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 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. That's not an improvement.

Mostly Voices [1:41]

Lighten up, Francis.

Mostly Uncle Frank [1:45]

But now onward to episode 162. Today on Risk Parity Radio, it's time for our weekly portfolio reviews of the seven sample portfolios you can find at www.riskparityradio.com on the portfolios page.

Mostly Voices [2:06]

But before we get to that, I'm intrigued by this how you say, emails.

Mostly Uncle Frank [2:11]

And first off, first off we have an email from Luis from Brazil. and Luis writes. Hi, Frank.

Mostly Mary [2:29]

I don't know if you're aware, but you've got an international audience. I'm listening to your podcast from Sao Paulo, Brazil. Although I invest internationally, I'm seeking to build a parity style portfolio with the ETFs and stocks we have in the Brazilian stock market. You'd probably need time to research them, but I'd really appreciate it if you could give us some ideas on how to build them here. Our fixed income is way more rewarding than the US as we have TIPS paying inflation plus 5.76% a year at the moment.

Mostly Uncle Frank [3:10]

Would you still hold a grudge against TIPS in this scenario? Thanks a lot for your attention and keep up the excellent work. Well, thank you for writing in, Louise. Yes, I was aware that I have an international audience, which surprises me, but I'm happy you're all there and so enthused about this topic. Only ones I worry about are those Canadians.

Mostly Voices [3:32]

Good day, how's it going? I'm Bob McKenzie, it's my brother Doug. How's it going, eh? We got two topics today, back bacon and long underwear.

Mostly Uncle Frank [3:43]

Now as to your questions, I have to say I'm not that familiar with the investments that may be available to you in Brazil. I am aware that Brazil is a very resource rich country and so a large part of its equities markets are dominated by companies like Vale. But whenever I hear the name Vale, I somehow associate that with the importer/exporter Art Vandelay. For some unknown reason. Vandelay Industries.

Mostly Voices [4:17]

So, George, what does Art Vandelay import? Vandelay.

Mostly Uncle Frank [4:24]

Anyway, let's talk about a process for determining whether these Brazilian tips would be worth having in your portfolio. And when you're looking at assets in a vacuum, You need to be careful, but you also need to be thinking about what is the role for this in my portfolio? What role would this be fulfilling? Because that is one way to look at a risk parity style portfolio is that it's a role based portfolio and each asset in there is performing a specific role. Now, the problem with tips in the United States is they try to do a couple different roles. that are incongruous and they don't do either one of them well at all.

Mostly Voices [5:08]

You had only one job.

Mostly Uncle Frank [5:12]

So in the US, if you're thinking about your risk parity portfolio, you would want your bonds to be negatively correlated with your stocks so they're truly diversified from your stocks. TIPS are bonds and so you would want them to be negatively correlated with your stocks, but they're not. They're positively correlated and they're positively correlated at the worst time when there is a recession. like 2008, tips will go down with the stock market, at least the US variety. So they do not perform their role as a bond very well.

Mostly Voices [5:47]

You had only one job.

Mostly Uncle Frank [5:51]

Now, what is their other role supposed to be? It's supposed to be inflation hedging. But when you look at how they do that, they're just barely keeping up with inflation. They're just an alternative to holding cash. and getting something out of that, it's not going to hedge your whole portfolio to be holding tips in it against inflation. You had only one job.

Mostly Voices [6:09]

Better inflation hedges are certain kinds of equities,

Mostly Uncle Frank [6:13]

usually on the value side, usually on financials and commodities producers and some real estate and also commodities and sometimes gold. All of those perform that role better than tips do. which leaves TIPS kind of as an odd man out in a risk parity style portfolio in the US. The only thing that you could possibly use them for is as some kind of cash equivalent, something that you would have put in short term bonds anyway. But that's never going to be a very big role in any portfolio. So in order to evaluate what you have available in Brazil, you would need to decide what role is this supposed to play in my portfolio and then compare it to other things that may or may not perform that same role and see which one is better for that role. I would not simply evaluate them in a vacuum and I think that's the mistake a lot of people make in portfolio construction instead of looking at their whole portfolio holistically. They're basically wandering down the aisles of a Target store saying, oh, that looks good. I'd always want to have one of those and just throwing random things in their cart that they might find appealing for one reason or another, but may or may not work together. So I realize that's not a complete answer, but I hope it gives you a good process for being able to find that answer because it would be interesting to see. And thank you for that email. Second off.

Mostly Mary [8:07]

Second off, we have an email from Paul, and Paul writes, Dear Frank, can you share your thoughts on the performance of long-term treasuries during the recent declines in equities? I had hoped that my long-term treasuries would have performed better during this period as stocks have declined 10% plus But my long-term treasuries seem also to be going down, but not as much. Thanks for your thoughts.

Mostly Uncle Frank [8:26]

Well, I think you're probably taking too narrow a view in terms of time frame that these things tend to work themselves out over months and years as we move through economic cycles going up and down. And I have to say, a decline in the stock market of 10% plus is really not much of a decline. Where you really need your bonds to perform particularly well is during stock market crashes, like in 2008 and 2020. I note that you wrote your email on March 8th, which I think is right before the Fed had its meeting and made its announcements about what it was going to do. And it seemed to be that everybody was waiting for that to occur. And there had been a lot of volatility in the markets and a lot of people just kind of sitting on the sidelines waiting to see how that was going to play out. Since then, as we know, equities have done quite well. And I think today the S&P 500 is down less than 5% year to date. Of course, long-term treasury bonds are having one of their roughest patches in decades, I think. And it's interesting the kind of narratives you hear about why this is happening and what's going to happen in the future and what does it all mean? I'll give you a couple of them. One is that Jay Powell is basically trying to be Paul Volcker and will just keep raising interest rates until we have a recession. And the people who are calling that narrative are also watching what's called the yield curve. And as we see right now, the shorter term bonds like the five year are actually have higher yields than the longer term bonds until you get out to the 30. But even out at the 30, the whole curve out there is very flat. If that yield curve inverts, there's been a 100% correlation to that event with a recession within six to 24 months after that. And so a lot of pundits are watching that and are saying there's going to be a recession. If that happens, what you're seeing right now then is a topping of yields, particularly on the long end of the curve. And they'll top out at some point and then they'll start going down again. So as far as our risk parity style portfolios are concerned, we will end up rebalancing into the bonds while they're at a higher interest rate. And then when this recession that people are calling eventually hits, they'll go down and then we'll be selling the bonds. Buy low and sell high, that's what rebalancing does for you. Buy low, sell high, fear, that's the other guy's problem. I also read an article in one of the financial media outlets this past week, which I call the Marshall Plan narrative and the story there was that the last time long-term bonds had a really, really bad year was 1949, which was at the time of the announcement of the Marshall Plan. And the author of this article was analogizing that situation to what's going on in Europe today and America's commitment to supply natural gas and other commodities and things. And what the article said was, what happened then between 1949 and 1955 is the stock market tripled. And so the narrative there was that this decline in bonds, because yields were going much higher, was actually a good thing for the stock market and you should be buying stocks. All this tells you is that there is a story for any set of facts and people like to tell stories and predict the future with their crystal balls.

Mostly Voices [12:16]

Now, the crystal ball has been used since ancient times. It's used for scrying, healing, and meditation.

Mostly Uncle Frank [12:24]

But what we know is we're just better off sticking with our plans, knowing that we have different assets that are going to be going up or down at different times, and then we will be rebalancing as we go and selling the best performing assets to fund our distributions. Does that make you different than most everybody else? The answer is yes. Somebody says, why is that?

Mostly Voices [12:48]

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

Mostly Uncle Frank [12:55]

This year, the best performing asset has actually been gold. And so we've been selling lots of gold to payout distributions, and we'll probably do so again at the end of this month. I love gold.

Mostly Voices [13:06]

One other thing I've noted is that the popularity of different

Mostly Uncle Frank [13:11]

sectors of the stock market seems to be changing. in ways that I can't explain. It's interesting, in episode 149, I was asked about some investments in property and casualty insurance companies that I hold as part of my value stock allocation. And you can go back and listen to that, but the reason I hold those things is simply because they have historically performed like the stock market but are sufficiently diversified. I would never expect them to perform extremely well in any particular environment. But in fact, they have in this particular environment. A lot of them have gained 8% since Powell's big announcement. I'm not sure why. If you look at the big ones I mentioned in episode 149, Progressive Insurance is up 15%, Allstate is up 20%, AIG is up 12.3%, Chubb is up 13.9%, and Travelers is up 20.5%. and that's year to date. But that's also an example of a certain asset playing a particular role in a portfolio that you want to have these value assets and financials and small cap value in a rising rate environment, because those are doing much better than the tech stocks that do better in a lower interest rate environment. The point is we just hold these things. We don't try to predict which one's gonna do best next, 'cause that's what gets people into trouble, performance chasing. Forget about it.

Mostly Voices [14:47]

Well, thank you for that email. Okay, everybody, everybody chill.

Mostly Uncle Frank [14:52]

Now next off, we have an email from Alexei.

Mostly Voices [15:00]

So that's what you call me, you know? That or his dudeness or duder or, you know. Bruce Dickinson. If you're not into the whole brevity thing.

Mostly Uncle Frank [15:08]

And the dude writes. Hey, Uncle Frank.

Mostly Mary [15:11]

One topic that I would love to see you address is your method for determining which assets to place in taxable versus tax deferred accounts. Morningstar reports both a three year tax cost ratio and potential capital gains exposure for some, but not all funds. And Fidelity reports all distributions, including capital gains distributions. What is your best method for determining the tax efficiency slash suitability for a fund within a taxable account? Alexei.

Mostly Uncle Frank [15:41]

All right, this is an interesting question. Now, this is a secondary or tertiary issue that you want to deal with after you decide what your allocations are and then think about where they're going. Then you always have a choice of funds within a particular asset class. and one of the considerations when you're choosing those funds is what is going to be the tax treatment of any distributions that come out of that fund and what are the distributions likely to be. I don't think there's any one metric that really measures this. You should obviously look at recent past performance for a fund in the past few years and see what kind of distributions it's had and whether those were long-term capital gain distributions or some other kind of ordinary income distribution. But in general, funds that have low turnover are going to have lower tax burdens. And that is a reason in particular to use index funds over managed funds and to use ETFs over mutual funds because both ETFs and index fund versions of ETFs have lower turnover and therefore lower tax burdens. The other question you also have is do they throw out qualified dividends or ordinary income? because if they throw out the ordinary income, you probably want to put them in their IRA or somewhere like that. If they're throwing out qualified dividends though, that is a reason to keep them in a taxable account because the tax rates are so much lower for those. Another issue you might want to look at for some funds is whether they issue K1s, not because it's going to change the taxation of it so much, but just because it's a filing burden to have to deal with K1s, which are essentially partnership returns, and you will get some of those for your more esoteric funds that deal in volatility and those sorts of things. So I'm sorry I don't have a silver bullet to give you, but hopefully those guidelines I provided will be helpful. And thank you for that email. Last off, we have an email from My Contact Info, and I believe this is a different My Contact Info than the usual My Contact Info that writes in. But anyway, My Contact Info writes.

Mostly Mary [18:14]

Hi Frank, I'm curious to get your thoughts on this risk parity style portfolio inspired by the Golden Ratio and Golden Butterfly portfolios as it's a cross between them. QQQ 50%, TLT 25%, GLD 15%, O 10%. In the backtest, it has done very well compared to the portfolios that inspired it. Love to hear your thoughts. All right, my thoughts on this.

Mostly Uncle Frank [18:39]

Well, my thought is you have a concentration because QQQ is concentrated on tech stocks in particular. And what does that mean in a portfolio? It means it'll have a higher risk but higher potential rewards, but also higher volatility. And you may feel like you're missing something in times like this where you see the tech is going down along with some of these other things, and you don't have the kind of value stocks or other sectors that are going to perform better in a rising inflation environment. Then you might. I'm telling you, fellas, you're gonna want that cowbell. The reason obviously this is outperformed in the recent past is that it's been a good environment for tech, a spectacular one the past 10 years, and a very good environment if you look over, say, the past 25 or 30 years. But for amusement, and to illustrate the point I was getting at, about having a concentration on one kind of thing that might skew the portfolio one way or another. I went and ran an analysis of this portfolio against a portfolio where I took out the QQQ and put in a fund called KBWP that I also talked about in episode 149, which is a collection of property and casualty insurance companies. And I wanted to see how those two versions of this portfolio performed in the recent past, just going back to the beginning of 2021. And what you'll see from that is the one with QQQ in it had a compounded annual growth rate over that period of only 4.59% compared with the compounded annual growth rate of the one with the insurance companies in it. of 9%. You also saw that the standard deviation of the QQQ portfolio was higher. The variance was much higher. Its best year was 14.34%. Its worst year was -7.84% compared to the insurance company portfolio, which had a best year of 10.96% and a worst year of -0.35%. The max drawdown for the QQQ portfolio was -7.84%. versus negative 4.85% for the insurance company portfolio. Sharpe ratio of the QQQ portfolio was 0.42. Sharpe ratio of the insurance company portfolio was 0.83. So really that insurance company portfolio blew the doors off this QQQ portfolio for the past 14 months. But that is just an illustration of what's going to happen if you have a particular concentration, particularly in the equity side of your risk parity style portfolio, that yes, it will perform better in time periods where that concentration was better or best, but it will perform much worse or differently in other time periods when something else was performing better. So you do want to be wary of that when you're back testing, because if you're just picking something that did well in a particular time period, It's probably not going to be a good idea for a long-term risk parity style portfolio overall that you're drawing down on. Surely you can't be serious. I am serious. And don't call me Shirley. And thank you for that email.

Mostly Voices [22:10]

And now for something completely different.

Mostly Uncle Frank [22:14]

And the something completely different is our weekly portfolio reviews of the seven sample portfolios you can find at www.riskparityradio.com on the portfolio's page. But just going through what the markets were doing last week for comparison purposes, the S&P 500 was up 1.79% for the week, the Nasdaq was up 1.98%, gold was up 1.88%, I love gold. Bonds took another beating last week. They were down 3.48%, at least as represented by TLT. Do you expect me to talk? No, Mr. Bond, I expect you to die. REITs, represented by the fund REET, were down 0.38% for the week. Commodities again were the big winner. PBDC, our representative commodities fund, was up 5.87% for the week. and PFF, the preferred shares fund, was down 1.49% for the week. If you were wondering about those insurance companies, KBWP, that insurance company fund was up 3.65% for the week. It was up 8.6 for the past two weeks. Too bad we don't have that as one of our elements in these sample portfolios, but it is a bit focused and esoteric to be included in Generic portfolios. But now let's get to those portfolios. The first one is the All Seasons Portfolio. This is a reference portfolio to remind you that this is not actually something I use, but I use it for comparison purposes. This is the Risk Parity Style Portfolio that Tony Robbins developed after interviewing Ray Dalio. And I think it's a bit overly conservative and unbalanced. But anyway, it has 30% in total market stock fund VTI, 55% of it is in treasury bonds divided into long and intermediate term, and then it's got 15% in gold and commodities, 7.5% each of those. So it was down 0. 66% for the week. It is down 5.44% year to date. It is up 7.1% since inception in July 2020. But you can see from that why having an over 50% allocation to treasury bonds is probably not a good idea because it ends up with a more unbalanced portfolio. You want to really keep those bond allocations down to 20-25% for the most part. But now moving to our bread and butter portfolios, the next three, which are more akin to holding a 60/40 kind of portfolio. The first one is the Golden Butterfly. This one is 20% in gold, and then it's got 40% in stocks divided into a total stock market fund and a small cap value fund, and 40% in bonds, but only 20% of that is long-term treasuries. The other 20% is short-term treasuries, which are more like cash or a savings account. Anyway, this was down a whopping 0.14% for the week. It pleasantly does not move around too much, so it's very easy to hold. It is up, I should say it's down 2.93% year to date, also not terribly unpleasant, and it is up 19.97% since inception in July 2020. So it's very stable and it just chugs along. Next one is our Golden Ratio Portfolio. This one's 42% in stocks. It is 26% in long-term treasury bonds, 16% in gold, 10% in a refund R-E-E-T, and 6% in cash. This one was down 0.3% for the week. It is down 5.22% year to date. It is up 19.4% since inception in July 2020. And then we get to our risk parity ultimate. This one has 14 funds in it. I'm not going to go through all of them. If you're wondering how many treasury bonds it's got in it, it's got 15% in TLT and then it's got 5% in TMF, which is a leveraged treasury bond fund. So it was down 0.50% for the week. It is down 6. 45% year to date. It is up 17.04% since inception in July 2020.

Mostly Voices [26:52]

And now we're moving to these experimental portfolios, which have leveraged funds in them, and so are much more volatile. Tony Stark was able to build this in a cave with a box of scraps.

Mostly Uncle Frank [27:04]

First one is the Accelerated Permanent Portfolio. This one is 27.5% in TMF, that's a leveraged Treasury Bond Fund, 25% in UPRO, A leveraged stock fund. And it's got 25% in PFF, that's preferred shares, and 22.5% in gold, GLDM. It was down 0.78% for the week. It is down 13.79% year to date and is up 13.64% since inception in July 2020. Our next one is the most volatile one and probably least diversified portfolio we have as well. This one is the aggressive 5050. It has 33% in a leveraged stock fund, UPRO, 33% in a leveraged bond fund, TMF. The remaining third is divided into PFF preferred shares and VGIT, an intermediate treasury bond fund. It was down 1.62% for the week. So it's actually a lot less volatile than it's been the past couple of weeks going up and down more than 5% in those weeks. It is down 18.91% Year to date, it is up 13. 68% since inception in July 2020. Certainly is a roller coaster. And our last portfolio is the Levered Golden Ratio. This one's only been around since July 2021. It is 35% in a composite leveraged fund that is S&P 500 and treasury bonds. It is 25% in gold, GLDM, 15% in O, that's the Realty Income Corp REIT. It's got 10% each in TMF, that leveraged treasury bond fund and TNA, which is a leveraged small cap fund. The remaining 5% is divided into a volatility fund, VIXM. which is still up for the year or up since inception, I should say, and two cryptocurrency funds, BITQ and BITW for the remaining 2%. It was down all of 0.12% for the week, which is indicative of its diversification. It is down 7.8% year to date. It is down 4.16% since inception in July 2021. I always like looking at this one because it started in a period where a lot of things had peaked and so you're really getting a sense of what it's like to retire or start with a portfolio that started in a bad period as opposed to the other portfolios which happened to start in July of 2020 which was in the middle of a good period for most asset classes. So what did we learn from this overall? Well, We learn what we usually do that even with a lot of volatility in some of the asset classes in the portfolios, the overall results are muted because there is a great deal of diversification. Yes. And not just into a basic stock fund, but also including things like small cap value, gold, commodities, and other things like that. But now I see our signal is beginning to fade. If you have comments or questions for me, please send them to frank@riskparityradio.com that email is frank@riskparityradio.com or you can go to the website www.riskparityradio.com and put in your message into the contact form there and I'll get it that way. If you want to check out other Risk Parity Materials. I invite you to check out Risk Parity Chronicles, which is the website of one of our listeners, and there are a lot of good resources there to look at. If you haven't had a chance to do it, please go to your podcast provider and like, subscribe, give me some stars or a review. That would be great. Okay.

Mostly Voices [31:11]

Thank you once again for tuning in. This is Frank Vasquez with Risk Parity Radio. Signing off.

Mostly Mary [31:42]

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.