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 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 onward to episode 155 of Risk Parity Radio. Today on Risk Parity Radio, it is time for our weekly portfolio reviews. Of the seven sample portfolios you can find at www.riskparityradio.com on the portfolios page.

Mostly Voices [1:24]

And... Guess what? I'm putting you to sleep.

Mostly Uncle Frank [1:27]

But before I put you to sleep with that... I'm intrigued by this.

Mostly Voices [1:31]

How you say... emails.

Mostly Uncle Frank [1:35]

First off, first off, we have an email from Chris. And Chris writes... Hello Frank.

Mostly Mary [1:43]

I was recently looking at the RPAR ETF's fact sheet. One interesting decision they made is that they decided to invest more in emerging markets than an ETF like VT would. I'm not sure why they did that, but it really hurt their 2021 performance.

Mostly Uncle Frank [1:58]

Well, yes, Chris, I think that is one of the reasons they had a lower performance in 2021 with that and also a heavy reliance on tips. But I think what they're trying to do there a little bit is to do some market timing. And I'm not sure that they're as good of market timers as they are of portfolio constructors. and that's why as do-it-yourself investors, I think we're probably better off not trying to be market timers, but be better portfolio constructors. There is a big tendency, I think, if you're going to manage a fund to be tweaking it up and down with various things, which I'm not sure is all that helpful and actually makes your fund less attractive, I think, because you're not sure exactly what you're getting. But the pros are the pros, and their fund will rise or fall on their performance. Well, thank you for that email. I will link to the fact sheet in the show notes.

Mostly Voices [2:55]

Second off, second off, we have an email from Kevin from Canada.

Mostly Uncle Frank [3:05]

And Kevin from Canada writes：hello Frank,

Mostly Mary [3:09]

I was researching the BTAL ETF when I came across a Canadian version, QBTL, that appears to have a significantly lower expense ratio 0.55%. For my fellow Canadians, the ETF is hedged. Having said that, despite the reduced expense, the ETF has still underperformed its US counterpart. I suspect from the embedded hedging costs. Anyway, it might be an alternative for Canadians concerned about their currency exposure. Also, I thought you might find the paper entitled Betting Against Beta interesting. Lots of theoretical insight why the beta-neutral strategy might have positive expected returns over a longer timeframe. It appears the implementation in the paper is different than the fund slightly, in that the theoretical model would take the lowest beta stocks, or fixed income, etc. and lever them up to match the higher beta stocks. My understanding is that the BTAL/QBTL strategy is simply equal dollar amounts long/short. Anyway, not sure if this paper is referenced on the show, but I found it to be a good read. It's also entirely possible that I misunderstood the entire paper. So not a question, I suppose, but food for thought. Thanks again for your work.

Mostly Uncle Frank [4:20]

All right, just to orient everybody here, BTAL is an ETF we analyzed back in episode 114, and it is designed to do well when the stock market is doing poorly by essentially investing long in low beta stocks and then going short in high beta stocks. and we found that it was effective for that, but that it did not have the kind of oomph, if you will, that you would want to see in a fund like that. So you'd have to probably hold too much of it in most portfolios. But you can go back and have a listen to that. I did look up this Canadian version, QBTL. It tracks BTAL almost exactly over time, and so it's basically the same idea and the same kind of fund. So I think anything that would apply to BTAL is also going to apply to QBTL. But that is an interesting option for Canadians.

Mostly Voices [5:19]

How's it going? I'm Bob McKenzie, it's my brother Doug. How's it going, eh? We've got two topics today：back bacon and long underwear. Now as to this paper.

Mostly Uncle Frank [5:27]

This paper is a little bit famous in a good way. It is done by the National Bureau of Economic Research called Betting Against Beta written in December 2010, authors are Frizzell and Pedersen. They are also affiliated with AQR Capital Management, which is a firm that has done a lot of work in the risk parity space and written a lot of white papers about that. I will just read you the abstract to this paper, and I will link to it in the show notes. The abstract says, We present a model in which some investors are prohibited from using leverage and other investors' leverage is limited by margin requirements. The former investors bid up high beta assets while the latter agents trade to profit from this but must delever when they hit their margin constraints. We test the model's predictions against US equities across 20 global equity markets for treasury bonds, corporate bonds, and futures, consistent with the model we find in each asset class that a betting against beta factor which is long a leverage portfolio of low beta assets and short a portfolio of high beta assets, produces significant risk adjusted returns. When funding constraints tighten, betas are compressed towards one and the return of the bet against beta factor is low.

Mostly Voices [6:51]

All right, what does that mean? You are talking about the nonsensical ravings of a lunatic mind.

Mostly Uncle Frank [6:55]

Well, in terms of BtAL or QBTL, those funds are trying to implement this kind of strategy, buying low beta stocks and shorting high beta stocks. And the paper basically says, yes, it can work, but you really need some leverage in order to get much out of it. Which is interesting because we came to a similar conclusion when we were analyzing BtAL back in episode 114. But if you want to dive deeper into that, I will have that paper there in the show notes, as I mentioned. And thank you for that email. Next off, we have an email from Davis, and Davis writes.

Mostly Mary [7:35]

Hi, Uncle Frank. Risk Parity Radio has become a mainstay for my fiance and I for about a year now. Groovy, baby.

Mostly Voices [7:42]

Your humor is great, and I love trying to guess which movies or pop culture

Mostly Mary [7:47]

references your sound bites are from. Forget about it. I think I'm about 50/50 on being able to identify all of them. Though I am in the accumulation phase, I have been listening to every episode and sharing my favorite ones with my dad and uncles who are retired and whom I feel would benefit greatly from this show if only they would implement the advice. Sigh. Anyway, I was hoping you would take the time on your show to help me with some of the thoughts and questions I have below. I hope they are of interest to you and my fellow listeners. So here it goes. Why not use utilities instead of REITs in your Golden Ratio portfolio? Utilities ETFs seem to have lower correlation to VTI than REITs do and with lower volatility and similar returns. Plus, would they pay qualified dividends in a taxable account and thus be more tax efficient? Do you have any thoughts on using frontier markets in risk parity portfolios? Analyzing the ETF ticker symbol FM specifically, it's expensive but is less correlated to the US market than other international funds, except for KBH. KBA and even outperforms emerging markets with less volatility. It gives exposure to some interesting markets like Vietnam and Nigeria with much less volatility than KBA. Combining large cap growth in equal parts with small cap value in the Golden Ratio portfolio is brilliant. They pair so well together in backtests. As I mentioned earlier, I am in the accumulation phase and have decided this 50/50 large cap growth and small cap value asset allocation is the approach I would like to take With my equity heavy investment strategy, do you think the two factors would pair equally well together internationally? For example, pairing EFG with AVDV and finding similar proxies for emerging markets, large cap growth and small cap value. Thank you so much for your thoughtful advice. I have learned so much from you already, Davis.

Mostly Uncle Frank [9:39]

All right, your first question is, why not use utilities instead of REITs in your Golden Ratio portfolio? And the answer is, yes, you could do that. Yes! And we did a modeling of that when we talked about utilities back in episode 27. So you might want to go back and listen to that. It looks a little bit different over time. You're going to get more oomph, if you will, out of REITs than you will out of utilities. But as a trade-off, utilities are going to make your portfolio a little bit more conservative. and they also have that nice benefit of having mostly qualified dividends. So if you're going to run this all in a taxable account that is of size, that would be a consideration that you might want to put into it. So yes, it's an option. As we've talked about in many prior episodes recently, this golden ratio portfolio is designed for flexibility with that last 16% After you do the 42% in stocks, the 26% in treasuries and the 16% in gold, what you have left are a 10 and a six or a total of 16% which can be allocated to suit your goals and specifically how aggressive you want the portfolio to be overall within a range. All right, next off you asked about frontier markets and the ticker symbol FM. I did take a look at that and compare it to EEM, which is in a merging markets ETF, and they do perform similarly, or at least they have performed similarly recently. So I like the idea of frontier markets or finding things in frontier markets, particularly those ones that have growing economies and populations. But honestly, I have not seen a long-term analysis showing that that would be a really good thing to have in your risk parity portfolio. But perhaps that will evolve over time. I did go ahead and run a asset correlation analysis over at Portfolio Visualizer including EEM and FM that you may want to take a look at. I'll link to it in the show notes. And it shows that EEM and FM are similar when you compare them to other kind of basic funds you might find in a risk parity portfolio. although the FM does seem to have performed better than EEM at least recently. FM has only existed, however, since October 2012. But I'll leave that for you to take a look at. Now as to your third point, that makes even more sense to me to instead of looking at these international funds on a country-by-country basis that we break them down into their factors. so we're talking about large cap growth versus small cap value, etc. And on and so forth. To me, those are better differentiators than country by country analysis. And I think that may solve the problem that I have with a lot of international funds is that instead of helping you diversify, they're just concentrating you in one particular area based on what goes on in that particular country's stock market as opposed to that particular country's overall economy. So it seems to me that your idea would be the better way to go, like pairing the EFG with the AVDV.

Mostly Voices [13:04]

You're going to want that cowbell.

Mostly Uncle Frank [13:07]

That being said, there isn't a whole lot of back testing or analysis you can do on this idea, simply because these funds have not been around that long. But I can't see any reason why that would work differently than it works in the US, provided that whoever putting these funds together is accurate in determining what are your large cap growth and your small cap values, et cetera. And that may take a little work. I gotta have more cowbell. But I always like to get emails like this because it confirms to me how intelligent and thoughtful this audience is about these issues. and how they can take principles, you can take principles and apply them in new and useful ways. So thank you very much for that email. But I am wondering about you and your fiance finding love around this podcast. I'm imagining in my mind that someday you'll have children and name them Golden and Oratio. Much like the children Walker and Texas Ranger, And Talladega Nights.

Mostly Voices [14:16]

I'm Walker, and I'm Texas Ranger. What can I say? Both of my parents are hot. Tarnation, N-R-K! I don't even know what that means, but I love it. I will not have my grandbabies acting like shiftless, wild hobos. But now, fourth off, we have an email from Amy.

Mostly Uncle Frank [14:39]

Aimee what you wanna do? And Aimee writes. Hi, Sensei. About your Sensei.

Mostly Mary [14:51]

I don't think I'm being hyperbolic in saying that the education on risk parity you provide with this podcast has changed my life. Yes. Certainly, it has made me a much better investor. So you have my sincere gratitude for the work you put into the show.

Mostly Voices [15:03]

I will take mercy on Mary and make my question short.

Mostly Mary [15:14]

Merry Merry, why you buggin'? Why does the Golden Ratio Portfolio hold 6% cash in a money market account? I notice no other portfolio holds a cash allocation. The portfolio policy statement states, We will sell the money market asset first and a portion of the most productive fund after that as necessary to support the withdrawals. So it sounds like this cash allocation is for the purpose of safeguarding future withdrawals by holding them on deck. Can you talk about this cash bucket strategy? Does data support this as a better strategy or is it just a more conservative one? It seems to me once you withdraw that cash, you need to rebalance the portfolio in order to fill the cash allocation back up so it doesn't avoid selling in a down market. I'll soon migrate my 100% stock funds portfolio to a golden ratio portfolio in preparation for retirement five years from now. I wonder if I don't need to bother with the cash allocation until I begin withdrawals. Thanks sincerely, Amy.

Mostly Uncle Frank [16:11]

Well, the short answer is no, you don't need to bother with cash if you're not withdrawing from your portfolio. And we've talked about this in other episodes, but one way to reallocate that 6% if you just wanted to leave everything else the same would be to put two more percent into the stock component making that 44%, two more into the treasury bond component making that 28%, one on the gold, and one on the REITs or whatever else you have there. So those become 17 and 11 in terms of percentages. The reason I set it up this way for a sample portfolio is I did want to have at least one sample portfolio that had this kind of cash component to it that you just withdrew down upon all year long. Because many retirees do set themselves up in that manner. For example, I know that Paul Merriman, who holds a portfolio that is 50% stocks and 50% treasury bonds, he and his wife will just take 5% at the beginning of the year, put that in cash or short-term treasury bonds and just live on that all year and not look at their portfolio again until the next year. That is kind of a tried and true way for many retirees to manage their decumulation portfolio. In reality, most retirees have between one and three years of cash or short-term bond type instruments. Some people have a lot more. I think that gets kind of excessive. Other people don't need so much because they've got income coming from pensions, Social Security, rental properties, or something else, in which case their cash needs are much lower. And this also gets to the kind of the different ways of managing decumulation. We've got the two basic methods in our sample portfolios. One is this method where you simply put some money into your cash or cash equivalents and just draw down on that all year long and then replenishing at rebalancing time. The other method that we're using for most of the portfolios is kind of the monthly method where you look at the performance of your asset classes as you go along. and the ones that are performing the best, you take the distributions out of those. So it kind of has a natural rebalancing over time on a monthly basis. I don't know of any proof that either one of these is superior to the other. I think it has more to do with the psychology of it, that if you are a person that does not like to look at their portfolio, doing it once a year and having the big cash bucket may be the way to go. But if you're a person who's going to be looking at it all the time anyway, and has a mindset or desire to be tinkering or doing something, then creating a system that won't hurt you like the monthly withdrawal from the best doing asset is a way to go to keep you on board in terms of portfolio management. I am not aware of any data that says that one is mathematically better than the other method. And I would be very surprised if there is a significant difference given that you're only taking a small percentage out of the whole giant portfolio anyway. So I'm glad you raised that, Amy. The best, Jerry. The best. Because I'm sure a lot of other people have these kinds of questions, and you should feel free to adjust that golden ratio portfolio to suit your needs. It is a sample portfolio. not intended to be the end all and be all of portfolios. And thank you for that email and having mercy on Mary.

Mostly Voices [19:45]

Mary, Mary, I need your hug. I think I could stay with you for a while longer if I do. Last off. Last off, we have an email from Mark, and Mark writes.

Mostly Mary [20:11]

Uncle Frank, in episode 149, you stated that the Avantis ETFs, and specifically AVDV, were from DFA starting at about the timestamp 1025. I don't believe that is the case. Well, the people that founded Avantis were very senior execs at DFA before leaving in 2017 and eventually founding Avantis in 2019. That is where the connection with DFA ends, as far as I understand. There is good news on the DFA front, though. Over the past year or so, DFA has started the process of converting its own portfolio over to ETFs. As you can see in the table, there is a mix of brand new ETFs and existing DFA mutual fund conversions to ETF. The mutual fund to ETF conversions are the ones that have over 10 years of performance data, while the truly new ETFs have only since inception data. You may notice that the expense ratios for the ETFs are also lower than DFA's corresponding mutual funds. And of course, there is no advisor requirement for the ETFs. There is currently no perfect DFA ETF for AVDV from Avantis. DFA is still building its ETF portfolio, and Avantis has a two-year head start. Mark.

Mostly Uncle Frank [21:24]

Well, you know what I have to say to that, Mark. You are correct, sir. Yes. and thank you for bringing that to my attention. Yes, I did confuse that in my mind that we were talking about people from DFA starting those funds and not DFA itself and that I was also aware that DFA was setting up those funds so I did confuse that in my head. Wrong!

Mostly Voices [21:47]

Don't be saucy with me Bernaise!

Mostly Uncle Frank [21:50]

Nevertheless, both sets of funds are drawn on the same kinds of principles. which is to take a basic, say, small cap value fund and then just tweak it a little bit to make it perform a little bit better. All of those kinds of funds, whether they come from Avantis or DFA itself, are new as far as their ETF construction is concerned, although the principles underlying them have been used for at least a couple of decades by DFA itself. But you didn't used to be able to have access to those funds as a do-it-yourself investor because DFA would only deal with you if you went through a financial advisor. Again, that is a sign that we are in a new era of investing that is much more favorable for DIY investors.

Mostly Voices [22:39]

We had the tools, we had the talent.

Mostly Uncle Frank [22:43]

That the people that create these funds now cannot sit on their laurels and only deal with the financial services industry. They have to deal with us as do it yourself investors. if they want to have a hope of sucking on our milkshakes.

Mostly Voices [22:58]

I drink your milkshake. I drink it up. And now for something completely different.

Mostly Uncle Frank [23:11]

And the something completely different is our weekly portfolio reviews of the seven sample portfolios you can find at www.riskparitybrader.com on the portfolios page. And this was another exciting week in the markets and another boring week in our risk parity style portfolios, which is kind of just the way you want it to happen when things are going crazy in the markets and going up and down the way they did last week. So just looking at those markets, the S&P ended up 0.82% for the week. The NASDAQ ended up 1.08% for the week. Gold was actually down for the week. For once, it was down 0.56%. Although at one point it was up over 3% I think in the middle of the week. Long-term treasuries represented by the fund TLT were down 0.90% for the week. REITs represented by the fund R E E T were up 1.14% for the week. Commodities represented by the fund PDBC were up 1.27% for the week. Preferred shares represented by the fund PFF were up 0.61% for the week. And now going to our portfolios, the first one is this All Seasons portfolio that is only 30% in stocks, 55% in treasury bonds, and then 7.5% each in gold and commodities, GLDM and PBDC. As I mentioned many times, this is there as a sample, but it's probably not something anybody would use because it's really too conservative for most people. But anyway, it was down 0.07% for the week. It is up 7.62% since inception in July 2020. So it is really going nowhere these days. And now going nowhere in the other direction, we'll move to our three bread and butter portfolios. First one being the Golden Butterfly. This one's 40% in stocks divided into a small cap value fund and a total market fund. 40% in treasury bonds divided into short and long funds. And then it's got 20% in gold. GLDM, it was up a whopping 0.09% for the week and is up 19.65% since inception in July 2020. Moving along in our snooze fest, the Golden Ratio portfolio is our next one. This one's 42% in stocks, 26% in long-term treasury bonds, 16% in gold, and then in this sample version, we have 10% in REITs, R-E-E-T, and 6% in cash. It was up 0.25% for the week. A big move compared to the other ones. It is up 18.86% since inception in July 2020. And now we're going to the Risk Parity Ultimate. This one has 14 funds in it. I won't go through all 14 of them, but it'll make you sleep even longer. Last week we noted this portfolio is up $1. $1. This week it's up $4. So a whopping 0.04% for the week. It is up 17% since inception in July 2020. And now we go to our experimental portfolios, which are usually much more volatile when not so much this week. These have leveraged funds in it. The first one is the Accelerated Permanent Portfolio. It's 27. 5% in long-term treasury bond fund, TMF, which is leveraged 25% in UPRO, a leveraged stock fund, 25% in PFF, A preferred shares fund in 22.5% in gold GLDM. It was down 0.12% for the week. It is up 14.83% since inception in July 2020. Moving to what is usually our most volatile portfolio, the aggressive 5050. This one is 13 in the leveraged stock fund, UPRO, 13 in the leveraged bond fund, TMF, and then the remaining third is divided into PFF and VGIT, which are a preferred shares fund and an intermediate treasury bond fund. It was down 0.15% for the week. It was up 16.56% since inception in July 2020. And then we get to our last portfolio, the Levered Golden Ratio. This one is 35% in a composite stock and treasury bond fund that is leveraged. It's called NTSX. Then it's got 25% in gold, GLDM. 15% in a REIT called O Realty Income Corp. And the next 10% or 2% are in a leveraged stock fund TNA, which is a small cap fund, and a leveraged bond fund TMF, which is a long-term treasury bond fund. The remaining 5% goes in VIXM, which is a volatility fund in 2% in two crypto related funds. this one was the big winner last week, up 0.44% for the week. It is down since inception. Its inception was actually in July 2021. This one's a much younger portfolio. It's down 4.31% since inception. Really all of that coming in this year. And that concludes the portfolio review. I think what we really get out of that and what we've really got out of that the last month or so is that even though Various markets can be very volatile. If you have a combination of uncorrelated asset classes that are well diversified, then your results are going to be much more muted and you will be able to sleep at night. I took the liberty of putting away something in your teeth.

Mostly Voices [28:49]

It'll be interesting to see how the monthlies come out,

Mostly Uncle Frank [28:53]

which we will have next week. Along with the monthly distributions, and we may just go ahead and talk about that in the middle of next week, along with looking at some more emails since we are getting continually behind with those. 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 question or comment into the contact form 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 and 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 [30:15]

We wanted us some wussies. We would have named them Dr.

Mostly Mary [30:23]

Quinn and Medicine Woman, okay? 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.