Mary and Others [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.

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 Expect the unexpected. There are basically two kinds of people that like to hang out in this little dive bar.

Mary and Others [0:59]

You see, in this world there's two kinds of people my friend in this world.

Mostly Uncle Frank [1:04]

There's two kinds of people, my friend. The smaller group are those who actually think the host is funny, regardless of the content of the podcast. Funny how? How am I funny? These include friends and family and a number of people named Abby.

Mary and Others [1:20]

Abby, someone Abby who Abby normal Abby, someone Abby who.

Mostly Uncle Frank [1:25]

Abby normal, abby normal. The larger group includes a number of highly successful do-it-yourself investors, many of whom have accumulated multi-million dollar portfolios over a period of years.

Mary and Others [1:42]

The best, Jerry the best.

Mostly Uncle Frank [1:47]

And they are here to share information and to gather information to help them continue managing their portfolios as they go forward, particularly as they get to their distribution or decumulation phases of their financial life.

Mary and Others [2:03]

What we do is, if we need that extra push over the cliff, you know what we do Put it up to 11. 11, exactly.

Mostly Uncle Frank [2:11]

But whomever you are, you are welcome here. I have a feeling we're not in Kansas anymore. But now onward to episode 374. Today on Risk Parity Radio, it's time for our weekly portfolio reviews. Of the eight sample portfolios you can find at wwwriskparityradiocom On the portfolios page.

Mary and Others [2:35]

Boring.

Mostly Uncle Frank [2:37]

Yeah, not much happened this week.

Mary and Others [2:40]

I could have told you that.

Mostly Uncle Frank [2:42]

But before we get to that, I'm intrigued by this how you say Emails and First off. First off, we have an email from Gordon.

Mary and Others [2:56]

Will the commissioner be in his office at this?

Mostly Uncle Frank [2:58]

hour. Of course, in the face of this crime wave, he'll be alertly marshalling all the forces of law and order. And Gordon writes Great podcast with Brad of ChooseFI.

Mary and Others [3:06]

Thank you for sharing your knowledge, wife. He'll be alertly marshalling all the forces of law and order, and Gordon writes Great podcast with.

Mostly Uncle Frank [3:11]

Brad of ChooseFI. Thank you for sharing your knowledge, gordon Well.

Mary and Others [3:13]

Gordon, I'm glad you enjoyed that. You are talking about the nonsensical ravings of a lunatic mind.

Mostly Uncle Frank [3:19]

What Gordon is referring to is episode 508 of the Choose FI podcast from last month, which we actually recorded some months ago, and that podcast was more about personal philosophy than personal finance, but you can check that out. That's actually the third time I've been on the Choose FI podcast. The first episodes were episodes 194 and 313, 313. And the topics there were investing in bonds and diversification, if you wanted to go check those out. But I do heartily recommend the ChooseFI podcast if you're interested in financial independence or in personal finance generally.

Mary and Others [4:03]

Top drawer, really top drawer.

Mostly Uncle Frank [4:08]

I've known Brad and Jonathan since they started the podcast and reached out to them when I think they were up to about episode number 10, but I really thought it was a nice way of presenting financial independence topics to the broader audience than the previous one that I'd been involved with, which was mostly the nerd contingent, if you will Revenge, of the nerds, nerds, nerds, nerds, nerds. But since then Chusify has grown and prospered, live long and prosper and become one of the mainstays of financial independence podcasts and financial independence media in general. But I'm sure most of you know that. If you don't, you should go check out the Choose F5 podcast. Most definitely.

Mary and Others [4:57]

Definitely have to leave the table. No, please, please, please, please, gotta watch Wapner. Leave the table, yeah leave the table.

Mostly Uncle Frank [5:04]

Since starting this podcast, I really learned that podcast guesting is kind of a cottage industry. Right now I'm inundated with emails that I do not share on the air from various people wanting to appear as a guest on this podcast. Forget about it. Even though we don't have any guests, Forget about it and mostly they're promoting something. But there are now businesses that you can sign up for and pay them and then they try to get you on podcasts to promote your stuff Inconceivable. I enjoy appearing on other people's podcasts as a guest, but only when asked. I don't have anything to promote in particular.

Mary and Others [5:47]

Don't be saucy with me, Bernays.

Mostly Uncle Frank [5:49]

I think I may be recording this week for the Earn and Invest podcast with Jordan Gromit. I'm not sure exactly what we're going to be talking about or when it will come out, but it's always an enjoyable adventure. The Inquisition, what a show. The Inquisition here we go. Adventure. Anyway, when I do appear on other people's podcasts, I will let you know, and thank you for your email. Put any fears you may have had aside, commissioner. We're back in action. Batman, batman, the answer to a policeman's prayer. Thank you, commissioner. Good night, second off. Second off. We have an email from Roger.

Mary and Others [6:36]

Flight 209,. You are cleared for takeoff, roger Huh, la departure frequency 123.9. Roger Huh, request vector over what? Flight 209,? Clear for vector 324. We have clearance, clarence, roger. Roger, what's our vector, victor?

Mostly Uncle Frank [6:55]

And Roger writes.

Mary and Others [6:57]

Hi Frank, what do you think about this movement aiming to cap how much a stock can grow with any passive index? Thanks, roger, wait a minute.

Mostly Uncle Frank [7:07]

I know you. You're Kareem Abdul-Jabbar.

Mary and Others [7:10]

You play basketball for the Los Angeles Lakers. I'm sorry, son, but you must have me confused with someone else. My name is Roger Murdoch. I'm the co-pilot.

Mostly Uncle Frank [7:20]

Well, roger, you linked to a Bloomberg article that I was unfortunately unable to read because it's behind a paywall. I will conclude the link in the show notes for other people. But I am generally familiar with this topic and what it pertains to is there are certain regulations, I think are put out by the SEC and others, about how index funds are constructed and there is kind of a cap that you're not supposed to have, like one stock that is over, say, 25% of an index. That's not exactly the rule, but it's something like that, and I think the general idea is that if you're investing in some kind of an index fund or passive fund, you're hoping to do that to get a diversified selection of stocks, and if one stock grows to be too big, then you're not really getting much diversification. This has actually been more of a plague in foreign markets, foreign from the United States, and the most infamous example of that was when the company Nortel became a very large share of the Canadian stock market and then crashed, which really did some serious damage to that index in terms of its performance, even though it was really only about that one company and not about the rest of the Canadian economy. But that is generally true in a lot of other countries besides the US, who have just smaller stock markets, that if you look at the listings in a lot of countries, you will going to happen over and over again as companies get large and then get small in relative terms use of algorithms or methods to construct various funds, because I think that's where the innovation is happening and that's going to be more important in the future.

Mostly Uncle Frank [9:37]

If you think about the history of fund construction, it was largely done in this cap-weighted basis, which is why you have things like the S&P 500. The prior way of weighting things was the way the Dow does it, which is actually by the price of the shares, which nobody thinks is actually a good way to weighting things was the way the Dow does it, which is actually by the price of the shares, which nobody thinks is actually a good way to weight things. It was just a convenient way of constructing an index back in the time. They did that around 1900. Of course, more recently now we have a lot of funds constructed around either sectors or factors or some other characteristic. The most egregious of those kind of funds these days are what they call thematic indexes, where they just come up with some popular idea and throw a bunch of stuff in it and see if anybody buys the fund. A lot of the ARC funds are kind of like that.

Mostly Uncle Frank [10:25]

The more interesting and sophisticated and useful developments are the things that, for instance, that DFA and Avantis are doing in their ETFs, and that is, to come up with, essentially, formulas or algorithms that are not specifically indexes but do not involve human beings picking stocks. So they'll add another filter on top of, say, a small cap value fund, to add a profitability factor, for example, in a fund like avuv, and that seems to be a way of building better funds, but still at a very low cost, particularly when you're talking about smaller companies or international companies or some sector or part of the market that has essentially a lot of junk in it that you want to weed out. Another interesting idea now is the concept of replication or reverse engineering a fund to perform like some index or some other thing. That's how DBMF, that Managed Futures Fund, is constructed. It's based on a SOCGEN index, but that index is of a bunch of hedge funds, and so it's looking at the index and reverse engineering what is likely to be in that or in a fund that would correspond with that index, and I'm wondering if that mechanism could also be used in other contexts with respect to equities or bonds or some other thing, where you're trying to match performance to some index or something that you've identified without actually buying all the stuff.

Mostly Uncle Frank [12:01]

In the midst of kind of an ETF revolution, where all sorts of things are being put into ETFs, including very advanced strategies that involve both leverage and derivatives Good examples of those include the funds at Simplify, but I think we're really kind of in an era of experimentation with a lot of those things, and we'll know a lot more in the next decade what sort of fund constructions tend to work the best, and then move towards the funds that are using those sorts of methods, but we're not in a big rush and we shouldn't be. This is kind of a wait and see what they come up with. I think it's all good, though, from the perspective of do-it-yourself investors, because we just we're going to have a lot more options to look at and to use and incorporate in the future. Anyway, very interesting topics and thank you for your email all right, but just remember, my name is roger murdoch.

Mary and Others [13:03]

I'm an airline pilot. I think you're the greatest, but my dad says you don't work hard enough on defense. And he says that lots of times you don't even run down court and that you don't really try except during the playoffs. The hell, I don't Listen, kid. I've been hearing that crap ever since I was at UCLA. I'm out there busting my buns every night. Tell your old man to drag Walton in the near up and down the court for 48 minutes.

Mostly Uncle Frank [13:38]

Last off, last off of an email from John. Here's Johnny, and John writes Hello again.

Mary and Others [13:49]

I sent an email yesterday regarding the use of NTSX in a risk parity portfolio to juice up returns, but I think it may be more helpful if I gave my entire portfolio. I currently am about three years from retirement and I am transitioning into something resembling a golden butterfly portfolio with a slightly higher allocation to equities. The current portfolio is 60% NTSX, 15% AVUV, 15% GLDM, 10% DBMF. If you can get behind this rationale, what proportions would you hold in a drawdown portfolio?

Mostly Uncle Frank [14:29]

Thanks again, John in a drawdown portfolio. Thanks again, john. Well, john, this is another interesting topic that is developing, if you will, which is how to use some of these leveraged funds, particularly the ones that are composite, that have more than one asset in them, and I think when you're analyzing something like this, you do need to kind of take it apart to see exactly what you have. So in this case, your fund that is 60% NTSX, that is, the S&P 500 and treasury bonds, in essentially a 60-40 mix that is levered up 1.5 to 1. So if you break that out into what it would be, it's basically 54% devoted to an S&P 500 fund and 36% devoted to a treasury bond fund. That includes short, intermediate and long-term treasuries. When you add that to the other things that are in this portfolio, you end up with a portfolio that looks like 69% in stocks, that is the S&P 500 component and the small cap value fund, avuv. Then you have 36% in treasury bonds. So it's close to a 70-35 mix of those, and then on top of that you're adding 25% in alternatives. So the entire fund has 130% as its base with the leverage in it. 70% of that approximately is in stocks. 35% or 36% is in bonds with an average intermediate duration and 25% in the alternatives gold and managed futures, so it's actually quite similar to the sample portfolio that we just added, that Optra portfolio number eight, and it also follows what is known as return stacking if you follow people like Resolve Asset Management or Corey Hofstein the idea of adding alternative assets like managed futures and gold on top of a standard kind of 60-40 or 70-30 kind of portfolio, as opposed to inserting them instead of now.

Mostly Uncle Frank [16:33]

There was an excellent video presentation podcast that came out a couple of weeks ago. I'll link to in the show notes. I would watch the video on youtube because it's got a presentation that goes with it. That's all about the theory here, but basically this is a risk parity style idea. Now, in my mind, it is still easier, though, to manage a portfolio if the assets are separate, as opposed to being in these kind of composite funds, particularly if you are drawing down from it or trying to rebalance it, and I'm not sure whether that's more of a personal preference or just because it's easier for me to look at it and then easier to know okay, we're selling from stocks this month or selling from bonds this month as opposed to selling from a composite fund. But I think you can approach portfolio construction either way. You just need to be cognizant of what specifically is in these kinds of funds and then how to break it out and compare it with whatever else you're adding to it. In that guise, there are several new of these return stacked ETFs. One is called RSST, which is US Stocks and Managed Futures, one is RSBT, which is Bonds and Managed Futures, and then there's another one called RSSB, which is a global stock portfolio and bonds, and those are not the only ones, but those are specifically designed for this kind of portfolio construction.

Mostly Uncle Frank [18:01]

Now, speaking to what you would want in a drawdown portfolio, I still think the key thing you are looking for in a drawdown portfolio is the ability to spend money out of it more money than you could out of some other portfolio. And so looking at those projected safe withdrawal rates and perpetual safe withdrawal rates in my mind is the first priority, and that is whether you are constructing your portfolio out of composite funds with or without some leverage in them or not. And so, over the past 100 years or so of data, we are aware now that portfolios with higher safe withdrawal rates tend to have the following characteristics First, they have between 40% and 70% in equities in them, and generally at least half of those equities are value tilted. So right now your portfolio has about 70% in equities in it, but only 15% of them are really value tilted. So you probably want to add some more value tilted stocks whether it's a small cap value or some other part of the value spectrum, that's up to you.

Mostly Uncle Frank [19:09]

After that equity allocation, the next allocation that seems to work well is somewhere between 20 and 30 percent in treasury bonds US treasury bonds in particular, and generally of intermediate or long-term duration. For those, you basically already have something like that, although it's embedded in the fund, and so you could not sell just bonds out of this construction you have, and along those lines I find it convenient to have short and long-term bonds in different funds, and whether your short-term bonds are actually in a cash holding in a savings account or something is not the relevant factor. The idea is you are able to pull from that specifically without having to pull out other parts of a fund, and that's also why having two or three different bond funds is preferable to having one total bond fund, because you want them distinguished by their durations. After that bond allocation, the next thing that seems to work well is having somewhere between 10 and 25 percent in alternative assets, and typically those are going to be things like gold and managed futures.

Mostly Uncle Frank [20:16]

The characteristic you are looking for in your alternatives, though, is low or zero correlation with both stocks and bonds. That is really the defining factor of these alternatives. Now, you also want them to generate some kind of return and hopefully, historically, something that is between bonds and stocks, but when you are thinking about looking at some asset class and trying to decide, is this a good alternative asset? The first question you should be asking yourself is what is the correlation of this with stocks, what is it with bonds? And is it low enough in both circumstances to make this a worthwhile diversifier? Because certain things that are touted out there as good alternatives these days, like private equity, actually fail that test because they tend to be highly correlated with stocks or bonds or both.

Mostly Uncle Frank [21:10]

So don't get wound up in superficial characteristics of diversification, but focus on actual correlations and whether they are likely to go up or down at the same time with stocks and bonds. And then, finally, the last characteristic of a good drawdown portfolio is that it is not holding too much cash, and it appears that about 10% in cash I mean I'm talking short-term instruments that are two years or less really, because when you have more than that in a portfolio, it just tends to drag down the performance without really adding much more in the way of diversification properties and you end up with lower safe withdrawal rates. Then those kinds of portfolios work really well if your real strategy is don't spend a whole lot of money, but they are not very good if you are actually looking to spend 4 or 5 or more percent of your portfolio, at least over a longer period of decades. Obviously, short-term cash-like instruments also work well if your time period is very short and that is where you would want to overweight them but then plan on spending them, such as, for example, a bridge between when you retire and when you choose to take Social Security. Filling that kind of gap with cash makes a lot of sense, but it doesn't make a lot of sense to just hold big piles of cash that you're not actually planning on using anytime soon.

Mostly Uncle Frank [22:35]

Anyway, getting back to your portfolio, after you deal with the considerations I just gave you, then your other question is whether you still want to be taking leverage in your drawdown portfolio because it will make it more volatile and I'm not sure it's worth it in your case. So you might consider something like reducing the exposure to NTSX itself and then adding to more value-tilted stock funds and some other treasury bond fund or something, and you likely will end up with something that looks like a more aggressive golden butterfly portfolio or a golden ratio kind of portfolio and either has a very high probability of working pretty well in a retirement or drawdown scenario. So hopefully that helps and thank you for your email. And now for something completely different.

Mostly Uncle Frank [23:23]

And the something completely different that we get to do now is our weekly portfolio reviews of the eight sample portfolios you can find at wwwriskparityradarcom on the portfolios page. Just looking at the markets last week the S&P 500 was down 0.96%. The NASDAQ was up 0.16%. Small cap value was actually the big loser last week. Representative fund VIOV was down 3.34%. For the week, Gold was up again.

Mary and Others [23:51]

I love gold.

Mostly Uncle Frank [23:55]

Marginally. Gold was up 0.72% for the week. Long-term treasury bonds, represented by the fund VGLT, were down 1.76% for the week. Wreaths, represented by the fund REET, were down 2.23% for the week. Commodities were the big winner last week. Representative fund PDBC was up 2.15% for the week. Commodities were the big winner last week. Representative Fund PDBC was up 2.15% for the week. Preferred shares were down. Representative Fund PFF was down 1.46% for the week and managed futures managed to be down as well. Representative Fund DBMF was down 1.59% for the week. So this all resulted in some small losses for most of these portfolios. And getting to them. The first one is this All Seasons a reference portfolio. It's only 30% in stocks and a total stock market fund, 55% in intermediate and long-term treasury bonds and 15% in gold and commodities. It was down 0.93% for the week. It's up 8.42% year-to-date and up 10.07% since inception in July 2020.

Mostly Uncle Frank [24:58]

Now moving to these bread and butter kind of portfolios. First one's Golden Butterfly. This one's 42% 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 1.1% for the week. It's up 11.69% Year-to-date. It's up 34.62% since inception in July 2020. Next one is the golden ratio. This one is 42% in stocks, divided into three funds 26% in long-term treasury bonds funds, 26% in long-term treasury bonds, 16% in gold, 10% in a REIT fund and 6% in a money market fund. In cash, it was down 1.28% for the week, it's up 12.66% year-to-date and up 31.86% since inception in July 2020. And moving to our kitchen sink kind of portfolio, the risk parity ultimate. We'll go through all 15 of these funds, but it was down 1.55% for the week. It's up 14.61% year-to-date and up 22.38% since inception of July 2020. Now, moving to these experimental portfolios that involve leveraged funds.

Mary and Others [26:10]

Look away, I'm hideous.

Mostly Uncle Frank [26:13]

They did look a bit hideous this week. First one's the accelerated permanent portfolio. This one is 27.5% in a levered bond fund TMF, 25% in a levered stock fund UPRO, 25% in a preferred shares fund PFF, and 22.5% in gold GLDM. It was down 2.39% for the week. It's up 15.95% year-to-date and up 6.26% since inception in July 2020. Next one's the aggressive 50-50. Our most levered and least diversified of these portfolios One-third in a levered stock fund UPRO, one-third in a levered bond fund TMF, and the remaining third divided into PFF and a intermediate treasury bond fund as ballast. It was down 3.23% for the week. It's up 12.02% year-to-date and down 8.13% since inception in July 2020.

Mostly Uncle Frank [27:07]

Next one is the levered golden ratio. This one is 35% in a composite levered fund that we talked about earlier NTSX. It's got 25% in gold, 15% in a REIT-O, 10% each in a levered bond fund TMF and a levered small cap fund, TNA, and 5% in a managed futures fund KMLM. It was down 2.57% for the week, so 14.75% year year-to-date and down 0.7% since inception in July 2021. And now moving to our last one and newest one, the Optra portfolio. One portfolio to rule them all. My precious Get to me, my love, my love, my love. This one is 16% in a levered stock fund UPRO S&P 500. 24% in a composite value-tilted fund, a global value-tilted fund that's AVGV. 24% in a US Treasury Strips fund, govz, and the remaining 36% divided into managed futures and gold DBMF and GLDM. It was down 1.71% for the week. It's up 5.31% year to date and since inception since inception was only in July 2024.

Mostly Uncle Frank [28:44]

And that concludes our portfolio reviews. But now I see our signal is beginning to fade. I'll be going on hiatus again, doing a little bit of traveling, seeing some friends. So there may or may not be a podcast in the middle of this week. There definitely will not be one next weekend. Not going to do it Wouldn't be prudent at this juncture, but you'll all just have to make, do You're not going to amount to jack squats.

Mostly Uncle Frank [29:13]

You're going to end up eating a steady diet of government cheese and living in a van down by the river In the meantime. 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. 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 follow, a review. That would be great. Okay, thank you once again for tuning in. This is Frank Vasquez with Risk Parity Radio signing off.

Mary and Others [29:57]

And it's gone. Oh what it's gone, it's all gone. 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.