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 [0:37]

Thank you, Mary, and welcome to episode 120 of Risk Parity Radio. Today on Risk Parity Radio, we are going to go once again with the emails. But before that, I think it's time for something else.

Mostly Voices [0:56]

I want you to be nice until it's time to not be nice. Well, how are we supposed to know when that is? You won't.

Mostly Uncle Frank [1:05]

I'll let you know. Yes, it's our monthly rant that we missed last month. Now, if I can just find the button. and away we go. Today's monthly rant is more of a mini rant. Now, I debated ranting about the fact that September is Life Insurance Awareness Month, but they were unlike the annuity providers in June. They were not putting out any coloring books and stickers, so it just didn't seem like as much fun. I'll let my old classmate Ned Ryerson. Just address that for you.

Mostly Voices [1:56]

I sell insurance. What a shock. Do you have life insurance? Because if you do, you could always use a little more. Am I right or am I right or am I right? Right, right, right. Tell me, have you ever heard of single premium life? Because I think that really could be the ticket for you. And that's probably enough of that.

Mostly Uncle Frank [2:14]

You are correct, sir.

Mostly Voices [2:17]

Although I do wonder why we do not get to have simple

Mostly Uncle Frank [2:21]

inexpensive diversified portfolio awareness month. That would be something I could get behind. Yes! But what I wanted to rant about today was my personal experiences with friction in the financial services industry. Friction that tries to keep you from getting at or using your own money. Danger, Will Robinson. Danger. And I've experienced this friction in a couple of accounts this year. One, I was trying to transfer a pension fund amount and roll it over into a personal IRA. And the other, more recently, when I was trying to take a Roth 401k and move that into an IRA. In both circumstances, I was confronted by processes that might be described as from the stone age. Now with the first one, and this occurs a lot with people who have retired and they have some kind of pension that can either be paid out or rolled over into an IRA or turned into an actual pension payment. I wanted to have mine rolled into an IRA. and you would figure that they would be able to do that with a few clicks and do it electronically. But they were not. They insisted they cannot transfer money electronically, that they have to transfer money by writing a check, a check, a piece of paper, and sending it off in the mail to either me directly or to the new company where the IRA was. Now, it was a large sum. It was seven figures. I did not want to have seven figures of my retirement money floating around in the mail somewhere in the form of a paper check. But evidently, they can't do that in these days. They don't know how to use electronic transfers through the banking system. Forget about it. Now, the recipients of the money at Fidelity were happy to take it either way, either in a check or in the form of an electronic Transfer. And I gave them the electronic transfer instructions. And they said, no, we can't do it that way. We have to write a check. Or you can take the annuity payments. Check or annuity payments. That's it, buddy. That's it, buddy. That's all you get. Forget about it. So, I took the stupid check. I had it sent straight to Fidelity and they were able to deposit it very promptly, actually. I was pleased with that part of the transaction. But it seems ridiculous in 2021 that we would have large sums of money floating around in paper checks for no good reason other than people don't want to make it easy for you. They like the friction. Yeah, baby, yeah! The financial services industry loves friction in accounts. That way they get to keep your money. They set up friction by having mutual funds that if you sell them anywhere else, they cost you money. I drink your milkshake. Or 20th century ecosystems that involve a bunch of interconnected annuity products.

Mostly Voices [5:45]

I drink it up.

Mostly Uncle Frank [5:49]

But let me tell you about my other saga this year, which is more recent and is still ongoing. so all I wanted to do was take my Roth 401k money and transfer it into a new IRA. And I was willing to set up the IRA at the same company because they have no fee trading and fractional shares. This was not Fidelity with somebody else. I don't need to mention them. But my money in there was in a self-directed part of the 401k account, which allows me to invest in anything like a regular Brokerage. And so I just wanted to transfer that account into the IRA. You would think they'd be able to do it at their own company and they would be able to do it in kind. No, no, we can't. We can't have nice things in the 21st century.

Mostly Voices [6:39]

You can't handle the banana's.

Mostly Uncle Frank [6:42]

We have to go back to the Stone Age and do things in as Byzantine a way as possible.

Mostly Voices [6:47]

It is King Arthur and these are my knights of the round table. And this is the procedure I had to follow.

Mostly Uncle Frank [6:55]

First, I had to sell everything in the Roth 401K. Everything. And make it go to cash. And of course, that takes at least three days to settle. And so I had to sell everything and it sat there for three days. Then could I transfer then? No, no, I could not transfer then. I had to move the money back out of the self-directed part of the 401 into the regular part of the 401. And I called several people and asked them how to do this since it did not seem possible on the website itself.

Mostly Voices [7:28]

I am a scientist, not a philosopher.

Mostly Uncle Frank [7:32]

And after calling people for three days, I finally found somebody that could tell me how to do it. And it was in a completely different section of the account. that did not have anything to do per se with fund transfers whatsoever.

Mostly Voices [7:43]

That's not how any of this works.

Mostly Uncle Frank [7:46]

And so I was able to do that yesterday. And now today we are working on actually getting it into the Roth IRA so I can rebuy my investments. If you can dodge a wrench, you can dodge a ball. Now all of this seems really simple. I mean, we can pay somebody with our phones through Venmo or Zelle or other things like that. Yet we're stuck when it comes to our real money, our real retirement funds. We have to go through Byzantine processes.

Mostly Voices [8:21]

Now go away or I shall taunt you a second time.

Mostly Uncle Frank [8:24]

I blanched at the thought of what it would be like to transfer that account to actually a different company. Although I'm kind of in mind to do that. I'm talking about the central nervous system.

Mostly Voices [8:36]

But all of this is simply to comply with another Byzantine set

Mostly Uncle Frank [8:41]

of rules about Roth 401 s and Roth IRAs. We have been charged by God with a sacred quest.

Mostly Voices [8:48]

That Roth 401 s are subject

Mostly Uncle Frank [8:52]

to required minimum distributions and Roth IRAs have this five-year creation timeline before you can access the money, or at least the gains on that money put into the IRA. I fart in your general direction. If not for that, I may have just left it where it was. But you would figure since other people have to do that, that they would have a reasonable system set up to make that easier, and you wouldn't have to call People seven or eight times like I had to, most of them who did not know how to do what I was asking them to do. Forget about it. And that it could be done in an easy way. I'm not sure this one was actual friction designed to prevent you from getting your money or just stupidity in this sense. Fat, drunk, and stupid is no way to go through life, son. But whatever it was, there's really no reason for it. And the financial services industry ought to be able to perform better or at least equally well as our phones do when we transfer money to each other. Bow to your sensei. I'm just transferring money to myself. Bow to your sensei. But thankfully, that saga is over or just about over. Class. is dismissed.

Mostly Voices [10:21]

But now... Here I go once again with the email. And... First off.

Mostly Uncle Frank [10:29]

First off, we have an email from Jay, who actually sent this through my Facebook page, Risk Parity Radio. I don't advise you doing that. I was able to find it, but Facebook isn't very good about telling you where they keep those things.

Mostly Mary [10:47]

But anyway, Jay writes：hi Frank, I just started listening to the podcast, started at episode one. My funds are in Vanguard. I was wondering if there is a document that gives the Vanguard equivalent to the funds in your portfolios. Specifically, I'm interested in mirroring the All Seasons, but can't find the Vanguard equivalent for PBDC. Anyway, love the podcast.

Mostly Uncle Frank [11:08]

And the answer is, I do not have a document that details all of the Vanguard equivalents to all of the funds in each of the portfolios. I will list a few that I'm aware of in the show notes, so you can take a look at those. But unfortunately, Vanguard does not have equivalents for all of these funds, particularly as you get out into the alternative investments. And one of the funds it does not have would be an equivalent for something like PD&BC or CoM, which we use in some of our portfolios. That's also a commodities fund. But what I would suggest you do for that is simply make sure you have the regular brokerage option opened up at Vanguard, which I understand you can do as other listeners have told me this is the solution. And then you can go and buy whatever you want with no fees. in that portion of Vanguard. And so you can go and buy PDVC if you'd like, or buy COM. The reason I'm talking about COM, it's something we did review in one of our earlier episodes, and it tends to perform like PDVC over time, but it has lower volatility just because the way it's set up. It's only been around for a few years, but if you look at its Total history and PBDC's history since that time, they perform about the same. PBDC has a higher volatility. So you might think about using that one even though PBDC is more liquid. But thank you for that email. And now, second off. Second off, we have an email from Andrew, and Andrew writes.

Mostly Mary [12:56]

Thanks for sharing your experience, wisdom, and exasperation. I'm one of those who greatly appreciates the sound effects, so there's one more vote in their favor. Our household cannon overlaps remarkably with yours, but with a bit more Mel Brooks, I think.

Mostly Voices [13:08]

We know you're wishing that we'd go away, but the inquisition's here and it's here to stay.

Mostly Mary [13:20]

A few weeks ago, you mentioned in passing some days to avoid rebalancing. I've heard advice elsewhere that any day of the year is good as long as you are consistent. You choose the middle of the month. It makes sense not to make moves right before or after quarterly reports. Please enlighten us again as to the days to avoid. You gave them a nice clever name too, which would be nice to throw around. Now enters his holiness, Takemata.

Mostly Uncle Frank [13:46]

Yes, this is an interesting little topic that ideally you make your trades on days where there is not a whole lot of volatility in the markets. so that you can get the best bid asks on them, which you should also use limit orders to make sure that you're getting the price that you're expecting. But what I had referred to in the other episode was a triple witching day, which was the expiration of three different kinds of futures and options. It's funny because this week we're having what's called a quadruple witching day, which are four different varieties of futures and options. And oftentimes on those kind of days, there's a lot more volatility in the market because institutions are buying and selling a lot of options and futures to roll them over or to close out positions that they have. And so those are typically a day to avoid. Other days to avoid include end of months, end of quarter, end of year, or the beginnings of those things too, because there's oftentimes more volatility based on timing rather than anything else in those periods. And then if there's going to be some big announcement coming out, you probably want to avoid trading around or near when that announcement comes out in the middle of the day from the Fed or the government or somebody else that somebody might be making a bunch of trades around. So what does that leave you? It might be a better answer to talk about, well, when are the good times to trade? This is not so important as it used to be because markets are pretty liquid and the kinds of funds we're talking about are some of the most liquid funds. So even if you did trade on the days I was talking about before, it's probably not going to hurt you or not hurt you very much. But if you are looking for the best times to do it, usually those would be a Tuesday, Wednesday, or Thursday at some point in the middle of the day. So you wouldn't want to do it before 10 o'clock. The market's open at 9：30 Eastern time and there's usually a lot of activity until 10 or 10：30 and then it calms down. And then also at the end of the day after 3 or 3：30 then the volatility picks up in the market again and so you would want to Do it generally in the middle of that time window. Why I say Tuesday through Thursday, because usually it's Monday or Friday when you have announcements coming out or something that had happened over the weekend. And sometimes there's volatility right away on Monday because there hasn't been trading on the news that has happened in the past couple of days. As for dates, yeah, if I had to pick dates, it'd probably be somewhere around the 10th of the month and somewhere around the 20th of the month. There seems to be usually less going on at those points in time. But again, that date is not so critical. So for instance, if and when that money that I've been talking about going into the Roth IRA gets transferred, I will put it back into the markets pretty much just the day that it gets in there, whether that is Friday or Monday, I'm not going to be worried or upset, I'll probably just do it in the middle of the day and be careful about it and make sure I put in limit orders on larger orders to make sure that they get executed at a price that is predicted or set by me, I should say.

Mostly Voices [17:15]

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

Mostly Uncle Frank [17:18]

But if you want to have Halloween early, on Friday, put on your quadruple witching hats and dance around a cauldron and enjoy them for what they're worth. And thank you for that email.

Mostly Mary [17:50]

Our third email comes from David and David writes, Frank, thank you very much for responding to my emails on a recent show. You provide a unique high value add window into the investing universe.

Mostly Uncle Frank [18:00]

Well, thank you for the thank you, David.

Mostly Voices [18:04]

I guess I love having my own little universe. You are talking about the nonsensical ravings of a lunatic mind.

Mostly Uncle Frank [18:15]

And it is very helpful that I have listeners who are savvy and send in a lot of interesting questions, especially the ones that correct my errors.

Mostly Voices [18:26]

You need somebody watching your back at all times. And thank you again for that email.

Mostly Uncle Frank [18:33]

And our fourth email of the day comes from David. I think this is the same David.

Mostly Mary [18:40]

Prove it, baby. And same David writes：Frank, sorry link did not work. The podcast I mentioned was from Morningstar, the Long View series. Title of podcast is Rick Bookstaber, Avoiding Complexity is Risk 101. Below is summary and link. Hope it works this time.

Mostly Uncle Frank [19:04]

And I did go listen to that podcast. It was very interesting and I will link to it In the show notes, Mr. Bookstabber is a graduate of MIT and I always like listening to those. I always want to know what the Caltech rivals are doing.

Mostly Voices [19:22]

Never underestimate your opponent. Expect the unexpected.

Mostly Uncle Frank [19:26]

One of the more interesting things I listened to in that podcast and I wholeheartedly agree with is that you can reduce your risk by adhering to simplicity. And he says when you're constructing a portfolio, particularly one that you expect to last for a long time, you want to create a simple and coarse plan that will do well in many possible worlds because you cannot predict which world you are going to get next. You can't handle the crystal ball. and his analogy, which I loved, was to an animal. An animal analogy. He said, a robust portfolio that is able to withstand a lot of risk and uncertainty is one that's like a cockroach. Cockroaches are not very complicated, but they have survived for millions and millions of years in all kinds of environments. and can do so regardless of whether it's cold, hot, wet, dry, whatever. Forget about it. And so I thought that was a fun analogy that risk parity portfolios are kind of like cockroaches when it comes down to it, especially when you're talking about our more conservative ones. And no, they do not get squished. Forget about it. Another thing he said in the interview was that individuals who are young with a long time frame also have an automatic way of reducing risk because having a very long time frame means your portfolio is going to experience all kinds of environments and that is also a way of mitigating risk. Which goes to how we talk about constructing an accumulation portfolio versus a drawdown portfolio. that you are relying on that accumulation portfolio to have a very long time to grow and so can be more risky on its face because it's got that time that helps reduce the risk. Now how this relates directly to some of the things we talk about here, one of our principles is the simplicity principle that we want to make our portfolios as simple as possible, as coarse as possible in what he's talking about. And there are mathematical reasons for that that he didn't get into specifically in that interview, but we've talked about in some of the episodes on this show. And I will refer you back first to episodes 64 and 66 where we talk about the difference between risk and uncertainty. And I wish he had broken that apart in his analysis. He was mostly actually talking about uncertainty of the future in that interview. Whereas when we think of risk, we think of something that we can actually calculate what the odds are. Whereas uncertainty, an uncertain world, you cannot calculate what the future odds are. You just have an idea of what conditions might be like or sort of the whole universe of possible conditions. You're just not sure which ones you're gonna get. Do you want a chocolate? And that's the actual world we live in is a world of uncertainty.

Mostly Voices [23:00]

My mom always said life was like a box of chocolates. You never know what you're gonna Now,

Mostly Uncle Frank [23:08]

when you have a world of uncertainty, and I'm going to direct you back also to episode 49, where we talked about something called the bias variance dilemma. Now, what that says is if you are looking at a data set, in this case, we're looking at past data of market performances of any number of assets we want to analyze, the more variables you put into that, the more it's likely to be biased to the past, and the less likely it's going to be performing well in the future or in a predictable manner in the future. So the less options or less variables or less rules you have based on past performance, the more likely that kind of portfolio or those kind of investments are going to perform as they have in the past. and it gets the idea that you do not want to over optimize your portfolio. You don't want to be saying things like, well, we've observed that the first Tuesday in October is typically a good day to sell, and then you buy back in the first Monday of November. Those kind of rules, even if they have worked in the past, are unlikely to work in the future. because they're just born out of data mining. The same thing can be said over picking particular stocks or getting too fixated on particular funds or particular fund managers. Chances are the more specific your rules are, the less likely your portfolio is going to perform as it has in the past. And this goes to what he was saying that it's better to have a course portfolio that is going to perform like that cockroach and is going to survive and do all right in all kinds of situations and all kinds of environments because that gets you the lower variance. And that's the dilemma between the bias and the variance. The more you optimize a portfolio, the more it's going to be optimized for the past and be unlikely to perform in the future. The fewer variables that you put into a portfolio, the more coarse it is, the less variance you're going to have in the future and the more likely it is to perform in the same way it has in the past. That was weird, wild stuff. I did not know that. And that goes to one of the reasons we have behind what we call the simplicity principle, that we should not make our portfolios more complicated than they need to be. And we should also construct our portfolios so they have things in them that will do well in all kinds of economic environments. And the macroeconomic environments we're concerned about, and the ones that were written about by Ray Dalio and others in the past, are essentially a quadrant where you're thinking about growth and inflation. You have increasing growth and increasing inflation, decreasing growth and decreasing inflation, Or you could have one going up and one going down and two other quadrants. And so if you have a portfolio that has simple elements that do well in all of those environments, then you are going to have a cockroach or risk parity style portfolio that's both going to be uncorrelated between the assets themselves and be able to do reasonably well in whatever environment presents itself in the future. It will not be optimized for any of the quadrants. So if you are predicting that we're going to be in a specific quadrant and you have that in your head, in your crystal ball... A crystal ball can help you. It can guide you.

Mostly Voices [26:59]

It can also use the ball to connect to the spirit world.

Mostly Uncle Frank [27:03]

Then your portfolio is going to be slanted towards what that crystal ball says.

Mostly Voices [27:11]

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

Mostly Uncle Frank [27:14]

And if you don't get that, it's kind of looking at the aura

Mostly Voices [27:18]

around the ball. See the movement of energy around the outside of the ball. It's going to do very poorly.

Mostly Uncle Frank [27:33]

It's going to be like a beautiful butterfly that has a very short life and cannot withstand a lot of changes in temperature or humidity. Now that all makes me feel like I should put a cockroach in the logo for Risk Parity Radio. But I suppose if you look at that little Mandelbrot set, that little red thing in there, if you squint at it a little bit, it kind of looks like a cockroach, one that's kind of disproportionate, but it's close enough, I suppose.

Mostly Voices [28:06]

The best Jerry, the best. But thank you for that email.

Mostly Uncle Frank [28:14]

It gets us back to some of the theoretical underpinnings of what we're doing around here. Cornbread. Ain't nothing wrong with that. And now, last off. Last off, we have an email from Justin.

Mostly Mary [28:33]

And Justin writes, hi Frank, thank you so much for all your hard work showing us how to construct diverse portfolios. I'm trying to back test the golden ratio on portfolio visualizer using the asset classes so I can go back farther in time.

Mostly Uncle Frank [28:50]

What alternative to the low volatility fund do you suggest we use to get the best idea of how it would have performed? All right, Justin, yes, the low volatility fund you're talking about in these portfolios is USMV. It's a relatively recent creation on the factor kind of analysis that is popular these days. It is most analogous to either large cap value or a mix of large cap value and large cap blend. It is designed to mimic the S&P 500 with lower volatility, which it does sometimes and sometimes it doesn't. But you should take the existence of that fund in the Golden Ratio portfolio as more of a suggestion than a rule, you can also construct that portfolio without that fund and simply make your stock allocation half large cap blend and half small cap value. And that would be kind of the simplest formulation that I would recommend. Or you could also make the stock allocation more complicated and put in some International funds or whatever you thought was appropriate for a stock allocation. But you do need to make sure that some of that allocation does well in inflationary environments like small cap value does. But that is also why there is a REIT component in the Golden Ratio because that also tends to do well in inflationary environments. Just remember that the sample portfolios are merely suggestions and and they are designed to be fairly simple in form so that you can see that you don't need to optimize for any particular part of the portfolio to be able to construct a decent risk parity style portfolio. That they are cockroaches, they are coarse, and they will hold up under many different environments. if you've got those basic elements in them. And thank you for that email. I think I've improved on your methods a bit too. But now I see our signal is beginning to fade. Just as a housekeeping matter, this podcast may go on a bit of a hiatus for the next month. We'll be doing some moving around and traveling and other things. Hopefully we'll have a few episodes. I will try to keep the sample portfolios updated each week even if there is no episode. But if you haven't gone back and done it, you might listen to the first odd numbered episodes 1, 3, 5, 7, and 9 for some of the basic principles. And then if you have an interest in a particular portfolio we did reviews of each portfolio in some of those earlier episodes and compared them with kind of standard 60/40 or other popular portfolios. So you can see there the comparisons and how well the sample portfolios do against popular variants. As always, if you have comments or questions for me, You can send them to frank@riskparityradio. com that email is frank@riskparityradio.com or you can go over the website www.riskparityradio.com and fill out the contact form there and I'll get your message that way. If you haven't had a chance to do it, please go to your podcast provider and like, subscribe, leave me some stars and all that good stuff. That would be great. Mm-kay. Thank you once again for tuning in. This is Frank Vasquez with Risk Parity Radio signing off.

Mostly Mary [32:59]

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.