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 [0:39]

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. It's a relatively small place. It's just me and Mary in here. And we only have a few mismatched bar stools and some easy chairs. We have no sponsors, we have no guests, and we have no expansion plans.

Mostly Voices [1:10]

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

Mostly Uncle Frank [1:14]

What we do have is a little free library of updated and unconflicted information for do-it-yourself investors. Now who's up for a trip to the library tomorrow? So please enjoy our mostly cold beer served in cans and our coffee served in old chipped and cracked mugs along with what our little free library has to offer. But now onward, episode 343. Today on Risk Parity Radio, we're just going to get back to doing what we do best here, which is attend to your emails, and we are still plowing through emails from April and getting further behind.

Mostly Mary [2:10]

That's not an improvement, which I tell you is probably only going to

Mostly Uncle Frank [2:14]

get worse in the next month because I'm going on several trips and we'll miss some recordings.

Mostly Voices [2:22]

I'd say in a given week, I probably only do about 15 minutes of real, actual work. But anyway, without further ado, here I go once again with the email.

Mostly Uncle Frank [2:38]

And, first off, we have an email from Stuart. Stuart is one of the family now.

Mostly Voices [2:42]

We do not eat family members.

Mostly Uncle Frank [2:46]

Ann Stewart writes：Frank, just a minor bit of feedback

Mostly Mary [2:49]

on your response to Anderson's levered accumulation portfolio. First off, it's important to account for the cost of leverage so as not to get overexcited about big numbers. Using portfolio charts, I suggest adding a negative 30% of short-term bonds to account for the UPRO swaps. I'd also bump up the expense ratio if the input allowed it, But that shouldn't be a big drag for the small allocation. The same trick works with Portfolio Visualizer. Last off, I'd suggest pairing the UPRO with EDV to mitigate volatility using a dash of risk parity. The last thing one wants is for an account with just UPRO to crash by 90%. Stand, it's gone! Uh, what? It's gone.

Mostly Voices [3:32]

It's all gone.

Mostly Mary [3:35]

Hopefully the EDV can counter some of that. I wouldn't be as worried about the others.

Mostly Uncle Frank [3:39]

All right, just to orient everyone, this is referring to our episode number 332, where we were talking about a portfolio suggested by our listener, Anderson.

Mostly Voices [3:54]

Must have been one of them low-flying buzzard hawks or something. And he was going to use this portfolio for accumulation.

Mostly Uncle Frank [4:02]

And what he was putting together was 15% Upro, which is a leveraged S&P 500 fund, 25% EDV, which is a Vanguard Strips Bond Fund, 40% AVUV, which is an Avantis US Small Cap Fund, 10% AVDV, which is an Avantis Emerging Market Fund, and 10% AVEM, which is an Avantis Emerging Market Fund. And so I think the key to answering your question is what you observe, which is that the overall exposure to UPRO is only 15% in this portfolio. So if that were to lose 90% of its value, you're still talking about only a 13.5% drawdown in the entire portfolio, which is not actually that large for an accumulation portfolio if you're using it for that. Because what you are really comparing this portfolio to in accumulation is to something that is 100% stocks, which could be down 50% in any extended time frame. And you would expect to see that over the course of 20 or 30 years at some point. Now I did go and try to put in a negative 30% in short term bonds and portfolio visualizer to try and create a synthetic version of UPRO using SPY and negative cash and negative short-term bonds. I was not very successful, but I will put the results in the show notes. But yeah, you could experiment with subtracting various things to account for the drag you may see in UPRO or are likely to see in UPRO over time due to the cost of the leverage. And then I'm not sure whether this was just a typo in your email or you suggested pairing the UPRO with EDV, but that's exactly what Anderson has done here. So I think we've already covered that unless you were talking about just using a different percentage of EDV. Anyway, for those of you who are interested in this, I would suggest you go back and listen to episode 332 and then take a look at some of the links that we put in the show notes both for That episode and this one. And thank you for your email.

Mostly Voices [6:23]

You look somewhat like a mouse. Yeah, well, I am somewhat like a mouse. I see. I have to go. Second off. Second off, we have an email from George. How can you be grateful when you're so close to the end? When you know that any second poof, bam, oh, it could all be over. I mean, you're not stupid. You can read the handwriting on the wall. It's a matter of simple arithmetic, for God's sake.

Mostly Uncle Frank [6:56]

And George writes, hello, Frank and Mary.

Mostly Mary [7:00]

I spent some time with an old friend last week during the eclipse. We had many good conversations about all facets of life, including investing and finance. I shared my portfolio design, risk-parity gold and ratio permutation with him, and he felt long-term bonds were not a good play in the current environment. I reiterated the reasons for my choice, including historical analysis, correlation considerations, volatility requirements, simplicity, ease of maintenance, etc. and reminded him, We don't know what we don't know. My crystal ball is cracked. A really big one here, which is huge. He feels the long bond is the least manipulative market, making it a true canary in the financial coal mine. He pointed out that in April of 2020, the 30-year Treasury attained its lowest yield and highest price, while interest rates were the lowest worldwide in 5,000 years. He believes we will not return to those rates in our lifetime. U.S. Government debt spending, war, political impotence, and the alienation of our most important buyers through recent actions conspire against long bond security. Real wrath of God type stuff. As a result of these beliefs, he is betting against long-term bonds using a double inverse bond product, TBT, ProShares UltraShort 20-Plus Year Treasury. TBT seeks returns that correspond to two times the inverse, minus 2x, of the daily performance of the ICE US Treasury 20-Plus Year Bond Index. It has about $300 million in assets, adequate liquidity, and a 0.9% expense ratio. There are similar funds with more leverage, such as TTT, ProShares UltraPro Short 20-Plus Year Treasury, and TMV, Direxion Daily 20 Plus Year Treasury Bear 3x Shares, targeting three times the inverse of the index, along with funds with less leverage, -1X, such as TBF, ProShares Short 20 Plus Year Treasury. While I don't necessarily buy into his interpretation of the long-term bond market, I never considered hedging my bond holdings with an inverse product. Adding this product to my portfolio will surely reduce the volatility of my risk parity portfolio. However, it would also diminish the desired impact, non-correlated and high volatility, of holding long-term bonds as a part of the portfolio. I don't know how to express my concerns about playing both sides of the same asset class, but it seems it would not make sense in my risk parity design.

Mostly Voices [9:37]

You are correct, sir, yes.

Mostly Mary [9:41]

In my gut, it feels as if this would be diminishing the desired impact of this holding in my portfolio. I don't know how to model a leveraged inverse fund in a backtest using Portfolio Visualizer, so cannot confirm my conclusions. I hope this makes sense and that I have communicated my concerns. Your thoughts? And keep up the good work, George, an avid fan and a long-term supporter via Patreon.

Mostly Voices [10:08]

Kramer, you can't go. Who's going to do the feats of strength? How about George? Good thinking, Cougar. Until you pin me, George, the Festivus is not over. Please, somebody stop this. Let's rumble!

Mostly Uncle Frank [10:27]

Well, first, let me apologize for not getting to this one early or earlier. I see that you are a supporter on Patreon, and all that money goes to the Father McKenna Center, the charity that we support. But you were supposed to go to the front of the line, and I did not move you to the front of the line, and I apologize for that. Shoot him now!

Mostly Voices [10:48]

Shoot him now! you! keep out of this. He doesn't have to shoot you now. He just so has to shoot me now. I command that you shoot me now.

Mostly Uncle Frank [11:04]

Nevertheless, Your email is of a timeless nature, and so we can answer it today just as well as we could right after the eclipse. My reaction to your friend was similar to what I hear pretty much on a daily basis on various financial media and podcasts, which are a whole cavalcade of hedgehogs, and those are experts I describe as having sort of one big theory that they pound over and over again and look for reasons to justify it. These people are usually not very good at predicting anything. And there are a set of them that are campaigning or predicting higher interest rates, and then there are a set of them that are campaigning or predicting for lower interest rates. And you will find that what they do then is they go cherry pick various narratives, various data, and kind of assemble it and list it and say, here's all the reasons that they think this is going to happen the way they believe it to be unfolding. Now, I don't get a whole lot out of that one way or another, but what I always do notice is that the kinds of things that a given expert will come up with because they're kind of a laundry list of stuff generally include some stuff that is not probably true or not very accurate or not very germane. So let's just put on our critical thinking hat and take a look at some of the things your friend had to say. And one of those was, he feels the long bond is the least manipulative market, making it a true canary in the financial coal mine. Surely you can't be serious. I am serious. And don't call me Shirley. That does not appear to be true to me simply because there is a well-known technique called quantitative easing that our government and many other governments engage in through their central banks, where they use the central banks to actually buy up various government debt, including treasury bonds, and that could occur anywhere on the treasury curve. And this is not something new. In fact, it goes back to as long as we've had central banks, in particular in the United States, if you go back to around World War II, we had pretty severe yield control across the yield curve that was essentially controlled by the central bank. And you've seen a lot of that in Japan recently and other efforts and other things. So that market is just as subject to manipulation as any other bond market. The only advantage you have there is that it's a extremely large and deep market, but on the other hand central banks are extremely large and deep when it comes to what they can do if they really want to affect the price of something. All right, the next thing we're talking about is the 30-year treasury attained the lowest yield and highest price while interest rates were the lowest worldwide in 5,000 years. Inconceivable! Well, that's because we were in the middle of a pandemic and in fact, The central banks were buying a whole lot of treasury bonds. So it kind of goes to the last point that it's not surprising that if we have a global health crisis and the governments all around the world use their central banks to intervene in financial markets that you might get that kind of outcome, at least temporarily. Now, the 5,000 year reference is more amusing and more fallacious. So I was thinking, well, what actually was going on in human societies 5,000 years ago in terms of the most developed societies? And you're talking about things like Sumerians and Egyptians. And they weren't using money or they didn't have a financial system as we know it today. What we do know from looking at cuneiform tablets and things like that is that what they largely used those for was keeping track of grain stores and other things that they collected basically as their form of taxation and form of money. The largest societies there and the kings and whatever would collect from the people all of these stores of wealth in the form of grain and things and put it in pots and make tally marks on tablets to keep track of it. And this was well prior to the widespread use of any real form of money, which at least in the Western societies only started occurring, you know, 4500 BCE. The Lydians did it first and then other people adopted it like Persians. I may have my dates wrong. It could go back to 600s. But anyway, the interesting development over the past 5000 years is that financial technologies have developed so much. and with the development of financial technologies over time, whether that was bills of exchange or the use of goldsmiths and receipts as money or any other financial innovation, it does make the whole process more liquid, more cheap, and it is no accident that interest rates have fallen over time because technological developments are generally deflationary. Specifically, if it costs a lot less money to hold and use money and use debt that's going to come out of the cost of money. So it's not very surprising that in modern information societies we have lower interest rates than you did in some agricultural society that barely had used any money. They also had things like debt jubilees back then. Ooh, how convenient. But now I really digress. There is an interesting book that came out a year or two ago called the Price of Time, which actually discusses all of this for historical periods. And if you're interested in it, I would suggest you pick that up. The other fallacious idea I've got out of what your friend said was this idea of magic mean reversion. And for some reason, people think that because interest rates fell, for the past 40 years, that means they need to automatically rise for the next 40 years, as if there's this kind of magic hand that pushes the interest rates up or down based on what had happened in the past. But we know that's not how it works. That's not how it works. That's not how any of this works. So whether interest rates are going to go up or down in the future, is not dependent on what happened in the past, even though you might see similar economic conditions that would result in similar outcomes. But the very idea that interest rates went down before does not mean they're going to go up or down in the future. Forget about it. And in fact, the most common movement in interest rates is not either up or down, but up and down as economic cycles work through the system. So whenever there's a recession, interest rates go down, and then whenever there's a expansion, inflation rates go up. And that's true regardless of 40-year trends or any other trends. If you look at a long-term horizon over the past, say, 100 years, you would say that interest rates look pretty average and normal today and very similar to what they were saying the late 1950s or other periods in time when nobody thought they were interesting. So I think we should be agnostic about interest rates and not try to be predicting them.

Mostly Voices [18:54]

Crystal ball can help you. It can guide you.

Mostly Uncle Frank [18:58]

And it's funny that many people who understand that you cannot predict the stock market or movements in the stock market in a very well or accurate way also seem to think out of the other side of their mouth or brain that they are perfectly competent to predict future interest rates. Now, why people think they have this magic crystal ball that doesn't work for the stock market but does work for interest rates is kind of funny actually because if you could accurately predict interest rates, obviously you could make a lot of money very quickly trading futures and options and become one of the wealthiest people in the world relatively quickly. Now you can also use the ball to connect to the spirit world. And if you can do that, please do more power to you. But if you cannot do that and you cannot make money that way, you would be better off recognizing that your ability to predict interest rates in the future of interest rates is pretty close to zero, and you would stop doing it and then take action that suggested that you were not trying to rely on such crystal balls.

Mostly Voices [20:11]

But what about your grandfather's work, sir? My grandfather's work was doodoo!

Mostly Uncle Frank [20:15]

And one of those things would be to hold a portfolio that will perform reasonably well whether interest rates go up or down. So your portfolio is not beholden to your ability to predict interest rates. Didn't you get that memo? All right, now talking about TBT, which is this ProShares UltraShort 20-Year Treasury Bond Fund that is two times leveraged. I haven't really looked at something like that in about 10 years, but I am familiar with it. And basically it's a speculative product. It's like, yeah, if you want to speculate on the direction of interest rates, yeah, you could use that. Now, it doesn't really make much sense in any portfolio that is based on stocks largely because typically you're going to be having things go in the same direction then. Over time, stocks tend to outperform inflation because inflation gets embedded in a stock market, which means most of the time TBT is highly correlated with stocks. So it doesn't really have a place in a portfolio where it has a place as if you are trying to speculate on the direction of interest rates. But if you want to do that, there are probably other more interesting and better speculation vehicles today. And if you go back to episodes 248, we talked about a few of those. One is a fund called PFIx, which speculates on higher interest rates. Another one is RRH. and another one is RISR. I won't go over those today again, but I would think that some of those, particularly PFIX, which moves a lot when inflation rates rise or fall, would be a better speculative vehicle for this sort of thing than TBT probably would. But again, that's not really for a portfolio. That's for speculation. The product I think that would be the most useful for a portfolio that would incorporate some of this is simply a managed futures fund like DBMF, because those things can go long and short on interest rates. And one of the reasons those funds did so well in 2022 is they were in fact short interest rates effectively. And you can see which ones they are long and short simply by looking at the monthly disclosures of what they are holding. But if we did have a sustained period where interest rates were rising, that trend would be picked up by a fund like that and it would do very well like it did in 2022. And that would hedge your interest rate concern, at least with respect to bonds. And it would likely pick up other trends in commodities and currencies that tend to go along with trends in interest rates. So, I think that is your real solution here for portfolio construction and not something that is entirely a speculation on interest rates, and in particular, not something like TBT that is exactly the opposite of something else you hold in your portfolio. Because if you have two things that are doing exactly the opposite, this is kind of wasted space. The other problem I see with TBT is I believe it has a negative expectation over time because it's essentially absorbing the interest rate cost. So that is yet another reason not to use it except for speculative purposes. And finally, you can actually model negative treasuries in this new tool that's at testfool.io. And if you do that with some stocks, which ends up putting leverage in the portfolio, you find you get some very volatile portfolios that could lose 80 or 90% of their value if you combine stocks in a inverse treasury kind of thing. It essentially adds to the volatility of the portfolio. But I will let you check that out at your leisure and thank you for your email.

Mostly Voices [24:24]

I took you to take him, Georgie. Come on, be sensible. Stop crying and fight your father. Ow! Oh, I gave you a boost! This is the best Festivus ever! Last off.

Mostly Uncle Frank [24:39]

Last off, we have an email from my contact info.

Mostly Voices [24:43]

Oh, I didn't know you were doing one. Oh, sure. I think I've improved on your methods a bit too. And my contact info writes.

Mostly Uncle Frank [24:51]

Hi Frank, all your podcasts are wonderful.

Mostly Mary [24:56]

But your rants are exceptional.

Mostly Voices [25:00]

You are talking about the nonsensical ravings of a lunatic mind. Such as your comments on TDF.

Mostly Mary [25:05]

Fees on fees are problematic, but the chronic underperformance of the TDFs is noteworthy. Perhaps it is a structural problem given that the glide path adjustment periodically, maybe 50% of the time, assuming a random walk, works against the potential positive rebalancing impact. Not sure. In any case, my sense is that the glide path veiled active slash timing bet overlay may be in part the culprit. In any case, no silver bullets and convenience is not free, especially in the exponential space where we all inhabit as investors. Thank you for the informative podcast.

Mostly Uncle Frank [25:46]

All right, for reference, this refers to our Shall we say discussion of target date funds in episode 333 where we went through some recent research, very troubling research that shows how bad these things have been and have become since they became popular in the past 10 or 15 years. It was one of those things that was maybe a good idea in theory but has turned into Frankenstein's monster in practice and just another excuse by the financial services industry to extract additional fees from the unsuspecting public. Because only one thing counts in this life.

Mostly Voices [26:31]

Get them to sign on the line which is dotted.

Mostly Uncle Frank [26:35]

Supported now by a host of well-meaning but misinformed or maybe not so well-meaning people in the financial advisory field and personal finance generally. Am I right or am I right or am I right? Right, right, right.

Mostly Voices [26:53]

Anyway, I will not repeat everything I said in that episode 333.

Mostly Uncle Frank [26:58]

You can go back and listen to it. But it is sufficient to say that the data does speak for itself that these things are generally a very bad idea unless you are comatose. Dead is dead. Because they are better than not investing at all. Not gonna do it. Wouldn't be prudent at this juncture. I think you are likely correct that having a long glide path is not advantageous for these kinds of funds and generally in your investing lifetime. And I think that's because you basically have two phases where you're either trying to accumulate or you are beginning your decumulation. And that is a more abrupt cliff than most people realize. It's not something you want to glide into over many decades. Forget about it.

Mostly Voices [27:48]

Basically, you want to put the pedal to the metal, at least at

Mostly Uncle Frank [27:52]

the beginning of the journey.

Mostly Voices [27:55]

Down the quarter mile of death in their 7,000 horsepower nitro burning suicide machines.

Mostly Uncle Frank [27:59]

Until you get close to where you want to be, and then you want to take the pedal off the metal. in very short order and reconfigure your portfolio to something that you'd be decumulating from. I mean, look at you. You couldn't even drive a wheelchair. You should look at yourself, Max. You're a mess. And there's nothing about a long glide path that actually matches that scenario or matches up well with that scenario. And in fact, the research that Michael Kitces and others have done suggests that having a reverse glide path, particularly in retirement, would be advantageous. Although I don't know anybody who's really ever adopted such a thing because I think it's psychologically difficult to do. But there certainly is no research that I'm aware of that suggests that a glide path, a long glide path throughout your accumulation phase, helps you in any way, shape or form other than psychological, as in if it keeps you from bailing out during a market crash, yes, that would be a useful improvement. But assuming you're not going to bail out in a market crash, then it does not help you because it just slows down your accumulation phase.

Mostly Voices [29:15]

Forget about it!

Mostly Uncle Frank [29:19]

Anyway, I do not have any additional research to point you to at this point in time, but I would suggest taking a look again at the research in episode 333 in the show notes if you have not looked at it in detail already. It's a quite well-developed academic paper. And thank you for your email.

Mostly Voices [29:39]

Bow to your sensei. Bow to your sensei.

Mostly Uncle Frank [29:43]

But now I see our signal is beginning to fade. As I mentioned at the beginning of this podcast, I'm going to be doing a bunch of traveling off and on In the next month, we're going to a wedding this weekend for my friend Diana Merriam of Economy Conference fame. Marriage. Marriage is what brings us together today. And that should be a lot of fun. Then I'll be running off to visit some family and then later in the month I'll be partying in Milwaukee with some old friends. that I grew up with a long time ago in a galaxy far away. The rap The rap the rap But we will eventually get to all of these emails sooner or later. Yes In the meantime, 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, a review, a follow, That would be great. Mm, kay? Thank you once again for tuning in. This is Frank Vasquez with the Risk Parity Radio. Signing off. Who's they?

Mostly Voices [31:24]

Oh, oh, oh, I'm sorry. I thought my dark lord of the Sith could protect a small thermal exhaust port that's only two meters wide. That thing wasn't even fully paid off yet. Look, I'm just dealing with a lot of crap right now. Death Star blown up by a bunch of. Teenagers, you know, I didn't mean to snap.

Mostly Mary [31:44]

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.