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 [0:36]

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 1-3-5-7-10. 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 171. 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. And it was another one of those ugly weeks out there. Fire and brimstone coming down from the sky, s- Looks like I picked the wrong week to quit sniffing glue.

Mostly Voices [2:19]

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

Mostly Uncle Frank [2:23]

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

Mostly Voices [2:28]

You cannot break the spirit of a Winchester. My voice shall be heard from this wilderness, and I shall be delivered from this fetid and festering sewer. Then Chaz writes, Uncle Frank. Thanks again for all your great work.

Mostly Mary [2:43]

I know listening to your show has helped me build out my own versions of risk parity portfolios, but it's also helped others that I've discussed the principles with. You're impacting people in a great way. Anyway, I'm curious to hear your thoughts on using Berkshire B stock, 0.47 market correlation in portfolio visualizer in a risk parity portfolio. Since Buffett and Munger have essentially turned the company into a blend of a private equity firm and mutual fund, I'd assume it's at least diversified enough at the individual holdings level to consider. Also, what do you think about the family of mutual funds from Direction that are leveraged two times with a monthly reset? They have all of the core traditional asset classes, I believe. Would that reduce the risk around volatility drag with these instruments since the monthly resets are designed for longer term use?

Mostly Uncle Frank [3:35]

All right, two interesting questions here. I guess this Berkshire Hathaway question is timely given they're about to do their annual meeting over in Omaha.

Mostly Voices [3:47]

Real wrath of God type stuff.

Mostly Uncle Frank [3:51]

But the answer is yes, you could use Berkshire Hathaway as part of your stock allocations in a risk parity style portfolio. It will take a little more work in pairing it up with other appropriate funds. And the reason I say that is because its composition changes over time. So you noted that there was a 0.47 market correlation in Portfolio Visualizer. It actually has a higher correlation now to overall markets. And that's because in the past eight years or so, it's acquired a very large share of Apple, which is also one of the key components of most large index funds. And that might cause you to reduce the holding of some other fund that also held a lot of Apple stock in it. So as long as you're willing to monitor what it's holding and then review it periodically, perhaps that rebalancing time every year would be more than sufficient. There's no reason why you couldn't use Berkshire as part of your stock holdings in a risk parity style portfolio. And the same is generally true for all kinds of managed funds. You just need to be aware of what is actually in them and how it's changing. and then make adjustments to your portfolio based on that. So it can be more work. I don't think I'd like another job. But in a case like Berkshire Hathaway, it's probably not too much work because its holdings just don't change that much and don't change that quickly. The other nice thing about Berkshire, I suppose, is that it does not pay a dividend, and so it's very tax efficient. if you're holding it in a taxable account. It also gives you a lot of exposure to property and casualty insurance, which tends to be a value sector that is less correlated with your large index funds than many other things. Now, moving on to these Direction funds, these Direction Mutual Funds. I will link to this in the show notes. Direction has a lot of ETFs that are very popular. Most of those are the three times leverage varieties or in particular sectors. Its mutual funds are much less popular. And if you look at it, you can probably see why. They are very expensive funds to hold with fees that are between one and a half and two percent for the most part. And because they are in the mutual fund form, you cannot buy and sell them like stocks or ETFs. and you may have to deal with higher fees depending on whether your brokerage supports those funds or not. But I have not analyzed them specifically or put them in any sample portfolios because I do like to stick with ETFs. So they may work just fine, but you'll have to do some of your own analysis.

Mostly Voices [6:42]

Surely you can't be serious. I am serious. And don't call me Shirley.

Mostly Uncle Frank [6:46]

Because you know I am retired and I'm not desirous of having another job. It's not that I'm lazy. It's that I just don't care. And thank you for your email.

Mostly Voices [6:59]

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

Mostly Uncle Frank [7:03]

And Javen writes. Hi Frank, still loving the podcast.

Mostly Mary [7:07]

Thanks for all the work you put into this to help the rest of us become smarter investors. Forgive me if you've answered this question already, and if you have, please point me to the right episode. But I'm wondering about the best way to build a risk parity portfolio in a taxable account. Conventional wisdom about asset location would suggest that bonds, REITs, and commodities should not be held in taxable accounts, as they throw off dividends that are taxed as regular income. I suppose one solution to this problem would be to hold only equities in the taxable account and hold bonds, REITs, commodities, etc. in tax-advantaged accounts. But supposing this is not an option, what would be the most tax efficient way to build a risk parity portfolio inside a taxable account? Thanks for your insights.

Mostly Uncle Frank [7:50]

Well, Jayvin, yes, you're generally correct that the place you want to put these things that throw off a lot of income generally is in tax-advantaged accounts.

Mostly Voices [8:03]

You are correct, sir, yes.

Mostly Uncle Frank [8:07]

Because the general idea is that you put things that either generate capital gains or losses in your taxable account and things that pay qualified dividends in your taxable account, and then you are tax optimized. Now, as to various considerations over different types of assets, first with respect to bonds, if you are holding primarily long-term treasury bonds as your bond holding, those actually work fairly well in a taxable account because the income they throw off is a small portion of their actual returns and where their returns are coming from tends to be capital appreciation or losses and capital depreciation. But those are taxed as long-term gains if you hold the bonds long enough. And so they're pretty tax efficient actually and offer some nice tax loss harvesting opportunities given their negative correlation generally with stocks. Another thing you might do is actually swap out something that pays qualified dividends for something that pays ordinary income. And in that respect, you might use utilities or utilities fund as a substitute for REITs. You will get a portfolio that has slightly different characteristics. that'll be a bit more conservative, but it will be more efficient on the tax side of things. And we have talked about that from time to time going all the way back to episode 27, where we did a 10 question analysis of utilities funds and trotted out a couple of sample portfolios you might consider. For something like commodities, I would probably worry less about it for a couple of reasons. First of all, you're not going to be holding a a large portion in any portfolio of pure commodities funds because they are really there to do that one job of providing a buffer in inflationary times when the rest of your portfolio may not be doing so well. You had only one job. So in most years they will not be generating a lot of income anyway. Forget about it. And dealing with a larger tax bill for that every once in a while just may not be that big a deal, particularly if your holdings of those are relatively small. Some other ideas for that would be to hold commodities producers, like say energy companies. In my experience, that does not work quite as well and you need to hold more of those in order to get the bang for your buck. So I'm not sure that's really an efficient way to go about things and it may be more of the tax tail wagging the investment dog, which you really don't want to do. If you are in the very highest tax bracket, I'm talking about people that would be paying the 20% long-term capital gains with annual incomes of over $500,000, you might be interested in things like preferred shares and municipal bonds. for some portion of your portfolio. Just bear in mind those will make your portfolio more conservative because they really don't have the kinds of returns that you would expect out of stock funds or other more volatile assets. Hopefully that helps and thank you for that email. Bow to your sensei. Bow to your sensei. Last off. Last off we have an email from Ponkage and Ponkage right It appears that the portfolios are too US-centric. Is there a reason for not including international stocks? Well, we've talked about this before, but we can talk about it again. The issue here is not so much international stocks per se, but that the common funds that are used in this area are really not very well diversified from US stocks. And so if you take a large fund like VXUS, which is kind of a total hodgepodge international fund of stocks, it actually is very similar to a US large cap value fund because it's holding a lot of things like Nestle and Toyota and Unilever and a bunch of large banks and other large international companies. So if you're going to use international stocks, you really need to be more selective about the fund choices and not gravitate towards those common large funds that people use. What you are really looking for is something that is very well diversified from your large US total market or large cap growth funds. And examples of this are things like Chinese A shares, which invest primarily in stocks in the domestic Chinese economy and historically have had decent returns but a very low correlation to the rest of world markets. Another couple new entries into this space that look very promising are the Avantis Funds, AVES and AVDV. And what those are are small cap value stocks ES is the emerging markets world and DV is the developed world. And both of those have relatively low correlations to your large US stock funds and have a nice pedigree because they're based on the work of Dimensional Fund Advisors over the past 15 or 20 years. So it's really specialized in developing these sorts of funds and is rolling out its own set of ETFs if it hasn't already. But that is really what you're looking for here is things that have actual low correlations as measured by numbers in a correlation analyzer.

Mostly Voices [14:16]

This idea that because something is headquartered in some other country that it is automatically diversified is just wrong. Wrong. Wrong. Wrong. Right. Wrong. Wrong.

Mostly Uncle Frank [14:28]

What's far more important are the actual characteristics of the company and what sort of business it is in. Yes! And whether it is truly localized or not, or is just going to be subject to the same market forces and factors that large international companies are subject to. So I don't have anything in particular against international stocks and can use them provided you get the right funds for the job. I like to do the job right. I think that relying on this notion from 15 or 20 years ago that international stocks are automatically uncorrelated with a domestic US fund is just obsolete and mostly wrong. Forget about it. And we know that just by looking at correlation analyzers. Forget about it. And so knowing that it's kind of a mistaken notion we shouldn't be repeating or doing the same thing over and over again expecting a different result. That's not how it works.

Mostly Voices [15:28]

That's not how any of this works.

Mostly Uncle Frank [15:32]

Because it's the 2020s and it's time to up our games here as do-it-yourself investors.

Mostly Voices [15:36]

That is the straight stuff, O Funkmaster.

Mostly Uncle Frank [15:40]

And thank you for that email.

Mostly Voices [15:44]

And now for something completely different. What is that? What is that? What is that?

Mostly Uncle Frank [15:51]

And the something completely different is our weekly portfolio reviews and monthly reviews of the seven sample portfolios you can find at www.riskparityradio.com Looking at the past week, it was awful again.

Mostly Voices [16:04]

Looks like I picked the wrong week to quit amphetamines.

Mostly Uncle Frank [16:08]

Felt kind of like this. Ah, no, not the bees! Not the bees!

Mostly Voices [16:11]

Ah! I'm losing my eyes! My eyes! Ah! Ah!

Mostly Uncle Frank [16:22]

And in fact, the whole month was awful.

Mostly Voices [16:25]

Every single day of my life has been worse than the day before it. So that means that every single day that you see me, that's on the worst day of my life.

Mostly Uncle Frank [16:38]

And the whole year has been awful. Wow, that's messed up. We're now reading reports of things like, well, this is the worst month since 2008, and this is the worst start to the year since 1939 or something like that. I did not go and verify that information, but those are the sorts of things I've been hearing. But anyway, looking at how bad it was, the S&P 500 was down 3.27% for the week. The NASDAQ was down 3.93% for the week. It is down 21.16% year to date. Gold was down 1.78% for the week. Long-term treasury bonds represented by TLT were one of the big winners this week, only being down 0.45%. They really kind of flattened out and then treading water recently. REITs represented by the fund REET were down 5.25% for the week. I think there may have been a distribution there. Commodities were actually up last week. represented by PDBC, our commodities fund, it was up 1. 20% for the week and preferred shares represented by the fund PFF were down 0.79% for the week. Now looking at our sample portfolios, they mostly had a rough time but not nearly as rough as the stock market and the rest of the markets for the most part. Our most conservative portfolio, this all seasons portfolio, it's a reference portfolio. That's 30% in stocks, 55% in treasury bonds, and then 15% divided into gold and commodities was down 1.27% for the week. It is down 10.86% year to date and is up 1.29% since inception in July 2020. Since it's the end of the month, we calculated our distributions for May. and this fund will be distributing $32 from cash that has accumulated for May, and that is at an annualized 4% rate. It has distributed $173 year to date, I believe all from cash, and $734 since inception in July 2020, when it started out with about $10,200. This portfolio has a lot of cash in it right now because it had fairly large distributions out of that commodities fund last December. That will continue to pay all the distributions until it's rebalanced in July. Moving into our bread and butter kind of portfolios. The first one is this golden butterfly, 40% in stocks divided into a total market fund and a small cap value fund, 40% in bonds divided into long and short term treasuries, and 20% in gold. It was down 1.92% for the week. It is down 9.23% year to date. Not too bad all things considered. It is up 14.18% since inception in July 2020. For its distributions for May we taking $45 from the Gold Fund at GLDM and we are distributing out of it at a 5% annualized rate. We have distributed $231 year to date out of it and $1,012 since inception in July 2020 when it started with 10,000 and it has 10,450 right now. Next one is our Golden Ratio Portfolio. This one is 42% in stocks, 26% in long-term treasuries, 16% in gold, 10% in REITs, and 6% in cash. It was down 2.52% for the week. It is down 12.82% year to date. It is up 12.86% since inception in July 2020. We are distributing $43 out of it from cash for May, which is also at a 5% annualized rate. This portfolio always distributes out of cash, which is replenished at rebalancing in July. We've distributed $231 out of this year to date, or will have, and $1,012 since inception in July 2020. Now moving to our third bread and butter portfolio, the Risk Parity Ultimate. This one has 14 funds in it. I won't go through all of them, it's our most diversified portfolio. It was down 2.22% last week. It is down 12.94% year to date and is up 9.69% since inception in July 2020. We are distributing $49 out of it at a 6% annualized rate for this portfolio. It is coming out of the fund COM, which is a commodities fund that we hold in this portfolio that has been the best performer recently. We will have distributed $269 out of it year to date and $1,189 out of it since inception in July 2020. And it is now just under the $10,000 it started with. It is at $9,829 at the end of this week. And now moving to these experimental portfolios where we learned that having lots of leverage may not be a good idea in a down market. Look away, I'm hiding. But that's why we run these experiments. Well, you have a gambling problem.

Mostly Voices [22:12]

First one is our Accelerated Permanent Portfolio.

Mostly Uncle Frank [22:16]

This one is 27.5% in the Leverage Bond Fund, TMF, 25% in UPRO, the Leverage Stock Fund, 25% in PFF, that's a preferred shares fund, and 22.5% in GLD, I'm a gold fund. It was down 3.6% for the week, so fairly comparable with the stock markets. It is down 24.88% year to date. It is up 1.04% since inception in July 2020. Back to where it started and we are distributing out of this at the Gaudi rate of 8% annualized. So we'll be taking $57 from cash out of it for May because the cash had accumulated there. We'll have taken out $343 year to date and $1,560 since inception in July 2020. A couple more weeks like this last one in the stock market will be rebalancing it again. Don't be saucy with me Bernaise. This time we'd be selling bonds and buying stocks at the rate it's going. But we check that on the 15th of every month for these experimental portfolios because they are on rebalancing bands. As we describe on our portfolios page. Next experimental portfolio is this aggressive 5050 portfolio. Lots of leverage, lots of pain. Horrible, twisted, free.

Mostly Voices [23:37]

Not any gold, lot more pain.

Mostly Uncle Frank [23:41]

So it has 33% in the stock fund at UPRO, the Leveraged Stock Fund, 33% in the Leveraged Bond Fund, TMF. The remaining 34% is divided into PFFA Preferred Shares Fund and VGIT, a Intermediate Treasury Bond Fund. It is down 3.96% for the week. It is down 32.36% year to date and is down 2.04% since inception in July 2020. Went all the way from about a 40% gain at the end of last year to down 2% this year.

Mostly Voices [24:13]

Demand's a gulf.

Mostly Uncle Frank [24:17]

And we will be distributing $55 out of it for May at an annualized rate of 8%. It will be coming from VGIT, the Intermediate Treasury Bond Fund, which is the best performer recently. We will have distributed $352 year to date and $1,598 since inception in July 2020. And our last portfolio is the newest one. It's only been around since July of last year. It's a levered golden ratio portfolio. This one is 35% in a composite leveraged stock and treasury bond fund called NTSX, 25% in gold, GLDM, 15% in a REIT, ticker symbol O, Realty Income Corp, 10% each in a leveraged bond fund, TMF, and a leveraged small cap fund, TNA, and the remaining 5% is divided into a volatility fund, VIXM, and a couple of cryptocurrency funds. It was down 3.39% for the week. It was down 14.75% year to date and is down 11. 09% since inception in July 2021. We will be distributing $50 out of it for May. That's at an annualized rate of 7%. We're going to take it out of the Volatility Fund, VIXM, which has performed Pretty well in a terrible market like the one that we've had and is up 15.54% since last July. We will have taken $275 out of it year to date and $472 out of it since inception in July 2021. And so is the end of a rotten week and a rotten month.

Mostly Voices [26:03]

Human sacrifice, dogs and cats living together, mass hysteria.

Mostly Uncle Frank [26:11]

We'll be updating the monthly returns in the next couple days here. Once I get to it, I see that for comparison purposes, the total stock market fund VTSAX was down over 9% last month. The Vanguard Wellington Fund was down over 6%. The Vanguard Wellesley Fund was down over 4%. Hopefully this will all turn around relatively soon, but we'll be okay even if it doesn't.

Mostly Voices [26:35]

Okay, everybody, everybody chill.

Mostly Uncle Frank [26:39]

Certainly is providing a good test case, that's for sure. 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 some more risk parity related materials in blog form, please check out Risk Parity Chronicles, that's www.riskparitychronicles.com, which is run by one of our listeners, Justin. If you haven't had a chance to do it, please go to your podcast provider and like, subscribe, give me some stars or review. That would be great. Okay? Thank you once again for tuning in. This is Frank Vasquez with Risk Parity Radio.

Mostly Voices [27:30]

Signing off. 106 miles to Chicago. We got a full tank of gas, half a pack of cigarettes, it's dark, and we're wearing sunglasses. Hit it.

Mostly Mary [27:46]

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.