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 [0:46]

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.

Mostly Voices [0:53]

Expect the unexpected. It's a relatively small place.

Mostly Uncle Frank [0:57]

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. I don't think I'd like another job. What we do have is a little free library of updated and unconflicted information for do-it-yourself investors.

Mostly Voices [1:25]

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.

Mostly Voices [1:50]

But now onward, Episode 282.

Mostly Uncle Frank [1:54]

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. Boring!

Mostly Voices [2:09]

But before I put you to sleep with that, I'm intrigued by this how you say, E-mails.

Mostly Uncle Frank [2:18]

And? First off. First off, we have an e-mail from Kevin.

Mostly Voices [2:25]

Kevin, stop singing, man.

Mostly Uncle Frank [2:32]

Huh? Who's the singing guy?

Mostly Mary [2:36]

And Kevin writes, Hey, Frank and Mary, one of these days I'm gonna sit down and write a long letter, Neil Young, and ask a bunch of questions, which I hope you will answer. But in the meantime, We just sent a contribution which is generous for us from our donor advice fund. Thank you for your show. Regards, Kevin.

Mostly Voices [2:58]

To all the good friends I've known.

Mostly Uncle Frank [3:08]

Well, Kevin, I'm feeling a little overwhelmed by your generosity, and I'm very grateful for what you've done.

Mostly Voices [3:16]

And I'm gonna try to thank them all for the good times together, though so apart we've grown.

Mostly Uncle Frank [3:31]

As most of you know by now, This podcast does not have any sponsors and is not intended to make any money, but it does have a charity. And that charity is the Father McKenna Center. I'm on the board of the charity and also am the current treasurer. The Father McKenna Center serves homeless and hungry people in Washington, DC and helps at least 100 people every day in some way. That being said, it's a very small operation with a very small staff that relies heavily on volunteers to help out and donations of food, clothing, and cash. And so you get a lot of bang for your charitable buck with this organization. I won't say what Kevin has given, but if everybody who listened to this podcast gave that much, we would fund the Father McKenna Center for several years. And there's only about a thousand people who listen to this podcast. And so I'll be very happy to answer as many emails as you want to send me. Yes! There's also an opportunity that may be of some interest to you, which is that we have our main fundraiser in September called the Walk for McKenna. And we all get out and walk and wear t-shirts. And people who make significant donations can get their names put on the t-shirt as sponsors. So if that is of interest to you, let me know or let the sole fundraiser person that we have there know. Her name is Liz Daley at the Center. And she would be very happy to put your name on the t-shirt as a sponsor, but you'll need to let her know by August 20th. It kind of reminded me I had not actually collected up the money we collect on Patreon for the Center in a while. And there is enough there that that would qualify as a sponsor. So we're going to make Risk Parity Radio a sponsor based on all of the donations we've received through Patreon. And I want to thank all of you for that as well. You are splendid. You are splendid. You. If you are interested, you can find the details for the Father McKenna on the support page of the podcast, riskparadioradio.com, or you can go directly to the center's page. and donate the way Kevin did.

Mostly Voices [5:52]

Fortune favors the brave.

Mostly Uncle Frank [5:55]

Let me know if you do it that way as well, and I'll put that link in the show notes. So thank you again, and I eagerly await your next email. One of these days. Second off. Second off we have an email from Philip.

Mostly Mary [6:43]

And Philip Wrights? Hi Frank, I apologize in advance for such a long email.

Mostly Voices [6:54]

But I did make a donation to the Father McKenna Center via your support page,

Mostly Mary [6:58]

so I hope that makes up for it. Yeah, baby, yeah! I found your podcast about two months ago, and I have listened to about a hundred episodes so far. What I like about your podcast is that you provide a framework for how to think about portfolio construction via the three principles, Holy Grail, Macro Allocation, and Simplicity. I think that it's easy, or at least has been for me, to read different financial experts and jump from one portfolio recommendation to another without a framework for evaluating portfolio construction.

Mostly Voices [7:31]

Forget about it. I have a few questions for you.

Mostly Mary [7:34]

First, you have spent a lot of time discussing the portfolios for both retirees in the drawdown phase and young investors in the accumulation phase. The recommendation for retirees is a risk parity style portfolio, what I plan to hold when I retire, and the recommendation for young investors is 100% equities. Your preference is 50% large cap growth and 50% small cap value. I am kind of in between these two groups. A few facts about me. I'm in my late 30s. I have a high savings rate, approximately 50% of my take-home pay. I have approximately $500,000 saved, so I don't have enough to retire on now, but it is also not a small amount of money. I would like to be able to retire around 17 years from now. If I had very little saved, I would go 100% equities, but I'm wondering if it would be better for me to add in some gold and long-term treasuries to avoid large drawdowns. While I know crystal the balls really work. I do worry about the current level of stock valuations and in the economy in general. My thought is to construct a portfolio like this one. 35% large cap blend, S&P 500, 35% small cap value, VIOV. You're going to want that cowbell. 20% long-term Treasuries, EDV, 10% gold, GLDM. I love gold. When I backtest this via Portfolio Visualizer, it has a compound annual growth rate of 11.64% versus 12.98% for a 50/50 large cap blend small cap value portfolio. But the worst year is only -19.18% versus a worst year of -34.54% for the large cap blend small cap value portfolio. It seems to me that if my time horizon is 17 years, this portfolio has enough equities to provide a solid return while at the same time substantially reducing the drawdown and may help me stay the course. Thoughts? My second question is on international funds. I have always thought that having some international funds was necessary because many financial experts recommend it. However, I understand the argument that total international markets ETFs are very closely correlated to the US stock market, and so they provide minimal diversification benefit. What about an international small cap value fund like AVDV or emerging markets VWO or IEMG though? I have heard you talk about Chinese A shares fund before, but if I were to add an international ETF in retirement, I would rather have a fund with less single country risk. Do you think adding some international equities ever has a place in a retirement portfolio? And if so, what percentage of the portfolio would you dedicate to it? Thank you for all you do, Philip.

Mostly Voices [10:52]

It appears that we are awash in generosity these days. The best, Jerry, the best.

Mostly Uncle Frank [10:59]

And thank you also for donating to the Father McKenna Center. And that's why Phillips' email goes to the front of the line, well, right behind Kevin's. It's the best I can offer you. I'm glad you like the principles and the framework. And if you haven't gone back and listened to those early episodes, that's where we really discuss those. I think in episodes seven and nine in particular. I think one of the problems with the topic of portfolio construction is that it often devolves into personal preferences and being a fan or not being a fan of this or that asset class without any real grounding in what you are trying to do and what your process is for constructing a portfolio for whatever purpose you are constructing it. And so I think these three principles do help us come up with a rational process for constructing and evaluating portfolios. And of course, I lifted them shamelessly from other people because my goal here is not to create original ideas, but simply take all of the ideas from others and combine them. And so the Holy Grail principle does come from Ray Dalio, his book Principles and a nice little video that I've linked to before about choosing uncorrelated assets. The macro allocation principle actually comes from Jack Bogle. He describes in chapters 18 and 19 of Common Sense Investing the concept that when you looked at the portfolios of hundreds or thousands of managers, it's clear that the main distinguishing characteristic of them was whatever their macro allocations were and that portfolios of the same kinds of macro allocation, stocks, bonds to other, tended to have the same kinds of general performances over time, which tells you that that's an important and critical factor to focus on. And then the simplicity principle actually comes from Rick Ferri and also from Paul Merriman's conversation or interview with Jack Bogle, where Bogle said to Merriman about, Merriman's ultimate portfolio, that it looked great, but it was probably too complicated for most do-it-yourself investors to work with. And based on that feedback, Merriman simplified or provided much simpler variations of his work over the past few years for people to use. But I think if you balance out those three principles and then focus in on what your goal is, whether that's accumulation or constructing a portfolio with a high safe withdrawal rate, which is what we mostly talk about here, that can get you to something that is practical, easy to manage, and is low cost as well. But conversely, if you only focused on one of those three principles, you probably aren't getting the best construction that you could get. So you could look at something like the simplicity principle and say, I only want one, two or three funds to hold in retirement. When you do things like that, you are putting the principle ahead of the purpose. And remember, the purpose is not to have the absolute simplest portfolio you can have, but to have a simple portfolio that yields a high safe withdrawal rate. Similarly, if you only focus on the macro allocation principle and say all that matters is whether my portfolio is 60/40 or 80/20 or 70/30 or something without regard to the components or the sub-components of those macro allocations, then you are also missing something and you're also putting that idea ahead of the idea of, well, we are trying to get something here that has a higher safe withdrawal rate than something else of the same macro allocations. And as we know from the book, the Perfect Portfolio, the Holy Grail of investing, also from the Holy Grail principle, is to have portfolios with assets that are diversified both across asset classes and within asset classes. So you need to be mindful of both of those things. And the macro allocation principle only gets you partway there. But then what about that Holy Grail principle? If you were to only focus on that, then you would end up with a very complicated portfolio that had 20 or 30 things in it that probably would be difficult to understand, difficult to manage, and speculative as to its performance, which is probably why you just want a portfolio that has between five and ten funds in it. Unless you enjoy some complexity, in which case there is room to have many more things if you'd like them.

Mostly Voices [16:08]

It just should not be necessary to construct a decent portfolio that's simple enough to understand and manage. Necessary? Is it necessary for me to drink my own urine? Probably not. No, but I do it anyway because it's sterile and I like the taste. Now getting to your questions.

Mostly Uncle Frank [16:24]

If you can dodge a wrench, you can dodge a ball. Your first one is, can you accumulate in a portfolio that's not 100% equities? And the answer is, of course you can. And many people do that. In fact, Tyler of Portfolio Charts and the Value Stock Geek, which uses the weird portfolio, Tyler uses the golden butterfly, just decided that's what they wanted to use as also their accumulation portfolio simply because they did not want to experience all the ups and downs. Now, the drawback to that is it's just going to take longer to accumulate in a portfolio like that, or at least it's probably going to take longer. But that doesn't mean you can't do it if that's what makes you comfortable. So if you wanted to go to this 70-20-10 portfolio you've described here, and accumulate in that. Yeah, you could do that. But just a couple of caveats. I would not be doing it based on your subjective assessment of current market conditions. Now you can also use the ball to connect to the spirit world. I would be doing it because that's what you feel personally comfortable with. Because the danger you face then, if you are basing your allocations on your ability to assess current market conditions, is that you will start jumping in and out of asset classes. And that kind of strategy of jumping around has been shown to be the major reason that amateur investors tend to underperform their own holdings because fund chasing just doesn't work. Not going to do it. Wouldn't be prudent at this juncture. But so long as you have a defined plan, and I would define it, I would write it down so that you can look at it and follow it from a rote and not having to be guessing about market conditions. As long as you can do that, any variation of these portfolios is going to work long term. It just will probably take you a little longer to get there than if you were to have more equities in the portfolio. But if you're not in a big hurry and it doesn't sound like you're in a big hurry, I would just go ahead and construct the thing that you're suggesting and that are comfortable with. And then just ride it off into the sunset when the sun begins to set.

Mostly Voices [18:44]

You're gonna end up eating a steady diet of government cheese and living in a van down by the river. Moving to your second question on international funds.

Mostly Uncle Frank [19:02]

Now, I don't have anything against international funds per se, just the way people use them. and I could imagine constructing portfolios that are up to half internationally based. Now that may be unnecessarily complicated, but I suppose you could do it if you understand a couple of things. First, the way you want to construct your portfolio is not based on headquarters location. That is not a good method for diversification, and that's what just this raw kind of grabbing a total international fund, that's all you're doing. We know from all of the research that the better approach is to use the Fama-French factors and in particular the size and value factors. I think the value factor is the most important. You could also incorporate momentum if you were advanced. I got an angle. But the most basic construction that you could come up with is something that is half large cap growthish and half small cap valueish. So when you're choosing funds, I would be looking at those characteristics and not necessarily the headquarters locations as the primary characteristic. Fortunately, we have a lot of nice Avantis funds like AVDV and AVES. that would allow you to make those kinds of investments fairly easily now. I would probably stay away from the big broad-based international funds like VXUS or you mentioned VWL, which is kind of raw all of the emerging market stuff at once. You probably don't really want much of the growth side of that because you are trying to balance these selections with your primary US selection, which has the main characteristic that differs the US from the rest of the world are these large tech companies. And so you don't need any more of that kind of thing. You don't need that kind of growthiness out of your international stocks. They already have some value tilt towards them. And so it's relatively easy to take some of your value allocation and put that on the international side with some of these funds. So all that's very doable. One thing that I don't think most people appreciate, though, about international stocks, if you're talking about it from a US investor perspective, is that investing in international stocks is also a speculation on the relative value of the US dollar. So if you take a couple of graphs going back to the 1970s and look at the relative value of the US dollar versus other currencies and compare that to the performance of international stocks against US stocks over time, you'll see that there's a huge correlation that really what drives an outperformance in international stocks is a weak US dollar. And when the US dollar is strong, like it has been for the past decade or so, international stocks tend to underperform. Now it turns out that's actually not a very helpful characteristic in portfolio construction. And that's because most of the things in your portfolio also have a similar correlation, just not as much as international stocks have. When the dollar is weaker, US stocks tend to do better. When the dollar is weaker, things like gold tend to do better. And finding assets that do well with a strong dollar can be difficult sometimes. That's why you hear people talk about the dollar wrecking ball, which we also experienced in 2022, when the value of the dollar went up by 15% before declining back to its mid-range where it sits right now. Besides the dollar itself, the only things that seem to do well under extreme dollar strength are things like managed futures, which can take positions on currencies, and volatility indexes, and very short term debt is fine too, but you're not going to make any big returns off that in any event. But all of this makes diversification with international stocks just that more difficult to accomplish, because if you were to subtract out the effect of currency valuations, you would find that international stocks, at least the big companies don't really perform much differently than their counterparts in the US. I was listening to J. David Stein talk about this problem in one of his recent podcasts where he was talking about how they had invested in a fund in Japan that had performed really, really well recently, but because the value of the Japanese yen had declined by so much recently, they really only saw a small good performance and not a large good performance. which you would have experienced if you were holding the shares in yen and not in dollars. So you can use international funds in your portfolio, but I just encourage you to not do the kind of magical thinking I see most amateur investors do about international stocks and international funds, thinking that just because it's headquartered in another country somehow makes it uncorrelated or very different in performance. And that is not the reason that it's different. The reason has to do with these currency issues. And in large part, the difference also pertains to what industries these companies are in, what sectors they're in. The actual conditions in other countries are usually not what is driving international stocks to underperform or outperform US stocks. And to the extent they are, it's usually in the negative sense, because you're more likely to have catastrophes or other government interference kind of things. in countries outside the US than you typically are in the US, with many, many exceptions depending on exactly where you are and what industry you're talking about.

Mostly Voices [25:09]

You need somebody watching your back at all times.

Mostly Uncle Frank [25:13]

But if you understand those things, then you can proceed with eyes wide open in adding international funds to your portfolio. And thank you again for your donation and your email.

Mostly Voices [25:28]

Last off. Last off, an email from Brown. Hear your names. Mr. Brown, Mr. White, Mr. Blonde, Mr. Blue, Mr. Orange, Mr. Pink.

Mostly Mary [25:44]

And Brown writes, Dear Uncle Frank and Aunt Mary, regarding the appropriate mix of different diversifying asset classes in one's risk parity portfolio, I was wondering about your thoughts in the ideal percentage or percentage range for utilities ETFs. Looking at the style box for utilities ETFs on Morningstar.com, utilities are placed in the mid to large cap value category. Do you consider your portfolio allocation to utilities as part of your value stock allocation or as an alternative asset class? Although the favorably taxed qualified dividends paid by utilities ETFs have historically been attractive, I've read some articles regarding the questionable future growth and income potential of utilities. For example, concern has been raised regarding the increasingly government-regulated utilities no longer being able to easily pass on their inflation-related and other increasing operating costs onto ratepayers. Also, Warren Buffett has said, Our country's electric utilities need a massive makeover in which the ultimate costs will be staggering. Thanks again for all you do to help us DIY investors. Sincerely, Brown.

Mostly Uncle Frank [27:08]

Well, first off, I should say that I do not actually have an allocation to utilities, either in any of these sample portfolios or in our personal portfolios. That being said, I know a lot of people do, and it can be a useful thing to have if it fits what you're doing overall. You should include that as part of your overall stock allocation and in the value category. So if you were going to use an allocation to utilities, you may want to make some other adjustments to the other stocks in your portfolio to balance everything out. As an overall portfolio allocation, I would say zero to ten would be my primitive stab at an appropriate allocation. I can't see making more than about a 10% allocation to any one sector because you always do have those sector related risks. And so I view any allocation to a particular sector as purely optional in a portfolio. Just make sure you allocate it around those Fama French factors that we talk about all the time. For our own personal portfolios, we do have a allocation to a subsector, which is property and casualty insurance companies. and those do have a kind of a mid-cap value tilt towards them. These are companies like Travelers and Chubb and Progressive and Allstate. There is a fund that holds them called KBWP, but we don't actually use the fund. We just use the fund to identify the companies and then just buy the companies directly. A little bit of direct indexing on our part. But the reason I like them is they to demonstrate a good market like performance over time, but also pretty substantial diversification from the overall market. And so, for example, they were one of the subsectors that was actually positive in 2022. It was up about 10% in that subsector. You know, it's funny, the reason I started looking at those a few years ago is simply because I know that Warren Buffett and Berkshire Hathaway owns a lot of insurance companies. And so I thought, well, maybe there's something to that sector that is worth considering or owning. And when I looked at it and did a few back tests, I said, yeah, this is a decent thing as part of a portfolio. The main problem I have with it is there's no way to really back test it back past the great financial crisis. But I figure if it's good enough for Warren Buffett, it's good enough for me in terms of an allocation. I just can't afford to buy whole companies. The other thing I just like about it or amuses me about it is that it is the exact opposite of buying insurance contracts or insurance policies. Basically, you're betting on the house.

Mostly Voices [29:49]

Am I right or am I right or am I right?

Mostly Uncle Frank [29:57]

And since insurance contracts are often a bad idea for the individual investor or policy holder, They should be correspondingly a good idea for the company that is selling them. Bing! So if you do a little Charlie Munger invert the question, you realize that when you're telling people they should stay away from using insurance contracts as investments, the flip side of that is it's very profitable for the insurance companies.

Mostly Voices [30:26]

Bing again!

Mostly Uncle Frank [30:29]

And with a name like Chubb, it's got to be good.

Mostly Voices [30:33]

Cool.

Mostly Uncle Frank [30:37]

And I realize we're getting a bit off topic there, but I do that sometimes.

Mostly Voices [30:42]

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

Mostly Uncle Frank [30:47]

You asked about utilities, I answered your question, and thank you for your email.

Mostly Voices [30:53]

Now listen up, Mr. Pink. There's two ways you can go on this job, my way or the highway. And now for something completely different.

Mostly Uncle Frank [31:05]

And the something completely different is our weekly portfolio reviews of the seven sample portfolios you can find at www.riskparityradio.com on the portfolios page. The markets were unpleasant last week again, although not that unpleasant. The S&P 500 was down 0.31% for the week. The Nasdaq was a big loser. It was down 1.9% for the week. Small cap value represented by the fund VIoV was down 1.22% for the week. Gold was a loser. It was down 1.64% for the week. I think that was partially on a strong dollar. Long-term treasury bonds represented by VGLT were down 1.1% for the week. REITs represented by the fund REET were almost flat. They were down 0.04% for the week. Commodities were flat. PDBC did not move. That's our representative fund. Preferred shares represented by the fund PFF were actually up marginally. They were up 0.07% for the week. And the big winner last week was actually managed futures. Our representative fund DBMF was up 1.45% for the week. And when I see performances like that, it does confirm to me that having a bit of that is a good diversifier in a portfolio because it often tends to go up when just about everything else is down. But now moving through these sample portfolios, they really didn't do that much this week. First one is this All Seasons portfolio. This is a reference portfolio that's only 30% in stocks. in a total stock market fund. It's got 55% in intermediate long-term treasuries and 15% in gold and commodities. It was down 0.79% for the week. It's up 4.96% year to date, but down 3.5% since inception in July 2020. Moving to these three kind of bread and butter portfolios. First one is the Golden Butterfly. This one's 40% in stocks divided into a total stock market fund and a small cap value fund. 40% in treasury bonds divided into long and short and 20% in gold. It was down 0.8% for the week. It's up 6.04% year to date and up 13.7% since inception in July 2020. Next one is the golden ratio. This one's 42% in stocks and three funds, 26% in long-term treasury bonds, 16% in gold, 10% in a REIT fund and 6% in Money Market Fund. It was down 0.67% for the week. It's up 7.03% year to date and up 9.71% since inception in July 2020. It actually benefited by having that read in there, which has not been much of a benefit over the past 18 months or so. Next one is the Risk Parity Ultimate. This one's got 15 funds in it that I won't go through, including some crypto holdings in a separate account. It was down 0.8% for the week. It is up 7.96% year to date and up 2.03% since inception in July 2020. And now we move on to the hideous experiments with leveraged funds and portfolios. In the first of these experimental portfolios is the Accelerated Permanent Portfolio. This one is 27.5% in a levered bond fund, TMF 25%, in a levered stock fund, UPRO, 25% in PFF, a preferred shares fund, and 22.5% in gold. It was down 1.35% for the week. It's up 7.69% year to date, but down 17.92% since inception in July 2020. These really bounce around a lot. Next one is the aggressive 50/50, which is our least diversified and most levered portfolio. It's one half in stocks and one half in bonds essentially. So it's got 33% in a leveraged bond fund, TMF, 33% in a leveraged stock fund, UPRO, and the remaining third in balance divided into a preferred shares fund, PFF, and an intermediate treasury bond fund, VGIT. It was down 1.46% for the week. It's up 8.69% year to date, but down 24.69% since inception in July 2020. And our last one is our newest one, the levered golden ratio. This one's 35% in a composite fund, NTSX, that is the S&P 500 in treasury bonds, 25% in gold with GLDM, 15% in ERETO, 10% each in a levered small cap fund, TNA, and a levered bond fund, TMF, and the remaining 5% divided into a Bitcoin fund and a volatility fund. which really has been dragging. It was down 1.38% for the week. It was up 6.51% year to date and down 18.46% since inception in July 2021. We may end up rebalancing one or two of these experimental portfolios next week. We checked these on the 15th because they are rebalanced on rebalancing bands, which is described on the portfolios page. And that concludes our portfolio reviews for the week. 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. And if you donate to the Father McKenna Center, you get to go to the front of the line. Just like Kevin and Philip. Groovy, baby! 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. That would be great. Mmmkay? Thank you once again for tuning in. This is Frank Vasquez with Risk Parity Radio, signing off. One of these days.

Mostly Mary [37:43]

One of these days, one of these days, I won't be alone. 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.