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,

Mostly Uncle Frank [0:54]

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 Voices [1:28]

Top drawer, really top drawer, along with

Mostly Uncle Frank [1:31]

a host named after a hot dog.

Mostly Mary [1:34]

Lighten up, Francis.

Mostly Uncle Frank [1:37]

But now onward to episode 254. 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, I'm putting you to sleep. But before I put you to sleep with that, I'm intrigued by this. How you say, emails. And first off, we have an email from Javier.

Mostly Mary [2:12]

And Javier writes, hi, Frank and Mary, your podcast is a gift to all of us do-it-yourself investors. Thanks. No one can stop me. For those of us with gambling problems, can you do a review on a recent ETF, Simplify Volatility Premium ETF, S-V-O-L. Thanks again.

Mostly Uncle Frank [2:33]

Well, I see somebody's been playing around in the new and exciting ETFs.

Mostly Voices [2:40]

You can't handle the gambling problem.

Mostly Uncle Frank [2:44]

And Simplify does have a lot of interesting newer funds, most of which have been rolled out in the past couple of years, including one called PFIX, which is a rising interest rate fund. But that's not what we want to talk about today. We're going to talk about SVOL, the Simplify Volatility Premium ETF.

Mostly Voices [3:06]

Yes.

Mostly Uncle Frank [3:11]

And what this seeks to do is take short positions on the VIX, the volatility index, and generate an income off of that. Just reading from their fact sheet. The Simplify Volatility Premium ETF seeks to provide investment results before fees and expenses that correspond to approximately one-fifth to three-tenths the inverse of the performance of the CBOE Volatility Index VIX Short-Term Futures Index while also seeking to mitigate extreme volatility. SVOL aims to provide an attractive income stream and source of diversification while seeking to avoid risks inherent in other income-producing asset classes. The fund's short VIX position provides investors an optimized exposure for monetizing the premium in the VIX futures market. A modest option overlay budget is then deployed into VIX call options to help protect against adverse moves in VIX. All right, just so everybody's aware of what we're talking about. The VIX is an index of volatility of the stock market, and it tends to go up often violently when there are stock market crashes. But when the stock market is doing well, the VIX tends to fall. And this fund is betting that the VIX is going to fall. That's how it makes its money, or at least not go anywhere. This is one of those strategies that has been likened to picking up nickels in front of a steamroller. Because usually you get paid if you're short the VIX, but when things go badly, For instance, if you had sold calls on the VIX and the VIX jumps in a stock market crash, you can get killed. Danger, Will Robinson. Danger. I believe what S. Vol is trying to do is to make sure you don't get killed, but yet get some income out of this strategy. While this might be somewhat entertaining, I don't think it's that useful, particularly if you're talking about portfolio construction of the kind of portfolios that we are talking about here. And the reason primarily is that a short VIX fund is essentially long the stock market. So it's highly correlated with the stock market. In this case, if you run a correlation analysis of this fund with a fund like VOO, which is the S&P 500, the correlation is 0.84. So what that's telling you is it's not really adding anything in terms of diversification to a stock-based portfolio.

Mostly Voices [5:55]

Forget about it.

Mostly Uncle Frank [5:59]

And what you are getting is just some income, which is going to be taxable at ordinary income rates. So it really does not have much of a place, I would say, in a stock-based portfolio. You would have to have a much different kind of portfolio for this to be useful. What is actually more useful to hold in One of our stock-based portfolios is something that is going to be long the VIX or long volatility, because those sorts of things do give you diversification. The problem that we see and we have with a lot of things that are long volatility, like a fund like VIXM, is that they tend to have negative expectations in terms of returns. And so they're really only good as insurance. So one of the conundrums of portfolio construction has been finding things that are essentially long volatility, but don't drag your portfolio down too much. And the person who has done the most work on that in connection with this program is our friend Alexei.

Mostly Voices [7:06]

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 [7:18]

And so if you search him in the search box at the website, you'll get a lot of episodes where we talked about him and his portfolios. The most recent one is in episode 248, where he gives an example of the volatility portion he's using for a risk parity style portfolio. And that can include things that are essentially long the dollar, which is generally correlated with volatility, because everybody rushes to the dollar when things are bad. So if you are short the euro against the dollar or short the yen against the dollar, that is going to be usually long volatility, as well as a dollar fund like UUP. You might also use long short funds like BTAL, which we've talked about, and that was in episode 114. But I'd have to say there does not seem to be any one fund or thing that does this job particularly well. You had only one job. But thankfully the dude is working on it. The dude abides. Getting back to Sval, though, this ETF that you asked about, I don't really think this is probably something that most of us Would want to use for anything in particular, given its correlation characteristics with the stock market.

Mostly Voices [8:41]

Well, Laddie, frickin' da! So I think I would say it's for entertainment purposes only. Well, you have a gambling problem!

Mostly Uncle Frank [8:52]

And thank you for your email. Second off. Second off, we have an email from Heath.

Mostly Voices [9:01]

Say hello to my little friend!

Mostly Mary [9:05]

And Heath writes, Frank, I've been a long time fan of yours. Always appreciate your comments on the Facebook group and your advice in general. My claim to fame is when you liked one of my comments. Yeah, baby, yeah! A couple of years ago, I started investing in treasury bonds due to your education on the benefit of these bonds being negatively correlated with stocks. I recently listened to episode 16. I appreciated your metallurgical analogy. I'm a manufacturing engineer with my specialty as metal cutting, so I deal with that stuff a lot.

Mostly Voices [9:41]

There can be only one.

Mostly Mary [9:47]

My question is in relation to last year where we saw treasury bonds decline along with the market. I think this was caused because the Fed has been raising interest rates, which they almost never do during a recession. Was this a fluke event? Were there other times in history when this happened? Are Treasury bonds still the best option to hold going forward? Thanks for all you do, Heath.

Mostly Uncle Frank [10:13]

Well, thank you for the kind words, Heath. Not everybody appreciates my advice, and in particular, they do not appreciate the tone of my advice.

Mostly Voices [10:22]

I want you to be nice.

Mostly Uncle Frank [10:26]

Probably for good reasons. This is pretty much the worst video ever made. I do find it interesting that I think a high proportion of my listeners are either engineers or doctors.

Mostly Voices [10:40]

But look at what has been done with hearts and kidneys. Hearts and kidneys are tinker toys.

Mostly Uncle Frank [10:47]

But are generally people who are more interested in the content of advice than the tone of it. Thankfully for me.

Mostly Voices [10:54]

Dead is dead.

Mostly Uncle Frank [10:58]

But now let's get to your questions, which boil down to last year's action in Treasury bonds and whether that is an unusual occurrence and whether it's occurred in the past. Inconceivable. And the answer is, yes, it's an unusual occurrence, and yes, it has occurred in the past, but not very often. The last time you saw something like that was back in the 1970s, but it was not as concentrated into one year as what we saw in 2022. Then you have to go back to 1937 for another similar incident. And then I've heard other people comparing it to 1872 and the early 1700s in England. What was unusual about last year is that I think it was the record for raising interest rates that fast by the Fed, and also that it occurred during one calendar year, pretty much. And so looks even worse just because of the way the calendar lines up. And so, for instance, we had a giant recovery in January, but obviously that's in a different year. So if you wanted to put a probability on it, it's probably A likelihood of about 2% to 3% because you need to have all of these things line up correctly. Surprise or increasing inflation and then a Fed raising interest rates at a high rate. More importantly, as your last question, are Treasury bonds still the best option to hold going forward? And that really breaks down to should we change our strategy? And the answer is no.

Mostly Voices [12:39]

Forget about it.

Mostly Uncle Frank [12:43]

Because remember that these portfolios, we've tested them over these other bad periods of the 1970s and even going back to the 1930s. If you use a back tester like the one at Early Retirement Now, the safe withdrawal rate toolbox, that'll take you all the way back to the 1920s. So you shouldn't treat your bond holdings any different than your other long-term holdings, your stocks, your gold, everything else. And what that means is when they do poorly, you buy more of them. You buy low and then you sell high. And with bonds, particularly on the longer end, they tend to roll over over time, so the interest rates do rise on them. And then when you have the next recession, they can go up in value substantially, which is exactly what happened in the early 1980s after they raised the interest rates. Eventually there was a recession and then they started reducing the interest rates and the bonds went up in value substantially. So if you just followed the program, bought more bonds when the interest rates went up, then when the interest rates went down, you profited from that and sold some. And that's just an observation that the primary movement of interest rates and bond prices is to oscillate up and down with the economy. And that tends to happen over the course of several years. And so we see now that long-term treasury bonds are now up about 8% this year. And if the economy continues to slow, they will probably be up further as the year goes on. But we don't really need to predict that. We will simply be buying more when it's time for rebalancing, although not as many as we would have bought if we were rebalancing late last year. Meanwhile, with the higher interest rates, they are throwing off more cash now, which we are using for the distributions as we go. So really, when you're looking at portfolio performance overall, you want to be looking at at least Complete economic cycles, and we have not been through one since the beginning of this podcast yet. That's usually a three to five year time frame. And then you're really also looking at performance over decades, or at least a decade. And there are a couple other ways of looking at this. One is that last year was probably a worst case scenario for any stock bond portfolio. And so it's highly unlikely for something like that to repeat, at least not for a few more decades. And the other is to think of your treasury bonds, your intermediate and long-term treasury bonds, like they were a dividend paying stock. They're going to keep paying that income at a steady rate, regardless of the fluctuations in the price. And so what you really want to do is keep taking the income and then buy more when the price is low and sell some when the price is high. So stay the course, don't panic, and everything will work out over time. Remain calm. All is well. All is well. Hopefully that helps and thank you for your email.

Mostly Voices [16:07]

Did you say over? Nothing is over until we decide it is. Was it over when the Germans bombed Pearl Harbor? Last off.

Mostly Uncle Frank [16:20]

Last off, we have an email from Joao. And I'm sure I mispronounced that. My Portuguese is not very good. But Joao writes, Hi, Frank.

Mostly Mary [16:38]

Greetings from São Paulo, Brazil. If dividend income weren't taxed at all and sale of shares were taxed at 22.5%, would it make sense to invest for dividends then? That's the case in my country, Brazil.

Mostly Uncle Frank [16:57]

What do you think and what would you do? Well, I cannot say that I am familiar with the ways taxation works in Brazil. But yes, if you are not being taxed on dividends, but you are being taxed on capital gains, you would prefer to receive your returns in the form of dividends. And so you would place a higher value on things that pay dividends. I would have to believe, although I do I don't know, but I would have to believe that the prices of securities would adjust for this phenomenon, like the prices of municipal bonds adjust for their taxation characteristics in the United States. But I do not follow Brazilian markets, and so I cannot say that I would actually know that. Like anyone can even know that. It is true that whatever taxation system you're under, ultimately what matters is how much you take home after paying taxes. And so you do want to pull the right levers in your system to make that net income as high as possible. This also makes me think, though, that things like preferred shares, if there was a preferred shares fund in Brazil, would be highly valuable since they pay almost all of their returns in the form of dividends. So I would definitely be looking at something like that if I were there and it were available. Anyway, I was very pleased to get your question and I'm always pleased to get questions from our international listeners who often have different perspectives and different experiences to offer. So thank you for that email.

Mostly Voices [18:47]

How dare you. And now for something completely different.

Mostly Uncle Frank [19:09]

And the something completely different will be our weekly portfolio reviews of the seven sample portfolios you can find at www.riskparityradio.com on the portfolios page. We had another one of those weeks where everything was rosy and then collapsed on Friday. Uh, what? It's gone. It's all gone. But it didn't turn out so bad in the end. Anyway, the S&P 500 was up 0.79% for the week. The Nasdaq was up 0.29% for the week. Small cap value represented by the fund VIoV was up 0.88% for the week. Gold looked like it was going to break a record and then ended up down 0.30% for the week. You're insane, Gold Member.

Mostly Voices [19:54]

It still is the best performer this year.

Mostly Uncle Frank [19:57]

Long-term treasury bonds represented by the fund VGLT were down 2.9% for the week. They were the big loser. REITs represented by the fund R EET were down 1% for the week. Commodities represented by the fund, PDBC were up. They were up 1.45% for the week. Preferred shares represented by the fund, PFF were up 0.9% for the week. And finally, the big winner was actually managed futures this week. A representative fund, DBMF was up 2.55% for the week, flexing its diversification muscles.

Mostly Voices [20:35]

You have a toy body. Yes, I see that from your toy pants. Yes, you are toyed like a tiger.

Mostly Uncle Frank [20:46]

Now going through these portfolios, there was not a whole lot of movement. First one is this All Seasons, our reference portfolio that's only 30% in stocks, in the total stock market fund, 55% in treasury bonds, intermediate in long term, and the remaining 15% divided into gold and commodities. It was down 0.89% for the week. It is up 5.95% year to date and down 2.59% since inception in July 2020. Moving to our three kind of bread and butter portfolios. First one's this golden butterfly. It's 40% in stocks divided into a total stock market fund and a small cap value fund. 40% in bonds divided into short and long term. and 20% in gold. It was down 0.29% for the week. It is up 5.45% year to date and up 13.06% since inception in July 2020. Next one is the Golden Ratio. This one's 42% in stocks and three funds, 26% in long-term treasuries, 16% in gold, 10% in REITs, and 6% in A money market fund. It was down 0.58% for the week. It is up 6.18% year to date and up 8.85% since inception in July 2020. Next one is our Risk Parity Ultimate Portfolio, which is kind of our kitchen sink with 15 funds in it that I won't go through. I think it was our best performer this week. It was only down 0.21% for the week. probably because it's got a Bitcoin and an Ethereum fund in it, which have both been doing quite well recently. It is up 7.43% year to date and up 1.53% since inception in July 2020. Now moving to these experimental portfolios that involve leveraged funds in them and are much more volatile.

Mostly Voices [22:47]

Tony Stark was able to build this in a cave.

Mostly Uncle Frank [22:55]

With a box of scraps! First one is the Accelerated Permanent Portfolio. This one is 27.5% in a leveraged bond fund, TMF, 27.5% in a leveraged stock fund, UPRO, then 25% in preferred shares, PFF, and 22.5% in gold, GLDM. It was down 2.23% for the week. It is up 11.81% year to date, but is down 14.78% 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 divided into preferred shares and an intermediate treasury bond fund as ballast. It was down 2.88% for the week. But it is still up 12.01% year to date and down 22.4% since inception in July 2020. It tends to move the most because it has the most leverage. And our last one is the levered golden ratio. This one is 35% in a composite levered stock and treasury bond fund called NTSX, 25% in gold, 15% in a REIT, 10% each in a levered bond fund and a levered small cap fund, and the remaining 5% divided into a volatility fund and a Bitcoin fund. It was down 0.79% for the week. It is up 6.96% year to date and down 18.11% since inception in July 2021. Since this is the middle of the month, this is the time we look to see whether we should be rebalancing these levered portfolios because they're on rebalancing bands. And the levered golden ratio came close to that. If gold had gotten up to 30% of the portfolio, we would have rebalanced it, but gold is only 29.23% of the portfolio. So we will be leaving it alone at least for another month. And you can find all of these rebalancing rules as well as all the other rules for these portfolios at the website in the portfolio descriptions. But now I see our signal is beginning to fade. If you have comments or questions for me, please send them to frank@riskparityradio.com that email is frank@riskparityradio.com or you can go to the website www.riskparityradio.com put your message into the contact form and I'll get it that way.

Mostly Voices [25:42]

I think I'm only about six weeks behind now in the email Pile, although it got a lot bigger at the end of March, but we will get to them eventually Looks like you've been missing a lot of work lately.

Mostly Uncle Frank [25:46]

I wouldn't say I've been missing it Bob In the meantime, if you haven't had a chance to do it, please go to your favorite podcast provider and like subscribe follow 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 Mary [26:34]

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.