Mostly Voices [0:01]

A foolish consistency is the hub goblin 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 [0:18]

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 112 of Risk Parity Radio today on Risk Parity Radio. It is time for our weekly portfolio reviews of these seven sample portfolios that you can find at www dot Risk Parity Radio dot com.

Mostly Voices [0:57]

But before we get to that, I'm intrigued by this how you say Emails

Mostly Uncle Frank [1:03]

And our first email today comes from Bob. And Bob writes, good morning. I learned about you from and your podcast from Choose Fi and enjoy the education the podcast provides. I have one big complaint, the overuse of sound effects is annoying, unnecessary takes away from your message and frankly makes the podcast unlistenable. The information you provide is so important. Please do not risk losing your listeners and pair down the sound effects.

Mostly Voices [1:36]

Sincerely, Bob Unlistenable, you say, I don not think of Miss what you think of Miss.

Mostly Uncle Frank [1:38]

Well, I was thinking about this on my recent week, long bike ride across Iowa. Some of those days were pretty long up to 85 miles. I think we in two miles, 60 on the Grantwood Parkway or Byway in northeast Iowa. And after a while you start hearing voices and things. One of those voices came to me and I was thinking about this podcast whether I should continue it or what I'd do with it in this voice, it sounded something like James Earl Jones or Darth Vader. I'm not sure which. This is what it said. People will listen to Risk Parity Radio, they'll listen for reasons they can't even fathom. They'll tune in not knowing for sure why they're doing it. They'll arrive as innocent as children longing for simpler solutions that they can do themselves. Of course, no one will mind if they only listen once or twice. They'll stop thinking about the high price financial advisors, the insurance salespeople, and the phony guarantees for it is money that they have and humor that they lack. They'll listen to the stories of portfolios being created with simple and straightforward low cost ETFs and it will be as if they've dipped themselves in magic waters. The memories and stories of their ancestors will be so thick they'll have to brush them away from their faces. People will listen. The one constant through all the years has been doing it yourself. Personal finance fads have rolled by like an army of steam rollers. They're erased like a blackboard. Rebuilt and erased again, but do it yourself. Investing has marked the time. It's part of our past. It reminds us of all that was once good and could be again. Oh, people will listen. People will most definitely listen And then it said go the distance. So I kept going. So while I do appreciate the criticism and it has some validity to it, this is a hobby podcast for me and I'm going to have some fun with it. And you are largely outvoted, I'm afraid, at least in accordance to the messages and emails that I've received which tend to request more sound bites and not fewer ones. What I would suggest you do is first of all, avoid any of my podcasts that involve a rant. There's one a month and you don't wanna listen to that and then take a look at the show notes because in each episode the show notes will tell you what the podcast is essentially about for that week in terms of just looking at the portfolios, you can always just go to the portfolios page at Risk Parity Radio dot com and see what's going on with those there without having to listen to me at all.

Mostly Voices [5:05]

Shut it up, you head it up me.

Mostly Uncle Frank [5:09]

And hopefully that will be a balance that will be acceptable.

Mostly Voices [5:13]

Yes.

Mostly Uncle Frank [5:15]

Alright, second off, second off, we have a email from Zahir and Zahir writes, Frank, I've been listening to your podcast and I'm learning a tremendous amount of information about the stock market and life in general. Some of the things you say are very profound and I try to think and reflect over it as I listen and re-listen to your podcast. Very profound.

Mostly Voices [5:41]

You say, I don Not think I miss what you think I miss.

Mostly Uncle Frank [5:42]

I have a question that I'm unable to answer or find an answer to. If I were to create a levered risk parity portfolio with two x levered ETFs without using any broker margin, how would I compare returns on that to buying more of unlevered similar portfolio on broker provided margin at a rate of say 2%? How would I calculate out my returns and costs over long term? Thank you for your help. Well, it would be tricky to get an exact calculation for these things because a lot of the portfolio analyzers we have are not set up to do that. But you can't do it exactly, but you can do it approximately. One way is when you go to portfolio charts, you can actually put in more than a hundred percent in a portfolio and it'll analyze it as if you have more than a hundred percent in a portfolio, then you would have to subtract off of course the margin that you would anticipate paying. So if you were leveraging up to 200% and your margin was 2%, you're only paying the margin on the extra 100%. So it ends up being 1% of the entire portfolio. 'cause two divided by 200 is one, so you would be subtracting that 1% off of all of the compounded annual growth rates and other things you saw there. With the leveraged funds that are out, it's, it's more difficult to do. The easiest thing to do is simply to analyze it using portfolio visualizer and use those funds themselves because then you'll know exactly what their drag is others have found. And when you combine these, they have less of a drag depending on what your rebalancing schedule is for them, but the principle is largely the same. You can also do more than 100% at portfolio visualizer. I did not know that. So you could create a portfolio that was of the leveraged funds and then you could create a portfolio right next to it that's of the normal funds jacked up to say 200%, double all the things, then put in cash X as one of your components in that portfolio and subtract off what the amount of leverage is. So if you were going up to 200, you'd put a a cash X minus 100 in it, then it will add to a hundred at the bottom and portfolio visualizer will analyze that for you. And that has how many people have analyzed or projected back portfolios of leveraged funds back to say the 1980s even though we didn't have leveraged funds back in the 1980s.

Mostly Voices [8:41]

Groovy baby.

Mostly Uncle Frank [8:43]

You'll see an example of that if you look at the show notes for the last episode, episode one 11 where we were talking about some leverage funds and I did one of those analyses at Portfolio Visualizer, so you can check that out.

Mostly Voices [8:56]

You have a gambling problem

Mostly Uncle Frank [8:59]

In terms of the overall performance when the portfolio goes up and when the portfolio goes down. The leverage shouldn't change how that works, it would just magnify it to the amount of the leverage that you put into it. And I know that's not a completely satisfying answer, but hopefully it will help you a bit if you're going to fiddle around with leveraged funds.

Mostly Voices [9:21]

Uh, what The money in your account, it didn't do too well, it's God.

Mostly Uncle Frank [9:25]

And thank you for that email. Our next email comes from Melanie and Melanie writes, message, love your podcast edu educational outreach and humor. Humor.

Mostly Voices [9:39]

You say, I don't think of miss what you think of Miss

Mostly Uncle Frank [9:41]

After listening for a number of months now, I've taken the leap to test run the golden Butterfly with a $10,000 cash holding I had at the all too familiar near 0% interest rates near 62 ready to transition into retirement and a risk parity type portfolio. This test run will start the shift for other investments to follow over. Can't thank you enough for the insight help and guidance with your understanding market correlations and how to move from accumulation to preservation and eventually draw down phase with your help. I have gained a sense of confidence in making this financial life altering shift while I have much to learn yet I don't plan on having to tap into these portfolio investments until age 70. Until then I plan to continue following your most informative podcast.

Mostly Voices [10:29]

Yeah, baby.

Mostly Uncle Frank [10:31]

Yeah, Many thanks Frank. Well thank you for that. Very nice email Melanie. And I think this is really a great approach, particularly in this era when you can create small portfolios as test portfolios and we have no fee trading and we have fractional shares at places like Fidelity. So you can take a small amount of money, even a thousand dollars and create one of these portfolios and just watch it and see what it does. Or you can create several of these portfolios and just watch them and see what it does if you're so inclined. This was kind of the approach I took, although most more in an organic fashion back around 2010 and 2011, I started thinking about the whole future, what kind of portfolio we wanted and up in and did run some of these sorts of little experiments.

Mostly Voices [11:25]

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

Mostly Uncle Frank [11:31]

Starting with things like the Harry Brown permanent portfolio and other variations on that theme. This was before we had analyzers like portfolio charts and portfolio visualizer. So it really was more testing things out.

Mostly Voices [11:47]

Well I Like to do the job right

Mostly Uncle Frank [11:49]

Eventually we did move our funds, our main funds into risk parity style portfolios around 20 16, 20 17, 20 18 and that's where we've been ever since. It's nice to have that all set up so that when you go into your drawdown phase, everything is already lined up and you're not worried about having to make a switch in the middle of some kind of drawdown or some bad sequence of events happening while you're trying to do that. So yes, before you climb the mountain, make sure you have lined up all of your equipment and are ready to go at a moment's notice.

Mostly Voices [12:27]

No more flying solo.

Mostly Uncle Frank [12:29]

And thank you for that email and the test run suggestion. I hope that others follow in your footsteps. I think that's a good idea.

Mostly Voices [12:37]

You're correct, sir. Yes.

Mostly Uncle Frank [12:41]

Alright, our next email comes from Pat and Pat writes, I love your show and I've recommended it to every person I know. I have learned a lot from this podcast. I had a question about individual stocks. I mostly invest in ETFs, but earlier this year I tried doing individual stocks and I put myself in a mess When growth stocks fell in February, my account dropped by 25% and is still negative.

Mostly Voices [13:06]

It's God, it's all God.

Mostly Uncle Frank [13:08]

I have been selling the individual stocks as soon as they turn green. As my goal is to get rid of all the individual stocks. I do have some stocks that are as down as much as 75% and they may never come back. What would you do if you were me? Continue waiting for them to be positive or sell at a loss? Any help would be highly appreciated. Thanks in advance for all that you do, pat. Well, let's talk first about the psychology of this. It is hard to sell something that has gone down and there are three cognitive biases that conman, urky have found that seem to go along with this cognitive hurdle that this creates. One, it's called the endowment effect, which means that we tend to overvalue things that we already hold, whereas if we didn't hold them, we wouldn't be running out and buying them. So we overvalue things that we just happen to already hold. The next cognitive bias that this plays to is called the anchoring effect. And what you're anchoring to is that original price you bought in at. And so that becomes a target of some kind, whereas in reality and investment reality, what you paid for something at some point in the past is pretty much irrelevant for most purposes as to whether you should keep it in the future. But that's what's holding us and holds many people to holding onto something to see if it will go back to zero before they get rid of it. And then the other issue is what's called loss aversion, that selling it at a loss is psychologically painful. And so we avoid that by saying, well, we haven't lost anything until we pull the trigger on that sale, which is not really true mark to market, but that is the psychology of it. So this is what I would do. First of all, if it's in a taxable account, I would definitely wanna sell it. In fact, it's a benefit to sell it at a loss because then you have a capital loss, either short or long term looks like short term in this instance that you can harvest against taxable gains on other things. So from a tax perspective, selling things at a loss is always an advantage and psychologically may give you the impetus or benefit from that. Now, if it's not a taxable account, the tax considerations go away. But I think what you want to do is think about your long-term strategy. Don't kick yourself. Many people have done this, you know for some people this works out great. They buy a few individual stocks, they go up all kinds of money, it's like winning the lottery. And of course then they think they're brilliant, but the fact is this is usually just luck. And some people get lucky and the stocks go up and some people don't get lucky and the stocks go down.

Mostly Voices [16:07]

You've gotta ask yourself questions, do I feel lucky? Do I feel lucky?

Mostly Uncle Frank [16:12]

But after you played that game for a couple of times and sort of realized, well I don't really like playing that game,

Mostly Voices [16:18]

Well do you punk,

Mostly Uncle Frank [16:20]

Then it's time to just put that aside and what you should be thinking about, well, what is my long term plan for my money? And once you have figured that out, what you can stick with long term, then go ahead and pull the trigger on these things. Get rid of them, put 'em into whatever assets you want to be holding long term. And just one other note, sometimes it is psychologically helpful in the future to actually keep one of those bad ideas around mostly so you can see it frequently. And so every time you're tempted to do something like that in the future, you say, oh, but it could end up like that one and I don't want to do that again.

Mostly Voices [17:04]

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

Mostly Uncle Frank [17:07]

Sometimes that having that little reminder in your portfolio will actually improve your ability to stick with your long-term plans in the future.

Mostly Voices [17:17]

Bow your sensei, bow your sensei,

Mostly Uncle Frank [17:20]

But you are on a path that has been trodden by many people and they have survived it and thrived, so I don't think it will be any different.

Mostly Voices [17:39]

In your case, fear, that's the other guy's problem and thank you for that email and we have time for one more email today Last off

Mostly Uncle Frank [17:41]

And this one comes from Rob and Rob writes, dear Mr. Vasquez. Mr.

Mostly Voices [17:49]

Vasquez, you say, I don't think it miss what you think it miss,

Mostly Uncle Frank [17:52]

Your podcast has been so helpful to me. I was turned onto it from your appearances on Choose FI's podcast. Thank you for sharing your labor of love. I have a couple questions, but first a comment, I just moved back to the DC area Annandale.

Mostly Voices [18:07]

Yeah baby.

Mostly Uncle Frank [18:09]

Yeah, And if you would ever like a free meal, please let me know.

Mostly Voices [18:13]

Ain't nothing wrong with that.

Mostly Uncle Frank [18:16]

I have attached a spreadsheet of various portfolios I ran through portfolio charts. The second page is just a transposition of the first to make it easier to search on outcomes. Note that the safe withdrawal rate and permanent withdrawal rate are based on 40 years or perpetual withdrawal rate. I should say. If the goal is to maximize the safe withdrawal rate and perpetual withdrawal rate, it would seem that the portfolio that is 60% small cap value does that. My gut would say that's a crazy portfolio to keep, but numbers don't lie. This probably would make for terrible radio. But I'm curious on your thoughts. It does seem that there are several combinations that get similar returns to the stock market with less volatility even without using leverage or really anything fancy. Realizing of course that past results do not guarantee future performance. My corollary question is, is there an acceptable safe withdrawal rate slash perpetual with withdrawal rate? What do the drawdown results matter? If I stick to the 5. 2% or whatever it may be and ignore the fluctuations, I should be fine regardless of if there is a six year recovery or a three year recovery. Correct. Similarly, if the value goes down 40% or 17% and I stick to the perpetual withdrawal rate, I should say stay solvent, right? I see the portfolio loss issues at the end of the accumulation phase, but not once you are withdrawing at a given rate in retirement for a given safe withdrawal rate slash perpetual withdrawal rate. I think another metric that may be useful and perhaps I just didn't see it, would be how often do negative returns occur over a year? Historically, I believe US stocks are down approximately one in three years. I apologize for the length of note, I'm not gifted enough to make it shorter. Thank you for your time. I hope you are not saddle sore from your cycling trek signed Rob, and thank you for that email. Yes, my soreness has dissipated so as to get it together sometime. I'm not opposed to that idea. I think there are several people actually Elizabeth's podcast in the DC area, so maybe we can make that happen sometimes. I have no particular plans for it at this moment in time, but I'll think about it some more.

Mostly Voices [20:30]

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

Mostly Uncle Frank [20:34]

Now, getting to your questions first as to the negative returns uh, on how often they occur, there are things at both at portfolio charts and portfolio visualizer that you can look at and get that information very quickly. If you go to portfolio charts, if you look at the annual returns, it'll say how much are in the red, essentially it's got red and blue and then there's a number there which tells you what the percentages of negative returns and that's on an annualized basis. So for instance, the golden butterfly I think has a only 16% of the years is it in the red for something like the golden ratio, it's more like 20% and you are correct for something like the stock market, it's more like one out of three. So you can see why year to year holding a risk parity style portfolio is advantageous psychologically. Just knowing that the chances of having a down year are just much less than other kinds of portfolios that are less diversified. You'll also see that reflected in what's called the heat map at portfolio charts. All these little boxes, and particularly if you look at the first column for all the years, all the red boxes, you count those and divide that by the number of total boxes and you'll get the same figure. It'll be 16% for golden butterfly or one third for total stock market. It's another way of doing it. There are also several metrics or other things you just eyeball at portfolio, visualize or seeing the, there's a tab that goes with just drawdowns that you can look at and then you can look at the returns over years with the little bar graphs and see how many years out of the total a particular portfolio was down. But that's the easiest way to find that information and that kind of goes with your other observations here that yes, it is true. If you have the fortitude to run with longer drawdowns, then maybe you can have a portfolio that has longer or deeper drawdowns and not feel bad about it. Most people though, going into their retirement want to minimize that and psychologically it's painful. If you're not having any other income and you're seeing the assets that you hold, go down in value and stay down. It's a very unpleasant experience. So to avoid that unpleasant experience, you choose portfolios that don't do that. Now with respect to small cap value, it is true that small cap value over many, many decades has outperformed the overall stock market. And this was calculated by Fama and French and it's found to be still true today, but over a given decade or two it may underperform and for the last decade or so it has underperformed. So you may not get there in your lifetime. You probably need 40 years I would say to make sure that that's true over the time that you hold your portfolio, because this is a very long term phenomenon. If you're only talking about 10 or 20 years, your portfolio could underperform substantially the rest of the stock market or other things, and that might cause you to try to change horses in midstream, which is really the thing that you want to avoid with any portfolio. You hold that if you hold a portfolio and it performs badly, the worst thing you can do is bail on it right then and there. If you're going to change portfolios, the time to do it is when it's at or near an all time high. So you don't get essentially selling low and buying high. You don't want to get stuck there. And having the short draw down period also goes to this sequence of return risk problem that we see with some portfolios that are not diversified enough that everybody's worried that in the first few years of retirement they're going to see a draw down in their portfolio and it will stay down for a while. Now the popular way to fix that these days is to stick bandaids on it. Bandaids that are buckets of cash and other bond ladder things and other things like that. I think the better solution is to just have a better diversified portfolio to start with and if you have a better diversified portfolio, then you won't have to worry about those lengthy drawdowns or steep drawdowns because your portfolio will not be subject to those in the same manner that others would be. Cool. Because when we see drawdowns in the stock market, everybody's portfolio is going to be down. The question is going to be how much and how long. If you have things that are diversified from stocks, it probably won't be as much and it won't be as long. If you have assets that are not very well diversified from your stock holdings, then it's going to be longer and it's going to be deeper. That's just the facts of life.

Mostly Voices [25:40]

Expect the unexpected.

Mostly Uncle Frank [25:42]

So in the end, your portfolio choice here may have as much to do with comfort in psychology as it does to do with extremely long-term returns. Turns, and thank you for that email.

Mostly Voices [25:57]

And now for something completely different

Mostly Uncle Frank [26:00]

And the something completely different is our weekly portfolio reviews of these seven sample portfolios you can find at www dot Risk Parity Radio dot com. We've been remiss, we haven't seen these for three weeks, although the information is updated there weekly. Now just going through the markets, and it was a typical August week where not much is happening, but we did see the s and p 500 go up 0.71%. The NASDAQ was down 0.09%. Gold was the big winner. Last week it was up 0.95%.

Mostly Voices [26:35]

I love gold.

Mostly Uncle Frank [26:39]

Long-term treasury bonds represented by TLT were up 0.62%. It's the second biggest winner. Well, actually it was the third biggest winner and then we have res REET. They were down 0.01%. Commodities represented by the fund PDBC were up 0.03% and preferred share represented by the fund PFF we're down 0.01%. So you see a lot of things were just basically flat for the week. I'm putting you to sleep. What this resulted in is nice little advances for all our portfolios pretty much, and if we take a look at the most conservative one, the all seasons, this one's only 30% in stocks. It's got 55% in treasury bonds, 40% that are long term, 15% that are short term, I'm sorry, intermediate term. And then it's got 7.5% in gold and 7.5% in the commodities fund. PDVC, this one was up 0.47% for the week. It is up 10.49% since inception, which occurred in July, 2020 and we moved to the golden butterfly. These are more of our bread and butter risk parity style portfolios. The next three, the golden butterfly is 40% in stocks. It has 20% of that in VTI, the total stock market fund and 20% in small cap value. And then it's got 40% in bonds divided by TLT at 20% in SHY. The short term treasury bonds at 20% and then 20% in gold in GLDM, this one was up 0.43% for the week, and it is up 20.73% since inception in July, 2020. And moving to the golden ratio, this one is 42% in stocks and three funds including small cap value and large cap growth. And then it's got 26% in the long-term treasuries, TLT 16% in gold, GLDM, 10% in REITs, REET, and 6% in cash for the distributions. It was also up 0.42% for the week, and it is up 21.36% since inception in July, 2020. And now we go to the risk parity ultimate. We talked about how this was restructured this past month in July, if you want to go back and listen to that episode, but it's got roughly 40% in stocks in it, 20% in treasuries, but with some leverage it acts more like 30%. It's got 10% in preferred shares, PFF 5% in REITs, REET, 15% in gold GLDM. And then it's also got 3% in commodities, COM, and 2% in Bitcoin funds, B-B-I-T-Q and BITW. This one was up 0.54% for the week. It is up 21.52% since inception. In July, 2020, it was overtaken its compatriots by a small margin in the horse race of portfolios.

Mostly Voices [29:57]

And now we are moving to the experimental portfolios, Real wrath of God type

Mostly Uncle Frank [29:58]

Stock. The first one is the accelerated permanent portfolio. This one is 25% in U Pro. It's a leveraged s and p 500 fund, 27.5% in TMF. That is a leveraged long-term bond fund. Then as ballast, we have 25% in PFF and 22.5% in gold GLDM, it was up 1.08% for the week. It is up 24.2% since inception in July, 2020. So it was humming along nicely and now we get to our aggressive 50 50. Our most leveraged portfolio, which has been high flying these past few months, and it is 33% in U Pro that leverage stock fund 33% in TMF. They leverage long-term treasury bond fund. Then it's also got 17% in PFF, the preferred shares fund and 17% in VTI it a Vanguard intermediate treasury bond fund. So it was a big winner last week it was up 1.21% for the week. It is up 31. 46% since inception in July, 2020. And finally, our newest portfolio that we just put together in July last month at the beginning of the month, this is the levered golden ratio. This one has 35% in a leveraged fund called NTSX that we have analyzed previously on this program. And then it's got 25% in gold, GLDM, 15% in O. That's a reit. And then it's got 10% in each of two leveraged funds, a leveraged small cap fund, TNA and A leveraged long-term treasury bond fund, TMF. That helps balance out the NTSX into the golden ratio proportions. And then with the final 5%, we've put 3% of that in a volatility fund, VIXM, and then 2% in Bitcoin funds, BITQ and BITW. This one was up 0.74% for the week. So about how much you would've expected given it's basically 1.6 to one leverage. It is up 2.69% since inception on July 1st of this year. And so not too much major two report with the sample portfolios, which is hopefully the way it is most of the time with small advances each week and each month. But now I see our signal is beginning to fade.

Mostly Voices [32:38]

I Don't think of miss what you think of Miss.

Mostly Uncle Frank [32:41]

We are almost caught up with the emails, but I may do just do another email episode coming up and then get off into analyzing some more funds suggestions that I've gotten recently. If you have comments or questions for me, please send them to Frank at Risk Parity Radio dot com. That email is frank at Risk Parity Radio dot com. Or you can go to the website, www dot Risk Parity Radio dot com and fill out the contact form and I'll get your message that way. If you had 'em and had a chance to do it, please go to your podcast provider and follow, like subscribe, leave me a nice review and all of that great stuff. I would greatly appreciate that. That would be great.

Mostly Voices [33:28]

Okay,

Mostly Uncle Frank [33:30]

Thank you once again for tuning in. This is Frank Vasquez with Risk Parity Radio signing off.

Mostly Mary [34:01]

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.