Mostly Voices [0:00]

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

Mostly Mary [0:18]

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

Mostly Uncle Frank [0:36]

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

Mostly Voices [1:39]

That's not an improvement. Lighten up, Francis.

Mostly Uncle Frank [1:47]

But now onward to episode 199. Before we get started here today, I just wanted to remind you all that we have a charitable event upcoming on September 10th for the charity that we support with this podcast, the Father McKenna Center. It is called the Walk for McKenna and we are going to walk around near the McKenna Center in downtown Washington, DC and raise some money. And I will link to that in the show notes. So if you are in the area and would like to join, that would be greatly appreciated. And if I know you're there, perhaps we can go out for brunch afterwards.

Mostly Voices [2:25]

Surely you can't be serious. I am serious. And don't call me Shirley.

Mostly Uncle Frank [2:29]

But now let's get to what we do best around here.

Mostly Voices [2:33]

Here I go once again with the email. And...

Mostly Uncle Frank [2:36]

First off, first off, we have an email from Alexi.

Mostly Voices [2:47]

So that's what you call me, you know, that or his dudeness or duder or, you know, Bruce Dickinson if you're not into the whole brevity thing.

Mostly Uncle Frank [2:55]

And the dude writes.

Mostly Mary [2:59]

Hey, Frank, hope this finds you well and you are enjoying your summer. Just wanted to share another good pod with Andrew Beer, the DBMF guy. More detail on their method of reverse engineering the SOC Gen HF Trend Index. Also, some interesting insights on the limits of academic research on factor investing, et cetera.

Mostly Uncle Frank [3:19]

All right, just to orient everyone to what the dude is talking about here. The dude abides. We had first started talking about funds that invest in managed futures back a year and a half ago. If you go back to episodes 55 and 57, In particular, we talked about this fund, DBMF. Now, why would anyone want to invest in managed futures? As a lot of research has shown, it's very well uncorrelated with stocks, bonds, or anything else that you might hold. And over time has a reasonable return. That would convince somebody that would be something you'd want to put some of your money into. The problem with this area is that historically, the kinds of funds and investments that you could put your money into have been just way too expensive. So it really has not been a viable place to invest money for most do-it-yourself investors. However, in the past couple of years, we've seen the advent of a few lower cost ETF structures to invest in this asset class. One of those is this fund, DBMF. It's constructed in an unusual way. They take what is called the Society Generale or SocGen HF Trend Index and use an algorithm to essentially construct an index fund to invest in these managed futures at a lower cost. A couple other ones that have recently come on the market, one is called CTA, which just came out last year. and one is called KMLM, and I am watching all of these things to see how well they perform. They have done what you wanted or expected them to do in this year in particular. They're up an average of about 20% year to date. So to me, this looks like one of those evolving areas. Now, I did listen to this podcast you referenced to by a couple of guys that call themselves the Market Huddle. They talk too much, but this was a very good interview of Andrew Beer, who is the person that constructed DBMF with this algorithm and indexing method. And it was an interesting listen. Another podcast I listened to recently, and it was just at the end, I think it was Top Traders Unplugged, which is run by Dunn Capital, who is an old line managed futures kind of investing firm. And there was a discussion at the end of one of their episodes that I thought was kind of amusing. It was very reminiscent of the way that managed mutual fund people used to talk about index funds, which is, oh, I don't know if that's going to work. How can you trust an algorithm blah blah blah blah blah? Don't be saucy with me, Bernaise. To me, they sounded scared. You can't handle the banana's. Because if these sorts of things do work, it really cuts into their business models because they're the ones that have been charging too much for investing in this sort of thing.

Mostly Voices [6:37]

Always be closing.

Mostly Uncle Frank [6:41]

So the fact that they view this as a threat to their business is a very good sign for us as do it yourself investors who are looking for low cost options for this. Am I right or am I right or am I right? I still do view this as an optional or fringe kind of investment and we'll probably look at it that way until we see these funds around for a number of more years and have gone through a complete economic cycle or more than one economic cycles that we can then analyze better. But I will link to this in the show notes and thank you for bringing it to our attention and your email. Take it easy, dude. Oh yeah. I know that you will.

Mostly Voices [7:22]

Yeah, well, the dude abides. Second off.

Mostly Uncle Frank [7:31]

Second off, we have an email from Brian and Brian writes. Hi, Frank. I really enjoy your podcast.

Mostly Mary [7:38]

Thank you for educating and demonstrating new tools for the DIY investor. I'm seven years from my fat fire goal, at which time I'll be 55.

Mostly Voices [7:46]

Yeah, baby, yeah!

Mostly Mary [7:50]

I'm in the process of transitioning from a 100% stock portfolio to a mix that reduces my risk a bit without sacrificing too much on the return side. I want to keep it simple. What do you think about this mix? 65% total stock market, 15% small cap value, 10% long-term treasury bonds, and 10% gold. Using portfolio charts, I reduced the Ulcer Index significantly, but maintain my total return within 0.2 or 0.3% of a 100% total stock market benchmark. Taxes are not a factor, as nearly all of these assets are in tax-protected accounts. Cheers, Brian.

Mostly Uncle Frank [8:36]

All right, this is an interesting question. Let's just talk about some basic principles that we are applying here to orient the audience. What Brian is doing is transitioning from his accumulation portfolio to his retirement portfolio. And as we've discussed in the past, the goal of an accumulation portfolio is to accumulate as much money as possible and you really don't care about the volatility because you're using having a long time frame to deal with that knowing that you're going to be continually investing more money in dollar cost average through any downturns. Now when you get to your retirement portfolio you're really not trying to maximize that. What you're trying to maximize is your projected safe withdrawal rate which is why you go to a much more diversified portfolio that it's going to have drawdowns that are much less in depth and much less in time, which is just as important. So your accumulation portfolios typically look like 100% equities in low cost index funds and your retirement portfolios typically look like having between 40 and 70% in equities and then the rest of it in things to diversify that portfolio. Now, what you're talking about here is transitioning from a 100% equity portfolio to one that is 80% in stocks or equities and then 20% in other things. Here you've got long-term treasury bonds and gold, which should be fine for that purpose. And I think this should work fine for you. What's really the most important thing to know though is when you have enough, what is your ultimate goal for this portfolio in terms of how much do you think you need based on your projected expenses. And that may become more clear in the next couple of years. But once you actually get to that amount or you're cruising into that amount with little accumulation left required, you can just move to your retirement portfolio and kind of glide in with that. And that will give you more security in terms of just being able to walk away from your primary income whenever you want. But this looks like a good step along that way. It's kind of halfway there. I probably would add more on the small cap value side or on the value side in general to something like this.

Mostly Voices [11:16]

I'll be honest, fellas, it was sounding great, but I could have used a little more cowbell. Because I think that's what you're going to probably want eventually.

Mostly Uncle Frank [11:27]

I'm telling you, fellas, you're gonna want that cowbell. In fact, you might take the stock portion of this and think about, well, what do I want to end up in retirement and make this 80% look like whatever that stock portion in retirement is going to look like because it'll save you some extra headaches when you get there. I got a fever and the only prescription is more cowbell. That being said, if it's all in an IRA, there's no transaction fees or tax issues, so it's more of a preference than a necessity or something. So I think what you're doing sounds just fine.

Mostly Voices [12:09]

Before we're done here, Y'all be wearing gold-plated diapers. And thank you for your email.

Mostly Uncle Frank [12:16]

Next up, we have an email from Ned.

Mostly Voices [12:19]

Needle nose Ned, Ned the head, come on, buddy, Case Western High. Ned Ryerson, I did the whistling belly button trick at the high school talent show. Bing! Ned Ryerson got the shingles real bad senior year, almost didn't graduate. Bing! Again, Ned Ryerson, I dated your sister Mary Pat a couple times till you told me not to anymore. And Ned writes.

Mostly Mary [12:42]

Hello, Frank. I've been listening to your podcast for a year and a half so far, and I must say I'm enjoying it immensely. I'm new to the whole risk parity concept, so excuse me if this is a novice level question. The aggressive 50/50 portfolio has an enormous amount of volatility with it. I'm curious if that volatility would aid in using it as a possible accumulation portfolio where the rebalancing would occur monthly with each new contribution. I did a backtest on Portfolio Visualizer and it did seem to perform well, better than the standard Vanguard 500 Index Fund. I'm curious to your thoughts on the matter. I know these leveraged portfolios are experimental and this may be considered a huge gamble using this. Like I said, new to the whole subject. Thanks, Ned. Cue sound clips of the Three Amigos, Groundhog Day, or Flanders from the Simpsons. Ned Ryerson?

Mostly Uncle Frank [13:40]

Well, first you should know that the name Ned is near and dear to our hearts here. We have a son named Ned. I have a brother named Ned. And so Neds are always welcome here.

Mostly Voices [13:52]

Flanders, you're the devil. It's always the one you least suspect.

Mostly Uncle Frank [13:56]

Now getting to your question, yes we know that it's theoretically possible or advantageous to use leverage in an accumulation phase. And I will link once again to the Ben Felix video about leverage for anybody who's interested in the academic backing for that. There is another interesting article called Buffett's alpha that maybe I could find again, which observes that the real secret to Warren Buffett's success has been using the leverage associated with the insurance company operation he's got going on in Berkshire Hathaway, which effectively gives the fund leverage of about 1.7 to 1. I did not know that. I did not know that. So for us, this can Make for some interesting experiments.

Mostly Voices [14:51]

Please, Lord, grant me the power to psychologically torture them into loving you.

Mostly Uncle Frank [15:01]

Behold, the last in the ass room of Ned's Landers Hell House. As we know, there have been a lot of leveraged funds on the market now since about 2009. that were generally designed for short-term trading, but people have used them for longer-term accumulation. I have a listener, Grant from Waco, who told us in previous episodes that he had rode his way to financial independence from 2011 by investing exclusively or primarily in the 3x leverage fund, UPRO, UPRO. You have a gambling problem. And he rode it all the way through things like March of 2020, which must have been a gut-wrenching roller coaster ride indeed. Well, you have a gambling problem. So I'd have to say it's definitely possible, both in theory and in practice, to use leveraged funds in that way. You could ask yourself a question. Do I feel lucky? Do I feel lucky? Whether it's desirable for most people is another question, but one of the reasons we have these experimental portfolios is to explore these sorts of issues. Now, the experimental portfolios are performing much worse, partially simply because we're taking withdrawals out of them as opposed to adding money to them. If you have a long time frame and are actually dollar cost averaging into them, You will have better results than if you are trying to use them as a drawdown portfolio. Am I right or am I right? Or am I right? Am I right?

Mostly Voices [16:45]

Am I right?

Mostly Uncle Frank [16:49]

And you can run simulations like that on Portfolio Visualizer where you program it to be adding a certain amount every month and see how it performs over that time. And generally dollar cost averaging into something does by itself dampen the volatility of whatever that thing is.

Mostly Voices [17:08]

You are correct, sir, yes.

Mostly Uncle Frank [17:12]

Whereas withdrawing from it can increase the volatility of it.

Mostly Voices [17:16]

That is the straight stuff, O Funkmaster.

Mostly Uncle Frank [17:20]

I'm actually most interested in the newest of our experimental portfolios, that levered golden ratio portfolio. You know, whenever I see an opportunity now, I charge it like a bull.

Mostly Voices [17:31]

Ned, the bull, that's me now.

Mostly Uncle Frank [17:35]

That has a levered ratio of about 1.6 to 1, so it's not terribly excessive. And so in theory, it's going to have the same kind of return characteristics as a 100% stock portfolio with less volatility. And I'll be interested to see how that plays out over a period of years. It's all one big crapshoot, anywho. So far it has not lived up to that billing yet, but it's only been there for a year and a very bad year at that. So certainly within the ballpark of what you might expect in a year like this. You can't handle the gambling problem. So I'm glad you're getting something out of this podcast and thank you for your email. Ned, Ned, Ned, Ned. Incidentally, if you are all looking for particular podcasts, there are a couple ways to search the whole lot of them. One is you can just use the search function that's on the podcast page at the website www.riskparityradio. com, but also if you go there and click on what is called the RSS feed, one of those little symbol boxes, that will take you to a page that in one page has all of the podcasts with all of the show notes in them. which may be easier to search for particular things. These go to 11. So in this case, if you wanted to find those podcasts involving Grant, you could go there and search the word Grant and you would find them. Last off.

Mostly Mary [19:12]

Last off. We have an email from William and William writes. Uncle Frank, first off, I would like to thank you and Mary for putting in the time in your retirement to create such a wonderful podcast. I have listened to every episode, some more than once, and have gained so much knowledge and confidence in my personal investing career. Second off, I just listened to episode 191 and found out something that will make some Vanguard investors a bit more happy. Vanguard now supports fractional shares for ETFs. Unfortunately, this only applies to Vanguard ETFs, but I'm hoping this will extend to any ETF in the future. While making a purchase, you just click dollars instead of shares in the box where you type in the amount. Their mobile app is still way behind the times, but I thought it would pass along their progress. Third off, now to my question. After all the new information I have learned from your podcast and from other sources you have recommended, I have decided I would like to switch out some allocations in the stock portion of my portfolio in my IRA. I am having a hard time grasping when is the right time to make this change. I currently have equal portions in VTI, VO, and VBR. Using the exposures tab at Portfolio Visualizer, I see that I have a lot of overlap and hold almost half in mid-caps, 48% mid-cap, 29% large-cap, and 23% small-cap. My goal is to have a 50% in in a large cap blend, most likely VOO or VTI, and 50% in small cap value, VIoV or AVUV. Since there is really no urgency in making this move, is it better to wait until the portfolio recovers or just make the changes now? I know right now mid cap is down slightly more than large cap and a lot more than small cap, so I'm trying to avoid selling low and buying high into small caps. Thank you so much. Regards, William.

Mostly Uncle Frank [21:17]

Well, that's good to hear about Vanguard. I'm glad they are improving their offerings and coming into the 2020s. I think I've improved on your methods a bit too. And I do expect they will catch up with the other discount brokerages in the next few years here simply because they have to. It's a competitive environment. Which is what we like to see as do-it-yourself investors. Yes! Now getting to your question, you are thinking about transitioning from a portfolio that is equal parts total stock market, mid cap, and small cap value to a portfolio that is more oriented towards both ends, the large cap blend end and the small cap value end. And so long as you don't have any tax implications, I think this is kind of a flip of the coin. Transition point for you. There's no real way of knowing which little group here is going to perform the best in the next few years here because they are actually quite similar. They are both well diversified 100% stock portfolios.

Mostly Voices [22:28]

Crystal Ball can help you. It can guide you.

Mostly Uncle Frank [22:33]

And so the macro allocation principle tells us that they are likely to perform over 90% the same over extended periods of time, and that which one will perform better over shorter periods of time is largely up to chance.

Mostly Voices [22:54]

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

Mostly Uncle Frank [22:58]

So I would probably just do whatever makes you feel the most comfortable psychologically, which Maybe a shift now, maybe a shift later, or maybe a partial shift now and a partial shift later.

Mostly Voices [23:10]

Of course, people do go both ways.

Mostly Uncle Frank [23:14]

Kind of depends on what your crystal ball says. As you can see, I've got several here.

Mostly Voices [23:19]

A really big one here, which is huge.

Mostly Uncle Frank [23:26]

But you're gonna be fine here, whichever way you choose to go. 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'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. Mmmkay? Thank you once again for tuning in. This is Frank Vasquez with Risk Parity Radio signing off.

Mostly Mary [24:25]

Hi Lucky. Hi Dusty. Good night Ned. Good night Ned. Good night Ned. 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.