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 Risk Parity Radio. If you are new here and wonder what we are talking about, you may wish to go back and listen to some of the first episodes where we did our introductions of the various topics. And those episodes are episode one, 3, 5, 7, and 9. And so if you go back and listen to those, it will get you up to speed. But now on to episode 142 of Risk Parity Radio. Today on Risk Parity Radio, it's time for our weekly portfolio reviews of the seven sample portfolios that you can find at www.riskparityradio.com on the portfolios page. And just to give you a preview of that...

Mostly Voices [1:23]

Fire and brimstone coming down from the skies. Rivers and seas boiling. 40 years of darkness, earthquakes, volcanoes, the dead rising from the grave. Human sacrifice, dogs and cats living together, mass hysteria. But first... I'm intrigued by these, how you say, emails.

Mostly Uncle Frank [1:42]

And in that vein... First off, we have an email from Dan. Now Dan goes to the front of the list because he became a patron on Patreon this week.

Mostly Voices [1:59]

We few, we happy few, we band of brothers.

Mostly Uncle Frank [2:02]

Which you can do over at the support page and all of that money goes to the Father McKenna Center, our designated charity for this podcast. But if you do that, your email will go to the front of the line with the exception of Alexei who had his own show last time. I'm the Alexei.

Mostly Voices [2:22]

So that's what you call me, you know, that or his dudeness or duder or, you know, Bruce Dickinson, if you're not into the whole brevity thing.

Mostly Uncle Frank [2:33]

And we'll stay in the queue with the rest of the people now. I should also say I wanted to thank Alexei because he made a direct donation, a large donation to the Father McKenna Center, which you can also do. And I would be very happy if you did it that way because then you can Get the tax deduction form and all of that good stuff, but you can do that directly at the Father McKenna site on the donate page, which I will link to in the show notes. But getting back to Dan's email, Dan writes. Aloha.

Mostly Mary [3:03]

I discovered your podcast a few months ago just as I was retiring, and it's been invaluable in figuring out how to adjust my portfolio for de-accommodation. I wish I'd discovered it earlier. If Alexei is finally out of questions, I had something I wanted your thoughts on. And I finally became a Patreon supporter. Yeah, baby, yeah! Have you seen the book Risk Parity by Alex Shahidi that just came out? I picked it up for obvious reasons. I found it very interesting. He goes over risk parity investing, analyzes how several different asset classes behave in various market conditions, and then puts together a portfolio. I wish it had more information on how to do the analysis yourself, like you provide in your podcast. but it had lots of valuable information nonetheless. I was curious of your thoughts on a few areas, which I don't think you can answer without reading the book. One, tips is one of the four asset classes he uses as something that will do well with increasing inflation and decreasing growth. He talks about it as one asset class that most clearly does well in increasing inflation. You just mentioned in your last episode and others like number 78 that you aren't a fan of tips. He seems to show pretty compelling data using long-term tips, but obviously can't go back that far in time. It makes me want to consider some LPTZ or similar in my portfolio, but using Portfolio Visualizer, I'm actually having trouble improving my portfolio with it. He also talks about leveraging tips, but he does so by just having more of it in his portfolio, which seems like it's just going to reduce the overall returns volatility of his portfolio. For commodities, he compares commodity futures to commodity producing equities. He sees that commodity producing equities that don't have quite the qualities he wants, but if he mixes them 60-40 with gold that they do and have better returns, volatility and tax efficiency compared to futures. What do you think? He doesn't give an example ETF or more info on how to actually invest in commodity producing equities. Any thoughts on opportunities there? There's a lot of other interesting stuff in the book, and I'm curious what you think. Thanks, Dan.

Mostly Uncle Frank [5:15]

All right, Dan, let's first talk about tips, because they are the bane of risk parity existence.

Mostly Voices [5:27]

Oh, Hayek, now enters his holiness, Takemata. Do not employ him for compassion. Do not beg him for forgiveness. Do not ask him for mercy.

Mostly Uncle Frank [5:38]

And I say that because in theory, they have such promise in practice, they just don't do a whole lot. So in theory, you are buying something that hopefully would perform really well in an inflationary environment. And by really well, I mean 10-20% return, something that is at least comparable, if not much better than a stock market would perform because you have alternatives that you can use in inflationary environments. So last year, 2021 should have been a blowout year for TIPS, a blowout year for TIPS.

Mostly Voices [6:12]

The best, Jerry, the best.

Mostly Uncle Frank [6:16]

They should have been, if they were useful to you, should have been getting 10%, 20%, something like you would get out of long-term treasury bonds in a deflationary environment, the opposite of that. So what did you get if you invested in TIPS in 2021? Now, mind you, this is the best year since 1982 to hold these things. The best Jerry, the best. The best year in the last 40. The best Jerry, the best. 40 years. So how did TIPS perform? What is their best performance in 40 years of theory? Well, the headline fund TIP returned 5.67%. 5.67%. I'm sorry, that's just not good enough. That's garbage. If you are putting lots of things in your portfolio that are only yielding 5.67% in their best theoretical year, Your portfolio is just not going to perform very well. It's going to be dragged down by that holding. Okay, well, what about the long-term TIPS fund you were talking about, LTPZ? Surely, as a long-term bond fund, it should have had a much better performance, maybe 10, 15, 20% in the best year in 40 years. The best, Jerry, the best. What did it return? Last year, it returned 7%. Seven percent. That's not going to cut it either. Forget about it. It's just not. Forget about it. So until there are tips that actually perform really well during an inflationary environment, there's no practical use for them in these portfolios unless you are constructing a portfolio that has a target return of something like five or six percent nominal. I don't know anybody who wants a portfolio like that. It'd be extremely, extremely conservative. I suppose there might be some use for it. It would be more conservative than our most conservative portfolio, the all seasons portfolio. So if you want that kind of portfolio, yeah, you can use some tips in there. But if you want a portfolio that's going to perform like a 60-40 or a 50-50 or something like that, you're not going to get anything out of tips. You're just not. You can't handle the truth. So what? Could you or should you be using instead of that? Well, what did we use last year in the All Seasons portfolio to deal with an inflationary environment? We used a commodities fund. The commodities fund we used there was PBDC. It's a popular fund. There are other ones out there. What did PBDC return last year? 41.86%. 41.86%. That means that in order for TIPS to perform as well as that, you would have to have 7.4 times as many tips in your portfolio as PDBC. So that portfolio has 7.5% of this commodities fund in it. If you wanted to have tips in there instead and have them perform the same, it would have to be 50% tips. That portfolio would have to be 50% tips. The truth is it is very easy to find lots of things that do well in inflationary environments. Commodities funds, small cap value funds, REITs, there's a lot of stuff out there you can choose from. REITs were up over 30% last year. So by using TIPS, all you're doing is solving a problem you already have solutions for with something that doesn't work as well. That's not an improvement. And what the result of that is going to be is a portfolio that just does not perform very well. And this is what happened to a couple of the professional portfolios out there we're going to be talking about a little bit later here. They did not perform very well because they had a lot of short-term stuff and a lot of tips in there and it didn't work. And it hasn't worked and the probability of working in the future is pretty darn small. Slim and none and slim just died. Forget about it. Now as for the book, I have not read it yet. I probably will at some point. From your description of it, and I shouldn't say anything because I haven't read it yet, but your description of it seems to suggest that it's a very theoretical book because some of the things that he's saying sound great in theory, but don't work very well in practice. Now, if you are looking for commodities producers funds, go to your favorite search engine, put in commodity producer ETF. It'll come up with a bunch of different funds. They're oftentimes labeled natural resource funds. and they are companies that produce natural resources and things like that. I don't see any reason to create these mini portfolios of stuff that's on the side, like you describe a 60/40 where you have commodity producers and gold in them. You should just look at your entire portfolio as one big portfolio and analyze it that way. It doesn't make sense to create a bunch of little portfolios and then try to slap them together. That's the mistake people do When they are deciding what bond funds to put in their portfolio, they create a bond portfolio without considering whether those funds are correlated or uncorrelated with the stocks in their portfolio. So as an approach to portfolio construction, I think it's a procedural mistake to create separate little portfolios and then try to slap them in a bigger portfolio. Just look at the whole portfolio together. Gold stands by itself. Sometimes it behaves commodity like, sometimes it behaves currency like. It does its own thing. So just put it in there separately. And usually 10 or 15% is what works best in most portfolios. I do think it seems to me that you're better off on the commodity side using actual commodities funds and just making very small portions of them, because as we saw last year, they are very volatile and may have performances where they're down 50% one year and up 50% another year. And that's fine, and it's good if you're using that to deal with inflationary years, like what happened in the All Seasons portfolio last year. Having things that do one thing well and putting them in small proportions in a risk parity style portfolio tends to work pretty well. Now, what I'm wondering really is, Whether using a more trend following kind of fund for commodities will get you better results. We do have in our sample portfolios another commodities fund called Com, C-O-M, that's relatively new that basically invests in commodities when they're trending upward, about 20 different ones, and stops investing in those when they're trending downward. And that returned 28% last year. so that was also a good idea for something that's going to perform well in an inflationary environment instead of TIPS. And it seems to have lower volatility than funds like PBDC. I don't know whether it will in fact, on a risk reward basis, a sharp ratio outperform those other funds going forward because it's relatively new. But that is the kind of thing we would be looking for to deal with inflationary environments. And that the author of that book has not considered these things. he may be a little bit behind the times. The book may be obsolete already because there's a lot going on out there in these alternative spaces in terms of new ETFs to perform particular roles in particular portfolios. But thank you for that email. And I'm happy to bash tips anytime somebody brings them up because the data does not bear out the promise that they were originally constructed with. I always wonder whether it's because TIPS are indexed off of the CPI essentially, but the CPI itself does not necessarily reflect all the inflationary activity going on in an economy like a commodities fund would or a refund would. So in effect, TIPS are doing an indirect job as opposed to the direct job of actually investing in the things that are rising in price. And maybe that's the problem with it. I don't know.

Mostly Voices [14:35]

Let's face it, you can't talk them out of anything. But moving on.

Mostly Uncle Frank [14:40]

Second off. Second off, we have an email from Chaz.

Mostly Mary [14:44]

And Chaz writes. Uncle Frank, second email here. You are still crushing it. Yes. Really appreciate you taking the time to talk through risk parity with all of us listeners. Currently utilizing the Leverage Risk Parity Portfolio with a couple modifications in an after-tax bucket that both provides liquidity and will likely be used pre-traditional retirement if all goes right. I have developed an alternative portfolio that I want to see what you think. Here is the portfolio. 5% UPRO, 10% VOO, 10% VIoV, 5% TNA, 13% VEA, 13% AVDV, 5% VWo, 10% TMF, 15% GLDM, 14% SCHH. The effective allocation is stocks exposure, S&P 25%, small cap 25%, international 13%, international small cap 13%, emerging markets 5%, treasuries 30%, gold 15%, Real estate reads 14%. I plan to use a 10% margin on the account to come to about a 154% portfolio, which is comparable to the leveraged risk parity portfolio. Two primary reasons why I wanted to approach it this way. First, I don't really need the short-term treasuries nor intermediate treasuries in NTSX, as the treasuries are used for the drawdown protection. Second, while I know the international stock component is highly correlated with the US market, I like the thought of diversifying outside the US in the event that the US does not dominate similar to the recent time periods in the back testing tools. Let me know what you think. Again, very much appreciate all you're doing here. Thanks, Chaz.

Mostly Uncle Frank [16:39]

All right, let's talk about your approach here to portfolio construction. I think the first thing you need to do is think about the macro allocation principle here. What are the big picture numbers for this portfolio. I would include REITs in with your stocks. They are part of the stock universe. And so if you added up your percentages, including the leverage in it, what you end up with is something that looks like 95% stocks, 30% long-term treasury bonds and 15% in gold. Now, if you break that down, into its proportions as if it were a 100% portfolio as opposed to a leveraged portfolio that would be 68% in stocks, 21% in long-term treasury bonds, and 11% in gold. So it's basically a 70/20/10 portfolio, 70% equities, 20% long-term treasury bonds, 10% gold. And so in terms of comparison, you might just run another portfolio that looks like that with some leverage in it, but just one fund in each position to see how this compares against it. And you may find that you want to cut back on the stocks a little bit and put more of the alternatives in there, which would give you probably a higher sharp ratio on a risk reward basis. On the other hand, if you want to be more aggressive in stocks than a typical risk parity style portfolio, this will do the trick because it is a little more aggressive on the stock side. Okay, now you mentioned you had all these international funds with the thought of diversifying outside the US in the event that the US does not dominate similar to the recent time periods in the back testing tools. Okay, that is a narrative, that is a story. And in order to have something useful, you need to attach a probability to that because repeating a story over and over again makes us think that it's more likely to come true. But we need to think about, well, what is the probability of that happening? And how do we assess that? Well, the easiest way to do that is to go to a correlation analyzer, like the one at Portfolio Visualizer. And I did that with this portfolio, and I'll post this in the show notes. Because then you can see how correlated each of these funds is with the other ones in your portfolio. And that can be read as a probability. So if something is 90% correlated with another thing, there's only about a 10% chance next year or any given year that it's actually gonna do something significantly different than that other thing. These correlations translate into probabilities. Now it's probably not exactly 10%, but it gives you low, high, medium. What is the likelihood of your narrative coming true? And so you read these things as probabilities, and that's how you can make a decision about two funds, about whether you need both of them or not. That way you have a number and not just a story. So looking at these funds, I would suggest that most people trying to do this from scratch start with three things, one being a large cap growth fund like VUG or a total market fund, which is going to be 99% correlated with that. a small cap value fund like VIoV, which you've got, and then some REITs. Those three things tend to work well together. Then you need to be thinking about, well, what else can go in here that is actually significantly different in terms of performance? And looking at the funds that you've got there, first VEA, that is the FTSE Developed Markets ETF. If you look inside that thing, It's basically a large cap value fund. It's got stuff like Nestle, it's got stuff like Toyota, all these large international companies that have been around forever that you don't expect to have significant growth out of it. It does not have a lot of tech stocks or other growth stocks in it. That is over 90% correlated with something like VOO. So it's very questionable as to whether that fund is going to be useful in your portfolio. as an addition with that 90% correlation. You might also compare it just with a US large cap value fund. So I'm not sure that one's really doing anything for you. Now, you look at the Advantis International Small Cap Value ETF, that hasn't been around that long. I mean, it says 90% correlated. I would think that that would be less correlated over time. So I would I'd give that one a pass. I'd put it with the other small cap value you have. That might be something worth keeping. And then you get to VWO, which is the emerging markets ETF. Now you're talking at something that actually looks diversified in a significant way, has a correlation coefficient of 0.75 with VOO. But frankly, when I'm looking at international funds, I want to be even more selective and even more diversified. So I'm looking at things like XSOE, which is a fund that invests in emerging markets and other markets, but it does not include state-owned enterprises. One of the problems you have in a lot of international markets is they're on the stock exchanges, state-owned enterprises, which are not really very well-run companies designed to produce a profit. They may be more interested in doing what the government there wants, employing people or whatever. and those tend to drag down a lot of international funds that are put together kind of indiscriminately. If you look inside of VWO, you'll see that it's a lot of Chinese stocks. So you might consider, well, why don't I just focus on the Chinese market? So you can get something like KBA, which is China's A shares, stocks that are only traded in China. That has a correlation coefficient down there, something like 0.2 or 0.3. with the US stock market, that's diversification. So in a year like last year, it did terrible, lost money. In other years when the US stock market is down, it can gain. But I think those are the kinds of things you're actually looking for because your main horses, your main drivers are still going to be your US large cap growth and US small cap value, I think. Everything else needs to orbit around that and work with that in a productive way. The other thing you might want to consider is whether you want individual REITs instead of a REIT fund because oftentimes you can get better diversification that way. And we talked about that in episodes 19 and 21 and there's a nice big table of assorted REITs on a correlation matrix that you might want to consider. So I'd go ahead and listen to that and think about what you want to do with that. The reason we just use one REIT in our sample portfolios is because we don't want to make it too complicated. and we don't want to be focused on the picking. But since this is your personal portfolio, and what I do in my personal portfolio is pick individual REITs, and I have about 10 or 12 of them, but they're all going to be on that matrix that I mentioned. So those are my basic suggestions. I don't have any problem with you not using NTSX. It's an interesting fund that you can build things with, but it's not the be all and end all of risk parity building funds, so that's no big deal. But hopefully that works well for you.

Mostly Mary [24:01]

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

Mostly Uncle Frank [24:05]

Last off, last off, we have an email from Sam. And Sam writes, hello Frank, thanks for enlightening us with all your wisdom.

Mostly Mary [24:15]

I have a few basic questions. One, what is the difference between owning Vanguard Total Bond ETF, BND, instead of long-term treasury ETF, VGLT, in the Golden Butterfly portfolio? What is the role of a short-term treasury like VGSH in the Golden Butterfly portfolio? Can owning more of a long-term treasury ETF like VGLT make any difference? 2. Is the Backdoor Roth or Mega Backdoor Roth going away? 3. Doesn't owning a total international fund help? There is no allocation for the same in the Golden Butterfly or All Seasons portfolios. Isn't having total international fund allocation considered to make a portfolio more diversified? Four, is there any way to know regularly which months and dates emails you are reading? Thanks again for all you do, Sam.

Mostly Uncle Frank [25:11]

All right, your first question as to bonds, BND, VGLT, and so on and so forth. First, I would suggest that you go back and listen to our bond episodes, particularly episodes 14 and 16. where we discuss a lot of this in detail and also episode 64 and 69. Now, as to the short answer to your questions, the difference between BND and long-term treasury bond funds like VGLT is that BND is a composite fund that has a lot of corporate bonds in it. It also has some mortgage-backed securities in it in addition to the treasury bond funds. and it's got bonds that are stretched across all maturities from short term to very long term. The problem with it is not a problem unto itself. It's a problem when you combine it in a portfolio with stocks because it's just a lot less diversified than a fund like VGIT, which is focused just on treasury bonds. So while it has close to a zero correlation or slightly negative correlation A Treasury bond fund is going to have a much more negative correlation with stocks and therefore give you a lot more diversification in your portfolio and reduce the overall drawdowns of the portfolio. And that's why we like Treasuries as our bonds because we are working primarily with our stocks and want to shore those up, make those work well, and we're not focused on creating some kind of bond portfolio with just a bunch of bonds in there. So, the long-term treasury bonds are in these portfolios as a maximum diversifier against the stocks. The short-term bonds are in these portfolios mostly as a cash equivalent. If you're drawing down on a portfolio, having some of that in a portfolio often smooths out your ride. But there's a question always as to how much of that kind of stuff you put in a portfolio. Because what it tends to do is not only reduce the volatility of the portfolio, it also reduces the returns of the portfolio proportionally. So something like TIPS would do that as well. But TIPS are less diversified from stocks, and so they don't give you anything you want. They don't give you the returns, they don't give you the diversification. That's why you're probably better off with a short-term treasury bond fund for that purpose. But you can take a look at the difference between A portfolio like the Golden Butterfly, which has 20% of this kind of thing in it, is more conservative than something like the Golden Ratio, which only has 6% of cash equivalents in it. But it's just an easy way of taking some risk out of a portfolio. You don't want to overdo it. I would say 20% is probably the most anybody would ever want to have of that sort of thing in a portfolio that they're trying to live off of. Somewhere between 5 and 15% is probably better. But your mileage may vary. Alright, second question is the backdoor Roth or Mega Backdoor Roth going away? I have no idea. Man's got to know his limitations. And honestly, it doesn't matter to me. I don't think we need IRAs to make investments. We have brokerage accounts. We have the ability to invest. in stocks, bonds, commodities through ETFs, regardless of what account it's in.

Mostly Voices [28:34]

We had the tools, we had the talent.

Mostly Uncle Frank [28:37]

And so I spend my time focusing on what I can control, which are my investments, and not what I can't control, which are what is going on in Congress. And then I work with whatever the laws are to do the best I can with my portfolio. So I wouldn't spend any time thinking about that. It's not a useful exercise. I'll tell you what those kind of conversations are actually used for. They're used to market stuff.

Mostly Voices [29:03]

Do you have life insurance? Because if you do, you could always use a little more. Am I right or am I right or am I right? Right, right, right.

Mostly Uncle Frank [29:10]

They're used by the financial services industry and financial media to have something to talk about that's current and to create or manufacture a problem that they can then, quote, solve, unquote, for you. A, B, C. And that's how they get people in the door. A, always B, B, C, closing. Always be closing.

Mostly Voices [29:30]

Always be closing.

Mostly Uncle Frank [29:35]

So if you go to a free steak dinner with somebody that's trying to sell you some stuff, a lot of it's going to be about what's going on in legislation. A lot of it's going to be about fears of taxes, fears of inflation, fears of something, because they need to ramp up that fear to sell you stuff.

Mostly Voices [29:52]

Because only one thing counts in this life. Get them to sign on the line which is dotted.

Mostly Uncle Frank [29:56]

But as they say, move along, nothing to see here. We use the buddy system. No more flying solo.

Mostly Voices [30:03]

You need somebody watching your back at all times.

Mostly Uncle Frank [30:07]

All right, next question. Doesn't owning a total international fund help? And the answer is, no, not really. for the reasons that we discussed in the answer to the last question. Because you need to really hone in on what is the definition of diversification? What does it really mean? Diversification does not mean different in portfolio construction. It's like going to the supermarket and just throwing things in your cart because they look different. You wouldn't do that. You want to create a meal that's going to have specific ingredients that work together. So just looking at something and saying, oh, it's different, it must be diversified, that's wrong.

Mostly Voices [30:49]

Wrong! It's not true.

Mostly Uncle Frank [30:56]

You can't handle the pop roast! We know it's not true because the numbers, the data, shows us what's true and what's not true. So you need to take whatever funds you are looking at, go to a correlation analysis and analyzer, Like you find at Portfolio Visualizer, put your funds in there, see if they're diversified or not. It comes out in the numbers. I did not know that. There's also this idea that diversification is valuable in unto itself. Actually, the only purpose of it is to reduce the overall volatility in your portfolio, hopefully more Then you are reducing the returns by diversifying into something. But you only know that by doing the analysis. And so if you go and look at some of these funds over at Portfolio Visualizer and compare them to US funds, you know, something like VEA is 88, 90% correlated with US stocks. Something like VXUS, which is just everything international, is also 88 to 90% correlated with US stocks. That's not diversified. I'm sorry, it's just not. Forget about it. You need to pick something different if you want diversification that is actually diversified based on the data and the numbers, not on some name or what somebody said or some casual remark or some story. In fact, you'll find more diversification within the US market if you compare things like a large cap growth fund like VUG with a small cap value fund like VIOLV. Those are more diversified from each other then these international funds are diversified from US stocks, believe it or not. All right, final question, is there any way to know regularly which months and dates emails you're reading? Well, I'm usually two to three weeks behind, sometimes up to a month behind. But if you want to know whether your email has been read and what episode it might be in, the easiest way to do that is just to go to the website www.riskparriaradio.com, go to the podcast page and just put your name in the search thing there and it'll bring up all the podcasts where your name is mentioned. And then you can see your email and listen to that podcast and you'll know whether it's been answered and which podcast it's in. Yes! But thank you very much for this email. It gets at some nice fundamental questions that we do need to review every once in a while. Because they come up a lot.

Mostly Voices [33:29]

And now for something completely different.

Mostly Uncle Frank [33:33]

And the something completely different is our weekly portfolio reviews of the seven sample portfolios you can find at www.riskparityradio.com and it was a really ugly week last week. Surely you can't be serious. I am serious. And don't call me Shirley. With lots of announcements and chaos and lots of things that have not been resolved yet. Commentators saying all sorts of things. I heard somebody say, well, this is going to crash the stock market and the 10-year treasury bond is going to go down to 0.75 in the next year. And then I heard somebody else say, no, this is more inflation. And so the long-term treasury or 10-year treasury note is going to go up to 2.75 in the next year.

Mostly Voices [34:14]

I don't know which is going to happen. We don't know. What do we know? You don't know. I don't know. Nobody knows.

Mostly Uncle Frank [34:21]

But we'll be fine either way. But anyway, before we got to last week, I wanted to take a look at some of the professional risk parity style funds from last year and see how they performed. And I've got six of them here. I'm not going to go through a whole lot about them. Some of them we have reviewed, some of them we haven't. The one that did the best. The best, Jerry, the best. It's from AQR Funds, and they've been doing risk parity work for a long time and written a bunch of articles and white papers about it. But anyway, one of their flagship funds, AQRNX, had a return of 14.06 last year, and it is designed to function like a 60/40 kind of portfolio, and it's right in that wheelhouse. It's very similar to how A 60/40 portfolio performed last year and also our golden ratio and risk parity ultimate portfolios. And if you look inside that, it's about 45% stocks, 24% bonds, and 22% in commodities. I'm sure that even adds to 100, but it's roughly that sort of thing. So that was on the bright side of things. Most of the other ones did not perform that well. Invesco's fund, ABRIX, 9.52% for 2021. RPAR, that relatively new risk parity ETF, came in at 7.78%, which is below our All Seasons portfolio, our most conservative sample portfolio. For reference, that was 8.68% for 2021. Another fund, MMAFX, 6.94%. And then we look at the Wooful Wealth front, risk parity style portfolio. I don't think those people know what they're doing over there. That's ticker symbol WFRPX. And that came in at 7.62%. Now there's also a global fund called GAA that we've talked about. It's not explicitly risk parity, but it's got everything in the kitchen sink in it. That came in at 10.5%. And so all of these underperformed our basic sample portfolios if you match them up. Now, if you look inside and see why most of these professional risk parity portfolios underperformed, the reason is pretty obvious. And the obvious reason is there's a lot of tips in these underperforming portfolios. There's a lot of tips and there's a lot of cash equivalents, short-term bonds, those sorts of things. And so by having significant piles of that stuff, it dragged down the performance of these portfolios. And I think this is one of the reasons that professionally managed risk parity style funds are not very popular, because they are still attached to these theories about how things should work, as opposed to looking at the realities of how things have worked and are likely to work in the future. And therefore they're making more complicated constructions of things that don't perform very well on their own, and so the probability of them outperforming our simple Do it yourself risk parity style portfolios is pretty low because they've just got cash drags going on in there. I said consummate these, consummate. Geez. Guy wouldn't know majesty if it came up and bit him in the face. But if you're interested, go look up those funds for yourself, see how they performed. I do notice that the people who run the fund RPAR are also coming out with a leveraged version of that called U-P-A-R, which I thought was interesting, but I think that fund is just getting off the ground now. It'll be interesting to see how that does as well, but I can tell you it's going to underperform if it's got a bunch of tips in it. I can just tell you that right now.

Mostly Voices [38:12]

Bow to your sensei, because there is no cowbell

Mostly Uncle Frank [38:16]

in tips. None. It doesn't work for me.

Mostly Voices [38:19]

I gotta have more cowbell. I gotta have more cowbell. But let's go and talk about what happened last week.

Mostly Uncle Frank [38:27]

This may be one of the worst weeks we've had with these sample portfolios since this podcast began. But you'll see, although it was a horrible week, it wasn't all that horrible for our main portfolios and only really stung when you got to the leveraged experimental portfolios. But just looking at the markets last week, we saw the S&P 500 down 1.87%. the Nasdaq was down 4.53%, gold was down 1.85%, long-term treasury bonds represented by the fund TLT were down 4%. This is an unusual week where everything's down. It does happen sometimes. Usually it doesn't go on for a long time, but it does happen sometimes. REITs were down 2.91% for the week. Interestingly though, commodities, PBDC was up 2.2% for the week. Preferred shares were down 2.03% for the week. And I'll just make another note, some stock funds were actually up last week, including small cap value, VIOV, was up 1.24%. So to the extent people were trading on inflation or inflation fears, you can see those components, commodities and small cap value, coming to the fore and being the diversification that you want to see in these portfolios. TIPS would have been no help to you last week. None. I think they were down too. All right, now going through the portfolios, our most conservative one is the All Seasons Portfolio. This one's only 30% in stocks. It's got 55% in treasury bonds, and it's got some commodities and some gold in it. It was down 2.44% for the week. I think that's the most it's ever been down in one week. It is up 10.31% since inception in July. 2020. Moving to the next one, the golden butterfly. This one is 40% in stocks divided into small cap value and a total stock market fund. It's got 40% in treasury bonds divided into short and long and 20% in gold GLDM. This was the big winner last week, the best performer of our seven. It was down 1.4% for the week. It is up 21.79% since the Inception in July 2020. And you can see how this one being a little more conservative than our next two bread and butter portfolios with the large allocation to short term treasury bonds did cushion it. But you do give up some performance on the other side of that. Moving to our next portfolio, the golden ratio. This one's 42% in stock funds, 26% of long term treasuries, 16% in gold, 10% in REITs, and 6% in cash. It was down 2.63% for the week. It is up 22.58% since inception in July 2020. The Risk Parity Ultimate, this is our most complex portfolio. I'm not going to go through all 14 of these funds. It does include some esoteric things like commodities, COM, which did alright last week, but also some things like Bitcoin, BITQ, and BITW at 1% each, and those had a horrible week last week. But anyway, this one was down 3.02% for the week. It is up 21.13% since inception in July 2020. And now we will move to the experimental portfolios. These ones have leverage in them and they suffered because of it last week. And so the first one is the Accelerated Permanent Portfolio. This one is 27.5% in A leveraged bond fund, TMF, 25% in UPRO, a leveraged stock fund, 25% in PFF, its preferred shares, and 22.5% in gold, GLDM. It was down 5.33% for the week. It is up 24.17% since inception in July 2020. Now we move to our worst performer, and our most leveraged portfolio is the aggressive 50/50. this one is 33% in the leveraged stock fund UPRO 33% in the leveraged Bond fund TMF and then as ballast it has 17% each of PFF the preferred shares and VGIT an intermediate treasury Bond fund it was down 6.32% for the week it is still up 30.88% since Inception in July 2020 and our most recent Entrant, the levered golden ratio. It's only been around since July 2021. This one is similar to the golden ratio portfolio, but it is levered up 1.6 to 1. It was down 3.55% for the week. It is up 0.27% since inception in July 2021. So all in all, a very ugly week to start out 2022. But mama said there'd be weeks like this. And now our signal is beginning to fade. 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'll get your message that way. We'll be picking up this week probably with some more emails. I do need to sit down at some point here and do another tutorial to add to our little collection over there at the YouTube channel we're constructing. We've got three there so far. I'm going to try and do one every month. Let me start looking at the Portfolio Visualizer Monte Carlo Simulator, which is an interesting tool. If you haven't had a chance to do it, please go to your podcast provider, like, subscribe, Give it some stars, a review. That would be great. Mm, okay. Thank you once again for tuning in. This is Frank Vasquez with Risk Parity Radio signing off. Oh, my mama told me, there'll be days like this.

Mostly Voices [44:33]

Oh, my mama told me, there'll be days like this. Oh, my mama told me, there'll be days like this. Oh, my mama told me they'll be dead like this.

Mostly Mary [44:49]

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.