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 [0:21]

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! And the basic foundational episodes are episodes 1, 3, 5, 7, and 9. Some of our listeners, including Karen and Chris, have identified additional episodes that you may consider foundational. And those are episodes 12, 14, 16, 19, 21, 56, 82, and 184. And you probably should check those out too because we have the finest podcast audience available.

Mostly Voices [1:28]

Top drawer, really top drawer, along with a host named

Mostly Uncle Frank [1:32]

after a hot dog. Lighten up, Francis. But now onward, episode 287. It's good to be back. We went to Iowa for my 40th high school reunion. And we discovered that we're old, the town's old, everything's old. But you did not come here to hear about that.

Mostly Voices [2:14]

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

Mostly Uncle Frank [2:21]

First off, first off, I have an email from Chaz.

Mostly Voices [2:36]

And Chaz writes, hi, Frank and

Mostly Mary [2:39]

Mary. I am reading through the complete guide to factor-based investing based on a recommendation you had a few weeks ago and had a question come up. The studies show a relatively persistent lower correlation between value and momentum, and it got me thinking, why do you typically use large cap growth with small cap value rather than a momentum strategy like MTUM? While the data only goes back to 2013 for MTUM, I threw it into Portfolio Visualizer's Correlation Tool, linked below, and it shows a 0.68 versus 0.70. While I imagine that's effectively the same given the literature around momentum premium over the long term, would it not make sense to use that in comparison to VUG if you were holding in a tax advantaged account to avoid any tax implications with the turnover of momentum strategies?

Mostly Voices [3:36]

Thanks again for everything, Chaz. Ouch. Ouch. Ouch, Charlie. Ouch. Charlie, that really hurts.

Mostly Uncle Frank [4:06]

Well, a short answer to your question is the reason that we would use a large cap growth paired with a small cap value rather than a momentum strategy is simply because we have a whole lot more data about large cap growth than we do about momentum, in particular, MTUM. And the reason for that is that there is no one defined momentum strategy, if you will. If you look at different momentum funds, they are employing different kinds of strategies, and so you can get different results out of them. The other problem you'll see with a lot of momentum funds is that they have a lot of turnover, if their momentum strategy involves frequent rebalancing into more momentum-y stocks. But we do have a momentum aficionado in our little dive bar here. And who would that be? Why, it's our friend Alexei.

Mostly Voices [4:55]

So that's what you call me, you know, that or his dudeness or Duder or, you know, Bruce Dickinson. if you're not into the whole brevity thing.

Mostly Uncle Frank [5:05]

And so we had a couple of episodes, episode 231 and 234, where we did discuss this more at length. And I don't want to repeat all that here again. I would go back and listen to those. But we also discussed, for instance, a momentum fund called QMOM, Q-M-O-M, which is more momentum-y, if you will, than MTUM and has a lower correlation with other things. We also had a link to an article from AQR about an interview of Eugene Fama, Professor Fama, if you will. Which talked about the use of momentum and how it could be used, but maybe not. And there's also a video that I will link to in the show notes, which is more questions than answers with Eugene Fama. So I think what's unresolved about the use of the momentum factor is which is the right methodology to use.

Mostly Voices [6:05]

May I have your attention, please? Will it please stand up?

Mostly Uncle Frank [6:09]

Will the real Slim Shady please stand up? And then how best to work it in with the other classic factors of size and value versus growth? How does it go? I'm the real Shady, all you other Slim Shadys are just imitating so won't the real Slim Shady please stand up? Please stand up, please stand up, please stand up. There are some interesting funds out there that combined a momentum factor with some of those size factors. So if you look at a fund like XSVM, it's a small cap value fund with a momentum filter overlaid on top of it. And that actually outperforms things like VIOV or the DFA small cap value mutual fund. I plop those into Portfolio Visualizer and I'll give you a link to that if you want to check that out. Of course, that fund's only been around since 2010, and that's what you get with most of these momentum-based funds. They've really only been around for 10 or 15 years in many cases. So where I come out on this is there probably are good uses for momentum. I just don't know which ones are the right ones to use yet.

Mostly Voices [7:21]

I repeat, will the real slim shady please stand up?

Mostly Uncle Frank [7:25]

But hopefully we'll find out in the next decade or so as more people are experimenting with this. I think it's probably going to be best incorporated as an overlay, much as the profitability or quality factor is an overlay in the Avantis Fund AVUV, which is a small cap value fund with that overlay or filter on top of it for profitability. But lest I repeat myself again, the problem with all of these things is they just haven't been around that long. Forget about it. And in the most recent period, going back to the great financial crisis, there hasn't been a whole lot of variation in markets except for very recently. So it's difficult to conclude a whole lot out of them. I will link to your asset correlation link from Portfolio Visualizer in the show notes. as well as a couple other things. But I would go back and listen to those episodes 218, 231, and 234, and look at those links as well. And hopefully that will help, and thank you for your email.

Mostly Mary [8:30]

Look at him walking around, grabbing his you know what, flipping the you know who. Yeah, but he's so cute though. Yeah, probably got a couple of screws up in my head loose. Second off, Second off, we have an email from My Contact Info. Oh, I didn't know you were doing one. Oh, sure. I think I've improved on your methods a bit, too. And My Contact Info writes. Frank and Mary, enjoyed the laughter at the start of recent podcast 283. I need to remind myself from time to time that the correlation between economic growth and stock market performance is surprisingly low. Forget about it. Thus, although economic history slash data is a fascinating subject, the amount of time and effort spent on pontification about economic growth or lack of is interesting to contemplate. Thus, a reasonable response to questions about the economy is that based on past data, it does not matter from a statistical perspective. Below is a solid compilation of the relevant studies. That was weird, wild stuff.

Mostly Uncle Frank [9:45]

Well, we also enjoyed replaying parts of episode 283 for our friends recently. This is where Mary is laughing at me about an email describing me as, quote, disagreeable, unquote.

Mostly Voices [10:01]

Surely you can't be serious. I am serious. And don't call me Shirley.

Mostly Uncle Frank [10:04]

But I do happen to view laughing as a value and goal in life.

Mostly Voices [10:12]

You mean, let me understand this, 'cause I don't, you know, maybe it's me.

Mostly Uncle Frank [10:19]

I'm funny how? I mean funny like I'm a clown, I amuse you? So, I give myself a point for laughing every day and an extra point if somebody else laughs with me or even at me, especially if it's Mary.

Mostly Voices [10:27]

You said you changed. Well, you're just no cuter thing. I ain't gonna be no widow. I've spoken my piece and counted to three. She counted to three. She counted to three.

Mostly Uncle Frank [10:40]

And the rest of you sad sacks will just have to suffer with my irrational exuberance.

Mostly Voices [10:49]

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

Mostly Uncle Frank [10:52]

But anyway, getting to your email and link, I will link to this article in the show notes. It is an article written by Larry Swedroe, and the title is Is There a Link Between GDP Growth and Emerging Market Returns? And the answer to that question is not really, but if anything, it's a negative correlation between the two of them. But it does really go to the basic idea or understanding that you are unlikely to be able to make good decisions about your personal investments by attempting to analyze macroeconomic data. Danger, Will Robinson. Danger. And that even if you can do something with that, the best you're going to be able to do is come up with some probabilistic framework saying that these sorts of assets usually do well in this kind of economy. GDP is notoriously difficult to use for anything because there are real questions as to how it's even being measured and whether that measure is useful. In Days of Yore, we used something called GNP, and I forget the difference between the two of them, but you can look it up if you're really interested in that. What's often more interesting to me is it's usually not the macroeconomic metric itself that's meaningful, but actually the derivative or change in that as to whether it's going up or down at a particular time. that more defines an economic environment or not. So in a growth period, you want to see rising growth, not just higher growth. And when you have falling growth, that's when you have your recessions. But obviously, that's also where you end up with your bottom of the cycle. And so you can have very low growth and a very well performing stock market, like you might have seen in 2009. When you're trying to apply something like this to emerging markets, it gets even more messy and murky due to all the different variables that might affect a stock market in an emerging market country, including a lot of currency issues and overall country risk associated with a particular country, which leads to one of the biggest fundamental errors I frequently hear commentators fall into. Which is to try to compare the stock market of one country to another country without considering any of those factors and saying things like, well, the PE ratio or CAPE ratio in this country is way lower than it is in the other country. Therefore, this one ought to do better and catch up to the other one. Wrong. It just doesn't work that way. Wrong. Wrong. Right. Wrong. The reasons why stocks may be undervalued or have a lower value in a country may just be a symptom of the risk inherent of doing business in that country. Or the kinds of companies that are in that country stock market that are all like mining companies, like Canada or something.o U,,, upy, diy, tiy This all leads me to a recent podcast from Corey Hoffstein that I was listening to. It was basically about 15 ideas that had come out of his work over the 15 or 20 years he's been in the business. And one of them I thought was really important for us to recognize and consider, which is that naive diversification is often better than trying to use macroeconomic factors to try and market time. So you are usually better off simply by taking an asset allocation that kind of covers all the economic environments, sticking with that, then trying to say, okay, let's tilt our portfolio this way or that way based on our reading of these economic environments.

Mostly Voices [14:54]

Crystal Ball can help you. It can guide you.

Mostly Uncle Frank [14:58]

And I wholeheartedly agree with that approach. Both because it's simpler and it's more likely to succeed on a reliable basis. That's the fact, Jack.

Mostly Voices [15:13]

That's the fact, Jack.

Mostly Uncle Frank [15:17]

Which is also why whenever I see somebody ask a question that contains the words current conditions or right now, and they're asking about what to invest in, I think their process is just wrong. Wrong! It's just a bad process for deciding what to invest in. Not gonna do it. Wouldn't be prudent at this juncture. Because even the most sophisticated professionals can't use that methodology reliably, which means there's almost no hope for amateurs to do that or DIY investors to do that. And if they happen to succeed at that, it's due to luck and not skill. Larry, I don't have any good skills. But anyway, I thought this was an interesting read and thank you for bringing it to our attention. And as always, thank you for your emails.

Mostly Voices [16:21]

Last off.

Mostly Uncle Frank [16:25]

Last off, we have an email from JDM and JDM writes. Great podcast. Thank you for all that you do.

Mostly Mary [16:33]

I want to implement the golden butterfly strategy across my taxable, tax deferred, and tax free investments, but simply do not know how to implement. Where can I turn and do you assist? And at what price? How can I potentially work with you to implement? Thank you and I look forward to your response. All right, your second question is first.

Mostly Voices [16:56]

Put your hands in the air. Give me all your money.

Mostly Uncle Frank [17:00]

Do I work with people to implement their plans? And the answer is yes, but I don't advertise it and I don't want to make it too much of a habit.

Mostly Voices [17:11]

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

Mostly Uncle Frank [17:14]

But if you're interested in that, please send me an email and we can set that up. It's financial coaching, not financial advice.

Mostly Voices [17:21]

Bow to your sensei. Bow to your sensei.

Mostly Uncle Frank [17:25]

I do not have any certifications other than degrees from Caltech and Georgetown. Will Laddie Frickin' Die? I charge $300 an hour for a to our minimum, and that's usually all anybody needs. And by doing that and not advertising, I keep that activity down to about one person a month.

Mostly Voices [17:52]

Looks like you've been missing a lot of work lately. I wouldn't say I've been missing it, Bob. Which is just the right amount of people, I think, for that activity.

Mostly Uncle Frank [18:00]

It's not that I'm lazy. It's that I just don't care. But that is one of the ways I know that this audience is filled with highly sophisticated and successful do-it-yourself investors.

Mostly Voices [18:12]

The best, Jerry, the best.

Mostly Uncle Frank [18:16]

So send me an email if you're interested in that. But now for the basic answers to your questions, it's not that complicated. What you are talking about is tax location. I mean, the first thing you want to do is look at all of your investable assets as one big portfolio. And then after you decide what you want, then you decide where it goes. A lot of where it goes in terms of your taxable, tax deferred, or tax free accounts has to do with how much room you have in those accounts. But basically you want to fill up those traditional IRAs and other tax deferred accounts with the things that are generating the most ordinary income. which are often bonds. Stocks can go in your taxable account or your Roth account, but if you have things that are particularly high growth oriented or potentially high growth oriented, you would put those in your Roth account. And usually you put something like gold, basically wherever you have room left. Now if you have something like a managed features fund, you also want to put that in a traditional IRA usually because it will generate significant ordinary income at the end of the year. So those are the basics. As I mentioned, it's going to be a little bit different for each person simply because they may not have room in a particular account or not, or they may be in a situation where they still have a 401k with limited choices in it, in which case Sometimes you have to just take the choices that apply in that account and then adjust the other accounts to cover the other assets, if you will. Sometimes you may need to create other accounts. If, for instance, you had your IRA at a bank or something, you would want to get away from there and get it to a place like Fidelity that has no fee trading and you can buy fractional shares out of ETFs. If you are not at a place that has no fee trading and allows you to purchase fractional shares, you probably need to move your accounts to somewhere that does have those features because those are or should be our baseline expectations of what we should be getting from our brokerage these days. The other question that often comes up is whether you actually need to sell all the funds you have already and buy the other ones out of the sample portfolio? And the answer is no, but you do need to assess what category they are in. So for example, if you had an S&P 500 ETF in a taxable account, would you need to sell that and buy a total market fund just to match what's in the sample portfolio? The answer is no, those assets are sufficiently similar that you could just stick with what you had. And there are a lot of circumstances like that because you certainly don't want to be generating lots of tax bills when you don't have to. Just always remember that those sample portfolios are intended as samples. I don't believe in one portfolio fits everybody for all purposes. And I'm more interested in applying the principles that we've talked about in the early episodes, the macro allocation principle, the simplicity principle, and the holy grail principle. The acquisition!

Mostly Voices [21:46]

Want to show the acquisition! Here we go! Than in any particular formulation.

Mostly Uncle Frank [21:54]

So hopefully that helps. Send an email to frank@riskparityradio.com if you want more personalized help. Oh, behave! Yeah, yeah, baby! Yeah! And if not, that's fine too.

Mostly Voices [22:13]

Do you think anybody wants a roundhouse kick to the face while I'm wearing these bad boys? I'm just gonna spend it all on booze and charity anyway.

Mostly Uncle Frank [22:24]

Yeah, baby, yeah! Although not necessarily in that order. But now I see our signal is beginning to fade. We'll pick up again this weekend with our weekly portfolio reviews. And some more emails. I've been stacking up since I haven't been around. 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. If you haven't had a chance to do it, please go to your favorite podcast provider And like, subscribe, give me some stars, a review, a follow, a subscribe. That would be great. M'kay? Thank you once again for tuning in. This is Frank Vasquez with Risk Parity Radio, signing off.

Mostly Mary [23:36]

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.