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 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 Voices [1:28]

Top drawer, really top drawer, along with a host

Mostly Uncle Frank [1:32]

named after a hot dog.

Mostly Voices [1:35]

Lighten up, Francis.

Mostly Uncle Frank [1:38]

But now onward, episode 348. Today on Risk Parity Radio, we're just gonna try and do what we do best here, which is answer your emails. And so without further ado, Here I go once again with the email. And first off, first off, I have an email from Marco Esquandolas.

Mostly Voices [2:11]

Marco Esquandolas.

Mostly Mary [2:24]

And Marco writes：hi Uncle Frank, thanks for all that you do. It's been invaluable. First off, we have a precocious 11 year old who is becoming interested in saving and investing.

Mostly Voices [2:32]

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

Mostly Mary [2:40]

He makes money around the neighborhood doing odd jobs, so we set him up with a custodial Roth account at Fidelity, and he slash we are contributing $100 a month. We are 50% AVUV and 50% AVDV for his 50 plus year investing timeline. How do you feel about that allocation over a very long time frame? Paul Merriman suggested that combo for the best potential returns over very long time periods. Second off, said 11 year old is saving the rest of his earned money to buy a classic fixer upper car when he turns 16. Groovy baby! He has been listening to your podcast episodes with me and wants to use a short term, five-year risk parity style allocation so he can optimize his spending cash in five years. What five-year horizon portfolio slash allocation would you recommend for him? I have set up a Fidelity taxable investing account that we will use for him as his short-term savings account. We want to teach him the difference between his long-term retirement investments and his shorter duration savings. Your podcast has been a fun way to do that. I don't think he believes me that you may actually respond. Time is money, boy. Thanks so much. We are very grateful. Oh, and remember, whatever you do, take care of your shoes.

Mostly Voices [3:57]

Sincerely, Marco Esquandolas. All we need to do is get your confidence back so you can make me more money.

Mostly Uncle Frank [4:05]

All right, first thing is, I think we need to get your priorities straight. You're supposed to be teaching your children to fish, as in teaching them how to do investments. You are not supposed to be teaching them about fish the band. They'll end up running like an antelope all the way to the Hunger Games.

Mostly Voices [4:41]

Got to run like an antelope, out of control. Happy Hunger Games, and may the odds be ever in your favor.

Mostly Uncle Frank [5:01]

Or to Thunderdome.

Mostly Voices [5:06]

Ladies and gentlemen, boys and girls, dying times here.

Mostly Uncle Frank [5:14]

Or something like that. But I'm glad we're all having fun with this and I do appreciate your references.

Mostly Voices [5:23]

Why, what have children ever done for me? But now let's attend to your questions.

Mostly Uncle Frank [5:30]

All right, the first off question, you're talking about a portfolio that is 50% AVUV and 50% AVDV as an accumulation portfolio. And just so everybody knows what that is, that is half small cap value US and half small cap value developed world outside the US. Yes! So it's an all small cap value portfolio. And I have to tell you, I don't think that's exactly what Paul Merriman recommends, at least not for his grandchildren. I have spoken to him personally when he was coming up with his 2-Fund recommendation, and the recommendation he actually came up with was half S&P 500 and half small cap value. and he also mentioned that on the earn and invest podcast, I think back in September of 2022. Maybe I can dig that out. My own preference would be to go with half large cap growth and half small cap value, and I don't really care whether that's International or not. The large cap growth would be better off if it's us-based because that would include all of these gigantic worldwide tech companies. The reason I would go with the combination I just suggested is that it's more diversified really. I think you're going to get similar results with either a total market or an S&P 500 or a large cap growth as one of the 50% and then small cap value as the other 50%. And I also alluded to this back in episode 208 where I also talked about that conversation I had with Paul Merriman. So you and your son may wish to go back and listen to that as well. It's a Wizard of Oz themed extravaganza for beginning investors. But honestly, any combination of low cost, 100% equities for the long term, decades long, is probably going to perform pretty well. But you won't know which combination was best for 30 years or more. and in every given decade, any one combination could beat any other combination of things. Because a decade is actually a trivial amount of data when it comes to comparing these kinds of funds that are all highly correlated anyway. So the real recommendation here is to pick some combination and then just stick with it. Because the only problem you could run into is if you pick a combination then see another combination doing better in the last five years or whatever and start jumping around from fund to fund. That is how you would end up underperforming and it's what you really would not want to do. That is my least favorite thing to do. So pick something and stick with it and your results should be grand. That is the straight stuff, O' Funkmaster.

Mostly Voices [8:30]

Now moving to your second question, which is：Of course, much more interesting,

Mostly Uncle Frank [8:35]

because you were talking about an intermediate accumulation portfolio that does not have a specific draw date on it, although it has a sort of a target range. And these risk parity style portfolios are actually pretty good for this kind of intermediate goal saving because they tend to have drawdowns of three to five years or less overall. over very long periods of time, whereas something like a 60/40 portfolio might have a 10 to 13 year drawdown in worst case scenarios. So this is actually what our adult children use when they are saving for a house or just saving more money for some indeterminate expense in the future, like buying another car or something like that. This is also a great way to make sure you're not hoarding too much cash because what a lot of people do or have trouble with is they have their retirement portfolio, which is all stocks or mostly stocks, but then they don't really know what to do with the rest of their money. So it ends up just sitting there piling up in a savings account somewhere, which is not really a good use of your money over extended periods of time. It's kind of funny. Our eldest son's girlfriend is also one of these kind of super saver kind of people. I always joke with her whether she's sitting there with jars of money in a circle meditating upon them. A really big one here, which is huge. Perhaps with some squishy mellows in between, but she is also using a risk parity style portfolio for intermediate accumulation. Now, what exactly to use? Well, the golden butterfly is a simple solution for that. It is more conservative, and so will have shorter and shallower drawdowns than many other combinations, because it does have that 20% in a short-term bond fund. So that would be one option that he could consider, and that is obviously easy to implement and has been written about extensively by Tyler of Portfolio Charts since about 2015. Now, if you wanted to go with something more aggressive, it's going to look more like the sample Golden Ratio portfolio, where you're increasing the amount of stocks from 40% to 50% or more. And I'll give you this little simple idea because it's easy to implement in terms of the percentages. You could go with 25% large cap growth, 25% small cap value, 25% long-term treasuries or intermediate term treasuries. I probably use the long-term ones. 12.5% gold and 12.5% managed futures. And so you could use a combination of funds like VUG for the large cap growth, AVUV for the small cap value, VGLT for the treasury bonds, GLDM or IAU for the gold and DBMF for for the managed futures. And so you end up with a portfolio that's 50% in stocks, 25% in bonds, and 25% in alternatives. It's going to be more volatile than something like the golden butterfly because it doesn't have any cash in it. But if you wanted some cash, maybe you just do 20% in treasury bonds, 10% each in the gold and the managed futures, and then you have 10% that you can put in a money market or a short-term bond fund. Any of those sorts of combinations will probably work well. I would do this at Fidelity so he can buy fractional shares of these things. And generally the way you do this is simply to be adding to whatever is the worst performer at the time. And that way you're never actually rebalancing this and you're never actually having to deal with any tax consequences until you're going to sell a big chunk of it. So every time he's got money to invest, you would look at it and say, okay, well this asset looks lower than its target allocation, so we're going to put the money in there this time. And then when that changes, you put the money in a different one. And that's basically the way our adult kids do this. And I think this could be a great learning experience because the problem with set it and forget it plans is oftentimes that they decrease the opportunity to learn about different kinds of investments and how they work and really be able to do some hands-on buying of things and adding up the numbers and looking at the percentages and doing that kind of basic back of the envelope algebra and then learning how to push the buttons. Because believe it or not, this is one of the biggest problems or impediments that many people still have today. because they've never opened a regular brokerage account and made investments and just see how the plumbing works there. They are very unfamiliar with it and really have not learned a life skill. And so I think the time to learn that life skill is when you are a teenager or a young adult and have these accounts, even if it's just a little bit of money, so that when you get a lot of money later on, you're not stuck like an antelope in the headlights trying to figure out what to do and being afraid. People should not be afraid to handle their money in this way. And the best way to not be afraid of investing is to engage in the process of investing as early as possible, which is now quite easy with no fee trading and fractional shares at places like Fidelity. So go ahead and use them. Anyway, it pleases me no end that you've been listening to this podcast and your 11 year old is interested in doing this sort of thing. I'm happier than a pig in slop because you've won half the battle if you can attract the interest in investing. to begin with. Oh, I get it. Let me try. So hopefully this all helps. And thank you for your email. Whatever you do, take care of your shoes. Second off. Second off, we have an email from Adrian.

Mostly Mary [15:23]

Yo Adrian, Adrian. And Adrian writes. Hi Frank, I recently discovered your podcast and I've been going through the episodes. Love the mission and the content. You are talking about the nonsensical ravings of a lunatic mind. I share the interest in this type of portfolio construction and in many of the building blocks, ETFs that you've covered. In the spirit of risk parity and simplicity, I'd like to throw in a portfolio for discussion. I call this the Vanilla Stacked Portfolio, a no-frills extension of the 60/40 via stacking leverage. NTSX/DBMF 7030. This implements a 60/40/30 stocks/bonds/trend portfolio, Quite cheap and efficient, 35% leverage. Strictly speaking, it's 63.42/30. Very good risk-adjusted metrics. What say you? Maybe I'll hear you discussing it on the air. Cheers, Adrian.

Mostly Voices [16:24]

I admitted you are better than I am. The more you smile, because I know something you don't know. And what is that? I am not left-handed.

Mostly Uncle Frank [16:38]

Yes, I have seen this kind of simple to fund portfolio with stocks, bonds and managed futures recommended elsewhere. I can't remember whether it was on a Corey Hoffstein podcast or YouTube video or something with Andrew Beer, who is the person that runs the DBMF managed futures ETF. And this is Corey Hoffstein's approach, what he calls return stacking, which is to take essentially a hundred percent portfolio or close to it that is stocks and bonds and then add some managed futures overlay. And that's why he's got now these three ETFs that he's put out recently. One is like half bonds and half managed futures. One is half stocks and half managed futures. And those are also designed for this kind of construction. I think the drawback here is that on the stock side, you're really not getting a fully diversified portfolio. You're basically just getting an S&P 500 component. in there. And if you really want to diversify this better, you also want to have small cap value or something on the value side, particularly if you're going to be drawing down on this thing. If you're going to be accumulating, it probably doesn't matter that much. But that's kind of the drawback to something like NTSX and a lot of these combo kind of funds that they are not internally Diversified on the stock side in the way that you might so you end up having to add some small cap value on the side of that, or some other combination of value funds, which then kind of defeats the purpose of making this ultra simple, and you might as well have broken it apart in the first place anyway. And I think this also gets at another issue that I see in portfolio construction, which is kind of an over obsession with the simplicity principle. Remember, we have three principles we talk about here. Simplicity, as in let's use as few components and low-cost components as we can find to construct our portfolio. But that is the tail of the dog, really, or the hindquarters, if you will. The more important principles are the Holy Grail principle and the macro allocation principle, which are getting at these ideas of diversification. And so getting obsessed with having as few funds as possible is actually counterproductive and is not helpful when you're trying to rebalance something, and it's not helpful to fine tune your diversification. You would prefer actually to have about four to eight funds to work with so that you actually have differentiated performances over time and can facilitate things like rebalancing. Now, as I mentioned, this does not matter that much if you're using this as an accumulation vehicle, which you very well could because what you are proposing does have a similar risk profile to 100% stock portfolio. But those are kind of the pros and cons of this approach. Mostly pros, but a few cons depending on what you're doing. Hopefully that little commentary helps you and thank you for your email.

Mostly Voices [20:05]

Last off.

Mostly Uncle Frank [20:09]

Last off of an email from Paulo. Abbe Normal. And Paulo writes, Greetings Queen Mary and Uncle Frank.

Mostly Mary [20:18]

I know you don't go in for flash in the pan news stories, But I wondered if you had thoughts about the Fama-French Cowbell Data Kerfluffle. One of the relevant links is below, though it's behind a paywall. Best, Abby Normal, AKA Paulo in Tampa.

Mostly Uncle Frank [20:33]

Well, Mary does appreciate being promoted, from Aunt Mary to Queen

Mostly Voices [20:38]

Mary. Stop. Could you please step on the same foot at the same time?

Mostly Uncle Frank [20:47]

I will continue to assume my role as court jester around here. Occupation, stand-up philosopher. What?

Mostly Voices [20:55]

Stand-up philosopher. I coalesce the vapor of human experience into a viable and logical comprehension. Have you all heard about this new sect, the Christians? They are a laugh riot. First of all, they are so poor. How poor are they? Thank you, they are so poor that they have only one God.

Mostly Uncle Frank [21:26]

This kind of question really does make me appreciate you all as my audience because it's very sophisticated and in the weeds, if you will. Secondary latent personality displacement.

Mostly Voices [21:36]

Oh, great one. Yes, sir. But it really shows that you guys are savvy and well informed.

Mostly Uncle Frank [21:44]

I will try to link to this Bloomberg article that you provided, but unfortunately I think it's going to be behind a paywall. There are a couple other references I found to this issue, and I will post those as well, one being the Fama and French new article that they posted about this. And this is all about the database of data that they use to calculate these Fama and French factors, and this goes back to their original paper in 1993, as they've gotten better data and cleaned it up, they've updated the database, which obviously does change the results of analyses in small ways, as it turns out. But somebody had posted a paper criticizing them cleaning up the data or how they cleaned up the data. and this is essentially their response in their own paper about cleaning up the data, and it's got very gory details about what exactly they did. Ultimately, to me, it didn't change very much, but I know some people like to argue about these things, and in terms of factors, what they mean and how to use them, this is an endless debate that's been going on for two decades now. It doesn't really change the baseline conclusions that we've gotten out of it as do-it-yourself investors looking for simplified portfolios that work well. And you still do come down to the basic idea of diversification between growth and value being the most important thing to have in a well-diversified portfolio. And then people debate how much the small and large really matters. And then what happens when you add other factors like momentum or quality. like the Avantis funds do, or the DFA funds do as well. Same idea. So I will link to these things. I would suggest you read at your own risk and make sure you have some caffeinated beverages with you when you do, because this stuff really does get into the weeds. Thank you for bringing this to our attention, and thank you for your email. Very good, that'll be all. Quick time, Harch!

Mostly Voices [24:04]

I love quick time, Harch.

Mostly Uncle Frank [24:07]

But now I see our signal is beginning to fade. I will be going on hiatus again, it's what I seem to be doing this summer. It's not that I'm lazy, it's that I just don't care. I'm running off to Milwaukee to hang out with some childhood friends and go to some baseball games and drink some beer out of boots. Beer. And then we have some family members coming in next week. So I'm not sure we'll have too many podcasts next week either. Maybe we'll have one. We'll see how we do. In any event, I will try to keep the website updated as best as possible. We will have monthly distributions coming up, and I do have a special surprise for you. But I'll just wait and spring that upon you in the next couple weeks here. 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. Mmmkay? Thank you once again for tuning in. This is Frank Vasquez with Risk Parity Radio signing off. and they.

Mostly Mary [26:20]

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.