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 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, three, five, seven and nine. And so if you go back and listen to those, it will get you up to speed. But now onward to episode 148 today on Risk Parity Radio, we will proceed with what we seem to do best here, which is answer emails. But first, I'd just like to give a shout out to my friend Diana Miriam, who has a podcast, Optimal Finance Daily, where she was recently talking about the perennial debate about the 4% rule and mentioned our podcast here, episode 128, where we took the new Morningstar report to task. Another interesting thing that has come up about that recently is an article from Michael Kitces also taking that to task as being highly unrealistic. And I will link to that in the show notes so you can check that out too. But now...

Mostly Voices [2:01]

I'm intrigued by this. How you say? Emails. And...

Mostly Uncle Frank [2:07]

First off. First off we have two emails from Rory. And Rory writes：Hi Frank, thanks for all you have done with this podcast and guest appearances.

Mostly Mary [2:19]

I am in my early 30s and only a few years into my career. Boy, graduate school took a long time. However, since hearing your show, I have been holding a golden butterfly for medium term spending goals and tracking it against a total stock market return. Recently, I have thought of adding leverage, UPRO, to the equity side to bump up returns for a short period. Though it is not necessary, I wish to experiment a bit with leverage. Today, January 13, 2022, I looked up UPRO in my Fidelity account and saw that it had lost about 50% in the past two days. Clearly, this seems like a good time to buy some. However, I cannot seem to find any indicators which can shed light on this fall. Perhaps a latent response to the multiple percent drop from last week? This seems unlikely and off by an order of magnitude. What are your thoughts? Hi Frank, a follow up to my prior email about UPRO. It appears that the historical data I was observing for UPRO was being shown incorrectly. I have taken a screenshot from Yahoo Finance, but I cannot send it through this medium, which shows a 50% drop. Now, that being said, there has been a healthy and real drop over the past week. Given uncertainty in the markets, is it a good time to pick up 5% of a golden butterfly in UPRO? I should reiterate that the portfolio is for medium term spending goals under $5,000 and serves more as a testing platform as I learn new ideas. I am squarely in the accumulation phase and have no intention of leaving my job anytime soon. Secondly, I have created a tool to aid in my rebalancing efforts. However, I have a question on effective use and how to allocate the funds. The tool currently parametrizes the portfolio allocation percentage and current percentage then distributes funds evenly to pull it as close to 20% as possible. As I see some assets dropping more than others, I wonder if a better strategy is to put the total addition into the asset lagging the most. In some cases, this could pull the asset above the target allocation. How would you approach this decision? Lastly, thank you for your work with the podcast. Your analytical approach appears to my engineer brain. I also want to thank you for taking questions, as my DIY approach to most things in life would have me make mistakes to learn from, whereas I feel like I have many people who are lending ears through you and your listeners. Thanks RBG. Well, thank you for these emails.

Mostly Uncle Frank [4:40]

Yeah, I do think you had a data glitch in wherever you're getting your market data because UPRO did not decline by 50% in January, although it was highly volatile. And so seeing it go up or down by 5% in one day is not very unusual for that ETF. It happened once. As to whether it's a good time to pick up some UPRO, Well, I don't really know. I could talk to my friend Sonia about it. My name's Sonia.

Mostly Voices [5:10]

I'm going to be showing you the crystal ball and how to use it or how I use it.

Mostly Uncle Frank [5:17]

But really, this is probably not the podcast for you if you're looking for market timing ideas.

Mostly Voices [5:22]

Forget about it.

Mostly Uncle Frank [5:26]

Anecdotally, I've heard people say that the worst is now over. I've heard other people say that we are going into some kind of six to nine month downturn. And of course, the perennial this is the End forecasts from various quarters.

Mostly Voices [5:42]

Dogs and cats living together, Mass hysteria.

Mostly Uncle Frank [5:46]

I would say if you're going to use UPRO for anything, expect a lot of volatility because it is very volatile. I'm not sure exactly what you're doing with it in a golden butterfly portfolio since that does not involve leverage, but you could create a leveraged butterfly portfolio, I'm sure.

Mostly Voices [6:03]

Yes!

Mostly Uncle Frank [6:07]

Now you said you were using this for intermediate term savings, which is a good use for a risk parity style portfolio generally. As to whether your tool does a better job in terms of what to allocate to, again, I see that more as a market timing thing. There's really no way of knowing in advance whether using the tool you described or Simply just adding to whatever's low is going to be better for any particular time period. I think it's kind of a coin flip on that. I think the key thing to do with this is just to try to minimize tax burdens. And so that makes sure that you are always buying things and not doing a whole lot of rebalancing. One of the advantages of accumulating in a portfolio like this is you can essentially do the rebalancing by buying things as opposed to having to sell anything. And if you don't have to sell anything, you're going to minimize your tax liabilities or potential tax liabilities there, at least until it's time to sell the whole thing or sell a big part of it to buy whatever you are saving for. But I am glad you enjoy the approach here. I also like fiddling around with the numbers. And sorry I couldn't be more definitive in my answers, but that is part of the deal.

Mostly Voices [7:33]

Forget about it! That we accept the uncertainty of markets, A really big one here, which is huge.

Mostly Uncle Frank [7:36]

And simply work around it with well-constructed portfolios.

Mostly Mary [7:54]

Second off, we have an email from Frank, and Frank writes：Frank, in what type of account is it best to place gold, taxable account or IRA? I read falling upward as you recommend in your response to my previous email. I am Catholic and assume you are also. I'm sorry but I did not get much from the book. I'm curious, why did you recommend it? Thank you, Frank. All right, so two questions.

Mostly Uncle Frank [8:12]

One short and one long and philosophical. Go with the short one first about the gold. I love gold. I would say that with gold, the first idea is do not put it in a Roth account unless that's the only place to put it. So then you're dealing with a taxable account or an IRA or 401k. And I think there it's almost a coin flip. I would position your other assets and then make this as one of the last things you put in there. In reality, you're probably not going to be doing a lot of buying or selling of gold, at least in very large quantities. It's going to be a small part of your portfolio. So oftentimes it's just convenient to be able to buy or sell in either one of those accounts based on what's going to happen in the future. And having that flexibility is the most useful thing. So I would focus first on your stocks and REITs, and then on your bonds or income payers, and then on your cash, which should go in the taxable account, and leave the gold as one of the last things to allocate to any particular account. All right, now let's talk about your philosophical question. First, I suppose I should explain to the audience what Falling Upward is. Falling Upward is a book that was written by Richard Rohr, who is a Franciscan priest who has written a lot of books for lay people and ordinary people. And so Falling Upward is also sponsored by the AARP in its publication. So that book starts with an observation that Most people do not live the kind of lives that famous people live, as in somebody who becomes a Supreme Court justice and they die on the bench, or somebody who wins a Nobel Prize in literature and they write until the end of their days, or something where a person is known for doing one particular thing or having one particular career, and that's all they do until they die. Most of us live at least two lives and falling upward is directed at the two life model where you have some kind of career for some period of your adulthood and then you shift to something else. Some people have more than one of those so you could have three, four, five or more but two is the most common division for most people. And so what falling upward is talking about is how do you make that transition? How do you stop doing what you were known for doing or spent a couple of decades doing or more? and start doing something else. How do you choose something else? How do you get into that? What do you do? Now, I'm very fortunate. I've had a lot of advantages in life. And one of the advantages I have is that I have two very good role models for how to do this. How to transition from a career to a second career. You can call a retirement. But whatever you're doing next. And for me, those two role models are my two aunts. Aunts, if you prefer. I say aunts because I'm from Iowa. Anyway, my two aunts are Sister Sarita and Sister Francine. Sister Francine passed away a few years ago. But they spent most of their initial careers being educators and administrators where they live, which is now called Belize. It used to be called British Honduras. But they did eventually retire from those positions, and they could have just gone and withered away, or gone back to the convent or whatever. But that's not what they did. They each chose a new path that had something to do with what they were very much interested in personally. Now for Sister Sarita, this was meditation and the spiritual life. And so she founded a center called the Guadalupe Center. that is focused on those activities and brings in a lot of people from the community to participate in that. And that has been a very rewarding second act for her. Now she did actually retire from that within the past couple years, but she's turning 91 next month. She still drives to Mass every morning, still lives a fairly normal life and has a rich set of relationships developed even over the past couple decades. Now, Francine took a different interest. She went off and ran a soup kitchen, but Francine had all kinds of different interests and was unconventional about pursuing them. So she would adopt all sorts of people and animals. She had surrogate children. She had surrogate grandchildren. She had a mongrel dog that she called Rusty from the streets that would bite anybody that came near it. And so she had a completely fulfilled life until the end of her days. which were a few years ago. And when we had her memorial mass in the cathedral, it was full. It was full with all of those people that she had formed those positive relationships with over both her initial career and her second life or second career. And so these are the models I look to when I'm thinking about what am I gonna do with myself now that I'm not working in my career anymore. But since most people don't have those models, falling upward seemed to be the closest thing I could recommend for somebody to have a look at. There's another book that might be appealing to some of you that came out recently. It's called the Second Mountain by James Brooks, who's an author and a commentator. I did not find that as enlightening, but you might, so you might check that out. Another thing if you are interested that is not specifically about retirement, but I would recommend it is a book called Awareness by Anthony De Mello, which is also something that Tim Ferriss likes to recommend. And that's just more about orienting yourself as to what's really important in life. But I suppose that is enough lecturing about life's philosophies and so on and so forth. But thank you for that email and giving me the opportunity to pontificate.

Mostly Voices [14:30]

All we know is some get the spark and say, I'm going to change my life. I'm going to change my health. I'm going to change my relationship with my family. I'm going to change everything. And if it starts with an apple, if it starts with a walk around the block, if it starts with a book, if it starts with a journal, whatever it starts with, I'm a candidate. I'm ready to go and change my life. I invite you on that journey. Once you look back on it, you will never turn back. You'll never go back to the old ways and the old language and the old neglect. Never. Now let's move on.

Mostly Uncle Frank [15:02]

Our next email comes from Andy, and Andy writes：Frank, I hope all has

Mostly Mary [15:06]

been well for you since our last correspondence. I started a thread today on the Bogleheads forum and thought it might be a worthwhile topic for you to discuss on the podcast. Now that UPAR is available, it is the first risk parity fund index that I know of that targets a standard deviation similar to 100% stock. This can be combined with a fixed income product to create what I'm calling the Tobin 2 Fund Portfolio. Would be curious to hear your feedback. Here's a link to the forum thread post.

Mostly Uncle Frank [15:34]

Cheers, Andy. Well, it's nice to hear again from you, Andy. It's been a little while, but I'm glad you're doing well. Now, as to your email, I will link to what you put here to the Bogleheads forum so people can review it. It is essentially creating a portfolio using this new risk parity fund, UPAR, and something very inert like Amiga. That's M-Y-G-A. It's a short-term annuity essentially that operates kind of like a savings account. My general feedback on this is I probably would not do something like this because I do not actually like to use these commercially prepared risk parity portfolios like UPAR or RPAR. I think it's do-it-yourself investors. We are better off creating our own portfolio out of the raw ingredients than accepting one of these things off the shelf. Because when you're using something off the shelf, it becomes actually much more difficult to combine that with anything else in a way that makes sense for you. It's much easier to use the raw ingredients and create your own concoction, if you will. I also don't like some of the construction that they use in RPAR and perhaps UPAR. UPAR is brand new, so I don't know exactly what they're doing there. But their overemphasis on things like tips led to poor performance last year in RPAR in particular. And I think they make things a little bit overly complicated without adding anything positive, if you will. But I do like to use those kinds of funds as points of comparison to our own risk parity style portfolios. And we did just talk about that back in episode 142. If you want to give it a listen. So where I come out is in theory this looks very interesting. I probably just would not go about it the same way that you have done here. with just the two funds. I would take my own risk parity style portfolio and combine it in some way with something else. But thank you for that email. I'm always interested to see what other people are thinking or doing with this because I recognize that I do not have all the answers and things are developing. This UPAR fund is brand new and so I expect we're going to see more different kinds of funds available to construct these kinds of portfolios in the future. You are talking about the nonsensical ravings of a lunatic mind. But now moving on, last off. And last off, we have a tome, we have a novel from Mark.

Mostly Mary [18:16]

And Mark writes, Uncle Frank, it gave me great pleasure when listening to episode 143 to be presented with an opportunity to help somebody who has already helped me so much. In that episode, you mentioned that you could not provide a bookmark in the podcast show notes to the portfolio you had created in Portfolio Charts. After I heard that, I created a tool to solve that problem for you. The solution. If you do construct a portfolio that adds up to 100% and bookmark it, you might notice a long character string in the URL right after the shortcode equals that follows the format. 1. The string zusaX to open. Two, a long series of data elements concatenated together, each with a two character code for every input field and a two character value for that field. Three, the closing character Z. By constructing numerous different portfolios that used all of the different input fields and bookmarking them, I was able to reverse engineer all of the codes that Tyler uses for all of the input fields so we can build our own URL bookmarks and they don't have to add up to 100%. To make this more useful, usable for you, I created a spreadsheet that creates these bookmark URLs for you. Right now, the tool that supports everything I think you actually use. I know you've started to invest some funds in China, so if you need the mapping for those fields as well, please let me know and I will add that. After you use this spreadsheet to construct a portfolio and you click on the link to portfolio charts, the page will show you the short code for your portfolio and you will need to manually cut and paste that short code into the black box next to the pie chart. Frankly, it is a bit annoying and I would love to fix it, but needing to do this step isn't specific to the spreadsheet tool I created. It is the exact same process that somebody has to do when they bookmark a portfolio that adds up to 100% and I'm not about to start complaining that Tyler isn't doing enough for us already. Feeling flush with victory after getting the portfolio chart link creation done, I went ahead and reverse engineered the portfolio visualizer bookmark URLs and added a portfolio visualizer bookmark builder in the same spreadsheet. So that when you are building a portfolio in the spreadsheet, you can quickly link to the same asset allocation in both tools for convenience. You will find the tool attached to this email as an Excel spreadsheet. It is currently populated with the Golden Butterfly portfolio as a nod to Tyler. Please don't hesitate to ask me for improvements or changes if something will make your life just a little bit better. Further thoughts not related to the tool. Let me start with a more complete thank you. I caught you early in your podcasting journey thanks to the Choose a FI guys and I've listened to all your podcasts. If you haven't figured it out, the reason you are gaining so much traction in Gravitas isn't just because risk parity as a topic is resonating, it is because of who you are and more specifically your commitment to structured and rigorous thought and its application to the personal finance realm. I have a close friend who studied philosophy at Oxford and he spent a good amount of time explaining to me that philosophy isn't as much about navel gazing as it is about highly disciplined and structured thought applied to a subject, almost like an algorithm.

Mostly Voices [21:21]

I coalesce the vapor of human experience into a viable and logical comprehension.

Mostly Mary [21:25]

That describes pretty well your approach to personal finance, and I don't know if we should blame your engineering background or your experience as a lawyer, because I think they both play a part. You are correct, sir, yes! I am a VP at IBM who transitioned from a career as a software engineer to the business side, eventually leading large businesses for IBM in my career. and I have gone back and forth across the boundary from the technical and business side enough to know that having depth on hard science and breadth on business context is a powerful and rare combination. As an engineer who became a lawyer, you have had a similar mix of experiences and your contribution to the personal finance space is built on the fact that you have bridged that gap in a way few people do. Please keep going and thank you again. Lastly, there is a topic I wanted to open your mind to considering because I would be eager to hear your wisdom opinions on this after you dug in a bit. Yes, I know you're retired and don't work anymore, but I think this will be fun for you. I have been digging into some conservative option strategies lately. I know that you do not consider yourself to be very knowledgeable about options, and I can understand the knee-jerk reaction to avoiding them because the mindset, personality, and approach of most option trading is the exact opposite of the principles we both hold dear and our investor policy statements. However, there is a set of option strategies that are consistent with a long-term buy and hold strategy and may do a better job of mitigating downside risk and increasing the consistency of returns than risk parity does. I will describe one of those strategies here. It is called the collar strategy. Yes, collar, like on a horse or dog, but you are putting a collar on a stock in this case. You start with the buy and hold part, buy 100 shares or multiples of 100 of an ETF such as VTI or SPY. Then you sell a covered call contract on those 100 shares and use some, but hopefully not of all that income, to buy a put contract on same position to protect your downside. In a fictitious example, if the underlying ETF is at $100, you might sell a call contract that expires in 90 days at a strike price of $110. At the same time, you buy a put contract that also expires in 90 days with a strike of $90. Then in 90-day months, you repeat the same process. You are now contractually guaranteed to not lose more than 10% in a given 90-day period. And you are also giving up any positive returns above 10% in that same 90-day period. There are two new ETFs that even implement this collar strategy for you from Global X：XCLR and QCLR. Obviously these are so new that it will be a while before we can invest them safely, but I think it is an interesting way to solve the same problem Risk Parity Radio is attempting to solve, and I would be curious what your reaction to it is. Thank you again, Mark.

Mostly Uncle Frank [24:12]

Now I think Mary is tired. Mary, Mary, why you buggin'? First I should say that we actually did not even read this whole email, believe it or not. But we read most of it. And it was most excellent. First off, thanks for the very nice words that you said about me and this podcast. This topic is a bit narrow and it's a bit esoteric. So when you're making something like this, you wonder whether anyone else cares about it. But it's nice to learn that there are people that care about it very deeply and really appreciate your work. And I have to say that's what makes me so happy about having the kind of audience that I have. You all seem to be very sophisticated, thoughtful, and experienced as do-it-yourself investors. Yeah, baby, yeah! and knowing that there is a core of people that really, really like what I'm doing, even if it's not the most popular thing, energizes me and makes me want to keep going. We have been charged by God with a sacred quest. So thank you for giving me that feedback. And thank you for creating this tool, which I will share with everyone. It is a very nice way to be able to take a little spreadsheet template and put your portfolio in and then have it immediately be translated into portfolio charts and then portfolio visualizer. So I'm going to put a link to it in the show notes to Google Sheets and then hopefully put it somewhere else on the website.

Mostly Voices [25:56]

I may need to contact you again because I may have screwed the thing up when I was playing around with it before I saved it. And it's gone. But I'll let you know if I have trouble with that.

Mostly Uncle Frank [26:01]

But it's this kind of thing that also makes me very grateful for the audience that I have for this podcast. That you not only want to hear the material, you want to actively engage with the material, which is very inspiring to me. I got this inkling. I got this idea for a business model.

Mostly Voices [26:19]

I just want to run it past you. You get a bunch of people around the world. who are doing highly skilled work, but they're willing to do it for free and volunteer their time 20, sometimes 30 hours a week. And then what they create, they give it away rather than sell it. It's going to be huge.

Mostly Uncle Frank [26:38]

All right, now let's talk about option strategies. My general opinion on option strategies is I am sure they work. I'm not sure how long they work or which ones will work. or which ones will work in which conditions. People have been employing all kinds of futures and options strategies on stock market holdings going all the way back to the 1980s, probably further back than that. But in the 1980s is the first time you saw people constructing what was then called portfolio insurance, which was mostly involving futures and not so much options. That actually led to the 1987 crash in the stock market the way the algorithms operated at that point in time and led to the creation of a whole bunch of circuit breaker rules so it wouldn't happen again. There have also been waves of funds that employ option strategies. Again, beginning back in the 80s with some mutual funds, it became in vogue again in the first decade of the 2000s and is now in vogue again right now. And the problem with all these things is they seem to work until they don't. And when they stop working is anybody's guess. The main issue I have with them is there's really no good way to test these historically or run them through any kind of Monte Carlo simulation. What seems to work the best over very long periods of time is this kind of Nassim Taleb barbell strategy where you hold some really far out of the money options knowing that in almost every case they are going to expire worthless. But then when the stock market crashes you're going to make a whole lot of money. You need to have at least a decade long time horizon to even implement something like that. And I do not have the patience or ability to do that. Man's got to know his limitations. The main issues you run into with options strategies around the strike price is the cost of them. And that cost tends to rise when the market is more volatile. So when you actually want the things, that's when they cost the most. And so you can end up with the kinds of problems that we have with volatility funds, that they seem to lose money most of the time and are a drag on your portfolio. And that is what's going to happen with most option strategies. So when you think about it, in a sense, the option strategies actually were the initial idea, the original idea. Risk parity came along after that as an alternative way to try to do what the option strategies were doing. but could not seem to do reliably or at a reasonable cost. So in the end, where I come out is I'm sure you can be successful with option strategies to reduce stock market risk. I'm not sure anyone can do it consistently, or at least anybody that I know, or I can do it consistently. Put it that way.

Mostly Voices [29:54]

You can't handle the crystal ball.

Mostly Uncle Frank [29:58]

So I'm happy to kind of stand on the sidelines and watch that occur. Now mind you, this does not prevent me from actually buying and selling a few options here and there.

Mostly Voices [30:09]

No one can stop me.

Mostly Uncle Frank [30:14]

But I do not make it part of any kind of set strategy that I plan on following long term. It's more out of curiosity than anything else. Surely you can't be serious. I am serious. And don't call me Shirley. So if I were to analyze these two funds you mentioned, XCLR and QCLR, I would be looking inside them to see what kind of options they were holding and what the proportions were to the rest of their holdings. And then think about, well, could I do that myself outside of this fund structure? And sometimes you can and sometimes you can't.

Mostly Voices [30:52]

Now I shall be ruler of the world.

Mostly Uncle Frank [30:56]

But if anyone knows of such a strategy that has worked over say a 50-year time frame that we can go back and reliably test and monkey around with, I would certainly be all ears.

Mostly Voices [31:09]

Forget about it.

Mostly Uncle Frank [31:14]

But thank you once again for this email, your most excellent comments and your most excellent creation that we will Share with this audience.

Mostly Voices [31:22]

The best Jerry, the best.

Mostly Uncle Frank [31:26]

But now I see 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 put in your message into the contact form and I'll get it that way. We'll be picking up this weekend with our weekly portfolio reviews and probably some more emails. Take a look and see what we have. If you haven't had a chance to do it, please go to your podcast provider and like, subscribe, give me some stars, a review. That would be great. Okay? Thank you once again for tuning in. This is Frank Vasquez with Risk Parity Radio. Signing off. To maintain your existence would be illegal.

Mostly Mary [32:23]

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.