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. Yeah, baby, yeah! And the basic foundational episodes are episodes 1, 3, 5, 7, and 9. Some of our listeners, including Karen and Chris, have identified additional episodes that you may consider foundational. And those are episodes 12, 14, 16, 19, 21, 56, 82, and 184. And you probably should check those out too because we have the finest podcast audience available.

Mostly Mary [1:28]

Top drawer, really top drawer, along with a

Mostly Uncle Frank [1:31]

host named after a hot dog.

Mostly Voices [1:35]

Lighten up, Francis.

Mostly Uncle Frank [1:39]

But now onward to episode 216. Today on Risk Parity Radio, it's time for our weekly portfolio reviews of the seven sample portfolios you can find at www.riskparityradio.com on the portfolios page. We not only have our weekly reviews, we also have our monthly distributions to talk about. But before we get to that, I'm intrigued by this how you say, emails. And first off, we have an email from Blake.

Mostly Mary [2:12]

And Blake writes：hi Frank, thanks for the great feedback on episode 200 regarding my pathway to financial independence descent portfolio. I took your comments into consideration, yeah, baby, yeah! and created version two of the portfolio and accompanying white paper. You are the second person who recommended a smaller equity exposure for a retirement phase, so I went ahead and reduced it to 70% overall by reallocating 6% to gold and long-term bonds. According to portfolio charts, This improved the historical volatility and safe withdrawal rates, as you might expect. The portfolio now stacks up well against the Golden Butterfly with a meaningful improvement in returns and safe withdrawal rate in exchange for a little more downside risk. For someone like myself, with a long retirement horizon ahead, I am happy with that trade-off. I considered FAMA and French in constructing this portfolio, which brought in the small cap value. But I ended up with a large cap blend instead of growth because many core funds that follow the S&P 500 or a total stock market index lean toward growth anyway. And I thought it would be more practical for most people to find a good low-cost fund in that category. I also did not see the value, pardon the pun, in switching to large cap growth when I looked at the difference in portfolio charts going back to 1970. In general, I don't mind having a more value-leaning portfolio if that's the case. As for the real estate and utilities portions of the portfolio, I like having some sector diversification as well, and I think the dividends from these sectors can come in handy for income generation in retirement. Neither large-cap US nor international funds have much real estate or utilities in them. They tend to be dominated by tech companies and financials these days, hence the lower correlation with these sectors. I see what you are saying about the style boxes, though. Utilities are large and value-y and REITs are a mid-cap blend. So again, more of a value lean to compensate for the large growth companies that dominate a core US stock market fund. I guess I must love value. Not bad company in that case, Buffett, Munger, and Graham.

Mostly Voices [4:31]

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

Mostly Mary [4:40]

I looked at the effect of diversifying the international allocation across large-cap, small-cap value in emerging markets. and added that to the appendix of version two of my white paper. At the small percentages involved, there was not much difference, and I am cautious about the higher fees that many specialized international funds take. Here are the links to the updated portfolio and white paper. Thanks again for your feedback. I love the show. The best, Jerry. The best.

Mostly Uncle Frank [5:06]

Well, Blake, I was happy to give that feedback in episode 200, and I'm glad to see you are Continuing to make good use of these tools to come up with your own variations for a decumulation portfolio. I will link to both of your papers in the show notes so people can check them out. But what Blake has done there is some analysis using the tools at Portfolio Visualizer and Portfolio Charts, in particular the Risk Reward Calculator at Portfolio Charts. and the Correlation Analysis at Portfolio Visualizer. And to me, this is really an example of a best practices process for constructing your own portfolios in the 2020s.

Mostly Voices [5:56]

Am I right or am I right? Am I right? Am I right? Am I right?

Mostly Uncle Frank [5:59]

10 years ago, we were not able to do something like this as do-it-yourself investors because we didn't have access to these tools and this data. But now that we do have access to these tools and this data, we had the tools, we had the talent. It behooves us to use them and not just blindly follow what others have done. Fat, drunk, and stupid is no way to go through life, son. And I'm meaning not just blindly follow what I've done either.

Mostly Voices [6:24]

I switched glasses when your back was turned. Ha ha, you fool.

Mostly Uncle Frank [6:28]

Because the portfolios that we've constructed here are just samples.

Mostly Voices [6:37]

You are talking about the nonsensical ravings of a lunatic mind. And samples are meant to be improved upon.

Mostly Uncle Frank [6:41]

You may also wish to play around with the calculator over at early retirement now that Karsten Jeske has put out. It is in a spreadsheet form so it's not quite as user friendly as some of the others you've been playing with, but it does have data that goes back to 1926 in terms of the Fama-French factors. You would describe it as very deep, but not very broad in terms of the choices that you can make. You cannot put in, for example, REITs or utilities going back to 1926. However, you can model portfolios with small cap value in them and with gold and with basic 10-year treasury bonds. And we will be talking further about that in a future episode. Just to wet your whistle, Expect the unexpected. And just a couple more comments on your email. I'm glad you found the style boxes because those differentiations between value and growth, I think, are important considerations when you're talking about the stock part of your portfolio. And as we've seen this year in particular, you can get very differing results from value stocks versus growth stocks. in some years. Usually they won't be that much different, but a year like this they are up to 20% different in performance. And that's why you want to have some of both. Your use of 70% in equities is also consistent with basic guideline recommendations from people like Bill Bengen and Wade Pfau. The sweet spot for Maximizing a safe withdrawal rate seems to be somewhere between 40 and 70% equities in an average retirement style portfolio. When you go higher or lower than that, it tends to generally detract from the projected safe withdrawal rate. And people are often surprised by that, but it does illustrate the difference between maximizing total returns and maximizing a safe withdrawal rate. that you have two different kinds of portfolios that do that.

Mostly Voices [8:50]

That is the straight stuff, O' Funkmaster.

Mostly Uncle Frank [8:57]

And that's why we want to cut back on the 90 or 100% equity holdings that we might have during our accumulation phase. To something a little bit less aggressive.

Mostly Voices [9:04]

Yes!

Mostly Uncle Frank [9:08]

And I agree with you that it's often difficult to figure out what to do about international stocks. Because one of the realities, if you are a US investor investing international stocks, a large part of what you are doing is in effect speculating on the value of the US dollar versus other currencies. Because a lot of the relative returns are based on the relative value of the US dollar and which way it's going. That's the principal reason why international stocks have done so poorly this year has been largely the strength of the US dollar. And if you look back in time, you'll see that international stocks really outperformed in those periods when the dollar was falling in value versus other currencies. So if you're looking at a period shortly after the beginning of 1985 was a very good period for international stocks, and of course, after 2002 when the dollar also reached a peak. was a very good era for international stocks. And you also see this phenomenon playing out just in US stocks generally that companies that derive a lot of their revenue from outside of the United States tend to do worse than those that are deriving most of their revenue from inside the United States, which are a lot of value stocks and a lot of small cap value stocks. Because if there is a strong dollar and you are a company that is importing raw materials and then creating something in selling it in the US, that's the best position to be in because your costs are essentially going down while your revenues are going up just on the currency fluctuation. And if you want to see a microcosm of that, just look at what happened on Friday. I think the dollar dropped by about 2% in value, which is a huge move currency wise. But of course that led to huge moves in international stocks, particularly the Chinese stocks went up. not only because of that, but because of other factors, but some of those funds were up 7 or 8% on Friday. And then you look at things like gold, and that was also up 3% on Friday. And that's all really related to the relative performance of the US dollar. But I think that's enough on that. So I will put these links in the show notes, and thank you for that email.

Mostly Voices [11:26]

Second off.

Mostly Uncle Frank [11:32]

Second off, we have an email from Jen and Jen writes. Hi, Frank.

Mostly Mary [11:35]

I'm binge listening to your podcast and enjoying it. I have a question, though, on the implementation of the risk parity portfolios. When using ETFs, my understanding is that fractional shares cannot be bought. So how do you rebalance and maintain the exact target percentages? Thanks. Gigi.

Mostly Uncle Frank [11:54]

Well, I think I've answered this question before, but I don't mind answering it again. Your understanding is incorrect that whether you can buy fractional shares of ETFs depends on your brokerage, not on the nature of ETFs. So you can do that at Fidelity, you can do it at E-Trade, and it is in fact what we are doing with our sample portfolios. We buy and sell fractional shares for the distributions and rebalancing.

Mostly Voices [12:20]

What we do is if we need that extra push over the cliff, you know what we do? Put it up to 11. Exactly. So if you want to be able to do that, you simply need to move your accounts to a brokerage that allows you to do it.

Mostly Uncle Frank [12:33]

These go to 11. But that being said, rebalancing does not need to be that precise. Using whole shares is probably good enough unless you were talking about something like Berkshire Hathaway's A shares. So if something is within a percent, rebalancing is not going to make a big difference anyway. But this is a general problem I see that amateur investors have is not comprehending orders of magnitude in the decision making process or management of a portfolio. Oftentimes some of these things are just of a trivial nature and this is one of them. whether you rebalance with fractional shares or use a whole share. Another one would be comparing ETFs down to the basis point. There really is not that big a difference between an ETF with a expense ratio of 0.03 versus one with 0.05 or 0.07. Those are within the same order of magnitude. The differences come when you're talking about something with a expense ratio of less than 0. 1 in something with an expense ratio that's closer to one. But also along those lines, while you want to have the lowest expense ratio for your biggest holdings in a portfolio, if you have something that is going to be a very small holding anyway, a higher expense ratio is not going to matter that much for the overall portfolio because the amount of it you are holding is very small. Sometimes it is good just to pull out a calculator and check out something on an order of magnitude basis to see whether it's something of real concern or of trivial concern because you want to be focusing your efforts on those things that are going to matter the most and not on trivialities. Forget about it. And this is also why rebalancing too frequently with trivial percentage amounts doesn't actually help you and in fact probably hurts you, at least with respect to making more transactions which can lead to more taxes and losing money on the bid ask spread of whatever you're trading. Although with the big ETFs, you're talking about a penny, so it probably doesn't matter that much. Hopefully that answers your question again. And thank you for that email. Last off. Last off, we have an email from my contact info.

Mostly Voices [15:13]

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

Mostly Uncle Frank [15:17]

It was very busy with us in early September.

Mostly Voices [15:21]

I think I've improved on your methods a bit too.

Mostly Mary [15:26]

I employed some Kiara Scuro shading and my contact info rights. Here is another good discussion of managed futures from the Investors First podcast. Our guest today is Andrew Beer, managing member and co-portfolio manager for Dynamic Beta Investments, an investment firm founded in 2012. Over the past decade, Andrew's singular focus has been to identify strategies to match or outperform portfolios of leading hedge funds with low fees daily liquidity, and less downside risk. Andrew has been in and around the financial services and hedge fund industry in particular for more than 25 years. In today's episode, we will discuss Andrew's journey to starting Dynamic Beta, democratizing access to hedge fund strategies at reasonable costs, the benefits of replication and managed futures for portfolios, and building investment solutions to solve for client needs. My name is Frank Garcia, and I currently serve as the president of CFA Society Orlando and will be your host today. Please enjoy the episode. Well, it's amazing how much people like to talk about things that are doing well in a particular year.

Mostly Uncle Frank [16:40]

And just for reference, what is being talked about and who Andrew Beer is, is the founder of a fund called DBMF, which invests in managed futures. in an algorithmic format. And we first talked about that in episodes 55 and 57, almost two years ago now, as a potential wave or part of the future in terms of being able to invest in this asset class, managed futures, which had frankly not been very investable for the do-it-yourself investor in the past. And as it turns out, that fund has done very well. It's now being adopted by many registered investment advisors for high net worth clients and others, and now has over a billion dollars in assets in it and is up 25 or 30% this year. So Mr. Beer has done a number of interviews in the past several months. I will link to this one in the show notes. It is also worth listening to if you are interested in this asset class.

Mostly Voices [17:38]

Real wrath of God type stuff.

Mostly Uncle Frank [17:42]

So thank you for bringing this to our attention and adding to our little free library we have here. Groovy baby! And thank you for that email.

Mostly Voices [17:52]

And now for something completely different.

Mostly Uncle Frank [17:55]

And the something completely different will be our weekly portfolio reviews of the seven sample portfolios you can find at www.riskparriarradio.com on the portfolios page and talk about our monthly distributions for which we have made the trades but have not made the distributions themselves. but we'll be doing so next week. But anyway, it was another crazy week out there in the markets. The S&P 500 was down 3.35%. NASDAQ was down 5.65% for the week. No thank you, Jerome Powell. People really didn't like that press conference he gave. But small cap value did alright comparatively. Our representative fund, VIoV, was only down 1.39% for the week. Gold was one of the big winners last week. I love gold. Gold was up 2.21% for the week. All of that on Friday, really. REITs represented by the fund R E E T were down 1.35% for the week. Commodities were the big winner last week. Our representative fund, PDBC, was up 4.84% for the week. Preferred shares represented by the fund PFF were down 2.76% for the week. Long-term treasury bonds represented by the fund TLT were down 2.67% for the week. Continuing their slide for the year, I heard something to the effect that this year has been the fourth or fifth worst year for government bonds in English-speaking countries since 1700.

Mostly Voices [19:31]

I demand that you shoot me now.

Mostly Uncle Frank [19:36]

And one of the more worse years was the one involving the South Seas bubble in 1720. Which leads to our last fund, that managed futures fund, DBMF, that was up 0.44% for the week. Moving to our sample portfolios, the first one is this reference portfolio, the All Seasons, that is 30% in a total stock market fund, 55% in intermediate and long-term treasury bonds and then the remaining 15% divided into gold and commodities. It was down 1.59% for the week. It is down 21.6% year to date and 10.25% since inception in July 2020. We will be distributing $28 from it from the commodities fund, PDBC for November. That's at an annualized rate of 4%. We will have distributed $352 year to date and $913 since inception in July 2020. All of that is also recorded on the portfolios page at the website. Moving to our three bread and butter portfolios in kind of order of aggressiveness. First one is the Golden Butterfly. This one is 40% in stocks divided into a total stock market fund and a small cap value fund. 40% in bonds divided into long and short-term treasuries and 20% in gold. It was down 1.11% for the week. A veritable snooze fest again. It is down 15.86% year to date and is up 5.62% since inception in July 2020. We will be distributing $39 out of it for November. It will come out of cash, which has accumulated. Those bonds are paying 4% now. We are distributing 5% annualized from this portfolio, and after the distribution we'll have distributed $475 year to date and $1,256 since inception in July 2020. Just for reference, all these portfolios started with $10,000 or about that when we initiated them. The next one is the Golden Ratio Portfolio. This one is 42% in stock funds, 26% in long-term treasuries, 16% in gold, 10% in REITs, and the rest in a money market fund. It was down 1.86% for the week. It is down 21.52% year to date and is up 0.31% since inception in July 2020. We'll be distributing $37 from it for November. That's at an annualized rate of 5%. It comes out of the cash or money market portion because that is the way we distribute from this particular one. And then just replenish the cash once a year. We will have distributed $469 from it year to date and $1,250 from it since inception in July 2020. Next one is our Risk Parity Ultimate. This is kind of a kitchen sink portfolio. It has 15 funds in it. I will not go through all of them. It was down 1.64% for the week. It's down 25. 65% year to date and 4.98% since inception in July 2020. We are distributing $41 out of it for November. That's at an annualized rate of 6%. It will be coming from that managed futures fund, DBMF, which has done so well recently. We will distribute $534 out of it year to date and $1,454 out of it since inception in July 2020. And now we move to these experimental portfolios. We perform hideous experiments here so you don't have to. All these involve levered funds and so are quite volatile. The 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, 25% in PFF of Preferred Shares Fund, and 22.5% in Gold, GLDM. It was down 3.89% for the week. It's down 44.49% year to date and 22. 1% since inception in July 2020. We'll be distributing $31 out of it from the preferred shares fund PFF for the month of November. We're distributing an annualized rate of 6%. We will have distributed $577 out of it year to date and $1,800 out of it since inception in July 2020. Now moving to our most levered and least diversified portfolio, the aggressive 5050. This one's half stocks and half bonds. It is comprised of 33% in UPRO, the leveraged stock fund, 33% in TMF, the leveraged bond fund, and the remaining third divided into a preferred shares fund and an intermediate treasury bond fund as the ballast. It was down 5.59% for the week. It is down 52.01% year to date. And is down 26.92% since inception in July 2020. Went from the best to the worst this year. You can't handle the gambling problem. We will be distributing $29 out of it, which is at a 6% annualized rate. It will come from the Intermediate Treasury Bond Fund, VGIT for November. We will have distributed $560 out of it year to date and $1,801 since inception in July 2020. Moving to our last portfolio, which has only been around since July 2021. This is the levered golden ratio. It is comprised of 35% in NTSX, which is a Composite S&P 500 and Treasury Bond Fund, 25% in Gold GLDM, 15% in a REIT O, Realty Income Corp, 10% each in a levered small cap fund TNA and a levered bond fund TMF. The remaining 5% is in a volatility fund, a VIXM and a Bitcoin fund GBTC. It was down 2.16% for the week. is down 28.56% year to date and down 24. 18% since inception in July 2021. We will be distributing $29 out of it for November. That's at a 5% annualized rate. It will come from NTSX, the composite fund. We will have distributed $479 out of it year to date and $776 out of it since inception in July 2021. And all of this information is contained at the website www.riskparityradio.com on the Portfolio's page. But now I see our signal is beginning to fade. We are almost halfway through September's emails. We'll see how far we get next week. 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. Mmmkay? Thank you once again for tuning in. This is Frank Vasquez with Risk Parity Radio. Signing off.

Mostly Voices [27:38]

Fell victim to one of the classic blunders.

Mostly Mary [27:48]

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.