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!

Mostly Voices [0:51]

And the basic foundational episodes are episodes 1, 3,

Mostly Uncle Frank [0:55]

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. Top drawer, really top drawer. Along with a host named after a hot dog.

Mostly Mary [1:34]

Lighten up, Francis. But now onward to episode 232.

Mostly Uncle Frank [1:41]

Today on Risk Parity Radio, it's time for the grand unveiling

Mostly Voices [1:45]

of money.

Mostly Uncle Frank [1:49]

Which means we're going to do our weekly portfolio reviews of the seven sample portfolios you can find at www.riskparityradio.com on the Portfolio's page. And they actually had one of their best weeks in over a year, I think.

Mostly Voices [2:04]

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

Mostly Uncle Frank [2:12]

First off, an email from Trey. And Trey writes. Hi, Frank.

Mostly Mary [2:20]

You always say to pick your bond funds based on their functions instead of a total bond fund like BND. I want to move from BND into something else, and what I want is a single bond ETF that gives me some monthly income and also portfolio stability. Researching, I found IEI to be a middle ground between the two. Would you agree, or would you have another thought process to select one bond fund for a portfolio?

Mostly Uncle Frank [2:49]

There can be only one. Well, Trey, what you've presented here is what is known as a false dilemma. Yes! Because the constraint that you put on yourself, only having one bond fund, is not really a valid constraint to impose on yourself in the real world, and so this ends up being an academic exercise. It's like saying, I'm looking for a new way to drive to work, but I only want to make right turns and go straight. Yes, you can probably devise something that works for that, but that doesn't mean it's a good idea or it's something you should do. The reason that you want to have probably at least two bond funds is it makes portfolio management a whole lot easier and better because you can rebalance those funds in addition to the other funds you're holding. Now, just about everybody who's drawing down on a portfolio wants to have what is essentially short-term bonds, which can also include savings accounts, CDs, I-bonds, all of those types of things that are intended to be stable and basically available to be taken out as distributions if the rest of the portfolio is not doing very well. And then the question becomes, how much of a portfolio are you going to devote to that? because it's not a good long-term investment. We know that. And we'll end up having a drag on the overall returns of the portfolio over time. So typically you would keep one to three years of that sort of thing, because once that starts getting over about 10% of the portfolio, it starts actually being a drag on the portfolio. But that's one reason that you hold bonds or other short-term debt instruments in a portfolio. Now, the other reason is typically straight diversification, in which case you're looking at intermediate or longer-term bonds. And an intermediate bond fund like IEF, which is the sister fund of the one you're talking about, or VGIT are based around the 10-year treasury bond. And that is a pretty standard bond fund to use, and is why when you look at all kinds of analyses and back tests that go back 100 years, they're always using the 10-year bond as the basic standard for bonds. Now, if you go out further on the duration spectrum, you'll get to longer term bonds, which will be more volatile, but then you can hold less of them in a portfolio to have essentially the same effect. So that is why I think it's basic good portfolio management to have at least two different bond funds if you include whatever cash CD short-term bond as one of those. Now, IEI is a bond fund that invests in three to seven year treasuries. So it is designed essentially to mimic a kind of ladder of five-year treasury bonds. So it is right between a short-term bond like VGSH or SHY, which are one to three year treasuries, and the intermediate term bond that I just talked about, which is a fund like IEF or VGIT. Now, one way of comparing bond funds, assuming they're of equal quality, is to look at their average duration. And so the average duration of IEI is about 4.5 years. You can get this information from the Morningstar analysis tool, and that compares with the average duration of something like BND, which is about 6.5 years. But honestly, I would expect those two things to perform pretty similarly most of the time. I think there's a distortion going on currently since the Fed has raised the short-term interest rates so high. The shorter-term bonds look much more attractive now. than they usually do. What I mean by that is usually you don't have an inverted yield curve where bonds on the short end of the spectrum, one to five years, are yielding much more than long-term bonds. In a normal world, the longer-term bonds yield more interest. So I would not count on shorter-term bonds continuing to have such attractive yields going out more decades. Because what typically will happen is that the Fed will raise rates until the curve is inverted, then there'll be a recession, and then the Fed will lower rates, and the shorter term bonds will go back to yielding very little. And since the shorter term bonds roll over more quickly because they're shorter in duration, they tend to adjust their interest rates more quickly than a longer term bond fund would. I think in the end, if you were only going to choose one bond fund, you would probably go with the intermediate term or 10-year Treasury. So that would be a fund like IEF or VGIT. Because over the long term, that is going to be a better choice in terms of both diversification and in terms of income. But honestly, I think I would just revisit the premise altogether. Unless you are treating your cash or short-term assets as something separate from your investment portfolio. And I know some people do that. I think you should put everything together if you really want to analyze it correctly. I think the bottom line, as we're learning over time, is that limiting yourself to a two or three fund portfolio, while that sounds attractive and has some history to it, is really not an optimal way to construct a portfolio, especially in retirement, because it really precludes you from diversifying not only across asset classes, but within asset classes. And so I think a properly constructed portfolio is going to have at least four or five funds, and at least two of them are going to be equity funds, and at least two of them are going to be bond funds.

Mostly Voices [9:00]

I'm telling you, fellas, you're gonna want that cowbell.

Mostly Uncle Frank [9:04]

And I am including in that mix money markets and very short-term savings as effectively a bond fund, just a very short-term one. Now hopefully that helps some and thank you for your email. Second off, we have an email from Nita. I'm not sure I got the whole email here, but here's what Nita writes.

Mostly Mary [9:28]

Projected retirement in four years. DIY investor.

Mostly Uncle Frank [9:34]

Honestly, it looks like your email was cut off because there's no question there. That's not how any of this works.

Mostly Mary [9:42]

But we have talked in the past about the transition

Mostly Uncle Frank [9:47]

from accumulation to decumulation. with some both theoretical and practical ideas for that. If you want to go listen to the two episodes with Karen who is doing this, go listen to episodes 160 and 163. I think that'll be helpful. And then we also did something like that with Chuck, and that episode was 68, which you'll also want to listen to episodes 64 and 66 which feed into episode 68. In general, the first thing everybody needs to do when they're doing these kind of plans is what nobody ever seems to want to do, which is to sit down and figure out what your annual expenses are today and what they're likely to be like going forward. Because you can't really do any planning until you've done that. Then once you've determined that you have enough to retire or are getting very close, then you can move to your retirement style portfolio even before you get to retirement. And that's what we did about four years before we pulled the plug on full-time work. We had already moved our assets to that configuration, so you just glide in after that. Groovy, baby. so if you are indeed four years from projected retirement and you have accumulated enough money, I would be moving to your retirement style portfolio sooner rather than later. But check out those other episodes and they will give you some more information and ideas. And please write back if you did indeed have a specific question. I think it's probably easier if you you send it to frank@riskparityradio.com the email frank@riskparityradio.

Mostly Voices [11:50]

com this message came through the website and sometimes I have problems with the way those come through or don't come through you can't handle the banana's but thank

Mostly Uncle Frank [11:54]

you for your attempt at an email you'll have to do better than that I could see why they made this guy

Mostly Voices [12:01]

their leader Next off, we have an email

Mostly Uncle Frank [12:05]

from Christy.

Mostly Mary [12:12]

And Christy writes, hello Frank, I'm enjoying your podcast and really learning a lot about portfolios. I'm 50 years old and I want to learn as much as I can to prepare for retirement, and I'm working my way through your podcast currently just on episode 42. My question is, are your portfolios designed more so for post-retirement money management, They all seem so since equity portions are on the lower side. I'm just wondering if outside my 401 plan should I use a risk parity style to manage my outside investments? I know you can't really advise, but if you could maybe age categorize your portfolios, that would be helpful. Thanks.

Mostly Uncle Frank [13:05]

Well, yes, Kristy, these are largely intended for portfolios you'd be distributing out over, drawing down on, or using for retirement. The sample portfolios really come in three categories. The first one, that All Seasons portfolio, that is just a reference portfolio of what Tony Robbins put together after interviewing Ray Dalio and oftentimes When people hear the term risk parity, that's what they're thinking about, even though that's just the tip of an iceberg. So you might call that a classic risk parity style portfolio. However, in a classic risk parity style portfolio or risk parity portfolio, you would add leverage to that. So your portfolio would look something like the portfolios in the funds, RPAR or UPAR. which are both similar to that portfolio with leverage added to it. Now the next three sample portfolios, the Golden Butterfly, Golden Ratio, and Risk Parity Ultimate are more similar to what somebody might actually hold in a retirement portfolio. Now we know from many pundits, academics, and other gurus and the like, that a sweet spot for a retirement style portfolio that you can draw down on that has a higher safe withdrawal rate typically has somewhere between 40% and 70% in equities in stock funds and the rest of the portfolio is in bonds or other things. And so we've used that simple concept along with risk parity principles to construct those three portfolios. I will say that the Risk Parity Ultimate Portfolio is actually just kind of a kitchen sink sort of thing. I did not want to have 10 different variations of things, but I did want to have a portfolio that had all of the sort of alternative and esoteric assets that somebody might use. And that portfolio has a couple of leveraged funds in it, so it's essentially levered up 1. 2 to 1. So has the equivalent of about 65 to 70% in equity funds or similar things, 25 to 30% in bonds or similar things, and then the remainder going up to 120 in the alternatives such as gold and commodities and managed futures. Now the remaining three portfolios are experimental portfolios that use leveraged funds in them. and they really are more just something to play with, because the leverage in them makes them far too volatile to be used as a retirement portfolio. The idea there is that you could use something like that for an aggressive form of accumulation, particularly in something like a Roth IRA, if you didn't mind taking all the risk. Believe it or not, there are some whippersnappers out there who are enamored with such things these days. You have a gambling problem. And in theory, that is one way to improve the returns of a portfolio is adding leverage to it. It's just been a very difficult thing to try for a do-it-yourself investor before the advent of leveraged ETFs. Well, you have a gambling problem. But those probably are not of any interest to you in particular. Now, besides being used for retirement, one of the use of these types of portfolios would be for intermediate kind of savings. So, for instance, our 20-somethings use a golden ratio style portfolio to save for things like a down payment on a house. The reason these sorts of things are good for intermediate kind of savings or investing is they tend to have a recovery time of less than five years. And if you are contributing to them over time to build up some kind of savings, they work even better. So if you had some kind of goal like that, you could create a portfolio like that for that kind of a intermediate investment savings type goal. Now, as you're thinking about retirement and the transition of your portfolio from accumulation to your retirement portfolio, you probably also want to go back and listen to those episodes I mentioned in the last question, because I think those will answer some of your broad based questions. If you are still in the middle of accumulation, then these probably are not the portfolios for you because you want to be more aggressive and have 80% or more in equities. But as I like to say, and as I stole from Bill Bernstein, Once you've won the game, you can stop playing, which is why you also need to focus on what your actual expenses are versus how much you've accumulated in your investments to see whether you've won the game or you'll be winning it soon. Because once you've done that, then you actually can move your assets to a retirement style portfolio. So you're ready to just kind of pull the plug and walk away at any time. Yeah, baby, yeah! What you don't want to have happen is staying in your accumulation portfolio too long and then having some big downturn happen right before you want to retire. That's a worst case scenario. Now all that may mean is that you have to work a bit longer, but on the other hand, if you're all set up and ready to go with your retirement portfolio, then that's not something you need to worry about so much. But if you have more specific questions, please send them in. And thank you for your email.

Mostly Voices [19:02]

Last off. Last off.

Mostly Uncle Frank [19:06]

We have an email from Keith and Keith writes.

Mostly Mary [19:10]

Frank, since commodity trend following is the recent hot topic, I thought you might find it interesting. Dunn Capital has a portfolio modeling tool that they just released. I have not tried it yet, but I did listen to their description of it on their podcast. It will be interesting to see how their models compare to Portfolio Visualizer and how trend following fits into the model portfolios. Keith.

Mostly Uncle Frank [19:36]

Well, thank you for sending this in, Keith. I will link to it in the show notes so people can check it out. Basically, it says they've developed a portfolio builder tool that allows you to build and visualize any portfolio allocated across US or international equities, global bonds, real estate, gold, and their WMA strategy, which I take to be trend following since it's done. But it's always good to have more tools in the toolbox to play with.

Mostly Voices [20:08]

Are you saying that I put an abnormal brain into a seven and a half foot long, 54 inch wide, gorilla! Is that what you're telling me? And compare the results between that and some other tool.

Mostly Uncle Frank [20:31]

We'll just call this another addition to our little free library.

Mostly Voices [20:36]

Hearts and kidneys are Tinker Toys.

Mostly Uncle Frank [20:39]

So thank you for the link and thank you for that email. Now we're going to do something extremely fun. And the extremely fun thing we get to do now is our weekly portfolio reviews of the seven sample portfolios you can find at www.riskparriaratior.com on the portfolios page. And it actually was a fun week for once.

Mostly Voices [21:04]

Do you want a chocolate?

Mostly Uncle Frank [21:08]

Santa Claus decided to show up for Orthodox Christmas. Happy holiday.

Mostly Voices [21:12]

Happy holiday. Happy holiday. Happy holiday. But let's just check this out.

Mostly Uncle Frank [21:21]

Looking at the markets, the S&P 500 was up 1.45% for the week. The Nasdaq was up 0.98% for the week. Small cap value stocks represented by the fund VIoV were up 3.64% for the week. Gold was up. I love gold. Gold was up 2.24% for the week. But the biggest winner was the long-term bonds. Long-term treasury bonds represented by the fund VG L T were up 5.21% for the week. REITs represented by the fund R E E T were up 1.54% for the week. Preferred shares represented by the fund PFF were up 4.55%. Commodities were the big loser, one of the only losers. PDBC, our representative fund, was down 4.26% for the week. I think the price of oil keeps dropping. And then our managed futures fund, our representative fund, DBMF was down 2.1% for the week. Moving to the portfolios themselves, first one is the All Seasons that I talked about. This one's only 30% in stocks. It's got 55% in treasury bonds and the remaining 15% in gold and commodities. It was up 2.58% for the week. So it's up 2.58% year to date. and is down 5.68% since inception in July 2020. And now moving to these three bread and butter kind of portfolios. First one's a golden butterfly. It's 40% in stocks divided into a total stock market fund and a small cap value fund. 40% in treasury bonds divided into short and long and 20% in gold. It was up 2.56% for the week and is up 2.56% for the year so far. and is up 9.97% since inception in July 2020. Next one is the Golden Ratio. This one's 42% in stocks and three funds, 26% in treasury bonds, long-term treasury bonds, 16% in gold, 10% in a reit fund, and 6% in money market or cash. It was up 2.72% for the week. and year to date, of course, and is up 5.3% since inception in July 2020. Next one is the Risk Parity Ultimate. This one has 15 funds in it. I will not go through all of them. It was up 2.94% for the week and year to date and is down 2.71% since inception in July 2020. At the rate these are going, they'll have recovered all of last year's losses In about 10 weeks. Somehow I don't think it's gonna work out that way.

Mostly Voices [24:15]

Crystal Ball can help you. It can guide you.

Mostly Uncle Frank [24:18]

But now moving to these experimental portfolios with the leveraged funds in them. The first one is the Accelerated Permanent Portfolio. This one's 27.5% in a leveraged bond fund, TMF. 25% in a leveraged stock fund, UPRO. 25% in a preferred shares fund, PFF, and 22.5% in gold. GLDM, it was up 7.44% for the week and 7.44% year to date. You can see what leverage does for you when it's moving in your favor.

Mostly Voices [24:48]

That was weird, wild stuff.

Mostly Uncle Frank [24:52]

It is down 18.11% since inception in July 2020. Next one is the aggressive 50/50, the least diversified and most levered of these portfolios. It is 33% in a leveraged stock fund, UPRO, 33% in a leveraged bond fund, TMF, and the remaining third of the portfolio divided into PFF, a preferred shares fund, and VGIT, an intermediate treasury bond fund. It was up 8.18% for the week and year to date. Surely you can't be serious. I am serious.

Mostly Voices [25:26]

And don't call me Shirley. Just screaming out of the gate here.

Mostly Uncle Frank [25:34]

It is down 25.05% since inception in July 2020. And now moving to our last portfolio, the levered golden ratio, which is levered up about 1.6 to 1. It is comprised of a composite fund called NTSX, which is the S&P 500 and Treasury bonds. 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% divided into a volatility fund and a Bitcoin fund. It was up 3.24% for the week, and obviously 3.24% year to date is down 20.96% since inception in July 2021. And so we are off to the races in January of 2023.

Mostly Voices [26:31]

Down the quarter mile of death in their 7,000 horsepower nitro burning suicide machines as they shake hands with the devil when they scream through the burning gates of hell.

Mostly Uncle Frank [26:42]

Although we're kind of just recovering from the December of 2022. Yeah, well, the Duda binds. And that's the way the volatility ball bounces sometimes. 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 a 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. Okay. Thank you once again for tuning in. This is Frank Vasquez with Risk Parity Radio signing off. Looks like you've been missing a lot of work lately. I wouldn't say I've been missing it, Bob. Good one. Oh, that's terrific, Peter.

Mostly Mary [27:50]

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.