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.

Mostly Mary [0:18]

A different drummer. 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 127 of Risk Parity Radio. Today on Risk Parity Radio, we are going to see if we can get through some of our email backlog. So we're not over a month behind, but only about two weeks behind. And so we have a lot of emails today. And without further ado... Here I go once again with the email.

Mostly Mary [1:10]

First off, first off we have an email from John, and John writes：hi Frank, I wanted to get your thoughts on this recent comment to Big Earns article, especially the comment that both bonds and gold appear nearly useless if we exclude the 1970s. Does the data support that if we remove the 1970s? I am continuing to move my portfolio toward a risk parity style portfolio, which includes long-term U.S. treasury bonds and gold. My stomach gets tied in knots just reading all the possibilities mentioned here. I guess that's why it's better to stay put with a risk parity style portfolio and not get caught up with all these what if scenarios. Thanks, John G.

Mostly Uncle Frank [1:45]

All right, this refers to the comment section of an article about using gold in a portfolio that we reviewed in episode 40. Now the episode concluded as well as the article that holding 10 to 15% in gold in your portfolio seems to improve its performance over long periods of time. So I'll link to this article and the comment in the show notes, but I'm not going to read the whole thing because it's kind of convoluted and long.

Mostly Voices [2:21]

You can't handle the dogs and cats living together.

Mostly Uncle Frank [2:25]

This does remind me though of a phrase attributed to Mark Twain, like just about every other quote from the 19th century. And what it is and what it says is, it's not what we don't know that hurts us, it's what we think we know for sure that just ain't so. Yes!

Mostly Voices [2:40]

And I do seem to run into this a lot with people

Mostly Uncle Frank [2:44]

that like catastrophe scenarios and like Crystal balls, particularly those who like juggling crystal balls. As you can see, I've got several here.

Mostly Voices [2:56]

I have a calcite ball and I have a black obsidian one here.

Mostly Uncle Frank [3:03]

Oftentimes a lot of these crystal balls are just cracked from the beginning simply because what they believe to be true about the past is just demonstrably false. And this is one of those circumstances where, okay, just taking the comment that you flagged, both bonds and gold appear to be nearly useless if we exclude the 1970s.

Mostly Voices [3:27]

Wrong! That doesn't make any sense at all.

Mostly Uncle Frank [3:31]

Let's just talk about bonds. Bonds had a bad decade in the 1970s. I'm specifically talking about treasury bonds. Oklahoma corporate bonds didn't do much better. But since then, they've been up and down. And what they typically do, like we talked about last in episode 124 and linked to an article, is that there is a flight to safety when the stock market crashes, and that involves people buying lots of treasury bonds and not selling them. And so they tend to go up in those circumstances. And that's well documented over 100 years. Yeah, baby, yeah! Now, as for gold, I love gold. Gold did best in the 1970s, that's for sure, but it also did well in other periods, most recently in the entire period from about the year 2000 to the year to 2010, and then more recently in the past few years, and it tends to have good and bad decades.

Mostly Voices [4:31]

Emotions running high, yes.

Mostly Uncle Frank [4:34]

So, no, the data doesn't support that statement. So, when you're starting from a assumption about something that is supposedly known for certain but is not so, then you have a GIGO problem. GIGO means garbage in, garbage out. If you have bad data and you're sticking into any kind of analysis or thought process, There's no point in the outcome because it's not based on a reality. It's based on a speculation, a wish, a hope, or psychosis, maybe.

Mostly Voices [5:09]

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

Mostly Uncle Frank [5:13]

The first statement I'm looking at in this comment, one of them says, Long duration bonds are at great risk. And stock market was PEs in the 30s based on the There is no alternative rationale could get adjusted. Yeah, that could happen.

Mostly Voices [5:28]

Expect the unexpected.

Mostly Uncle Frank [5:33]

That's a crystal ball saying long duration bonds are a great risk. People have been saying that probably every year since about 1995. So it becomes a meaningless statement after a while. Last year at this time, people were saying, oh, the interest rates are going to go at least up to 2.5% next year. that are 1.5 right now going up and down like they usually do. PEs in the 30s. Well, that is the caped crystal ball that we've criticized in the past.

Mostly Voices [6:10]

A really big one here, which is huge because it tends to rely on

Mostly Uncle Frank [6:14]

the assumption that price to earnings ratios are some kind of a stable mean reverting thing that has an invisible hand that pushes stock prices down or up based on this assumed mean reverting quality. It's kind of looking at the aura around the ball.

Mostly Voices [6:33]

See the movement of energy around the outside of the ball.

Mostly Uncle Frank [6:37]

And history has shown that has not worked. That's not how it works. It just hasn't worked. That's not how any of this works.

Mostly Voices [6:44]

Since people have been predicting that stock prices are going

Mostly Uncle Frank [6:48]

to go down because of the PE ratio, They have not done that. Forget about it. And so we can confidently say that whatever that theory is, it does not work in any useful timeframe. At least it hasn't worked in the past 15 years. So why don't we forget about that as well?

Mostly Voices [7:06]

Forget about it.

Mostly Uncle Frank [7:10]

And if you want to hear more ranting about that, go back to episode 70 where we discuss it in more detail.

Mostly Voices [7:17]

Human sacrifice, dogs and cats living together, mass hysteria.

Mostly Uncle Frank [7:23]

All right, the next bit of this comment I'll read to you, it says, Meanwhile, the 10-year Treasury yield on October 12, 2021 hit the exact same 1.59% level it was at on June 2nd. The top before gold fell 7.9%. Now fossil fuels are the trendy place to be. This is a reminder that gold isn't correlated or uncorrelated with anything except by accident. Wrong! Okay, that is also one of these statements that is based on ignorance or not understanding what things mean. There's no need to fear, underdog is here. Bow to your sensei. To say something is correlated means it has a positive correlation number. Uncorrelated means it's close to zero, and negative correlation means there's a negative number there. Gold is in fact uncorrelated because its correlation number is close to zero with stocks and bonds. That is the definition of uncorrelated. And yes, of course, if two things are uncorrelated, they would only seem to move in the same direction or in opposite directions by accident because that's the definition of uncorrelated.

Mostly Voices [8:35]

That was weird, wild stuff. I did not know that.

Mostly Uncle Frank [8:39]

So here's the more evidence this person has a cognitive issue with understanding how these terms work and what has happened in the past. You can't handle the truth. All right, the next comment that comes out of the comments is, in his opinion, the high inflation scenario of the 1970s is off the table due to the Fed's balance sheet and the broad license has been granted to swing it around. Similarly, these price Precisely zero chance that we'll get off the gold standard or go back on in the next five to six years. So I take the late 1960s, early 1970s to be out of the failure rate analysis. Well, that's fine. You can do that. I would like it if it was out of the failure rate analysis because if it is, then it would imply that our safe withdrawal rates are all too low because that is the period of the most failure. Now, what did well in that period was gold, but that doesn't mean that gold doesn't do well in other periods as we've just discussed. discussed. Gold has done well in periods like 2000-2010. It's doing well now. It is uncorrelated with stocks and bonds. You keep using the word. Next comment here. The commenter says, I do think there's a risk of an acid bubble popping and causing a demand side recession like 2000 or 2008. And stocks, bonds, housing, derivatives, commodities or crypto. Okay, well, what did well in the periods like 2000 and 2008? Bonds did exceptionally well because bonds move opposite to stocks. You don't see stock market crashes and bond market crashes at the exact same time. That is not an historical fact. That's not how it works. At least not with treasury bonds. You would see them with corporate bonds. But if you don't know the difference, then you have another problem. Gold also did well in that period until about 2011. He also says, I do think there's a risk of a flash crash like 1987. Well, we also had kind of a flash crash in the year 2020. It was of similar length. The causes were different, but you saw a lot of the same sorts of things with bond values spiking at the same time and it not being a big deal overall if you just simply held on to your portfolio and managed it properly, you didn't really have a problem with either of those circumstances. It's the people that panicked that had the problem. And then he concludes both bonds and gold appear nearly useless if we exclude the 1970s inflation episode and narrow our concerns to these possibilities. And what is that? Wrong! Yes, it's just wrong. Wrong! Wrong?

Mostly Voices [11:29]

Wrong, right?

Mostly Uncle Frank [11:33]

Wrong! Because if you've got the data wrong, you've got the ideas wrong, you've got everything wrong.

Mostly Voices [11:40]

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

Mostly Uncle Frank [11:43]

So if you do want to be a prognosticator in such things, the first thing you need to do is go and do some research so you understand which Kinds of assets do well in which kinds of environments? The basic four environments are rising inflation with rising growth, falling inflation with rising growth, rising inflation with falling growth, or you can have them both falling at the same time. If you know what assets do well in all four of those quadrants and you can construct them, you'll have a risk parity style portfolio. If you don't know what those are, then you may be flailing around coming up with spurious theories and catastrophizing while you're trying to juggle your crystal balls. Hello.

Mostly Voices [12:31]

Hello, anybody home? Think McFly, think.

Mostly Uncle Frank [12:35]

But thank you for that email, John, because we are as individual investors plagued by this kind of spurious information being thrown at us. as dramatic storytelling. Whether it's on a comment, on a blog like that, or on YouTube channel, or in the financial media, you see it here, there, and everywhere. Danger, Will Robinson. Danger.

Mostly Voices [12:58]

But it kind of falls apart when you do any critical

Mostly Uncle Frank [13:02]

analysis of it. Bow to your sensei. So stay the course and you won't have these troubles. Bow to your sensei. And also in the breaking crystal ball line of thinking or observations, I also read an article from MarketWatch the last couple of days talking about more pain likely for hedge funds as leveraged investors unwind wrong way bond market bets traders say. And it's a story about a bunch of speculators trying to speculate on interest rates going higher and then The Bank of England did something and some other central banks did something and all of a sudden everything's turned upside down and interest rates are going down. And so it says, meanwhile, so-called real money players like asset managers and life insurers are continuing to scoop up treasuries. That demand coupled with hedge funds short covering and a reduced supply of treasuries going forward is leading to higher bond prices and falling yields. Well, that's fine. This isn't one of these in the mirror sorts of things, but you can see How trying to use crystal balls to forecast future interest rates is really a bad idea and that even the professionals can't do it and often get themselves into a lot of trouble trying to do that. Forget about it.

Mostly Voices [14:28]

All right, let's go to the next email. Second off. Second off, we have an email from Gary.

Mostly Uncle Frank [14:34]

Gary. Oh, Gary. And Gary writes：hi Frank, Gary here again.

Mostly Mary [14:43]

I hope you had a great vacation and that I could add to your future content questions. Like what's your take on adding alternatives to a portfolio and how one might evaluate the correlation and possible impact? Thoughts on this? Or even some yield street type positions? Regards, Gary.

Mostly Uncle Frank [15:03]

All right, I will link to these links in the show notes. What these are and you should be aware of this that The investing world has changed a little bit, opening up more sort of quasi hedge fund opportunities to more investors and they're being able to advertise these things. And what these two things are, are essentially hedge funds that are out there trying to get investors basically. And one of them's got the standard 2 and 20, 2% plus 20% of the profits kind of thing. They both are talking about investing through their own skills in a variety of alternative investments that include real estate, art, commodities, other things. Now, while these are interesting, there is really no good way of analyzing these or figuring out how they're going to play in their portfolio. So the main difficulty I see with these is that they are based on the manager's skill to choose assets in some combination and then create something in your portfolio. But there's really no way of analyzing how this particular fund or that particular fund is going to match up with the other allocations in your portfolio because it's not a investment in one thing. So unless you were to know how the breakdown will be and that that breakdown of those things is going to be relatively constant, there's no real way of knowing how to fit this in other than taking a flyer on it and saying, all right, well I'll just put 5% of my portfolio in this. If it's that small of a thing, then yeah, you can go right ahead, but you're not going to know the outcome in terms of both returns and in terms of correlation, which is the important thing with the rest of your portfolio, until you've been holding this for a number of years and then it could change. So this is one of those things that it looks nice in theory or in a vacuum or as a potential investment, but as a practical matter of portfolio construction, it's very difficult to construct a portfolio out of things when you don't really know how they relate or will relate in the future to the other things in your portfolio. This is why we like to invest in ETFs that are of defined asset classes. So we know exactly what we're getting and that's all we're getting and we're not getting something else and there are no surprises there. As a practical matter, that is a very useful tool to construct a portfolio, whereas these kind of shifting composite investments are not as useful. But if anyone wants to check these out, they can do so through the show notes. I don't have any real objection to them in particular. They are interesting because they do show us that there is a demand for alternative Investments like there always have been in my view, that demand should be filled for a do-it-yourself investor by individual ETFs that represent those categories and not some kind of alternative bucket that is more difficult to manage. But thank you for that email. And now our next email comes from Chuck and Chuck writes.

Mostly Mary [18:42]

Hello, Frank, I noticed that you frequently use ETFs like SPY, TLT, IEF and GLD on Portfolio Visualizer, but they only go back to the mid to early 2000s. I've recently discovered that there are Vanguard mutual funds that can be used to go back to the 90s. Also, the Karat Gold keyword can be used to get the gold data. They are nice because they give you a view into how the portfolio would have performed through the tech bubble. N-A-E-S-X for small cap. VFINX for intermediate term treasuries, VUSTX for long-term treasuries, VFINX for S&P 500, and Karat Gold for gold. There are also a bunch of Fidelity sector funds. They are active, but they more or less track their sectors. Most go back through the 80s. VSUTX Utilities, VSRBX banks, FIDSX financial services, FRESX REITs, FSPHX healthcare, FIREX international REIT, FSDPX materials, FCYIX industrials, FSENX energy, FDFAx, consumer staples, FSCPX, consumer discretionary, FSPTX, tech. Anyway, thanks for the show and all of the information you share, Chuck.

Mostly Uncle Frank [20:15]

Well, thank you for this email. I'm glad you've been playing with those analyzers there at Portfolio Visualizer. Yes, this is one way to get around the fact that some of your funds may not be that old. that if you can find a fund that invests in the same asset class that goes back further in time, you're gonna have more data to work with and a more robust analysis. But the other way to really get around that entirely is to use the alternative calculator there. There's one calculator there that will allow you to put in individual stocks or funds like the one you've been talking about here, but the other calculator there is just asset classes by themselves. So you can put in small cap value or long-term treasury bonds or gold or REITs, and you will get data there. Some of it only goes back to the 1990s, but a lot of it does go back to the 80s or the 1970s. And so even if you do your calculation on the other one where you put in specific funds, you always also want to go over to the asset allocation based calculator and run your portfolio in that as close as you can get. Obviously, you can't get exact if you don't have the exact funds. But you want to do that and you want to do the same sorts of analysis at portfolio charts because the more kinds of analysis you have that match up, whether they're short term or long term in terms of overall performance, the more confidence you can have in the shorter term analysis. Cool. But those were very good finds and I will include them in the show notes.

Mostly Voices [21:55]

These go out to 11. And thank you for that email.

Mostly Uncle Frank [21:59]

And our next email comes from PJ and PJ writes, Dear Frank, what happened to the podcast? Is this a break in new episodes?

Mostly Mary [22:08]

A small fluke? Or are you done with Risk Parity Radio? Sad face.

Mostly Uncle Frank [22:15]

Well, and here's another quote attributed to Mark Twain. Rumors of my death have been greatly exaggerated. Yes, cat, now I shall be ruler of the world. So yes, from time to time you will have breaks in the episodes here. And the reason for that is this podcast is not a full-time job for me or something that I'm running as a business. It is more or less a glorified hobby and part of my retirement. Now the other parts of my retirement require me or allow me to go off and do other things, in which case the podcast has to take a back seat for some period of time. But rest assured I do like talking into a microphone, have a lot of things to say and hope somebody will listen to them. as is the predilections of men in their 50s. But thank you for looking after me and thank you for the email. I should also say I'm very gratified by all the listeners that we have. We went over 150,000 downloads in October and we have over a thousand regular listeners to this podcast and It is very gratifying that somebody does want to listen to me. At least when Mary gets tired of me babbling on. No one can stop me. And our next email is from Dave, and Dave writes.

Mostly Mary [23:48]

If there's an email distribution, please add me. Thanks, Dave.

Mostly Uncle Frank [23:52]

Well, I suppose this kind of goes with the answer to the last email. I do not have an email distribution at this time. do not intend to create one or create emails that I send out regularly simply because that involves a lot of writing that seems to be work to me and which I do not wish to do at this stage of my life.

Mostly Voices [24:16]

Forget about it.

Mostly Uncle Frank [24:19]

If I do ever come up with such a thing, then I will send it out and add you to that distribution list. Yes. There are a lot of materials on the website www.riskparadigmradio.com, at least a lot for me. I again want to keep that website relatively simple about the podcasts and the sample portfolios and do not intend to expand it greatly. But you never know what might catch my fancy in the future.

Mostly Voices [24:49]

I want money and power and money and power and money and power. Thank you for that email. And now our last email of the day. Last off.

Mostly Uncle Frank [25:04]

And our last email of the day comes from Brandon. And Brandon writes.

Mostly Mary [25:09]

Hi, Frank, on your podcast, you stated Roth 401ks have the same RMD required minimum distribution requirements as traditional 401ks. I was not aware of this. Whoa. I did not know that. Do the same RMD rules apply if a Roth 401K has been transferred to a Roth IRA outside of an employer-sponsored plan? When I left my employer, I transferred a Roth 401K to Vanguard and it was placed in my Roth IRA account, indistinguishable from my other monies within the Roth. There is no breakdown that I can see at Vanguard as to what money is from a Roth 401K or from my Roth IRA contributions now that they are merged together in my Roth IRA account. How does Vanguard know what portion has required RMDs out of my Roth IRA? Thanks for all that you do, Brandon.

Mostly Uncle Frank [26:02]

Okay, Brandon, you'll be relieved to know that once you transfer that money out of a Roth 401k and put it into a Roth IRA, you no longer have to be worried about any potential required minimum distributions. It's just a Roth IRA that conforms to the regular Roth IRA rules. There's a five-year rule you should look up, but you shouldn't be worried anymore about RMDs there. That's why I recently transferred part of my Roth 401K or part of my 401K, I should say, because it had both Roth and traditional in it. I moved the Roth to an IRA, a Roth IRA, I left the traditional where it was because I qualify for what is known as the rule of 55. So if I did want to access that money in the 401k in the traditional account, I can do that without penalty after age 55. But if I were to move that part into an IRA, a traditional IRA, then I would lose the ability to use the rule of 55. These rules are all very Byzantine, but they're not that complicated. I do recommend looking them up. They're widely available if you search for rules on IRAs and 401 s. And ultimately it's not that difficult to deal with. It's just a minor annoyance. I should say also I have no idea how Vanguard keeps its records since I don't have an account there. And Vanguard will have to speak for Vanguard. But thank you very much for that email. But now I see our signal is beginning to fade. You'll probably not be hearing from me this weekend. Or Mary. It's gone. It's all gone. We will be at the Economy Conference in Cincinnati. There will be a breakout session with the two of us. talking about asset allocations and withdrawal strategies in retirement. So if you're going there, you can sign up for that and you'll see me in the flesh.

Mostly Voices [28:12]

Everyone should do as Simon says.

Mostly Uncle Frank [28:19]

But we will be picking up next week and hopefully we'll finish our emails for October by then. If you have comments or questions for me, please send them to frank@riskparityradio.com that email is Frank@riskparityradio.com or you can go to the website www.riskparityradio.com, put in the message in the contact form there and hopefully I'll get it that way. If you haven't had a chance to do it, please go like, subscribe, review this podcast wherever you get your podcasts. That would be great. Okay. Thank you once again for tuning in. This is Frank Vasquez with Risk Parity Radio. Signing off.

Mostly Voices [29:04]

No one can stop me.

Mostly Mary [29:08]

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.