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. Thank you, Mary, and welcome to episode 123 of Risk Parity Radio.

Mostly Uncle Frank [0:49]

Today on Risk Parity Radio, I'm intrigued by these, how you say, emails.

Mostly Voices [0:52]

And we are backed up with our emails, still working through the September pile. Hopefully we'll get that done in the next couple episodes here, but they do raise some very interesting questions. And it's gone. Uh, what? Wait, I think I pushed the wrong button. And first off, first off, we have an email from visitor 3050, the mysterious visitor 3050.

Mostly Mary [1:28]

What? And the mysterious 3050 visitor writes. Hey, would you mind adding a few measures of risk for each portfolio? I think risk-adjusted returns are more useful than just returns. Thanks.

Mostly Voices [1:41]

Yes, I agree that risk-reward measures are more useful than just having returns. And so we're looking generally at what are known as the Sharpe and Sortino ratios for those. But you need to be careful on how you use those because every portfolio will have a different Sharpe or Sortino ratio for a particular time period. So the proper way to use them is to compare more than one portfolio in a given time period and then look at them on a relative basis. There's no such thing as a given sharp ratio for a given portfolio because it's always qualified by that time period. That's why it would be improper to assign a particular risk reward measure to these portfolios without identifying what the time period is that's at issue. Now, how have we dealt with this? We've actually done a lot of these comparisons in prior episodes. And you'll need to go back to some of the first episodes. Before I had a lot of emails, I had time to do lots and lots of comparisons. So if you go back to episode 15, for example, we compared the Golden Butterfly portfolio with a Bogleheads 3-Fund Portfolio and found that for the data available there for Portfolio Visualizer for that, which was about 25 years, I think, the Golden Butterfly had a sharp ratio of 0.74 compared to 0.45 5.8 for the Bogleheads 3 fund. In episode 17, we did a similar analysis using the golden ratio portfolio against that Bogleheads 3 fund, and it showed that the Sharpe ratio for the golden ratio was 0.73 compared to 0.60 for the particular time period. And so it was also better. We did another one, episode 18, compared the Risk Parity Ultimate Portfolio to the Bogleheads 3 Fund. The reason we use that is it's a very common portfolio that is well established and well liked by many people. And that showed that the Risk Parity Ultimate had a sharp ratio of 1.19 for the period available versus 1.01 for the Bogleheads 3 Fund. I think that just probably went back about 20 years. If you go to episode 20, you'll see a comparison between the Accelerated Permanent Portfolio and two Dave Ramsey style growth portfolios that are all growth funds. And what you see there is the Accelerated Permanent Portfolio at a Sharpe ratio of 1.23 versus 0.74 and 0.88 for the growth portfolios. So significantly better. Episode 24, we compared the aggressive 50/50 portfolio with those two Dave Ramsey style growth portfolios, while growth funds. And that showed a sharp ratio for the aggressive 50/50 of 1.32 versus 0.83 and 0.96 for those two growth portfolios. In episode 26, we did a comparison between the All Seasons portfolio and the Vanguard Wellesley which is a conservative fund that is basically a 35-65 kind of portfolio. We saw sharp ratios for the all seasons of 0.99 versus 0.95 for the Vanguard Wellesley. You'll also see comparisons in episode 36 of a Rick Ferri Core 4 portfolio versus a Golden Butterfly. You'll see in episode 38, Rick Ferri Core 4 versus Golden Ratio. Episode 39, Rick VaRi Core 4 versus Risk Parity Ultimate. In episode 42, we looked at a Paul Merriman portfolio versus a modified portfolio to make it more risk parity like. And in episode 47, we did a comparison of the All Seasons portfolio to a global fund kind of portfolio. In all of those comparisons, you'll see that the risk parity portfolios had better risk reward metrics than any of the standard of the other portfolios. And if you want to see this all in one place, the best place to do that is to go to the Portfolio Charts Risk Return Analyzer, which I will link to in the show notes. And what that has there is, first of all, it's laid out all of these common portfolios. which include the classic 60/40, a 712 portfolio, Coffeehouse Portfolio, Rick Ferri Core Four, Global Market Portfolio, Ideal Index Portfolio, Ivy Portfolio, Larry Portfolio, Merriman Ultimate Portfolio, no-brainer Portfolio, I think that's from Williams-Bernstein, Permanent Portfolio, the Sandwich Portfolio, a Swensen Portfolio, and that Bogleheads three fund portfolio, as well as the total Golden Butterfly. And if you want to put in a golden ratio portfolio, because it allows you to just pick one and also add it to this mix, go ahead and put in this for a simplified golden ratio portfolio. Put in 21% large cap growth, 21% small cap value, 26% long-term treasuries, 16% gold, 10% REITs, and 6% in T-bills, B-I-L is the symbol there for that. And so then it plots these all on a graph of risk reward, and you can change the things measured on the risk reward axes. And so on the risk side of it, you can plot on standard deviation, What's called the ulcer index, how painful it is to hold something, deepest drawdown, longest drawdown, or start date sensitivity. On the reward side of it, you can plot on average return, baseline long-term return, baseline short-term return, safe withdrawal rate, and perpetual withdrawal rate. And so you have all of these different mixes of measures. When you go in there and do this, this is what you will find. You will find that the risk parity Style portfolios are superior in risk reward metrics in almost all combinations of all of these graphs. Yeah, baby, yeah. This is a universal finding. The best, Jerry, the best. And so you will find that golden butterfly and golden ratio portfolio, which are two of our kind of baseline retirement style portfolios as superior in risk reward. to just about any other common portfolio that anybody's devised or anybody uses or anybody talks about. Forget about it. And that is over the time frame since 1970. So over 50 years now. So if you do want the best risk reward characteristics for your retirement portfolio, It would suit you to pick a risk parity style portfolio. That's the bottom line. Real wrath of God type stuff. Because the only way that's not true is if your crystal ball says the future is going to be much different than the past and therefore one of these other portfolios or something you've devised is going to be better because of your ability to predict the future. A crystal ball can help you. It can guide you. you can also use the ball to connect to the spirit world. A really big one here. But we do know what happens to most of these crystal balls within the next 10 years or so after somebody rolls one of them out. And it sounds like this. But I will leave you to those calculators and those episodes so you can See this for yourself. Onward and upward. Go and tell your master that we have been charged by God with a sacred quest. Second off. Second off, we have an email from Daniel and Daniel writes.

Mostly Mary [10:24]

Hi, I compared the Swann ETF and SPY70 VBIX90 CASHX60 on Portfolio Visualizer, and they give quite different results.

Mostly Voices [10:42]

Do you know why? And Daniel did provide a link to this analysis he did on Portfolio Visualizer, which I will include in the show notes so you can look at it. But what he's referring to is our episode on the Swan ETF SWAN, which was episode 118 where we analyzed that. Now, I had said on that episode that the thing was designed to behave like a levered portfolio that was 70% S&P 500 and 90% in bonds. And the reason I said that is because that's what I got from the Optimized Portfolios website, which had a little article about this and was referring to at least what it was designed to do. Wrong! Now, was I correct in that statement? Does this behave like a 70/90 portfolio? Wrong! Wrong! Wrong! Right? Wrong! Yes, that was wrong. That did not pan out. Wrong! Or at least has not panned out with this ETF so far. So I went back and did a little more modeling and actually what it models more like is a portfolio that is 45% S&P 500 and 80% intermediate term treasuries. So perhaps it is poorly constructed or poorly implemented, but that is part of the danger of using levered ETFs that sometimes they do not perform as advertised. Forget about it. And Daniel has found one that obviously does not or is not performing as advertised so far. Now will they fix that in the future? I don't know. But right now it is safe to say over the past few years of its existence it does perform like a levered portfolio that is 45% S&P 500 and 80% intermediate term Treasuries. And I will link to that little analysis in the show notes so you can see that comparison. But thank you for that most Excellent observation. You are correct, sir, yes. And next off, we have an email from Chet, and Chet writes, hello, Mr.

Mostly Mary [12:56]

Vasquez. I have been listening to your past episodes in order, and I'm up to number 50 so far. Being an engineer and a finance enthusiast, I really like the way you explain risk parity principles, how to select an investment, and back all of your episodes with data and tools that listeners can use to analyze and create their own portfolios. The sample portfolios provide an excellent starting point to understand the concepts and build from. Thank you for the time and energy you spend to create the podcast. I am in the midst of creating a risk parity portfolio for part of my investments using the Risk Parity Ultimate portfolio as a starting point. I swapped some of the funds equivalent available in my 401k. When using Portfolio Visualizer to analyze the Risk Parity Ultimate or my revised portfolio, I see that the time horizon is constrained to a very short window driven by specific funds in the portfolio that has the shortest life, which makes it difficult to gauge the portfolio's performance over past market downturns. I was wondering if there was a way around that.

Mostly Voices [14:00]

Thanks in advance for your guidance. Well, yes, depending on which funds you put into those analyzers at Portfolio Visualizer, it's obviously only going to give you the data available. Now there's a couple of ways around that and you all should be using these methods to get as much or as long a data set as possible. And the way you would use that is use the closest asset classes or funds that have a longer history. And there are two different calculators on the Portfolio Visualizer site. One is the one where you put in specific stocks and ETFs. Another one which gives you longer time series is where you're just putting in asset classes like small cap value or intermediate treasury bonds. And with that one you can get more data. And so you should look at what you are planning on holding, figuring out, well, is that a large cap growth fund or what is that thing that you're planning on holding and then model it as its own asset class. It's always safest to assume that something within an asset class will perform in the future as an average of that asset class. That's the best kind of modeling to assume because otherwise you are using a crystal ball to say, well, I think these particular groups of stocks are going to perform better. And you may or may not be right, but that is not a good way to model a portfolio. to make sure that you are actually reflecting what is most likely to happen in the future and not just remodeling or recreating the past. Because the best thing for the recent past is unlikely to be the best thing for the future. Danger, Will Robinson, danger. You should also go through the same exercise over at Portfolio Charts because it has an even longer time series, even though it has fewer choices in the asset classes. and just model it as best you can because you are just getting different models of hopefully similar or the same kinds of portfolios and you would want or expect them to all look about the same. Because if you see something that performs much differently in a short time period than it does in a very long time period, you know that that short time period is probably not very reflective of what it's likely to do in the future. All portfolios have periods where they perform better than most other portfolios and then other periods where they perform worse than other portfolios. And the best you can do is capture a time series that has both of those kinds of periods in them. I should note this is also kind of a corollary to one of our three principles, the macro allocation principle. That principle comes from The Book of Jack on Common Sense Investing by Jack Bogle. Chapters 18 and 19 talk about this phenomenon that for diversified portfolios, it is those macro allocation mixes, stocks, bonds, gold, other things that really dictate how the portfolio is going to perform overall over long periods of time and not so much any one individual component which may or may not perform extremely well in a given time period or extremely poorly. So modeling these portfolios by asset class is always a good idea in addition to any modeling you do on specific funds or stocks. And thank you for that email.

Mostly Mary [17:42]

Our next email comes from Jack G. And Jack G. Writes, hi Frank, I continue to enjoy your podcast and I've caught up on pretty much all of the episodes. I've been working on a portfolio where I have a small part of it in leverage funds and the majority of it in a more standard golden butterfly-like allocation. What I'm doing is using UPRO and TMF as part of my stock allocation in a 55/45 ratio. in place of small cap value. I was running back tests and it seems like that kind of portfolio does best with quarterly rebalancing. Meanwhile, the rest of the portfolio in unleveraged ETFs does better with annual rebalancing. My question is, have you heard anybody talk about what I'm calling bracketed rebalancing, where you have one section of your portfolio that you rebalance quarterly and then annually you rebalance that with the remainder of your portfolio? I'd be interested in hearing your thoughts. By the way, I know you're retired, but you might want to consider writing a book about this. I think you'd have a good audience for it, Jack G.

Mostly Uncle Frank [18:50]

A book, you say? I don't think it means what you think it means.

Mostly Voices [18:53]

Well, a book at this point in my life sounds like work. So, I'm unlikely to write a book at this stage of my life. I prefer pontificating on a podcast at this point in time. Bowed to your sensei. Bowed to your sensei. But that might be a good idea at some point in the future. It would be nicer to have a much longer time frame. You can imagine if we let these portfolios run for 10 years and we see all kinds of different economic environments, then we'll have a much better story, a much more interesting story to tell about these portfolios. The other thing I'm kind of wary about is that things are changing a lot in what's available to the do-it-yourself investor. You can't handle the gambling problem. With all of the new ETFs coming online, with all of the calculators that are available now, I almost feel like anything that would be written now could be obsolete in a couple of years. Like a lot of the advice from the 20th century is now obsolete, even though people continue to follow it. Do you have life insurance, Phil? Because if you do, you could always use a little more, right? I mean, who couldn't? But I will put that in my back pocket and sit on it. Now, as to your question about bracketed rebalancing, or rebalancing parts of a portfolio on one time frame or with one set of rules, and other parts of the portfolio on a different time frame or different sets of rules. I don't know that anybody's ever done a study of that. I don't see any reason why it could not work. Rebalancing is a little bit overblown. Most of the studies show that getting too granular about when you rebalance is probably not adding anything to your portfolio. On the other hand, when you look at these levered funds, which have a lot of volatility and tend to move up and down a lot. In simulations, those do just tend to benefit from more rebalancing, whether you do it more on quarters or on bands. And I'm not unaware of anybody that's run a long-term study showing why that is or why that shouldn't be. I do prefer to rebalance those sorts of things on rebalancing bands. as we do in our sample portfolios. We wait until they go a certain percentage off of their targets, look at them once a month, and then rebalance if they've gone beyond the band, if you will. But I don't see any reason why your idea wouldn't work or couldn't work. So you might run with that and see how it turns out. I don't think it will harm you very much, and it could help. I'd be interested to find a calculator that could model this. I'm unaware of any calculators that allow you to do this separately. I suppose if you monitored two separate portfolios with different rebalancing schedules and then combine them, you could come up with some kind of a model, but that sounds really messy. And in any event, it's beyond my meager programming skills, so I will leave it to someone else to come up with something like this. Just be wary of getting too granular and over optimizing any sort of thing. When you start saying, well, I'm going to rebalance this every Tuesday that one of the things drops 5% or more, then you are getting too granular and are probably just over optimizing based on some kind of past anomaly. You need somebody watching your back at all times. But thank you for that email.

Mostly Mary [22:57]

And our next email comes from Jeff and Jeff writes：hi Frank, I have been thoroughly enjoying all of the podcasts. I actually went back and listened to several of the original podcasts detailing specifics about risk parity in your first few episodes. While I understood it the first time, I found that reviewing it a second time was extremely beneficial, as I am now far more comfortable with some of the terms you use and the rationales behind these portfolios. I shall taunt you a second time.

Mostly Voices [23:23]

My question for you is regarding the gold allocation in my

Mostly Mary [23:26]

portfolio. Right now, I do not have any gold at all.

Mostly Uncle Frank [23:30]

I guess you could say so far that I don't love gold. I think you've made your point, Goldfinger. Thank you for the demonstration. Do you expect me to talk? No, Mr.

Mostly Mary [23:42]

Bond, I expect you to be I am about five to seven years away from drawdown potentially and would like to accumulate at least a 10% position in gold. Would you recommend waiting during the accumulation phase and making that 10% purchase all at once? Or would you suggest dollar cost averaging in that amount of gold over the next five to seven years? I have done the averaging in with my long-term treasury bond allocation over the last several years. I was just curious whether you found it more beneficial to make the transition at once or more slowly over time. I realized that I am still technically in the accumulation phase, however, I would feel more comfortable getting my overall portfolio to risk parity style sooner rather than later just to offset any potential market downfalls at a time when I would start taking money out of these portfolios to live on. Thank you so much for all of the great information, as well as the very funny sound clips. Best regards, Jeff. What do you mean funny? Funny how? How am I funny? Funny like I'm a clown? I amuse you? And I'm glad you are amused.

Mostly Voices [24:50]

One thing I know for sure, it's those sound clips that keep my children listening to this podcast. So I've got extra motivation to find something particularly amusing for them to listen to. You're not going to amount to jack squat. You're gonna end up eating a steady diet of government cheese and living in a van down by the river. As to your question, yeah, I think either method is going to be okay. It's not that big of a difference. It may be easier just to build this up by dollar cost averaging into it. I mean, it's not like it's your whole portfolio. It's only a small percentage of it. It's not wrong to do it the other way to just make a shift at one point in time. But generally for most people, because they're balancing taxable and non-taxable accounts, it's much easier to just start contributing to something and build it up than to have to go sell something else and buy it. Because as soon as you sell something, There could be a tax event if it's in a taxable account. Obviously, there's not gonna be one if it's in an IRA or 401k. But oftentimes, just building up a position is the easier way to go ahead with this. So you can take either path and get there just fine.

Mostly Uncle Frank [26:16]

Ain't nothing wrong with that. And thank you for that email.

Mostly Voices [26:20]

Last off. And last off, we have an email from Mark.

Mostly Mary [26:28]

And Mark writes, I'm assuming that 37% long-term treasury bonds equivalent to TLT is roughly calculated by 3 times 10% of TMF and then adding the 10% of the 35% in NTSX 3.5 and multiplying by leverage of three. This gets us to 40.5, however. I realized that NTSX uses intermediate bonds, however, I got thereby those wanting a DIY version of this fund with ETFs can achieve roughly the same exposure with 90% VOO and 10% TMF in the optimized portfolio review of NTSX.

Mostly Voices [27:20]

And I think this is another place where the optimized portfolio site has a slight error in what it thinks this looks like. Wrong! If you look at the bond portion of NTSX, and I had looked at this originally and it looked to me at the time that it was roughly one-third short-term treasuries, one-third intermediate-term treasuries, and one-third long-term treasuries, but I looked at it again recently, and honestly, it looks more like 40% short-term treasury bonds, 40% intermediate-term treasury bonds, and 20% long-term treasury bonds. So you would not compare that to a holding of 10% in TMF, which is like 30% in long-term treasury bonds. So what does this all mean? It means I need to make some corrections as to how this plays in real life. It doesn't modify this portfolio in great detail. But when you break it down, we're talking about the leveraged sample portfolio, the leveraged golden ratio sample portfolio, and that has 35% in NTSX. Now, what is that like in order to convert that into how it performs, at least on the bond side. The first thing you do is you multiply it times 1.5 because it has 1.5 leverage in it. And so it's behaving as if it's a part of a portfolio that is 52.5% of that portfolio. Now 40% of that is bonds. You take the 40% times the 52.5 and what you get is 21. So the bond portion is like 21% in treasuries, and then you can further break that down by the metrics I just said. So if that 21% is comprised of 40% short-term treasuries, 40% intermediate-term treasuries, and 20% long-term treasuries, that comes out to being 8.4% short-term treasuries, 8.4% intermediate-term treasuries, and 4.2% in long-term treasuries. Now when we push that into the levered golden ratio portfolio, just looking at the bonds, how this plays out, because it's got that 10% TMF in there that performs like 30% long-term treasuries. So we have that as 30% long-term treasuries in the portfolio. We add that 4.2 from The discussion I just gave you, so it comes out to be 34.2% long-term treasuries, and then you have another 8.4% in intermediate-term treasuries. Now, when you look at the way intermediate-term treasuries perform in a portfolio, they tend to be about half as volatile and have half the returns of long-term treasuries over time. So if you cut that in half, You end up with something that is acting like it has about 39% long-term treasuries in it. So I guess that means I was wrong again, but not very wrong. And also what is said on that optimized portfolio page about the composition of NTSX is also wrong, but also not wrong in a big way. I will make these adjustments. on the Portfolios page where I clarify what this portfolio is designed to perform like. But thank you for that email because it caused me to go back and make this correction. Now, I swear that the first time I looked at it, it looked like one-third short term, one term intermediate term, one-third long term in the bond holdings for NTSX. But When I looked at it again, it was 40-40-20. So what can I say? Wrong. Wrong. Wrong. Right. Wrong. But thank you for that email. One thing about being a consumer of financial products and not a purveyor of them is I don't mind saying or admitting when I've been wrong. It happens and it's okay. Hopefully I'm not Too wrong and too big of a way most of the time.

Mostly Uncle Frank [31:52]

Fat, drunk, and stupid is no way to go through life, son.

Mostly Voices [31:57]

But now I see our signal is beginning to fade. We are still working on September's emails. I have noticed that sometimes the messages from the website tend to fall through the cracks a little bit. So if you sent me something back in July or August in particular, I haven't gotten through all the ones in September yet and it didn't come up through the feed. Please do send it again and if you want to make sure that I get something, do send it to the email address. That email address to send comments or questions to is frank@riskparityradio.com or you can go to the website www.riskparityradio.com and fill out the contact form and Hopefully I'll get your message that way. I think I'm getting 95% of those messages and not having them disappear on me later. We will be picking up this weekend with some more emails and our weekly portfolio reviews of the seven sample portfolios you can find on the portfolios page at www.riskparityradio.com. If you hadn't had a chance to do it, Please go to your podcast purveyor and like, subscribe, leave me some stars, a review, and that would be greatly appreciated. I'm asking you to do that. But what's easy to do is what? Easy not to do. Thank you once again for tuning in. This is Frank Vasquez with Risk Parity Radio signing off. I'll be doing that one over.

Mostly Mary [33:33]

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.