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 [0:39]

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 1, 3, 5, 7, and 9. And so if you go back and listen to those, it will get you up to speed. But now onward to episode 154 of Risk Parity Radio. Today on Risk Parity Radio, I think we'll just try to see if we can catch up on some of your many messages to me.

Mostly Voices [1:18]

And so without further ado, here I go once again with the email. And... First off.

Mostly Uncle Frank [1:25]

First off, we have an email from Brandon, and Brandon writes... Hi Frank, so glad you started your podcast.

Mostly Mary [1:33]

It has filled such an interesting and important niche in the investing podcast space. It seems that you think risk parity portfolios are more for those nearing or in retirement to reduce volatility, and that you would encourage people early in their accumulation phase to go all in on a total stock market index fund rather than a pure risk parity portfolio. However, your leveraged sample portfolios have very attractive annualized returns that are competitive with or beat the total stock market and with potentially less volatility. So why shouldn't a 25 year old start off with, say, a mildly leveraged risk parity portfolio and use it as their accumulation portfolio? If they had an aggressive 100% stock portfolio, then during the inevitable dips in market crashes, they would be missing out on great buying opportunities that a risk parity portfolio would take advantage of through rebalancing. Thanks for your thoughts, Brandon.

Mostly Uncle Frank [2:29]

Well, Brandon, the answer is you could do that. And in theory, it should work out quite well. Do I feel lucky? But let me just give you some background and caveats to that. I'm going to link to a YouTube video from Ben Felix of Common Sense Investing. He also has a podcast called the Rational Reminder Podcast. but he is a financial advisor in Canada who specializes in a lot of the academic research around some of these topics. And so this video is all about leverage and he cites to a couple of papers. One of them is from AQR from 2012, which is about concentration versus leverage, a more theoretically sound approach. So traditionally there are two ways to get more than, say, the total stock market fund would get you in terms of returns. One way to do that is by concentration to invest in more risky stocks, essentially, hoping to get better returns out of that. And the other way, as you have surmised, is to add leverage to a portfolio. Now, traditionally, you would have to do that by borrowing money on margin. And so, you are increasing the risk, obviously, when you increase the leverage on something. And so it wasn't very convenient, especially for a small investor, to apply leverage to a portfolio. And you could risk things like margin calls. Fire! Fire! Fire! But as he now also points out in this video, now we do have these leveraged ETFs. So in theory, you could use those for this purpose. And that is how these leveraged portfolios are constructed with leveraged ETFs. Yeah, baby, yeah! Now, the main drawback to those, as we talked about in prior episodes, is that they are designed to have a leverage over the course of one day and are not specifically designed for leverage over the course of, say, a year or more. In fact, over the period they've existed since about 2009, they have performed pretty well for what they're doing. So even though they're not designed for long-term holding, they have worked for the people that have used them for that. The other point he makes in the video is that there is a serious risk of loss here, obviously. You could lose your entire invested capital. Now, if it's just a small amount because you're at the beginning of your investing journey and you plan to invest more, in theory, that wouldn't hurt you very much. But there is a psychological problem here too, that if you go into this and it doesn't work out well, would you be willing to stick with it over time? And I think that's probably the real issue with having a levered portfolio is the psychology of it, because it's going to have some really bad times and bad years. And because these leveraged ETFs just haven't been around that long, There is some risk they're just not going to perform the way you would want them to or expect them to. So as of right now, this is not a conventionally accepted way for beginning investors to get going. Now that doesn't mean you can't do some of that. You have a gambling problem. You just need to be careful and be aware of the risks. I wonder whether in 10 or 15 years time this will become more of an acceptable way to get going on investing for people. But it's certainly not conventional wisdom today. Well, you have a gambling problem. And we must always remember what the philosopher Yogi Berra said about these things. In theory, there is no difference between practice and theory. In practice, there is.

Mostly Voices [6:23]

Totally blitzed, no great one.

Mostly Uncle Frank [6:27]

So I like your ideas. But be careful out there.

Mostly Voices [6:30]

You can't handle the gambling problem.

Mostly Uncle Frank [6:34]

And thank you for that email. Second off, second off, we have an email from Scott and Scott writes.

Mostly Mary [6:42]

Hi, Frank and Mary. Yes. No question. I just wanted to thank you for fully and thoughtfully answering my question in episode 140. In appreciation and not an attempt to cut line or Alexi bomb you. I made a small contribution directly to the Father McKenna Center. If you are ever hankering for a free lunch in the D.C. area, just let me know. It's on me, Scott. Well, Scott, I almost never turn down food.

Mostly Voices [7:10]

I'll have tomato soup and tuna on toast. Okay. This is it, you know. This is the meal. So stock up, buddy boy.

Mostly Uncle Frank [7:21]

But I did want to thank you for your contribution. to the Father McKenna Center. You can learn more about that on the support page at www.riskparityradio.com. I am also a member on the board there for full disclosure. If you do make a contribution, please let me know so your email can go to the front of the line. You're supposed to buy me dinner in a nice restaurant like Mendy's. And thank you for that email and hope to see you sometime in the future, Scott. Looks like dad is bringing home the barbecue. And now third off. Third off we have an email from Junior.

Mostly Mary [7:59]

And this next one seems unnecessarily rude and aggressive, but here we go anyway. Don't mess with Mary, Junior. Don't make me angry.

Mostly Voices [8:07]

You wouldn't like me when I'm angry.

Mostly Mary [8:13]

Junior writes, Just listened to episode 89 and was very disappointed. The whole reason for someone to use the QYLD is for income, and you haven't even mentioned that in the podcast. Income, income, income, 10% yield.

Mostly Voices [8:29]

Well, Junior, that's not how it works. That's not how any of this works.

Mostly Uncle Frank [8:36]

First off, mostly what you're getting from this fund is actually not income at all. It's just a return of capital. It's like you gave me $100 and I gave you $10 back and I called that income. And this is reflected in the tax treatment of QYLD. What you'll see is the return of capital is not taxed right away, but it does reduce the cost basis for what your holding is there. So eventually that cost basis is going to go to zero. And then if you ever sold the QYLD, you would get taxed on the entire sale of it. That's not an improvement.

Mostly Voices [9:11]

In addition to paying ordinary income taxes on whatever you're

Mostly Uncle Frank [9:15]

getting out of that after the cost basis goes to zero. But now we did go through a full analysis of this particular ETF back in episode 98 and I don't want to repeat all that, but let's just back out and talk about what these things are and where they come from and why they exist. Gonna go back in time. Gonna go back in time. Gonna go back in time. QILD is part of a family of funds that have an index or a group of stocks that are bought and then there is overlaid an option strategy on top of that, hopefully to generate some income or do something else. These things have been around since the 1980s in their first guise. At that point in time, usually you were looking at a closed-end fund if you wanted to invest in something like this. Later, we had mutual funds that have the same kind of investments in them, and now we have ETFs. So in terms of popularity, they had a big burst in the 1980s, then they had kind of another burst in the mid-2000s, and now they've become popular again. Surely you can't be serious. I am serious, and don't call me Shirley.

Mostly Voices [10:40]

So why do these things become popular and then go away like acid-washed jeans or something? You think anybody wants a roundhouse kick to the face while I'm wearing these bad boys? Well, they're not well structured and they decay over time.

Mostly Uncle Frank [10:47]

And if you look at the history of this one in particular, I think it started at 25 bucks. It's now down to somewhere around 20. And so over time you expect it to decay until people leave the fund and they close it. That's usually the history of the way these things work. And so what this means is that the overall returns on these funds are actually less than what they're distributing. Which means generally they are poor performers, especially when you compare them to investing less amount of money in the same index and then using the rest of the money to invest in something else. In fact, it's kind of a joke when you do this.

Mostly Voices [11:26]

What do you mean funny? Funny how? How am I funny? and I did it for you so you can understand how this works. I make you laugh. I'm here to amuse you.

Mostly Uncle Frank [11:34]

We did an analysis over at Portfolio Visualizer. We have a portfolio that is 100% QYLD, which relies on the Nasdaq QQQ fund as its basis. And we compare that with a kind of mindless fund of half QQQ and half SHY. SHY It's just a short-term treasury bond fund. It's essentially like holding cash close to it. So now how did QYLD perform against this half-baked, half-QQQ, half-SHY fund? Well, the QYLD fund stunk. Forget about it. It stunk to high heaven. Forget about it. For the entire history of QYLD, It had a compounded annual growth rate of 7.97% against this very simple portfolio that we constructed as a compounded annual growth rate of 10.92%. It has a higher standard deviation, QILD does, which means it's more risky. It has a worst worst year. It has a worst best year. It has a maximum drawdown of 17. 18% versus our easily constructed alternative, which has a maximum drawdown of 8.72%, leads you to a sharp ratio for QILD of 0.7 versus a sharp ratio of our simplified portfolio, our 5050 portfolio, of 1.2. So there's really no contest here. It's obvious that this is a bad investment when even compared against what it is holding as the basis for it. Jeez.

Mostly Voices [13:12]

Guy wouldn't know majesty if it came up and bit him in the face.

Mostly Uncle Frank [13:19]

So in practical terms, what does this mean? It means don't waste your time with something like QYLD. Forget about it. Just hold a smaller portion of QQQ to stand in for it, and then take your other money and invest it in something else. Anything else. Come on, man. Fat, drunk, and stupid is no way to go through life, son. Like other forms of dividend investing or investing for income using stock funds or stocks, this once had a purpose back in the 1980s, say, when transaction fees were especially high. And so if you wanted to get income out of your stocks without selling them, you needed to resort to one of these kinds of mechanisms to do that. But we don't live in that era anymore. We live in the 2020s. There are no transaction fees for selling any of your funds. None. So you just sell whatever you need, create your own dividend, as much income as you like, or at least can be supported by whatever you're investing in. And then you'll have that. There's really no point to this.

Mostly Voices [14:23]

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

Mostly Uncle Frank [14:31]

Using these kinds of funds is like going back to 1987 and driving a Chrysler LeBaron convertible. I'll link to this video in the show notes of one they used as the Indy Pace Car that year. Now it's a very nice looking car for its era. It had some interesting features. It had a cassette tape player. Groovy baby.

Mostly Voices [14:51]

It had voice alerts so if you left the door open it would actually talk

Mostly Uncle Frank [14:54]

at you. Like the car in Knight Rider, it would say, Please close the driver's side door. And that's on the video. You can check it out. And it had a 2.2 liter four-cylinder engine. The best, Jerry. The best. Generated something like 170 horsepower. Now, you could still get one of those today and drive it around. It would be fun, but it wouldn't be efficient. It wouldn't be useful in terms of long-term transportation. Things would probably fall apart in a few years.

Mostly Voices [15:28]

And it's gone. You wouldn't be able to find parts for it either. Uh, what? It's gone. It's all gone.

Mostly Uncle Frank [15:35]

But it's just another example of why we need to stop using things from the Stone Age or the Bronze Age of investing as individual investors. We're in the age of steel. We have the tools.

Mostly Voices [15:48]

We have the talent. We have no fee trading. We have fractional shares.

Mostly Uncle Frank [15:52]

We have all kinds of ETFs to invest in all kinds of things. Get with the program. Use what we have. Use modern technology in investing to do your best investing. Otherwise, guess what? Guess what? Guess what is you are going to have to work longer to accumulate your portfolio and you're going to have lower drawdowns in retirement.

Mostly Voices [16:17]

Y'all be wearing diapers. That's the truth. You can't handle the truth.

Mostly Uncle Frank [16:25]

But thank you for that email. I always like the ones that reveal the foolish consistencies that are still the hobgoblins of many little minds. And adherence to past practices which just aren't good enough anymore. Bow to your sensei.

Mostly Voices [16:42]

Bow to your sensei.

Mostly Uncle Frank [16:45]

And now, fourth off, we have an email from Tony, and Tony writes,

Mostly Mary [16:49]

Not sure if you received the chat message. A few episodes ago, someone noticed that UPRO had dropped 50 plus percent. It was most likely the fact that UPRO had a two to one split mid-January.

Mostly Uncle Frank [17:00]

What can I say, Tony?

Mostly Voices [17:04]

You are correct, sir. Yes. Thank you for that email.

Mostly Uncle Frank [17:10]

And now finally, last off.

Mostly Mary [17:18]

Last off we have an email from Chris and Chris writes：hello Frank, recently UPRO did a stock split and some brokers displayed it as a 50% drop. That may be the reason that one commenter thought it had a 50% drop. There was a commenter asking about backtesting further than portfolio charts in Portfolio Visualizer can. Simba's backtesting spreadsheet pulls together data from several sources and has data going back to the late 1800s. There are gold data sets that track its price before 1969. Since we know gold's price in the UK and we know the exchange rate, the price in US dollars can be calculated. On the Bogleheads forum, they have a thread documenting their progress in maintaining the spreadsheet and they have mentioned that they include the data but it is deactivated. if I can find a way to activate it and run a back test with it, I will let you know. Well, thanks for that reference, Chris. I will put that in the show notes.

Mostly Uncle Frank [18:11]

I know the bogleheads are always fishing around looking for more data. As for gold, every study I've seen, some of them going back 100 years, has said that it does improve the volatility characteristics of a portfolio and the quote to right amount unquote for most portfolios is somewhere around 10 to 15%. If you want to go back and listen to episodes 12 and 40, we talk more about it there as well as you can always search the podcast itself for any topic including gold and it will bring you up all the ones where it is mentioned in the show notes. And if it's mentioned in the show notes then it was a topic for that podcast. But thank you for that email and I would be very interested to see any backtests that you're able to run with any new data that you can find. But now I see our signal is beginning to fade. We'll pick up again this weekend with our weekly portfolio reviews. Of these seven sample portfolios you can find at www.riskparityradio.com on the portfolios page. And we'll probably take a look at some more emails. I think Amy's been waiting patiently to have her email read, and I'd like to do that. Yes! 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 your message into the contact form there. And I'll get it that way. If you haven't had a chance to do it, please go to your favorite podcast provider and like, subscribe, give me some stars or a review. That would be great. Okay. Thank you once again for tuning in. This is Frank Vasquez with Risk Parity Radio signing off.

Mostly Voices [20:09]

What is that? What is that? What is it? Oh, no, no, lots of beasts, lots of beasts. I love my eyes. My eyes.

Mostly Mary [20:30]

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.