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 [0:37]

Thank you, Mary, and welcome to Risk Parity Radio. If you are new here and wonder what we are talking about, you may wish to go back and listen to some of the foundational episodes for this program. 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 The finest podcast audience available. Top drawer, really top drawer. Along with a host named after a hot dog.

Mostly Voices [1:34]

Lighten up, Francis.

Mostly Uncle Frank [1:38]

But now onward to episode 218. Today on Risk Parity Radio, it's time for our weekly portfolio reviews of the seven sample portfolios that you can find at www.riskparityradio.com On the Portfolio's page. Sorry I've been gone for the past week and a half. I was on another frolicking detour with some friends, this time back to Iowa and points in between. If you ever get a chance to go to Spring Valley, Minnesota in southeastern Minnesota, there is an old fashioned A&W restaurant there with an actual Drive up.

Mostly Voices [2:23]

Well, you haven't got the knack of being idly rich.

Mostly Uncle Frank [2:27]

And a statue of the old papa burger man, which I'm sure you will not want to miss if you happen to be there.

Mostly Voices [2:31]

The pleasures are unlimited. But enough on that.

Mostly Uncle Frank [2:34]

We need to get down to business here. Yeah, baby. Yeah.

Mostly Voices [2:39]

And first on the agenda, I'm intrigued by this. How you say, emails?

Mostly Uncle Frank [2:46]

We're only two months behind on our emails. That's what three vacations will do to you. But here we go. First off, we have an email from Ethan. And Ethan writes...

Mostly Mary [3:03]

Hey Frank, first, thank you for your time you spend on your podcast. It has become my new favorite after years of getting every last drop I could squeeze out of Chooseify. That way you squeeze my lemonade. I'm gonna pour right out of it. Also, thanks for reading my email way back in episode 71. I felt like I was meeting and conversing with a celebrity when I listened to that. Also, I appreciate the golden ratio and Mandelbrot set pure math nuggets in your logo in this investing style. I studied pure math as an undergraduate, mainly, so I get a little excited seeing these fascinating math ideas surface in the real world. We have been charged by God with a sacred quest. After finishing my master's degree and starting my career as a high school math teacher, I'm finally on the cusp of taking some action on this risk parity idea. And I've got a couple of questions I thought might be worth sending your way. for entertainment and informational purposes only, of course.

Mostly Voices [4:13]

Yes!

Mostly Mary [4:17]

One, what considerations and basic steps would one utilizing something like the Golden Ratio Portfolio go through when accumulating and then using it for something like a down payment on a house? I jumped over to the M1 Train a couple years ago and have been loving the pie chart setup, fractional shares, and automated investing features. and I'm thinking of starting a fresh portfolio there in a regular taxable brokerage account for this saving investing exercise. I'm thinking I have a minimum of three years, but probably more like four or five before I would be using this for actually purchasing a house. I'm thinking it would go something like this. Set up the allocations for each asset class like in one of the sample portfolios. Contribute each week or month for the next three plus years. Maybe try to harvest some long-term capital gains at the 0% or 15% rate along the way. Sell everything when I'm getting close to ready to buy the house, three to six months ahead maybe, and move the money out to a high-yield savings account until the purchase takes place. I've got my head around the accumulation part, but I wonder if I'm missing something about the selling part as that seems like a big move to make all at once. Two, how does the analysis of something like the Golden Ratio Portfolio change when we look at it as a medium-term vehicle with contributions going in? I understand that when backtesting it all together as a retirement portfolio, we can see its maximum drawdown period is short enough to be suitable for a medium-term goal, but I would imagine there's maybe more to consider. For instance, is there some sort of increased series of return risk with a condensed timeframe for accumulation and then making a big sale, or quickly phasing it out into cash for a home purchase? I mainly want to make sure I've got a clear picture of the mechanics on how one actually handles a portfolio like this when using it for a medium term goal. Also, thank you Mary for reading this lengthy one.

Mostly Voices [6:23]

Cheers, Ethan.

Mostly Uncle Frank [6:27]

Well, Ethan, your accumulation plan sounds just peachy to me.

Mostly Voices [6:31]

Top drawer, really top drawer.

Mostly Uncle Frank [6:35]

I think the key to using one of these portfolios as a medium term accumulation vehicle is to just reduce the number of sales transactions. And so I think you have it right as you contribute to whatever is low in terms of the allocations, and then you will not have to have many sales. in the meantime, except for the potential tax loss harvesting you mentioned. And then when you're about to use the money, it is a little bit more art than science. Hopefully you'll have an idea of what your down payment is likely to look like even before you really start looking for the house. And when the portfolio reaches that goal, you could just sell it and put it into some kind of short-term vehicle. These days we have a lot of short-term vehicles paying over 4%, so you'll have a lot of options there. I think you do want to avoid waiting until the last minute to sell out of the portfolio, because you never know what might happen at the last minute. But the easy way around that is to have a target in mind and then sell when you reach the target for the particular purchase. Assuming you're getting close to actually making the purchase. And I probably would just do all the sales there all at once, unless you're perhaps at the cusp of a year and you wanted to spread the sales into two different tax years. But chances are you'll be looking at some long-term capital gains mostly, and some perhaps losses in one of the assets to harvest against the gains. And there may be some short-term losses or gains as well for the last money that you put in there. But I think the simpler you make the process, the better it's likely to turn out. Do you want a chocolate?

Mostly Voices [8:26]

Now, as to your second question, whenever you are

Mostly Uncle Frank [8:30]

accumulating and depositing more money at intervals, you are essentially dollar cost averaging into whatever you are investing in. And so it has the same effect as if you were to start with the whole pile of money that you were going to contribute in cash, future cash essentially, and then move that into a portfolio. So what that means is it's going to dampen the volatility of the overall portfolio experience, if you will. Groovy, baby!

Mostly Voices [9:01]

Because you essentially have a large portion allocated

Mostly Uncle Frank [9:05]

to cash for modeling purposes. and whether that cash is just coming in from your income or it was just sitting in a pot on the side does not matter as far as the overall performance of the portfolio is concerned. If you want to model this, you can actually do this at Portfolio Visualizer pretty easily. It's got a setting that allows you to model adding some amount on a regular basis to a portfolio. and see how it performs. And you'll find it just has lower volatility overall. And that's regardless of whether it's a golden ratio portfolio or some other portfolio. There is not necessarily an increased series or sequence of return risk if you don't have to sell at a particular time, but can simply wait till the portfolio grows to a certain amount. that risk is only present if you have a hard stop where you have to spend the money. But that is why you don't want to wait until the last minute before you're about to purchase the house to take the money out of that portfolio and should do your withdrawal based on achieving a certain amount and not on a particular date and time. On the other hand, if you don't know when you will buy a house or even if you will buy a house, you can pretty much let it ride until you come to more of a decision about what exactly you're buying and what the time frame may be. That's basically what our eldest son is doing since he's already got his house. He's thinking about, well, should he buy another house as a rental, but he doesn't have any concrete plans for what he would buy or when he would do it, so he's just continuing to accumulate in his golden ratio portfolio. Young America, yes sir. Hopefully all of that helps and thank you for that email.

Mostly Mary [11:20]

Second off, we have an email from Eric and Eric writes, Dear Uncle Frank, I listened to two podcasts recently that you might also enjoy. First, James Grant was interviewed on the September 16th edition of Consuelo Mack WealthTrack. After 20 minutes in, Grant discusses his idea for one investment. He starts by saying, Consistency is the hobgoblin of great minds. I will give Mr. Grant the benefit of the doubt and assume that he is taking poetic license rather than misquoting Emerson. I thought you would enjoy hearing a venerable financial writer using one of your signature samples. Unfortunately, he neither credits Mr. Emerson nor the venerable Frank Vasquez. Forget about it. Second, Andrew Beer, the creator of DBMF Managed Futures ETF, was interviewed on Season 5, Episode 9, July 22, of Corey Hoffstein's Flirting with Models podcast. I found the interview very informative and it helped me to understand the strategy for the DBMF fund. It also helped me gain an understanding of how the fund is run and why it might perform better than the other MF ETF funds. You or your listeners might find some value in the above podcast. Thanks. Eric from Scentsy. P.S. Say hi to Mary.

Mostly Voices [12:32]

Mary, Mary, I need your hug. I hope your time off was rejuvenating.

Mostly Mary [12:40]

I know DBMF has been mentioned recently by another listener, So I hope I am not too late to the party.

Mostly Voices [12:55]

And we're clear.

Mostly Uncle Frank [12:58]

Well, thank you for these references. It is funny how Jim Grant mangled that quote because it says a little bit about his way of thinking. He said, Consistency is the hobgoblin of great minds. That is not the quote. The quote is, A foolish consistency is the hobgoblin of little minds, not great minds.

Mostly Voices [13:21]

Forget about it.

Mostly Uncle Frank [13:25]

And this goes to the ideas behind what makes a good forecaster or not. This is something that Philip Tetlock, the psychologist, has studied and written about extensively. And he divides forecasters into two kinds of people. You see in this world there's two kinds of people, my friend. And they are hedgehogs and foxes. The characteristic of a hedgehog is that they have this kind of one big thesis that they tend to view reality through and base all their forecasts on that one big thesis. And that contrasts to a forecaster who is a fox who doesn't have one big thesis but is constantly changing their forecast based on ideas or data that comes in. And Tetlock says that foxes just make much better forecasters than hedgehogs. What's interesting to me is that most of the people that write books and newsletters about forecasting economic futures are in fact hedgehogs, and being a hedgehog sells more because you get an audience that all believes the same things or the same way, and they want to buy the product or subscribe to the newsletter. I was once listening to somebody who had been in the economic forecasting newsletter business, and he reflected this is way before Tetlock did his research, but he said, At first he tried to be right and be accurate in his forecasting and realized it was very hard to do and it wasn't getting him anywhere. And then he realized what actually sold newsletters was some kind of big theme or thesis that you could just repeat. Because then you could attract true believers in that theme or thesis and you could all forecast together. And then when you were wrong, Wrong! Simply say, well, I'm not wrong, I'm just early. You can't handle the crystal ball. And so now getting back to Jim Grant, if you followed Jim Grant's writings over the years and his newsletters and it's, he's got a podcast now, you would recognize that he is a hedgehog. And so he's actually terrible at forecasting. Wrong? Wrong! Right? Wrong! And his big theme or thesis since the 1990s or before is that the dollar is about to collapse any day now.

Mostly Voices [15:58]

And we're going to go back to some kind of gold standard and things like that. I think you've made your point, Goldfinger. Thank you for the demonstration.

Mostly Uncle Frank [16:07]

And that is the kind of thesis that may be right someday, but someday just never seems to come. And so the actual use of that Theme or theory for forecasting anything is pretty useless. That's not an improvement.

Mostly Voices [16:22]

One thing you can say about hedgehogs is they are very

Mostly Uncle Frank [16:26]

consistent and they are the people that think consistency is a virtue. Now that may be true in things like relationships, but it is definitely not true in things like economic forecasting. And so the next time you are listening to or reading something from one of these forecasters. Ask yourself, is this person a hedgehog or a fox? In most cases, they are probably hedgehogs if they've been around for a while. And so you want to take those people for entertainment purposes only, for the most part. That and a nickel get your hot cup a Jack Squat. And if you aren't going to try to be a forecaster, you're going to be more accurate trying to be a fox and not a hedgehog, even if you're not going to be nearly as popular. I don't want pop. I'm a dapper Dan man. Because basically hedgehogs have crystal balls that say similar things all the time.

Mostly Voices [17:36]

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

Mostly Uncle Frank [17:44]

And foxes sound more like this most of the time. Does that make you different than most everybody else?

Mostly Voices [17:48]

And the answer is yes. Somebody says, why is that? We don't know. What do we know? You don't know. I don't know. Nobody knows.

Mostly Uncle Frank [17:59]

But I will link to that interview in the show notes so people can check it out. And I will also see if I can link to this other interview of Andrew Beer, the creator of the DBMF Managed Futures Fund. There have been a number of good interviews of him in the past two or three months, a number of which I'd already linked to. But that's what happens when a particular asset class starts performing particularly well in a year where many other things are not performing particularly well. So I don't think you're too late to the party. Just be careful that you're not chasing into something like that just because it's had a good run recently. That's always the danger when something gets hot like that. If you did want to add something like that to your portfolio in a significant amount, the best practice for doing that is to wait until your current portfolio gets at or near another all-time high. which you may have to wait a little while for before making that kind of a shift, because that guarantees that you're essentially selling high as to what you already hold, and then perhaps buying lower depending on what you're moving into. Because one of the worst things amateur investors do is fund chasing or portfolio chasing, where they are making substantial changes frequently based on what's been performing well recently. And that is how amateur investors will typically underperform even the things that they hold simply because they are jumping around into the next latest greatest thing. And that often does not work out too well. For some reason, I'm reminded of this old Yogi Berra quote, or at least something that's attributed to him, which is, Nobody goes there anymore. It's too crowded, meaning that once something becomes too popular, maybe you'd be best off staying away, or at least not getting overly excited about it. But enough on that, and thank you for that email. Class is dismissed. Next off, we have an email from my contact info.

Mostly Voices [20:22]

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

Mostly Uncle Frank [20:26]

And my contact info writes.

Mostly Mary [20:33]

Good point about Total Bond Fund and importance of iterating views when data suggests it may be relevant to do so. Even Bogle rethought Total Bond Fund. Fama, albeit reluctantly, did the same concerning momentum investing. As you astutely point out, finance is not physics. Thank you for your wonderful podcasts.

Mostly Voices [20:49]

You are correct, sir, yes.

Mostly Uncle Frank [20:53]

Well, I will link to these two articles in the show notes. One is about Bogle rethinking the total bond fund. I heard an interesting interview by Rick Ferri, I don't know, a few months ago, of the people that run Vanguard's total bond fund. And the first thing they discussed is that it is not in fact a total bond fund. and does not include all the bonds in the world, but includes an arbitrary mix of bonds that somebody came up with at some point. And while at the time, and we're talking 20 years ago or so, having a fund like that was a vast improvement over trying to assemble a whole bunch of individual bonds, which would have been very difficult for a do-it-yourself investor, it's really kind of suboptimal for portfolio construction because it's likely that there's stuff in that total bond fund that you really don't want and maybe you want more of something that is not in there. But now that we have much more differentiated funds in terms of the kinds of bonds and the duration of the bonds that are in there, we can really pick and choose which ones fit best into our portfolios based on what purposes they serve. and so a total bond fund ends up being kind of an anachronism in the 2020s and is no longer a best practice in terms of do-it-yourself investing and portfolio construction. Now as for your second article, unfortunately the link did not work. AQR seems to have done something with its website. The momentum factor is one of those things that people have been playing with ever since It was discovered, so we're talking about 25 years now, and some people have had some success with it and some people haven't. The momentum funds that are out there are typically pretty tax inefficient, which has been one of the problems with them. And it seems that momentum may be best used as an add-on to some other methodology. For instance, you can find a fund like XSVM, which is small cap value with a momentum factor added to it. And I know at least that fund's had a pretty good track record. The thing I find most interesting about the concept of momentum, however, is that all cap weighted funds are in fact momentum funds when you think about it. Because what's going on in a total market fund or an S&P 500 fund is that the fund is automatically buying more of the stocks that are performing the best, which is a momentum strategy. That was weird, wild stuff.

Mostly Voices [23:39]

I did not know that.

Mostly Uncle Frank [23:43]

Now, it's a very slow momentum strategy, but it is one. And I don't think most people realize that when they are using those commonly used funds, they are in fact momentum investors. because they are not holding just the same things all the time, but changing their allocations based on a momentum factor. And I wonder if that is just enough momentum for most people. You can't handle the gambling problem. And you can also experience the inverse of that if you're buying small cap stocks or value related stocks. because potentially that stock can outgrow the category and then the fund will sell that particular stock. But I suppose that's just one of those things to ponder. I'm not sure anybody's done any particular research on that.

Mostly Voices [24:35]

Inconceivable.

Mostly Uncle Frank [24:40]

Let me know if you run across any, and thank you for that email. Last off. Last off, we have an email from John. Here's Johnny!

Mostly Mary [24:50]

And John writes, Frank, I've been listening for quite a while and learned a ton. I love the sound bites, though the cowbell has not been paying off for me this year. I gotta have more cowbell.

Mostly Voices [25:02]

I gotta have more cowbell.

Mostly Mary [25:06]

But I was pleasantly shocked to hear Welcome to the Pleasure Dome dropped in. Who knows that song besides me? Apparently you. Thanks again for doing the podcast. I do realize that even though it may be fun, it is also a bit of work. John.

Mostly Uncle Frank [25:20]

Well, John, yes, there are a lot of unusual songs and sayings and movie clips floating around in my brain.

Mostly Voices [25:28]

You are talking about the nonsensical ravings of a lunatic mind.

Mostly Uncle Frank [25:36]

And you get to hear a number of them for better or for worse. For worse. Looks like I picked the wrong week to quit I'm fed up with them. I am glad you're enjoying the podcast. Looks like you've been missing a lot of work lately. I wouldn't say I've been missing it, Bob. And they're a proud member of the Sound Clips Brigade. You only think I guessed wrong.

Mostly Voices [25:55]

That's what's so funny. I switched glasses when your back was turned. Haha, you fool.

Mostly Uncle Frank [26:02]

But at this point, Mary's probably saying, Don't encourage him.

Mostly Voices [26:05]

I've spoken my piece and counted to three. Count to three. Do it.

Mostly Uncle Frank [26:13]

She counted to three. And thank you for that email.

Mostly Voices [26:18]

And the encouragement. Shooting stars have stopped. Even when there is time, shooting stars never stop. Even when we reach the top, there goes a supernova. Wanna push over a mountain? Yeah, they go to supernova, quite a pushover, where I love it, but home. Welcome to the Pleiades, long way from home. Welcome to the Pleiades, home. Now we're going to do something extremely fun.

Mostly Uncle Frank [26:59]

And the extremely fun thing we're about to do is our weekly portfolio reviews. Of the seven sample portfolios you can find at www.riskparityradio.com on the portfolios page. Actually, it wasn't that much fun this week, but on the other hand, it wasn't painful either. Boring. Just looking at the markets themselves before we get to the portfolios, the S&P 500 was down 0.69% for the week. NASDAQ was down 1.57% for the week. Small cap value represented by the fund VIOV was down 0.99% for the week. Gold was down too. It was down 1.32% for the week. Long-term Treasuries were the only thing that was up last week. The representative fund TLT was up 1.79% for the week. REITs represented by the fund REET were down 1.46% for the week. Commodities were the big loser last week. The fund PDBC was down 3.57% for the week. I think the price of oil is falling again. Surely you can't be serious. I am serious and don't call me Shirley. Preferred shares represented by the fund PFF were down 0.85% for the week and managed futures represented by the fund DBMF were almost flat. They were down 0.06% for the week. 30% for Moving to these portfolios, the first one is the All Seasons Portfolio, a reference portfolio. It's only 30% in stocks and a total stock market fund, 55% in treasury bonds divided into intermediate and long term, and then the remaining 15% is divided into gold, GLDM and commodities, PBDC. It was absolutely flat for the week. It was up or down maybe 20 cents. It is down 18.63% year to date and down 7.05% since inception in July 2020. Now moving to our bread and butter portfolios, the next three. First one is the Golden Butterfly. This one's 40% in stocks divided into a total stock market fund and a small cap value fund. 40% in treasury bonds divided into long and short, and 20% in gold. It was down all of 0.33% for the week. It is down 12.86% year to date and is up 8.54% since inception in July 2020. Continues to be the best performer this year. Next one is the golden ratio. This one's 42% in stocks and three funds. 26% in long-term treasuries, 16% in gold, 10% in REITs, and the remaining 6% in cash. Actually, it's in a money market fund. It was down 0.12% for the week. It was down 17.98% year to date and is up 4.49% since inception in July 2020. Next one is our risk parity ultimate. I will not go through all 15 funds in this portfolio, but it was down 0.52% for the week. It is down 23.1% year to date and down 2. 04% since inception in July 2020. And now we'll move to these experimental portfolios. We do hideous experiments here so you don't have to. These all involve leveraged funds and so can be quite volatile. We also rebalanced two of them using our rebalancing rules. And the first one here 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 Preferred Shares Fund, and 22.5% in Gold. GLDM. It was down 0.06% for the week, so almost flat as well. It was down 39.75% year to date and 16.49% since inception in July 2020. Now this one's on rebalancing bands and so we look at it at the 15th of every month and if one of the components is 7. 5% off of its beginning allocation, then we rebalance the whole portfolio. In this case, the bond fund TMF had fallen by 7.5% relative to the other components, and so we ended up selling $339 of GLDM and $286 of PFF. And those are kind of the ballast components of this portfolio. and then we bought more of the levered parts of the portfolio. So we bought $500 worth of TMF and $150 worth of UPRO. Which we can do because we have fractional shares and no fee trading. And so on the 16th, I just pull out my phone, pull up that Fidelity app and put the trades in. It was that simple.

Mostly Voices [32:24]

That is the straight stuff, O Funk Master.

Mostly Uncle Frank [32:28]

It will be interesting to see what happens going forward as this does in fact add more leverage back into the portfolio by selling non levered funds and buying levered funds. We'll see if that helps or create something even more hideous. What happened to your face?

Mostly Voices [32:44]

It looks like an old catcher's mitt.

Mostly Uncle Frank [32:47]

Moving on to our next portfolio, the most levered and least diversified portfolio, the aggressive 50/50. This one is one-third in a leveraged stock fund, UPRO, one-third in a leveraged bond fund, TMF, and the remaining third divided into preferred shares fund, PFF, and an intermediate treasury bond fund, VGIT. It was actually up last week, up 0.29% for the week, down 47.55% year to date, and down 21.29% since inception. since inception in July 2020. If you wanted to compare this with a similar portfolio that was unlevered, that portfolio would be down about 20% for the year without the leverage. So we also rebalanced this one. It's on the same kind of rebalancing bands and rules as the prior portfolio. And so the bonds had in fact dropped more than 7.5% from their initial allocation that fund TMF. So we ended up selling $310 worth of the preferred shares fund PFF and $290 worth of the intermediate treasury bond fund VGIT. Those are essentially the ballast funds in this portfolio. And then we bought $500 worth of TMF and $100 worth of UPRO. We did all that on November 16th. And all of that information is duly recorded on the website, on the Portfolios page for that particular portfolio. And you can see all the details about the prior rebalancings there as well. And now moving to our last portfolio, the Levered Golden Ratio. This one is 35% in a composite levered fund, NTSX. That's S&P 500 in treasury bonds, 25% in a gold fund, GLDM, 15% in a REIT, O, Realty Income Corp, 10% each in a levered bond fund, TMF, and a levered small cap fund, TNA. And the remaining 5% is divided into a volatility fund and a Bitcoin fund. It was down 0.57% for the week. I guess it was the big loser. It is down 25.05% year to date and 20.6% since inception in July 2021. It's a year younger than the other portfolios. And that concludes our portfolio reviews. Fortune favors the brave. But now I see our signal is beginning to fade. I don't plan on doing any more traveling in the near future, so hopefully I'll get more caught up on these emails. 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. Okay. Thank you once again for tuning in. This is Frank Vasquez with Risk Parity Radio signing off.

Mostly Voices [36:53]

The Risk Parity Radio Show is hosted by Frank Vasquez.

Mostly Mary [36:57]

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.