Mostly Voices [0:00]

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

Mostly Mary [0:19]

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

Mostly Uncle Frank [0:36]

Thank you, Mary, and welcome to Risk Parity Radio. If you are new here and wonder what we are talking about, you may wish to go back and listen to some of the foundational episodes for this program. Yeah, baby, yeah! And the basic foundational episodes are episodes 1, 3, 5, 7, and 9. Some of our listeners, including Karen and Chris, have identified additional episodes that you may consider foundational. And those are episodes 12, 14, 16, 19, 21, 56, 82, and 184. And you probably should check those out too because we have the finest podcast audience available.

Mostly Voices [1:26]

Top drawer, really top drawer,

Mostly Uncle Frank [1:30]

along with a host named after a hot dog.

Mostly Voices [1:35]

Lighten up, Francis.

Mostly Uncle Frank [1:38]

But now onward, episode 228. Today on Risk Parity Radio, it's time for our weekly portfolio reviews. Of the seven sample portfolios you can find at www.riskparityradio.com on the portfolios page. But before we get to that, we have some emails. Before we get to the emails, I just wanted to talk about a fun holiday tradition that our family has started recently. So all of our sons came home yesterday. The last one arrived home yesterday, and we had our annual Talladega Nights Golden Fleece Diaper Christmas Dinner, which featured Fast food fried chicken pizza and... Always delicious Taco Bell. Sodas ready.

Mostly Voices [2:24]

Come on, y'all. Been slaving over this for hours.

Mostly Uncle Frank [2:28]

And we washed it all down with some Mountain Dew and Pep's Blue Ribbon. Shake and bake. And hilarity ensued, as it usually does.

Mostly Voices [2:36]

What is wrong with you? Chick, I'm all jacked up on Mountain Dew. I like to think of Jesus, like, with giant eagle's wings and singing lead Vocals for Leonard Skinnard with like an angel band. And I'm in the front row and I'm hammered drunk. Hey, Cal, why don't you just shut up? Yes, ma'am. But now next on the program today. I'm intrigued by this. How you say, emails. And? First off.

Mostly Uncle Frank [3:07]

First off, we have an email from Drew.

Mostly Mary [3:11]

And Drew writes, I've been considering using a managed future overlay on top of an approximately 100% equity accumulation portfolio. Margin can be complex. I don't have the capital to run a managed futures program directly, and so I've been looking into giving the fund BLNDX a 25% allocation in my currently all equity portfolio. Any thoughts on this fund? It's capital efficient, looks like 50% equities and 100% managed futures at 10 to 12% volume. I'm usually very fee conscious coming from the world of Bogleheads, but I've come to accept the extra cost that comes with trend following managed futures. This is the first time I've considered adding an actively managed fund in my portfolio. Happy holidays, Drew. Also, just donate on Patreon, first time using it. How much of that goes to the Father McKenna Center versus how much for you to help offset the cost of your show? Like to keep track of how much money we give to charity per year, we have a 10% of income target for charities. Thank you again for all you do. Again, happy holidays.

Mostly Uncle Frank [4:25]

Well, first, just so everybody knows, Drew went to the front of the email line by donating to our charity, the Father McKenna Center, through the Patreon page, which you can do from the support page at riskparriyradio.

Mostly Voices [4:42]

com We few, we happy few, we band of brothers.

Mostly Uncle Frank [4:50]

And Drew, 100% of that money does go to the Father McKenna Center. That's the fact, Jack!

Mostly Voices [4:56]

That's the fact, Jack!

Mostly Uncle Frank [5:00]

minus what Patreon charges me to collect it, which is about five percent. This podcast really does not cost that much to produce, and that's by intention and design. I basically just pay for the website hosting and the podcast hosting service. But I do all the production work myself, having acquired some audio and video editing skills from a decade of Being the videographer for our son's rowing teams.

Mostly Voices [5:31]

Girls only want boyfriends who have great skills.

Mostly Uncle Frank [5:35]

And I have been able to write off the cost of the podcast against the little bit of income I receive from occasionally doing consulting calls. With some of you folks. But I've never really wanted to turn this into some kind of large business venture. I don't think I'd like another job. Because it's just something fun to do in my retirement. I got this inkling.

Mostly Voices [5:56]

I got this idea for a business model. I just want to run it past you. Here's how it would work. 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 [6:23]

And I'd like to do it in a minimalist and sustainable way so that I can keep doing it for a longer period of time. But anyway, if you'd like to go to the front of the email line, just make a donation to the Father McKenna Center. You can do that through the Patreon page or you can do it directly. I'll provide that link in the show notes. But just remind me when you send your email in if you've made such a donation so that I can appropriately move your email to the front of the line. I was just down there at the Father McKenna Center last week. We had a nice little graduation for some of the homeless men who are in a pilot program that we've started called the McKenna Academy, which is designed to teach life skills to homeless people so that when they get into apartments and things, they have the necessary skills to continue to develop. Once you look back on it, you will never turn back.

Mostly Voices [7:23]

You'll never go back to the old ways and the old language and the old neglect. Never.

Mostly Uncle Frank [7:30]

Including basic financial literacy, because many of them have never had a bank account. But anyway, full disclosure, I am on the board of that charity and am currently the treasurer. Count the money.

Mostly Voices [7:54]

Perfect, don't forget. Give it to me again, Monet. Monet. Very good. And if you were thinking about some last-minute charitable donations this year, I would be very grateful if you would consider the Father McKenna Center.

Mostly Uncle Frank [8:09]

But now on to your questions. This fund, BLNDX, well, I took a look at it. And it's one of those funds that is trying to be an entire portfolio unto itself. And so it not only has managed futures in it, it has a large selection of your basic kind of Vanguard and Schwab stock index funds and some treasury bonds and some other commonly used ingredients for portfolios. And that actually makes it a bit problematic for do-it-yourself investing because in order to do this the right way, you would have to go into this fund, tease it apart and figure out all of the allocations and then do some algebra with the rest of the things in your portfolio, including figuring out where the overlaps are with the things you already have and make a bunch of adjustments to get the target allocation that you're actually looking for. So funds like this are actually more difficult to work with. I also do not like the mutual fund structure because it ends up being more costly and more tax inefficient. And so the expense ratio on this fund, I think, is about 1.24, 1.25 right now. That's percent. Which might be reasonable if it were just a managed futures fund, but the fact that it's got all of these commonly held index funds in it, which are only charging.04 expense fees themselves, makes it a really inefficient way for holding those sorts of things. I think what you really want to work with is a fund that is just the building block you need, in this case, managed futures, and then look at expense ratios there. Because the idea would be that instead of holding 25% of something like this, you can hold a lot less of some other managed futures funds. Now, the two that I've found out there recently that seem to have decent performance reflecting the asset class at a reasonable cost are DBMF, the one we commonly refer to and have talked about frequently. And then there's another one, ticker symbol KMLM, that also seems to fit that bill. There is a newer one called CTA, but it hasn't been around very long, and so I can't say that it would be a good choice right now, but it might be going forward. Those are all ETF structures, and I believe they all have expense ratios that are under 1%, and you probably only need an allocation in most portfolios of something like that of around 10 to 15%, I would think. So those would be my general suggestions if you're looking for something like that. I should also say I think I'd be careful about making a big shift into some fund like that right now. unless you are just building out the position slowly. And the reason for that is that you could be caught fund chasing. Those kinds of funds have had a pretty decent year and were up about 20% the last time I checked. But if you're going to make a shift into something like that in an abrupt way, you probably do want to wait until your current portfolio has recovered because otherwise you're in danger of essentially selling low what you have now and buying high, which is one of these funds that has had a recently good performance. So I would take your time with that unless you're just building out something new to begin with. If you're looking for a rule of thumb, the rule of thumb is wait until your current portfolio is at or near an all-time high before making any large shifts into other allocations or asset classes. Hopefully all that helps and thank you for that email and for your donation. The best Jerry, the best.

Mostly Voices [12:16]

Second off.

Mostly Uncle Frank [12:20]

Second off we have an email from the sad fiendist. And the sad fiendist writes.

Mostly Mary [12:35]

Hi Frank, I was running some back tests on portfolio visualizer And I found it interesting that the IEI ETF intermediate treasury bonds are slightly more negatively correlated than TLT compared with VTI. Does it mean I can use the less volatile IEI ETF instead of TLT? I probably know what you'll say.

Mostly Voices [12:55]

You can't handle the truth.

Mostly Mary [13:00]

These funds only go back to 2007 and all, but still, A good 15 years. And since you always talk about the age of steel of investing, I think this period is a big enough and modern sample.

Mostly Uncle Frank [13:11]

Thoughts? Well, my frowny-faced friend. What you were talking about does have a very long history because the intermediate treasury bond fund is really the same thing as the 10-year. And so, You have 100 years of data to look at for something like that. Now, all treasury bonds, particularly when you get into intermediate and long term, are going to have similar correlation numbers to the stock market because they're the same kinds of things. So the difference is in the duration and how does the duration affect the asset class? Well, it makes the longer duration bonds generally have a higher return over long periods of time because there's more risk there. And they are also more volatile. And so you're probably scratching your head is thinking, well, why would I want something that's more volatile? That certainly wasn't very helpful in a year like this. Well, fortunately, years like this only happen once every 40 or 80 years. In the long run, if you are holding and rebalancing a portfolio, that volatility, if it's not correlated with something else, will give you more rebalancing opportunities and can reduce the overall volatility of the portfolio while maintaining a relatively high compounded annual growth rate. And this is why you don't want to look at these things in a vacuum and construct some kind of bond portfolio that's separate and apart from the rest of your portfolio. You want to look at the whole thing and see how the whole thing would perform over a long period of time. And one of the reasons you would prefer to hold the longer duration bonds in a complete portfolio is that then you have to hold less of them. You get essentially more bang for your buck, so you can hold a lower percentage in treasury bonds and have the same overall effect in the portfolio. than you would if you had a short duration or intermediate duration bond. And this is why we say there are really three reasons you might hold bonds to begin with. One would be stability, another one would be income, and another one would be diversification. When you're looking at duration, stability is on the short end of the duration spectrum. So short term bonds are very stable. But if you hold too many of them, they can be like dead weight. On the other hand, longer term bonds end up being the most diversified from stocks, not only by the correlation numbers, but by the volatility, which contributes to the diversification factor overall. This is why in a lot of respects, when you're using these bond building blocks to construct a portfolio, it's actually easier to just look at Short-term bonds is why I want this much of these because I'm looking for this much stability in this portfolio. And then I want these long-term bonds for their diversification qualities. The ones in the middle, those intermediate-term bonds, as you can imagine, do some of each but don't do either one as well. And so if you look at a couple of our sample portfolios, the golden butterfly and the golden ratio, The Golden Butterfly is an example of a conservative portfolio that's taken a 40% bond allocation and put half of that in stability, the short-term bonds, and half of that in diversification, the long-term bonds. The Golden Ratio portfolio has taken a more aggressive position, adding more on the diversification side and reducing the stability side to only the six percent that's used for distributions. Now you could imagine taking those portfolios and just replacing all the bonds with an intermediate treasury bond fund. And you may end up with very similar results for most periods, but it's going to be less flexible and it's probably going to end up with a lower Sharpe ratio for any given period of length that is compared. So it's certainly never wrong to use intermediate treasury bonds in a portfolio, it is a very standard and accepted practice. I think you just need to be asking yourself and be mindful of why you're using them and asking that question, why do I want this particular allocation to bonds? Is it diversification, income or stability? And then pick the right ones for that purpose. I think this is a topic that's very difficult for most do-it-yourself investors to get their heads wrapped around. And frankly, most popular personal finance gurus don't get it either because they have not read the academic papers and the white papers from the hedge fund people about these issues. So they end up with this kind of incomplete idea about bonds, which is that their primary purpose is stability and income, and also hold an erroneous belief that all bonds are diversified from all stocks and in the same manner. Those notions just are not true and become stumbling blocks to constructing better portfolios. Something for us all to ponder while we're drinking that spiked eggnog later this evening. You are correct, sir, yes. And thank you for that email. Last off. Last off, we have an email from Popeye.

Mostly Mary [18:56]

And Popeye writes, I understand you're taking withdrawals from the portfolios. My question is if the returns you state since its inception are taking the distributions into account or are they the starting and ending values that have grown by X percentage?

Mostly Uncle Frank [19:14]

Well, thank you for this question. I suppose the Real question is how are the distributions accounted for in connection with the returns? And the answer is the returns are not supposed to be influenced by the distributions. So the distributions are removed from the calculation of returns. So in any given year, if a portfolio had a 10% growth and we took out 5% of the portfolio as distributions that would be counted as a 10% return, even though the nominal amount of the portfolio obviously would only be 5% higher. Now, fortunately for me, Fidelity, where I keep these portfolios, has upgraded their performance tracking options and will give me year-to-date annualized returns and returns since inception on a daily basis. Yeah, baby, yeah! So starting this week, I'm letting Fidelity do it for me. Actually, starting the middle of last week, I fixed those numbers, which were similar but not exactly the same as the ones I had already calculated. So I will be relying on the professionals at Fidelity going forward. The thing is, Bob, it's not that I'm lazy, it's that I just don't care. And thank you for that email. And now for something completely different. And the something completely different is our weekly portfolio reviews of the seven sample portfolios you can find at www.riskparityradio.com on the portfolios page. Just going through what happened in the markets last week. It was a typical week for the year of 2022, which means it was bad. So the S&P 500 was down 0.2% for the week. NASDAQ was down 1.94% for the week. Small cap value stocks represented by the fund VIoV were down 0.36% for the week. Gold was actually up last week. I love gold. Gold was up 0. 14% for the week and is almost flat for the year right now. Long-term Treasury bonds were the big loser. Our new representative fund, VGLT, was down 4.56% for the week after some surprise moves by the Central Bank of Japan that rattled the world's bond markets. Real wrath of God type stuff. Now I had mentioned I was going to do this a couple weeks ago. What I did was sell all of the TLT in the various portfolios and replace that with VGLT, which is a similar long-term treasury bond fund but offered from Vanguard, which has a lower expense ratio than TLT. And I had done that based on an article I read at Portfolio Charts about the availability for those funds to do this kind of tax loss harvesting with because they're slightly different. I'll link to that article in the show notes again, but we will be using VG L T going forward as our representative long-term treasury bond fund. Moving on to the next asset, REITs represented by the fund R E E T were flat last week. Commodities represented by the fund P D B C were up 2.23% for the week. I should also note there was a large distribution out of that fund for the year. So it looks like it went down a lot, but that is actually coming back into the portfolios as a cash dividend payment. The next one is preferred shares represented by the fund PFF. That was down 1.57% for the week. Then our last one, managed futures represented by the fund DBMF were up 0.77% for the week. Now, moving to these portfolios, first one is this reference portfolio, the All Seasons. It's only 30% in stocks and a total stock market fund, 55% in intermediate and long-term treasury bonds, and 15% in gold and commodities. It was down 1.97% for the week, is down 18. 59% year to date and down 7.28% since inception in July 2020. Moving to our three bread and butter kind of portfolios. First one is a golden butterfly. This one's 40% in stocks divided into total stock market fund and a small cap value fund. 40% in bonds divided into long and short term treasuries and 20% in gold, GLDM. It was down 0.84% for the week. It was down 13.34% year to date and up 7.46% since inception in July 2020. Next one is the Golden Ratio Portfolio. This one is 42% in stocks and three funds, 26% in long-term treasury bonds, 16% in gold, 10% in a reit fund, and 6% in a money market fund. It was down 1.15% for the week. It is down 18.6% year to date and up 2.94% since inception in July 2020. Next one is the Risk Parity Ultimate. I will not go through all 15 of these funds in this portfolio. It was down 1.68% for the week. It's down 24.37% year to date and down 5.03% since inception in July 2020. Now moving to these experimental portfolios involving leveraged ETFs. So the first two are levered up more than 100% and have the kind of volatile returns you would expect from that. First one is the Accelerated Permanent Portfolio. This one has 27.5% in a levered bond fund, TMF, 25% in a levered stock fund, UPRO, 25% in a preferred shares fund, PFF, and 22.5% in gold. Gldm was down 5.04% for the week. It's down 41.07% year to date and down 21.97% since inception in July 2020. Next one is the most levered and least diversified portfolio, the aggressive 5050, which is half stocks and half bonds. It's got 33% in a levered stock fund, UPRO, 33% in a levered bond fund, TMF and the remaining third divided into a preferred shares fund, PFF, and an intermediate treasury bond fund, VGIT. It was down 6.29% for the week, had an awful week, is down 49.39% year to date with all that leverage in it, and it's down 28.39% since inception in July 2020. It truly is a speculative endeavor. And going to our last one, the levered golden ratio, which is only levered up about 1.6 to 1. This one is 35% in a composite fund called NTSX. That is S&P 500 and treasury bonds with 1.5 times leverage in it. It has 25% in gold, GLDM, 15% in a reit fund, O, 10% each in a levered Small Cap Fund TNA and a levered bond fund TMF and the remaining 5% in a volatility fund and a Bitcoin fund. It was down 1. 45% for the week, down 26.66% year to date and down 22.39% since inception in July 2021. It's a year younger than the other ones. And so after a miserable December in a miserable year, we're all hoping that Santa Claus will come next week with the Santa Claus rally. Will he come? Crystal Ball can help you. It can guide you. What does our Crystal Ball say? We don't know.

Mostly Voices [27:33]

What do we know? You don't know. I don't know. Nobody knows.

Mostly Uncle Frank [27:38]

But enough on that. Now I see your 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 are still about six to eight weeks behind on the emails, just finishing October, so if you do want to go to the front of the line you can take advantage of that option by making a donation to our charity. And let me know if you do that so I can move you to the front of the line. 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. M'kay?

Mostly Voices [28:29]

Hope you have some happy holidays. Dear tiny Jesus, your golden fleece diapers with your tiny little fat balled up fist, pawing at the air. There was a man, he had a beard. Look, I like the baby version the best. Do you hear me? And thank you for listening in.

Mostly Uncle Frank [28:47]

This is Frank Vasquez with Risk Parity Radio signing off.

Mostly Voices [28:51]

Well, the teacher asked me what was the capital of North Carolina. I said, Washington, D.C. Bingo, nice. She said, no, you're wrong. I said, you, got a lumpy butt. She got mad at me and yelled at me. And I pissed in my pants. And I never did change my pee pants all day. I'm still sitting in my dirty pants.

Mostly Mary [29:13]

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.