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 1-3-5-7-8. 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 Voices [1:41]

Lighten up, Francis.

Mostly Uncle Frank [1:45]

But now onward to episode 187. Today on Risk Parity Radio, we are going to hack away at our pile of emails here from June.

Mostly Voices [1:56]

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

Mostly Uncle Frank [2:04]

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

Mostly Voices [2:08]

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

Mostly Mary [2:11]

And my contact info writes, Thank you, Frank, for your thoughtful response concerning Vanguard ownership structure. To your point, many insurance companies are mutually owned, yet this has not been a panacea for buyers of insurance products.

Mostly Uncle Frank [2:28]

So to clear everybody in, what he's referring to is a question we had that he asked back in episode 181 about Vanguard in particular. And I don't think I need to really elaborate on that any more than I did, I'll just make the point that what matters more than the ownership structure of an organization is just its business models, regardless of where those profits are going to. Even nonprofits have business models. And so when you are evaluating the behaviors and motivations and actions of somebody you are dealing with, whether it's a car dealership or Vanguard or an insurance company, It helps you to be mindful of how their business model works because then you can assess whether what they are saying to you is impacted, shaded, or biased by that business model. As we're adding a little something to this month's sales contest, as you all know, first prize is a Cadillac El Dorado. And this goes for both people that are in the financial services industry Like the brokerages and advisory services who might use commissions or AUM fees, which motivate a whole set of behaviors. I drink your milkshake.

Mostly Voices [3:54]

I drink it up.

Mostly Uncle Frank [3:58]

But it also affects people in the financial media who have sponsors and are unlikely to say things on their shows that contradict or might be interpreted as going against something their sponsors do. Not gonna do it. Wouldn't be prudent at this juncture. And so we always get to that favorite Upton Sinclair quote of mine, which is, It is difficult to get a man to understand something when his livelihood depends on his not understanding it. Am I right or am I right or am I right?

Mostly Voices [4:29]

Right, right, right.

Mostly Uncle Frank [4:33]

So just be careful out there and thank you for that email.

Mostly Mary [4:37]

Second off, second off, we have an email from Brett and Brett writes, Frank and Mary, my apologies to Mary for the alphabet soup that follows. Your persistence in reading these is very much appreciated. Mary Mary, why you buggin'? I'm going to be converting my TSP portfolio to a risk parity portfolio within a Fidelity IRA I have when I turn 59 and a half in a few months. The TSP funds that are available are the following：G Fund, short-term treasury is the closest equivalent. F Fund, total bond index. C Fund, S&P 500. S Fund, Dow completion index. I Fund International Index. As of now, current holdings are as follows：G Fund 45%, F Fund 5%, C Fund 34%, S Fund 12%, I Fund 4%. I have a question regarding a conversion strategy. In order to avoid locking in losses, my initial plan is to start with rolling over the G Fund and the F Fund to start building my position in TLT and IAU. When making the purchases within the Fidelity account, do you recommend dollar cost averaging over a certain period of time or simply making a single purchase? If making a single purchase, is there any level of technical analysis that you believe can be leveraged to choosing a reasonable price? As TLT seems to be dropping as quickly as the SP these days, is the current level of high correlation a concern? Your podcast is my favorite and I very much appreciate the work that goes into it. Keep up the fantastic mix of entertainment and education. Regards, Brett.

Mostly Uncle Frank [6:35]

Well, thank you for those kind words, Brett. And Mary thanks you too. Mary, Mary, I need your hug. We do try to have a little fun here.

Mostly Voices [6:48]

You're not going to amount to Jack squat. But now let's get to your questions.

Mostly Uncle Frank [6:55]

First of all, just for clarification, it looks like overall you've got a portfolio that is 50% in stocks, 5% in a total bond index, and then the remaining 45% in short-term bonds and other short-term cash-like instruments. And it looks like you have a reasonable rollover plan to get this over to fidelity, which should work fine. I would do a little research, which I have not done to see how long that transfer takes. The last time I did it, it took about three weeks, and it was a frustrating experience. I have a friend, Gwen Murrs, who had a similar recent experience. And the frustrating part of this seems to be that they want to use Stone Age 20th century technology to move your money around and actually issue a check, which then needs to go to you and be deposited at Fidelity. In my case, I had them send it directly to Fidelity, but that process was indeed frustrating and was not instantaneous. It did take several weeks for the whole thing to get done. I will link to her Fiery Millennial blog entry about her recent experience and you can check that out. It wasn't exactly moving a TSP, but it was moving accounts to Fidelity, I believe. But now getting to your specific questions, your first one is when making the purchases within the Fidelity account, do you recommend dollar cost averaging over a certain period of time or simply making a single purchase? And then I'll combine that with your second question, which is if making a single purchase Is there any level of technical analysis that you believe can be leveraged to choosing a reasonable price? Well, the short answer to both questions is that you would need a very good crystal ball in order to actually determine whether any given point in time is the exact right time to be making purchases in any financial markets. My name is Sonia.

Mostly Voices [9:06]

I'm going to be showing you the crystal ball and how to use it or how I use it.

Mostly Uncle Frank [9:13]

Statistically, over long periods of time, people have found that it's advantageous to make the purchases all at once, but that is on average of all potential purchases that could be made over time. In practice, it may not matter that much because if you're going to be holding this portfolio for 20 or 30 years or something, it's probably not going to matter a whole lot whether you deposited it over one day or one year. And psychologically, if it feels better, you can do either one. Some people do actually feel better just getting it over with and some feel better scheduling it out over some reasonably short period of time. Where people get into trouble is where they set some artificial trigger that they feel needs to happen before they're willing to make their investment. Something like, I need to see the S&P 500 get down to the same level it was at in March 2020 would be an example of that. And that's where people screw up because they end up sitting around in cash for years on end because their trigger point just never happened or they miss out on a recovery. But no, I'm not aware of any particular trigger that would say, Now is the time or Now is not the time. At least not one that is reliable.

Mostly Voices [10:37]

A crystal ball can help you. It can guide you. And it's through the candle that you will see the images into the crystal.

Mostly Uncle Frank [10:46]

Here's the most recent one I heard of though that sounds interesting.

Mostly Voices [10:51]

A really big one here, which is huge.

Mostly Uncle Frank [10:56]

And it comes from Patrick Boyle, who is a Former investment banker and now teaches and runs a hedge fund. And he has a YouTube channel where he talks about a lot of global financial matters. But anyway, in one of his recent videos he said that you might be better off stopping your investments in markets when the Fed starts raising rates and then starting again when the Fed starts lowering rates. Surely you can't be serious. I am serious. And don't call me Shirley. I have not investigated that and have no idea whether it would be a useful thing to do.

Mostly Voices [11:34]

You are talking about the nonsensical ravings of a lunatic mind. Or in what markets he was specifically talking about other than global stock markets.

Mostly Uncle Frank [11:47]

But the problem is, I think that you run into one of those suggestions every week or every month if you consume enough. Finance content. So I would probably just either do it all at once or do it on a set schedule over a period of months if that made you feel more comfortable. And I'll link to one of Patrick Boyle's videos in the show notes. All right, your third question, as TLT seems to be dropping as quickly as S&P these days, is the current level of high correlation a concern? Well, it's not pleasant, but it's happened before. When you would expect TLT to do well though is when we have a recession. And when people start talking about recessions or hinting about recessions, TLT seems to be doing well those days. But everybody wants to get ahead of themselves. And so that's why you see a lot of volatility in it. All I know is we're going to have a recession sooner or later, because we always do. And TLT will perform pretty well during that time period. And I think it would be a mistake to try to time correlations between asset classes, just as it would be a mistake to try to time markets generally.

Mostly Voices [13:00]

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

Mostly Uncle Frank [13:04]

You might need an even bigger crystal ball for that.

Mostly Voices [13:08]

This is the one that I tend to use more often. I have a calcite ball. And I have a black obsidian one here.

Mostly Uncle Frank [13:19]

I can tell you that we will be doing some rebalancing of the sample portfolios that go on an annual basis this month, and we'll probably be buying some more TLT for those portfolios when that comes up. Yes! Because buy low and sell high applies to all asset classes, not just your equity fund. Never show any sign of weakness.

Mostly Voices [13:42]

Always go for the throat. Buy low, sell high. Fear, that's the other guy's problem.

Mostly Uncle Frank [13:50]

Hopefully that answers your questions and thank you for that email. Last off, we have an email from Jamie.

Mostly Mary [14:07]

And Jamie writes：hi Frank, two questions on funds. One, have you any suggestions for how to backtest the category of managed futures? I can't find a long-standing fund here, but have been listening to a managed futures fan cast, and they have done some backtesting where they end up with 15% being optimal in a risk parity portfolio. Thoughts? Two, what do you think of SCO in risk parity? Thought is that oil prices decrease in slowdowns and long term due to electric vehicles, et cetera. I know this is a very contrarian view right now, but it seems to backtest well in my portfolios. Thanks, Jamie.

Mostly Uncle Frank [14:52]

All right, managed futures.

Mostly Voices [14:55]

Well, laddie, frickin' da!

Mostly Uncle Frank [14:59]

well, you're right, Jamie. I'm not aware of any publicly available data for testing managed futures. I am aware of a lot of CTAs, which are essentially hedge funds for commodity traders, and that follow these kinds of strategies that have created their own data sets and analysis. And typically they end up concluding something to the effect of that the right amount of these for an average portfolio is somewhere between 10 and 20%. I don't have any way of verifying that, but it's hard for me to dispute it because I've seen it and heard it many times over the past 10 or 15 years. You might want to go back and listen to episodes 53, 55, and 57 where we talked about what's called the Dragon Portfolio, which is a creation of Artemis Capital. And they have a nice paper on their website called the Allegory of the Hawk and the Serpent that does analysis of managed futures strategies and other strategies that it uses in its portfolio going back to 1928. And they've got some tables and charts in there. I will link to that. paper in the show notes. Well, I think you have to put an email address to get it. But let me just read this little part of this paper for yours and everyone's edification because I think it's informative both describing what this is and then how it might fit in and why it might fit in. And the section is called commodity trend following in commodities. And the first paragraph says, Commodity trend following, CTAs or commodity trend, is a strategy that seeks to monetize the tendency for prices of goods, e.g. crude oil, natural gas, soybeans, copper, to break out in trends up or down using rules-based systematic trading. The strategy has traditionally shown non-correlation to stocks and bonds and has performed during periods of market duress. To test this strategy over 90 years, we applied a simple 50-day moving average rule to buy or sell a broad basket of commodities using data back to 1928. The modern equivalent of the strategy is accessible via hedge funds, such as those in the HFRX Macro Systematic Diversified CTA Index and through select exchange-traded products. Commodity Trends shows excellent performance over 90 years of history, earning a plus 9.2% per year with a return to risk ratio of 0.67. It was the second best performing asset overall next to real estate. Commodity trend following has shown an ability to perform in periods of deflation, the 30s, the 2008, and inflation, 1970s. Despite substantial performance from 1928 to 2008, the strategy has been flat for the last decade. Note this paper is written in 2019. And like long volatility hedging has fallen out of favor with many investors. It is important to note that our CTA replication index does not include reinvestment in or use of treasury bonds or rate derivatives and such inclusion would likely help the performance during the period of 1984 to 2007. And then it finishes off with this paragraph. Commodity trend is a crucial part of our optimal 100-year portfolio at 18% allocation. Despite this fact, it still has a lower risk weighting than active long volatility. It is essential to understand why. Commodity trend following has a higher correlation to equities than active long volatility over 90 years, and this has a substantial impact on how mathematics optimizes these assets. Many portfolios include broad commodity exposure. While this is a solid diversifier during periods of stagflation like the 1970s, removing the trend component reduces risk-adjusted performance substantially. And so just a couple things to note here. Commodity trend following and managed futures are often used synonymously, but this paper also points out that it was not including this kind of strategy applied to interest rates or rate derivatives, and it does not include currencies in this formulation. I think this strategy is much better if applied across all of those kinds of asset classes, and you can see that if you look at something like the DBMF Managed Futures Fund, which we talked about back in episodes 55 and 57, and has shown much better performance characteristics in this kind of recent inflationary environment than ordinary commodity trend following funds. I think another problem in this space data wise is there are many different indexes. Most of them have been around since only around 1990 or so, and there is no standardized one that everybody accepts is the right one to look at. But even despite that, at least all of the hedge funds and others who have attempted these kinds of analyses and created these kinds of databases have come up with that kind of consistent recommendation of between 10 and 20% allocated to this strategy. The problem that I've had with it since I started looking at things like this over 10 years ago is the funds just weren't very good and they just didn't do a good job. I'm hopeful that that's changing. That fund DBMF may be a partial answer to that. There's a fund that just came out like three months ago called CTA from Simplify that is attempting to do the same kinds of things. I'll be curious to see how that one performs. The Commodities Fund Com/COM that we talked about in episode 99 may also be another partial solution in this area as it has some simple trend following characteristics like the thing they described in this paper that I read to you.

Mostly Voices [21:30]

That was weird wild stuff.

Mostly Uncle Frank [21:34]

So I think this is an interesting and evolving area. You have a gambling problem. But that the devil is still in the details and the implementation of it. Because the quote right unquote allocation to it is going to depend a lot on the structure of these kinds of funds and the breadth of whatever they are trend following. and hopefully somebody will come up with a standardized data set, but I won't hold my breath on an index for it. I will link to an article in the show notes that lists about 10 different indexes that somebody might use. Now, moving to your second question. What do I think of SCO in risk parity? Just so everybody knows what we're talking about, SCO is a ETF That goes short oil futures.

Mostly Voices [22:30]

Well, you have a gambling problem.

Mostly Uncle Frank [22:34]

And so it's extremely volatile and has gigantic spikes whenever the price of oil drops like it did in March 2020.

Mostly Voices [22:42]

You can't handle the gambling problem.

Mostly Uncle Frank [22:46]

And conversely does pretty awful when the price of oil is rising like it has been recently. I honestly have a hard time seeing how this could be used as a long-term holding. It's really designed for short-term speculation. And I kind of have the same problem with it that I have with a lot of these volatility funds that never work very well due to decays and other issues with the underlying assets, which are usually futures and options contracts. Danger, Will Robinson, danger. So you may also have to apply a specific set of rules to it for buying and selling it that would be separate and apart from your regular rebalancing of the rest of your portfolio. So I don't think it's something I would get involved with, but if you have found a good use for it, then more power to you. Stay in formation.

Mostly Voices [23:40]

Targets just ahead. Targets should be clear if you're going low enough. You'll have to decide. You'll have to decide. And thank you for that email.

Mostly Uncle Frank [23:56]

Once again proving that this podcast has the most savvy and thoughtful listeners in personal finance. The best Jerry, the best. 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 on the Portfolio's page. 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 are a review. That would be great. Okay. Thank you once again for tuning in. This is Frank Vasquez with Risk Parity Radio signing off. The Inquisition.

Mostly Voices [24:58]

Wanna show the Inquisition. Here we go. We know you're wishing that we'd go away. But the Inquisition's here and it's here to stay.

Mostly Mary [25:20]

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.