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 [0:20]

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 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!

Mostly Voices [0:51]

And the basic foundational episodes are episodes 1, 3,

Mostly Uncle Frank [0:55]

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 [1:27]

Top drawer, really top drawer.

Mostly Uncle Frank [1:31]

Along with a host named after a hot dog.

Mostly Voices [1:34]

Lighten up, Francis.

Mostly Uncle Frank [1:38]

But now onward, episode 279. Welcome to season four of Risk Parity Radio. Who would have thunk it? Looks like I picked the wrong week to quit amphetamines. A big thank you to all my loyal listeners out there.

Mostly Voices [1:55]

The best Jerry, the best.

Mostly Uncle Frank [1:58]

Some of you who have been here quite a long time.

Mostly Voices [2:02]

It's called a posse, weird wild stuff. That it is sir, yes.

Mostly Uncle Frank [2:08]

Some of whom have just shown up recently. Young America, yes sir. I thank you for your interest and your tolerance. It's funny this podcast either gets five star ratings or one star ratings depending on the person.

Mostly Voices [2:23]

Don't be saucy with me Bernaise.

Mostly Uncle Frank [2:26]

But at least I know that the people who are here really want to be here. Cool. Thank you again. And in celebration of you, my loyal listeners, we are just going to get back to your emails.

Mostly Voices [2:42]

And so without further ado, here I go once again with the email.

Mostly Uncle Frank [2:50]

And? First off, First off, I have an email from Pete. How many lumps do you want? Oh, three or four.

Mostly Mary [3:02]

And Pete writes, Uncle Frank and Aunt Mary. So for context, the portfolio I'm leaning towards, largely modeled after the Golden Ratio in retirement, is as follows. 10% UPRO leveraged large cap growth, 25% AVUV, small cap value 10% AVDV, international small cap value 25% EDV, long-term treasury strips 5% VGSH, short-term treasury 15% GLDM, gold and 10% DBMF, managed futures A couple of points or questions. UPRO is my only leveraged fund, 3X. I used Portfolio Visualizer's backtest, UPRO/VFINX backtest, to try to align UPRO with a regular S&P 500 fund and found that about 38% UPRO with the other 62% rebalanced annually in cash is otherwise equivalent-ish with 100% in a standard S&P 500 fund. I assume it's not perfectly 33.3% repeating, of course, percent due to fees and volatility decay. Due to UPRO's inception date in 2009, the backtest only goes to 2010, which makes me nervous since I'm missing the critical 2008 GFC. I'm wondering if I'm oversimplifying using UPRO as an S&P 500 replacement. Though I'd prefer to use one of the return stacking funds like NTSX or GDE for their lower fees, it annoys me that they come prepackaged with paired assets. I like using individual ingredients. I know you're not a fan of international, and I understand your rationale and generally agree with it, but also find myself swayed by the AQR viewpoint in international diversification, still not crazy after all these years. It recognizes long-term international underperformance, and yes, 30 years is a very long time frame, but highlights the valuation potential that might exist going forward for non-U.S. equities. I thought I would incorporate that point by increasing my small cap value portion with AVDV given me close to an 80-20 ratio in equities between US and international. My problem is that AVDV is so new, I can't really backtest it or get any meaningful correlation matrix. I assume it's highly correlated to small-cap value stocks in general and fairly well correlated to the S&P 500 as well. Portfolio Charts has an ex-US SCV asset option, but no leverage large-cap growth or managed futures options. My modified portfolio seems to do well with a 5. 5% portfolio charts withdrawal rate, but do you know any better tools to check my assets against? While EDV isn't leveraged, the extended duration seems to give it leveraged-like qualities, so I'm happy to avoid the higher fees and additional leverage in something like TMF. Normally, I wouldn't use VGSH, but the UPRO uncertainty is enough to convince me to keep some pouring baking soda in this cake recipe. Not sure that metaphor works because I'm pretty sure baking soda is a critical ingredient. Any thoughts on the portfolio itself would be appreciated. I'd also appreciate any tools or tricks I might not be aware of to better replicate the portfolio with online resources. I'm not the most technologically inclined, but my gut feeling is that some of these toys are just too new to have the data I'm wishing for. First world problems, right? All the best to you and Mary, de opresso liber, Pete.

Mostly Uncle Frank [7:18]

Well, Pete, you've put together an interesting portfolio here with a little bit of leverage in it. It looks very well diversified and I would think it would perform pretty well. It reminds me a little bit of the return stacking stuff that Corey Hoffstein does, and who has just put out a new ETF combining treasury bonds and managed futures for that purpose with the idea you would combine that with something like NTSX to get a levered portfolio that had a significant managed features component. That new ETF is called RSBT. and other than learning about it, I don't know anything much about it or how it would perform because it's brand new. But it'll be interesting to see how that does going forward. Looking at your specific queries, while UPRO is not ideal, it does seem to actually work pretty well, and I think it's due to the way it's constructed with swaps contracts, which seems to make it perform more as advertised. I will link to a review of that from Optimized Portfolio, so you can check that out. But between that, the 10% in that, which performs like 30%, and then the 35% you have in small cap value, I think that's a nice mix between growth and value.

Mostly Voices [8:44]

I'm telling you, fellas, you're gonna want that cowbell.

Mostly Uncle Frank [8:49]

And if you are looking for real-time bad performance of UPRO, you can look at March. 2020 to see how it performed in that time. And it basically did three times as badly as the S&P 500 for that period and then recovered substantially after that. Now, as for using partially international small cap value, I gotta have more cowbell. I don't have any issue with using international funds in particular. The main problem I have with them is if you just look at the Generic cap-weighted international funds, they don't really provide the kind of diversification you want from your generic cap-weighted US funds. And what you end up getting are just a bunch of banks and companies that are kind of duplicative of large US conglomerates like Unilever and Nestle and Toyota and things like that. But now that we have In particular, these Avantis funds that have factor diversification in an international context. I think we do actually have something better to work with there. The other fund that you might consider for part of that allocation would be AVES, which is the Avantis Emerging Markets Small Cap Value, or I should say the Emerging Market Value. I don't think it's Small Cap. Now, I realize that fund is new, but the concept is not new. and if you look at the older DFA Mutual Funds, you can find things to back test to give you more data to work with. In this case, if you use a fund like DISVX, that is the DFA International Small Cap Value Fund. So I would plug that in for your back testing as well as a US small cap value, either just a generic one or the DFA Mutual Fund version of that. I would be careful trying to use comparative valuations of various stock markets to make some kind of determination whether something is undervalued or overvalued. The problem is when you go outside the US, you end up with both a different mix of sectors, which is going to give you a different valuation metric to work with as a baseline. because you don't have, for instance, the big tech companies that are in the US, which makes the US stock market naturally have a higher PE ratio than another stock market that doesn't have those kind of companies in it. And then every country is also going to have an associated country risk that goes with it, which may justify why the valuation numbers are so low there. The best example of that I can give you is Prior to the war in the Ukraine, Russian equities had a PE of about four, and most of that had to do with this country risk, that you might not be able to get your money out of there, or there might be a war or some other event that would destroy the value in that investment. But it's for those basic reasons that I find these arguments about other countries' stock markets having a lower valuation, to be only superficially interesting, and you would have to analyze them in more detail, both from the country risk factor and what the expected average PE of the companies in the sectors that are in that particular market that dominate that particular stock market ordinarily would hold. And that's not an easy calculation.

Mostly Voices [12:26]

Crystal Ball can help you. It can guide you.

Mostly Uncle Frank [12:30]

All in all, I think you're just better off doing what you're doing, which is using those international factor funds that are now available in ETF form. And I do myself hold some AVDV and AVES in our personal portfolios, although not really very large percentages of them, because I'm holding them mostly for curiosity's sake at this point. I agree that EDV also does tend to perform like a leveraged version of VGLT or TLT, and it's about 1.5 to 1. You may get better results actually if you look at ZROZ, which is a similar fund to EDV. It has a slightly different construction. One problem I've had with EDV in the past when I've held it is it does tend to throw off some very large distributions at the end of the year. and I think that just has something to do with the way it's constructed. I will link to a little comparison analysis I found in the show notes. You can compare EDV and ZROZ. EDV is the cheaper option, I can tell you that. The other kit on that block is a fund called GOVZ that you may want to take a look at, but I'm less familiar with that one. I think it's younger. And I also agree it makes sense to hold some VGSH or other kind of short-term bonds or cash in this kind of portfolio, because you may be wanting to take some distributions out of that sometimes. So having between 5 and 10% in that kind of makes sense as well. All in all, this looks like a pretty decent and very interesting portfolio that you've created. And I'm always glad to see listeners taking the knowledge that they've learned here and making their own. Because as we've learned in the book the Perfect Portfolio, which I've spoken about in the past and I'll link to in the show notes, there is no such thing as a perfect portfolio. But what the most highly skilled and knowledgeable professionals, going back to Harry Markowitz, agree upon that the number one principle for portfolio construction is that holy grail principle of diversification, not only within asset classes, but also across asset classes. And it seems like you're doing a really good job of that, so I commend you on your efforts. Peter, would you be a good sport and indulge us and just tell us a little more? And thank you for sharing it. And thank you for your email.

Mostly Voices [15:15]

By the way, how many lumps do you want? Oh, better give me a lot of lumps. A whole lot of lumps. Second off.

Mostly Uncle Frank [15:28]

Second off, we have an email from Arnold. I'm a cop, you idiot. I'm Detective John Kimball. And Arnold writes.

Mostly Mary [15:36]

Hi, Frank. What do you think of the new buffer ETFs out there? especially the TJUL.

Mostly Uncle Frank [15:45]

Well, what do I think of TJUL? And these sorts of buffered ETFs? The answer is not much.

Mostly Voices [15:56]

Do you think anybody wants a roundhouse kick to the face while I'm wearing these bad boys? Forget about it.

Mostly Uncle Frank [16:00]

Fortunately, Barry Ritholtz wrote down my thoughts for me in a little article about this very fund that was posted recently, and I'll read you a couple of selections from it to get you the gist of what I also think. And he writes, First and foremost, products like these are wholly unnecessary. Forget about it. At least if you are a smart investor who does the right things. Set up a financial plan, manage your own behavior, engage in long-term thinking, and avoid reacting to the endless daily noise that markets and media generate. Second, follow Charlie Munger's advice and invert the sales pitch. 70% of the upside, you give up 16.62% per year for two years, with none of the downside sounds attractive unless you think about what you are really giving up and getting in exchange. Would you accept a trade where for about 32% of the upside you are freed from having to manage your own behavior? Not going to do it. Wouldn't be prudent at this juncture. That sounds quite expensive for something that should cost you A nothing if you do it yourself or to 50 to 100 basis points if you work with an advisor. That sounds like a terrible deal to me. You fell victim to one of the classic blunders. Third, when you own a broad index of equities, the upside compounds over the long run while the drawdowns are temporary, giving up permanent gains to avoid impermanent drops seems like and awful exchange.

Mostly Voices [17:32]

God, you have nothing but nightmares.

Mostly Uncle Frank [17:36]

And I agree with him 100%. Because the real answer to what should you do instead of using a buffered ETF is just to take a lower exposure to whatever the underlying asset is. It's not to attach bells and whistles to something.

Mostly Voices [17:52]

Forget about it.

Mostly Uncle Frank [17:55]

Which gets me to a larger point. in which I share the views of Paul Merriman, who has talked about this problem in the financial services industry, which is why do these things exist? Why are there buffered ETFs and structured products and things with buy right option strategies attached to them? The reason these things exist is because they make a lot of money for their purveyors. the entities that create them. Because only one thing counts in this life. Get them to sign on the line which is dotted. Merriman has made this observation that if you look at how products are promoted and sold and how much money and time and effort is used into them, that gives you an idea for how much money they are making their purveyors. Because you wouldn't be spending all that money to promote something unless you could make a lot of money on it. They're sitting out there waiting to give you their money or you're gonna take it. So these kinds of structured, buffered, complex products that are just alternative ways to invest in the S&P 500 or something Other kind of index are really analogous to the complicated insurance products and annuity products that are sold on that side of the ledger. Bing! The only difference is who is getting paid for creating and selling the product. In this case, it's usually large Wall Street banks. Always be closing. And they're related fund creators. And on the insurance side, it's large insurance companies with sales forces to match. Bing again! If you know the history of these kinds of products, you'll see that they rise, get promoted, get popular for a while, and then generally fade away over time, and then the fund gets closed, and then they open up a different one or a new one, and the cycle starts all over again. This has been going on since the 1980s. It's nothing new. Am I right or am I right or am I right? Right, right, right. In the end, the reason people buy these things is somehow that they think that they can get a free lunch out of a complex product that's not available for a simple product. Wrong. That idea is just wrong. There are no free lunches in investing. Right, wrong. No matter what kinds of bells, whistles, or structures you put around an index fund. It's still an index fund in whatever index it's in.

Mostly Voices [20:42]

That's the fact, Jack! That's the fact, Jack!

Mostly Uncle Frank [20:46]

And if you want less exposure and less risk, you simply take less of the raw index fund. If you want more exposure and more risk, you take more of it or add leverage to it. That's what you should be thinking about not looking for something with bells and whistles and hoping that it's got magic properties to it.

Mostly Mary [21:08]

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

Mostly Uncle Frank [21:12]

So I really wouldn't be wasting your time with this or a structured product or some buy right fund or anything like that.

Mostly Voices [21:19]

No more flying solo.

Mostly Uncle Frank [21:23]

Those are not good building blocks for portfolio construction.

Mostly Voices [21:27]

You need somebody watching your back at all times.

Mostly Uncle Frank [21:31]

And because they seem to appear and disappear at intervals, there's actually no way of even testing them either. How convenient for the purveyors.

Mostly Voices [21:38]

Hey, it's all one big crapshoot anyhoo.

Mostly Uncle Frank [21:41]

Anyway, I've probably carried on enough about that.

Mostly Voices [21:46]

You are talking about the nonsensical ravings of a lunatic mind. So I'll just let it rest now.

Mostly Uncle Frank [21:55]

And thank you for your email.

Mostly Voices [21:58]

It might be a tumor. It's not a tumor. It's not a tumor at all. Last off.

Mostly Uncle Frank [22:10]

Last off, I have an email from Igor. Do you know Igor? Okay, I don't know.

Mostly Voices [22:17]

Who are these people that I'm supposed to know? Igor from Prosper. Timor from Kukor. What am I in the Colombo episode all of a sudden? I don't know, I don't know any Timor.

Mostly Mary [22:35]

Why is it you all look alike and you have or on the end of your name? And Igor writes, hi, Uncle Frank, I hope you and Mary are well. I had a question regarding the Portfolio Visualizer Monte Carlo simulation tool in regard to its outputs for the safe withdrawal rate and perpetual withdrawal rate. It is my understanding that the perpetual withdrawal rate should always be lower than the safe withdrawal rate, like it is when using Tyler's portfolio charts. It's also my understanding that the safe withdrawal rate relates to not running out of money, while the perpetual withdrawal rate not only doesn't run out of money, but also preserves the original inflation-adjusted portfolio value. When I look at the results in the performance summary section for Monte Carlo simulations on Portfolio Visualizer, though, The perpetual withdrawal rate will sometimes be higher than the safe withdrawal rate, especially when looking at the more pessimistic 10th to 25th percentile column results. I am trying to wrap my head around how a safe withdrawal rate could be lower than a perpetual withdrawal rate, but I'm having no luck and wondered if it is a bug within the tool. If it isn't, and you could help me understand, that would be splendid. And you all say splendid. You all say splendid.

Mostly Uncle Frank [23:47]

Splendid all the time. They say splendid. Who doesn't say splendid in their life and in their day? We don't say splendid. I never say splendid. Nobody else says splendid. People say splendid at least twice a day. It is fact. Well, Igor, I can't say that I can answer your question since I don't know what you were putting into this and I don't know why it would spit out a perpetual withdrawal rate that is higher than a safe withdrawal rate, unless there's something screwy with a very short amount of data being analyzed. You can go to the documentation section at Portfolio Visualizer and look up how these things are calculated. And it does follow that definition that a perpetual withdrawal rate is supposed to leave you with the same inflation adjusted amount that you started with. If you send me a link to exactly what you were looking at or analyzing, I might have a better idea or some form of an answer, although I can't guarantee that I would have an answer even if you did that. It might be something that you'd want to flag for the people at Portfolio Visualizer. I'm sure they would be happy to be alerted to any bugs that there could be in their system, because they have an awful lot of calculators there. that do all kinds of different things. But as always, these safe withdrawal rate calculations and perpetual withdrawal rate calculations are best used to compare two different things over a similar time period. Because unless your time period is very long and takes into account sort of the worst case scenarios like you saw in maybe the 1970s or the early 2000s, you should be taking those absolute figures with a grain of salt, especially if you're looking at something that is completely post great financial crisis. I'm sorry I couldn't be of more help to you here, but thank you for your email, nevertheless. And feel free to follow it up with another one, with a link this time. 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. We should be able to resume with two podcasts a week, at least for the next few weeks. And so we'll pick up this weekend with weekly and monthly portfolio reviews and distributions. If you haven't had a chance to do it, Please go to your favorite podcast provider and like, subscribe, follow, give me some stars, 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 Voices [26:41]

Hi. My name is Igor. I run Prospore. How can I help you? Hi, I'm Jeff Green. We spoke on the phone about the vase. You spoke on the phone about the vase. Nice to see you. You've got a friend. Yes, that okay? Larry. Splendid.

Mostly Mary [26:59]

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.