Mostly Voices [0:00]

A foolish consistency is the hobgoblin of little minds, adored by little statesmen and philosophers and divines. If a man does not keep pace with his companions, perhaps it is because he hears a different drummer. A different drummer.

Mostly Mary [0:19]

And now, coming to you from dead center on your dial, welcome to Risk Parity Radio, where we explore alternatives and asset allocations for the do-it-yourself investor. Broadcasting to you now from the comfort of his easy chair, here is your host, Frank Vasquez.

Mostly Uncle Frank [0:38]

Thank you, Mary, and welcome to episode 122 of Risk Parity Radio. Today on Risk Parity Radio, we're going to work on our backlog of listener comments and questions.

Mostly Voices [0:52]

And so without further ado, here I go once again with the email. First off.

Mostly Uncle Frank [0:59]

And first off, we have an email from EJ and EJ writes, Frank, since I don't think

Mostly Mary [1:08]

this has been mentioned before, I thought it might be wise to advise listeners about the tax treatment of the BITW fund in the Risk Parity Ultimate portfolio. Those looking to invest in a taxable account may wish to avoid or substitute given that this particular fund appears to issue a Schedule K1, which can add undesired complexity. Thanks.

Mostly Uncle Frank [1:31]

Well, thank you for letting us know that, EJ. No, I was not aware of that. This is the first time I've used BITW in anything this year. What I might suggest you do if you don't want to have to deal with that K1. A K1 is not that difficult to deal with for something like this. I've gotten them for other investments in the past. It's just a small annoyance. when you fill out your tax forms. I don't think it means what you think it means.

Mostly Voices [1:58]

But as we talked about in last episode,

Mostly Uncle Frank [2:01]

Kiplinger has listed the 11 current funds available to invest in cryptocurrencies. And so you might check that out. I'll relink that in the show notes. I know there are, as of today, another fund out there, a 12th one, BITO, which invests in Bitcoin futures. However, I could not recommend investing in that kind of fund. Usually the ETFs based on futures have some problems in terms of rolling over the futures contracts and the consequence of that. In theory, this one's going to be affected a lot by that, so I wouldn't put any money into that until you see how it works out over the course of time. I would look at something else. An alternative to BITW is obviously GBTC, which is the grayscale Bitcoin trust. It trades like a closed-end fund, but it only invests in Bitcoin, whereas BITW invests in 10 different cryptocurrencies. Cool.

Mostly Voices [3:13]

Fire, fire, fire, fire.

Mostly Uncle Frank [3:16]

Or I suppose you could do it the old-fashioned way and invest in the currencies themselves. But that is beyond the scope of this podcast because we are looking for simple and easy ways to construct portfolios out of ETFs and alike instruments. Man's got to know his limitations. Thank you for that email.

Mostly Mary [3:45]

Second off, we have an email from Jay Allen and Jay Allen writes：Love your show, love the sound drops, keep it up.

Mostly Voices [3:48]

I do what I'm told.

Mostly Mary [3:52]

I found you from the Choose F.I. guys and listened to all of your episodes. You are making me a better investor. I have followed the Callan Periodic Table of Investment Returns for years. Looking at the released version and many copies, most organizations are lumping all the bonds together using broad indexes. Additionally, they are not including gold. Why not look at total return? It would be interesting to see these along with correlation numbers. Have you run across a version such as this in your travels? Thanks again for all your hard work, Jay.

Mostly Uncle Frank [4:25]

Well, yes, I wish there was something like that Callan Periodic Table for more investments. I have looked at it and enjoyed that presentation over the years. It is limited, though. It's really focused more on stock-related funds. and has a couple of bond boxes, but things are combined. And so it really does not have the breadth of asset classes that you would want to be able to consider in a risk parity style portfolio. I'm afraid I do not have a substitute for that.

Mostly Voices [5:04]

Geez, God wouldn't have majesty if it came up and bit him in the face.

Mostly Uncle Frank [5:08]

Probably the best you could do would be to create portfolios over at Portfolio Visualizer of these various things and look at them. I realize that's not a very attractive solution and is a lot more work for this, but I'm afraid it's the best I can do. Forget about it. If you do run these through the correlation analyzer there at Portfolio Visualizer, it not only has those correlation numbers in a table, but it also has the average returns for each class or fund that you're putting in there, which is of use as well as volatility metrics, which is also useful. Sorry I can't do better than that.

Mostly Voices [5:53]

I award you no points and may God have mercy on your soul.

Mostly Uncle Frank [5:57]

But thank you for that email.

Mostly Mary [6:01]

And our next email comes from Paul, and Paul writes, Hey Frank, I enjoy listening to your podcast and when you've been on other podcasts advocating for risk parity. I freely admit I don't understand everything you talk about, but that's okay. I like learning. My wife and I are looking at a five-year timeline until early retirement at 52-ish and am currently in a pretty traditional three fund mimicking plan. I say mimicking because a large chunk is tied up in 401 s, so it's a little hard to get to a true traditional three fund US international bond, but I mimic it as best I can with the allowed funds. Also, a large chunk in a taxable brokerage account at M1. Anyway, on to the questions. One, given that we want five more years of accumulation or so, what do you consider the easy way to transition to a risk parity style? Is there any way without triggering a large tax event? VTI did well this year. Two, when do you consider a transition period from accumulation to preservation? Or do you just flip the switch and live with the taxes? Three, how do you handle the more limited choices faced in a 401? Thanks for all you do, Paul. Well, I'm glad you're enjoying this podcast.

Mostly Uncle Frank [7:20]

Yeah, baby, yeah! Even the assorted interruptions. You can't handle the crystal ball. But as to your questions on the question one, what is the easy way to transition to a risk parity style? That really depends on exactly what you're holding. I sense that you're having some issues with your 401k not offering a whole lot of different options, which is unfortunate because in the ideal world, what you would do is Quit your job and then transfer that to an IRA and then you could make as many adjustments as you like within the tax deferred side of this to adjust to a risk parity style portfolio without having any tax issues. If you're unable to make many or any adjustments in that 401k, then you are stuck dealing with your taxable brokerage account. The easy non-taxable way to approach this is to start making your new investments into the asset classes you are missing. And then also, if perchance, and I doubt you have this situation, if you had anything to tax loss harvest, you could also do that. That would be great. I did mention something that might be useful in the last episode. If you're particularly trying to build out a bond portfolio and you don't have a lot to work with, if you buy the leveraged ETF TMF, that will function as if it's three times the value of TLT, which may be a decent temporary solution at least to move towards a risk parity style portfolio. Now regarding question two, when to do this or when to use a transition period, I think the issue there has mostly to do with whether you've hit your number, whether you've accumulated as much as you feel like you need to accumulate to support your distributions in retirement. And if you are at that point or can glide into that, say with low returns of only, you know, 4 or 5%, then you can transition anytime you want. So if you didn't have a tax issue, yeah, you could just flip the switch and do it. If you do have tax issues, I think you really should take those things into account and think more about, well, what can I sell that is not going to create a large tax liability, if anything, and sometimes you have newer shares that you could specifically designate and sell those. That might help. Or you can, as I mentioned, add to the asset classes you are missing, the other way to do it. But it's not like it's an emergency situation. What you should think about is what is the most efficient way for me in my situation to do this. as opposed to somebody in some kind of ideal situation. All that's happening if you're staying in a accumulation style portfolio is you are taking on more risk, essentially. The other way to reduce risk without necessarily getting into a full risk parity style portfolio would be to increase the bond allocations, whichever bonds you have available in your tax deferred account in your 401 account, that would at least reduce the risk even if it's not the ideal holdings. With the idea that once you do stop working and can move that 401 out into an IRA, then you can make those adjustments there. And so you won't have the perfect allocation, but you'll have a lower risk allocation if you will before you make that move. And I think that leads into your third question, how do you handle the more limited choices faced in a 401k? And the answer is, I think you just do the best you can with what you have to work with. What are the closest analogs to the things that you actually want to hold in your risk parity style portfolio? So while an aggregate bond fund is not the ideal thing to hold, It is much closer to a treasury bond fund than a stock fund would be. So you have to play a little horseshoes and hand grenades here and get as close as you can with the idea that you're reducing the risk right now. And then you'll optimize the portfolio selections later when you have more options, when you've got that 401k moved out into your IRA. And then it's much easier to simply sell one thing and buy another one. Probably one of the more important moves that you could make potentially in a 401k is to move some of your stocks into a small cap value fund or a value based fund. Because what's really missing in a traditional 60/40 portfolio is something that does well in inflationary environments. If you just have those total stock market funds or large cap growth funds, which are similar to total stock market funds, those have problems in inflationary environments where value does well in inflationary environments. Don't count on any bonds to do well in inflationary environments. So don't worry about dealing with that. Handle that sort of thing with your stock allocations. Because that's really why we have portfolios here with allocations to small cap value, to commodities, to gold, to those sorts of things. And I realize what I've told you is not terribly a perfect solution for your situation. That was weird, wild stuff. But I hope it helps. And thank you for that email. And our next email comes from Horseman. There can be only one.

Mostly Mary [13:47]

And Horseman writes, Hey Frank, I really enjoy your work and find it very informative and useful. Working through your previous episodes, and I heard you talking about I-bonds, and you mentioned that you could only buy $10,000 per social security number. That's partially correct. You can only buy $10,000 worth of I-bonds electronically, but you can also buy a paper I-bond worth up to $5,000 with your tax refund for a combined total of $15,000 per year per Social Security number. Thanks for all you do. Well, what can I say?

Mostly Uncle Frank [14:19]

You are correct, sir. Yes. Yes, that is a additional method for getting money into an I Bond account in addition to using the Social Security numbers of your family members to set up separate accounts. I bonds are much more interesting these days since the interest rate on them has jumped to over, I think, around 7% for the next six months. May not always stay that high, but it's a very safe investment. So it's sort of a why not put some money in here? And thank you for that email.

Mostly Voices [15:02]

You need somebody watching your back at all times.

Mostly Uncle Frank [15:07]

And our next email is from Larry, and Larry writes：Frank,

Mostly Mary [15:10]

thanks for your podcast. It has helped me increase my understanding on investing. A question I have is if you would consider using momentum with your strategies. I have been doing so very successfully, see the attached website, and in all of my strategies it has increased my returns with lower risk. Let me know what you think. Larry.

Mostly Uncle Frank [15:34]

Well, I took a look at the link you provided, which was interesting, and I'll also provide in the show notes. And the answer is, no, I would not consider that kind of strategy, at least within the confines of what we're talking about in this podcast. One of our principles is the simplicity principle, and the simplicity principle here means that what we are looking for is a simple allocation of investments that we can make that is not subject to a lot of trading or other metrics, things that we need to monitor and deal with. And so the only ones we really want to deal with are things like rebalancing, which we do on bands or on calendars. So I wouldn't discourage anyone from trying any particular strategy. But that is not what we do here. That's really not what I do. As the article mentions, this strategy does involve a lot of daily volatility and jumping in and out of assets every month, which could create a lot of tax liabilities. To its credit, I mean, it says it's Best for a retirement account where you wouldn't have those tax problems, but that sort of begs the question as to, well, what do you do with the rest of your portfolio? The other issue, and this is also noted in the article, is it really doesn't include any other assets besides treasury bonds and stocks, which is a great place to start, but that's not all that's out there and you would want to be able to include other things. I found the long-term data going back to 1871, even though it was limited, was the more interesting thing to look at simply because this strategy obviously was extremely good in the 2000 to 2010 period and was more comparable or down to earth in other periods. such as 2010 and until now. And it looked like it was reasonable back in the 1970s, but it was difficult to carve that out. It would be interesting to see it more on a decade by decade breakdown, if you will. This is the kind of thing that may work extremely well in one decade and then only be so-so in another decade. and if you took into account slippage, any transaction fees, which should be minimal by now, but more importantly taxes, you might not have the same sort of results as you see in some of these simulations. So I will leave it to you to pursue these market timing extravaganzas and best of luck with them. You could ask yourself a question. Do I feel lucky?

Mostly Voices [18:40]

Do I feel lucky? Thank you for that email.

Mostly Uncle Frank [18:46]

Last off. And our last email of the day comes from Anderson.

Mostly Mary [18:59]

And Anderson writes, Frank, I'm in my mid-30s in a stable career, which I enjoy. However, I've continued to enjoy all things personal finance and have considered a career in financial advising. I really enjoy helping people, and especially in the area of personal finance where there's so much confusion for your average person. Here's the rub. One of the reasons I feel pulled in this direction is because there are so many bad actors with poor motives, as you often point out. I share your distrust and frustrations with the financial services industry. That being said, what are your thoughts about a career in financial planning advising? Any recommendations on how to approach this?

Mostly Uncle Frank [19:37]

Well, this is an interesting question. I'm not sure I am qualified to answer it, but I will give it a go. All hayyib now enters his holiness, Takimata. The problem I see overall with the financial services industry is simply that It is built on a sales model and not a model of professionalism or service.

Mostly Voices [20:05]

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

Mostly Uncle Frank [20:10]

And so the model that has been handed down to the financial services industry is the one that comes from the 1940s and 50s and 60s when you had a stock broker who was trying to generate trades and would call up clients and try to convince them to buy various things or buy and sell various things because the commissions were very large at the time and that was a way that you could make a living. There really wasn't any organization that would call itself financial planning or financial services until about 1970. And then after that, most of what was going on in that industry until 1986 was finding interesting tax shelters for people to invest in, which all went away with the 1986 tax code changes. So the motivations are all messed up. I was just listening to an episode of Millionaires Unveiled where they were talking to somebody who was in the financial services industry and he said, Really the motivation there is to try to get as much money in the door as possible by any means necessary. And so it's not really focused on service but on the sales aspect of it. I drink your milkshake.

Mostly Voices [21:35]

You can see this by the resistance

Mostly Uncle Frank [21:39]

of the financial services industry given their business models to anything resembling like a fiduciary rule that would cover all of what they do. Ideally, you would want to see them have ethical codes like lawyers and doctors who are in a services based industry. We use the buddy system. And so they don't have the conflict that the financial service industry creates by its nature. Because only one thing counts in this life.

Mostly Voices [22:13]

Get them to sign on the line which is dotted. There's almost a Gresham's Law problem here too.

Mostly Uncle Frank [22:20]

Gresham's Law says bad money chases out good money in an economy. People hoard the good money. In the financial services industry, the lack of standards chases out people who want to have standards. It's a trap! Because there's more money to be made selling product and gathering AUM than there is focusing on the services aspect of what they do. They're sitting out there waiting to give you their money. Are you gonna take it? And that money is what motivates the business models and how they behave. Always be closing. Always. be closing. So if you wanted to have a career in financial planning or advising, at least on the sort of the highest levels, if you will, you either need to accept that model and be enthusiastic about the sales aspect of these jobs.

Mostly Voices [23:26]

You know, whenever I see an opportunity now, I charge it like a bull. Ned, the bull, that's me now. Tell me, have you ever I've heard of single premium life because I think that really could be the ticket for you.

Mostly Uncle Frank [23:37]

Or you're going to need to work for an independent advisory service, which is likely to be small, a registered investment advisor is what you're ultimately looking to become or become involved with. I think a good example of that would be the people that run the money guy podcast, which is, I believe their service is called Abound Wealth Management. I do like their business model, which is essentially We are going to be out there giving away lots of free information to help beginning investors figure out how to do things and accumulate wealth. And then when they have a lot of wealth, then they can come to us for a consultation. Whereas the model that most of the industry follows is get you in the door as soon as possible and start generating those fees, commissions and other things. And it's gone. I think in this day and age financial advisory services ought to give lots and lots of information away for free and to recognize that most people with not a whole lot of money don't need a whole lot of advice and don't need to be doing something that's very complicated in order to succeed. Forget about it. But I will link to one of their YouTube videos in the show notes about how to choose a financial advisor, which goes through the issues about how many financial advisors are involved in sales models and how few of them are actually independent. So how would you go about as an individual getting into one of these positions? Well, you could try to go intern for one of them. I know places like that have Internships. Another way to do it though, and probably the path most people follow, is to go work for a large organization that has a reputation. I have a young cousin who first worked for the Federal Reserve out of college, became an analyst there, worked for there for a few years, and now has gone on to a small financial advisory shop. but she would not have been hired by them had she not had this reputation. Because obviously, if you're a young person in particular and you're trying to sell yourself to a client, it would be nice to say you work for a big investment bank or an institution like the Federal Reserve, because that's going to give them some confidence that you know something that they don't and you know what you're doing.

Mostly Mary [26:09]

I think I've improved on your methods a bit too.

Mostly Uncle Frank [26:13]

But what can you do now? What resource should you look for? Go pull up the Michael Kitces podcast. Michael Kitces has a podcast that is directed at financial advisors and business models for financial advisors. And so there are hundreds of interviews there and suggestions as to how to do this what to do, how to run a financial advisory services, all those sorts of things. And you can go through the whole list and listen to the ones that seem interesting to you, but it gives you kind of a different take on the financial services industry from the kind of a small shop perspective. And I do have a lot of respect for people like that who are actually trying to make their industry less sales oriented and more service oriented. Which is long overdue.

Mostly Voices [27:15]

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

Mostly Uncle Frank [27:19]

And hopefully that long rambling answer will have something in it that will be of use to you.

Mostly Voices [27:27]

You are talking about the nonsensical ravings of a lunatic mind. Thank you for that email.

Mostly Uncle Frank [27:31]

But now I see our signal is beginning to fade. 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 to the website www.riskparityradio.com and fill out the contact form and I will get your message that way. We may have another hiccup this weekend where I'm not able to do a podcast, but I will endeavor to at least update the website on the Portfolios page of the seven sample portfolios that you can find there. If you haven't had a chance to do it, please go to the place you get this podcast, like it, subscribe to it, give it some stars or review. All of that would be greatly appreciated. That would be great. M'kay? Thank you once again for tuning in. This is Frank Vasquez with Risk Parity Radio signing off. Uh, what? It's gone.

Mostly Voices [28:39]

It's all gone.

Mostly Mary [28:43]

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.