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. Expect the unexpected. It's a relatively small place. It's just me and Mary in here. And we only have a few mismatched bar stools and some easy chairs. We have no sponsors, we have no guests, and we have no expansion plans.

Mostly Voices [1:10]

I don't think I'd like another job.

Mostly Uncle Frank [1:14]

What we do have is a little free library of updated and unconflicted information for do-it-yourself investors.

Mostly Voices [1:23]

Now who's up for a trip to the library tomorrow?

Mostly Uncle Frank [1:27]

So please enjoy our mostly cold beer served in cans, and our coffee served in old chipped and cracked mugs, along with what our little free library has to offer. But now onward to episode 264. Today on Risk Parity Radio we will finally have another weekend episode after not having one for about a month.

Mostly Voices [2:03]

Surely you can't be serious. I am serious and don't call me Shirley.

Mostly Uncle Frank [2:10]

In which we will go over our sample portfolios and look at the weekly and monthly portfolio reviews and talk about the distributions for June.

Mostly Voices [2:18]

It's time for the grand unveiling of money! But before we get to that, I'm intrigued by this.

Mostly Uncle Frank [2:30]

How you say, emails? And first off, we have an email from Thirsty Horse.

Mostly Voices [2:34]

I've been through the desert on a horse with no name. It felt good to be out of the rain.

Mostly Mary [2:54]

In the desert, you can remember your name, 'cause there ain't no one and Thirsty Horse writes, hi Frank, you mentioned in one of the podcasts that the messages via the site can sometimes be glitchy and to use the email instead. I've been raving to you about some of my, I've been raving about you to some of my colleagues at work. I've also become a patron, but don't feel like you need to move this message below earlier in the queue. It's not urgent, just curiosity. I'm happy to support the great cause at the Father McKenna Center. Yeah, baby, yeah!

Mostly Voices [3:20]

Beyond that, I get a lot of value just listening to what you've already shared

Mostly Mary [3:24]

through your show. Thanks for creating this amazing resource for do-it-yourself investors. It has given me a lot of clarity on how to transition to a state where I can retire if I want to in about 10 years at age 56. It is a bit embarrassing to say that though I subscribed and started listening to your podcast a couple of years ago, I wasn't a regular listener, nor did I connect it to my personal situation. Insert the horse trough metaphor. I've never seen a horse like that before. No, it never will again, I fancy. There's only one of him and he's it. He's the horse of a different color you've heard tell about. Something changed this year when I heard an episode where you mentioned the potential to get 5% withdrawal rates or higher during retirement. compared to how I thought about the 4% rule. Since then, I've caught up on the background episodes and several other email episodes and have a decent idea of the concept. I've also explored the sites you mentioned and found the videos on your YouTube channel very handy for that. My question, first if hopefully many in the future, arose from those videos. Looks like those videos were done close to the top of the market in 2022 and the survival rates of some of the portfolios seem to have changed significantly if I did it correctly. For example, the Monte Carlo simulation for Golden Ratio at 5% withdrawal has about a 79% survival rate now, compared to greater than 90% when the video was made. How should I think about this big drop? Is it more about the simulation including more negative growth data in the overall time span? Or is it more specific to the negativity happening in the recent past, an effect similar to high stress when including worst years upfront? Does the big drop make you think about those portfolios differently? Thanks, Thirsty Horse.

Mostly Voices [5:20]

After two days in the desert sun, my skin began to turn red.

Mostly Uncle Frank [5:28]

Well, first let me thank you for becoming a patron and supporting our charity, the Father McKenna Center. Yes! which serves hungry and homeless people in Washington, DC. We don't have any sponsors, we just have a charity. Full disclosure, I am on the board and the current treasurer of that 501c organization. I think we have a little bit of a trifecta today. I think all of our emailers today have either become patrons or given to the Father McKenna Center directly. But thank you all for your support.

Mostly Voices [6:03]

It's top drawer, really top drawer.

Mostly Uncle Frank [6:07]

We had an interesting visitor to the center last month. Caleb Williams, the young man who won the Heisman Trophy last year, also attended the high school, Gonzaga, that owns the space that the center is located in, and volunteered at the center while he was in high school. And he came back just to say hi and talk to some of the patrons there and talk about how volunteering there had also inspired him to start his own charity, which I'm sure will become quite large given his current trajectory. But anyway, getting to your email. The short answer is no, not really, and I was unable to duplicate what you had done, but I did go back and run some more simulations at Portfolio Visualizer of golden ratio type portfolios. One of the limitations you have at Portfolio Visualizer is depending on what you put into it, you might not get a whole large series of data. And in particular, if you were just using a REIT fund or some of the funds that we're using in the Golden Ratio Portfolio, you would only get less than 20 years of data. And then I think their read data just goes back to 1994. So I ran asset classes back to 1994 using the REIT data and got an 88% survival rate at a 5% withdrawal rate going back to 1994. But then when I substituted mid-cap stocks, which is probably the closest you can get to REITs to get a longer data set, which goes back to the 1970s, then I got a 94% or 94.6% survival rate for that kind of portfolio on a 5% withdrawal rate. What's probably more interesting is what I discussed in Episode 223, which was using the toolbox at early retirement now, we modeled a portfolio that is similar to a golden ratio portfolio back to 1926 and showed that it had over a 5% safe withdrawal rate on a 30-year time frame. So I would view what you observe as a data limitation more than anything else. as always, what's more critical is comparing one portfolio to another because obviously you have to hold something in retirement or not in retirement. And so you really want to be actually comparing two portfolios over a similar time frame and hopefully it's a long enough time frame to give you meaningful results. Another very useful tool is the retirement spending tool over at portfolio charts, which I'll link to in the show notes, and you can put in various portfolios into that and see how that would work have worked out for you given a withdrawal strategy that you can also input into that. And that goes back to 1970. So if you want to model a golden ratio kind of portfolio in there, put in 21% in total stock market or large cap growth, put in 21% in the small cap value box, 26% in the long-term treasury box, 16% in the gold box, 10% in the REIT box, and 6% in the treasury bill box. And you'll see that it survives in all instances without much trouble in that calculator since 1970 on a 5% safe withdrawal rate.

Mostly Voices [9:40]

Well, Laddie, Frank, Vasquez, Hopefully that gives you some more things to play with and really go down some

Mostly Uncle Frank [9:48]

deep rabbit holes. And thank you for your email.

Mostly Voices [10:09]

Second half. Second off, we have two emails from Alexi. 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. And the dude writes. Hey, Frank, I really enjoyed today's episode 259.

Mostly Mary [10:35]

I particularly liked Ron's question slash exercise calculating the break-even interest rate where investing in leveraged ETFs is better than using margin to invest in simple index funds. Some questions and thoughts. One, when investing in leveraged funds, one should probably rebalance with greater frequency in proportion to the degree of leverage, since volatility scales perfectly in proportion to the leverage level, i.e. in a three times portfolio, One should rebalance about three times as often as in a one times portfolio. This should mitigate the volatility drag of daily rebalanced leveraged funds. Two, to really do Ron's experiment well, wouldn't one have to adjust the financing cost of a margin on a yearly basis to reflect the risk free rate at the time of borrowing? I am not sure of the mechanism, but I have to imagine that the risk free rate is accounted for in the borrowing cost of the embedded leverage in few futures slash swaps and options contracts. Great stuff, AZ. And in his second email, the dude writes, Hey Frank, a belated thank you for the awesome Flight of the Concord sound drops. I may be wrong, but I interpreted your comments to mean that you have watched this incredible show. The show is not so current. It barely misses your 90s sweet spot. What do I have to do to get you to watch all three seasons of Flight of the Concord? I will happily pay for a month of HBO. Those Kiwis are hilarious. Easy. Not gonna do it. Wouldn't be prudent at this juncture.

Mostly Uncle Frank [12:16]

All right, first things first. Episode 259 and Ron's question and analysis about comparing when to use margin interest and when to use leveraged ETFs in a portfolio on a given interest rate. which is what we were talking about back in episode 259. No, I haven't done much more with that since then. Man's got to know his limitations. And I'm hoping one of you would take this up.

Mostly Voices [12:47]

It's not that I'm lazy, it's that I just don't care.

Mostly Uncle Frank [12:51]

But yes, I think it still is an open question as to what is the appropriate rebalancing strategy for a leveraged portfolio. I agree with you that I think it's more than a non-leveraged portfolio or more often, but that doesn't answer the fundamental question of, well, do you do it on bands? And if so, how big are the bands? I still kind of default to that article that Michael Kitsis wrote that suggested that 20% bands were probably optimal rebalancing for rebalancing bands, which would give you more opportunities to rebalance in a leveraged portfolio because They're gonna hit those bands more often.

Mostly Voices [13:31]

That is the straight stuff, O Funkmaster.

Mostly Uncle Frank [13:35]

As to the second part of your question, talking about adjusting the financing cost of margin on a yearly basis to reflect the risk-free rate of return at the time of borrowing, yes, you're probably correct. Sweet. But you seem to forget I'm retired and am unlikely to take on such tasks. I don't think I'd like another job. So I will invite you, Ron, or others to think about that and see what they can do.

Mostly Voices [14:04]

And I'll go ahead and make sure you get another copy of that memo, okay?

Mostly Uncle Frank [14:07]

And thank you for your first email. Now moving to your second email regarding Flight of the Conchords. No, I've never watched the show. I did pull up some YouTube videos and check them out. Found what I thought were the funniest ones for that episode where I inserted those clips. Bwahahahahahahahahahahahahahahahahahahahahahahahahahahahahahahahahahahahahahahahahahahahahahahahahahahahahahahahahahahahahahahahahahahahahahahahahahahahahahahahahahahahahahahahahahahahahahahahahahahahahahahahahahahahahahahahahahahahahahahahahahahahahahahahahahahahahahahahahahahahahahahahahahahahahahahahahahahahahahahahahahahahahahahahahahahahahahahahahahahahahahahahahahahahahahahahahahahahahahahahahahahahahahahahahahahahahahahahahahahahahahahahahahahahahahahahah think I've watched anything consistently on TV in over 15 years. Forget about it. And that includes streaming. I think the last thing I actually watched or binge watched was Black I find that I can't sit still and want to fast forward things like I'm listening to a podcast. Looks like I picked the wrong week to quit amphetamines. But we'll just chalk that up to another one of my quirks. You are talking about the nonsensical ravings of a lunatic mind. And thank you for your email. Both emails. How far out are you, man? I'm pretty far out.

Mostly Voices [15:33]

That's pretty far out, man. I'm all in. Risk Parity Radio, Frank Vasquez, risk parity, risk, parity, Frank, Vasquez in the audio. Last off. Last off, we have an email from Mark. All hail the commander of His Majesty's Roman Legions, the brave and noble Marcus Vindictus.

Mostly Mary [16:22]

And Mark writes, hi Frank and Mary, I have three questions about the risk-free rate of return. One, is the risk-free rate of return a useful concept when evaluating investment allocations in the context of a risk parity portfolio? Remember, thou art mortal. Two, more specifically, should our allocation to higher risk investments decrease as the risk-free return rate rises and the excess return gap between the risk-free return rate and higher risk returns shrinks? Remember, thou art mortal. Three, would you characterize this as a form of market timing or the application of a consistent risk return policy in an investor policy statement or other? Remember, thou art mortal.

Mostly Uncle Frank [17:10]

Well, Mark, I think my answer is no, and I have not done any significant research on this.

Mostly Voices [17:17]

Remember, thou art mortal.

Mostly Uncle Frank [17:20]

But I'm not aware of any research that suggests that you can use the risk-free rate of return either in portfolio construction or in adjusting portfolios. The concept itself is kind of an artificial one in that what we typically use for that is the US Treasury bond rate. Usually they're looking at the 10-year or the 30-year. But I think you're really just trying to turn it into some kind of crystal ball. A crystal ball can help you.

Mostly Voices [17:50]

It can guide you.

Mostly Uncle Frank [17:53]

There is a very interesting podcast I listened to recently. It was Azwath de Motorin on the Long View podcast. of May 16th, which I'll link to in the show notes. And he's done a long series of data on the equity risk premium, which is essentially the difference between what equity stock market is yielding versus the risk-free rate of return. It's that differential. And if you go to his website, which I'll also link to, he's got all kinds of data about this going back to the 1990s. But it was interesting what he said about it on the podcast. He said two things that I thought were very enlightening. The first was that he found that this metric, in terms of valuation, and that's what he's known for, was the best metric for trying to predict future returns. And it was better than any PE ratio or anything else that he had looked at. The best, Jerry, the best. So basically what he was saying was the best crystal ball he could find in terms of valuation metrics.

Mostly Voices [19:02]

Now the crystal ball has been used since ancient times. It's used for scrying, healing and meditation.

Mostly Uncle Frank [19:09]

But then what he said next was even more important that he said you could never use a valuation metric even the best one he had found as some kind of a crystal ball or a mechanism for Adjusting portfolios or doing anything like that.

Mostly Voices [19:25]

You can't handle the crystal ball.

Mostly Uncle Frank [19:28]

And the reason for that, that even the best one that he had found was only about 17% correlated with future outcomes. And 17% correlated is pretty much just noise. It's close to being uncorrelated. Forget about it.

Mostly Voices [19:44]

So what that's telling me is that this is a fool's

Mostly Uncle Frank [19:49]

errand to try to be using things like the risk free rate of return, the equity risk premium, PE ratios or CAPE ratios or any other thing like that as a mechanism for predicting or as a practical mechanism for doing anything with your portfolios because it just does not work well enough. And I'll take as what the motor in's word for that. Bower your sensei. Bower your sensei. And the failures of this kind of methodology are actually well known, although people often don't want to talk about them because people would rather point to some caped crystal ball or something else that supposedly is going to help you adjust your investment choices.

Mostly Voices [20:33]

A really big one here, which is huge.

Mostly Uncle Frank [20:38]

But the best evidence of that, or some of the best evidence of that is is failures in the past. I'll link to a famous paper, at least I think it's famous or should be famous, written by three very well-known retirement and portfolio researchers, David Blanchett, Wade Pfau, and Michael Finke. And it comes from 2013. And the title of the paper is the 4% Rule or Rate of Withdrawal is Unsafe in a Low-Yield World. which is essentially getting at your risk-free rate of return issue. And they made the startling claim in this paper in 2013 that using the 4% rule was likely to yield a 50% chance of failure for a standard 50/50 kind of stock bond portfolio. Real wrath of God type stuff. Now if you were reading that in 2013 and you did some machinations or adjustments to your portfolio, you would have done exactly the wrong thing at the wrong time.

Mostly Voices [21:36]

Are you stupid or something?

Mostly Uncle Frank [21:40]

This is because, as it turns out, and now we know in hindsight, the valuation metrics they were relying on do not have a stable mean to revert to, and it changes over time. And so I do not know that any of those authors, well known as they are, would refer back to that paper as something that they would rely on, tout, or recommend. Given how poorly its predictions fared.

Mostly Voices [22:08]

I award you no points and may God have mercy on your soul.

Mostly Uncle Frank [22:12]

Michael Kitces subsequently wrote a couple articles around 2014 or 2015 kind of debunking this methodology and showing that it had very little usefulness. And I'll link to those in the show notes. I've linked to them before. But you can check them out again. Let's do it. Let's do it. But anyway, going back to what Aswath Nemotaran said, I think the sooner we disabuse ourselves that we are going to find magical valuation metrics to predict the future with and recognize that's not a practical idea.

Mostly Voices [22:49]

Now you can also use the ball to connect to the spirit world.

Mostly Uncle Frank [22:53]

The better off we're going to be.

Mostly Voices [22:56]

That is the straight stuff, O Funkmaster.

Mostly Uncle Frank [22:59]

Interesting food for thought, and thank you for your email. Now we are going to do something extremely fun. And the extremely fun thing we get to do now is talk about our weekly and monthly portfolio reviews of the seven sample portfolios you can find at www.riskparityradio.com on the portfolios page. Looking at the markets last week, it appears the Largely manufactured debt ceiling crisis is now over and all the politicians are patting themselves on various body parts.

Mostly Voices [23:37]

Tina, you fat lard, come get some dinner!

Mostly Uncle Frank [23:44]

The whole thing reminded me of the Emily Litella character on old Saturday Night Live with Gilda Radner.

Mostly Voices [23:53]

Here to reply to a recent editorial is Miss Emily Lytella. I'm here tonight to speak out against busting school children. Busting school children is a terrible, terrible thing. I hear this is going on all over the country. Mean policemen arrest little children and put them Put them in jail in the wrong neighborhoods so they can't even play with their little friends. Imagine busting school children. The food in jail isn't good. And even though they get bread, I don't believe they can get toast. Or nice cake. Now, who will tuck them in? Where will they hang their leggings? Where will they set up their little lemonade stands? Well, they don't have toys in jail, except maybe tiny tears dolls. And did you know they have little holes in their bottoms there? The tiny tears and you can get, where will they put their toys away? Excuse me? If they have toys. Ms. Artello? Yes. I'm sorry. The editorial was on busing school children, busing. Fussing. Oh? Not fussing.

Mostly Uncle Frank [25:14]

I'm sorry. Never mind. But all the amateurs who've been dumping their assets over the past two weeks are probably feeling very nonplussed today. Fat, drunk, and stupid is no way to go through life, son. Taking a look at the markets last week, the S&P 500 was up 1.83% for the week. the Nasdaq was up 2.04% for the week. Small cap value represented by the fund VIoV was the big winner last week. It was up 3.34% for the week. I'm telling you fellas, you're gonna want that cowbell.

Mostly Voices [25:50]

Gold was also up. It was up 0.94% for the week.

Mostly Uncle Frank [25:55]

Long-term treasury bonds represented by the fund VGLT were also up 1.06% for the week. Reits represented by the fund R E E T were up 2.97% for the week. Commodities were one of the big losers, not so big. Our representative fund, P D B C was down 0.51% for the week. Preferred shares represented by the fund P F F were up 2.49% for the week. And managed futures represented by the fund D B M F were down. They were down 0.3% for the week. Taking a look at these sample portfolios. First one is the All Seasons Portfolio. This one is only 30% in stocks, 55% in long and intermediate treasury bonds, and the remaining 15% divided into gold and commodities. It is our reference risk parity style portfolio in the classic form. It was up 1.09% for the week. It was up 5.5% 49% year to date and down 3.01% since inception in July 2020. For the month of June, we are distributing out of it at a 4% annualized rate and that will be $29. It will come out of accumulated cash. We will have distributed $176 out of it year to date and $1,150 out of it since inception in July 2020. when we started all these with about $10,000 in them. Moving to our three bread and butter kind of portfolios, the Golden Butterfly is the first one. Hope you all listened to that interview of Tyler I pointed out on the Value Stock Geek podcast that I mentioned in last episode. But this portfolio is 40% in stocks divided into a total stock market fund and a small cap value fund, 40% in Treasury bonds divided into long and short and 20% in gold. It was up 1.25% for the week. It is up 5.25% year to date and up 12.85% since inception in July 2020. We will be distributing $40 from it at a 5% annualized rate for June. That'll be coming out of the gold fund, GLDM. Gold has been one of the best performers this year and so we've been taking a lot of money out of it. That'll be $245 year to date and $1,543 since inception in July 2020. Next sample portfolio is the golden ratio. This one is 42% in stock funds divided into large cap growth, small cap value, and a low volatility fund. It is 26% in long-term treasury bonds, 16% in gold, 10% in a refund, and 6% in in a money market fund. It was up 1.51% for the week. It's up 6.47% year to date and up 9.14% since inception in July 2020. We were distributing out of this at a 5% annualized rate. All our distributions will come from cash, the way this one is structured for management purposes. So that'll be $39 from cash, the money market fund for June. $236 out of it year to date and $1,521 out of it since inception in July 2020. Next one is our Risk Parity Ultimate, our kitchen sink kind of portfolio. It's got 15 funds in it I will not go through, but it was up 1.49% for the week. It is up 6.92% year to date and up 1.05% since inception in July 2020. We were distributing out of this one a 6% annualized rate It'll be $42 from the gold fund, GLDM for June. That'll be $255 year to date and $1,751 since inception in July 2020. Now moving to our experimental portfolios. 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 PFF, the preferred shares fund, and 22.5% in gold, GLDM. It was up 2.91% for the week. It was up 10.43% year to date, but down 15.83% since inception in July 2020. We'll be taking $34 out of it from June. That's at a 6% annualized rate. It'll come out of the cash that is accumulated. That'll be $205 year to date and $2,030 total since inception in July 2020. Next experimental portfolios are aggressive 50/50, the least diversified and most leveraged one of these portfolios. It's one third in the leveraged stock fund UPRO, one third in the leveraged bond fund TMF, the remaining third divided into preferred shares and an intermediate treasury bond fund as ballast. It was up 3.4% for the week, the big winner. It is up 11.39% year to date, but down 22.82% since inception in July 2020. We're taking $31 out of it for June. That's at a 6% annualized rate. It'll come out of the stock fund, UPRO. It'll be $187 year to date and $2,020. distributed since inception in July 2020. And the last experimental portfolio is our youngest one, the levered golden ratio. This one has 35% in a composite fund, NTSX, that is S&P 500 and treasury bonds levered up 1.5 to 1. It's got 25% in a gold fund, GLDM, 15% in a reit, O, 10% each in a levered Small cap fund TNA and a levered bond fund TMF and the remaining 5% divided into a volatility fund and a Bitcoin fund. It was up 2.01% for the week. It is up 6.24% year to date but down 18.66% since inception in July 2021. It's a year younger than the other ones. We'll be distributing $30 out of it from GLDM, the gold fund. for June, that's at a 5% annualized rate. It'll be $183 year to date and $993 since inception in July 2021. All told, just like most of the markets, everything's kind of gone nowhere for the past month or so. And just taking a look at our crystal ball, see what might happen next. And it's through the candle.

Mostly Voices [32:43]

that you will see the images into the crystal.

Mostly Uncle Frank [32:47]

What does our crystal ball say? We don't know.

Mostly Voices [32:52]

What do we know? You don't know. I don't know. Nobody knows.

Mostly Uncle Frank [32:57]

Funny it always seems to say something like that.

Mostly Voices [33:01]

What do you mean funny? Funny how? How am I funny? But now I see our signal is beginning to fade.

Mostly Uncle Frank [33:08]

We should be back on the two week podcast schedule, so hopefully I'll get caught up on the emails at some point here. We're still at the end of April and early May for them, for the most part. But 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 eventually. If you haven't had a chance to do it, please go to your favorite podcast provider and like, subscribe, give me some stars, a follow, 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 [34:25]

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.