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 [0:36]

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, and 9. 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 165. Today on Risk Parity Radio, we are going to do what we seem to do best around here. Here I go once again with the email.

Mostly Voices [1:57]

And so without further ado, first off.

Mostly Uncle Frank [2:01]

First off, we have an email from Mike.

Mostly Mary [2:04]

And Mike writes. Frank, what's going on with long-term treasuries this year? Specifically, I hold TLT in a risk parity portfolio. While I thought treasuries should go up when equities go down, I feel like I'm losing my shirt with my TLT holding, while at the same time my equities are losing value also. What gives?

Mostly Uncle Frank [2:24]

Well, I suppose what gives are a couple of things. Really? First off, stocks really have not declined very much, at least at last note, the S&P 500 was down 5% for the year, which is not exactly crash territory. I know they did go down Further, but unless we are talking about 30 or 40% declines, we're really not talking about the situation of a stock market crash like in 2020 or 2008 or 2000, 2002. Second off, it is the case that you can have bonds and stocks going up or down together at the same time. But that is usually when your alternative investments are performing pretty well. I think part of it is looking at too narrow a time frame. And maybe what makes more sense is to look at the year on year performance of these asset classes. If we go back one year from today and take a look at what that looked like, because that's really what we're interested over long periods of time. In the past year, long-term treasury bonds were the weakest performer. They were down 7.6% for the year-on-year performance. The S&P 500 was actually up 9.98% for that period. But more importantly, if you look at these alternative investments, they were up a lot more. Gold was up 11% for that year-on-year period. REITs as a sub-asset class of stocks were up 18.14%, at least as represented by that fund, R-E-E-T. And if you own some commodity, say a fund like PDBC, that's been up 57.58% over the past year. So what this tells you is a couple of things. You do need some of these alternatives in your portfolio to have a truly diversified portfolio. That if it's just stocks and bonds, you may have significant drawdowns that you're not going to have if you have alternative assets in your portfolio. That is the straight stuff, O Funk Master.

Mostly Voices [4:33]

and usually somewhere between 20 and 30% seems to be about the right

Mostly Uncle Frank [4:37]

amount for most average portfolios. The other thing you should take out of this is you do not want to overweight long-term treasuries in your portfolio. You can see in the sample portfolios in a couple of them where we have larger allocations in those experimental portfolios. Those are doing some of the worst. I've had other listeners who who have wrote in saying, what about holding 35 to 40% in long-term treasury bonds in a portfolio, which has worked well over a lot of periods, but doesn't work well over all periods, and tells you that you need to have right size your allocations in effect. You need somebody watching your back at all times. And if you do that, you will have relatively muted bad performances in bad times, and that's illustrated by the year-to-date performances of the sample portfolio, the Golden Butterflies, down 2.74%, the sample Golden Ratio portfolio is down 4.17%. And while we'd prefer them to be up all the time, those sorts of losses over a few months is not something that's going to keep you up at night. I'm putting you to sleep. I guess the other observation I'd like to make here is that Most amateur investors seem to have an odd perspective on bonds that does not jive with their overall perspective and is not necessarily rooted in how things actually work. That's not how it works.

Mostly Voices [6:11]

That's not how any of this works.

Mostly Uncle Frank [6:15]

And what I mean by that is when the stock market goes down 10%, sure a few people pull their hair out, but they say, well, that's what I would expect out of the stock market that it could go down 10%. When it comes to their bonds, when bonds decline 5%, people start freaking out. Why is that? Because they have this erroneous idea that bonds are supposed to be stable at all times and not have any volatility to them. Wrong! That's only true of short-term bonds. But short-term bonds are going to be like cash, so they're going to be low volatility, low return. and drag on your portfolio if you hold too many of them. Other people say, well, maybe I can fix that problem by holding TIPS. I think I've improved on your methods a bit, too. That's not going to fix your problem. It's just going to cause another problem. So if you look at year on year how TIPS performed over the past year, the main fund TIP was up about 4%. That is not a useful performance for an alternative asset and it's taking the risk that if we have a recessionary environment, it's also going to go down substantially when your stocks are crashing like 30 and 40%. That's not an improvement. So the ultimate lessons here are, yes, pick the right bonds for the kind of portfolio you are constructing to fit in it overall over long periods of time. and then make sure you have the right sizing of them. These days there's little or no reason that somebody should be holding 30 or 40% in bonds in most portfolios, especially if a great portion of those is correlated to stocks or positively correlated with stocks most of the time. You're better off taking out that chunk and putting in some of these alternative investments that have low or zero correlations with both stocks and bonds, such as gold, such as commodities, and also sprinkling a few REITs or other things like that in there too. Everybody does need some small cap value. You're gonna want that cowbell. And thank you for that email.

Mostly Voices [8:27]

Before we're done here, y'all be wearing gold-plated diapers. Second off.

Mostly Uncle Frank [8:30]

Second off, we have an email from John.

Mostly Mary [8:36]

And John writes：Thanks for the fantastic podcast. Have you analyzed or discussed the weird portfolio by Value Stock Geek? It seems to perform well in comparison to most other risk parity portfolios, and I'd be interested in your take on it. Well, yes, John, we have talked about that in the past.

Mostly Voices [8:52]

Yes!

Mostly Uncle Frank [8:56]

And the portfolio that Value Stock Geek has come up with as his weird portfolio is a kind of Risk Parity Style Portfolio. If you want to hear about that, someone emailed in about it and we talked about it in episode 113. And then Value Stock Geek himself emailed in, the best Jerry, the best. And we talked about that again in episode 126. That was weird, wild stuff. So rather than regurgitating all that for you here, I would go back and listen to those episodes. They also have the links to these portfolios. I will include the one you provided in the show notes as well. I think it is worth reading his description of his evolution in portfolio construction because it's similar to mine that you see things and you see ideas and then you get other ideas over time and figure out how to apply them in these methodologies to maximize your diversification In a portfolio that makes sense. Groovy, baby. And thank you for that email.

Mostly Mary [10:06]

Next off, we have an email from Jeff, and Jeff writes, Uncle Frank, longtime listener of the podcast and a big fan of the Rants. I would like to use my taxable brokerage account at Interactive Brokers to borrow money at their very low margin rate. this money would be used for home renovation and other expenses. Risk parity principles seem like they would be helpful in constructing a portfolio that had less risk and less volatility than a traditional 60/40 portfolio, both important characteristics when using margin. What are your thoughts on constructing a portfolio to use as a source of margin loans? Thank you for such an enjoyable podcast and best regards, Jeff.

Mostly Uncle Frank [10:47]

Well, Jeff, yes, you can do this and I have, in fact, done this at Interactive Brokers. So you know what that means. You are correct, sir, yes. I like to say this is infinite banking for people that actually know what they're doing because people who go and buy insurance contracts to do this, they really don't know what they're doing. And they've been sold marketing and paying high commissions and doing a lot of unnecessary things to borrow against their assets. You do it this way, you keep your assets, you borrow what you want, you pay less interest. Everything is much better. Everything. Looks like I picked the wrong week to quit amphetamines. So here are a few thoughts about that. First off, make sure that the portfolio you construct there does not have any cash or cash equivalents in it, because if you are borrowing against something, all of those things in there should be essentially have total returns that are greater than the borrowing rate. So it would not make sense to be holding a short-term bond fund in there that is paying 1% interest when you are paying 1. 5% interest on the margin. You might as well just liquidate that part of it and spend that money. So what you are looking at is some kind of modified golden butterfly or golden ratio style portfolio. The second idea is that it is actually advantageous to have a few things in there that are generating ordinary income. such as REITs, you just need to make it right size. The idea is this, your interest that is being paid on this is tax deductible against the returns or income being generated by the portfolio. So all the income, say, generated by a REIT fund, may be equal to or greater than the interest that is paid. Those things are set off. Your margin interest can be set off against that ordinary income one to one. and then you won't be paying any taxes on it. You will be doing that through IRS Form 4952. I will link to that in the show notes. IRS Form 4952, which is about interest used to support investments. And you can look at that form and read the instructions there and see how that works. And finally, you need to be careful out there because two things.

Mostly Voices [13:11]

real wrath of God type stuff.

Mostly Uncle Frank [13:15]

You don't want to take too much margin against your portfolio that can get you in hot water pretty quickly. The Inquisition, want to show the Inquisition, here we go. And also recognize that the margin interest rates there are variable and they will be going up now with the Fed raising the short term rates there because they're tied to that. But I believe they're still going to be down in the 1-3% range for some time. And so hopefully that information is helpful to you. You have a gambling problem. It is not advice or recommendation, so do not take it as that. I am merely telling you how that idea can work in practice.

Mostly Voices [13:57]

Well, you have a gambling problem.

Mostly Uncle Frank [14:01]

And thank you for that email. Fourth off, we have an email from Wong, and Wong writes.

Mostly Mary [14:08]

Hi, Frank, first-time listener. I had to check out your podcast after what Big Earn said about you. He said it's hard to argue with the following three crowds. One, dividend growth investors, two, small cap value investors, and three, risk parity investors. They all think they can ignore basic financial and economic principles because they are so much smarter than everyone else. Dunning-Kruger effect. He also blocked me from his blog for me being Chinese and defending my country in an argument there. This millennial fire crowd is so self-centered it's impossible to talk to. Thank God we have Frank and your brilliant podcast to counterbalance their narrow minds.

Mostly Voices [14:50]

Whoa, whoa, whoa, whoa, whoa. Just slow down. Okay, everybody, everybody chill.

Mostly Uncle Frank [14:57]

Yes, I do think we need to relax here. First of all, I don't know what Big Earn said, what context he said it in, and whether it was about me or not. And none of that really matters. And please do not send me emails with links because I'm not going to pursue this inquiry any further.

Mostly Voices [15:16]

Not gonna do it. Wouldn't be prudent at this juncture.

Mostly Uncle Frank [15:21]

I know that I sometimes get excited here about these topics. and portfolio construction.

Mostly Voices [15:29]

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

Mostly Uncle Frank [15:34]

But this podcast is really not about people and feelings or about who said what about whom or who is naughty and who is nice. I want you to be nice.

Mostly Voices [15:45]

I confess to being plenty naughty over the years. You can't handle the banana.

Mostly Uncle Frank [15:53]

I think part of it is that my mode of presentation is related to my experience of being a lawyer and arguing things in court. And people in the legal profession who argue in court generally have an easy time separating the people from the arguments, if you will. So just because I might disagree with somebody about something and disagree with them vehemently doesn't mean I'm not going to Respect who they are, enjoy who they are, and sit down and have a beer with them when appropriate.

Mostly Voices [16:24]

Fat, drunk, and stupid is no way to go through life, son.

Mostly Uncle Frank [16:27]

The truth is that most people who are out there talking about portfolio construction, at least those that follow kind of the legacy of Jack Bogle and using low-cost funds, mostly agree on most things. And the other truth is that many different approaches are likely to work. In fact, most common approaches are likely to work for a retirement portfolio in average times. And so a lot of it comes down to what your true goals are in constructing whatever portfolio you have. Because some people may have this goal that they never want to touch their principle and leave it to somebody and die with as much money as possible. There's nothing wrong with that goal if that's what you want to have, but that will be a different process, a different portfolio and a different safe withdrawal rate than somebody who is doing something different. And so I try not to speak to what other people are doing and what their goals might be. What our goals are here are to maximize projected safe withdrawal rates. And we do that by applying these three principles that you can learn a lot more about by going back to those foundational episodes.

Mostly Voices [17:40]

Particularly, I think, five and seven. And particularly talking about that Holy Grail principle. Go and tell your master that we have been charged by God with a sacred quest.

Mostly Uncle Frank [17:53]

Which is how do we use the principles of diversification in a process that takes advantage of the best tools and funds and opportunities that we have available these days that frankly, were not available 10, 15, 20 years ago even.

Mostly Voices [18:13]

We had the tools, we had the talent.

Mostly Uncle Frank [18:17]

Because I think what we've learned over the past 30 or 40 years is that is really the most important thing that everybody agrees upon. One of my listeners cited a new book called In Pursuit of the Perfect Portfolio by Andrew Lo from MIT and Steven Forster. And that's a book that just came out maybe just this year or last year. But anyway, it's got interviews of all of these famous people going back to Markowitz, including Sharpe, Bogle, Fama, Jeremy Siegel, and a lot of other people. And the conclusion of that book was that the one thing that all of these famous names in finance agreed upon was that the most important principle of portfolio construction was diversification not only within asset classes, but across asset classes. Surely you can't be serious. I am serious. And don't call me Shirley. And now that we have all of these ETFs that divide up even broad asset classes into those sub asset classes, we can mix, match, combine pieces of different asset classes, for instance, different kinds of bonds with different kinds of stocks in an ETF form. And then we can add gold commodities or other alternatives that make sense to maximize this diversification. Yeah, baby, yeah. So as I said before, we don't want to be stuck in the past. We don't want to be stuck in an era where you didn't have these opportunities, where you had high transaction fees that we don't have anymore. We don't want to be stuck driving cars with carburetors. when everybody's driving fuel-injected cars today and many people will be driving electric cars in the future.

Mostly Voices [20:02]

A foolish consistency is the hobgoblin of little minds, adored by little statesmen and philosophers and divines. With consistency, a great soul has simply nothing to do. He may as well concern himself with his shadow on the wall. Speak what you think now in hard words, and tomorrow speak what tomorrow thinks in hard words again.

Mostly Uncle Frank [20:27]

We should be doing the best we can with the tools we have to work with, and we have much superior tools to work with today than we did even 10 years ago. That includes not only the funds and the structures, but also the tools such as portfolio visualizer and portfolio charts. And we should also take advantage of all of the literature that has been written about these topics. over the past 25 or 30 years, particularly as it relates to diversification and how to implement it. Ultimately, what we need to do with all of this information is take the advice of the Chinese philosopher, Li Junfan, who is known in the United States as Bruce Lee. And here's what he said. He said, Absorb what is useful, discard what is useless, and add something that is specifically your own. Absorb what is useful, discard what is useless, and add what is specifically your own. And from a meta perspective, that's all we're really trying to do here. Well, Ladi Frickenda! Yeah, you're a legend in your own mind. In addition to that book, let me give you two other podcast references that I find particularly useful. One is the Rational Reminder podcast with Ben Felix. What I really like about that is he does discuss things in terms of academic papers. He tries to find the most unbiased information he can find, and he's critical of a lot of rules of thumb that amateur investors tend to throw around and that have popular currency. The other one I invite you to listen to is Money for the Rest of Us with J. David Stein has many decades of experience in advising institutions about investments. What I really like about his podcast is he's not afraid to talk about different kinds of alternative investments and how to put those into a portfolio so he doesn't artificially restrict himself to this set of stock funds and this set of bond funds, and that's all we can invest in. That's just not true anymore.

Mostly Voices [22:41]

You can't handle the truth.

Mostly Uncle Frank [22:46]

And he does a really good job in explaining different kinds of investments and how they might fit in or not fit into your personal portfolio. And so those are the kinds of approaches I think we should be trying to take and what I'm trying to do here more or less when I'm not goofing around.

Mostly Voices [23:00]

Looks like dad is bringing home the barbecue.

Mostly Uncle Frank [23:08]

And so I urge anyone who is thinking about these things to not engage in ad hominem arguments, but to focus on the information itself and see whether it makes sense to you or not. Because the best thing is you get to do whatever you want to do with your money. Pigpen, this here's a rubber duck and I'm about to put the hammer down. And nobody can stop you.

Mostly Voices [23:32]

No one can stop me. And thank you for that email.

Mostly Uncle Frank [23:35]

Hey, hey, hey, hey, come on, come on,

Mostly Voices [23:38]

don't do that. I didn't mean to snap. Okay, okay, bye. I, yeah, I, I love you too. Last off.

Mostly Uncle Frank [23:50]

Last off, we have an email from Ray, and Ray writes,

Mostly Mary [23:55]

Hi, Uncle Frank. I love your podcast and listening to it is part of my daily exercise ritual. Although, my wife hates it because she's tired of hearing me recite the foolish consistency quote and she's also tired of me telling her not to get saucy with me, Bernaise. Au contraire. I have a question about tax loss harvesting. Just a little background, my wife and I are currently working part-time and slowly decumulating a golden Butterfly portfolio in a taxable brokerage account. I have some Janus funds that I purchased 20 plus years ago and would like to sell and invest this money into my golden butterfly portfolio. But, but, but, I have some sizable gains that I would like to offset by tax loss harvesting my VGLT and VGS bond funds that are running at a pretty decent loss in my GB portfolio. Do you have any suggestions on similar duration bond funds that I could go into that would not run afoul of the wash sale rules? It's my understanding that I wouldn't just be able to buy a similar fund with another fund company, but I would also need to have that fund track a different index. For example, VGLT tracks the Bloomberg Barclays Index and purchasing the iShares version, TLT, that tracks the ICE US Treasury Bond Index Series might work for tax loss harvesting purposes. What are your thoughts or suggestions on doing this with my bond funds? Would you even recommend it? Thanks in advance for your insight.

Mostly Uncle Frank [25:37]

All right, Ray, this has to be one of my favorite emails that I've received recently. I have similar conversations with Mary sometimes. Mary thought that this particular clip might be more attractive to your wife's ears.

Mostly Voices [25:53]

By mine honor, in true English I swear I love thee. By which honor I dare not swear thou lovest me. Yet my blood begins to flatter me that thou dost. Notwithstanding the poor and untempering effect of my visage, now beshrew my father's ambition. He was thinking of civil wars when he got me. Therefore was I created with a stubborn outside, with an aspect of iron, that when I come to woo ladies, I fright them. But in Faithgate, the elder I wax, the better I shall appear. My comfort is that old age, that ill layer up of beauty, can do no more spoil upon my face. Thou hast me, if thou hast me, at the worst. And thou shalt wear me, if thou wear me, better and better. Now moving on to your question.

Mostly Uncle Frank [26:45]

Yes, this is quite timely as I would imagine that tax loss harvesting would be a useful thing to be thinking about with these long-term treasury bonds these days. First, as to the short-term bond fund, that's a pretty easy one. You can actually just use just about any other short-term bond fund even with corporates in it. That's obviously not the same. So BSV is a good candidate for that. You could even use VTI if you wanted to. because you're not expecting that fund to have a whole lot of volatility or a whole lot of return, whether you hold it just for 30 days or longer. But getting to the more interesting question, on the long-term ones, I think you're correct that it's unclear whether the tax authorities would consider VGLT and TLT to be significantly different. I don't know what the answer to that is, and it's always vague when it comes to those sorts of things. Schwab also has a fund that is similarly constructed, I believe it's called SCHQ. But here are a few alternatives that you might think about for at least parking the assets somewhere for your 30 days if you don't want to leave them there longer term. Two of them are the funds EDV and ZROZ. Now both of those are even further out on the curve in terms of duration. They're essentially strips or zeros is the way they're constructed. And so they are highly correlated with TLT, but they are more volatile. So they tend to have a relationship that is 1.5 times the oomph of TLT, if you will. So in theory, $10,000 worth of ZROZ or EDV will have the same kind of performance in a given time period as $15,000 worth of TLT. I have personally held both of them at various times. I think that ZROZ seems to have more reliability in terms of this relative performance than EDV does. EDV is a Vanguard fund, but for whatever other reason, its construction throws out a lot of capital gains or distributions at the end of the year much more than ZROZ. I'm not sure why that is, but just be aware of that if you're holding it for a longer period of time. Both of those are relatively illiquid when you compare them to something like TLT or VGLT. So make sure you are entering limit orders to buy and sell them and not just using market orders because the buy sell spreads are pretty wide. Another new option for a place to park or move for tax loss harvesting purposes is a relatively new fund called TYA that we talked about in episode 137. And you can go back there and also look at the links in those show notes. What TYA is, and it's called the Risk Parity Treasury Bond Fund or something like that, is a construction of a levered intermediate treasury bond fund, and it's levered up in such a way that it is designed to have the same kind of performance as TLT. Now, whether it will actually do that or not is unclear because the thing has literally been around only for a few months, I think, since last October. And I believe recently it's underperformed because the 10-year bond that it's based on, the intermediate treasury bond, has actually gone up further in terms of its interest rate than the longer term bond. That's the effect of this yield curve steepening and then inverting. So I think over the past few months, TYA has actually underperformed TLT, whether it'll revert back to performing better than or the same as, I can't say one way or the other, but that would be a one-to-one exchange, unlike the 1 to 1.5 exchange we were talking about with the others. And I would also make sure you're using limit orders to buy or sell that because it certainly does not have the volume or tight spreads that TLT would have or VGLT would have. Hopefully you will find that information useful and thank you for that email. It might be a tumor. It's not a tumor. It's not a tumor. at all. 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 in your message into the contact form and I'll get it that way. If you are looking for other risk parity materials, I invite you to check out our listener Justin's website, Risk Parity Chronicles, where he has collected a lot of the materials we've discussed here and even more. And that's at www.riskparitychronicles.com.

Mostly Voices [31:58]

So shines a good deed in a weary world.

Mostly Uncle Frank [32:02]

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

Mostly Voices [32:22]

So I threw the Senate at him. The whole Senate. True story. Oh my God, that is so funny. You made it come out of my nose.

Mostly Mary [32:32]

Go for Papa Palpatine. 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.