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

Mostly Mary [1:28]

Top drawer, really top drawer, along with

Mostly Uncle Frank [1:31]

a host named after a hot dog.

Mostly Voices [1:34]

Lighten up, Francis.

Mostly Uncle Frank [1:38]

But now onward, episode 342. 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.

Mostly Voices [1:54]

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

Mostly Uncle Frank [2:03]

First off, we have an email from Jeff.

Mostly Voices [2:07]

Mr. Speckoli, that's the name they gave me.

Mostly Mary [2:11]

And Jeff writes, hi Frank, I always appreciate you taking the time to answer my questions. I used your suggestion and entered my target portfolio into the portfolio charts matrix. It scored very highly overall.

Mostly Voices [2:26]

Yeah, baby, yeah!

Mostly Mary [2:31]

My question is regarding the standard deviation versus safe withdrawal rates. On my portfolio, as well as some of the other highly rated ones on the site, such as the Weird Portfolio, the safe withdrawal rate scored very well, but the standard deviation did not. Is this a cause for concern in your mind, or is this something to just ignore when constructing a risk parity style portfolio. Obviously, all portfolios will have some things that they do better than others, but it just seems like this was the main outlier for my portfolio as well as one or two others that seem to score highly in every other category. I would love your insights on that. Thank you so much, regards, Jeff. Hi Frank, I forgot to include my specific portfolio for you to see to what I was referring. 35% total stock market US, 15% total international, 15% small cap value, 20% long-term treasury, 10% gold, 5% REIT. Thanks again.

Mostly Uncle Frank [3:27]

Oh, gnarly. Well, it was good of you to include that second email so we know what you're talking about. And I did plop that into the portfolio. Matrix Analyzer, I'll see if I can link to that in the show notes, but you may have to do it manually. The other Portfolio Charts chart you may be interested in looking at is the Annual Returns chart, which will show you the standard deviation in relation to the annual returns because that standard deviation is in relation to all of the annual returns over time. All that being said, I don't think the standard deviation is very meaningful in this context. What you will find is that it has a high correlation simply to what is the percentage of stocks in your portfolio. So the more stocks you have in a portfolio, the higher the standard deviation is likely to be simply because of all of these assets that we generally talk about. The stock market has the highest potential returns and highest potential losses and therefore has the highest standard deviation. Now that wouldn't be true if you had something like Bitcoin in that matrix, but that is not an asset class that can be analyzed at portfolio charts. But no, it doesn't actually tell you a whole lot about what you really care about with respect to these kinds of portfolios, which in general is that projected safe withdrawal rate, the perpetual withdrawal rate. The other thing I think that that is the most meaningful for holding a portfolio, kind of the experience over time, is the depth of the maximum drawdown and the length of the maximum drawdown, which you can also find there on portfolio charts in a comparison form. Because that really tells you what does it feel like to hold this kind of portfolio over an extended period of time? And am I going to have three-year drawdowns or am I going to have 10-year drawdowns? Because you will find that the best kinds of portfolios have relatively short drawdowns in terms of max drawdown over a period of years. And your portfolio scores in the middle of the pack as far as how deep the drawdown is, or the potential historical drawdown, and is at the higher end of the range. tied for number three in terms of the length of the drawdown. And that's a really good sign for a portfolio. And this is also one of the interesting differences between a portfolio that's used for accumulation and a portfolio that's used for drawing down on in retirement. Because in accumulation you actually don't mind fairly lengthy drawdowns because you are basically going to be buying all through that trough, if you will, because you're going to be adding to the portfolio in an accumulation phase. It's when you start taking out of it that you really get more concerned about, well, how long is this going to go on? Especially if you're using some kind of variable withdrawal rate. And so there also is a specific length of drawdown and depth of drawdown charts that you can bring up in portfolio charts. And so you can see that graphically depicted for each portfolio that you put in there in addition to the comparison in the portfolio matrix. Hopefully all that helps and thank you for your email. Why are you continuously late for this class, Mr. Spicoli? Why do you shamelessly waste my time like this? Oh, no. Second off. Second off, we have an email from James. Hey Jim, baby.

Mostly Voices [7:22]

I see you brought up reinforcements. Well, I'm waiting for you, Jimmy boy. And James writes.

Mostly Mary [7:31]

Hi Frank, I thought you might enjoy this paper by the Crew at the Mutiny Fund. Thanks, James.

Mostly Uncle Frank [7:38]

Well, James, thank you for the reference and I will link to it in the show notes. We actually had a detailed discussion about this very paper and the Cockroach Portfolio all the way back in episode 194 from July 2022. Yes! And if you haven't listened to that, I would go check that out. I don't want to repeat the whole thing here. But basically, I think they are approaching this like a Risk Parity style portfolio, trying to create a very diversified portfolio that will do well in different kinds of economic regimes. There were a couple of drawbacks that I observed in episode 194, and one was they used the template from the permanent portfolio, which was a very simplistic portfolio that we actually talked about in the history of these kind of portfolios back in episodes three, five, and seven. But that portfolio was one quarter cash, one quarter long-term treasury bonds, one quarter gold, and one quarter US stock market, which was kind of a primitive stab at a risk parity style portfolio made by Harry Brown back in the 1970s and 1980s when we really didn't have the data to use to construct one of these things. While that is interesting historically, I don't think you should be basing a portfolio today on that construct, which was just taking these four differing asset classes and dividing it into four. And the reason it's not that ideal is because it's not really allocated for things like maximizing a safe withdrawal rate. It was just kind of a primitive stab at the whole thing. So when you think about it, it ends up with too much cash in it and not enough stocks in particular. And that's what I thought of this cockroach portfolio when I looked at it. It didn't look like they were making decisions about how much of each asset class to include. based on any kind of data analysis or metrics, but we're basically just kind of assigning a percentage to every asset class they could think of and shoving it into this cockroach portfolio. So I thought there should have been a lot more variations in how much of an allocation they allocated to each sort of thing. The next thing I found that was not desirable about it is it just has too many assets in it. There's no reason to be having every asset in the world just because all of these assets exist. To me, that kind of violates the simplicity principle because a lot of these assets are overlapping and highly correlated with another. That's the fact, Jack! That's the fact, Jack! So to me, that's just unnecessary complication. Forget about it. And I wouldn't be including things like heavy exposures to corporate bonds, for example. But I think part of their deal is and their reason for existing is to put this out as kind of a hedge fund kind of thing, that they are actually going to manage these assets and maybe include some private equity and private debt and other things as some kind of secret sauce or something like that. And I suppose that's fine if they're trying to sell their services, but that's a bridge too far. and unnecessary if you're trying to be a DIY investor and use these kind of principles to construct a portfolio with. But I do see these guys come up occasionally on various podcasts by Meb Faber and other people like that who specialized in highly diversified portfolios. And they are interesting to listen to about this. Now, if you go download that the whole paper from that site, what you link to in the link is a summary of the paper, and then if you download the whole paper, which is about 60 pages long, that also gives you a nice summary of what these various asset classes are. So this paper can also be used just kind of as a little reference manual if you haven't heard of a particular asset class and are interested to know just, well, what is this thing? It does have a nice description of a lot of different things, including trend following and other stuff. that I think is fairly useful for somebody who's not familiar with a lot of these things. So thank you for bringing this to our attention again. It's an oldie but a goodie, and I think other listeners who are not listening in July of 2022 may find it interesting to go back and take a look at this. And so thank you for your email.

Mostly Voices [12:25]

Last off. Last off, an email from Graham.

Mostly Mary [12:35]

And Graham writes, Dear Uncle Frank, I have reached the financial independence phase, but still happy with work, so not quite to the retired early part yet. I have started to transition my portfolio to a golden ratio style, but my asset location options are holding me back from completing this task. About 30% of the portfolio is in 401 s with limited investment options. Over 50% is in a taxable brokerage account where I would prefer to not place bonds or manage futures due to their high yield. So currently, my bonds and managed futures allocation is below what I would like the long-term target to be. I do have a bond allocation within the 401 but it is an aggregate bond fund. One option I have is to roll most of the 401 money into an IRA. This would allow me to allocate the portfolio as desired with the correct account for each asset. The only drawback I see is that it will keep me from doing my annual backdoor Roth conversions due to the pro rata rule. I certainly like the tax benefits of the Roth account, but the annual contribution limit is only $7,000, so my plan is to roll that 401 into an IRA after this year, and stop doing the backdoor Roth funding. Do you think this is the right move or is everyone in this room now dumber for having heard this? Thanks so much, Graham.

Mostly Uncle Frank [13:59]

Everyone in this room is now dumber for having listened to it. Well, this is an interesting question and I think it has a lot to do with proportionality in this case. Because if you are at your F number or close to it, that means you've accumulated a significant amount of money. And so the ongoing contributions to your assets are probably relatively insignificant going forward. That what's mattering more is the gains and losses on what you've already accumulated. And so keeping that in mind, I think it's probably more important to focus on the management of what you've already got than be concerned about what else is going to go in there and how it's going to go in there in the future. So I probably would roll that 401k money into an IRA so that you can properly allocate it to what you want it to be for the overall portfolio and then just let the backdoor Roth contributions go at this point. And you can do conversions later on or conversions from what you've already got. but you're probably going to not want to do those anyway right now if you are still employed and still making a lot of ordinary income anyway. One of the mistakes I often see retirees making is getting too wound up about making Roth conversions early on or too much at one time, which just ends up increasing the tax bills. In fact, you want to space them out over as much time as you have, particularly if there's time between stopping work and taking your Social Security. I was also listening to another podcast recently. I think it was Big Picture Retirement Show. I'll figure it out and link to it in the show notes. But they were talking about when you might be overdoing it actually on Roth conversions. Because there are a couple of reasons why you would want to just keep your traditional IRA money or 401k money in that form. Anyway, after age 70, one is that you can use qualified charitable distributions or QCDs to donate directly to charity out of one of those accounts. And you never see the tax man then because it never counts as income. The other possibility they raised is that if you were going to use some of your retirement money to self fund long term care, you probably want to do that out of a traditional retirement account. because if you're spending that much money in a year on health care, you are going to qualify for that deductible threshold. I think it's over 7.5% that would give you this big tax deduction, effectively wiping out most of the taxes that you would have ordinarily had to pay for Roth conversion or something else, or just taking the money as an RMD or as a general distribution. So thankfully we have not been made dumber by reading your email to the audience. A very good question, actually, and thank you for your email.

Mostly Voices [17:05]

And may God have mercy on your soul. And now for something completely different.

Mostly Uncle Frank [17:13]

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. Things were up and down, but actually didn't move a whole lot last week in the end. Looking at the markets themselves, the S&P 500 was up 0.03% for the week. The Nasdaq was up 1.41% for the week on the strength of Nvidia, I think. Small cap value was down. Our representative fund, VIoV, was down 2.24% for the week. Gold was also down. Gold is a big loser last week. Gold was down 3.49% for the week. Mr. Bond got to Goldfinger last week.

Mostly Voices [17:57]

Do you expect me to talk? No, Mr.

Mostly Uncle Frank [18:04]

Bond, I expect you to die! Speaking of bonds, long-term treasuries represented by the fund VGIT were down 0.03% for the week. REITs represented by the fund R E E T also took it on the chin. They were down 3.14% for the week. Commodities represented by the fund, PTBC were down 0.77% for the week. Preferred shares represented by the fund PFF were down 0.41% for the week. And managed futures represented by the fund DBMF were down 0.10% for the week. Which means they are still outperforming just about everything else this year up about 15.68% according to Morningstar. Now moving to these portfolios, the first one is the All Seasons Portfolio, a reference portfolio that's only 30% in stocks and a total stock market fund, 55% in intermediate and long-term treasury bonds, and 15% in gold and commodities. It was down 0.46% for the week, it's up 2.49% year to date, and up 4.05% since inception in July 2020. Moving to our more bread and butter kind of portfolios. First one's Golden Butterfly. This one's 40% in stocks in a small cap value fund and a total stock market fund, 20% each. 40% in treasury bonds divided into long and short and 20% in gold, GLDM. It was down 1.27% for the week. It's up 3.28% year to date and up 24.48% since inception in July 2020. Next one is the Golden Ratio. This one's 42% in stocks in 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 1.23% for the week. It's up 3.09% year to date and up 20.66% since inception in July 2020. Next one is the Risk Parity Ultimate. I'm not going to go through all 15 of these funds, but it was down slightly last week. It was down 0.78% for the week. It's up 6.6% year to date and up 14.59% since inception in July 2020. At the rate it's going, it looks like we'll be selling some ether for the next month's distribution. which I think was just approved for an ETF and so had a big hop last week. Now moving to our experimental portfolios. We do hideous experiments here, so you don't have to. Don't try this at home. Look away, I'm hideous. All these involve levered funds, and so it makes these portfolios highly volatile. First one's the Accelerated Permanent Portfolio. this one is 27.5% in a levered bond fund TMF 25% in a levered stock fund UPRO 25% in a preferred shares fund PFF and 22.5% in gold GLDM it was down 1.04% for the week it's up 3.54% year to date and down 5.11% since Inception in July 2020 Next one is the aggressive 5050, the most levered and least diversified of these portfolios, and it shows. It's 13 in a levered stock fund, UPRO, 13 in a levered bond fund, TMF, and the remaining 3rd in ballast, divided into PFFA preferred shares fund and VGIT, an intermediate treasury bond fund. It was down 0.33% for the week. It's up 1.74% year to date and down 16.57% since inception in July 2020. And finally, the Levered Golden Ratio Portfolio. This one is 35% in a composite levered fund called NTSX. That's the S&P 500 and Treasury bonds, 25% in gold, GLDM, 15% in iREIT, 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 is down 2.2% for the week. It's up 2.55% year to date and down 11.25% since inception in July 2021. And that concludes our portfolio reviews.

Mostly Voices [22:34]

Boring.

Mostly Uncle Frank [22:38]

Yes, it was a snoozer, but it usually is. That's what you really want in your portfolios. especially in retirement. 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 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, follow or review. That would be great. Okay. Thank you once again for tuning in.

Mostly Voices [23:22]

This is Frank Vasquez with Risk Parity Radio signing off. Why don't you get a job, Sikoli? What for? You need money. All I need are some tasty waves, cool buzz, and I'm fine. The Risk Parity Radio Show is hosted by Frank Vasquez.

Mostly Mary [23:45]

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.