Mostly Voices [0:00]

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

Mostly Mary [0:19]

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

Mostly Uncle Frank [0:37]

Thank you, Mary, and welcome to Risk Parity Radio. If you are new here and wonder what we are talking about, you may wish to go back and listen to some of the foundational episodes for this program. And those are episodes 1-3-5-7-8. 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 198. Today on Risk Parity Radio, it is time for our weekly portfolio reviews of the seven sample portfolios you can find at www.riskparityradio.com on the portfolios page.

Mostly Voices [2:02]

It's time for the grand unveiling of money! But before we get to that unveiling, I'm intrigued by this, how you say, emails. And?

Mostly Uncle Frank [2:15]

First off. First off, we have an email from Karen. I believe this is a different Karen than the Karen we usually hear from. Karen, they were in everything.

Mostly Mary [2:27]

That's all the money that we had, Karen. I was dependent on that. Why did you do that? And Karen writes. Hi, Frank. In a recent episode, you said that China might never surpass the US in terms of military power. I'm not so sure of that. Are you following the latest achievements they made in hypersonic missiles that the U.S. doesn't even have? Merry Merry, why you buggin'? Also, the recent development of the Poseidon-like nuclear superweapon. Its main job is to strike at coastal installations with little to no warning. You had only one job. It reportedly has an especially dirty nuclear warhead. which means it would not only cause immediate damage, but would also contaminate the area with radiation and impede any continued operations or repairs. Some believe Poseidon would detonate off the coast near large naval installations and/or major population centers and send a wall of irradiated water inland, swamping and contaminating large areas with radioactivity. Its nuclear propulsion and other design elements would allow it to be launched from thousands of miles away and potentially loiter for long periods on standby before prosecuting an attack or being recalled. Crazy world we live in these days. Tides are turning, unfortunately. Let's beware.

Mostly Uncle Frank [4:01]

Well, it appears we are venturing far afield these days. Real wrath of God type stuff.

Mostly Voices [4:09]

Fire and brimstone coming down from the skies. Rivers and seas boiling. 40 years of darkness, earthquakes, volcanoes, the dead rising from the grave. Human sacrifice, dogs and cats living together, mass hysteria. Let me put this in context before I answer your email.

Mostly Uncle Frank [4:25]

This was in the context of discussing whether the Chinese Renminbi or Yuan would overtake the United States as the world's reserve currency and when that would be likely to occur if it did occur. And as many of you know and have read, Ray Dalio, the hedge fund manager, has written a book about geopolitics, doing research for the last 500 years or more about how one power overtakes another power. historically. And one of the things he observed was that there was a series of things that happened and that seemed to occur in the same sequence so that a power would start by improving technology and education, eventually overtake the other power in military power, and then one of the last things that would occur would be the change or shift in the world's reserve currency. based on the rise of the new power. So it's the last event in the sequence, or one of the last events in the sequence. And so historically he observed that Great Britain overtook the Netherlands in naval power going back to the 17th and 18th centuries, and then the pound became the world's reserve currency after that. And then in this century, or the 20th century, the United States overtook Great Britain as the dominant naval power of the world. And it was around that point in time, the end of World War II, when the dollar became the world's reserve currency. That is the straight stuff, O' Funkmaster.

Mostly Voices [6:04]

And my observation as to China and the United States is that China

Mostly Uncle Frank [6:08]

is nowhere near overtaking the United States in terms of being the world's dominant military power, and particularly the dominant naval power. United States has bases all over the world and can influence any theater of the world. So in order for China to rise to that level, you would want to see it have naval bases in places like El Salvador and Vancouver, Canada. And then you could say it was dominating the world if it had naval bases all over the world. And until you saw that happen, it was highly unlikely that China's currency would overtake the dollar as the world's reserve currency, at least according to the very analysis that Dalio laid out. My point was that his conclusions at the end of the book did not follow the analysis and the data that he had actually uncovered. There's a mismatch there. Now getting to this email, no, I do not follow weapons systems, either Chinese ones, American ones, or anybody else's weapons weapon systems. That being said, this is a prime example what you've done here of what Danny Kahneman called system one thinking as opposed to system two thinking. And what it gets to is a cognitive bias called the possibility effect. Now the possibility effect confuses possibility with probability. So just saying something could happen does not mean it's likely to happen. and whether China develops a particular weapon system does not automatically make it the world's dominant power and the Chinese currency, the reserve currency of the world. That's a big non sequitur with too many holes or gaps in it to see how this possibility results in China's currency becoming the world's reserve currency. But this is actually a repeated human failing when it comes to analyzing markets. You are correct, sir, yes. And in particular, you see it a lot recently with oil bulls or with gold bulls in particular, people that have these stories in their head that, okay, I believe this sequence of events is going to occur and therefore we're going to have $200 oil next year or gold is going to be $5,000 announced next year or some other grandiose prediction Risk Parity Radio, Frank Vasquez, risk parity, risk, parity, Frank, Vasquez in the audio. And that is the possibility effect at work. Don't be saucy with me, Bernaise. Also related to what's called the narrative fallacy. If I can tell a dramatic story about something, it makes it more likely. That's just not true. So as do-it-yourself investors, we need to discount and basically ignore these sorts of stories. Forget about it. If we're going to be good investors, we're not just following dramatic storylines. I was listening to an interview a couple of months ago about somebody who had been in the financial newsletter business, which still exists but used to be way more popular before the internet, people writing up these newsletters about their forecast for some given markets or something like that. And what he learned by being in that business that you don't sell newsletters by trying to be actually right on your predictions. because it's too hard and you're probably going to get it wrong. The best way to sell newsletters is actually to sell a storyline or big fat problem in the world that is evolving and then make vague predictions off of that.

Mostly Voices [10:15]

A crystal ball can help you. It can guide you.

Mostly Uncle Frank [10:18]

Because then you can always just not be right today and be right someday.

Mostly Voices [10:23]

It's a trap!

Mostly Uncle Frank [10:27]

And that made a lot of sense to me because that's the way the human mind works. And also the kinds of people that are buying those things are always looking for shortcuts and magic crystal balls. Truth is, they're morons.

Mostly Voices [10:39]

But now I know we've spent far too long on this topic for this

Mostly Uncle Frank [10:42]

kind of podcast. Hey, Karen, will you grow up? Stop!

Mostly Voices [10:46]

I'm still gonna go out! But thank you for that email. Jeremy, if we stay around here, we're dead. That's what happens when you go away. I've told you that. We're on our own. Forget everybody else. Second off. Second off, we have an email from Adam.

Mostly Mary [11:01]

And Adam writes. Hi, I am a relative newbie. However, I was curious as to your thoughts on how risk parity strategy investing is pertinent to someone younger in their accumulation phase. I understand that by limiting the volatility, you can sometimes improve your overall return, but for someone interested in an aggressive investment strategy over the long term, do risk parity strategies hold any value? For examples, for one small bond portion, does holding long-term Treasuries serve as the best option? I have a hunch that the negative correlation may prove better as a ballast to someone's heavy equity position, But I have no data to back this up. Thank you, Adam.

Mostly Uncle Frank [11:48]

Interesting email, Adam. And this really gets to a fundamental misunderstanding that amateur investors have about diversification. You say in your email, I understand that by limiting the volatility, you can sometimes improve your overall return. That's just not true, actually. Wrong. Diversification and reducing volatility Does not increase returns. It does not increase returns. It's not supposed to.

Mostly Voices [12:15]

That's really not what I do.

Mostly Uncle Frank [12:19]

If it did, you would move all your money into short-term bonds. Your portfolio would be not very volatile at all. Wouldn't have very good returns either. Forget about it. The real question here is what are you trying to maximize? And when you are in an accumulation phase, you are trying to maximize returns. when you are decumulating or living on your assets, you are not actually trying to maximize the return. What you're trying to maximize is your projected safe withdrawal rate. And that gets directly to these issues of volatility and diversification. Because you care more about the risk reward ratios and how the portfolio is going to perform how deep the drawdowns are going to be and how long the drawdowns are going to be. You really don't care about that much in the accumulation phase. You don't care about volatility that much because you're just putting money into the pot and watching it grow. And if it goes down by 50% next year and you're not going to touch it for another 20 years, you're going to be happy about that because you're just buying more of something at a lower price. So the question becomes, what are you trying to optimize? And in your accumulation phase, you are trying to optimize your overall returns over a long period of time. Fire, fire, fire, fire, fire. And so if you are a buy and hold investor investing for accumulation, you don't need lots of asset classes. We already know historically which is the best buy and hold asset class, and it's the stock market. And if you hold between one and four broad-based index funds, you're going to cover that market. The only way to improve on that would be to have a concentration that your crystal ball says is going to be a concentration that outperforms the market in the next 10 or 20 years.

Mostly Voices [14:19]

And it's through the candle that you will see the images into the crystal.

Mostly Uncle Frank [14:27]

And then the other way of improving performance would be to take leverage. You have a gambling problem. And there is a nice video on that from Ben Felix that I'll link to again in the show notes with the academic backing for those ideas. So I would say you do not need a bond portion at all in your accumulation phase, especially if you're decades away from using the money. And whether it's in one kind of bond or another is going to be largely irrelevant in terms of how the whole thing performs. I mean, if you're talking about some 10% allocation to bonds. It is true that longer duration bonds should outperform shorter duration bonds over any lengthy period of time simply because you're taking more risk and should get more reward out of those. But that's just a basic characteristic of bonds, not of diversification or anything like that. The main reason you would not hold an all stock portfolio in your accumulation phase has largely to do with psychology and then timing as you get close to retirement. The psychology of it is that if you can't sleep at night because you feel overexposed to the stock market, You do not want to be in a situation where the stock market goes down and you bail or change your strategy. So if you're going to go with a 100% stock portfolio, you have to be committed to holding that through a downturn with the idea that eventually it will go back up again and you're going to be investing in dollar cost averaging through this trough in the meantime. Groovy, baby. If you don't feel you can have that conviction, then it is better to not have a 100% equity portfolio and to have bonds or something else in there to soften the downturns and to prevent you from changing your strategy midstream. So bold strategy, cotton. Let's see if it pays off for them. And then as you get closer to retirement and planning to use the money, as I've said many times, once you've won the game, you can stop playing, you can take some of your chips off the table, but in order to do that, you have to figure out what your annual expenses are and what is enough for you. So to answer the first question you asked, I don't think these kinds of strategies are that pertinent to somebody in their accumulation phase, especially if it's a long ways away, or they're just getting started investing. If you want a very simple portfolio that tends to outperform the S&P 500 over decades, make it half small cap value and half large cap growth, and then contribute to whatever is low. And that will work just fine, just like many other groupings of all stock portfolios. They're all going to perform About 90% plus the same if they are diversified over large sections of the market. That is the macro allocation principle from Jack Bogle's Common Sense Investing chapters 18 and 19, if you want to read those. Let me put it this way. Have you ever heard of Plato, Aristotle, Socrates? Yes.

Mostly Voices [17:49]

Morons.

Mostly Uncle Frank [17:52]

Or I should say the macro allocation principle is a corollary of the information you'll find in those chapters. And thank you for that email. Always good to get back to some first principles.

Mostly Voices [18:05]

Bow to your sensei. Bow to your sensei. Last off.

Mostly Uncle Frank [18:13]

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

Mostly Mary [18:17]

Thanks for all the help you provide to DIY investors. The best, Jerry. The best.

Mostly Uncle Frank [18:39]

Is there a good resource for equivalent funds for tax loss harvesting for risk parity portfolios? If not, do you have any suggestions for replacing gold and long-term treasuries for tax loss harvesting purposes? Well, no, I'm not aware of any one source for identifying funds for tax loss harvesting purposes. If I were to look from scratch, I would probably go to the ETF database. I will link to that in the show notes. and you can sort all the ETFs by whatever they are. So you can sort all the long-term bond ETFs and you'll see them all there. All the gold ETFs, you'll see them all there, and so on and so forth. And that will narrow your list of things to choose from. But talking specifically about long-term treasuries and gold, long-term treasuries are relatively easy. I mean your basic long-term treasury funds are TLT, VGLT, which is a Vanguard version, or SCHQ, which is a Schwab version. I probably would not swap those out for each other because they are essentially based on the same indexes, and I don't know whether that would qualify for tax loss harvesting. I've never tried it. But here's a few things that seem to work fine. One is a relatively new fund called TYA, which is actually a leveraged intermediate treasury bond fund. So it's slightly different, but it is designed to have the same risk reward characteristics as TLT. So you could certainly use that at least for 30 days. It does have some tracking error. Sometimes it performs better and sometimes it performs worse than TLT. Another option would be to use an extended duration fund and just hold less of it. And those funds are ZROZ, EDV, and GOVZ. Those are about 1.5 times as potent as TLT. So if you sold your long-term treasury bond fund and bought two-thirds of one of these extended duration funds, that would get you pretty close. You may not want to hold that long term. Maybe you just hold it for 30 days. And then you could also use the 3x leveraged bond fund TMF. But then again, I would probably do that as a short term holding and you need to hold one third of your ordinary holding in the long term treasury bond fund. Now, as for gold, like, honestly, I don't have much occasion to tax loss harvest gold funds. I'm usually just selling them when they're the best performer as they were earlier this year. One fund you might use for that, at least one that claims to be significantly different from the other gold ETFs, is called PHS, P-H-S, and I will link to their website. I am not giving any tax advice here because the rules on this are very vague and there is no way of definitively saying that something can tax loss harvest for another thing. A little trick you might want to use with your brokerage. Most brokerages will identify wash sales when you violated the tax loss harvesting rules. And so you can do a little test since we have no fee trading and fractional shares. You can sell a little piece of something and buy a little piece of something else and see whether it triggers the wash sale rules according to your brokerage. and that may inform you as to whether something is appropriate for tax loss harvesting or not, because that is how it's going to be reported on your 1099s to the IRS. I guess that other form is an 8849, although don't quote me on that. So while there are no definitive resources that I'm aware of, there are many ways to skin this tax loss harvesting cat. And thank you for your email. Now we are going to do something extremely fun. And the something extremely fun thing that we're going to do right now is our weekly portfolio reviews of the seven sample portfolios you can find at www.riskparityradio.com. on the portfolios page. And it was pretty much a good week all around. We just look at the markets themselves. The S&P 500 was up 3.26% for the week. The Nasdaq was up 3.08% for the week. Gold was also up. I love gold.

Mostly Voices [23:13]

Gold was up 1.37% for the week.

Mostly Uncle Frank [23:18]

Bonds were the only loser last week. The long-term treasury bond fund TLT was down 0.79% for the week. Do you expect me to talk? No, Mr.

Mostly Voices [23:28]

Bond, I expect you to die.

Mostly Uncle Frank [23:32]

REITs were one of the big winners. Our tracking fund, R E E T was up 4.41% for the week. Commodities represented by the fund, P D B C were the big winner. They were up 5.19% for the week. And preferred shares represented by the fund P F F We're up 0.43% for the week. Looking at these sample portfolios, they all made modest improvements.

Mostly Voices [23:59]

Oh sure, I think I've improved on your methods a bit too. First one is this All Seasons Portfolio, a reference portfolio.

Mostly Uncle Frank [24:06]

It's only 30% in stocks in the Total Stock Market Fund, VTI, and it's got 55% in treasury bonds divided into Intermediate and long term with more on the long term side and the remaining 15% is divided into gold and commodities, GLDM and PDVC. It was up 1.27% for the week. It is down 11.31% year to date and is up 0.82% since inception in July 2020. It is still out there campaigning for a recession because this portfolio tends to perform or outperform during recessions due to its high bond component. But moving to our three bread and butter portfolios that are more similar to a 60/40 portfolio. The first one is a golden butterfly portfolio. It is 40% in stocks divided into a total stock market fund and a small cap value fund. 40% in bonds divided into short and long. Treasury bonds, that is, and the remaining 20% in gold, GLDM. It was up 1.81% for the week. It is down 7.81% year to date, our best performer year to date, and is up 14.38% since inception in July 2020. The next portfolio is our Golden Ratio portfolio. This one is 42% in stocks, 26% in long-term Treasury bonds, 16% in gold and 10% in REITs and then 6% in cash. It was up 1.92% for the week. It is down 10.95% year to date and is up 12.77% since inception in July 2020. And the last of these three, the Risk Parity Ultimate, I will not go through all 15 funds in this. It's got everything in the kitchen sink in it. It was up 2.14% for the week. It is down 14.09% year to date. It is up 8.36% since inception in July 2020. And now moving to these experimental portfolios that involve leveraged funds in them.

Mostly Voices [26:23]

Well, you have a gambling problem.

Mostly Uncle Frank [26:26]

Still having a relatively hideous year.

Mostly Voices [26:30]

What happened to your face? It looks like an old catcher's mitt.

Mostly Uncle Frank [26:34]

First one is the Accelerated Permanent Portfolio. This one is 27.5% in a leveraged bond fund, TMF, 25% in a leveraged stock fund, UPRO, and it's also got 25% in a preferred shares fund, PFF, and 22.5% in gold, GLDM. It was up 1.84% for the week. It is still down 26.56% year to date. and is down 0.88% since inception in July 2020. Moving to our next one, the aggressive 5050. This is the most leveraged and least diversified of these portfolios.

Mostly Voices [27:13]

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

Mostly Uncle Frank [27:21]

It has 33% in a leveraged stock fund, UPRO, 33% in the leveraged bond fund, TMF, and the remaining third is divided into the Preferred Shares Fund, PFF, and Intermediate Treasury Bonds, VGIT. It was up 1.98% for the week. It is still down 33.55% year to date and is down 3.54% since inception in July 2020. Those two portfolios tend to be very volatile. You can't handle the gambling problem. But now moving to our last one, the levered golden ratio, which has only been around for about a year. This one is 35% in a composite S&P 500 and treasury bond fund called NTSX. Then it's got 35%, I'm sorry, 25% in gold, GLDM, 15% in a REIT, O, Realty Income Corp, 10% each in a leveraged Bond fund TMF and a leveraged stock fund TNA, which is small cap, and then the remaining 5% is divided into a volatility fund VIXM and a Bitcoin fund GBTC. It was a big winner last week. It was up 3.17% for the week. It was down 13.77% year to date and is down 9.1% since inception in July 2021. I think it's really benefiting from that levered small cap exposure, which seems to be performing quite well these days and was up over 6% just on Friday. But all in all, it was another positive week and hopefully that'll continue. It's funny listening to the talking heads out there in punditry land Some of them seem to be getting kind of angry that the stock market hasn't rolled over again. I guess that's what they were predicting. You can't handle the crystal ball. But that's why we are not in the prediction business. I see nothing. I know nothing. But now I see our signal is beginning to fade. For the next month we will be promoting an event for our charity, the Father McKenna Center. which serves homeless and hungry people in Washington, DC. There is an event on September 10th that is called the Walk for McKenna that Mary and I will be doing with a few hundred other people. If you are in the DC area on September 10th and would like to join us, you would be most welcome. It's a $40 donation fee. I will link to it in the show notes. And if you let me know you're there, Perhaps after the walk we can go have a little brunch somewhere or something. Yeah, baby, yeah! And maybe that would be fun too. Surely you can't be serious. I am serious. And don't call me Shirley. 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, a review. That would be great. M'kay? Thank you once again for tuning in. This is Frank Vasquez with Risk Parity Radio. Signing off.

Mostly Voices [31:01]

Do you know why Jeannie's husband went to the can? Because of Jeannie, because he wanted to get away from her, that's why. The city cops say five. Your counsel says five. The answer is not five.

Mostly Mary [31:16]

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.