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 [0:36]

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.

Mostly Voices [0:52]

Expect the unexpected.

Mostly Uncle Frank [0:56]

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 [1:12]

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

Mostly Uncle Frank [1:16]

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

Mostly Voices [1:23]

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

Mostly Uncle Frank [1:27]

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 296. 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. It's a preview of that. The beatings will continue until morale improves.

Mostly Voices [2:17]

But before we get to that, I'm intrigued by this, how you say, emails. And?

Mostly Uncle Frank [2:23]

First off, I have an email from Dave.

Mostly Mary [2:27]

And Dave writes. Hi, Frank and Mary. I found your excellent podcast while researching what I now believe to be a risk parity portfolio called All Assets, no Authority.

Mostly Voices [2:41]

You are correct, sir, yes.

Mostly Mary [2:45]

Aside from the thoughtful discussions on risk parity investing, I've enjoyed your adherence to first principle thinking.

Mostly Voices [2:52]

Have you ever heard of Plato, Aristotle, Socrates? Segues into Dan Pink's work.

Mostly Mary [2:56]

They give it away rather than sell it.

Mostly Uncle Frank [3:01]

It's going to be huge. Regular clips from office space.

Mostly Mary [3:04]

I have people skills. I am good at dealing with people. Can't you understand it? And the discussions on personality types. According to Myers-Briggs, I'm a logician, and logicians like the idea of personality types. It's a great dive bar.

Mostly Voices [3:21]

You are the bouncers. I am the cooler. All you have to do is watch my back and each other's.

Mostly Mary [3:29]

Take out the trash. I've now been sufficiently down the rabbit hole to frame a couple of questions, I think. I hope I have not missed something in one of the 300 odd episodes that renders my question a duplicate. First, a tiny bit of context. I'm 47 and an entrepreneur. I've sold part of my business and have enough to retire now if I'm careful. Yeah, baby, yeah! I will get a significant boost to my retirement proceeds in five to ten years if my business does well. But I'm banking on getting nothing more and planning accordingly. Sometimes nothing can be a real cool hand. I have taken the first step and created a golden butterfly portfolio for roughly a third of my liquid assets. I'm starting to draw down on this, largely to get used to the experience. On to my question. It strikes me that to the extent that this approach is data driven, there should be at any point in time and driven largely by the ETFs available, a single portfolio allocation that is best. I picked the Golden Butterfly because A, you're compelling enough to convince me that your sample portfolios are likely to be a good subset of all the options. B, when I look at the portfolio descriptions, it is the simple non-experimental portfolio with the highest safe withdrawal rate. I am trying to understand why I would not only use this portfolio and put all my drawdown assets into it. Is anything else not ignoring the data? It seems your preference is the golden ratio, and I am drawn to the added flexibility. But as it has a marginally lower safe withdrawal rate, again, is this not ignoring the data? I have made a contribution to the Father McKenna Center as it's a great cause, and I am okay with the bribery aspect. Kind regards, Dave.

Mostly Voices [5:38]

You're a genius, Davey.

Mostly Uncle Frank [5:41]

Well, first off, Dave, thank you for stopping in. What are all these people doing here?

Mostly Voices [5:46]

Drinking and having a good time.

Mostly Uncle Frank [5:49]

You seem to be exactly the type of person that is attracted to this podcast.

Mostly Voices [5:57]

We have been charged by God with a sacred quest.

Mostly Uncle Frank [6:00]

And I also wanted to thank you for your generous contribution to the Father McKenna Center. If you don't know by now, this podcast does not have any sponsors, but it does have a charity, which is the Father McKenna Center, which serves homeless and hungry people in Washington, D.C. It's a small charity, small but mighty.

Mostly Voices [6:21]

You see, we're on a mission from God.

Mostly Uncle Frank [6:24]

But if you donate to the charity, you get to go to the front of the email line, as Dave has done here. And you can do that directly on the donation page of the Father McKenna Center or through the support page in Patreon on the podcast page at riskparadioradio.com But however you do it, please reference that in your email when you send it so I can move it to the front of the line. And thank you for your support. Now getting to your questions. Basically what you're asking about from a kind of meta perspective is How do we use data in these analyses? And why do we use data?

Mostly Voices [7:02]

Did you see the memo?

Mostly Uncle Frank [7:06]

I think that first question is answered.

Mostly Voices [7:15]

Well, it's the least bad alternative for something to use, because the alternative to using data is to use crystal balls. A crystal ball can help you.

Mostly Uncle Frank [7:19]

It can guide you. And crystal balls have proved to be extremely unreliable. on any lengthy time scale.

Mostly Voices [7:26]

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

Mostly Uncle Frank [7:31]

And so using data gives us a less bad idea or way of constructing portfolios that may work well in the future because they have worked well in past economic environments. And all we're really saying when we're using data for this purpose is that past economic environments are likely to recur, although we don't know which order they're going to recur in. But we do know what the environments are, and we do know basically what kinds of investments perform well or poorly in any given economic environment. That's the fact, Jack! That's the fact, Jack! And this is why portfolio construction often devolves into this analogy with the weather. And people talk about all weather kind of portfolios, because that is another domain where we don't know exactly what weather is going to occur, but we do know what all the kinds of weather are, and we do know what kinds of things you should be wearing or not wearing in various kinds of weather. It's the same principle applied to a long data set for portfolios and assets and portfolio construction. But then that leads us to the next important question, which is, well, which data are we looking at or using? And what are the statistical pitfalls or things we need to be mindful of in using data from the past to get an idea of the future? Now, the three calculators or sets of data I tend to talk about the most here are the ones at Portfolio Visualizer, Portfolio Charts, and then the long sets you can find by downloading Big Earns Toolbox from Early Retirement Now. And they each offer advantages and disadvantages. The Portfolio Visualizer set is very broad, but it does not go back very far in time, especially when you're looking at individual ETFs that have only existed for 20 or 30 years. at best. But they also do have sets based on asset classes there that go back anywhere from the early 2000s all the way back to about 1972. Now, if you go over to portfolio charts, you do get a data set that goes back to 1970, but it is much more limited in its breadth. And then if you look at the data that's in the early retirement now toolbox, That goes back over 100 years. The most useful part of that data though goes back to the 1920s. It's very narrow though. All you can get there are treasury bonds, the Fama-French factors, the basic ones. So you can construct portfolios with various aspects of size and value factors. But you have to do it in the traditional academic way. It's not intuitive. and there's also gold in there. Now, if you take a set of portfolios that you can analyze and analyze them using just the Portfolio Visualizer data or a limited set of that, or just the Portfolio Charts data, or just the Early Retirement Now data, you will get different outcomes. They will be similar In that they're all grouped in the same area, but which one is better than another one for a given time period is going to change over time. Looks like I picked the wrong week to quit amphetamines. And that gets you to this statistical idea of what is called the bias variance dilemma, which is a warning that trying to be too precise using past data to forecast the future is kind of a fool's errand. and is not something you can actually do. The best you can do is get into a range that includes the best formulation for the future. And once you realize that the best you can do is get close enough for your purposes, then things do become a matter of preferences. So what we know looking at the longest set of data is that Portfolios that have the highest safe withdrawal rates tend to have basically the following characteristics. They have between 40 and 70% devoted to stocks. At least half of that is tilted towards value. They have usually between 20 and 30% in intermediate and long-term treasury bonds. They have 10% or less in cash or cash equivalents or short-term bonds. and they have somewhere between 10 and 25% in alternative assets. And the primary one there, at least the one we have the most data for, is gold. And if you're using gold, usually the sweet spot is somewhere between 10 and 15%. We know that on a 100-year analysis that comes from the Safe Withdrawal Series, Early Retirement Now, number 34, or you can go back and listen to episode 40 of this podcast where we discuss that. And so within those parameters, you are going to get a variety of risk parity style portfolios that include things like the Golden Butterfly, the Golden Ratio, what Value Stock Geek calls his Weird Portfolio, and a number of others. Now, Portfolio Charts has this interesting Portfolio Matrix tool that I linked to in the last episode and will link to again. That makes it kind of easy to compare different portfolios on a variety of metrics, including compounded annual growth rates, safe withdrawal rates, perpetual withdrawal rates, et cetera, all in one kind of place. And all of the portfolios I'm talking about tend to rise to the top of the list when you're looking at particular metrics like that, and far above things like traditional 60/40s and three fund portfolios and other things. There's about 19 of them standardized there that you can compare. But I can tell you if you do similar analyses going back 100 years instead of 50 years, you'll find that the Golden Butterfly tends to underperform some of the other portfolios generally for two reasons. First, that it's got a very low allocation to stocks, a 40% allocation, whereas most of these have an allocation between 50 and 60%. It's got a bit of an over allocation to gold, which was great in the 1970s, but it's not that great in most other time periods. And then it's got an over allocation to short term bonds or cash, which works very well in periods like this, where the dollar wrecking ball is wrecking everything.

Mostly Voices [14:23]

You can't handle the dogs and cats living together.

Mostly Uncle Frank [14:31]

But if you do that hundred year analysis, you'll find that that portfolio tends to have a lower safe withdrawal rate than something with a bit more stocks and a bit less gold and a bit less short-term bonds in it. And then this naturally leads to crystal balling the data.

Mostly Voices [14:44]

You can actually feel the energy from your ball by just putting your hands in and out.

Mostly Uncle Frank [14:51]

Where you're saying, well, I think today's markets are Not anything like those markets way back in the 30s and 40s, so we shouldn't pay much attention to that data. There could be some validity there.

Mostly Voices [15:06]

It's kind of looking at the aura around the ball. See the movement of energy around the outside of the ball.

Mostly Uncle Frank [15:14]

But it often also just devolves into competing narratives or preferences, if you will. Subjectivity instead of objectivity.

Mostly Voices [15:22]

This is the one that I tend to use more often. I have a calcite ball and I have a black obsidian one here.

Mostly Uncle Frank [15:33]

So as to your last question, am I ignoring the data? The answer is no. I'm actually trying to incorporate as much data as I have. And then it really comes down to a preference for whether you want to be less or more aggressive essentially with your overall portfolio, which is generally expressed as the percentage of equities that you're holding in the portfolio and the percentage of cash that you're holding in the portfolio. The more equities, the more aggressive, the more cash, the less aggressive. And your situation is a good example of why somebody would want to take a more conservative approach on this portfolio. based on the other things going on in their financial life. In your case, you have another payout coming. You don't know when it's coming, you don't know what it is, but it potentially could be very significant. That is effectively an aggressive allocation to something. It's analogous to an equity allocation, 100% equity allocation in the case of a business. It's illiquid. and knowing that it would make sense to take a more conservative approach with other investments, which kind of balances things out. If you didn't have that and you were retiring in your 40s, you would probably want a more aggressive allocation to equities because you're looking for that long-term growth over a long period of time. And then I think the other consideration is to recall that a portfolio construction is only One of the three basic levers you are pulling in terms of a safe withdrawal rate. And all of these comparisons between these portfolios are based on keeping the other two levers constant. Now, those other two levers are an initial withdrawal rate and then a mechanism for future withdrawals. In the default setting, we're always looking at a fixed withdrawal rate that starts based on a percentage of the original portfolio. and then adding CPI inflation to that every year. In fact, if you change those levers, then you're going to change the outcomes of everything in terms of the safe withdrawal rates. And the biggest other lever than you have to pull is by being able to vary your withdrawal rates. Because if you can vary your withdrawal rates, then you are better off having a more aggressive portfolio with a more variable withdrawal. strategy. That's not necessarily intuitive, but that's kind of the way it ends up working out. So if your personal situation is all of your expenses are mandatory and not discretionary, you are better off with a more conservative portfolio that has a high enough safe withdrawal rate to cover all of that. If a good portion of your expenses are discretionary, because say you have a pension or something that covers most of the mandatory stuff or all of the mandatory stuff, then you can take more risk with the portfolio knowing that you can vary the withdrawals based on recent portfolio performance and you're not wedded to ratcheting and up and taking a fixed percentage every year. But this is also why if your total expenses are very low as a percentage of your overall invested wealth, you are probably better off taking the contractual solution of a simple annuity at some point in your life as you get older, or a bond ladder, or some combination thereof. Because for people like that who don't want to spend their money, Donate to the children's fund.

Mostly Voices [19:20]

Why? What have children ever done for me? Or are afraid to spend their money.

Mostly Uncle Frank [19:24]

Getting that all covered, those expenses all covered by fixed contractual payouts, then allows them to take the rest of it and do frankly whatever they would want with it.

Mostly Voices [19:36]

Now how much would you pay? You get the Ginsu knife, the matching carving fork, the versatile six in one kitchen tool, a set of six steak knives and the spiral slicer. You get them all guaranteed in writing for 50 years for only $9.95. It's the most incredible knife offer ever.

Mostly Uncle Frank [19:54]

That is a much less efficient solution, but often a more palatable solution for somebody with those kind of preferences. But if your idea is to spend the most money that you can in an efficient manner, then you do want a diversified portfolio with a high safe withdrawal rate to do that. Which is what we are mostly focused upon here. That is the straight stuff, O Funk Master. Hopefully that all helps and there wasn't too much rambling there. Please write in again if you have follow-up questions. And thank you for your email. And I took so long on that, I'm afraid I've only got time for One more email today.

Mostly Voices [20:47]

It's not that I'm lazy, it's that I just don't care. And so... Last off.

Mostly Uncle Frank [20:55]

Last off, we have an email from Kanamboo. And Kanamboo writes... Hi Frank, this is Kanamboo.

Mostly Mary [21:01]

I'm a citizen of Chad, one of the poorest countries in the world. I got extremely lucky to have ended up in the United States. Studying here with a scholarship from my government catapulted me to where I am today, nearly reaching fire and living in your beautiful country. I found your podcast through the Choose a Fight podcast. Beforehand, I apologize for not contributing to your charity, but logically I find it way more pressing for me to do charity in Chad where dozens die every day of starvation. A homeless person in the USA's capital would be equivalent to a middle class person in Chad. Just the American citizenship alone would perhaps grant a homeless upper middle class level in Chad. That brings me to my question to you, sir. I found out about the donor advised fund in the community. That would allow me to do much needed charity work in Chad and help me tax wise in the USA, I hope. My question is that if a donor advised fund would entitle me to pick a charity in my home country instead of an American one with the same benefits. Thank you for your great work, Kanomboo.

Mostly Uncle Frank [22:13]

Well, thank you for writing in Kanomboo, and I hope I'm not mispronouncing your name. As you might suspect, there are not many podcasts about personal finance in the United States that receive emails from people such as yourself, and I'm honored that you sent one to us. Your story reminds me of that of my own father. who also came to the United States on a scholarship and built his American dream from there. This was all the way back in 1946. And he came from a country that Alice Huxley, the famous author, described at the time as one of the ends of the earth if the earth had ends. A place that was not on the way to anywhere, had no strategic value, and was practically uninhabited at the time. And like Chad, it was then the colonial possession of a great European power. But it's now known as Belize. And is still only partially developed. Now getting to your questions. I am not an expert on donor advised funds, although we do have one at Fidelity. But you need to think of them as having two sets of rules. There are the laws that apply to donor-advised funds, which allow them to be conduits to a number of different kinds of charities. But in fact, most of the brokerages that run donor-advised funds in the United States tend to take a more restrictive view of the whole situation. and would usually generally prefer only to be a conduit to donating to what are known as 501c3 registered charities, which is how charities register with the Internal Revenue Service in the United States. So I'm afraid the very unsatisfying answer I have to give you on this is I do not know whether a particular donor advised fund operated through a particular brokerage would allow you to pick a charity in Chad. But the obvious way to find out is to actually contact donor advised funds, whether it's at Vanguard, Fidelity, or another brokerage, and ask them what their policies and procedures are. If you had the specific name of the specific charity, that would be the easiest way to approach it. Now, a quick search reveals that there are 501c registered charities in the United States that do work in Chad. And a quick search reveals things like the Chad Relief Foundation, the International Rescue Committee, Aid for Chad, and some others. Now, I don't have any personal knowledge of exactly what those organizations do or how efficient they are, but those might be something that you want to consider. and if you're ambitious, you could also get an organization from Chad registered as a 501c3 charity in the United States. And that would also solve this issue for you. So I'm sorry I don't have any definitive answers for you, but hopefully that will give you a process by which to go about this. But I think the first step is to actually contact some of these Providers of donor-advised fund services and ask them whether you can just do what you're planning to do with a charity you're planning to donate to without having to go through any of this other rigmarole. None of this should be considered tax advice, but hopefully that helps a little bit. And thank you for your email. And now for something completely different. What is that? What is that? What is it? Oh, no, not the bees!

Mostly Voices [26:11]

Not the bees! Ah! I love my eyes! My eyes! Ah!

Mostly Uncle Frank [26:26]

And yes, the bees appear to be upon us once again, although they're not stinging us quite as much this week as they have in the past month. With all this volatility in the treasury bond markets, we're partying like it's about 1981. or some time thereabouts. But anyway, looking at the markets, the S&P 500 was up 0.48% for the week, the NASDAQ was up 1.6% for the week, small cap value represented by the fund VIoV was down, it was down 3.23% for the week, but I believe that also included a distribution for the end of September. Gold was down 0.94% for the week. Long-term treasury bonds represented by the fund VGIT were down 4.07% for the week. And that also included a distribution. REITs represented by the fund R E E T were down 1.65% for the week. Commodities represented by the fund PDBC were down 4.21% for the week. Preferred shares represented by the fund PFF were down also 4.21% for the week. And I also believe those included distributions, at least for PFF. And Managed Futures managed to be up again. They were up 0.10% for the week. That's DBMF, the representative fund. Moving to these sample portfolios, first one's this All Seasons portfolio that's only 30% in stocks, 55% in intermediate and long-term treasuries, and 15% in golden commodities. We keep it as a reference portfolio. It was down 1.86% for the week. It's down 0.96% year to date and down 8.94% since inception in July 2020. It's an overly bond-heavy portfolio and it shows. Next we move to these three kind of bread and butter portfolios. First one's a golden butterfly. This one's 40% in stocks divided into 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 1.35% for the week. It's up 0.04% year to date and up 7.27% since inception in July 2020. Next one's the golden ratio. This one's 42% in stocks and three funds. 26% in long-term treasuries, 16% in gold, 10% in a REIT fund, our EET, and 6% in a money market fund. It was down 1.14% for the week. It's up 0.43% year to date and up 2.95% since inception in July 2020. Next one's a risk parity ultimate. We'll go through all 15 of these funds. It was down 1.51% for the week. It's up 0.82% year to date and down 4.71% since inception in July 2020. Now moving to these experimental portfolios. Look away, I'm hideous. And yes, they were hideous once again. These all involve levered funds. The first one is the Accelerated Permanent Portfolio. This one's 27.5% in a levered bond fund, TMF. 25% in a leveraged stock fund, UPRO, 25% in a preferred shares fund, PFF, and 22.5% in a gold fund, GLDM. It was down 3.28% for the week. It's down 5.79% year to date and down 28.2% since inception in July 2020. Next one's this aggressive 50/50, our most levered and least diversified portfolio, and it shows. It's 33% in a levered bond fund, TMF, 33% in a levered stock fund, UPRO, and the remaining third in ballast in a preferred shares fund and a intermediate treasury bond fund. It was down 4.02% for the week. It's down 7.84% year to date and down 36.15% since inception in July 2020. It's had over a 20% swing in the last six months or so. That's not an improvement. And the last one is the levered golden ratio. This one is 35% in a composite S&P 500 and Treasury bond fund called NTSX. That's levered up 1.5 to 1. 25% in gold, GLDM. 15% in a REIT, O. 10% each in a levered Bond Fund, TMF in a Leveraged, Stock Fund, Small Cap Fund, TNA, and then 5% in a managed futures fund, KMLM. It was down 2.15% for the week. It's down 4.17% year to date and down 27.09% since inception in July 2021. And that concludes these portfolio reviews. All in all, this is an unpleasant experience. It's probably a worst case scenario for these portfolios really. At least with respect to treasury bonds. Probably the only thing good to say about it at this point is that these portfolios are now having relatively high yields for what they are holding compared to what they were yielding a couple years ago. But any portfolio that's mostly stocks and bonds is pretty much in the Same boat here. It's like I took the wrong week to quit drinking. I'm wondering why my crystal ball didn't tell me to sell all that and buy managed futures at the beginning of 2022.

Mostly Voices [32:15]

The crystal ball is a conscious energy.

Mostly Uncle Frank [32:20]

Wouldn't it be great if life worked that way?

Mostly Voices [32:23]

Fortune favors the brave.

Mostly Uncle Frank [32:27]

But I'm sure things will change in the future as they always do.

Mostly Voices [32:31]

My dad said he listened to Matt Damon and lost all his money. Yes, everyone did, but they were brave in doing so. But now I see our signal is beginning to fade.

Mostly Uncle Frank [32:39]

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 and 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, follow, 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.

Mostly Mary [33:36]

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.