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 109 of Risk Parity Radio. Today on Risk Parity Radio, it is time for rebalancing day.

Mostly Voices [0:51]

Bring out your dead. Bring out your dead.

Mostly Uncle Frank [0:59]

our annual rebalancing of the four sample portfolios that are on a calendar rebalancing.

Mostly Voices [1:05]

Yes!

Mostly Uncle Frank [1:09]

But before we get to that, we have a few other things to do. First off. First off, I would like to thank everyone because this podcast has gone over 100,000 downloads in just shy of one year. Yeah, baby! Yeah! which is pretty amazing since I only thought that about a dozen or so people would probably listen to it. And we have over a thousand regular listeners now. Special thanks to Diana Merriam over at Optimal Finance Daily who has talked about me and this show and also to the guys at Choose FI, Jonathan and Brad, who have also talked about this show and featured me on their show as well. Groovy, baby. In celebration, I bought Mary a bottle of wine and we enjoyed it last evening. Ain't nothing wrong with that. Second off, we do have time for a little bit of our favorite activity here on Risk Parity Radio, which is answering listener questions. Here I go once again with the email. And we'll just be doing two emails today. The first one comes from Robert N. And Robert N performed a circus trick and skipped to the front of the line for emails. If you would also like to perform that circus trick, what you need to do is support me on Patreon. Go to the support page on the website www.riskparadioradio.com and you put in Support pledge at Patreon. You will go to the front of the email line and that money there is collected for the Father McKenna Center in Washington, DC, which serves homeless and hungry people and I am a board member on that organization for full disclosure. But now getting to Robert's email. Robert writes, hi Frank, I have just recently taken a deep dive into risk parity investing after hearing you on the Choose FI podcast and I have to say I'm hooked.

Mostly Voices [3:18]

You have a gambling problem.

Mostly Uncle Frank [3:22]

The topics you discuss and the tools you have pointed me to certainly opened my eyes to some weak spots in my investing mindset. A little about me, I am a 37 year old engineer who has been a very motivated saver and investor since Coming across other well-known personalities in the FII space several years ago. For my accumulation phase, I had been adhering to the JL Collins philosophy of 90% VTSAX and 10% VBTLX. The bulk of this 1.2 million is in a company 401k with Fidelity, but I also have about 500k in a taxable brokerage account with Vanguard. There is another $600k or so across various traditional and Roth IRAs, HSAs, etc. This accumulation strategy has served me well in recent years, but with the equity market now at all-time highs, I believe I am rapidly approaching my number and I'm now very interested in transitioning to an RP style portfolio. When I sit down to consider the actual mechanics of this transition, however, I find myself pretty daunted at the thought of how to move into something like, say, the Golden Butterfly to get to 20% in gold, for example, approximately 500k for me, there would likely be a massive tax hit to sell off my current equity positions as there are no gold ETFs in any tax sheltered accounts of substantial value or with Vanguard, period. Do you have any advice for someone in my position trying to get from a heavily equity weighted portfolio into a more diversified risk parity style portfolio. Thanks and keep up the good work. Regards, Rob. All right, Rob, yeah, I do have a couple of ideas. First, regarding Vanguard, after we had another listener with this issue, I did have two other listeners write in and tell me, since I do not have accounts at Vanguard, and I'm not an expert there, that you can just open a brokerage account at Vanguard to go with, I guess, a separate mutual fund account. I don't know how they handle their accounts there, but evidently if you do that, then you can go off and buy any ETF you want, including any of the gold ETFs that we talk about. So that would at least open that possibility up for you there. Am I right or am I right? Or am I right? Am I right? The traditional and Roth IRAs, I assume, are at places where you could also make transitions to other assets. And that is the easiest place to make those kinds of transactions. If you just look at your entire holding as one big portfolio, you can make transactions within your IRAs into some of these ETFs without any tax consequences. And so that's a very good way to take care of that as well. And then I wasn't sure you say you have a 401k with Fidelity. I wasn't sure whether that just encompassed some of their Mutual funds also had a self-directed option there. I would look at that. Most companies don't have that, but some companies do. And that is often a way you can get to taking your 401 money and putting it into whatever you want, as opposed to the mutual fund offerings that are usually on a 401 website. Failing that, I think the next best option is to simply start accumulating things in the asset classes you are missing, which is another way to approach this. Takes a little longer, but doesn't suffer any tax consequences. And then besides taking the tax bullet itself, there is the issue of whether you plan on continuing to work where you are, in which case if you don't, you would wait until you stopped working for that year to do Most of your taxable transactions, you should be in the 0 or 15% tax bracket when you're doing those. At 37 as an engineer, you are probably in the middle of your career, however, if you enjoy doing what you're doing, you probably won't be leaving there for another decade or so, in which case I would probably just build out the other asset classes as you go. since you won't be actually using the money anytime soon in that kind of scenario. And the only other possibility I can think of is if you are changing jobs anytime soon, you could roll your 401k money into an IRA and then do whatever you wanted with it in the IRA. So hopefully one or more of those options will work for you. And thank you for that email and your contribution at Patreon.

Mostly Voices [8:14]

We few, we happy few, we band of brothers.

Mostly Uncle Frank [8:19]

All right, then we'll just do one more email today. This one's from Colin D and Colin D writes, message hi Frank, thanks for educating us all on risk parity. 55 and retiring in two weeks, having achieved fat phi with a $5 million liquid and $5 million in rental properties. My wife will continue to work as a school teacher for another nine years and then receive a pension at age 60. Between her pension, my Social Security and our rental income, we have all but $75k a year of expenses covered. About half of the liquid assets, $2.5 million, are in a deferred compensation plan that will be paying out to me over the next five years. After taxes, college expenses for two kids, living expenses and investment gains, I expect to have 1.5 million left over. This will form the basis of a risk parity portfolio to fund our income gap of 75k a year at a 5% permanent withdrawal rate using the Golden Butterfly portfolio, which I like for simplicity. First question, how did you size the positions of the risk parity portfolios you have constructed? Was this trial and error using back testing results? Or was there another method you used? I'm interested in modifying some of these portfolios away from real estate, which we already have plenty of. How did you pick which alternative asset classes to emphasize? The second question is what to do with the other $2.5 million. which are in tax deferred accounts, 401, 403, two Roths and an HSA. Our after-tax risk parity portfolio allows us to defer taking retirement distributions until RMDs at age 72, as well as defer claiming my Social Security until age 70. Since we may not ever need our tax deferred accounts, we are considering to keep them in 100% stocks. At least the Roths and the HSA for the 401k T Rowe Price and 403b Vanguard probably use this to augment our lifestyle with more travel and to fund a gifting strategy to our kids slash grandkids. For these funds we are thinking that a 60/40 risk profile may be more appropriate as this could be viewed as shifting our time horizon from long to medium term. Since our investment universe is limited in these accounts the only way to execute a risk parity portfolio would be to roll them over to IRA at a brokerage account or at least do a partial rollover to fund an RP portfolio sufficient to fund the discretionary spending amount. Hypothetically speaking, what do you do if you were in my shoes? Well, I'd probably go buy my wife another bottle of wine. You guys are doing quite well. That's gold, Jerry, gold.

Mostly Voices [11:07]

And these are all good problems to have.

Mostly Uncle Frank [11:11]

But let's just go through a few of your questions. in terms of how I size the positions in the Risk Parity portfolios I constructed. Well, two of them I did not construct. They are off the shelf. That is the All Seasons portfolio and that Golden Butterfly portfolio. And so those were constructed by others. And then when we got to the Golden Ratio and the Risk Parity Ultimate, which were the ones I did construct, yes, it was a lot of trial and error and using the tools at portfolio charts and portfolio visualizer. I wanted to have a portfolio that had more equities in it than the Golden Butterfly does, which is only at 40% and fewer short-term bonds. And so I was fiddling around with the balance of those sorts of things. And where you always end up with in when you're constructing one of these things is you have a stock portion, something in long-term treasury bonds and something in gold and then fill in the rest is sort of the way it typically works. That is more the way the Risk Parity Ultimate was constructed. The way the other asset classes are chosen are from a variety of sources and ideas, but the idea is to pick things that are in between the correlations of the long-term treasury bonds and the stock funds on the two different ends of the spectrum. And so you do end up with things in the middle like preferred shares and REITs. You could use utilities in there. And then you're also looking at the historical returns for these possibilities, which tends to reject a lot of them because you don't want to have essentially stuff that's just hanging around in cash in your portfolio. Or at least not too much of it. Put it that way. The preferred shares idea in particular comes from Rick Ferri. who has those in his personal portfolio. But if you want to go back, I would take a look at any asset class you're interested in. We've analyzed most of these things. If you go to the podcast page, there's a little index there of all the different assets we've been talking about through many episodes, and we use our 10 question analysis to go through that and then think about whether that would be an appropriate thing to put in into a risk parity style portfolio. And that's kind of the mechanism we ultimately use to decide whether something should be in or out. That and taking the whole then portfolio together and doing some analysis on it. If you also go back to some of the early episodes, we have specific episodes on these portfolios. In particular, if you want to Think about the Golden Butterfly, the Golden Ratio, or the Risk Parity Ultimate. If you go back to episodes 4, 6, and 11, those are the introductory episodes to those particular portfolios, and there are a number of other episodes involving analyses with those portfolios. A lot of those occurred before I was getting so many emails. So the emails tended to take precedence over some of those comparison analyses that we did, but they are there if you are interested. Okay, I mean, you do have an interesting situation in that it appears that you have more money than you need to live on. You've won the game more than once, put it that way. So anything that you want to take out and think about as somebody's inheritance, that really becomes another accumulation kind of portfolio. So to the extent you can say, no, I'm never really going to use this piece, you can put that back into something that is just on an accumulation kind of metric, as if it was already in the accounts of the person inheriting it. One thing that you should think about, if you haven't done it already, is advancing those inheritances for your kids as they go. And what I mean by that is when they have earned income, you want to give them a maximum contribution to put into a Roth IRA in particular, or a traditional IRA if they're making too much money. But that's one way to get that inheritance off of your books and onto their books where it can grow in their name and then they can use it. long before you die, hopefully, maybe to make a down payment on a house or some other thing that they might need because in the particular circumstances of a Roth IRA, any contributions that go in there can be taken out for those or just kept in there and left growing away forever. It's much better to get it in there with the new rules on IRAs because they have to be disposed of when you inherit them within 10 years. So give them their money now, put it in their own IRA, and then they can keep it for their entire life growing away. That would be great. Okay. For that 401k and 403b, yes, I would definitely roll those out into IRAs so you can manage them directly and buy whatever you want with them. You shouldn't be hamstrung by the offerings that T Rowe Price or Vanguard in there. The only exception to that is if you were using the rule of 55, since you are retiring at 55, to use that money to live on before you got to age 59 and a half, that would be a reason to leave it in there. But it doesn't sound like you're going to be needing or using that money to live on. So I would just roll it off into IRAs as soon as you can after you stop working. And then you can do whatever you wish with it. And whatever you wish with it will have some divergence depending on whether it's going to be part of that inheritance or whether it's going to be part of stuff you're going to be living on now. A 60/40 portfolio in the meantime is a fine place to go because the idea of our risk parity style portfolios, at least our main ones, is to have the same risk profile as a 60/40 portfolio. but with better returns and better volatility characteristics. So in terms of risk profile, they're about the same. I think some of your biggest issues will be taxes and conversions, a lot of which you may be wanting to do between age 59 and a half and when you take Social Security, depending on what your other income is in a given year, because it would behoove you to convert some of that IRA money into Roth money before you hit the time of the RMDs. And in that regard, I probably would seek some tax advice. A good CPA is worth their weight in gold when you start having this amount of assets to manage from the tax side. I love gold. One thing you should ask that CPA is whether it makes sense for you to set up what is called a donor advised fund if you are in the habit of giving to charities, you set up this fund and it basically is the stopping point before something gets distributed to charities. And so it is a way of donating shares in particular. And if they're appreciated, then you don't end up paying any taxes on it, but you get the entire tax deduction for the charity in the year that you put it into the donor-advised fund. even if the money is not actually distributed to the charities in that year. So you could basically front load this in one particular year with enough charitable contributions for the next five years, say, if that made sense for tax reasons in that particular year, taking a large deduction like that. But I'm sure your tax advisor will have many other such ideas. and thank you for that email.

Mostly Voices [19:30]

And now, last off,

Mostly Uncle Frank [19:35]

we have to discuss our rebalancings, which occurred today. We rebalanced four of our sample portfolios that you can find at the website www.riskparityradio.com. These were all set up to be rebalanced on an annual basis. We picked July 21 as a rebalancing date because it's a meaningless date, but it is at least a year since they were created. And so henceforth, this will be the rebalancing date for those portfolios. If you are choosing a rebalancing date on a calendar, you do want to make it on a date that is not meaningful financially. It's not the end of the year, it's not the end of the quarter, it's not the end of the month. It doesn't have any significance in financial markets. That way you're likely to be rebalancing on a day when markets are relatively quiet and there isn't anything strange going on. Do not rebalance on triple witching days.

Mostly Voices [20:39]

You can't handle the dogs and cats living together.

Mostly Uncle Frank [20:43]

A prize for you if you know what those are. Don't be saucy with me, Bernaise. so I put all the details of the rebalancings up on the portfolios page at the website so you can see the specific numbers. But I will go over them briefly here for the all seasons portfolio. This is our most conservative portfolio and it has a target of 30% in stocks, VTI is the fund for that, 40% in long-term treasuries, that's TLT, 15% in in intermediate term Treasuries, that's VGIT, and then 7.5% in each of Gold GLDM and Commodities PDBC. So what ended up happening in there is since stocks and commodities did well this past year, we ended up selling lots of those, buying lots more bonds, and buying a little bit of gold.

Mostly Voices [21:35]

I love gold.

Mostly Uncle Frank [21:38]

It's interesting to see how these things played out over the year, but that's what happened. Now we go to the Golden Butterfly. This one is 40% in stocks divided into small cap value, VIOV, and a total market index fund, VTI. Then it's got 40% in bonds divided into long-term treasuries, TLT and short-term treasuries, SHY, and then it's got some gold in it. GLDM 20% of the portfolio is that. And so this also ended up being a question of selling the stocks and particularly that small cap value which has been the best performer over the past year and then some of the index fund BTI. And then we bought both kinds of bonds and some gold and now that is rebalance to its original characteristics. And now we go to the Golden Ratio Portfolio. This is our next rebalancing. And this one is designed to have 42% stocks divided into three funds. One is a large cap growth fund, VUG. One is a small cap value fund, VIOV. And one is a low volatility fund, USMV. We ended up selling out of all of those, mostly out of the small cap value fund because that one has done the best over the past year. And then we ended up buying lots of bonds, TLT, to get it back to its 26% of the portfolio. And we bought some gold, GLDM, to get it back to 16% of the portfolio. Now the other holding in this is REITs, REET. We ended up selling a bit of that about 2% to get it back down to its 10% allocation because it also was a winner last year. And this portfolio has 6% in cash which had dwindled down to 1.68% but is now back up to its full cash holding which will be used for the drawdowns for all of next year. And now we go to our most complicated rebalancing because we also did some reallocating in this portfolio. This is the Risk Parity Ultimate Portfolio. And so I've got all the details at the website just to summarize this. I wanted to make this portfolio a little bit more diverse in a couple of areas. One of the areas was Foreign stocks, one of the areas was commodities. And then I wanted to add a little bit of crypto just to see how that would function. And so it had been 40% in stock funds, 25% in treasury bond funds, 10% in gold, 10% in rates, 12.5% in preferred shares, and 2.5% in the volatility fund. The new configuration is fairly similar. It will have 40% in stock funds, and that is divided into 12.5% in small cap value, the IOV, 12. 5% in large cap growth, the VUG, 5% in USMV, which is a low volatility fund, and then it's got 5% also in KBA, which is a Chinese A shares fund. And the reason we included that is it's very much diverse from the other stock funds and has a decent historical return. It is shares you cannot buy outside of China of companies that mostly serve domestic Chinese markets, including their largest alcohol producer.

Mostly Voices [25:36]

That was weird, wild stuff.

Mostly Uncle Frank [25:39]

And then to round that out, we also have 5% in UPRO, which is the LevEraged stock fund. On the bond side, we got rid of the EDV and so we just have TLT and TMF in there now. We have 15% in TLT, the long-term treasury bond fund, and 5% in TMF, the LevEraged long-term treasury bond fund. And then we upped the gold contribution. It was at 10% We move that now to a 15% allocation.

Mostly Voices [26:11]

That's gold, Jerry, gold!

Mostly Uncle Frank [26:15]

Which seems to be more optimal for more portfolios, particularly ones that involve a slight bit of leverage like this portfolio now has with the UPRO and the TMF in it. And then for the remaining assets, we have 10% in preferred shares, PFF now down from 12.5%. We've dropped the REIT component. to 5% from 10% since we have more in other stock funds now. And then the remaining 10% is divided into a commodities fund, COM, that we reviewed several episodes ago, and that's 5%. We're putting 3% in a volatility fund. We switched from VXX, took the capital loss on that, Bought an alternative called VIXY, which is pretty much the same kind of thing. And we have 3% in that. And then with the remaining 2%, we put it in crypto funds. One is BITQ, which is crypto related companies, and one is BITW, which holds a bunch of cryptocurrencies directly, 10 of them to be specific. And so that rounds the whole thing out. I'm putting up a Correlation analysis, a new one for that, so you can see what that looks like. And you can access that from the Portfolios page. I don't expect this portfolio to have risk characteristics that are terribly different from what it was before, but it will be more diversified and contain all of these asset classes. Everything that has transpired has done so according to my design. I'm not sure anyone needs something that is so complicated such as this, but I did want to have one portfolio that kind of brought everything together just to see what that would look like, to see how these things perform, and to see how they perform in relation to each other as a nice experiment. But it's all there on the website for your perusal and amusement.

Mostly Voices [28:19]

Funny, like I'm a clown. I amuse you.

Mostly Uncle Frank [28:22]

But now I see our signal is beginning to fade. Shut it up, you. I am going on hiatus for the next couple of weeks here.

Mostly Voices [28:31]

I don't think it means what you think it means. A hiatus called a vacation.

Mostly Uncle Frank [28:35]

And so there may not be any more episodes until about the week of August 9th. We may have another one in between there if I can get to it, but I make no promises. Forget about it.

Mostly Voices [28:51]

I will try to update the website, but I can't promise

Mostly Uncle Frank [28:55]

that I can do that either.

Mostly Voices [28:59]

You can't handle the crystal ball.

Mostly Uncle Frank [29:02]

Because my priorities will be different for the next couple weeks. I shall taunt you a second time.

Mostly Voices [29:06]

What a strange person.

Mostly Uncle Frank [29:10]

If you have questions or comments for me, please send them to frank@riskparityradio.com That's frank@riskparityradio.com, that's the email. Or you can go to the website www.riskparityradio.com and fill out the contact form there and I'll get your message that way. If you are looking for something to listen to on this topic and you haven't done it already, I would go back to some of the original episodes, in particular the episodes 1, 3, 5, 7, and 9. go over a lot of the basics and background for this style of investing and what its history is and what its attributes are and why you might be interested in it. Bow to your sensei. If you haven't had a chance to do it, please go to wherever you get this podcast, Apple podcast or wherever and leave it a five star review and like and subscribe and all that good stuff. That would be great. Mmkay? And hopefully that'll get the message out to even more people. Thank you once again for tuning in. This is Frank Vasquez with Risk Parity Radio. Signing off.

Mostly Voices [30:26]

Uh, what? It's gone. It's all gone.

Mostly Mary [30:29]

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.