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.

Mostly Uncle Frank [0:38]

Thank you, Mary, and welcome to episode 106 of Risk Parity Radio. Today on Risk Parity Radio, it is time for our weekly portfolio reviews of the seven sample portfolios that you can find on the portfolios page at www.riskparityradio.com.

Mostly Voices [0:57]

But before that, here I go once again with the email.

Mostly Uncle Frank [1:06]

And we are still working on June's emails, but we'll hopefully finish them this day or the next. Our first email today comes from John and John writes, hi Frank, I recently started listening to your podcast after learning about it from Choose FI and listening to your guest episodes in that space. I'm afraid most of it is over my head at the moment, but I'm pretty certain the information that you are specializing in is exactly what I need for my next steps as an investor. And I'd like to take action rather than forgetting about it because of a lack of understanding. My situation. 30. Kids. One income, at least until the kids are school age.

Mostly Voices [1:43]

Dogs and cats living together. Mass hysteria.

Mostly Uncle Frank [1:47]

We have goals to be financially independent in 10 years. and be able to make some significant changes at that time. I've been sitting on quite a lot of cash for a few years, the idea of maybe buying our first house and using the three fund portfolio without the bond portion and Paul Merriman's ultimate buy and hold investment strategies in our various different investment accounts. We are currently sitting at two-thirds equities and one-third cash at the moment, but intentionally investing everything that we save from this point on because I've gotten uncomfortable with the amount of cash we have, especially given all the talk around inflation and now not knowing if we will even buy a house with how difficult it's becoming. My question, I'd like to invest a portion of our cash savings, but I don't want to dump the extra into our current investment portfolios with the uncertain market being at all-time highs. Is this a situation where I could utilize an additional portfolio that is negatively correlated with my current investment strategies and what ideas or recommendations might you have for setting up a portfolio in this situation? Thank you so much for the work you are doing for us, DYI investors. Well, I'm very happy to do that work. I find it an entertaining hobby. So just I'm thinking about your situation I'm not sure you would want a negatively correlated portfolio to what you already have simply because it's gonna look pretty strange. It's actually gonna look kind of like that all seasons portfolio, which is mostly bonds, which I don't think is really what you want at this stage. What I would probably do since you're still thinking of buying a house and you kind of have these intermediate goals, I would take some of that money and invest it in a risk parity style portfolio that looks something like the Golden Ratio or the Golden Butterfly. That's a good portfolio for intermediate kind of needs. And the reason those portfolios are good for those is that if they do have drawdowns, they tend to have drawdowns of less than 20% that go on for less than three or four years. And that will also give you a little chance to test drive a portfolio like that. to see whether it's something that you might want to put more of your assets in once you get to that 10 years where you're thinking of actually retiring or being financially independent. At that point in time, you will want to move to a drawdown style portfolio, whether it's a risk parity style portfolio or some other kind of portfolio. But as you get close, you're going to want to be thinking of converting into that. the advantage of having a lot of cash is that you have a lot of flexibility right now to buy other things with it. You do kind of need to make that decision as to are you going to spend some on a house or not. As for worrying about the market being at all time highs, well, when the market's going up, it's hitting all time highs all the time. So if you look at the history of the stock market, it's been hitting all time highs more than 50% of the month that it goes on or some very large percentage of that. So I wouldn't necessarily be worried so much about that other than, you know, if you want to diversify from that, then you need to own the bonds, the gold and other things. Because as we've seen, as the market's getting more volatile these days, those treasury bonds are actually doing quite well since March. They've been advancing and that's why some of our more bond heavy risk parity style sample portfolios have been doing so well in the past couple of months here. despite crystal balls.

Mostly Voices [5:34]

Now you can also use the ball to connect to the spirit world.

Mostly Uncle Frank [5:38]

Let's say that the interest rates were going to go up all year and end at two and a half percent for the 10 year. That has not happened and they've been going down for three months. That's not how any of this works. But we know what happens with these crystal balls.

Mostly Voices [5:56]

Now the crystal ball has been used since ancient times.

Mostly Uncle Frank [6:04]

It's used for You might also want to take note of a Choose FI page where they asked a bunch of people to put up various sample portfolios. I did put up three of them, one for accumulation, one that's a version of the Golden Ratio, and one that's a levered experimental kind of thing. And that may give you some more ideas as to what you might want to do with this. But I would say you don't need to take all that cash and put it into something like this. Why don't you just take a little bit of it, get comfortable with whatever you're thinking about, and then you can move more towards something like that as you go.

Mostly Voices [6:41]

Groovy, baby. Thank you for that email.

Mostly Uncle Frank [6:45]

And the next email comes from Toby L. And Toby L. Writes, Message, Uncle Frank, your podcast has brought Risk parity to the mainstream. Woo hoo. Thank you.

Mostly Voices [6:57]

Yeah, baby, yeah.

Mostly Uncle Frank [7:01]

I'm nearing retirement and I'm shifting to a risk parity allocation. Two questions. The golden butterfly seems to be an ideal mix. I struggle with holding 20% gold. What are the pros and cons of adding 5% REITs and or commodities in place of gold? Question two, I want to keep some of the money in TSP. What's the best risk parity mix with the TSP options? Keep up the good work. You are changing lives. I don't think it misses what you think it misses.

Mostly Voices [7:27]

Well, thank you for all those nice statements.

Mostly Uncle Frank [7:31]

You can't handle the crystal ball. Yeah, that 20% gold is pretty high and that sample portfolio is the one that has the most gold in it. Back testing analyses, if you go back to our gold episodes, which you can find by looking on the podcast page at the website, the little index there suggests that probably 10 to 15% in gold is more the ideal or optimal holding of it in most portfolios, depending on what else is in there. I think if you take and look at shaving off 5% and putting it in REITs, then you'll have a portfolio that looks a little bit more like the golden ratio or you put it in commodities. If you run those things, you'll see that These portfolios are very similar in attribute and go to portfolio charts where you can get a 50-year run on these things. So I don't think it's possible to say which version of that is going to do the best in the future, but that all of them would probably be just fine and perform relatively similarly. And you'll see an example of that when we get to the portfolio reviews. of the three kind of base portfolios that we talk about here and their performances over the past year or so. As for the TSP, you know, I think there's not a whole lot you can do in there besides using the C and S funds for your stock portion. It doesn't really have a long-term treasury bond fund. It certainly doesn't have a gold fund. The stock funds are just fine. So I would generally use it for those purposes. If you need to roll some of it out, you can roll some of it out into an IRA and then make the adjustments there. But to the extent you're keeping it in the TSP, you would probably want to use that for stock holdings. And I suppose you could also use that, what is it, the G fund or the money market fund essentially for if you're going to have a large kind of short-term bond or cash type holding like you see in that golden butterfly portfolio. But those are my recommendations. That was weird, wild stuff. And our next email comes from Dale, and Dale writes, hi Frank, I was sent this summer letter from an investment firm for my interest. And it's from IMA investors. It's long but I hope you find it an interesting read. As I mentioned in a previous email I was moving from Africa to the States with cash. I have now arrived. Yay! Yeah baby yeah! And want to start investing my money several hundred thousand dollars. I was thinking 50% large cap growth and 50% small cap value in a Vanguard ETF type setup. Then I read the letter. Should I consider investing with a company that buys 20 to 30 well researched, undervalued companies with great management over my 50/50 approach, they won't look at you with less than 500k, which would be the majority of my cash. Secondly, assuming I go for the 50/50 portfolio in the next couple of months, I will be buying when the market is high. If crystal ball stuff would bear with me, the market crashes. Crystal ball stuff, but bear with me. and the crash lasts several years before it gains again. It's continuously buying into the market over the years when the market is cheaper, offset the loss of the initial higher price investment. Love the show. We'll be calling for a couple hours of advice when I am ready to pull the trigger on investing. Cheers, Dale. Okay, so looking at that letter, that is actually a firm run by a gentleman named Vitaly Katzenelson, who is a Russian immigrant who lives in Colorado. I do listen to his podcasts and I'm very familiar with the content of that letter. His podcast is called the Intellectual Investor podcast and a lot of it is reading through things he has written. That firm is a value investing firm, so they are focusing on the investment style that was pioneered by Benjamin Graham and partially adopted by Warren Buffett that's famous for looking for undervalued companies and buying them and holding them for a decently long period of time. I don't have any problem with that style of investing, but if you've been around for the past 10 years, you've realized that that tended to underperform for the past 10 years, but for other periods, like the late 70s into the 80s, it overperformed. And like the early 2000s, it overperformed. So whether it's going to under or overperform general markets in the future, I don't know. You could ask yourself a question.

Mostly Voices [12:43]

Do I feel lucky? Do I feel lucky?

Mostly Uncle Frank [12:47]

The reason that I recommended a 50% large cap growth and 50% small cap value as a basic accumulation portfolio is it covers both ends of a spectrum. And you can see how that has played out interestingly over the past six or eight months when people were talking about inflation and the interest rates were going up, all of a sudden small cap value stocks were doing really well and they went up 70% in eight months. and large cap growth stocks were not doing so well. Now that interest rates are going down again, the large cap growth stocks are doing better again, because they tend to do better in that kind of environment. So by holding both ends of those, they're kind of the most diversified of large asset classes that you can hold in a stock market, which makes them a nice, easy setup for that sort of thing. Now, as for buying while it's high, think big, think positive, never show any sign of weakness. Always go for the throat. Buy low, sell high, fear, that's the other guy's problem. The best thing for a new investor when the market is high is would be for the market to crash if you're going to continue to invest substantially over the next period of years because the idea is that you'll invest through the trough, the Market will eventually come back to where it was, and you'll record a large gain. This was best illustrated by a hypothetical investor who started investing in 1929 at the peak of the market and invested for the next 25 years. During that time, the market went nowhere. If you just looked at where it was at the height in 1929 and where it ended up in 1954, However, if you invested steadily through that period, you would have realized an 11% annual gain by 1954, even though the market was at exactly the same place. What you have there is a forced dollar cost averaging type of investing, and that is what most people are forced to do because they don't come with a large pool of assets to invest right away, and they're not going to stop investing right away either. So yes, consistent investing does tend to mitigate any potential downturns over time. Of course, the problem with dollar cost averaging voluntarily is that the market could just keep going up from where you were, in which case you would have been better off just putting all the money in to begin with. Statistically, that seems to be the better choice. But I think it's better to do what you can psychologically do and can stick with because sticking with your plan is more important than what the plan is believe it or not. It's people who can't stick with the plan and bail out at the wrong time are the people that really underperform.

Mostly Voices [15:44]

It's a trap!

Mostly Uncle Frank [15:48]

And as for calling me for a couple hours of advice when you're ready, Yes, I do offer that service. I don't publicize it much. It is at $300 an hour and I have served several clients enough for what it's worth. I don't intend to run a business out of it, but if you're interested in being financially coached by me, you can send me an email whenever you're ready and then we can set that up. And if there's too many of you asking for that, I'm going to raise my prices. Don't be saucy with me, Bernaise. Don't worry, that's not likely to happen when I'm not advertising it. Forget about it. All right, I think we have time for one more email today. This one comes from Andrew and Andrew writes, you featured iBonds in episode 93. The price is certainly right and they beat cash. But where exactly would they fit in a risk parity portfolio? They could stand in for SHY, short-term treasuries, and the golden butterfly. The one-year holding period seems to negate their value for the cash component of the golden ratio. I'm having a hard time seeing where these might fit, maybe a down payment, et cetera. I'm curious as to what your strategy is. Well, I like to do the job right. Well, yes, they do go in as a substitute for either cash or short-term bonds or anything that is low return and low volatility. the way I would structure them is as a ladder in your portfolio. So you would put 1% in of your portfolio for like for the next five years, and then you have the advantage of aged bonds that you can then sell and use after five years. There's no interest rate penalty. Before five years, there's a three-month interest rate penalty, which isn't that big a deal. It's only that one year that you can't use it. So I think the idea is you wouldn't put it all in there at once, but simply ladder it in so the portion that is stuck in there for the one year is a small portion, maybe 1% of your portfolio. If your portfolio is large enough, you're just going to end up hitting the $10,000 annual limit anyway. So if you had a million dollar portfolio and you wanted to put 5% of it in I Bonds, you would put $10,000 in each year for the next five years and then you would have it all set up that way and you could put in more or not in future years in terms of rebalancing your portfolio. But thank you for that email. Now for something completely different. And the something completely different is our weekly portfolio reviews of the seven sample portfolios you can find at the website www.riskparityradio.com. But just looking at what the markets were doing last week, they had a very volatile week, but they didn't end up that much different. The S&P 500 was up 0.4%, the NASDAQ was up 0.43%, Long-term treasury bonds represented by TLT advanced again. They've been up like every week for the past five or six, I think. Well, maybe not all five or six weeks, but most of them. But anyway, they were up 0.96%. Gold was up 1.76%.

Mostly Voices [19:23]

That's gold, Jerry.

Mostly Uncle Frank [19:26]

Gold! It's one of our best movers, but not as good a mover as REITs represented by REET. Those were up 2.18%. Commodities represented by PDBC were the big loser last week. They were down 2.01%. Preferred shares represented by PFF were flat. And just another reference point, if you're wondering how different stock sectors did. Small cap value stocks represented by VIOV were down 1.19% and they have been kind of sliding since that big run up earlier this year and at the end of last year. What I found interesting is some of the headlines about some of the crystal balls that are exploding in piles of glass these days. I have a headline here from an article on Seeking Alpha that says, 10-year Treasury yield continues to plunge as analysts reassess forecasts. They reassess forecasts. Why were their forecasts wrong to begin with? We're talking about being able to predict interest rates in the next six months. These go to 11. You have a really bad crystal ball if you can't do that. Not that most people can do that. But why bother if you can't even do that? What's the point?

Mostly Voices [20:56]

Expect the unexpected.

Mostly Uncle Frank [21:00]

Well, the point is you gotta say something and people love to prognosticate.

Mostly Voices [21:08]

You are talking about the nonsensical ravings of a lunatic mind.

Mostly Uncle Frank [21:11]

Anyway, so in the article it says, what's happening? Well, the move has mystified many traders. The move has mystified many traders.

Mostly Voices [21:19]

You can't handle the unexpected. Don't be mystified.

Mostly Uncle Frank [21:24]

And then it says, some are ascribing the reverse to changing narratives and new developments. Again, never underestimate your opponent.

Mostly Voices [21:35]

Expect the unexpected.

Mostly Uncle Frank [21:40]

And here's somebody from Society Generale. Crystal ball can help you.

Mostly Voices [21:44]

It can guide you.

Mostly Uncle Frank [21:48]

The market is sort of taking a deep breath. Are those optimistic forecasts for economic growth and inflation actually achievable? And here's somebody from Schwab. All that seems to be implying is perhaps the inflation was transitory, but maybe some of the growth has been transitory.

Mostly Voices [22:10]

And what do they say over at BMO Capital Markets? the crystal ball is a conscious energy.

Mostly Uncle Frank [22:14]

Tuesday's weaker ISM reading just added more motivation to extend the move in treasury yields lower. Somebody from Aptis Capital Advisors says that the supply of bonds is shrinking by the US government. JP Morgan says a big portion of what we are seeing is capitulation of the higher rates thesis. Capitulation. What does capitulation of crystal balls sound like? And then they say some short covering has occurred, but the breadth of bearish duration positions remains on par with 2017 to 2018. Forget about it. And then it concludes, most analysts had expected 10-year treasury yields to hit around 2% by this point in the COVID economic recovery, or at least by the end of 2021. In the first quarter alone, the yield soared from 0.9% to nearly 1.75% as the reflation trade took hold. But it looks like the move lower is now staying firmly in the opposite direction. Long-term yields are also a closely watched economic barometer with the rates tending to fall on weakening growth outlook.

Mostly Voices [23:37]

Anyway, what should you understand or get from this? You can't handle the crystal ball.

Mostly Uncle Frank [23:42]

Those prognosticators have some of the most sophisticated abilities in the industry to make predictions, to analyze economic data. Do you think you can do better than they can? Forget about it. Do you think the guy on YouTube can do better than they can. Forget about it. This is what all the crystal balls sound like. Better to admit that we can't know what the future's going to bring. We don't know.

Mostly Voices [24:15]

What do we know? You don't know. I don't know. Nobody knows. So we better expect the unexpected. You need somebody watching your back at all times.

Mostly Uncle Frank [24:27]

All right, looking at the sample portfolios, the All Seasons is our most conservative portfolio. This one is 55% in treasury bonds and has been benefiting by those lowering rates. It is only 30% in stocks. VTI is the fund there. It's got 7.5% in gold, GLDM, and 7.5% in commodities, PBTC. This one was up again. It was up 0.42% for the week. It is up 9.52% since inception last July, and so is, you know, performing like a very conservative portfolio ought to perform and easily covering its distributions. And now we go to our three kind of standard risk parity style portfolios that are designed to take the same kind of risk as a 60/40 portfolio. And the first one is a golden butterfly. This one's 40% in stocks divided into small cap value and a Total Market Fund VTI, and it's got 40% in Treasuries, half of that's in short-term Treasuries, half of that's in long-term Treasuries, and then it's got 20% in gold, the fund GLDM. Now this one was up only 0.11% for the week. It is up 21% since inception last July. This one's been interesting. It's actually been flat to falling a little bit. largely because this one has the most small cap value stocks in it and a smaller share of treasury bonds. And so it benefited a lot when those were having their big run up. And now it's taking a little bit of a hit when those are going down. But as we see, it's not moving a whole lot. And that's because it's well Diversified with both the stocks, the bonds and the gold. I love gold. Going to the golden ratio, and this one is 42% in stock funds, it's got 26% in long-term treasuries, 16% in gold, 10% in REITs, that's R-E-E-T for that, and then it's got 6% in cash, or at least it did to start with during the year. We'll have to rebalance into that because we've been distributing out of that all year. This one was up 0.66% for the week. It is up 20.88% since inception last July. And now we go to the Risk Parity Ultimate. This is our most complicated portfolio. It has 14 funds in it. Sorry, it's got 12 funds in it. It's 40% in stocks, 25% in long-term treasury bond funds, and it's got 10% in gold, 10% in REITs, 12.5% in PFF, a preferred shares fund, 2.5% in VXX, a volatility fund. This one was up 0.83% for the week. It is up 20.63% since inception last July. I think what's interesting with the last three portfolios is you see that their performances over the course of the past year have ended up pretty close to being in the same place for all three of them. That was weird, wild stuff.

Mostly Voices [27:30]

So even though there's some variation, they are sort of all mashing up

Mostly Uncle Frank [27:33]

with the same kind of risk profile.

Mostly Voices [27:37]

I did not know that.

Mostly Uncle Frank [27:42]

Which is also why you can say that making 5% variations here and there probably isn't going to make that much of a difference in the long run. As long as you stick with whatever you come up with as your portfolio and aren't jumping in and out of funds and making drastic changes. Danger, Will Robinson, danger! All right, now we go to our experimental portfolios.

Mostly Voices [28:08]

Tony Stark was able to build this in a cave with a bunch of scraps. These all involve leverage.

Mostly Uncle Frank [28:16]

Our first one is our accelerated permanent portfolio. This one is 27.5% in a long-term treasury bond fund, TMF. It's a leveraged fund. We have 25% in UPRO, it's a leveraged stock fund, 25% in PFF, and 22% in GLDM. That's preferred shares in gold. This one was up again. It was up 1.4% this past week. It is up 21.69% since inception last July. It may actually get rebalanced this week. We'll have to see what it looks like. on the 15th when we look at it for rebalancing purposes. All right, then we're moving to our aggressive 5050. This is our most volatile portfolio. It has 33% in UPRO, that leveraged stock fund, 33% in TMF, the leveraged bond fund, and then 17% in an intermediate treasury bond fund, VGIT, and 17% in PFF, a preferred shares fund. and this one had been going up steadily for the past month or so. It's up another 1.55% for the week. It is our leader. It's up 26.99% since inception last July and has been benefiting greatly from the moves in the long-term bonds these days. Fire, fire, fire, fire.

Mostly Voices [29:46]

we had rebalanced into long-term bonds back in March when they were at their lows.

Mostly Uncle Frank [29:51]

So it's obviously reaping some of the benefit of that. All right, then our last portfolio, our new one, it's only been around about a week. This is our levered golden ratio, and this one has 35% in NTSX, which is a stock and treasury bond fund that is leveraged. It's got 15% in O, that's a REIT, it's got 25% in gold, GLDM, and it's got two other leveraged funds, TMF, which is a long-term treasury bond fund, and TNA, which is a leveraged small cap fund that tracks IWM, the Russell 2000, and then for the remaining 5% it has 3% of that in a volatility fund, VIXM, and 2% in Bitcoin related or crypto related funds, BITQ and BITW at 1% each. It is up to a decent start, is up 0. 78% for the week. It is up 1.51% since inception on July 1st.

Mostly Voices [31:14]

If you want to know more about that portfolio, go back to that episode a couple episodes ago, three episodes ago, I think now, and you can hear all about it. Nothing you have ever experienced can prepare you for the unbridled carnage you're about to witness. Super Bowl, the World Series, they don't know what pressure is. In this building, it's either kill or be killed. You make no friends in the pits and you take no prisoners. One minute you're up half a million in soybeans and the next, boom, your kids don't go to college and they've repossessed fade.

Mostly Uncle Frank [31:40]

If you have questions or comments for me, you can send them to frank@riskparityradio.com that email is frank@riskparityradio.com or you can go to the website www.riskparityradio.com and fill out the contact form and I'll get your message that way. If you haven't had a chance to do it, please go like, subscribe, give me five stars, or whatever you can do at Apple Podcast or wherever you get this podcast. and that would be greatly appreciated. That would be great. Mmmkay? We will pick up this week with some more emails. We'll finally finish June and get into July with them. Thank you once again for tuning in. This is Frank Vasquez with Risk Parity Radio signing off.

Mostly Mary [32:25]

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.