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 [0:38]

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.

Mostly Voices [0:50]

Yeah, baby, yeah!

Mostly Uncle Frank [0:54]

And the basic foundational episodes are episodes 1, 3, 5, 7, and 9. Some of our listeners, including Karen and Chris, have identified additional episodes that you may consider foundational. And those are episodes 12, 14, 16, 19, 21, 56, 82, and 184. And you probably should check those out too because we have the finest podcast audience available.

Mostly Voices [1:26]

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, episode 266. 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 portfolio's page, just a little preview of that.

Mostly Voices [1:55]

Boring, boring.

Mostly Uncle Frank [1:59]

The only thing that really moved of interest was small cap value stocks.

Mostly Voices [2:04]

I'm telling you, fellas, you're gonna want that cowbell. But before we get to that, I'm intrigued by this, how you say, emails and.

Mostly Uncle Frank [2:17]

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

Mostly Voices [2:25]

So that's what you call me, you know, that or his dude-ness or duder or, you know, Bruce Dickinson if you're not into the whole brevity thing. And the dude writes.

Mostly Mary [2:38]

Hey, Frank, here is a nice little article on the box spread strategy, which corresponds to the box ETF Wes Gray discussed on the Meb Faber podcast a little while back. An interesting new wrinkle is selling a box spread to borrow at the risk-free rate. On an unrelated note, here is a hypothetical I've been pondering lately, even though it is not entirely relevant to me yet as an accumulator.

Mostly Voices [3:09]

You are talking about the nonsensical ravings of a lunatic mind.

Mostly Mary [3:17]

Let's say you are a retired risk parity investor invested in the Golden Ratio Portfolio and drawing down at a 5% annual withdrawal rate. In the current interest rate environment, would it not make sense to sell your portfolio and invest it all in T-bills or the BIL ETF for as long as the interest rates on T-bills exceeded your withdrawal rate? You would, of course, be giving up expected returns, And such a strategy could be problematic in an environment of hyperinflation that makes a stable withdrawal rate more difficult to live on. But the essential question is, why continue to take risks in time periods where the risk-free rate exceeds your ongoing liabilities? AZ.

Mostly Uncle Frank [4:10]

Well, now I have to say some of this is getting beyond the capabilities of us mere mortals when you start talking about box spreads. Remember thou art mortal.

Mostly Voices [4:21]

For those who don't know what that is, which is most of us,

Mostly Uncle Frank [4:25]

man's got to know his limitations. It is a method for taking both long and short positions in the stock market to essentially get a yield similar to Treasury bills.

Mostly Voices [4:42]

Hearts and kidneys are Tinker Toys.

Mostly Uncle Frank [4:45]

For most of us, this is probably not something we need or would want to do. Dead is dead. But I will link to the article in the show notes so you can check it out. It is from Alpha Architect, who is one of the more interesting purveyor of funds and strategies and also puts out a number of papers and other things.

Mostly Voices [5:05]

I'm not a magician, Spock, just an old country doctor.

Mostly Uncle Frank [5:09]

There's another paper by them I read recently that I think is of interest to do-it-yourself investors and it is about value tilts and whether when you're talking about the size factor and the value versus growth factor, which one is more important, it basically concludes that the value factor is really what matters and they were analyzing an equal weight value allocation, which is different from typical value-based funds, which are cap weighted and so overweight the largest companies in the sector. But this basically concluded that having an equal weight value fund that covered small, medium, and large was probably the better way to go, or at least as good as simply doing small cap value.

Mostly Voices [5:58]

Guess what? I got a fever. And the only prescription is more cowbell.

Mostly Uncle Frank [6:06]

I haven't analyzed that in a whole lot of detail, but I will link to it in the show notes. Right now, I'm not aware of any equal-weight value funds. Although I wouldn't be surprised if they exist. If your portfolio had several different value funds or value kind of allocations, you may end up with something like that.

Mostly Mary [6:22]

I think I've improved on your methods a bit too.

Mostly Uncle Frank [6:25]

Now as for your hypothetical question. Shirley, you can't be serious. I am serious. And don't call me Shirley.

Mostly Voices [6:33]

Which is, would it make sense in an interest rate environment where

Mostly Uncle Frank [6:38]

the interest rate on T-bills is greater than your annual withdrawal rate to move your entire portfolio into the T-bills for as long as the interest rates on the T-bills exceeded your withdrawal rate? And the answer is probably not.

Mostly Voices [6:55]

I am a scientist, not a philosopher.

Mostly Uncle Frank [6:59]

I think at best you would get a random outcome where the results would simply be a wash. But I think it's more likely that your portfolio will outperform the T-bills in any given time frame, as you would expect in a random time frame. The kind of period you would be looking at would be the period of the early 1980s, which after bottoming out in the first couple of years, the markets were kind of off to the races for about the next five. And the problem with being out of the market is that most of the gains in the market occur in very short time frames, or in a very limited number of days. and it's very easy to miss them. And if you miss them, you will miss out on the long-term performance of your portfolio, which is what you actually need to occur over time to have the sustainable safe withdrawal rate. So I would say the risk of not being invested is greater than the risk of a lower performance in any given time frame. At least that's my story, and I'm sticking with it.

Mostly Voices [8:13]

That and a nickel get your hot cup a Jack Squat. But as always, thank you for your email.

Mostly Uncle Frank [8:21]

Take it easy, dude. Oh, yeah. I know that you will.

Mostly Voices [8:26]

Yeah, well, the dude abides. Second off, we have an email from Pete. I got a little rabbit in this hole, and I'm gonna catch the little rabbit and eat him up.

Mostly Uncle Frank [8:48]

And Pete writes, Uncle Frank

Mostly Mary [8:51]

and Aunt Mary, aside from providing an unbiased financial learning environment for us listeners, I really appreciate your logical approach to keep general hysteria and euphoria to a minimum. You can't handle the dogs and cats living together. Episode 260, where you addressed de-dollarization hysteria really stood out to me. In particular, I like this line. This kind of thinking is barely rational, and it's certainly not logical, after which you then go on to address cognitive biases.

Mostly Voices [9:25]

At no point in your rambling, incoherent response Were you even close to anything that could be considered a rational thought?

Mostly Mary [9:34]

If you found yourself with a slow email day, I think we'd all benefit from a mini clinic on logical argumentation and the art of identifying and countering fallacies, or at the very least, maybe pointing us towards some of your favorite resources that we could use to educate ourselves. I don't want to sidetrack you too much from your main mission, I just think our society, in particular American society, is in desperate need of this skill set for everyday life. Thanks again, De Oppresso Liber, Pete.

Mostly Uncle Frank [10:11]

Well, I'm afraid this topic is too big for me overall, and many others have written many books about it. I don't think I'd like another job. But I can give you some suggestions and things to check out that will help you with your understanding of fallacies and cognitive biases. One is the youe Are Not so Smart podcast. And you're gonna have to go back in time into their library. This podcast goes back to about 2013 or 2014, and it is in the episodes between say about 15 and 20 and about 115, that there are a series of episodes that are just about specific fallacies, about what they are, how to recognize them, so on and so forth. That podcast has veered off into other topics and things since that time, but I always thought that was one of the best series that I've heard on a podcast, which is why I can remember it. That is the straight stuff, O' Funkmaster.

Mostly Voices [11:14]

I will see if I can link to one of those in the show notes,

Mostly Uncle Frank [11:17]

but you should be able to find the whole series at your favorite podcast provider. Another source I would recommend is a professor at the Max Planck Institute named Gerd Gigerenzer, a fine German gentleman who speaks English, like he's from the late 19th century in that avuncular manner. But he wrote a book called Risk Savvy that is extremely good. about some of these things and also has a series of videos and lectures on YouTube. I'll link to at least one of those in the show notes. Hopefully one that talks about ignoring base rates because that is a critical problem in reasoning that we talked about in episode 260 that in particular infects these narratives about what might happen in economic futures. Then I think you want to look at the behavioral economics or psychologists that talk about cognitive biases generally. Kahneman and Tversky's thinking fast and slow is the classic in this area. I will link to a summary of those ideas in the show notes, which has about 35 of these cognitive biases and they're all related to fallacious thinking or misimpressions. Another nice one is Predictably Irrational by Dan Ariely. And he's got another book out called Dollars and Sense, spelled S-E-N-S-E, subtitled How We Misthink Money and How to Spend Smarter. But I have to say that I believe that humans are designed or wired to think in fallacious ways. probably to avoid being eaten by prehistoric predators and to thrive in groups of other humans. But I'm certainly not an expert in that.

Mostly Voices [13:10]

Forget about it.

Mostly Uncle Frank [13:14]

In any event, it generally takes conscious effort to overcome these types of fallacies. Let's just talk about a couple of them. The most prevalent in society Seems to be what is called the slippery slope fallacy. That if we go from A to B, it means somehow we are going to slide into C, D, and E. Real wrath of God type stuff. And the Freakonomics podcast is actually doing a couple episodes on this. I will link to that in the show notes, but that is a typical device used in political discourse and relied on heavily by the press. That one's usually pretty easy to recognize because the person using it often says the words：Slippery slope. Fire and brimstone coming down from the skies.

Mostly Voices [14:03]

Rivers and seas boiling. 40 years of darkness, earthquakes, volcanoes, the dead rising from the grave.

Mostly Uncle Frank [14:11]

Even if the slope is actually not very slippery, or maybe not even a slope. Human sacrifice, dogs and cats living together, mass hysteria. A couple of fallacies more relevant to investing and markets include the Texas Sharpshooter Fallacy and the Gambler's Fallacy. The Texas Sharpshooter Fallacy is a way of mistaking random events or random data for some kind of trend or pattern. And it comes from the idea that if you shot a whole bunch of random shots at a barn, Randomly, there would be a tendency of them to cluster in a few different areas. And you could take a pen and then draw a target around those clusters and pretend that those had meaning. But you would still be fooled by randomness. And that's because just because data clusters in a certain area or certain patterns appear in data or graphs or things doesn't necessarily mean they're anything other than a random clustering or a random pattern found on a chart. The gambler's fallacy is the erroneous idea that random things with a probability will revert to a mean in any meaningful time period. Where you see this very frequently is the use of valuation metrics in the financial media or by talking heads who say that, well, stocks look overpriced, therefore they should go lower, or they're recently underpriced, therefore they should go higher. In truth, there is no magical device pushing stocks up or down simply based on the fact that they are higher or lower than they were in some past period. And so it was that a famous person, I think maybe John Maynard Keynes, is reputed to have quipped the market can remain irrational longer than you can remain solvent. You can actually see how these two fallacies, the Texas Sharpshooter Fallacy and the Gambler's Fallacy, might combine in a set of data or your observations of a set of data. That was weird, wild stuff.

Mostly Voices [16:38]

Suppose you had something as simple as a coin flip

Mostly Uncle Frank [16:42]

that you were flipping a thousand times. Randomly, there would be clusters of many heads in the row or many tails in a row. Now, somebody engaged in the Gambler's Fallacy, who was watching that as time occurred in real time, would see seven heads in the row, and think that the probability of a tails coming up next is somehow higher than 5050. In fact, it's not. It's still 5050. Somebody using the Texas Sharpshooter fallacy would see a cluster of the same coin flips in a row and believe that had some kind of meaning or pattern. Everything that has transpired has done so according to my design. And that there was some particular reason for that cluster to appear in that place at that particular time. Which would be wrong because the clusters appear randomly.

Mostly Voices [17:45]

Forget about it.

Mostly Uncle Frank [17:50]

But perhaps the most common fallacies used in connection with predictions in financial markets, particularly these kind of global market crash predictions is what is known as the narrative fallacy, and it's related to ignoring base rates, which we talked about back in episode 260, which is basically confusing possibility with probability. And the existence of a vivid narrative that is told and retold over and over again can be persuasive on the human mind. that the possibility of some occurrence spoken about by this narrative makes the occurrence of the event more likely. And the way to think around these kind of narratives is to go and calculate a basic base rate. And usually you can calculate a basic base rate for at least economic occurrences. And this idea is kind of ingrained in in our psyche that in particular we tend to overweight possibilities as probabilities when it is dependent on us doing something. We overweight our own abilities and conversely we underweight base probabilities of things happening out in the world. A good example of that that's often used is if you were going to start a restaurant What is the probability that that business would succeed? Now, what most people will do is say, well, I've got experience in this, and I've done this before, and I have this backing, and I have this great idea, and this great menu, and look at all the things I have going for me. This has to be a success. It's got a high probability of success. The proper way to look at it, though, is first to look at the base rate. What is the base rate of Everybody attempting to open a restaurant, what is their base rate of success? And when you look at that, the base rate of that is very low. Something like only 20% of restaurants survive after maybe one year or two years. And so if you're analyzing that situation accurately, you would first start with that base rate that your probability of success is no better than anyone else's. and then you would only modify that slightly based on these positive factors. So even if you have the best idea for it, the probability of you succeeding is probably still going to be far less than 50% simply because the base rate is far less than 50%. Now we can apply this to a lot of different things. Let's apply it to something like hyperinflation. We hear often vivid stories about, well, hyperinflation is just around the corner. Look at Venezuela, look at Zimbabwe, look at Argentina. They have hyperinflation problems. Therefore, hyperinflation is likely to occur anywhere at any time, including here. Mass hysteria.

Mostly Voices [20:57]

You can also sense there's a slippery slope kind of quality to that

Mostly Uncle Frank [21:01]

thinking. But the proper way to analyze that is what is the base rate of hyperinflation occurring in a particular country? And you don't really need to know anything about what was going on in any particular country to just take out the data, look at all of the countries in the world over all the economic history you have and maybe do it month by month and calculate out, well, we have this many countries with this many months, that's the denominator. And we have this many countries with this many months experiencing hyperinflation, and that's your numerator. And that fraction is the base rate for any country to experience hyperinflation. And if you do a calculation like that, you'll find that's an extremely low percentage or probability. And so if you're actually trying to evaluate the probability of the United States or any other country experiencing hyperinflation, you have to start with that as your base case, and then you would only modify or move from there up and down based on the other factors that may be germane to the particular country. And if you're looking at countries that hold the reserve currency, that pretty much drops to zero. Because there's never been hyperinflation in a country with the world's reserve currency. That's not how it works. That's not how any of this works. At least not if you correctly define hyperinflation as something like 50% per month. But that then leads you to another form of fallacious reasoning, which is given the shorthand of moving the goalposts or simply changing the definitions of words to make whatever the proposition is True or more true or more likely than it would be had you used a common or accepted definition of whatever term you're talking about But anyway, that's all I got for you on that topic at least for now I will give you some links in the show notes to peruse and ponder at your leisure youe need somebody watching your back at

Mostly Voices [23:12]

all times and thank you for your email. How many lumps do you want? Oh, three or four Last off. Last off, we have an email from Dean. Every Halloween, the trees are filled with underwear.

Mostly Mary [23:35]

Every spring, the toilets explode. And Dean writes. Hi, Frank. Thanks for all you do for us retail investors. I have a question that is more of an observation I'm seeing regarding variable and floating rate Funds and ETFs out there. Would you place them in the same category as TIPS, meaning they are both useless? You had only one job. In 2021, with all the prediction of higher rates in the near future, I bought a good amount of variable rate preferred shares ETF ticker VRP, but instead of raising with the rates, it sank and its yield didn't change much. Exactly the same useless and negative effect TIPS have had in portfolios in 2022. Thoughts?

Mostly Voices [24:23]

There is a little-known codicil in the Faber College Constitution which gives the dean unlimited power to preserve order in time of campus emergency.

Mostly Uncle Frank [24:35]

Well, I'm not sure that you would say that these preferred shares or variable preferred shares funds are completely useless, but I would not think that they would have any measurable effect on a portfolio and really would only be used as ballast or in some circumstances if you are a high income individual in a high tax rate holding something like this that pays most of its income in the form of qualified dividends can be of some advantage. I think the problem you're facing here with this is that preferred shares, if you're looking at what the duration of them would be in terms of a debt instrument that they are analogous to, are rather long dated. They're at least intermediate dated and maybe long dated, which means they are going to behave a lot like bonds in a rising interest rate environment and go down in value. Now, you might not care about that if you're just holding them for the very long term and taking the income off of them, because things like this now are paying in the 6 to 7% range. And if you don't plan on selling them, you might not care about the fluctuations that much. All that being said, I would expect these things to have some similar characteristics to both stocks and bonds, and they will do poorly when the stock market is crashing. They won't crash as much as other stocks. They will also do poorly in rising interest rate environments. However, they will probably pay a very consistent income in terms of its dollars, if not in terms of percentages, over time, and they would variably adjust to prevailing rates over time. But what that tells you is if you are going to hold something like this, you have to be committed to holding it for a period of time because it's not really a short-term investment. It's more of a long-term method of generating some income. I think also the fact that they are preferred shares means that they have much more in common with a typical preferred shares fund like PFF than they do with any kind of variable rate kind of thing. It's interesting we do use a couple of those funds in these experimental portfolios we have with leverage in them, but we really are only using them as ballast for a portfolio like that because everything else in it is so much more volatile. In the end, I think you're correct in that they're not going to save you from any particular calamity, and they're not going to be significantly different from the performance of the average between a stock performance and a bond performance. So you have a year like we had last year when both stocks and bonds performed poorly, this thing is also going to perform poorly. So I would probably only continue to hold it if you liked the income that it is throwing off for your particular purposes.

Mostly Voices [27:47]

Then as of this moment, they're on double secret probation.

Mostly Uncle Frank [27:52]

This was a very apt observation by you though, and thank you for your email.

Mostly Voices [27:59]

The time has come for someone to put his foot down. And that foot is me. Now we're going to do something extremely fun.

Mostly Uncle Frank [28:12]

And the extremely fun thing we get to do is our weekly portfolio reviews of the seven sample portfolios you can find at www.riskparityradio.com on the portfolios page. Not much happened in the markets last week. Just looking at those before we get to the portfolios, the S&P 500 was up 0.39% for the week. The Nasdaq was up 0.14%. Small cap value represented by the fund VIoV was the big winner last week. It was up 1.95% for the week. I gotta have more cowbell. I gotta have more cowbell. And it's interesting how that has suddenly jumped to life after being an underperformer for most of the year. And it also seems that it was almost a random occurrence, and since there wasn't any particular event to spark those stocks from suddenly going up that quickly. But it just goes to show you. You never know what you're gonna get. Moving along, gold was down 0.97% for the week. Long-term treasury bonds represented by the fund VGIT were down 0.08% for the week, basically flat. REITs represented by the fund R E T were up 0.17% for the week. Commodities represented by the fund PDBC were down 0.22% for the week. Preferred shares represented by the fund PFF were down 0.58% for the week and managed futures represented by the fund DBMF were also a winner last week. They were up 0.37% for the week. Moving to these sample portfolios, which we will move through with alacrity since there wasn't much activity. First one is the All Seasons portfolio. This one is 30% in a total stock market fund. 55% in long and intermediate treasury bonds and then the remaining 15% divided into gold and commodities. It was up 0.28% for the week. It is up 5.65% year to date, but down 2.86% since inception in July 2020. Moving to our three bread and butter kind of portfolios. First one's a golden butterfly. This one is 40% in stocks divided into total stock market fund and small cap value. 40% in treasury bonds divided into long and short and 20% in gold GLDM. It was up 0.67% for the week. One of the big winners on that small cap value.

Mostly Voices [30:45]

Before we're done here, y'all be wearing gold plated diapers. Up 5.

Mostly Uncle Frank [30:50]

86% year to date and up 13.5% since inception in July 2020. Next one is the golden ratio. This one's 42% in stocks and three funds. 26% in long-term treasuries, 16% in gold, 10% in a reit fund, and 6% in a money market. It was up 0.37% for the week. It is up 6.92% year to date and up 9.6% since inception in July 2020. Then we get to the Risk Parity Ultimate. This one has 15 funds in it. I won't go through. It was actually down last week, down 0.09% for the week. It is still up 7.01% year to date and up 1.14% since inception in July 2020. Now moving to our experimental portfolios involving levered funds and preferred shares as ballast.

Mostly Voices [31:49]

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

Mostly Uncle Frank [31:57]

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, that preferred shares fund, and 22.5% in gold, GLDM. It was up 0.28% for the week. It is up 10.61% year to date, but down 15.69% since inception in July 2020. Next one's the aggressive 5050, our most levered and least diversified sample portfolio in all of its hideous experimentalness. What's happening in your face?

Mostly Voices [32:33]

It looks like an old catcher's mitt.

Mostly Uncle Frank [32:37]

Is one-third in a levered stock fund, UPRO, one-third in a levered bond fund, TMF, and one-third divided into preferred shares, PFF, and a Intermediate Treasury Bond Fund, VGIT, has ballast for it. It was up 0.21% for the week. It is up 11.49% year to date, but down 22.75% since inception in July 2020. And moving to our last one, the Levered Golden Ratio, which got its inauspicious start in the second half of 2021. It has 35% in a composite levered fund called NTSX, that is a 60/40 mix of the S&P 500 and treasury bonds, 25% in a gold fund, GLDM, 15% in a REIT, O, 10% each in a levered bond fund, TMF, and a levered stock fund, TNA, which was up considerably last week, and the remaining 5% divided into a volatility fund and a Bitcoin fund. It was up 0.66% for the week. It is up 6.94% year to date and down 18.13% since inception in July 2021. And there really isn't much more to say about those this week. I'm putting you to sleep. It was interesting. We have all of the news outlets and pundits now saying that the bear market is over and we're in a new bull market. And what does that really mean? We don't know.

Mostly Voices [34:09]

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

Mostly Uncle Frank [34:14]

But then again, we knew that. Well, Ladi freaking God! Truth is, we really don't know what exactly is going to happen next. Now you can also use the ball to connect to the spirit world. But now I see our signal is beginning to fade. If you have comments or questions for me, please send them to frank@riskparityradio.com that email is frank@riskparityradio.com or you can go to the website www.riskparityradio.com put your message into the contact form and I'll get it that way. 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 review, A follow. That would be great. M'kay? Thank you once again for tuning in. This is Frank Vasquez with the Risk Parity Radio. Signing off. Remain calm. All is well. All is well.

Mostly Mary [35:20]

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.