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 [0:36]

Thank you, Mary, and welcome to episode 130 of Risk Parity Radio. Today on Risk Parity Radio, we are going to finish off our emails from October. We're only a few weeks behind. And then we'll be doing something extremely fun. At least extremely fun for me and I hope you enjoy it too.

Mostly Voices [1:00]

But without further ado... Here I go once again with the email.

Mostly Uncle Frank [1:08]

And first off, first off we have an email from Stephen. And Stephen writes... Good evening Frank, I hope you are well.

Mostly Mary [1:16]

If the general strategy within the financial independence movement is say 100% stocks until you reach or get close to your FIRE number, and once there, they always say, just add total bond market. How do you decide how much to add in terms of, say, gold and long-term bonds? My personal thought was moving to 20% long-term bonds, 10% gold, and the rest 70% in global equities. Does this seem okay or am I missing something? The alternative for me is in the UK, they allow 25% tax-free. I could put that in some short-term bond savings account, move from global equities to the UK FTSE 100, 100 Index by 25% Gold and 25% Long-Term Bonds, you will have recognized the permanent portfolio. Sorry, really questions I should have asked in our interview. Thanks again, Steven. Hey, Steve.

Mostly Uncle Frank [2:16]

All right, just to put this in context, Steven is a young man, at least young by my standards. who lives in Scotland and has a small podcast that I appeared on earlier this year, and I will link to that in the show notes again. But as to your question, yeah, I think that kind of portfolio you're suggesting 70% in global equities, 20% in long bonds, and 10% in gold may work pretty well. Yes. How we decide how much to put in these portfolios, It's generally done on experience and back testing. What we've learned in particular about gold, if you go back to episodes 12 and 40, is that the ideal proportions in most portfolios seems to be about 10 to 15%. And in terms of long-term bonds, I see the proportions needing to be somewhere around 20 or 25% in most portfolios. as far as the global equities are concerned, just make sure they're not all large caps that you have some small cap or small cap value and perhaps put some REITs in there. What I would suggest you do though is go to portfolio charts, the My Portfolio page, and you can put in first your country because it has multiple countries in there. And after you put in your country, then you can put in various portfolio constructions that you might be considering, and it will show you how that performed since 1970 and give you an idea and tell you what the historical safe withdrawal rate has been for a particular portfolio. Another nice feature of that is it will also identify the funds that you may be interested in using because they are the lowest cost ones that are available for particular asset classes. And it does it by country. So it's going to give you those long letters and numbers codes that people use in Europe to identify funds with. And so that will give you a ability to not only pick a portfolio, but actually identify specific funds that you may have access to and can use for your portfolio. Groovy baby! I think the initial portfolio you've suggested is likely to be better than the permanent portfolio. That permanent portfolio was constructed a long time ago and was not very well proportioned in terms of the volatility of its components. It was just a guess at the time when it was constructed back around 1980. So something between that and the first one you suggested may be what you are looking for if you are looking for a drawdown portfolio. If you are still in your accumulation phase, you may wish to be more aggressive on the equities and go up to 100% in equities. These go to 11. Depending on where you are in terms of your accumulation and your ultimate goals.

Mostly Voices [5:27]

There can be only one.

Mostly Uncle Frank [5:30]

But thank you for that email. Second off.

Mostly Mary [5:33]

Second off, we have an email from James and James writes. Evening Frank, long time listener, first time emailer. Listening to episode 123, a listener found that a UPRO/ TMF strategy did best with quarterly rebalancing. I am fairly confident this is due to the fact that rebalancing quarterly has you buying lots of UPRO right around the March 2020 stock market bottom and selling your TMF near highs. Personally, I use a semi-discretionary approach to rebalancing this portion of my portfolio. I have a baseline allocation, 60% UPRO, 40% TMF, but I give myself discretion to rebalance when I feel like I need to, mostly staying between 37.5 to 45% TMF. For example, TMF is currently above 40% of the portfolio, but since long-term treasuries had a huge move up today, 10/27/21, I'm going to wait to rebalance until either momentum slows down or TLT gets back up around 151. Keep up the good work. Your podcast is fantastic, James.

Mostly Uncle Frank [6:42]

Well, that is an interesting observation, James, and that does make a lot of sense that picking quarterly rebalancing just had the happenstance of choosing that exact bottom or close to the exact bottom in March 2020, if you are using a portfolio that is UPRO and TMF. For those who don't know what we're talking about here, he's got a experimental portfolio that is two leveraged funds, three times leveraged funds. So it's a very aggressive thing he's fooling around with there. It's 60% UPRO and 40% TMF. That's a leveraged S&P 500 fund and a leveraged long-term bond fund. Now, normally rebalancing a normal portfolio, you don't want to do it too often. You do it once a year or on some rebalancing bands that are about 20% is usually the optimal thing to do. With these experimental portfolios, it does seem that more frequent rebalancing makes more sense. I would tend to use some kind of a band structure, but there is no definitive research as to what is the optimal way to rebalance these sorts of portfolios. So what you're doing there seems to be interesting to me. I'm wondering how it will turn out. If you do that for a few years, you'll get an idea of it. I don't have any particular knowledge as to one way or another whether it will be better or worse than some other strategy. If you look at our experimental portfolios, we did choose a relatively Simple strategy for rebalancing them on bands and you can take a look at that. I believe we're using 7.5% as our metric for the accelerated to permanent portfolio and aggressive 50/50, which are our experimental portfolios. But I'm always interested to see what people are doing with these things because they are relatively new and could be very useful. You have a gambling problem. Although I do have to caution, they are a little bit dangerous and have not been around that long.

Mostly Voices [8:53]

Well, you have a gambling problem. So be careful out there. You could ask yourself a question.

Mostly Uncle Frank [9:01]

Do I feel lucky? And thank you for that email. And our next email comes from Randy.

Mostly Mary [9:13]

And Randy writes, Hi Frank, stumbled upon your podcast, notice you cover Golden Butterfly Permanent Portfolio, All Weather, and many more. I am a strategy creator. All my info is over at www.duamomentumsystems.com. I am attaching a spreadsheet comparing my most conservative strategy, Triad, and comparing it to Golden Butterfly Permanent Portfolio and the S&P 500. I think you will appreciate the strategy results and metrics. Unlike a static rebalanced allocation, my strategy uses some gears and levers to move in and out of IWB up to 33%, IWS up to 33%, and SGOL up to 17%. Any funds not in those allocations are invested in the best performer of VGIT, VCSH, or VGSH. Triad was created because I don't believe a 60/40 strategy is viable going forward. I think this is a better way to go for the conservative investor who doesn't mind possible investment changes at the end of the month. Cheers.

Mostly Uncle Frank [10:19]

Well, I took a look at your spreadsheet and the website. And this does look interesting. It's probably not something I would do, but you can't argue with the back tests, which show it performing very well over the period that you've tested it. I can see that at one point you had one-third gold going in and out of this thing. Just to clarify for the listeners, what this system requires is looking at some metrics every month and then jumping in and out of these funds that have been selected. Real wrath of God type stuff. There are always a couple issues with these types of systems. The first one is taxes, because if you tried to do this in a taxable account, it would generate substantial taxable gains and some of them would be short-term gains. So it probably would not be advisable to do it in a taxable account, at least not with a lot of money involved. The second thing I noticed is that you have not been able to test this back in the 1970s and that is in fact going to be probably the worst period for it. So if you can figure out a way to do that, I would do that. I do notice that you've changed this system a little bit in the past month or two and gone from having 1/3 in gold or up to 33% and substituted 1/6 in gold or up to 17%. That actually makes more sense to me. But again, if you run this back in the 1970s, you're gonna be better off having something with more gold. in it, then not less gold. That's gold, Jerry, gold. The other two issues with this are a little bit more esoteric, one is statistical and one is psychological. The statistical issue has to do with something called the bias variance dilemma, which says that the more rules or variables you have on a system based on past data, the less likely it is going to perform as well in the future. it gets to the issue of overfitting to past data. And the more rules you have, the more likely it is that it's not going to work in the future. I will link to a prior episode where we discussed that in more detail, but that is a statistical truth, if you will, that you always need to be aware of when constructing these kinds of systems. And then the other issue is going to be psychology. It probably will be difficult for somebody psychologically to be buying and selling something like this. And so it does tend to violate our simplicity principle. But if it works for you, I can't say that you should not try it or not do it. It's just any kind of strategy that involves buying and selling is going to have those two esoteric issues attached to it. Well, you have a gambling problem. but I will be interested to see how it performs in the future. I would suggest that you actually set up real live portfolios to do these experiments. You can do them all at Fidelity like I've done because actually doing it with the actual transactions is different than tracking it on some paper trading kind of thing. And since we have no fee trading and you can buy as little as a dollar worth of any of these things, you can literally test this system out with just a couple hundred bucks basically. And I would encourage you to do that so you can test drive it before putting substantial money into it. Stand it's gone. But thank you for that email. Last off. Last off we have an email from David and David writes.

Mostly Mary [14:09]

Frank, wonderful podcast. Thank you for your continuing and unique investigation of the investment universe. I am now listening to episode 123 and wondering if it might not make sense to publish your results in a white paper. Quite impressive. Also, possible future rants based on performance of Robinhood IPO and new futures-based Bitcoin ETF may be interesting. Thank you.

Mostly Uncle Frank [14:36]

A white paper, he says. Well, David, you need to realize something. I am retired and so I'm not likely to do something that sounds like work to me. And these days writing a white paper does sound like work to me. Maybe sometime in the future I would want to do something different or write about this. I think it's going to be a lot more interesting to write about if we keep doing it for a few years and see the results of these portfolios as they unfold. Because that's the most interesting thing about what we're doing here is having real time Portfolio so people can see what's going on with them and how they actually do as opposed to do in theory. It's top drawer, really top drawer. As to your other suggestions, yeah, that might be something to rant about. I could do a whole rant on just Robinhood because it seems like it's bad for its consumers every time you look at it. Forget about it. So come for the platform breakdowns and stay for the investigations. As for IPOs, just a general thought about IPOs. The purpose of an IPO is not to give people access to the shares of the thing. The purpose of the IPO is so that people that hold it privately can cash out and make a bunch of money from their IPO. So it'll almost never make sense to get excited or buy into an IPO because you you are essentially the sucker at the table. Robinhood's a good example of that. It's now below its IPO price after, you know, peaking at some early point and seems to keep going down. But that's a common experience that people do have with IPOs. It's actually more common than having somebody issue an IPO, people buy in right away and see it go up. You're much better waiting off until the thing's been around for a while and then you can assess it just by its own merits and not with respect to whether there's an IPO and whether there are private people selling a bunch of shares in the market. And as for that Bitcoin ETF based on futures, which is ticker symbol BITO, J. David Stein did do a nice little podcast about that. He frequently does excellent podcasts about various kinds of investments and the risks that are inherent with using futures contracts in something like that because of the need to roll the contracts over that causes an automatic decay as opposed to another fund that may just be holding the Bitcoin without dealing with the futures contracts. And I will link to that in the show notes. But thank you for that email. And that concludes our emails for October. And now, Now we are going to do something extremely fun. And the first fun thing we're going to talk about here is our NFT experiment. These are the NFTs you could find on the support page of the Risk Parity Radio logo. They are on sale at OpenSea for about the equivalent of $21 in Ethereum and all of that Money is going to a charity, the Father McKenna Center, that we support here at Risk Parity Radio. We use the Buddy system. I did receive word that our listener Andy was the first one to buy one over on the Polygon network. Another one has been sold in the past week to a nice gentleman named Mike Damaso, who is poking around talking about NFTs in the Choose FI Facebook group. And so he went over there and bought one. He also did give me a link to this Polygon Network because that's how you have to buy them. You have to move your Ethereum to the Polygon Network and there's something called a bridge for the way you do that. I will link to that in the show notes if anyone else is interested, but it is kind of a fun thing to fool around with. What do you mean funny? Funny how? How am I funny? I can't say I understand why we have multiple networks that we need to use for these sorts of things, but maybe I'll dig into that sometime and learn exactly how all of that works. That would be great. Okay. Which leads me to my plea. As you know, this podcast does not have any sponsors, is not beholden to anybody in the financial services industry or anyone else, but we do have a charity that is associated with this, it is the Father McKenna Center. I sit on the board. The Father McKenna Center is a small charity in Washington, D.C. that operates out of the church next to Gonzaga College High School on North Capitol Street, and it serves homeless men and hungry people through programs and a food pantry there. I'm bringing this up today because next Tuesday is Giving Tuesday, and if you are in the mind to share some of your wealth and you haven't thought about where you might share it, I would invite you to share some with the Father McKenna Center, which you can do through the support page for the podcast or go to the Father McKenna website itself. If you are in the DC area, I would also like to invite you to a program that we're going to have there on December 9th at 7 o'clock in the evening, It is called Lessons and Carols. Now what is Lessons and Carols? I'll just read you the description. Since 2018, the Father McKenna Center has been hosting Lessons and Carols. As a tradition, its popularity dates back to 1918 when it was introduced to King's Chapel, Cambridge, United Kingdom on Christmas Eve to offer solace to people who were distressed, exhausted, injured, and in many cases, bereaved at the end of the first world war. It consists of nine readings, the lessons and nine carols, and it will be featuring a gospel choir and the chamber choir from the high school where our children attended. It's interesting to note that people in that era were also dealing with the fallout from a pandemic in addition to the first world war. But that is probably enough fun for another episode.

Mostly Voices [21:06]

Shirley, you can't be serious. I am serious. And don't call me Shirley.

Mostly Uncle Frank [21:14]

And now I see our signal is beginning to fade. It is the day before Thanksgiving, so I hope you all have happy Thanksgivings. And enjoy a few days off if you are not already retired. We will be picking up this weekend probably with a few more emails from November. and a review of our seven sample portfolios that you can find at www.riskparityradio.com on the portfolios page. 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 and fill out the contact form and I should get your message that way. If you haven't had a chance to do it, please go to your podcast provider and like, subscribe, give me some stars and a review. Thank you once again for tuning in. This is Frank Vasquez with Risk Parity Radio. Signing off.

Mostly Voices [22:16]

Perry, Mary, why you buggin'? The Risk Parity Radio show is hosted by Frank Vasquez.

Mostly Mary [22:24]

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.