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 [0:36]

Thank you, Mary, and welcome to episode 107 of Risk Parity Radio. Today it is time to look at some more emails and finally finish the ones for June and get into July. But I believe I've been remiss here. Since we haven't had our monthly rant yout know how we get this started.

Mostly Voices [1:05]

I want you to be nice Until it's time to not be nice well, how are we supposed to know when that is? You won't.

Mostly Uncle Frank [1:14]

I'll let you know Now if I can just find the magic button All right, today's monthly rant, like last monthly rant, comes courtesy of the website Think Advisor, which tells you about all of the things that the financial services industry is doing. usually proudly but often nefariously. And here we are going to talk about something called the hat switch that a large financial services player was got caught doing. Jeez. It happened once. And fined by the SEC and investigated by the New York Attorney General. Now who was this? This was not some run of the mill organization. This was TIAA who got caught doing this. Mind your own business. TIAA, an industry leader, TIAA, an example, one would think, for the rest of the industry. You keep using the word. I don't think it means what you think it means. Somebody who's right down the middle of what this industry does. And they were doing something for years called the hat switch. Emotions running high, yes.

Mostly Voices [2:45]

And what is that? I'll read the article to you.

Mostly Uncle Frank [2:50]

During the relevant period, TIAA-CREF Services compliance training manuals instructed advisors that they wore two hats at times. What? They were a fiduciary when they acted as an investment advisor representative and at other times when they were not. when they acted as a registered broker-dealer representative. This according to the Attorney General's office. I don't think I miss what you think I miss. Now how did they use this hat switch to enrich themselves? I fart in your general direction.

Mostly Voices [3:25]

What they did was this.

Mostly Uncle Frank [3:30]

They pushed workplace retirement plans participants to roll their assets over into managed accounts with higher fees. and they failed to adequately disclose the nature and extent of the conflicts of their interest.

Mostly Voices [3:43]

I don't think it misses what you think it misses.

Mostly Uncle Frank [3:47]

They did not ensure that the role or recommendations were in the best interest of their clients. Even though they were calling themselves fiduciaries for part of the time, they were not fiduciaries when they didn't want to be, and they would just Take off one hat, put on another hat. Of course the hats look the same and you're a customer, you have no idea which hat is which.

Mostly Voices [4:10]

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

Mostly Uncle Frank [4:14]

It's not only a hat switch, it's a bait and switch. Forget about it. So they have to pay the Securities and Exchange Commission $97 million in restitution. This affected thousands of clients. It went on for years. They were sticking things into a managed account program called the Portfolio Advisor.

Mostly Voices [4:37]

Fire, fire, fire, fire, fire.

Mostly Uncle Frank [4:42]

I think this thing worked kind of on the milkshake business model, which sounds like this.

Mostly Voices [4:45]

If you have a milkshake and I have a straw, there it is. That's a straw, you see. Watching. My straw reaches a cruuuuuse through and starts to drink your milkshake. I drink your milkshake. I drink it up.

Mostly Uncle Frank [5:16]

So what they did was over the course of six years, tens of thousands of customers were pressured by TIAA advisors to move their investments from low-cost employer-sponsored retirement plans to higher-cost individually managed accounts.

Mostly Voices [5:28]

Because only one thing counts in this life：get them to sign on the line which is dotted.

Mostly Uncle Frank [5:36]

And that this milkshake portfolio advisor business model was significantly more expensive for clients and generated hundreds of millions of dollars in fees for TIAA. I drink your milkshake. I drink it up. They got hundreds of millions of dollars in fees. They only got fined 97. It was a good deal for them, even getting caught with their hand in the cookie jar. Don't worry.

Mostly Voices [6:08]

We can just transfer money from your account into a portfolio with your son, and it's gone.

Mostly Uncle Frank [6:12]

According to the SEC's order, TC Services trained its WMAs, the advisors, and its WMAs made representations that they offered objective and non-commissioned advice, put the client first and acted in the client's best interest while holding themselves out as fiduciaries. Uh, what? It's gone. It's all gone. This was misleading because TC Services financial incentives for WMAs rendered their advice non-objective and TC services did not ensure that their advisors recommendations were in fact in the best interest of their clients. Get them to sign on the line which is dotted.

Mostly Voices [6:55]

They're sitting out there waiting to give you their money or you're gonna take it.

Mostly Uncle Frank [7:03]

TC services simultaneously applied continual pressure to compel these advisors to prioritize the rollover of ESP assets into the Portfolio Advisor milkshake sucking program over lower cost alternatives.

Mostly Voices [7:18]

Always be closing. Always be closing. They're sitting out there waiting to give you their money. Are you gonna take it? And what does TIAA have to say about this?

Mostly Uncle Frank [7:30]

Everything that has transpired has done so according to my design. At the end of the article it reports that they are pleased to settle the matter that covers a time period that ended more than three years ago. As if three years ago is a long time. I mean, how long have you been doing this? How long is everybody else doing this? Because you know everybody else is doing this. And it's not even the fault necessarily of the poor financial advisors that go to work for these people trying to think, oh, I want to help people with finances. It's like, no, you got to implement this milkshake, suck it out of them. That's what you're here to do.

Mostly Voices [8:05]

A, B, C. A always B, B, C closing. Always be closing. This is your priority. Drink your milkshake.

Mostly Uncle Frank [8:19]

Do this or get out of here.

Mostly Voices [8:23]

I do what I'm told.

Mostly Uncle Frank [8:29]

Now can we expect good things to come out of this? Forget about it. No, it's all caveat emptor. You can't trust these big organizations to manage your money. They have business models that skirt the law, and sometimes they get caught with their hands in the cookie jar, and sometimes they just suck away the milkshake and nobody knows.

Mostly Voices [8:52]

I drink it up. All we can do is caveat emptor. It's a trap.

Mostly Uncle Frank [8:59]

Don't hire big retail services to manage your money.

Mostly Voices [9:03]

Danger, Will Robinson, danger. You need help, go get it.

Mostly Uncle Frank [9:07]

Go to your tax professionals. I have a great professional who told me something that I didn't know. He said that because I had sole proprietorship income last year, I can still open a SEP-IRA for this year all the way until I actually file my taxes and since I got an extension, I can open the 2020 SEP IRA all the way to October and save thousands and thousands of dollars.

Mostly Voices [9:32]

That was weird, wild stuff. I did not know that.

Mostly Uncle Frank [9:37]

That's the kind of advice you want to get. You don't need somebody sucking off AUM fees or other fees or commissions. You don't need that. It's a trap. You need some estate planning, get yourself a good attorney. If you do need a financial advisor, go to one that charges by the hour or by the job or in some limited way that you can control. You need somebody watching your back at all times.

Mostly Voices [10:07]

Because don't expect the SEC to be able to protect

Mostly Uncle Frank [10:10]

you.

Mostly Voices [10:19]

They recovered 97 million dollars on hundreds of millions of dollars of now for you What do you mean funny? It's funny how'm funny? You know it's still going on out there.R. Never underestimate your opponent. Expect the unexpected. Don't fall for it.

Mostly Uncle Frank [10:41]

All right, let's get intrigued by something else. I'm intrigued by this. How you say?

Mostly Voices [10:48]

Emails.

Mostly Uncle Frank [10:52]

And our first email today comes from Adam. I believe this is our last email for June. And Adam writes, Message, Frank, really enjoying your podcast. We're close to pulling the trigger on retirement. We are in our mid-40s and have two-thirds of our assets in retirement accounts. We plan to leave them untouched and 100% in equities until we approach age 59. For the remaining one-third, the goal is to withdraw a constant amount from now until age 59. If we design it perfectly, we'll liquidate the last taxable dollar just as we are able to access the retirement fund. So my question is this：the risk parity style portfolios are designed to enable perpetual withdrawal rate that is safe or larger than the standard 4% rule while maintaining or increasing the size of the portfolio. portfolio. How would you structure things differently if your goal was to maximize the withdrawal rate while at the same time depleting the assets? Our current allocations are 58% VTI, 8% IJS, 2% TLT, and 32% in real estate, which is half fundrise and half a poorly performing condo. We plan to sell the condo and use the proceeds to increase TLT and to add some gold. I love gold. Then supplement the real estate income by selling the best performing assets as needed. Thank you, Adam. Well, this is an interesting mathematical conundrum. I mean, the short answer is because you cannot predict the future accurately as to returns, that the only way to do this and have the same exact amount come out each year would be to buy an annuity, sell all your stuff and buy an annuity that pays out over 10 years. I wouldn't recommend it, but if you wanted the exact same amount and to know exactly what that amount was, that's what you would have to do with that. Now, of course, there are many better solutions and you probably don't need to have exactly the same amount come out every year. So I think the easiest way to do it would be something like this. Say you had a portfolio that looked kind of like the Golden Butterfly Portfolio. That is 20% in short-term bonds, cash equivalents, and then 80% in what we would call risk assets, things that have similar volatilities. In that case, it's got gold, long-term treasuries, and 40% in stocks. So what you would do, I think, is the first year, since you have 10 years left or however many years you have left, I'm going to assume you have 10 years left to do this, that you want to deplete in 10 years. So you look at the whole pot, you divide it by 10 and then you take out from it and you would take out, you would not take anything out of the cash portion, that short-term bond portion, you're going to leave that for last. You're just going to take out of the other asset classes. And you'll take out of them based on how they have been performing, but basically kind of equalize those at a lower level, if you will. So the first year you would remove an average of 2.5% from those four segments that are the risk segments and leave the cash alone. And then the next year you're going to divide it by nine and take out that much money. and the next year you're going to divide by eight and take out that much money. What will happen is you'll see the riskier side of this portfolio shrink over time so it'll get less risky over time. So in those last couple years you will simply be withdrawing from the short-term bond fund or whatever it is and that will be very stable and so you'll know pretty much what that is. Groovy baby! In those last two years, last three years, you're going to divide by three and then you're going to divide by two and then the last year you take the whole thing, that's the rest of it. And then you're done. Cool. Honestly, I think what you're probably going to want to do is start with that plan, but then make adjustments along the way, depending on what's going on in the rest of your portfolio, which probably needs to be converted at some point prior to you getting to that last year. And then you're going to be in a situation where you're more looking at your entire portfolio overall. Don't be saucy with me, Bernaise. So I would also model this in the other way where instead of you're trying to deplete these things, that you're just looking at everything in your overall portfolio, thinking about what would be a safe withdrawal rate for that, whether it's 4% or 5% or whatever, and then you could adjust your assets accordingly with that plan. And that may be a bit more flexible than trying to do these two portfolios over different time periods? But it should work either way. Fear, that's the other guy's problem. Interesting question. And our next email comes from Brian E. And Brian E. Writes, he writes this in July. He says, Hey Frank, in episode 102 you answered Chris's email about him questioning wouldn't pursuing assets with zero correlation be more advantageous than pursuing those with a negative correlation? When I started out on my investment journey, I too fell into this same mental trap. It's a trap! Despite being well aware that the conventional wisdom was otherwise. So I try to think back as to why I strongly believed that hypothesis at the time. I think the trap was envisioning one asset like the stock market, where it was up most of the time and occasionally crashed, then envisioning a second asset that was essentially the inverse of that. So in my mind it was like why carry an insurance asset that is a drag on returns most of the time, only to have it pay off occasionally, even when most needed, versus why not have two assets where usually both sled dogs are running most of the time and occasionally one goes down. The Trapp was thinking of negative correlation as inverse returns as opposed to inverse variability.

Mostly Voices [17:03]

You are correct, sir, yes!

Mostly Uncle Frank [17:08]

I had to hold the math in my hands, turn it over a few times before I was able to let go of my old way of thinking. Below is a simple numbers example I created at the time to allow it to click for me. I shared in case there are others who, like me, that have a hard time allowing the words of others to sway them from the math that's going on in their head. And I won't read the summary that he's got there. I will post that in the show notes for anybody that's interested. And then he writes, this should pop some folks' mental bubble when they play with this, not a combined return of zero, but rather a combined volatility of zero when taken to extreme. Side note, I think Dalio's reference to the Holy Grail is maybe more cheeky than just a casual phrase.

Mostly Voices [17:49]

Go and tell your master that we have been charged by God with a sacred quest.

Mostly Uncle Frank [17:58]

Much like Galahad would spend his life looking for the Grail, Dalio's examples that were so easy to depict with Illustrative numbers. He would spend countless hours in real life searching for high return, low correlated assets. Well, thank you for that email. This does raise some interesting mathematical thoughts. I'm going to try and put these more into words than in the math for the purpose of this podcast. You are talking about the nonsensical ravings of a lunatic mind. When you are thinking about investments and putting them in your portfolio or not, you're essentially considering three factors. You're considering its historical return, you are considering its historical volatility, and then you are also considering what its correlation is to the rest of the things you are holding. Now when something has a negative correlation to something else, it does not mean that it moves in the opposite direction to the same extent that something else moves. In fact, over time, they'll move a little bit randomly, but chances are one is going to move more in one direction than the other one is going to move in the other direction at any given time or any length of time. And so always the best you have is some kind of an approximation of knowing that if this asset is likely to be going up, this other one is likely to be going down, and vice versa. If you have something with zero correlation, it means that there's no relationship to them, that it's just as likely that the two assets will go up together as they will go down and up or up and down.

Mostly Voices [19:44]

Real wrath of God type stuff.

Mostly Uncle Frank [19:48]

Oftentimes what you'll see in real life is that one of these assets go anywhere for a while while the other one is moving. And then a different one will move at a different time. That's why you would never want to really consider correlation on a daily or even a monthly basis. This is really something to look at over a period of years or whatever your holding period is going to be. So ideally you have things with similar or high enough returns that They can work together even if they're uncorrelated, or especially if they're uncorrelated or negatively correlated, I should say. Where you get into trouble with some assets are two things. One is there are a lot of assets out there that have negative expected returns. They didn't exist way in the past, but these days you can buy funds that are volatility funds that have negative returns, or inverse stock market funds that have negative returns. Those things you need to be really careful about because anytime you put something with a negative long term return in your portfolio, it is going to drag your portfolio backwards, even if it reduces the overall volatility of your portfolio, which you may want because you may have other funds in there that are extremely volatile and will cover essentially the drag that those other things put in your portfolio. And then the other thing you need to worry about are those things that are low return, low volatility, which look attractive on their face. We're talking about things like cash and short-term bonds and tips, funds and things like that. Those while they sound great, they will not only dampen your volatility of your portfolio, they will dampen the returns of your portfolio in the same proportion. portions, pretty much. I did not know that. And that's really not desirable. What you're trying to do is construct a portfolio with things that work together that reduces the volatility of the portfolio more than it reduces the returns of the portfolio. And the kind of goal that we have here, what we're able to achieve with these risk parity style portfolios is constructing portfolios that have roughly 80 to 85% of the returns of the stock market while only having half of the volatility of the stock market. Whereas you had some portfolio that was, say, 70% stocks and 30% cash, that's going to have only 70% of the returns of the stock market and it's also going to be more volatile than the Risk Parity style portfolio. It'll have 70% of the volatility of the stock market, not half. So you can see why constructing a portfolio of things that have relatively high returns but low correlations and sufficient volatility in those directions is what you're really looking for. But the only way to really analyze it is to put all the things together and do your analysis that way. It's a big mistake to look at individual assets in a vacuum and try to decide whether they belong in your portfolio or not. Because what you'll probably end up with is either things that are too low return to really generate enough return for your withdrawals. Fat, drunk, and stupid is no way to go through life, son. Or you'll end up with things that are all the same, and so you'll end up taking too much risk. You can't handle the gambling problem. But enough on that. I think I'm repeating stuff that I said in episode 102. You can go back and listen to that if you'd like to as well. All right, our next email is from Anderson and Anderson writes, hi Frank, thank you for your podcast. I really enjoyed it and have found it to have a significantly deeper dive into portfolio construction than other podcasts out there. These go to 11. I have made it through a good portion of your podcast, but forgive me, you had already answered this question. I am looking into using leverage to help maximize returns in an aggressive long-term portfolio. In my mind, I see two main ways, using leverage funds or using a margin account. Could you discuss the differences in advantages/disadvantages? Some platforms like M1 and Robinhood offer low rates, 2-3% margin accounts. What would be the difference between using a margin account to buy an S&P 500 fund, for example, versus a regular account in leveraged S&P 500. I also see dividends are very small for the leveraged funds. And how would this impact be different between the two? I'd love to hear your thoughts and truly appreciate your podcast. Andy. All right, yeah. Andy, yeah. This is an interesting topic for thinking about. First of all, if you're going to use margin, I suggest you go to interactive brokers to open that kind of account because you're just gonna get lower rates there and lower rates in the future. This is when the big dogs come out.

Mostly Voices [25:00]

Okay, all right. The big dogs stay on the board. M1 and Robinhood are new on the block. They've only been around for a little while. Their rates may very well be teaser rates.

Mostly Uncle Frank [25:11]

Interactive brokers that had extremely low rates for a couple of decades now. And we're talking rates of 0.75 to 1.6% these days. Yeah, baby, yeah! So I wouldn't mess around with those other things in terms of a margin account. I just wouldn't. Forget about it. In terms of the difference between using leveraged funds and margin in the account, I mean, let's think about that in terms of just like a single fund. You could buy SPY as a basic fund and apply leverage to it, or you could buy UPRO, which is a three times leverage fund. So let's think about this. Suppose you went to Interactive Brokers, put $10,000 in there in SPY, or I should say $10,000 in there, but then you bought $30,000 worth of SPY, which they probably allow you to do. although you're pushing it with that much leverage in it. Now that will perform identically to the SPY times three, and then you'd have to subtract off the margin interest you would pay around 1% or so. So you're basically paying 1% for a leveraged fund creation that you have made. Now there's also that risk there of getting a margin call if it goes down. which is a substantial risk if you're talking about just one fund like that. Now let's compare that to a fund like UPRO, which is already three times leverage. So you could take that $10,000 and just buy $10,000 worth of UPRO. In theory, it's going to perform like three times as much SPY. In practice, it doesn't. It has a drag on it because of the way it's constructed and those leverage funds are designed to mimic that for one day at a time and not over long periods of time. In practice, it's actually done better than you might expect. It doesn't have that big of a drag on it, but it does have some drag on it. Now, you are also paying an expense fee to hold that fund that's much larger than the SPY fee, which is negligible. I think the fee on UPRO these days is 0.7 or 0.8. So in just terms of efficiency, you're probably better off with SPY levered up with margin on its face. The problem is that margin could get you into a margin call, whereas if you just own the UPRO, you're never going to get a margin call on that. It could go down to $2,000 from $10,000, but you're not going to get a margin call on it. So in that sense, it's safer, if you will. I'm always surprised that these leveraged funds actually do perform decently over time, at least the ones that are tracking things like the bond market or the S&P 500. But they have worked very well for the past 12 years. Now they do seem to work better when you combine them and you get that rebalancing as they go up and down because they swing so much. and that seems to ameliorate some of the drags you're getting out of them. So now you're wondering, well, what do I do? Well, I do some of both.

Mostly Voices [28:36]

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

Mostly Uncle Frank [28:40]

I just limit the margin that I'm taking over at Interactive Brokers so it's not so high and I've never come close to a margin call, but I also do use some of the leveraged funds. Oftentimes they're very convenient. If, for example, you wanted to buy some more treasuries in your taxable portfolio, it's often more convenient to buy one third of TMF than you would have spent on TLT. And that's for tax reasons and other reasons. There's an advantage there that it doesn't pay a dividend or not much of a dividend, because then it's not paying an income that you have to pay taxes on. So the answer is one is not necessarily better than the other, at least at these really low interest rates that we have right now. If the margin rates were higher, if they were that 2% to 3%, like M1 or Robinhood, I think you're probably better off with the leverage funds. in those cases, but then you're going to have to balance them out with other things in the portfolio so you can rebalance them periodically. Because if you just hold them raw by themselves, they will drag and they will not perform like three times their index over a long period of time. And what, how much is that drag? I don't know. So other people have calculated it, but I'm sure you can search it and figure it out very quickly. You have a gambling problem. All right, we have time for one more email. And this one comes from Benny. Benny writes, Message, long time listener to your podcast, which I love. Do you have mutual funds or ETFs, which would automate the buys and sells for me? And the answer is not really when you come talking about specific funds. If you use M1, they are set up to do that. You create a portfolio and then they allocate things for you. and so that's kind of exactly what they do, at least on the buying side of it. The issue may be on the selling side of it when you're drawing down. I really do think you want to get in the habit of being comfortable making transactions with your funds and giving yourself reminders if you need them. You can do this on your phone now. It's just really not that hard. And I do hear this kind of excuse, well, I need something that's automated. It's like, Really? I mean, do you need to automate watering your plants or knowing when to shave or other things like that? Once you get into a habit, if you need to have a habit, you can put it on your calendar on your phone. It's really not that hard to make these transactions when you need to make these transactions. And I would suggest that you take that on as a capability, as a skill that you have, because it will serve you very well in the future and will give you lots more options as to what kind of platforms you can use, what kind of funds you can invest in, you'll be able to buy partial shares of ETFs, and everything will be better, I can assure you. Yeah, baby, yeah! So here I would say use M1 for that if you must. but I would prefer you to develop that skill set. Bow to your sensei. Bow to your sensei. But now I see our signal is beginning to fade. We'll pick up this weekend with our weekly portfolio reviews of the seven sample portfolios you can find on the portfolios page at www.riskparityradio.com and we'll also take a look at some more emails. 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.riskparityradio.com and fill out the contact form and I will get your message that way. If you haven't had a chance to do it yet, please go to Apple Podcasts if you can get that thing to work these days. It's terrible. And we'll leave a five-star review and a comment or follow, like, subscribe, whatever they allow you to do there or wherever you pick up this podcast. And I would greatly appreciate that. That would be great. M'kay? Thank you once again for tuning in.

Mostly Mary [33:34]

This is Frank Vasquez with Risk Parity Radio signing 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.