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 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 The finest podcast audience available. Top drawer, really top drawer. Along with a host named after a hot dog.

Mostly Voices [1:35]

Lighten up, Francis.

Mostly Uncle Frank [1:38]

But now onward, episode 243. 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 Portfolio's page. Boring! But before I bore you with that, we do have a few emails. And so without further ado, Here I go once again with the email. And our first two emails are about a similar topic, so we will do them together. First off, we have an email from Johnny. Here's Johnny.

Mostly Mary [2:20]

And Johnny writes, Frank, I made a donation and attached the receipt here. Hopefully my email will be read on the podcast.

Mostly Voices [2:29]

That's what I'm talking about.

Mostly Mary [2:32]

What is your opinion on managed futures funds like DBMF or KMLM replacing the traditional long-only commodity ETFs like PDBC in risk parity portfolios? Portfolios. These managed futures funds generally consist of 25 to 30% commodities, short or long already. That's true.

Mostly Voices [2:56]

I ain't promising another extra.

Mostly Mary [2:59]

So it seems a bit strange to have a long only commodity fund when you also have a managed futures fund which, depending if they are long or short at the time, could be either doubling down on the commodities in your other fund or could be zeroing them out. Wouldn't it be better to just replace the long-only commodity funds with the managed future funds? A backtest using the oldest managed futures fund I could find, ASFYX, shows that having it replace PDVC in a risk parity portfolio always helps to sharpen sortino ratios. Thanks, Johnny. Second off.

Mostly Uncle Frank [3:37]

Second off, we have an email from Kevin.

Mostly Voices [3:41]

Kevin, stop singing.

Mostly Mary [3:48]

Hi, Frank. Here's an interesting article you might enjoy from the KMLM ETF folks. They take a number of common portfolios and add a dollop of managed futures. As expected, all metrics improve. As a bonus, they sprinkle the article with dirty Harry quotes, which is great fodder for sound clips. Cheers. Go ahead.

Mostly Uncle Frank [4:11]

Make my day. All right, let's go back and start with Johnny. Go, Johnny, go. Go, Johnny, go. Go, Johnny, go. First we note that Johnny has taken advantage of our one offering here on Risk Parity Radio, which is that you get to go to the front of the line for email answers if you donate to our designated charity, the Father McKenna Center, and the information for that is on the support page. But if you do that, and let me know, I will move your email to the front of the line. And so thank you for your support and donation, Johnny. Johnny be good. And thank you to the rest of you as well, particularly those who donate regularly through the Patreon page, which you can also access from the Risk Parity Radio support page.

Mostly Voices [5:14]

We few, we happy few, we band of brothers.

Mostly Uncle Frank [5:26]

Well, Johnny, I think you make a good point here, and it appears to me that managed futures are probably these days a better choice if you're going to choose between a managed Futures Fund and a Commodities Fund for a spot in your portfolio. And there are a couple of reasons for that. First, both of them perform well in terms of being uncorrelated to most of your other holdings, your stock and bond holdings in particular. And both of them seem to do well in inflationary environments, which isn't surprising given that inflationary environments tend to provoke or involve trends in commodity prices. Over time, it's also true that managed futures seem to have a better expected return than commodities funds. Managed futures funds seem to have a real return of about 6% maybe, less than the stock market, but more than many other things. Whereas the historical performance of straight commodities funds is really down in the 2 to 3%. return range, which is why you would never want to put a whole lot of that in your portfolio anyway, because it's essentially inflation insurance and you pay something for that. Both of them can also be very volatile and depending on what fund you're using, the managed futures may be more or less volatile than a commodities fund. But I think what has really changed over time and really changed recently is the investability question. Because commodities funds have been around for quite a while and there have been reasonable choices to be made in that space, particularly in ETFs, for at least about a decade or more. Managed futures in the past have been kind of uninvestable for a couple of reasons. First, the costs of the funds were very high, often 2%, 3%, or more percent. And second, it wasn't always clear what you were getting because these were heavily managed funds. that could change their strategies. So it was very unclear as to whether their past performance would be indicative of any future performance. Now, a couple of things have happened in the past decade or so in that space. The first is the period of 2010 to 2020 was historically one of the worst periods for managed futures and many of the fund operators essentially went out of business. It sort of thinned the herd of all of the lesser funds and lesser operators. And so what you were left with was people that essentially knew a lot more about what they were doing than the great masses of what you saw in around 2008 to 2010, which was the last big managed futures era. The era between 2000 and 2010 was actually a very good decade for managed futures. So, almost all of the current fund operators who work in this space now are using some kind of algorithmic trading. They're not just looking at charts and making guesses. Forget about it. Along with that, the costs have now come down substantially so that you can get into a managed futures fund in the form of an ETF, like the ones you suggest, DBMF or KMLM. which have only been out for a few years, and get kind of an index-like performance. And so they have just become a lot more attractive. This sector has become a lot more attractive for a do-it-yourself investor who does not want to be trading managed futures or commodities themselves. Speaking from personal experience, I did some of that back in the 1990s, and it was a lot of work.

Mostly Voices [9:09]

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

Mostly Uncle Frank [9:12]

So I agree with you that if you are going to pick between the two of them, you would probably go with the managed futures fund. The other thing that you should recognize though is that you would need less of a commodities fund than a managed futures fund to have an impact in your portfolio. And that's largely due to its volatility characteristics. So looking at our sample portfolios, we actually don't have much in either of these right now in these portfolios. The only portfolio you see a straight commodities fund is that All Seasons portfolio. And that's not something I constructed. That is a reference portfolio as described on the Portfolios page. It comes from Tony Robbins interview of Ray Dalio and what they constructed for the book Money Master the Game, which gained a currency as the risk parity portfolio. And so that's why we include it. And it has a 7.5% Commodities allocation to it. So it's got that fund in it. The only other place you'll see a commodities fund in our sample portfolios is in the Risk Parity Ultimate because we wanted to include something of everything. That's our kitchen sink portfolio. And what we've gone with there is not a straight commodities fund, but a modification of a commodities fund in the form of a fund called COM, which we talked about back in episode 99. and that fund has a simple trend following mechanism in that when commodities are going up, it will buy commodities, but when commodities are flat or going down, it will sell them and go to cash. It's a very simplistic trend following mechanism, but it does make that fund less volatile than a straight commodities fund and also gives it more consistent performance characteristics while still maintaining the kind of diversification characteristics that you want it to have because you want a commodities fund to do well in inflationary environments. That's what it's there for. That comm fund will do that, but then will go essentially dormant when commodities are not doing well and your stocks and bonds are probably doing well because you're not in an inflationary environment. So overall, this is a very good example of an area of investing that is evolving in a way that's more favorable to do-it-yourself investors and gives do-it-yourself investors more choices now than you would have had, say, 10 years ago. So a very good question and a very good observation. Young America, yes.

Mostly Voices [11:44]

Now moving to Kevin.

Mostly Uncle Frank [11:48]

Kevin has located for us an interesting article from Mount Lucas, the people that operate the KMLM fund. and the article is dated December 1, 2022. I will be linking to it in the show notes. It is called Dirty Portfolios：Managed Futures as a Portfolio Element.

Mostly Voices [12:08]

You know what makes me really sick to my stomach? What? It's watching you stuff your face with those hot dogs. Nobody, I mean nobody puts ketchup on a hot dog.

Mostly Uncle Frank [12:23]

And so it's a series of extended back tests where they've taken some traditional off-the-shelf portfolios and then inserted managed futures into them and ran two back tests, one with the managed futures, one without the managed futures, and done comparisons. And so most of these do go back into the 1990s or in some cases back to the 1980s as their managed futures component. They used what is now the basis for the KMLM fund. So it's an index that's constructed. And so they ran this with the Harry Brown Permanent Portfolio, something called the Margarita Portfolio, the Swenson Lazy Portfolio, Armstrong's Ideal Index Portfolio, the Schwed Row Minimum Fat Tails Portfolio, and a traditional 60/40.

Mostly Voices [13:12]

You're on notice, Callahan. This little wild west show of yours yesterday is exactly the kind of thing this department's no longer prepared to tolerate. Is that clear?

Mostly Uncle Frank [13:24]

And generally they were sticking about 20% of the managed futures fund into these portfolios, which they just made room for by reducing the other components of the portfolio. And in all cases, it shows that adding managed futures does improve the performance characteristics of any of these portfolios.

Mostly Voices [13:45]

I hate the goddamn system, but until someone comes along with some changes that make sense, I'll stick with it.

Mostly Uncle Frank [13:53]

And so I'll just read you one for the traditional 60/40, and then they have the dirty 60/40. You're thinking did he fire six shots or only five? They call all of their portfolios the dirty version adding the managed futures, which leads to their dirty hairy quotes. Now to tell you the truth, I forgot myself and all this excitement.

Mostly Voices [14:17]

But anyway, this back test runs from January 1988 through

Mostly Uncle Frank [14:22]

September 2022, and it shows that the compounded annual growth rate with the original is 8.5% with the dirty version with the managed futures in it, it's 9.3%. But being this is a 44 Magnum, the most powerful handgun in the world, that will blow your head clean off. the maximum drawdown improves from -32.5% for the 60/40 to -20.6% for the dirty version. You could ask yourself a question. The volatility is less with the dirty version, 7.6% versus 9.2. The Sharpe ratio is better with the dirty version, 1.22 versus 0.94. And of course, last year's performance is very much improved, which in this case is only through the first nine months of the year, but this traditional 60/40 was down 20.1% at that point, and the dirty version was down 8.9% at that point. And so they equated all of this to a 16% improvement. I'm not sure exactly how they measured that. Do I feel lucky? But you can read the article yourself. Well, do you, punk? And I think this all goes back to what we've been talking about here for a couple of years now, going back to episodes 55 and 57, where we were talking about the fund DBMF as a potential addition to a portfolio. And the real question in my mind at that time was whether these new, less expensive funds would perform adequately and reflect the managed futures area and have those kind of performance characteristics over time. They seem to have acquitted themselves quite well over the past couple of years, giving the kind of performance you would have expected and wanted and helping improve the performance characteristics of a portfolio like described in this I've got an article on some of the backtests that we've run here as well. Now we don't want to get overly excited about it just because it had a bang up performance in 2022. But this is something we should consider as we will be discussing in the next email. So thank you for bringing that to our attention. The best Jerry, the best. Last off. Last off we have an email from Daniel.

Mostly Mary [16:59]

And Daniel writes：hi Frank, thanks for the good work you do. You always say that the best moment to switch funds is when your portfolio is at or near an all-time high. However, that's the moment you're going to pay the most taxes if you do that. I find it's best to switch equivalent funds when the cost basis is near the trading price. For example, I wanted to trade out a Vanguard VTI into BlackRock's ITOT. And I did that when VTI was near my purchase price of 187 last year. Isn't that the best approach tax-wise? Thanks, Daniel.

Mostly Uncle Frank [17:34]

All right, Daniel, I hope I didn't confuse you in that earlier episode, but I think we're talking about two different things or ideas here. What you are talking about in your email is just replacing one fund for another that is representing the same thing, the same asset class. So you are not talking about changing assets or allocations, which is what I was talking about in that earlier episode. First, just looking at these two funds, VTI and ITOT are so similar that there would be no reason to replace one with the other one unless you're getting some benefit like tax loss harvesting out of it. In my mind, these are both just different brands of tissue. One is Kleenex and one is Puffs. And this is very common these days to have multiple funds from different providers that are essentially providing the same thing in a different package. So if you, what you are talking about is really a distinction without a difference like this. The only reason you would do something like this is for tax loss harvesting purposes. And so as an example of that, we did in our sample portfolios last year, replace the fund TLT with the fund VGlt, which is a Vanguard version of that. The reason we did it at that time is because we could tax loss harvest, and so we took advantage of that, and VGlt has a lower expense ratio. Now we would not incur taxes just to get a lower expense ratio when they're as close as they are. but all of this is just kind of an opportunistic substitution that you're talking about and not a real change in the allocation of a portfolio. So this is the situation I was actually talking about. Suppose you wanted to change the overall allocation of your portfolio by, say, adding a managed futures fund to it. And in order to do that, you would have to substitute it in for something else. So something's coming out, and these are two different things. What I was saying is you don't want to do that in a fund chasing manner. So if you looked at 2022 and said, wow, this managed futures stuff is really performing great and some of my other funds are not performing great, why don't I just latch onto that and stick it in my portfolio for one of these things that's not performing well? That is what I'm telling you not to do. That is fund chasing. or fund hopping. Fat, drunk, and stupid is no way to go through life, son. But that does not mean that the idea is bad. It's just the timing that's probably bad. And what I was saying is that you should wait until the current portfolio that you hold is at or near an all-time high. Now, there is another way to do that, which is to run two back tests of a portfolio one with the new fund substituted in for one old fund, and then you can see how they would have performed over time. And if they get to a point where they would have been the same, that is also a good place where you can do a substitution, because the idea here is to not buy high and sell low, or at least be doing just an exchange of equal things for equal performances. So when I was reading your email and the other two emails, I thought, well, this could be an opportunity for us to have a learning experience, learn by doing kind of experience. And what I'm proposing to do and what I think we will do is take a managed futures fund and insert it into a couple of our portfolios. And so now we come up with the plan to do that. And then we are going to be looking at these portfolios to decide when to do that based on these two ideas, either waiting for the portfolio to get near its all time high or since I think we're just going to be doing a direct substitution, looking at a back test for each portfolio as if they held the two different assets and figuring out when to go ahead and do that. So we're not essentially buying high and selling low. I know that's a convoluted explanation, but I think it'd be easier if I just tell you what I'm thinking would be interesting to do. So we have these two Golden Ratio style portfolios that have REITs in them. The Golden Ratio has a fund called R-E-E-T in it, and the Levered Golden Ratio has an individual REIT called O in it. And while REITs are a reasonable choice for some diversification in a portfolio, they certainly do not give the kind of diversification that you would get out of a managed futures fund. So the proposal or plan that we will be making here is to substitute managed futures funds, and we'll use DBMF for the golden ratio and KMLM for the levered golden ratio. And so we draw up this plan that this is some, a substitution that we have decided to do. And what we are interested now is what is the timing for that substitution? So I went to Portfolio Visualizer to set this up, and I'll link to this in the show notes.

Mostly Voices [22:56]

We have the tools, we have the talent.

Mostly Uncle Frank [22:59]

We've started the original golden ratio from when it started in July 2020, set that up with the withdrawal rate that we're taking out of it, which is 5% annualized on a monthly basis. And then we've set up the alternative portfolio where we have DBMF substituted for REET. And if you look at those performances over time, it's interesting to look at. They're not that much different with the two different funds in them. You would think that they might be significantly different, but they're really not that much different. And what you see there is very interesting. You see that the original version tended to outperform the proposed new version early on, but then when you got to a year like 2022, the alternative version performed better. And then you can see that the alternative version is also less volatile than the original version, which is really what we want to get out of this. We want something that performs about the same with less volatility. That is the holy grail principle at work. and the true benefit of diversification. So when you look at these two portfolios, you see that they are not that far apart right now. The original one is behind the substitute one running back all the way back to the beginning of the portfolio for this illustration. And so we can now make a little plan here. We can watch this every month and when the things cross, when they would be equal, We can make the substitution knowing that we are no worse off by doing that substitution at that point. That we would have had the same overall results, whether we would have had the reit fund in there or the managed futures fund in there from the beginning. And so that gives us a reasonable point to make this substitution. Now it's really only possible to do this because we're dealing with just one fund. If you were making a whole bunch of changes together, you would essentially want to wait until the original portfolio got to at or near its all-time highs before you made the wholesale substitutions or multiple substitutions. We're trying to keep this simple here because we're doing this more for the learning of it than any burning need or desire to have to do this. And so now looking at our other guinea pig here, the levered golden ratio, I picked this one because it started at a different time than the other one. so this one started in July of 2021. And I also put into the Portfolio Visualizer a backtest going back to then using all of the components of the original version and then another version where I've taken the REIT O out and substituted in KMLM. And you will also see that the performances are very similar, but that the version with KMLM would be currently outperforming the other version, mostly based on what happened last year. So we will also put a pin in that, wait until they get near each other or overlap again, and then make that switch at that point in time. So it's the same idea as the other one, and hopefully this will be a nice learning experience for all of us. Vouch your sensei. Vouch your sensei. I should say, if you're doing something like this in real life, you also need to account for tax consequences, which may have a lot to do with the location of this substitution that you make. Because obviously it's easier to do in a tax-protected account, like an IRA, than in a taxable account. But thank you for that email and giving us this idea for a little experiment. Experiment to run. Hearts and kidneys are Tinker Toys.

Mostly Voices [26:51]

I'm talking about the central nervous system. But sir, I am a scientist, not a philosopher. Class is dismissed. And now for something completely different.

Mostly Uncle Frank [27:08]

And the something completely different is our weekly portfolio reviews of the seven sample portfolios that you can find at www.riskparity.com. riskparityradio.com on the portfolio's page. And really just not much happened last week overall. Looking at the markets, the S&P 500 was down 0.28% for the week. The Nasdaq was up 0.59% for the week. Small cap value represented by the fund VIoV was a big winner last week. It was up 1.44% for the week. Gold was down. Gold was down 1.34% for the week. Long-term treasury bonds represented by the fund VG LT were down 0.86% for the week. REITs were down, our representative fund, our EET was down 0.61% for the week. Commodities were the big loser last week. Our representative fund, PDBC was down 2.12% for the week. Preferred shares represented by the fund PFF were up 0.03% for the week. And managed futures were also a winner last week. The representative fund DBMF was up 0. 96% for the week. Moving to these portfolios, we'll go through these with alacrity today since there isn't much to say. First one is the All Seasons. This one is what we were just talking about before in the commodities discussion. This one is 30% in a total stock market fund, VTI, 55% in treasury bonds divided into intermediate and long. and then 15% in gold and commodities. And it was down 0.60% for the week. It is up 3.25% year to date and down 5.07% since inception in July 2020. Now moving to our three bread and butter kind of portfolios. First one is the 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 treasuries, and then 20% in gold, GLDM. It was down 0.11% for the week. It was up 4.95% year to date and up 12. 53% since inception in July 2020. Next one is the golden ratio that we've been talking about. This one's 42% in stocks and three funds, 26% in a long-term treasury bond fund, 16% in gold, 10% in a REIT fund, R-E-E-T, the one we're talking about substituting out, and 6% in a money market fund or cash. It was down 0.21% for the week. It is up 5.34% year to date and up 7.98% since inception in July 2020. Moving to the Risk Parity Ultimate. This has 15 funds that I will not go through. It was down 0.23% for the week. It is up 5.92% year to date and up 0.10% since inception in July 2020. And now moving to our hideous experiments. These experimental portfolios involving levered funds that I know some of you enjoy playing with.

Mostly Voices [30:22]

Well, you have a gambling problem.

Mostly Uncle Frank [30:25]

But anyway, the first one is the Accelerated Permanent Portfolio. This one is 27.5% in a levered bond fund, TMF, 25% in a levered stock fund, UPRO, 25% in a preferred shares fund, PFF, and 22.5% in gold, GLDM. It was down 1.45% for the week. It is up 8.15% year to date and down 17.57% since inception July 2020. Next one is our most levered and least diversified portfolio, the aggressive 5050. This one is 1/3 in a levered stock fund, UPRO, 1/3 in a levered bond fund, TMF, and the remaining 3rd in a preferred shares fund and an intermediate treasury bond fund as ballast. And it was down 1.53% for the week. It is still up 9.04% year to date, but down 24.46% since inception in July 2020. When it moves, it moves quickly. And finally, our newest portfolio, the Levered Gold and Ratio. This one is 35% in a levered composite fund, NTSX, that is S&P 500 in Treasuries, 25% in gold, GLDM, 15% in that REIT, O, 10% each in a levered bond fund, TMF, and a levered small cap fund, TNA, and the remaining 5% is in a volatility fund, VIXM, and a Bitcoin fund, GBTC. It was down 0.23% for the week. It is up 6.41% year to date, down 18.53% since inception in July 2021, which was not an auspicious time to be starting a portfolio given what happened in 2022.

Mostly Voices [32:11]

That's not an improvement.

Mostly Uncle Frank [32:16]

But that concludes these portfolio reviews. It's kind of a move along, nothing to see here week. Forget about it. But now I see our signal is beginning to fade. Just a couple announcements. First, we are gearing up for the Economy Conference next month, just in a few weeks now. This is in Cincinnati, Ohio, run by my friend Diana Merriam. I will be doing a breakout session there. And there'll also be a variety of speakers and other activities in the personal finance space. Top drawer.

Mostly Voices [32:49]

Really top drawer.

Mostly Uncle Frank [32:53]

So I know I'll be seeing some of you there already if you are still interested. I believe there are still tickets left. And I will link to that in the show notes so you can check that out if you are so inclined.

Mostly Voices [33:04]

Better check your stuff before you wreck your stuff. 'Cause I'm back for your health. I come real stiff.

Mostly Uncle Frank [33:08]

Second announcement is that we will be doing a reduced schedule for this podcast for at least the next month or so because I have many other things I need to be doing these days.

Mostly Voices [33:19]

Well, you haven't got the knack of being idly rich. You see, you should do like me, just snooze and dream. Dream and snooze. The pleasures are unlimited.

Mostly Uncle Frank [33:33]

So I will be podcasting as time permits, but we will get back to the to a week schedule, probably in April or May sometime, we'll see. In the meantime, 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, follow, subscribe, give me some stars, a review. That would be great. M'kay? Thank you once again for tuning in. This is Frank Vasquez with Risk Parity Radio. Signing off.

Mostly Voices [34:19]

His mother told him someday you will be a man and you will be the leader of a big old band. Many people coming from miles around I hear you play your music when the sun go down. Maybe someday your name will be in lights and Johnny be good tonight. Go, go, go, Johnny go. Go, go, go, Johnny go. Go, go, go, Johnny go. Go, go, go, Johnny go.

Mostly Mary [34:50]

Go, go, go, Johnny be good. 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.