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 [0:20]

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. That's not an improvement.

Mostly Mary [1:41]

Lighten up, Francis.

Mostly Uncle Frank [1:45]

But now onward to episode 175. Sorry for the little hiatus I've been on. Go! We've been up to Massachusetts and then down to Tennessee and now we're back home. That was weird, wild stuff.

Mostly Voices [2:01]

And I see the emails continue to pile up and I'm almost a

Mostly Uncle Frank [2:05]

month behind. So I think you know what we'll be doing here today.

Mostly Voices [2:09]

Here I go once again with the email. And?

Mostly Uncle Frank [2:14]

First off, first off, we have an email from my contact info again.

Mostly Voices [2:20]

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

Mostly Mary [2:29]

And my contact info writes excellent commentary on leveraged ETF. Understanding the mechanics of how an ETF is constructed is not an easy exercise, but can be a source of value and or a way to avoid potential anguish. As you point out, many ways to achieve leverage, for example. Thank you. Well, what can I say? You are correct, sir, yes!

Mostly Uncle Frank [2:54]

But I don't think I need to rehash what I said in episode 170, so you can all just go back and listen to that if you want to hear more about leveraged ETFs.

Mostly Voices [3:05]

But I really don't like it, and I'm not going to go.

Mostly Uncle Frank [3:09]

But thank you for that email. Second off. Second off, we have an email from the Nameless One.

Mostly Voices [3:18]

I have no name. Well, that right there may be the reason you've had difficulty finding gainful employment. And the Nameless One writes. Hi, Frank.

Mostly Mary [3:32]

Thanks for answering my questions on the Golden Butterfly and giving me some thoughts and perspective on its cash position. It was very helpful, and I ultimately decided to reduce the cash position to 8%. Thanks to you too, Mary, for reading my long email. Mary, Mary, why you buggin'? And thanks to both of you for this podcast. It remains tremendously valuable. Forget about it. I was wondering if you had some thoughts on how changes in the global monetary system or significant changes in the national currency would impact risk parity portfolios such as the Golden Butterfly. I look at gold and how its data becomes less and less meaningful against the other assets in the Golden Butterfly starting in the 70s and getting worse as you go to the 40s and beyond. Back then, there was little difference between actual gold and US currency. I think you have mentioned that in that situation, you would have held gold miner stocks and currency instead of gold and currency. Please correct me if I am wrong or if I have misunderstood you. It seems to me that changes in the global monetary system or significant changes in the national currency would cause the assets in the Golden Butterfly and most other risk parity portfolios to have to change in order to remain a portfolio of well-proportioned and uncorrelated assets. Do you think so too? If so, then as holders of these portfolios, what should be our tools and strategies allowing us to see these changes clearly as they occur and make appropriate changes in our portfolios? Most especially, what tools would help us determine what assets to replace and what to replace them with? Enjoying the journey with you, the Nameless One.

Mostly Uncle Frank [5:25]

Well, a lot of theoretical questions here that are probably not possible for anyone to really answer.

Mostly Voices [5:28]

But first, first you must travel a long and difficult road, a road fraught with peril.

Mostly Uncle Frank [5:42]

I would say, yeah, if you change the global reserve currency, it probably will change the flight to safety asset class, which is going to be related to that reserve currency. And it probably would be the bonds of that currency, the currency itself, or whatever the currency is based on, if it's based on something other than fiat. You shall see a cow on the roof above. Cotton house. This is a topic I think is very popular for people to talk about because it makes a nice dramatic narrative and goes with a cognitive bias called the possibility effect. The idea that because something is possible it becomes more likely. But the reality of changes in global monetary systems is that they don't happen very often and they take a long time. But how'd he know about the treasure? And as with anything, it's important to understand the history of something before going off and drawing up narratives that may say something else. And for the history of this, probably the most convenient thing to look at these days is Ray Dalio's new book about principles of changes in the global order or something like that. One of the nice things he lays out in there is long histories of how societies rise and diminish, or I should say nations rise and diminish, and when in that cycle the global currency or reserve currency is likely to change.

Mostly Mary [7:34]

I don't think it means what you think it means.

Mostly Uncle Frank [7:37]

And what you learn from that is it's usually the last thing that changes, and that one of the precursors or prerequisites for that change to occur is first the alternative nation or reserve currency has to become the preeminent military power on the planet. And I can't see that changing anytime soon. But then when you also look at the process for how currency changes are made over time. It generally takes decades if you look at the switch from the global reserve currency of Great Britain, the pound, that took place essentially between the end of World War I and the end of World War II. And an interesting book to read about that era in particular would be Lords of Finance. which is about how the various central banks in the world were trying to manage the currency crises of the 1920s and 1930s, and the problems they were having, particularly with the gold standard, and then how various countries recovered from their depressions by devaluing their currencies, which led to a kind of hodgepodge of global usages until the Bretton Woods system was put in place at the end of World War II. And then of course that changed again in the early 1970s with the closing of the gold window and the floating of all the major currencies. That's not an improvement.

Mostly Voices [9:11]

So while it's tempting to muse upon what might happen in

Mostly Uncle Frank [9:15]

this area, it's really not very realistic to think that great changes are going to happen either anytime soon or very quickly. Because if you know your history, you know that's not how it works.

Mostly Voices [9:30]

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

Mostly Uncle Frank [9:34]

And if you don't know the history, maybe it's time to start looking into some of that before you take any of these popular narratives very seriously.

Mostly Voices [9:43]

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

Mostly Uncle Frank [9:51]

Because otherwise you end up with a lot of magical thinking about this stuff.

Mostly Voices [9:55]

Now, the crystal ball has been used since ancient times.

Mostly Uncle Frank [9:58]

It's used for scrying, healing, and meditation. That tends to ignore basic facts like over half of the international transactions done in the world are done in dollars, and most of the other ones are done in the major currencies that are all connected and flowed with the dollar itself. and that's just not going to change very quickly. A crystal ball can help you.

Mostly Voices [10:21]

It can guide you. But thank you for that email. I cannot tell you how long this road shall be, but feel not the obstacles in your path for feet has vouchsafe your reward. Do the rude me why? Ye, you harsh weary. Still shall ye follow the way, even unto your salvation.

Mostly Uncle Frank [10:52]

And now next off, we have an email from Jeff, and Jeff writes.

Mostly Mary [11:03]

Hi Frank, thanks for answering my question about Ulcer Index/Martin Ratio on sample portfolios in episode 170. I found the site lazyportfolioetf.com has max drawdown, rolling returns, and negative periods percentage on multiple time frames, which is very helpful to evaluate risk-adjusted return. Could you please ask them to include your Golden Ratio Portfolio? Thanks, Jeff.

Mostly Voices [11:26]

I'd wag for no man.

Mostly Uncle Frank [11:31]

Well, Jeff, I did go ahead and look at this site and I will link to it in the show notes, lazyportfoliETF.com, I did not see any way of communicating with the people that run the site or asking them to include any particular portfolios. And there did seem to be way too many ads on that site for my tastes. Always be closing! So I'm afraid I'll have to leave it to others to request that that portfolio be included there or elsewhere. In the meantime, I do suggest you use the tools at Portfolio Visualizer and Portfolio Charts where you can put in any portfolio you would like and analyze it there against any other portfolio that you would like. Yes! But thank you for that email. Fourth off, we have an email from Alexi.

Mostly Voices [12:30]

So that's what you call me, you know, that or his dudeness or duder or, you know, Bruce Dickinson if you're not into the whole brevity thing.

Mostly Mary [12:41]

And the dude writes. Hey, Uncle Frank, in my daily noodling, I came across an interesting fund with a surprisingly strong exposure to the value factor. KBWR is the Invesco KBW Regional Banking ETF, and it has a whopping 1.15 exposure to the HML value factor. Impressive. I've seen it argued that the size factor is only additive to portfolios from a risk return standpoint in a long-short strategy. Might this be an appropriate sub for an SCV fund in a risk parity portfolio? KBWR less correlated to market than all of the SCV funds that I have tested. Probably doesn't move the needle. But, Interesting. AZ. Well, I did take a look at that.

Mostly Uncle Frank [13:31]

KBWR is an example of a value-focused portfolio in a particular area. I think its sister fund, KBWP, is probably more useful for a risk parity style portfolio. KBWP invests in property and casualty insurance companies. I will link to an asset correlation analysis of those two funds, as well as some other commonly held funds, full risk parity style portfolios. One thing I like about KBWP in particular is that it is performing alright in an environment like the one we have, and is actually up this year, believe it or not. But I think the drawbacks to these kind of funds are twofold, really. One is that they have relatively high expense fees compared to sort of standard small cap value funds or other index funds. Now, one way to get around that is to just go and buy the individual components of funds like this, but that makes things even more complicated, which leads to the second issue, which is the over complication of something like this, and the fact that you don't have decades of data to analyze it on like you would with some of these broader asset classes. So there is another risk there. But there certainly is nothing wrong with constructing your own kinds of portfolios using the principles that we talk about here, particularly that holy grail principle of looking for low asset correlations. And I think we will be having more opportunities with even more kinds of ETFs coming online in the future that we might use to construct these kinds of portfolios.

Mostly Voices [15:28]

Groovy, baby.

Mostly Uncle Frank [15:32]

So I applaud your curiosity and innovation. The dude abides. And thank you for that email. Take it easy, dude. Oh, yeah. I know that you will. Last off. Last off, we have an email from Jeff, and this is a different Jeff than the first Jeff we had. And the different Jeff writes. Hi, Frank.

Mostly Mary [15:58]

I appreciate you taking my question and truly love your content. I had a question for you about rebalancing. I am still in the accumulation phase but have started to transition my portfolio to eventually get to a risk parity style in about four to six years. Currently, I have about 5% of my holdings in gold, I love gold, with a target allocation of about 10% at the end of my accumulation phase. My question is regarding the concept of rebalancing during the accumulation phase. Gold has been by far my best performer in the last six months while my stocks and treasuries have been crushed. I am tempted to sell some gold to refill some of the other buckets. However, I am hesitant to do so since I don't have my target allocation of gold set up at this point since I am still accumulating. Would you just accumulate by adding new money to each bucket? Or would you think it's wise to take some gold profits right now and redistribute it to stocks and treasuries and then refill the gold over the several years with new cash coming in from my salary. Thanks so much, Jeff. It's gold, Jerry. Gold.

Mostly Uncle Frank [17:17]

Well, I'm not sure it's going to make a big difference overall as to which way you do this, depending on how your rebalancing strategy is going to be implemented. But I also think that the simplest thing to do would be to just add to the portions of the portfolio that are on the low side and that way you don't have to engage in as many transactions. Because selling things, it's in a taxable account, is going to result in taxable gains. And so if you can avoid having additional transactions in a taxable account, that is almost always to your advantage. So I think I would just focus on your targets and add to the assets that require More contributions to reach those targets. That is the straight stuff, O' Funkmaster. And thank you for that email. But now I see our signal is beginning to fade. We will pick up again this weekend with our weekly portfolio reviews of the seven sample portfolios you can find at www.riskparityradio. com and I'll see if I can get more caught up on some of these emails, and some of these other little projects that have been stacking up. It's not that I'm lazy. It's that I just don't care. Just a couple of shout outs while we were in Tennessee. Mary and I had a very nice dinner with Bill Yount and his wife, Karen. Bill runs a Facebook group called the Financial Literacy Project that you might want to check out. If you're a Facebook denizen.

Mostly Voices [18:57]

Young America, yes sir.

Mostly Uncle Frank [19:01]

And if you're looking for some more risk parity related materials, you might want to check out Risk Parity Chronicles, which is another website run by our listener Justin. The best Jerry, the best.

Mostly Voices [19:12]

Who has collected a lot of the materials and references that I am just too lazy

Mostly Uncle Frank [19:16]

to collect myself. I don't think I'd like another job. 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 comment into the contact form there and I'll get it that way. If you haven't had a chance to do it, please go to your favorite podcast provider and like, subscribe, give me some stars, a review. That would be great. Okay. Thank you once again for tuning in. This is Frank Vasquez with Risk Parity Radio signing off.

Mostly Mary [20:14]

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.