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.

Not Uncle Frank [0:17]

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.

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.

Not Uncle Frank [0:52]

Expect the unexpected.

Mostly Uncle Frank [0:55]

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

Not Uncle Frank [1:10]

We have no guests and we have no expansion plans. I don't think I'd like another job. What we do have is a little free library of updated and unconflicted information for do-it-yourself investors.

Mostly Uncle Frank [1:26]

Now who's up for a trip to the library tomorrow. So please enjoy our mostly cold beer served in cans and our coffee served in old chipped and cracked mugs, along with what our little free library has to offer. Welcome reviews of the eight sample portfolios you can find at wwwriskparityradiocom on the portfolios page, and hopefully I can get through it. I do have a cold so my voice is not what it usually is. Just one little programming note before we get going here. I recently appeared on Stephen Boyer's relatively new podcast and video. It is called Forget About Money, and he asked me all about risk parity and risk parity radio and 5% safe withdrawal rates, and so I will link to that in the show notes the YouTube version of it, and you can also get it on your podcast player. But he's had a lot of great guests on there. I was right after William Bernstein, so you should check that out if you get a chance. And now, without further ado, here I go once again with the email.

Mostly Uncle Frank [2:51]

And first off, first off, an email from Brian.

Not Uncle Frank [2:58]

Hey, brian, care to place a wager?

Not Uncle Frank [3:00]

And Brian writes good day, frank, enjoying your podcast, as always. Yes, I've noticed talk about YouPro and Brian writes be some as well through pro shares. Can you discuss and enlighten your awesome audience on what leverage does the pros and cons of levered funds and where it may fit into an accumulation portfolio or even decumulation? My biggest fear is that there is a higher chance of losing it all if the market downturns enough. Is this a rational fear or not really with levered funds? Also, could you share any thoughts on levered small cap funds and if there are any decent ones or if they're not needed? I was considering a small portion of UPRO, potentially in my Roth, as a means to have some rebalancing options between that and my small cap value fund, avuv, although the correlation isn't significant, but maybe significant enough at 0.8. Thanks, frank, brian.

Not Uncle Frank [4:10]

You've got Carol Channing, the actress, beating Mike Tyson, the boxer. Hell, give me 50 bucks on Tyson.

Mostly Uncle Frank [4:17]

So you want to talk about leverage, huh.

Not Uncle Frank [4:19]

You have a gambling problem.

Mostly Uncle Frank [4:22]

Well, we have a lot of people around here with gambling problems, so this is a perennial topic that we talk about often. I'll just give you a few of the other episodes so you can go back and listen to them, because I'm only going to be doing a little summary here. 258, and also episodes 255, 259, 285, 317, 318, 319, and 322. And there are actually a lot more of them going back a lot further. But if you actually want to search the whole catalog of podcasts, you can do that from the podcast page at wwwriskparrywaycom. Either in the search box right where the episodes appear, or there is a link to the RSS feed where you'll see all of the podcasts and all of the show notes on one big web page and you can search the whole thing for any word you want. And leverage comes up a lot about 190 times in fact. But let's give you a quick summary of leverage and what you might do with it in a portfolio.

Mostly Uncle Frank [5:31]

The idea of leverage is simply to borrow money or take more risk in a portfolio to improve the returns, and typically you also increase the volatility at the same time. There is a nice video by Ben Felix, a rational reminder about the general use of leverage in a portfolio, and I'll link to that again in the show notes. But he talks about the academic perspective of this, that there are really only two ways that you can beat the market if you will. One is to take a concentration in a particular thing because you think it's going to perform better than the market, and the other one is to add leverage to a portfolio to improve its returns. Now this idea is one of the original ones applied by people like Ray Dalio at Bridgewater to a risk parity style portfolio. So they would take a portfolio that looks something like that all seasons portfolio in our sample portfolios and add leverage to that, and that was the original kind of risk parity concept, because the idea was those portfolios are just way too conservative by themselves but if you add leverage to something like that, you can get a stock market like return but a lower volatility, and so that is how this has been traditionally used by professionals in risk parity world.

Mostly Uncle Frank [6:49]

Now there's also been a lot of experimentation with this in the past decade. There's a nice site called Optimize Portfolios. That is all about leveraged portfolios and leveraged funds and portfolios, and if you're really interested in this topic, I would go spend some time over there, because they basically take all of the common portfolios you can think of and add leverage to them and do some analysis of that and then also talk about a lot of the leveraged ETFs and what they think of various ones and how they're constructed. I'm not going to go into all of that here, but there are basically two ways an amateur can add leverage to a portfolio.

Mostly Uncle Frank [7:27]

A professional might use futures and options, but for most amateurs, the two common ways are to either take leverage in a margin account where you just borrow money on margin and add to the portfolio that way, or you can use these leveraged ETFs like UPRO that you mentioned, which is a three times leveraged ETF that tracks the S&P 500. Now these types of ETFs have been around since around 2009. At least that one has, and they were originally designed for day trading or short-term trading because they benchmark on each day, but over the past 10 years, people have found other uses for them, including what you're thinking about doing is adding a small bit of that to a portfolio.

Not Uncle Frank [8:15]

Well, you have a gambling problem.

Mostly Uncle Frank [8:18]

There are now other leveraged funds that are actually designed for long-term holdings. One of those is called NTSX and we have that in one of our sample portfolios and that is a combination of the S&P 500 and a treasury bond fund, levered up 1.5 to 1. So instead of a 60-40 portfolio, it's representative of a 90-60 portfolio. There are some newer ones from Corey Hofstein that are known as return stack portfolios. That are various combinations of treasury bonds, managed futures in the stock market, but all of this is relatively new within the past few years, and so we know how they all perform in theory, but we haven't had a lengthy trial run or practice run, except for something like UPRO. That's been around 15 years now. So you asked about the pros and cons. Well, the pros are that you can get more return out of a portfolio than you would have if you didn't put leverage into it. The downside is you can blow up because you're going to have a whole lot more volatility in the portfolio as well. Those two things go hand in hand. There's no reward without risk, and you can actually see that in these sample portfolios because a number of them we are running experiments with leveraged funds essentially. So you see that the kind of ordinary plotters like the golden butterfly and golden ratio just kind of plot along, whereas some of these other ones are all over the place and go up and down by 5% in a week.

Mostly Uncle Frank [9:50]

You asked whether there's a higher chance of losing it all if the market downturns enough. Well, yes, there is, particularly if you've got a lot of allocation to one of these levered funds. But if you're only allocating a small amount to it, you're not putting as much risk in there. So, for example, in that Optra portfolio that we just started in July, we are using 16% in UPRO, which is going to function as if it were a 48% allocation to the S&P 500. That's what I would call a smaller allocation. If you're putting one-third of the portfolio in UPRO, or even a quarter, that is a much larger risk you're taking.

Not Uncle Frank [10:30]

Ooh, how convenient.

Mostly Uncle Frank [10:33]

All right, levered small-cap funds. I've actually been disappointed with the kinds of small-cap funds that are available. Typically they're like TNA, which we use in one of our sample portfolios the levered golden ratio. But unfortunately that is more like a small cap growth fund because it is tracking or indexing against the Russell 2000. And so it picks up a lot of undesirable characteristics out of small cap growth that you really don't want as much. What you really want to have in that position would be a small cap value fund that is leveraged, but such a thing does not exist right now.

Mostly Uncle Frank [11:15]

Hopefully somebody's listening and they will invent one. So at least right now I think it's better to do what you're contemplating doing, which is using a standard small cap value fund like AVUV as that allocation, and then you can substitute some of your S&P 500 allocation or large cap growth allocation with UPRO and just use less of it. So if you want to use a small amount of UPRO and put it in a Roth, that's not going to cause you any trouble. I don't think it will be more volatile, obviously, but it's not going to go off the rails and disappear or blow up the whole portfolio. And right now there is not a good small cap value leveraged solution, so we're stuck with that. So hopefully all of that helps. I would listen to some of those other episodes or search the episodes.

Not Uncle Frank [12:09]

And thank you for your email. Hey, it's me. Knock knock. So you got my money. Huh, oh yeah, I'll pay you soon. Yeah, well, here's a suggestion have the money by tomorrow and there won't be any problems. Huh, yeah, 24 hours. Why, what happens in 24 hours? I don't know, not psychic man, I'm just saying it would probably be better for everybody if you had the money tomorrow. Yeah, all right, I'll see what I can do. Sweet, sweet great. See you later, don't forget, nah you're not going to forget.

Mostly Uncle Frank [12:40]

Second off, second off.

Not Uncle Frank [12:44]

We have an email from JD. Now you can call me Ray or you can call me Jay.

Not Uncle Frank [12:47]

And JD writes Frank, truly enjoy your podcast and I'll add a great voice to fall asleep to.

Not Uncle Frank [12:56]

Snooze and dream, dream and snooze. The pleasures are unlimited.

Not Uncle Frank [13:01]

I need help finding ETF alternatives to GLD. You had mentioned a few in one of your podcasts, but I can't. Alternatives to GLD you had mentioned a few in one of your podcasts, but I can't seem to find it. Do you recall the episode number? Thanks again.

Mostly Uncle Frank [13:13]

JD. Hmm, I'm wondering if I should repackage this podcast as a sleeping aid.

Not Uncle Frank [13:19]

Yes, you take my dreams, like the one that you just interrupted. It was marvelous. I was foreclosing the mortgage on a lifelong friend and I was creating a poverty pocket right in the heart of Beverly Hills.

Mostly Uncle Frank [13:33]

You're getting the really deep and gravelly version today. But gold ETFs, yes, we do talk about these from time to time, and I won't make you go find another podcast, I'll just put a link in the show notes here. The best place to actually just search ETFs generally is the ETF database, and you can search all the gold ETFs or all the precious metal ETFs and it'll just line them up there and then you can click on each one and look at its characteristics In terms of costs. These days, the ETFs IAUM and GLDM are the cheapest ones in terms of expense fees, and I think they're at 0.09 and 0.10.

Mostly Uncle Frank [14:13]

There is another interesting gold ETF called FIS P-H-Y-S, which is formed as a trust and advertises that it is subject to more favorable tax treatment. I don't know whether that's true or not, but I'll take their word for it. It does have a higher expense ratio though, so it's probably only of interest if you had very large holdings in a taxable account that you were planning on buying and selling more frequently than most people, but I'll see if I can dig out a little article about that and also link to that in the show notes if it's of interest to you. So very happy to help you find the gold or go for the gold.

Not Uncle Frank [14:52]

I love gold.

Mostly Uncle Frank [14:57]

Check out those links and thank you for your email.

Not Uncle Frank [15:02]

This is gold.

Not Uncle Frank [15:03]

Mr Bond, I think you've made your point. Goldfinger, thank you for the demonstration. Do you expect me to talk? No, mr Bond, I expect you to die.

Mostly Uncle Frank [15:16]

Last off. Last off, we have an email from Andrew, andrew and Andrew writes.

Not Uncle Frank [15:33]

Hi, I am 44 years old and considering retiring early. I have a risk parity style portfolio already. I was just curious with a longer time frame for myself being retired, what type of withdrawal percentage should I consider using? I know people that retire early say under 4%, but I think that is a little conservative considering the type of portfolio I'm using. No leverage in my portfolio, just total market small cap value, international total market international small cap value, intermediate government bonds, some private real estate, credit and managed futures.

Mostly Uncle Frank [16:09]

Well, very good question, andrew. Yes, I think you can take more out of a portfolio than standard, and I don't have any way of analyzing your specific portfolio, but I am going to assume, for the purpose of this question, that it has risk characteristics similar to something like a golden butterfly or golden ratio portfolio that would have a 30-year safe withdrawal rate of 5% or more if you follow the standard, adding for inflation every year, which you probably won't do. So the easiest way to approach this is to simply look at longer time frames, and the calculators at portfolio charts go out to 50 or 60 years and as well as the ones at Portfolio Visualizer. In the Monte Carlo simulator, you can change the number of years that you're modeling, and what you'll find in general is this that for every 10 years that you add to your model, the safe withdrawal rate goes down by about 0.3%, but it doesn't ever go down more than about 0.6% because it does not go down in a linear manner, but an asymptotic manner, so that once you get out a certain distance of years, it doesn't change very much anymore.

Mostly Uncle Frank [17:23]

This is kind of one of the myths of safe withdrawal rates that people say things like well, it only worked for 30 years. Therefore it's going to turn into a pumpkin or something. In fact, most of this is going to work fine for however long you need to do it, even forever. So that's the first thing I would do. But then I would also consider what is your actual withdrawal strategy? Because that is going to add back to your safe withdrawal rate. So, for instance, if you were to not increase your withdrawals by the rate of CPI inflation but increase it by CPI minus one, that would add about 0.5% back to your safe withdrawal rate. So just doing that would solve for going from 30 years to, say, forever or close to it. You can do even better if you use a guardrails kind of strategy. Unfortunately, these are somewhat difficult to model on most calculators. There is a retirement planning calculator at Portfolio Charts that you can do some of this on. But the other data source that I've found useful are some of these Morningstar reports that come out every year about safe withdrawal rates reports that come out every year about safe withdrawal rates, and in one of the last ones they did modeling of all of these variable withdrawal rate strategies and that's where this 0.5% comes from and over 1% for a Guyton-Klinger guardrails kind of strategy and they were modeling a kind of standard 60-40 kind of portfolio. But the same things are going to apply to a more complex portfolio of similar macro allocations, like you're talking about here. So I don't see any reason why you would not be able to take out at least 4% or even up to 5% with a decently diversified portfolio and using variable withdrawal rate strategies.

Mostly Uncle Frank [19:19]

Diversified portfolio and using variable withdrawal rate strategies the way I tend to look at this is that you should try to keep your baseline expenses to about 3%. Then I look at the next 1% is what I would call comfort expenses, so that's eating out and your gym membership and stuff that you like to have and do but you wouldn't have to in a pinch, and then that leaves another 1% for what I would call extravagances, which are one-off big vacations or other big purchases that are likely to change every year, and that money could also be used for some kind of an emergency. Say you had to replace the HVAC in your house or something like that, and I talked about those kind of 3-1-1 guidelines back in episodes 334, 338, and 341, if you want to hear about that in more detail. So I would go and do some modeling, but what you're describing is definitely doable in my view and I'm hoping you'll be able to implement it as you describe, and thank you for your email. Now we're going to do something extremely fun.

Not Uncle Frank [20:16]

Thank you for your email.

Mostly Uncle Frank [20:18]

Now we're going to do something extremely fun, and the extremely fun thing we get to do now is our weekly portfolio reviews of the eight sample portfolios you can find at wwwriskparadisecom on the portfolios page. And we are also going to be talking about monthly distributions for September because it's the end of the month and so, just looking at the markets, last week not a whole lot happened. The S&P 500 was up 0.24% for the week. The Nasdaq was down 0.92% for the week. Small cap value, represented by the fund VIOV, was up 0.25% for the week. Gold was down it was down 0.34% for the week. Long-term treasury bonds were the big loser last week. Representative Fund VGLT was down 1.71% for the week. Reits were up. Representative Fund REET was up 0.42% for the week. Commodities were down. Representative Fund PDBC was down 0.67% for the week. Preferred shares were flat. Representative Fund PFF was down 0.03% for the week and managed futures managed to be up. Our representative fund DBMF was up 0.47% for the week.

Mostly Uncle Frank [21:32]

And now going through these sample portfolios, first one's the all seasons. This one 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 0.73% for the week. It's up 8.08% year-to it's up 9.72% since inception, july 2020. For the month of September, we are withdrawing $32 from FIGI LT, the long-term bond fund, which has done the best since rebalancing. That's at a 4% annualized rate. That'll be $272 year-to-date and $1,595 since inception, july 2020. And all of these portfolios started with about $10,000 in them. Now moving to these kind of bread-and-butter portfolios. First one's Golden Butterfly. This one is 40% in stocks divided into a total stock market fund and a small-cap value fund, 40% in treasury bonds divided into long and short and 20% in gold. It was down 0.31% for the week. It's up 9.81% year to date and up 32.35% since inception in July 2020. For September, we'll be withdrawing $45 from it. Also from VGLT, the Treasury Bond Fund. That's at a 5% annualized rate. That'll be $386 year-to-date and $2,164 since inception in July 2020.

Mostly Uncle Frank [23:10]

Next one is the golden ratio. This one's 42% stocks in three funds, 26% long-term treasury bonds, 16% gold, 10% in a REIT fund and 6% in cash in a money market fund. It was down 0.34% for the week. It's up 11.30% year-to-date and up 30.27% since inception, july 2020. We'll be withdrawing $44 out of it for this portfolio. Our management rules say we take it all out of the cash all year long, so that's where it's coming from. That's at a 5% annualized rate. That'll be $375 year-to-date and $2,126 since inception in July 2020. X1's a risk parity ultimate. I will not go through all 15 of these funds, but it was down 0.61% for the week. It's up 12.77% year-to-date and up 20.66% since inception in July 2020. For September, we'll be withdrawing $40. It's going to come out of GLDM and that'll be at a 5% annualized rate. For September. That'll be $341 year-to-date and $2,328 since inception in July 2020. Now moving to these experimental portfolios with the levered funds in them. Don't try this at home, although I know some of you do.

Not Uncle Frank [24:34]

You have a gambling problem.

Mostly Uncle Frank [24:36]

First one's the accelerated permanent portfolio. This one is 27.5 percent in a levered bond fund tmf, 25 percent in a levered stock fund upro, 25 percent in pffa preferred shares fund and 22.5 percent in gold gldm. It was down 1.59 percent for the week. It's up 14.87% year-to-date and up 5.27% since inception in July 2020. For September, we'll be withdrawing $40 from cash. That's at a 6% annualized rate. So that'll be $329 year-to-date and $2,513 since inception in July 2020. Next one's the aggressive 50 50. This is our most levered and least diversified portfolio. It is one third and a levered stock fund upro, one third and a levered bond fund tmf, and the remaining third in ballast in a preferred shares fund and an intermediate treasury bond fund. It was down 1.76 percent for the week. It's up 13.64% year-to-date and down 6.81% since inception in July 2020. For September, we are withdrawing $35 out of it. It's going to come out of the UPRO stock fund. That will be $258 year-to-date and $2,493 since inception in July 2020. That is at a 6% annualized rate these days.

Mostly Uncle Frank [26:02]

Now moving to the seventh one, the levered golden ratio. This one's 35% in a composite levered fund called NTSX that's the S&P 500 and treasury bonds, 25% in gold GLDM, 15% in EREIT O, 10% each in a levered bond fund TMF and a levered small cap fund TNA, and the remaining 5% in KMLM, a managed futures fund. It was down 0.52% for the week. It's up 13.25% year-to-date and down 1.99% since inception in July 2020. We are withdrawing $34 for September at a 5% annualized rate. It's going to come out of the gold fund, gldm. That'll be $284 year-to-date and $1,451 since inception in July 2021.

Mostly Uncle Frank [26:55]

And going to our last one, the Optra portfolio One portfolio to rule them all, one ring to rule them all. Yes, that's a joke. We just started this one in July. It is 16% in a levered stock fund UPRO. 24% in a composite value tilted tilted fund, a worldwide value tilted fund called avgv, from avantas 24 in a strips fund that's treasury bonds of extra long duration. That fund is govz. And then the remaining 36 is divided into gold and managed futures, gldm and DBMF. It was down 0.6% for the week. It's up 4.11% year-to-date and up 4.11% since inception in July 2024. So it's actually only two months old. So we'll be taking $52 out of it for September. That's at a 6% annualized rate. It's going to come out of GLDM, the gold fund, and that'll be $103 year to date and $103 since inception in July 2024.

Mostly Uncle Frank [28:10]

And that concludes our portfolio reviews, and now I see our signal is beginning to fade. Our episodes in the next month are going to be a bit spotty. I'm not sure there'll be one this midweek Got to take a dog to North Carolina but I think we will have one next weekend and then there'll be a hiatus for about two and a half to three weeks. We'll do the best we can here, but I will keep the website updated In the meantime. If you have comments or questions for me, please send them to frank at riskparityradiocom. That email is frank at riskparityradiocom. Or you can go to 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 review, a follow. That would be great. Okay, don't forget to check out my recent interview by Stephen Boyer on the Forget About Money podcast. Thank you once again for tuning in. This is Frank Vasquez with Risk Party Radio, signing off.

Not Uncle Frank [29:21]

Stewie, uh, hey, hey there. So, uh, it's been 24 hours. Got my money? Oh, I, you know what. Just give me till next Friday, I'll have it for you. Oh, oh, that's funny, I could have sworn. I said have it today. Yeah, I don't have it, sorry. Oh Well, all right then then, mmm, that's good. Oj, yeah, that's what happens, man. Oh my god, where's my money? Man, where's the money? Yeah, you like that? That feel good, that feel good. Where's the money, man, where's my money? You got till five o'clock, you hear me, you got till five o'clock. You, freaking psychopath, clean yourself up. What the hell happened to you? I fell down the stairs. You should be more careful.

Not Uncle Frank [30:29]

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.