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 have just stumbled in here, you will find that this podcast is kind of like a dive bar of personal finance and do-it-yourself investing.

Mostly Voices [0:53]

Expect the unexpected. It's a relatively small place.

Mostly Uncle Frank [0:57]

It's just me and Mary in here. And we only have a few mismatched bar stools and some easy chairs. We have no sponsors, we have no guests, and we have no expansion plans. I don't think I'd like another job. What we do have is a little free library of updated and unconflicted information for do-it-yourself investors.

Mostly Voices [1:25]

Now who's up for a trip to the library tomorrow?

Mostly Uncle Frank [1:29]

There are basically two kinds of people that like to hang out in this little dive bar.

Mostly Voices [1:33]

You see in this world there's two kinds of people my friend.

Mostly Uncle Frank [1:37]

The smaller group are those who actually think the host is funny regardless of the content of the podcast. Funny how, how am I funny? These include friends and family, and a number of people named Abby. Abby someone. Abby who? Abby normal. Abby normal. The larger group includes a number of highly successful do-it-yourself investors, many of whom have accumulated multimillion dollar portfolios over a period of years. The best Jerry, the best. And they are here to share information and to gather information to help them continue managing their portfolios as they go forward, particularly as they get to their distribution or decumulation phases of their financial life.

Mostly Voices [2:39]

What we do is if we need that extra push over the cliff, you know what we do? Put it up to 11. Exactly.

Mostly Uncle Frank [2:44]

But whomever you are, you are welcome here.

Mostly Voices [2:48]

I have a feeling we're not in Kansas anymore.

Mostly Uncle Frank [2:54]

So please enjoy our mostly cold beer served in cans and our coffee served in old chipped and cracked mugs, along with what our little free library has to offer.

Mostly Voices [3:13]

But now onward to episode 215

Mostly Uncle Frank [3:17]

of Risk Parity Radio. Mary and I are back from our little vacation. We went up to Boston and to Maine, to the Acadia National Park, saw some other things, some roadside attractions, as well as watched two of our boys row in the head of the Charles regatta in Boston.

Mostly Voices [3:40]

Top drawer, really top drawer.

Mostly Uncle Frank [3:43]

But now I see I'm almost a full two months behind on the emails, so we better get right to those.

Mostly Voices [3:48]

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

Mostly Uncle Frank [3:56]

And first off, we have an email from Peter. Could I come home and think that I've been fishing all day or. Something. That's really not what I do, Peter. However, the good news is I think I can help you. And Peter writes.

Mostly Mary [4:16]

Hi, Frank. Thank you so much for taking the time to answer my question in episode 195 in such a thoughtful and concise manner. Your research teachings, advice, knowledge, skill set, and expertise in do-it-yourself portfolio construction is truly changing people's lives. Listening to your podcast is definitely changing my life and I truly thank you for sharing your war chest of knowledge and research with us. Forever grateful for everything you are doing. Sincerely, Peter.

Mostly Uncle Frank [4:49]

Well Peter, that's a very nice comment and thank you very much for it. The best Jerry, the best. It is very gratifying to be able to answer people's questions and provide useful information in an area where much of the information is often very murky and conflicted.

Mostly Voices [5:10]

Am I right or am I right or am I right? Right, right, right.

Mostly Uncle Frank [5:14]

But that's all part of our business model here at Risk Parity Radio.

Mostly Voices [5:17]

I got this inkling, I got this idea for a business model. I just want to run it past you. Here's how it would work. You get a bunch of people around the world who are doing highly skilled work but they're willing to do it for free and volunteer their time 20, sometimes 30 hours a week. Oh, but I'm not done. And then what they create, they give it away rather than sell it. It's going to be huge.

Mostly Uncle Frank [5:43]

And now if you're looking for additional information in a blog or written format, I invite you all to check out Risk Parity Chronicles. which is a website created by one of our listeners, Justin, and he has a nice resource page with lots of things that we talk about here. Because as we know, the host here is of limited capacity in terms of his desire to do much work.

Mostly Voices [6:12]

Well, you haven't got the knack of being idly rich. You say you should do like me, just snooze and dream. Dream and snooze. The pleasures are unlimited.

Mostly Uncle Frank [6:21]

But I'm glad you're enjoying the podcast and thank you for that email.

Mostly Mary [6:31]

Second off, and now here's an email about things that are not going to happen.

Mostly Uncle Frank [6:35]

Second off, we have an email from David.

Mostly Mary [6:39]

And David writes, I like your show, but there are so many pop culture sound bites inserted that it disrupts the flow to the point of annoyance. Three per show would be good.

Mostly Uncle Frank [6:51]

Well, I hate to disappoint you, David. Yes, this happens to be our most controversial topic on Risk Parity Radio. The quantity and quality of the sound bites. Shirley, you can't be serious. I am serious. And don't call me Shirley. But I have to tell you that a good number of my audience and some of its most important members pretty much only listen to this podcast Because of the sound bites and attempts at humor. It's okay, Charlie. I got an angle. And those include our children, our adult children.

Mostly Voices [7:26]

Why, what have children ever done for me?

Mostly Uncle Frank [7:29]

Because I found that the best way to get them to listen to old dad is to remind them of things we used to watch or listen to when they were growing up.

Mostly Voices [7:44]

What's that supposed to be? Some kind of stupid secret code? I can't tell you because you're not a member of the club. Oh, yeah? What does it take to be a member? Besides being a moron, huh?

Mostly Uncle Frank [7:57]

Including, for example, our new holiday tradition since they've gotten old enough to watch the cartoon movie Heavy Metal at Christmas time.

Mostly Voices [8:08]

I told you, Charlie, I got an angle.

Mostly Uncle Frank [8:12]

after Mary goes to bed, of course.

Mostly Voices [8:24]

So while I fully appreciate that my personality and sense of humor are annoying to many people, you are talking about the nonsensical ravings of a lunatic mind.

Mostly Uncle Frank [8:32]

I would not expect things here to change very much. Not gonna do it.

Mostly Voices [8:35]

Wouldn't be prudent at this juncture.

Mostly Uncle Frank [8:39]

So long as I am catching ears of my most important audience members. Shut up, Charlie.

Mostly Voices [8:46]

I got an angle.

Mostly Uncle Frank [8:50]

But I do thank you for your email, regardless. Excellent. You are worthy to serve me.

Mostly Voices [8:56]

Give me the girl or die. Well, if I have a choice, I'll take death. So be it. You'll have to do better than that. I could see why they made this guy their leader.

Mostly Uncle Frank [9:15]

Next off, we have two emails from my contact info.

Mostly Voices [9:22]

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

Mostly Uncle Frank [9:26]

He's not only doing one, he's doing two. But we'll do them together.

Mostly Mary [9:31]

And in his first email, my contact info rights. Perhaps ESG funds are an example of soft conflict of interest. Below are two relevant articles. Thank you. And in his second email, my contact info writes：Frank, in a recent episode, a listener asked about decomposing value and growth. Over long periods, the returns based on Vanguard data have converged. Bogle spoke about this in at least one interview questioning the value of investing in separate growth and value funds. The data, see below, continue to support his view that total market fund over longer periods assumes factor return differences.

Mostly Uncle Frank [10:16]

Well, I honestly don't have too much to say about ESG funds or ESG investing. The concept has been around for quite a long time. I recall back in my law school days I sat on a advisory board for the university who was trying to get the university to get out of investments of their endowment in South Africa, which was still under apartheid at the time. So the idea of avoiding certain types of businesses or places is not new, but generally had only been something that institutions were interested in until more recently. But as with anything that becomes popular, once the financial services industry gets a hold of it, it turns into some gigantic series of marketing schemes and funds and all sorts of other shenanigans. Because only one thing counts in this life.

Mostly Voices [11:14]

Get them to sign on the line which is dotted.

Mostly Uncle Frank [11:18]

I will include your links in the show notes. One of them is from Azzwat de Modoran. the well-respected NYU professor. And I heard a recent interview of him that kind of captures what I feel about this, is that if you're going to make these decisions, you ought to do them as an individual and not rely on somebody else's fund to pick things for you to invest in. And his example was that His wife would not let him invest in anything that involved Monsanto, the company Monsanto, which his wife considered to be evil incarnate, according to him. Slender, you're the devil.

Mostly Voices [12:05]

It's always the one you least suspect. And so they've structured their investments to avoid that.

Mostly Uncle Frank [12:13]

Now, that used to be only be practicable on an institutional level. where somebody was investing in individual companies for the most part on behalf of an institution. But we can do that ourselves now with no fee trading in fractional shares. So if it is of interest to you, you could take something like a S&P 500 fund, go through say the first 100 companies, take out the ones you don't want for whatever reason, add other ones you do want and invest in those companies individually. It's going to be more work for you, obviously, but if it's important to you, it's probably worth doing, and it's probably a better option than taking some off-the-shelf product that is probably charging you too much and doesn't match your viewpoints anyway. But I have to say, I haven't spent a lot of time studying any of these types of funds. I am aware that there is one called the Parnassus Endeavor Fund, ticker symbol PARWX, that has ESG attributes and has actually outperformed the big index funds. It's basically a large cap value or large cap blend fund of companies like Merck and Microsoft. But I'd be more inclined to take something like that, not pay the fee for it, and then just invest individually in the components of something like that. and rebalance it every once in a while, which I think basically is what Ozwat de Motorin was saying in that interview where he was talking about Monsanto. But now as to your second email, well, I couldn't get this link to work that you gave me.

Mostly Voices [13:59]

A disgrace to you, me, and the entire gym state.

Mostly Uncle Frank [14:03]

But I don't think that it really gets at the issue here as to why you would want to have differentiated funds, say a small cap value and a large cap growth, as opposed to just having one fund with everything. And that is the diversification issue and your ability to rebalance those funds over time. Because that's really why having something like a small cap value fund paired up with a large cap growth or total market or S&P 500 fund works so well. in terms of a drawdown portfolio, because it is reducing that overall volatility. These types of factors perform differently well at different times. This past year is a very good example of that concept in action, because what we've seen is these high flying fang stocks and large cap growth stocks have stumbled and not done very well this year. dragging down the overall market, whereas some parts of the market, especially large cap value and some small cap value, energy stocks and financials have all done relatively well. Most of those types of things have lost a lot less money and some of them have actually gained during this year. In my own personal portfolio, I have as part of my value selection, for example, a bunch of property and casualty insurance companies, which I pulled out of the fund, KBWP, if you want to look at the fund. I'd rather not own the fund, I'd rather just own the individual companies. But anyway, that fund is up seven or eight percent year to date in a year like this.

Mostly Voices [15:49]

And is one of the reasons you see the Dow going up 14%

Mostly Uncle Frank [15:53]

last month, which was the best performance since 1976 for a month. And I don't think it's any accident that that period in time, 1976, was similar in terms of inflation and other issues affecting markets. So while I would expect the returns to be relatively similar over long periods of time, even though people argue about how much extra you might get out of a small cap value fund. Even if the returns were exactly the same, you would still want to hold them as differentiated funds for the diversification and the lowering of volatility over time, knowing that one of those sectors is going to outperform the other in any given time period, but you're never going to be quite sure which one will be the best performer. in any given year, like the year we're having right now. So I think that Bogle was just wrong in that assertion that having just one fund is better than separating out growth and value funds. Forget about it. And any number of back tests will confirm that and does confirm that. I'll go ahead and link to in the show notes, a simple back test of a half large cap growth, half small cap value selection. against a total market fund since 1970, and you'll see there's really no contest as to which is better. So this is not something where we tell stories and look at total returns. This is something where we actually need to look at actual data, do the analysis, and draw the conclusions from that. It's not a point of opinion. Do you think anybody wants a roundhouse kick to the face while I'm wearing these bad boys? Because small cap value does not care whether you are a fan of small cap value or not a fan of small cap value.

Mostly Voices [17:49]

I'm telling you fellas, you're gonna want that cowbell.

Mostly Uncle Frank [17:52]

The data shows that you are better off having a few differentiated funds as opposed to just having one total market fund.

Mostly Voices [18:00]

Before we're done here, y'all be wearing gold-plated diapers.

Mostly Uncle Frank [18:06]

And so in order to think otherwise, you would have to have a crystal ball that would tell you that the future is going to be much different than the past has been, at least the past 50 or 100 years.

Mostly Voices [18:22]

Now, the crystal ball has been used since ancient times. It's used for scrying, healing, and meditation.

Mostly Uncle Frank [18:28]

But I think that's enough on that. And thank you for that email. Last off. Last off, we have an email from Mark, and Mark writes, hello, Mary.

Mostly Mary [18:44]

Hope all is well, and thank you in advance for reading my very long email. Mary, Mary, why you bargain?

Mostly Voices [18:49]

Frank, I have come across a very interesting ETF

Mostly Mary [18:53]

that is worthy of your critical thinking skills magic, J-E-P-I. I know you hate mixing responsibilities in ETFs, but I thought it would be fun to exercise your awesome skills with the following challenge. I assert that we can follow the simplicity principle and replace four funds and three responsibilities in your risk parity ultimate sample portfolio with this one ETF, and it will increase portfolio returns without decreasing useful diversification or the safe withdrawal rate of the portfolio. Here are my replacement candidates and arguments to back up this claim. PFF is the first to go. JPEI has both a much higher yield and lower expense ratio than PFF. The correlations to the market are extremely similar, 0.87 versus 0.89, with PFF having the slight edge here. But in addition to the higher income, the biggest advantage to JPEI over PFF is that most of JEPi's income returns aren't extracting value from the underlying companies in the ETF like traditional dividend payments do. Instead, the income comes from JEPi's strategy of using ELNs and selling covered calls, so most of the income is coming from other traders in the market. In fact, JEPi is able to outperform PFF on an income basis even though the selection methodology for the companies in this fund does not prioritize high dividends, but instead low volatility. VIXM is the next to go. One of the very positive consequences of JEPi's income strategy is that the dividends go up significantly when you need them the most. This is because the option prices go up when the market volatility goes up and this fund sells options. so monthly income from the fund is highest when the market is turbulent. It's true that VIXM has far more correlation diversification than JEPi does, and it also has a much more leveraged effect than JEPi during a crash. But I would argue that JEPi will actually provide the more useful volatility hedge because this particular portfolio, Risk Parity Ultimate, is only rebalanced annually and has no rebalancing bands. So while it is true that VIXM is going to be very high in a market crash, if the market then stabilized at that lower level and calmed down before annual rebalancing, VIXM is going to come right back down and all of your temporary gains will disappear. With the policies of this portfolio, the only way it produces returns that can actually be used to bolster the rest of your portfolio is if there happens to be a high volatility market crash during an annual rebalancing period by coincidence. JEPi, on the other hand, is dumping increased income returns into your portfolio as cash every month during volatile markets, and that can be used to buy low or to live off of while the rest of your portfolio is tanking. And importantly, JEPi also has a positive expected long-term return, which makes it a much better candidate for a long-term buy and hold than VIXM. USMV and SPLV are the last to go. The core holdings of JPEPI are a low volatility fund, as I mentioned above. And in fact, JPEPI and USMV correlations to the market are identical. SPLV is significantly better at 0.79 versus 0.89 for the other two. If JPEPI was only a low volatility fund without the income generation component, I would be the first to admit that this swap wouldn't be worth it, especially with the higher expense ratio for JEPi. But given the other advantages that JEPi brings to the table, combined with the fact that it is also a completely acceptable low volatility fund, I would argue that USMV and SPLV are rendered unnecessary. I do understand that simplification is not the point of the Risk Parity Ultimate example portfolio at all. I just thought that this would be a fun way to test out J-E-P-I. Looking forward to your banter on the subject.

Mostly Voices [23:23]

Watch out for that first step. It's in doozy.

Mostly Uncle Frank [23:27]

Ah, yes, JePi. J-E-P-I. What is JePi? JePi is part of a highly promoted group of buy right funds, funds that hold stocks and then have some kinds of option strategies overlaid on them. Bing! That have become popular again in recent times and there are some relatively new ones. I think Jeppy's just been around for a couple of years. Bing again! What you need to understand or recognize about this is that this is sort of the 3.0 version of these kinds of funds and strategies. Version 1.0 goes back to the 1980s. Version 2.0 appeared in the early 2000s, and now we're on version 3.0. Why have there been three versions of these things? Because they tend to decay or blow up over time, at least in versions 1.0 and 2.0. At a certain point in the market cycle, these funds tended to fail and become unpopular. It's all one big crapshoot, anywho. Now it's possible that this time will be different and maybe they've got their formulas right with respect to these kinds of funds, but I would not be putting a lot on them, particularly since the newest round are so new. I would need to see them go through an entire market cycle and not decay over time. If you take a look at something like QYLD, over its history, you'll see that it is already decaying over time. That is the straight stuff, O Funkmaster. That one started out at $25 a share in 2014, is now down at about $16 per share. And I would expect it to keep falling over time because that's the typical behavior of these kinds of funds. You are correct, sir, yes. Now, maybe Jeppy will escape that fate, but I have to believe that a large part of its performance since it began in May of 2020 is simply due to the fact that that was a great time to start a fund. Things may have been a lot different if it started in January of 2020. The other thing that it's got going for it this year is it does happen to be invested in high quality, low volatility kinds of stocks, which as we just pointed out have done pretty well this year comparatively. But anyway, if you were to use it in a portfolio, it would go in as one of your stock selections. And you are correct that it is most analogous to something like USMV or SPLV. Now, JePI versus PFF is an interesting thing. But what you need to realize is that the income produced by JPE is going to be taxed largely at ordinary income rates. If you're doing an option strategy, that is ordinary income. PFF is taxed at qualified dividend rates for the most part. So you're talking about a very serious difference if you have a high income between those two things. And PFF, that preferred shares fund, is really something you would only hold in a taxable account that needs to generate some income but you don't want it to be highly taxed. So if you're somebody like Rick Ferri he uses that fund and some municipal bond funds to generate income without generating a lot of taxes. If you use something like J.P. Morgan you're just going to be generating a lot of taxes. That's not an improvement. So you wouldn't want to use that in the same circumstances that you would use PFF in. If you're going to use Jeppy, you're probably going to put it in an IRA or behind some tax advantaged account as you would do with a REIT because it's throwing off all that ordinary income. So those are just two different animals. And it's an even more different animal than a volatility fund like VIXM. The easiest way to see that is just by looking at a asset correlation Matrix and I'll link to one in the show notes so you can see the correlation between Jeppy and these three funds you've selected. It has a negative correlation with the Volatility Fund, so you would not use those two things interchangeably. The real question with Volatility Funds is a separate question as to whether they are investable at all for a do-it-yourself investor, because the ones we have right now just aren't very good. and they do decay over time. So I think it's a very valid question as to whether you include something like that at all. The kinds of things that would also fit in that space would be things like something that is bullish on the dollar against other currencies, or a long short fund like BTAL that we've talked about, which I think is up over 16% in a year like this one. But anyway, if you're going to use a fund like Jeppy, it belongs as part of your stock funds and you would substitute it for one of your stock funds or part of your stock allocation and you would consider it as part of that macro allocation when you are looking at your overall allocations. In the end, I don't think I'd use something like Jeppy, at least until it's been around for a few years and I was convinced that it would not decay overall over time. Because that has been the sordid history of such animals in the past.

Mostly Voices [29:25]

I'm gonna end up eating a steady diet of government cheese and living in a van down by the river. And thank you for that email.

Mostly Uncle Frank [29:37]

But now I see our signal is beginning to fade. We will pick up again this weekend with our weekly portfolio reviews of the seven sample portfolios you can find at www.riskparityradio.com and in the meantime, 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. And if you want to avoid what is now a two month line of emails. You can do that by becoming one of our patrons on Patreon at the support page at www.riskparityradio.com and all of that money does go to our charity, the Father McKenna Center, which is also linked to on that page. And full disclosure, I am on the board of that charity and am the current Treasurer. Yeah, baby, yeah! If you'd like to support the show in another way, 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 Mary [31:38]

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.