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 117 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 portfolios page.

Mostly Voices [0:57]

But before we get to that, I'm intrigued by this. How you say? Emails. And?

Mostly Uncle Frank [1:05]

First off, we have an email from Bob. Kind of a long email. Bob, 10, Bob, come on. And Bob writes.

Mostly Mary [1:13]

Hi, Frank. You've inspired me to dig in and improve my understanding of the investments in a risk parity style portfolio. I was wondering why you chose TLT for long-term treasuries, so I've been researching the other options out there. I was surprised to find that TLT is the only ETF available that promises to hold treasury bonds with remaining maturities of 20 years or more. However, its effective duration is only 18.9 years. I found there are several funds, including VGLT, SPTL, and SCHQ that use the Bloomberg Barclays US Long Treasury Index, but this index considers bonds with maturities of 10 years or more to be long term. Perhaps this is why you didn't choose one of these funds? On the other hand, the current effective duration for these funds is pretty close to TLT. For example, VGLT has an effective duration of 17.96 years versus 18.9 for TLT and is cheaper, five basis points versus 15 basis points for TLT. So why not one of these instead of TLT? But then I discovered long-term Treasury strips, i.e. zero-coupon bond funds, EDVZROZ, and GOVZ. These have the longest effective duration, up to 27.58 years, but perhaps more importantly, they seem to have the same or slightly more negative correlation to the total stock market, higher volatility, and significantly higher return by over 2% annualized. Backtesting some portfolios shows some significant differences with one of these funds replacing TLT, Producing an annualized return that can be 0.5% higher. These funds seem like a better choice for a risk parity style portfolio than TLT. Do you agree? Thanks in advance for your thoughts. P.S. At the risk of sounding like a school kid writing a report on what I learned from my homework assignment... Fat, drunk, and stupid is no way to go through life, son. Here are a few things I learned that your listeners may find useful. One, these long-term Treasury funds have to turn over their holdings regularly because once the remaining maturity of a bond gets too low, they need to replace it with a new long-term bond to keep their effective maturity high. Two, I thought Treasury strips funds wouldn't have any dividends because the bonds have been stripped of their coupons, but it turns out that due to original issue discount rules, some of that discount must be reported every year as income, so these funds do pay a dividend. Vanguard's EDV has paid capital gains distributions for 9 out of the last 10 years, whereas the other two long-term Treasury strips funds, ZROZ and GOVZ, have never paid a capital gains distribution. Only makes a difference if you hold it in taxable accounts. But still, I wonder why Vanguard doesn't shift to capital gains out of EDV using redeemed shares or heartbeat trades like the other EFTs do. All right, let's talk about your options for long-term treasury bond funds.

Mostly Uncle Frank [4:15]

Now these kind of funds, these ETFs have only been around since 2002. That's when TLT came into existence. What you've seen recently now is both Vanguard and Schwab have gotten on that bandwagon. Vanguard's created VGLT in the past few years. Schwab has created SCHQ in the past few years. And those do have lower expense ratios. So you can use those. These are all interchangeable. The main reason I use TLT is simply because it's the oldest one and has the longest history for analysis purposes. Now when you take a look at these strips funds, they act kind of like TLT or one of those other funds on steroids. These go to 11. But they do have some issues with them. The first one was EDV and that came into existence in 2008. that is a Vanguard product. I've always thought it was kind of an orphan as far as Vanguard was concerned. They don't promote it. It's not widely traded. It does have an issue with having a wide bid-ask spread most of the time. Two other funds that have come online that are similar to that are that ZROZ fund, which came into existence in 2010, and then GOVZ is a very new one that actually just came into existence in 2020. And as you've noticed with those funds, I have held EDV off and on for the past 10 years. I generally use it as an option or alternative to TLT. It does have several problems with it. One is that bid ask spread that I talked about that can be substantial, often 30 cents or more. Another issue with it is that it pays capital gains, and often significant capital gains at the end of the year. So there is a tax management issue with it in addition to the original issue discounts that it pays as income, which also need to be accounted for. I'm not as familiar with ZROZ or GOVZ and how they are going to be handled with respect to that, but all of these things are available if you want to try them in different portfolios. The most liquid one still is TLT and usually has a bid ask spread of one cent. And so it's the most easy to get in and out of. But these other ones are available when you want to say tax laws harvest one of them, you can buy a different one. And if you are just getting started and you don't have a bunch of TLT in your portfolio already, as I do, you may want to start with VGLT at Vanguard or SCHQ at Schwab. Those are fine. funds, I would not sell all your TLT just to go into one of those for the expense ratio. It's not that much different and it doesn't make that much of a difference in these sorts of funds, at least in the proportions that we tend to hold them in these portfolios. My experience with things like EDV or ZROZ is that they do behave like these standard long-term treasury bond funds, but a little bit on steroids. They seem to have up to 1.5 the oomph, but sometimes they are just the same. And it's difficult to know whether they were how they would perform in an unfavorable environment. What I mean by that is the environment for treasury bond funds has been favorable for the past 20 years because interest rates have generally been falling for the past 20 years. Now, whether those new funds would perform or how they would perform in an era like the 1970s is unclear because they didn't exist. They haven't existed that long. Whereas something like TLT, although it itself has not existed, those kinds of bonds and those kinds of bond setups have existed as long as there's been treasury bonds. But overall, I mean, it's just good that we have more options instead of just one option. We didn't even have that option in the 20th century, TLT. And I think this is indicative of the era we live in where there are more and more ETFs coming online that capture specific investments that we can then use as DIY investors in these kinds of portfolios. And that is the wave of the future. Groovy, baby. I don't have too much more to say about them. You are correct, sir, yes. But thank you for that email. Second off. Second off, we have an email from Kelly.

Mostly Mary [9:10]

And Kelly writes, I've listened to every episode, some more than once. Episode 112, too funny. I had to pause and LOL. Yeah, baby, yeah. Then send this email before finishing. Congrats on completing the bike ride. Like the photo of Walden Pond, too. Best of luck keeping up with the emails. Thanks, Kelly.

Mostly Uncle Frank [9:33]

Kelly is referring to our Field of Dreams episode, episode 112, which I did enjoy making. And having grown up in Iowa, I really do love that movie. Thanks for congratulating me on completing the bike ride. RAGBRAI is the name of that ride. Stands for the Register's Annual Great Ride Across Iowa sponsored by the Des Moines Register. and it was taxing, but it was a lot of fun too. The photo of Walden Pond that Kelly is referring to is the backdrop on my Facebook page. Our youngest son goes to college in Boston and we drove out there to Walden Pond one day. It's a nice little lake and I highly recommend it, especially in the fall when the leaves are changing.

Mostly Voices [10:22]

Am I right or am I right or am I right? Right, right, right.

Mostly Uncle Frank [10:26]

You can see the remnants of the cabin or buildings where Thoreau lived on the property owned by Ralph Waldo Emerson. And thank you very much for that email. and our next email is from Jack and Jack writes. Hi, Frank.

Mostly Mary [11:10]

I'm enjoying your podcast trying to catch up on earlier episodes. You mentioned that Ray Dalio's Holy Grail of investing is the foundation of risk parity style investing. Recently, Dalio posted an article about how long-term treasury bonds are no longer useful as a counterbalance to stocks due to historic low yields and the end of the long-term debt cycle. I understand convexity, podcast 102, and I know you don't like prognostications, which are hard, especially about the future. But I'd like to know how you respond to what he says since he is one of the founders of this type of investing. Thanks.

Mostly Uncle Frank [11:54]

And the article that he is referencing is called why In the World Would youd Own Bonds? Written by Ray Dalio, published on March 15th, 2021. And this article does a comparison of this long-term debt cycle with other ones going back to the 1930s and 40s, and is basically saying that these cycles occur in very long time periods, and so he's got some concern over US bonds and how well they're going to pay in the coming years. He also is recommending in this article that people go and buy Chinese bonds as an alternative and invest in China generally, because he sees China on the rise. So what do I think of this? Well, I think one needs to separate a person from his or her ideas. That they may be correct or have a good idea in one sense and then some of their other ideas may not pan out like they thought. That's not an improvement. The danger here is a cognitive bias that's called the halo effect. It's also related to something called trusting experts. And these are biases that were identified by Kahneman and Tversky and described in Kahneman's book Thinking Fast and Slow. Basically what happens with the halo effect is if you have a positive view of a particular person, there is a tendency to view other aspects or other thoughts that come out of their mouth in a positive light or give them credit when credit is not necessarily due. And this idea, this happens a lot in financial media, that somebody becomes famous, whether they're Warren Buffett or somebody, and so every time they say something, it's taken as if it's some kind of gospel that we should all pay attention to. as it turns out, these people are just as fallible as many other people. And so not everything they say is worth listening to. My name's Sonia.

Mostly Voices [14:08]

I'm going to be showing you the crystal ball and how to use it or how I use it.

Mostly Uncle Frank [14:16]

And I'm not sure this particular view of Ray Dalio is worth listening to, at least in terms of portfolio construction. this is what I call a should be true someday prediction.

Mostly Voices [14:29]

You can actually feel the energy from your ball by just putting your hands in and out.

Mostly Uncle Frank [14:36]

And there are a lot of these things out there, particularly when they relate to the national debt or what the government is doing or money creation, all those sorts of things. At least for my lifetime, there's always been Somebody predicting, well, this is going to end badly someday. Real wrath of God type stuff.

Mostly Voices [14:56]

Exactly. Fire and brimstone coming down from the skies. Rivers and seas boiling. 40 years of darkness, earthquakes, volcanoes, the dead rising from the grave. Human sacrifice, dogs and cats living together,

Mostly Uncle Frank [15:09]

mass hysteria. And that may be true. That may be very true.

Mostly Voices [15:13]

We're all going to die someday, too. You can't handle the truth.

Mostly Uncle Frank [15:17]

Crystal ball. But that doesn't make it an actionable thought. Forget about it. And when I look at this and it says go by Chinese bonds instead of US bonds, I'm sort of like, nah, I don't think that that really sounds like a good idea. If you've heard Dalio speak about other things, he is kind of enamored with China the same way I saw people enamored with Japan back in the 1980s when Everybody was saying the hot thought that of that time was Japan's gonna take over the world. They know how to do things better. They have more money. Everything's more valuable there. They're buying all the buildings in the United States.

Mostly Voices [16:01]

You can't handle the dogs and cats living together. And that thesis just didn't pan out.

Mostly Uncle Frank [16:05]

Forget about it. And I've seen that kind of thing happen over and over again. And usually when it's in these giant, broad terms of somebody trying to predict when the world will end or how the world will change in the future.

Mostly Voices [16:24]

And it's through the candle that you will see the images into the crystal.

Mostly Uncle Frank [16:28]

Oddly enough, you didn't see many people predicting in the 1980s that the Soviet Union was about to collapse.

Mostly Voices [16:35]

Expect the unexpected. that was not a widely held view.

Mostly Uncle Frank [16:39]

But that's in fact what happened. And Japan did not take over the world. Japan went into a big recession and has been in a recession ever since, driven largely by demographics. And that same issue is going to affect China in a big way in the coming couple of decades. So I don't think you can say anything predictable about China and whether you should be buying Chinese bonds as opposed to US bonds. Forget about it! This reminds me also of a book I read in 2006 by economist named Lawrence Kotlikoff who is out there and has written lots of books. And he had a thesis that because the debts of the government were expanding that inflation was going to come very soon and therefore you should all go out and buy lots of tips. And this was 2006 in a book called Spend Till the End. Well, I thought that was a good idea. It sounded good at the time. It was a really bad idea. And I learned that in the crisis of 2008. And that taught me not to put too much into these kind of predictions that this could happen someday. It happened once. Unless a prediction is right on the money at the right time and has a date on it, it's not worth considering in terms of portfolio construction. It's just not. It's just another crystal ball about some future that may happen someday. Now you can also use the ball to connect to the spirit world. In the end, I try to adhere to this idea from an Asian philosopher named Li Junfan. Li Junfan is better known in the United States as Bruce Lee. Li Junfan means return again, by the way, in Cantonese, at least what I've been told. But what he said is this：Whenever you are given information or being taught something. He said, Absorb what is useful, discard what is useless, and add what is specifically your own. What that means is don't rely on the halo effect. Use some critical thinking just because something is said by somebody who you respect and who has a good history of having good analyses, that doesn't mean you just take everything they say as gospel and follow it. Danger, Will Robinson, danger! This is one of those things that I think we should discard as useless because it's a someday kind of prediction, just like the predictions that, oh, everybody needs to own TIPS that have been bouncing around for 15 or 20 years, and that's been a really terrible investment for just about anybody that's owned those things. Stand, it's gone. It's gone, it's all gone. I suppose the real kicker here though is what I really like to do when I see these things. I look at the date they were published and then see what happened after that. So suppose you read this in March of 2021 of this year and you thought, oh, Ray Dalio says I should be out of these bonds. I better go sell all my long-term treasury bonds. if you did that, you sold them at the low point for them for the year. Since then, TLT is up 10.62% since March 18th. If you add in the interest that was paid, it's over 11%. TMF, the leveraged bond fund, is up about 30%. So you can see the folly and the danger Danger, Will Robinson. Danger. Of reading something that somebody has published, some girl has published, and acting upon it. That is the mistake that I made back in 2006. I learned my lesson and I'm not gonna do that again. Forget about it. Even if it's Ray Dalio.

Mostly Voices [20:58]

Forget about it.

Mostly Uncle Frank [21:02]

Crystal balls are still crystal balls, even if they're made out of the finest crystal by the finest hand crafters of that crystal. And we all know what happens to those in the end. But thank you for that email. I will link to this in the show notes, although it's kind of hard to get into this site. They ask you a bunch of questions in order to look at the article, but I'll leave it to you if you'd like to look at it. And we have time for one more email. Last off.

Mostly Mary [21:38]

And this email is from David and David writes. Frank, I thought this podcast about risk may be of interest. Thank you for your wonderful podcast and ongoing live experiment.

Mostly Uncle Frank [21:51]

Well, David, I tried to go to this link and it doesn't work. At least not the way it came through in the message. So you'll need to send it again. What I suggest you do is simply send the name of the podcast and the episode, and then I can go look at it and see what it's got there. But I am curious as to what it is and what it says. And thank you for going to the effort of sending the email. And now for something completely different.

Mostly Voices [22:20]

And that's something completely different is our weekly portfolio reviews

Mostly Uncle Frank [22:25]

and our month end portfolio reviews. and distributions for September. These are of the seven sample portfolios you can find at www.riskparriaratior.com on the portfolios page. But as we always do, we do a quick review of the markets and then see how our sample portfolios performed in the past week. And if we look at the markets, the S&P was up 0.58%, the NASDAQ was up 1.55%, Gold had another good week, up 0.52%. I love gold. TLT, those long-term treasury bonds were down, exhibiting their typical negative correlation with the stocks. They were down 0.84% for the week. REITs were a big winner last week, the big winner. Our EET, our representative fund, was up 2.58%. Commodities represented by PBDC were up 0.55%. Preferred shares represented by PFF were up 0.1%. Just a couple other interesting things to note. VIoV, the small cap value fund was actually down 1.44% last week, but TNA, the leveraged fund that invests in all small caps was up 1.37% for the week. So depending on what you held, you had a good or a bad week. We'll see these did not result in much movement in our sample portfolios, looking at the All Seasons portfolio first. This is the most conservative one that's only 30% in stocks, 55% in treasury bonds of long and intermediate duration. It's got 7.5% in gold and 7.5% in commodities, PDVC. This was down 0.03% for the week, so essentially it was flat. It is up 11.3% since inception. Now for our monthly distribution, we are distributing out of this at a 4% annualized rate. So that translates into a monthly distribution of $36. We are taking that from VTI, the stock fund which did the best over the past month. And so for the total since inception in July 2020, we've taken out $451, starting with $10,200 in this one. And that came $35 from GLDM, $33 from VGIT, 212 from VTI, $70 from PBTC, and $104 from cash that had accumulated from dividends. So as you can see over time different parts of this portfolio perform better than others and then you can distribute from those and keep it at an even keel as we do with all of these portfolios leading to less rebalancing when it comes to time to rebalance. And now we're going to move to our three middle of the road portfolios here. The first one is the Golden Butterfly. This one is 40% in stocks divided into a Vanguard Total Market Fund and a Vanguard Small Cap Value Fund. 40% in treasury bonds divided into long-term treasuries and short-term treasuries and then 20% in gold. This one was also nearly flat last week. It was down 0. 15% for the week. It is up 21.86% since inception in July 2020. We are distributing out of this at an annualized 5% rate. So that turns out to be a monthly distribution this month of $48. We're also taking that out of VTI. That was the best performer in this past month. We have distributed $638 out of this total. It started with $10,000 in it. It still has $11,596 in it. And those distributions $43 came from GLDM, the Gold Fund, $411 came from VIoV, that small cap value fund that was doing so well earlier this year. And now $48 from VTI, the Total Market Fund, and $136 from Accumulated Cash. Our next portfolio is the Golden Ratio. This one's 42% in stocks, 26% in long-term treasury bonds, 16% in gold, 10% in REITs, and 6% in cash that we distribute from. It was up 0.32% for the week. It is up 23% since inception in July 2020. And we will be taking $49 out of it. It's coming out at a 5% annualized rate. It still got 11,715 bucks left in it. We have distributed $634 from cash since this portfolio's inception in July 2020. The rules for this are we always distribute out of the cash and then rebalance once a year in July. And our next portfolio is the Risk Parity Ultimate. This is our most complex portfolio. I won't go through all of these funds, but it's got 40% in stocks, including a leveraged fund, UPRO, 20% in long-term treasuries, including a leveraged fund, TMF. It's also got 5% in REITs, 10% in preferred shares, 15% in gold, 5% in a commodities fund, C-O-M, 3% in a volatility fund, V-I-X-Y, and 2% in crypto related funds, BITQ and BITW. It was up 0.47 for the week. It is up 23.34%. since inception in July 2020. We are distributing out of this at a annualized rate of 6%. And so this month we'll be taking out $58. We will take it from the leveraged stock fund, UPRO, which was the best performer. And we will have distributed $750 total out of this portfolio since inception. That's 52 from gold, $319 from VIOV, that small cap value fund. 108 from VUG that's a large cap growth fund now $58 from UPRO and $213 from accumulated cash. It's interesting to note that all three of these funds that I've just been talking about have very similar performances and they have very similar risk profiles. You see the Golden Butterfly at 21.86% since inception, Golden Ratio at 23% since inception, Risk Parity Ultimate at 23.34% since inception, conception. And that makes sense. The golden butterfly is slightly more conservative than the other two. The golden ratio is kind of in the middle of the most aggressive of these three is the risk parity ultimate. But they all are within the same kind of category in terms of risk reward. They are all designed to compete with a standard 60/40 portfolio. And now we'll move to our experimental portfolios. that use a lot more leverage in them. And so our first one is the Accelerated Permanent Portfolio. This one is 27.5% in a leveraged bond fund, TMF, 25% in a leveraged stock fund, UPRO, then it's got 25% in PFF or preferred shares fund, and 22.5% in gold, GLDM. It is up 0.09% for the week. It is also nearly flat. It is up 26.2% since inception in July 2020. We are taking $78 out of it for September. That'll come out of UPRO, the best performer in the past month. And the distributions for this since inception look like $991 total. 71 came out of TMF, the leveraged bond fund. The 638 came from UPRO, the leveraged stock fund. Stocks have had a great year this past year. We've also taken 65 from PFF, the preferred shares fund, and 217 from accumulated cash from dividends. And now we are going to the aggressive 50/50 portfolio. This is our most leveraged and most volatile fund portfolio, I should say, although it wasn't very volatile last week. This one has 33% in the leveraged stock fund, UPRO, 33% in TMF, the leveraged bond fund, 17% in PFF Preferred Shares Fund, and 17% in VGIT and Intermediate Treasury Bond Fund. It was up a whopping 0.03% for the week, which is also very flat. It is up 33.37% since inception in July 2020. We are distributing $83 out of this from UPRO. I should say we are distributing out of this fund and the last one at a rate of 8% annualized because we do want to put these through their paces. If they are really all they're cracked up to be, they ought to be able to support a much larger distribution than the unleveraged portfolios, and so that's what we're doing with them. So out of this or for this we have taken $1,006 total since inception. It started at $10,000. We took that out. There's still $12,414 left in it. so it's still growing despite the 8% withdrawal rate. It has $70 of TMF that we've distributed out of there, 660 from UPRO, the leveraged stock fund, 63 from PFF, and 213 from cash accumulated. And our final portfolio is our newest one, the levered golden ratio. This one's only been around since July of this year. It is kind of an intermediate leveraged portfolio. That's about 1.6 to 1 in terms of leverage. It has 35% in NTSX. That is a composite leveraged fund of an S&P holding and a treasury bond holding. It's got 25% in gold, GLDM, 15% in O, that's a REIT, Realty Income Corporation. 10% in TMF, the Leverage Bond Fund. 10% in TF, T-F-T-N-A, which is a leveraged small cap fund. And then for the remaining 5%, we've got 3% in a volatility fund, V-I-X-M, and 2% in the crypto funds, BITQ and BITW. This one was up 0.75% for the week. It was actually our biggest winner this past week. It is up 5.17% since inception in July of this year, July 1st, and we are distributing $61 from it. We were distributing out of this at a rate of 7%. In theory, it ought to support a safe withdrawal rate of around 9%, but we are doing it at 7%. And so we are taking $61 from NTSX, which was the best performer last month. And so we have now distributed twice $121 total, $60 from the leveraged bond fund TMF and $61 from the leveraged composite fund NTSX. And that is pretty much all we have for you today. Which is good because now I see our signal is beginning to fade. And we will pick this up later this week. With probably some more emails and maybe a rant since I forgot to rant last month, I might as well make up for it this month. We'll see if I can come up with something for that though. We don't want to rant about just nothing. If you have comments or questions for me, you can send them to the email 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 will get your message that way. If you haven't had a chance to do it, please go to Apple Podcast or wherever you get this podcast and like it, subscribe to it, follow it, give it some stars, a comment. That would be greatly appreciated. That would be great. Okay. Thank you once again for tuning in. This is Frank Vasquez with Risk Parity Radio. Signing off.

Mostly Mary [35:15]

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.