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. Thank you, Mary, and welcome to Risk Parity Radio.

Mostly Uncle Frank [0:45]

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! 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 [1:28]

Top drawer, really top drawer, along with a host

Mostly Uncle Frank [1:32]

named after a hot dog. Lighten up, Francis. But now onward, episode 270. Today on Risk Parity Radio, it's time for our weekly portfolio reviews of the seven sample portfolios you can find at www.riskparityradio.com on the portfolios page.

Mostly Voices [1:54]

But before we get to that, I'm intrigued by this, how you say, emails. And?

Mostly Uncle Frank [2:04]

First off, I have an email from my contact info.

Mostly Voices [2:09]

Oh, I didn't know you were doing one. Oh, sure.

Mostly Uncle Frank [2:13]

And our old friend, my contact info writes.

Mostly Mary [2:17]

Hi, Frank. Below podcast covers the concept of ergodicity. An important concept that maybe I finally understand thanks to this podcast. Luca De Lana on Risk, Ruin, and Ergodicity, EconTalk. Author and consultant Luca De Lana talks with EconTalk host Russ Roberts about the importance of avoiding ruin when facing risk. Along the way, De Lana makes understandable the arcane concept of ergodicity and shows the importance of avoiding ruin in everyday life. My sense is that the importance of ergodicity is underestimated in portfolio construction and financial planning. You are correct, sir, yes.

Mostly Voices [2:57]

Would very much look forward to your thoughts on the concept.

Mostly Mary [3:00]

Thank you. Well, thank you for that reference.

Mostly Uncle Frank [3:04]

I will link to it in the show notes. I did not actually think that that interview really explained ergodicity that well, at least from my my perspective. I think that's one of those words that is difficult to understand because it means a little bit different things in different contexts, and it is a word that describes a whole branch of mathematics. It comes from thermodynamics. But I am going to link to an article in the show notes by somebody named Taylor Pearson who works with Mutiny Funds, I believe. who explains this pretty well in the context of investing and going about life. And this also relates to the work of Nassim Taleb and others. Nassim Taleb in his books describes different systems in the world as either being in mediocre stan, in which case normal distributions apply, like the heights of various people, or Extremistan, where the rules of normal distributions in mathematics do not apply. For instance, if you look at the relative wealth of all individuals, it's very skewed in one direction. Another way of saying that is you have fat tails for certain sorts of things. Now you would describe a normal distribution as part of an ergodic system, whereas the non-normal or power law kind of distribution as non-ergodic. And in an ergodic system, the performance or outcome of any individual is likely to match up with the average or be close to it. So if you have a bunch of people all flipping a coin a hundred times, they're likely to all get similar outcomes. In something that's non-ergodic, You can have very disparate outcomes and a risk of ruin in terms of investing. The classic example of that used in this article is the game of Russian roulette, where you have five outcomes where you live and one outcome where you die. You could ask yourself a question. Do I feel lucky? Do I feel lucky? The average outcome though is you are 5/6 alive. Obviously you are not going to have that outcome. You're never gonna have that outcome. Either you're gonna live or you're gonna die. You're gonna die. The same idea is generally true in investing. So if you picked 10 random companies and said well I could invest in this or I could invest in an index, the index is going to be much more ergodic than investing in the 10 companies. Because the 10 companies could have very disparate outcomes. Some of them could go to zero. Some of them could double, triple, or 100x. And those are all non-ergodic outcomes. And in fact, your outcome of just picking 10 random companies is likely to be quite disparate from the outcome of buying an index fund. One of the reasons for that is that Most of the gains in an index of stocks like the S&P 500 come from the performance of only about 4% of the companies in that index. So the likelihood of actually picking those in any 10 in random ones is pretty low. But if you accidentally picked one of those or two of those by happenstance, your 10 companies would outperform the index. And so a lot of life is non-ergodic in which there is a risk of ruin. or a significant risk of ruin that you have to be aware of and try to avoid by not playing those kinds of games, such as putting all your money into just a couple of different stocks. Another area where this plays in that I've always been fascinated with are mortality tables or what is called the Gompertz mortality curve by which all life insurance works. Because it's very easy or relatively easy to predict amongst a large population how many people of that population are going to die by a certain age. You're gonna die. But it's impossible to predict when an individual is going to die. Like anyone can even know that. And you may be living an ergodic life where you're not taking lots of risks or a very non-ergodic life. where you're doing base jumping and other such activities that are highly likely to result in death at some point if you do them enough. You're gonna die. A lot of this is also related to fractal mathematics and models like what we would call the sand pile or rice pile model, where if you keep dropping grains of rice or sand into a pile, they will pile up for a while, but eventually, one grain of sand or rice will trigger some kind of avalanche in the pile, but you don't know which one it's going to be. Market crashes are often like that. That something that happens in one context doesn't do anything, but then next year or next month, the same thing happens and it causes a cascade. Those are examples of nonergodic systems. As a contrast, a more Air gotti system would be you dripping water into a container and just watching the water go up in the container. The results of each drop is going to be the same. It's just going to dissipate into the mass and fill the container. Same thing with gases when you put them in a vacuum chamber. They spread out to fill the whole space, which is where a lot of this idea originally comes from. Now, this also relates to the concepts of uncertainty versus risk, which we've discussed in episodes 49, 64, 66, and 153. Basically, risk is something you can calculate. It's like those coin flips. It's ergodic. In an uncertain world, you have non-ergodic systems, which are often complex, and can break apart or collapse in unpredictable ways. One interesting observation about these two kinds of systems is that in a risk-based system, having more and more data and doing more analysis helps you decide better or make better decisions. That's an ergodic system. In something involving uncertainty, often you are better off just following rules of thumb. because you're really just trying to avoid ruin and you recognize that having more data isn't going to necessarily help you make a better decision. That's a non-ergodic system. That's why things like the 4% rule actually work pretty well in just estimating how much money you need for retirement, because basically that's modeling a worst case scenario. and it tells you where the ballpark is. Because in theory, and what the financial advisors used to do prior to Bengan's work and the work of others, was to try to actually predict the average returns of, say, the market or a portfolio and say that, well, the average is 6% or 7%, you ought to be able to take that much every year. Or if you're Dave Ramsey, you might say 12%. or 8%. Those kinds of ideas are assuming an ergodic system where an individual's outcome is very likely to be an average outcome, and there isn't much activity or what they would call fat tails in Nassim Taleb speak. But that's also why the use of crystal balls does not work in forecasting future returns of the stock market or anything else. It's a non-ergodic system. So you can't just go out and look at some valuation metric or something else and use that as a basis for decision making. A crystal ball can help you.

Mostly Voices [11:29]

It can guide you.

Mostly Uncle Frank [11:33]

Because if the markets were ergodic, then you could use crystal balls to decide what to do next.

Mostly Voices [11:38]

As you can see, I've got several here. A really big one here. Which is huge.

Mostly Uncle Frank [11:46]

Ruminate on that morsel of wisdom for a while. But we've probably talked enough about this for one episode, so I'll leave you to check out the other ones if you haven't already, and the links that I'll leave in the show notes. And thank you for your email.

Mostly Voices [12:20]

You're gonna die twice!

Mostly Uncle Frank [12:26]

Second off, we have an email from Anonymous.

Mostly Voices [12:30]

I have no name.

Mostly Mary [12:34]

And anonymous rights. Was interviewed for a blog on investing and gave you a shout out. Feel free to share about it on your podcast, but please don't mention it to me. I use an anonymous Twitter handle for now.

Mostly Voices [12:49]

Well, that right there may be the reason you've had difficulty finding gainful employment.

Mostly Uncle Frank [12:53]

Well, thank you for this link to this very interesting article and the shout outs you gave to us in that article. In this article, Anonymous was interviewed about his investing styles and different portfolios that he uses. And he's basically a value and momentum investor that follows a number of the things that we follow and talk about around here. But he was talking about one of his portfolios is a variation of the Golden Ratio portfolio, which he uses for intermediate term accumulations of, say, three to five years. And I'll link to it, but just for the podcast, it's 50% in equities, divided into small cap value and large cap momentum. So it's got AVDV, AVUV, IMTM, and MTUM in it. Then it's got 25% in long-term treasuries and VGLT, 15% in managed futures, including KMLM and RSBT, and another fund from AQR, and then 10% in gold and GLDM. I love gold! And he credits us for the germination of the idea. It's impossible.

Mostly Voices [14:11]

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

Mostly Uncle Frank [14:18]

Which is very heartening to see, because from my perspective, the purpose of this podcast is to discuss some ideas and then get some ideas from the audience I learn as much from. the audience, as I do by talking about the things I already know and the variations and the ways that I've seen our audience use these principles that we talk about here, particularly that Holy Grail principle, make me feel like we are collectively making progress as do-it-yourself investors to come up with better portfolios for whatever purpose that we are using them for. Yes. So I invite you all to check this article out. I thought it was very illuminating and informative. The best Jerry, the best. And so thank you for your email. Last off.

Mostly Mary [15:12]

Last off, we have an email from Arun. And Arun writes. Hello, Uncle Frank. I would like to set up a portfolio that generates cash for my monthly fixed costs like car payments, insurance, water bill, electricity, et cetera. Thoughts went to dividend yielding ETFs, stocks, portfolios. But listening to your old episodes, I think you suggested a diversified growth portfolio with desired perpetual withdrawal rates that should take care of my needs.

Mostly Uncle Frank [16:07]

But I am not able to get it out of my head that such a portfolio would eventually decay, whereas a dividend paying ETF or portfolio Risk Parity Radio, Frank Vasquez, risk parity, risk, parity, Frank, Vasquez in the audio. irrelevance of dividends when considering investments. Because here's the thing, whether a company pays a dividend or not does not tell you anything about how the company is run, whether the company is going to make more money in the future, or really much of anything other than the management running the company does not believe that they have a good use for cash coming into the company in terms of growth. And so they are using the money that's coming in to give back to the shareholders, which they could do through a dividend, they could do it through share buybacks, so on and so forth. So the main reason to invest in equities is for their growth prospects, not for their dividend paying or income paying. If you are really trying to do this kind of liability matching, where you do want something that is paying an income or stream of income to cover expenses that are occurring, you wouldn't be using equities at all except for preferred shares because you're going to get a lot more income out of something like that. You would be using fixed income products, bonds and things like that because you need to match the duration of the instruments with the liabilities to be paid. So you'd be managing like an insurance company or pension plan would have to manage keeping enough short-term assets around to make those payments. While that can be useful, it is an inefficient way of managing your assets. It just is. And it becomes even more inefficient if you're using equities to do it because their payouts are generally much lower So you have to hold more just to generate the same kind of income. So if I'm trying to generate income from stocks, I'm not going to be buying just plain old ordinary dividend payers. I'm going to be buying preferred shares and things like that that are paying six or seven percent right now. There's really no contest there. But all of that is also very short term thinking because if you look at, say, what an insurance company or pension plan has, Sure, they have some things to cover their short-term liabilities, but they also have most of their assets invested for the long term, because that's really the important thing. And if you're an individual who is going to be living off a portfolio for many decades, you need to be really focused on, well, what is the best thing for the long term? And then how much do I need to compromise for short-term needs? Because if you were fixated on this kind of time segmentation, which in its full flowering would be just have a gigantic bond ladder from now until eternity. As Michael Kitces and others have pointed out, that works fine, but it just requires much more in total assets to support that kind of portfolio management. As I've often said, if your strategy is I'm just not going to spend much money, you can hold just about any kind of portfolio you want to that makes you feel good. That's the fact, Jack! That's the fact, Jack! But if you want to spend the most amount of money out of a portfolio over a long period of time, then you need to focus on the things we talk about here in terms of constructing a portfolio that's going to maximize your long-term safe withdrawal rate. and not be fixated on what's going to be happening in the next one, two, three, or five years. Now, as I've also mentioned in the past, the other reason that this kind of investing persists, what I mean by this is just live off dividends, is historical.

Mostly Voices [20:08]

It is King Arthur, and these are my knights of the round table.

Mostly Uncle Frank [20:12]

Because if you go back to the 1980s or before, Transaction fees were very high. You did not want to try to be selling parts of your portfolio and paying lots of transaction fees. You wanted to get some kind of income out of them without having to do that. And dividends were the natural solution for that. So that kind of investing made a lot of sense in that world. We don't live in that world anymore. We live in a world with no fee trading and fractional shares. So there's no need to be adopting essentially an obsolete management strategy to deal with a world that no longer exists. Forget about it. It's like making sure that you have enough hay in your garage just in case somebody with a horse and buggy shows up.

Mostly Voices [21:01]

Forget about it.

Mostly Uncle Frank [21:05]

Alright, then the final thing you were talking about here, that you're not able to get it out of your head that such a portfolio would eventually decay. Whereas dividend paying ETFs and portfolio would preserve the basis. That honestly just doesn't make any sense. That's not how it works.

Mostly Mary [21:20]

That's not how any of this works.

Mostly Uncle Frank [21:24]

If you go and look at any index, the S&P 500 or any other index, you'll see that over time it tends to go up and to the right. And that's because these are growing companies that are worth more money and so people are willing to pay more money for them over time. There is no decay there.

Mostly Voices [21:54]

In fact, there is much more growth in something that is not paying dividends and retaining the assets for further growth than there is going to be something that is throwing out all its cash and not having anything left to fund growth. Think McFly, think. Think McFly, think.

Mostly Uncle Frank [22:06]

But again, this just comes down to having this magical thinking about Companies that pay dividends being somehow superior to companies that don't. Fat, drunk, and stupid is no way to go through life, sir. That's just not true. And in fact, the opposite is likely to be true in a lot of circumstances.

Mostly Voices [22:22]

Stupid is as stupid does, sir.

Mostly Uncle Frank [22:25]

Particularly when the dividend becomes unsustainable. A good example of that recently is the company Intel, which was paying a nice dividend for a really long period of time and people really loved it for its dividend. And then earlier this year, it cut its dividend. It's been struggling throughout this year. Danger, Will Robinson.

Mostly Voices [22:44]

Danger. Danger.

Mostly Uncle Frank [22:47]

Which is often what happens to a company when it stops growing and stops innovating. It gets overtaken by other companies. In this case, a company like Nvidia. And so you need to ask yourself, would you be rather owning companies like Intel these days or companies like Nvidia? Are you stupid or something? That's another way of stating this proposition. Hopefully that'll knock a little sense into you. Johnny, the dreaded purple nerfle.

Mostly Voices [23:17]

I haven't seen this move since the fifth grade. Amazing, Mick.

Mostly Uncle Frank [23:22]

If you really need it, thank you for your email. And now for something completely different. And the something completely different is our weekly portfolio reviews. Of these seven sample portfolios you can find at www.riskparityradio.com on the portfolios page. And just about everything was down this week. Just looking at the markets, the S&P 500 was down 1.47%. The NASDAQ was down 1.51%. Small cap value represented by the fund VIoV was one of the big losers. It was down 3.49%. Gold was down, was down 1.86%. Long-term treasury bonds were one of the winners. Our representative fund, VGLT, was up 0.6%. REITs had a rough week. Our representative fund, R EET, were down 4.93% for the week. Commodities represented by the fund of PTBC were down 2.55% for the week. Preferred shares represented by the fund of PFF were down 0.46% for the week. Managed futures managed to move up this week. Our representative fund at DBMF was up 0. 62% for the week, making it the big winner for the week. As you might expect, all the sample portfolios were down this week, although not substantially. Going to the first one, the All Seasons, this reference portfolio, it's only 30% in stocks, 55% in in intermediate and long-term treasury bonds, the remaining 15% in gold and commodities. It was down 0.76% for the week. It's up 6.22% year to date, but down 2.34% since inception in July 2020. Moving to our three kind of bread and butter portfolios, the Golden Butterfly is the first one. This one's 40% in stocks divided into a total stock market fund. and a small cap value fund, 40% in bonds divided into long and short treasury bonds, and then 20% in gold. It was down 1.39% for the week. It's up 5.09% year to date and 12.68% since inception in July 2020. Next one is the golden ratio. This one's 42% in stocks and three funds, 26% in a long-term treasury bond fund, 16% in gold, 10% in a REIT fund, and 6% in a money market fund or cash. It was down 1.58% for the week. It's up 6.35% year to date and up 9.02% since inception in July 2020. Next one is a risk parity ultimate. There's 15 funds I won't go through, but the small allocations to Cryptocurrency funds seem to be doing quite well these days. It was down 1.29% for the week. It was up 7.39% year to date and up 1.49% since inception in July 2020. Now moving to our experimental portfolios. We run hideous experiments here so you don't have to. These all involve leveraged funds. First one's the Accelerated Permanent Portfolio. It is 27.5% in a leveraged bond fund, TMF, 25% in a leveraged stock fund, UPRO, then it's got 25% in a preferred shares fund, PFF, and 22.5% in gold, GLDM. It was down 1. 72% for the week. It is up 11.7% year to date, but down 14.86% since inception in July 2020. Next one is the aggressive 5050, our least diversified and most levered portfolio, sample portfolio. It is 33% in a levered stock fund, UPRO, 33% in a levered bond fund, TMF, and the remaining third divided into a preferred shares fund and an intermediate treasury bond fund as ballast. It was down 1.61% for the week. It is up 13.67% year to date, down 21.24% since inception in July 2020. And our last one, the levered golden ratio portfolio. This one's 35% in a composite levered fund called NTSX, that is the S&P 500 and treasury bonds. 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. The remaining 5% in a volatility fund and a Bitcoin fund is down 2.04% for the week. It's up 6.28% year to date, down 18.67% since inception in July 2021. It's a year younger than the other ones. All in all, a bad week after a number of good weeks in a row. Overall, these are performing fairly average year to date. given their compositions and next month we'll get to do some rebalancing and won't that be fun surely you can't be serious I am serious and don't call me Shirley 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 What's 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. Mmmkay? Thank you once again for tuning in. This is Frank Vasquez with Risk Parity Radio signing off. Release the hounds.

Mostly Voices [29:23]

What's wrong with Cryptler? Oh, he's getting on, sir. He's been here since the late 60s. Ah, yes. I'll never forget the day he bagged his first hippie. That young man didn't think it was too groovy.

Mostly Mary [29:37]

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.