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 1-3-5-7-10. 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.

Mostly Mary [1:39]

That's not an improvement.

Mostly Voices [1:42]

Lighten up, Francis.

Mostly Uncle Frank [1:48]

But now onward to episode 184 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.

Mostly Voices [2:06]

Don't call it a comeback! But before we get to that, I'm intrigued by this, how you say, emails.

Mostly Uncle Frank [2:13]

And? First off, First off, we have an email from My Contact Info.

Mostly Voices [2:21]

Oh, I didn't know you were doing one. Oh, sure.

Mostly Uncle Frank [2:25]

Well, this actually might be a different My Contact Info than the one that usually writes in. Email addresses different this time. But anyway, this My Contact Info writes.

Mostly Mary [2:36]

Hi, Frank. I know I'm very annoying, so I'll just ask one simple question this time. When are we going to see your book about risk parity investing on the shelves? Thank you.

Mostly Voices [2:48]

Well, I have to say... Not gonna do it. Wouldn't be prudent at this juncture.

Mostly Uncle Frank [2:55]

And the primary reason right now is that I've spent the last several decades writing detailed reports and briefs with lots of citations in them. So the idea of sitting down and writing a book or even a blog just sounds like work at this point.

Mostly Voices [3:14]

I don't think I'd like another job.

Mostly Uncle Frank [3:18]

I'd rather just talk into this microphone and act a little goofy.

Mostly Voices [3:22]

You are talking about the nonsensical ravings of a lunatic mind.

Mostly Uncle Frank [3:27]

But I never say never. You keep using the word. I don't think it means what you think it means.

Mostly Voices [3:34]

That would be a foolish consistency.

Mostly Uncle Frank [3:37]

I do have to say it's not going to be anytime soon. It's not that I'm lazy. It's that I just don't care.

Mostly Voices [3:45]

I'd say in a given week, I probably only do about 15 minutes of real, actual work.

Mostly Uncle Frank [3:52]

And I think it might be more interesting to do something like that after this podcast and sample portfolios have been running for a number of years. Forget about it. Because then there will be more to talk about. Au contraire. The basic principles of risk parity style investing have already been written about ad nauseam by people with many more years investing that way than I have. But what I'm more particularly interested is how to apply those principles for a do-it-yourself investor in a way that's easy to do and doesn't take too much time. I also do think we're in the middle of a change when it comes to do-it-yourself investing, what I call the change from the Iron Age to the Steel Age. And in this new Steel Age, what we've accumulated so far over the past few years are free high-powered tools like Portfolio Visualizer to do analysis that we couldn't do before. We had the tools, we had the talent.

Mostly Voices [4:55]

We now have no fee trading to make it easy to construct portfolios.

Mostly Uncle Frank [5:00]

The way we've done the sample portfolios would not have been possible really without having no fee trading, given the relatively small amounts that we're talking about for those. What is ongoing right now is a proliferation of all kinds of interesting ETFs in asset classes and sub asset classes that we may not have had access to before in the past. What's that supposed to be? Some kind of stupid secret code. We can't tell you because you're not a member of the club. And I think I'd kind of like to see the way that all evolves over the next few years before sitting down and saying, well, this is what you ought to do. Because I do think if I wrote a book now, there's a good chance it's going to be obsolete within of just a few years.

Mostly Voices [5:49]

You can't handle the dogs and cats living together.

Mostly Uncle Frank [5:54]

But we shall see. And thank you for that email. Forget about it. Second off. Second off, we have an email from Nancy and Nancy writes.

Mostly Mary [6:06]

Do the values of each portfolio include or exclude the withdrawals?

Mostly Uncle Frank [6:13]

And the short answer to that is, Yes! But let me give you a little longer explanation to be clear. If you go and look at the sample portfolios on the portfolios page at the website, you'll see every week a series of snapshots which are the closing values of each of the portfolios and their components as of the end of the week Friday. And those dollar values there are net of all withdrawals. I take those withdrawals out every month and I spend them. Yeah, baby, yeah! But if you look in the descriptions above those snapshots, you'll see I've listed how much has been taken out since inception of the portfolio and how much has been distributed year to date, as well as which components it came from for each of the portfolios. In order to calculate the Percentage rate of return, those values are added back in. So if you see a portfolio that has a current value of $10,000 and there's been $1,000 of distributions, you would add that back in to get $11,000 and you could calculate it as a 10% return since inception. Now the monthly returns there you see come straight from Fidelity. and those are the performance of the investments overall, or the portfolios overall on a monthly basis, and those do not include distributions in that calculation. So hopefully that's a reasonable clarification of that, and thank you for that email. Last off.

Mostly Mary [8:12]

Last off, we have an email from Anderson and Anderson writes, Uncle Frank, I have two somewhat controversial questions that I have been thinking about lately. Annuities. I had never considered them and always wrote them off as a marketing gimmick until I heard this episode from Money for the Rest of Us, why all retirees should consider an income annuity. Usually, if David Stein has an opinion about something, it's worth considering, and I know you respect his work. Thoughts on this? What do you think about a fixed income part of your portfolio being an annuity? Doing a very brief search, I was surprised with how high the rates were. Are there certain people or portfolios this may work for? Two, going the complete opposite direction, what do you think about a portfolio that increases risk in response to market downturns with the use of leverage? For example, if you took the stock portion of a portfolio, say VOO, and had some design rules such as when it loses 10% from its highest value, you convert 10% over to UPRO, another 10% drop 20% to UPRO, etc. When the market recovers to the previous high, you convert back to the unleveraged version. Has anyone studied this or is there a way to test this? Or does rebalancing in a diversified portfolio make this a moot point as you are buying into the underperformance Asset Class.

Mostly Uncle Frank [9:33]

All right, a couple interesting questions here. First, let's talk about these annuities in that podcast you referenced. I had listened to that before but went back and listened to it again. What David Stein is talking about there is the Wade Fau or McLean Asset Management approach, which they have called Safety First. I'm not sure they've trademarked that or not, but that's what they call it, which involves recommending annuities to certain classes of people. The first nugget you should glean out of that is that really only simple annuities are recommended and are efficient according to both Fau and Stein, at least with respect to that podcast, and I do agree with that. There are basically two variations of that. You can have a single premium immediate annuity and an immediate annuity starts paying right away. Basically you give a pile of cash to an insurance company and they start paying you an income monthly. Or you can do what's called a deferred annuity where you give them the cash now but your payment stream does not start until sometime in the future. So we are going to limit our discussions here to those Because frankly, most of what else exists out in annuity universe is bad for your financial health. Am I right or am I right or am I right? Right, right, right.

Mostly Voices [11:02]

Lots of bells, whistles and complications. Because only one thing counts in this life. Get them to sign on the line which is dotted.

Mostly Uncle Frank [11:13]

And not to bury the lead, I agree that these products can be appropriate in some circumstances. I can tell you when. I will be considering one, but I disagree with the process that McLean Asset Management puts forth as the process for determining whether you should be buying annuities or not. Because I think it's conflicted and it doesn't actually necessarily look at all of the correct factors. Now, what McLean Asset Management and Wade Pfau have developed is something they call the RISA, which is this kind of lengthy questionnaire that is designed or is attempting to determine what a client's financial preferences are in terms of risk taking, goals, retirement, etc. I was actually a guinea pig for when they were developing this thing, at least for a while until I got tired of taking their surveys. So you're gonna quit? Nuh-. Not really. I'm just gonna stop calling. But it was basically hundreds and hundreds of similar questions about preferences for risk and investments. In the end, I found it was kind of like a Myers-Briggs personality test. That sure the information was interesting, but not necessarily actionable. But anyway, they've refined this test now, and now they advertise it as part of their methodology, and they give it to clients, and they say by using this test, they'll be able to determine which investments are appropriate for you. I am assuming they also incorporate your goals and other factors, as any financial investment management advisor would do. But this is their calling card and how their process is really driven. So honestly, I don't think that's a good process because it sounds nice in theory, but all you are really measuring is somebody's preferences at a given point in time, which may change over a retirement that is decades long and is going to be influenced by what happens in their life. Shirley, you can't be serious. I am serious.

Mostly Voices [13:28]

And don't call me Shirley.

Mostly Uncle Frank [13:32]

Another problem with it is I don't think it's necessarily psychologically sound. We don't know the outcomes because this has only been around for a couple of years. And to me it just seemed like a glorified version of that very simple test that you often get at any brokerage asking you about risk preferences. It's a trap! But then I get to the conflict part of this that I don't like. They now have a podcast which is essentially an advertisement for McLean Asset Management and this kind of methodology. One of the hosts on that podcast is a guy named Alex who tends to talk too much and doesn't realize necessarily what he said. Cool. And in one of the last couple episodes, he kind of let the ball drop on the facade here. What he said is a few years ago when people came to them looking for annuity products, they would always just send them somewhere else because they were only focused on total return kind of plans for people in retirement. But now that they've come up with this new program, they can keep those clients happy and in-house.

Mostly Voices [14:45]

Sitting out there waiting to give you their money.

Mostly Uncle Frank [14:52]

Are you going to take it? Which to me was just code word for saying, this is how we can increase our AUM and ultimately run our business better and make it more profitable.

Mostly Voices [15:00]

Because we're adding a little something to this month's sales contest.

Mostly Uncle Frank [15:07]

As you all know, first prize is a Cadillac El Dorado, which is fine and I'm glad that he had admitted it, even though he didn't admit it up front. But to me, that's the whole purpose of this whole exercise. From my perspective, what matters most is not your personal preferences about risk. The most important thing is your health, actually. And that is something that this test and other tests do not deal with or even attempt to deal with. In my mind, it's pretty much malpractice for a financial advisor to be advising people to purchase things to pay for life when there has not been any kind of health assessment to determine how long that person might live. Because if you know that you are likely to essentially live longer than the actuarial tables say you would on average, then annuities tend to make sense, at least for part of your assets that are covering fixed expenses. But if you don't know that, or you have some kind of condition, it may not make sense at all. Then there's also a timing issue that kind of goes with this. The best times to be buying annuities are when you are older because the payout ratios are higher. But obviously you have less time to live, but that's also where you're going to get the most bang for your buck by living longer.

Mostly Voices [16:31]

That is the straight stuff, O Funkmaster.

Mostly Uncle Frank [16:38]

And so if you go to the immediate annuity site that I always look at for this, and David Stein also recommends, you can price out what the payout ratio would be for a annuity if you are 72 or 62 or whatever age you are and you have to put your gender in there. And if you do that, you'll find that you really don't start getting really decent payouts until you're about 70 or or later. So to me, it does not make sense for anybody to be looking at them until they get to 70 or later. And why is that? Because you don't know what your health is. If you're buying something like this when you're 50, even if it's deferred, you're basically betting on good health as opposed to knowing a whole lot more about what your health is when you start the annuity and are getting a relatively high payout. Now, I just came back from a funeral today for a friend who died at age 71 and he had had cancer for three years. But if he would have walked into one of these offices when he was 55 and took a survey, he would have easily ended up buying one of these products. Maybe they said, well, we'll just defer this one and start it at age 70. How would that have worked out for him? The point is you don't know what's going to happen between now and your 40s and 50s and what sort of things you might be developing by the time you get to age 70. You also don't know what inflation's going to be over the next couple of decades, especially if you're doing a deferred annuity. And annuities are one of the worst things to hold in an inflationary environment because they're not indexed for inflation. Now, on the other hand, you may find that you are in good health. and it's likely to continue. My own father is 93 years old. My mother is 89. They still live in a house, drive themselves around, live like most people in their 60s or 70s. So at least in theory, I am a good candidate for this kind of a product. Inconceivable! Now we can start talking about health assessments and how you do that. That's a whole 'nother kettle of fish that I really don't want to get into. Right now you can go to places like Blue Zones and take simple tests about your current habits and lifestyle and get an idea for whether you're going to exceed your actuarial death date or not. But better tests are being developed all the time, and I think within another decade we're going to be knowing a lot more about aging than we do today. If you want to listen to a whole podcast about that, try Drive with Dr. Peter Attia, who is obsessed with longevity and how to achieve it. And you'll learn more than you want to know about it there. The short answer to the question is how do you achieve it? It's by avoiding or delaying chronic conditions as long as possible and treating them aggressively as soon as they show up. And those include things like high blood pressure, Your tendency towards diabetes or being able to process sugar. And aggressive cancer screening too. So my plan is to wait until Mary and I are about 70. Mary, Mary, why you buggin'? Assess our health at that time and then determine whether a single premium annuity for one or both of us or a joint one would make sense. Stupid is, stupid does, sir. Doing that now does not make sense because that is over a decade away and a lot of things could occur between now and then. Are you stupid or something? And that's regardless of how we might perform on some financial profile risk assessment. Now of course there are other categories of people that these products may be appropriate for such as people who have cognitive impairments, or a history of, say, a gambling addiction and they're squandering money. You have a gambling problem.

Mostly Voices [20:44]

You can think of a whole laundry list of people that would benefit by

Mostly Uncle Frank [20:49]

not being able to have access to a pot of money, but only having a stream of money coming to them on a regular basis. Again, I think that's a relatively small group of people. And then if we did decide to buy a SPIA at that point, it would only be for what we would consider fixed expenses beyond Social Security. I can't see putting the bulk of one's assets in anything like that, if only because of the problem of them not being indexed for inflation and not keeping up with inflation like you would expect equity and other investments to do. I think it would be a mistake for most people to be fiddling around with these things in their 50s or younger. or even trying to plan with them then doesn't make any sense. Fat, drunk, and stupid is no way to go through life, son. I suppose I should add just one more point on these annuities. The answer to a lot of the critiques that I've made, if you brought them to an annuity salesman, would be to give you all kinds of riders and other things to get part of your money back at part of a time or to modify the contract in some way. But all that costs money. And I think you're much better off just waiting until you think you actually need it, and that it will be cost effective for you based on your health and your lifestyle, and not be trying to plan what you're doing in your 70s and 80s while you're still in your 50s.

Mostly Voices [22:23]

Now, as to your second question about taking leverage in a downturn, you have a gambling problem.

Mostly Uncle Frank [22:27]

I'm not aware of anybody that's tried to model such a thing, and I think it would be difficult to model. The main problem is actually volatility, because in downturns you get these extreme volatility that we're actually seeing right now. And that means that every crash is going to be different, and the optimal rules for one particular crash or even a whole group of crashes is unlikely to be optimal for the next crash. There's too much variance there. You can't handle the gambling problem. And so what you end up having is just a market timing problem of trying to catch a falling knife. Trying to figure out when you're supposed to turn on the jets.

Mostly Voices [23:08]

Now witness the firepower of this fully armed and operational battle station.

Mostly Uncle Frank [23:16]

I don't think it would be a moot point because as you say, you could take something like VOO and decide to convert some of it when it falls by a certain percentage to UPRO or something else like that, as you described. So while I'm not saying it can't be done, I think it would be a tall order to try to do it.

Mostly Voices [23:37]

A really big one here, which is huge.

Mostly Uncle Frank [23:40]

And I do not believe that I could do it and would not pay somebody who said they could do it. Danger, Will Robinson.

Mostly Voices [23:47]

Danger. But who knows, maybe you'll be the one.

Mostly Uncle Frank [23:51]

There can be only one.

Mostly Voices [23:58]

And thank you for that email.

Mostly Uncle Frank [24:01]

Now we're going to do something extremely fun. And the something extremely fun we're going to do now is our weekly portfolio reviews. of the seven sample portfolios you can find at www.riskparriaratior.com and it was a recovery week or maybe just a bear market bounce I don't know expect the unexpected these numbers indicate a lot of volatility in a roller coaster ride foreign But anyway, just looking at the markets, the S&P 500 was up 6.45%, the Nasdaq was up 7.49%, gold was down, gold was down 0.7%, so not much. Long-term treasury bonds represented by the fund TLT also did not move very much, they were up 0.5%. REITs were the big winner last week. The refund REET that we use was up 9.15% for the week. Commodities were a big loser. They were down 6. 1% for the week as represented by the fund PDTC and are down over 10% in a couple of weeks. I think the oil sector and oil stocks are down something like 20% in the past two weeks. But what goes up fast can come down fast too. And preferred shares represented by the fund PFF were up 2.71% for the week. Now moving to the sample portfolios. The first one is the All Seasons. This one's only 30% in stocks. It's got 55% in treasury bonds, intermediate and long term. The remaining 15% is divided into gold and that commodities fund, PBDC. It was up 1.74% for the week, PBDC not helping it very much. It's down 14.44% year to date and is down 2.54% since inception in July 2020. We keep that one around just as a reference portfolio because it's seriously underweight in equities. And now moving to these three bread and butter portfolios that have similar risk profiles to a 60/40 portfolio. The first one is a golden butterfly portfolio. It's 40% in stocks divided into a total stock market fund and a small cap value fund, 40% in bonds divided into short and long term and 20% in gold. It was up 1.94% for the week. It is down 11.63% year to date and is up 9.96% since inception in July 2020. It is the best performer or least bad performer of these portfolios this year. Next one is our Golden Ratio portfolio. This one's 42% in stocks and three funds, 26% in treasury bonds, long-term treasuries represented by the fund TLT, 16% in gold GLDM, 10% in REITs REET, and the rest in cash for distributions It was up 3.14% for the week, probably on the strength of those REITs. It is down 15.36% year to date and is up 7.57% since inception in July 2020. Next one is our most diversified portfolio, the Risk Parity Ultimate. I won't go through all 14 of these funds, but it's got stocks, bonds, commodities, and a little Bitcoin, and a volatility fund to boot. It was up 2.48% for the week. It is down 18.1% year to date and is up 3.73% since inception in July 2020. And now we move to the experimental portfolios. These all have leveraged funds in them so are much more volatile on average. And that's not helping them very much this year. But anyway, the first one is the Accelerated Permanent Portfolio. This one is 27.5% in a leveraged bond fund, TMF, 25% in a leveraged stock fund, UPRO, and then 25% in PFF, a preferred shares fund, and the remaining 22.5% in gold, GLDM. It was up 4.39% for the week. It was down 32.52% year to date and is down 8% since inception in July 2020. And now still dragging up the rear these days is our most leveraged and least diversified portfolio, the aggressive 5050. This one is 33% in a leveraged stock fund, UPRO, 33% in a leveraged bond fund, TMF, the remaining third divided into preferred shares and an intermediate treasury bond fund, which act as ballast in this portfolio. It was up 5.91% for the week. It is still down 40.23% year to date and is down 11.98% since inception in July 2020. And it tends to move pretty violently every week with all that leverage in it. Now going to our last portfolio, the lever to golden ratio. This one is 35% in a leveraged composite fund called NTSX. The S&P 500 and Treasury bonds, 25% in Gold GLDM, 15% in a reit fund O Realty Income Corp. It's got 10% in a leveraged bond fund TMF, 10% in a leveraged stock fund TNA. That's a small cap fund. And the remaining 5% is divided into a volatility fund VIXM and a Bitcoin fund GBTC. It is up 4.47% for the week. It is down 20.69% year to date and is down 16.16% since inception in July 2021. I had screwed this one up on the website last week, but I think I've fixed it. So hopefully it reflects where it is right now. Sorry about that if you're scoring at home. I do think the most interesting thing that happened This past week in the markets was that big drop in commodities and in oil in particular. I don't think most of the pundits out there predicted that. They've all been telling you to go out and buy more Chevron and Exxon. Does that mean we're headed towards a recession? Well, maybe we should check the crystal ball.

Mostly Voices [30:39]

You can actually feel the energy from your ball by just putting your hands in and out. And what does it say? We don't know. What do we know? You don't know. I don't know. Nobody knows. Funny, my crystal ball seems to say that a lot.

Mostly Uncle Frank [30:56]

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 and I'll get it that way. If you are interested in checking out somebody who writes about risk parity, check out Risk Parity Chronicles, which is a blog run by our listener Justin.

Mostly Voices [31:29]

Young America, yes sir.

Mostly Uncle Frank [31:32]

And always has some interesting things to look at. If you haven't had a chance to do it, Please go to your podcast provider and like, subscribe, give me some stars, a review. That would be great. Okay. Thank you once again for tuning in. This is Frank Vasquez with Risk Parity Radio. Signing off.

Mostly Mary [32:03]

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.