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 [0:39]

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, and 9. 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 Voices [1:39]

That's not an improvement. Lighten up, Francis. But now onward to episode 190.

Mostly Uncle Frank [1:48]

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 [2:07]

Stranger, I feel drowsy. It's only mid-afternoon, huh? Well, I took the liberty of putting away something in your teeth. What are you talking about? I'm putting you to sleep. You old fool. Is there an antidote? Of course there is. Right here. Well, it'll cost you a guinea. But before I put you to sleep with that, I'm intrigued by this. How you say? Emails. And?

Mostly Uncle Frank [2:36]

First off. First off, we have an email from Jody.

Mostly Mary [2:41]

And Jody writes, Frank, I love your show and thanks for the time you and Mary put into the podcast. Anxiously awaiting another YouTube video. I am very curious about how you construct a portfolio. I suspect that you iterate using Portfolio Visualizer or some similar tool. It would be interesting to see what this process looks like, how you optimize each position. Last, do you have any tools, books, or other references you would recommend for portfolio construction? Thanks again for all you do.

Mostly Uncle Frank [3:17]

Well, Jody, I'm glad you enjoy the podcast. I think we have over 300,000 downloads now, and about a thousand loyal listeners, and I'm grateful for each and every one of you.

Mostly Voices [3:29]

That is the straight stuff, O'Funkmaster.

Mostly Uncle Frank [3:32]

And you are correct that I am a bit remiss on the YouTube videos that I thought I would do once a month, and I have not done once a month. But you know how it is when you're retired. It's not that I'm lazy. It's that I just don't care. But you've asked a broad and interesting question. How to go about portfolio construction? Let's see if I can answer it a little bit. I think your first question always has to be is what is the purpose of this portfolio that you are constructing? Yes. Generally, there are two broad purposes that most of us have in our lifetime of do-it-yourself investing. The first one being to accumulate enough money to retire with, and the second one to make a portfolio that is best for de-cumulation or distributing out of the portfolio. What that comes down to is for the accumulation portfolio you're really trying to maximize long-term returns for the decumulation portfolio you're really trying to maximize the projected safe withdrawal rate so that you can take more money out of it because you're trying to maximize your distributions and still remain safe. Now you can probably think of an infinite variety of other goals you might have, but those are the two basic ones that we deal with and that most people talk about most of the time. But after you've determined what you're trying to do, I think the next to go out and see what people have already done because there's no point in trying to reinvent the wheel. Now, a very good place to do that is at Portfolio Charts, and I will link to this in the show notes, because he's listed 18 different professional recommendation kind of portfolios that have been popularized in one way or another, and he's got a write up on each one of them. where it came from, and some links to other references, depending on which one you're interested in. And those are, I'll just list them, the 712 Portfolio, the All Seasons Portfolio, the Classic 6040, the Coffee House Portfolio, the Core Four Portfolio, the Global Market Portfolio, the Golden Butterfly, the Ideal Index Portfolio, the Ivy Portfolio, the Larry portfolio, the Merriman Ultimate Portfolio, the no-brainer portfolio, the permanent portfolio, the pinwheel portfolio, the sandwich portfolio, the Swensen portfolio, the three fund portfolio, and the total stock market portfolio. So I think just reading about those will give you some background and we'll spur some ideas as to What you might be interested in constructing.

Mostly Voices [6:26]

If you can dodge a wrench, you can dodge a ball.

Mostly Uncle Frank [6:30]

Now, the two basic standards for comparison to those two questions, a portfolio for accumulation and a portfolio for decumulation are at base the total stock market portfolio for accumulation and the 60/40 for decumulation. So those can be your benchmarks in terms of those two particular goals. Now what we are interested in most here on this podcast is decumulation portfolios. So we are generally comparing portfolios to the 60/40, at least our base portfolios. I'm not talking about those experimental ones. Those are a different kettle of fish.

Mostly Voices [7:08]

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

Mostly Uncle Frank [7:17]

Now, the next step in that process is then thinking about your macro allocations. And when I'm talking about macro allocations, I'm saying how much of this is going to be in stocks, how much of this is going to be in bonds, and how much of this is going to be in other stuff, and what is that other stuff? Because as the macro allocation principle tells us, it is those macro allocations that tend to drive most of the performance of a portfolio. That a portfolio that is 60% stocks and 40% bonds is going to perform 90% the same as just about any other diversified portfolio of 60% stocks and 40% bonds. And now in most cases for do-it-yourself investors, we are looking at stock-based portfolios. Basically, We are looking at stock funds or stocks themselves to drive most of the returns in a portfolio, and the rest of the stuff in that portfolio is there for diversification purposes, largely. Now, a good rule of thumb for a decumulation portfolio that is primarily stock based is that the sweet spot appears to be somewhere between 40 and 70% in stocks. I think in the last interview I heard of Bill Bengen, which was just a week or two ago, he says it seems to be somewhere between 50 and 55%, but of course that is based on what else you're holding in your portfolio. And after you get your macro allocation set, then you can start looking at the individual components. If you want to have 50% stocks, well then what funds are you going to comprise that of, and you should generally be looking at what are the factors or styles for those sorts of things. So when you're talking about stock funds, you should be thinking of large and small caps, growth and value stocks, and those other factors. And then the other thing you would consider is sectors, such as utilities or REITs or other things like that. If you want to listen to a good example of this process, go back and listen to episode six, where I tell you how I constructed the Golden Ratio Portfolio and why it's constructed the way it is. Some really good tools to help you play around with that, particularly on the macro allocation side, are also at Portfolio Charts. Take a look at the Portfolio Finder Tool, the Portfolio Matrix Tool, and the Risk and Return Tool. We had the tools. We had the talent. And a lot of those tools analyze those 18 portfolios I mentioned before and then allow you to create your own and compare them with those portfolios on a variety of metrics. Now you'll notice what I haven't talked about here at all, at least not yet, is what particular funds to pick. And that's because that is actually the last step or stage that you engage with in portfolio construction. I think most people get this backwards. They look around and say, oh, that fund looks good, and this one looks good, and this one looks good. Let's just throw them all in a pile. And that method of shopping is not good portfolio construction. Fat, drunk, and stupid is no way to go through life, son. Because you're not looking at how these things interrelate with each other based on what kinds of things they are. So the fund picking actually comes last.

Mostly Voices [10:48]

You can't handle the gambling problem.

Mostly Uncle Frank [10:52]

And that's where you get over to somewhere like Portfolio Visualizer where you were just plopping in, I'm going to use this set of stock funds and this set of bond funds and these sets of alternatives, gold, commodities and other things and compare them and contrast them. But then you do get to the fund tweaking, picking individual funds and checking them out.

Mostly Voices [11:13]

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

Mostly Uncle Frank [11:17]

One of the things you want to do there is eliminate funds that are essentially doing the same thing. One of the easiest ways to do that is to put them into the asset correlation analyzer at Portfolio Visualizer and things that are more than 90% correlated, you probably don't need both. both of them or a lot of both of them. And certain things you just are just completely overlapping. So if you had a total stock market fund, a large cap growth fund, and an S&P 500 fund, those are basically all doing the same things. You don't need to have all three of them. Pick the one that you really want based on how it compares or lines up with the other things in your portfolio. And you can just use one fund for all three of those things. So eliminating those overlaps is also important because you really want everything in your portfolio to be doing a particular job.

Mostly Voices [12:18]

You had only one job.

Mostly Uncle Frank [12:22]

And doing that job in concert with the rest of the things in your portfolio. But now where this frequently gets you is to the problem of over optimization. Inconceivable. And that problem is constant tweaking of funds and percentages of funds and trying to get the maximum return or maximum safe withdrawal rate out of a particular group of things by excessive tweaking of them. You keep using the word. I do not think it means what you think it means. And that is a danger that is not going to work for statistical reasons. Basically, The more over optimized your portfolio is to fit the past, the less it's likely to perform the same way in the future. That phenomenon is called the bias variance dilemma or bias variance trade off. You're that smart, really? And we've talked about that in a number of episodes you'll want to go back and listen to. Check out episodes 49, 64, 66, 91, 95, 120 and 137. But the upshot of that phenomenon is that the fewer building blocks you use for a portfolio, and if they are broad based building blocks, say a small cap value fund or a long term treasury bond fund, the more likely it is going to perform as it has in the past. and the more things you put into a portfolio, particularly if you only have a short data set to analyze them on, the more likely it is that whatever you put together is not likely to perform the way it has in the past. And that's another reason to use as much data as possible and in particular be able to get data from the 2000s, the first decade of the 2000s and the 1970s. Those are the two problem eras for portfolios generally. And so if you construct something that has done really well since, say, 2010, chances are it's not likely to perform well in other periods and in the future, or at least not as well as it did in the recent past. And what that leads you to is more advanced considerations, the level 201, where you are taking some fund that may have only existed for the past 15 years, trying to come up with, well, what was like this in, say, the 1970s that I have some data for? So you can at least get some sense of what it might have been like to have and run that comparison to see what that portfolio would have looked like or done in a different period. Because the way professionals do this is to come up with some kind of construction, and this goes with any data set, whether it's this kind of portfolio construction or not. If you have, say, 50 years of data, you would construct a portfolio and optimize it for, say, 10 years of it, and then go test it on the other 10-year periods in the set to see how well it performed or didn't in those periods. And it's that kind of cross-testing that tells you whether you've arrived at something that's robust and is likely to work in the future, or if you've just over-optimized for a particular period in the past, which is a very frequent occurrence for amateur portfolio constructors. You can't handle the crystal ball.

Mostly Voices [15:58]

I award you no points and may God have mercy on your soul.

Mostly Uncle Frank [16:02]

All right, your last little bit. Do I have any tools, books, or other references? Well, I've already gave you a number of them from portfolio charts and portfolio visualizer. But the other place you should look is over at Risk Parity Chronicles on the resources page, because if you are particularly interested in risk parity, which is basically answering the portfolio construction question as to what kinds of portfolios have the best risk reward characteristics. The best, Jerry, the best. There are a lot of most excellent resources there. And I thank Justin for accumulating them.

Mostly Voices [16:44]

Young America, yes sir.

Mostly Uncle Frank [16:48]

Because as we've learned from the recent book called the Perfect Portfolio, where Professor Andrew Lo went back and interviewed everybody from Harry Markowitz to Eugene Fama and others about what is the most important thing to do in portfolio construction. It's to diversify across asset classes, stocks, bonds, commodities, other things, and to diversify within asset classes. And by diversification here, we mean specifically low correlation. We don't mean different. We mean very specifically low correlations. Because if two things are different on their face, but they have high correlations, they are functionally the same in terms of Portfolio construction. Am I right or am I right or am I right? Right, right, right. Hopefully that all helps and thank you for that email.

Mostly Voices [17:51]

Second off, we have an email from Neil and

Mostly Uncle Frank [17:55]

Neil writes.

Mostly Mary [17:59]

Hi, Uncle Frank, I have some questions for you if I may. Fortune favors the brave. I thought the Golden Ratio portfolio was much more common out there, but I couldn't find much literature about it. Where can I read more? I share Buffett's opinion about gold, so what asset class do you think it's best to replace gold with? What portfolio style did you personally adopt for the bulk of your FI money? Thanks.

Mostly Uncle Frank [18:26]

Well, this is a good follow-up to the last question. We can do this.

Mostly Voices [18:30]

We just have to be brave.

Mostly Uncle Frank [18:33]

The reason you won't find much about the Golden Ratio portfolio out there is because I invented it.

Mostly Voices [18:41]

No one can stop me.

Mostly Uncle Frank [18:45]

And I did discuss that back in episode six. Yes, cat, now I shall be ruler of the world. But it was an effort to come up with a simple Portfolio that was well diversified and had enough stocks in it to give it some oomph in terms of overall returns. One thing you'll note about it is that two thirds of it is essentially a 60/40 portfolio. It's got 42% in stocks and 26% in treasury bonds. That is a 60/40 ratio in terms of those two things. and that comprises 68% of the portfolio, and then the rest of it is the other things to improve its diversification and performance. I'm telling you, fellas, you're gonna want that cowbell. So I'm afraid you'll just have to go back and listen to more of this podcast if you want to learn more about it. Episode six is where we talked about its construction in particular, but if you go to the Podcast page at the website at www.riskparityradio. com youm can search the podcast, type in the word ratio and you'll probably come up with all of the episodes where we talked about the golden ratio specifically. Now about gold. I love gold. Well, there is no substitute or asset class you can replace gold with because it's unique. in its lack of correlation to both stocks and bonds and the fact that it keeps up with inflation over time. And so while people have tried to substitute things like gold miner funds, like the fund GDX, or sometimes people have tried to substitute the Swiss Franc in the past, believe it or not, going back to the 1980s, or generalized commodities funds, none of those seem to perform in the same way that gold does, which functions as an alternative currency in terms of its relationship to the dollar and other kinds of markets. The factual reason that it's unique in the world of assets is its history of being used as money and the fact that central banks around the world still hoard lots and lots of gold as an ultimate backstop, which creates a unique kind of demand for it. that does not apply to virtually anything else. To understand why we use it in risk parity style portfolios, I would go back and listen to episodes 12 and 40. But this also gets to why it doesn't make sense for Warren Buffett to hold gold, but it might make sense for you to hold gold in your decumulation portfolio. And the reason is this：Gold is not an accumulator. It's there for diversification. It's not something you hold when you're trying to accumulate wealth. Warren Buffett is still working, still accumulating wealth. That's what he likes to do. That's what he's going to continue to do until the day he drops. And he's accumulated so much wealth, he doesn't have a safe withdrawal rate that's applicable. Now, the rest of us are not in that enviable position. If you have unlimited resources, then you don't care about portfolio construction.

Mostly Voices [22:07]

Forget about it.

Mostly Uncle Frank [22:11]

But if you have finite investable resources and are trying to maximize your safe withdrawal rate from them, then you do care about diversification and that's why you would hold things that are not stocks in your portfolio. And gold is one of those things. Surely you can't be serious.

Mostly Voices [22:27]

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

Mostly Uncle Frank [22:34]

Episode 40 is particularly instructive because we go over A study done by Big Earn over at Early Retirement Now, when he looked at 100 years of data and concluded that having 10 to 15% gold in a portfolio did increase the safe withdrawal rate. Others have done similar studies to that. And I've never heard of anyone refuting those studies.

Mostly Voices [22:55]

Forget about it.

Mostly Uncle Frank [22:59]

Now, as to your last question, what portfolio style did you personally adopt for the bulk of your FI money? And the answer is the Golden Ratio Portfolio. So what I hold in my personal accounts looks like a cross between the Golden Ratio Portfolio and the Risk Parity Ultimate Portfolio. Because in addition to those three basic building blocks, which are stocks, treasury bonds, and gold, I am also interested in how to incorporate things like commodities, managed futures, and volatility into an even more diversified portfolio. The trouble is we haven't come up with the greatest funds for those kinds of investments, at least not yet. I think those would go in the portion of the sample Golden Ratio portfolio that is now REITs and cash, because it's really the stocks, treasury bonds and gold that make up the base for that portfolio. And then you can put whatever other window dressing you wish to have upon it, depending on your risk tolerances and other goals for your portfolio. So hopefully that answers your questions and thank you for that email.

Mostly Voices [24:17]

I want money and power and money and power and money and power. There's no need to fear. Underdog is here. Last off.

Mostly Uncle Frank [24:36]

Last off we have an email from the Nameless One.

Mostly Voices [24:40]

I have no name.

Mostly Uncle Frank [24:44]

Well, that right there may be the reason you've had difficulty finding gainful employment. And the Nameless One writes：Hi, Frank and Mary.

Mostly Mary [24:52]

Thanks for your response to my previous email. It was insightful and helpful as always. Your recommendation of the Lords of Finance is great. It is a very fun book for anyone interested in monetary policy and central bankers. One of my friends passed me this link to a write-up on iBonds. Your show introduced me to those bonds and I have happily taken advantage of them. They seem to me to be the best place to park shortish term, no risk money right now. The linked page has several articles that mostly cover things with regard to I bonds that I found uninteresting or of no use. But I was surprised to see an article on purchasing I bonds via a business. Apparently a business like an LLC or S Corp can purchase $10,000 of I bonds a year, which might be of interest to some listeners who are running a business in the work optional phase of their life or running one alongside their W-2 job. The nameless one.

Mostly Uncle Frank [25:51]

Well, I'm glad you're enjoying the podcast and liked that book, the Lords of Finance.

Mostly Voices [25:59]

We have been charged by God with a sacred quest.

Mostly Uncle Frank [26:04]

I think you really become a lot more educated about finance in general and economics if you go read histories of what people did in the past and how it worked out. because a lot of the ideas I hear people spout as new and interesting are things that were tried by somebody in the past and had deleterious consequences in one way or another. But the people spotting the ideas are blissfully unaware of the history of what they are talking about and frequently are wearing rose-colored glasses about the past and engaging in What I call the golden era nostalgia fallacy, which is the idea that things were better in the past. That kind of thinking in my experience only leads to repeating the errors of the past. That's not an improvement. Trogdor strikes again. Anyway, I bonds. Yes, we first talked about those back in episode 93 before they became a big thing. But they are a very useful place for you to park what you would otherwise invest in savings accounts, CDs, short-term bonds, those sorts of things. And so a nice idea as you approach retirement and know that you're going to be holding some amount of your portfolios in those kinds of assets is to build up yourself an I-Bond ladder over a period of years so you always have some accessible to pull out of there and use or rebalance into other things as might be appropriate because the interest rates are high now but they're going to go down at some point. I'm not familiar with all the rules allowing businesses to invest in them but I understand that if you have an EIN for a business it may be eligible to invest in I Bonds. So I will leave this link in the show notes and people can Check it out and see if it's useful or helpful to them.

Mostly Voices [28:10]

You need somebody watching your back at all times.

Mostly Uncle Frank [28:13]

And thank you for that email. Now we're going to do something extremely fun. And the extremely fun thing we're going to do next is our weekly portfolio reviews of the seven sample portfolios you can find at www.riskparityradio.com And you'll find out that not much happened this week in terms of these portfolios. Snooze and dream, dream and snooze, the pleasures are unlimited. But just looking at the markets, S&P 500 was down 0.93% for the week, NASDAQ was down 1.57% for the week, gold was a big loser, it was down 2.08% for the week. Long-term treasury bonds represented by the fund TLT were the big winner last week, they were up 3.24%. I suppose what's most interesting about that category of investments these days is the yield curve has seriously inverted now, where I think that the one and two year bonds may be paying higher interest rates than the 30-year bond and certainly much higher rates than the 10-year bond, all of which is flashing a big red warning light recession ahead at some at some point, it still doesn't tell you when or how bad it's going to be. But anyway, moving on, REITs represented by the fund REET were down 0.66% for the week. Commodities represented by the fund of PDBC were once again the big loser. It's funny, they went up 40% or more in the early part of the year and now they've down 20% in the past month or so, but they were down 5.06% for the week and preferred shares represented by the fund PFF were flat for the week. No movement at all. Moving to the portfolios, the first one is our most conservative portfolio, the reference portfolio, all seasons. It has 30% in stocks and a total stock market fund, 55% in treasury bonds in the long term and intermediate term, and then 15% in Gold and commodities, GLDM and PBDC, 15% total. And it was up 0.44% for the week. It is down 14.67% year to date and is down 2. 82% since inception in July 2020. Now moving into these bread and butter portfolios you would compare with a 6040. 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 treasury bonds divided into long and short, and 20% in gold GLDM. It was down 0.19% for the week. That was a real snooze fest. I'm putting you to sleep. It is down 12.75% year to date, our best one year to date, and is up 8.67% since inception in July 2020. Next one is our fan favorite, the Golden Ratio.

Mostly Voices [31:17]

Don't be saucy with me Bernice.

Mostly Uncle Frank [31:21]

This one is 42% in stocks. It's got 26% in long-term treasury bonds, 16% in gold, GLDM, 10% in REITs, R-E-E-T, and the remainder in cash. It was down to 0.06% for the week. Harley moved at all. It's down 16.3% year to date and is up 6.46% since inception in July 2020. Next one is our risk parity ultimate. I won't go through all 14 of these funds, but it was down 0.46% for the week. It is down 19.26% year to date. It is up 2.39% since inception in July 2020. And now we get to these experimental portfolios. We run hideous experiments here so you don't have to. The first one is the Accelerated Permanent Portfolio. All of these involve leveraged funds, by the way. This one is 27.5% in a leveraged bond fund, TMF. 25% in a leveraged stock fund, UPRO. 25% in preferred shares, PFF, and 22.5% in gold. GLDM it was up 1. 55% for the week on the strength of those treasury bonds. It is down 32.2% year to date and is down 7.62% since inception in July 2020. Next one is the aggressive 5050 which was our big winner last week. This one is 33% in a leveraged stock fund, UPRO 33% in a leveraged bond fund, TMF and the remaining third divided into a preferred shares fund, PFF, and an intermediate treasury bond fund, VGIT. It was up 2.54% for the week, down 38.81% year to date, and down 10.19% since inception in July 2020. It just narrowly missed a rebalancing this month. We checked this on the 15th of every month, and if an allocation has moved by more than 7.5%, we would rebalance the whole portfolio. In this case, the allocation to stocks, UPRO, has dropped by 7.35% from 33 to 25.65%. So didn't quite make it, but we will check it again next month and we'll rebalance then if it fits the criteria. And our last portfolio is the levered golden ratio. This one is 35% in a composite Fund called NTSX, which is the S&P 500 and treasury bonds levered up 1.5. It's got 25% in gold, GLDM, 15% in a REIT, O, 10% each in a leveraged treasury bond fund, TMF, and a leveraged small cap fund, TNA, and then the remaining 5% is divided into a volatility fund and a crypto fund. It was up 0.14% for the week. It is down 21.38% Year to date, it is down 16.9% since inception, but this one is only a year old, so its inception was in July 2021. So it's been living in a bad environment most of its life. But that concludes our portfolio reviews. Since we are nearing the second year, For most of these portfolios we have four of them, the first four that are on a calendar rebalancing schedule. And so that date for rebalancing for these portfolios is July 20th, or I should say July 21st. We look at the portfolios on July 20th, determine what needs to be bought and sold to get them back to their original allocations, and then go ahead and do that which we will be talking about next week.

Mostly Voices [35:32]

Well, Ladi Frickin' Da! But now I see our signal is beginning to fade.

Mostly Uncle Frank [35:40]

If you have comments or questions for me, please send them to frank@riskparityradio.com that email is frank@riskparityradio.com or go to the website www.riskparityradio.com and put your message in 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, 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 [36:20]

I cannot tell you how long this road shall be, but feel not the obstacles in your path. forfeit has vouchsafe your reward. Do the rules me why? Ye, you hearts grow weary. Still shall ye follow the way even unto your salvation.

Mostly Mary [36:53]

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.