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

Mostly Voices [0:53]

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

Mostly Uncle Frank [0:57]

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

Mostly Voices [1:25]

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

Mostly Uncle Frank [1:29]

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

Mostly Voices [1:33]

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

Mostly Uncle Frank [1:36]

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 [2:39]

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

Mostly Uncle Frank [2:43]

But whomever you are, you are welcome here.

Mostly Voices [2:47]

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. But now onward to episode 221. Today on Risk Parity Radio we have a little collection of emails that seem to have a theme to them, or at least be loosely based around a particular theme.

Mostly Voices [3:35]

And what might that theme be? I got a fever, and the only prescription is more cowbell. And so without further ado, here I go once again with the email.

Mostly Uncle Frank [3:47]

And first off, we have an email from Gregory and Gregory writes.

Mostly Mary [3:55]

Hi Frank, I really liked your recent podcast going over the basics of investing inspired by your conversation with Paul Merriman. Yes. Although admittedly think the references to the Wizard of Oz might be confusing or lost on us younger listeners.

Mostly Voices [4:10]

Just try to stay out of my way. Just try. I'll get you, my pretty, and your little dog too.

Mostly Mary [4:19]

I was hoping you could lend any thoughts on possibly improving a simple equity portfolio for young accumulators with different asset classes. I've been struck by how impressive a large cap growth and small cap value equal weighted portfolio has done historically from Paul's two funds for life tables. Try as I might, I find it hard to improve on it in Portfolio Visualizer for an accumulation portfolio. The two tickers I'm looking at would be VUG and AVUV, although their history is very short. But using other funds to evaluate the history of these two asset classes. Two main questions. One, do you think that lacking international exposure is concerning enough to modify such a 50/50 large cap growth and small cap value portfolio to make room for international assets? If so, what do you think is a fair proportion of domestic to international assets, perhaps 70/30, respectively, and what would you hold for international? Two, do you see ways to improve upon the domestic portion? An easy but perhaps incomplete solution seems to substitute a large cap growth fund For both NTSX, S&P 500 seems close enough to large cap growth to get exposure to intermediate treasuries and its sister fund, GDE, to get some exposure to gold. Do you see this as valuable in an accumulation portfolio? If yes, in a similar manner, might there be other asset classes attractive enough to hold for an accumulator, perhaps managed futures, utilities, or others? Huge fan of the show, Gregory.

Mostly Uncle Frank [6:03]

Well, Gregory is referring to episode 208 where we talked about advice for beginning investors using a Wizard of Oz theme. And Mary assures me that all of our nieces and nephews are well aware of the Wizard of Oz and would be happy to run off and get their ruby slippers, if so prompted. But as to your questions, your first one is about international versus domestic. Well, let's talk about that a little bit. There is a big elephant in the room that nobody seems to want to talk about when discussing international stocks versus US stocks, at least from the point of view of a US investor in particular. And that big elephant in the room is the reserve currency, the US dollar, and how it is valued against the currencies of other countries. Why does that matter and why do we care about that? If you go back in time and look at a chart of the US dollar and when it was stronger and when it was weaker, you can just look at that chart and tell when non-US stocks were doing well and when non-US stocks were not doing well. Because when the dollar is weaker, international stocks tend to outperform US equities and when the dollar is stronger, International stocks underperform US equities. What that means is a practical matter that if you are a US investor investing in international stocks and you're not currency hedged, then a good part of your investment is a speculation on the value of the US dollar versus other currencies. And if you were to remove that speculative element, you would see that US stocks and international stocks, at least the large ones, tend to perform rather similarly or a lot more similarly than you think they do. You keep using the word. I don't think it means what you think it means. At least when you're talking about the Unilevers and Procter and Gamble and Toyotas and Fords of the world. So while I'm not opposed or reverse to holding international stocks as a US investor, I think what we need to avoid is this kind of blind, belief that that is somehow a real diversification play when it's not really much of a diversification play except on this currency issue.

Mostly Voices [9:00]

That is the straight stuff, O Funk Master.

Mostly Uncle Frank [9:03]

So I would be applying the same kinds of criteria to your international fund selections as you do to the US selections, which means looking for the small cap value international looking for the things that have the lowest correlations with US stocks historically, and thinking about how you might do that. Now, it has not been easy in the past to get that kind of differentiation, because the kind of differentiation you get is on location of headquarters. You can buy the stocks in one particular country or a basket of emerging market stocks or a basket of developed country stocks. None of those are particularly well diversified in terms of Fama-French factors. Fortunately, it is possible now to get more of that diversification through things like those Avantis funds. Now Paul Merriman also publishes what he calls the best in class picks for ETFs for various fund classes, both domestic and international. which include a lot of those Avantis funds. I'll link to that in the show notes. That's also a good source to look at. So if you are a US investor, I'm pretty agnostic as to whether you actually hold any international stocks or not, but I would want you to go and hold them on the basis of value versus growth and on size premia, like you would look at US stocks and not just be holding generic piles of international whatevers. That's not an improvement. I think the calculus is a little bit different if you're outside the US because then your question is, well, how much of US based or these large US based international companies do I want to hold? It's probably at least 50% of your stock holdings. And again, that's partially based on this US dollar issue. It makes a lot of sense to hold a lot or a significant portion in your home country's currency if it's a decent currency. But I think that's going to be a little bit different for everyone depending on your country of origin and what kind of currency you plan on spending in retirement. And just one more thought on this. implied speculation on the US dollar. It's not actually that helpful to have things that are speculating that the US dollar will be weaker in the future, like international stocks, because as we've seen this year as an example, as the US central bank has raised interest rates, the dollar has become extremely strong, and that hurts just about every other asset class, including US stocks, foreign stocks, gold, commodities, the only things that benefit from that are things like managed futures that happen to be trading on that currency pair that the US dollar is going to be stronger than Euro or Yen or other things. You can see that kind of dramatically very recently because since sometime in October the US dollar has fallen in value and correspondingly just about all asset classes have recovered somewhat. So that's just a caveat or caution on investing things that involve a speculation that the US dollar will get weaker versus foreign currencies. The other thing I would caution you strenuously on analyzing US stocks versus international stocks is that the things like the PE ratios are not comparable at all. That's because something like a PE ratio not only incorporates the risk of the companies themselves, but the risks of operating in a particular country, the so-called country risk, which involves things like regulations and regularly functioning capital markets and countries that are more likely to get sanctioned or go to war. There's a good reason why they have low PE ratios oftentimes, because there are a lot of risks that are outside of just the companies themselves and how they're operating. So whatever you do, do not use those kinds of metrics in evaluating US stocks versus international stocks, because those things do not revert to a mean, and sometimes they just go off a cliff. All right, question two, do I see ways to improve upon the domestic portion besides the default to a large cap growth and a small cap value? And the answer is, I'm not really aware of one. There may be one that comes out, it will have something to do with factor investing. So, for instance, I'm wondering whether a fund like XSVm, which adds a momentum factor to a small cap value allocation, will ultimately be better than straight small cap value. But I can't say whether it is or it isn't now. I'm just not aware of long enough research to verify something like that. But I think you need to differentiate your thinking here because part of what you're also talking about in your question is whether or not to add leverage to the portfolio. And that is a separate question from what you're putting in the portfolio. Because it is true that any portfolio that you add leverage to, if it's going to have a positive return, will have a greater positive return. That is in fact one of the two methods of getting a higher return than say a straight Total stock market investment. And I will link to in the show notes the video about leverage from Ben Felix at Rational Reminder to discuss that. Because when you're talking about things like NTSX, you're talking about a leveraged fund. Now, if you have a long time to go, I'm talking about decades, I would stick with something that is essentially 100% equities as a default for now, because the chances are in terms of raw returns, those are going to perform better than managed futures or utilities or some kind of debt instrument or something else. They've been more reliably better performers over long periods of time than the alternative investments you might put in a portfolio later when you're drawing down on it. I don't see that much reason to add them earlier on unless you're just experimenting. Accumulation just does not need to be that complicated. I am curious as to whether a slightly diversified but levered portfolio will perform better than a all equity portfolio. The one you're suggesting is NTSX and GDE. Those are both leveraged funds that involve stocks, bonds and gold collectively. I don't think they've been around long enough to say whether that would work one way or another. At this point, I would assume that it's probably not going to work any better than your standard 100% equity accumulation portfolio. But if you wanted to experiment with something like that with a small amount of your money, there wouldn't be anything wrong with that. You're not going to lose your shirt. And just finally, there are a couple of good podcast featuring Eduardo Repetto, who is the head of Avantis Funds and is all about factor investing, small cap value, and other things of that nature. He was just interviewed on the Rational Reminder podcast just last week, I believe, and a couple months ago on the Rick Ferri Bogleheads podcast. Both of those are worth listening to if you have any interest in factor investing whatsoever, or if in Avantis Funds in particular. And so I will link to those in the show notes and you can check those out too. I really do think that that is where best practices are going in terms of do-it-yourself investing. The best, Jerry, the best. Low-cost factor funds, we'll call it that.

Mostly Voices [17:42]

I'll be honest, fellas, it was sounding great, but I could have used a little more cowbell. Hopefully that all helps. And thank you for that email. Are you doing that on purpose or can't you make up your mind? That's the trouble. I can't make up my mind. I haven't got a brain. Only straw. How can you talk if you haven't got a brain? I don't know. But some people without brains do an awful lot of talking. Don't they? Yes, I guess you're right. Second off.

Mostly Uncle Frank [18:15]

Second off, we have an email from My Contact Info.

Mostly Voices [18:19]

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

Mostly Mary [18:22]

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

Mostly Uncle Frank [18:26]

And My Contact Info writes. Hi, Frank. Hope you are well.

Mostly Mary [18:30]

Very impressive that you can count Paul Merriman as a listener. Not sure if you want to approach the subject of factor investing and asset pricing models given the contentious nature of the subject. But if you do, the below podcast is, in my humble opinion, very valuable. The research mentioned is old, but probably worth revisiting. Thank you.

Mostly Uncle Frank [18:54]

Well, I did go back and listen to that podcast. I think I had listened to it originally and I pulled up one of the versions of this paper that they were talking about. Just to clue everybody in, what these two researchers, and they're both academics, were trying to do is figure out what value managed funds had and how to estimate or calculate that value. The short answer is they believe that fund managers can add value to a fund, but it essentially gets all eaten up by fees. and that if you wanted to take advantage of it, your best strategy would be to hop from fund to fund to fund after you analyzed these managers, which is completely impractical. But the biggest issue or problem I have with their research was the default portfolio they were using. And you can see this if you want to look at that paper. Basically, they just took this kind of hodgepodge of Vanguard funds, the oldest ones they could find, and use that as kind of the default portfolio to compare their managed funds analysis against. And it was 11 funds that were overlapping. So there was like the total market one, then there was an extended market one, then there was an S&P 500, then there was a small cap and an intermediate one, a couple different international ones. It really was not something that anyone in reality would use or have had constructed. These go to 11. But I realized that they were just looking for a data source as a default portfolio to compare against. Now, the podcast hosts didn't go into this a lot, but there was a suggestion that if you simply made a better portfolio than this default one that they had used by using some of the factor analysis we now know about, Putting a small cap value fund in there, for example, and a S&P 500 or a large cap growth fund and making a better combination of those, you would outperform this default portfolio as well. And so to me, that was the takeaway. Well, if you just create a better portfolio still using low cost index funds, I'm telling you, fellas, you're going to want that cowbell and

Mostly Voices [21:13]

not using managers or chasing managers around.

Mostly Uncle Frank [21:17]

then you are likely to have a better performance. And the data analysis that we've done and others have done surely suggests that that is the case. Surely you can't be serious.

Mostly Voices [21:29]

I am serious and don't call me Shirley.

Mostly Uncle Frank [21:36]

So it was funny when they got to the end of the podcast and they asked one of them about, well, how are you going to invest your money based on this? And he says, well, this would take too much work, so I'm just going to put it in index funds anyway. Because the practical application of their research would involve lots and lots of transactions and probably a lot of taxes. So this is a good example of that Bruce Lee adage.

Mostly Voices [22:00]

Never go in against a Sicilian when death is on the line.

Mostly Uncle Frank [22:07]

When you're confronted with new or expert information that you should look at it and take what is useful, discard what is useless, and add something uniquely your own. And the useful thing to take away from this is not the stuff about the managed funds, but that it's very easy to improve upon a bad default portfolio while still having lower fees. Before we're done here, y'all be wearing gold-plated diapers. But I will link to all that in the show notes and you can check it out yourself. And thank you for that email.

Mostly Mary [22:54]

Next off, we have an email from Ralphio and Ralphio writes. Hi Frank, is the ETF IJR considered cowbell? That's my main small caps holding. I gotta have more cowbell.

Mostly Uncle Frank [23:08]

Well, the answer is kind of, but you could do better. And let me just tell you how you can analyze this without having to ask me. Not that I mind being asked, but let's talk about how to fish and not just give you a fish. So go to your Morningstar, the free analyzer they've got there. I'll link to this in the show notes. Put your fund in, this case IJR, go over to the portfolio tab, click on that. And then you can look at what they call the style boxes there, which are the measurements of small versus large and value versus growth. And if you look at this particular fund, you'll see it is small and in the blended box section, it is close to the value line. So it's more valuey than an average blended fund, but it's not as valuey as a value fund. In this case, if you want to use essentially the same provider and the same fund with the growth elements stripped out of it, you just would take the fund IJS, which is the sister fund of IJR, and that actually is the small cap value fund of those and is over in that value style box. And just for reference purposes, IJS is based on the same index as the Vanguard fund, VIOV, so those funds are essentially the same and interchangeable VIOV and IJS. So I don't know if that's enough cowbell for you. I gotta have more cowbell. But we don't know what else is in your portfolio, so hopefully that will help you analyze it. And thank you for that email. Last off. Last off, I have an email from Spencer.

Mostly Mary [25:11]

And Spencer writes, Frank, could you start listing the performance of small cap value in your weekly portfolio updates? I gotta have more Cowbell. Splendid. Spencer S. from the law firm of Igor, Gregor, and Timor, LLP.

Mostly Voices [25:27]

It doesn't work for me. I gotta have more cowbell. I gotta have more cowbell.

Mostly Uncle Frank [25:33]

Well, Spencer, I heard your message and I have updated that for our weekly portfolio reviews. We now include VIoV as one of the reference funds. And hopefully that will be enough cowbell. Splendid, splendid, I understand splendid.

Mostly Voices [25:53]

You are splendid, you are splendid.

Mostly Uncle Frank [25:57]

But now I see our signal is beginning to fade. 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. We'll pick up again this weekend with our weekly portfolio reviews and some more emails. We're into October's emails. How about that? 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 [26:45]

I don't know, Igor, Gregor, or Bolivar. No relation. And you all say splendid. You all say splendid all the time. They say splendid. They say splendid. Who doesn't say splendid in their life at this point in time? I never say splendid. Never in my life. Nobody else says splendid. People say splendid at least twice a day. It is fact.

Mostly Mary [27:08]

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.