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 [0:19]

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. That's not an improvement.

Mostly Voices [1:42]

Lighten up, Francis.

Mostly Uncle Frank [1:45]

But now onward to episode 185. Today on Risk Parity Radio, we're going to try and put another dent in the pile of emails that have accumulated.

Mostly Voices [1:58]

And so without further ado, here I go once again with the email.

Mostly Uncle Frank [2:03]

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

Mostly Mary [2:07]

And Eric writes, Dear Frank, I recently listened to one of your podcasts and portfolio reviews. If I remember correctly, you are using interactive brokers to custody your assets in your portfolios. Most reviews of interactive brokers that I have read seem to give them an A for fee structure and margin rates and an F for platform user interface. Can you provide a review of the interactive brokers interface and explain if it is really that terrible? Given that many brokerages have gone to zero dollar commissions and most risk parity do-it-yourselfers will not be using margin, Is there any reason for us do-it-yourself risk parity types to use Interactive to custody our assets? Is it simply difficult to learn how to execute trades in the beginning? Or is the platform designed so badly that it is aggravating to use every time even for seasoned customers? Thank you, Eric from Scentsy.

Mostly Uncle Frank [3:05]

Well, Eric, just as an initial point, I think there are a number of different places where Do-it-yourself investors might hold their assets now, including the three big discount brokerages：Fidelity, Schwab, and Vanguard, although people do complain sometimes about Vanguard's interfaces. And you could also use eTrade or Empower or several others, anywhere that offers no fee trading and fractional shares, or something similar is a possibility. Now, Interactive Brokers was originally designed for professional traders and hedge funds and people who are managing family offices. So prior to this era of no fee trading, Interactive Brokers always had the lowest fees that you could find out there in the industry. And it was never that easy to use compared to some of the other brokerages. That's not to say it was really difficult to use if you knew what you were trying to do. Johnny, the truth is they're morons. But I think expectations on user friendliness are much different these days and much more is demanded. I'm from an era where we used to call up the brokerages to enter our trades in.

Mostly Voices [4:26]

Today, everybody spoiled rotten. When I was a boy, we didn't have these video games.

Mostly Uncle Frank [4:34]

And then I think it was maybe Schwab back in the 1990s that came up with a way of doing it on a touch tone phone.

Mostly Voices [4:41]

We made up our own games like chew the bark off the tree. You and your friends would find a nice oak tree and just start chewing their skin off of it. And there were no winners. Everybody was a loser.

Mostly Uncle Frank [4:56]

And then as the internet developed, you had the first internet brokerages of the dot-com era. E-Trade was probably the poster child for that.

Mostly Voices [5:04]

We didn't have this technology. Yeah, look at these itty-bitty microphones. I hate them.

Mostly Uncle Frank [5:12]

And now we have phone apps, and most of the brokerages have applications you can download on your phone and trade with them.

Mostly Voices [5:20]

In my day, we didn't know what to say when we were mad, so we just made up things like flibuldy-flu, because we were idiots, and that's how it was. Just a bunch of people flying out of car windows and their burning pajamas, shouting into a melon and chewing on trees. And that's the way it was and we liked it. Interactive Brokers actually has two of them.

Mostly Uncle Frank [5:44]

It has their ordinary app and then it has another one called Impact, which also has ESG functions on it. I don't find it that difficult to use, but it is true that an app like Fidelity's app is much easier to use for the average person. I know nothing. Nothing. And the main reason we use Fidelity for the sample portfolios is that it's easy to use, and it has no fee trading and fractional shares.

Mostly Voices [6:14]

You need somebody watching your back at all times.

Mostly Uncle Frank [6:18]

So there are two reasons I use Interactive Brokers as our main taxable account. The first one is Invesco. I've been there about 10 years now. And I went there originally because it had the lowest fees when there still were transaction fees. And that's the way it was and we liked it.

Mostly Voices [6:37]

But the other benefit of being there is it has the lowest margin

Mostly Uncle Frank [6:41]

rates in the business. And that is useful even if you're not actually trading on margin because what it allows you to do is effectively borrow against your assets without having to sell them. basically infinite banking done the right way. Put your assets in a place like that. And so if we wanted to get cash out of there, we would just get cash out of there and it would go on the margin account.

Mostly Voices [7:12]

Yeah, baby, yeah!

Mostly Uncle Frank [7:16]

And I think the rates are still in the 1% to 3% range right now, even though they will go up as the Fed raises the Fed funds rate because everything is keyed off of that. But unless you need or want that capability, or you want to trade esoteric assets in markets all over the world, or if you're based outside the US and are doing that anyway, I would just stick with whatever you're comfortable with so long as you're not paying any fees for it, and it offers the things that you want to trade. Personally, I've never found the trading interface itself to be a high priority in considering what brokerage to use. Forget about it. But I am older and crustier than most, I suppose. Get off my lawn. And thank you for that email.

Mostly Mary [8:07]

Second off. Second off, we have an email from Colin. And Colin writes：hi Frank, I was wondering what you think about adding private equity, venture capital, or other private investments as an addition to a high net worth portfolio for money. David Stein of Money for the Rest of Us podcast talks of having an asset garden approach of investments with different sources of risk. Private assets seem to fit the bill for accredited investors with enough assets in excess of their needs. My question is, are they worth it? Fees tend to be high. The Infamous 2 and 20 for private equity, which eats into returns. By my calculations, a venture capital general partner pockets 25% of total fund returns, leaving only 75% to the limited partners. Performance also appears to vary widely by asset manager and often depends on fund vintage, which appears to be a fancy way of describing the herd mentality of asset managers to overpay for assets during times of exuberance. Lastly, most private investments seem to be walled off from the public and only available through financial advisors who take another 1% in fees for simply being a gatekeeper. I wonder how the performance of private investments stack up to public ones after fees. I would expect to receive a premium for locking up my money for 10 years. I also wonder how one would be able to differentiate promising managers from bad ones. And finally, is it possible to bypass the financial intermediaries to access quality private investment opportunities? Sounds like great fodder for our rant. You are correct, sir. Yes.

Mostly Uncle Frank [9:56]

Well, this is an interesting email. You've actually raised two topics here. Let's talk about the narrower one first, which is private equity. My experience with private equity is that it's been a fairly useless subasset class for do-it-yourself investors, at least in the time it's been available in ETF form. Surely you can't be serious.

Mostly Voices [10:20]

I am serious. And don't call me Shirley.

Mostly Uncle Frank [10:23]

It's been long on promises and very short on delivery on those promises. There is a fund called PSP, the Invesco Global Listed Private Equity ETF. It's been around since 2006. It is the largest fund in this category that's easily available for do-it-yourself investors and people trading on brokerages. There are other ones, but it's very representative of the sub asset class. So I went and ran a correlation analysis over at Portfolio Visualizer, which I'll link to in the show notes. And what you see from this, if you compare it particularly with common funds like VTI or VBR, the Vanguard Small Cap Value Fund, is that it has a very poor return, a high volatility, and it's highly correlated with stock funds, 90% correlated with funds like VTI and VBR. That's not an improvement. Which means it's pretty useless as far as something that we would be able to use in a constructive way to build a portfolio with and rebalance periodically. It never really makes sense to hold badly performing things that are highly correlated with something else in your portfolio that performs decently. Forget about it.

Mostly Voices [11:50]

And it's one of the critical ways we reject new fund ideas.

Mostly Uncle Frank [11:55]

And so if you can't buy this in fund form in a way that makes sense, then you are left with trying to figure out individual investments in these areas, which essentially requires you to become an expert or hire an expert in the particular business in which a particular private equity fund is investing in.

Mostly Voices [12:19]

Not going to do it. Wouldn't be prudent at this juncture.

Mostly Uncle Frank [12:22]

Which leads to a lot of its other problems that you have identified. There's a liquidity problem. Oftentimes these investments are very illiquid. There's a high fee problem. The reason these things are being promoted these days is to generate fees. One of the most controversial things that Vanguard has done in the past couple years is go into this area and people have pointed out the only reason you're probably doing that is to generate some fees because it really hasn't been a very useful or fruitful area for ordinary investors to get into. I'm just as stupid as a stupid does. The other drawbacks are that it requires advanced knowledge or skill to be successful in this area. And there is a complete lack of past performance data to show that this would be useful or viable for most of us. In fact, the people that profit the most from private equity are the people that are putting together the funds and getting the fees off of not the investors in the private equity funds. Am I right or am I right or am I right? Right, right, right. And finally, it's highly correlated with your other assets. And particularly, it's highly correlated with the stock market. If you take out the liquidity issue, as you can imagine, whether you invest in a public form of a business or a private form of a business, it's going to be affected by the same economic factors. that affect that particular business, regardless of the corporate structure. So there is no basis to think it would be diversified from other publicly traded businesses that you're investing in, unless you are specifically investing in a different business, in which case it's going to be diversified for that reason and not diversified because it's structured as private equity. this is often cleverly hidden because these things are not priced at mark to market. They're not priced every day. So they have to come up with an estimate of what this thing is worth, which is usually done every quarter or so, and may or may not be accurate. So it looks like it's more diversified than it is simply because it's not being marked to market. So in summary, it has five strikes against it. Illiquidity, high fees, requires advanced knowledge or skill, lack of past performance data, at least performance data that's positive and highly correlated with other assets. So maybe someday somebody will come up with a fund that makes this a viable investment for us average do-it-yourself investors.

Mostly Voices [15:10]

Inconceivable.

Mostly Uncle Frank [15:14]

But I wouldn't hold my breath and I wouldn't spend a lot of time, effort, or energy fiddling around with these until that fund appears and has performed well over a period of at least five years. And in a manner that shows it's actually uncorrelated with your other equity investments. All right, let's talk now about the asset garden approach that David Stein follows. Everything that has transpired has nothing to do with my design. And the short answer to what this thing is, is that it is an active management approach of a wide variety of assets. And so it requires a high degree of skill and attention to pull off. Everything is proceeding as I have foreseen. How do we know this? Well, it's fairly obvious if you look at the kind of portfolio that David Stein is holding. that he is using an active management approach. Easiest way to see this is to go to his book, Money for the Rest of Us, look in chapter nine and there is a table there which summarized his holdings as of the time he wrote the book, which is a couple of years ago. And from listening to his podcast and looking at his website, I don't think it's changed that much. There are different things being moved in and out of it all the time. But if you look at what's in his portfolio, only about a third of it is invested in typical things that you could buy at a brokerage in a fund form. So only 9% of his portfolio was invested in ETFs and stock funds. And that compares with somewhere between 40 and 100% for most of us. He's got a few other stock-like things in there. Publicly traded REITs are 3% of his portfolio. Preferred stock is 1% of his portfolio, mastered limited partnerships, which are also publicly traded as 3% of his portfolio. So that all adds up to a total of 16% of his overall portfolio. Then he's got 10% in bonds, in ETFs and funds, and then he's got 5% in gold and cryptocurrencies, which are also publicly traded and easily available. So, what's the rest of his portfolio? Well, it's all things that require knowledge, skill, time and effort to invest in.

Mostly Voices [17:43]

You know, like numchuck skills, bow hunting skills, computer hacking skills. Girls only want boyfriends who have great skills.

Mostly Uncle Frank [17:56]

So, there is 1% in renewable energy infrastructure assets. 1% in bank loans, 27% in private real estate, 11% in private capital, which includes leveraged buyouts, venture capital, and real estate, and real asset funds, 21% in asset-based lending, which are loans made to individuals secured by real estate, so it's private lending, 1% in unsecured lending, loans made to individuals, and 1% in art and antiques in the form of furniture and paintings. The best, Jerry, the best.

Mostly Voices [18:34]

So the issue you see with most of the investments he's got in this

Mostly Uncle Frank [18:37]

asset garden approach are the same ones you would see with private equity, which they are illiquid. They potentially involve high fees depending on what they are. Most importantly, they require advanced knowledge and skill.

Mostly Voices [18:54]

Numchuck skills, bow hunting skills, Computer hacking skills.

Mostly Uncle Frank [18:59]

Because you have to manage each one of these separately, determine when to get in, when to get out, what specifically to invest in. And since they are fairly unique and esoteric, they are diversified on their face, but you can't really evaluate how well correlated or uncorrelated they are with standard publicly traded funds and other investments. Now, who would this kind of portfolio be appropriate for? It's probably not going to be average investors like you and me. But David Stein is not an average investor. He's been managing investments professionally for a couple of decades. And so he has a much higher level of skill and ability than most of us. He is a master gardener whereas all the rest of us are amateurs.

Mostly Voices [19:54]

You can't handle the crystal ball!

Mostly Uncle Frank [19:57]

Now that's not to say that you or I could not learn the skills to manage some of these investments, but we should expect that it's going to take a lot of effort and a lot of time before we would become proficient enough to do it at a high enough level that it would exceed our abilities to simply construct portfolios out of commonly available funds. Man's got to know his limitations. If you wanted a good analogy, this is the one I thought of. What we're trying to do in connection with this podcast is akin to basic landscaping, where we have some evergreens, some deciduous trees, some bushes, some grass, and we plant them and take care of them But we're not constantly rerouting them and bringing in new plants to put in our garden. And we might have a small garden where we do some of that. But the idea of having these kinds of plants around our houses that they don't require a lot of maintenance or care and can largely just be trimmed or cut back as needed, as you might consider rebalancing does for our portfolios. Now contrast that with what David Stein is doing. What he is doing is not simple landscaping. It is creating and managing a beautiful garden with a master gardener that is constantly caring for and replacing the plants in the garden. And so correspondingly requires a much higher degree of time, skill, and effort. Let me put it this way. Have you ever heard of Plato, Aristotle, Socrates? Yes.

Mostly Voices [21:42]

Morons.

Mostly Uncle Frank [21:46]

Because the advantage of our simplistic approach is that it's relatively easy to make it look decent or good. Whereas if you have a garden full of temperamental plants, you can end up with a lot of weeds and a lot of dead things. Simply because you don't really know what you're doing. Danger, Will Robinson. Danger. So if you want to take the acid garden approach, that's fine, but be aware there are no simple rules that you can apply. There are no rebalancing rules. It's not paint by numbers. It's a blank canvas and you have to be the master artist to create the masterpiece based on your own skills and capabilities.

Mostly Voices [22:30]

Nothing you have ever experienced can prepare you for the unbridled carnage you're about to witness. Super Bowl, the World Series, they don't know what hit 'em. pressure is. In this building it's either kill or be killed. You make no friends in the pits and you take no prisoners.

Mostly Uncle Frank [22:44]

One minute you're up half a million in soybeans and the next boom, your kids don't go to college and they've repossessed your Bentley. Are you with me? So if you go back and read that book, Money for the Rest of Us, after explaining the acid garden approach, he proposes as an alternative, a risk parity style approach, as a simpler alternative to what he's talking about. Groovy, baby. And it does all come back together. If you take a look at his investments in terms of equity like things, I said 16%, bonds at 10%, and then alternatives around five or six percent. Those ratios are the same ratios we use in the Golden Ratio portfolio. I did not know that. I did not know that. But since we don't have all these alternative investments floating around, those proportions are much larger. They are essentially 42%, 26%, and 16%. And then as our smaller garden, we have that other 16% that can be used to augment the basic parameters of the portfolio. Now, is it a coincidence that David Stein's publicly Traded portfolio looks like a golden ratio portfolio. Perhaps, but maybe not. There are many roads to the same place. But those are very interesting things to talk about and think about.

Mostly Voices [24:05]

Real wrath of God type stuff. Exactly. And thank you for that email.

Mostly Uncle Frank [24:11]

Last off. Last off, we have an email from Chris.

Mostly Mary [24:18]

Frank Vasquez：hello, Frank, risk parity radio is a weekly routine of mine, and I never miss an episode. Thank you for this great resource you have created. You are talking about the nonsensical ravings of a lunatic mind. You had answered a question of mine in episode 113 about using a risk parity style portfolio in a brokerage account for medium term savings goals like a house. Thank you for that answer, and since then I've gone all in. You gave me the confidence to take action. I was hoping you could discuss the difference between stagflation and inflation, and what is in our Risk Parity portfolio that protects us against stagflation. We've been hearing rumblings of stagflation for some time now, the slowing growth with high inflation, and the World Bank has recently used their crystal ball to warn that the world economy could slip into a period of stagflation similar to the 1970s. This is the one that I tend to use more often.

Mostly Voices [25:16]

I have a calcite ball and I have a black obsidian one here.

Mostly Mary [25:24]

What mitigates the impacts of stagflation within our risk parity portfolios? Thank you for all that you do and I'm looking forward to hearing what you have to say on this topic. Chris.

Mostly Uncle Frank [25:36]

Well, Chris, the best way to approach any idea or term In my view, is to look at the history of that idea or term, and here we are talking about stagflation.

Mostly Voices [25:44]

I shall taunt you a second time.

Mostly Uncle Frank [25:48]

Now that's a word that is of relatively recent vintage. It was first coined by the British politician Ian MacLeod in the 1960s in a speech to the House of Commons. And I'll link to an Investopedia article which talks about that and other things. You don't frighten us, English pig dogs. Basically what it's come to mean is a period of relatively high inflation and relatively low growth. But it's a mushy term and it does not have any explicit numerical definition. And the classic period for stagflation was in fact the 1970s. Which leads to your next question, what did well in the 1970s? Well, the kinds of investments that did well in the 1970s were golden commodities, very short-term bonds and money markets, value stocks, and managed futures. And so if we see an extended period that looks like the 1970s, you're likely to have similar performances, and we can see that already this year in terms of the performance of a lot of these things. So the commodities sector has outperformed just about everything else this year. Gold though has been relatively flat, but what's different this time about the 1970s, at least so far, is that the dollar has actually been strengthening against most currencies in the world, and so gold has kept up with the dollar. but is not outperformed like you would see if the dollar was declining in value. Value stocks have certainly outperformed growth stocks and the stock market itself. Some of the best performing sectors this year have been in energy and some of the financials, at least the ones that benefit from rising interest rates like insurance companies. Short-term bonds have been fine. They're never going to be exceptional, but they're always going to keep up. And if you look at something like I bonds, that's just a unique kind of short-term bond that benefits from recent inflation. Now managed futures are essentially trend following systems that might be invested in commodities, but also interest rates and foreign exchange. And so they benefit a lot when something like the dollar or interest rates is going strongly in one direction for an extended period of time. We talked about those in connection with the Dragon Portfolio in episodes 53, 55, and 57, and also a little bit in episodes 98, 110, and 168, if you want to go back and listen to some of those. Now those were not really tradable in fund form until very recently, and most of the funds that were constructed to do this over the past 15 years have not been very successful. There is a newer fund called DBMF that seems to have solved that problem, at least based on its recent performance. It's only been around a few years. We talked about that in episodes 55 and 57, but something like that is up 25-30% this year, and you would expect it to continue to do well in this kind of environment. The other kinds of investments that are likely to do well in this kind of environment involve investments in volatility in the stock market and other assets, but that is very difficult to invest in and we don't really have any good funds for that, although we are experimenting with some of them in some of our risk parity style portfolios, the sample ones. So if you do look at the sample portfolios, you can see that a sample portfolio like the Golden Butterfly is the best performer this year, because it's got large sections of short-term bonds, value-related stocks, and gold in it. And the worst performing sample portfolios are the ones that are just stocks and bonds, namely that aggressive 50/50 one, which also has a lot of leverage in it. But still, because it lacks the diversification of some of the other portfolios and doesn't have these kinds of asset classes, that's why it's not doing as well. But what I think is dragging down markets overall right now is the uncertainty of it all, because some people are predicting that, well, inflation's here to stay for many years. Other people are saying, no, it's not. We're going to go into some kind of big recession very soon. The real danger here is always trying to predict the future by looking at a short-term rear view mirror.

Mostly Mary [30:38]

Now you can also use the ball to connect to the spirit world.

Mostly Uncle Frank [30:42]

This is the most common bad behavior of amateur investors, thinking that whatever's happened in the past six months, a year, or a couple of years is likely to continue in a linear way in the future. And that's invariably always wrong. Either it continues in a more exponential way in the future, Fire! Fire! Fire! Fire! or it does not continue in the future. In any event, if you already have a risk parity style portfolio, I wouldn't be doing too much different. And I certainly would not recommend fund chasing either. So while you might add small allocations to things in your portfolio that you don't have, for instance value stocks or gold commodities or managed futures, I would not be making any big moves where you take a large chunk of your portfolio and suddenly jump into something that has done well recently, like say, energy related stocks. Because that kind of fun jumping usually puts you behind, not ahead, and you really should be thinking about your long term allocation to things, not whether stagflation is going to be here next year or not. Fat, drunk and stupid is no way to go through life, son. So hopefully that helps and thank you for that email. But now I see our signal is beginning to fade. We'll pick up again this weekend with our weekly portfolio reviews of the seven sample portfolios you can find at www.riskparityradio.com and we'll also talk about the monthly distributions for July. 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 haven't had a chance to do it, please go to your favorite podcast provider and like, subscribe, give me some stars. That would be great. Mkay? Thank you once again for tuning in. This is Frank Vasquez with Risk Parity Radio. Signing off.

Mostly Voices [33:00]

In my day, we had radio and you couldn't see anything and it was primitive and lousy and we liked it.

Mostly Mary [33:07]

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.