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 [0:18]

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. Top drawer, really top drawer, along with a host named after a hot dog.

Mostly Voices [1:34]

Lighten up, Francis.

Mostly Uncle Frank [1:37]

But now onward, episode 260. Today on Risk Parity Radio, we're just going to do what we seem to do best here, which is tackle your emails.

Mostly Voices [1:48]

And so without further ado, here I go once again with the email. And... First off.

Mostly Uncle Frank [1:56]

First off, we have an email from Drew.

Mostly Mary [2:04]

And Drew writes, hi, Uncle Frank, catching up on your show and heard you wanted us to let you know if we are monthly donors. I am indeed.

Mostly Voices [2:08]

Yes.

Mostly Mary [2:13]

I've been spending more time looking into UPAR as a replacement for some of the equities in my accumulation portfolio. I'm trying to work out my thoughts on the subject and would love your feedback. I know you've reviewed RPAR. Anyone who has listened to this podcast by now knows your distaste for tips. But tips aside, do you think that the 0.65 expense ratio is reasonable for the 1.68 leverage you get in UPAR? Certainly seems easier than managing the futures on my own, plus rebalancing plus taxes. The ETF structure should provide tax efficiency. Also within UPAR, it seems to me that gold would be the primary fighter of unexpected inflation in the short term. Equities help with inflation over the long term. The comm producer equities are interesting, but I think it would be safer to just consider them part of the equity allocation, a sector bet with some idiosyncratic risk rather than commodities, kind of like you do with REITs in your model portfolios. That being said, the comm producers seem to be primarily made up of upstream companies that are closest to the price of commodities. Finally, long bonds should do fine for expected inflation over time, which leaves me with your beloved tips. Is it really such a knock on the fund after all? Since tips help in times of unexpected inflation for the bond portion of your portfolio, it seems fine. Not a mark against nor for necessarily. Might help a teensy bit. Also, is there any reason you don't simply divide up the long bonds into half TIPS, half TLT in your model portfolios? Again, to hedge the bonds against unexpected inflation, since my understanding is that they have similar expected returns in the long run. It seems that is what RPAR and UPAR is doing, though with a little active management depending on interest rates. Thank you as always, Drew.

Mostly Uncle Frank [4:09]

Well, first off, thank you for being one of our patrons on Patreon. We happy few, we band of brothers. If you'd like to go to the front of the line like Drew has here. Top drawer, really top drawer. You can donate that way to the Father McKenna Center or you can donate to the Father McKenna Center directly and just tell me if you've done that when you send in your email and I will move your email to the front of the line. Because we don't have any sponsors here, we just have a charity. A charity that helps hungry and homeless people in the Washington, DC area. It's a relatively small operation, so all of your donations are very well received. And full disclosure, I am on the board of the charity and am currently the treasurer. There can be only one! Now getting to your questions. We're talking here about UPAR and its sister fund, RPAR, which is the older one. and these are both classic risk parity style portfolios in the form of ETFs. They are relatively new. We first started talking about RPAR though back in episode 31, and the main difference between the two of them is RPAR has less leverage and UPAR has more leverage in it. And so UPAR is designed to have the same risk characteristics as a standard 100% equity portfolio. Now both of these are constructed, as I said, along the classic risk parity portfolio lines. So they look in allocation kind of like the All Seasons portfolio, that sample portfolio. If you took that portfolio and added leverage to it, you would get something that looked like one of these portfolios. So just looking as to the expense ratio itself at 0.65, I don't think that's too much to pay for a fund like this, which is a managed risk parity portfolio construction. You probably could do it a bit cheaper on your own if you, for instance, used NTSX, that composite S&P 500 and Treasury Bond fund. as the base and then added some other components like managed futures, gold, commodities, etc. But if you're looking for a one-stop shop, this is a decent option for the price and certainly much better than the sorts of things you would have seen 10 years ago that were charging you 1 and 2%, most of which no longer exist. Now both of these funds still are relatively new. Our PAR has been around for A few years, UPAR has only been around for a little over a year now, but they do seem to be performing like you might expect a portfolio like this to perform. All right, as for the various components inside of these funds, and just to orient everyone, these funds take their bond allocations, and in particular their long-term bond allocations, and split them between nominal bonds and TIPS. And then for the commodities or inflation fighting components, they tend to rely on equities of energy producers and similar companies as opposed to managed futures or commodities themselves. And then they also have some gold and some other equity exposure in them. So I tend to agree with you that equities that produce commodities like energy companies Sometimes work as inflation fighters and sometimes they don't. They do not work exactly like managed futures or commodities themselves would work. And since they are equities, they do tend to track or be correlated with most of the rest of the stock market. Now that was not true last year. They did have a big outperformance and were negatively correlated with the stock market, but I would view that as an exception and not the rule. Thinking about the other inflation fighters in that portfolio, there is gold, although I would not consider gold itself to be that good at matching inflation, at least over short or even intermediate time periods. Over long periods of time, it certainly keeps up with inflation, and that's what you would expect from it. But its strength or weakness is really dependent a lot on the strength or weakness of the US dollar whatever currency you're working in. And then the other factor that seems to affect it the most is the changes in what is called the real interest rate, which is what you can get out there in interest rate land minus inflation. And when that is sinking, gold tends to do well, and when that is rising, gold tends to do badly. So it's really more something that is off doing its own thing rather than responding to inflation itself. If you really want to have something in a portfolio that has been proven to do well in times of inflation, you would look to things like managed futures and commodities themselves. Managed futures, though, can also encompass trends in interest rates and currencies, which makes them a bit more robust than simply investments in commodities futures. There are now a few funds on the market that are very specifically designed to do well in inflation or rising interest rate environments. We've talked about them from time to time. One of them is called PFIX from Simplify, which is the most volatile of these three. Another one is RISR and another one is RRH. Now these are all so new that I can't say that I would use them without looking at them closely or wouldn't use very much of them. But they seem to fulfill the promise that TIPS do not fulfill, which is to be an actual inflation hedge in a portfolio that makes a difference. Which gets me to what TIPS are doing in these two ETFs, UPAR and RPAR. And the answer is really not very much. That and a nickel get you a jack squat. In a year like last year, when you would have expected them to do something in the face of inflation, they performed pretty much like nominal bonds of the same duration, but actually even worse.

Mostly Voices [10:59]

Next morning you find it filled to the brim with Jack Squat.

Mostly Uncle Frank [11:07]

Because it's really the fact that they are bonds and that they have some duration that dominates their performance. not their attachment to a variable interest rate that adjusts with CPI. So my view is they're not adding anything to these portfolios. I'm not sure that they're taking anything away, but they're not adding anything in terms of performance or in terms of performance in the face of inflation. And it would be a mistake to think that because these have tips in them that they're going to be better inflation fighters than other Risk parity style portfolios. You're gonna end up eating a steady diet of government cheese and living in a van down by the river. And if I have any critique of these two particular concoctions is that what they have chosen for inflation fighting is not really the best choices to make in terms of allocations and that they'd probably be better off with some exposure to a managed futures fund like DBMF or something similar. Now there were a couple of recent discussions I thought were interesting about the problems of using TIPS as an allocation in kind of a standard portfolio. One was a reference we made in episode 256, which was an article by Bill Bernstein who is constructing a TIPS ladder, which is a different idea than using a standard portfolio in retirement. And he noted in that article in his discussions that tips are very hard to place in a standard portfolio because they don't seem to fit very well, which is what I've observed as well. Because they don't really fight inflation or hedge a portfolio against inflation. They can only hedge themselves. And then in a deflationary or recessionary environment, they do worse than nominal bonds. So if they have any particular job, they're not doing it very well. You had only one job. There was also just last week a nice interview of Michael Kitces on the Long View Podcast by Morningstar, and I'll link to that in the show notes. But he made a couple observations. He said that tips were really not helping that much in a portfolio, that if you were exposed to short-term bonds somewhere in your portfolio, those were going to keep up with inflation because they rolled over relatively quickly and that would be an easy solution. And then he also talked about the idea of using TIPS as some long bond ladder, which Bernstein has done. And he said there were essentially two problems with that. One, that it's a very expensive solution in retirement and that if you have that much money to implement some kind of a solution like that, your withdrawal rates are probably sub 3% and you could just have a stock portfolio that's a total stock portfolio or of any kind of allocation and simply ride out the dips. And then the other problem with that kind of construction is it assumes you know when you're going to die. Because if you don't die on time, you'll run out of money. Dead is dead.

Mostly Voices [14:18]

So I thought both of those observations were pretty astute,

Mostly Uncle Frank [14:22]

like most everything he has to say, and they are consistent with what was realized in the Bernstein article, and I've read more recently that TIPS as an allocation in a portfolio really aren't what they're cracked up to be. Forget about it. And that there are probably better alternatives depending on what you're trying to do. Unless you're trying to construct some kind of lengthy bond ladder. But I think that's more than enough on that.

Mostly Voices [14:54]

Looks like I picked the wrong week to quit amphetamines. And thank you for your email. Second off.

Mostly Uncle Frank [15:00]

Second off, we have an email from Carlos. And Carlos writes. Hi, Frank.

Mostly Mary [15:08]

What do you think about the de-dollarization going on in the world and how this could impact us in the United States in the future? So far, the US has enjoyed all the great benefits of being able to print the world's reserve currency. But if that is not the case, at least to some extent in the future, what could that mean to us retail investors? Should we increase our global ex-US stock exposure? Gold, yuan, real? Check this article, for instance. Thoughts?

Mostly Uncle Frank [15:38]

All right, I will link to this article in the show notes, but this is a good example of some of the problems with people that write about macroeconomic factors and these very long-winded feces about what's going to happen.

Mostly Voices [15:54]

Fire and brimstone coming down from the skies, rivers and seas boiling, 40 years of darkness, earthquakes, volcanoes, the dead rising from the grave.

Mostly Uncle Frank [16:05]

And that is they have two cognitive biases that are pretty obvious to them. if you are familiar with the Kahneman and Tversky work. One of them is called the possibility effect, and this plagues amateur investors, but is also endemic in these kind of articles. What is the possibility effect? The possibility effect is a cognitive bias where human beings confuse the idea of the possibility of something happening with the probability that it will happen. And so the way this commonly presents itself as some kind of story about some incident that occurred, and then some kind of extrapolation of that to the future without any numbers or context to it whatsoever.

Mostly Voices [16:56]

Human sacrifice, dogs and cats living together, mass hysteria.

Mostly Uncle Frank [16:59]

So here the author is saying, Well, there have been some more transactions in currencies other than the dollar recently in commodities between countries like Russia and China or Brazil and China. Therefore, this is the wave of the future and this is likely to change everything about how people use US dollars. Real wrath of God type stuff. This kind of thinking is barely rational. And it certainly is not logical, which gets to the other cognitive bias that's implied here, which is something called ignoring base rates, which means that whenever you are trying to assess the probability of something, you should be looking at the base rate of its occurrence in the past with as much data as you have. And you should also be looking at the relative magnitude of the story that's being told with the rest of the world that is supposed to be affected by this story. Now, what do we know about that data? We know that the US dollar is used for over 80% now of the world's international transactions. And that has not changed based on these recent transactions. because these recent transactions are essentially a drop in the bucket. Surely you can't be serious. I am serious.

Mostly Voices [18:26]

And don't call me Shirley.

Mostly Uncle Frank [18:30]

And in fact, the dollar as a reserve currency is probably just as strong today as it ever has been. And it's certainly stronger than say it was before the fall of the Soviet Union, when there was actually a whole other economy operating between various countries. that did not use Western currencies, did not use the dollar as its main currency. And what is the other base rate or idea that we should know about when we're talking about the world changing reserve currencies? What we know from history is that it takes a really long time that the time between The British pound losing its reserve currency status and the dollar overtaking it was about 60 years from near the end of the 19th century until the Bretton Woods Agreement after World War II or at the end of World War II. And so it's kind of like watching stalagmites grow in a cave.

Mostly Voices [19:34]

Tony Stark was able to build this in a cave.

Mostly Uncle Frank [19:37]

It happens slowly and takes a long time. And so if this is the beginning of something, it's going to take decades and decades Before you end up with any other currency supplanting the US dollar. And right now there is no heir apparent.

Mostly Voices [20:12]

Forget about it.

Mostly Uncle Frank [20:15]

Because what else we know from history, and this comes from Ray Dalio's Principles book, the most recent one, when he was reviewing economic history for the rise and fall of various empires and civilizations, is that the change in the reserve currency is pretty much the last thing that occurs. And it has to occur after a country ceases to be the most dominant world military power and some other country becomes that power. And so we're nowhere near any of this occurring.

Mostly Voices [20:49]

Not gonna do it. Wouldn't be prudent at this juncture.

Mostly Uncle Frank [20:53]

And the only reason you would believe this is if you were succumbing to the possibility effect. and you were ignoring base rates. Now it does make for good marketing, either to sell various financial products or just push some political theory or something else. Bing again! But no, I would not use this incident or the theory put forth in this article to make any decisions about my personal finances.

Mostly Voices [21:28]

At no point in your rambling, incoherent response were you even close to anything that could be considered a rational thought. Everyone in this room is now dumber for having listened to it.

Mostly Uncle Frank [21:44]

Because relying on dramatic stories and not on actual numbers is not a good process for investing.

Mostly Voices [21:51]

I award you no points and may God have mercy on your soul. And thank you for your email. Bow to your sensei. Bow to your sensei.

Mostly Uncle Frank [22:05]

Last off, we have an email from Eric and Eric writes. Hello, Frank.

Mostly Mary [22:13]

Thank you for the wonderful podcast and resources you provide for us listeners. I feel I have learned a lot so far and I still have many episodes to digest. Thank you. I found you here at Risk Parity Radio first. But also listen to one of your interviews on Choose FI recently. In that interview, you mentioned that one of your sons used a risk parity style portfolio in their taxable account while saving a down payment for a house. Would you be willing to shed some light on what that portfolio looked like? Thank you and all the best, Eric. Sure, Eric.

Mostly Uncle Frank [22:46]

I've shared that before. I'm happy to share it again, and as many times as people would like me to share it. Go back, Jack, do it We'll turn it around and round you go back, Jack, do it again. Basically what my adult children have been doing is saving money for intermediate term purchases like a down payment on a house in what looks like a golden ratio kind of portfolio. which is one of our sample portfolios. And you could also use kind of a golden butterfly type portfolio for it as well. When our elder started doing this, short-term interest rates were very low, and so he was not putting any money or leaving any money for this purpose in cash. These days you could do that because it's a reasonable investment, at least for now. And by cash, I'm really talking about money markets and short-term bonds. I believe as a modification, he was not using the fund REET for that 10% REIT portion, but divided it into a couple of individual REITs. I think he used O and WY, Warehouse, which invests in timber.

Mostly Voices [24:05]

Oh, I get it. Let me try.

Mostly Uncle Frank [24:09]

But that was basically it. So he's got a ordinary brokerage account. And whenever he has extra money to put into it, he puts the money in there and then simply invests in whatever is low in terms of allocations. So he's always buying the low thing. Time is money, boy. And if you do that, you essentially never have to rebalance it. You can just keep accumulating. But I think he does also rebalance it once a year. I'm not sure that's necessary for something like this. What have children ever done for me? And then when it's time to make that purchase, he does sell the portfolio down and take the money out and use it for that down payment on a house. And he actually is buying his second house, which will close in July. Young America, yes sir. And we'll move out of the room in the house that he's currently occupying, but mostly renting. into the new house with some more people. He's following the Scott Trench Set for Life Playbook, if you're familiar with that book.

Mostly Voices [25:27]

It's okay, Charlie. I got an angle.

Mostly Uncle Frank [25:32]

Although not doing it at the crazy pasted that the author did.

Mostly Voices [25:35]

I told you, Charlie, I got an angle.

Mostly Uncle Frank [25:40]

But the point of this and the reason why you can use these kinds of portfolios for this purpose is that historically, their drawdowns in terms of time have only been a max of three to four years, whereas the drawdowns for a standard kind of 60/40 portfolio or stock bond portfolio have been a max of over a decade. That's not an improvement. And so that's what makes these kinds of portfolios a viable option for intermediate term savings. Hopefully that helps. I'm happy to talk more about it anytime.

Mostly Voices [26:19]

I didn't apologize for when I was 18, I made my younger brother have to be my personal and thank you for your email.

Mostly Uncle Frank [26:35]

But now I see our signal is beginning to fade. I'm gonna be taking another weekend off, so you probably won't hear from me until next week. If that. It's not that I'm lazy, it's that I just don't care. So we'll just keep stacking up the emails and get to them eventually. I will continue to update the website in terms of the portfolio performances. If you have comments or questions for me, please send them to frank@riskparityradio.com that email is frank@riskparityradio.com or you can go to the website www.riskparityradio.com and put your message into the contact form and I'll get it that way. If you haven't had a chance to do it, please go to your favorite podcast provider and like, 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 Voices [27:37]

Now it's sure I'm dead and I haven't done anything that I want or I'm still alive and there's nothing I want to do. I'm sober, I'm dead, and I haven't done anything that I want. Or I'm still alive and there's nothing I want to do.

Mostly Mary [28:03]

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.