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 [0:20]

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 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. Abby Normal. 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.

Mostly Voices [2:16]

I have a feeling we're not in Kansas anymore.

Mostly Uncle Frank [2:20]

But now onward, episode 347. 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. Just a preview of that. Boring. Yeah, not much happened, although we did get to do a rebalancing in one of the portfolios.

Mostly Voices [2:47]

Well, Ladi Frickenda.

Mostly Uncle Frank [2:50]

So at least we'll have something to talk about there.

Mostly Voices [2:54]

But before we get to that, I'm intrigued by this.

Mostly Uncle Frank [3:02]

How you say, emails? And first off, we have an email from Steven.

Mostly Voices [3:07]

Hey, Steve.

Mostly Mary [3:11]

And Steven writes, I want to thank you for your podcast. I have learned a great deal from you. Bow to your sensei. Bow to your sensei.

Mostly Voices [3:18]

In one of your previous episodes, I heard you mention that there

Mostly Mary [3:22]

was no leveraged small cap value, but I ran across a ProShares fund ticker SAA that appears to offer a 2x version of the S&P Small Cap 600. Is this something that could be used to juice up the small cap value portion of a portfolio, or do the fees and spread make it something to avoid? Thanks for all you do, Steven S.

Mostly Voices [3:46]

I'll get you a Steve if it's the last thing I do.

Mostly Uncle Frank [3:52]

Well, Steven, the answer is yes and no. First, you need to understand what this is based on in terms of the index. The S&P SmallCap 600 is a blended index. It is not strictly a value index. There is a separate S&P 600 value index, small cap value index. Those are represented by the two funds IJR, which follows this index with SAA, and the fund IJS or VIOLV, which follow the S&P 600 small cap value index. Now that being said, when you run this in Morningstar, you do see it does have a value tilt. Now I'm talking about SAA in particular, and it is more value oriented than another leveraged small cap fund like TNA, which is based on the Russell 2000 index. So I think you could possibly use this for something, but it's not really the solution we're looking for. These aren't the droids you're looking for.

Mostly Voices [5:02]

These aren't the droids we're looking for.

Mostly Uncle Frank [5:06]

What we're hoping to see some day is a leveraged small cap value fund that is specifically based on one of the value indexes. So I probably would not use this instead if I were trying to construct another risk parity style portfolio involving leverage on the stock side. I think you could go with a smaller allocation to something like Upro, which is the S&P 500, and then a larger allocation to a straight small cap value fund, like a AVUV or VIoV. And that way you would definitely have more cowbell.

Mostly Voices [5:47]

Guess what? I got a fever, and the only prescription is more cowbell.

Mostly Uncle Frank [5:54]

Hopefully that helps, and thank you for your email. Second off. Second off, we have an email from Caleb.

Mostly Voices [6:10]

Hey guys, it's me, Risk Parity, down mail. Lola's, oh, it's Caleb's puppy, Lola.

Mostly Mary [6:18]

And Caleb writes. Hi Frank, are there ETFs of CDs? If not, why? Should we put an investment management firm together and do it?

Mostly Voices [6:31]

No. Now I'm really confused. It's a little confusing at first.

Mostly Uncle Frank [6:38]

Well, no, I'm not aware of any ETFs of CDs that would probably be overkill, but you don't really need an ETF of CDs because there are many very short-term ETFs now that invest in all kinds of combinations of things. So on the Vanguard side, there's a fund called VUSB, which has a duration of less than one year. JP Morgan's got one called JPST. There's also the new Box ETF, which simulates a fund of T-bills but without the tax consequences. It's by Alpha Architect. Our friend Alexei has mentioned that in some of his past emails. The due to binds. If you want to go see what ETFs are available in any particular category now, there is a nice ETF database screener I will link to it in the show notes with a link to ultra short bond funds. And you can see there's probably about 30 different ones. So no, there'd be no reason for anybody to create a new ETF involving CDs. There are other ETFs now, though, that are specific duration that terminate if you were to want such a thing. In reality, I think amateur investors spend far too much time fiddling around with Short-term bond funds, savings accounts, CDs, all of those sorts of things. That is really a cash management exercise. It's always money in the banana stand. It is not really investing.

Mostly Voices [8:10]

Forget about it.

Mostly Uncle Frank [8:13]

But I think people like to fiddle with that because it feels comfortable and it makes them feel like they're doing something important or useful.

Mostly Voices [8:21]

I'm happier than a pig in slop.

Mostly Uncle Frank [8:24]

When in reality, it's usually a big waste of time involving buckets, flower pots and ladders and the like.

Mostly Voices [8:33]

There's $250,000 lining the walls of the banana stand.

Mostly Uncle Frank [8:37]

Lots of window dressing to make somebody feel like they're actually doing something. Forget about it. Real investing involves focusing on your intermediate and long-term assets. because that's really where the important decisions are to be made in terms of diversification and things like that. And if cash management is a big deal to you, it may be a sign that you're just holding way too much cash.

Mostly Voices [9:06]

There's always money in the banana stand! No touching! No touching! These days, what you really want to focus on there, if you're in a high

Mostly Uncle Frank [9:13]

tax bracket, is reducing the tax burden of those things because they pay ordinary income. You have to pay taxes on it in a taxable brokerage account. And so they're very inefficient. So either you need to move them into a retirement account, if you have a lot of that, or you need to pick things that are not subject to ordinary income tax by the nature of their structure, like this new ETF box. I will link to an article from Morningstar about that ETF because it's become extremely popular in an extremely short period of time. Among registered investment advisors and sophisticated investors who are looking for ways to pay less taxes on their cash, essentially. So you can read that as well. Hopefully that helps. And thank you for your email.

Mostly Voices [10:07]

And so Michael, his son and his brother together enjoyed the cathartic burning of the banana stand. Last off. Last off, I have an email from Reynolds.

Mostly Uncle Frank [10:21]

Have you read this?

Mostly Mary [10:29]

And Reynolds writes, hi Frank, I'm very conservative with my investments. I've always used the IEF 10-year Treasury fund because it's less volatile than TLT. But lately, I'm thinking I should use TLT so I could hold fewer bonds and more stocks with the same overall volatility profile. profile. Is this thinking correct? I'm in the late accumulation phase and I'm holding 30% IEF and 70% S&P 500. With TLT, could I go to 2080 or 1090 with the same volatility? How do I calculate that equivalency? Thank you, Reynolds. Never gonna be president now.

Mostly Voices [11:10]

One less thing to worry about. That's one less thing to worry about. Well, this is a very interesting question.

Mostly Uncle Frank [11:18]

And let me explain how you can look at this in a way that makes sense for comparison purposes. The key difference between a fund like TLT and a fund like IEF is the duration, because it is the duration that tends to determine the volatility. There is a general rule of thumb that When interest rates move by 1%, your fund will move by 1% times its duration. So if you have a fund with a 10-year duration and the interest rates move up or down by 1%, you would expect that fund to go up or down 10% in capital value. It doesn't always do that, but that's a rule of thumb. That gives you an easy way of comparing two funds by looking at their durations to bond funds I'm talking about here to get an idea of their overall volatility characteristics. And the easiest place to do that I think is the Fund Analyzer at Morningstar which is free and you can go over there and put in any fund, in this case these ETFs. You'll see on the first page you come up with a summary of returns over time which you can compare and you'll See how that plays into this duration issue. To look at the durations, go to the portfolio page and it's on kind of the upper right corner of the data that's there. And so you'll see that the current duration of IEF is somewhere between 7.5 and 8. And I think the current duration of TLT is somewhere around 16. so it's roughly double. And then if you go back and look at the historical returns, you'll see that TLT seems to have roughly double the returns up or down in a given year that IEF has. So what this means in terms of portfolio construction is that you can use duration as a kind of form of leverage, and you are correct if you are looking at a 30% allocation to something like IEF, but you don't want to spend 30% of your portfolio in that asset and you want to have more room for other things, more stocks or whatever, you can reduce the allocation and move out on the yield curve. So in this case, a similar effective allocation to TLT as 30% IEF would be about 15% in TLT because it has about double the duration. And so those two things are likely to have the same general effect in a portfolio. Now, would doing that keep your volatility of your portfolio the same in this case? The answer is no there, but it's not because of the bonds. It's because if you're adding more stocks to a portfolio, it's going to become more volatile. So if you moved from a 70/30 portfolio where you had 70% in stocks and 30% in the intermediate treasury bond fund and went to an 85% stocks and 15% in a long-term treasury bond fund, you would have a more volatile portfolio based on the stocks, not on the bonds. Now, of course, you could reduce the volatility of the stock portion here by diversifying that better than saying just a S&P 500 fund, that if you split that between growth and value, that would give you diversification within the stock sphere there and would probably reduce the overall volatility of the portfolio, especially in years like 2022. Now conversely, if you were to go shorter and shorter durations on your bonds, first you would need to hold more bonds for the same kind of effect in the portfolio, and second, you would be reducing the overall return profile as well as the volatility of a portfolio almost in a proportional manner over long periods of time. But this is why holding too much cash in a portfolio just tends to drag on it long term because cash is effectively very short duration bonds if you're putting it in savings accounts or T-bills or something. and we know from a lot of historical research that holding more than 10% in a cash allocation tends to degrade the long-term performance of a portfolio that's otherwise stocks, bonds, and other things with more aggressive return profiles. So this is actually quite a fascinating topic for portfolio construction when you're really thinking about what effect particular assets will have on an overall portfolio and how in this case you essentially can make more room in the portfolio to add something else. This is why a lot of risk parity style portfolios do have an allocation to long-term bonds or even longer-term bonds, which are zero coupon bonds, and those have a duration of more like 25 years. Because having a smaller allocation to something like that frees up space in the portfolio for things like gold managed futures and other things that add to the diversification of the portfolio.

Mostly Voices [16:43]

That is the straight stuff, O'Funkmaster.

Mostly Uncle Frank [16:47]

Or in your case, you can just add more stocks and it'll just be a more aggressive portfolio with similar characteristics and hopefully a higher return profile over the longer term. I've said elsewhere and it is generally true in terms of constructing portfolios that have the highest safe withdrawal rates, you generally want to keep the equity portion to 70% or less and the sweet spot seems to be somewhere between 40% and 70% as found by Bill Bengen, Wade Pfau and others. And when you're over 70% in equities, you're really talking more of a accumulation style portfolio or something that's intended to be left to heirs because you're not going to be spending it anyway. So this is a very interesting topic. I'm glad you brought it up because it does get to the nuts and bolts of how the sausages are made. If I can mix metaphors.

Mostly Voices [17:42]

I don't think it means what you think it means.

Mostly Uncle Frank [17:45]

And so thank you for your email. Now we are 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. Just looking at the markets last week, they didn't do a whole lot. The S&P 500 was up 0.61%. The NASDAQ was flat, flat as a pancake. Small cap value represented by the fund VIoV was up 0.78% for the week. Gold was up. Gold is up 0.64% for the week. I love gold. Long-term Treasuries represented by the fund VGIT were down 0.64% for the week. REITs represented by the fund REET were up 0.04% for the week. so almost flat. Commodities represented by the fund, PBDC were up 0.72% for the week. Preferred shares represented by the fund PFF were up 0.35% for the week. And managed futures were actually the big winner last week. They were up 1.9% for the week and that's our representative fund DBMF. Now moving to these sample portfolios. First one is this Reference Risk Parity Portfolio, the All Seasons. It is only 30% in stocks and a total stock market fund, 55% in intermediate and long-term treasury bonds, and the remaining 15% divided into gold and commodities. It was down 0.04% for the week, so almost flat, is up 4.5% year to date and up 6.09% since inception in July 2020. Now moving to these more bread and butter style portfolios that one might actually use as a decumulation portfolio. 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 bonds divided into long and short and 20% in gold, GLDM. It was up 0.07% for the week. Not much movement here either. It's up 3.79% year to date and up 25.09% since inception in July 2020. That's a good example of a conservative portfolio that has lower volatility overall. And that's both because its share of stocks is only 40% and because it has a large allocation to shorter term bonds that are of one to three year durations. Moving to the next one, the Golden Ratio. This one is 42% in stocks and three funds, including some large cap growth and small cap value, 26% in long-term treasury bonds, 16% in gold, GLDM, 10% in a REIT fund, R-E-E-T, and 6% in cash in a money market fund. It was up 0.23% for the week, It's up 4.56% year to date and up 22. 38% since inception in July 2020. Next one is our kitchen sink portfolio, the Risk Parity Ultimate, where we try to put a little bit of everything, although I don't think you need to try this at home. It has 15 funds and I'm not going to go through all of them, including a little bit in Bitcoin and Ether, but it was up 0.27% for the week. It's up 7.9% year to date and up 15.79% since inception in July 2020. We've been harvesting the Bitcoin in Ether recently to pay our distributions, and that's probably going to be true of next month's distribution as well, since we're going to be doing a whole rebalancing of this and the prior three portfolios in July. And now moving to these experimental portfolios. With lots of leverage and lots of volatility. Don't try this at home either. You have a gambling problem. First one's the Accelerated Permanent Portfolio. This one's 27.5% in a leveraged 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 down 0. 21% for the week. It's up 8.29% year to date and down 0.76% since inception in July 2020. Now we rebalanced this last week. This one is being managed with rebalancing bands. And so what we do is we look at it every 15th of the month. And if any of the allocations are off by 7.5%, then we rebalance the entire portfolio. So in this case, the percentage of UPRO had grown from 25% to over 32.5%. And so when we saw that on the 15th of June, that triggered a rebalancing and we rebalance it back to the percentages that I gave you in the first instance. In this case, that involved selling $627 of UPRO, buying $117 of gold GLDM, buying $303 of PFF, that preferred shares fund, and buying $179 worth of TMF, the leveraged bond fund. And as always, we'll duly record that on the portfolios page at the site so you can see where all the rebalancing's occurred. And we do use this kind of band structure for all three of the experimental portfolios because it seems to work best with more volatile things like leveraged funds. For the others, we do the simplified calendar-based rebalancing and just do it once a year. And studies have shown that doing the rebalancing more often than once a year, if you're on a calendar basis, probably doesn't improve the portfolio's performance in any meaningful way. I'll see if I can dig out that Michael Kitces article about that. But I think the calendar basis is actually the simplest way to manage a portfolio in terms of rebalancing rules. Now moving to the next of these levered portfolios. Go to the most levered and least diversified one, the aggressive 5050, which is simply designed to model a 50% stock, 50% bond portfolio with leverage in it. This one's constructed with 13 in a levered stock fund, UPRO, 13 in a levered bond fund, TMF, and the remaining 3 in ballast divided into PFF, a preferred shares fund, and VGIT, an intermediate treasury bond fund. It was down 0.19% for the week. None of these portfolios moved very much. It's up 7.64% year to date and down 11.72% since inception in July 2020. You'll see that this portfolio has underperformed the Accelerated Permanent Portfolio, the last one we talked about, even though it has more leverage in it, or perhaps because it has more leverage in it. But a lot of that has to do with the more diversified structure of the Accelerated Permanent Portfolio in that it has a significant allocation to gold in it, unlike this one. And that has made all the difference. Now going to our last one, the Levered Golden Ratio, which is our youngest portfolio. It is 35% in a levered composite fund called NTSX. That is a combination of S&P 500 and Treasury bonds, 25% in gold, GLDM, 10% each in a leveraged bond fund, TMF, and a leveraged small-cap fund, TNA, 15% in a REIT, O, and the remaining 5% in a managed futures fund, KMLM. It was down 0.22% for the week. It's up 3.27% year to date and down 10.2% since inception in July 2021. It is still lagging primarily due to the small cap fund because small caps peaked in November of 2021 and they have still not recovered, unlike the large cap counterparts. And reflecting back on our first question, this is one of the deficiencies of this portfolio is that although it's got a small cap fund. It's not really a small cap value fund, which would actually have performed a bit better. But we don't have any of those in a leveraged version. As I mentioned, if I were to reconstruct a better version of something like this, I would probably not use the NTSX, but instead use a smaller allocation to UPRO for the large cap and growth stocks and then use a larger allocation to a standard small cap value fund and do the leverage that way. But I had wanted to build something around NTSX and this is what we came up with three years ago around this time. I am thinking of constructing a brand new portfolio designed to take advantage of some of the latest and greatest ETFs and some of the principles we've been talking about here over the past few years, but we'll see if that happens in the next week or so here. I want to make sure it's different enough from things we already have to make it worthwhile. There's no point in having multiple sample portfolios that are essentially the same things. 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, a review, a follow. That would be great. Thank you once again for tuning in. This is Frank Vasquez with Risk Parity Radio. Signing off. Terms. Boy. One condition and one term. All right. Let's have the condition first.

Mostly Voices [28:33]

Free banana whenever I want. Single dip. Double dip. But I'll take one stick. All right. What else? Creative control, spin-off rights, and theme park approval for Mr. Banana Grabber, baby banana grabber, and any other banana grabber family character that might emanate therefrom. I retain animation rights, and we're gonna go back to Single dip, done. Great.

Mostly Mary [28:59]

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.