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. Expect the unexpected. There are basically two kinds of people that like to hang out in this little dive bar. You see in this world there's two kinds of people my friend. 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. But whomever you are, you are welcome here.

Mostly Voices [2:08]

I have a feeling we're not in Kansas anymore.

Mostly Uncle Frank [2:12]

But now onward to episode 235. Today on Risk Parity Radio we'll just be doing what we seem to do best here, which is dig into our pile of emails.

Mostly Voices [2:23]

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

Mostly Uncle Frank [2:31]

And, first off, first off we have an email from Arun. And Arun writes, hello Uncle Frank and Aunt Mary, happy holidays.

Mostly Mary [2:39]

I finally got my wife excited about investing. Yeah, baby, yeah! She wants to start small, say $100 a month in her individual brokerage account. The goal of this account is to keep her excited and eventually start contributing more. There is no real timeline we are looking to withdraw this money. In theory, this money and account can be opened forever. To give you our background, we are in our mid-30s and have combined retirement accounts worth $250,000. groovy baby. I started a modified leverage golden ratio portfolio in my individual brokerage account about a year ago and am regularly contributing every month. I have about $10,000 there. I understand the ups and downs and I'm curious to take risks and play around a bit. In the past, I have failed to convince my wife to open an I bond account for $10,000 when the interest rate touched 9%. I think the $10,000 amount scared her. Coming to her new account, I'm thinking of putting everything in VTI just to say you own a little bit of every publicly listed company, but I'm afraid VTI's volatility will scare her. I remember you suggesting 80% NTSX and 20% GLD to one of the users asking for a conservative portfolio. I think this will suit the need and reduce volatility. But is it a good idea for a beginner to take a leveraged fund? I would like to know your thoughts on the approach and feel free to throw in a completely different one. I'm all ears. Cheers Arun.

Mostly Uncle Frank [4:29]

Well Arun, I'm glad you're enjoying the podcast and are having some fun with your own efforts in portfolio construction. These go to 11. Because the purpose of this is not for me to tell you what to do, but to give you ideas on things that you might want to try or implement for yourself. Real wrath of God type stuff. Exactly. It sounds like you and your wife are well on your way to financial independence. Looks like you've been missing a lot of work lately. I wouldn't say I've been missing it, Bob. I'm glad she's interested in the topic of investing. As for starting out, yes, VTI or a similar Total Market Fund or S&P 500 fund is a great place to start. I'm telling you, fellas, you're gonna want that cowbell. So you could try V-I-O-V or if you're into Paul Merriman's suggestions, maybe AVUV, the Avantis Fund. I gotta have more cowbell.

Mostly Voices [5:56]

I gotta have more cowbell.

Mostly Uncle Frank [6:00]

But I think those two funds together would serve her well in a 50-50 split. If you're worried about Volatility, I probably would not go with any leveraged funds because they specialize in volatility. You have a gambling problem.

Mostly Voices [6:15]

Although it is true that a portfolio of 80% in TSX

Mostly Uncle Frank [6:21]

and 20% in a gold fund does have about the same amount of volatility as a straight VTI portfolio. It was a little higher last year, but not really that much. If you're really adventurous and you're at a place like Fidelity, you could just set up two separate accounts, one that runs VTI or VTI in a small cap value fund and one that runs NTSX and 20% gold and compare them in a little horse race. Put it on Neptune. That's really the advantage we have these days with no fee trading and fractional shares. that if you don't mind the hassle of setting up the accounts and it's not very much of a hassle, it's pretty easy to run any number of accounts at a place like Fidelity. You will get a lot of tax forms though. I have to warn you about that. Well, you have a gambling problem! But if you're not doing much with them, they won't be very consequential. Hopefully that gives you some ideas and it'll help you continue Moving forward without getting too excited about too much leverage. You can't handle the gambling problem. It might be interesting if you would report back in a year and see how you guys have progressed. And thank you for your email. Second off. Second off, we have an email from Blake and Blake writes. Hi Frank.

Mostly Mary [7:51]

Thank you for the fun and informative podcast.

Mostly Voices [7:54]

I'm funny how, I mean funny like I'm a clown, I amuse you.

Mostly Mary [7:58]

I've been trying to build a portfolio of maximally unique uncorrelated assets and am largely on the path to a portfolio that resembles those you publish with a bit more leverage. You have a gambling problem. In addition to stocks, bonds, and real assets, I've been trying to harness the elusive short volatility premium that some espouse. The idea being that most people overpay for optionality, so shorting optionality, i.e. being short out of the money options, is an uncorrelated, albeit negatively skewed, risk premium. In order to harness this systematically, I paid for an automated option trading platform to regularly sell put spreads, call spreads, Iron Butterflies and Iron Condors combined with simple filters for IV rank and or technicals like RSI. Well, you have a gambling problem. I don't believe I have any alpha, but feel that enough trades over time should approach something like a short volatility beta. I paid $2,000 for the trading platform and have lost about $2,000 out of the $25,000 allocated to the strategies over the past year of running the programs I built. Granted, it's been a tough time to be short volatility, but I'm beginning to wonder if I should just throw in the towel and merge this trading account in my other risk parity style investments. I think I have the patience to wait out drawdowns, but I don't know if that's a good thing or a bad thing. I'm 30 years old and have about 120,000 saved, making this about 20% of my net worth. If you would give up on this, would you stop immediately? or wait to see if the program gets back in the black. I'd love to hear your thoughts on how you would proceed. Thank you, Blake C.

Mostly Uncle Frank [9:48]

Well, now we've moved from leveraged funds to options trading. We really do have a theme going on here today.

Mostly Voices [9:57]

Well, you have a gambling problem.

Mostly Uncle Frank [10:01]

It's kind of funny how sometimes these emails seem to bunch up on similar topics. Last year was actually a pretty strange year for trading volatility because you would have thought that the volatility indexes would have been a lot higher given the poor performance of the stock market. The volatility index for bonds was actually out of sight last year, but there isn't a really good way to trade that unless you are really into the interest rate Futures and Options markets. That is one of the reasons that a managed futures fund like DBMF did so well last year because it was essentially short bonds or short interest rates, expecting interest rates to rise or following the interest rates up rather. My own experience trading options and futures, most of which was some time ago, even before we had children, was that it took a lot of time to do it the right way and even when you did it the right way, it wasn't all that profitable. Certainly was not passive.

Mostly Voices [11:06]

Man's got to know his limitations.

Mostly Uncle Frank [11:10]

I have no idea whether whatever strategy you're using is going to be profitable or not in the future. You could ask yourself a question. Do I feel lucky? Do I feel lucky? I would say I probably would not put any more money into it than you already have. and whether you want to continue going with it has more to do with your curiosity and willingness to withstand some pain if more pain is coming. But Ian, this is a.44 Magnum, the most powerful handgun in the world, and would blow your head clean off. You've got to ask yourself one question.

Mostly Voices [11:46]

Do I feel lucky? Well, do you, punk?

Mostly Uncle Frank [11:51]

But you might just want to continue on with it and kind of get it out of your system. if you ever had the urge to do this kind of trading, because once it's out of your system, you probably won't have the urge to do it again.

Mostly Voices [12:05]

Not gonna do it, wouldn't be prudent at this juncture.

Mostly Uncle Frank [12:09]

And on the other hand, if it really works well, you'll find out relatively quickly.

Mostly Voices [12:13]

And it's gone.

Mostly Uncle Frank [12:16]

I suppose the other issue I have with it is that if you are short volatility, you are essentially going to be positively correlated with most other assets because investing in stocks and bonds is essentially taking a position that is short volatility. So typically, if you wanted to diversify against that, you would be using a strategy that was long volatility. That is the straight stuff, O Funk Master. The general issue with those two strategies is they are really not two sides of the same coin. they are really completely different strategies in terms of how it feels to implement them. Because if you are long volatility, you would typically expect to lose money in any given year and then have some big payoff in a particular year when the volatility spikes and there's a big stock market crash or some other event like that. Being short volatility, you'd expect to get paid more often. But as Nassim Taleb has said, being short volatility can be like picking up nickels in front of a steamroller. That yes, usually you get paid the nickel, but every once in a while you get run over by the steamroller. Uh, what? It's gone. It's all gone.

Mostly Voices [13:36]

And then you may be out of the game if you put too much of your capital into that. The money in your account, it didn't do too well. It's gone.

Mostly Uncle Frank [13:40]

I suppose the other consideration that I would have with you is whether this is impacting your lifestyle or your ability to save in the future. If it's not really affecting those things, then you could continue on with it. But if it's causing a crimp in your life, then I probably would not continue with it. You need somebody watching your back at all times. But we know what this all comes back to.

Mostly Voices [14:07]

You can't handle the gambling problem.

Mostly Uncle Frank [14:10]

I'd also be interested to know how things worked out for you after another year if you continue to stick with this or try something else. And so thank you for your email. Bow to your sensei.

Mostly Voices [14:21]

Bow to your sensei. Last off.

Mostly Uncle Frank [14:27]

Last off, we have an email from my contact info.

Mostly Voices [14:31]

Oh, I didn't know you were doing one. Oh, sure. And my contact info rights.

Mostly Mary [14:36]

Frank, the general result of the survey cited below is not surprising, but the magnitude is, I think, amazing, especially for the bond market. Apologies if you have already seen it. Thank you. Each year, some investors manage to do it, of course, but can they do it consistently? A new study of actively managed mutual funds by S&P Dow Jones Indices asked that question and came up with a startling result. It found that not a single mutual fund, not one, managed to beat its benchmark in either the US stock or bond markets regularly and convincingly over the last five years. These results are even worse than those of 2014 and 2015 when I last examined this subject closely.

Mostly Uncle Frank [15:21]

Yes, I did see that article when it came out. And it's really not surprising, but what's funny to me is when these articles come out, everybody in the financial services industry always acts like they are so surprised that they are so bad at what they're supposed to be doing in terms of stock picking. It's all one big crapshoot anywho. And then of course there are the inevitable predictions for the next year, which always run like, well, that was before the future isn't like the past or might not be like the past. I think next year will be a stock pickers market. A stock pickers market. Bing! As if that term ever had any meaning. Bing again! In fact, last year should have been the biggest stock pickers market in a generation, really. Am I right or am I right or am I right? Right, right, right. And the reason I say that is because there was such disparity between certain sectors and certain other sectors. So, if you were a great stock picker and you picked energy stocks or you picked property and casualty insurance companies or any of the things that had a good year on rising interest rates and inflation, then you could call yourself a good stock picker. But if you were picking all the stocks that have been popular for the past 10 years, namely big tech, then you were a terrible stock picker. I award you no points and may God have mercy on your soul. But the disparity between the winners and the losers last year was so great that if that was not a stock pickers market, I don't know if we'll ever have a stock pickers market. In typical years, you do not see that kind of disparity between sectors and even between value and growth. Forget about it. It's usually a few percentages, not 20 or 30% different, or I guess 90% different if you're talking about the difference between the Fang stocks and Exxon Mobil and Chevron. But I suppose this also leads me back to some basic principles of portfolio construction, and sometimes I like to just talk about what not to do. You can't handle the crystal ball. At times like this, particularly in January of every year, you see amateur investors lining up and saying, oh, check out this fund. Maybe I should pick this. Or maybe I should pick this other fund over here. Or what do you think about this Fidelity Puritan Fund or some other select fund? And what that tells you is they really have their process backwards.

Mostly Voices [17:57]

Do you think anybody wants a roundhouse kick to the face while I'm wearing these bad boys?

Mostly Uncle Frank [18:01]

Because if you're going to construct a portfolio, you focus first on your macro allocations, your stocks, your bonds, your other things. And then within those, you focus on the allocations within the stocks using factors, since we have 30 years of history now showing that's the best available process. And when you're looking at bonds, you're looking at things like durations. And it's only after you look at what kinds of things you want, then you go and look at particular funds, starting with index funds.

Mostly Voices [18:37]

Shirley, you can't be serious. I am serious. And don't call me Shirley.

Mostly Uncle Frank [18:44]

So if you ever find yourself asking the question, should I just add this random fund to my portfolio that I just read about or somebody just recommended, the answer to that is always no.

Mostly Voices [18:53]

Forget about it.

Mostly Uncle Frank [18:57]

Or almost always no because you would not choose funds based on that process. Now stop it, stop it. The first question you should be asking yourself is, do I even want funds that invest in these kinds of things? And then if you do, I presume you already probably have some. And then there becomes a question of, well, do I like this fund better than the one I already have that's investing in the same kinds of things? And maybe you do or maybe you don't, and maybe it's worth switching if you can get a tax loss harvesting benefit out of it or for some other reason. But now if you do have that itch to scratch, to either fund pick or stock pick or both? A crystal ball can help you.

Mostly Voices [19:37]

It can guide you.

Mostly Uncle Frank [19:41]

The best way to handle that is to reserve part of your portfolio allocation for that purpose.

Mostly Voices [19:48]

It's kind of looking at the aura around the ball. See the movement of energy around the outside of the ball.

Mostly Uncle Frank [19:55]

And if it's small enough, it probably won't hurt you. and might even help you some years.

Mostly Voices [20:02]

Now you can also use the ball to connect to the spirit world.

Mostly Uncle Frank [20:06]

But only if you're a good stock picker.

Mostly Voices [20:11]

A really big one here, which is huge. The truth is more likely. You can't handle the crystal ball.

Mostly Uncle Frank [20:18]

But now I see our signal is beginning to fade. Sorry this was a short episode, but I got things to do, places to go, people to meet, things to see. What does Matt Damon say on that Bitcoin commercial? Fortune favors the brave.

Mostly Voices [20:33]

If you have comments or questions for me, please send them to frank@riskparityradio.

Mostly Uncle Frank [20:38]

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. Just one announcement. If you'd like to come to a party about money and financial independence, please come to Cincinnati around the weekend of March 17th for the Economy Conference. I'll link to it in the show notes so you can check that out. I'll be running a little workshop on withdrawal strategies at my customary rate And then what they create, they give it away rather than sell it. It's gonna be huge. Mary will also be there to keep me in line. I've spoken my piece and counted to three. And I will link to that in the show notes so you can check that out. 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 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 Mary [21:52]

Risk parity, risk parity, Frank Vasquez. 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.