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 [0:21]

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 1-3-5-7-9-11-13-15-17-19-21-23-25-27-29-31-33-35-37-39-41-43-45-47-49-51-53-55-57-59-61-63-65-67-69-71-73-75-77-79-81-83-85-87-89-91-93-95-97-99-101-103-105-107-109-111-113-115-117-119-121-123-125-127-129-131-133-135-137-139-141-143-145-147-149-151-153-155-157-159-161-163-165-167-169-171-173-175-177-179-181-183-185 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.

Mostly Voices [1:32]

Yes!

Mostly Uncle Frank [1:35]

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 167. Today on Risk Parity Radio, we are going to see if we can knock off the rest of the emails from March. I don't think we'll quite get there, but we'll almost get there. Au contraire. We'll see how far we get.

Mostly Voices [2:04]

Don't be saucy with me, Bernaise. But without further ado, here I go once again with the email.

Mostly Uncle Frank [2:11]

And, first off, we have an email from Paul.

Mostly Mary [2:19]

And Paul writes, hi Frank, I have a friend who wanted to create a risk parity style portfolio using only Vanguard ETFs. So I put together the following for him：20% VTI, 20% VBR, 10% VGSH, 10% VGIT, 10% VG Long-Term Treasuries, and 30% EDV Extended Term Treasuries. The numbers for this portfolio at Portfolio Visualizer look similar to the Golden Butterfly, but they only go back as far as 2011. Compound Annual Growth Rate 9.21%, Standard Deviation 7.05%, Best Year 21.34%, Worst year：-5.24%. Max drawdown：-6.77%. Sharpe ratio：1.21 and Sortino ratio：2.22. The expense fees for this Vanguard-only portfolio average out to 0.06%. The 10% 30% split of long-term to extended-term treasuries, rather than just 40% long-term treasuries, added an extra 1% to the return without hurting the volatility numbers too much. What are your views on this portfolio? For further backtesting, I also composed a portfolio replacing the first five ETFs with older, comparable, I think, mutual funds to get numbers going back to 2008. The five funds I found and substituted at comparable percentage weightings were VFINX 1976, DSVX 1994, VFISX 1991, VFITX 1991, VUSTX 1986, while EDV was retained 2008. The overall results, including the extra years, were similar, although not quite as good as, the numbers for the ETF portfolio already described for the period 2011 to present. Using these five older funds and replacing EVV with VGLT allowed me to go back to 1994. Comparing that portfolio to a 60/40 VTSMX/VBMFX standard portfolio on Portfolio Visualizer gave me the same ending value for 1994 through 2022 within 0.1%, but the ride was so much smoother than the 60/40. the Vanguard only risk parity portfolio's compound annual growth rate is 8.48% compared to 8.43% for the 60/40, best year 28.64% compared to 28.74%, worst year -4.46% compared to -20.20. Ouch! Max drawdown -16.3% compared to -30.72% double ouch. And of course, better, sharper, and Sartino ratios back testing by asset class 1987 to present, the Vanguard only portfolio and the 60 40 yield similar numbers and the Vanguard only portfolio also compared favorably to the Golden Butterfly portfolio over this time period. Does my approach make sense to you? And do you agree with my interpretation of the results? Also, since EDV only goes back to 2008 and GLD only goes back to 2005, are there equivalent funds that started earlier? Are there any earlier funds I could use in place of the ones I found going back to the 1990s? Thanks for a great show and all your help understanding investing. Nice rabbit hole you've got here, and I've been spending a lot of time down it. Paul.

Mostly Uncle Frank [6:17]

All right. Well, my views on this portfolio are that it's probably not diversified enough and that it has a problem in that It is not going to perform well in times like the 1970s or what we've been experiencing in the past couple of months here. And there are two factors that play into that. One is that it really needs to have some gold or alternatives in it or both, and it probably has too many longer term treasury bonds in it. And what you want to do to see this is When you go to Portfolio Visualizer, instead of looking at the back tester that looks at specific funds, you should be looking at the one that analyzes asset classes because it goes back further in time. And so I'll link to this in the show notes, but I set up a couple of portfolios that go all the way back to 1972. Now, you can't do that with all of the bond classes, but you can at least do it with the 10 years to give you an illustration. So, I did one portfolio that's 20% total stock market like yours and 20% small cap value like yours, and then it's got 60% in intermediate term treasuries, the 10 years, what it's in. And then I did an alternative to that that instead takes out some of those treasuries and puts it into gold. and you'll see that the one with the gold in it performs a lot better over time. And it is mostly that period in the 1970s where a portfolio that is only stocks and bonds is going to have problems. And if you look in particular at the years 1973 and 1974, you'll see the big drawdowns that occurred in that kind of portfolio then. And while that kind of market doesn't come around that often, We are experiencing something like that now, where the best performers this year have been gold and commodities. And you also see that on the stock side, the better performers have been on the value side of things. So your total stock market and growth funds have been struggling in the past few months, whereas a lot of the value REITs and similar sectors have been flat or even going up in price. That's what we've seen with these property and casualty insurance companies, for example. And so when you are doing your portfolio analysis, you always have to ask the question, how would this portfolio have done in the 1970s? Because the 1970s were just much different than the 80s, 90s, aughts or 2010s. And the two easiest ways to do that are to Look at similar asset classes on the asset class back tester at Portfolio Visualizer and then also go over to Portfolio Charts, which also goes back to 1970 and you can check things out there as well. Surely you can't be serious.

Mostly Voices [9:26]

I am serious and don't call me Shirley.

Mostly Uncle Frank [9:30]

Just as a general rule, fund selection is much less important because we are thinking about these things in what's the lowest cost Fund that gets me a small cap value or a total market or whatever other sector we are trying to emulate. But you always want to look at the asset classes and subclasses first. That's really where the rubber hits the road.

Mostly Voices [9:53]

It's all the same to you. I'll drive that tanker.

Mostly Uncle Frank [10:00]

Just one other trick you can use in Portfolio Visualizer Even in the one that's analyzing specific funds, if you use the caret symbol, that's the symbol that's above the numeral six on your keyboard, and then type in gold after that, that will give you a model for gold that goes all the way back, I think, to 1972, even in the fund analyzer section. So I usually just use that because otherwise you are stuck with GLD, which just goes back to about 2004. That's not an improvement. So hopefully those little tips will help you and thank you for that email. Second off, we have a email from the mysterious My Contact Info. Yes!

Mostly Voices [10:50]

Who's actually one of my eldest son's favorites.

Mostly Uncle Frank [10:54]

Oh, please! And my contact info writes：Frank, now listening to episode 163.

Mostly Mary [11:01]

Awesome episode. Thank you. Content of episode made me think of an ongoing debate and would look forward to your thoughts in light of your podcast endeavor and background as a lawyer. Null hypothesis：Impossible for any asset management company to offer financial advice given potential inherent conflict of interest. Perhaps this is obvious, but the concept is definitely not implemented. Thank you.

Mostly Uncle Frank [11:27]

Well, I think you're correct that there is an inherent conflict of interest for any provider of financial services when they are also creating the products. So if they're a fund creator, they shouldn't be a fund manager. You are correct, sir, yes. However, that's how most of the retail financial services industry is set up that either they're creating funds or they are profiting from funds. And usually the way that works is something called a 12B-1 fee that it is a fee added on to the fund, which actually goes to whoever markets and sells the fund. It's a marketing fee. It does go to that Upton Sinclair quote I've used before, which says, It is difficult to get a man to understand something when his salary depends on his not understanding it. It is difficult to get a man to understand something when his salary depends on his not understanding it. Forget about it.

Mostly Voices [12:28]

And so that is why most of the financial services industry is inherently

Mostly Uncle Frank [12:32]

conflicted. I think I saw a statistic on the Money Guy Show that something like only 1.5% of financial advisors could be deemed to be independent. And so you're really talking about registered investment advisors there who have a fiduciary duty to their clients, and typically they will advertise as I don't create funds. And what you should use that as is basically a minimum standard for consideration of advice. And while we would like things to be different and to change, I don't think that's going to happen, at least not in our lifetimes. Another day, another migraine. because the whole history of the industry is based on sales. What Fred Schwed wrote in the famous book, Where Are the Customers' Yachts? Back in 1940 still essentially holds true today.

Mostly Voices [13:32]

Yes, you take my dreams like the one that you just interrupted. It was marvelous. I was foreclosing the mortgage on a lifelong friend and I was creating a poverty pocket right in the heart of Beverly Hills. So, caveat mTOR out there.

Mostly Uncle Frank [13:46]

Danger, Will Robinson. Danger. And now, next off, we have an email from Alex, and Alex writes.

Mostly Mary [13:54]

Hi, Uncle Frank. Thank you for all you do. I noted that WisdomTree launched a new leveraged gold ETF with 90% gold exposure, 90% S&P 500, 10% T-bills. The leverage ratio is 1.8. What do you think? Does this achieve tax efficient gold exposure to avoid the weird gold tax laws in a taxable account? How would you implement this, if at all? Thanks again, Alex, not Alexei.

Mostly Voices [14:25]

Take it easy, dude. Oh, yeah. I know that you will. Yeah, well, to do the binds. Forget about it.

Mostly Uncle Frank [14:38]

Well, I wasn't aware of that, but I did go check these new funds out. These are brand new funds put out by Wisdom Tree. One of them is called GDMN, and it is Efficient Gold Plus Gold Miners is the name of it, or something similar to that. And so it's a leverage fund that not only invests in gold futures, but also gold mining stocks. And then there's another fund called GDE, which I think you described, which is called the Efficient Gold Plus Equity Strategy Fund that seems to have that or is advertised to have a 90% gold exposure and a 90% S&P 500 exposure. With things so new as this, I wouldn't do anything with them other than watch them because the first question is, are they going to perform as advertised? and you really won't get a sense of that until they've been out there for at least two or three years. And then the next question after that, well, how would you use this in a risk parity style portfolio? I suppose you could use it in theory, like we've used NTSX in the leveraged golden ratio portfolio, the sample portfolio. That one is S&P 500 and treasury bonds. But honestly, I really don't like these kind of composite Constructions and the drawbacks to them is they're just more difficult to manage and you can't rebalance the things inside them yourself. So you're kind of stuck with what they give you and then you need to build with other funds around that to get to the macro allocations that you're trying to have for your entire portfolio. So it kind of creates this extra level of complexity.

Mostly Voices [16:23]

It's got a cop motor, a 440 cubic inch plant. It's got cop tires, cop suspension, cop shocks.

Mostly Uncle Frank [16:34]

It's a model made before catalytic converters, so it'll run good on regular gas. From a portfolio constructor's point of view, it is much easier and better just to have things that are pure. Here's the gold part of it, here's the stock part of it, here's this treasury bond part of it, so on and so forth, so that it's much easier just to pick exactly what you want and exactly how much of it you want and not have to be doing some algebra just to figure out what your overall exposures are going to be because you have these funds that are composites. What do you say? Is it the new Blues Mobile or what? Forget about it. That being said, it's good to see more innovation on this front. Real wrath of God type stuff.

Mostly Voices [17:15]

It's going to help us as do-it-yourself investors in the long

Mostly Uncle Frank [17:19]

run to have more options. And even if these aren't particular ones that I would choose in the future, just knowing that somebody is out there actually trying to create more and better options is a good sign and bodes well for our futures as do-it-yourself investors. Groovy, baby. And thank you for that email. Last off. Last off, we have an email from Marvin. And Marvin writes.

Mostly Mary [17:48]

Hi, Frank. I'm an avid listener of your podcast and have learned a great deal from you regarding achieving true diversification through means of uncorrelated assets. I'm currently in accumulation phase and have nearly 100% stock allocation. I came across a recent video of a retiree who asked Dave Ramsey about having a portion of his portfolio in gold. While I don't personally hold any gold, I clearly understand why small allocation would be helpful for risk parity purposes, especially during retirement living off the portfolio. I thought I would share their exchange with you because it was clear that Ramsey did not understand the diversification slash risk parity application for someone who is drawing from those assets. This is an example of why educational podcasts like yours are valuable to bring broader perspective to the blanket financial advice being given out to large audiences. Thanks, Marvin.

Mostly Uncle Frank [18:45]

Well, this is something interesting to think about. It does follow along that Upton Sinclair quote, It is difficult to get a man to understand something when his salary depends on his not understanding it. There is a growing tendency to think of man as a rational thinking being, which is absurd. And that leads us to the most important question to ask. when considering any information you get from the financial media or the financial services industry. And that question is, how does this person get paid? How does this person get paid? What is their business model? Because oftentimes that is what influences how they conduct themselves and what sort of information that they send out to the world. So how does Ramsey's business model work? Well, it's a classic model of aggregation and sales when you look at it. It's something that you'd want to study in a marketing class 'cause he does it so well. His business model works the same way that Google and Facebook work. The people that are watching the program or listening to the program are not the customers, they are the product. And his job is to aggregate these products, these people, and then that is sold to the customers who are the affiliate marketers who pay Ramsey for marketing them. And so he literally has thousands of service providers, individuals and companies paying him to aggregate this audience and serve them on a platter. to his real customers.

Mostly Voices [20:28]

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

Mostly Uncle Frank [20:36]

Are you gonna take it? And so the information he provides must be consistent with that model.

Mostly Voices [20:40]

A, B, C. A always B, B, C closing. Always be closing. Always be closing.

Mostly Uncle Frank [20:52]

Because otherwise people are not going to pay him. if he is saying things on his program that might not be consistent with the audience buying the services from the customers. Am I right or am I right or am I right?

Mostly Voices [21:04]

Right, right, right.

Mostly Uncle Frank [21:08]

And so you see examples of this throughout all of his materials, starting with the baby steps. 'Cause the idea that everyone is a financial baby and will stay a financial baby essentially forever plays into the idea then a financial baby is gonna be stuck in a high chair or a playpen and needs nannies to take care of them. Nannies from the financial services industry. I drink your milkshake. And so much of what he does is spent on grooming this audience so they are prepared to pay the nannies. People who are in debt with no money to spend cannot afford to pay nannies. So most of his efforts are focused on helping people get out of debt. And he does a very good job with that. But once they are out of debt and can afford to pay for a nanny, his real customers, he wants to shunt them over to those nannies. And so that's where the education kind of just ends with him. And it's gone. He doesn't ever want his audience to really be educated enough that they can get out of their high chairs or playpens. and go off and take care of themselves. Because if they did, then they wouldn't need the financial nannies who are paying his bills. Inconceivable. And so his message on investing is generally kind of vague and always lapses in the end to this is really complicated and you need help. And so go pay these people that pay me to get that help.

Mostly Voices [23:06]

Get them to sign on the line which is dotted.

Mostly Uncle Frank [23:10]

And so the whole thing is run in this kind of folksy Papio Daniels flower hour.

Mostly Voices [23:14]

Oh, I'm looking for some old-timing material. You see, people can't seem to get enough of it. Since we started broadcasting it on the Papio Daniels flower hour.

Mostly Uncle Frank [23:26]

With lots of folksy references and so on and so forth designed to make his audience feel very comfortable and to trust his recommendations that they go and pay these other people to take care of their finances. We ain't one at a time in here. We're mass communicating. Oh, yes, that's a powerful new force. Take a leg, Junior. But what that also ultimately plays into is you get to this conflict where it's not in his interest in his business model to educate people beyond a rudimentary level. Because if they were educated beyond a rudimentary level, They would see that they probably didn't need to pay for the services that his real customers are providing. You can't handle the truth. In the parlance of the Plato's Cave analogy, he wants to keep those people in the cave looking at the shadows that are provided by his customers. And in the process, he's just become a master at deflecting any criticism thrown his way. Going to paddle a little beehive. Ain't gonna paddle it. Gonna kick it real hard.

Mostly Voices [24:36]

No, I believe he's gonna paddle it. I don't believe that's a proper description. Well, that's how I'd characterize it. I believe it's more of a kicking situation.

Mostly Uncle Frank [24:44]

Because he also recognizes that his critics are not likely to be buying his customer services anyway. So it's just kind of a waste of time for him to be arguing with people. That's what the people arguing with him don't get. He doesn't care. He knows what his message is. He knows how his bread is buttered and he stays on message and he's very good at it.

Mostly Voices [25:10]

Because only one thing counts in this life. Because he really is running a daycare center.

Mostly Uncle Frank [25:17]

And if you want to be educated beyond that level, you have to get out of the high chair, get out of the playpen, walk out of the daycare center, to a better school, to a library. Because the fees for staying in a daycare center are pretty darn expensive. Oh, Mr.

Mostly Voices [25:37]

Marsh, don't worry, we can just transfer money from your account into a portfolio with your son, and it's gone.

Mostly Uncle Frank [25:44]

And you are just going to have to leave behind some of the people that would prefer to stay in the daycare center. I do what I'm told. I am highly doubtful that there are any such people in this audience. Which may be one of the reasons my audience is relatively small compared to Dave Ramsey's.

Mostly Voices [26:04]

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

Mostly Uncle Frank [26:08]

The good news on that is we are approaching a quarter million downloads actually for this podcast. and this one should put us over that hump, which will be nice. And I'm grateful to all of you who participated in that effort. Yeah, baby, yeah! Just one other thing, if you wanted to see some comparisons between a couple of our experimental portfolios and a Dave Ramsey style portfolio, go back to episodes 20 and 24 and look at those show notes and you can see those. and you can see how the Dave Ramsey style portfolios were constructed using information from the white coat investor and others. I think that's probably the last time I mentioned anything about Dave Ramsey on this program. But as we also say, take what is useful, discard what is useless, and add something that is uniquely your own. That's from Bruce Lee. Bout of your sensei.

Mostly Voices [27:07]

Bout of your sensei.

Mostly Uncle Frank [27:11]

And in terms of investing, there isn't a whole lot there to be gleaned from the daycare center about investing. So I'm afraid you'll have to just deal with the shoe tying and the potty training somewhere else besides this program. And just one other note, the kind of recommendations he does make are straight out of the Bronze Age. They're straight out of the 1990s when all the rage was finding the best fund managers to manage these funds.

Mostly Voices [27:47]

I'm not here to make a record, you dumb cracker.

Mostly Uncle Frank [27:51]

It's been proven to be a bad approach since then, but he never moved on from that. And he's been very skillful about maintaining that kind of perspective and that kind of marketing. And thank you for that email. But now I see our signal is beginning to fade. I think we'll be taking off this weekend for Easter. Mary and I have a few other things we need to do.

Mostly Voices [28:13]

Snooze and dream. Dream and snooze. The pleasures are unlimited.

Mostly Uncle Frank [28:21]

I will update the website with the sample portfolios, even if I don't have time to do a podcast. 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 and I'll get it that way. If you're interested in other risk parity materials, I invite you to check out Risk Parity Chronicles www.riskparitychronicles.com Where one of our listeners, Justin, has assembled a lot of the materials that we talk about here in a more organized form than I tend to present it. Secondary latent personality displacement. Oh great, yes sir. If you 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. Mmmkay. Thank you once again for tuning in. This is Frank Vasquez with Risk Parity Radio.

Mostly Voices [29:24]

Signing off. We're going to play a wonderful game called who is my Daddy? And what does he do? Yes? Is your daddy a fireman? He's probably big. Is he a wrestler? Is he a basketball coach? No, no, no, no, no, no, no, no. What's the matter? I have a headache. It might be a tumor. It's not a tumor. It's not a tumor. at all.

Mostly Mary [29:54]

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.