Not Uncle Frank [0:01]

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 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.

Frank Vasquez [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.

Not Uncle Frank [0:50]

Yeah, baby, yeah.

Frank Vasquez [0:52]

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. Whoa, and you probably should check those out too, because we have the finest podcast audience available.

Not Uncle Frank [1:26]

Top drawer, really top drawer.

Frank Vasquez [1:31]

Along with a host named after a hot dog.

Not Uncle Frank [1:34]

Lighten up Francis.

Frank Vasquez [1:37]

But now onward to episode 356. Today, on Risk Parody Radio, we're just going to get back to what we do best here, which is answer your emails. But before we get to that, I'd be remiss if I did not talk about our current charitable promotion. We are raising money for the Father McKenna Center, which is the charity this podcast supports. The charity supports hungry and homeless people in Washington DC. It is a small charity. I am on the board of the charity, full disclosure and the reason we are doing this now is because we have a matching opportunity.

Frank Vasquez [2:18]

I appeared on a podcast called the Financial Quarterback, which actually dropped just this week, and I will link to that in the show notes so you can check that out. I thought it was a pretty good interview, summarized a lot of things that we talk about here, and I only said um a few times and only laughed a little too much and not excessively too much. But if you give to the Father McKenna Center right now, the financial quarterback has offered to match donations for up to $10,000 total in matching funds and we've had a goodly number of people who have stepped up, including a couple of the emailers today who duly went to the front of the line for emails, but we'll get to those shortly. To participate in the promotion, all you need to do is go to the donation page of the Father McKenna Center website, which I'll link to in the show notes, and when you make your donation and there's many ways to do it please note in the box where there's a place for comments or dedications box where there's a place for comments or dedications the financial quarterback match so that we can track how many are coming in.

Frank Vasquez [3:34]

One of our listeners, David, had an even better idea that I'd like to share with you if you are interested. As some of you know, occasionally I do do private consulting, although I do not advertise it because I really don't want another job. So are you going to get another job? I don't think I'd like another job, but I normally charge $300 an hour for that, for a two-hour minimum.

Frank Vasquez [3:55]

Now what David offered to do was to take his donor advised fund and essentially pay me double, although not pay me but give the money to the Father McKenna Center, and so I took him up on that offer because then we can get the match for that and effectively getting a quadrupling of what would be an ordinary donation. So if any of you are interested in that opportunity, please send me an email to frankatriskparodyradiocom and we can set that up. But, as we all know, donating to a charity from a donor-advised fund or through appreciated stock is a very tax-efficient way to do this, and for anyone who's over 70, there are also the opportunity to use QCDs or direct donations from your traditional IRA accounts, and that is also very tax-advantaged, and maybe I'll talk more about that someday.

Not Uncle Frank [4:52]

But right now, and without further ado, here I go once again with the email.

Frank Vasquez [4:58]

And First off. First off, we have an email from Ed. Market drops five points. I'm glad my money's tied up in hay. First off, we have an email from Ed and Ed writes.

Not Uncle Frank [5:11]

Hey, frank and Mary. I donated directly on the Father McKenna site and included the financial quarterback for the generous match Hike. I've been looking at preferred shares funds, including the one you use, pff. I also reviewed your earlier episode, ray. Preferred Shares. Would you mind doing a refreshed discussion, since it's been a while, or point me in the right direction if you've had a deeper dive in the past couple years on this topic? My goal is to move 5% of my portfolio from cash into preferred shares and improve the yield, which is currently 4.2% in a savings account with Ally Bank. I also want to lessen the tax amount by focusing on qualified dividends instead of interest income and, of course, I'd like the least amount of volatility. Yes, I want my cake and pie and ice cream.

Not Uncle Frank [6:02]

I've been using the ETF database and portfolio visualizer websites and, interestingly, there's only about 20 preferred shares ETFs. Then, with the criteria of at least $1 billion in assets, 10 years since inception and less than 1% expense ratio, there are only four that fit the bill. Four that fit the bill PFF, pgx, pfxf and FPE. My understanding is that preferred shares are interest rate sensitive and would have thought they'd be more highly correlated with long-term treasuries. Per Portfolio Visualizer, pff is only 0.09 correlated with TLT since its 2007 inception. When I include all four above ETFs, the correlations get higher and are limited to FPE's inception of March 2013. See below table. Thank you very much and please share any thoughts you can regarding volatility distributions, how to tell how much dividends are qualified or any tips when buying a preferred ETF, ed. Hello.

Frank Vasquez [7:09]

I'm Mr Red. Well, first off, thank you for your generous donation and participation in our financial quarterback match promotion for the Father McKenna Center, and that's why you got to go to the front of the line. Yes, but let's talk about preferred shares. So we have talked about these from time to time and I'll give you all of the episodes where we did discuss them. They are episodes 9, 94, 132, 150, 249, 309, and 339. And we also discussed them in the context of the risk parity ultimate sample portfolio in episode 353 recently, since we changed the preferred shares fund we were using there. But just briefly, what are preferred shares funds and why might they be interesting to some people?

Frank Vasquez [8:03]

Preferred shares are a form of stock that companies can issue that are designed to mostly just pay large dividends, and so they are kind of bond-like in the way they perform. And the reason they're generally labeled preferred is because the company is bound to pay the preferred shares dividends before it pays the common shares any dividends, and so that's where that name originally came from. And so what do these perform like? They tend to perform like long-term corporate bonds and do have some interest rate sensitivity as well as some positive correlation with the stock market, but not nearly as much as actual common shares. So why would anyone want to use these things? Well, they're most useful for people who are in high tax brackets because they pay relatively high income. But a lot of that income, or most of that income, can come as qualified dividends and so qualifies for that lower long-term capital gains tax rate. So if you are in a 30% plus tax bracket, you could only be paying 15% on the taxes coming out of one of these things, which is very advantageous when you compare that to something like a CD or a savings account or some corporate bond that's paying ordinary income. Now they do fluctuate in value with the interest rates. When interest rates go up, these tend to go down in capital value and vice versa, just like intermediate or long-term corporate bonds. But, that being said, they are relatively stable, particularly if you're just holding them for the long term, because most funds have hundreds of issuances of these things and they are typically issued by a lot of banks, insurance companies and other large financial institutions, and sometimes there's a few REITs.

Frank Vasquez [10:03]

But it's mostly financial-related companies that like to issue preferred shares and pay on them, and they're more than capable of doing that. So in the fund world PFF was kind of the granddaddy of these kind of ETFs, and it still is the most popular one. However, it is getting a little bit long in the tooth. Its expense fee is relatively high for these funds now I think it's still about 0.4. And so a number of other ones have come along, including the ones you mentioned PGX, pf, xf and FPE but those are not actually my favorite ones these days. My favorite ones these days are PFFV and PFFD, with particularly PFFV being my most favored one, and the reason it's my most favored one is because it has a lower expense ratio, first of all, and it is paying higher dividends than most of these other ones. The current dividend rate is something like 7.28%, and if you're only paying long-term capital gains tax rates on that which I can confirm is almost all of the dividends that are qualified, it is a very good deal.

Frank Vasquez [11:21]

As far as these preferred shares funds are concerned, now, that fund and some of these other ones have only been around for about five years, I think, in fact, pffv only came into existence about the same time we started this podcast. I think they've been around long enough to sort of prove their mettle, so I would not be concerned that they haven't been around for 10 years. One of the things you always need to recognize with ETFs is that there was a change in the regulations around 2018 or 2019 that made ETFs more viable and easier to construct, and so has led to kind of an explosion of new kinds of funds in ETF form that didn't exist before, and PFFV, I think, is an example of that. Let's go to your list of items that you wanted me to talk about, including volatility distributions and how to tell how much dividends are qualified. As to volatility, preferred shares funds seem to have about the same volatility as half of the stock market, so when the stock market crashes, they tend to go down about half as much, and we're talking about recessionary crashes, and on the other side of the equation, they don't tend to appreciate that much because they're paying out almost everything in dividends and in periods like we've had for, say, the past year, when interest rates really haven't been changing, they don't fluctuate much at all. If interest rates do go down, you will expect most of these funds to increase in value, but then their corresponding yield is going to go down.

Frank Vasquez [12:59]

Distributions Most of these have distributions once a month because people are typically buying them for income and do want a steady stream of distributions from them. Sometimes there are larger distributions on quarters or at year ends, but I believe that most of them are on a monthly distribution kind of schedule. Third question how to tell how much dividends are qualified. This is kind of one of the annoying things about these preferred shares funds because it's difficult to tell. There is not one source you can just go to and see a list. I think the problem is this changes every year and since a fund company can't guarantee what the tax treatment is going to be for a particular thing, they'd almost rather not say.

Frank Vasquez [13:45]

My own experience is that the only way to really know is to hold one or more of them and see what happens. My experience with PFFV over the past couple of years is that almost all of its dividends are qualified. You can also look at the holdings of these preferred shares funds and if you see that their holdings are mostly shares of banks or insurance companies or other those kind of institutions, those are going to be qualified dividends. Where you have ordinary income is where a preferred shares fund is got a lot of real estate in it, in particular because anything that's REIT related is going to throw off ordinary income, and you can also just search online, but it is kind of annoying because this data is not contained in just one place as far as I know. So, in closing, I think that PFFV is probably your best choice or best practice today, the closest you can get to cake and pie and ice cream. By the way, I want a feast you ate before you came to the factory.

Frank Vasquez [14:53]

I want a bean feast. What are those? Cream buns and donuts? And fruitcake with no nuts so good, you could go nuts.

Frank Vasquez [15:01]

The only caveat I'll mention is it is a variable interest rate fund, although I have found it's not that variable. I think just because it's got so many different holdings in it. But in theory, the rate of payment could also go down when the interest rates change, because what's going on there is, the underlying shares that are issued have variable rates attached to them. I've not found that to make a big difference overall for this sort of thing, and I think that's probably because they're just holding so many different ones that one of them is not going to vary at the same time as the other ones or be adjusted at the same time as the other ones. And I should also say that these are certainly an optional asset.

Frank Vasquez [15:46]

I don't think anybody really needs to be holding preferred shares funds in particular, but they do come in handy for particular circumstances high tax rates and people who are just looking for an income source. I want the world, I want the whole world. So they probably don't belong in most people's portfolios. So they probably don't belong in most people's portfolios, but they do have a use here and there that you can take advantage of, especially if you're comparing it to some other thing that is just generating ordinary income, because they do kind of beat the pants off a lot of these CD, corporate bond funds and other things like that which are going to be highly taxed if you're in a high tax bracket. So hopefully that helps, or at least some of it helps, and thank you for your email.

Frank Vasquez [16:37]

A horse is a horse, of course, of course and no one can talk to a horse, of course. That is of course unless the horse is the famous Mr A. Second off, second off. We have an email from sigh and this is the real groovy apartment you got here and sigh writes hi, cousin frank and mary.

Not Uncle Frank [17:06]

I'd like to nominate episode 109, the first annual rebalancing episode, as a foundational episode.

Frank Vasquez [17:13]

Inconceivable.

Not Uncle Frank [17:15]

Without rebalancing risk, parity portfolios become George Foreman portfolios. Set it and forget it.

Frank Vasquez [17:22]

If you followed all the instructional material, you just set it and forget it.

Not Uncle Frank [17:28]

Looking through the past episodes, I realized I've been missing your monthly rants about financial miswisdom. Vaya con Dios, Cy.

Frank Vasquez [17:37]

I want you to be nice until it's time to not be nice. All right, cy also got to go to the front of the email line because he is participating in the charitable promotion and getting the Father McKenna matching pledge from the financial quarterback, and so thank you, cy.

Frank Vasquez [17:59]

You are a fun person, I like you. Now getting to your email. Well, I've been procrastinating about redoing my intros for this podcast. I've only been procrastinating about it for about 18 months now. It's not that I'm lazy, it's that I just don't care. But I will add episode 109 to the list and if any of the rest of you have other suggestions as foundational episodes, we can add those as well. The last time I did an intro, I think we only had about 200 episodes.

Frank Vasquez [18:33]

I agree with you that rebalancing is a fundamental technique for management, particularly of drawdown portfolios, because it does go into this issue as to well, where is the money coming from, and that needs to be coordinated with. However, you are rebalancing the assets in the portfolio Because what rebalancing ultimately does is force you to buy low and sell high. It did work astonishingly well recently when we rebalanced out of growth and into value in the last rebalancing on the calendar and suddenly small cap value went through the roof and growth didn't do so well. And the same thing for gold. Gold went up 20 in the past year. We either sold a lot of that for distributions or rebalanced out of it recently I love gold and then it promptly took a little dive lucky.

Frank Vasquez [19:33]

No, it's not always going to work that way and in fact it usually doesn't work that way, but over time you do get the benefits of buying low and selling high through the process of rebalancing. Always go for the throat Buy low, sell high. Fear that's the other guy's problem. So I agree with you. It is a fundamental management principle and the most important thing about it is to have a specific plan and stick to it, because what you want to avoid is what you would call ad hoc rebalancing, where you are making guesses as to which of your assets are going to do better in the future and then selling the other ones. I think that would be a disastrous process because you'd likely be wrong most of the time Wrong. Disastrous process because you'd likely be wrong most of the time Wrong. And it would encourage you to be selling low and hoping the high thing goes higher.

Not Uncle Frank [20:24]

That's not an improvement.

Frank Vasquez [20:26]

Now, as for the rants, yes, I did a lot of those early on. I was doing them once a month, largely because we didn't have as many emails that were coming in and they weren't stacking up the way they are these days, and I do think it's probably more important to answer your questions than to go off on what's irritating me that week or that day, and you won't be angry. I will not be angry. The last one we did was episode 321, which was about free steak dinner invitations. I was pleased with that one, actually no man. Well, I don't think I'll be doing those monthly anymore. I do think doing them from time to time, when certain things stack up, may make the most sense, because I do know that some of you find those to be the most entertaining part of this podcast.

Not Uncle Frank [21:19]

You are talking about the nonsensical ravings of a lunatic mind.

Frank Vasquez [21:25]

And for others. It makes you want to scream and hide and give me a one-star review.

Not Uncle Frank [21:30]

Hello, this is Chuck to remind Bill to shut up.

Frank Vasquez [21:36]

So different strokes for different folks. Anyway, thank you for your donation again and thank you for your email.

Not Uncle Frank [21:44]

You love it. It looks just like your telephone in U-47.

Frank Vasquez [21:51]

Next off, we have an email from Visitor5002. I have no name and Visitor5002. I have no name and Visitor 5002 writes.

Not Uncle Frank [22:03]

Is it just me or is an issue impacting overcast app use? With your podcast, frank, for the last 10 to 14 days I get not authorized when I try to download or listen to recent episodes. Unsubscribing and resubscribing does not fix the issue, using your website episode player in the meantime. Well, that right, there may be the reason you've had difficulty finding gainful employment.

Frank Vasquez [22:29]

Well, I'd like to be able to give you a straight answer, but I don't have one. You see, the way this works is I don't interact directly with any of the podcast players. What I do is upload my podcasts to a service called Buzzsprout and there are a number of these services now and then they distribute the podcast to all of the different outlets and players that people commonly use, and I know sometimes they have problems interacting with some of these platforms, usually because somebody has changed something and something needs to be reset. I don't use overcast, so I don't know what the situation is with it now, but I will say that if you can't get this podcast on a particular player, it is is available at Apple Podcasts, it is available at Spotify and now it's also on YouTube, although all you get to look at on YouTube is a picture of the logo while the audio is playing. Since I don't do video, forget about it.

Frank Vasquez [23:32]

One new feature I think we'll be rolling out here very soon is that my provider, buzzsprout, now has a artificial intelligence that will do transcripts and a few other things, and so hopefully we'll have transcripts for this podcast going forward. I'd ask them whether they could do transcripts for the prior 350 some podcasts, and they're not set up for that, at least not right now, but I'm going to check out that new part of the service and hopefully that'll be of service to you as well. It's all one big crapshoot. Anywho, it's funny. It will also create these little promotional blurbs for your podcast, based on the transcript, which I think I'll be posting into Facebook just for some added entertainment value for those who look at Risk Parity Radio on Facebook. But again, I don't do much over there other than use it as a place to promote the podcast, because you can do it in one click from Buzzsprout, which I'm grateful for.

Not Uncle Frank [24:31]

You follow all instructions and you Set it and forget it, set it and forget it.

Frank Vasquez [24:38]

Set it and forget it, you anyway. That's probably a little bit more than you want to know about the nuts and bolts of this podcast and podcasting. I will say I was surprised and pleased when I started this that there were services like buzzsprout that basically took all of the real hassles of putting your work out to the internet that you would ordinarily have to deal with on your own and would be prohibitively expensive or time-consuming. Rexquando, we use the buddy system. No more flying solo. You need somebody watching your back at all times. So if you wanted to know how some of the sausages were made, now you know and thank you for your email Last off, last off of an email from Lucas what we got there.

Not Uncle Frank [25:51]

We got a Lucas Jackson. You don't have a name here until Driveline gives you one and Lucas writes Hello, frank, is the guy that did the Risk Parody Chronicles ever coming back Thoughts on any of the portfolios he was tracking? Rpc stability Levered golden butterfly with cap efficient. Just seems hard to find a better portfolio for decumulation than traditional golden butterfly. Thanks, lucas.

Frank Vasquez [26:16]

Sometimes nothing can be a real cool hand. Well, my answer is Lucas. I don't know, but Justin did write in in episode 350, if you want to hear the last word from him, he has a day job at a family and so I think the blog was taking up too much of his time, although I know one of his children is being shipped off to college recently, so maybe he'll have some more time to devote to things like Risk Parody Chronicles after that. His YouTube channel with the videos that he created is still there and available, and we will hope that he will revive his blog at some point when he has time. I will say that writing a blog is actually a lot of work, and a lot more work, actually, than creating a podcast, at least this kind of podcast.

Not Uncle Frank [27:07]

Oh, I see nothing.

Frank Vasquez [27:09]

I was not here I did not even get up this morning so I greatly appreciated it when it was active, and hopefully it will be active in the future. Justin, if you're out there listening to this, the people are calling Did you know that it's not called a ban anymore, it's called a posse? Weird, wild stuff. That it is, sir, yes, a posse, a posse, but I completely understand if you don't really have time to attend to this sort of thing right now. And finally, as to your observation, just seems hard to find a better portfolio for decumulation than traditional golden butterfly. Yeah, it is pretty hard. I mean, that is a really good portfolio for that purpose. A really good portfolio for that purpose.

Frank Vasquez [28:01]

I will say that it looks better right now over the past few years, because these have been particularly bad years, and so it's 20% allocation to short-term bonds has really helped it in this environment, particularly 2022.

Frank Vasquez [28:12]

It would not have looked as good in the past decade. Before that, though, though, compared to something with less of an exposure to gold and less of an exposure to short-term bonds. So just be mindful that what looks good over a few year period may not look as good in another decade or another set of years. What we're really aiming for here is just something that performs pretty well in most environments and that certainly fits the bill, especially if you're looking for something on the conservative end of things. I take no credit for that. That's all Tyler of Portfolio Charts and he rolled that out in 2015, and we all first learned about it on the bulletin board at Early Retirement Extreme, and we all first learned about it on the bulletin board at early retirement extreme, which was before financial independence and the recent fire movement became a popular thing. So it's not only a good decumulation portfolio, it also is an OG portfolio of the fire movement.

Not Uncle Frank [29:15]

The best, Jerry the best.

Frank Vasquez [29:21]

Thank you for your musings and thank you for your email, but now I see our signal is beginning to fade. If you have comments or questions for me, please send them to frankatriskparityradarcom. That email is frankatriskparityradarcom. Or you can go to the website, wwwriskparityradarcom. Put your message into the contact form and I'll get it that way. If you haven't had a chance to do it, please go to your favorite podcast provider and like subscribe. Give me some stars, a follow or a view. That would be great. Okay, thank you once again for tuning in. This is Frank Vasquez, with Risk Party Radio, signing off. I want the works, I want the whole works Presents and prizes and sweets and surprises Of all shapes and sizes, and now, don't care how I want it now, don't care how I want it now.

Not Uncle Frank [30:25]

She was a bad egg. The Risk Parody 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.