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 [0:18]

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 1-3-5-7-8. 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 [1:46]

But now onward to episode 159 of Risk Parity Radio. Today on Risk Parity Radio, we will continue to work through our never-ending pile of emails. And we have some interesting ones to discuss today. But before we get to that, I thought we would do something we hadn't done in quite a while, which is our monthly rant that doesn't occur every month. I want you to be nice until it's time To not be nice. Well, how are we supposed to know when that is? You won't. I'll let you know. Now if I can just find that button. Today's rant comes to us courtesy of Think Advisor. That website that tells us about all the nefarious deeds of the financial services industry, even the ones they don't think are nefarious. Surely you can't be serious. I am serious. And don't call me Shirley. Now you would think this site, if it were professionally oriented, would be telling people how to be better financial advisors. But what it tends to be talking about in large part, is how to be better marketers.

Mostly Voices [3:15]

They're sitting out there waiting to give you their money.

Mostly Uncle Frank [3:22]

Are you gonna take it? And so the latest entry in that category is an article from March 7th, and the article is entitled How Advisors Do the Party Circuit. And I have visions in my head of some combination between Ned Ryerson from Groundhog Day. You know, whenever I see an opportunity now, I charge it like a bull.

Mostly Voices [3:48]

Ned the bull, that's me now. And Lewis Tully from Ghostbusters. How you doing? Why don't you have some of the Brie? It's at room temperature. You think it's too warm in here for the Brie? Trying to dance their way to fame and fortune.

Mostly Uncle Frank [4:03]

Listen, maybe if we start dancing, other people will join in. But anyway, just let me read you a few highlights for your amusement. Warmer weather is coming, and it means that the party circuit isn't far behind. Yes! This is an opportunity for advisors to mingle with the sort of people the sort of people they covet. They covet for clients.

Mostly Voices [4:34]

Top drawer, really top drawer. And why do they covet them? My straw reaches a cruel throat. I drink your milkshake. I drink it up.

Mostly Uncle Frank [4:56]

And then the article asks the age-old question, how do you do the party circuit? Do the dance, make a little love, get down tonight, get down tonight.

Mostly Voices [5:20]

With tips like this, buy your tickets early, buy a table, get listed in the program, take out a business card ad, obey the law, hope for a pre-party or an after

Mostly Uncle Frank [5:24]

party.

Mostly Voices [5:27]

When you see flashing police lights in your mirror, stop immediately.

Mostly Uncle Frank [5:31]

Arrive at the start, meet the big wigs. You gotta meet those big wigs. Well, you haven't got the knack of being idly rich.

Mostly Voices [5:38]

You see, you should do like me, just snooze and dream. Dream and snooze. The pleasures are unlimited.

Mostly Uncle Frank [5:47]

And then stand up and be counted during the paddle raise.

Mostly Voices [5:51]

I don't think it means what you think it means. Let me just read that one.

Mostly Uncle Frank [5:55]

In the live auction, most organizations announce a project, then ask people people to donate money by raising their paddle. This is done in decreasing amounts. Donors are sometimes asked to stand, making counting easier. At the end, they tally how much was raised. Everyone applauds. That would be great. M'kay? You want to be counted and seen at least in the final and lowest category. Sounds more like some of these people need to be paddled.

Mostly Voices [6:34]

Obey the law.

Mostly Uncle Frank [6:38]

And the next list is for parties at clients homes. And here's that list. Accept all invitations. Dress well. Get the car washed and waxed.

Mostly Voices [6:56]

Or maybe get a job at the car wash. Working at the car wash. Working at the car wash. Arrive bearing a gift.

Mostly Uncle Frank [7:09]

They suggest wine, flowers, or chocolates. I talked to Mary about that, and she was appalled. Forget about it. Nobody wants to be running around putting flowers in a vase. When they're trying to host a party, just because somebody decided to bring them. I award you no points, and may God have mercy on your soul. Don't arrive early. Mingle with the guests. Don't behave as if no one ever feeds you. It happened once. Now I'm thinking of Dan Ackroyd, Santa Claus, and Trading Places.

Mostly Voices [7:44]

You'll be sorry. You'll all be very, very sorry.

Mostly Uncle Frank [7:54]

Don't be the last guest to leave. Send a handwritten thank you note afterward. And then if you're hosting your own party, here's that list. Send a physical invitation. Invite people who get along. No, invite people to fight with each other.

Mostly Voices [8:12]

You can't handle the dogs and cats living together. Low-key is okay.

Mostly Uncle Frank [8:16]

Consider renting a tent, figure out parking, have enough food and drink, consider renting glassware, hire staff, circulate, and have coffee and bottled water on hand.

Mostly Voices [8:31]

I always have plenty of low-sodium mineral water and other nutritious foods in the house, but you already know that. Yeah, I know that. Because remember Lewis Tully's advice. I'm giving this whole thing as a promotional expense. That's why I invited clients instead of friends.

Mostly Uncle Frank [8:49]

You having a good time, Mark? Anyway, I realize this is just kind of a throwaway article to throw up on a website to maybe get a few clicks. But it is kind of indicative about the way the financial services industry views itself. They don't really view themselves as professionals. They view themselves as salespeople. That's where their business model comes from. from sales.

Mostly Voices [9:15]

Always be closing because only one thing counts in this life. Get them to sign on the line which is dotted.

Mostly Uncle Frank [9:27]

What does that mean for us? It simply means that most of them are not to be trusted until they're willing to throw away the sales models as only a few of them are willing to do. We few, we happy few. They ought to be people that we try to stay away from unless we really need one of their particular products. And most of the time we really don't. Forget about it.

Mostly Voices [9:58]

But I've ranted about that before and I'm sure I'll rant

Mostly Uncle Frank [10:01]

about it again.

Mostly Voices [10:05]

You need somebody watching your back at all times.

Mostly Uncle Frank [10:09]

Let's just calm down and move on now. Here I go once again with the email. And, first off. First off, we have an email from the Nameless One.

Mostly Voices [10:21]

You work for the railroad, Grandpa? I wag, but no man. Got a name, do ya? I have no name.

Mostly Uncle Frank [10:33]

Well, that right there may be the reason you've had difficulty finding gainful employment.

Mostly Mary [10:40]

And the Nameless One writes：hi Frank, first off, thank you for your show. It is excellent and fills a void in the FI retirement independent investing space. Second off, I started running a permanent portfolio in 2011 and transitioned over to a golden butterfly when I discovered it in 2015. Recently, I was playing with Portfolio Visualizer and the golden butterfly. Specifically, I played with reducing the cash portion of the Golden Butterfly. I was very surprised to see what this did to the compound annual growth rate, permanent withdrawal rate, safe withdrawal rate, Sharpe ratio and the Sortino ratio. Apologies if this has been covered before and please feel free to summarize my email if it has. Essentially, it looked to me like taking the cash percentage of the Golden Butterfly down dramatically, even to a mere 4% of the portfolio, increased the expected returns of the portfolio and safe withdrawal rate and perpetual withdrawal rate. Unsurprisingly, it also increased how bad the worst year was in the max drawdown. But with a worst year at 9. 88% versus -7.12% and an improvement in the compound annual growth rate from 7.73% to 8.64%, it seems to me that the 20% cash position is a clear drag on the portfolio. and it adds relatively little to the portfolio stability. For these numbers, I'm using the asset allocation backtest. More amazingly, reducing the cash position causes the safe withdrawal rate and perpetual withdrawal rate each to go up between roughly 0.6% and 0.4%, depending on whether you were looking at the backtest portfolio asset class allocation or the backtest portfolio asset allocation on portfolio visualizer. I call this cash lien portfolio the nimble golden butterfly. In my mind, the large cash position was always there in the permanent portfolio and golden butterfly to act as dry powder, ready and willing to buy up the other four assets in the event that they all fell or did nothing as the cash position grew. Harry Brown suggested that this occurred during what he called tight money recessions, which are essentially recessions that occur when the Fed engaged in open market operations to raise interest rates and reduce the money supply. As an aside, I recommend checking out the recordings of his radio show dedicated to covering the permanent portfolio if you can find them. I got to thinking, even if this is how our monetary system and economy work and will work in the future, and even if tight money recessions are going to occur in the future, all of which is uncertain to me, then would you ever really need 20% in cash? It is supposed to be there for you when this particular tight money recession poop hits the fan. But when this particular poop is on the fan, do you really need 20% cash to deal with it effectively? Here are my thoughts and perhaps you can weigh in. During accumulation, you are putting cash in and that cash influx would likely overfill the cash bucket every year and spill into the other assets during the annual rebalance. That has certainly been my experience running it now for over a decade. Perhaps a small cash position is an issue during a tight money recession where all of the other assets go down. Best guess on portfolio chats in Visualizer is the worst year is down 9 to 12% for the Nimble Golden Butterfly. When I try to simulate this and see how much of the 4% cash would actually be needed to service the rebalance, it seems like it is roughly one-tenth of the 4% cash bucket that would be needed to bring the other assets back up to 24% each. Please correct me if I have mathed that up. So it doesn't seem like an issue even in this case, and I see this case as the main reason the 20% cash position is in the golden butterfly at all. In retirement, the cash position is effectively the drawdown bucket. Here I can see an issue. In portfolio charts, I ran the nimble golden butterfly, and it said that the longest time to recovery in drawdowns chart was three years. Four percent of your portfolio covering you for three years of expenses is probably unrealistic. Instead, in retirement, the cash position is effectively the drawdown bucket. Here I can see an issue. In portfolio charts, I ran the nimble golden butterfly and it said the longest time to recovery in the drawdowns chart was three years. Four percent of your portfolio covering you for three years of expenses is probably unrealistic. If instead we use eight percent for the cash bucket, then we are in much more realistic territory, but we likely have to go up to 12% cash to really ensure that the cash alone can cover a three-year drawdown. That said, the risk of three-year drawdown occurring is small, and it could be mitigated by other factors such as working in retirement, having your portfolio do unexpectedly well early in retirement, selling some of the other assets in the portfolio, the appearance of unexpected income, inheritance, unexpected income generating opportunities, etc. Given all of this, I find it very hard to justify a 20% cash allocation for all but the most extremely conservative of the golden butterfly investors. And because of that, it seems to me that the golden butterfly, as it appears everywhere with a 20% cash allocation, should be the exception and not the rule. It seems to me that the standard version of the golden butterfly should have significantly less than 20% cash in it. And this is why I'm writing this email. I haven't really seen any discussion of this anywhere, which makes me think that I am missing something. Am I missing something? Please see the assets and allocations I used in the attached screenshots. Please identify me as Nameless One instead of using my real name. Thanks. I have no name.

Mostly Uncle Frank [16:36]

All right, let's start with Harry Brown and that permanent portfolio. That was something I also looked at around 2010 and 2011, and I went and bought one of his old books, which was called why the best laid investment plans usually go wrong. It was published in 1989. What was most interesting about that book, besides the presentation of that portfolio, was just the description of how cumbersome things were in that era for a do-it-yourself investor. Everything seemed to involve lots of transaction fees and other kinds of gyrations whether it was buying stocks, creating some kind of bond ladder, or buying physical gold, which is what you had to do then. So I can see why this approach wasn't very popular back then simply because it was just really difficult to do. We don't have that problem anymore these days. We have all these ETFs. You can buy whatever you want and there's no fees and there's low expense fees for the ETFs. So it's pretty much infinitely better than the circumstances that they were dealing with. in 1989. Now let's talk about your main observation, which is that 20% in cash or short-term bonds seems like a little bit too much for most people in most of their portfolios. And I tend to agree with that. You are correct, sir. Yes. To me, that is also one of the drawbacks of the golden butterfly portfolio. If you don't want something that is that conservative. That's one of the reasons I developed the Golden Ratio Portfolio because it has a much smaller allocation to that cash. I did not know that. Because what happens with cash or cash equivalents is that although they reduce the volatility of your portfolio, they tend to proportionately reduce the returns of your portfolio because it's almost like you just have less of a portfolio. It's just not doing anything. All it's really doing is just creating a more conservative option of a more typical 50 or 60% stock portfolio. But it's easy to see why it's attractive from a couple different perspectives. One being it just does make a Smooth a ride when things are going badly. And you can see that from the sample portfolios I posted the year to dates now for all of those portfolios. And if you compare kind of our what we call our bread and butter portfolios, which are the golden butterfly golden ratio and risk parity ultimate, you can see how the more conservative one, the golden butterfly, that one's only down 3.62% for the year. The golden ratio is down 6.63% for the year. and the Risk Parity Ultimate is down 7.64% for the year. Now all of those are pretty decent considering how bad the markets have been since the beginning of the year. But if you really want to sleep at night, that golden butterfly is very comfortable on that score. Nice soft fluffy pillows going on there. In practice, I think what makes the most sense is for an individual to determine how much cash they think they need, sort of separate and apart from the rest of their portfolio. And what you see with the Golden Butterfly is essentially holding four or five years worth of cash in it. Now that actually is kind of the recommendations you see from a lot of financial advisors who are using these bucket methodologies or other things telling people they need to hold five years of cash in their portfolio. and I think that's true for the portfolios they're probably constructing, which are more traditional stock bond portfolios that may have drawdowns of up to 13 years. But if you're working with a much more Diversified risk parity style or other Diversified portfolio, it seems like having all that cash is kind of a waste and a drag on what you're trying to do. So I would think One year is probably minimum for a retiree in terms of how much cash they need. And two or three years is probably a good amount for most people with this kind of a portfolio. Of course, it's also going to depend on whether you have other sources of income, cash, etc. Because if you do, you could just go down to zero and you don't need any cash in this part of your portfolio. So I think your modifications make sense. to go to 4%, 8%, or 12% in cash or short-term bonds in that kind of portfolio if you want to make that kind of modification. I would not change the name of the original Golden Butterfly portfolio simply because it's not mine to change. It's not my design or my portfolio. The Golden Butterfly was designed by Tyler over at Portfolio Charts and the reason It's called golden is because it's got gold in it. And the reason it's called a butterfly is the gold 20% represents the head and then the wings are represented by the 40% in bonds and the 40% in stocks. I bet not all of you knew that. But you learn something here new every day. Lighten up, Francis. So we'll be leaving those naming rights alone. But I do commend you on making your own modifications to suit your own situation. The best, Jerry, the best. And thank you for that email.

Mostly Voices [22:27]

I cannot tell you how long this road shall be, but fear not the obstacles in your path. For feed has vouchsafe your reward.

Mostly Uncle Frank [22:35]

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

Mostly Mary [22:44]

And Q writes：hi Frank, thanks for the video on the Monte Carlo simulator. I'm confused on how to use the tax treatment toggle. If I want to live on $100,000 and pay a tax rate of 25%, I would need $125,000. Would I enter $125,000 withdrawal rate select after tax returns and enter 25% in tax? Thanks, Q.

Mostly Uncle Frank [23:08]

All right, for audience reference, we are talking about a video that I put up on our YouTube channel, up to about three or four videos. I will link to that in the show notes. But this is talking about using the Monte Carlo simulator over at Portfolio Visualizer. And that's what that little video is about. Now the answer to your question broadly is Yes, that's how you would deal with the after-tax returns, but I think there's a couple of limitations you need to be aware of in using that function of that simulator. One of them is that you can only use that particular function with the forecasted returns modeling and the statistical returns modeling. And specifically you cannot use it with the historical returns modeling. Now, in those two forms of modeling, what you are looking at is some kind of either forecasted mean that you put in there yourself, you made up a number from your crystal ball.

Mostly Mary [24:10]

A really big one here, which is huge.

Mostly Uncle Frank [24:15]

Or you took the statistics for each asset class from historical perspectives and looked at the mean volatility and correlations of the portfolios. to do that model. Now neither one of those are my personal preference. My personal preference is to use the historical returns modeling as a base for a Monte Carlo simulation. And the reasons for this are twofold. First, it does not rely on any crystal ball. So you're not putting in your own guesses as to what the future might be. You can't handle the crystal ball. Because what do we really know about the future? We don't know.

Mostly Voices [24:58]

What do we know? You don't know. I don't know. Nobody knows.

Mostly Uncle Frank [25:02]

Second, only really historical returns reflect economic environments in which things happened. And what I mean by that is this. There are certain assets that perform well or perform badly in each kind of macroeconomic environment you can have. And what I mean by those environments are the basic four are increasing inflation with increasing growth, decreasing inflation with decreasing growth, that's a recession or a depression, or you can have environments where one of those is going up and the other one's going down. And you want to model all of your assets working in a particular environment at the same time, because otherwise your model can spit out ridiculous scenarios that are equivalent to a snowstorm during a drought in July. And if you were to just use statistical models, which each asset class separate, and put them all on random walks, it would not actually be reflecting real economic environments that have existed. So you would be potentially modeling environments that don't make much sense, equivalent to saying there's a COVID shutdown, but all the stores are actually open and we're going to pretend like they're all open and things are going on normally. And it's a little bit esoteric, but the reason you want to do it that way, it's based on my belief and most observers of financial markets beliefs that the performance of assets is dictated by the environment they happen to be in. at that time. It is not completely random. We don't have snowstorms during a drought in July in the Northern Hemisphere. So whatever your model is, it should reflect the same parameters for the same time period being forced upon whatever group of assets you're modeling. You don't want your bonds pretending it's winter while your stocks are pretending it's summer at the same time. that doesn't happen. That's not an improvement. All right, let me get to something more helpful now. If you run a Monte Carlo simulation with that simulator, then what you want to do is go to the simulated assets link or tab there, and it will give you exactly how it's applying taxes to each of the asset classes that you're dealing with. It'll show you the before tax, the after tax, and what rates were actually applied. because it's going to be slightly different depending on which asset classes you're using for your particular simulation. This is also why I think it's better in most cases to model things without trying to account for the taxes on the return side of things, but rather look at taxes as an expense item and simply increase your expenses by whatever amount you think they're going to be. because your effective tax rate is just going to be different for each person. And it's going to be dependent on factors that are unrelated to your investments in large part, such as whether you're married, what kind of real property you own, and whether you have any other pensions or other money coming in. But the good thing about that tool is you could do it both ways and just compare them then. Just go ahead and use that simulated assets tab to really see how It is applying taxes. And thank you for that email. Reminds me I need to do another tutorial for that YouTube channel. You are talking about the nonsensical ravings of a lunatic mind. Next off, we have an email from Brian. And Brian writes.

Mostly Mary [28:52]

Hi Frank, forgive me if you've answered this previously, but I was curious how you would recommend I allocate assets across several different types of accounts. My wife and I have a joint brokerage, an IRA and Roth IRA each, and an HSA. Would it be better to have each of these accounts as its own mini target portfolio or group the asset types in different accounts? Apologies if you've answered a similar question in the past. If so, could you direct me to the episode? Thanks, Brian.

Mostly Uncle Frank [29:23]

Well, I have answered this question before in various guises, but I have no issue with answering it again because it comes up frequently and it's a good question. I think you want to look at all of your assets together as one big portfolio to start. Figure out what kind of portfolio you want to have overall. And then after that, it's a matter of allocating specific assets to specific accounts. And this will depend both on the size of each account and on the specific assets that you picked for your portfolio. But this is generally driven by tax treatment of various assets. So for instance, if you have things that generate a lot of ordinary income like REITs or some of these commodities funds, the best place to put those is probably going to be in your traditional IRA. In your Roth accounts, which are usually smaller, you generally want to put the highest growth or long-term performing assets. because you're never going to be paying any taxes on that and you want to maximize the growth there. And then things that pay qualified dividends or have some kind of favorable tax treatment, say like municipal bonds, those belong in your taxable account because then you can take advantage of the favorable tax treatment that's offered by those. In addition, if you were holding something that you expected to lose money on a regular basis, say some kind of volatility fund, you would certainly want to put that in the taxable account because you can tax loss harvest it. And then after you put the obvious choices into the obvious buckets to the limits that you have for those buckets, then it's just a matter of distributing your other assets amongst the three. And you're never going to achieve perfection in this, but it doesn't need to be perfect. Just needs to be good enough for the best you can do given your personal circumstances and the accounts that you have. Just don't let the tax tail wag the investment dog. Don't make decisions about what your portfolio should be simply based on taxes and not on how you want the whole thing to perform overall. The other issue people are going to have is that you're not coming to this with just having this pile of money to allocate to these accounts. Most people are going to have a taxable account that perhaps has things with a lot of gains attached to them that they don't really want to sell, or at least not sell in a big pile all at once. So generally the other rule of thumb is that you try to make the most transactions in your IRAs or other tax protected accounts so that you're not generating taxes based on those transactions. so this is something you'll also have to take into account, particularly if you're still working at the time you're making these adjustments and so your income is relatively high. Sometimes you just want to come up with a temporary solution as to where things are, wait until your income is lower, and then use that period to sell a few more things out of your taxable accounts when your taxes may be lower. I have to say it ends up being a little bit more art than science in the end, and it does depend very much specifically on your particular situation. But thank you for that email. Last off. Last off, we have an email from Eric.

Mostly Mary [32:56]

And Eric writes, Dear Frank, I came across your podcast from reading a Substack newsletter from one of your other listeners. The listener provided a link to your site in the newsletter. What a fantastic podcast and treasure trove of information. I was a long time follower of William Bernstein and Paul Merriman. Your podcast now seems to be carrying the torch for these grandfathers of investing wisdom on the subject of risk parity portfolios. Thank you. I have two questions. One, in your discussion of the Holy Grail principle, you emphasize the concept of diversification and non-correlation of assets. But the other side of the coin is expected return of an asset class. Ideally, the asset classes in a portfolio should have high expected returns and have similar expected returns. Both criteria seem necessary for a rebalanced, diversified risk parity portfolio to work well. In some of your podcasts, you address expected returns with phrases like drag on the portfolio or cash is a drag on the portfolio, or more recently, your comments on PIC-K related to your Swedish listener. But I have not heard you address the concept of expected return from first principles. Any comments? How tightly grouped do you want the expected returns from the different asset classes to be? How much can they vary before they stop being effective? Two, I definitely believe in holding some Bitcoin and maybe Ethereum. I know that BITW is a 1% position in the Leverage Golden Ratio portfolio, and it's great to see it in the portfolio. However, have you ever looked at the market price of the ETF versus the NAV? Do you find the difference troubling? The fund website has a time series chart comparing the two. This ETF may be suitable for an experimental portfolio, but maybe not for a real portfolio. In this instance, investors may be better off buying crypto through a trusted exchange like Coinbase, even though it is a bit more complicated. Thanks again and keep up the fantastic work. Eric, PS, short time binge listener, first time caller.

Mostly Uncle Frank [35:02]

Good questions that get back to some of our main principles. First, let's talk about expected returns and how those factor into your decision making about whether you want to hold an investment or not. This first goes to the macro allocation principle that we've talked about, which says that for any given, say, stock bond portfolio that's an 80/20 portfolio or a 60/40 portfolio, it's going to perform 90% similar to all other portfolios of those same macro allocations. And the reason for that is because in most of these portfolios, we're talking about the main return driver being stock funds or stocks. And so the primary characteristic of any portfolio is going to be what is the overall percentage of stocks in that portfolio. And you'll have higher potential reward and higher risk depending on how high that number is. But then you can also use expected returns as a method for choosing between two particular Assets. So suppose you have two assets A and B and you do a correlation analysis and you find out that those two assets have exactly the same kind of correlation relationships to the rest of your portfolio. So in effect, they're performing the same role in your portfolio. Out of those two, you would probably pick the one with the higher expected return, unless you had some other reason. for not doing that. And that's why you probably only need a few funds and you don't need ones that overlap. It also goes to things like this fund PICK that we had talked about, that if it has the same kinds of correlation characteristics in the portfolio as a basic stock fund or something else, then it doesn't really have much of a role to perform in that particular portfolio. All right, now let's talk about drags on a portfolio. When I'm saying there's a drag on a portfolio, what you're looking at is an asset that has a low expected return and a low volatility, and cash is the classic one of those. When you have things like that in a portfolio, as we talked about in the first question, it's almost like your portfolio is just a smaller portfolio consisting of all the other assets. because that low volatility, low expected return asset is going to be reducing both your returns and your volatility proportionally. And that's really not that helpful. What you want to have in your portfolio is assets that if they reduce the returns of your portfolio, they reduce the volatility by more than they are reducing the returns. A good example of that is gold. It has a lower return profile than your stocks, but it also has enough volatility and enough volatility in different directions from stocks and bonds that it's going to reduce the overall volatility of the portfolio more than it reduces the returns of the portfolio. Groovy, baby. I think it's difficult to just look at an asset and know how it's going to perform in a particular portfolio. What you really want to do is model multiple portfolios where you are switching in and out one particular asset, because then you'll have a better idea as to how that's performed along with the other assets, which is what you care about. You care about how they all perform together, not how each one performs in isolation. So I don't think just comparing expected returns of various asset classes to be that useful.

Mostly Voices [38:58]

Expect the unexpected.

Mostly Uncle Frank [39:02]

Because you also want to know about their correlations. And ultimately, the expected return of your portfolio is going to be largely driven by how many stocks or stock funds you have in a portfolio and how leveraged it is if it's leveraged at all. And it's also partially driven by how many cash drags or drag assets you have in a portfolio. Because the more of that stuff you have, the lower your overall expected returns are going to be.

Mostly Voices [39:31]

That's not an improvement.

Mostly Uncle Frank [39:35]

All right, let's talk about that fund BITW. Well, the problem with it is it's not an ETF. Danger, Will Robinson.

Mostly Voices [39:43]

Danger.

Mostly Uncle Frank [39:47]

If it were an ETF, then it's price at its NAV or net asset value would be very similar. That's the principle behind ETFs and how they work. What it's really structured like is a trust or a closed end fund. And in those kinds of structures, which are older, it is the norm to have a discount or premium to the net asset value reflected in the price of the fund. I agree with you that if you're going to hold cryptocurrency, those kind of funds are probably not the best vehicle right now to hold this in. But in terms of having a sample portfolio and what's available in to fund form, those are what we have available right now. If they continue to underperform, we'll be tax loss harvesting and buying some other crypto type fund. to substitute for one of those. And hopefully someday there'll be an ETF and that'll just solve that problem altogether. Yes. Just make sure that wherever you are holding your cryptocurrency that that exchange and the people that run the exchange are in some jurisdiction like the United States where they can be found, put in jail and sued if necessary. because that's what's going to keep them all honest and having integrity in terms of their operations. I think one of the worst things about these cryptocurrencies these days still are these ridiculous transaction fees that you have to pay in many of these places. The lowest I found is actually through Interactive Brokers, which has an arrangement with Paxos and you can buy the most common cryptocurrencies like Bitcoin and Ethereum through your interactive brokers account. The transaction fee is 0.18%, so that's quite small compared to a lot of other ones. The only drawback there is you're not going to earn interest on your holdings, which you can at many of these platforms now. So there are trade-offs with all these things. It'll be funny to watch and see how many of them just disappear. once an ETF is actually rolled out. I do know also know that some people are actually speculating though on the conversion of some of these funds that are trading at discounts to their net asset value. Because if those were to be converted, then you would suddenly see a jump in the value of the fund up to its net net asset value with the new structure. But I believe that's enough of that for one day. You can't handle the dogs and cats living together. Thank you for that email. And 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 your message into the contact form there, and I'll get it that way. We'll be picking up again this weekend with our weekly portfolio reviews and probably some more emails and various and sundry things. If you haven't had a chance to do it, please go to your podcast provider and like, subscribe, give me a review, some stars. That would be great, okay? Thank you once again for tuning in. This is Frank Vasquez with Risk Parity Radio, signing off.

Mostly Mary [43:54]

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.