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 have just stumbled in here, you will find that this podcast is kind of like a dive bar of personal finance and do-it-yourself investing.

Mostly Voices [0:53]

Expect the unexpected.

Mostly Uncle Frank [0:56]

There are basically two kinds of people that like to hang out in this little dive bar.

Mostly Voices [1:01]

You see in this world there's two kinds of people my friend.

Mostly Uncle Frank [1:05]

The smaller group are those who actually think the host is funny regardless of the content of the podcast.

Mostly Voices [1:12]

Funny how? How am I funny?

Mostly Uncle Frank [1:16]

These include friends and family and a number of people named Abby. Abby someone. Abby who? Abby normal.

Mostly Voices [1:25]

Abby Normal.

Mostly Uncle Frank [1:29]

The larger group includes a number of highly successful do-it-yourself investors, many of whom have accumulated multimillion dollar portfolios over a period of years. The best Jerry, the best. And they are here to share information and to gather information to help them continue managing their portfolios as they go forward, particularly as they get to their distribution or decumulation phases of their financial life.

Mostly Voices [2:03]

What we do is if we need that extra push over the cliff, you know what we do? Put it up to 11. Exactly.

Mostly Uncle Frank [2:11]

But whomever you are, you are welcome here.

Mostly Voices [2:15]

I have a feeling we're not in Kansas anymore.

Mostly Uncle Frank [2:19]

But now onward, episode 262. Today on Risk Parity Radio, we will continue to hack away at our emails since we're over a month behind again. Thanks to me not being around to do the podcast on the weekends these days. Looks like you've been missing a lot of work lately. I wouldn't say I've been missing it, Bob. But anyway, Without further ado.

Mostly Voices [2:45]

Here I go once again with the email. And?

Mostly Uncle Frank [2:49]

First off. First off, we have an email from Bruce.

Mostly Voices [2:57]

Just this morning, my wife and I went to this hotel in the hills. That's right, the Bel Air Hotel. A very good friend of ours happens to be staying. And the name of this young man is Mr. Bruce Springsteen. That's right. Yeah, he said, Brad, I'm tired. How would you like to be the boss for a while?

Mostly Mary [3:28]

Well, yeah. And the boss writes. Just discovered your website. How are you feeling about the drawdown since the inception of the portfolios? It seems like the assumption of negative correlation of stock bonds might have hurt the portfolios. Comments? Thanks. Interesting question.

Mostly Uncle Frank [3:51]

Actually, the more interesting question is what did we learn? Because my feelings are kind of irrelevant in terms of what we should get out of any episode or any data. You know this week I don't feel tired. Obviously, I wish that the portfolios would not have had as severe of drawdowns, although The ones I really care about are the Golden Butterfly, the Golden Ratio, and the Risk Parity Ultimate. The first one, the All Seasons, is a reference portfolio, and the other three on the end are experimental. And so I'm really not concerned about their performance in any given period. But just going through a few comments.

Mostly Voices [4:40]

Yes!

Mostly Uncle Frank [4:44]

the first comment is that this episode 2022 is within the boundaries of what might be expected. It's happened before, it's happened infrequently, but it's happened in the 1970s and it's happened in a time like 1937. And what has happened is when the Federal Reserve raises the interest rates very quickly, particularly in an inflationary environment, it tends to cause both stocks and bonds to perform poorly. Now, if you were to look at simply the base rates of that occurrence, you would say it probably occurs in about 2 to 3% of the years or periods in question, given the historicals. And it's been about 40 years since you saw something like that occur. So it's not outside the realm of Possibility. However, it does not change the overall dynamics of the market. It's not a new paradigm. It's not anything that is outside of what say these portfolios had been back tested through.

Mostly Voices [5:49]

You can't handle the dogs and cats living together.

Mostly Uncle Frank [5:52]

The truth is, and we've talked about this before, is that the correlations between stocks and bonds Treasury bonds in this case do change over time. Sometimes they are negatively correlated, sometimes they are positively correlated. Overall, on average, they are negatively correlated, but that does not mean there won't be periods when they are not positively correlated. And this was discussed in a paper that we've discussed before that fortunately is updated by the people at, I think they're at the University of North Carolina researchers. I'll link to this again. It's a 70 page paper about the correlation between volatility in the stock market and bond returns. And that research goes back to the 1950s, although it has been updated through April of 2023. So you can check that out. But the other thing we really learned from this experience is that it confirms what assets did well or did not do well from prior episodes. If you look back to the 1970s and the Volcker era, both your basic stock funds, S&P 500 types, large cap growthish things, and bonds tended to do poorly. What did better was value tilted stocks. And we saw that last year, large cap value was only down about 2%. Small cap value was down maybe 11 to 12% I think, if memory serves me. Whereas the stock market itself is down about 20%. And there were pockets of value tilted stocks that actually went up last year. Energy was one notable sector, but another interesting sector that I do hold in my personal portfolio was property and casualty insurance companies. Things like Allstate and Progressive. And as a group, those were up about 10% last year. And so I've been selling those. That's not something I've incorporated into the sample portfolios because I don't have enough data to say too much about whether that is a better long-term investment than say a basic small cap value or mid cap value fund. And if you go back to the 1970s, you'll see that value stocks tended to do well. In fact, Small cap value stocks between 1975 and 1987 were up every single year. So what this tells you is that in your stock portfolio for a drawdown portfolio, it is important that you have a significant value tilt, that you're not just relying on total stock market funds, which are cap weighted to large caps and have a growth tilt towards them. the other thing we learned from last year is that having alternative assets is important for diversification purposes. Now, most of these portfolios have some gold in them, and that was one of the best performers last year simply by not going down. It went up at the beginning of 2022, and then it went down and then it came back to neutral. And right now it is up near all-time highs, and so has been the source of our distributions. Another thing that we've been talking about as a diversifier since the beginning of 2021 or the end of 2020 is the possibility of using a managed futures fund, but being circumspect about which ones were available and whether they were cost effective. What we saw last year was that that in fact is a good idea and we do have cost effective funds to use for that now. And so, as I've discussed in an episode earlier this year, we will be making a couple of transitions to add managed futures to the Golden Ratio Portfolio and one of the experimental portfolios in an appropriate time frame. We're not just going to be jumping into something that just because it performed well last year. But more critically about what we are thinking about going forward, is the time for the portfolios to recover to where they were previously. Now, if you just have a portfolio that's just stocks and bonds, like a standard 60/40 portfolio, that may have a recovery period that is up to 13 years long, as it was in the 1970s and as it was in the early 2000s. Typically, these kinds of portfolios we're talking about here have maximum recovery times of 3 to 4 years. And so that's the time frame we're really concerned about going through entire economic cycles. In this case, we have not been through an entire economic cycle since we started these portfolios. But what we're most interested to see is after we do go through a recession and are recovering from it, and we've had a complete economic cycle to compare these portfolios to standard other options. And let's be clear that you have to compare this to another option that you might have adopted because otherwise you just end up with false comparisons between apples and oranges. Now, going through the specific portfolios, if you look at that All Seasons portfolio, which is a traditional risk parity style portfolio, you see why we only use it as a reference portfolio because I do believe that it has too many bonds in it overall. and that it's not really optimized for maximizing a safe withdrawal rate. The next sample portfolio, that Golden Butterfly portfolio, actually did pretty well, relatively speaking. I think it was only down 12 or 13%, and so you would have been much happier with that than a traditional retirement portfolio. The Golden Ratio had about the same performance as the 60/40 portfolio did last year. What's interesting about that one and all of these portfolios is that there was a steep recovery actually in January. So in some respects, and this is true of everybody's portfolio, the fact that the peak of the market was at the end, very end of 2021, and then you had this big trough towards the end of 2022 sort of matches the calendar up exactly, whereas if the months were slightly different, The results would have been much different. If you move to that next portfolio, the Risk Parity Ultimate, that one's really not optimized very well because we use it kind of as a kitchen sink to just put something of everything in it. If you look at it on a more granular level, what you'll see is because it's got some leverage in it in a bad year that magnifies negative performance. And then if you go through all of the stock holdings in there, you'll also see that it tends to have a growth tilt to it instead of a value tilt to it. It's more growth stocks than value stocks all told. And that shows you a deficiency in that, that it would be better off if it were structured so that if it had a more value tilt to it, it would have performed better in the period. Now moving to the next couple sample portfolios. These are experimental portfolios that have leveraged funds in them. and they really are designed to be compared with each other. So the Accelerated Permanent Portfolio is more diversified, has a substantial portion of gold in it compared to that aggressive 50/50 portfolio. That aggressive 50/50 portfolio is actually designed to be something like what is called the Hedge Fund E portfolio, only without quite as much leverage. that portfolio is something we discussed back in episodes 116, 110, and 82. And my basic comment there was, it was great for the period that people have been talking about in the past 10 years, but if you brought it into a period like the 1970s, you may have trouble. And so that scenario did play out for that aggressive 50/50 portfolio. and is also a demonstration as to why it is actually important to have things besides stocks and bonds in a portfolio. Because that portfolio is basically 50% stocks, 50% bonds with some leverage added to it and does not have any kind of value tilt to it either. And then the last one, the levered golden ratio portfolio. What did we learn about that? Well, we learned that if you started in the second half of 2021, that was a really bad time to start a portfolio experiment given what was about to happen in 2022. I think that portfolio also suffers a bit because it does not have a high enough value tilt to it. In the stock portion of that portfolio, it does have a small cap fund, but that small cap fund tends to be more growth oriented than value tilted. So the lessons to be learned in terms of portfolio construction are a confirmation of the 1970s that it is a good idea to have a value tilt, small cap value in your portfolio, and it is also a good idea to have alternative investments in your portfolio, such as gold or managed futures. And as an aside, that tips are fairly worthless. in this kind of environment and will only drag down your portfolio. But then again, we knew that. But they are who we thought they were, and we let them off the hook. Despite popular delusions to the contrary.

Mostly Voices [15:38]

Don't be saucy with me, Benaise.

Mostly Uncle Frank [15:42]

And the last perhaps disappointing notation was the lack of performance of the volatility funds that are in a couple of portfolios. which you would have expected to do better in a down year for the stock market, but did not. But maybe that's telling you that those are not worthwhile to be holding in portfolios since we've just been experimenting with them. That has never been a investment or allocation that we've been able to find satisfactory funds for. I'm thinking you may be better off with something that like a long short fund like BTAL. that we've talked about that also has a value tilt toward it. And you may be better off with some of these newer funds that are purely designed to go up during inflationary times, such as PFIX or RISR. But a lot of those funds just haven't been around that long. So this is more of an observation than a learning conclusion of some kind. But anyway, all of the portfolios have begun to recover this year. and we'll see how things go.

Mostly Voices [16:51]

Gonna end up eating a steady diet of government cheese and living in a van down by the river.

Mostly Uncle Frank [16:59]

You never know where you may end up, Bruce.

Mostly Voices [17:03]

Then I got married pregnant. And man, that was all she wrote. And for my 19th birthday, Birthday, I got a union card and a wedding coat. And thank you for your email. Second off.

Mostly Uncle Frank [17:26]

Second off, we have an email from Raymond.

Mostly Voices [17:30]

My name is Raymond J. Johnson Jr. Now you can call me Ray, or you can call me Jay, or you can call me RJ, or you can call me RJJ, Or you can call me RJJ Jr.

Mostly Uncle Frank [17:41]

And Raymond writes, hi, Frank and Mary.

Mostly Mary [17:46]

I'm 39 years old, and I plan on retiring early at 50. Right now, my allocation is 50% stocks, 10% small cap value, and 20% 10-year treasury bonds. I keep the rest about 20% in money market funds. I know this last part is a big drag on my portfolio, And as I'm in the accumulation phase, I should be 100% equity. I've tried that, but I definitely couldn't sleep at night. I'm very risk averse. So my question is, what is more important to you, to be able to sleep well or to optimize your investment to maximize your withdrawal rate? Any tips on how to stomach more risk without losing sleep? Thanks, Raymond.

Mostly Voices [18:35]

Rex Quondo, we use the Buddy System. No more flying solo.

Mostly Uncle Frank [18:38]

Well, Raymond, sleeping at night is more important.

Mostly Voices [18:42]

You need somebody watching your back at all times.

Mostly Uncle Frank [18:45]

Not only for your mental health, but for your ability to manage a portfolio. Because here's the problem. The biggest error amateur investors make and why they typically underperform even what they're holding themselves is that they get nervous at various times and start jumping in and out of funds. either becoming uninvested and trying to jump back in, or chasing funds that did well in the previous period, whether that period's last year, the last three years, last five, or last ten. And if you are not getting enough sleep, you are more likely to do something impulsive like that. So it is always better to stick with a decent portfolio like the one you have, and get the sleep than becoming too obsessed with trying to maximize your outcomes.

Mostly Voices [19:39]

Get those brokers back in here. Turn those machines back on. Turn those machines back on.

Mostly Uncle Frank [19:46]

But there will be a price to pay for short-term sleep when you have a conservative portfolio. And that is it just will not grow as fast over time. So you didn't specify in your email how close you are to becoming financially independent as far as your finances are concerned, but it is not necessarily feasible for you to say that you're going to make it in 10 years or 11 years. There is a nice little simple calculator over at Portfolio Charts that I'll link to about basically time to financial independence. given a contribution rate in a particular portfolio that you can stick in there, and I would stick it in there and see whether you're on track or not. Because that's the real consequence to the portfolio you're holding over a long period of time. It's going to underperform a more aggressive portfolio, and so you may not get to where you want to be in 10 or 11 years. It may happen in 15 years or something. But I would run your own personal numbers and see where you are. Because maybe you'll get there with your current portfolio when you're 48. So maybe you can just sit tight and sleep all you want and you'll be just fine. Snooze and dream.

Mostly Voices [21:02]

Dream and snooze. The pleasures are unlimited.

Mostly Uncle Frank [21:06]

The other things that you might do are just get some better diversification in terms of this portfolio that if you were to take those stock funds and reorient them so you have essentially half large cap growth and half small cap value. You're probably going to both sleep better and have a better performance, at least historically that would be the case. But then as you surmised, the real long-term drag in your portfolio is that 20% in a money market fund, which is doing just great right now, but you would not expect it to outperform anything else in your portfolio over the time periods that you're talking about a decade or more. So to the extent that you can move a little bit of that into some of your other holdings, that would help you a little bit. Or if you wanted even more diversification, you could add something like managed futures for maybe 5% of the portfolio. or even gold, but I hesitate to tell you to do that right now because gold's at an all-time high, and I feel like most people that are getting excited about gold now are doing exactly what they should not be doing, which is fun chasing based on a recent good performance. But honestly, I would not beat yourself up over this. This is not a bad portfolio. You will get to where you need to be. It just might take a little longer. And that's not really a big deal.

Mostly Voices [22:36]

Fortune favors the brave.

Mostly Uncle Frank [22:39]

So sleep tight and thank you for your email. Last off. Last off, we have an email from Alexi.

Mostly Voices [22:51]

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 Mary [23:02]

And the dude writes, Hey Frank, here's a fun little one. I was looking for a stand-in for UPRO for the purpose of tax loss harvesting and came up with a leveraged large value/large growth mix in the form of a 50/50 UwOD and TQQQ mix. It works surprisingly well. You have a gambling problem.

Mostly Uncle Frank [23:30]

All right, so I will link to this little back test you provided in the show notes. What the dude has done here is do a comparison between the performance of UPRO, that three times leveraged S&P fund, with a portfolio that is mixing a leveraged Dow index fund with a leveraged NASDAQ fund. and the 50/50 UDAO and TQQQ fund does outperform the UPRO fund for the period of their existence, which is from around 2010. I'm not sure you can make a whole lot out of this, given the nature of the time period we're talking about when the NASDAQ was outperforming just about everything else. So to the extent you put something like TQQQ in a portfolio for that period, the portfolio probably will outperform just about anything else. On the other hand, it is attractive in the respect of having those two funds, U-Dow and TQQQ, would allow rebalancing between the two of them. And basically you're talking about a value tilted fund, U-Dow, and a growth tilted fund, TQQQ, that in theory, could give you some nice rebalancings over time. I have not gone through and tried to optimize the rebalancing of them in Portfolio Visualizer. Although that's something you could do, stick in bands and things like that and see what other kind of results you get. And I did go and run a little experiment that I'll link to in the show notes to try and test this hypothesis. What I did was go to the asset class analyzer and Portfolio Visualizer and put in unlevered portfolios, one that is just the total stock market and another portfolio that was 50% large cap value and 50% large cap growth. And the second portfolio actually does outperform the just plain old total stock market going back to the early 1970s. You can run the test all the way back there. It's about a half a percent on the compounded annual growth rate. Which doesn't sound like much, but over the course of 50 years, that's about an extra half a million dollars, or about one-third better than the plain old total stock market. So you may be on to something there.

Mostly Voices [26:02]

Yeah, baby, yeah!

Mostly Uncle Frank [26:06]

And I'll be curious to see how that all works out going forward. And thank you for your email. Take it easy, dude. Oh, yeah. I know that you will.

Mostly Voices [26:16]

Yeah, well, the dude abides.

Mostly Uncle Frank [26:20]

The dude abides. But now I see our signal is beginning to fade. Continuing our tradition for May, I've just started. There will not be a podcast this weekend. It's not that I'm lazy. It's that I just don't care. Because I have to go to Boston and help our youngest son clean out the room in the house he's living in and bring all his stuff home. Such is life in the fast lane of middle-aged parenthood.

Mostly Voices [26:54]

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

Mostly Uncle Frank [26:58]

In the meantime, 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. If you haven't had a chance to do it, please go to your favorite podcast provider and like, subscribe, give me some stars or review. That would be great. Mmmkay? Thank you once again for tuning in.

Mostly Voices [27:30]

This is Frank Vasquez with Risk Parity Radio. Signing off.

Mostly Mary [28:07]

Down to the river, my baby and I, oh down to the river, be right behind 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.