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 [0:37]

Thank you, Mary, and welcome to Risk Parity Radio. If you are new here and wonder what we are talking about, you may wish to go back and listen to some of the foundational episodes for this program. Yeah, baby, yeah!

Mostly Voices [0:51]

And the basic foundational episodes are episodes 1, 3,

Mostly Uncle Frank [0:55]

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

Mostly Voices [1:27]

Top drawer, really top drawer.

Mostly Uncle Frank [1:30]

Along with a host named after a hot dog.

Mostly Voices [1:34]

Lighten up, Francis.

Mostly Uncle Frank [1:37]

But now onward, episode 301. 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 portfolio's page. Boring! Yes, thankfully it was kind of boring this week because it's been another awful month for just about everything except gold.

Mostly Voices [2:12]

I love gold!

Mostly Uncle Frank [2:18]

But before we get to that, I'm intrigued by this how you say emails and First off. First off, we have an email from Alexi.

Mostly Voices [2:25]

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 Mary [2:38]

And the dude writes, hiya, Frank and Mary, a couple of new ETFs that have me interested enough to monitor. You're insane, Gold Member. C-A-O-S.

Mostly Voices [2:50]

Dogs and cats living together, mass hysteria.

Mostly Mary [2:53]

This markets itself as a tail risk ETF and uses option strategies, puts, calls, spreads for its stated goal of convex returns during violent stock market drawdowns without significant bleed and with minimal distributions for tax efficiency. Real wrath of God type stuff. All such products sound interesting upon launch, but the nice thing about this product is that it was a mutual fund prior to being wrapped up into this ETF, which gives us a nice longish track record to investigate. The mutual fund ticker was AVOLX. AHLT, another managed futures ETF in an increasingly crowded space. This one specifically interests me for two reasons. One, it is a higher volatility offering with a standard deviation of about 15. This would be particularly useful for a leveraged portfolio construction. Two, it is managed by Man AHL, a firm with a long track record in the managed futures hedge fund space. Ciao, AZ.

Mostly Uncle Frank [4:02]

Well, interesting, very interesting. You always bring us new things to look at.

Mostly Voices [4:09]

Hearts and kidneys are Tinker Toys.

Mostly Uncle Frank [4:14]

And I did take a look at this ETF Chaos. And it's mutual fund ticker. It does show the data going back to about 2011 in Morningstar at least. Fire and brimstone coming down from the skies.

Mostly Voices [4:28]

Rivers and seas boiling. 40 years of darkness, earthquakes, volcanoes. The dead rise from the I'm not sure really what to make of it. Most years it doesn't do much of anything at all.

Mostly Uncle Frank [4:39]

It is up this year about 10%. It was down last year though. It was up in 2020 significantly and most other years it hasn't done much of anything. On the other hand, I have not tried to insert it in any portfolios and do any extended analysis. As for AHLT, that one looks brand new. It does look similar to something like KMLM, but as you've noted, there's a number of ETFs now that have come out in the managed futures space, and I think we just need to kind of look at them for a couple of years to see how they actually perform. But it's always good to see more competition out in ETF land, as it were. Well, that's why we're here. You're too stupid to have a good time. Because I do think we're going to have many more options to construct portfolios with in the next number of years here, and ones that are more cost effective than their predecessors from 15 years ago.

Mostly Voices [5:59]

You are the bouncers, I am the cooler. All you have to do is watch my back and each other's. Take out the trash. Anyway, as always, thank you for stopping in, dude.

Mostly Uncle Frank [6:11]

Take it easy, dude. Oh, yeah. I know that you will.

Mostly Voices [6:16]

Yeah, well, the dude abides.

Mostly Uncle Frank [6:20]

And thank you for your email. The dude abides. Second off. Second off, we have an email from My Contact Info.

Mostly Voices [6:33]

Oh, I didn't know you were doing one. Oh, sure.

Mostly Uncle Frank [6:37]

Looks like we got all the regulars here today. The truth is they're morons.

Mostly Mary [6:42]

And My Contact Info writes. Frank, thank you for responding to my Food for Thought email. You made some excellent points. Most of the math related to finance is not complicated, especially for someone with an engineering background like yourself. Yeah, baby, yeah! Probably the most complex formula is the geometric sum formula. See below for an interesting explanation. Or maybe Black-Scholes option pricing model. Aside, every time I see Black-Scholes option pricing model, I find it useful to think about LTCM.

Mostly Voices [7:19]

You can't handle the gambling problem.

Mostly Mary [7:22]

As you say, finance is not Newtonian physics. So the interesting question is, do the planning software programs do more harm than good? Do most practitioners really understand the innards of the model? Is there some degree of intentional obfuscation? In any case, thanks again for your commentary. Keep painting.

Mostly Voices [7:42]

You need a lot of paint in the bristles, just like with a one-inch brush, to bring it to a nice sharp chisel edge. Wiggle it, that loads the brushes, the bristles, I mean, loads of bristles, and by wiggling it and pulling it, it pulls a paint toward the end of the bristles and sharpens it, just like you would a knife.

Mostly Uncle Frank [8:02]

Well, this is really a follow-up to episodes 274 and more recently episode 297, where we talked about the pluses and minuses of popular retirement calculators generally. Going to your question specifically, do the planning software programs do more harm than good? Well, I suppose it depends on how they're used, honestly. They are really just tools and all they are really doing is giving you an estimate of the future because anything they spit out about what's going to happen in 10 or 20 years is really not going to be accurate or only as accurate as the fixed items that you're putting in there, such as pensions or expenses. There's no way any of these things can add to the accuracy of a Monte Carlo simulation, for example, because that's all they're running underneath their hoods. I think generally that professionals know how to use these things because they use them over and over again with a bunch of different people, and so get a feel for what's good and bad about them. I think it's often amateurs that use them and get screwy results that either tell them they can never retire or could retire 15 years ago. Forget about it. And that's mainly a result of putting in assumptions that are either conservative or aggressive and then compounding them without reference to reality. You will find that it is you who are mistaken. a great many things. What I often see there is somebody that says, okay, well, the average return of the stock market is 10 or 11%. So to be conservative, I'm going to use 8% and then average inflation is 3%, but be conservative, I'm going to use 5%, which all of a sudden gives you a real return of 3%. Which is completely ridiculous.

Mostly Voices [10:09]

Wrong, wrong, right, wrong.

Mostly Uncle Frank [10:13]

Because if you really believed that, you would not bother investing in markets. You would be buying annuities and bond ladders. Au contraire. Don't be saucy with me, Bernaise. And if you put something like that or some variation of that into one of these calculators, you're just going to get a garbage results out of it. You're not going to amount to jack squat. So the problems aren't so much with the softwares themselves, but in the way they're being used and misunderstood. Next question. Do most practitioners really understand the innards of the model? The answer to that has to be no, because most practitioners are not trained very well or glorified salespeople.

Mostly Voices [11:01]

Am I right or am I right or am I right? Right, right, right.

Mostly Uncle Frank [11:05]

And so most practitioners get training by their company in how to use the software, but they have no knowledge of what it actually means or how it actually works. To them, they just get a set of inputs from a client and it spits out nice graphs and they present them and then get paid exorbitant fees for that. Because only one thing counts in this life.

Mostly Voices [11:28]

Get them to sign on the line which is dotted.

Mostly Uncle Frank [11:36]

And that's really why creating these things is such a lucrative area for the creators of these tools that are supplying them to retail financial services. Because basically it's doing all the work for the advisor who doesn't know what they're doing anyway. Because they were selling automobiles last week. A guy don't walk on the lot lest he wants to buy. And I know most amateurs don't understand how these models work for the reasons that I just described about putting overly conservative or overly aggressive numbers in there that just seem a little bit conservative or a little bit aggressive. But then when you compound them, it spits out garbage. And I don't think most financial media types even understand that because that's also the fundamental problem you run into if you are not using historical data. Because if you're not using historical data as the basis for your modeling, you end up having to use crystal balls.

Mostly Voices [12:32]

My name's Sonia.

Mostly Uncle Frank [12:39]

I'm going to be showing you the crystal ball and how to use it or how I use it that you're just shoving in there saying that you think this asset's going to yield this amount and you're going to give it this standard deviation. Again, returns aren't normally distributed for most things either. So that's another problem.

Mostly Voices [12:56]

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

Mostly Uncle Frank [13:00]

And then if you have multiple crystal balls for different things and you're just modeling them on a mean variation kind of model, you're not getting the correlation between or among the assets because you're treating them all as independent variables. You should not treat them all as independent variables. That's why you want to use historical data because historical data represents a particular economic environment where these things were performing. And so you do not want to create models where you have one of your assets in an inflationary environment while another one's in a recessionary environment at the same time. And that is effectively what happens often if you treat them as independent variables. Describing, healing and meditation. I don't think most people understand that at all. Yeah, that's smart. And finally, your last question. Is there some degree of intentional obfuscation? Obfuscation. It's early in the morning. I need more coffee.

Mostly Voices [14:13]

Are you stupid or something?

Mostly Uncle Frank [14:17]

And I think the answer is yes with some of these tools because some of these tools are very primitive in particular in their modeling aspect of it, particularly the free ones, the ones that are offered to amateurs generally. If your tool only allows you to model the stock market and the bond market and cash, That is not a good model. It is not up to snuff for the 2020s. You need something that will model all kinds of different assets appropriately and not treat all stocks as the same and not treat all bonds as the same. It wouldn't be prudent at this juncture. We're way beyond that. And you really should be using tools that at least have the capabilities of portfolio visualizer. that's kind of a baseline minimum standard today. But believe it or not, a lot of these tools do not have that standard or are not up to that kind of snuff that especially plague some of these older fire tools, C-FIRE-SIM, FireCalc, those sorts of things have limited data sets and are of limited utility for that reason. And the obfuscation comes from it printing out some kind of pretty chart that's supposed to be accurately forecasting the future. But if you saw how the sausages were made in the underlying spreadsheets, you probably wouldn't have as much confidence in what you're getting out of them. I still think the best kind of modeling is divided up between things that you have a reasonable degree of certainty about, such as your Social Security payment or a pension payment, and your expenses, which can be modeled in one category versus returns on portfolios, which have to be modeled a different way and in a different category. I think if you mix those two things together, you get a false sense of certainty over the whole thing. So I'd rather be working with something that starts with a pool of fixed expenses projected or adjusted for however many years there are and then subtracting off payment streams or income streams that are known, because then that leaves you with a net expense to be covered by whatever portfolio or method you are going to use for the rest of your assets to deal with those expenses. I think going through that kind of process yields a lot better understanding of what's going on there, as opposed to just shoving a bunch of numbers in a calculator and getting some pretty graph out of it. But now I believe I'm just repeating myself from what I said in those prior episodes. You can go back and listen to those if you want to hear more about this. I will link to your nice little link to the Khan Academy about finite geometric series. Always good to have a little math in the diet.

Mostly Voices [17:20]

Let me put it this way. Have you ever heard of Plato, Aristotle, Socrates? Yes. Morons. Really? And thank you for your email. Last off.

Mostly Uncle Frank [17:36]

Last off we have two emails from James.

Mostly Voices [17:39]

Hey Jim, baby. I see you brought up reinforcements. Well, I'm waiting for you, Jimmy boy. Finnegan. Finnegan.

Mostly Uncle Frank [17:50]

And we'll read them together. And James writes, hi Frank, thanks for all your great information.

Mostly Mary [17:58]

I went back to Educate Myself on Bonds and listened to episodes 14 and 16. Very informative. Question. Given recent bond performance and market correlations, any updates on your thoughts on these? Do you agree with the Risk Parity Chronicles blog post that VGLT is a great investment now for new contributions. Thanks for your great insights. Don't in my earlier message, I meant EDV, not VGLT, that was referenced in the Risk Parity Chronicles blog post. Thanks.

Mostly Uncle Frank [18:34]

Don't. Well, I'm glad you liked episodes 14 and 16. For those of you who don't know, those were the ones where we Just talked about bonds and how they fit into a portfolio or don't fit into a portfolio depending on which ones you are looking for and what you're trying to do. Alright, as to your question, do I agree with the Risk Parity Chronicles blog post that VGLT or EDV, which are long-term and extended duration bond funds, are a good investment right now to put new contributions into. I suppose my answers are a couple fold. If you're comparing them to what they were a couple years ago, yeah, they're a better investment than they were a couple years ago. But I don't think that's the way you ought to be looking at bond allocations in a portfolio. And by that I mean that I would not be making changes to the overall allocations in your portfolio based on recent performance of bonds or any other asset. I realize that's tempting because we're looking at a very extreme event over the past couple of years, which people alternatively say hasn't happened in 40 years or hasn't happened in 80 years or has never happened, depending on what you're looking at in particular. That's very true in terms of how fast the Fed has raised the interest rate, which now leads the popular pundits to be talking about new paradigms and new regimes and new this, that, and the other. Wait, there's much, much more and say, this time is different. I don't think this time is ultimately going to be different. And what I mean by that is long-term treasury bonds tend to go up and down with economic cycles, and that's been very distorted over the past few years. due to COVID, its aftermath, and then what the government has done in terms of fiscal spending and now raising interest rates. But I do expect the primary kind of movement you will see in bonds going forward will be the one that has always been there, which is they go up or down in value with the business cycles. One very popular narrative these days is, well, the interest rates were going down for 40 years. That must mean now they're going to go up for 40 years. that's not how it works.

Mostly Voices [21:07]

That's not how it works. That's not how any of this works.

Mostly Uncle Frank [21:16]

There is no magic mean reverting lever or pusher that makes interest rates behave that way. So I would not be engaging in any kind of market timing involving bonds any more than I would with stock funds or any other asset. Really, when you're talking about portfolio construction, your portfolio should be matching what your personal circumstances are. Are you in an accumulation phase? Are you decumulating? How much do you need to pull out of this portfolio? Those kind of personal requirements, if you will, are what should dictate how you construct your portfolio, not your ability to predict future interest rates or any other thing, or use any particular crystal ball for that. As you can see, I've got several here, a really big one here, which is huge. So as interest rates have risen and the value of the bond funds has fallen, yes, you do end up buying more in terms of rebalancing. That's just buying low and selling high. But other than that kind of buying, unless you were making a complete portfolio shift, I would not be out there running around buying these bonds or any other particular bonds. And some might say, or some actually have said, well, now it's time to go out and build that bond ladder. And my answer to that is, well, maybe it is and maybe it isn't, but it doesn't have anything really to do with the fact that interest rates have risen a lot recently, that should be a process that you're following based on your own particular circumstances and if you plan to be living off a bond ladder for the next 30 years or however long you want to construct it for. Because if you're not planning on actually using it, there's no point in constructing it. Because really where interest rates are these days, at least the long-term rates, is a pretty average place if you look at where they've been over the past hundred years or so. It's only in the past decade since the great financial crisis that they've been extremely low. And so anybody who's saying, well, I need to go do this now, is simply engaging in market timing. Interest rates might go down in the future and they probably will go down if there's a recession. But as I've said before, what I expect them to do is go up and down over periods of years. And that's true even if they are trending in one direction over a course of a couple of decades, which is actually not very normal, honestly. That long-term spike in interest rates that you saw around 1980, followed by a decline, is probably not something that is going to get repeated. At least there's no particular reason why it would be repeated. So I think it's best to put your crystal balls away before you hurt Anyway, I suppose I should note that this email actually is from much earlier this month when long-term interest rates were lower than they are right now. Which just goes to show you that you would have been better off waiting. But we're only going to know something like that in hindsight. Anyway, interesting topic as always, and thank you for your email.

Mostly Voices [24:53]

And now for something completely different.

Mostly Uncle Frank [24:58]

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, it was another ugly week for equity markets, not so ugly for other markets. But just looking at those markets, the S&P 500 was down 2.53% for the week. The Nasdaq was down 2.62% for the week. Small cap value represented by the fund VIoV was down 2.84% for the week. Gold was up for the third week in a row. this is gold, Mr. Bond. I think you've made your point, Goldfinger. Thank you for the demonstration. Gold was up 1.15% last week. Long-term treasury bonds also managed to eke out a gain. VG L T, the representative fund, was up 1.34% for the week. REITs represented by the fund R E E T were also down with the stock market. They were down 2.27% for the week. Commodities represented by the fund at PBDC were down 0.4% for the week. Preferred shares represented by the fund at PFF were down 0. 28% for the week. And our representative managed futures fund at DBMF was down 0.80% for the week, which is actually about its worst performance in the last couple months. Moving to these sample portfolios, First one is this reference portfolio, the All Seasons. It is 30% in a total stock market fund, 55% in intermediate and long-term treasury bonds, and the remaining 15% in gold and commodities. It was down all of 0.14% for the week, so it didn't move much. It's down 1.37% year to date and down 9.32% since inception in July 2020. The past few months here have taken a toll on just about everybody's portfolio, I think. I'm moving to our three kind of bread and butter portfolios. The first one is a golden butterfly. This one's 40% in stocks divided into a total stock market fund and a small cap value fund. 40% in bonds divided into long and short treasuries and 20% in gold. It was down 0. 45% for the week. With gold leading the way.

Mostly Voices [27:23]

Do you expect me to talk? No, Mr. Bond, I expect you to die. It's up 0.

Mostly Uncle Frank [27:31]

13% year to date and up 7.36% since inception in July 2020. Next one is a 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 a money market fund. It was down 0.65% for the week. It's down 0.37% year to date and up 2.13% since inception in July 2020. Next one is a risk parity ultimate. I won't go through all 15 of these funds, but it has benefited by the rise in Bitcoin and Ethereum, where it holds a 2% total stake in those. It was down 0.36% for the week. It's down 0.35% year to date, down 5.82% since inception in July 2020. Now moving to these experimental portfolios that involve leveraged funds. Look away, I'm hideous.

Mostly Voices [28:33]

And yes, they are still looking hideous.

Mostly Uncle Frank [28:37]

the first one is this accelerated permanent portfolio it's 27.5% in a leveraged bond fund TMF 25% in a leveraged stock fund UPRO 25% in a preferred shares fund PFF and 22.5% in Gold GLDM it was down 0.70% for the week it's down 8.26% year to date and down 30.07% since inception in July 2020 Next one is the aggressive 5050. This one is the most levered and least diversified of these portfolios. It's one third in a levered stock fund, UPRO, one third in a levered bond fund, TMF, and the remaining third divided into preferred shares, PFF, and an intermediate treasury bond fund as ballast. It was down 1.59% for the week. It's down 13.32% year to date. down 39.95% since inception in July 2020. Looking very yucky these days, but there's no gold to protect it in this one. Or managed futures or anything else of that ilk. I expect you to die! And going to the last one, this is our levered golden ratio. This one is 35% in a composite fund. NtSX, that is the S&P 500 and Treasury bonds, 25% in gold, GLDM, 15% in a REIT, 10% each in a leveraged bond fund, TMF, and a leveraged small cap fund, TNA, and the remaining 5% in a managed futures fund, KMLM. It was down 0.93% for the week. It's down 6.08% year to date. down 28.09% since inception in July 2021. And it wasn't too painful this week, but we'll be finishing up a very painful October following a very painful September in a not-so-great August. But it is a good test of these things, isn't it? 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 and put your message into the contact form and I'll get it that way. If you want to hear a lot more of me right now, you can listen to an interview that I did in September with the Catching Up to Five people, Bill Yount and Becky Heptig, and I will link to that in the show notes. Or we talk about more generalized topics than we talk about here. And I believe they also made a video out of it. Shut it up, you.

Mostly Voices [31:42]

Shut it up, me.

Mostly Uncle Frank [31:46]

And if you haven't had a chance to do it, please go to your favorite podcast provider. 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 Voices [32:03]

And see what happens as you paint. You'll see all kind of things happening on your canvas. Very soon you learn to use all these beautiful little things that happen. I think in one of the earlier shows I mentioned, we don't make mistakes. We have happy accidents.

Mostly Mary [32:21]

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.