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 The finest podcast audience available.

Mostly Mary [1:28]

Top drawer, really top drawer.

Mostly Uncle Frank [1:30]

Along with a host named after a hot dog.

Mostly Voices [1:34]

Lighten up, Francis.

Mostly Uncle Frank [1:37]

But now onward to episode 258. Today on Risk Parity Radio, hopefully we'll get back to actually talking about investing, given the frolic and detour we had last time. Tushbalba? Tushbalba! But we do need to answer all of the questions around here. Anyway, 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. But before we get to that, we do have some emails from the beginning of April.

Mostly Voices [2:25]

Yes! And so without further ado, here I go once again with the email.

Mostly Uncle Frank [2:33]

And? First off, I have an email from one of the Bobs. What would you say you do here? And this Bob writes?

Mostly Mary [2:43]

Hi Frank, I just discovered your podcast recently and I find it extremely informative. I have a question about fixed income in my 401. I have access to an intermediate treasury index fund, VSIGX, as well as a stable value fund. The expense ratio for VSIGX is 0.07 and the stable value fund is 0.47. Would there be any advantages to investing in the stable value fund over the intermediate term treasury fund? I know that stable value funds tend to be very stable during periods when interest rates are volatile. I'm curious what your thoughts are. Thank you very much, Bob.

Mostly Voices [3:28]

The thing is, Bob, it's not that I'm lazy.

Mostly Uncle Frank [3:31]

It's that I just don't care. All right, Bob. These are two different investments that are generally used for different purposes. So let's talk about each one of them. The first one is this stable value fund. Now, a stable value fund is something that is offered in many 401 plans these days. And what it is is similar to a MIGA, because it's backed by an insurance contract, typically. It's a contractual investment, and so tends to pay a fixed interest rate, and there are various ways to construct it. Now, these were brought in really in the past decade or so when interest rates were so low on your short-term bonds and money markets that they wanted to offer something at least a little bit better than that. And so stable value funds were brought in for that purpose. They are a short-term kind of investment and should be compared with money markets, savings accounts, and those sorts of things. and really all there is to it and looking at one of those things is what is it paying and what else could I get somewhere else? And that somewhere else may be outside of this 401k. So I would not be really concerned with the expense ratio here, just whatever the net interest rate being paid is. Now, an intermediate treasury bond fund is not something that you would generally hold for short-term investing, but would be part of a longer term portfolio. And so it's something you would put in a portfolio when you are at the drawdown phase because you want to have it there for rebalancing purposes as time goes on with the other things in your portfolio. And I believe that VSIGX is similar to VGIT and has a duration of about an average of five years or a little more than five years. which tells you that it is a longer term investment than the Stable Value Fund or other short term instruments. Now, what's peculiar right now is that we are under this condition of an inverted yield curve where things that are shorter term are actually paying higher interest rates than things that are longer term. And that is not normal, and that is due to the Fed raising interest rates so fast. Because long term, the markets do not believe that those interest rates are sustainable. Otherwise, the longer term bonds would be yielding higher than the shorter term bonds. And typically what happens and what we would expect to happen eventually is that there is some kind of economic crisis, recession, problem with the banks, et cetera, which then causes the Fed to reduce the short term interest rates. lower than the long-term interest rates again. And two things will typically happen when that happens. First, things that are based on short-term interest rates, like perhaps this stable value fund will start yielding a lot lower interest rates again. And then although the intermediate bonds will be yielding more than the short-term instruments, they will also have a lower interest rate than they have right now. which means there will be some capital appreciation in those bonds. They'll go up in value in addition to whatever interest rate they're paying. And so knowing that they will fluctuate in value is why they are a longer term investment and will tend to outperform the shorter term instruments on a long term basis. Now, getting to the real question, which one is better for you? And that is a question I cannot answer. I wouldn't say I've been missing it, Bob. And the reason I cannot answer it is because I don't know what your personal situation is, whether you are accumulating or decumulating, and what your overall asset allocations are or you intend them to be. But I would treat these things as two separate animals for different purposes. And if you were, for example, early in your accumulation phase, you wouldn't want either one of these in your 401k because you're trying to accumulate. And if you are retired, then you probably want some of each of these in your portfolio or something similar to each of these in your portfolio. And a typical retirement portfolio is going to have something like between four and 10% in short term instruments and no more than about 10% and then between 15 and 30% in intermediate and longer term bondS, but it all depends on what else you're holding and what you're really trying to do. Now, if you're not sure what you're trying to do and just need somewhere to park something for a short period of time, yes, that stable value fund would probably work for that purpose. But I would get on with figuring out what your plans are and implementing those, because it's probably only going to be a small part of any actual plan that you are devising and following. That's the fact, Jack! That's the fact, Jack! Hopefully that helps, and thank you for your email. And here's something else, Bob.

Mostly Voices [8:49]

I have eight different bosses right now. I beg your pardon? Eight bosses. Eight, Bob. So that means that when I make a mistake, I have eight different people coming by to tell me about it. That's my only real motivation is not to be hassled.

Mostly Uncle Frank [9:06]

Second off, second off, I have an email from Mitchell and Mitchell

Mostly Mary [9:10]

writes, Frank, thanks for all you do. I have a parent whom I'm helping with her finances. She is in her early 80s and physically doing well. I would estimate she will live at least another 10 years. She has more than enough assets under investment to live reasonably well, but not able to manage finances herself. So I'm doing this. This brings me to my question. What do you plan to do for investments when you get into your 80s? Strongly considering annuitizing your investments? If not, what perpetual drawdown percentage would you use in this case and why? I know there are many factors just looking for some broad ranges. Thanks for your help, Mitchell.

Mostly Uncle Frank [9:53]

Well, this is a very interesting question because it not only gets at your specific question as to what to do in your '80s, particularly if you don't care to manage investments, but also just the kind of the general philosophy or approach to retirement planning. And this is probably where I differ the most with how people typically think of this and how it is often presented by retail providers, which is to come up with some master plan When you get into retirement in your 60s that you're just going to follow without variation as you march towards death with a lot of fixed instruments and not much flexibility. I think you should plan on having maximum flexibility, particularly if you are retiring before age 60. Never go in against a Sicilian when death is on the line. And that trying to plan too carefully for Something that is 20 years away and may never occur is probably not the best strategy. Haha, you fool.

Mostly Voices [11:00]

You fell victim to one of the classic blunders. It's the difference between risk and uncertainty.

Mostly Uncle Frank [11:08]

Because the biggest wild cards are going to be your health, the health of your spouse, and your other relationships and financial obligations that you may or may not have and may not know about or be able to predict. more than a decade out. There are some natural decision points, though, that are kind of forced upon you by law. One is that you do have to start taking Social Security at some point. You can't keep getting more bonuses by delaying it past 70. And the other is that you have to start taking RMDs in your 70s, which may or may not be significant depending on what you've done in terms of conversions before that time. One of the more interesting options you have with your RMDs out of your traditional IRAs and 401 s is to buy an annuity called a QLAC with some of those proceeds, which then can be deferred into your 80s and then used for expenses at that time. And if you defer an annuity like that for a decade, it's going to have enormous payouts that are probably one quarter to one third of what you put into it in nominal terms and on an annual basis. So to me, these work out to be kind of two different phases of a retirement in financial terms. One before age 70, say, or the time you're going to actually take Social Security and then be subject to RMDs, and in which you're probably going to be pretty healthy and wanting to spend money on travel and things like that. And then the second phase or planning period where you are really looking at slowing down and you are forced to take certain forms of income and want to plan around that. It's also by that time your expenses are going to become more and more fixed and very predictable. And I've seen this with my own parents who are 94 and 89 right now, and they still live unassisted, but live pretty quiet lives that do not involve much travel or variances in expenses for month to month. And that's pretty much the state they've been in for about the past decade. So what we did in their case is we bought their old house from them and gave them the equivalent of a private annuity for life, which gives them a monthly income. And then we bought a different house for them to actually live in, which we will ultimately sell when they pass on. Now, when I get to that age, I hope to have most of my expenses annuitized in some way, and we certainly won't be living in the house that we live in now. To the extent we need help managing our investments, I'm hoping that our adult children can help us with that.

Mostly Voices [13:47]

Oh, I get it. Let me try. Hello, Patrick.

Mostly Uncle Frank [13:57]

Lovely day we're having, isn't it? and hopefully they're learning all about that now by listening to this podcast. Time is money, boy.

Mostly Voices [14:01]

And in other interactions.

Mostly Uncle Frank [14:05]

Do you think anybody wants a roundhouse kick to the face while I'm wearing these bad boys? But we would probably hire somebody to help with that if we actually thought we needed it. We already get tax advice and have an estate's attorney for those sorts of things. Now, I expect we'll end up with money or investments we actually don't plan to use. And I'm hoping to either pass those down to our heirs or give the money away before we would get into our 90s, because by that time our children are going to be retired or very close to it. So in your case, I would look in to see what her actual expenses are and see whether it makes sense to cover that with some annuitization of part of what her investments are, and then if you feel comfortable with it, you could manage the rest of them and hopefully plan some special trips or events if she's up for it. One of the best things we did with my parents is that we all went back to the old country where my father is from when he turned 80, which was 14 years ago now, but we took a big multi-family trip there. and he got to see his sisters who still live there, and one of them has passed away now. And then we took him again by himself when he turned 90, and thankfully my brother was able to accompany him on that trip, otherwise it would not have happened. Because it's a long way from western Montana to Belize. And just to give you another example, my in-laws are both academics and worked through their 70s very comfortably. and so when they retired in their 80s, they've got more than they need, particularly after they downsize their house, did a fabulous Swedish death cleaning so that their children would not have to deal with that. And they have somebody that manages their Investments for them, what little management it requires, which all just goes to show that there are many good ways to approach this, and I suppose many bad ways, but If you're on top of it and intentional about it, that's probably 80 to 90% of the battle. Hopefully that helps and thank you for your email. That's not how it works.

Mostly Voices [16:20]

That's not how any of this works. Last off.

Mostly Uncle Frank [16:28]

Last off, we have an email from Davis and Davis writes,

Mostly Mary [16:33]

I'll go Frank. While listening to you discuss leverage on your podcast this morning, I started wondering about your leverage model portfolios, such as the Accelerated Permanent Portfolio. It seems like using leverage is most often talked about in an accumulation stage portfolio, but most often I hear you recommend a 100% stock portfolio for the accumulation phase as opposed to one of your leverage portfolios. Are there circumstances in which you would recommend a leveraged risk parity portfolio over a 100% stock portfolio for someone in their accumulation phase. I also noticed that you are subjecting these leveraged portfolios to a pretty maniacal withdrawal rate of up to 8%.

Mostly Voices [17:18]

You're insane, Gold Member! And that's the way, -huh, -huh, I like it!

Mostly Mary [17:26]

I was wondering, do you intend for any of these leveraged portfolios to actually be used by a retiree who wishes to increase their withdrawal rate up to 8% to cover living expenses? that would seem enticing to a retiree on a tight budget. I guess my overarching question here is, who are these leveraged portfolios appropriate for? And since you started this podcast, would you say you have learned anything new about these leveraged strategies that one of your dear listeners can benefit from? Best regards, Davis.

Mostly Uncle Frank [17:57]

Well, Davis, these are very good questions.

Mostly Mary [18:01]

The best, Jerry, the best. And I'm not quite sure what the answers are.

Mostly Voices [18:05]

That's not an improvement.

Mostly Uncle Frank [18:10]

When I started this podcast back in 2020, I was aware that people had begun to construct leverage portfolios, both from the Rational Reminder podcast and then other sites like Optimized Portfolios. And applying leverage is the traditional way that risk parity portfolios were constructed by hedge funds. And so I was just curious to see what we could do and what would happen if we essentially applied 100% leverage to a couple of these portfolios and then increase the withdrawal rate similarly. One of the advantages I have on a podcast like this, since I'm not trying to sell anything in particular, is that I can just follow my curiosity and do experiments like this. and when I do experiments, I'm interested in pushing things to their failure limits. It's the material scientist in me, because that's how material scientists actually test what they do by breaking things. So I intentionally put one together that was just half stocks and half bonds. Because I wanted to see what a 50/50 portfolio, a very traditional portfolio, would do if you applied leverage to it. And that's what that aggressive 50/50 portfolio is intended to model. And then if you look at that accelerated permanent portfolio, that is designed as a comparison, essentially, with the aggressive 50/50 with a little less leverage and much more diversification. because it's got 22.5% in gold in it. But that also was not optimized in any particular way. It just took Harry Brown's original permanent portfolio and added some leverage to a couple of components of it. And then the third one we constructed in 2021, a year later, which is designed to take one of our basic sample portfolios, the golden ratio and add leverage to it using primarily the fund NTSX, which is specifically designed as a long-term holding with leverage. And it's a newer fund designed for that purpose. These days, I do see the idea of using leverage in portfolios kind of popping out all over, particularly if you look at what Corey Hoffstein's done with return stacking and the people that run resolve asset management or the simplify ETFs. So there is a lot of ongoing development in this area as we speak. And if I were to construct another sample portfolio today, based on what we've learned over the course of this podcast, a sample leverage portfolio, it would probably look something like 15% UPRO, 15% TMF, 15% a managed futures fund, like DBMF or KMLM or maybe CTA and then 25% in a gold fund, 25% in a small cap value fund, and then you have a remaining 5% you could allocate to anything. Could be just a cash or money market fund or some other alternative. Now getting to your specific questions, who are these leverage portfolios appropriate for? Right now, I think they'd be most appropriate for somebody in the accumulation phase. And in some respects, I wish that I would have turned the experimental portfolios with leverage in them and made them accumulation portfolios instead of decumulation portfolios. Because I think they're probably going to work a lot better for that purpose, especially if you were dollar cost averaging into something like that over time. And the reason I think that they're most appropriate for accumulation does go back to this rational reminder podcast or YouTube video I've cited before and will link to again, where they talked about really the only ways for somebody to beat the market is to take a concentration in something that you think is going to do better than the market in the next time period, or to apply leverage to a portfolio. And if you are applying leverage to a portfolio, you can also Diversify it a bit to reduce the variance, but still outperform the market due to the leverage. So my answer today, which may not be my answer tomorrow, is that it would seem that the best use of a leverage portfolio would be for somebody in accumulation and also in a Roth IRA. And the reason you would want to put it in a Roth is you are swinging for the fences. and so you would want all of those gains to not be taxed. Other than that, I'd be very careful using leverage because a lot of these funds just haven't been around for that long. And using leverage is one of the traditional ways that people have bankrupted themselves with investing. And that not only goes for amateurs, but it goes for the professionals, which is one of the lessons of Long-term capital management and why it failed spectacularly in the late 1990s. Now, whether leverage can be used successfully in a drawdown scenario to improve a safe withdrawal rate and allow a retiree to take even more out of their portfolio, I think is a very open question. I don't think I'd be using any of the sample portfolios we've devised so far for that purpose. But on the other hand, I wouldn't be taking 6%, 7%, or 8% out of a portfolio that I expected to last for decades, even with leverage in it. Again, that is designed to push these things to their breaking points. You have a gambling problem. I do think that within another decade we're going to have a much better idea as to whether these concepts are useful in retirement portfolios. and how useful they may be. And so I will continue to follow my curiosity about them, but will not be betting the farm on them anytime soon. We do have a couple of smaller Roth accounts that I've done some leverage experiments in. Well, you have a gambling problem, which mostly look pretty ugly after last year, but they're not a significant part of our overall assets. So we will continue to run our hideous experiments with leverage so you don't have to, because that's how we learn. Bow to your sensei.

Mostly Voices [24:57]

Bow to your sensei. And thank you for your email.

Mostly Uncle Frank [25:03]

Now we are going to do something extremely fun. And the extremely fun thing we get to talk about are our weekly portfolio reviews. Of the seven sample portfolios you can find at www.riskparityradio.com on the portfolios page and also we'll be discussing our monthly distributions for each of the portfolios and where they stand with that. But first looking at the markets, the S&P 500 was up 0.87% last week, the Nasdaq was up 1.28% for the week. Small cap value represented by the fund VIoV was actually down. It was down 0.58% for the week. And the reason for that is undoubtedly some of these smaller banks which are struggling these days because you will find some of those in small cap value funds. Moving along to our other assets, gold was up 0.2% for the week. I love gold.

Mostly Voices [26:03]

Long-term treasury bonds are presented by the fund VGLT,

Mostly Uncle Frank [26:07]

where the big winner last week They were up 1.88% for the week. REITs represented by the fund R E E T were up 1.35% for the week. Commodities represented by the fund PDBC were down. They were down 0.91% for the week. Preferred shares were also down. Our representative fund PFF was down 0.29% for the week. And managed futures were almost flat. They were down 0.15%, at least our representative fund, DBMF. Moving to our sample portfolios, first one is this reference portfolio, the All Seasons. It's 30% in a total stock market fund and then 55% in intermediate and long-term treasury bonds, and the remaining 15% divided into gold and commodities. It was up 1.02% for the week, It is up 6.43% so far year to date. It is down 2.14% since inception in July 2020. For May, we will be taking $30 out of it. It will come out of the cash that has accumulated. These bond funds are throwing off lots of cash these days. And that is at a 4% annualized rate. We will have withdrawn $147 from this year to date. and $1,121 from it since inception in July 2020. Moving to our next three kind of bread and butter portfolios here. 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 the remaining 20% in gold. It was up 0.50% for the week. It is up 5.52% year to date and up 13.14% since inception in July 2020. It's interesting. It's actually the one that is up the least this year of the seven portfolios, but did the best last year. But a lot of that is due to its conservative and well-diversified nature. We'll be withdrawing $41 from it for May. That's at a 5% annualized rate. and it will come from the gold fund GLDM, which has done the best recently. That will be $205 from it year to date and $1,503 from it since inception in July 2020. All of these portfolios started out with about $10,000 in them at the beginning. Moving to our next one, the Golden Ratio. This one's 42% in stocks and three funds, 26% in long-term Treasuries, 16% in gold, 10% in a REIT fund, R-E-E-T, and 6% in a money market fund. It was up 0.77% for the week and is up 6.78% year to date and also 9.46% since inception in July 2020. We're also withdrawing out of this at a 5% annualized rate and that'll be $40 from it. we always take out of the money market fund for this portfolio and then rebalance and fill it up again once a year. And so that's $40 from cash for May.$197 have been withdrawn year to date, and then that's $1,482 since inception in July 2020. Next one is the Risk Parity Ultimate. That's 15 funds I won't go through. It was up 0.95% for the week. It is up 7.71% year to date and up 1.8% since inception in July 2020. We are withdrawing out of this at a 6% annualized rate. So it'll be $43 from gold for May. Again, that's been the best performer recently for this fund. And that will be $213 we've withdrawn year to date and $1,709 dollars out of it since inception July 2020. And now moving to these experimental portfolios with the leverage in them that you'd be very happy this year if you had been dollar cost averaging into them.

Mostly Voices [30:29]

Tony Stark was able to build this in a cave with a box of scraps.

Mostly Uncle Frank [30:34]

Anyway, the first one is the Accelerated Permanent Portfolio. This one is 27.5% in a leveraged bond fund, TMF, 25% in a leveraged stock fund, UPRO, 25% in a preferred shares fund, PFF, and 22.5% in gold, GLDM. It was up 2.08% for the week and is up 13.13% year to date. It is still down 13.77% since inception in July 2020. We are withdrawing from this one currently at a 6% annualized rate. It started at 8% but now it's down to 6%. You can read about that on the portfolios page as to how that works. So it'll be $35 from gold for May. It'll be $171 year to date and $1,996 since inception in July 2020. Moving to the next one, this aggressive 50/50 that is the Most levered and least diversified of these portfolios. It is one third in a levered stock fund, UPRO, one third in a levered bond fund, TMF, and the remaining third divided into a preferred shares fund and an intermediate treasury bond fund as ballast. It was up 2.69% for the week. It is up 14.02% year to date, but down 21% since inception in July 2020. We are also withdrawing out of this at a 6% annualized rate. It'll be $32 in accumulated cash for May. That'll be $156 year to date to $1,989 since inception in July 2020. And moving to the last one, the levered golden ratio. This one is 35% in a levered composite fund, NTSX, that is the S&P 500 in Treasury bonds. 25% in gold, GLDM, 15% in EREIT, O, 10% each in a leveraged small cap fund, TNA, and a leveraged bond fund, TMF. The remaining 5% is divided into a volatility fund and a Bitcoin fund. It was up 0.82% for the week. It was up 7. 51% year to date, but down 17.69% since inception in July 2021. We are withdrawing from this one at a 5% annualized rate currently. It'll be $31 from the Gold Fund, GLDM for May, $153 year to date and $963 since inception in July 2021. And so you can see that all of these portfolios have benefited by the diversification into gold except for the aggressive 50/50 which doesn't have any gold in it. But gold was flat last year and is up about 10% this year. And so that's a good example of what we're trying to achieve with these kinds of portfolios, that we will be having something that is not necessarily stocks or bonds, that is doing well in a particular year, and we can sell that high and then not have to sell our stocks or bonds to maintain our withdrawals. Now, note what we are not doing. We are not jumping into gold and buying more of it because it's doing well right now, which unfortunately is what many amateurs are doing.

Mostly Voices [34:02]

Fat, drunk, and stupid is no way to go through life, son.

Mostly Uncle Frank [34:06]

If you're going to hold alternative investments, you need to hold them just as you would hold anything else for the long term, so you're buying more when it's low, and then you sell it when it's high. Buy low, sell high. What a concept. Groovy, baby! And with that bit of wisdom, I now 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 and we do have a lot of interesting questions in the queue. Coming up in the next few weeks here. Although I think we're gonna get behind again because we're gonna be doing some traveling on some of the weekends coming up and we will not have as many podcasts. If you haven't had a chance to do it, please go to your favorite podcast provider and like, subscribe, give me some stars, follows, a review. That would be great.

Mostly Voices [35:05]

Mmmkay?

Mostly Uncle Frank [35:09]

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

Mostly Voices [35:17]

I'd like to move us right along to a Peter Gibbons. Now, we had a chance to meet this young man, and boy, that's just a straight shooter with upper management written all over him. Ooh, yeah. I'm gonna have to go ahead and sort of disagree with you there. Yeah, he's been real flaky lately. And I'm just not sure that he's the caliber person that we would want for upper management. He's also been having some problems with his TPS reports. I'll have it. We feel that the problem isn't with Peter. Mm-mm. It's that you haven't challenged him enough to get him really motivated. There it is. Yeah, well, I'm just not sure about that right now. Yeah, Phil, let me ask you a real quick question here. How much time would you say you spend each week dealing with these TPS reports?

Mostly Mary [36:24]

Yeah. 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.