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 [0:37]

Thank you, Mary, and welcome to episode 110 of Risk Parity Radio. We are now in season two for those who are counting, although we will keep the individual episode numbers to make it less confusing to find them. I returned to my easy chair from two harrowing vacations, and I'm recovering from them, although I have caught cold. I did a 450 mile bike ride across the state of Iowa, followed by a trip to Alaska, where we hiked to a glacier amongst various and other sundry things, including a wedding. But I am happy to be back with you, and I see that my email stack has gotten very large and I'm over a month behind. In connection with that, as I often say I'm intrigued by this how you say emails and so we will be working through these emails and have a couple of extra episodes before we get to that I have updated the portfolios page for the past two weeks on the website www.riskparadioradio.com and you will see that they Had gone up a little bit the first week I was gone and went down a little bit the second week I was gone. So they haven't changed much, but we will be getting back to those portfolio reviews on the weekends going forward. But now, first off, first off, we have an email from Spencer S and Spencer S writes, good morning, Frank. I came across this portfolio on Reddit this week and wanted to get your thoughts about it. It is a reference to the Hedge Fundy portfolio. I just listened to your new podcast on the Levered Golden Ratio. It does sound relatively similar, albeit with fewer asset classes. By the way, I'm a huge fan of yours. I heard you on Choose FI and your second appearance recently is my favorite episode. The principles about creating a short medium term portfolio were circulating in my brain for a while and your reasoning and explanations were exactly what I was looking for. Also a big fan of the Ghostbusters slash Goodfellas drops. Probably my two favorite movies.

Mostly Voices [2:59]

Real wrath of God type stuff. Thanks in advance and happy Fourth of July.

Mostly Uncle Frank [3:03]

Spencer from Baton Rouge. Well, thank you for that email, Spencer. I'm glad you're getting a lot out of this podcast. As for that portfolio you referenced, we talked about that back in episode 82. and that portfolio is comprised of 55% UPRO and 45% TMF. There is a lot written about it, including a nice summary on the Optimized Portfolios page, which I'll link to in episode 82 and we'll link to again in the show notes for this. But basically where I came out on it is it is a highly leveraged stock bond portfolio. And the issue with that is it does have a lot of volatility. So it really does not have the characteristics of a fully diversified risk parity style portfolio that might include some gold and some other things. I love gold. In that line, it does end up having a 69% drawdown if you do the analysis of it back to the 1970s. And so my conclusions on it, while it was interesting, I would not probably adopt it given those sorts of limitations. If you look at our experimental portfolios, the aggressive 50/50 is the most similar to that portfolio. But I do invite you to go back and listen to episode 82 because it has all of the parameters and discussion of the analysis of that portfolio. In that light, it is much more aggressive than the leveraged Golden Ratio portfolio, which really has leverage of only 1.6 to 1, basically. If you look at the whole thing, whereas the hedge fund portfolio is a 3 to 1 leveraged portfolio. I'm glad you enjoy the Ghostbusters, good fellas, sound drops. Well, I'm funny how? I mean, funny like I'm a clown? I amuse you? But you know, it's interesting. I think that's become the most controversial thing about this podcast. I've gotten many emails saying that they really love those things, and then I've gotten some messages saying they really hate those things. Although the like them is running about 80-20 against the don't like them. But I suppose there's not too much you can do about it.

Mostly Voices [5:39]

As one of my favorite philosophers, Ricky Nelson has sung：But it's all right now I learned my lesson well youl see you can't please everyone so you've got to please yourself and so I am afraid that the beatings will continue until morale improves

Mostly Uncle Frank [5:56]

but I'll try to be judicious about them yeah,

Mostly Voices [5:59]

baby, yeah! All right, second off.

Mostly Uncle Frank [6:07]

And second off we have an email from Nick, and Nick writes, hi again Frank. This article crossed my path today and there's a reference I will give for the show notes. It's from Alpha Week, Risk Parity Guerrilla in the Room article. In summary it appears to go into depth as to the mechanics behind why a risk parity approach is as close to optimal as possible, without the benefits of hindsight bias. Some aspects, however, fell well above my bandwidth to digest. For example, why was a 60 to 70% fixed income preferred at some points in history in an effort to remain on the efficient frontier? Is this problematic for those of us considering the Golden Ratio Portfolio, which utilizes a much lower bond allocation? I feel as though I and others of your podcast would benefit from your summary and assessment Of the main points laid out for and against risk parity referenced in the comprehensive article. Thanks for your time. PS I have recently reviewed the article on Gold by Big Earn. It is rather helpful to see his numerical analysis coming to a 15% gold allocation recommendation as this is what the Golden Ratio uses. However, within the lengthy commentary following that blog post he seems to make several jabs at risk parity as back tested through portfolio charts. www.riskparityradio.com, Reason Given is the relatively short look back period available. Why are you comfortable utilizing this back testing only dating back to the 1970s, especially given the grievances expressed by EARN? Interesting how Lee however, EARN seemed to come to the consensus that a 60-25-15 stock bond gold portfolio would have been an ideal allocation to hedge market volatility when looking back at his back tested models dating back to the 1920s. How different is this from your sample portfolios? Are you and Earn in agreement on these things? All right, there's a lot here. Let's talk about that article first. It's a very well-written article. The point of the article is to say that the reference portfolio for retirement portfolios and pension style portfolios ought not to be a 60/40 portfolio but should be a 50/50 S&P 500/10-year Treasury bond portfolio. And it provides a lot of analysis of efficient frontier, sharp ratios, and other things. So I think it's a very good article. It does reference a lot of the material about risk parity style investing that has accumulated over the past 25 or 30 years. What I find most interesting about this is this. This is essentially the jumping off point for constructing risk parity style portfolios. And why is that the case? Because these are the two most diverse commonly available asset classes, a stock market investment along with a treasury bond investment. They're using the 10 year because you have the most history for the 10 year bond. Now the 10 year bond is on the short end of the long term treasuries, if you will. or the longest end of the short of the intermediate term treasuries. So it's right there on that borderline. So I think that is a good reference point to start. If you can't beat that kind of portfolio, you may be wasting your time. But what you'd want to do is start with that kind of portfolio and then modify it by adding other things and seeing what you get. One thing that we do to construct our risk parity style portfolios is go further out on that treasury bond curve. And the reason we want to do that is because then we can use fewer treasury bonds in the portfolio and have the same kind of effect. Where that effect comes into play is when you're looking at downturns like in 2000 or 2008 or 2020, when you saw the stock market crash and treasury bonds go up substantially in value at the same time. Now the ones that went up the most in value were the longest term bonds available, so we're talking about the 25 and 30 year bonds. So you can get the kind of effect you would have with a 50% 10 year bond portfolio, but only incorporating 20 to 25% of the longest term treasuries. And that allows you then to add other things in your portfolio to drive better returns and get some better diversification overall, which include things like the gold for the diversification and maybe some REITs or some preferred shares for some more income, and perhaps some in the short term category if you need cash to be spending in your drawdowns. And the Golden Ratio Portfolio does seek to come to a balance of those kinds of things. And so I did go ahead and go over to Portfolio Visualizer and run this 50/50 stock/10-year treasury portfolio against the golden ratio for the data that was available, which goes back to 1994. And you'll see that the golden ratio outperforms this 50/50 portfolio by about 1% compounded annual growth rate per year and has a higher safe withdrawal rate and higher perpetual withdrawal rate. They have the same Sharpe ratio of 0.83 for that period. But I think the point of the article is clear that if you are taking a retirement style portfolio you ought to be able to beat one of these very basic kinds of portfolios. if you're going to choose something that is different, which is what we've tried to do with our sample portfolios. Now moving to your PS about big earns, analyses, and comments in his article, which I will also link to again in the show notes. We talked about that extensively back in episode 40 if you are looking for that. I think one of Big Earn's criticisms of portfolio charts and in particular the Golden Butterfly portfolio was its reliance on small cap value and small cap value as being something that might perform better in the future as it did back in the 1970s. But I'm not sure I would necessarily agree with that criticism. Fama and French have tested small cap value back to 1926 or however long their paper went back to and found it to be a valid way to improve performance of a portfolio. Although the sample size has to be over many decades in any given decade or two small cap value may underperform the market as it has substantially for the past. decade or so. But I think Big Earn and I are in somewhat agreement there. What he's basically saying is that you probably need more than 40% of stocks in your portfolio as the golden butterfly has. So when we look at something like the golden ratio and include the REITs, which are part of the stock market, you're looking at a 52% allocation to stocks and something like that. So I tend to agree that 40% is probably the lower end of any kind of portfolio you would want to hold in retirement unless you are going for something that is intentionally much more conservative. As for back testing back before the 1970s, you could make that criticism. I don't think it's that valid if you look at other sources. For instance, the guy who came up with the Dragon Portfolio has tested things back a hundred years. If you go to the YouTube channel Next Level Life, I will link to that in the show notes. He had a recent video about talking about why gold seems to stabilize all kinds of portfolios, and his analysis also goes back to the 1920s. So I don't think there's that much that's substantially different about the era before 1970 than after 1970, with the exception of the fact that gold floats after 1970. So it's actually much more useful in the current environment than an environment where it was pegged to the dollar, i.e. you're getting more diversification out of a gold holding now than you would have in that earlier period. So I think that Big Earn and I actually agree mostly on most things regarding portfolio construction. If you're looking for more controversy, let me see if I can generate some here in a joke smoking way. One area that I would disagree with his analysis is his use or reliance on the CAPE ratio for any kind of predictive forecasting. I think that the CAPE ratio has proved to be useless in terms of predictive forecasting. It's not a very good crystal ball. I did a rant on this back in episode 70. and you can check that out if you want to hear me talk more about that. And the technical reason for that is there is no evidence that the CAPE ratio is actually mean reverting. And all of these kinds of analysis that say, well, this was the average in the past, therefore it's likely to get back towards that average in the future. That has an implicit assumption in that kind of analysis. And the assumption is that the metric you're talking about is in fact mean reverting. And there's a great controversy as to whether the CAPE ratio is in fact mean reverting. This was discussed on Ben Felix's podcast at Great Length. I think you can find that on YouTube if you search CAPE, and maybe I'll be able to link to that in the show notes as well. But unless a metric is in fact mean reverting, it cannot be used for any forecasting purpose whatsoever because it is dependent more on future economic conditions, i.e. the weather, if you will, the macroeconomic conditions of typically the increase or decrease in growth rates and the increase or decrease in inflation rates. are the two big weather factors that influence these other factors. Now, where do you see this mistake also being made? I think this mistake is also being made when people think about inflation. They think that because inflation was higher in the past at some point, somehow it needs to get higher in the future. That is an assumption of a mean reversion. and it really doesn't make a whole lot of sense or does not hold much water. The same goes for interest rates. People think that because interest rates were higher in the past, they have to go up in the future, that they're mean reverting. But there also is no evidence that that is true. And so without the mean reverting assumption, that forecasting or that idea Frank Vasquez：risk parity, risk parity, Frank Vasquez in the audio. I do view this as a fundamental problem with a lot of what we see in the financial services industry today. People essentially copying these couple ideas because they would rather be consistent and wrong with the consensus, that foolish consistency, than actually think about whether this is a good idea and what are the implicit assumptions about using these sorts of things as crystal balls. Now you can also use the ball to connect to the spirit world. I think we are much better off just throwing out those kinds of crystal balls and trying to construct portfolios that are agnostic of our ability to predict the future, which is really what we're trying to do here. But that's probably enough controversy for one email. Groovy, baby! Let's move on to the next one. This one comes from Bob B. And Bob B writes, Can you discuss how to choose a gold ETF? I understand that GLD is useful for analysis since it's been around the longest. And I assume you use GLDM because it is a much lower expense ratio, 0.18% versus 0.4%, and is the third largest gold ETF. Presumably size does matter, so you can trade it. at NAV, but there are other gold ETFs that are 1 billion or larger. GLDM is not quite the cheapest gold ETF. There are some with an expense ratio of 0.17% and the new IAU at 0.15%. There's also scary language in the prospectuses for all gold ETFs. For example, from IAU：the iShares Gold Trust is not a standard ETF. The trust is not an investment company. registered under the Investment Company Act of 1940 or a commodity pool for the purposes of the Commodity Exchange Act, shares of the trust are not subject to the same regulatory requirements as mutual funds from GLDM. GLDM relies on its custodian for the safekeeping of essentially all its gold bullion. As a result, failure by the custodian could result in a loss to GLDM. From another, the custodian which may not cover the full amount of gold. In addition, some ETFs have annual audits, while others audit more frequently. I also noticed that some gold ETFs publish a daily bar list, notably not GLD slash GLDM or IAU slash IAUAM, perhaps because they are the current market leaders or because they've been in the gold ETF business the longest. So how worried should we be about the integrity of gold ETFs in general? I'm also wondering if SGOL or BAR would be slightly better choices than GLDM due to their slightly smaller expense ratios, more importantly because of the efforts to be more transparent by publishing a daily bar list. Though they are smaller than GLDM, 4.6 billion, they are still fairly large, 1.1 billion for BAR and 2.5 billion for SGOL. Thanks for your thoughts and for the podcast. And then he says, Oops, correction, IAU/IAUM does publish a daily bar list. So let me add IAU M to the S G O L and B A R for considerations as alternatives to GLDM. And by the way, what's the deal with mini shares GLDM versus gold and micro shares IAU M versus IAU? Is there some difference? Given you can buy fractional shares easily now, why would anybody buy the higher expense ratio GLD or IAU instead of GLDM or IAUM. Okay, what you're seeing here is the evolution of gold ETFs. That GLD was one of the first very popular sector kind of ETFs going back to, I think, 2004 is when it rolled out. Its popularity has spawned all of these other ones. who are giving us lower share prices and also lower expense ratios for them. And so this is a good thing for the consumer. We have many more options here than we did just a few years ago, and we can take advantage of them as you have observed. The reason that somebody might use GLD instead of GLDM or IAU, instead of IAU is because that higher share price actually makes it easier to trade options with those holdings or those kind of securities. So if you are employing some kind of option strategy, you would be better off using GLD in most circumstances than the lower priced ones. After that, there's really no reason why anybody who's just looking for a gold ETF would need to hold GLD or IAU because as you observe there are cheaper ones now, including ones provided by the same purveyors of GLD, which is GLDM, or IAU, which is IAUm. So I would be comfortable holding any of these so long as they are relatively liquid and easy to get in and out of. The reason you wouldn't want to change horses if you already hold one of them is there are tax consequences, particularly if you're holding any gold in a taxable account to selling something and then buying the same thing just to save that 0.1 expense ratio is probably not going to be worth it for most people. Because remember, we're not talking about holding a portfolio that's 80% gold. These portfolios are only 10 or 15% gold for the most part. So the expense ratio is less important for that reason. As for the safety of these funds, I don't think there's any problem with the safety of these funds. They are highly regulated. There's no more issue with these kind of ETFs than any other kind of ETFs. If you were suspicious of gold ETFs, you should be suspicious of every kind of ETF, and you probably should not be investing in financial markets at all. What's more interesting to me is Where does this suspicion come from and who benefits by promoting this kind of suspicion? Most of it comes from and if you look at who's talking and who's paying them or who's advertising on their channels, it comes from marketing of people that either sell physical gold or want to store it for you and charge you for holding it. and these are the traditional players in these markets who existed before these ETFs came online. These ETFs have bit into their business very substantially, so they have a very vested interest in casting aspersions and doubt over gold ETFs because it's cutting into their bottom line. And so that's where all this fear mongering is really coming from when it comes down to it. From my own perspective, I look at the professionals who run hedge funds and invest in gold. And what do they hold their gold in? They hold it in ETFs. Ray Dalio and Bridgewater are holding ETFs. They are not holding physical gold. And I figure if it's good enough for the best professionals on the planet, it is probably good enough for me because I do not know better than they do. in terms of how these things work. Whenever I hear these sorts of things, I'm always reminded of this quote by Upton Sinclair, which says, It is difficult to get a man to understand something when his salary depends on his not understanding it. And this applies a lot to people in the financial services industry who don't want to accept that there are better ways of doing things in the 21st century than there were before because it interferes with their ability to make money. And that applies to people that are selling or promoting physical gold. That applies to people that are promoting or selling annuities. That applies to things like loaded mutual funds, high AUM fees, all manner of things. that ought to be creatively destroyed in this century. And hopefully many of them will, because we have better tools today than we did before and we ought to be using them. We have the tools, we have the talent. All right, our next email comes from Randy B. in Vermont. And Randy B. writes, hi Frank, we currently have most of our retirement funds in a TDSP provided by the corporation I work for and they do not provide a gold fund as an option. Currently we have a 67/37 stock bond mix with a year before retirement. I'd like to take some risk off the table since we've already won the game. Would it make sense to go with the golden ratio portfolio and just substitute a money market fund in place of the gold for now? By the way, another epic pop culture gold clip would be from Seinfeld's fellow comic Bania. That's gold, Jerry. Gold. I do believe I have that one. Gold Jerry Gold.

Mostly Voices [27:52]

Signed Randy B.

Mostly Uncle Frank [27:55]

Well, if you're only talking about a year, yeah, that makes a lot of sense. If you're just trying to reduce your risk right now to avoid a sequence of return stock drop in the next year, it would make sense just to take that off the table. You're going to reduce your risk and reward proportionately. So in your case, we're managing that risk is prominent. Yes, that makes sense as a short-term solution, I would think. Particularly since you say you've won the game. Therefore, in theory, you could hold the whole thing in cash. Although that wouldn't make too much sense either. It would just cause a lot of unnecessary transactions. But thank you for that email. And our next email comes from Falco. Falco writes, hi Frank, thanks so much for your answer to my previous email. I also appreciate the recurrence of Der Kommissar by Falco. I've started to create a version of the Golden Ratio portfolio that's using funds available to me in the Netherlands. I'm also trying to make use of the hundred or so funds that my broker DeGiro offers on commission free purchases. My thinking was to look for funds available here that are highly correlated to the US ones you mentioned on your website using the Unicorn Bay resource you shared. As a result, I've made a couple of adjustments. I replaced the US large cap growth for a European large cap growth fund. A US version was not readily available, but the EU one is 99.4% correlated to VUG over a 13 year period. The minimum volatility stock component wasn't really an option here, so I decided to distribute the 14% allocation evenly over the large cap growth and small cap value segments. Third, I took the 6% that is in cash and distributed that allocation to all the other components. I looked at the emerging markets and SHY variations you discussed in episode 56, but neither wanted to make the portfolio more aggressive nor add a small component that cost a commission to purchase. Do you have any other advice how to approach this? Thanks, Falco. Well, thanks very much for this email, Falco. I mean, this really is what I would hope people would be able to use this podcast for, not to simply accept what I put forth, but to take their own personal circumstances and modify it so it works for them, regardless of where they live or what they're doing. Now, as far as the US large cap growth for European large cap growth, another option here is simply to use a total market fund for that because a total market fund is cap weighted and so it ends up being mostly large cap growth. So for instance, if you look at something like the Golden Butterfly, that is total market fund 20% and small cap value 20%. Adding the large cap growth instead of the total market makes it a little bit more growthy but not that much more growthy. So the other option I would look at for you is to look at your total market funds, maybe even worldwide total market funds, and use that as the large cap growth segment of that. And that may work just as well or better than the fund you have found. But the fund you have found does sound like it should work as well. As for that minimum volatility stock component, yeah, that's just a little thing we put in there. goes with what is called quality factors or low volatility factors, both of those. But it is really designed to just mimic a S&P like return. So you don't really need to have it, is what I'm saying. And you can just go with the other two funds and that would be just fine. In fact, it may work a little bit better with a little bit more small cap value in there. and then in terms of that 6% in cash, yeah, that is really there for the purpose of this portfolio, mostly in the sample portfolios, as a mechanism for having a pool of cash to distribute for the year. So it's really not doing anything. So making that modification of just taking that 6% and redistributing it across the other ones does make a lot of sense if you're just going to construct this portfolio and you can hold cash somewhere else doing something else. there's no real reason to hold cash in the brokerage account because you can hold it in other places. It's just convenient for the purpose of the sample portfolios and in the US to hold some of that right in the brokerage account because there are a number of options we have here that it doesn't sound like you have in the Netherlands. But thank you again for that email and I'm very glad you're able to use the resources that I have been able to provide. All right, our next email comes from Kevin. And Kevin writes, Message hello re episode 7. Dalio Basic Components video is marked as private so is not available. Is there an alternative link? Thanks. Yeah, that's interesting. It wasn't private when I linked to it. It's just a YouTube video of an interview of them. I'm not sure who holds it or why they made it private. I did try to look for it. I have not been able to find another version of it that's public. But I will tell you, I mean, what it really says or what he says in that interview is essentially you start with some stocks and then usually you're looking at treasury bonds and gold as two of your basic components for constructing one of these risk parity style portfolios. And so that was all the import of that video in terms of that episode. That when we're constructing these kind of portfolios, it is natural to start with stocks, treasury bonds, and gold as three basic components to work with at the beginning and then add other things to taste. Cornbread.

Mostly Voices [34:20]

Ain't nothing wrong with that.

Mostly Uncle Frank [34:23]

All right, and we got time for one more email today. Last off. Last off we have an email from Daniel D. And Daniel D. Writes. Actually, it's Daniel S. Message, greetings. Thank you so much for your work. I was going to implement the risk parity ultimate portfolio as part of my tax deferred IRA and M1 Finance. But now I realize I can't put in partial percentages for each fund. Any suggestions as to how to handle that if I can only implement full percentage numbers? I hate to guess which stock to lower or raise to full percentages. Thanks. Well, I don't think it's going to matter that much. You would probably just round them if you're using the old version of the Risk Parity Ultimate. There is a new version, fortunately, for you. that I just put out in July where we added some even more diversification to it. What you will like about that version is that all of the percentages are whole percentages except for the VUG and VIOLV, which are still listed at 12.5% each. Now as far as those are concerned, I would probably go with 13% in VIOV and 12% in VUG. because that will give you just a smidgen more of diversification for those. I don't think it is of monumental significance, but that is what I would go with.

Mostly Voices [35:55]

And thank you for that email.

Mostly Uncle Frank [36:00]

But now I see our signal is beginning to fade. It's good to be back in my easy chair, recovering from my adventures. If you have comments or questions 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 fill out the contact form and I'll get your message that way. We have a lot more emails to go through. I am only about a month behind after going through those. I will probably try to do another all email episode this week to see if we can get more caught up and what I mean by caught up is only a week or two behind. I very much enjoy answering your emails because you raise lots of interesting issues and if you are asking questions about it, I'm sure other people have questions about it. It makes it much easier for me to know what my audience is interested in hearing about.

Mostly Voices [37:02]

Forget about it.

Mostly Uncle Frank [37:05]

If you'd like to help out the show and haven't had a chance to do it yet, I would very much appreciate it if you'd go to Apple Podcasts or wherever you get this podcast and leave it a five-star review and a like and a follow and all those nice things. That would be great. M'kay? Thank you once again for tuning in. This is Frank Vasquez with Risk Parity Radio. Signing off.

Mostly Voices [37:30]

And it's all right now. Yeah, learn my lesson well. You see you can't please everyone, so you got to please yourself.

Mostly Mary [37:47]

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.