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 [0:18]

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 [0:37]

Thank you, Mary, and welcome to episode 28 of Risk Parity Radio. Today on Risk Parity Radio, we are going to have our weekly portfolio review, which was a very exciting week this week, not exciting in a good way, I'm afraid. And we're also going to have a monthly review talking about what we are removing from these sample portfolios for the month, the sample portfolios you may find at www.riskparadioradio.com on the portfolios page. But before we get to that, since it is also the first episode of the month, We have our monthly rant about financial mis-wisdom. I feel like I need some theme music for this. I will see if I can insert something. This month's rant is going to be about free lunch marketing of stock market based investments. Now what am I talking about? You've probably been marketed to at some point some kind of financial product that says look you can get the returns of the stock market but we are going to make sure you don't lose the money in the stock market with some kind of a guarantee or floor or something of that nature. A lot of times you see these in insurance products. This is the way variable annuities and index based annuities are marketed to get you in there to put your money into that and say, oh, look, I'm invested in the stock market, but I'm not taking stock market risk. that is a free lunch offering. The problem is there is no free lunch and it comes at a price. Now, the topic for today's rant is a new product that I heard about in a podcast last week. It's a new ETF called a stacker ETF. Now, one thing about these products that you often can recognize them They all, they always have catchy names. They always have these catchy names and high fees that are associated with them or some form of risk that you can't see. And that's the case for these new ETFs that have been marketed on a popular podcast and they are called stacker ETFs. It sounds like a sandwich you might buy at a fast food restaurant. But anyway, these things come in varieties of the triple stacker ETF, the double stacker ETF, ETF and the Double Stacker 9 Buffer ETF. I feel like I'm at Wendy's in the drive-thru. But anyway, what these things do is they are some kind of option strategy to supposedly give you upside in several different stock markets, namely the NASDAQ, the SPY, the S&P 500, and the Russell, but only give you the downside of the S&P 500. Now, there's no real way to evaluate how these things are going to perform because they're sort of brand new and out there. But the point of it is why would you want this? And it's interesting because the person describing and promoting these things was saying, Yes, I'm promoting them through financial advisors. So what's going on here? Why would you take this complicated thing and send it through a financial advisor to try to promote it to their clients? What you should recognize from this is something I learned from Paul Merryman, that anytime you're talking about a structured product with a marketing angle to it, it should ring off warning bells in your head that this thing has got some high fees or some high risks or some combination of things that you don't want. And one of the main problems with these things is you cannot really analyze them, especially if they involve options or strange variations of things. So this thing is supposed to give you potentially three times the upside with only one times the downside of the stock market. But it depends on when you buy in and it's got some kind of year-end true up or realization on it that has to do with the options being held in it. And you get into this and it's like, well, what is the point of this? What is the point of this? The point is to try and convince you there's a free lunch in the stock market, that you can invest in the stock market and not take stock market risk. But the problem with this product and the problem with all of these kinds of products, especially those annuities pumped by insurance companies that are tied to the stock market and say, we'll give you a floor, They're going to take the top, they're going to take the fees, they're going to take some of the money that you would have gotten from the stock market. The problem with this is not evaluating the very simple alternative, which is if you don't want to take stock market risk with your entire portfolio, don't put your entire portfolio in the stock market. lower that allocation to the stock market. That's the simple way of reducing your risk in the stock market is not exposing yourself to the stock market entirely, but to have other assets in your portfolio. That's the simple answer to this problem. It's not to go out and look for funny products with catchy names that have these strange kind of weird guarantees attached to them along with a bunch of fees attached to them. It sounds like a nice story, but you need to consider the alternative. And the alternative is to apply the simplicity principle that you can do the same thing simply by changing the allocation of your portfolio that you have to stocks or changing the allocation that you have the most high risks stocks and putting some low risk stocks in there, like utility funds like we discussed the other day. And these things just keep turning up like a bad penny. Every year there's a new variation, a new version. A new stacker, a new whacker, a new backer, a new annuity, something flexible, something with guarantees. You just need to disabuse yourself of the notion that these are a good idea for you or your portfolio. The way to handle this is by changing the allocation of your portfolio to the stock market to a allocation that matches your risk tolerance and what you are trying to do by investing in the stock market in the first place. Because there is no free lunch. If you're going to invest in the stock market, you're going to take stock market risk, or you're not going to get stock market returns, which kind of defeats the purpose of investing in the stock market now, doesn't it? But I think that's enough ranting for today. And let's move on to our portfolio reviews for the week. Now, this was an interesting week in the markets because it was the worst week since March. And let's just take a look first at what all of the basic market components did, because this is going to illustrate the lower volatility that our risk parity style portfolios generally have to market risk. Now if we look at the S&P 500, it was down 5.64% last week. The Nasdaq was down 5.51% last week. It was a bad week, as I said. But if we compare that with what went on in some of the other assets in our portfolio, we see why we are taking less risk because we have actually diversified assets. So if you look at gold, for instance, that was only down 1.29%. Long-term treasury bonds were down 1%. REITs were down 3.8%. Preferred stocks were down a mere 1.7%. Commodities were down 3.2%. Short-term treasury bonds were flat. They were down 0.01%. And another thing that we hold in one of our Risk Parity Style Portfolios is a volatility fund, VXX. And guess what happened to that one? That fund was up 17.2% last week, 17.2%. Now, it usually goes down when the stock market goes up, but that is the reason you would hold such a thing in a portfolio because you're going to have these kind of weeks and maybe this will turn into a bad month. We don't know. But that's the kind of thing that you would want to have for insurance in addition to the bonds and the gold and the other things. They might not go up exactly when the stock market goes down, but they will be different and they probably will go up if this continues, because people will migrate to those treasury bonds the worse the stock market gets. Now let's take a look at these portfolios individually. Our most conservative sample portfolio, the All Seasons portfolio, which is mostly bonds, was down 2.3% last week. And we are also looking at these for taking out the monthly distributions. We'll be taking $33 out of this fund out of this portfolio for November, and we'll take that out of VGIT, the intermediate term Treasuries. So since inception we will have taken out $137, $35 out of gold, $33 out of the intermediate Treasury fund, and $69 out of the total stock market fund VTI. and that is based on the different performances over different months. So you end up taking your distributions out of the one that is performing the best at the time, and it acts as a kind of automatic rebalancing mechanism. Now looking at the next portfolio, the Golden Butterfly, and that one is the one that is 20% gold, 20% short-term treasuries, 20% long-term treasuries, 20% total stock market, and 20% small cap value. That one was down 3.07% last week, so about 60% of what the stock market was down. That is a good representation of the kind of lower volatility that you'll get out of this kind of portfolio. And we will be removing $42 from this for November. that will come out of VIOV, the small cap value fund. And since inception in July, we'll have taken $171 out of this portfolio.$43 came from gold, $86 will have come from the small cap value fund, and $42 will have come out of cash, which was generated by dividends and distributions from the various holdings. The next portfolio is the Golden Ratio portfolio, and you'll see that these baseline risk parity style portfolios, which are the Golden Butterfly, the Golden Ratio, and the Risk Parity Ultimate, are all down about that three something percent in a week when the stock market goes down five and a half percent. and that gives you a good idea of the type of volatility reduction you see out of these kinds of portfolios. So this one was down 3.75% last week and we will be taking from it for November $42 which comes out of the cash portion which is a stable portion of this and we'll be taking out of for the entire year until it gets rebalanced next July. So we've taken $171 out of this since inception in July. The next portfolio is the Risk Parity Ultimate Portfolio. And this is the one with the volatility fund in it that went up 17% last week, which is a very small portion of the portfolio, but it adds that little cushion there. And that's what it's there for. So it was down 3.6% for the week and we will be taking $49 from cash out of it. The cash is accumulated by being paid dividends and distributions from the various funds that are in it that include preferred stocks and REITs and several different stock funds. The total that we have removed from this and we are removing at a 5% annualized rate, we've taken out $204 from it since inception in July. And so we have $52 in gold, $52 from the small cap value fund, $52 from the large cap growth fund, and $49 from cash. And again, you can see how the distributions can come out of the best performing asset for the month. So you are in effect selling high. The next one is one of our experimental portfolios, and these are designed to take approximately stock market risk or more because they are leveraged. This one has 25% in a leveraged stock fund, UPRO, 27.5% in a leveraged bond fund, which is TMF and then it has 25% in preferred shares PFF and 22.5% in gold GLDM and this one was down 5.88% last week which is very similar to what the stock market did for the month of November we are taking out $65 from the preferred shares fund, which has been doing the best lately. And so we will have taken out $276 out of this total since inception. And this is at a rate of 8%. We are really putting these through a ringer, if you will, in terms of drawdowns just to see how they'll hold up. And that has come $140 from UPRO, $71 from TMF. and $65 now from PFF. And again, that those drawdowns come out of the best performer for the particular month so that we are selling high again. Now our most volatile portfolio is the other experimental portfolio, the aggressive 50/50. And you can see the volatility in this because it only has stocks and bonds and it doesn't have gold or any other alternative asset. So it was down 7.03% last week, which is pretty comparable to stock market risk in this case. It's a little more. And so we will be taking $63 out of this from the preferred shares fund. We have taken out $272 total since inception in July. and that comes 139 from the Leveraged Stock Fund, UPRO, $70 from the Leveraged Bond Fund, TMF, and $63 from the Preferred Shares Fund, which is coming out for November. All of this information is also on the website at the Portfolios page at www.riskparityradio.com. And you will also see on that page that some of our portfolios are now below where they started. And that is due to this drawdown and also to the drawdowns we've been making as we were taking money out of these portfolios at an accelerated rate to make them a test case. I note this past week the father of the 4% rule, William Bengen, said it should really probably be a 4.5 or a 5% rule. But whatever it is, we are taking out of these portfolios at rates of 4, 5, 6, and 8%. So we are really putting them to the test. For the total of the drawdowns for these portfolios over the past three months or four months since inception, we've taken out $1,231 in income, which is approximately 2% of what we started with in these portfolios. And so it comes out to an annualized basis of about six percent. You can see that these drawdowns are intentionally severe because we did want to really put these things to a test to see how they will perform over time. Next week we will also have the figures up to compare these to our reference funds, which are the Vanguard Total Stock Market Fund, VTSAx, the Vanguard Wellington Fund, and the Vanguard Wellesley Fund, who represent a standard retirement portfolio and a very conservative retirement portfolio, respectively. But hopefully next week will be a better week. We'll see. We are prepared for it if it's not, it will be probably more interesting if it's not, although I wouldn't want to wish that upon us or upon anyone else for that matter. But now I see our signal is beginning to fade. If you have questions or comments, I invite them. You can send them to frank@riskparadioradio.com that's frank@riskparadioradio.com that's the email, or you can just go to the website www.riskparadioradio.com and fill out the little contact form and I will get your message that way. Thank you for tuning in. This is Frank Vasquez with Risk Parity Radio signing off. The Risk Parity Radio show is hosted by Frank Vasquez.

Mostly Mary [20:56]

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