Mostly Voices [0:00]

A foolish consistency is the hobgoblin of little minds, adored by little statesmen and philosophers and divines. If a man does not keep pace with his companions, perhaps it is because he hears a different drummer. A different drummer.

Mostly Mary [0:18]

And now, coming to you from dead center on your dial, welcome to Risk Parity Radio, where we explore alternatives and asset allocations for the do-it-yourself investor. Broadcasting to you now from the comfort of his easy chair, here is your host, Frank Vasquez.

Mostly Uncle Frank [0:36]

Thank you, Mary, and welcome to Risk Parity Radio. If you are new here and wonder what we are talking about, you may wish to go back and listen to some of the foundational episodes for this program. And those are episodes 1-3-5-7-10. and nine. One of our listeners, Karen, has also reviewed the entire catalog and has additional recommendations as foundational episodes. Ain't nothing wrong with that. And Karen's recommendations are episodes 12, 14, 16, 19, 21, 56, and 82, in addition to the first five that I mentioned. Now, I realize women named Karen get a bad rap these days, but I assure you that all of our listeners are intelligent, thoughtful, and savvy. Yes! And don't forget that the host of this program is named after a hot dog. That's not an improvement.

Mostly Voices [1:41]

Lighten up, Francis.

Mostly Uncle Frank [1:45]

But now onward to episode 186. 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. You can hear a little preview of that in the background.

Mostly Voices [2:11]

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

Mostly Uncle Frank [2:22]

First off, we have an email from Matsui, and Matsui writes, hi.

Mostly Mary [2:30]

I've noticed you had to reduce the safe withdrawal rate of one of your portfolios already. The market is not even halfway down the extent it fell in 2008. Don't you think the safe withdrawal rate of your sample portfolio is a little too optimistic?

Mostly Uncle Frank [2:47]

Well, Matsui, the whole point of constructing portfolios like this is to try to maximize safe withdrawal rates. And so to do an adequate demonstration of that, we've intentionally set them at very aggressive levels. And in theory, the first four portfolios should hold up fine under those levels that have been set. So it's 4% for the All Seasons portfolio, 5% for the Golden Butterfly and Golden Ratio, and 6% for the Risk Parity Ultimate. But we are pushing it with those. Now for the experimental portfolios, I do not know whether they will hold up under the very aggressive withdrawal rates that we are applying to them. And as we have seen and will see today, all three of them have now triggered the lowering of those withdrawal rates due to them going under 80% of their starting values. So the safe withdrawal rates are being applied to the sample portfolios are intentionally aggressive and done so by design for the purpose of demonstration. Now we could have chosen to make it easy by reducing the safe withdrawal rates to say 3% or less as some people recommend these days. But I don't think you'd learn anything from that because the reality of it is you could hold just about any combination of low-cost stock and bond index funds and apply a 3% safe withdrawal rate to them. That's not an improvement. And in fact, if you were doing that, you'd probably just be better off going off and buying the Vanguard Wellington Fund or the Vanguard 60/40 balanced fund and calling it a day. Because if you're doing that, it kind of implies a goal that you're trying to die with as much money as possible. And maybe that is your goal for some people because they want to leave as large a fortune as possible to their heirs or somebody else. And so if your goal is to die with as much money as possible, you would leave it all in 100% stocks, live off as little as possible, and then you're probably going to die with as much as possible. Now, on the other end of the spectrum, you could imagine somebody who has a goal of spending all their money during their life, but taking zero risk. And that person is probably going to be better off buying single premium annuities, either immediate or deferred, over the course of their retirement, and then just spending all the money that way, because they're probably going to get more than 3% out of it. with an annuity purchasing strategy. But I think when most people sit down and really think about it, their goal probably is to spend as much money possible in retirement without risking running out of it, which is why you're interested in maximizing the safe withdrawal rate. And then that gets you to what kinds of portfolios are likely to maximize the safe withdrawal rate, which is why we're all here.

Mostly Voices [5:48]

Don't be saucy with me, Bernaise.

Mostly Uncle Frank [5:52]

If you go all the way back to episode one, I think I talked about this originally in that episode, but those foundational episodes 1, 3, 5, 7, and 9 would clue you in as to why we have the safe withdrawal rates we do for these particular portfolios. But just for fun and interest, since the first six portfolios have been now running a full two years of withdrawals, we can look at what the realized withdrawal rates have actually been over time. and we'll do that in our portfolio review segment. Just as an aside, how I actually approach withdrawals in real life in retirement is to base them largely on expenses. And I think a good goal is to keep your basic expenses, what I call the keep the lights on expenses, to 3% or less. Your starting portfolio value Then use another 1% to be comfortable and up to another 1% for extravagances.

Mostly Voices [6:53]

Yeah, baby, yeah!

Mostly Uncle Frank [6:56]

Because in practice, nobody just looks at the value of their portfolio and decides that's how much they're going to spend. Your spending is more based on your habits and your lifestyle, which is not likely to follow the fluctuations in your portfolio. Inconceivable! and for most people tends to decrease over time as we age. I did not know that. I did not know that. And then only inch back up towards the end of life. But our sample portfolios are not tied to any particular expenses, although I do tend to spend those distributions fairly frivolously. As my desire is to spend as much money as possible in retirement, and not die with as much money as possible in retirement.

Mostly Voices [7:42]

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 [7:49]

Your mileage may vary.

Mostly Voices [7:53]

We just have to be brave. But not too brave or else Matt Damon will come and take all our money. And thank you for that email. Second off.

Mostly Uncle Frank [8:04]

Second off, we have an email from furious risk parity investor.

Mostly Mary [8:09]

And Furious Risk Parity Investor writes：Frank, wasn't TLT supposed to be negatively correlated with the stock market? I know you'll always find a reason why it's doing that, but my money is going puff. I'm switching back to bread and butter VTSAX VTI cash again. Got really burned with your style of investing.

Mostly Uncle Frank [8:28]

Sounds like somebody's going all Ezekiel on me here.

Mostly Voices [8:32]

and I will strike down upon thee with great vengeance and furious anger, those who attempt to poison and destroy my brothers. And you will know my name is the Lord.

Mostly Uncle Frank [8:47]

It sounds like we might be running different races, though. The race I'm trying to run here is over decades in thinking about what kind of portfolios are going to survive and do well over decades. The race you appear to be running looks like it's a very short race, a six-month or a one-year race. And in any given shorter period, risk parity portfolios, or any kind of portfolios, may do less well than their projected averages for various reasons that include the volatility in correlations. Because correlations are not constant. They are very volatile. As for the correlation of TLT or treasury bonds versus the stock market, we talked about this several times in the past. I would go back to episode 176, where we talked about this most recently. And there is a reference to a paper there analyzing data that goes back to 1952. with a table showing the volatility and variation of treasury bonds versus the stock market over periods of time and showing that it will be positive for some periods but will tend to go most negative when you're having recessions. And there's some nice tables there going back to 1952 showing that attribute. So we have not had a recession yet in the time period that this podcast and the sample portfolios have been. in existence, although people say we're about to have one. Crystal Ball can help you. It can guide you. And I suppose last week probably was a good example of what that is likely to look like if we have a recession where we see the stock market declining about 3% a week, whereas the long-term treasury bonds are going up close to 3% for the week. And so in the words of the great philosopher, I beg your pardon. I never promised you a rose garden along with the sunshine. There's gotta be a little rain sometime. And my advice to you going forward is to pick something and stick with it because if you're jumping in and out of different portfolio constructions based on what has performed better or worse in the last year or two years, that's not a good process and you're likely to underperform even the portfolios that you're using. But I'm sorry you had a negative experience and thank you for your email.

Mostly Voices [11:29]

But I'm trying, Ringo. I'm trying real hard to be the shepherd. Last off.

Mostly Uncle Frank [11:43]

Last off, we have an email from Paul, and Paul writes.

Mostly Mary [11:47]

Hi, Frank. Love the podcast. Fellow lawyer here. On a recent Bogleheads Live podcast discussing asset class correlations, Christine Benz recommended intermediate-term treasuries over long-term treasuries because with ITTs, you get most of the same negative correlation with equities, as you get with LTTs, but with much less interest rate risk. What do you think of this comment? Are ITTs the new LTTs? Thanks, Paul.

Mostly Uncle Frank [12:17]

Well, it's an interesting comment because it leads to a little thought process here. The short answer to the question is no, but let's talk about why that's the case.

Mostly Voices [12:32]

Have you ever heard of Plato? Aristotle, Socrates, yes? Morons.

Mostly Uncle Frank [12:36]

First, it's generally true that all treasury bonds all the way across the curve have the same sorts of negative correlation to the stock market. So they're all going to have similar correlations to the stock market. The exceptions tend to be at the very short end because those are more dictated by what the Fed is doing. But we're talking about cash and short-term bonds for that. But there are actually two components to every asset in your portfolio that matter. One is this correlation, correlation between it and the other things in your portfolio. And the other is its volatility or potential returns, which are related. And a more volatile component will move more in a given economic environment. So when you have a recession like we saw in March of 2020, you saw the long-term treasury bonds go up in value 25 or 30%, whereas the intermediate term ones went up in value maybe 10% and the short-term bonds went up in value maybe 5%. A nice analogy to think about that, particularly when we're talking about treasury bonds since they're all the same kind of instrument, is to think of it as these bonds sitting on a seesaw, where the short-term bonds are sitting close to the fulcrum, where the seesaw goes up and down, and then intermediate-term bonds are sort of halfway down the seesaw, and then the long-term treasury bonds are all the way at the seat on the end. So when the seesaw moves, the long-term treasury bonds move the most, both up and down. Now, ordinarily, you might think this is not a desirable characteristic, but when you're talking about a risk parity style portfolio with a bunch of different assets that tend to move in different directions at different times, it becomes a desirable characteristic because it leads to more rebalancing opportunities. And it also tends to lead over time to more stable portfolios. It's a paradox of it. More volatile components when combined in certain ways lead to more stable portfolios. Now, what happens when you reduce the duration of your bonds, making them less volatile? Well, a couple of things happen. First, you need more treasuries to do the same thing. So a portfolio that has all intermediate treasury bonds needs to have a larger portion of those to have the same effect on a portfolio as a smaller portion of the long-term treasury bonds. So by holding the long-term treasury bonds in a smaller amount, you can reduce the amount devoted for that purpose in your portfolio, and then you have room for other things. if you go with shorter duration, what happens is you end up with either having to have more of that in your portfolio or just getting to a situation where you effectively have a cash drag. I mean, if you took Christine Benz's idea to its max, you would make all your bonds short term and then they just turn into cash like a savings account. But you want to have some of it in a portfolio, but if you have too much, it just drags down the overall returns. and the overall safe withdrawal rate of the portfolio. So just to illustrate this and how it works, I did go over to Portfolio Visualizer and ran some comparisons using a Golden Butterfly portfolio, which is 40% in stocks, 20% long-term treasuries, 20% short-term treasuries, and 20% gold, and then doing two substitutions, one where I took all of the short and long term treasuries and replace them with intermediate term treasuries. And then a third scenario where I just changed out the long term treasuries for the intermediate term treasuries. And this simulation goes back to 1978 or 1980. But what you can see from it is the one with the long term treasuries in it does perform better over time. Now, the differences are not that significant. But they are significant enough to demonstrate the point of what I'm saying is that you cannot just throw in intermediate term treasuries and hope that they will perform over time like long-term treasuries. They may over short periods of time, but probably not over longer periods of time. It is interesting though, there is a fund out now, ticker symbol TYA, which is a Treasury Bond fund designed for risk parity portfolios that takes intermediate term treasuries and then leverages them up. Hopefully, I guess, getting the best of both worlds out of them. But it hasn't been around long enough to really see the comparison between them. It is something you might use for tax loss harvesting though, as in theory TYA and TLT should have the same kind of characteristics. But that's another thing that's out there that's new that we are just kind of watching to see what it does. But this is an interesting topic because it is one of the things that even experienced people in the financial services industry frequently get wrong. Wrong! And what I mean by get wrong is they don't appreciate the total differences between different kinds of bonds, whether they're treasuries or corporates, and how duration can affect the overall diversification of a certain class of bonds with a stock portfolio. And there's a key flag you can look for or listen for to see whether somebody gets this idea or not. And when people are start talking about having a bond portfolio that is somehow separate from their overall portfolio and that they're going to treat separately, it means they really don't get it as far as diversification with the overall portfolio is concerned. And they're likely to make this erroneous conclusion that you can just take one duration treasury bond and substitute it for another one and get the same results because it just doesn't work that way, at least not over time. That's not how it works. That's not how any of this works. So interesting topic and thank you for that email. And now for something completely different. And the something completely different is our weekly portfolio reviews of the seven sample portfolios you can find at www.riskparadymradio.com and since it's the end of the month, we also have our monthly distributions to discuss and go through.

Mostly Voices [19:30]

Well, Ladi, frickin' die!

Mostly Uncle Frank [19:34]

But just checking at the markets last week, another bad week for the stock market. Looks like I picked the wrong week to quit amphetamines. The theme of this year, the S&P 500 was down 2.21% for the week. The Nasdaq was down 4.13% for the week. No! And I think that concludes something like the worst first six months of the year since something like 1962 for the stock market. It's an historically bad performance. But anyway, moving on, gold was down 0.61%. Treasury bonds, represented by the fund TLT, were the bright spot last week. They were up 2.88%. Reits represented by the fund REET were down 0.77%. Commodities had another bad week, the third in a row. Our representative fund, PDBC, was down 3.1% for the week. Preferred shares represented by the fund PFF were up 0.01% for the week. So not much movement there. But as we'll see for these sample portfolios, This led to flat performances or even positive performances for our sample portfolios this week. And our first one is the All Seasons. This is our conservative reference portfolio. It's only got 30% in stocks and a total stock market fund, 55% in treasury bonds divided into long-term and intermediate term, then it's got the remaining 15% in gold, GLDM, and a PDBC for commodities. It was up 0.29% for the week. It is down 14.14% year to date and is down 0.33% since inception in July 2020. This sample portfolio always benefits from recession talks because of its over weighting towards treasury bonds. Now in terms of distributions we will be taking $30 out of the cash portion of it since it's still got a lot of cash in it for July of this year. We're doing that next week and that is at a 4% annualized rate. We will have taken out $235 year to date in distributions and $796 since inception two years ago. These first six portfolios have now gone through exactly two years of distributions after we do them next week. And so for this one, if you look at it over time, since the distributions are variable and based on the amount in the portfolio, the actual realized distribution rate over the past two years has been 3.98% for this portfolio. So slightly less than the 4% target. And the reasons these are going to be different from their targets is because we are withdrawing on a monthly basis and also withdrawing on a variable basis based on the current value of the portfolio. But moving into our bread and butter portfolios, the next three, the first one is the Golden Butterfly. This one's 40% in stocks, divided into a total stock market fund and a small cap value fund, 40% in bonds divided into long and short term treasuries, and then the remaining 20% is in gold, GLDM. this one was down 0.07 for the week it continues to be very stable I'm putting you to sleep compared to what goes on in the markets these days it is down 11.7 year to date not bad in the worst year since 1962 and it is up 9.89 since Inception in July 2020 for its distribution for July will be taking 41 dollars from the short-term bond fund, which has been the best performer recently. We will have distributed $315 year to date and 1096 since inception two years ago. So that is a realized annualized rate of 5.48%, which is greater than the 5% target that it's subject to. And our next portfolio is the Golden Ratio portfolio. This one is 42% in stocks, stocks divided into three funds. It's got 26% in long-term treasury bonds, TLT, 16% in gold, GLDM, 10% in REITs, represented by the fund R-E-E-T, and the remaining 6% is in cash from which we pull the distributions. It was down 0.26% for the week and it was down 15.58% year to date. It is up 7.31% since inception. For July we'll be distributing $40 from it. This is at a 5% targeted annualized rate. It will come from cash because that's how we manage this portfolio. We take all the distributions from cash and replenish that when we rebalance, which is also going to happen in July. And for the year so far we've taken out $313 in distributions and $1,094 since inception two years ago. And that turns out to be a realized rate of 5.47% for this portfolio. And our next portfolio is this Risk Parity Ultimate Portfolio. It's got 14 funds in it. This is the most diversified one we have. I will not go through All 14 of these, you can check it out at the website. It was down 0.38% for the week. It was down 18.4% year to date and is up 3.38% since inception in July 2020. We are distributing out of this at a 6% annualized rate. So we're taking $45 out of it and we can take it out of the accumulated cash for the month of July. then we will have distributed $362 year to date and $1,282 since inception in July 2020. And that turns out to be a 6.41% realized annualized rate. And the reason that these realized rates end up being higher than the targets is because we take out more when the portfolio is growing and less when it's receding. They've been growing more than they've been receding, believe it or not, over the past two years. And now we move to these experimental portfolios.

Mostly Voices [26:44]

Tony Stark was able to build this in a cave with a box of scraps.

Mostly Uncle Frank [26:51]

Which involve leverage funds and excessively high safe withdrawal rate targets. First one is the Accelerated Permanent Portfolio. It is 27.5% in a leveraged long-term treasury bond fund, TMF. 25% in UPRO, that's a leveraged S&P 500 fund. 25% in PFF preferred shares and 22.5% in gold, GLDM. It was actually up last week, up 0.82% for the week. It was down 32% year to date and 7.3% 8% since inception in July 2020. For July's distribution we'll be taking $38 from GLDM, the gold portion which has been the best performer recently. Now you will note this is at a 6% annualized rate. This portfolio started with a withdrawal rate of 8% but has an automatic trigger where if it goes below 80% of its starting value, the withdrawals will go down to 6% until it returns to its starting value. And so that has happened this month. We've taken out $436 from this portfolio year to date and $1,653 since inception two years ago. And that realized rate is 8.37% for this portfolio. It's also interesting this portfolio is on rebalancing bands and if it remains in its current state on July 15th we'll have another rebalancing due primarily to the very poor performance recently of the stock market. We would be rebalancing out of bonds and gold and into the stock market if that happens, but we make that check on the 15th of every month. Moving to our next one, the aggressive 50/50. This is our most leveraged and least diversified portfolio. It's 33% in UPRO, that leveraged stock fund, 33% in TMF, the leveraged bond fund, and then the remaining third is divided into PFF, a preferred shares fund, and VGIT, an intermediate treasury bond fund. It was a big winner last week. It was up 1.42% for the week on the strength of those treasury bonds. It's down 39.42% year to date. and down 10.96% since inception in July 2020. This one was already at the reduced distribution rate of 6%, so we'll be taking out $36 from the Intermediate Treasury Bond Fund, VGIT for July. We will have distributed $428 year to date and $1,674 since inception in July 2020. and that is at a realized rate of 8.37%. I may have misspoken on the prior portfolio. I think its realized rate for the accelerated permanent portfolio is actually 8.27% when I got them confused. And our last portfolio is the lever to golden ratio portfolio. This one is 35% in a leveraged composite fund called NTSX. That's this S&P 500 in treasury bonds. Then it's got 25% in gold, GLDM, 15% in O, a REIT, 10% each in TMF and TNA. Those are leveraged treasury bond funds and a leveraged small cap fund. The remaining 5% is divided into a volatility fund and a Bitcoin fund. It was down 0.22% for the week. It is down 20.85% year to date and is down 16.33% since inception last July, one year ago. We are also reducing the distribution rate on this one from 7% to 5% since it's fallen below 80% of its starting value. We'll be distributing $32 from accumulated cash for July. That's $356 year to date and $653 dollars since inception last July, which is a realized annualized distribution rate of 6.53% for that one year. But that concludes our weekly and monthly reviews of the sample portfolios that you can find at www.riskparityradio.com. And 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 fill out the contact form there and I'll get it that way.

Mostly Voices [31:42]

If you're looking for more content like this in a blog form, I invite you to check out Risk Parity Chronicles, which is a website run by one of our listeners, Justin. Young America, yes sir.

Mostly Uncle Frank [31:46]

Where he collects all the stuff that you ask me to collect. And more. We use the Buddy System. No more flying solo. 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 Voices [32:16]

Come along and share the good times while we can. I beg your pardon. I never promised you a rose garden along with the sunshine. There's gotta be a little rain sometimes. I think your pardon.

Mostly Mary [32:44]

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.