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 [0:21]

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 [0:52]

Expect the unexpected.

Mostly Uncle Frank [0:56]

It's a relatively small place. It's just me and Mary in here. And we only have a few mismatched bar stools and some easy chairs. We have no sponsors, we have no guests, and we have no expansion plans.

Mostly Voices [1:10]

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

Mostly Uncle Frank [1:14]

What we do have is a little free library of updated and unconflicted information for do-it-yourself investors.

Mostly Voices [1:25]

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

Mostly Uncle Frank [1:29]

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

Mostly Voices [1:33]

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 [2:51]

But now onward to episode 231. Today on Risk Parity Radio, we'll just get back to what we've been doing best here.

Mostly Voices [3:03]

And so without further ado, here I go once again with the email.

Mostly Uncle Frank [3:07]

And, first off, First off, we have an email from My Contact Info.

Mostly Voices [3:14]

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

Mostly Uncle Frank [3:18]

First one of the year from them.

Mostly Mary [3:22]

And My Contact Info writes：Frank, thank you for responding to my email about growth versus value funds. Cannot disagree with your correlation analysis. Also, to some extent, in addition to correlation/rebalancing benefits you mentioned, it may make sense to hold in different accounts from a tax perspective. Below is the data for which the link did not work from Vanguard.

Mostly Uncle Frank [3:43]

All right, I believe you were referring back to episode 215 where we were talking about the mixed value and growth portfolio and why that seems to be a good baseline to construct a portfolio with. I think I've improved on your methods a bit too. Because it certainly gives you better diversification than a simple total market kind of setup, and may give you outperformance, at least it has in the past 50 to 90 years, I think now. I'm telling you, fellas, you're gonna want that cowbell.

Mostly Voices [4:17]

And I took a look at the link you provided, which was a comparison

Mostly Uncle Frank [4:22]

between the Vanguard Value Index Fund, I believe that's VTV in the Vanguard Growth Index Fund, which is ticker symbol VUG. and at the time of this year to date, as of the end of September, the value fund was down 14.6%, while the growth fund was down 33.04%, which is a large difference and demonstrates diversification between those two funds. Now, it's interesting, that discrepancy only got more severe towards the end of the year because the value fund VTV ended up the year only down about 2%, whereas the growth fund was still down 33% at the end of the year and did not recover like the value fund did from the end of September.

Mostly Voices [5:15]

I got a fever, and the only prescription is more cowbell.

Mostly Uncle Frank [5:19]

And we talked about this briefly in the last episode that this past year was a year of extremes. including the extreme difference between the performance of growth and value. And usually they are different, but not that much different, although there have been years in the past where we have seen value greatly outperform growth. And... Guess what? It usually is in times of increased inflation. So while the performances last year were not typical, it is typical to see those kinds of performances When you look at the data over decades.

Mostly Voices [5:55]

Before we're done here, y'all be wearing gold-plated diapers.

Mostly Uncle Frank [6:00]

Now, neither one of those should be taxed excessively if you are using true index funds and they're paying qualified dividends for the most part. But that could be a consideration in terms of asset location. And your mileage may vary depending on what else is in your portfolio. and how much room you have in each account. Yes!

Mostly Voices [6:22]

Growth versus value is always a topic of interest here.

Mostly Uncle Frank [6:26]

And thank you for that email. Second off, we have an email from Sai.

Mostly Voices [6:43]

And this is a real groovy apartment you got here.

Mostly Uncle Frank [6:48]

And Sai writes：hi Frank, when my dad

Mostly Mary [6:52]

died in 1990, he left mom and me a considerable amount of liquid assets. I wasn't born on third base, but made my way around the bases by the pitcher throwing balls. I've already won the game. My mom has included my kids in her estate plan and will leave each of them about $500,000. When we meet at Christmas, how might I frame the discussion about their portfolios? Be aggressive because of the inheritance backstops? Build a golden butterfly for simplicity and learning? Our son contributes to his 401k and has no interest in investing. Our daughter doesn't have a 401k and likes investing. She attended Phil Town's investing workshop about one and a half years ago.

Mostly Uncle Frank [7:44]

Well, Sai, first, sorry I didn't get to this before Christmas. You did send it in early November.

Mostly Voices [7:52]

Maybe I'm crazy.

Mostly Uncle Frank [7:57]

But we know how things go around here.

Mostly Voices [8:01]

It's not that I'm lazy. It's that I just don't care.

Mostly Uncle Frank [8:05]

In any event, I'm sure you'll be having more conversations with your family in the future about these issues. But just getting to the specifics, it's always difficult to know what will spark someone's interest in finances. Most people are not interested in it because they're curious about the topic itself. Shirley, you can't be serious. I am serious. And don't call me Shirley. Only mutant people, such as the ones that listen to this podcast, might fall into that category. You can't handle the dogs and cats living together.

Mostly Voices [8:41]

But it sounds like your daughter might be one of those people.

Mostly Uncle Frank [8:49]

We few, we happy few. And then it's a question of what aspect of investing they are interested in. Now he says she liked Phil Town's investing workshop. Phil Town is essentially a Warren Buffett Lite. I would call him with a little too much marketing and sales going on for my tastes, but the methodology he talks about is a sound methodology because it's based on Benjamin Graham's value investing fundamentally. And that is probably the direction you want to point her to Berkshire Hathaway and Benjamin Graham, particularly if she wants to get involved in analyzing particular stocks and companies. And a fun thing for the two of you to do might be to go buy some shares in Berkshire Hathaway and then go to Omaha and have a little trip together, just the two of you, to check out the annual shareholder meeting and the circus that goes on there every year. I think most people are more like your son. They really are not curious about the math or ins and outs or other aspects of investing. And for those people, you really need to tie investing to some other purpose. Saving for your long-term future or retirement is one such purpose. Saving for short-term wants or needs is another such purpose. And then savings for intermediate term things like a down payment on a house or a new car or those sorts of things might be another purpose. And there might be other purposes that you could tie investing to. And that's how I would present or explain investing or accounts and what you might put in them based on the purpose of the account or investment and the length of time you expect to be holding it. And where you end up with that is for a younger person, their long-term investing can be 100% equities or close to it, or something with return characteristics like that. For short-term stuff, you want to get them in the habit of having some pile of savings that can be in savings or checking accounts. I think $10,000 is a good number for an average single young adult with a decent income, but it could be more or less than that. And then you can have this intermediate account that is available for use for a down payment for a house or a car or something, but the idea is the money in there is typically sloshing around for at least three to five years. And it's in that account that you would put a golden butterfly or other risk parity style portfolio, both because it makes sense for that kind of intermediate term investing and because it can pique an interest in how the whole thing works as they learn how to deposit money in the account, buy the various assets and true them up along the way. and then sell them when it's time to put that down payment on the house or whatever they're doing with it. So it can really be a nice training ground for portfolio management. Oh, I get it. Let me try. We've found that helping our kids get set up in this way really gives them a lot of agency and purpose about their own finances and their own money.

Mostly Voices [12:31]

Young America, yes sir.

Mostly Uncle Frank [12:34]

And so both of our working children have gotten into the habit first of putting those long-term retirement accounts on automatic, making sure that just happens, making sure they max out on those accounts, and just putting that in simple index funds, depending on what's available in their 401 s. And then they have their savings or checking accounts and they build and save in there. But when The money exceeds the amount that they want to keep in there. It then sloshes over into this intermediate investment account where they have golden ratio style portfolios. So bold strategy, Cotton, let's see if it pays off for them. And I found that just seeing the various different assets go up and down at different times and perform differently does pique some interest as to what they are and why they do that, even if they do I didn't really have a clue as to what a ticker symbol represented when I first helped them set it up. That's gold, Jerry, gold! And our eldest also helped his girlfriend set up a similar system. And so she's got quite an intermediate term portfolio herself these days. And we took a look at these things over the holidays.

Mostly Voices [13:50]

But I don't need anybody. I'm independent. Yeah? Me too. I'm, whatever you said. Independent. Hey, what do you say we both be independent together, huh? And she doesn't even have a particular thing that she's saving for.

Mostly Uncle Frank [14:18]

Our Elders had been working on saving for a second house and recently set up a little LLC Which we also talked about over Christmas in order to put that property. Time is money, boy.

Mostly Voices [14:29]

He's already got new roommates lined up to stick in

Mostly Uncle Frank [14:33]

there. I think he's going to move from his current one to that one and do the whole house hacking thing. All that noise, noise, noise, noise. And our second one is also beginning to look at housing in his local area. But I also find it very interesting what sorts of things interest various people because I can tell you as to real estate, I do not like looking at houses or thinking about things like that. But Mary does and she is the one therefore that will go with them and kick the tires if you will on various pieces of property and talk to realtors and things like that. Mary, Mary, why you buggin'? Now, as to piquing their interest, there are a couple of, well, there's more than a couple, but there are some natural points where these topics will naturally come up. One is when they start a new job or move to a new place, or have something else like that going on. And it can be part of the discussion about 401ks and other things like that. And where are you going to live and how long are you going to live there? You need somebody watching your back at all times! Another way we do it is the advance on the inheritance, and that is the funding of the Roth IRAs that we try to do every year. As soon as the child has enough earned income, has some earned income, they can have a Roth IRA and that money does not need to come from them, it can come from you. You can give it to them in a lump, sit down, help them open an account, or fund the account and talk about what needs to go in there. We use the Buddy System. No more flying solo. Make sure you use someplace with a decent phone app, like a Schwab or a Fidelity, because that makes it a whole lot easier to have these conversations since they want to do everything on their phone anyway. That's the fact, Jack. That's the fact, Jack. Now you have another interesting situation regarding this inheritance that they will be receiving. Now I don't know if you have any influence about how and when that will occur. It would be better if that process started before your mother passed away. So if some of that money could actually be given to them along the way in an organized manner and perhaps involving setting up some of these investment accounts, That to me would make a lot of sense. Even if we're talking about a few thousand at a time, it's better to give people smaller amounts of money because if they're going to screw up with it, they can screw up with something small rather than wait and then have this huge pile of money come to them and them not knowing what to do with it or how to handle it.

Mostly Voices [17:37]

Gosh, idiot.

Mostly Uncle Frank [17:41]

Now I had another thought if your family is charitably minded that some of that money could be put in donor advised funds which you can set up. And grandma can take a tax deduction for that. So you would say take a hundred thousand for each child, put it in a donor advised fund, and then you and the child will be managing the donor advised fund. and the child will decide who that money needs to go to in terms of the charities to be donated to. And then you can run that account like a miniature endowment account or retirement account where you invest it in a retirement style or risk parity style portfolio, and then you take out a given percentage every month or every year, and the child gets to decide how that money is donated and where it's donated.

Mostly Voices [18:36]

I don't care about the children. I just care about their parents money. And also how some of it is invested.

Mostly Uncle Frank [18:43]

But again, that would give purpose to the money and also an opportunity to practice with an actual diversified portfolio as opposed to the thing they're just going to hold long term, which is probably just going to be some index funds, except for your daughter who's going to be wheeling and dealing with Charlie Munger. Charlie, Charlie bit me. So those are some ideas, and hopefully some of them are helpful. They're certainly not the only ideas, and you never know which idea will appeal to which person. But hopefully that helps, and thank you for that email.

Mostly Voices [19:33]

Give me that. Next off, we have an email from Alexi. So that's what you call me, you know, that or his dude-ness or duder or, you know, Bruce Dickinson, if you're not into the whole brevity thing. And the dude writes. Hey, Frank, one subject which I don't believe you covered explicitly on the podcast is the momentum factor.

Mostly Mary [20:09]

As you may have noticed in most of my portfolios, when I allocate to the equity bucket, I split it up into plain old beta in the form of SPY or Leverage UPRO, as well as a small cap value, VIOV or XSV, and momentum funds, usually QMOM. I have never been a big believer in a large growth allocation, VUG, because there is no academic evidence for a risk premium associated with this class of equities. I do understand the argument that large growth gives you diversification benefits when paired with a small cap value, but when you plug VUG, QMOM, VIOM, and SPY into the correlation calculator at Portfolio Visualizer, you find that QMOM is either equivalently or less correlated with VIoV when compared to VUG, depending on correlation timeframe, and always far less correlated with SPY. So all things considered, I would argue that momentum trumps large growth when it comes to diversification benefits and expected returns in the context of a risk parity portfolio. None of this is terribly important in the big picture macro asset allocation, of course, What prompts me to write this message now is the surprising year-to-date performance of QMOM. I know that small cap value has historically outperformed in time periods of inflation volatility such as the 70s or 2022. I would not have expected the same to be true of momentum equities and really had no way of knowing how such a strategy would have behaved in the 70s based on backtesting.

Mostly Voices [21:49]

To my surprise, Surprise, surprise, surprise.

Mostly Mary [21:56]

QMOM has outperformed even VIoV year to date, and both have outperformed the S&P. I wonder if this is because a momentum strategy is able to pivot to recent winners in the context of regime change in the same way that trend following is generally nimble in times of change. It would be interesting to look at QMOM holdings in 2021 versus now to flesh this out. Any thoughts?

Mostly Uncle Frank [22:22]

Well, you know what my general thought is. You have a gambling problem. But besides that, let's talk about the momentum factor. The momentum factor is been one that's been difficult for people to deal with and implement because the academic studies suggest using a momentum factor means trading Extensively and having the portfolio turnover a number of times per year. Now, that's not very practical from a taxation perspective because you can imagine all those transactions generating all those taxes. It doesn't end up being very desirable from a practical perspective. The other problem then, if you do have a different kind of momentum factor fund these go to 11 is what are going to be the rules for your momentum factor fund? And you can see this issue most easily by comparing the one you're talking about, QMOM, with the iShares MTUM momentum fund, which is attempting to be a momentum index fund where you're looking at a managed fund. And if you look at those two funds, you'll see they bear almost no relationship as to how they are constructed or perform. So although they're both called momentum funds, they do not really appear to be related in any way.

Mostly Voices [23:54]

May I have your attention, please? Will the real Slim Shady please stand up? I repeat, will the real Slim Shady please stand up?

Mostly Uncle Frank [24:05]

The MTUM fund I referred to performs a lot like a large cap growth fund and is over 90% correlated with a large cap growth fund like VUG. Which is why something like that generally is not that useful to be adding to a portfolio. It overlaps too much with the things you probably already have, whether that's a total market fund. S&P 500 or Large Cap Growth Fund. But the fund you've identified is peculiar and different from that standard momentum fund. I'm not sure that just having a momentum factor fund by itself makes as much sense. So QMOM was actually up over 60% in the year 2020. mostly following the COVID crash. But then when you got to 2021, it was actually down for the year. It was actually down 4.06% for the year when the average stock fund was going to be up somewhere between 15 and 25%. And that MTUM fund was certainly up along with other total market funds and things like that. So all I can say really about QMOM is that it does not appear to be based on a standardized momentum Methodology, which doesn't mean it's a bad fund, it just means I don't know how to analyze it or how it's likely to perform in the future. Man's got to know his limitations. It has only been around since 2016. Where I think actually the momentum factor probably makes the most sense is in combination with other funds or other factors, particularly the value factor. And the reason I say that is because of that Bloomberg study that I've referred to a couple times. When they looked at factors, they found that in inflationary environments, the best two factors were in fact value and momentum. So perhaps combining those, like you see in that fund XSVM, a small cap value with momentum, would make sense. This is also the concept that has been adopted by Dimensional Fund Advisors and the Avantis Funds. The idea being you take a simple fund like a small cap value index fund or a large cap growth or some combination of those and then further add another factor to that mix. In their case they mostly focus on profitability related factors. And it seems to me that's probably the next step in the evolution of these types of things. but a lot of these funds and ideas simply have not been out that long and don't have the necessary data to really back test them very far in the past. So while I think that it's probable that some combination of these standard size and value factors, in addition to momentum or something else, will be found to be A preferable combination of future. I can't say that I know or believe any particular combination is the best right now. You could ask yourself a question. Do I feel lucky? Well, do you, punk? DFA or Avantis? Maybe leave. One's in the lead upon developing those sorts of things. It's certainly interesting stuff to ponder.

Mostly Voices [27:49]

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 [27:57]

And thank you for that email. Last off.

Mostly Mary [28:01]

Last off, we have an email from Chris and Chris writes, Frank and Mary, I just wanted to tell you thank you for addressing my questions in episode 210. Very insightful and helpful. Thank you, Chris.

Mostly Uncle Frank [28:16]

And Chris is referring to an episode where we were answering his question about transitioning from accumulation to decumulation, I believe, in episode 210. So you can check that out if you haven't already yet. But I'm glad what I had to say was helpful.

Mostly Voices [28:37]

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

Mostly Uncle Frank [28:42]

And I am very grateful for the audience that I have who sends in such interesting questions to talk about. The best Jerry, the best. It really makes this show something beyond the run of the mill dive bar.

Mostly Voices [29:00]

Top drawer, really top drawer.

Mostly Uncle Frank [29:05]

And so thank you for that email and the ones you sent in before. 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. If you haven't had a chance to do it, please go to your favorite podcast provider and like, subscribe, give me some stars or review. That would be great. Mmmkay? Thank you once again for tuning in. This is Frank Vasquez with Risk Parity Radio signing off.

Mostly Mary [30:04]

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.