Mostly Voices [0:00]

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

Mostly Mary [0:18]

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

Mostly Uncle Frank [0:36]

Thank you, Mary, and welcome to Risk Parity Radio. If you are new here and wonder what we are talking about, you may wish to go back and listen to some of the foundational episodes for this program. 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 Voices [1:28]

Top drawer, really top drawer, along with a

Mostly Uncle Frank [1:32]

host named after a hot dog.

Mostly Voices [1:35]

Lighten up, Francis.

Mostly Uncle Frank [1:39]

But now onward to episode 220.

Mostly Voices [1:42]

It's time for the grand unveiling of money.

Mostly Uncle Frank [1:46]

And that grand unveiling will come in the form of our weekly portfolio reviews of the seven sample portfolios you can find at www.riskparityradio.com. www.riskparityradio.com on the portfolio's page.

Mostly Voices [1:59]

But before we get to that, I'm intrigued by these how you say emails?

Mostly Uncle Frank [2:08]

And first off,

Mostly Mary [2:12]

we have an email from Nick and Nick writes, Dear Frank, two years and still going strong. Thank you for investing your time and effort in keeping this community of do-it-yourself investors going, and long may it continue. We have been charged by God with a sacred quest. A quick logistical question, which I'm not sure has been addressed. If so, apologies if I missed it. I usually listen to your podcast just before going to bed, and every so often I end up intentionally dozing off before getting to the end. I guess your voice just has a unique calming and soothing quality. Snooze and dream. Dream and snooze. The pleasures are unlimited. Many risk parity portfolios include a gold ETF such as GLDM. I maintain a portfolio modeled after the Golden Butterfly which invests a portion in GLDM. However, come tax time, my 1099-B from my brokerage shows numerous sell transactions of GLDM for a few cents each because, as I understand it, gold ETFs typically sell a portion of their holdings each month to cover expenses. Furthermore, brokerages are not required to report the cost basis information for precious metal ETFs such as GLDM, making it a real drag come tax time. I was wondering how you deal with the tax reporting aspect for these funds in your sample portfolios. Do you know of any gold ETFs that do not engage in this practice of making regular sales to cover expenses? That would make it so much easier for tax reporting. Thanks, Nick. Well, Nick, I guess it has been over two years.

Mostly Voices [4:17]

What a long strange But thank you for sticking around and your support.

Mostly Uncle Frank [4:25]

We built a nice little audience here of people who are very interested in this topic. The best Jerry, the best. And I appreciate each and every one of you. We are a small but mighty community.

Mostly Voices [4:36]

It is King Arthur and these are my knights of the round table.

Mostly Uncle Frank [4:40]

Now as to your question, This is a kind of a peculiar thing because I think it may change depending on which brokerage you have your funds at. I've got GLDM both at Fidelity and at Interactive Brokers. And Fidelity does report the way you describe with these small transactions. Interactive Brokers does not report that way. So I have to believe that this has something to do with the way each one of them are interpreting what they need to do to put on a 1099. It ends up being kind of a de minimis amount, but it is kind of an annoyance just to have those things there. I went and looked at what our CPA did in terms of reporting that on the tax forms. And in addition to filing the Schedule D and the 8949, we also took what is called the de minimis safe harbor election under Reg Section 1. 263a to 1f, which allows you to file things in summary formats when they are small. So I don't know whether that will be helpful to you or not. We do not prepare our own tax returns because they are very lengthy and hairy. I think our federal one was about 120 pages long this year. or for 2021, I should say. Now, it's also interesting. I don't see these kind of tiny transactions being reported on earlier 1099s than, say, last year, although I didn't do a comprehensive look through them. And I haven't seen it in connection with other funds like BAR or GLD. And like I said, interactive brokers doesn't seem to have reported it that way at all. So I'm thinking it may have more to do with the brokerages and their own interpretations about what needs to be on a 1099 through their compliance departments than it does have to do with the funds themselves. The reason I still like GLDM is because it now has the lowest expense fee, which is 0.1. The other ones with lower expense fees are Iuam with an expense ratio of 0.15 in BAR with an expense ratio of 0.17. I'm guessing that the others will reduce their expense ratios at some point because that's how competition works. Yes!

Mostly Voices [7:15]

But for now at least GLDM seems to be still the best

Mostly Uncle Frank [7:19]

option even with the inconvenience on the 1099s. But hopefully that helps at least somewhat and thank you for that email.

Mostly Mary [7:29]

Second off. Second off, we have an email from Mr. Harris. And Mr. Harris writes, Mr. Vasquez, the idea behind the asset allocation principle indicates that in times like this, I should be selling bonds to buy stocks to bring the allocation to target. However, I find myself having to sell stocks to buy bonds at the present to reach my target allocation on rebalancing. Does it make sense or are we just seeing the end of the allocation principle theory?

Mostly Uncle Frank [8:02]

Well, no, nothing's really changed here. The reason we have rebalancing rules that are written out and are mechanical in nature is so we can just follow them mechanically and we aren't speculating or thinking about modifying them in some way. And so this has been a year when bonds have performed badly and you end up buying more of them, like we did just last week in two of our experimental portfolios was mostly bond buying. And there was bond buying in July for some of the other portfolios as well. Because what rebalancing forces you to do is to buy low and sell high. So In the case of some of these bond funds, while they've been down most of the year, in the past month they're up 10%. And if you tried to time that, you would have screwed yourself up. Stupid is, stupid does, sir. We really need to try to stay out of the predicting business. There is a nice article from Michael Kitces about rebalancing. It's called Optimized Rebalancing. I've linked to it before in show notes. I'll link to it again. so you can read that. But the most important thing about rebalancing is to come up with a plan and then stick with that plan, because otherwise you're just market timing and guessing, and you really don't want to do that. Hello?

Mostly Voices [9:29]

Hello? Anybody home? Ah, think McFly, think! Hopefully that helps, and thank you for that email.

Mostly Uncle Frank [9:39]

Last off. Last off, we have an email from Howard and Howard writes. Thanks for your podcast.

Mostly Mary [9:51]

It helped me to see the light into my portfolio. I'm just wondering when I look at a fund such as PRW CX T Rowe Price Capital Appreciation, it seems in the long term, this fund performs better than any of the risk parity portfolios. with not much higher risk. What is wrong with this analysis? And would it be wise just to retire on this fund? Thank you.

Mostly Uncle Frank [10:15]

Well, the answer is no. This is a managed fund you were talking about, and so it would not be wise to rely on the past performance of a managed fund because they tend to revert to means over time. Shirley, you can't be serious. I am serious. And don't call me Shirley. But first, let's talk about what you're actually looking at, because it's not what you think you're looking at.

Mostly Voices [10:44]

I don't think it means what you think it means.

Mostly Uncle Frank [10:48]

This is the way the managed fund world works. Suppose you started out with a hundred dice, six-sided dice, and they were in different colors. So we had red, white, and blue ones, and green and yellow ones. 20 dice each, and you rolled all of those dice. Some of them are gonna come out sixes, and some of them are gonna come out ones, and one of the colors is probably going to have more sixes than the other ones just by random chance. So that's effectively what happened if you assume that all your managed funds started out the same 20 years ago or 30 years ago. But what has happened since that time is the people that rolled the ones and twos, they took their dice away off the table. So you're not seeing those ones anymore. Those funds closed down. And this is what is called survivorship bias. When you are looking today at past performance of funds, you are not seeing the ones that failed because They don't exist anymore. And T. Rowe Price had just as many of those as anybody else. So what you are seeing is a survivorship bias. And in this case, you're also saying, okay, well, the red ones came up with more sixes, and this was one of the sixes. So why don't I just pick that die on the theory that if I keep rolling that die, it's going to have more sixes than the other dice. Except we know that's not true because these dice revert to the mean if you keep rolling them. So you should not expect that die to keep rolling high numbers just because it has rolled them in the past. One of the dice is going to appear more lucky than the other ones. That's just the way probability works. Now how do we know that that analogy I just gave you is correct? in reality. We know because there was a big debate about this about 20 years ago. It was the competition between index funds, low cost index funds and managed funds. And there were a lot of papers written about this. A lot of analysis was done. And the index fund side won the debate. The research came out showing that Managed funds are like throwing a whole bunch of dice and that managed funds tend to revert to the mean of whatever the kind of stuff that is in them. So if they're a large cap value fund, they're going to keep performing like all other large cap value funds eventually. Now, the leader of this charge was Jack Bogle, or he's one of the leaders of the charge because Vanguard had the index funds, and that was the debate that was being had. So if you go back and read, and I would commend you to go back and read Common Sense Investing by Jack Bogle, and in particular pay attention to chapters 18 and 19 where a lot of this is discussed. And that's where we get what's called the macro allocation principle. That if you have macro allocations, in this case we're looking at a fund That says it's 40 to 70% in stocks. And if you look at the Morningstar analysis of it, it's basically large cap growth stocks and the rest in bonds. So it's comparable to a 60/40 portfolio where the 60 is tilted towards large cap growth stocks. And so over time, you would expect it to perform very similarly to other portfolios that have that mix. that macro allocation mix. And the research shows this is true. And that research continues to be done and continues to be confirmed year after year after year. That any advantages that a managed fund might have are eventually sucked out by its fees and it reverts to the mean of whatever is the kind of thing that's in it. This is published now every year by an organization called SPIVA. It's an acronym, S P I V A, and they do reports of managed funds to see how they compare with their indexes. And year after year, managed funds tend to underperform, or 80% of managed funds tend to underperform their indexes. And the ones that outperform tend to be different most years. Now, you're going to find outliers like this fund, Because that's how probability distributions work. Something has to be on the end and something has to be on the other end. And most of them have to be in the middle. And here the middle is underperforming the indexes. I'll link to one of the latest SPIVA reports in the show notes from 2021 and you'll see the same outcome. Now, your other assertion was that this fund performs better than any of the risk parity portfolios in the past. That's actually a false assertion because it's based on the idea that you are picking the outlier in hindsight and I can do the same thing.

Mostly Voices [16:15]

No one can stop me.

Mostly Uncle Frank [16:19]

And I did do the same thing that I'm going to show you on Portfolio Visualizer what that is. The first thing I did was, well, what if we just took this fund and made it more of a risk parity style portfolio? And to do that, I did a very simplistic thing. I said, well, why don't we compare 100% portfolio in this fund to one that is 85% this fund and 15% in gold. And so this data in portfolio visualizer goes back to 2005 with the parameters we were using, which is highly appropriate since this fund changed managers in 2005 or 2006. So it was a different managed fund before that. Another reason why you have to be careful with managed funds. They change. But anyway, when you ran this comparison, you see that the fund with the gold in it had a slightly higher compounded annual growth rate, and I ran this with a 4% withdrawal coming out of it. So it's a couple ticks higher on that regard. But it's significantly higher on both the Sharpe ratio and the Sortino ratio. and those are measures of risk reward. So turning this fund into a more risk parity style portfolio, using this fund as a base, gives you a better return. Oh, but I'm not done. Now, your methodology is to look backward in time, because hindsight is 2020, and pick whatever fund you want as your performer. I can do that too.

Mostly Voices [17:59]

Never underestimate your opponent. So I picked a different fund.

Mostly Uncle Frank [18:03]

I picked the Parnassus Endeavor Fund, which is a large cap fund with ESG qualities that has been around since 2005. And I took that fund and I used the Golden Ratio portfolio. And so I took that fund and substituted it for The stock portion that we would ordinarily carry in index funds and the 10% in REITs, that is just another stock component that we've added in that sample portfolio. And then I ran that against your T-Rowe Price Fund.

Mostly Voices [18:38]

I want you to be nice until it's time to not be nice.

Mostly Uncle Frank [18:46]

And my portfolio is leaps and bounds better than yours. using your methodology of picking a fund. It has a higher compounded annual growth rate. It has a higher Sharpe ratio and a higher Sortino ratio. So there's really no contest here.

Mostly Voices [19:11]

And his name is John C.

Mostly Uncle Frank [19:14]

But this analysis and this form of fund picking or methodology for it is really quite So it's not going to be useless because we know from all the research that any managed fund that's going to outperform is likely to revert to the mean of its components. So we can do this all day. I could stand up here and talk on and on like some bow weevil sitting on a stump bragging to a dog in heat. I can go find another list of the top performing funds in the past 20 years and shove a different one in there and get another better result than you have. It doesn't say anything and it doesn't mean anything. Unfortunately, this is one of the fundamental problems that amateur investors have in portfolio construction.

Mostly Voices [19:58]

Did you see the memo about this? Did you get that memo? Yeah, I got the memo. Yeah.

Mostly Uncle Frank [20:09]

Didn't you get that memo? They look at a series of past returns and say, Well, that one has a higher return for the past 10 years. I'll jump right into that. And then what happens, it reverts to the mean and underperforms in the next period, and then they jump to another fund, and then they jump to another fund. And this is how amateur investors repeatedly underperform even the funds that they are holding because of this bad methodology and bad process that ends up jumping out of funds and essentially Buying things that are high and selling things that are low. So the lesson here should be not that it's a bad fund, but the process is bad and you shouldn't be using this process to decide what goes in your portfolio. And I'll go ahead and make sure you get another copy of that memo. Okay? Now, just a couple other notes. First, if you look at the fund that you're talking about, the T. Rowe Price fund and put it into the Morningstar, Analyzer, which kind of tells you what's in it, you'll see that it's tilted towards large cap growth. And anything that's tilted towards large cap growth over the past 10 or 15 years is going to outperform the market because that was the best performing factors since the great financial crisis. That pattern is unlikely to continue over decades of time and is inconsistent with the hundreds of years of data showing that those factors do not tend to outperform the market over time, but tend to yield average market returns. Again, say an S&P 500 fund. And just one other thing, and this is kind of the capper. If you wanted to invest in this fund, you have a big problem. This fund is closed to new investors and has been closed for some time. So unless you're already invested in this T Rowe Price fund, You can't invest in it. Now, why do companies who promote funds and have funds close them as T Rowe Price has done here for a couple of reasons? It's much easier to manage a mutual fund if it's closed because you don't have the inflows and outflows that you would have with an open fund. So fund management becomes a lot easier. The other reason that you would want to have as a fund provider a fund like this is essentially advertising. Always be closing. Because you can say, look, we've got this long running fund that's outperformed for many, many years. Now you can't get into that one, but we've got these other ones over here that are maybe just as good, or maybe not, but that's the way the fund universe works because they got rid of all their dogs a long time ago. and you see it have this survivorship bias that helps with marketing. And that's how they suck you in.

Mostly Voices [23:06]

Because only one thing counts in this life. Get them to sign on the line which is dotted.

Mostly Uncle Frank [23:13]

Now, if you did want to invest in the components of this, you could do your own direct indexing because you can find the list of the companies that are in it. And it's like companies like Microsoft and a lot of other big companies that are in a lot of large cap funds, and you could buy those stocks individually. You avoid the fees, the fund fees for this, if you wanted to do that and make that as part of your stock allocation in whatever portfolio you're holding. But if you're going to go to all that trouble, you might as well just make that component just a large cap growth component of your portfolio, because that's what you're going to end up with anyway. But I believe that is enough on this topic for now. Thank you for that email though, because these issues are very fundamental for amateur investors to grasp and understand as to why managed funds are not likely to be your best choice. And you are essentially guessing at the future when you're choosing managed funds over index funds. Fat, drunk, and stupid is no way to go through life, son. Because chances are, if there is outperformance in the future, it's probably going to get eaten up by the fees the fund is charging you. That's just the way it works.

Mostly Voices [24:31]

Forget about it. And thank you for that email.

Mostly Uncle Frank [24:35]

Now we're going to do something extremely fun. And the extremely fun thing we get to talk about is our weekly portfolio reviews of the seven sample portfolios at www.riskparityradio.com It was a good week all around, which we can't say that much this year. But just looking at the markets themselves, the S&P 500 was up 2.02% last week. The Nasdaq was up 0.73% for the week. Small Cap Value Fund, VIoV, was up 1.15% for the week. Gold was also up a little bit. It was up 0.17% for the week. Big winner last week was long-term treasury bonds represented by the fund TLT. They were up 3.27% for the week. Seem to be making a furious recovery at the end of the year after being the worst performer all year long. REITs represented by the fund R E E T were up 1.48% for the week. Commodities were the big loser last week. PDBC, our representative fund, was down 1. 5.9% for the week. Preferred shares represented by the fund PFF were up 1.11% for the week. And managed futures represented by the fund DBMF were down last week. They were down 1.38% for the week displaying the negative correlation they've had with most of the other asset classes this year at least. Over time that category really has more of a zero correlation than a negative correlation with the other assets. Now, moving to these portfolios, the first one is this reference portfolio called the All Seasons that is only 30% in stocks and a total stock market fund. It has 55% in Treasury bonds divided into intermediate and long term, and the remaining 15% is divided into gold and commodities. It was up 1.69% for the week. It's down 17.31% year to date and down 5.63% since inception in July 2020. Moving to our three more bread and butter kind of portfolios. First one is this golden butterfly. It's 40% in stocks divided in total stock market fund and a small cap value fund, 40% in bonds, treasury bonds divided into long and short, and 20% in gold, GLDM. It was up 1.2% for the week. It is down 11.84% year to date and up 9.72% since inception in July 2020. Next one is the Golden Ratio. This one's 42% in stocks in three funds. It's got 26% in long-term treasury bonds, 16% in gold, 10% in that REIT fund, R-E-E-T as a sample, and 6% in a money market fund or cash. It was up 1.59% for the week, it's down 16.74% year to date and up 5.95% since inception in July 2020. Next one is our Risk Parity Ultimate. This one's got 15 funds in it. I'm not going to go through all of them. I have to tell you the worst ones have been these small allocations to cryptocurrencies that we've got though. It's been really ugly this year. But it was up 1.35% for the week, it was down 22.12% year to date, and down 0.91% since inception in July 2020.

Mostly Voices [28:13]

And now we move to these experimental portfolios, which are now showing some life. Tony Stark was able to build this in a cave with a box of scraps.

Mostly Uncle Frank [28:22]

These all involve leveraged funds, ETFs. The first one is the Accelerated Permanent Portfolio. This one has 27.5% in the Leverage Bond Fund, TMF, 25% in a leveraged stock fund, UPRO, then 25% in PFF, a preferred shares fund, and 22.5% in Gold, GLDM. It was up 4.17% for the week. It's down 37.44% year to date and down 13.76% since inception in July 2020. Now moving to our most volatile and least diversified portfolio, this aggressive 5050. It's also got the most leverage in it. This one is 33% in the leveraged stock fund, UPRO, 33% of leverage bond fund, TMF. The remaining third is divided into the Preferred Shares Fund, PFF, and an intermediate treasury bond fund, VGIT. It was up 5.02% for the week, down 45.14% year to date with all of that leverage and is down 18. 24% since inception in July 2020. And now moving to our last one, it's only been around for a little over a year. This is the levered golden ratio. It's got 35% in a levered composite fund that's S&P 500 in Treasuries called NTSX, 25% in gold, 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. And it was up 1.66% for the week. It's down 23.88% year to date and down 19.41% since inception in July 2021. All these portfolios seem to have had a pretty good month in the past month, but we'll see if that continues to the end of the year. But now I see our signal is beginning to fade. I hope you all had a happy Thanksgiving. We're still having more people over this weekend. More food and more fun. I note on the calendar that Giving Tuesday is coming up and our podcast has no sponsors, but it does have a charity, the Father McKenna Center, which is linked to on the support page. And so if you are thinking about giving something but haven't decided who to give it to yet, I would appreciate it if you would consider the Father McKenna Center as a recipient of some of your largesse. Full disclosure, I am on the board of that institution and I'm currently the treasurer.

Mostly Voices [31:20]

I don't care about the children. I just care about their parents' money.

Mostly Uncle Frank [31:23]

And I want to thank all of the people who have already donated over the past couple of years, especially Our patrons on Patreon who have signed up for monthly donations, and you can do that as well on the support page if you are so inclined. Now 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, put your message into the contact form and I'll get it that way. I'm still back in October as far as these emails are concerned, but I think I've concluded for September there might be one or two more in the bin there, but I will get to them. 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.

Mostly Voices [32:28]

aigning on Happy, happyeorge happy, happy Gorge Happy, happy Gge happyppy, happy. be dod Iy a happy do. I be happy, I me, I me, I me. I me, I me. I I be a do.

Mostly Mary [32:50]

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.