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.

Uncle Frank [0:36]

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 [0:49]

Yeah, baby, yeah.

Uncle Frank [0:51]

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.

Uncle Frank [1:30]

Along with a host named after a hot dog.

Not Uncle Frank [1:34]

Lighten up Francis.

Uncle Frank [1:37]

But now onward, episode 358. Today, on Risk Prairie Radio, we're just going to get back to doing what we do best here, hopefully after a fashion which is answer your emails, let's do it, let's do it, and so, without further ado, here I go once again with the email, and First off, and First off. First off of an email from Jared.

Not Uncle Frank [2:11]

Jared Jared, jared Jared.

Uncle Frank [2:17]

Jared and Jared writes.

Not Uncle Frank [2:21]

Hi Frank. I recently donated to the Father McKenna Center for the Financial Quarterback Match.

Uncle Frank [2:27]

Yes.

Not Uncle Frank [2:28]

I've been a longtime listener of your podcast, since I first heard your appearance on the Choose Fi podcast. While my career has been in the field of mechanical engineering, for the past year or so I've been learning about machine learning and deep learning for personal growth and maybe a career change. As part of this, I thought it would be interesting to create a risk parity radio LLM that would take the transcripts of all your episodes as a reference and pull them in using a RAG retrieval, augmented generation in order to create a chatbot that would more or less answer questions with a similar tone and set of logic as you do on your podcast.

Uncle Frank [3:07]

We use the Socratic method here unlike any schooling we've ever been through before.

Not Uncle Frank [3:15]

In one of your recent episodes you mentioned that your podcast service has the ability to create transcripts of new episodes but not old episodes. Given that these podcasts are your creation, I only felt it fitting that I send you the attached podcast transcripts. They only go up to episode 343, as I stop there to try and work out some bugs on the LLM. If you would like, I can create transcripts of the rest and send them to you. If you have any interest in seeing what an Uncle Frank chat box might look like, I can see about hosting it for a limited time. Ai is expensive to host. Please let me know if you have any interest in this and I'd be happy to continue this fun side project. As it pertains to portfolios, I was very intrigued by the most recent Optra portfolio. I am still mid-career and probably 20 years to retirement, but previously had been going with a 50% total stock market fund VTI with a 50% small cap value, avuv. According to the test folio tool, the 50-50 accumulation portfolio would see a max drawdown of 62%. In my estimation, max drawdown is probably a good metric for risk, as it is the acceptable amount of drawdown an investor is expecting to see and still stick with an allocation without feeling the need to fiddle.

Not Uncle Frank [4:40]

My thought was that maybe we can do better than that 50-50 accumulation. My potential accumulation portfolio would look like 36% AVGV, 12% DBMF, 12% GLDM, 16% GOVZ, 24% UPRO. According to Testfolio, this new accumulation portfolio would have a compound annual growth rate of 13.2% compared to the 10.72% of 50% S&P 500, 50% small cap, while actually having a smaller max drawdown of 51%. Without giving specific advice, do you see any issues with using this type of higher risk opto portfolio for accumulation?

Not Uncle Frank [5:31]

Additionally, the way that many of these online tools implement leverage is to add a negative cash component. It seems that this would be more analogous to leveraging the entire portfolio, but in our case, the leverage is primarily in UPRO, while the Strips Fund tends to give a bit more juice 1.5 times than a traditional long-term treasury fund. Is there any additional risk that should be factored in, since only certain components of the portfolio are leveraged, or am I overthinking it? Thanks again for everything you do and I look forward to hearing your comments on the podcast Jared Girls. You won't believe it. Guess what? What? He went to Jared. He went to Jared. He went to Jared.

Uncle Frank [6:24]

Well, first off, thank you for your donation to the Father McKenna Center. I suppose this is a good time for the public service announcement we've been making here. As most of you know, this podcast does not have any sponsors, but we do support a charity called the Father McKenna Center that supports hungry and homeless people in Washington DC. And full disclosure I am on the board of the charity and am the current treasurer. We are running a two-for-one promotion these days Double your pleasure, double your fun. I appeared recently on a podcast called the Financial Quarterback, where they allowed me to promote the Father McKenna Center and also offered to match any contributions coming in in the near term for my audience for up to $10,000. We're making good progress on that, but we are not there yet, and so I would invite you, if you had considered donating to the Father McKenna Center to support this podcast, you, if you had considered donating to the Father McKenna Center to support this podcast, to do so now. And if you do that, what you need to do is go to the donation page on their website and I'll link to that in the show notes, and then, when you make your donation, mention the financial quarterback match and we'll collect all that info to present to the financial quarterback, for the matching info to present to the financial quarterback for the matching and, incidental to that, you get to go to the front of the line for any donations you make to the Father McKenna Center, the email line I'm talking about. So that's what Jared has done here today. That line is currently about two months long, so it is worth something. That, and a nickel, get your hot cup a jack squat and I invite you to take advantage of it. And thank you for your support, jared. Now let's get to your email First.

Uncle Frank [8:22]

Thank you very much for pulling those transcripts together and sending them to me. That was something I had been scratching my head about for some time. There are transcript services, but I always felt there ought to be an easier way to do this with large language models and the improvements in AI. Now Buzzsprout does not let me easily upload all of those to the episodes, but I am matching them one at a time, which is kind of just the way you end up having to do it and cutting and pasting the text into the transcript part of the podcast hosting there, and so I've just done the first couple of them. I think I'll be doing a few a day until they all get done. So, yes, if you had the other ones after episode 343 up to where we started doing the transcripts a couple of episodes ago automatically, that would be great. The only file that did not come through was for episode 20, and I don't know why, but it would not unpack that one.

Uncle Frank [9:28]

It's funny you mentioned the Choose Fi podcast, because I had actually asked Brad Barrett about this, about whether there was a way to take the transcripts from a podcast or the audio from a podcast and essentially put it into a chat, gpt or AI large language model and have it mimic me, if you will.

Uncle Frank [9:49]

So, yes, I'd be very interested to see if you could make that happen, if it's not too much trouble, because the other thing that I'd come up with respect to AI was every once in a while I get asked whether I'm going to write a book about this topic, and the prospect of writing a book just sounds like way too much work and very unpleasant at this stage of my life, because I spent too much time writing things for most of my career.

Uncle Frank [10:14]

I don't think I'd like another job and I'd rather talk than write. So since the appearance of AI. I had been wondering well, could I take all of the transcripts of what I've been saying and somehow turn that into a book at some point? But it seems like we're moving closer to that. I do think this would be a much better book, if you will, if we wait a few more years. I'd rather have closer to a thousand episodes than where we are right now, because I think that would really fill out a lot of things that are likely to happen in the future, including recessions and the development of more of these alternative ETFs that we talk about here. So, yes, I would be very pleased if you would continue your side project into AI of this and let me know how it goes. Then we'll figure out something to do with it then.

Not Uncle Frank [11:10]

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

Uncle Frank [11:17]

And so thank you very much for that. I do really have the most talented audience available.

Not Uncle Frank [11:22]

The best, Jerry the best.

Uncle Frank [11:26]

Now getting to your question about whether you can use this leveraged portfolio. You've constructed as an accumulation portfolio based on the new Optra sample portfolio, because you know we need one portfolio to rule all, one ring to rule them all. I think in theory it should work pretty well, and particularly if you are working from an accumulation setup where you are adding more money to it periodically, because that will effectively dampen out a lot of the volatility, or at least some of the volatility. And that is going to be the real issue, particularly in short time frames with a leveraged portfolio, that you could get all of the assets moving the same way at once, which would in fact, increase the volatility of the portfolio. And that's really what you are looking at as a limitation is that leverage by its nature adds to the volatility of anything, and just because it worked one way in the past, this is where any deviation is going to get essentially multiplied by the leverage. So I would expect, ultimately, that this proposed leverage portfolio is going to have at least the same volatility characteristics as that 50-50 total stock market fund small cap value portfolio. But I do observe that for both of these, when I looked at the backtesting there, these gigantic downturns were in 2008. And while it's certainly possible to have another episode like that in our lifetimes, it is not a high probability event.

Uncle Frank [13:24]

I think, if you're going to do something like this, I would definitely try to do it in a Roth IRA, if you have room for it in there, and I would also consider whether you really want to use AVGV as your value allocation. I did use that for the Optra portfolio because it's a convenient one-stop shop there. One-stop shop there. But the disadvantage to that particular fund is it is not weighted more towards small caps or as much towards small caps as you might like. So you might be better off taking out the components of it, which are all of Avantis' value tilted funds, and coming up with your own formulation that matches that 36%. It won't be as simple or elegant, but it might be more effective. Anyway, the bottom line is here. I think this should work out pretty well in theory, but we haven't had these funds around in practice for all that long, and so it's difficult to say anything definitive about this. So I wouldn't bet the farm on it, but you could bet something on it.

Not Uncle Frank [14:30]

You have a gambling problem.

Uncle Frank [14:33]

And you'll probably be happy with the results, I would guess, in the long term. Anyway, hopefully that helps. Thank you very much for the transcripts and thank you for your email he went to.

Not Uncle Frank [14:46]

Jared, jared.

Uncle Frank [14:53]

Second off. You went to Jared. I'm Jared. Second off. Second off.

Not Uncle Frank [14:58]

We have an email from John here's.

Uncle Frank [15:00]

Johnny, and John writes.

Not Uncle Frank [15:04]

Hi Frank. Do carry. Strategies like those discussed on the Resolve Risk podcast on their 531 episode have a place in our DIY portfolios. Are there specific funds you would consider?

Uncle Frank [15:21]

Thanks, John, All work and no play, make Jack a doll boy carry strategies. Well, this is a very interesting topic and I will link to that resolve riffs podcast in the show notes, because that explains carry much better than I'm going to right now, which is going to be a very quick summary. For those who aren't familiar with the idea of a carry strategy, that label applies to several different kinds of strategies, but they basically all try to take advantage of either a real interest rate or an implied interest rate in a couple of different assets may have heard this recently is the idea that you would borrow in a currency like the Japanese yen at a low rate and then take that money and invest it in dollars at a higher rate, and so you are getting the carry between the two different rates and that's how you're making money off of the strategy. Now, as you can imagine, sometimes this is like picking up nickels in front of a steamroller, because it can unwind very quickly if the currencies move against you or interest rates change abruptly, and that's where it doesn't work. But now there are other versions of carry strategies that typically involve trading commodity futures, both in a short month out and a longer month out, with the same idea, using the implied interest rate between the two of those to come up with a trade. It's more complicated than that, but that's a basic understanding of a different way to use carry and to profit from it. So these kinds of strategies have been around for at least a couple of decades. They are a kind of bread and butter hedge fund kind of strategy, along with long short strategies and things like that.

Uncle Frank [17:21]

There are only a couple of funds out there right now that specialize in this. One is called CCRV. I believe it's an iShares fund. I'll link to the Morningstar printout of it. It's a relatively new fund. That's been around for about the past five years since they changed the ETF rules and made these things more easy to construct and put out in the world. There is an older one called ICITF. It's a mutual fund form. I believe that is more of a currency carry kind of strategy. I may have them mixed up at this point in time, idiot. I'll also link to a link there in the show notes.

Uncle Frank [18:04]

I've noticed that in addition to this, simplify has put out a new ETF called QIS which actually incorporates Cary and several other of these exotic hedge fund kind of strategies, and it's pretty much brand new, so I have no idea how it's going to perform, and that is really, I think, the problem with trying to use these in a portfolio right now. It's just really not knowing how they are going to perform, what their relative volatility is, what their correlations are to the various other assets in the portfolio. In theory, they should have close to zero correlation, although they may have positive correlation with things like managed futures if they are treading the same kinds of grounds. So I would say, yes, you could use one of these things in theory, but in practice I'm not sure how it's going to work at this point in time, and I would not be surprised, though, if there are many other funds that come on along the lines of the ones I just described, because we are living in an era of conversion of these kind of hedge fund strategies into ETF forms that anybody can invest in and use.

Uncle Frank [19:17]

One of the problems you have with carry is because it's kind of a generic description of several different strategies. There is nothing that resembles an index of carry strategies, nothing that resembles an index of carry strategies, so it's very difficult to determine how this would perform or how it did perform in the past, without knowing exactly the particulars of the fund or the strategy. Unlike something like DBMF, which is that managed futures fund that replicates the SOC Gen index. There is some kind of target or index you can reference for that. We don't really have anything like that. When it comes to something like Cary, it's Cary.

Uncle Frank [19:58]

Now, I am also certain that there are hedge fund, mutual fund things like the ones out of AQR, that are incorporating these kinds of strategies, so they are out there in the world, at least as part of a larger strategy. But sitting here today, I do not actually know exactly how I would incorporate Carrie into one of these portfolios, the girl who lives in that creepy house with her crazy mother, with her crazy mother. No, no, no. Oh, I can imagine taking a golden ratio portfolio and making Carrie the 6% just to see what happens. It will be a nightmare, no, no. But those funds I mentioned, in particular CCRV and ICITF, would be the kinds of things you'd be looking at if you wanted to incorporate Cary into some kind of portfolio, at least at this stage. Probably your best bets. Anyway, sorry, I couldn't be more informative on that, but at least I found a couple of funds and thank you for your email, if you have a taste for terror.

Uncle Frank [21:21]

If you have a taste for terror you have a date with Carrie.

Not Uncle Frank [21:25]

Last off, last off of an email from Jimmy. Hey Jim, baby, I see you brought up reinforcements.

Uncle Frank [21:31]

Well, I'm waiting for you, jimmy, boy and Jimmy writes Hi Frank, huge fan of the show.

Not Uncle Frank [21:39]

I am a little late to the risk parody radio party so I may have missed the episode where this topic was discussed. What is the strategy with dividends, slash interest, slash distributions from the portfolio holdings? Do you have them reinvest or sweep to cash? One more regarding managed futures, given the seemingly wide variety of strategies, what do you think of the multiple manager approach versus the single holding approach, for example, allocating to DBMF, kmlm and HIDE versus only allocating to DBMF? Thank you for your great work on the podcast, jimmy L.

Uncle Frank [22:15]

Well, you're not too late, Jimmy. I'll be here all week or all decade Do not ask him for mercy.

Not Uncle Frank [22:23]

Let's face it you can't talk him out of anything.

Uncle Frank [22:28]

Let's get right to your questions. Your first one was what is the strategy with respect to dividends and distributions from the portfolio holdings? This has to do with where you are in your own personal financial life, meaning, are you on the accumulation side of things or are you decumulating and taking money out of the portfolio? If you are still accumulating, you can probably just reinvest these things if it's convenient for you. But if you are decumulating, I would turn off all of the reinvestment options that you have, because it is just a lot easier to manage than in terms of taking distributions in cash anyway or reinvesting them or rebalancing them, and from a tax perspective, you always want to have fewer transactions in a portfolio. Every reinvestment of a dividend or income counts as a new transaction, which is really annoying in a taxable account to have all of these tiny transactions of reinvested stuff that you have to deal with when you are selling it and calculating capital gains. And it can also cause problems if there are transactions going on in a retirement account and you could potentially lose tax-loss harvesting due to a wash sale where you've sold something at a loss in a taxable account but something's going on in a retirement account where it's buying the same thing within 30 days. And so, to avoid all of those potential pitfalls, just turn that reinvestment option off when you are at decumulation or about to get to decumulation, and you might consider just leaving it off in taxable accounts to begin with, simply to avoid having excessive numbers of transactions.

Uncle Frank [24:19]

All right, next question what do I think of the multi-manager approach versus the single-holding approach to managed futures? Well, that is the typical approach of, say, a hedge fund or an institution would hire several different managed futures managers to do things. You'll find that a lot of the trades overlap because if they are all following the same kinds of assets, they will all be jumping on the same trends with the same assets. So there really may not be a whole lot of diversification there, unless the funds are specifically oriented towards, say, only commodities or only currencies or only interest rates. Then you'd get some divergence based on the markets that are being tracked. So I think there's probably less value in trying to do that in this circumstance and that you're probably not going to gain a lot over time, because remember, the main reason you are holding these things is because they are highly diversified from everything else in your portfolio. So you don't care as much that whether they are diversified from each other, so long as they're all kind of pointing in the same direction.

Uncle Frank [25:28]

Now, in terms of the funds themselves, dbmf and KMLM are interesting because they do have a trackable history, whereas most of the other newer ones really don't at this point, unless they had a preceding mutual fund. The system used by KMLM has been used since the 1990s, and so there is a way in Testfolio in particular to use data going back to like 1994 for KMLM. Dbmf follows the SOC, gen, managed Futures or CTA indexes, and so there is also a basis or history for backtesting purposes that you can rely on, as DBMF is attempting to replicate an index there. As DBMF is attempting to replicate an index there. I was listening to an interesting discussion recently it's probably on Top Traders Unplugged, but I'm not sure where they were talking about. Well, what is the likely deviation of something like DBMF, a replicator from the actual index? And it was thought to be somewhere between 5% and 10%, I think was the figures they quoted. So even then you're not getting exactly the same thing.

Uncle Frank [26:41]

So where do I come out on this? There's nothing wrong with tracking more than one of these things. I just don't think you're likely to get significantly different results, particularly since you're probably only going to be devoting 10 or 15 percent of this strategy anyway in the entire portfolio. But I would say that you should pick one strategy and just stick with it, because the danger here would be going with one of these funds and then seeing a different one perform better for a while and trying to jump to that one and trying to jump to the most recent good performer, and I think that would be a bad strategy to adopt. That you should just get with one of these that you're comfortable with, or a group of them you're comfortable with, and then just stick with it.

Uncle Frank [27:29]

In practice, I do hold both DBMF and KMLM in personal portfolios, but I try not to be jumping back and forth with them and in fact, mostly just leave them alone, although we did sell some last year and it looks like we'll be buying some in the near future if they keep underperforming the way they have in the very recent past.

Uncle Frank [27:52]

Anyway, this is kind of similar to the discussion we just had about carry strategies, in that most of these newer ETFs that are managed futures ETFs just have not really been around that long and I think we're going to know a whole lot more about how they perform in different economic environments after a few more years of this, which we'll all be looking forward to, I am sure. Anyway, hopefully that helps, 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 frank at riskparityradarcom. That email is frank at riskparityradarcom. Or you can go to the website wwwriskparityradarcom, put your message into the website wwwriskparityradiocom, 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, a review.

Not Uncle Frank [28:48]

That would be great.

Uncle Frank [28:49]

Okay, thank you once again for tuning in. This is Frank Vasquez with the Risk Parody Radio Signing off. Carrie, a new film by Brian De Palma Based on the chilling bestseller Starring Sissy Spacek, piper Laurie and introducing John Travolta in his first motion picture role. You know what they call a quarter pounder with cheese in Paris. What do they call it? They call it a royale with. Call it Royale with Cheese. Royale with Cheese.

Not Uncle Frank [29:37]

That's right. 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.