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 finest podcast audience available.

Mostly Voices [1:27]

Top drawer, really top drawer, along with a host

Mostly Uncle Frank [1:31]

named after a hot dog. Lighten up, Francis. But now onward, episode 252. 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! And we'll be talking about why it is a bit more boring than last year and why that's a good thing.

Mostly Voices [2:05]

But before we get to that, I'm intrigued by this, how you say, emails. And? First off.

Mostly Uncle Frank [2:13]

First off, we have an email from Andreas. and Andreas writes.

Mostly Mary [2:21]

Dear Frank, thanks so much for your response to my numerous questions. And thanks even more for your patience. So many questions left, but I'll try to keep it shorter this time. By the way, your sound bites made me laugh a lot. You're always welcome in Switzerland. A. In general, do you prefer independent third-party indexed-based factor ETFs to algorithmic slash systematic ETFs? I'm tempted by factor funds such as AVUV. But in the end, no matter how rules-based, it's still active management if management determines the rules, isn't it? B. What do you think of using a multi-factor fund instead of multiple single-factor funds, e.g. VFMF? Don't you worry about overlap in multiple single-factor ETFs? C. I've wondered if you had some kind of portfolio building manual. How do you weigh the following criteria when determining allocations to asset classes within your portfolio? 1. Expected return 2. Historical correlation 3. All-weather performance in rising/falling growth/ inflation Volatility max drawdown Here's a very crude idea of mine. What do you think? One, I'd allocate most to the highest expected return asset class, stocks, then treasuries, commodities, gold, etc. Two, then I'd allocate according to minimal historical correlation. Three, next, according to all weather criteria, giving points for performance in one of the four market environments, EG, 20% Treasuries do well in recessions, 20 points, but not in inflation, minus 20 points. In the end, this gives me an all-weather score. Lastly, I match volatility, allocating less to highly volatile assets and/or assets with significant historical drawdowns. We strive to achieve an overall minimum variance portfolio, but love highly volatile single assets freeing up space in our portfolio. Regarding 3, as you've pointed out in your response to my question in Episode 227, correlations may change, so we need to consider all-weather criteria too. I've just struggled to actually measure the all-weather resistance of a portfolio. Bridgewater seems a little vague on that. Thanks again for your great work, Andreas. P.S. I love the idea of adding low-volatility stocks to a risk-parity style portfolio. It equalizes SCV's volatility and provides recession protection at the same time. May I tempt you to elaborate on this one too?

Mostly Uncle Frank [5:20]

Well, Andreas, sounds like we better roll out some more of that toe-tapping Swiss pop music.

Mostly Voices [5:43]

I suppose you should be glad I haven't looked up yodeling recently. Oh, I do have to say I have a positive bias towards investors from smaller countries like Switzerland or the Netherlands or Denmark.

Mostly Uncle Frank [6:15]

It's probably just my perception or misperception, but it always seems to me that people from countries like that tend to have a more balanced view of the world and reality at large. And that particularly plays into financial markets. But we do seem to have a surprisingly internationalized listenership here. And my stats at the podcast host tell me that there are people from all over the world that listen to this podcast. Which to me is kind of an unexpected pleasure. Au contraire.

Mostly Voices [6:47]

Don't be saucy with me, Bernaise. But anyway, getting to your questions.

Mostly Uncle Frank [6:51]

So your first one is, do I prefer independent third-party index-based factor ETFs to the algorithmic or systematic ETFs? And you point to AVUV, I suppose we're talking about comparing something like VIoV, which is a basic small cap value fund, and AVUV, which is a small cap value fund with a algorithm as to a quality factor or profitability factor overlaid on top of it. And the answer is it's actually hard to know which is better. You always have to start with the basic index based factor ETFs simply because that's where you have the data. That's what you can test. It's really hard to test something that's based on some relatively new algorithm because you don't have much data in the past to show how it would perform or did perform in the past. And so there's more uncertainty as to how it might perform in the future. Although when you're talking about funds like the ones, the two we're comparing here, meaning there's a complete overlap, pretty much. AVUV just generally has fewer stocks than something like VIoV has in it because it has an extra filter on it. And I would differentiate that kind of management from what I would consider truly active management, where you had human beings sitting down and stock picking, as opposed to an algorithm that you're running, because all of the factors are, in fact, algorithms. A cap-weighted fund is running an algorithm to decide how much to invest in each stock in the fund. So you would be saying that these are different or more precise algorithms, if you will. I think over time we may find that that some of these newer algorithmic funds like AVUV may just be better than their simpler counterparts. I know that over at Paul Merriman's foundation, they are fond of these newer constructions like AVUV as the best in class, because they do this rating every year of the best in class for each type of factor combinations. So I think you should use them if you have confidence in them, but you do need to commit to them and not be jumping in and out of them in some kind of market timing manner. I do hold some of them personally, particularly on the international side. Things like AVDV and AVES are good ways to get specific factor exposure outside the US. But I'm happy to leave it right now at a place where I think they're both good and I really don't know which one is better. But I will be watching and thinking about that in the future, certainly. Your next question is, what do I think of using multi-factor funds instead of multiple single factor funds? And my answer to that is, I prefer the single factor funds because they're more like raw ingredients and when it comes to rebalancing time, you're going to get better rebalancing opportunities with specifically focused funds. The main problem with multi-factor funds or multi-asset funds is that it makes it difficult to construct the rest of the portfolio because you are essentially stuck with whomever runs the fund, whatever proportions they put in their fund for whatever reason. And then you have to take that into account when you're looking at everything else in your portfolio to make sure the overall allocations line up the way you want them to. So I think ultimately they make portfolio management a little bit more difficult. And do I worry about overlap in multiple single factor ETFs? No, I don't really because I'm looking at that when I'm choosing the funds. So you would just pick ones that are not overlapping or not overlapping significantly. You should have zero overlap essentially in something like a large cap growth fund versus a small cap value fund. Third question, do I have some kind of portfolio building manual? And how would I balance expected return, historical correlation, all-weather resistance, and volatilitymax drawdown? Well, I don't think I have a specific manual, no, but we do have methods and principles, which we described in those early episodes, listen to episodes 1357 in particular. Because before you even get to any of these characteristics, you have to decide what is the goal of this portfolio. And the two main goals that we might have are accumulation or decumulation. So a portfolio that is designed for accumulation over long periods of time, you don't care as much about the volatility. What you care about is steady higher returns. but for a portfolio that you are trying to take distributions from, you care a lot more about the volatility and what you ultimately care about is that higher projected safe withdrawal rate, which is a composite expression, if you will, of all of these factors that include the expected return, the correlations, and the volatility of the components. both separately and together. I think the four-step procedure that you've outlined in your email is essentially the way to go about it. I'm not sure you need to do it exactly in that order, but what you're really concerned about is just covering all of these bases so you're not forgetting about something or leaving something out. Obviously, you do need to focus on expected return, and that is why most of our portfolios are stock based, and that's where you start with the equity component. And that's where most of our constructions vary from a classic risk parity style portfolio, because that is like our first sample portfolio. And the way the professionals and hedge fund operators deal with that is by adding leverage to a portfolio like that to get its return profile high enough. So something like that is only going to have about one-third in the stock market and it's mostly bonds. When you're talking about an unlevered portfolio that you are either going to use for accumulation or decumulation, that percentage needs to go up because for do-it-yourself investors, the most reliable high return thing you can hold are equity funds. And once you've set on that, next most obvious thing to add is something that is also generating decent steady positive returns but is uncorrelated with stocks. And there's where you end up going with treasury bonds as your next major component. And then after that, you are thinking about, well, what other assets will complement these two main assets in an uncorrelated way? so as to minimize the overall stability of the portfolio while not detracting too much from its returns. And that's what gets you that higher projected safe withdrawal rate overall. In the end, there's no substitute for actually looking at what you've constructed and running it through various data analyses and comparing it with other things, because it's very difficult to just look at some raw components and think, if I put these together, they're going to make a good portfolio or a bad portfolio. you really can't tell until you put them together and do your back tests and other Monte Carlo simulations and things. Because it's only then that you can determine things like gold is a useful thing to have in a diversified portfolio, but how much do we need or how much is the right amount and how much is too much? And that's done more by trial and error than anything else. And if you do this enough, times, you do end up coming with some basic rules of thumb for a portfolio that you know is going to be mostly stocks and treasury bonds. And these ideas come not only from the kind of things that we've done here, but they go all the way back to Harry Markowitz's first paper and then the development of the 60/40 portfolio over time. Because if you read the perfect portfolio book, by Albert Lowe, where they interview all of these famous people and investors. The one thing they all agree upon is that the most important thing in constructing a portfolio is to have diversification both within asset classes and across asset classes. So anyway, so the rules of thumb you kind of end up with to get portfolios to have higher safe withdrawal rates are to have between 40 and 70% in equities, index funds that are diversified themselves have at least half of that allocation be tilted towards value. And there is an open debate right now as to how much of that needs to be small and how much of it can be larger. But everybody seems to agree that it's the value component and not the size component. That's the important thing for this purpose. The second rule of thumb is that you're going to want your Bonds to be treasury bonds and not corporates because those are the most diverse in terms of uncorrelated from your stock funds. The next rule of thumb is that you want to have 10% or less in short term bonds, money markets, other cash equivalents, CDs, savings accounts, I bonds, those sorts of things. And that general Rule of thumb exists because once you get over 10% in those things, particularly on the shortest end, it starts to be a drag on the portfolio. And then the last rule of thumb is that you need some alternative assets that are not stocks or bonds. Gold is the traditional one, but managed futures seem to work as well or better in some circumstances. And that allocation or that overall allocation seems to be somewhere between 10 and 25% in terms of complementing what you're doing with the stocks and the treasury bonds. But again, ultimately you want to run tests with those things, whatever you construct, in as best you can with as much data as you can find. Now moving to your last question in your post script, whether I can elaborate more on low volatility stocks in a risk parity style portfolio. Well, I'm actually kind of ambivalent about the funds. We do have USMV and a couple of our portfolios. And the reason I have difficulty with them is because of the overlaps you end up getting with value tilted stocks in particular, and the fact we really don't have much data to analyze low volatility funds with, because that's not how the data's been organized. So I end up in a place where I think they're useful, but I'm not sure how useful they are. Surely you can't be serious. I am serious. And don't call me Shirley. And again, it's always going to depend on what else you're holding. So when you are looking at a low volatility fund, for example, you do want to go to Morningstar or Portfolio Visualizer and run them through those analyzers that tell you how much is value, how much is growth, and what kind of size factors you're looking at for those funds, just so you can match them up with whatever else you have. And I think that's all I've got to say on that topic right now.

Mostly Voices [18:39]

Forget about it. But thank you for your email.

Mostly Uncle Frank [18:49]

Now just looking at how much time has passed, I think we've really only got time for one more email today.

Mostly Voices [18:57]

Looks like I picked the wrong week to quit amphetamines. And so? Last off.

Mostly Uncle Frank [19:04]

Last off, we have an email from Brad.

Mostly Mary [19:12]

And Brad writes, hi Frank, have you followed the work of Corey Hoffstein about rebalanced timing luck? The idea of rebalancing 1/12 of your portfolio every month rather than rebalancing your entire portfolio once per year on an arbitrary month sounds very sensible. When interviewed about this by the folks from Simplify, they happened to mention something very interesting about how dollar cost averaging works for you during accumulation, but works against you during decumulation. Apparently, by choosing to withdraw just enough to cover your living expenses each month, the volatility drag causes your portfolio to draw down even faster since it's basically DCA in reverse. The alternative of withdrawing a large sum once per year or rebalancing your cash allocation reduces this volatility drag effect, but is implicitly a market timing decision and opens you up to bad luck. Do you think this volatility drag is something to be concerned about if you're implementing rebalancing by selling assets monthly to fund withdrawals?

Mostly Uncle Frank [20:17]

Well, thank you for bringing this to my attention, Brad. I'm aware of Corey Hoffstein. We've talked about his return stacking papers and things in episodes 239, 141, and 129, if you want to go check those out. But I had not focused on this research he's done about rebalancing. And I did go watch that video that you linked to. I will put that in the show notes as well as the link to the paper there. I think this is still one of the kind of great unanswered questions about what is the optimal way to rebalance. I still think that rebalancing on bands is probably preferable to using a calendar, although I'm not sure how much more preferable it is. We've cited to a Michael Kitces article about optimized rebalancing, and I'll link to that again in the show notes. But after watching this video, I can make a couple observations. First, as they discussed in the video, they're mostly talking about very actively managed strategies and how to rebalance them. They were talking specifically about a lot of options trading strategies in that video. And at one point, I think it was Harley Bassman, the older gentleman there, observed that what it really sounded like was an argument for using passive investing as in index funds as opposed to active management where you'd have these rebalancing problems or more of these kind of rebalancing problems. I think more importantly was this discussion about the idea of rebalancing 112 of your portfolio every month and the idea of how dollar cost averaging could work against you during decumulation. One thing they didn't specify, but I think was implicit in what they were doing is when they were talking about decumulation, they were talking about removing equally proportional amounts from all parts of the portfolio. They were not talking about using the withdrawal mechanism as a rebalancing mechanism, which I think is what you want to do and what we do with our sample portfolios. is the ones that we're taking monthly distributions from, we're taking from the best performing assets. And that is in effect a partial rebalancing of that portfolio because you're selling high. So it is following this concept of more frequent rebalancing. So to me, if there's anything to be concluded from this is that the mechanism we are using actually is the way to go if you're going to take monthly distributions out of particular parts of your portfolio to use that as a partial rebalancing mechanism. Now, as for specifically trying to rebalance 1/12 of your portfolio every month, I'm not sure that's very practical and it could result in taxes or other costs. And it would seem to contradict the work of Michael Kitces and others who have found that rebalancing more frequently than about once a year generally doesn't add anything to a basic kind of portfolio as opposed to one of these actively managed option strategies that they were talking about. But another interesting idea he raised was the idea of almost randomizing when you're doing the rebalancing so you're not doing it at the same time every year. And I suppose an easy way to implement that that I thought of is that Instead of doing an annual rebalance, you could do it on a 13-month basis, in which case you're moving it forward. And the reason I would do 13 months and not 11 is because you want to make sure your holdings are over a year old to take advantage of long-term capital gains tax treatment. I'm not sure that would make any difference in the long run since we're not operating actively managed options portfolios, but I do not know one way or another.

Mostly Voices [24:22]

Somebody says, why is that? We don't know.

Mostly Uncle Frank [24:29]

Anyway, I thought this was very interesting research and I thank you again for bringing it to my attention because I wasn't aware of it and it does seem like maybe we will get to some better rules of thumb eventually as people explore this in more depth. I do really like Corey Hoffstein's work. I will link to another video or two where he's being interviewed about his personal portfolio. He does something he calls return stacking. It looks a lot like a risk parity style portfolio that's levered up and that employs managed futures in it. But this is why I like to say we have the finest podcast audience available. Top drawer, really top drawer. Because you do find things like this that are very Interesting and informative and are going to help us be better do-it-yourself investors going forward. So thank you very much for your email. Now we are going to do something extremely fun.

Mostly Voices [25:32]

It's not a tumor. It's not a tumor at all.

Mostly Uncle Frank [25:36]

Any extremely fun thing we get to do now? are our weekly portfolio reviews. Of the seven sample portfolios you can find at www.riskparriaratior.com on the portfolios page. Just going through the markets this past week, the S&P 500 was down 0.1%. The NASDAQ was down 1.1%. Small cap value represented by the fund VIoV was down 2.44%. the big loser last week. Gold was up again.

Mostly Voices [26:09]

I love gold.

Mostly Uncle Frank [26:13]

Getting close to all-time highs. It was up 1.84% last week. You're insane, Gold Member.

Mostly Voices [26:23]

And that's the way, -huh -huh. I like it.

Mostly Uncle Frank [26:27]

Bonds were the big winner last week. Long-term treasury bonds represented by the fund VGLT were up 2.01% for the week. REIT were down 0.52% for the week. Commodities represented by the fund, PDBC were up 1.62% for the week. Preferred shares represented by the fund PFF were down 0.45% and managed futures represented by the fund DBMF were down 1.74%. Now, as I alluded to at the beginning of the podcast, this makes for more boring performances for our portfolios because what we are seeing is a return to historical correlations or lack thereof between stocks and bonds in particular, which seem to be pointing in opposite directions most weeks. Boring! And then you have gold and managed futures kind of just doing their own things.

Mostly Voices [27:28]

And that's the way, -huh, -huh, I like it.

Mostly Uncle Frank [27:32]

This all leads to steady improvements in most of these portfolios.

Mostly Voices [27:36]

It's time for the grand unveiling of money.

Mostly Uncle Frank [27:41]

And so just going through them, the first one is this All Seasons are reference portfolio. That's only 30% stocks in a total stock market fund, 55% in treasury bonds, intermediate and long term, and 15% in gold and commodities. It was up 1.15% for the week. It was up 6.9% year to date and down 1.71% since inception in July 2020. Moving 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 treasuries, and 20% in gold, GLDM. It was up 0.35% for the week. It is up 5.76% year to date and up 13.39% since inception in July 2020. Next one is the golden ratio. This one is 42% in stocks divided into three funds, including one of those low volatility funds. It has 26% in treasury bonds, long-term treasury bonds, 16% in gold, 10% in a reit fund, and 6% in a money market or cash fund. It was up 0.54% for the week. It is up 6.81% year to date and 9.49% since inception in July 2020. Next one is the Risk Parity Ultimate. I won't go through all 15 of these funds. But it was up 0.56% for the week. It is up 7.66% year to date and up 1.74% since inception in July 2020. And now moving to these experimental portfolios involving leveraged funds. You have a gambling problem. Having a much better year than they did last year. First one is this accelerated permanent portfolio. This one is 27.5% in a leveraged bond fund, TMF, 25% in a leveraged stock fund, UPRO, 25% in PFF, a preferred shares fund, and 22.5% in gold, GLDM. It was up 2.36% for the week. It is up 14.38% year to date, but it's still down 12.82% since inception in July 2020. Moving to the next one, our most levered and least diversified portfolio, the aggressive 5050, that's half stocks and half bonds. It is 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 a intermediate treasury bond fund as ballast. It was up 2.51% for the week. It's up 15.33% Year to date, still down 20.09% since inception in July 2020, but making up a lot of ground very quickly these days. Well, you have a gambling problem. And our last one is the levered golden ratio that is 35% in a composite fund, NTSX, that's Treasury bonds and the S&P 500. 25% in gold, 15% in a REIT, O, 10% each in a leveraged bond fund, TMF, and a leveraged small cap fund, TNA, and the remaining 5% divided into a volatility fund and a Bitcoin fund. It was up 0.46% for the week. It's up 7.87% year to date, but down 17.41% since inception in July 2021 at a later and worse start date than the others. That's not an improvement.

Mostly Voices [31:38]

Truck door strikes again.

Mostly Uncle Frank [31:42]

Now we'll be checking these levered portfolios on the 15th, or rather the 14th this month to see if we do any rebalancing. And if gold continues to go up, it is likely we will be Rebalancing the levered golden ratio portfolio, because gold is now 28.91% of the portfolio, and if it gets over 30 that would trigger rebalancing. So we'll just have to wait and see. Ooh, how convenient!

Mostly Voices [32:12]

Exciting times in sample portfolio land.

Mostly Uncle Frank [32:17]

But now I see our signal is beginning to fade. Just one announcement. As you know, this podcast has no sponsors, but it does have a charity that we try to support. It's called the Father McKenna Center, and I am on the board and I'm the current treasurer. And what the Father McKenna Center does is serve homeless and hungry people in Washington, DC. And it's come to my attention that we've had a lot of demand at our food pantry And so we're running low on food. And so if you are so inclined, I would ask that you make a contribution to the Father McKenna Center, a tax-deductible contribution that you can do from our support page or at the link I will include below. And thank you for your support. And happy Easter to you if you celebrate Easter, or Passover, or Ramadan, Since we have everything going on at once this year, the moons and calendars have lined up. Real wrath of God type stuff.

Mostly Voices [33:21]

Human sacrifice, dogs and cats living together, mass hysteria. If you have comments or questions for me, please send them to frank@riskparityradio.

Mostly Uncle Frank [33:32]

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, subscribe, give me some stars, a review. That would be great. Okay. Thank you once again for tuning in. This is Frank Vasquez with Risk Parity Radio signing off.

Mostly Voices [34:12]

Sometimes it causes me to tremble.

Mostly Mary [34:30]

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.