Mostly Aunt Mary [0:01]

A foolish consistency, is the hobgoblin of little minds, adored by little statesmen and philosophers and divines.

Mostly Not Uncle Frank [0:10]

If a man does not keep pace with his companions, perhaps it is because he hears a different drummer.

Mostly Aunt Mary [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 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.

Mostly Not Uncle Frank [0:49]

Yeah, baby, yeah.

Mostly Uncle Frank [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.

Mostly Aunt Mary [1:26]

Top drawer, really top drawer.

Mostly Uncle Frank [1:31]

Along with a host named after a hot dog.

Mostly Not Uncle Frank [1:34]

Lighten up Francis.

Mostly Uncle Frank [1:38]

But now onward to episode 367. Today, on Risk Parody Radio, we're just going to get back to doing what we do best here, which is tending to your emails.

Mostly Not Uncle Frank [1:49]

No way.

Mostly Uncle Frank [1:51]

And so without further ado.

Mostly Not Uncle Frank [1:53]

Here I go once again with the email.

Mostly Uncle Frank [1:56]

And First off. First off, we have an email from Mark, an email from Mark All hail, the commander of his majesty's Roman legions, the brave and noble Marcus Vindictus.

Mostly Aunt Mary [2:12]

And Mark writes I remain a Patreon contributor to the Father McKenna Center. This is a longer one, sorry, mary. Mary, mary why you bugging. That's okay, mark, I do appreciate your paragraphs.

Mostly Uncle Frank [2:36]

Mary, Mary, I need you huggin'.

Mostly Aunt Mary [2:41]

I don't know if you have run across the Armchair Income YouTube channel yet.

Mostly Uncle Frank [2:45]

Not going to do it Wouldn't be prudent at this juncture.

Mostly Aunt Mary [2:49]

The Australian who runs the channel is pretty level-headed. That said, the clickbait video that dragged me into his channel was this one. I retired much faster with the 8% rule. It's not the same as Dave Ramsey's 8% rule at all, but I think your take on it would be very enlightening and entertaining, with that blatant attempt to tempt you into a mini rant on chasing income instead of a total return out of the way.

Mostly Aunt Mary [3:14]

One of the more interesting things I have found on his channel was his journey around a specific investment, spyi. He started out very negative on it with major concerns. He then interviewed the fund manager of S-P-Y-I. It was a well-done interview with good questions asked and even better answers given. He then did a revised review of the investment and he now includes it in his own portfolio. It was not a sponsored interview. I can't find the original negative review on his channel, just the revised one. This may be because he stated in the interview that many or most of his statements in his original review were rendered false in the interview. There are two reasons that I thought SPYI was interesting enough to bring to your attention One.

Mostly Aunt Mary [4:02]

Only time will tell for sure, but structurally SPYI seems designed to get us closer to the steel age of covered call income ETFs without the deterioration of principal over time that has plagued this investment type. There are two reasons for this. The monthly covered calls they are selling are 1% to 4% out of money instead of at the money like most covered call funds, so the underlying assets can grow 1% to 4% per month. They keep 10% to 25% of their S&P 500 portfolio uncovered by options so that portion can grow unrestricted. Two, the tax treatment of this ETF, if upheld by the IRS, is very innovative and advantageous for a taxable brokerage account.

Mostly Aunt Mary [4:50]

There are two main things driving the tax advantages. The taxes from the use of options on the index funds qualify for 1256 contract treatment, where capital gains are split 60% long-term gains and 40% short-term. They are somehow able to characterize some of the option income as a return of capital, even though they aren't returning the principal of your investment, which I have never heard of before. This is tax deferral, not tax elimination. There is no tax on the return of capital for that year, but it does also reduce the tax basis of the investment as well, so you will eventually need to pay long-term capital gains when you eventually sell the fund. Similar to the deferral of capital gains in a real estate investment. If this is legit and complies with the IRS code, I really hope more ETFs adopt this approach in the future, but it may only be available to ETFs working with options. I am not sure.

Mostly Uncle Frank [5:54]

Well, mark is one of our most prolific email line hoppers because he is a donor to the Father McKenna Center. As most of you know, we do not have any sponsors on this podcast, but we do have a charity we support. It's called the Father McKenna Center and it supports hungry and homeless people in Washington DC. Full disclosure. I am on the board of the charity and am the current treasurer. But if you give to the charity, you get to go to the front of the email line, as Mark has done here, which you can do through the support page at wwwriskparodyradiocom and become a Patreon contributor, or you can give directly to the center. But if you do give, mention it in your email so I can move it to the front of the line.

Mostly Not Uncle Frank [6:37]

Yes.

Mostly Uncle Frank [6:39]

Now getting to your email.

Mostly Not Uncle Frank [6:42]

I want you to be nice until it's time to not be nice.

Mostly Uncle Frank [6:50]

Okay, we've previously talked about these kinds of funds at length. I'm talking about things that invest in indexes and then have some kind of options overlay on them, and they are ostensibly designed to quote produce income, unquote. I don't like your attitude. What else is no, but remember that the first word that goes after income is taxes. Are you stupid or something? And while it may be a little different here, it's not that much different. Forget about it anyway. If you want to get a full rendering of my opinion of these funds, I would suggest you go listen to episodes 89 and 154, which are about QYLD, and then listen to episodes 215, 229, 298, and 300, which are about the infernal Jeppe and you won't be angry I will not be angry.

Mostly Uncle Frank [7:52]

One thing you should realize about these funds is they are heavily marketed by their promoters because they generate lots and lots of fees. And that is their real purpose in the world to generate lots and lots of fees for their promoters. It is not to help you. So get over that and don't think that's the reason they exist.

Mostly Not Uncle Frank [8:14]

Am I right or am I right, or am I right, right, right, right.

Mostly Uncle Frank [8:18]

They've been around since the 1980s. This is version 3.0.

Mostly Not Uncle Frank [8:23]

Always be closing, always be closing.

Mostly Uncle Frank [8:29]

And it isn't faring any better than any other version of these things. They decay over time.

Mostly Not Uncle Frank [8:35]

Forget about it.

Mostly Uncle Frank [8:38]

And nothing in this fund suggests that it will be any different over time. As you observe in your point one, most of these funds do decay over time. What generally happens, and what has happened in the versions that were put out in the 1980s and then in the early 2000s, is that they decayed over time. Then they get pulled from the fund universe and something else replaces them later, only to follow the same process else replaces them later, only to follow the same process.

Mostly Not Uncle Frank [9:07]

Because only one thing counts in this life Get them to sign on the line which is dotted.

Mostly Uncle Frank [9:11]

If you want to see an example of that, look at the history of QYLD since it was implemented or brought in in 2014. It usually takes a few years, but after a decade you can see the non-progress and that, in fact, your money is disappearing out of these funds the longer you hold them.

Mostly Not Uncle Frank [9:29]

They're sitting out there waiting to give you their money. Are you going to?

Mostly Uncle Frank [9:33]

take it but, more importantly, this approach trying to extract forced income out of your portfolio for retirement and other purposes. This is an obsolete approach in the 2020s. This is an approach from the 20th century, when transaction costs were high and there was some benefit to having your assets actually pay you income. We don't have that issue anymore. We live in a different world. We live in a world of no transaction fees and fractional shares. So, to the extent you want to get your money out of your funds, you can just sell a piece of it. It doesn't cost you anything, and so there is no reason to want to be forced to take income from your funds.

Mostly Uncle Frank [10:20]

It's not helpful, it's detrimental. Stupid is what stupid does, sir. It's something you have to manage away and deal with the taxes about. All that matters today is total returns, and none of what these funds are selling or promoting improves their total returns or makes it better than the alternatives that you already have in the form of index and other funds, than the alternatives that you already have in the form of index and other funds.

Mostly Uncle Frank [10:48]

Bing again no-transcript.

Mostly Aunt Mary [10:51]

That's not an improvement.

Mostly Uncle Frank [10:53]

Who cares? And I did watch at least one of the videos that you sent, the sort of revised version of the Australian gentleman who was talking about using these things. Again, he's one of these people that seems to be deluded that this is a good strategy to be producing lots of income out of your portfolio. I guess maybe you don't have to pay the taxes in Australia that you do in the US.

Mostly Not Uncle Frank [11:18]

This is your first trip to New York. First trip, anyway. Well, we might just have to give you one for free.

Mostly Aunt Mary [11:25]

Yeah, one more.

Mostly Uncle Frank [11:29]

But it's still a dumb idea.

Mostly Not Uncle Frank [11:32]

Hmm.

Mostly Uncle Frank [11:33]

I sense no danger here. How could?

Mostly Not Uncle Frank [11:35]

they be dangerous, they're covered with free cheese.

Mostly Aunt Mary [11:40]

All I know is Mr Krabs said Patrick, don't do that.

Mostly Uncle Frank [11:45]

And the reason for that is very simple. It has to do with how the stock market tends to recover very quickly after a bear market, because that is where they're really losing their oomph. They don't recover like the stock market should after a big downturn. Okay, as to your second point, this one may be more tax efficient than other ones. There should be zero taxes associated with this sort of thing, or only minimal taxes associated with it, because you should only be paying taxes on the dividends you are forced to take out of your index fund. This still generates a large forced income that you are required to take and pay taxes on in a taxable account, and that is just highly detrimental in terms of an asset that you need to manage. You don't want forced income, especially out of stock funds. What you want is total returns and then you sell a piece of it when you want the money from it. It's that simple.

Mostly Uncle Frank [12:47]

That is good portfolio management. Buying a lot of things that generate a lot of income is bad portfolio management. Didn't you get that memo? Now, I realize many people haven't got that through their head. Did you see the memo about this? Because they have some psychological comfort by seeing income generated from a portfolio, but it's an illusion. It's an illusion, but it's an illusion. It's an illusion. Income out of a portfolio is not making the portfolio perform any better on a total return basis.

Mostly Not Uncle Frank [13:22]

Did you get that memo?

Mostly Uncle Frank [13:24]

This is why Berkshire Hathaway collects a lot of dividends but it doesn't issue any dividends because Warren Buffett knows better. If you want to follow Warren Buffett, don't create taxes when you don't have to pay taxes, Just don't. But here is the litmus test that I always like to run these things through and that nobody I have seen nobody who recommends these things or talks about these things ever does. They don't do their homework. Let me tell you how you do your homework with one of these things. We did this with QYLD back in one of those episodes I mentioned before. But take this fund, SPYI, and compare it to another portfolio where you were just holding the S&P 500 in a lower allocation, with some allocation to cash, to T-bills, and you can play around with it. But what you're trying to do is match them up so they have the same kind of returns and volatility to them.

Mostly Uncle Frank [14:24]

In this case you can see and I did it on Portfolio Visualizer, I'll link to it in the show notes that, at least for the history of SPYI, it is very similar to holding a portfolio that is 70% SPY and 30% T-bills, Except the portfolio with SPY and T-bills isn't generating all that income. Well, it could be for the T-bills. But, more importantly, it's not taking up all that space in your portfolio, in your portfolio. So you can hold a just a lower amount of the underlying index fund rather than holding this, and then you have that extra space to put something else in your portfolio.

Mostly Uncle Frank [15:10]

These kind of things waste a lot of space in the portfolio, because the alternative is simply to hold a lower exposure to whatever the underlying thing is, as opposed to holding this thing that is worse than the underlying index but has a lot of complications attached to it. It's like attaching a spoiler to a Honda Civic it's not doing anything and in fact it's probably detracting from the aerodynamic qualities of the car. And so anytime you see one of these things or somebody talks about them, the question is have they done this simple analysis of comparing whatever it is to a lower allocation of the underlying with something else? Because if you can beat this with a lower allocation to the underlying and then you have room for something else, that is a better portfolio right there, it's just better.

Mostly Not Uncle Frank [16:03]

That is the straight stuff. Oh funk master.

Mostly Uncle Frank [16:06]

You're not forced to have that much space in the portfolio for this thing, you're not forced to take the income, you're not forced to pay the taxes. So there is still no purpose for these things in most amateurs' portfolios, and certainly not in your retirement portfolio. Their purpose is to generate fees from the people who promote them, and that is why they are heavily promoted, because those fees have to cover the cost of promoting them.

Mostly Aunt Mary [16:32]

And I'll go ahead and make sure you get another copy of that memo.

Mostly Uncle Frank [16:36]

And if somebody else wants to do something stupid, whether they're from Australia or not that doesn't mean you have to jump off the same cliff are you crazy or just plain stupid?

Mostly Not Uncle Frank [16:48]

stupid is stupid.

Mostly Uncle Frank [16:49]

Does miss blue, I guess and now my little mini rant is over, for those of you who enjoy these little mini rants, so don't take it personally. Mark, I appreciate your contributions to this august program and thank you for your email. Crocodile Dundee August program. And thank you for your email. Second off, second off. We have an email from John.

Mostly Aunt Mary [17:35]

Here's Johnny, and John writes Hi Frank, if a traditional retirement glide path shifts from equities toward bonds over time, could it be reasonable to think of an analogous risk parity glide path that is leveraged based, meaning as we transition from accumulation to retirement? Could we maintain a macro asset allocation ratio while reducing leverage over time? For example, if Optra is 1.44 times levered 2-1-1 portfolio and Golden Butterfly is a 0.8 times levered 2-1-1 portfolio, a glide path from something like Optra for accumulation to something like Golden Butterfly for retirement could be one such option. I'd love to hear your input on this approach. Thanks, as always, john.

Mostly Uncle Frank [18:27]

Well, this is a very insightful email, John. In fact, this is one version of the future of do-it-yourself investing that may or may not come to pass.

Mostly Uncle Frank [18:41]

Because, as we know from studying what hedge funds have used risk parity style portfolios for, it was to generate stock market-like returns in a lot of instances without taking that level of risk. And when we're fiddling around with leveraged portfolios that have the same return profiles as the overall stock market, that is in fact what we're trying to do. Unfortunately, I can't say that we've really hit on anything yet. That is that much better than holding the overall stock market, at least for most amateur investors, except for those of you with gambling problems.

Mostly Not Uncle Frank [19:18]

You can't handle the gambling problem.

Mostly Uncle Frank [19:21]

Because I know some people have successfully used leverage and leverage funds to get to financial independence very quickly, but they were taking a lot of risk when they were doing it, which may be acceptable for some people, especially if you're early on in your investing career and you can afford to have to start over, but it's probably not acceptable for most people who do not want to see their portfolios fluctuating that much while they're accumulating in them.

Mostly Uncle Frank [19:47]

But I am hopeful, or at least intrigued, that over time that we can make this work, given the kinds of ETFs we have available now and the relatively low cost. And there are a lot of people who are frankly working on this the Corey Hofsteins of the world, the Eric Crittendens and the people at Resolve Asset Management. Interesting enough, a lot of these people come out of or have some connection with Bridgewater, which isn't surprising. So there's no reason we can't at least run a few little experiments on the side, especially if we're just doing it in some small Roth account anyway. But I don't think we can say at this point that holding something like the Optra portfolio is a good recommendation for most do-it-yourself investors in the accumulation phase, and I think something like what Paul Merriman has come up with with half S&P 500 or large cap growth or total market and half small cap value.

Mostly Not Uncle Frank [20:43]

I'm telling you, fellas, you're going to want that cowbell.

Mostly Uncle Frank [20:47]

Is a very good place to start with in terms of a base portfolio for accumulation, and whether you want to add to that or modify it, that's kind of up to you.

Mostly Uncle Frank [20:59]

The truth is that particularly early on during accumulation, all that really matters is your savings rate, and that typically is the case until you get to about $100,000, or at least where your annual fluctuations in the portfolio are greater than your annual contributions. On the other hand, it does seem clear to me that at least some of the listeners to this podcast are already taking the approach that you are suggesting, john to use a levered version of a risk parity style portfolio in their accumulation phase, with the idea that they're going to move to a more conservative portfolio when they get to retirement. So if you're willing to take a little risk, I say have at it. Many amateurs take much more risks by investing in single stocks or cryptocurrencies or other speculative type things. So I don't think taking a little leverage in a portfolio that looks something like Optra is a big risk to take, at least not bigger than what I already see people doing.

Mostly Not Uncle Frank [21:59]

Well, you have a gambling problem.

Mostly Uncle Frank [22:03]

Hopefully that helps and provides you with some encouragement, and thank you for your email last off, last off an email from richard.

Mostly Aunt Mary [22:30]

Oh, richard, I'm so happy. Hold me and richard writes hi mary and frank. Frank's response to to Jose's question three on episode 355 was gold Mary and Frank gold.

Mostly Not Uncle Frank [22:39]

That's gold, jerry gold.

Mostly Aunt Mary [22:41]

Frank provided a great explanation of correlations and why we should base expectations on economic fundamentals.

Mostly Not Uncle Frank [22:49]

I see no reason for answers to be couched in riddles. I answer as simply as your level of understanding makes possible.

Mostly Aunt Mary [22:57]

Frank's explanation reminds me of a Cliff Asness blog post on how the efficient frontier the plot of expected returns versus volatility only matches economic fundamentals in the long run. In the short run, we see nonsensical relations between returns and volatility. In the short run, we see nonsensical relations between returns and volatility. Cliff talks about volatility instead of correlations, but highlights the same messiness of data and importance of fundamentals. Thanks for a great show, richard.

Mostly Uncle Frank [23:24]

Now, what you all don't see is that Richard has also rickrolled me with this email he sent just so you can appreciate that a little bit. We're no strangers to love.

Mostly Not Uncle Frank [23:37]

You know the rules, and so do I.

Mostly Uncle Frank [23:42]

Getting to your email yeah, thanks for the compliment and the article from Cliff Asness, which I did read and basically to summarize it, he was talking about volatility analysis of stocks and bonds and that how doing a very short-term analysis he broke it up into five-year increments gives a very misleading picture of the relationship between stocks and bonds. In his case he was talking about volatility. We've talked about correlations before, but that over the longer period of time the actual pattern does reveal itself and relationships do reveal it themselves. But that really gets to a fundamental principle about how to use past data or to misuse past data, in that any short period of time and I define short as less than 10 years you're only going to learn something very limited out of that kind of data set, because probably most of it is probably just noise and you really need to have a much longer data set in order to conclude anything out of the data. I usually say at least 25 years, but 50 is better, and it should include all kinds of different economic environments. But it's funny, people also misuse this principle itself by sometimes saying well, past performance is not indicative of future results, and what they're doing usually is they're trying to apply that in a broad brush sense to some idea or portfolio they don't happen to like or they disagree with.

Mostly Uncle Frank [25:22]

Unfortunately, that adage applies to everything, so it's kind of a neutral statement. It's like saying investing is risky. Well, does that mean this investment is more risky than the other one? No, it just is a general statement, and where I see that get misused is when it is applied to the extent of historical data is completely meaningless. Nobody who is serious about investing thinks that is true. So the question is not whether historical data is meaningful or meaningless. The question is when is historical data meaningful or meaningless? It is more meaningless when there's very little of it and it's in some kind of idiosyncratic time frame or economic environment. It becomes much more meaningful when you have much longer data sets and you are not curve fitting by not using very specific variables to input. What I mean by that is, you are not looking at some past data set and looking at all of the funds available and saying, oh, this is the best fund, therefore I should invest in that going forward. That would be a misuse of data.

Mostly Uncle Frank [26:36]

For people who are really trying to use data in an analytical way, the typical process is to come up with some analysis based on one part of the data, reserve the other part of the data for the test and then use the other part of the data for the test and then use the other part of the data as the test data to see whether what you concluded from your original analysis applies to the whole data set or not. That's what you'll see academics frequently doing. But the other conclusion you should get out of Cliff Asness's paper is that these conclusions that you come to, whether they're about volatility or correlations or anything else, are probabilistic in nature. They're not definitive. So you cannot say that in the next five-year period you are likely to see the same thing that you've seen on average in the past 50 years.

Mostly Uncle Frank [27:27]

In fact, it certainly will not be something like that. It will certainly be something different. But probabilistically, the most likely outcome is the one that comes out of the historical analysis and, in terms of trying to construct something that is most likely to work well in the future, you would be well advised to pay attention to what has been most likely to work pretty well in the past, if you have enough data and if you apply it correctly. Most people apply this incorrectly, at least most amateurs in financial media simply because they overweight the recent past. Anytime you hear somebody talking about well, we're obviously in a new paradigm based on what's happened in the past two or three years, they're blowing smoke.

Mostly Not Uncle Frank [28:16]

I've been smoking since I was born. Man, I can smoke anything. Man. You know, like, I smoked that Michoacan man, acapulco Gold man, I even smoked that Tide Stick. You know Tide Stick. Yeah, you know that stuff is tied to a stick. You know, oh, tide Stick. That is exactly not the way you were supposed to use data. Mostly Maui Waui man, yeah, but it's got some Labrador in it. What's Labrador what? Yeah, my dog ate my stash. Man.

Mostly Uncle Frank [28:57]

So I had to follow him around the little baggie for three days before I got it back. But the same thing applies when you show somebody a very long set of data say 50 or 100 years of data applied to some basic portfolio construction, and their response is well, past performance is not indicative of future results. Yeah, well, that's true of their portfolio too. But that doesn't change the fact that that kind of a data analysis does give you a higher probability of success in the future, unless you have some kind of crystal ball that is telling you that the future is in some way fundamentally different from the past 50 or 100 years in terms of what kind of economic environments may exist and how assets may respond in those kind of economic environments.

Mostly Aunt Mary [29:42]

Now the crystal ball has been used since ancient times. It's used for scrying, healing and meditation.

Mostly Uncle Frank [29:51]

You should be somewhere in between those two extremes in thinking, and then you will be able to make better decisions about your investing.

Mostly Aunt Mary [30:00]

Now you can also use the ball to connect to the spirit world.

Mostly Uncle Frank [30:04]

Anyway, thank you for this article 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 follower review.

Mostly Aunt Mary [30:37]

That would be great.

Mostly Uncle Frank [30:38]

Okay, thank you once again for tuning in. This is Frank Vasquez with Risk Party Radio.

Mostly Not Uncle Frank [31:15]

Signing off. Thank you.

Mostly Aunt Mary [31:30]

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.