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 [0:18]

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 [0:38]

Thank you, Mary, and welcome to episode 115 of Risk Parity Radio. Today on Risk Parity Radio, it is time for our weekly portfolio reviews of the seven sample portfolios that you can find at www.riskparityradio.com. on the Portfolio's page.

Mostly Voices [0:58]

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

Mostly Uncle Frank [1:07]

And we are actually just finishing the emails we received in July. So a month behind now, but we'll hopefully be working on that. But what's interesting about these last four emails from July is they're all from the same person named David or Dave. It reminds me of a Dr. Seuss story called Too Many Daves about a woman who named 23 sons all Dave. And Dr. Seuss wondered why some of them were not named Paris Garters and Harris Tweed or maybe Oliver Boliver Butt or my favorite Zanzibar Buck Buck McFate. Yeah, baby, yeah! But anyway, let's just go through these emails. We have a surprise guest reader of the emails today. I won't let you know who it is. You'll be surprised. And our first email is from Paris Garders. I mean David. And David writes, Thank you again for your wonderful podcasts.

Mostly Mary [2:10]

Although some listeners do not seem to enjoy the inserts, I find them very entertaining.

Mostly Voices [2:15]

Real wrath of God type stuff.

Mostly Mary [2:18]

It is amazing to me that given the results of your analysis, balanced funds, target date funds, and target risk funds do not incorporate risk parity ideas. In your opinion, what do you think are the main reasons for the resistance? It is amazing that Vanguard, for example, offers private equity and now direct indexing, but no explicit risk parity funds. Well, it's an interesting question here.

Mostly Uncle Frank [2:43]

I suppose there are several reasons. I think one of the reasons is that a risk parity style portfolio is probably not going to outperform basic indexes over long periods of time. So people in their accumulation phase will be looking more for those indexes and people looking at comparisons, if you look to a comparison over one, three or five years, usually what you'll see is a risk parity style portfolio. If those are good years for the stock market, it's going to underperform something that is 100% stocks. And so when somebody looks at that, the uneducated consumer will often just look at past returns without accounting for risk or longer time frames and decide that that portfolio is not what they want. It's also difficult to design a risk parity style portfolio that is appropriate for everyone because it's a mechanism or process of building a portfolio. Any given risk parity style portfolio might not be appropriate for any given person and needs to be customized a little bit depending on what that person already has. When you think about it, we're talking about portfolios that people are going to adopt or move into as they get to retirement, and they wouldn't want to be selling everything they own and buying this one risk parity style portfolio over here on the side because it probably is not going to make sense for tax purposes. So there's a lot of practical reasons why off-the-shelf risk parity style portfolios may never be that popular. But I think in terms of why more people aren't adopting this, it has a lot to do with inertia and it has to do with conflicts of interest. The inertia comes from the idea that people would rather be consistent then modify their approach based on new information. This is the foolish consistency that is one of the themes of this podcast. That given new information, people often will reject it if it forces them to have to make a change. And the truth is, it's not as if what the portfolios that they were using before are bad or not going to work. All we're saying here is that, well, we can improve a little bit by making these adjustments based on this Holy Grail principle that we ought to really look at the correlations of our components in our portfolio and drill down on that so that we can optimize for that and then also create something that is going to perform decently no matter what the economic weather looks like outside.

Mostly Voices [5:47]

You see, most, most blokes are going to be playing at 10. You're on 10 here, all the way up, all the way up, all the way up. Where can you go from there? Where? I don't know. Nowhere, exactly. What we do is if we need that extra push over the cliff, you know what we do? Put it up to 11. Exactly.

Mostly Uncle Frank [6:05]

So you see this and have seen this. I mean, the personal finance area of investing is just not that old. It's only a few decades old. But when innovations come in, they often get rejected by the powers that be simply because they don't want to make a change. So we saw this with Jack Bogle coming out with index funds. Those were a flop to begin with. Took 15 to 20 years to really catch on. And everyone criticized him for it because they would say, well, of course, a skilled Fund manager can obviously beat the indexes, which turned out to be false, but that needed to be proven over a period of time. Or if you look at, you know, Bill Bengen's work from the 1990s coming up with the first iteration of the 4% rule, when he came out with that, he was a brand new financial advisor. He had been a MIT-trained engineer who had gone off to run his family company for a while. and then came to this later as a second career, found out that nobody had done this analysis before, and so did it and published his findings, which were roundly and immediately criticized. He got hate mail for telling the truth that some of what other financial advisors had been recommending to their clients was not very good advice. And they would have rather stuck to their foolish consistency then make a change based on new information.

Mostly Voices [7:40]

You can't handle the truth.

Mostly Uncle Frank [7:44]

But now let's talk about a bit about the conflicts of interest here. Always be closing. Always be closing. One of the conflicts of interest that exists in the financial services industry is that they want their clients to accumulate as much money as possible because they get paid based on the assets under management. So they are more likely to say to their client, you should keep working longer and longer and longer to build up a bigger pool because I'm going to tell you that you can't take 4% anymore. You can only take 3% or some smaller amount, which means you need to accumulate more money, which means I get paid more. And you can see the conflict of interest there. I drink Your milkshake. I drink it up. The other conflict of interest we see is that instead of constructing a better portfolio, often financial advisors would rather sell a more expensive product, something that they're going to make money on. Tell me, have you ever heard of single premium life? Because I think that really could be the ticket for you. Some kind of annuity or fund that they've got constructed by whomever their big company is they're working for.

Mostly Voices [9:13]

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

Mostly Uncle Frank [9:20]

The truth of the matter is these portfolios and this method of investing isn't going to make financial advisors squat. Jack squat. You're not going to amount to Jack squat. So there's going to be a natural resistance to it for that reason as well. At the end of the day, the financial services industry really does not like innovation because all the innovations tend to go to them getting paid less, whether it's in commissions or other fees. This is just one more nail in that coffin.

Mostly Voices [9:58]

You're gonna end up eating a steady diet of government cheese and living in a van down by the river. So I'm not surprised that this idea is slow in its adoption.

Mostly Uncle Frank [10:15]

And as for Vanguard in particular, you'd have to say that Vanguard is no longer an innovator in markets today. They were the innovator two decades ago. The innovators out there are the people that are charging no fees and have fractional share trading, make all the ETFs available to all of their customers and make it much easier for them to buy things and construct portfolios. Vanguard's behind on that. I think they'll probably catch up. They'll just have to. But you would not say that Vanguard is an innovator. In today's financial markets. Forget about it. And as for the sound bites, I'm glad you enjoy my sense of humor. I realize that not everyone does, and it's the most controversial part of the Risk Parity Radio podcast. Bow to your sensei. Bow to your sensei. And our next email comes from Harris Tweed. I mean David.

Mostly Mary [11:21]

And David writes, In reference to Podcast 82, I think the portfolio updates are critical and make your podcast unique. Maybe try, but as you point out, that is the point. In my humble opinion, investing is not entertainment, although I find your podcast entertaining. Love the inserts, especially the one from the Wizard of Oz.

Mostly Uncle Frank [11:49]

Yeah, it's interesting you mentioned the Wizard of Oz. I guess the Fed Chairman got to play the Wizard of Oz this past week. It's always interesting that the financial media surrounds someone who's ever making an announcement or going to say something as the wizard we're all waiting for to speak, as if that is going to change what's going to happen in markets long term. Forget about it. And generally what happens is the person says something, there's some reaction in the media, and within two days everybody's moving on to the next Wizard of Oz. I'm glad you appreciate the portfolios and the portfolio updates. That was kind of one of my goals when I started this podcast. Because what I generally see when people talk about personal finance is they talk in kind of vague terms about portfolios and never really get down to the brass tacks. And then what tends to go on after that is narrative discussions about why to hold or not hold particular assets without considering how they actually work in an overall portfolio. So my original background is in engineering and so what engineers like to do is actually build prototypes and look at them and test them and play with them and do those fun things. And so these sample portfolios are those little prototypes and it gives you a much better feel for how something behaves over time to Put it out there, put it to some stress tests, see how it actually performs in the real world, and then make up your mind about it.

Mostly Voices [13:46]

But wasn't that the whole basis of your grandfather's work, sir? The reanimation of dead tissue?

Mostly Uncle Frank [13:50]

But that's also why I thought this podcast would only appeal to a few dozen people, simply because it is that kind of detailed tinkering Hearts and kidneys

Mostly Voices [14:01]

are Tinker Toys that most people do not find entertaining

Mostly Uncle Frank [14:05]

or want to get into. But I'm glad you appreciate it. And our next email comes from Oliver Boliver Butt. Actually, it's also from David. And David writes, Looking forward to watching the seventh portfolio.

Mostly Mary [14:24]

Using the markets as a live laboratory is brilliant. Listening to the comments on bonds, I think that it is worth revisiting bond math. My understanding is that higher interest rates are a positive in that interest is reinvested at lower bond prices. This coupled with rebalancing and the low negative correlation with equities make long-term treasuries a meaningful addition to a portfolio. Thus, worrying about higher rates is illogical. And, as you point out, interest rates are a random variable equals no crystal ball works. Thank you for your work. Well, I'm not sure I would say worrying about higher rates is illogical, but I would say it's definitely overblown.

Mostly Voices [15:06]

Dogs and cats living together, Mass hysteria.

Mostly Uncle Frank [15:10]

Because the truth of the matter is, is that the direction of interest rates tends to go up and down more than it tends to go in one particular direction. And it tends to go up when the economy is doing well and stocks are doing well and everything's doing well. And then it tends to go down when the economy is doing poorly and stocks are doing poorly. And so it does make an ideal diversifier to hold treasury bonds. Groovy, baby. What is overblown is worrying about them doing poorly when interest rates are going up. The way you deal with that is by having an appropriate allocation to them, which means you don't have 50% of your portfolio in long-term treasury bonds, more like 20% of your portfolio or something like that. And that is what you're trying to do when constructing a risk parity style portfolio. Not only select the assets, but put them in proportions that make sense and that will make your portfolio perform well, or not nearly as badly as some other portfolios based on its overall allocations. But you are also correct that when interest rates go up, that's when you buy more bonds at a higher interest rate. So you're getting that interest rate, and then when they go down, you sell them. Cool. And as for that seventh portfolio, yes, that is the levered golden ratio portfolio. I'm also Looking forward to seeing how it does, given its moderate leverage. Seems to be doing alright so far, but we will get to that a little bit later. And our last email of the day is from Zanzibar Buck Buck McFate. Actually, it's from David again.

Mostly Mary [17:10]

And David writes：Frank, I think this fund is Vanguard's effort to construct a risk parity portfolio. VP GDX. Would look forward to your analysis. Thank you.

Mostly Uncle Frank [17:22]

Well, I asked my twisted sister about this fund. VP GDX.

Mostly Voices [17:30]

And she said, if that's your best, your best won't do.

Mostly Uncle Frank [17:40]

and why did she say that? Well, this is not really a risk parity style portfolio. What this is is a typical kitchen sink kind of portfolio where somebody has just grabbed a whole bunch of things off the shelf, thrown them in a portfolio, and said, oh, look at this. It looks Diversified. Unfortunately, it's not really Diversified. If you look inside this portfolio, it's got 14 funds in it. I'll read you what they are. One's a total international stock index fund, one's a total stock market, one's a total bond market, US, something called an alternative strategies fund. It's got a commodity strategies fund, it's got a small cap value, another value fund, something called a market neutral fund, a total international bond index fund, dividend and appreciation, high dividend fund, Emerging markets, emerging markets bond fund, global minimum volatility fund. If you look inside all of those, what you'll find is you have a whole bunch of stocks and kind of an assortment of bonds. A lot of them are correlated to the stocks, including all those international ones. It doesn't really have much gold in it. The commodity strategy fund is a mismatch of things. I mean, the problem is Vanguard really doesn't have all of the components for a risk parity style portfolio to put together. If you're doing that, you throw out most of these because they're overlapping and overly correlated, and then find things that were not correlated. You take, for instance, the Vanguard Long-Term Treasury Bond Fund and put that in for some of these bond funds, and you would go get a gold fund and put that in for some of these other things. Yes! But I would describe this as a very typical mishmash when somebody is thinking diversification just means a bunch of different things. And I will link to that list of funds in the show notes, but more importantly, I will also link to a portfolio analysis from Portfolio Visualizer of this fund. compared with the Golden Ratio and Golden Butterfly portfolios in our sample portfolios. And so you can take a look at what these things do or how they operate and compare with each other. This Vanguard fund has only been in existence since January 2009, so we went back to that time period. And when we compared them, we see that over the past years the Vanguard VP GDX fund has a compounded annual growth rate for this period of 9.09%. That is in between the golden ratio, which was up at 11%, and the golden butterfly, which was at 8.79%, so slightly less. But where you see the difference is when you look at standard deviations and drawdowns, the Vanguard portfolio has a higher standard deviation than either the golden ratio or the golden butterfly, so it's more volatile. it has a worst year, it has a worse maximum drawdown, and so this translates into risk reward ratios, the Sharpe ratio and the Sortino ratio of 0. 88 for the Vanguard VP GDX fund, and that compares to the golden ratio in this period of 1.17 and the golden butterfly of 1.12, so they're both significantly better than Vanguard Fund. The Sortino Ratio, which focuses more on downturns, is 1.4 for the Vanguard Fund, 2.04 for the Golden Ratio, and 2.03 for the Golden Butterfly. And that's what you would expect if you compare something like that fund that is not as well diversified as some of our risk parity style portfolios. Chances are you're going to get the same or worse performance for more risk, and the Twisted Sister is not happy.

Mostly Voices [21:47]

Now for something completely different.

Mostly Uncle Frank [21:50]

We are going to move to our weekly portfolio reviews of the seven sample portfolios that you can find at www.riskparityradio.com on the portfolios page. But just looking at what the markets did last week, We saw the S&P 500 was up 1.52%, the Nasdaq was up 2.82%, gold was up 2.14%, I love gold, and long-term treasury bonds represented by TLT were down to 1.02%. So they moved in the usual direction you would expect on Good stock weeks. REITs represented by the fund REET were up 0.89% for the week. Commodities had the biggest gain of the funds we typically track. PDBC was up 7.33% for the week. Of course it was down about 6% the previous week so you can see how volatile it is. And PFF which represents preferred shares were up 0.51% for the week. what was interesting this past week is it seemed like things that would be sensitive to inflation were up generally including that Commodities fund being up 7.33% gold being up over two percent and then if you look at for instance a small cap value fund like viov that we hold that was actually up 4.5% so it was up significantly more than the S P 500 or the NASDAQ We have one of our funds, our seventh portfolio, holds a leveraged small cap fund that was up 15.74% last week, if you can believe that. But what that goes to show you is that we have components in these portfolios that cover all kinds of situations. In that line, suppose you were holding a tip fund like TIP, on the idea that that's going to help you in an inflationary environment. That was up 0.2% for the week. So that is not going to help you very much in an inflationary environment. In fact, it's going to probably do what it normally does, which is pretty much nothing, and then go down when the stock market goes down. And that is an example of reality not matching people's narratives. Because if you look at how these things actually perform in different circumstances, you'll see that the narrative that holding tips is going to help you in an inflationary environment is just wrong. Wrong! It will help you tread a little water, but that's about it. Not very much. But now let's get to these portfolios. Our most conservative one is this All Seasons portfolio. reference portfolio, it only has 30% in stocks in it in a total market fund VTI. It's got 55% in long-term treasuries, that's TLT and VGIT, most of that is TLT 40%, and then it's got 7.5% in gold GLDM and 7.5% in that commodities fund, PBDC, which helped it a lot this week. So it was up 0.97% for the week, which is a large move for that fund. It is up 11.34% since inception in July 2020. Moving more to our core risk parity funds that are designed to compete with a 60/40 style portfolio. Our first one here is the Golden Butterfly. This one is 40% in stocks divided into that small cap value, VIOV, and a total market fund, VTI. It's also got 40% in treasury bonds divided into Tlt, that's long term and SHY, that's short term, and then 20% in gold, GLDM. This one had a good week, too. It was up 1.49% for the week. It is up 22.04% since inception in July 2020. The next one is the golden ratio. This one is 42% in stocks divided into a large cap growth fund, a small cap value fund, and a volatility fund or a low volatility fund. It's also got 26% in long-term treasuries, that's TLT, 16% in gold, GLDM, and 10% in REITs, REET. The rest of it is in cash for distributions. It was up 1.05% for the week. It is up 22.63% since inception in July 2020. And then we get to our most complicated portfolio, our risk parity ultimate. It's got all the goodies in it. It has about 40% in stock funds, including 5% in a leveraged stock fund, UPRO. It's got 20% in long-term treasury bonds, but 5% of that is in a leveraged long-term treasury bond fund, TMF. It's got 15% in gold, GLDM, 10% in Preferred shares, that's PFF, 5% in REITs represented by the fund R-E-E-T, another 5% in commodities represented by the fund C-O-M, is a trend following commodities fund. And then with the remaining 5%, we divided that into 3% in a volatility fund, V-I-X-Y, and 2% in cryptocurrency ETFs. One is BITQ, which covers the companies, and BITW, which covers the cryptocurrencies themselves. It was up 1.39% for the week. It is up 22.8% since inception last July. And now we move to our experimental portfolios. First one is the Accelerated Permanent Portfolio. This one is 25% in that leveraged stock fund, UPRO. 27.5% in the leveraged bond fund, TMF. 25% in PFF, the preferred shares fund, and 22.5% in gold, GLDM. This one was up 1.02% for the week. It is up 26.09% since inception in July 2020. And now we go to our most volatile fund, although it was not the most volatile this week. This one is the aggressive 5050. It has 33% in the leveraged stock fund, UPRO, 33% in the leveraged bond fund, TMF, and then 17% each in PFF, the preferred shares fund, and VGIT, a intermediate treasury bond fund. and it was up 0.8% for the week. It is up 33.33% since inception in July 2020. So is by far and away the best performing portfolio, which you would expect over time with that leverage in it. And now we move to that seventh portfolio, the Levered Golden Ratio, which has about 1.6 to 1 leverage in it overall. It is divided into 35% in a leveraged mixed fund of the S&P 500 and treasury bonds, that's NTSX. Then it's got 25% in gold, GLDM. It's got 15% in O, that's a REIT, realty income. 10% in TMF, that's a leveraged long-term treasury bond fund, so it acts like 30% in that. It's got 10% in TNA, that is a leveraged small cap fund, so that also functions as if it were 30% in that investment, and that was the one that was up over 15% last week. And then with the remaining 5% we've got 3% in a volatility fund, VIXM, and then 2% in those two Bitcoin funds, BITQ and BITW. This was up 2% for the week. It is up 4.39% since inception this year on July 1. It was the big winner last week, probably because of that leveraged small cap fund in it and has been behaving nicely so far making small advancements most weeks. But now I see our signal is beginning to fade. I hope you enjoyed our guest reader of the emails. I hope she'll come back. I think she may if I'm nice to her. But you can encourage that by sending a nice message about it. And those messages you can send to the email frank@riskparityradio.com that email is frank@riskparityradio.com or you can go to the website www.riskparityradio.com and fill out the contact form and I'll get your message that way. We will be picking up this week by getting into August's emails finally. There's a whole mountain of them and we'll work through them as quickly as we can. If you haven't had a chance to do it, please go to Apple Podcasts or wherever you get this podcast and leave it a review and some stars and like it and follow it and all those nice things.

Mostly Voices [31:49]

That would be great. Okay.

Mostly Uncle Frank [31:53]

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

Mostly Voices [32:00]

We're not gonna take it. Hello, we ain't gonna take it.

Mostly Mary [32:50]

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.