird, wild stuff. Yes! Thank you for any attention you've given to this podcast. Shut it up, you! If you have questions or comments for me, please send them to frank@riskparityradio.com that email is frank@riskparityradio.com Or, you can go to the website www.riskparadioradio.com and fill out the contact form there and I'll get your message that way. If you haven't done it already, go to Apple Podcasts and their screwed up app and like, subscribe or whatever they do now. I think it might be follow. That thing really doesn't work very well. Au contraire.

Mostly Voices [25:54]

Don't be saucy with me Bernaise.

Mostly Uncle Frank [25:57]

But I thank you for that too. Last off. Thank you once again for tuning in. This is Frank Vasquez with Risk Parity Radio signing off.

Mostly Voices [26:09]

Tony Stark was able to build this in a cave.

Mostly Mary [26:13]

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.