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 [0:36]

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, and 9. 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 197. Today on Risk Parity Radio, we're going to do what we do best here.

Mostly Voices [1:56]

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

Mostly Uncle Frank [2:03]

And first off, we have an email from Howard. And Howard writes. Hi Frank, thank you for sharing your knowledge in finance.

Mostly Mary [2:14]

I think you are doing a much better job than those on CNBC.

Mostly Voices [2:18]

Forget about it.

Mostly Mary [2:22]

After I learned from you about the correlation concept for constructing a portfolio, I was wondering if you think there's a place in the portfolio for an ETF named RISR. Although the history is short, it has a negative correlation with all our three asset classes, stocks, bonds, and gold. Do you think that this fund has a potential in your portfolio? If it has, what would it be replacing and what would be the percentage? Thanks for all your education. I learn a lot from your show by trying to follow your logic about investments, Howard.

Mostly Voices [2:57]

Oh, Howard, are you getting frisky? CNBC, you say.

Mostly Uncle Frank [3:01]

Surely you can't be serious. I am serious. And don't call me Shirley. Well, that's a pretty low bar. Truth is they're morons. The difference is they do melodrama at CNBC.

Mostly Voices [3:16]

We have become lovers of pleasure rather than lovers of the economy. There are those who will say that the economy has forsaken us. Nay, you have forsaken the economy.

Mostly Uncle Frank [3:28]

And we only do comedy here. Let me understand.

Mostly Mary [3:31]

What do you mean funny? Funny how? How am I funny? I make you laugh.

Mostly Uncle Frank [3:40]

But before we get to your main question, let's have a little frolic and detour into CNBC and financial TV generally.

Mostly Voices [3:48]

I want you to be nice until it's time to not be nice. I rarely watch any of that.

Mostly Uncle Frank [3:56]

Inconceivable. Because I think it's bad for your financial health and your financial mind. Everyone in this room is now dumber for having listened to it. But like anything, in order to understand it, you need to understand the history of it. Financial TV in its current form was invented in the 1990s by Roger Ailes. And prior to that time, financial TV was known to be very boring. Snooze and dream. Dream and snooze. You had shows on PBS like Louis Ruckheiser's Wall Street Week, which were very low key talk shows.

Mostly Voices [4:39]

Yes, you take my dreams like the one that you just interrupted. It was marvelous. I was foreclosing the mortgage on a lifelong friend. I was creating a poverty pocket right in the heart of Beverly Hills. And Ailes wanted to create something that would attract many more eyeballs by being exciting. and dramatic. And now you know the economy's wrath. Oh, thou canst shop in a sporting goods store, but knowest thou that the economy will take away thy Bronco's cap from thine head. You mock the economy without fear. Thine own stockbrokers now lie dead by their own hand, and thou knowest that those stockbrokers did not fear the economy.

Mostly Uncle Frank [5:21]

And so that is why you have this moving ticker. Across the screen on those shows. And it's also why there's lots of noise.

Mostly Voices [5:29]

All that noise, noise, noise, noise.

Mostly Uncle Frank [5:38]

The way they used to do that commonly was to have people on the floor of the stock exchange with all the noise in the background. So it's no mistake that what you see on financial TV often is very busy and makes you feel like you're in a casino. Casino. And that's also why the way they report on finances as if they were a sporting event or some kind of entertainment. We got a jackpot, jackpot, jackpot, prizes, prizes, prizes. So there's always a lot of drama about who's saying what to whom and then what that might mean for the financial markets. And frequently all this is is them taking whatever general headlines there are and just asking somebody, well, what does that mean for the financial markets? And how is this different this time? How do we do it? How do we do it? Volume, volume, turn up the volume. Now why this is very bad for us as long term investors is because you always hear about them talking about How to adjust your investments in this current market or for this situation. And the idea that this is useful information rests on two false assumptions. The first assumption is that whatever is going on today is meaningfully different than anything else that's ever happened, because that's what you're considering when you're talking about being a long-term investor. who's investing for decades. And then the other false assumption is that we have some kind of crystal ball.

Mostly Voices [7:20]

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

Mostly Uncle Frank [7:27]

That is going to help us make the right moves based on whatever this current information is. A crystal ball can help you. It can guide you. So it ends up just being a fundamentally bad process for a long-term investor to be following. And there's never any penalty for whatever commentator or expert on there for when they are wrong. They don't look at what they said six months ago and grade them wrong.

Mostly Voices [7:59]

And put a little thing next to them. Wrong.

Mostly Uncle Frank [8:03]

If they did, it would look pretty bad for most of them. Wrong!

Mostly Voices [8:07]

Wrong! Wrong! Wrong! Right?

Mostly Uncle Frank [8:10]

Until there's really no basis for giving any of these people any credence. Forget about it. So what it ends up being is just a form of entertainment, like ESPN.

Mostly Voices [8:20]

It's ground pounding, hog-stomping, quarter-mile mayhem. And it's not even very entertaining.

Mostly Uncle Frank [8:29]

Now I will give them credit, they generally have decent websites. that you can go to and quickly glean whatever happened that day. Because honestly, most days, not that much happens.

Mostly Voices [8:41]

I just stare at my desk, but it looks like I'm working. But you only need a few minutes to do that.

Mostly Uncle Frank [8:48]

You don't need to be sitting in front of a TV or listening to somebody drone on. So if you wanna keep your financial head clear for long-term investing, I would tend to steer clear of financial TV. Now let's talk about this ETF, RISR. It is the Folio Beyond Rising Rates ETF.

Mostly Voices [9:15]

Yes. Now first of all, what is in this thing?

Mostly Uncle Frank [9:19]

What is in this thing is part of a mortgage backed security, largely. And what they do is they separate the principal and interest of a bond that a mortgage backed security is a bond. And then what this fund is investing in is the interest portion of that. And they're also using some treasury bonds and some futures and options. It's a managed fund, so they do various things. But that's principally what they are investing in is the stripped interest portions of mortgage backed securities. Now, the primary characteristic of this, well, there are two primary characteristics. One is there is some income coming out of it. It generates interest. But then in terms of the value of the fund on a capital basis, it tends to rise in value when the interest rates on mortgages are rising, which in turn tends to rise when generally interest rates are rising. And then the value of the fund will fall when interest rates are falling and specifically when the interest rates on mortgages are falling. And so this year it's had a dramatic rise as interest rates rose. They peaked, I think, in June and then the thing's been falling since then. So I think it went up 30% and down 10% or something like that in the past seven months here. Now, this fund has only been around since October of 2021, so less than a year. So at this point it's really impossible to say what this thing is likely to perform like on a very long-term basis. If you looked at it between October and December, it didn't really do very much, but then when you did see interest rates rising, it went up substantially in the first half of the year, which was a good thing this year. Now as you've observed, it seems to be relatively uncorrelated with Most other things, it's certainly inversely correlated with ordinary bond funds. And this is a good example in my mind of the kinds of new ETFs investing in alternatives that we simply did not have access to before as do-it-yourself investors. Now the main problem with it, of course, is that it's only been around for less than a year, And so at this point, I can't see putting any money into something like this until I've seen more of it in terms of a performance through an entire economic cycle. So give it a few years to see what it actually does over a period of time like that. I could only ever see it occupying a very small portion of most people's portfolios. I'm talking like 5% or so. but the fact that it's investing in something like mortgage-backed securities does lead me to believe that it could be something stable and useful and uncorrelated in the long term. I think we'll just have to wait and see though. I really do want to see what happens when it goes through a declining rate cycle like we may have coming up here in the next year or so. So we'll just have to watch and wait and see. And thank you for that email. Second off. Second off, we have an email from Paxton and Paxton writes. Hi, Uncle Frank.

Mostly Mary [12:53]

Do defense stocks have a place as a diversification tool in a risk parity portfolio? My thinking is perhaps their earnings are not determined by consumers, but by government spending and world events.

Mostly Uncle Frank [13:09]

Well, this is an example of what you would call a concentration, and you would put this as part of your stock portfolio if you wanted to do something like this. Now let's think about how that would look or what that would look like. First of all, there are a number of defense oriented ETFs because we have ETFs for everything these days. Sweet. The largest one is called ITA and I will link to the Morningstar analysis in the show notes that you can check out. What is most notable about something like this is that it has a very high concentration in just a few things. and in particular, this fund is 21% in Raytheon, 15% in Lockheed Martin, and 7% in Boeing, and that's over 40% of the fund. So you are really talking about a very high concentration in very specific companies. And if you're going to do this right, then you have to go and analyze those companies. specifically to determine that they are reliable in what you want. You will also see in the Morningstar analysis that this fund occupies a mid to large in terms of size of companies and it's a blend fund in terms of value and growth. It's about 80% correlated with something like the Vanguard Total Market Index Fund. So it provides some diversification but not a high degree of diversification like, say, utilities or something like that. But it would be taking the place of part of a total market index fund or something that is a blended version of stuff, if you were to put it in a portfolio. So the question would be, is it better either by performance or by some kind of diversification than a broader based fund, which is more internally diversified? And guess what you would need in order to figure that out for the future? A crystal ball can help you. It can guide you. I think the real problem with this and the real problem with all of these sorts of things is that world events are well known. There are many smart people out there studying them. And so you have to assume that anything that is known or predicted in the near future for world events is already priced into these stocks. So in order to have an advantage, you would have to believe that you have some kind of insight or personal way of predicting something that is different and favorable for these companies that is different from what is already known generally in the world. So in order to have an advantage, you would have to believe that you have some kind of insight or personal way of predicting something that is different and favorable for these companies that is different from what is already known generally in the world. And so if you have that kind of crystal ball or capabilities, then it would make sense to invest in something like this in lieu of some other general kind of stock fund. A really big one here, which is Huge. Now, me personally, I don't have that kind of crystal ball or those capabilities. It's kind of looking at the aura around the ball.

Mostly Voices [16:43]

See the movement of energy around the outside of the ball. So I don't think I would invest in something like this.

Mostly Uncle Frank [16:51]

I would have considered it if it had like a correlation of 0.3 or something. Then it would have been very interesting. But on the other hand, I can't say that it would be wrong to include this. in a portfolio. Wrong? Wrong.

Mostly Voices [17:07]

Right? Wrong.

Mostly Uncle Frank [17:10]

Since these are very large stable companies for the most part, the other ones in there are things like General Dynamics. And unless you think the United States or its military are going away anytime soon, it's probably a fairly safe bet to have some money in those kinds of companies. I myself are more inclined to stick with factor-based funds. that have a longer and more reliable track record than these specialized sector funds. So bold strategy, Cotton. Let's see if it pays off for them. But it's always good to think through these things, as with any investment. And thank you for that email.

Mostly Mary [17:58]

Next off, we have an email from Neil, and Neil writes：hi, Mr. Vasquez. What do you think of the active managed short-term bond fund, JPST? It seems to be a good money market replacement fund for a cash reserve. What do you think? Well, I took a look at JPST, this short-term bond fund.

Mostly Uncle Frank [18:23]

And I didn't see anything special there, just a little higher expenses than other things that are available. The expense ratio for that fund is 0.18, which is not high, but we're talking about a short-term bond fund here. You can get something like VUSB, which is the Vanguard Short-Term Bond Fund with an expense fee of 0.1%. And I think it's got a higher yield right now. It may go out slightly longer in duration. But let me just give you a general rule for thinking about whether it's even worth looking at actively managed funds in a given sector. In general, whenever something is very popular and there's a lot of trading in it, like large cap US stocks or the S&P 500 or things like Treasury bonds or these short-term bond funds of any shape and size, there is usually no real advantage to looking into managed versions of those things. You're better off with cheaper index funds in almost all cases. Where management really matters is when things are getting specialized. They're small cap, they're in emerging markets, they're something that's very unusual. And that's really the only places where you see managed funds seem to have more of an advantage. It's usually just less of a disadvantage, honestly, in terms of overall performance. And in terms of short-term bond funds, they almost all perform the same. And by the same, I mean, ones with the same kinds of duration of bonds in them are going to perform relatively the same because they turn over so much. So you're better off just looking for some low expense thing that fits the duration you're looking for, whether that's one of these ultra short ones or just regular short, something like SHY or BSV. Hopefully this is not occupying too much of a space in your portfolio because These end up being a cash drag over long periods of time. They're not expected to outperform other assets, and so you're holding them as some kind of ballast. And you shouldn't expect the choice of which one of these to affect the overall performance of your portfolio in any meaningful way, so long as the expenses are low. So this fund may very well be better than some of the other things you have been been considering in terms of a money market, but it may not be as good as some other things that are easily available. I would check out VUSB if you're looking in this area. And thank you for that email. Last off. Last off, we have an email from Sue New and Sue New writes. Hi, Frank.

Mostly Mary [21:24]

I know I will be losing the option of lifetime payments in retirement that could exceed my balance amount, but I will be rolling over my pension, a lump sum, instead of leaving it with my former employer for a decade plus. For this type of account, what portfolio would be a good fit to possibly outperform? They do not allow me to see the funds or investment mix, so I assume it's conservative. As mentioned above, I know moving it eliminates the lifetime payments for me, and when I pass, moving to my wife, but I do think having control of the money myself is a lot better than leaving it with an employer I no longer work for. I also know that the balance it accrues to when rolling it over to my IRA will be it. Once the last dollar is spent, the account is tapped out, the negative of not keeping it as a pension. So any portfolio recommendation for a one-and-done situation would be really insightful. Finally, for a bit more information, the balance is $300,000 and I'm thinking of a true one-time lump sum mutual fund buy-in. Is dollar cost averaging something I should consider with this amount? Are ETFs for a traditional IRA something I should consider also instead of mutual funds? Open to any and all feedback. You are awesome. Thanks.

Mostly Uncle Frank [22:49]

All right, a few things here. First, I'm not sure exactly what you have because I don't know what the rules are for this pension that you're describing, and it really does depend on how your employer set it up. And you do need to consult the rules in those documents. I will tell you what is typical or what is ordinary and what I'm familiar with is that an employer will set up some kind of a pension fund that is funded by the employees and they have an interest in that account at a certain amount. And while the employee is still working there, the employer and the manager, it's hired, invest that money in one big pool. And that is typically invested in some kind of relatively conservative 60/40 kind of portfolio, but it could be anything. It's really up to the employer and how the thing is structured. Now, when you leave employment there or retire, you are often given a few different options. And sometimes it's and this is what it sounds like. You're given an option of converting the value you have there into an annuity. And that annuity could either be for your life only or as a joint annuity. for the joint lives of you and your spouse. And then the main alternative to that is that they essentially give you the value of what you've accumulated in there. And then typically what you do with that is you roll it into a traditional IRA. But again, you need to know what the status is of it at the pension as to where it needs to go next because you want to make sure that if you are transferring this out into some kind of account that it goes to the right account. Because if you just take the money in cash, you're going to end up paying horrible taxes and penalties most likely. So you don't want to do that.

Mostly Voices [24:50]

That's not an improvement.

Mostly Uncle Frank [24:54]

Now, I don't think you need to make all of the choices that you think you need to make, given what your email says. And this is why, assuming you can roll this out into a traditional IRA. and I'll just use Fidelity because I did this myself at Fidelity. And so I had something like this and I rolled it into an IRA at Fidelity. And now that it's at Fidelity, I can invest it in whatever I want. And so I've invested it in a bunch of ETFs to go along with the rest of all my assets in one big portfolio. And they are just in there and I can buy and sell them any day I want to. and then withdraw from the account, obeying the rules, of course, which would involve paying taxes on it and paying a penalty if I'm before age 59 and a half. So if you put this money into an IRA like that, you retain complete flexibility over what it's invested in. It's not like you have one choice or one chance to put this in one thing and then it has to stay there forever. That's not how it works. That's not how any of this works.

Mostly Voices [26:00]

Now you could even do this.

Mostly Uncle Frank [26:04]

If you decided in a few years, you know, I really would like that money in an annuity. You can just sell the stuff that's in the IRA and then go find an annuity and buy it in the IRA or roll it into another annuity kind of product. So there isn't any loss of choice here. Just because you don't accept the annuity structure as the employer had set it up as an option for you to take now does not mean you could not create that thing later. So in order to keep the maximum flexibility, if this option is available to you, it probably does make sense to roll that money out of this employer program into a personal traditional IRA at a place like Fidelity where you can buy whatever you want inside the IRA. I would use ETFs instead of mutual funds because they're more efficient. There's no fee trading at a place like Fidelity. You can buy fractional shares there. So there's no use or advantage to using a mutual fund form there in general in the 2020s in the way that investments work today. ETFs are becoming more popular because they are just more efficient things to use, and mutual funds are beginning to go obsolete. And probably in another 10 years, most of them will be obsolete, and the ones that are kept around will be kept around for legacy purposes, or there's some regulation that limits what can be invested in in a particular account, which is still the case in in most 401 s, for example. Okay, now there is a way to evaluate whether the pension payment you're getting is better or worse than an annuity you could buy yourself. And it's simply to go price it at a place like immediateannuities. com and if you are getting $300,000 out, you can go put that amount in there, put the ages of you and your spouse, run a little calculation, and see how much a privately purchased annuity would pay. And then compare that to what your employer is offering and you can tell which one is better, at least from the perspective of pricing an annuity. But as I said, you may not want an annuity at all and you may never want an annuity. So unless you're got your heart set on one, there isn't any reason to buy one now. You can just buy one later. And the older you are, the better the payout ratio is going to be. That is the straight stuff, O Funk Master. Because they are priced mostly on life expectancy. Now finally, assuming you do take it as an IRA, as to what to invest in, you do need to consider that as part of your overall picture. And there's no way of me telling you anything about that without knowing what your annual expenses are, when you plan to retire, what other assets you hold, and many other things. Not going to do it. Wouldn't be prudent at this juncture. Assuming you are still accumulating, you would put it more in an accumulation style portfolio that is mostly or all stock funds. If you are at or near retirement, you would put it in a retirement style portfolio, a risk parity portfolio, if you're following this podcast closely. Yeah, baby, yeah! But you should be doing that in coordination with the rest of your investments. Hopefully all of that helps and thank you for that email. But now I see our signal is beginning to fade. If you have comments or questions for me, please send them to frank@riskparityradio.com that email is frank@riskparityradio.com or you can go to the website www.riskparityradio.com and put your message into the contact form there and I will get it that way. We will pick up again this weekend with our weekly portfolio reviews. of the seven sample portfolios you can find at www.riskparityradio.com and probably answer some more emails. I have people skills.

Mostly Voices [30:36]

I am good at dealing with people. Can't you understand it?

Mostly Uncle Frank [30:40]

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. Thank you once again for tuning in. This is Frank Vasquez with Risk Parity Radio, signing off.

Mostly Voices [31:01]

We must let the economy know that we are capable of respecting it. No more needless spending. The economy is our shepherd. We shall not want.

Mostly Mary [31:19]

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.