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 [0:37]

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 foundational episodes for this program. And those are episodes 1-3-5-7-10. and nine. One of our listeners, Karen, has also reviewed the entire catalog and has additional recommendations as foundational episodes. Ain't nothing wrong with that. And Karen's recommendations are episodes 12, 14, 16, 19, 21, 56, and 82, in addition to the first five that I mentioned. Now, I realize women named Karen get a bad rap these days, but I assure you that all of our listeners are intelligent, thoughtful, and savvy. Yes! And don't forget that the host of this program is named after a hot dog.

Mostly Voices [1:39]

That's not an improvement. Lighten up, Francis.

Mostly Uncle Frank [1:44]

But now onward to episode 156 of Risk Parity Radio. Today on Risk Parity Radio, we are going to do a brief monthly review of the seven sample portfolios that you can find at www.riskparityradio.com on the portfolios page and go over the distributions for those portfolios.

Mostly Voices [2:09]

But before we get to that, I'm intrigued by this. How you say emails? And... First off.

Mostly Uncle Frank [2:19]

First off, we have an email from Nathan, and Nathan writes...

Mostly Mary [2:27]

Hello Frank, I continue to love your podcast after listening for over a year. It's right up there with Dan Carlin's Hardcore History for my favorite podcast. You have mentioned on several episodes that small cap value is one of the best stock diversifiers from a total stock market or S&P 500 fund. I have heard you make the case that you prefer this to international funds as those are dominated by large cap growth companies such as Nestle and Toyota. This intuitively makes sense, but when I look at the back-tested correlations on Portfolio Visualizer, it appears that XUS International has a lower correlation to the total US stock market, VTSAX, than small cap value, VBR. It is not a large difference, 86% versus 93%, but International XUS seems to be a more diversified stock fund to hold versus small cap value. Am I missing something? I am in my accumulation phase and been trying to stick to the simplicity principle and only hold two funds. I am currently only buying VTSAX and VXUS. I was second guessing myself based on your comments and was thinking VBR or VIOV should be substituted VXUS, but they don't seem more diversified based on the backtests. Thank you for taking my question, Nathan. Well, first, thank you for that compliment.

Mostly Uncle Frank [3:50]

There are not too many podcasts that exhibit the originality and creativity of Dan Carlin's Hardcore History. And I'm not sure this rises to that level, especially the way Dan Carlin's able to modulate his voice when he reads the letters of others to simulate their voices. But I will take every compliment I can get. Yeah, baby, yeah! So thank you again. All right, first on this correlation analysis, what you want to do at Portfolio Visualizer is use the oldest funds that you can find so you can go as back far in time as possible. I'm gonna go back in time. And so the funds that you want to use for this correlation analysis are VTSMX, which is a Vanguard total stock market, the oldest version, VGTSX, which is total international stock index from Vanguard, and VISVX, which is the Vanguard small cap fund. And those are the oldest versions and they take you back to 1999 for the analysis. I ran it and I will link to it in the show notes. And what you'll see is that the Vanguard Total Stock Market has a correlation with the International Fund of 0.88 and with the Small Cap Value Fund of 0.77, which is significantly lower. And so you can see from that that the Small Cap Value Fund is in fact more diversified from the Total Stock Market Fund than the International Fund is. The other thing you'll note from that is that the annualized return for the International Fund is the lowest of the three at 5.21%, while the other two are at 8.39% and 9.98%. And part of the reason for that, I believe, is the concentration in those total international funds of essentially a lot of large cap value companies. So if you're only allowed to choose one more fund than a total stock market fund, your best pick is going to be a small cap value fund over an international fund. But you don't have to make that kind of absolute choice. Where this is actually going is now we are seeing the development of small cap international funds. And I just listened to last week an excellent podcast from Rick Ferri. and I'll link to this in the show notes is Bogleheads Podcast, episode 43. In that podcast, he is interviewing a gentleman named Eduardo Repetto, who is the CIO of Avantis Funds. Now, before doing that, he worked for Dimensional Fund Advisors, who has come up with some of the more innovative funds. And now that he's gone to Avantis, they're rolling those out as ETFs. the other thing I thought was very interesting is that before he went into fund world, he got a PhD at Caltech in aeronautics. A little more impressive than my mere Bachelor of Science from that institution. But score one for the alma mater all the same. Anyway, he talks about in this podcast rolling out small cap value funds that are both US and international, and so Avantis has several of those funds. that you might want to look at. They're relatively new. AVUV is their US small cap value fund. AVDV is their international developed small cap value fund. AVES is their emerging markets small cap value fund. Now all of those funds are relatively new, but they are based on a tried and true methodology which he describes in that podcast. So if I were looking for international funds to consider, I would definitely be looking at some of these. Because in theory, they should give you better returns than those general total international funds, and they are going to be more diversified from your large cap US kind of funds. I don't think you necessarily need to get that complicated, particularly in your accumulation phase. But if you're interested, Those are some good things to consider.

Mostly Voices [8:10]

I'm telling you, fellas, you're gonna want that cowbell.

Mostly Uncle Frank [8:14]

And thank you for that email. Second off. Second off, we have an email from Michael, and Michael writes. Hello, Frank. Thank you for creating such a fabulous podcast.

Mostly Mary [8:26]

I've learned a lot and appreciate the effort. I am fascinated by one of your experimental portfolios, the Accelerated Permanent Portfolio. The results are so spectacular that it almost seems too good to be true. I've learned in life that if something seems too good to be true, it probably is. That said, I just can't seem to find anything wrong with this one. I'm thinking about allocating some money to it, but I'm worried that I might be missing something. What are the risks of this portfolio? Would it ever have blown up in a 2007-2009 style environment? Are there risks to the leveraged ETFs that I might not be cognizant of? Michael.

Mostly Uncle Frank [9:06]

Well, Michael, I think you're probably the first one to find this the most interesting of those sample portfolios, but let's just talk about it briefly.

Mostly Voices [9:14]

Tony Stark was able to build this in a cave with a box of scraps.

Mostly Uncle Frank [9:23]

First, if you're looking for the introductory episode for this portfolio, it's all the way back in episode eight is where you'll find that. It was very kind of crudely constructed to look like Harry Brown's original permanent portfolio. And that was something that was developed in the 1980s. That was 25% gold, 25% stocks, 25% long-term treasury bonds, and 25% short-term treasury bonds or money markets at the time. But you can see that even just kind of crudely mapping that kind of setup and adding some leverage to it. does make a nice performing portfolio. You have a gambling problem. Now you asked about the weaknesses in it. Do I feel lucky? I think it would have done fine in the 2007-09 environment because of all the treasury bonds that are in there. Where it would have struggled, I think, is in the 1970s. And the reason for that is it's really kind of lacking Small cap value funds or other funds like commodities that would be doing very well in inflationary environments. So if you were going to modify it, you could probably easily do that by getting rid of the preferred shares fund that's in there, which is just kind of a plug as a mirror of cash or a money market from the old permanent portfolio and substitute some other kinds of asset classes that might perform better in an inflationary environment. It's too bad we really don't have a leveraged small cap value fund that we can put in anything. Maybe somebody will devise one someday. There are leveraged gold funds out there that might be interesting for this kind of portfolio, although I have not studied them in detail. Well, you have a gambling problem. As for the risks to these leveraged ETFs, We've talked about this in several episodes. If you want to talk about UPRO in particular, go back to episode 148, where we did a 10 question analysis of that fund. But the short answer to it is, yes, there are some risks there. One is that these funds are designed to perform 2x or 3x on a day-to-day basis and not for long periods of time. although they seem to work well enough over long periods of time. The second one is there are going to be idiosyncratic risks in each kind of these funds. UPRO itself involves swap contracts, which aren't so bad or so risky given that they're gigantic banks on the other sides of those contracts. But other kinds of leveraged funds may involve futures contracts and other things. So you need to be mindful and careful about those things. And then we just have to be cognizant that these things have only been around since about 2009. So we really don't have decades and decades worth of data to analyze them. Forget about it. So as I've said in other podcasts, these things should work very well in theory. Whether they work that well in practice in the future remains to be seen. But they certainly do seem to be a viable option for at least a portion of your investments, if you don't mind taking the risks that are associated with leverage.

Mostly Voices [12:45]

You can't handle the gambling problem. Hopefully that helps. And thank you for that email.

Mostly Uncle Frank [12:59]

Next off, we have an email from My Contact Info.

Mostly Mary [13:07]

And My Contact Info writes, you- recent podcast on dividends was exceptional. It is amazing to me that despite the theoretical support and empirical evidence supporting the inefficiency of dividend investing that it persists. Apologies if you are already aware of his work, but if you are interested in dividend policy, asworth demotoren covers the subject brilliantly, in my opinion.

Mostly Uncle Frank [13:28]

All right, yes, I am very aware of aswat demotoren The best Jerry, the best. He is one of the leading thinkers in areas of valuation in particular and has written a Bible on that subject. That's something I was intimately involved with in my legal career because I cross-examined a lot of economic and valuation experts. And so whatever Aswath Damodaran had to say about the subject was generally accepted. as gospel. Real wrath of God type stuff. Now regarding that podcast on dividends or that episode, that was episode 151 if anyone else is looking for it. And I had a couple other meta thoughts on the idea or the ideas going on when people start talking about dividend investing. The first one is that if you look at your assets, the ones you plan to live on, you can categorize them by their liquidity and also by their tendency to generate income. And so particularly if you're in retirement, you want assets that are either completely liquid or at least if they're not liquid, they are generating income such as rental properties or a pension. But if you have assets, financial assets that are completely liquid and we have those now because we don't have any transaction fees, and can trade in fractional shares. If you have those kinds of assets, then you shouldn't care whether they're generating income or not, as long as their total returns are sufficient for what you're trying to do. You would prefer them to not have the income and simply accrete that in terms of the share prices and then sell them when you need to. On the other end of this spectrum, you have assets that are actually kind of undesirable to hold in retirement. And those are things like your residence or your coin collection or anything that is not liquid and not income generating. That is actually where a lot of retirees get into trouble. If they have put all of their savings into non-liquid assets that are not income generating, they end up house poor and trying to get money out of their house or money out of their collections or something to live on. I don't think too many of my listeners have that problem here, but that is an endemic problem for the middle class in the United States when they're approaching retirement. If they have assets at all, often they have them in an illiquid form. The idea of dividend investing is assuming or treating a liquid asset as if it's Illiquid. And as we've talked about in that episode 151, get off my lawn. In the past, it was true that a lot of your financial assets were essentially illiquid due to the transaction fees and other costs associated with getting in and out of them. Geez. But that's not something we have to worry about these days. Forget about it. There's also another interesting take on this. Wade Fau of Retirement Research recently published a book where they had gone through a survey and part of the survey was asking retirees about the kind of preferences for how they would be living on their assets. And some people, a significant number, do have a psychological preference for having a set pile of assets and then having a set income coming off of them. You are talking about the nonsensical ravings of a lunatic mind. The advantage to having something like that is its predictability. The disadvantage to it is it turns out to be inefficient, at least if you are trying to get the maximum withdrawals or distributions out of your portfolio. And that's really what our goal is here. to get those projected safe withdrawal rates and perpetual withdrawal rates to be as high as possible so that we can save less money and take out more money in terms of drawing down on these portfolios. Cool. If your goals are different, for example, if your goal is to preserve some pile of assets for somebody else when you die, then you may be better off with one of those kinds of strategies, although even that's unclear. Forget about it. In any event, that kind of strategy is by its nature going to be less efficient than holding a risk parity style portfolio, even if it might feel better psychologically.

Mostly Mary [18:28]

Now you can also use the ball to connect to the spirit world.

Mostly Uncle Frank [18:32]

What I find interesting, it does appear that that is the group of people that Wade Fau and his advisory service are marketing to since they put a great emphasis these days on things like reverse mortgages and forms of annuities.

Mostly Voices [18:49]

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

Mostly Uncle Frank [18:56]

Which could make sense but are certainly not going to be as efficient as what we talk about here.

Mostly Voices [19:00]

No more flying solo. You need somebody watching your back at all times. But I guess somebody's got to drink some of those milkshakes.

Mostly Uncle Frank [19:08]

A my straw reaches across

Mostly Voices [19:12]

the room. I drink your milkshake. I drink it up. And thank you for that email.

Mostly Uncle Frank [19:28]

Last off. Last off, we have a message from Visitor5225 who sent this through the website.

Mostly Mary [19:39]

And Visitor5225 writes, hello, do you have the email address to send questions for the podcast? And the answer is, yes.

Mostly Uncle Frank [19:48]

And we give out that email at the end of every podcast. But today we'll do it right here and right now. Bowed to your sensei.

Mostly Voices [19:56]

Bowed to your sensei.

Mostly Uncle Frank [20:00]

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 without even using my email. So hopefully you'll be able to get a question to me in the future. And thank you for that message. Now we're going to do something extremely fun. And the extremely fun thing we're going to do is a brief monthly portfolio review for February and distributions for March. I would ordinarily combine this with my weekly Portfolio Review Podcast, but I'm not sure they're going to be one of those this week. Surely you can't be serious. I am serious. And don't call me Shirley. I am retired and I have retiree things to do this weekend. So you may only see it on the website in terms of the update and there probably will not be a podcast. But anyway, looking at these portfolios, these are the sample portfolios you can find on the portfolios page at www.riskparityradio.com and the first one is the All Seasons Portfolio. This is our most conservative one. We are withdrawing from this at a 4% annualized rate. And so we'll be taking $35 in cash out of it for March. Moving to the next one, the Golden Butterfly. We're withdrawing from that one at a 5% annualized rate. And that'll result in $47 taken out of it. And it'll be taken from the Goldfrond GLDM. because gold had a good February and so we were taking a lot of money out of that out of most of these portfolios. The golden ratio, we were withdrawing at an annualized rate of 5%. $46 comes from that, it comes from the cash holding in accordance with the investor policy statement for that one, which you can find on the portfolios page as well. Then we go to the Risk Parity Ultimate, we're drawing from this at an annualized rate of 6% and that'll be $54 and we're also taking that from the best performer last month which was GLDM, the Gold Fund. And then we have our experimental portfolios from the Accelerated Permanent Portfolio. We are taking out of this at an annualized rate of 8%, put it through its paces and so that'll be $69 from cash coming out of that one. From the aggressive 5050 we're also taking out of that at an annualized rate of 8%, at least $70 coming out of that one. And that one comes from UPRO this month. There is no gold in that fund to take from. And then finally, the Levered Golden Ratio, which we're drawing from at a annualized rate of 7%, will be taking $55 out of that. Also from GLDM, the Gold Fund that is in there. You will also see on the Portfolios page there at the top, the monthly summary, which we have updated going through to February 2022. I think this is getting interesting because we are seeing a lot of volatility and movement in the markets right now with different assets performing well, while the stock market is performing not so well. And so what you see is how these risk parity style portfolios are having much more muted returns than traditional portfolios. and if you look at this comparison for comparison purposes, VTSA X, the total stock market fund was down 2.55% last month. The Vanguard Wellington Fund, which is like a 65-35 kind of traditional fund, was actually down 3.25% last month. And the conservative Vanguard Wellesley Fund, VWIAX, was down 1.39% for the month. Now, looking at our base risk parity style portfolios, the All Seasons was down, but it was down 0.6% for the month. The Golden Butterfly was actually up in the month of February due to the high proportion of gold in it. It was up 0.83% for the month. The golden ratio was down, but it was down 0.41% for the month. Risk Parity Ultimate was down 0.23% for the month. the leveraged portfolios were much more volatile as you might expect the accelerated permanent portfolio is down 3. 27% for the month and the aggressive 5050 the most volatile one was down 5.93% for the month and that's the one that does not have any gold in it but if you look at the levered golden ratio portfolio that was only down 0.53% for the month and so that was also much more muted than any of these kind of standard portfolios. But I think that's a good illustration as to how these things generally work out over time, that where you see these kinds of portfolios do better than standard portfolios is generally in down markets or bad markets or difficult markets. And so that's what you saw in February, and actually that's what's happening again this week, which We'll see if it plays out because things are so volatile these days. You never know what you're gonna get.

Mostly Voices [25:24]

Do you want a chocolate? My mom always said life was like a box of chocolates. You never know what you're gonna get.

Mostly Uncle Frank [25:36]

But I thought all of that was interesting to consider and is why we have these portfolios that we are tracking. Yes. But now I see our signal is beginning to fade. Since you already know where to find me, I won't repeat that.

Mostly Voices [25:51]

Don't be saucy with me Bernaise.

Mostly Uncle Frank [25:55]

As I mentioned, we probably will not have a podcast this weekend, but we will pick up next week again with some more emails and commentary.

Mostly Voices [26:07]

Think big, think positive, never show any sign of weakness. Always go for the throat. Buy low, sell high. sell high. Fear, that's the other guy's problem.

Mostly Uncle Frank [26:18]

If you haven't had a chance to do it, please go to your favorite podcast provider like Karen and like, subscribe, give me some stars in a review, and maybe I'll feature you too. That would be great. Okay. Thank you once again for tuning in. This is Frank Vasquez with Risk Parity Radio. Signing off.

Mostly Voices [26:41]

Never knows how you come across somebody once in a while you shouldn't have messed with. That's me. You crazy man, get out of here man.

Mostly Mary [26:48]

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.