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. Thank you, Mary, and welcome to Risk Parity Radio.

Mostly Uncle Frank [0:44]

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

Mostly Mary [1:29]

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

Mostly Voices [1:34]

Lighten up, Francis.

Mostly Uncle Frank [1:37]

Today on Risk Parity Radio, it's time for our weekly portfolio reviews of the seven sample portfolios you can find at www.riskparityradio.com on the portfolios page. And as a preview, we just had our worst week of the year so far.

Mostly Voices [1:53]

That's not an improvement.

Mostly Uncle Frank [1:56]

But before we get to that, first, my eldest son reminds me that a week ago we had the 40th anniversary of the release of Motorheads Ace of Spades.

Mostly Voices [2:15]

Which he felt was important information to share with the world. Lemmy rules. Yes, yes, Lemmy, Lemmy. You know I'm going to lose. I got bling for fools. But that's the way I like it, baby. I don't want to live forever. Never forget me, son. You have a gambling problem.

Mostly Uncle Frank [2:46]

But enough on that, let's turn to your questions.

Mostly Voices [2:50]

Here I go once again with the email. And?

Mostly Uncle Frank [2:54]

First off, we have an email from Alexi.

Mostly Voices [3:01]

So that's what you call me, you know? That or his dudeness or duder or, you know. Bruce Dickinson, if you're not into the whole brevity thing.

Mostly Uncle Frank [3:09]

And the dude writes：Hey Frank, enjoyed today's

Mostly Mary [3:13]

pod. Thanks for addressing my email about Momentum's role in a risk parity portfolio. In regards to your point about QMOM having very different characteristics to MTUM, that is valid. Sweet. Much like choosing a small cap value fund, the name of the ETF is not that useful in selection. And it brings up another question. What is the ideal process for selecting an ETF? In my opinion, and in the context of my being a degenerate gambler, the best way to select a fund, at least when it comes to pursuing factor exposures, is to maximize your exposure to the factor in question. i.e. if I decided to use a growth fund, I would want it to be as growthy as possible. To do this, I used the mutual fund and ETF factor regression model at Portfolio Visualizer.

Mostly Voices [4:17]

Below are the US ETFs sorted using that tool for maximal exposure

Mostly Mary [4:22]

to the momentum factor using the Fama-French four-factor model. As you see, QMOM is the momentumiest ETF out there, with a momentum score of 0.82. MTUM is well down the list with a score of 0.38. You can also use this tool to sort for value, size, and beta exposures, in addition to quality and profitability if you are into that sort of thing. Hope this is helpful, AZ. The dude abides.

Mostly Uncle Frank [4:55]

All right, I'm not going to talk too much about QMOM and momentum strategies today since we just talked about them in episodes. 231 and 234, and you can go back and check those out if you are so interested. That and a nickel will get your hot cup a jack squat. But I do appreciate this email and the tool that is being referenced that we all should be aware of. I should have mentioned this in our last episode when Andreas asked about choosing ETFs, because the dude is correct here that a good way to choose factor-based ETFs and funds is to use this tool over at Portfolio Visualizer, which allows you to focus on particular factors or characteristics, search the whole database of funds and ETFs, and then it will spit out which ones conform the best to the factors you're most interested in. It is a little bit daunting to use, And you do have to be familiar with the Fama-French rubric of three-factor models or five-factor models. The dude was using a four-factor model in this instance. And I'll see if I can recreate what he did and sent to me as a JPEG. But I'm glad he's pointed this out for us. Because as I like to say, we have the finest podcast audience available.

Mostly Voices [6:21]

The best, Jerry. The best.

Mostly Uncle Frank [6:25]

And the emails reflect that. Yeah, baby, yeah!

Mostly Voices [6:28]

So thank you for this one.

Mostly Uncle Frank [6:31]

Take it easy, dude. Oh, yeah. I know that you will.

Mostly Voices [6:35]

Yeah, well, the dude abides. Second off, second off, we have an email from my

Mostly Uncle Frank [6:45]

contact info.

Mostly Voices [6:48]

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

Mostly Uncle Frank [6:52]

And my contact info, right?

Mostly Mary [6:55]

Frank, towards the end of the podcast linked below, there is an interesting discussion of growth stocks. Key point, growth stocks are not stocks, but bundles of options, and thus key determinant of value is volatility, not cash flow, DCF. Thank you as always for your wit and wisdom. Let me understand this.

Mostly Uncle Frank [7:19]

I'm funny how, I mean funny like I'm a clown, I amuse you? so the link in the podcast that my contact info is referring to is an interview of Professor Robert C. Merton. And if you have been living under a rock, he is a Nobel Prize winner in economics that specializes in market analysis and modeling. And this is a recent interview of him. I have listened to it. It is interesting, but you do have to be a little bit academically oriented to appreciate everything he's saying. I think what's most notable about Merton for our purposes is that in addition to winning a Nobel Prize and being a famous professor, he is also a resident scientist and advisor for Dimensional Fund Advisors, which is the outfit that has specialized in factor-based investing for the past few decades or so. And I think it's useful to differentiate between people like this who have developed methodologies based on analyzing large quantities of data, and somebody like Professor Kotlikoff, who we've talked about in recent episodes. Hello, Newman. Who is trying to apply economic theory to personal finance topics. Newman. And one of those methods is very useful, and one of them is not. No man! And being able to differentiate between the two of them is an important skill to have. Good night, no man.

Mostly Voices [8:49]

I don't want to carry on about this too long, because we just talked about it in

Mostly Uncle Frank [8:52]

episode 238, so you can go back and listen to that if you haven't yet. But I think our ultimate goals as do-it-yourself investors should be to try to synthesize the best practices from the academics and from the practitioners, particularly the professionals that run hedge funds and things like that, while also recognizing that we are not going to be capable of doing everything that they do. But this does provide us with a good litmus test for judging whether an idea in personal finance has much credence and is something that we ought to be pursuing. Hello. Hello, anybody home? Think McFly, think! Because if it's not up to snuff from either an academic kind of analysis or something that professionals have looked at in written white papers about, then it's probably something we shouldn't spend too much time on ourselves. And I will leave it at that for today. I will link to this in the show notes. So you can check it out.

Mostly Mary [9:59]

And as always, thank you for your email. Last off, we have an email from Mike. And Mike writes：what do you think of this portfolio, Frank? Mike, this crazy retirement portfolio has just beaten Wall Street for 50 years. This strategy beats the market with less risk, fewer upsets, and no lost decades. Surely you can't be serious. I am serious.

Mostly Uncle Frank [10:26]

And don't call me Shirley. Well, Mike is referring to this Brett Arends article from MarketWatch last month about this diversified portfolio that has done well at least recently and in the past. Let's talk about the portfolio and then talk about the article, which I will link to in the show notes. The portfolio described has seven components, and these are equal weighted components, so they're each about 14.3% of the portfolio. So on the stock side, it's got US large caps, the S&P 500, US small caps, the Russell 2000, developed international stocks, and REITs. And then in addition to those four components, it has one component of gold, one component of commodities, and one component of 10-year treasury bonds. And the article observed that this kind of portfolio would have outperformed a 60/40 portfolio over the past 50 years and had a particularly robust performance last year. And the author acts like this is some kind of amazing discovery that nobody ever knew about. Hello. Hello, anybody home? But if we take a quick look at it, you can see that it conforms to many of the kinds of best practices we talk about on this program. That's the fact, Jack. That's the fact, Jack. Now, one of those is that the sweet spot for the amount of equities in a retirement portfolio seems to be somewhere between 40 and 70%. And this portfolio does indeed have about 58% devoted to equity funds. So it checks a best practice box there. Now, looking at the other components, we have also talked about the fact that studies have been done going back 100 years that show that having between 10 and 15% in gold in a portfolio tends to smooth it out and raise its projected safe withdrawal rate. And lo and behold, there is 14.3% in gold in this portfolio. Surprise, surprise, surprise. Surprise, surprise, surprise. And then the other two components are treasury bonds and commodities. What do we know about treasury bonds and commodities? Well, treasury bonds tend to do well in deflationary or recessionary environments, whereas commodities tend to do well in inflationary or growth environments. So they are on the opposite ends of the spectrum as far as that form of diversification is concerned. and you would expect that adding those to a portfolio is going to help with its diversification. So I am not at all surprised that this kind of portfolio has a good long-term track record. Surprise, surprise, surprise. It follows all three of our basic principles. The macro allocation principle, which says that you need to get that right first. And the stocks and the gold reflect that in this Portfolio, the Simplicity Principle, this is not something that's very complicated or very difficult to implement for a do-it-yourself investor, and the Holy Grail Principle, which is to focus on diversification in terms of having low correlated assets when you're adding things to a portfolio to diversify it. Hence, the treasury bonds and the commodities work well with the stocks and the gold. But you can also see what's slightly deficient about this portfolio or the idea of constructing this portfolio in that just taking equal weight of each of these components doesn't probably make a whole lot of sense because they have different volatility and return characteristics that you want to balance out. So you probably want fewer commodities and more bonds in a portfolio like this. And if you don't have more bonds, you probably want to extend the duration of them at least. And so, as an example, I went ahead and tweaked this portfolio and put it in Portfolio Visualizer to compare against the original. And what I did was leave the stock allocation the same, but reduce the exposures to the international sector and the REIT sector down to 10% each. So the small and large US stocks were 18% each. Then I added more to the bonds and put it out to a longer duration, so it's 22% in long-term treasuries instead of 14.5% in intermediate-term treasuries. I took that from the commodity sector, so the commodity exposure went down to 7% or about half of what it was. Running that against this original portfolio, the data only goes back to the early 2000s in this example, but you can see it's a easy way to improve the characteristics of this portfolio, both in terms of return and in terms of volatility. But none of that is a surprise either, and you can check it out in the link in the show notes. So this is a good exercise in a risk parity style portfolio and how you might construct it and what you might do with it. But this is a terrible article because it expresses and reinforces the kind of ignorant thinking that we see from the financial media about portfolio construction. Are you stupid or something? None of what is going on here should surprise this author, Brett Arends, who's been writing articles for, I don't know, decades now. Honestly, as stupid as a stupid does. A lot of them are quite facile, like this one. Stupid is stupid does mean stupid, blue. And do not answer the basic questions as to why portfolios like this tend to perform better than simple stock bond portfolios. What you just said is one of the most insanely idiotic things I have ever heard. Instead, this article is just written in a way to attract clicks and eyeballs.

Mostly Voices [16:42]

At no point in your rambling, incoherent response were you even close to anything that could be considered a rational thought.

Mostly Uncle Frank [16:51]

And seems to be more of an ad for the person that devised this portfolio and run some kind of fund.

Mostly Voices [16:59]

Always be closing. Always be closing.

Mostly Uncle Frank [17:06]

The point being here in the 2020s, we can know and should know, and if you are in the financial media and you don't know, you're not doing your job.

Mostly Voices [17:15]

You had only one job.

Mostly Uncle Frank [17:19]

How portfolio construction works, how diversification works, things like the Holy Grail principle, and how to implement them as do-it-yourself investors. We do not need to run off to some Purveyor who supposedly is going to push magic buttons for us to create something like this.

Mostly Voices [17:41]

They're sitting out there waiting to give you their money or you're gonna take it.

Mostly Uncle Frank [17:44]

In fact, we can do better than ourselves just using the principles that are inherent in this kind of portfolio.

Mostly Voices [17:52]

We had the tools, we had the talent.

Mostly Uncle Frank [17:56]

But this is how the financial media and financial services work together.

Mostly Voices [17:59]

And I have a straw, there it is, that's a straw, you see. Watching, and my straw reaches across the room and starts to drink your milkshake.

Mostly Uncle Frank [18:17]

The financial media always acts like what people are doing in financial services is so advanced and so impossible to figure out and so innovative, but it's just not.

Mostly Voices [18:34]

Forget about it.

Mostly Uncle Frank [18:37]

In the 2020s, it's just not. We can do these things ourselves and we should do them ourselves. These things you say we will have. We already have. So I am once again disappointed by what the financial media has done with this topic.

Mostly Voices [18:53]

I award you no points and may God have mercy on your soul.

Mostly Uncle Frank [18:57]

But certainly not surprised. You're the Gray Rider. You may go in peace. I reckon not. This is yet another example of why we should not rely or trust what is commonly served to us by people trying to sell us things.

Mostly Voices [19:23]

I drink your Milkshake. I drink it up.

Mostly Uncle Frank [19:31]

So it was good of you to flag it so we could have this conversation. Bow to your sensei. Bow to your sensei. And thank you for your email.

Mostly Voices [19:39]

And now for something completely different.

Mostly Uncle Frank [19:47]

What is that? What is that? What is that? And the something completely different thing we are doing is our weekly portfolio reviews. Of the seven sample portfolios you can find at www.riskparityradio.com on the portfolios page. Just looking at the markets last week. They were mostly ugly.

Mostly Voices [20:11]

I feel like we're going back to 2022.

Mostly Uncle Frank [20:17]

Anyway, the S&P 500 was down 1.11% for the week. The Nasdaq was down 2.41% for the week. Small-cap value stocks represented by the fund VIoV were down 3.86% for the week. Gold was nearly flat, but it was down 0.13% for the week. Long-term treasury bonds were also down. They had their worst week of the year. They were down 2.98% for the week. Rates represented by the fund R E E T were down 2.19% for the week. Commodities were up and bucked the trend. They were the big winner last week. Our representative fund, PDBC was up 3.04%. Preferred shares represented by the fund PFF were down 1.7% and managed futures managed to eke out a gain. Our representative fund DBMF was up 0.46% for the week. Looking at our sample portfolios, they were all down, some worse than others. First one is this All Seasons portfolio that's 30% in stocks, 55% in treasury bonds divided into intermediate and long term, and the remaining 15% in gold and commodities. It was down 1.44% for the week. It is up 3.87% year to date and down 4.49% since inception in July 2020. Next one is our Golden Butterfly. This one is 40% in stocks divided into a total stock market fund and a small cap value fund, 40% in bonds divided into long and short funds, treasuries, and then 20% in gold GLDM. It was down 1.63% for the week. It is up 5.06% year to date and up 12.65% since inception in July 2020. Next one is our golden ratio. This is 42% in stocks, 26% in long-term treasuries, 16% in gold, 10% in REITs, and 6% in a money market fund or cash if you like. It was down 1.85% for the week. It is up 5.56% year to date and up 8.21% since inception in July 2020. Then our third kind of bread and butter portfolio here is the Risk Parity Ultimate. I will not go through all 15 of these funds. It's got a slight bit of leverage in it, but it was down 2.03% for the week. It is up 6.17% year to date and up 0.34% since inception in July 2020. Now moving to our experimental portfolios that involve Leverage and lots of volatility. They have leveraged ETFs in them. First one is the Accelerated Permanent Portfolio. This one is 27.5% in a leveraged bond fund, TMF, 25% in a leveraged stock fund, UPRO, 25% in PFF of preferred shares fund, and 22.5% in gold, GLDM. It was down 3.89% for the week. It is up 9.74% still year to date. and down 16.35% since inception in July 2020. Moving to our most levered and least diversified portfolio, this aggressive 5050 that is half stocks and half bonds. It's got 33% in a levered stock fund, UPRO, 33% in a levered bond fund, TMF, and the remaining third divided into a preferred shares fund and an intermediate treasury bond fund as the ballast. It was down 4.77% for the week. It is up 10.73% year to date and down 23.28% since inception in July 2020. And it does commonly have four or five percent swings in a given week, which is why it's better seen and not experienced.

Mostly Voices [24:11]

That is the straight stuff, O' Funkmaster.

Mostly Uncle Frank [24:15]

Unless you're a certain kind of person.

Mostly Voices [24:18]

You can't handle the gambling problem.

Mostly Uncle Frank [24:22]

Now we move to our last one, the levered golden ratio. This one is 35% in a composite fund, NTSX. That is the S&P 500 and treasury bonds levered up 1.5 to 1, 25% in gold, 15% in a REIT, O, 10% each in a levered small cap fund TNA and a levered bond fund TMF. and the remaining 5% in a volatility fund and a Bitcoin fund. It was down 2.93% for the week. It is up 6.75% year to date and down 18.29% since inception in July 2021. It's a year younger than the other ones. But that concludes our portfolio review. Hopefully next week they'll get back on track, but it's still quite a good year so far. But now I see our signal is beginning to fade. Just one more little announcement. Next month I will be attending and presenting at a breakout session at the Economy Conference in Cincinnati, Ohio. It's a party about money run by my friend Diana Merriam, and there'll be a lot of other younger, more entertaining speakers there as well, and some fun activities. If you're interested, I'll link to that in the show notes, and I already know I'll see some of you there. In the meantime, if you have comments or questions for me, please send them to frank@riskparityradio.com that email is Frank@riskparityradio.com www.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 another little programming note, there may be shorter and fewer podcasts over the next few weeks here because we've got things to do and places to go and people to see. Life in the fast lane as a mostly retired lawyer. If you haven't had a chance to do it, please go to your favorite podcast provider and like, subscribe, give me some stars, a review. That would be great. Mmmkay? Thank you once again for tuning in. This is Frank Vasquez with Risk Parity Radio. Signing off.

Mostly Voices [26:53]

And don't forget the Joker, the Ace of Spades, the Ace of Spades.

Mostly Mary [27:17]

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.