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 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.

Mostly Voices [1:20]

Abby someone. Abby who? Abby normal. Abby Normal.

Mostly Uncle Frank [1:33]

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 [2:04]

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 [2:12]

But whomever you are, you are welcome here.

Mostly Voices [2:17]

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

Mostly Uncle Frank [2:20]

But now onward, episode 239. Today on Risk Parity Radio, we'll just get back to doing what we do best here, which is attempting to try to be able to answer your questions.

Mostly Voices [2:33]

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

Mostly Uncle Frank [2:43]

And first off, First off, we have an email from Gareth. And Gareth writes, hi Frank, I love your show.

Mostly Mary [2:51]

Please keep up the great work. As you suggested to listeners, I have been playing about with asset allocations and portfolios on portfolio charts. I noticed a great disparity between the core portfolios depending upon which country was selected. Portfolio charts gives nine country options. I chose the golden butterfly as an example and worked through best worst performance metrics. Average return, best 6.3% USA, worst 4.5% Japan. Standard deviation best 7.8% USA, worst Sweden 12.2%.

Mostly Voices [3:32]

If you change your mind, you can change.

Mostly Mary [3:37]

Loss frequency best 17% USA, Worst, 35% Japan. Depth of loss, best, 10% USA. Worst, 27% Japan. Longevity of loss, best, you guessed it, USA. Three years. Worst, 13.1 years Japan. Perhaps most interesting to retirees, best SWR, 6.3% USA. Worst, 3.2% Japan. Best permanent withdrawal, 5.1% USA. Worst, 1.2% Japan. This research made me consider the impact of currency volatility on the model portfolios. Also, that as a quarter of the Golden Butterfly portfolio is held in gold, that the gold element at least should be local currency hedged against the US dollar to more accurately reflect the underlying assets' price movement. given that gold is priced in US dollars. This gave me the idea that although the underlying theory of the model portfolio should remain constant across different countries, individual investors should always factor in currency exposure slash hedging to ensure they are achieving their portfolio objectives when purchasing assets denominated in currencies that differ from their country of domicile. What do you think? Are there other explanations for the huge disparity in the same portfolio's performance between different countries? Have a wonderful Christmas, Gareth.

Mostly Uncle Frank [5:08]

Well, first as you can tell, we're celebrating Christmas on Groundhog Day this year. Watch out for that first step, it's a doozy. That just gives you an idea of how backed up we are on the emails. Bing again. But that's life in the fast lane of retirement here. It's not that I'm lazy.

Mostly Voices [5:31]

It's that I just don't care.

Mostly Uncle Frank [5:35]

I think what you are noticing is that every country has its idiosyncrasies, and those idiosyncrasies are on multiple levels, depending on what time period you are looking at. And some of those idiosyncrasies have to do with currencies. Now, I think many people have the erroneous idea that the capital markets and legal structures of various countries are so similar that we can just kind of wave our hands away and think that they do not really matter. But in fact, they really do matter. So let's talk about a few of these things. First, on the currency issue, the main idiosyncrasy here is the US's idiosyncrasy of having the world's reserve currency. which means there is a whole economy of dollar-denominated debt that exists outside of the US between non-US participants. And many countries will go and borrow in dollars when they float their debt because their currencies are not good enough. This gives what a French premier once said was an exorbitant privilege to the US dollar. and is one of the reasons if you go around the world, most large non-US institutions and companies and whatever hold a lot of assets denominated in dollars, whether they be bonds denominated in dollars, stocks denominated in dollars, why people want to buy US real estate from outside the country and invest in US businesses from outside the country. All of that is tied up on the fact that the US has the world's reserve currency and is going to make US and dollar denominated assets trade essentially at a premium for as long as that's true. Now, that's basically been true since World War II and does not seem to be abating anytime soon. The number of international transactions denominated in dollars is still somewhere around 75 or 80%. And that's something that is going to not change anytime soon, and certainly not on the flip of a switch. It generally takes many decades for one currency to supplant another. Now, gold is very interesting that you mentioned it. There is actually much more reason for somebody outside the United States, or who does not generally hold dollars, to hold gold, because their currency is weaker. and gold fulfills kind of a role as an alternative currency, at least for parking assets. So that is why, for instance, last year, gold was flat denominated in US dollars, but the price of gold went up substantially if priced in yen or euro or just about any other currency around the world, simply because the US dollar had gained so much strength and gold kind of went along with it. But gold is actually one thing that is priced in just about anybody's currencies. But you are correct that you need to make some currency adjustments depending on what kind of portfolio you are looking at. What else is different about the US and Japan in particular? Well, the US has the most vibrant capital markets for capital formation, for company formation in the world. It has things like venture capital that really don't exist in any significant form in other countries, certainly not in Japan. Now, what that has led to in our lifetimes is that the US is home to most of the world's significant technology companies and internet companies, which are some of the world's largest companies. Now, that also skews what kind of companies make up the US stock market versus other stock markets. that in the US there is a higher propensity for large cap growth companies to exist. If you go to anybody else's stock market, you may find that their stock market is more tilted to things like large cap value, more tilted to things like banks or insurance companies, or in places like Canada or Australia, natural resources and energy. And that's why just trying to distinguish between US and non-US is not a very useful or robust distinction without knowing what exact kinds of companies we're talking about and not just where they're located. But just knowing that tells you that you would expect US companies long term or the US stock market to outperform most other countries, given the makeup of the companies in that stock market. It's different. What else is different? Well, there's a very big difference in the legal regime for dealing with failures of companies. In the US, we have a very robust bankruptcy code, including something called Chapter 11, which doesn't really exist, not in that form, in most other countries. and allows for a very efficient either reformation or liquidation of a company. Now, if you go to a country like Japan, it's famous for zombie companies. And what happens if you allow essentially insolvent companies to drag on and on and on, if they are big enough, it will drag down the entire economy, which is part of what Japan experienced. It's a completely different mindset and a completely different regime. Some countries value keeping their largest companies alive for employment and other purposes, and so they are going to perform differently in terms of stocks being traded on an exchange. Now, one can do a study, and there are studies out there of just about every country's capital markets and legal structures which factor in what is known as country risk for that particular country, whether it's friendly to capital formation or not, and how its legal regimes and regulatory regimes function or don't. But I think the kind of conclusion this eventually leads you back to does have a lot to do with the US being the largest economy in the world and holding the world's reserve currency, because it basically means that US centric investors can kind of get away with not having to invest much in other parts of the world, whereas for people in other countries, just having some dollar denominated in US based investments is probably going to be very wise. And this is especially true when it comes to debt instruments, because if you are in a jurisdiction with a weak sovereign bond market. Those are actually speculative investments, and you probably don't want to hold them at all. You would prefer to hold things like gold or US Treasury bonds or other bonds in stable currencies. Japan is another idiosyncratic country in that respect, in that they have direct yield curve control as far as their central bank and their bond market is concerned. It doesn't really trade, and is a reason that really almost nobody outside of Japan wants to hold Japanese sovereign debt, because it does not trade on a market-based system, really. But this is a topic that people write books about, many, many books, and economists debate endlessly, and I think I've gone on about it enough. Looks like I picked the wrong week to quit amphetamines. Hopefully that gives you a sense or a flavor of the various potential differences between countries and why their markets and the portfolios based in those countries might perform much differently. It's like I picked the wrong week to be smoking. Food for thought and thank you for that email. I was in the Air Force stationed in Drambui off the Barbary Coast. I used to hang out at the Mugumbo Bar.

Mostly Voices [13:58]

It was a rough place. the seediest dive on the wharf, populated with every reject and cutthroat from Bombay to Calcutta. It's worse than Detroit.

Mostly Uncle Frank [14:07]

Second off. Second off, we have an email from Mark. And Mark writes.

Mostly Mary [14:15]

Frank, thanks for covering my previous question. I wanted to share with you some research I've been doing, as you may find it interesting. The attached analysis is on bear markets going back to 1957, and how various asset classes have responded during the S&P 500 peak to trough. A few takeaways would love your comments. 1. Utilities seem amazing. Equity-like returns in the long run, low correlation with the S&P, and performs admirably in a number of bear markets. I wonder why this seemingly wonderful asset class doesn't get more of your attention given what Magic it performs at a portfolio level. Two, watching gold go down as a result of dollar strength has been illuminating to me. What are your thoughts on currency, notably the dollar in a portfolio? Sharing some of the gold allocation with a dollar fund like UUP helps sharp Sartino and volatility while seeming to maintain the return. Three, managed futures also seem to work wonders at a portfolio level, but I noticed that one fund in particular marches to the beat of its own drummer. LC-SIX, a commodity-focused long/short fund, it's got everything to love：negative correlation with equities, good long-term return, and low correlation with other managed futures. Any thoughts on commodity-only managed futures versus the broader asset classes covered in a fund like DBMF? Feel free to improve upon my methods, Mark. I'll improve on your methods.

Mostly Voices [15:46]

What? Well, I took a look at your attachment.

Mostly Uncle Frank [15:50]

Unfortunately, I can't really link to it in the show notes, but I'll give you my comments anyway. All right, starting with utilities. Well, we have talked about them. We don't talk about them a lot because people haven't been asking me about them, but if you go all the way back to episode 27, we had a whole episode about them and how you might use them in a risk parity style portfolio. They are one of the two sectors along with real estate that has historically had a reasonable diversification from the rest of the stock market that you might want to consider it as a separate allocation in a portfolio. Now that being said, I would not expect utilities actually to outperform the stock market over time. They do provide a nice value-based tilt to add to a portfolio to something you can consider. Yes. I would not say that they are magical, but I would say that they are quite useful depending on what else is in your portfolio. I know some people that have taken, say, a golden ratio kind of portfolio and used utilities as a 10% allocation, for example, which can Make a lot of sense, particularly if you are holding something like that in a taxable account because utilities are going to pay more qualified dividends and lower your tax rate as to that allocation. All right, your second question, what are my thoughts on using currency, particularly the dollar in a portfolio? And you mentioned the fund UUP, which is a fund that basically invests in the dollar with enough leverage to make it not just dollars. I've looked at that fund before. The problem I've had with it is it takes up too much space for the most part. So I think you're probably better off using either a managed futures fund like DBMF, which incorporates some of that currency speculation, or as our friend the dude Alexei has shown us in a couple of his sample portfolios, you can also use a Fund that goes short on other currencies against the dollar to get the same kind of effect. The dude to buy and two of those funds are EOU and YCS, which go short the Euro and Yen respectively against the dollar. So that would be another way of putting some of that in there. It really goes as part of that volatility bucket, because being long the dollar is essentially also being long volatility when you're talking about other assets denominated in dollars. So you figure if there is high volatility in the stock market or the bond market or any other market, that asset is probably going down, which means it's going down against the dollar. Now, obviously, the other way of going long the dollar, at least in part, is simply to hold things like money market funds or short-term bonds or other things that are going to generate dollars and roll over with the dollar and be relatively stable. And so there is a small aspect to that in something like the Golden Ratio Portfolio with its 6% allocation to a money market fund or a golden butterfly type portfolio with an allocation to a short-term bond fund. I realize that's not exactly the same as something like UUP, But it is essentially the same idea when it comes to diversification principles. The problem with those sorts of things is if there is too much of that in a portfolio, it just drags down the overall performance of the portfolio. It's what we call a cash drag, which is really the central problem with a lot of so-called bucket strategies. They just have too much short-term cash like things in them, which is ultimately just like holding a portfolio that is only 80% of the portfolio that you were going to hold. For instance, if you have 20% in that. So you can use UUP, but there are probably some better things out there depending exactly on what you're trying to do and what else you've got in that portfolio. You can't handle the banter. All right, then you mentioned managed futures in your Third question, which, yes, are a very good diversifier, but also you've mentioned this fund, LCSIX, which is a long short commodities strategy fund is what it's called. I did go take a look at this and pull its fact sheet, which I'll link to in the show notes. So this is a very interesting fund. It basically approaches this area as if You were like an institution and you were hiring a bunch of different managers to perform alternative strategies. So this fund actually relies on seven different managers to come up with strategies for trading commodities. And the reason they call it a long short fund is because in any given period, it can be long some commodities and short other ones. So right now, as of the end of the year, it has a large long energy position and then it's short metals, short grains, short livestock. Tina, you fat lard, come get some dinner. Tina, eat. Eat the food. Eat the food. and is long commodity equities. So you would say this is an ultra managed fund and it would be difficult to say what it's like to perform like in the future. I realize it has a decent track record in the past and is positive almost all years. But here are the problems I see with it. This is part of the last generation of these sorts of funds. So it's a mutual fund. It has a very high expense ratio that's over 2%, and then also some of its variations carry 5.75% loads if you want to get into it. So it's a very expensive fund to hold, and therefore its annualized average returns over its lifetime are only in the 4% range. And this fund is the kind of example that I've talked about before when I've talked about managed futures that for do-it-yourself investors, this area, futures and commodities, has been kind of uninvestable for most of its lifetime for a do-it-yourself investor because the funds that were offered were just so expensive, they really dragged down the average returns. Now, if they were to reformulate this thing and put it in an ETF form, and get that expense ratio down below 1%, then you'd be talking about something that would be a lot more interesting. That's the fact, Jack. That's the fact, Jack. And so I'm wondering if a fund like the fund CTA, which is a new ETF that invests in futures that are specifically commodities futures, would be the answer for something like this. I have no idea whether that's the case or not, because CTA has only been around for about a year and a half to two years. In the end, I probably think I'd rather have a fund like DBMF, which just follows the SOC Gen index for managed futures, because it gives a broader exposure not only to commodities, but also to these currencies that we were just talking about and other things. Including being able to go short bonds or short interest rates. So I do find something like LCSIX to be interesting, but probably not something we want as do-it-yourself investors due to its fee structure. We must demand better in the age of steel. The best, Jerry. The best. Hopefully that improved on your methods a little bit. That's not an improvement.

Mostly Voices [24:12]

Trogdor strikes again.

Mostly Uncle Frank [24:15]

And thank you for that email.

Mostly Mary [24:24]

Last off. Last off, we have an email from Alex and Alex writes. Hi, Frank and Mary. Thank you again for all that you do to spread your knowledge out for your children and the world to absorb. Why, what have children ever done for me? As a resident of Cincinnati, I also hope you enjoyed your recent trip to our lovely city. It's quite underrated, in my opinion, as a travel destination, particularly in summer. I'm a WKRP in Cincinnati. Anyway, please see the document below. It contains the SEC filings for two interesting new ETFs both under the trademark return stacked. One, a total world stock fund plus intermediate treasuries at a ratio of 90-60-60-40 times 1.5. Two, a managed futures fund and intermediate treasuries at a ratio of 100. Full notional exposure to each asset. I predict many will want to wait and see how they work, But as an accumulator, it's admittedly tough to not go all in on the leveraged total world, maybe with a dash of the managed futures plus treasuries. And to think, all this after the fund AVGE just came out for factor heads. It truly is a golden age, particularly for those of us that want the benefits of leverage and/or factor investing all in one fund. Happy Holidays, Frank and Mary, Alex.

Mostly Uncle Frank [26:03]

Well, first, happy Groundhog Day to you as well, even though you wrote this at Christmas time. Do you think Bill's gonna come out and see a shadow?

Mostly Voices [26:14]

Punkzatoni Phil. That's right, woodchuck chuckers, it's Groundhog Day. Get up and check that hog out there. Yeah! Come here, Groundhog. And next, as to your email, Cincinnati.

Mostly Uncle Frank [26:29]

Yes, we're very pleased with Cincinnati when we visit. And we're going to be there again in March. Give you my announcement spiel right now for the Economy Conference. The weekend of March 17th, it's run by my friend Diana Merriam. It's a party about money, as she says, and there'll be a bunch of speakers and I'll be running a little breakout session with some markers and a big whiteboard to talk about withdrawal strategies. And since you're already there, I suppose there's a decent chance I'll actually see you there. It'll be great. Now getting to these ETFs, yes, return stacking is a concept from Resolve Asset Management, which basically is taking risk parity style portfolios, adding some leverage and putting other things on top. risk parity style portfolios at their base. They also have a nice podcast and YouTube channel where they talk about lots of these sorts of issues and getting better diversification. I will link to one of those in the show notes, as well as their little return stacking paper that is up on their website. But they are a good resource for these sorts of things. So that first fund looks like it's wanting to be a variation of the fund NTSX. NTSX is a levered up 60/40 portfolio of the S&P 500 and US Treasuries. This one that you found looks like it's a total world stock market and intermediate Treasuries with the same kind of leverage in it. But these are funds that are designed to be held long term as opposed to the usual leverage funds, which have a lot more leverage and are originally designed for short term trading, even though we've used them for long term purposes in some of our experiments. And then I see you've got this other managed futures fund and intermediate term treasuries, which also looks like a leveraged fund. That's 2x. Now these are interesting, but the challenge of using things like this that are mixed is that you have to kind of pull them apart and do some algebra with the rest of the things in your portfolio to get the right balance that you actually want. So they add a level of complication, which I don't like. I would prefer to have each fund be a pure thing with whatever leverage needs to go in it. But I guess this is the more popular way to do this these days, as I see a lot more of these sorts of ETFs coming out over the past few years and continuing to come out. It'll be interesting to see which ones of them actually survive because I think within the next few years there's just going to be way too many of them floating around out there. But they are a good example of the kind of things we see in the age of steel, a golden age of investing where we just have many more decent options as do-it-yourself investors that are not expensive mutual funds with large loads attached to them. Forget about it.

Mostly Voices [29:44]

So I will link to your link in the show notes and thank you for

Mostly Uncle Frank [29:47]

your email. 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. 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.

Mostly Mary [30:37]

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.