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 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 the finest podcast audience available. Top drawer, really top drawer, 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 328. Today on Risk Parity Radio, we're just gonna do what we do best here, or at least attempt to do, which is answer your emails.

Mostly Voices [1:49]

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

Mostly Uncle Frank [1:55]

Before we get to today's emails, I did have an amendment to the last episode where I was answering an email from Sean about Bond ladders in particular. Do you expect me to talk?

Mostly Voices [2:07]

No, Mr. Bond, I expect you to die.

Mostly Uncle Frank [2:11]

And when I was answering that, I was assuming that you actually did not have access to these funds that would become available when you turn 59 and a half. And then after I did the episode, I realized that maybe that wasn't true. You can't handle the truth. And if you are able to access your retirement accounts before 59 and a half, and there are many good ways to do that, including something called the rule of 55, that it might be possible to organize your portfolio So you didn't have to deal with this issue of waiting until some other asset got turned on. And what I mean by that is you could just manage this as one big portfolio from the get go. Forget about having to do some kind of interim bond ladder to get you from now until a point in the future. Forget about it. Because that is actually where I would go first. I think it's better to look at global principles and arrangements first and then back out what you need to do for particular time segmentation based on your personal circumstances. If you have things like Social Security or pensions being turned on or access to other money coming on at some other point in time or specific expenses that will need to be dealt with on some kind of schedule. I realize it's very popular these days to do that the other way. But I would consider that backwards. If you were just looking myopically at the first five or 10 years of your retirement and trying to make your plans around that and then trying to fix the rest of your retirement, I think that that would not be a very efficient approach. I think you should start with the global principles first and then back into whatever time segmentation or other things you need to do to make it all work. But that's just me.

Mostly Voices [4:06]

And that's the way, -huh, -huh, I like it. Keshi on the Sunshine Band.

Mostly Uncle Frank [4:13]

And the way we Caltech engineer economist people tend to think. It cuts, wack! But now let's turn to the main events of the day.

Mostly Voices [4:33]

Here I go once again with the email. And... First off.

Mostly Uncle Frank [4:40]

First off, we have an email from Mark.

Mostly Voices [4:47]

All hail the commander of His Majesty's Roman Legions, the brave and noble Marcus Vindictus.

Mostly Mary [4:51]

And Mark writes, hello Frank and Mary, I remain a Patreon donor. I mainly wrote to you because I really need Homer to tell me that I have a gambling problem. But I also wanted your feedback. No. Based primarily on information from your podcast, my understanding of the current state of leveraged investing is it is not yet at the steel age level that we enjoy with unleveraged ETFs. You are correct, sir, yes. Specifically, we currently have a choice between ETFs designed for long-term holding that mix multiple asset classes in a single ETF, destroying rebalancing opportunities, or we can choose single asset class ETFs that are designed for daily holding and trading. I was curious if we can minimize the downsides of both options by combining them. I do realize that investing in an ETF less than three months old isn't really an option, so this is an academic exercise for now. But perhaps it could become a real option in the future if the return stacked ETFs prove viable. In the portfolio model I created, 85% of the assets are in ETFs designed for long-term hold：15% RSST, 10% RSSB, 10% RSBT, 13% GDE, 32% AVUV, and 5% IBIT. Then I added 5% each of UPRO, TMF, and UGL. The core thought here was that the 5% allocations would allow me to independently rebalance stocks, bonds, and golds when one of them had a major movement while most of the assets remained in ETFs designed for the long-term hold. The result is a portfolio leveraged to 1.7 with approximately 49% stocks, about 21% bonds, about 15% managed futures, about 13% gold, and about 3% Bitcoin. My core question is whether or not you think independent asset class rebalancing would actually work well in a hybrid structure like this, but any feedback is welcome as always. I think the 5% allocations to the daily ETFs would help trigger rebalancing opportunities, But I do realize that the rebalancing itself would still be imperfect when the long-term ETFs are involved in the rebalance, since you are still moving money into or out of multi-asset ETFs, where one of the two assets in a given ETF are probably being impacted inappropriately. Thoughts? Here is a link to the Portfolio Visualizer backtest. Bitcoin limits the backtest to just over 10 years.

Mostly Voices [7:46]

Well, you have a gambling problem.

Mostly Uncle Frank [7:50]

Well, first off, let me thank you for being a Patreon donor. For those three of you who don't know, this podcast has no sponsors, but it does have a charity we support. It is called the Father McKenna Center. It's a four-star rating and charity navigator. And what it does is serve hungry and homeless people in Washington, DC. Full disclosure, I am on the board of the charity and am the current treasurer.

Mostly Voices [8:17]

I don't care about the children. I just care about their parents' money.

Mostly Uncle Frank [8:21]

It's relatively small, but very efficient, and we rely a lot on volunteers and also donations in kind from various food sources around the city, which we then supplement with your kind donations. The best, Jerry, the best. So anyway, if you give to the Father McKenna Center, my one and only reward to give you is you get to go to the front of the email line. Yeah, baby, yeah! And so there are a couple ways to do that. You can either give directly on the website and I will link to that again in the show notes. Or if you go to our support page, there's a way to do it through Patreon where you can just do a monthly donation. on your credit card or otherwise. Either way you get to go to the front of the line, but I do ask that you please flag that in your emails as Mark has done so that I do not miss the fact that you are a donor and needs to go to the front of the line. Did you get that memo? Now with all that said, let's get to your questions. I thought this was all quite interesting and I will link to your backtest in the show notes so people can check it out. and the global issue here is what is the most efficient way to add leverage to a portfolio, a risk parity style portfolio or any other kind of portfolio? Because as we know from a lot of academic literature, this is one way to improve your returns. And this is the traditional way that hedge funds have used risk parity style portfolios to obtain stock market like returns with lower risk profiles than the stock market. So as you mentioned, we basically have two kinds of leveraged ETFs on offer these days. The older ones tend to be these trading vehicles that are usually three times leveraged or are based on options or futures often, although the better ones seem to be based on swaps, contracts, and hold some of the underlying assets themselves. and buy better ones, I'm thinking of things like UPRO. But now, as you also mentioned, there are newer ETFs that are designed for long-term holding and add some leverage into them and typically also have lower expense fees. I think the leading one of that genre is still NTSX, which is a 60/40 S&P 500 to Treasury Bond portfolio that is levered up 1.5 to 1. So, It's basically a 90-60 portfolio. And then you could take something like that, make that, say, two-thirds of your portfolio, and then add on top of that other alternative assets and other things. And that's kind of the idea of how to use that in a diversified portfolio. We have these more recent ones from returns stacking land with Corey Hoffstein, that are R RSST, RSSB, RSBT, which are various combinations of managed futures, bonds and stocks. And there are a number of other ones, as you have noted, and more coming out all the time. Most of these funds are relatively new. And so it's difficult to actually assess whether they are even matching the promise within them, if you will, they're tracking the thing that they are supposed to be tracking. Most of them seem to be doing a good job. I think people are getting the hang of how to do this. And so I'm thinking that the newer ones probably will perform up to expectations, but there's no guarantees and you won't know it until you actually see it for a few years. But that's kind of where we are going with potential leverage for portfolios like this. As to your principal question, Whether or not I think independent asset class rebalancing would actually work in a hybrid structure like this, I think it probably would, but I don't have any real insight as to what would be the most efficient or effective way to do this. We don't know.

Mostly Voices [12:31]

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

Mostly Uncle Frank [12:35]

I will tell you that people like Corey Hoffstein think that these things should be rebalanced more often so that you are not getting a statistical anomaly just because of the time of year. You may have rebalanced something. Whether that means you do them on bands or take some other approach is unclear because I'm also not aware of any particular magic test to apply to a portfolio that says this is the rebalancing optimizer test, which tells us exactly the best way to optimize this particular portfolio, I do suspect that different portfolios will perform differently under different rebalancing regimes. I have to believe that it's more likely that rebalancing based on bands is more efficacious than rebalancing based on calendars, at least when you're talking about more volatile assets. But people like Cliff Asness of AQR have pointed out that Well, that is kind of the point of putting volatile yet uncorrelated assets into a portfolio so that you get more of these rebalancing opportunities. And as we've read in our famous Shannon's Demon article from Portfolio Charts, rebalancing does improve returns if you're talking about two uncorrelated assets that you can buy and sell off of each other. Anyway, I think this can work. I do think it's going to be a lot more complicated if you are trying to rebalance composite funds as a general rule because the rules you have to come up with cross over from one fund to another and you're not kind of getting the pure rebalancing you would get if you had say all of your bonds in one fund or two funds and then all of your stocks in another fund, so on and so forth. I thought this was an interesting approach you came up with. And I'm looking forward to some of our other listeners coming up with other approaches as time goes on. Because you know I'm always here to encourage gambling problems. You have a gambling problem. That's true.

Mostly Voices [14:47]

Will you forgive me? Oh sure. Remember when I got caught stealing all those watches from Sears? Well that's nothing because you have a gambling problem. And remember when I let that escaped lunatic in the house because he was dressed like Santa Claus? Well, you have a gambling problem. Oh, when you forgive someone, you can't throw a bag at them like that. Oh, what a jip.

Mostly Uncle Frank [15:11]

Our eldest son recently took some of his excess funds and created his own super aggressive accumulation portfolio. What's nice about Fidelity is you just open up another account if you really want to create some kind of I'm going to put that thing off on the side and put stuff in there. So anyway, what he's using is 75% XSVM, which is a small cap value fund with momentum. I could have used a little more cowbell. Which gives it a little bit extra juice and then pairing that with 25% in UPRO. So it's a 50/50 split between large cap growth and small cap value, essentially. or S&P 500 in small cap value. Lever it up to 150%. Oh, I get it. Let me try. But we got all kinds of trouble here going on in River City, I think.

Mostly Voices [16:04]

And I call that sloth. The first big step on the road to the depths of degreday. I say first medicinal wine from a teaspoon, then beer from a bottle. And the next thing you know, your son is playing for money in a pinchback and listening to some big out-of-town jasper hearing him tell about horse race gambling, not a wholesome trotting race, no, but a race where they set down right on the horse.

Mostly Uncle Frank [16:34]

Like to see some stuck-up jockey boy setting on Dan Patch, make your blood boil, well, I should say. I applaud your efforts, Mark, and thank you for your email.

Mostly Voices [16:37]

Libertine men and scarlet women and ragtime, shameless music that'll grab your son, your daughter with the arms of a jungle, animal instinct, Mastery, friends, the idle brain is the devil's playground. Trouble. Right here in River City. Way to capital, P and that rhymes with P and that stands for pool. We've surely got trouble. Right here in River City. Gotta figure out a way to keep the young ones moral after school.

Mostly Uncle Frank [17:07]

Second off, we have an email from Justin. Actually, we have two emails from Justin that we've combined into one.

Mostly Voices [17:15]

Yes! Hi, Frank.

Mostly Mary [17:18]

Longtime listener and I have learned a lot from your show. Thanks for doing what you do and filling all of us with information that allows us to improve ours and our family's financial situations.

Mostly Voices [17:29]

You are talking about the nonsensical ravings of a lunatic mind. So I have a few questions.

Mostly Mary [17:37]

The first is, when looking at your portfolios, you are saying that your accounts are up. For example, you say that the All Seasons portfolio is up 3.44% since inception, but when you look at the account information, it shows that there is just over $9,000 when it started with $10,000. So I was trying to figure out how that is up 3.44%. I assume I am misunderstanding something or your tables are not updated. Secondly, how would you recommend people break up their assets between Roth traditional and taxable accounts to maximize lifetime tax efficiency. I have been trying to get my assets to 33% in each, but I'm currently over weighted in traditional due to lack of understanding early in my money savings. Thank you again for what you do and I look forward to hearing your reply. At this point, I believe I have listened to every episode and I first heard about you back when you went on Chooseify and since then have been enjoying your podcast and hope it does not become too much work for you. Thanks for all you do in informing all of us on how to best manage the money we have worked to save. Thanks, Justin.

Mostly Uncle Frank [18:47]

Well, thank you, Justin. I'm glad you are enjoying this and indulging me in my little hobby here.

Mostly Voices [18:55]

Do you presume to criticize the great Oz? You ungrateful creatures think yourselves lucky that I'm giving you audience tomorrow instead of 20 years from now.

Mostly Uncle Frank [19:10]

Now, the way the portfolios are tracked on the website is to track overall performance. And so to get an idea of that, you would want to take the current balance and add back in the total distributions, which are also listed there, which explains why there is less in the portfolios than we started in most cases. because we're taking distributions from them. The tracking is actually done by the Fidelity algorithm, which keeps track of when the money is coming out and does those kind of time-based calculations to get an accurate overall performance characteristics. And so I just go to the performance tab over at Fidelity, pull out the numbers, which tell me the year-to-date since inception and plop that right in there. The only one I calculate directly is the weekly. So if you're wondering, what would it look like if we weren't taking distributions out of it? It would look approximately like whatever's in there today plus the amount distributed over time. And those distribution rates are intentionally set at very aggressive or high levels because this would not be a very interesting exercise if we were just taking, say, 3% out of these portfolios. They would all do just fine. We wouldn't learn anything. That's not an improvement.

Mostly Voices [20:34]

The point of designing portfolios like this is to design

Mostly Uncle Frank [20:39]

things that are capable of withstanding higher withdrawal rates. Because if you are trying to withdraw the most money in retirement, that's the kind of portfolio you want to have. So if you look at sort of the main three that we focus on, which are the Golden Butterfly, the Golden Ratio, and the Risk Parity Ultimate. The actual annualized withdrawal rates of those over the past couple of years is over 5% for the first two and close to 6% for the Risk Parity Ultimate. Most people are probably not withdrawing that kind of money out of their retirement portfolios on a regular basis or plan to on a regular basis unless they're up there in age. But that is the whole point of this exercise and it's consistent with the long term performances of these kind of portfolios. I'll link to again the Portfolio Matrix Calculator at Portfolio Charts that I think I also linked to last week. That's a very interesting comparison tool between these kind of portfolios and other kinds of common portfolios. in withdrawal scenarios, and you can see that they're just better over time. I should point out that there's one portfolio there, the weird portfolio from Value Stock Geek, who is also a avid do-it-yourselfer, and he was recently interviewed on the Millennial Investing series on the Investors Podcast Network. And I'll link to that in the show notes because You can see his interesting also evolution into what he's gone with there for his baseline portfolio, which is very similar to my evolution in that we both realized after studying all of these macro prognosticators for a number of years that all of them were terrible at prognosticating. Forget about it. And so that the best choice for a portfolio for most people was going to be something that sort of covered all macro environments in some way and was not trying to chase the latest economic news or cape ratios or any other things that don't work.

Mostly Voices [22:59]

My dad said he listened to Matt Damon and lost all his money. And have been proven not to work over time.

Mostly Uncle Frank [23:02]

Forget about it. He also is a avid value investor who analyze as individual stocks, which is something I would prefer not to do. Looks like you've been missing a lot of work lately. I wouldn't say I've been missing it, Bob. But more power to you if you have the time and the inclination for that. Anyway, you might want to check that out. Now, as to your second question, how would I recommend people break up their assets between Roth, traditional and taxable to maximize lifetime tax efficiency. I don't think there's one formula for that, and you can see why just by thinking about how people's income varies over time depending on their career path, who they marry, and all sorts of other issues. Because in order to answer the question, you would actually have to know the relative income and tax rates of somebody over time. long into the future. So you'd have to be sitting there as a 20 or 30 year old and being able to project, okay, well in my 40s I'm going to make this much and pay this much in taxes, and in my 50s I'm going to make this much and pay this much in taxes. And that's not just realistic to be able to project. That's really not what I do, Peter. If you're looking for a rule of thumb, I think it makes the most sense if you are in the sub 20% tax brackets to certainly be focused on Roth investing for all of your retirement accounts. If you are in the over 30% tax brackets, it certainly makes sense to be focused on putting all of your retirement assets into traditional accounts because the chances are you're going to be ending up in a lower tax bracket later on and the chances if your taxes are really low right now because your young and just getting started that they're going to be higher later. And if you're in those 20% brackets, it's kind of a coin flip, I think. Because the other issue is, well, how long are you going to be obtaining income from work? Because if you're going to retire before traditional retirement ages, you're going to have a lot of space there to do conversions and other things that you might want to be doing. If you're going to be working into your 70s, then all of a sudden you're going to butt up against Social Security and RMDs right away while you are still making income from a job or a career.

Mostly Voices [25:34]

That is the straight stuff, O' Funkmaster. So you can see why there's no one right rule for this.

Mostly Uncle Frank [25:41]

And I think trying to come up with a rule saying, well, we should have one third, one third, one third, and trying to follow such a thing would probably actually make you be doing suboptimal things for your particular situation. So I honestly wouldn't fixate on it too much. I would just try to make the best decision wherever you are in time and then adjust that decision as you go forward and reassess this every few years or so. Because ultimately there are a lot of ways of managing around these issues once you do stop working. The other thing you should always keep in the back of your mind is that the way the tax brackets are structured, they expand every year. based on some inflation metric. And so if your income is remaining static, particularly as you get to your retirement years or it's going down, you are automatically going to be paying reduced taxes on the same nominal income just by operation of the tax code. I think that's one of the least understood and least applied truths in taxes. You can't handle the crystal ball.

Mostly Voices [26:52]

But that's mainly due to marketing by annuity

Mostly Uncle Frank [26:56]

salespeople and other people who are constantly using fear of future taxes as a marketing ploy to get people to buy things they shouldn't be buying.

Mostly Voices [27:08]

Because only one thing counts in this life. Get them to sign on the line which is dotted.

Mostly Uncle Frank [27:15]

The truth is our taxes tend to go down in retirement for most people.

Mostly Voices [27:19]

I'm happier than a pig in slop.

Mostly Uncle Frank [27:23]

But oftentimes telling people that results in them experiencing cognitive dissonance because they've believed something different for over many years.

Mostly Voices [27:35]

Fat, drunk, and stupid is no way to go through life, sir.

Mostly Uncle Frank [27:39]

Based on whatever garbage they've been sticking in their head. Are you stupid or something?

Mostly Voices [27:42]

Stupid is as stupid does, sir.

Mostly Uncle Frank [27:46]

which usually comes from financial media transmuting marketing materials from the financial services industry. Anyway, don't get too wound up about it because you will be able to manage your way through it.

Mostly Voices [28:12]

Groovy, baby.

Mostly Uncle Frank [28:16]

But whenever you see or you're going to have a low ordinary income year, that is the time to think about more Roth and conversions, if you will. We have not actually started our conversions personally yet because it's going to make more sense for us to do that in our 60s the way our finances are playing out. But I think that's going to be plenty of time to take care of this because the other thing is you do want to spread out those kinds of things over many, many years and not try to jam them all down in a few years because that will only stick you into higher brackets. Some of the worst advice and worst moves I see retirees doing is taking large chunks of retirement accounts and paying down mortgages or things like that because Not only stops the growth, it also just creates a large tax bomb in whatever year that is, which is certainly not worth the comfort of paying off a mortgage early. Anyway, hopefully some of all that rambling helps in some way, shape or form. And thank you for being a listener and thank you for your email. Last off. Last off, we have an email from Sai. Come on, boy. And Sai writes, hi, Frank.

Mostly Mary [29:46]

I saw Blazing Saddles the year it came out in an almost empty theater in Austin, Texas. I started laughing out loud before the show ever started. My buddy and I had picked the best seats. eye level at the center of the screen. Then the dude and his date arrived and chose the seats directly in front of us. I was a bit annoyed, but not much, and with nothing else to do, I watched the dude make his classic pretend to yawn and put arm around date's shoulder while he muffed his move and smacked her in the mouth hard enough to knock her head back. I didn't laugh out loud then and watched him make a pretty good recovery. After a bit of chit-chat, he tried the same move with the same result. That's when I began to laugh. The opening music came on and disguised my laughter. Anyway, here are a couple of clips that I think would work. What in the wide, wide world of sports is going on here? I get no kick from champagne. Miraculous alcohol never thrills me at all, but I get a kick out of you.

Mostly Voices [30:50]

When you were slaves, you sang like birds. I get no kick from champagne. How about some more beans, Mr.

Mostly Mary [31:04]

Taggart? I'd say you've had enough. Of course, you'll have the good manners not to mention I spoke to you. Mongo only pawn in game of life. Ride a blazing saddle, sigh.

Mostly Voices [31:18]

what in the wide, wide world of sports is going on here?

Mostly Uncle Frank [31:22]

Well, sigh. I make no promises, but I. I'll see what I can do with it.

Mostly Voices [31:30]

Send the wire to the main office and tell them that I said, main office. Tell them I said, ow. Gotcha. It's funny.

Mostly Uncle Frank [31:41]

That movie is one of those things that. People tend to remember when they first saw it because it had such an impact on them. We'll kill the firstborn male child in every household.

Mostly Voices [31:53]

Too Jewish. I got it, I got it. So we'll work up a number six on them. Number six, I'm afraid I'm not familiar with that one. Well, that's where we go a-riding into town. A whoppin' and a whoppin', every livin' thing that moves within an inch of its life.

Mostly Uncle Frank [32:12]

I think for a lot of us, it was sort of like, well, when were we allowed to see it? Or when did we sneak in somewhere to see it? Excuse me while I whip this out. Because I was certainly too young to see it when it first came out.

Mostly Voices [32:29]

I want rustlers, cutthroats, murderers, bounty hunters, desperados, mugs, pugs, thugs, nitwits, halfwits, dimwits, Vipers, snipers, con men, Indian agents, Mexican bandits.

Mostly Uncle Frank [32:43]

It is one of my father-in-law's favorite movies.

Mostly Voices [32:48]

I was born here, and I was raised here, and dead gum, I'm gonna die here. And no side winding, bushwhacking, hornswogling, crocker crocker is gonna roll away from this cutter. Especially about the beans. How about some more beans, Mr. Tiger? I'd say you've had enough.

Mostly Uncle Frank [33:13]

Which my brothers-in-law all also seem to enjoy.

Mostly Voices [33:18]

But we don't want the Irish.

Mostly Uncle Frank [33:22]

Anyway, I do appreciate receiving emails like this occasionally to remind us that Yes, we are pursuing a hobby here, and this is supposed to be fun. So we very much enjoyed reading it, and thank you for your email.

Mostly Voices [33:36]

I shall now read from the books of Matthew, Mark, Luke,

Mostly Uncle Frank [33:44]

and John. 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 if you go to the website www.riskparityradio.com you can 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 follow or a view. That would be great. Okay. Thank you once again for tuning in. This is Frank Vasquez with Risk Parity Radio. Signing off. Oh, I am sorry, sir.

Mostly Voices [34:29]

I didn't mean to overstep my bounds. You say that. What? Meeting is adjourned. It is? No, you say that, Governor. What? Meeting is adjourned. It is? Here, play around with this for a while. Thank you, Headley. No, it's Headley. It is? Mungo like candy. That was a close one.

Mostly Mary [35:00]

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.