Speaker 1 [0:01]

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

Speaker 2 [0:10]

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

Mostly Mary [0:19]

And now, coming to you from dead center on your dial, welcome to Risk Parity Radio, where we explore alternatives and asset allocations for the do-it-yourself investor, Broadcasting to you now from the comfort of his easy chair. Here is your host, Frank Vasquez.

Mostly Uncle Frank [0:37]

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.

Speaker 2 [0:50]

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 Mary [1:26]

Top drawer, really top drawer.

Mostly Uncle Frank [1:31]

Along with a host named after a hot dog.

Speaker 1 [1:34]

Lighten up Francis.

Mostly Uncle Frank [1:37]

But now onward to episode 371. Today, on Risk Parody Radio, we're just going to hack away at our email pile, which is still largely in August.

Speaker 2 [1:48]

How much wood would a woodchuck chuck if a woodchuck could chuck wood? Woodchuck could chuck wood. Woodchuck could chuck wood, wood, wood, wood, wood.

Mostly Uncle Frank [1:58]

And so without further ado.

Speaker 2 [2:01]

Here I go once again with the email.

Mostly Uncle Frank [2:05]

And First off, and First off, first off, an email from Anderson.

Speaker 1 [2:10]

You know, back in Baton we could have fed 600 men in the time. It's taken you ham and eggers, just to take my order.

Mostly Mary [2:17]

And Anderson writes Uncle Frank, I'm a little disappointed. The Uncle Frank portfolio did not become the eighth portfolio, but I guess Optra is okay.

Speaker 1 [2:28]

Boy, I tell you what you can lead a jackass to water, but you can't make him drink.

Mostly Uncle Frank [2:33]

All right, Anderson is referring to our newest sample portfolio, which we call the Optra portfolio, and we talked about it extensively in episode 349. And I won't repeat all that Optra does stand for one portfolio to rule them all.

Speaker 1 [2:58]

One ring to rule them all, one ring to find them, one ring to bring them all and, in the darkness, bind them in the land of Mordor, where the shadows lie.

Mostly Uncle Frank [3:16]

And I picked it partially as a joke and partially just because it sounds good as an acronym.

Speaker 2 [3:22]

Place of a dark lord, you would have a queen, not dark but beautiful and terrible as the born Tertrific, as the sea Stronger than the foundations of the earth. All shall love thee and stand.

Mostly Uncle Frank [3:53]

That portfolio is designed to be a simplified version of a return-stacked portfolio, as that term is now used by people like Corey Hofstein and the people at Resolve Asset Management, but it's basically a risk parity style portfolio with a small bit of leverage, which is why we keep it in the experimental bin. But look at what has been done with hearts and kidneys.

Mostly Uncle Frank [4:11]

Hearts- and kidneys are tinker toys it would have been improper for me to name it the uncle frank portfolio, since I don't in fact hold that portfolio, although I hold something similar to a golden ratio portfolio that's a bit more complex and has 10% in managed futures as opposed to 10% in REITs in it. But I have to tell you I also have a distaste for portfolios that are named after particular people, which I realize is often just a matter of convenience, but to me it also smacks of some kind of guru worship, as if this one individual came up with the best portfolio for somebody or some purpose. So I'd rather give them more generically descriptive names for the most part.

Speaker 2 [4:58]

It's a trap.

Mostly Uncle Frank [5:00]

And so I feel like I actually went out on a limb with Optra, which is a lot more fanciful. Stupid is what stupid does, sir. But hey, we gotta have a little fun here, otherwise this topic will put you to sleep.

Speaker 1 [5:14]

I'm putting you to sleep.

Mostly Uncle Frank [5:16]

So thank you for your vote of confidence and thank you for your email.

Speaker 1 [5:21]

Snooze and dream. Dream and snooze. The pleasures are unlimited second off.

Mostly Uncle Frank [5:29]

Second off we have an email from sean sean of the dead, and sean writes hi, uncle frank and aunt mary.

Mostly Mary [5:41]

I finally caught up on every episode from the start and have even gone back to listen to a few episodes a second time. You're insane, goldmember. Of course, now I have some of the sound bites embedded so deeply in my brain that I'll hear something and think that's not how this works, that's not how any of this works. Or if something is really big, I hear Sonia's voice describing it all in 1.5 times speed, of course, a really big one here, which is huge. You touched on the idea of a bond tent or equity glide path portfolio back in episode 73. In and of itself, this approach does seem to be just another approach to a bucket strategy, and Kitsis himself suggests that might be the best Gosh. But he also indicates it can lead to better outcomes relative to a static equity exposure and potentially help alleviate sequence of return risks. But, as you talked about in that episode 73, just starting with a better portfolio construction is a more optimal approach.

Speaker 1 [6:47]

Yes.

Mostly Mary [6:48]

You have also suggested the optimal allocation to equities and drawdown portfolios to be somewhere between 40% to 70%, which is a pretty broad range.

Mostly Mary [6:58]

So my question is could it be useful to combine the strategies going into retirement with a risk parity style portfolio containing a higher percentage of bonds, with a plan in place to reduce that over time via rebalancing, largely via withdrawals, to eventually end up at a higher equity percentage? Just an example let's take as a starting point a modified golden butterfly portfolio with 40% equities, 20% long-term treasuries, 20% short and intermediate term treasuries, 10% gold and 10% managed futures. Could we put a plan in place in which we reduce the percentage allocated to the short and intermediate treasuries and increase the percentage allocated to equities, each by 2% a year over 10 years? We'd then have spent down those shorter-term treasuries and be left with 60% equities, 20% long-term treasuries, 10% gold and 10% managed futures going forward and while not relying solely on those treasuries in the early years, like a bond tent would have you do, they would make up a significant percentage of our withdrawals.

Mostly Mary [8:04]

How might one model or test this dynamic glide path allocation, particularly playing around with different starting and ending equity allocations? Or maybe these two concepts just don't play nicely together. It seems like it would be pretty easy to execute and not be a violation of the simplicity principle, but I'm sure I'm missing something. Thanks, sean.

Mostly Uncle Frank [8:27]

Well speaking of putting people to sleep.

Speaker 5 [8:30]

Mary, Mary, why you buggin'?

Mostly Uncle Frank [8:39]

Listening to every episode from the start is quite a feat now, since there are over 370 of them. This is pretty much the worst video ever made, but there is a lot of good information in there, even if some of it is repetitive.

Speaker 1 [8:55]

Inconceivable.

Mostly Uncle Frank [8:56]

And some of it is nonsensical.

Speaker 1 [8:59]

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

Mostly Uncle Frank [9:05]

But getting back to episode 73, we were talking about a Bond Tent article or a rising glide path, and I will link again to that article from Michael Kitsis that we were talking about back there. It's an article from around 2016, when people were first thinking about how best to modify a portfolio in terms of glide paths. In particular, at that time, a lot of research came out showing that the standard or what people thought was a good idea to have some kind of a long glide path, like a target date fund might put you in to go from a more aggressive portfolio to a more conservative portfolio over a long period of time, is actually not a very good idea and it does not help you either in accumulation or in improving your safe withdrawal rate. And the paradox of it was that it turns out that actually increasing your equity or risk exposure over a longer period of time during retirement itself seemed to have some positive effects. Now, to me, there's nothing to suggest that that idea or principle would be that much different with different kinds of portfolios, so long as we are talking about essentially stock-based portfolios where most of the returns long-term are coming from an allocation to equities, because all you're doing in connection with these glide path ideas is increasing the amount of equities and then decreasing whatever else is in the portfolio, whether it's bonds, gold, managed futures, whatever else you're putting in there and the macro allocation principle suggests that, at least over long periods of time, you're likely to get similar performances simply based on the macro allocations, and the only variances are going to be path dependent as to. Well, how volatile is it on the path to getting there?

Mostly Uncle Frank [11:06]

Now, the devil in these details is no, I'm not aware of a very good way of really testing this, and they didn't really offer one in that article either. There is a possibility and I haven't tried it out that article either. There is a possibility and I haven't tried it out if you go to Portfolio Visualizer in the Monte Carlo Simulator and the financial planning tool allows you to have a starting portfolio and an ending portfolio. So if you want to try and test at least some of this out, I would go there, turn it on the asset allocation or asset class allocation setting so you get more data to work with and then start putting in portfolios where you're taking money out, but you're changing the composition of the portfolio over some period of time. But I don't see why you wouldn't get any benefits out of doing this with a risk parity style portfolio that you would not see with some other generic portfolio, at least one that's primarily dealing with an allocation to equities. And I should say, by the way, that that allocation of 40 to 70 percent equities, that is something that has been shown to essentially maximize a safe withdrawal rate, and this information goes all the way back to Bengen's original study in 1994, but this has been analyzed by Wade, pfau and all sorts of other people over the past 30 years and they all come out with some kind of allocation that is between 40 and 70 percent in equities as the optimal amount for maximizing safe withdrawal rates. I think Bill Bengen himself now focuses on something that is right around 55%. I do view this idea as more akin to a kind of management technique similar to using some kind of variable guardrail withdrawal strategy.

Mostly Uncle Frank [12:45]

But this does get me to my last point here, which is kind of an overarching conceptual point as to, well, how do you go about deciding what you're going to use and then what?

Mostly Uncle Frank [12:53]

Go about deciding what you're going to use and then what other rules or things you're going to apply to it, and I think what you should do as a starting point is simply look at the portfolio constructions by themselves and compare them using some simple assumptions for withdrawals, such as the Bengen 30-year, and add inflation onto it, because what you're first trying to do is just compare sets of portfolios over a sufficient amount of data that includes periods like the 1970s and the early 2000s to determine which portfolio has the desirable characteristic you're interested in and for decumulation if you're interested in spending the most money, if you're looking at things like the safe withdrawal rate or the perpetual withdrawal rate.

Mostly Uncle Frank [13:41]

A nice tool for that is that portfolio matrix tool at Portfolio Charts, because it does allow you to just put in a portfolio and then look at a comparison with a whole bunch of other standardized kind of portfolios and then look at different metrics, whether that be the compounded annual growth rate, the ulcer index, safe withdrawal rates or other things you might be interested in maximizing or minimizing.

Mostly Uncle Frank [14:07]

But I think that should be the first step and then, once you arrive at a preferred portfolio for the purpose that you're trying to serve, then start looking at these other kinds of management techniques, whether they be these sort of glide paths or bond tents or variable withdrawal rates and then only after that add psychological factors such as well. Maybe I want this part of it to be fixed income. I'm going to buy annuity at age 70 to cover that and maybe I have enough here that I can add some big pot of cash to make me feel better and warm at night on the front end of this thing or in a side pot somewhere, or add some bucketing thing if that makes you feel good.

Speaker 5 [14:52]

Oh, richard, I'm so happy, hold me.

Speaker 1 [14:55]

Yikes.

Speaker 5 [14:56]

Don't run away from your feelings.

Mostly Uncle Frank [14:59]

But all of that stuff to me is window dressing. The window is the portfolio, and that's what you ought to focus on first. A lot of what I hear now in personal finance gets this backwards, particularly if you're using the psychology test called the Reese or some other psychology test to say well, you're the kind of person that would really benefit from annuities and would feel better with them.

Speaker 1 [15:24]

A guy, don't walk on the lot lest he wants to buy.

Mostly Uncle Frank [15:27]

And then using that as the basis for constructing the portfolio.

Speaker 1 [15:31]

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

Mostly Uncle Frank [15:38]

I think you should still start with what's the most efficient, effective way of doing it and then modify that for the psychology and not let the psychology drive the bus. Forget about it, because when you let the psychology drive the bus, you end up with very inefficient things involving buckets of cash and various ladders and flower pots and hoses that just make things more difficult to manage and less efficient. Not gonna do it Wouldn't be prudent at this juncture. So build your portfolio house first from the ground up in terms of base construction and then add the window dressing after that. Do not focus on the window dressing before you do the portfolio construction.

Speaker 1 [16:24]

No more flying solo.

Mostly Uncle Frank [16:26]

You need somebody watching your back at all times all times, because when you focus on the window dressing, what I see people end up doing is just solving any problems they have by deciding that well, I'm just not going to spend very much money that's not an improvement and yeah, if your real plan is don't spend much money, then you can probably focus on the window dressing, because basically you're just building a house with rooms you're not using in it you think you hate it now, but wait till you drive it anyway, this was an interesting email and led to some interesting topics, so thank you for writing it.

Mostly Uncle Frank [17:07]

Hopefully those who are interested in it will, and we'll go back and listen to episode 73.

Speaker 1 [17:13]

A long time ago in a galaxy far, far away.

Mostly Uncle Frank [17:22]

And thank you again for your email Last off. Last off, we have an email from Colin.

Speaker 5 [17:31]

Mary, Mary, I need your huggin'.

Mostly Mary [17:40]

And Colin writes Hi, Frank Colin here from episodes 109 and 185. Yep, I'm still an avid listener of Risk Parody Radio and still learning a lot. Thanks for all you do.

Speaker 1 [17:52]

Secondary latent personality displacement. Oh great yes.

Mostly Mary [17:58]

I'm writing to share with you an interesting retirement portfolio concept that I'm tentatively calling the smooth operator portfolio. The idea is to smooth out volatility and diversify across asset classes. It consists of the following six funds 29.4% SPLG or substitute half VG, half AVUV for more cowbell. 20.3% TLT or substitute ZROZ for more cowbell. 20% DBMF, 12.6% BTAL to smooth the equity exposure, 10% GLD and 7.7% PFIX to smooth the duration exposure. I'll briefly explain how I came up with this. The analysis was done in Portfolio Visualizer before they put up the paywall. The backtest is admittedly short, but covers a period encompassing the COVID recession and the subsequent bout of inflation and 525 BPS of Fed interest rate hikes.

Mostly Mary [19:14]

One I started with a basic 60-40 portfolio but added two ETFs designed to hedge the key exposures. I won't digress into the research I did to figure out these mixes. I allocated 30% of the equity space with BTAL to hedge the equity exposure. I allocated 1-6 of the long-term treasury space with PFIX to hedge rate exposure a one-to-five ratio. The results can be seen in the step one chart attached. Volatility was greatly reduced and Sharpe and Sortino ratios were greatly improved, but were still exposed only to two asset classes sources of risk. Two I added a 20% trend exposure DBMF based on the ideas of Bob Elliott, an ex-Bridgewater guy. The results are seen in the step two chart attached. There was another big improvement in volatility Sharpe and Sortino. The portfolio return improved by 20% as well. Three, I added GLD gold exposure to get another asset class in there. Cue the I love gold sound bite here.

Speaker 5 [20:15]

I love gold.

Mostly Mary [20:19]

The results are seen in the Step 3 chart attached. Further improved returns. Draw down Sharpe and Sortino 4. As a final check, I deleted BTAL and PFIX to see how the portfolio performed without the volatility hedges. The results are seen in the Step 4 chart attached. This confirms that the volatility hedges appear to be adding a lot of value. Note that the long volatility funds used are not high decay investments. In fact, they both throw off a decent yield. There is implied leverage in BTAL 2 times. There is implied leverage in BTAL 2x, pfix 5x and DBMF 2.5x, which probably explains the higher returns. Also, note that the unhedged four-asset class risk parity portfolio is significantly improved over the standard 60-40 portfolio during this period. My objective was to get the smoothest possible ride during a particularly volatile period of time for investments. What do you think Best, colin?

Mostly Uncle Frank [21:32]

Sounds like Colin's a Chardet fan, doesn't it? All right? Just to orient everyone here. First, the reference to SPLG. That is in fact the S&P 500. But I don't think that's really the focus here of this portfolio. But I don't think that's really the focus here of this portfolio. The other unusual features are an allocation to BTAL and PFIX.

Mostly Uncle Frank [21:58]

Now, what are those? Well, btal is something we talked about back in episode 114. And what that is is a long short fund, a simplified long short fund, where the fund is going essentially long value tilted stocks and short growth tilted stocks. So, regardless of when the stock market is up or down, that portfolio does better when value outperforms growth, which obviously has not occurred that much in recent years, although 2022 was a big exception and so the fund did pretty well that year. So, just for reference purposes, that fund BTAL was up over 20% in 2022. It was down 15% in 2023 when growth outperformed value. It is up this year between 14% and 15% because value has made a comeback, at least in the second half of this year. So it's an interesting thing to incorporate into a portfolio, although I've never personally figured out exactly how best to use it.

Mostly Uncle Frank [23:00]

Now, the fund PFIX is a really relatively new fund from Simplify. It is an example of one of these new funds involving derivatives that only became possible after the SEC changed the rules in 2018 or 2019. And what that fund essentially does is it does really well when interest rates are rising and poorly when interest rates are falling. So it seems to be a great fund for combating inflationary environments, and it was up over 90 percent in 2022 and still managed to be up in 2023 and in 2024, because my description of it is not exactly accurate. It does involve manipulation of the yield curve. It's more complicated than I've described it. Anyway, it's another interesting fund, but has a very short history. So, again, I'm also not sure how to incorporate that one into a portfolio, and it is extremely volatile. I will tell you that I think you put the implied leverage at 5x and I would tend to agree with that assessment.

Mostly Uncle Frank [24:05]

Now I am unable to include attachments in the show notes, so I will not be including the files you included, but my overall comment is yeah, sure, this looks great, but the main problem is it's only essentially three years of data, because that's only how long PFI-X has existed and that 92% performance in 2022 has to be regarded as an outlier. Now, if you had some way of backtesting what PFIX was doing over the past 20, 30, 40 years, then you might be able to develop something here that would be meaningful. I would just have to say that with this short amount of data, any analysis is not going to be very meaningful, and I would be particularly suspicious of anything that did really well in 2022, simply because that was a really anomalous year. Those are the kinds of years you use to test portfolios on a stress test kind of basis. So frequently if you go to a financial advisor who's relatively sophisticated, they'll take whatever plan they come up with to show you and say this is what it would have done in 1987. This is how bad it got in the early 2000s. This is how bad it was in 2008. And now you have 2022. That's another stress test point. This is how good or bad this portfolio was in 2022. Because the chances are a portfolio that performs really well in these anomalous kind of environments is not going to perform well in ordinary environments.

Mostly Uncle Frank [25:44]

So my overall view on this is it's very interesting, but I don't know how well or bad it will perform in the future, and I especially don't know whether this allocation to PFIX is way too little, or way too much given the implied leverage of it. But I am glad to see people doing these kinds of experiments thought experiments or otherwise because I do think that a certain set of these newer kinds of ETFs that comprise alternative investments that we didn't have access to in the past is going to be useful in the future in portfolio construction. I'm just not that all sure which ones are the best ones to use and in what proportions. Going forward, when you compare this to other portfolios, I would specifically exclude 2022 from some of your comparisons, since something like that generally only happens about once every 40 years, and so, whereas in a broad series of data, that would only be two or three percent of the data, in your data set, that is one third of the data set, and so you can see why you're just going to get a big distortion, particularly when you have some asset that performed extremely well in that one environment. This is the same trouble I think people have with trying to evaluate what cryptocurrency would do in a portfolio, because of its extreme volatility and extreme novelty that is unlikely to be repeated in the future.

Mostly Uncle Frank [27:17]

Lastly, this does bring up another broader topic that I've talked about recently, and also Tyler from Portfolio Charts just put out a nice article about this, which is this shibboleth past performance is not indicative of future results is not something that you can just say and apply to everything without thinking about it, because sometimes past performance is indicative of future results if you have enough data and if you are talking about similar economic circumstances.

Mostly Uncle Frank [27:49]

But he writes a nice article about when data is useful and when data is not useful and why. Just mouthing that phrase as a response to I don't like what you're doing is not a good reasoning process, because, in general, that statement applies to every portfolio and every strategy, which means it does not help you in distinguishing between portfolios and strategies, which means it does not help you in distinguishing between portfolios and strategies, and so I'll put that in the show notes so you can check it out. But thank you for your work on this. I am very interested to see what people are doing or could do with some of these newer alternative etfs, even if we can't say anything definitive about them at this point, and thank you for your email.

Speaker 5 [28:38]

You're going to end up eating a steady diet of government cheese and living in a van down by the river.

Mostly Uncle Frank [28:42]

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 wwwriskparityradiocom. That email is frank at riskpartyradiocom. Or you can go to the website wwwriskpartyradiocom. 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. You can be some stars a follower of you. That would be great, okay, thank you once again for tuning in.

Speaker 5 [29:19]

This is Frank Vasquez with Risk Party Radio signing off Smooth operator. Smooth operator. Smooth operator. Coast to coast, LA to Chicago, western Maine, Across the north and south to the Kilaugan up the Seine. I don't love the sand. School operator. School operator.

Mostly Mary [30:16]

School operator. School operator. School operator. School operator. School operator. The Risk Parity Radio Show is hosted by Frank Vasquez. The content provided is for entertainment and informational purposes only and does not constitute financial, investment, tax or legal advice. Please consult with your own advisors before taking any actions based on any information you have heard here, making sure to take into account your own personal circumstances.