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 [0:38]

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

Mostly Voices [1:10]

I don't think I'd like another job.

Mostly Uncle Frank [1:14]

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 [1:32]

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

Mostly Uncle Frank [1:36]

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 [2:36]

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 [2:55]

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 [3:14]

But now onward to episode 217.

Mostly Uncle Frank [3:19]

Today on Risk Parity Radio we're going to continue plowing through our emails from September. I have some very interesting topics to talk about today. But before we get to that, I wanted to call your attention to a new article over at Portfolio Charts that I will link to in the show notes. And the article is about tax loss harvesting, and in particular tax loss harvesting bond funds like TLT. And there's always been a question in my mind whether you could tax loss harvest TLT against a long-term treasury bond fund like VGLT. which is a Vanguard fund, or a fund like SPLT, which is an S&P version of that fund. And as it turns out, TLT and VGTLT are based on two different indexes. So at least Tyler has tax loss harvested his TLT that he talks about over there, I think with SPLT in his case, that it appears VGTLT and SPLT are both based on a Bloomberg index, and TLT is based on an ICE index, which he believes are sufficiently different to qualify as replacements for a tax loss harvesting. Now, while none of us know what the IRS would actually say, given they don't give pronouncements about this, and this is not tax advice, it's merely information.

Mostly Voices [4:53]

Fortune favors the brave.

Mostly Uncle Frank [4:57]

But since we are getting into tax loss harvesting season, I think it's very useful information to have right now. And you should check that out if you are interested in tax loss harvesting your long-term treasury bond funds, because I know I'll be doing some of that too. Let's do it. Let's do it. The article also has a nice list of other pairs for tax loss harvesting purposes. So it's got like a large cap growth pair and a small cap value pair and other things, which I believe Tyler has gotten from the Wealthfront website. And you would figure they would probably know what they're doing, at least with respect to tax loss harvesting since that's what they advertise to their clients. But again, you should check out the article because I think it's got a lot of useful information in it.

Mostly Voices [5:55]

Inconceivable. But now without further ado, here I go once again with the email.

Mostly Uncle Frank [6:03]

And, first off, we have an email from Brad.

Mostly Mary [6:12]

And Brad writes, hello Frank and Mary, here I go once again with another how you say email.

Mostly Voices [6:20]

Let's see what is cooking up tonight. Today, just right.

Mostly Mary [6:27]

Could you please discuss your process for choosing the relative weights of asset classes in a portfolio? I've heard you say that the permanent portfolios 25% each was somewhat arbitrarily chosen and that ideally one would take correlations into account. I'd like to hear your thoughts on how to do that. Am I correct in thinking that the risk parity approach is to scale the allocation or leverage of each asset such that they all end up having the same volatility. But is that independent of their correlations? In the case of the US total stock market and long-term Treasuries since 2002, the correlation is about -0.24 and annualized standard deviations are about 15% and 13% respectively. What is it about those numbers that led you choosing 1. 6 to 1 as the ratio between stocks and bonds in the Golden Ratio Portfolio? Or did you actually choose a ratio of 2 to 1, like the Golden Butterfly, by deciding on an equity allocation of 52% and then splitting that into stocks and REITs? Do you recommend using the Portfolio Optimization at Portfolio Visualizer for doing this? While researching this topic, I came across the following series of blog articles about geometric balancing, which uses rolling correlations to regularly adjust asset class weights in order to minimize volatility drag. I think that it violates your simplicity principle, but does at least provide a framework for how to think about choosing allocations.

Mostly Uncle Frank [8:06]

Well, Brad, you have an interesting set of questions here that get back to some fundamental ideas about portfolio construction. And let's just take this from an abstract view. If you have, say, three assets that you're trying to combine, asset A, asset B, and asset C. You could ask yourself questions. You need to ask yourself, what are the fundamental characteristics about these assets? And the fundamental characteristics for the purpose of Portfolio construction are first, what is the expected return of this asset? Second, what is the expected volatility of this asset? And then third, do I feel lucky? And then third, how does this asset relate to the other two assets in terms of correlations? And things with higher returns like the stock market typically have higher volatilities. and things with lower returns, like, say, a short-term bond fund, typically have lower volatilities. Because if you found something with a high return and a low volatility, you'd probably want more of that. And if you found something that had a low return and high volatility, you probably wouldn't want that at all. Now, as I've said many times in the past, it's difficult to just look at a bunch of assets and imagine what they would look like if you combined them. and you're probably gonna get the wrong answer. So what you actually need to do is combine them and do some back testing to see how that group of assets would have performed in a past period. So you get a flavor or an idea of what the overall performance is going to look like. Now if you wanna hear about how I constructed the Golden Ratio Portfolio originally, you can go back to episode six where we talk about that very topic. But basically what I did, the short version, is I looked at sample portfolios that already existed, such as the standard 60/40 portfolio and the golden butterfly portfolio. And I could find a lot of those samples at portfolio charts. They've got about 18 sample portfolios from various people there. And what I was most interested in is maximizing a safe withdrawal rate for a retirement or decumulation portfolio, which is related to a Sharpe ratio, but it's not exactly the same thing. And my general observation was that a 60/40 portfolio is in the proportions of the classic golden ratio, which is actually 1.61 to 1. It would actually be 61.8 to 38.2 instead of 6040. And so my theory was, well, if you had more assets that were more diversified and recombine them in those proportions, maybe you could come up with something that would work pretty well. And I tried that out and it worked pretty well. But that doesn't surprise me because that proportion tends to appear repeatedly in natural phenomenon. And so it's often a good starting point if you're just looking at mixing together two things. And more recently, I've seen research and information suggesting that's also a good place to go if you are leveraging up a portfolio. that 1.621 may be near an optimal amount of leverage. And how do we learn that? We'll go back to episode 141 where I talked about this. There's a paper called Warren Buffett's Alpha, which observes that the way Berkshire Hathaway is constructed is as if it was taking leverage due to the way they use the insurance float there. and the amount of leverage that is in Berkshire Hathaway is about 1.7 to 1. Now, the people at Resolve Asset Management, who do something they call return stacking, which is a variation of risk parity, and is also discussed in episode 141, also did a series of studies and I linked to a paper there where they have come up with their ideal proportion for a leveraged portfolio which is 1.6 to 1, which again is the golden ratio. Or I should say very close to the golden ratio, which is actually 1.61 to 1 or 1.618 or you can keep going out on the decimals as long as you like.

Mostly Voices [12:58]

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

Mostly Uncle Frank [13:02]

And you asked whether I targeted 52% and then split that into stocks and REITs. And the answer is, no, I did not do it that way. What I targeted was the 42% in stocks to 26% in the treasury bonds to 16% in gold, and those are all related to each other by the golden ratio, which left 16% to be used for other things. And as I've said in the past, those other things could be a variety of different things. We just used REITs and cash as a sample version of that. Now that it appears we are getting to a point where we'll have a viable fund for investing in managed futures, I'm wondering whether you'd be better off putting 10% in that, as opposed to 10% in REITs in one of these kind of portfolios. But that is getting more to fine tuning and whether you want the thing to be more conservative or more aggressive. depending on what you're trying to do. For example, some people don't need cash in there at all, and so they allocate that 6% to some other thing. Now moving to your next question. Do I recommend using the Portfolio Optimization at Portfolio Visualizer? I've tried using that and it doesn't seem to work very well to me. Portfolio Visualizer has so many different tools there. You can get lost in them. But some of them, like that one, seem to require more data than you have available. And so I think may give you some misleading results, which is why ultimately you need to go construct the portfolios and then go back and back test complete portfolios. Now, I also looked at these articles you posted from this website, Breaking the Market. and balancing portfolios and how they did it there. I think they're describing some useful tools there, but again, they may be trying to be too clever by half or trying to be too precise in an uncertain world. And this is how you can know that this is an issue because it's an issue with almost all methods of portfolio construction. When you're using things like standard deviations as a measure of volatility, You are assuming that the assets or data you are dealing with is normally distributed, and so it applies Gaussian principles to it. In reality, that's not true. Surely you can't be serious. I am serious. And don't call me Shirley. Financial markets do not tend to follow Gaussian patterns, but tend to follow fractal patterns, which are much more unpredictable. And so when you are using Gaussian methodologies like they're using there, you're going to get precise answers, but you have to know in the back of your head that what they are analyzing does not actually reflect as a model the reality of the financial assets you're dealing with. So I would say it's useful but not determinative in terms of decision making. But again, that's why we run historical back tests and do Monte Carlo simulations. And also why you should hold suspect any model of the future that starts with a return and a standard deviation as the basis for the model. Because if you run that model, you may get something that looks very precise, but is totally out of whack with what We know about markets for the past 50 or 100 years. So we should always be careful with such things. This, by the way, is what Nassim Taleb's all of his books are about, is that people are using Gaussian models to model reality, and reality is based on fractal mathematics, not Gaussian models for the most part. So that's why people are wrong all the time and miss these black swans and other things. He calls those worlds Mediocristan and Extremistan and basically says, well, financial markets live in Extremistan. They don't live in Mediocristan. And so you can't apply Gaussian models to financial markets and expect to get reliable results or predictive results. What you will get is something that will be useful For some markets at some times, but not all markets at all times.

Mostly Voices [17:38]

Forget about it.

Mostly Uncle Frank [17:42]

But that is probably enough on that for today. That was weird, wild stuff.

Mostly Voices [17:47]

Second off.

Mostly Uncle Frank [17:51]

Second off, we have an email from Craig.

Mostly Mary [17:54]

And Craig writes, Dear Frank, your podcast should come with the warning, addictive listening behavior is possible, even probable. You have been warned.

Mostly Voices [18:05]

You need somebody watching your back at all times.

Mostly Mary [18:09]

Alas, I admit to being one of those souls caught in the Risk Parity Radio maelstrom. But what a way to go.

Mostly Voices [18:16]

The geek shall inherit the earth.

Mostly Mary [18:20]

I am four years into my retirement and I am invested in the Risk Parity Ultimate Style portfolio. I currently have limited cash reserves, and I am now needing to gradually withdraw from my brokerage or Roth IRA investments. However, I am reluctant to do so because of the current market conditions. My taxable brokerage account should be the first I would withdraw from, but it is wholly invested in TLT, which like almost everything else is not doing well these days, and I hesitate to sell during a significant market loss. As an M1 customer, I can borrow against my brokerage account at a 4.25% interest rate. Is it wise to borrow cash to buy some time, trying to delay brokerage account withdrawals until the market recovers? And for the future, is it best to diversify the primary account from which investments will be withdrawn? Going forward, what's the best strategy for handling such a situation? Thanks for your continuing excellent work, Craig.

Mostly Voices [19:24]

Addictions, you say? You have a gambling problem. Well, Craig. The good news is I think I can help you.

Mostly Uncle Frank [19:39]

And I'm glad you asked this question because this is a frequent management issue that we have with retirement portfolios that consist of both taxable brokerage accounts and IRAs or other tax advantaged accounts. And how do we sell something in the IRA, but actually use the money in the brokerage account? And what you want to do here is use an asset swap technique.

Mostly Voices [20:04]

A really big one here, which is huge. Now, how do you do this? It's easiest if I just describe it with an example.

Mostly Uncle Frank [20:11]

So in your case, you have 100% in TLT in your taxable account, and you don't want to be selling that asset. Could be any asset. The asset you want to sell and live on is actually living in your IRA. Let's suppose it's gold or commodities.

Mostly Voices [20:31]

I love gold.

Mostly Uncle Frank [20:35]

Those are probably what you would have been selling with that kind of portfolio, at least in the past year, because those have been two of the best performing assets. So what you can do is this. You sell that amount of gold or commodities in the IRA. Also within the IRA, you buy back a like amount of TLT in your case, the asset that's outside. At that point, then you can sell the asset outside, the TLT, and you will end up with the equivalent of having just sold the Gold or commodities.

Mostly Voices [21:18]

That's gold, Jerry, gold.

Mostly Uncle Frank [21:22]

And so this asset swap technique is the best for handling these kinds of situations.

Mostly Voices [21:26]

The best, Jerry, the best.

Mostly Uncle Frank [21:31]

I suppose you could also borrow money on the portfolio outside, but that might create other complications in terms of future portfolio management and just risk in general. in terms of the overall portfolio percentages. Now here is the thing you always have to watch out for when you're doing this is that you don't want to have a wash sale by buying something in an IRA and selling it outside in a taxable account where you would have got a loss in the taxable account like you probably do with this this year. So you will need to buy something slightly different in the IRA, and you might use that article that we referred to at the beginning of this program to select that asset or something that performs the same but is not quite the same for tax loss harvesting purposes. And just in terms of the way we manage our own retirement portfolios, we do tend to keep a year to two in cash or cash equivalent kind of things. I'm talking like short-term bonds, I-bonds, savings accounts, all of those sorts of things. Because it makes it easier to manage these sorts of issues, especially in years like this. And so hopefully I didn't garble that explanation of the asset swap technique too much and that you can employ it in the future. But email me back if it was not clear.

Mostly Voices [23:01]

And thank you for that email.

Mostly Uncle Frank [23:10]

Next off, we have an email from Annie. Annie Muss, who I believe has a cousin named Abby. Abby who? Abby normal. And Annie Muss writes, Hi, Frank.

Mostly Mary [23:29]

Thinking, so is Todd just now into selling a magic sauce too, or is this another risk parity, or am I missing something?

Mostly Uncle Frank [23:38]

So what Annie Muss is referring to, and I did not quote, but was attached to the original email, was an email from this person, Todd.

Mostly Voices [23:50]

Well, half an hour early on the button. That's our Todd. Hello, Mrs. Leubner.

Mostly Uncle Frank [23:58]

And the subject of Todd's email is Todd's Picks：Investing what Works Now, Part 2. And it is a pitch for some kind of product or service. It does reference a few articles, one by Jeremy Grantham about the Super Bubble, another one about A Century of Evidence on Trend Following Investing. that's Managed Futures, by the way, and another article by Campbell Harvey about the best strategies for inflationary times, one of which is Trend Following or Managed Futures. Now, I'm somewhat familiar with some of the things this person has put out in the past. Some of it's good, some of it's not so good. It is interesting that I've never heard him talk about managed futures in the past, and that it appears that this is just an attempt to glom onto something that happens to be working this year. When we're talking about managed futures, we're talking about a fund like DBMF that we've talked about many times now here in the past. That is the straight stuff, O' Funkmaster. Which is an algorithmic trend following ETF that is up 25 to 30% this year and looks like a good candidate for addition to a risk parity style portfolio. We have added it to the sample risk parity ultimate portfolio. So I agree with him that maybe this is something we should consider. Yes. But I don't agree with the way it's being presented and marketed. as if it's some kind of new secret thing that you need to pay somebody for to get access to. Always be closing.

Mostly Voices [25:50]

Always be closing.

Mostly Uncle Frank [25:54]

And that he's got some kind of special sauce there that'll make this go faster for you. Because only one thing counts in this life. Get them to sign on the line, which is dotted. The truth is the sun is setting or ought to be setting on these kinds of peddlers of systems, newsletters, etc. Who want to give you information for a fee. This information is free. Yeah, baby, yeah! It's available online and on programs like this one. You don't need to be paying somebody for this information. And you shouldn't be paying somebody for this kind of information.

Mostly Voices [26:38]

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 [26:58]

Because in a capitalist society, certain things need to be creatively destroyed, and the peddling of free information is one of those things. And that's because we are in the steel age of investing, where we have tools. We have the tools, we have the talent. Like Portfolio Visualizer and Portfolio Charts and other tools and other data sources. and lots of white papers that are freely available online and other research. While 10 or 15 years ago, you might not have been able to find those things or access them without paying somebody for them, that's just not true anymore. Forget about it. And so we can live in today's reality and not in the realities of the past. But it's funny whenever I criticize people who are essentially repackaging free information and trying to put a large price on it. The fallback argument they always end up at is, well, I have to make a living some way. It's also something you hear out of insurance salespeople. Well, the truth is you don't have to make your living that way.

Mostly Voices [28:13]

Do you think anybody wants a roundhouse kick to the face while I'm wearing these bad boys?

Mostly Uncle Frank [28:17]

And so maybe it's time for a lot of that to end.

Mostly Voices [28:21]

You're not going to amount to jack squat. You're gonna end up eating a steady diet of government cheese and living in a van down by the river.

Mostly Uncle Frank [28:34]

Or at least be offered in a cheaper format commensurate with its availability elsewhere. Sorry for the little mini rant, but thank you for that email.

Mostly Voices [28:47]

Bob, you don't have to worry about me going all the way with Todd. I'm saving myself for my one true love, Marvin Hamlish. Last off. Last off, we have an email from Jack.

Mostly Mary [29:04]

Here's Johnny. And Jack writes, Thank you for your excellent podcast. It's changing the way I look at retirement investing. I've been working with the Portfolio Charts Portfolio Finder and came up with a combination that seems to have excellent characteristics for a high safe withdrawal rate. It's 20% each large cap blend, small cap value, REITs, long-term treasuries, and gold. I love to know how it did before 1970, and I'm wondering if you know any tools to do that kind of analysis.

Mostly Uncle Frank [29:42]

Ah, now this one's actually a trick question. No, you won't find REITs data before about 1970, and the REITs data going back to 1970 is a little bit iffy, even though it exists, simply because REITs did not exist prior to around 1970. I can't remember exactly when the corporate form was allowed and the taxation for it was established, but it was back around those years. And so if you're looking for old REIT data, it just doesn't exist because REITs didn't exist. And I think we should be a little bit cautious about that data simply because REITs have changed so much over time. If you look in a cap weighted REIT fund, what we see today does not resemble what you might have seen in the 1980s. What we see today in a cap weighted REIT fund looks like a lot of infrastructure, a lot of cell towers, a lot of data storage things, a lot of other non-traditional real estate. Originally, REITs really were focused on offices, commercial developments, and residential. Those are only a small part of the REIT universe these days. And then at various points in time, you saw things like mortgage-backed REITs become a huge part of the REIT world. Now they've shrunken back down to size after the debacle of 2008. I think it's safer to assume what others have found is that Over long periods of time, REITs do tend to perform pretty much like the rest of the stock market. They just perform differently at different times, which gives you a little bit of diversification here and there. If you look at what a REIT fund or index looks like now in terms of its Fama-French factors, it looks like a mid-cap blend fund. And so I suppose if you were looking, or if I were looking prior to 1970 and trying to model this, I would get some data to allow me to insert mid cap blend as part of the asset allocation. Now you might be able to do that with the toolbox safe withdrawal rate calculator over at early retirement now, because that does have data that goes back to 1926 at least that includes the Fama French factors. It does not have long-term treasuries, it just has 10-year treasuries. It does have gold in there. I've not tried to do that, but maybe you can try to do that. It's not that I'm lazy, it's that I just don't care. And I would bet that if you contacted Carson over there, he could tell you how to exactly model that using that tool. That tool is a spreadsheet tool, and so you have to know exactly what boxes to use and then how to make the adjustments. And I'd be interested to know how that turned out. So let me know if you actually do it. We will be talking about some other uses of that tool in an upcoming episode eventually. Groovy, baby. I will also link to that Portfolio Finder tool that Jack mentioned over at Portfolio Charts, which is an interesting tool. It basically allows you to take a limited number of assets and say, what if I want to include these? What would be a decent mix of them, and it'll spit you out some answers to that. It's a little bit crude as to the percentages, but it is a interesting and useful tool. And one of those things that you do want to kind of go back, if you think you've constructed a portfolio, is like, well, what if I just took these assets and threw them into this tool? What would that spit out and what would that look like? And is that better or worse than what I came up with? It's a fun thing to play with. It might be a tumor. It's not a tumor. It's not a tumor at all. And thank you for that email. But now I see our signal is beginning to fade. I'm afraid I'm going on hiatus for another week to ten days coming up now. Got some roadside attractions to see. So you won't be hearing from me. I will try to update the website and we will get further behind on our emails.

Mostly Voices [34:12]

Are you stupid or something?

Mostly Uncle Frank [34:16]

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

Mostly Voices [34:53]

By the way, my name's Sheldine. Hi, Sheldine. What's yours? My name's Todd.

Mostly Mary [35:04]

It's Italian for extra special. 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.