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 [0:39]

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 [1:11]

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

Mostly Uncle Frank [1:15]

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

Mostly Voices [1:24]

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

Mostly Uncle Frank [1:28]

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, episode 278. Today on Risk Parity Radio, we are having the last of season three. This will be the last episode in this season and we'll be moving on to season four starting in August. And since we have completed our third year of this podcast, we are also doing our rebalancing of the four portfolios, the sample portfolios that we have on an annual rebalancing schedule. So we are going to spend this episode talking about those rebalancing. Yes! I'm not going to go through all the ins and outs of rebalancing today. We most recently discussed that back in episode 225 if you want to check it out, and there are links there to an article by Michael Kitces and some other things. But one of the most common ways of doing rebalancing is to do it on an annual calendar schedule. It's kind of a tried and true method. It has the advantage of being simple, easy to implement, and reduces the numbers of transactions in your portfolio overall. And it's also a good time to take a look at what's in the portfolio, how it's been doing, and whether there are other changes that you may need to make, particularly if the circumstances in your life have changed. Now that's a little bit artificial when we're talking about these sample portfolios, but we will go through a little bit of the basics of them and what we are doing with them. We are making some allocation changes in one of them. So without further ado, let's start talking about them. We did all of these rebalancings last Thursday, July 20th, and they are reflected in the postings made to the portfolio page over the weekend. So you can see the updated portfolios there. The descriptions of exactly what we did are also on the portfolios page. So if you'd rather not listen to me talk about them orally, you can just go check that out at your leisure.

Mostly Voices [4:06]

Groovy, baby!

Mostly Uncle Frank [4:11]

So anyway, the first portfolio we rebalanced last Thursday was the All Seasons portfolio. This is a reference risk parity portfolio or a classic structure if you prefer. I don't think it's something most people would want to use unless they're very conservative. But anyway, in this portfolio, the setup or allocations for it are 30% in stocks and a total stock market fund 40% in long-term treasury bonds, 15% in intermediate-term treasury bonds, and the remaining 15% divided into gold and commodities. And so we wanted to put this portfolio back to those percentages. And that mostly involved selling a lot of stocks and gold and buying a lot of bonds. So the gold was actually up at 8.79%. We sold $119 worth of that to get it back down to 7.5%. The stocks had risen to 34.34% of the portfolio. We sold $403 worth of that to get it back down to 30%. And then we bought $357 worth of the long-term treasury bonds, which had done the worst last year. $21 of the intermediate treasury bonds, which didn't change that much last year. And then we also ended up buying $143 worth of the commodities fund. PDVC. Now that fund was kind of interesting because it was actually one of our best performers last year and paid a large distribution at the end of the year. And so we've actually been taking money out of it, but over the past six months or so as inflation has dropped, the commodity sector has also dropped and so it is now at a low point and we are buying more of it. Looking at this portfolio since the last rebalancing, it is down about $210 from $9,248 to $9,038 in terms of how much money is in it, but we also distributed about $360 out of it at a 4% annualized rate. Going forward in the next year we should expect that over half of the distributions for the next year will come straight out of dividends and bond payments or income payments from these funds since the Rates on the bond funds have gone up to over 4% each, which is precisely why you want to buy more bond funds when the bonds are down, because the interest rates are higher. And you're basically locking in the higher returns with whatever else you put into the fund at the time. It's interesting, I do see a lot of amateur investors essentially doing the exact wrong thing right now, which would be to sell your longer and intermediate term bonds when they're down and buy short-term instruments, which are paying more at the moment. If you do that, you're essentially selling low and buying high. We also saw some of that at the end of last year when it was very popular to sell your stock funds because they had been doing poorly last year and buy short-term savings instruments. We can already see that was a big mistake, and I expect that people who are reallocating their portfolios based on their current conditions or their crystal balls will probably have similarly bad performances in the future because that's the way it works.

Mostly Mary [7:40]

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

Mostly Uncle Frank [7:44]

The thing about rebalancing is it never feels like the right thing to do because you are selling your winners and buying your losers. But that's why it's the exact right thing to do. Now moving on to our next three portfolios, which are more like something that somebody might actually want to hold in retirement. First one is the Golden Butterfly, the most conservative of these three. This one is 40% in stocks, divided into 20% total market fund and 20% small cap value. I could have used a little more cowbell. It's got 40% in Treasury bonds divided into a long fund and a short fund, and the remaining 20% is in gold. So as you can imagine, the rebalancing was similar for this fund as it was for the last and for all the other ones, where we were selling the stocks and selling the gold, which have done well over the past year, and buying more bonds, and that entailed selling $116 worth of gold, which was at 21. 01% and is now back down to 20%, selling $257 worth of the Total Stock Market Fund, which has done very well over the past six months, and then we sold only $9 of the small cap value fund. That one had done much better last year in comparison. but not as well in the past six months. Now on the buy side we bought $248 worth of the long-term Treasury Bond fund which had sank down to 17.39% to get it back to 20% and $86 worth of the short-term Bond fund which was down at 19% but honestly does not move very much in any event. So these are all restored to about 20% each and then we kept some in reserve to pay the next distribution, which we have done for all of these portfolios. Looking at the overall performance of this over the past year, it was at 99. 55 on July 21st, 2022, and then most recently was at $10,073 on July 19th, 2023. So it went up even after distributions and we have distributed about $490 to $500 out of this over the past year. What this is telling you is these portfolios are holding up pretty well and recovering pretty quickly given that 2022 was the worst year in 40 as far as any kind of stock bond portfolio was concerned. A lot of that had to do with the relatively good performance of gold over the past year from which we took a considerable number of distributions. But as I mentioned, all this information is at the website on the portfolios page if you really want to check it out. We'll move to our next one. This is the Golden Ratio Portfolio, which is a little bit more aggressive than the Golden Butterfly Portfolio. It has 42% in stock funds, which are divided into 14% in a large cap growth fund, VUG, 14% in a small cap value fund, VIoV, and 14% in a low volatility fund, USMV, which in terms of factors is like a large and mid cap value fund, or at least it tilts that way. We also have a REIT fund, REET, which is mostly domestic but has some international REITs in it. Overall, this portfolio has a total exposure to the stock market right now of 52%. As I mentioned back in an episode in early January, we do have plans to swap managed futures in for the REIT allocation in the future, but are waiting for the REIT fund to recover a little bit more against the managed futures fund, which it actually is doing. but hasn't gotten there yet. REITs have been one of the still worst performing sectors of the stock market over the past 18 months or so. In terms of non-stock funds, this one has 26% in a long-term treasury bond fund, 16% in gold, and 6% in a money market fund. One thing that is different about the way we manage this portfolio compared to the other ones is we have adopted the once a year cash management strategy. So what we do is we refill up that money market fund every year with all the distributions we'll need for the year, and then we take all the distributions out of just that money market fund. And this is actually what was meant originally by a bucket strategy as Harold Evensky coined that term and invented this methodology back in the late 1980s. In contrast, what we do with the other portfolios is actually look at what are the best performing assets in a given month since the last rebalancing and take the distributions from those. This one is much simpler for people who do not want to look at their portfolios. This is a good option because all the money is just there sitting in the money market fund and you just take from there and don't look at the portfolio for the next year. That also means this portfolio over the past few years has the fewest transactions because we literally only adjust the holdings once a year. So it is a bit more interesting looking at these holdings and comparing them from year to year because you see the overall performance for the whole year relative to the other assets. So in this case, the best performer over the past year was actually the Gold Fund. Similar to the Large Cap Growth Fund, although the Gold Fund did better earlier and the Large Cap Fund has done better more recently. So anyway, it was up to 18.35% of the portfolio in gold. So we've sold $230 worth of that to get it back down to 16%. Then looking at the stock funds, we also sold In the large cap growth fund VUG, we sold $272 of that to reduce it from 16.77% back down to 14%. We're selling $98 worth of the small cap value fund VIoV to get it from 15% to 14% and then $54 worth of the low volatility fund USMV to get it back from 14.55% of the portfolio to 14%. What we are buying, we are buying some REITs, $41 worth of those to get it back from 9.58% of the portfolio up to 10%, and then a much larger portion goes to the long-term treasury bonds, which are buying $306 worth to get it from 22.88% back up to 26% of the portfolio, and refilling the money market fund from which we've been taking all the distribution, so we're putting $306 of that to get it back from 2.87% of the portfolio back up to 6% of the portfolio. In terms of the overall performance since last year, it was at 97.53 on July 21st, 2022. And then last week when we did the rebalancing, it was at 97.76 or about $23 more. And that's after all of the distributions, which were also about $490 for the past year. So what you can see from this, both for this portfolio and the last one, the Golden Butterfly is a very stable performance and pattern of distribution, even in the worst of times, which is what we like to see. But now we're going to move on to the most complicated portfolio here, the Risk Parity Ultimate. We keep this portfolio kind of as a kitchen sink of Examples of sort of all the things you might want to put in a portfolio. I don't think anybody's portfolio actually needs to be this complex. But I really didn't want to have about 10 different sample portfolios of all the different asset classes. So this one serves that purpose. That is the straight stuff, O' Funkmaster. And because of that, we also do make some small tweaks in terms of the allocations in this portfolio. each year to highlight different asset classes, management techniques, and other possibilities. So this portfolio has 15 funds in it, and let's talk about them in groups because I think it makes the most sense. Let's first talk about the stock and REIT funds, which we have modified slightly. In the old configuration, we had 12.5% in a large cap growth fund, 12.5%, in a small cap value fund, 5% in that low volatility fund USMV, 5% in a levered S&P 500 fund, UPRO, 5% in a domestic Chinese fund called KBA, and 5% in the REIT fund, EET. And that's 45% of the entire portfolio. Although when you consider the leverage in the levered S&P 500 fund. It is more like 55% of a portfolio. So just looking at how this portfolio has been structured overall, it's clear that it's slightly growth tilted, and that's due a lot to the leverage in UPRO and then also the existence of the Chinese equity fund, which performs mostly like a growth fund, even though it actually is quite diversified from the others. We also have a small allocation of cryptocurrency funds that tend to perform also like growth funds or positively correlated with them. So in order to remedy that imbalance a little bit, what we decided to do was just change the allocations to the large cap growth fund and the small cap value fund so that the new allocation will be just 10% in the large cap growth fund and 15% in the small cap value fund, which isn't much of a change, but it's a little change and should balance out some of the inequities between growth and value here. I do think as a basic principle or idea, what you really probably want in a drawdown portfolio is to have at least half of it be value tilted, because value stocks tend to be a bit more stable and also do a bit better in inflationary environments. So in terms of the actual moves we made, we sold $494 worth of the large cap growth fund VUG, which reduced it from 15. 55% to well over its 12.5% prior allocation, but now it's going to go down to 10%. And so we would have been selling some out of the Small Cap Value Fund, VIoV, but we ended up adding $186 to that to get it up to 15% of the portfolio. In addition to that, we sold $35 worth of the fund USMV, the low volatility fund. We sold $129 worth of the UPRO fund, which was up to 6.44% and is now back down to five. We ended up doing nothing with the refund, which was only $2 off of its 5% allocation. But we did buy $139 worth of that Chinese fund, KBA, which essentially is an emerging market fund, but tends to be more volatile and less correlated with the US funds. Unfortunately for us, that is also the worst performer, or one of the worst performers in this portfolio. Outside of the levered funds and so has been a drag. It's down over 40% in the last 18 or 19 months. It's been down about 30% since the last rebalancing. But historically it can also go up 40% in a year. So we'll buy low and see what happens next and hopefully be able to sell high in the future. Now moving to the bond part of this portfolio. There are three funds here. One is the long-term treasury bond, VGLT, which is 15% of the portfolio. The levered bond fund, TMF, which is 5% of the portfolio, but acts like another 15. And then we also have a preferred shares fund, PFF, that we group in with the bond instruments because it is bond-like in its performances. And there's 5% of that. Now that one was actually just very stable last year. We're ending up adding $19 worth of it to get it back from 4.77% up to 5%. I think we may have taken a distribution out of it last year at some point. Both of the other bond funds are down as you would imagine. So we're adding $113 to the VGTLT and $173 to the TMF to get them back to their 15% and 5% allocations. But now let's move to the alternatives, because we have a lot of alternative assets in this portfolio, not because we think you should be holding all of them, but because we wanted to have examples. So the biggest holding of these is actually in a gold fund, GLDM. That one was up last year and we had taken distributions out of it, but it was at 16.28% of the portfolio. at rebalancing time, so we sold $119 worth out of it to get it back down to 15%. Then we have two funds that are managed futures and commodity related. One is DBMF, which is a straight managed futures fund, and the other one is COM, which is a commodities fund that only invests when the commodities are going up. in value and focuses more on the agricultural stuff. The comm fund was actually up for the past year slightly. It was at 5. 1%, so we're selling $10 out of it to get it back down to 5% of the portfolio. Now the other one, DBMF was actually up a lot last year and we had been selling out of it for distributions, but over the past six months it has been down. And so we'll be buying $80 worth of it, or we did buy $80 worth of it to get it back from 4.08% back up to 5%. As I mentioned before, we also have a tiny allocation to two cryptocurrency funds which in the old version were GBTC and ETH, which are actually both organized as trusts or closed-end funds so they're not as efficient as ETFs. those were interesting because they were down horribly late last year but have recovered a lot and actually ended up up for the year. So the ETHE was at 1.07% of the portfolio and the GBTC was at 1.36% of the portfolio and so we're selling those to get them back down to 1%. One thing that became available last year is a technological advancement from Fidelity in which you can buy Bitcoin and Ethereum directly through a Fidelity account. You have to open a separate Fidelity account. So we went ahead and did that and got rid of these two funds, opened that separate account, and now have the two 1% of those two holdings in that separate account. And that is why when you look at the portfolios page, you'll see two printouts there because you're not allowed to hold this in the same account with the rest of your securities. It's interesting how Fidelity has moved into that space and made it easy for their investors to buy these most popular cryptocurrency funds or cryptocurrencies directly. And they're not charging any fees right now either, which is also a benefit. So anyway, we restore those to 1% each. And this leaves us with our last fund, which is VIXM in the old configuration, and that is a volatility fund. It really had a love-hate relationship, mostly a hate relationship, with all things volatility related because it's a very difficult area to invest in and the kinds of funds that you can get at tend to drag overall. And frankly, I know that the people that actually use those sorts of funds generally put them on a separate rebalancing and sell them whenever they spike. So even though last year was a difficult year for the stock market, it was actually also a difficult year for volatility funds, which did not perform as you would want them to, and this one was down like all the other ones, about 30 to 40%. So given our frustrations with it, we decided to get rid of it and instead use a long short fund called BTAL. Now, we talked about that back in episode 114, if you want to know all the details about it. But basically what it does is it buys low beta stocks, which are like value stocks, and then sells growth stocks or high beta stocks. So it tends to do well in two environments. It does well when the stock market is generally doing poorly, It's negatively correlated overall with the stock market, but it also does generally well when value stocks are outperforming growth stocks. So it essentially adds a value tilt to the portfolio overall. And since I also hold it personally, I thought it'd be a good thing to use here instead of the poorly performing volatility funds that we've been fiddling around with unsuccessfully. because it does also have positive returns over time. And so we made that small substitution for that 3% allocation in this portfolio. All of these details are laid out on the portfolios page at the website www.riskparityradio.com if you want to check those out. Now this portfolio is actually down about $300 between July 2022 and July 2023, not including the distributions. We're actually distributing out of this at a 6% annualized rate, which has been about $530 over the past 12 months. But it has been recovering quicker than the others with the growth tilt it's had to it. So it's up about 11% year to date. Anyway, what that's probably telling you is that more complicated is not better, particularly when it involves emerging market funds and volatility funds, which have really been the issue with this portfolio when you compare it to the Golden Butterfly and Golden Ratio, which don't have those. But then again, we're only taking 5% annualized out of those and not 6% like this one. But now I see our signal is beginning to fade. Thank you for listening to all of this if you've stuck with it for the entire time. I realize reading a bunch of numbers off in a podcast is not exactly scintillating entertainment.

Mostly Voices [27:47]

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

Mostly Uncle Frank [27:54]

But actual portfolio management ought to be a boring process and we aim to show you just how boring it can be. Boring. While still taking a healthy distribution or more than healthy distribution out of these, which is really more than most people would actually take out of portfolios. But really the point of the high distributions here is to stress test these sorts of things and make it obvious that if you just take a little less than five or six percent, you'll probably be just fine. Shirley, you can't be serious.

Mostly Voices [28:30]

I am serious. And don't call me Shirley.

Mostly Uncle Frank [28:33]

And that if you need that much in a given year, maybe not every year, that you can go ahead and take that without feeling like you are doing something that's going to sabotage your long-term results overall. You're gonna end up eating a steady diet of government cheese and living in a van down by the river. So I'll be going on hiatus again this weekend for a little frolicking detour with some friends I grew up with. We're gonna meet in St. Louis and go to some baseball games and goof off.

Mostly Voices [29:09]

Did you get that memo?

Mostly Uncle Frank [29:12]

And then sleep it off, of course. Well, you haven't got the knack of being idly rich.

Mostly Voices [29:16]

You say you should do like me, just snooze and dream. Dream and snooze. The pleasures are unlimited.

Mostly Uncle Frank [29:23]

And so we will pick up next week with season four of Risk Parity Radio.

Mostly Voices [29:31]

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

Mostly Uncle Frank [29:35]

And I see the emails have been piling up and we do have some good ones to go through. And so in the meantime, if you also have an email, you'd like me to read an address on air. Please send it 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. Mmkay? Thank you once again for tuning in.

Mostly Voices [30:20]

This is Frank Vasquez with Risk Parity Radio signing off. This is the end, beautiful friend. This is the end, my only friend, the end.

Mostly Mary [31:04]

Of our elaborent lives the end of everything that stands the end no safety or surprise the end I'll never look into your eyes again 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.