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 [0:37]

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 [2:03]

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 [2:11]

But now onward, episode 248. 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. Just a little preview of that. Boring! Yeah, not much happened this week after all of the sturm and drang over the Fed raising interest rates a quarter point and the failure of Credit Suisse last weekend. That's not an improvement. But before we get to that, we do have some missives from the Peanut Gallery. Surely you can't be serious. I am serious. And don't call me Shirley. And so without further ado, Here I go once again with the email. And? First off. And? Second off. First and second off we have two emails. From our number one denizen of the peanut gallery, otherwise known as Alexi.

Mostly Voices [3:20]

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 [3:28]

And we'll just do them together. In email one, the dude writes.

Mostly Mary [3:36]

Hey, Frank, a while ago, I wrote about RRH as a possible five questions candidate. these Rising rate hedge ETFs do look promising to me in the context of a long volatility portfolio Ballast role. Admittedly, their history is extremely short, which is concerning that this may be a regime specific asset. In any case, in looking at this category, I found an even better candidate for an for addition to a risk parity slash Dragon portfolio. Pfix from simplify has a bit longer track record, still very short, but more volatility. It seems to be composed mostly of Treasuries and option swaps. And in his second email, the dude writes, I came up with a simple portfolio structure yesterday for a risk parity investor in the accumulation phase. It doesn't perform differently in backtests from my other such portfolios, but I like its simplicity and agnosticism of design. More precisely, I think this structure is more robust in the face of future uncertainty because it has been less influenced by history of backtesting. I have noticed that I've accumulated some suspicious patterns in my portfolio design. As examples, I have some non-fundamental beliefs like 15% nominal gold is just right, long treasuries and managed futures should be equally weighted relative to each other, and overweight relative to gold. Is there any doubt that such beliefs are influenced by all the idiosyncratic results of my past backtests? The basic idea behind the portfolio is this. Start with a 100% nominal equity exposure to mimic the returns of a young 100% VOO or VTI investor. Then, for maximum diversification, I add 100% in nominal diversifiers in nearly equal parts Long Treasuries, Managed Futures, Gold, Long Volatility. Yes.

Mostly Voices [5:39]

Note that the long volatility is either a little underweight,

Mostly Mary [5:42]

21%, or overweight, 33%, depending on whether or not you count the leverage in the two times long currency ETFs. Portfolio structure, UPRO, 33.3%, TMF, 8.3%, DBMF, MFTFX for backtest 25%, UGL 12.4%, Long Volatility 21%, CCOR7, YCS6, EUO6, VIXM1, BTAL1. Below is a backtest of the new 50/50 portfolio against the S&P and my default accumulation portfolio of similar structure, CCOR omitted for back testing purposes.

Mostly Uncle Frank [6:34]

All right, getting to your first email, just to orient everyone here. What the dude is writing about is some newer ETFs that are designed to hedge interest rate risk and in particular go up in value when interest rates are increasing. And so we had previously talked about a couple of these. We talked about R-R-H back in episode 237 and back in episode 197 we talked about another one called R-I-S-R. And now you've identified another one called P-F-I-X. All these are constructed a little bit differently and so they have Different performance characteristics, although they do all or are all highly correlated because they do tend to go up in value substantially when interest rates are going up. So just as an example, PFIX went up something like 92% last year in 2022, which means that effectively it has a highly levered position using the options or futures that are in it. I agree with you that all of these are very interesting when you're thinking about looking for some insurance for what happened last year essentially. Because a sharp increase in interest rates is a relatively rare event and as we saw is very detrimental to most other assets including generally both stocks and bonds. But I think the jury is still out on these things just because they haven't been around that long. What I'm really interested to see coming out of them is whether over time they in fact have a positive overall return or not. I would suspect that it's close to neutral, but I could be wrong. But the only way to find out is to really just wait and see how they perform in different environments as they unfold. PFIX does seem to be definitely the most volatile of these three, which could be both good and bad. In any case, you would need a lot less of it than the other two to make a difference in a portfolio. Right now, I can't see including more than 1% to 3% of anything like this in a portfolio, simply because I think it's going to drag on the portfolio most of the time and then act as insurance in environments like we saw last year. All of these sorts of things are down generally about 10% so far in 2023. And you wonder whether that will be closer to their baseline performance in any given year. I suspect that they will go up and down substantially, even over short periods, like periods of months, like a VIX based fund. But I think it's just something for us to watch. over the next few years to see what these things actually do and whether they're of any use to us as do-it-yourself investors. I do commend you and thank you for identifying these sorts of things. That and a nickel will get you a hot cup of Jack Squat! Because a lot of them are relatively new and relatively obscure. Now moving to your second email. Yes, this is another interesting portfolio construction you have created here for us to peruse.

Mostly Voices [10:10]

You are talking about the nonsensical ravings of a lunatic mind.

Mostly Uncle Frank [10:13]

And I will link to it in the show notes so people can check it out. So bold strategy, Cotton. Let's see if it pays off for them.

Mostly Voices [10:21]

You are correct that it does look like it has about two times

Mostly Uncle Frank [10:25]

leverage in it. And we can't really back test it too far, so we can't really say a whole lot about it. But I think it does look interesting, like many of your constructions. Aren't you the least bit curious about it? Doesn't the bringing back to life what was once dead hold any intrigue for you? Now as for your non-fundamental beliefs, like 15% nominal gold is just right. Well, I think that belief is actually borne out by some data. If you go back to episode 40 and we were looking at the analysis from the safe withdrawal rate series of earlier retirement now, talking about gold in a portfolio that concluded that at least for kind of an ordinary stock bond kind of portfolio, having 10 to 15% in gold and it did tend to improve its performance, at least as far as safe withdrawal rates were concerned.

Mostly Voices [11:19]

I love gold.

Mostly Uncle Frank [11:23]

So I think that's a pretty good rule of thumb for that sort of thing. Now, as for your belief or suspicion that long treasuries and managed futures should be equally weighted relative to each other and overweight relative to gold, it's hard to know whether that belief is really correct or not. And the main problem here is that the managed futures funds are not all the same when it comes to volatility and leverage. depending on how they're constructed. So in theory, you could get some that have lower volatility and projected performance than a long-term treasury bond fund and some that have greater than that, and that would change your allocation. My own guess is that managed futures should be no more than 10 to 15% in a nominal portfolio, and treasury bonds or long treasury bonds should be slightly more than that. But those are kind of guesses, and it does depend a lot on what else you're putting in this portfolio. A lot of it just comes down to how much room do you actually have in the portfolio? Because I do think that you probably want to hit that 40 to 70% equities in a nominal unleveraged portfolio as the sweet spot for those. It's interesting if you go back to those original Dragon Portfolio papers that we talked about, way back in I think episode 55 or around abouts there, it was either 53, 55, or 57. They were looking at portfolios that did have somewhere around 20% in gold and 20% in managed futures. I'm not sure that those allocations were the right ones, but they had reconstructed something that went back a hundred years. Unfortunately, I don't think those papers are necessarily available, at least on their website anymore. But I do think we're going to learn a lot more about this in the next 10 years, because now that we have decent lower-cost ETFs that have these sorts of things in them, we'll be able to watch them perform or not perform in a variety of economic environments. The thing I'd be most concerned about at this point is that 2022 is probably such an outlier that we're not likely to see a year like that again. And so it begs the question as to whether some of these alternative asset ETFs will ever have a performance as good as it was in 2022. But on the other hand, if they have some kind of nominal performance between, say, five and 10% overall, and they are uncorrelated with our stocks, bonds, and other things, then they are going to be a valuable addition to a risk parity style portfolio. But I'm very glad that you're very curious about these things and are coming up with different formulations because I am equally curious as to see how all of this will play out over time. You had me at hello. And perhaps our children will enjoy the fruits of our labors.

Mostly Voices [14:22]

We're on a mission from God.

Mostly Uncle Frank [14:25]

Or perhaps they will say, Yes, it's true, but we do not speak of it. Forget about it.

Mostly Voices [14:32]

In any event, thank you for your email.

Mostly Uncle Frank [14:36]

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

Mostly Voices [14:39]

Yeah, well, the doo doo binds. Last off.

Mostly Uncle Frank [14:49]

Last off, an email from Barry from Canada.

Mostly Voices [14:56]

Good day, how's it going? I'm Bob McKenzie, it's my brother Doug. How's it going, a? We got two topics today. back bacon and long underwear. And Barry writes.

Mostly Mary [15:07]

Hi, Frank. I have listened to episodes of your podcast with great interest over this last week or so. I feel like I'm learning a lot about diversification and how it works. I am confused, though. I have looked online and maybe a half a dozen asset correlation matrices and they don't seem to agree. As an example, the portfolio visualizer table looks very different than the Morningstar table. Not only are the numbers different, but they don't even seem close. A 0.76 correlation between the S&P 500 and real estate at PV.44 at Morningstar. I know that they are not comparing exactly the same funds. Morningstars seem more general, whereas portfolio visualizers are very specific. But can they be that far off? Likewise, the correlation for commodities is 0.52 at Portfolio Visualizer, 0.124 at Morningstar. What am I missing here?

Mostly Voices [16:06]

I wouldn't say I've been missing it, Bob.

Mostly Uncle Frank [16:10]

Well, I went and looked at these links. I'm not quite sure what Morningstar is using for their fund or index as far as their real estate is concerned. and it's also unclear to me what the time frame is that they're talking about. Somebody did mention this same question on the Bogleheads forum. I'll link to that in the show notes. And they concluded it had to do with what years were involved. And that's the thing about correlations is that it's very noisy data. And if you even go to Portfolio Visualizer, you can get different correlation numbers depending on both how long the data set is you have, and then if you change the rolling correlation basis, which can be several different months, and then if you change the correlation basis itself to daily, monthly, or annually, you can get different numbers coming out of that depending on what you're comparing. What we are most interested for the purpose of portfolio construction is the long-term bases for correlation or lack thereof. Because you could also imagine somebody trying to trade on correlation based on macroeconomic factors as what the inflation and growth rates would be in a particular macroeconomic environment may inform you as to the correlation between two particular assets, and then you could put on some trade with respect to those. that's not something that I'm not sure anybody's ever done with any success rate, but theoretically it's possible. But it does not necessarily surprise me that you do get some differentiation in these numbers, particularly if you're comparing something like real estate or commodities funds, which may have different indices that they're actually looking at, as opposed to something that's very standardized like the S&P 500 or Intermediate Treasury bonds. And real estate is a particularly funny category in that it includes all different kinds of businesses if you're particularly looking at REITs. If you go back and listen to episode 21, I think it is, 19 and 21, I have a correlation matrix there for a whole bunch of different kinds of REITs. And you'll see that some of them are highly correlated with the stock market. whereas other ones have correlations that are only about, you know, 0.2 or 0.3. So I think with respect to REITs in particular, you really want to be looking at the particular REITs or REIT funds that you are thinking about investing in and comparing that with your other investments because some generic representation of real estate is probably not going to be accurate for the purpose you're trying to use it for. So I don't think you're missing anything. Forget about it. And hopefully that explains it at least a little bit. And thank you for your email. Now we are going to do something extremely fun. And the extremely fun thing we get to do now is our weekly portfolio reviews of the seven sample portfolios you can find at www.riskparityradio.com on the portfolios page. and there were lots of financial stories last week, but not a lot of actual financial movements in the end. So we won't spend too much time with this. Looking at the markets, the S&P 500 was up 1.39% for the week. The NASDAQ was up 1.66% for the week. Small cap value represented by the fund VIoV was down 0.13%, and that is most likely due to the fact that there are banks in small cap value funds, and they're not the largest banks, they are smaller banks. So that category has been a little more volatile than usual recently. Gold was down 0.63% for the week after its big jump the prior week before that. Long-term treasury bonds are presented by the fund VGLT were up 0.14% for the week. Reits represented by the fund are EET were down 1.53% for the week. Commodities represented by the fund, PBDC were up 1.25%. Preferred shares represented by the fund PDF were down 0.43% and managed futures represented by the fund DBMF were down 0.78% for the week. Moving to the sample portfolios, we see that they did not have much movement either, but it was to the positive side at least. First one is this All Seasons Portfolio that is a reference portfolio. It's only 30% in stocks and a total stock market fund, 55% in intermediate and long-term treasury bonds, and the remaining 15% divided into gold and commodities. It was up 0.47% for the week. It's up 4.64% year to date. and down 3.79% since inception in July 2020. We moved to these three kind of bread and butter portfolios. First one's a golden butterfly. This one's 40% in stocks divided into a total stock market fund and a small cap value fund. 40% in bonds divided into long and short-term treasuries and 20% in gold. It was up 0. 23% for the week. It is up 4.07% year to date and up 11.59% since inception in July 2020. Next one is the Golden Ratio. This one is 42% in stocks and three funds, 26% in long-term treasury bonds, 16% in gold, 10% in a REIT fund, and 6% in a money market fund. It was up 0.20% for the week. It was up 4.37% Year to date and up 7% since inception in July 2020. And the last of these three, the Risk Parity Ultimate, I won't go through all 15 of these funds, but it was up 0.29% for the week. It is up 4.94% year to date and down 0.82% since inception in July 2020. Now moving to the experimental portfolios involving leveraged funds. Tony Stark was able to build this in a cave with a bunch of scraps. Not too hideous this week. 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 22.5% in gold, 25% in a preferred shares fund PFF it was up 0.40% for the week it is up 8.84% year to date but down 17.05% since inception in July 2020. Next one is our most levered and least diversified portfolio the aggressive 5050 it is one third in a levered stock fund UPRO one third in a levered bond fund TMF and the remaining third In ballast divided into an intermediate treasury bond fund and a preferred shares fund. It was up 0.75% for the week. It is up 9.24% year to date, but is down 24.32% since inception in July 2020. When it moves, it moves a lot. And our last one is the levered golden ratio. This one is levered up about 1.6 to 1. is 35% in a levered composite fund, NTSX, that is S&P 500 in treasury bonds, 25% in gold, GLDM, 15% in a REIT, O, 10% each in a levered small cap fund, TNA, and a levered bond fund, TMF, and the remaining 5% divided into a volatility fund and a Bitcoin fund. It was up 0.54% for the week. It is up 5.13% year to date and down 19.51% since inception in July 2021. It's a year younger than the others. And so started at a more inopportune time in mid-2021. So not much else to say about those. They all seem to be having a decent year for 2023. But the year is still young. And we are just into spring.

Mostly Voices [25:04]

Fortune favors the brave. And as for what might happen next?

Mostly Uncle Frank [25:08]

We don't know. What do we know? You don't know.

Mostly Voices [25:11]

I don't know. Nobody knows.

Mostly Uncle Frank [25:15]

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.riskparriyradio.com and put your message into the contact form and I'll get it that way.

Mostly Voices [25:39]

I'm still seven weeks behind, but I'm trying to catch up and will be doing my best to have two podcasts a week, at least for the next month or so. And I will strike down upon thee with great vengeance and furious anger those who attempt To poison and destroy my brothers.

Mostly Uncle Frank [26:02]

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. Mmkay? Thank you once again for tuning in. This is Frank Vasquez with Risk Parity Radio signing off.

Mostly Voices [26:21]

Blessed is he who in the name of charity and goodwill shepherds the weak through the valley of darkness. For he is truly his brother's keeper and the finder of lost children. The truth is, I'm trying, Ringo. I'm trying real hard to be the shepherd.

Mostly Mary [26:41]

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.