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 1-3-5-7-9-11-13-15-17-19-21-23-25-27-29-31-33-35-37-39-41-43-45-47-49-51-53-55-57-59-61-63-65-67-69-71-73-75-77-79-81-83-85-87-89-91-93-95-97-99-101-103-105-107-109-111-113-115-117-119-121-123-125-127-129-131-133-135-137-139-141-143-145-147-149-151-153-155-157-159-161-163-165-167-169-171-173-175-177-179-181-183-185 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. Yes! And don't forget that the host of this program is named after a hot dog. That's not an improvement.

Mostly Voices [1:42]

Lighten up, Francis.

Mostly Uncle Frank [1:45]

But now onward to episode 169 of Risk Parity Radio. Today on Risk Parity Radio, it is time for our weekly portfolio reviews. Of the seven sample portfolios you can find at www.riskparityradio.com on the Portfolios page. Given what happened in the markets on Friday, here's a little preview Actually, it wasn't so bad.

Mostly Voices [2:23]

I don't think it means what you think it means. But before we get to that, I'm intrigued by this, how you say, emails.

Mostly Uncle Frank [2:34]

And, first off, first off, we have two emails from my contact info.

Mostly Voices [2:38]

Looks like I picked the wrong week to quit on Fedimanches.

Mostly Uncle Frank [2:42]

And in email one, my contact info writes, Annuities are interesting.

Mostly Mary [2:50]

My take? Basic math equation transformed in many cases into unnecessarily complex financial products. Same perhaps applies to option pricing models? As you allude to in your podcast, it is telling that other than Social Security, very few annuity products offer to hedge against inflation. Thank you. And in email number two, my contact info rights. Great quote from Upton Sinclair. The extremely difficult task of untangling what is good for the investor and what is profitable for the firm is in my view why it is for all intents and purposes impossible for an asset management company to offer advice. As competition intensifies and costs compress, this makes the approach that you espouse possible and logical. Thank you.

Mostly Uncle Frank [3:44]

All right, as to your first email, yes, annuities are interesting, and the problem with them is not so much what they are, but the way they are sold. And they are sold as these kind of Swiss Army knives that are supposed to solve all of your investing problems.

Mostly Voices [3:55]

With my trusty quarter staff. Actually, it's a buck and a quarter quarter staff, but I'm not telling him that. Ho, ha ha, guard, turn, parry, dodge, spear, ha, thrust.

Mostly Uncle Frank [4:16]

But when you think about a basic annuity and what it's really designed for, it's really only for one thing. You had only one job. And that thing is to provide a predictable stream of income. for a certain period of time, which is usually tied to somebody's life or more than one life. And the simplest annuities actually do that quite well and are largely cost effective because they are essentially commodity products that are not well advertised or sold because they do not generate very large commissions. Where they generally go off the rails and what they are sold as is generalized risk mitigation products. that are supposed to ameliorate the risks, say, in the stock market. And so you have these crazy design things that are indexed or variable, and they have floors and ceilings and all kinds of bells and whistles, and they are very difficult to understand because they are designed to extract the most money out of the product for the Product creator and not the product buyer.

Mostly Voices [5:29]

Let's see now, something amiss here. Hmmph. I'll run through it. Ho, ha ha, guard, turn, parry, dodge, spin, ha, thrust. Got it.

Mostly Uncle Frank [5:40]

In a lot of respects, they're kind of like using an RV as a commuter vehicle. Just in case you might not be able to find a place to go to the bathroom or make a sandwich between your home and your office. And we know what the correct tool for mitigating stock market risk is. It's called diversification. It's the Holy Grail principle.

Mostly Voices [6:02]

We have been charged by God with a sacred quest.

Mostly Uncle Frank [6:06]

If you want to reduce your risk in the stock market, you both reduce your overall exposure to the stock market and then put other things in your portfolio that are uncorrelated or negatively correlated, which will also help mitigate that risk. But of course, that kind of solution doesn't generate a lot of sales or commissions for somebody selling financial products, which I think is one of the reasons that retail financial services actually has very little interest in applying things like the Holy Grail principle and maximizing diversification. you don't really see that until you get to professional levels and levels of large pools of assets being managed. It was interesting, I live in Fairfax County, Virginia, and I actually heard a podcast recently that was an interview of the people who manage the pension funds for the government employees and the police in Fairfax County. And the basic principle that they apply to do that is risk parity. Surely you can't be serious. I am serious. And don't call me Shirley.

Mostly Mary [7:40]

Which leads you to the question that if the most sophisticated investors managing the most money for the public trust are using these sorts of principles to manage assets long term, why shouldn't we be applying those same principles to our own situations on a smaller scale? I think I've improved on your methods a bit, too.

Mostly Uncle Frank [7:44]

And besides inertia and/or lack of knowledge as to how to do it, I think the real barrier is that it's too efficient. It doesn't generate any commissions or fees in particular for the financial services industry. Am I right or am I right or am I right? Right, right, right.

Mostly Voices [8:00]

And so they prefer to do what makes sense for them to make the

Mostly Uncle Frank [8:04]

the largest profits and fees and not what's in the best interests of their clients necessarily.

Mostly Voices [8:13]

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

Mostly Uncle Frank [8:21]

And I will link to that podcast interview I found in the show notes. And I suppose this does also get to your second email about that quote from Upton Sinclair. And just to remind everybody what that was. The quote is, It is difficult to get a man to understand something when his salary depends on his not understanding it. Inconceivable. And it does go to that inherent conflict of interest that you find in the financial services industry when you have firms that are both creating products and advising people because the tendency is to want to essentially sell the product. Whether it's the right solution or not for a particular situation. Always be closing. Always be closing. So the first question that you always want to ask when there's money or an investment involved is how does the person making this recommendation get paid? And once you know the answer to that, you can ask the second question, how does that payment scheme motivate that person to behave.

Mostly Voices [9:30]

You know, whenever I see an opportunity now, I charge it like a bull, Ned, the bull, that's me now. Tell me, have you ever heard of single premium life? Because I think that really could be the ticket for you.

Mostly Uncle Frank [9:42]

And then recognize that on a large scale, behaviors become institutionalized so that when a person joins a large financial services firm, they quickly learn that this is the way we do things here.

Mostly Voices [9:58]

They're sitting out there waiting to give you their money or you're gonna take it.

Mostly Uncle Frank [10:03]

And the reason they do the things the way they do is because it's recognized as profitable for the firm. And if you are not willing to do things the way they do things there, you probably will not be working there that long.

Mostly Voices [10:17]

As we're adding a little something to this month's sales contest, as you all know, first prize is a Cadillac El Dorado. Anybody wanna see second prize? Second prize, a set of steak knives. Third prize is you're fired.

Mostly Uncle Frank [10:40]

But fortunately for us, as you've recognized, competition has intensified in the financial services area, particularly with respect to individual investors. Costs have compressed and we have many more options than we did even in the recent past.

Mostly Voices [10:52]

We had the tools. We had the talent.

Mostly Uncle Frank [10:56]

And so I do believe we are in a kind of golden age of investing when you think about it. The best, Jerry, the best. And thank you for those emails. Second off.

Mostly Mary [11:07]

Second off, we have an email from Chris. And Chris writes, Dear Frank, I've put together a risk parity portfolio that I rather like. And I'm using it as a conservative place to accumulate funds for a future purchase with about a five plus year time horizon. I'm still on the younger side, so given my investing time horizon, the whole portfolio is in a taxable account. I like the way the portfolio is performing, but I'm questioning if I may have too much diversification. My concern is that since all my funds are 100% taxable, some of the assets in the portfolio, like gold, treasuries, and REITs, may be losing a good bit of their returns over time due to taxes. At what point does it become more prudent to sacrifice some of a portfolio's diversification for higher after-tax returns by using assets that are more tax efficient? Never? Sometimes? Is there anywhere that lets someone model a portfolio's returns with taxes taken into account? Thanks, Chris.

Mostly Uncle Frank [12:15]

Well, a short answer to your question is probably never and maybe sometimes. But let's make sure we all understand as to how taxes actually work in a taxable account. You said that you had a concern that some of the assets in the portfolio like gold, treasuries, and REITs may be losing a good bit of their returns over time due to taxes. That's not actually how taxes work. You don't get taxed on time. You get taxed on two things. Either whatever you're holding makes a distribution, which you'll be taxed on or if you sell something then you will be taxed on whatever capital gain you get out of it. It doesn't matter what the time frame is or how long it's been in there. I think there is a mistake among people who are not familiar with the taxation of taxable accounts that there's some kind of belief that if they say buy $10,000 worth of a gold ETF It's going to start getting taxed on $10,000 every year. The answer is it's not going to get taxed at all until you sell it, and then you're only going to get taxed on the gain. And if you happen to have a loss, it's going to be counted against any capital gains that you have on the other side with respect to some other asset that you may have sold. Now, how this affects you personally is going to be a personalized calculation because it's based on your marginal tax rates, there is no general rule that applies to everyone. And there are two rates that are relevant. One is your annual rate on ordinary income, which usually puts you in a low bracket, which is less than 20%, a medium bracket, which is between 20 and 30%, or a high bracket, which is over 30% are the three general categories for that. Separate and apart from that, but related, is going to be your long-term capital gains tax bracket. And for most people that's going to be either 0% if you have a lower income or 15% if you have a medium to high income. And if you have a very high income over say 450 or $500,000 then you would be subject to the 20% long-term capital gains tax. And that will apply to two things. It will apply to your investments that you have held for more than one year and any gains that you've had on those. And it will also apply to any qualified dividends you receive along the way. Now there is that one exception for holdings in gold or other precious metals or collectibles. those are taxed at your ordinary income or 28% whichever is lower for the most part. Now really when you're talking about the taxation of investments you should never look at it in a vacuum. You always have to compare one set of investments to another one because otherwise you're really not making a valid comparison. So what would you be holding in this intermediate accumulation portfolio if you were not holding a risk parity style portfolio? Maybe you'd be holding something like a 60/40 portfolio with a total bond fund that was throwing out a lot of ordinary income or something like that. Maybe you put some of the money in CDs or some other income generator also paying ordinary income. What you should get from that is that the difference between holding this kind of portfolio and some other portfolio or investment is not likely to be very much different in terms of taxes. so long as you're not making a lot of transactions on either one of them, because it's the buying and selling of things frequently that would tend to generate large tax bills. For instance, if you were doing some covered call option strategy or something like that, you're going to have big tax bills out of something like that. On the other end of the spectrum, you could imagine just comparing it to a portfolio that was just a plain old index fund that would be a very low tax solution. The problem with that solution is that it would defeat the purpose of trying to lower your risk so that your portfolio didn't blow up when you needed the money. That's why we say those kinds of portfolios are appropriate for long-term investing that's over a decade long because the chances are you can ride out any bad period of time and not have to sell when you need the money. And that is the trade-off that you are essentially making. Now just going through these basic components you mentioned, first of all, most of the portfolio is going to be in stock index funds, so that's already as tax efficient as you're going to get for some kind of accumulation portfolio. The Treasuries these days, they are paying a very low interest rate, so you're not going to be paying a lot of taxes on ordinary income. If they have capital appreciation, that's going to be taxed at the lower long-term capital gains tax rate. And again, that is as good as you're going to get. The gold you will get taxed on, but only when you sell, only if there is a profit, only on the profit, and only on that small portion in the portfolio that it occupies. So if you're accumulating, say, $100,000, you may have something like $15,000 or $16,000 worth of gold altogether in that portfolio. Suppose it appreciates in value by about 20%, that would be, say, $3,000. So you'd have to pay the tax on a $3,000 profit once in the entire time that you're holding this thing. that ends up being less than $1,000 over a five to ten year time horizon. So I think if you actually calculate a few of these things out, you're going to find that they're small, especially when spread out over the time periods you're talking about. The last one you mentioned here was REITs. Yes, that will generate ordinary income every year that you'd have to pay taxes on. If that becomes a burden, yeah, you could switch utilities in there for REITs. It will give your portfolio a slightly different complexion that will be more conservative, but any income generated off of that or most of the income generated off of that will end up being qualified dividends that are taxed as long-term capital gains. But again, we're only talking about a tiny portion of your entire portfolio for that. And if you do the math, you're going to find out it's really not that much, especially when you consider that in an alternative portfolio, that spot would be occupied by corporate bonds, which would also be taxed on ordinary income. All right, are there any calculators? Well, you could use your tax form calculators to do some of this stuff if you've got any tax software. Honestly, it's easy enough to do on a spreadsheet or even on a piece of paper, because once you know your marginal rate and your long-term capital gains rate, you're just going to be multiplying a couple of numbers. You may also wish to try out the Monte Carlo Simulator at Portfolio Visualizer, which also allows you to input tax rates. I'll link to that in the show notes. I'm not sure that it's any better or easier to use than a simpler method of spreadsheets or pen and paper though. Just make sure whatever you were doing you were actually comparing it to a reasonable Alternative investment and how that would be taxed. Because that's what you're really looking at is what is the difference between the taxation on this and the taxation on something else? Not whether there'll be taxes or not. Forget about it. Because if your priority was minimizing taxes, you would simply put it in municipal bond funds or in cash and call it a day. Forget about it. And thank you for that email. Last off, we have an email from Karen.

Mostly Mary [20:40]

And Karen writes, thank you for the very detailed response to my novella. I did not know that utility funds are like REITs with qualified dividends and thus good for use in my taxable account. And I appreciate that you insert these nuggets even when you think we already know them. The gap between what you know and the rest of us know is wide and funny shaped. Let me understand this, because I don't, you know, maybe it's me. I'm funny how? I mean funny like I'm a clown. I amuse you. I make you laugh. I also appreciate the two clearly outlined methods for managing my portfolio and the discussion of the advantages of each. I will go with a combination of the two for the immediate future. Annual distributions, but looking more frequently for opportunities to get more of the assets I want at a discount. With gold and small cap value at historic highs, it feels like I'd be buying high to buy them now, especially given that the thing I'd be selling to get them has dropped in value since I bought it. I know, I know, insert crystal ball smashing noise. Finally, I want to thank you for talking about how you and Mary budget with the annual and monthly spreadsheets. I've never had a budget before, so while I designed one for looking at my expenses, I was definitely hazy on actually following it, short of looking at the end of the year to see if I'd spent too much. You spurred me to roll up my retirement budget into buckets of what must be spent, fixed costs and variable costs that nonetheless should be kept back in case of need, and what could be spent but could be cut if needed. I mapped those onto my quick and budget categories and did some transforming to get myself a spreadsheet I update monthly that shows me how much of the total could spend bucket has been spent versus progress through the year so I can see if I'm getting ahead of myself or need to suspend the optional spending. This view makes me feel like I'm actually on top of things. Plus, I got to use the sparklines function in Google Sheets. Yes! Take care, Karen.

Mostly Uncle Frank [22:44]

Well, thank you for this very nice follow-up email, Karen. Karen is referring to the analysis that we did of her situation in episode 163, if you want to go back and listen to that. But I'm glad we could be so helpful, and this does get at the real secret to do-it-yourself investing is to have a good handle on your do-it-yourself budgeting and expense management. Boring.

Mostly Voices [23:11]

Boring.

Mostly Uncle Frank [23:15]

Because if you can get that in place, oftentimes the investing part of it almost takes care of itself after you get that set up.

Mostly Voices [23:22]

I am a scientist, not a philosopher.

Mostly Uncle Frank [23:25]

And thank you again for that email and the opportunity to serve you. Like I'm a clown, I amuse you.

Mostly Voices [23:34]

And now for something completely different. What is that? What is that? What is it? Oh, no, not the beast. Not the beast. Ah, I love my eyes. My eyes. Ah.

Mostly Uncle Frank [23:53]

And the something completely different is our weekly portfolio reviews of the seven sample portfolios you can find at www.riskparityradio.com First going through the markets this week, and it was bombs away, especially for the stock market this week, especially on Friday. The S&P 500 was down at 2.75%. The NASDAQ was down 3.83%. I think it was a big loser last week. Gold was down 2.27%. And Treasury bonds represented by the fund TLT were down 0.59%. REITs were the big winner last week. REET, our representative fund, was up 0.03% for the week. Commodities represented by PDBC were down 3.62% for the week. and preferred shares represented by the fund PFF were down 1.75% for the week. So as you can imagine, our sample portfolios were all down for the week, but generally not as much as the stock market was. First one is our All Seasons Portfolio. This is a reference portfolio that we don't really use, but we have for comparison purposes. It is 30% in stocks represented by the fund VTI, is 55% in intermediate and long-term treasury bonds, and 7.5% in gold GLDM and 7.5% in commodities, PBDC. It was down 1.68% for the week. It is down 8.44% year to date and is up 2.51% since inception in July. 2020. Now moving to our bread and butter portfolios that somebody might actually consider using for retirement. We start with the Golden Butterfly. This one is 40% in stocks divided into a total market fund, VTI, and a small cap value fund, VIOV. It's got 40% in treasury bonds divided into long and short, and then 20% in gold, GLDM. I think it was our big winner this week, meaning it was only down 1.49% for the week. It is down 6.39% year to date. It is up 16.23% since inception in July 2020. Moving to our next one, it's the Golden Ratio Portfolio. This one is 42% in stock index funds, 26% in treasury bonds, TLT, 16% in gold, that's GLDM, 10% in the Reit fund, REET, and 6% in cash out of which we pay our distributions for this portfolio. It was down 1.64% for the week. It is down 8.95% year to date. It is up 15.53% since inception in July 2020. Our next one is the Risk Parity Ultimate Portfolio. This is 14 funds. I won't go through it all. It's our most diversified one. It is down 2.18% for the week, it is down 11.53% year to date, and it is up 11.92% since inception in July 2020. Now moving to our experimental portfolios, which have some leverage in them, and has made them very unpleasant to hold in these unpleasant times. Which is why they're experimental. Tony Stark was able to build this in a cave with a box of scraps. First one is this accelerated permanent portfolio. This one's 27.5% in a leveraged long-term treasury bond fund, TMF. 25% in a leveraged stock fund, UPRO. 25% in preferred shares, PFF, and 22.5% in gold, GLDM. It was down 3.39% for the week. It is down 24.25% year to date on all of that leverage and is up 4.25% since inception in July 2020. This one was also rebalanced last week and we have this portfolio on rebalancing bands so that we look at it at the 15th of every month and if a set allocation has gone further than 7.5% from its original allocation, then we rebalance the whole portfolio. And that happened for this portfolio this week because the bond fund TMF had sunk below 20%. And so we rebalanced the whole thing on Monday. We sold $155 worth of UPRO, $186 worth of PFF, $599 worth of GLDM, which had been the best performer recently and bought $941 worth of that bond fund TMF. Following the age-old prescription.

Mostly Voices [29:16]

Buy low, sell high, fear, that's the other guy's problem.

Mostly Uncle Frank [29:20]

And now moving to our next portfolio, the aggressive 50/50. This is the most leveraged portfolio of the samples. It is also one of the least diversified in that it's 50% stocks and 50% bonds when you break it down. It is comprised of 33% in UPRO, the leveraged stock fund, 33% in TMF, the leveraged bond fund, then the remaining 34% is divided into PFF, the preferred shares fund, and VGIT, an intermediate treasury bond fund, mostly as ballast for the other 2. It was down 3.74% for the week. It is down 38.11% year to date, and it's up 1.36% since inception in July 2020. And this does give you a good idea of why you should be careful about putting leverage in a portfolio, in particular one that it's only stocks and bonds in it. This also had a rebalancing last week because the Bond fund had fallen 7.5% below its target. And so we sold $126 worth of PFF, $33 worth of VGIT, the intermediate treasury bond fund, and $615 worth of UPRO, the leveraged stock fund. And then we bought $776 worth of TMF, that leveraged bond fund. So this portfolio has gone from the best performer to the worst.

Mostly Voices [30:53]

So bold strategy, Cotton, let's see if it pays off for them.

Mostly Uncle Frank [30:57]

And in only about four months time. And now moving to our final experimental portfolio, this is our newest one. It is the levered golden ratio. This one is 35% in a composite fund, NTSX, that's the S&P 500 and treasury bonds. It's levered up 1.5. And it's got 25% in gold, GLDM, 15% in in a REIT, O Realty Income Corp, 10% each in TMF, the Leveraged Treasury Bond Fund, and TNA, a Leveraged Small Cap Fund, and the remaining 5% is divided into a Volatility Fund, VIXM, which was actually a good performer this year, and two small holdings in crypto funds. And it was down 2.19% for the week. It is down 12.54% year to date and is down 8.12% since inception in July 2021. It is also on rebalancing bands slightly different from the other two portfolios and it got close but not close enough for a rebalancing so we will check it again next month on May 15th. And if you want to check these out just go to that portfolio's page at www.riskparityradio.com you'll see all these numbers and the rules for rebalancing each portfolio in its description. 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 your message into the contact form there, and I'll get it that way. If you'd like to see more risk parity related materials in a blog form, please check out Risk Parity Chronicles, www.riskparitychronicles.com, which is run by one of our listeners, Justin.

Mostly Voices [33:02]

Young America, yes, sir.

Mostly Uncle Frank [33:06]

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 view. That would be great. Mmkay? According to Listen Notes, this podcast is now in the top 1% in the whole world. Probably because there are lots and lots of podcasts that nobody ever listens to. But I thank each and every one of you who has put us up to to that level of being a one percenter in the podcast world.

Mostly Voices [33:41]

Yeah, baby, yeah.

Mostly Uncle Frank [33:45]

Thank you once again for tuning in. This is Frank Vasquez with Risk Parity Radio signing off. Hey, what about Major Kong?

Mostly Mary [34:12]

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.