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 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. Expect the unexpected. There are basically two kinds of people that like to hang out in this little dive bar. You see in this world there's two kinds of people my friend. The smaller group are those who actually think the host is funny regardless of the content of the podcast. Funny how? How am I funny? These include friends and family and a number of people named Abby. Abby someone. Abby who? Abby normal.

Mostly Voices [1:25]

Abby Normal.

Mostly Uncle Frank [1:29]

The larger group includes a number of highly successful do-it-yourself investors, many of whom have accumulated multimillion dollar portfolios over a period of years. The best, Jerry, the best. And they are here to share information and to gather information to help them continue managing their portfolios as they go forward, particularly as they get to their distribution or decumulation phases of their financial life.

Mostly Voices [2:05]

What we do is if we need that extra push over the cliff, you know what we do? Put it up to 11, exactly.

Mostly Uncle Frank [2:12]

But whomever you are, you are welcome here. I have a feeling we're not in Kansas anymore. But now onward, episode 322. 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. And what do we have to say about that? Well, as usual... BORING! But it was boring in the positive direction this week.

Mostly Voices [2:48]

Looks like I took the wrong week to quit drinking. But before we get to that, I'm intrigued by these how you say emails?

Mostly Uncle Frank [2:59]

And? First off, I have an email from Damon.

Mostly Voices [3:06]

What does Matt Damon say on that Bitcoin commercial? Fortune favors the brave.

Mostly Mary [3:10]

And Damon writes? Dear Frank and Mary, the investments my wife and I have are entirely in tax-advantaged retirement accounts, and they are split almost equally between us. We have reached a point where our yearly needs equal the predicted withdrawal rate for our selected investment strategy. However, I can withdraw today from my accounts without penalty, while my seven-year younger wife cannot for another seven years without going through some hoops, i.e. a Roth ladder.

Mostly Voices [3:47]

Jacob worked for Laban for seven years, but to him, the years seemed only like a few days because of the love he had for Rachel.

Mostly Mary [3:59]

If we would like to live solely off of our investments starting today, would you think the best approach would be to treat the total from both accounts as one giant pot of money? Have both accounts invest in the same risk parity way, and only withdraw from mine until hers is accessible? It seems at least marginally okay to think of this as a giant pot as it is unlikely that in seven years the accessible account is drawn down to zero. And it seems wrong to think of them as separate since we don't have enough saved for a withdrawal rate without counting both. Is there a better approach that I'm not thinking of? Thank you for all you do for this community. Your podcasts are both informative and a real joy to listen to. Sincerely, Damon.

Mostly Uncle Frank [4:51]

Well, what can I say, Damon? You are correct, sir, yes! Yes, I think treating all of your assets as one big portfolio makes a lot of sense. And in fact, that is the default that you should go to, that anyone should go to, simply because money is fungible and these assets are not going to perform differently just because they're in a different account. There may be different consequences of pulling from one or the other, but as to the portfolio constructions and assets themselves, you're much better off looking at everything as one big portfolio and then locating things for tax purposes. So for instance, you want to have anything that's paying a large ordinary income like most bonds and REITs and things like that in a traditional retirement account, which will shield those taxes until you actually take the distributions out of the account. In the meantime, you want your highest growing assets typically in your Roth accounts because you'll never have to pay any taxes on the growth there, even when the money comes out of the account. And in your taxable accounts, you want things that either don't pay much income or if they do pay income, pay it in the form of qualified dividends that are taxed at the long-term capital gains tax rate. Now, I'm also assuming you're married filing jointly, so the taxes on all of these accounts are going to be the same anyway, because you're subject to the same ordinary income tax rate. So you are definitely thinking about this in the right way and I approve of your approach. I would use those tax location principles I just gave you to the extent that they are useful, but it sounds like just about all of your assets are in the same kind of account anyway, so it doesn't really matter that much. And you do not want to let the tax tail wag the investment dog. There's no need to fear, underdog is here. So do not choose your investments or portfolio based on tax characteristics first. Congratulations on reaching your financially independent state of being. And thank you for your email.

Mostly Voices [7:10]

All this money and nothing to do and nobody to do it with. You were saying something, old boy? Mr. Howell, now that I'm a member of the club, what can I do? I had more fun as a club steward. Well, you haven't got the knack of being idly rich. You see, you should do like me, just snooze and dream. Dream and snooze, the pleasures are unlimited. Second off.

Mostly Uncle Frank [7:36]

Second off, we have an email from Pete.

Mostly Voices [7:40]

I got a little rabbit in this hole, and I'm gonna catch the little rabbit and eat him up.

Mostly Uncle Frank [7:47]

And Pete writes, Dear Uncle Frank and

Mostly Mary [7:51]

Aunt Mary, I'm sure you're just about sick of hearing from more degenerate gamblers, and I agree. You can't handle the gambling problem. I would never touch leveraged ETFs in my own accounts. Way too risky. Too dangerous.

Mostly Voices [8:09]

However, my children, aged 10 to 1 years old,

Mostly Mary [8:12]

have a terrible gambling problem. Their Roth IRAs are sitting in 50% QLD, two times NASDAQ, and 50% AVUV. What's worse is they intend to trade in QLD for TQQQ three times NASDAQ whenever the NASDAQ index itself slips below 20%. Kids these days.

Mostly Voices [8:38]

Good ship, lolly pop, sweet trip to a candy shop where fun Joking

Mostly Mary [8:51]

aside, I largely agree with your reticence on using leveraged ETFs with decumulation portfolios, but I think there may be value for those much younger than us. Based on the double digits numerics paper on LETFs that you shared previously, I'm betting on the benefits of holding the two times ETF long term. I look at using three times ETF as an imaginary cash pile to reallocate into the Nasdaq whenever there's a 20% drop. Until that point, it regains previous highs, then downgrade to two times. And Jimmy two times, who got that nickname because he said everything twice, like, I'm gonna go get the papers. Get the papers. Since it's their money and not mine, I feel comfortable with the wild ride. Hey, no one ever accused me of being a good parent. Well, you have a gambling problem. What will be really funny is when the four kids realize that I've only funded three 529 accounts and let them go at it. Anywho, should be interesting. No question at this point, just some musings. De Oppresso Liber, Pete.

Mostly Voices [10:05]

How many lumps do you want? Oh, three or four.

Mostly Uncle Frank [10:11]

Well, it sounds like you've come up with some intricate strategies based on making the right moves at the right times.

Mostly Voices [10:19]

Okay, well, what we'll do, I'll run in first, gather up all the eggs so we can kind of just blast them all down with AOE. I will use Intoning Shout to kind of scatter them so we don't have to fight a whole bunch of them at once. When my Shout's done, I'll need Anthony to come in and drop his shout too, so we can keep them scattered and not to fight too many. When his is done, Bass of course will need to run in and do the same thing. We're going to need divine intervention on our mages, so they can AE, so we can of course get them down fast, because we're bringing all these guys. I mean, we'll be in trouble if we don't take them down quick. I think it's a pretty good plan, and we should be able to pull it off this time. What do you think, Abdul? Can you give me a number crunch real quick? yeah, give me a sec. I'm coming up with 32. 33 repeating, of course, percentage of survival.

Mostly Uncle Frank [11:12]

And you know what happens when you do that?

Mostly Voices [11:16]

Oh, it's a lot better than we usually do. All right, thumbs up. Ready, guys? Let's do this. Oh, my God. He just ran in. David. Oh, gee. Stick to the plane.

Mostly Uncle Frank [11:28]

Oh, geez. Let's go. Let's go. Stick to the pledge. Stick to the plane. Oh gee, Leroy, you moron. Leroy, this is ridiculous. It's all masked. It's not my fault. I do applaud your efforts. I think there is some room for using leverage, particularly when the time frames are long and you are not betting the farm on that. I think this kind of approach is probably less risky than say buying individual stocks or trying to speculate on something like cryptocurrencies, because this is something that you do have a reasonable chance of modeling within a reason, because it's based on indexes. I will see if I can link again to that paper you mentioned in the show notes, as well as my favorite video about leverage from Ben Felix, where he talks about the academic applications of it. Mary and I were highly amused by the four children with the three 529 accounts. We thought that would lead to all kinds of interesting parenting possibilities, including the Hunger Games. Happy Hunger Games. And may the odds be ever in your favor. Thunderdome.

Mostly Voices [12:54]

Welcome to another edition of Thunderdome.

Mostly Uncle Frank [13:26]

And of course, the miracle of Festivus.

Mostly Voices [13:31]

Welcome, newcomers. The tradition of Festivus begins with the airing of grievances. I got a lot of problems with you people. Now, you're gonna hear about it. And now, as Festivus rolls on, we come to the feats of strength. Not the feats of strength. Until you pin me, George, the Festivus is not over. Please, somebody stop this. Let's rumble!

Mostly Uncle Frank [14:00]

Mary thought you could have a nice chart with some great scorekeeping going on to see who's the big loser that week and is in danger of not getting the 529. There's a famous story in my family involving our eldest son, I hate all of you. When he was about five or six, we were playing some game at our in-laws. I think it was like Connect Four or something like that. And so I would let them win sometimes, but I wouldn't let them win all the time. And I beat him in this game and it was getting later in the evening for him at least. And he got all upset about it and I said, well, we can play again. You don't want to go to bed a loser. And my mother-in-law thought that was about the funniest thing she ever heard and has been repeating it since. You don't want to go to bed a loser. So I was thinking about your 529 chart and the competition to see who would be going to bed a loser that night or that week. I can't wait to have grandchildren.

Mostly Voices [15:09]

Donate to the children's fund.

Mostly Uncle Frank [15:16]

Why? What have children ever done for me? But anyway, I appreciate your ideas and your stories about your family. And thank you for your email.

Mostly Voices [15:23]

I think you can take him, Georgie. Right, come on. Be sensible. Stop crying and fight your father. Ow! Ow, I guess I can. This is the best best of us ever. Last off.

Mostly Uncle Frank [15:37]

Last off, I have an email from Jeff.

Mostly Mary [15:41]

Dear Frank and Aunt Mary, I've tried to include a link to a recent article on ReturnStacked.com I am a big fan of the idea of stacking capital efficient ETFs of different asset classes together. I also like those in particular that do not reset daily as I've heard mixed things about them. My observation from this article is that you do not get the full stacked return of say 12% 7% for stocks plus 5% for bonds in the example, as you would have to subtract fees and the cost of borrowing, and as such may only get a percent or two above the stock return. Am I correct about this? Are there leverage funds that can really do what they say they can in a two times fund after fees and borrowing actually can do two times the underlying asset of the fund? Please help clear up this issue of leverage funds for me. Any links to sites that show me the math on this would be great. Thanks, Jeff. Well, I went and read that paper that you linked to, and I will link to it in the show notes.

Mostly Uncle Frank [16:43]

That is not a paper that is actually describing a real world phenomenon. What it is describing is how to do a calculation of returns using some basic assumptions, namely having different assets with an assumed rate of return, an assumed variance or volatility, and an assumed correlation with one another. And so the intent of that was not to say anything in particular about any particular investment. But all of this does go to a particular principle, which is the one that led to the development of risk parity style portfolios by hedge funds. And what they would do is basically come up with a very diversified conservative portfolio and then add leverage to that to get a better return profile and hopefully a better risk reward profile. This in fact is just another application of the original Harry Markowitz research and the papers back then which showed that the only way to get a free lunch is to use diversification of uncorrelated assets. And that is in fact what we are talking about here when we're talking about the Holy Grail principle. I'll link to that little Ray Dalio video in the show notes again to illustrate that because I think it's a nice five-minute explanation of the whole principle there. Now, as to your real question here, which is, are you going to get two times performance out of a two times leverage fund? The answer is probably not due to the way these funds are constructed and some happen to work much better than others. the ones that tend to use swaps contracts in particular tend to be relatively stable. Now the way to actually examine this or look into a particular fund is simply to go back test it, just go back to Portfolio Visualizer. And so if you take a fund like UPRO and that underlying index there is the S&P 500, you can put in a portfolio that's 100% Upro in a portfolio that's 100% of S&P 500 fund and compare them and see how close it came to three times performance. And you can basically do that with any leveraged fund. Now, a number of my listeners have found though that when you put these things in a diversified portfolio and then you start rebalancing them, you get some of that leakage back, if you will. because the rebalancing process tends to magnify returns due to the diversification principles there. So a portfolio of several diversified leverage funds is probably going to perform closer to the aggregate leverage in that, if you will, than the individual funds themselves. But that again is just a application of this Principal going back to Markowitz about there being a free lunch available in diversification. So if you want to compare individual funds or look at individual funds, I would use Portfolio Visualizer to start with. The other place you want to look at for leveraged funds is the optimized portfolio website, because that is all about using leveraged funds in portfolios and about specific and particular leveraged funds. and how well they do or don't do, and how they are constructed. So that's a good resource for this topic as well. That is the straight stuff, O' Funkmaster. Now you'll note that the people that run the Return Stacked website have also come out with three new funds, and those are RSBT, RSSB, and RSST, and those are combination funds. One is Bonds and Managed Futures, one is Stocks and Bonds, and one is Stocks and Managed Futures. And the idea there is you would combine those in various ways to construct various return stack portfolios that are going to have some of this leverage and diversification combined in them. And the idea of those funds is also that they would be long-term kind of holdings. There have been a few funds out there like that, like NTSX, which is the S&P 500, and Treasury bonds, but most leverage funds today are designed for short term speculation like UPRO or TMF are really designed for short term speculation, even though people do use them for longer term purposes. Now, those three funds are so new that I can't tell you anything about how they will perform, but in theory, that will be a decent way to get some leverage in a portfolio. at a reasonable cost, and that will have a better risk reward profile than, say, 100% equity portfolio. It's what you would compare something like that with. This is all an evolving area. This is something that hedge funds have been doing for a few decades now, but it really has not been a cost effective methodology for people to invest in these types of structures. I should say for the ordinary do-it-yourself investor to invest in these kinds of structures. These new ETFs are proposing to be a way for people to do that. And it will be interesting to see how this all develops because we are kind of in the middle of a ETF revolution, if you will, that started in about 2017 or 2018 when the SEC expanded the rules for the creation of ETFs. and what you could put in them. I expect we're really not going to know what the best practices are with respect to these things until about 2030. But it's all interesting to watch. Stay in formation. Targets just ahead. Targets should be clear if you're going low enough. You will have to decide. You will have to decide. You will have to decide. If you are interested in these developments and the people that are developing these things, I would listen to things like the Resolve Riffs, R-I-F-F-S, investment podcast by RSM. And Keeping it Simple by Simplify, which also creates a number of these ETFs. These are also in the form of YouTube videos as well. And Flirting with Models by Corey Hoffstein, which is very technically advanced, but he is the person behind return stacking in particular. and is involved with the creation of those ETFs. I would say there has been kind of an explosion of decent materials and resources about this in the past few years here, but I think they're just getting started. Anyway, hopefully all that helps and thank you for your email. Now we're going to do something extremely fun. And the extremely fun thing we get to do now is our weekly portfolio reviews. Of the seven sample portfolios you can find at www.riskparityradio.com on the portfolios page. And it was at least a little fun this week. Looking at the markets, the S&P 500 was up 1.66% for the week. The Nasdaq was up 1.4% for the week. Small cap value represented by the fund VIOV was actually down last week. It was down 1.28%. I think it was up the week before. Gold was up last week, it was up 1.03% for the week. Long-term treasury bonds represented by the fund VGIT were also up that amount, 1.03% for the week. REITs represented by the fund R E E T were up marginally, 0.09% for the week. Commodities represented by the fund PDBC were the big loser last week. They were down 1.35% for the week. Preferred shares represented by the fund PFF We're up 1.26% for the week and managed futures represented by the fund DBMF, we're up 1.04% for the week. Now moving to these portfolios, which really have not done very much this year, all told. And a lot of times that's the story you get with a lot of diversification. But anyway, the first one's the All Seasons. This is a reference portfolio that's only 30% in stocks. 55% in intermediate and long-term Treasury bonds, and 15% in gold and commodities. It was up 0.88% for the week. It's down 0.13% year to date, and up 1.39% since inception in July 2020. It's been a real snoozer, but that's what you get with something that conservative that is not leveraged. Now moving to our more bread and butter kind of portfolios. First one's a 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, GLDM. It was up 0.49% for the week. It's down 0.65% year to date, but up 19.74% since since inception in July 2020. Really has not been doing very much. Next one's a golden ratio. This one's 42% in stocks and three funds. It's got 26% in long-term treasury bonds, 16% in gold, 10% in a rate fund, and 6% in a money market fund. It was up 0.79% for the week. It's down 0.21% year to date, but up 16.8% 0% since inception in July 2020. Now we move to the exciting Risk Parity Ultimate portfolio with its 15 very well diversified funds including some cryptocurrency. As you can imagine it's been having a good time recently. It was up 1.14% for the week, it's up 1.3% year to date and up 8.1% since inception in July 2020. And I won't go through all those funds. You can look at them on the website. There's probably more there than anyone would actually want to hold. Now moving to our leverage portfolios involving leverage funds. Don't try this at home. You have a gambling problem. First one's the Accelerated Permanent Portfolio. This one's 27.5% in a levered bond fund, TMF, 25% in a leveraged stock fund, UPRO. 25% in PFF, a preferred shares fund, and 22.5% in gold, GLDM. It was up 2.86% for the week. It's up 0.28% year to date and down 8.1% since inception in July 2020. Next one's the aggressive 5050, the least diversified and most leveraged 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 in ballast composed of a preferred shares fund and an intermediate treasury bond fund. It was up 2.86% for the week. It's up 1.57% year to date, but down 16.7% since inception in July 2020. It's both spent the most time as the best performer of these portfolios and the most time as the worst performer of these portfolios. But that is what leverage does to a portfolio. Lots of volatility. And our last one and youngest one is the levered golden ratio. This one is 35% in a composite levered fund involving the S&P 500 and treasury bonds called NTSX. 25% in gold, GLDM. 15% in EREIT O, which has not been doing that well in the past year or so. 10% each in a levered small cap fund TNA and a levered bond fund TMF and the remaining 5% in a managed futures fund KMLM. It was up 0.87% for the week. It's down 1.87% year to date and down 15.08% since inception in July 2021. Biggest problem is that it invested in small cap funds Just as they were peaking in 2021, and unlike the large caps like the S&P 500, those have really not recovered since then. We're still waiting. But when they do move, they tend to move quickly and unpredictably. And I suppose we could ask our crystal ball about that, as to when they might catch up with their larger cap brethren.

Mostly Voices [29:31]

A crystal ball can help you. It can guide you.

Mostly Uncle Frank [29:35]

And what does the crystal ball have to say? We don't know.

Mostly Voices [29:39]

What do we know? You don't know. I don't know. Nobody knows.

Mostly Uncle Frank [29:44]

Yeah, that's what it always says. But it does speak the truth. That's the kind of crystal ball we have here. Never actually informative, but always quite truthful.

Mostly Voices [29:56]

Yes.

Mostly Uncle Frank [29:59]

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.

Mostly Voices [30:27]

com put your message in the contact form and I'll get it that way we'll need to take a little break this week to do some lawyering stuff so you probably won't hear from me until next weekend unfrozen caveman lawyer Caveman. But now he's a lawyer. Unfrozen Caveman Lawyer.

Mostly Uncle Frank [30:47]

But in the meantime, if you haven't had a chance to do it, you can also go to your favorite podcast website and give me a review, some stars, a follow. That would be great. M'kay? Thank you once again for tuning in. This is Frank Vasquez with Risk Parity Radio, signing off. Risk Parity Radio, Frank Vasquez, risk parity, risk parity, Frank Vasquez, risk parity.

Mostly Mary [31:37]

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.