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 1-3-5-7-8. and nine. One of our listeners, Karen, has also reviewed the entire catalog and has additional recommendations as foundational episodes. Ain't nothing wrong with that. And Karen's recommendations are episodes 12, 14, 16, 19, 21, 56, and 82, in addition to the first five that I mentioned. Now, I realize women named Karen get a bad rap these days, but I assure you that all of our listeners are intelligent, thoughtful, and savvy. Yes! And don't forget that the host of this program is named after a hot dog.

Mostly Voices [1:40]

That's not an improvement. Lighten up, Francis.

Mostly Uncle Frank [1:44]

But now onward to episode 174 of Risk Parity Radio. 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. But before we get to that, I did want to apologize for not being able to put out an episode earlier this week. I've been laid up in the easy chair with a bout of gout. Kind of resemble the little Monopoly man on the community chest card which says Doctor's Fee $50. And he's dancing around with crutches and a wrapped up leg. But I am on the mend and got some new meds and everything should be good going forward. What do you mean funny? Funny how?

Mostly Voices [2:40]

How am I funny?

Mostly Uncle Frank [2:45]

Now before we get to those portfolio reviews, I'm intrigued by this, how you

Mostly Voices [2:48]

say, emails.

Mostly Uncle Frank [2:53]

First off. First off, we have an email from Sunu and Sunu writes. Hi, Frank.

Mostly Mary [3:04]

Looking at opening a brokerage account and implementing a golden butterfly or golden ratio type of portfolio with the aim to preserve capital as best I can. I have a company 401k and Roth IRA and now that I am finally able to open a brokerage, my question is this. One, when trying to create a template portfolio, is it best to craft it solo, look at the brokerage by itself, or should one look to build one of these and include the Roth IRA and 401 as part of the allocations as if it is all one big pot? I ask because my 401 and Roth have a head start by several years, so the funds I am currently invested in don't really fall in line. and I don't think selling is a good idea in order to craft such a full portfolio, but I could be wrong. Two, finally, if I were to build the Golden Butterfly Portfolio, for example, by combining everything since I have the total market and small cap in my 401k, would I really open the brokerage with just long-term bonds, short-term bonds, and gold? Just need some help understanding how one goes about this if not starting from scratch. Keeping the brokerage separate from the rest seems to make sense, but just want to make sure the method is correct. My plan in theory is accumulate in the 401k, leave work in my 50s, I'm 40 now, and use the brokerage to live off of until 59 and a half when I can start pulling 401k. So essentially, a 10-year build period in the brokerage starting at zero, I think, calls for a conservative option. I could be wrong though, so willing to listen on how to view things. Thanks.

Mostly Uncle Frank [4:45]

All right, as to your first question as to whether you should look at the account separately or as one big pot. The answer is if it's all going to be used for the same purpose, then it's better to look at it as one big pot. If you had certain assets, say you were going to leave that Roth IRA for certain to your heirs, then you could look at that as a separate pot. But it looks like you're going to use all of this as one big retirement pot, so you should consider it as one big pot. Now, as to your second question in terms of building out this portfolio, I think the first thing that you would want to look at is what is available in the 401k. besides stock funds, sometimes there are some treasury bond or other funds or a self-directed option that you could use, and then you could easily shift those funds around to the ones you wanted. Obviously, with a Roth IRA, you should be able to buy whatever you want or change the allocations to whatever you want in there. And so you could convert that to some of the gold and long-term bonds, at least temporarily. And then when you actually retired and moved the 401k to an IRA, then you could rejigger that because you could make as many transactions as you'd like in the IRAs without incurring tax liabilities. So you have a lot of flexibility there in terms of holdings and moving them around or changing them over time. A lot of this is also determined by the relative size of each of the accounts. But after you make as many of those moves as you can, then you would take that brokerage account and fill it out with the rest of the things that you need. All of your short-term bonds are going to be in that brokerage account because short-term bonds in this case are also going to include any savings accounts or I bonds or any kind of holding that is essentially low volatility, low risk, low return. And so all of that stuff collectively should be in the taxable account. And then just one other note to the extent that you are using REITs or something that pays a lot of ordinary income, see if you can put that in either the IRA or the 401k. And then I suppose there's just one other caveat here. It's unclear to me how much of your portfolio is ultimately going to be in the 401ks and IRAs and how much is going to be outside of that. It seems like there will be a substantial portion of that if you do intend to be using that from age 50 to 59 and a half in terms of drawdowns. So it sounds to me you may end up with some of everything in the taxable brokerage account. And you'll need to make some accommodations for that. And then as you go forward, you would still be making most of your transactions in the IRAs, but then drawing down on the taxable account in the earlier years. So hopefully that helps. It's never an exact science putting these things together.

Mostly Voices [8:28]

Hearts and kidneys are tinker toys. I'm talking about the central nervous system. And thank you for that email. Second off, Second off, we have an

Mostly Uncle Frank [8:40]

email from Monica. And Monica writes, hello sir, can I be part of your group and learn from it? And the answer to your question is a resounding, yes. I suppose it's more of an informal club than a group.

Mostly Voices [8:59]

The first rule of Fight Club is, you do not talk about Fight Club. Second rule of Fight Club is, You do not talk about Fight Club.

Mostly Uncle Frank [9:11]

And in terms of club membership, we really don't have any requirements. So after the third week, I sent him a telegram and says, Please accept my resignation. I don't want to belong to any club that will accept me as a member. But welcome to our little place of information and inane conduct by the host.

Mostly Voices [9:31]

You are talking about the nonsensical ravings of a lunatic mind. And thank you for that email.

Mostly Uncle Frank [9:38]

The Inquisition. Wanna show the Inquisition.

Mostly Voices [9:42]

Here we go. Next off, we have an email from Jeff. And Jeff writes.

Mostly Mary [9:49]

Hi Frank, I have been with you since the first episode.

Mostly Voices [9:54]

Since before your sun burned hot in space and before your race was born. I have awaited a question.

Mostly Mary [10:06]

And I am absolutely thrilled with how many people are now part of this group.

Mostly Voices [10:10]

Third rule of Fight Club. Someone yells stop, goes limp, taps out. The fight is over. Thanks so much for all of your guidance.

Mostly Mary [10:19]

My question today is regarding Fidelity's separately managed account feature. I spoke with a gentleman at Fidelity and they claim to be able to do advanced tax loss harvesting inside my taxable account. since they actually buy the individual stocks that mimic the S&P 500. They charge a 0.4% expense fee for this feature. I drink your milkshake. But they claim the after-tax gains make it worthwhile.

Mostly Voices [10:51]

I drink it up.

Mostly Mary [10:55]

I am skeptical and tend to lean towards my boring but stable index funds that I have tax loss harvested myself quite successfully through the last six months with expense ratios of 0.03. What do you think? Thanks so much, Jeff.

Mostly Uncle Frank [11:11]

Well, first, I'm glad you're thrilled to be here because I'm thrilled to have you. Stay up for Ed McMahon's Party Machine!

Mostly Voices [11:19]

Yes!

Mostly Uncle Frank [11:23]

And I'm still also surprised and grateful as to how many people want to be part of this group.

Mostly Voices [11:28]

We few, we happy few.

Mostly Uncle Frank [11:31]

We Band of Brothers. Or Club, I should say.

Mostly Voices [11:36]

We can't tell you because you're not a member of the club. Oh yeah? What does it take to be a member? Besides being a moron.

Mostly Uncle Frank [11:44]

Now, as to your questions. What Fidelity's got going on here is part of the latest fad to attract people and give them something to do to market to potential customers for services.

Mostly Voices [12:05]

Am I right or am I right or am I right? Right, right, right.

Mostly Uncle Frank [12:08]

And what this is called is called direct indexing. And all it is is taking apart a fund and buying the components of a fund instead of the fund itself. This really became possible to offer to a wide variety of customers when Fidelity went to no fee trading because obviously it would have been prohibited on fees to do that when they were charging something for each trade of each security. My feeling on direct indexing is that it's completely unnecessary and it really violates the simplicity principle of making something more complicated than it needs to be. As do-it-yourself investors, we want to take advantage of the fact that we have ETFs that are focused on particular sectors or factors or asset classes and not be having to deal with the components that make up those sectors or factors or asset classes. So I don't see any real advantage to direct indexing for do-it-yourself investors. And in fact, it's kind of a trap to get you sucked into somebody else's overly complex rubric or formula that is not likely to do any better than what you're already doing, especially after fees. It's a trap! And as you've observed, tax loss harvesting is just not that hard. It's really just not that hard, people. If you can manage a portfolio of five to ten funds, you are not going to have any trouble Looking inside your portfolio, looking to see whether tax loss harvesting is available in certain funds or certain years and simply executing upon it. We had the tools, we had the talent. And if you don't want to be looking at it all the time, you can simply do it when you do your rebalancing. Yeah, baby, yeah. There are many, many funds that perform the same, even though they are not exactly the same. to other funds which makes tax loss harvesting very easy and very efficient for the do-it-yourself investor. It is certainly not something we need to be paying anybody to do for us. So I would just say thanks but no thanks to their offer.

Mostly Voices [14:36]

Do you think anybody wants a roundhouse kick to the face while I'm wearing these bad boys? Forget about it.

Mostly Uncle Frank [14:43]

And thank you for that email.

Mostly Voices [14:45]

Forget about it.

Mostly Uncle Frank [14:51]

Last off, we have an email from Jack. Here's Johnny. And Jack writes, hi, Mr. Vasquez. I'd like to rant about something.

Mostly Mary [15:03]

Eight years ago, I met the FIRE community and started investing their way. You know, mostly VTI. My cash flow is very irregular, so I've invested different amounts in different periods. But today, I checked my Fidelity account and my total return is in the red. Eight years investing and I have nothing to show for it. However, the many bloggers in the FIRE community brag every day about the beauty of the stock market. That market always goes up and all. Then, when I ask about Japan's stock market, they all say, Ah, but I'm only talking about the US stock market. I'd like to hear about your perspective on this. Does the market always go up period? Or just the American one? Or not even the American one will go up forever? Thoughts? Thank you, Jack.

Mostly Uncle Frank [15:52]

All right, Jack, let's first talk about your account. I have to say I'm not clear on what exactly you've been doing there if you've been doing this since 2014, which was eight years ago. Everything that you bought prior to early 2021 should be profitable by now, at least in VTI, the Total Market Fund. And if you go all the way back to 2014, VTI was trading at less than 100 starting that year and is up at about 200 right now, so has doubled in fact. So your total returns should not be in the red unless you made most of your investments recently. I am guessing that that has been the case, however, and for this reason, you would not have been buying VTI or should not have been buying VTI prior to the institution of no fee trading at Fidelity of VTI because otherwise you'd be charged every time you would have made a purchase in VTI which would not have been an efficient way of investing. So prior to, say, three years ago, what you would have or should have been doing is investing in the Fidelity equivalent of a total market index fund, which would have been FSKAX for most of that period, and then for part of that period could have been FZROX. But you didn't mention either one of those, so it's unclear to me exactly what you've been doing and why you've seen the results that you've seen. So bold strategy, Cotton. Let's see if it pays off for him. But now let's get to your broader question, which is more interesting, which is whether all countries markets behave the same. And the answer is no.

Mostly Voices [17:45]

That's not how it works. That's not how any of this works.

Mostly Uncle Frank [17:55]

In fact, every country's market is going to have idiosyncrasies that are germane only to that market or the markets in that region and then have some general correlation to the world at large. And this is why the stocks in foreign markets often have different kinds of valuations or valuations that are much lower than similar stocks in US markets. So, for example, right now, the Chinese tech sector is grossly undervalued if you just looked at, say, PE ratios compared to the US tech sector. Now, the shorthand way for talking about this, the way economists talk about this, and then investors in different countries talk about this, is what is called country risk. And anyone who invests in either a business directly or the stock markets in another country needs to be cognizant of country risk. I will give you a link in the show notes, but the country risk is designed to capture all of the factors that might cause you to undervalue or devalue a business in a certain country. And those factors include Political stability, foreign exchange risk, economic stability, the legal system, intellectual property protection laws, the banking structure, the tax implications, and dispute resolution options, which may include both the courts in that country or arbitrations under treaties. Now, in our lifetimes, the countries with the lowest risk have been the United States and countries in Western Europe, particularly the smaller ones like Switzerland and the Netherlands and Belgium. Which leads us to what are the specific factors that tend to lead to stock markets and countries to do poorly or to even fail. Because you would expect markets in a stable country to go up generally in economic conditions that are relatively stable and growing, either in size or in productivity or both. Because if you have a growing economy or one that is improving in productivity, then the companies in that economy are going to be more profitable and are likely to improve in value as time goes on. Now, what can interfere with that? well, one good example we see right now in Russia and Ukraine is war. Countries that have physical destruction going on of their infrastructure in their territory are not likely to do well. Countries that are subject to sanctions or potential expropriations or change in regimes are not likely to do well. That's why even before the war, Russian companies had very low PE ratios because it was recognized that there was a country risk for the businesses in that country. All right, now what about Japan? Well, in order to investigate questions like this, often the best thing to do is invert the question or change the question, as Charlie Munger would say, invert, invert, always invert. So when you look at what happened in Japan, the economy grew very quickly in the decades after World War II, culminating in an asset bubble and a real estate bubble towards the end of the 80s, which then popped and from which Japan has not ever fully recovered. Now, something similar happened in the US in 2008. where there was also an asset bubble, there was also a real estate issue, there were also financial issues. All the same kinds of things happened. But the result was different. So maybe the question you should be asking is, why didn't the United States have the same pattern as Japan after 2008 that Japan had after 1989? And there are many, many factors and economists have written books on this. Let me give you just a couple. One has to do with the legal regimes for defaults or bankruptcies in the two countries. Japan does not have the kind of bankruptcy system that the United States has. So in the United States, a company like General Motors could go completely bankrupt and be reorganized and reformed, wiping out the current shareholders, creating a new company that was functioning with the same assets and that could go forward. That kind of reorganization does not exist in Japan, at least not as a regular part of their law. So a lot of the companies in Japan became what they call zombie companies, which were heavily indebted, could not get out of debt and could not reform themselves and become active growing members of the economy again. Now, that's not to say that the United States has a perfect record here either. And in fact, one of the criticisms of many was that there were too many bailouts, essentially, of companies that should have been forced into bankruptcy. during the financial crisis of 2008. And if you want to read a good book about that and the history of bailouts in the United States, I would check out Bailout Nation by Barry Ritholtz, which was written right after the 2008 crisis. But the fact is, the United States has better mechanisms for dealing with those sorts of things, and so is able to reform them a lot quicker and get back on a growth track better than many other countries. Two of the other problems that Japan has had are related to demographics and productivity. It's a very quickly aging population. The population is actually shrinking. The economy is actually shrinking. If you have a shrinking economy, the only way that the companies there can outperform or perform better in the future is either increase their productivity or sell more products outside of the country. And the United States has just been in better shape in terms of being able to maintain its demographics through immigration and then create and sell more products both domestically and also internationally. As you saw, the rise of Google and Apple and Facebook as worldwide companies and other similarly positioned companies that sell across the world but are headquartered in the US. And so those stocks are essentially counted in our markets. Japan has not had that experience. In fact, it's had a negative experience in terms of competition, that there's been much more competition out of South Korea that has grown in much more competition out of China that has grown and moved into areas where Japan used to be dominant, like in consumer electronics and automobiles to an extent. So in the end, all countries and all markets are competing for the world's capital. And capital will tend to flow to the countries and markets where it feels like it's going to be treated the best. And so while the US may have problems, it still is the cleanest dirty shirt in the bin and attracts the most capital, both domestically and lots of foreign capital. If other countries do these things better in the future, then they will attract the capital and their markets will tend to go up faster or more than the US market goes up. And I suppose a really good micro example of this is why there is so much foreign investments from wealthy people all over the world in real estate in New York and in London. And the reason that is the case is because those are very stable places to put your money, politically stable and unlikely to expropriate your property. And so that's why the money flows there as opposed to going to some other country. Hopefully that answers your questions. What I gave you is just a very brief outline or overview of some of the factors that are involved. What you really want to avoid is simplistic thinking and employing what is called the possibility effect, which is a cognitive bias that we all have. And the way that erroneous thinking goes is something like this. I observe that there was this problem in this country at this particular time, that is possible that could happen here at some point in time. And because it is possible, it is therefore likely. And the more times I hear this idea or this story, the more likely I think it's going to happen. This is an erroneous way of thinking that is pervasive. Just because something is possible does not mean that it is likely. And in order to assess the likelihood, you need to assess things like base rates and look at the specific example of what you're talking about and every possible example of what you're talking about. Because if you don't do that, you're just bound to make bad decisions about finances. You will equate the possibility with a probability. Overweight the wrong thing and make the wrong decision about your money. You keep using the word. I don't think it means what you think it means. We always need to use as much data and the best data we can find and avoid using stories as data points. You can't handle the dogs and cats living together. And thank you for that email. Now we're going to do something extremely fun. And the extremely fun thing we get to do now is our weekly portfolio reviews. of the seven sample portfolios you can find at www.riskparityradio.com on the portfolios page. I suppose if there's any theme to this week besides the usual exhaustion, it's this one. And just taking a look at the markets for the week, we saw the S&P 500 was down again, 2.41% for the week. The Nasdaq was down even more, 2.8% for the week. Gold was also down. It broke down 3. 9% for the week. I think you've made your point, Goldfinger. Thank you for the demonstration.

Mostly Voices [29:20]

But the big winner this week was long-term Treasury bonds,

Mostly Uncle Frank [29:24]

as represented by TLT. and those were up 2.08% for the week. REITs represented by the fund R E E T were down 2.3% for the week. Commodities represented by the fund PDBC were down 1.25% for the week and preferred shares represented by the fund PFF were down 0.39% for the week. All of this led to bad but muted performance from our Sample portfolios and just going to the first one, this reference portfolio, the All Seasons, which is only 30% in stocks in a total stock market fund, then it's got 55% in treasury bonds, long term and medium, and the remaining 15% is divided into gold, GLDM, and commodities, PBDC. It was down all of 0.35% for the week, It is down 12.69% year to date and 0.67% since inception in July 2020. Moving to our three bread and butter kind of portfolios that are designed to be similar in risk profile to a 60/40 portfolio. The first one is a golden butterfly. This one is 40% in stocks divided into a total stock market fund and a Small Cap Value Fund and it's got 40% in treasury bonds divided into long and short and 20% in gold at GLDM. It was down 1.23% for the week. It is down 10.09% year to date. It's not too bad in a year like this of our sample portfolios. This one is doing the best year to date.

Mostly Voices [31:11]

Real wrath of God type stuff. It is up 11.

Mostly Uncle Frank [31:16]

75% since inception in July 2020. Moving to the next one, the golden ratio. This one is 42% in stocks, 26% in long-term treasury bonds, 16% in gold, 10% in REITs, and 6% in cash. It was down 1.29% for the week. It is down 13.85% year to date and is up 9.36% since inception in July 2020. And now we move to the Risk Parity Ultimate. This one's got 14 funds in it that I won't go through. It is our most diversified portfolio. It was down 1.72% for the week and is down 16.36% year to date. It is up 5.74% since inception in July 2020. And if you want to check out the details for that or any of the other portfolios, just go to the website on the portfolios page and you'll see all of these details, including the current holdings there. And now moving to our experimental portfolios.

Mostly Voices [32:25]

Weird, wild stuff.

Mostly Uncle Frank [32:29]

Which were not nearly as hideous this week as they have been in some weeks.

Mostly Voices [32:32]

I thought you were dead. My death was greatly exaggerated.

Mostly Uncle Frank [32:37]

These all involve leverage in them and so can move quite a bit, although did not move much this past week. I'm putting you to sleep. First one is the Accelerated Permanent Portfolio. This is 27.5% in a leveraged bond fund, TMF, 25% in a leveraged stock fund, UPRO, UPRO, and then 25% in a preferred shares fund PFF and 22.5% in gold GLDM. It was down all of 1.18% for the week. It is down 29.24% year to date and is down 4.12% since inception in July 2020. Next one is our most levered portfolio, although you wouldn't really know it from this week. It's the aggressive 50/50. It's 33% in the leveraged stock fund, UPRO, 33% in the leveraged bond fund, TMF, and then the remaining 34% is divided into PFF, the preferred shares fund, and VGIT, an intermediate treasury bond fund. It was down 0.34% for the week. It is down 36.22% year to date and is down 6.91% since inception in July 2020. You can see these kind of stabilized with the positive movement in the treasury bonds this week. And our last portfolio is our newest one, the levered golden ratio. This one is 35% in a composite stock and treasury bond fund that is levered 1.5 to 1 called NTSX. 25% in gold, GLDM, 15% in a REIT O, Realty Income Corp, 10% each in a levered stock fund TNA, that's a small cap fund, and a levered bond fund TMF, and the remaining 5% is divided into 3% in a volatility fund VIXM and 2% in crypto funds. this was down 1.63% for the week, it is down 18.35% year to date and is down 14. 77% since inception in July 2021. One note of interest for this portfolio is that a rebalancing was triggered because the fund TNA is now less than 5% of the entire portfolio, which triggers a rebalancing according to the pre-established rules for this portfolio, which you can find on the website. But anyway, we will be rebalancing this on Monday to get it back to its original configuration. We're also going to take the liberty of tax loss harvesting the two crypto funds that currently hold BITQ and BITW. and just replace them with the Bitcoin Fund GBTC, which I'm not sure is any better, really, but is trading at a substantial discount to its net asset valuation, which makes it a good deal in that respect.

Mostly Voices [35:56]

What does Matt Damon say on that Bitcoin commercial? Fortune favors the brave. My dad said he listened to Matt Damon and lost all his money. Yes, everyone did, but they were brave in doing so.

Mostly Uncle Frank [36:02]

if it were ever to convert to an ETF, it would suddenly gain 20 or 25% in value. There is still really no good or recommended fund for holding any of these cryptocurrencies because there are no ETFs except that ones that deal with futures contracts. So if you're going to hold any of it at all, you're probably better off holding it directly through one of the exchanges. Please use a reliable exchange headquartered in a reliable country with low country risk. Oh, Mr.

Mostly Voices [36:44]

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 [36:48]

But now I see our signal is beginning to fade. This podcast may go on a bit of a hiatus. For the next couple of weeks, we're doing some more fun retirement things that hopefully will not involve gout. So there may or may not be podcasts, but I will update the website as far as the sample portfolios is concerned. 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 in the contact form and I'll get it that way. If you're interested in more risk parity related materials, I invite you to check out Risk Parity Chronicles, which is another website that is run by one of our listeners, Justin, and is highly recommended. Young America, yes sir. If you haven't had a chance to do it, please go to your favorite podcast provider and like, subscribe, give me some stars or 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 [38:13]

Everything seemed calm at first, but then this guy in a suit shows up talking about investment opportunities. Next thing you know, these people over here started chanting Hodl, Hodl, and their NFTs started mooning. And then these guys over here started saying those guys right there right clicked them and called for a pump and dump which made these guys beat the living hell out of anyone who said it was just FOMO and died screaming that it was the flippening. Luckily, I came out of it okay. I got this little miniature donkey with a lit up sombrero.

Mostly Mary [38:44]

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.