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. 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, 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.

Mary and Others [1:23]

Now, who's up for a trip to the library tomorrow?

Mostly Uncle Frank [1:28]

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, which means we'll be doing our weekly portfolio reviews of the eight sample portfolios you can find at wwwriskpriorityravecom on the portfolios page.

Mary and Others [2:12]

But before we get to that, I'm intrigued by this how you say Emails.

Mostly Uncle Frank [2:19]

And First off. First off, we have an email from Allison, and Allison writes.

Mary and Others [2:38]

Hi Frank, what are your thoughts about using the ETF VT, a total world fund, for the accumulation phase? I know this is going all in on the simplicity principle and that you prefer 50-50 large cap growth, small cap value. I feel like VT has all that in it at a cheap expense ratio and includes all economies in the world. As the US percentage of the world's economy has been steadily declining since World War II, from 90 plus to around 60 percent now, I think that it makes sense to invest in a more balanced fund that kind of mimics the world's GDP percentage, though, granted that GDP is not the best measurement for that. But dot, dot dot.

Mostly Uncle Frank [3:36]

Well, the short answer is no, it's not a very good idea. Surely you can't be serious. I am serious and don't call me Shirley, although I suppose you could use it for accumulation. But what you're really doing when you're doing that is under-allocating towards large-cap tech worldwide and over-allocating towards large-cap value stocks, so it's not likely to outperform anything, although it may keep up Inconceivable. But then what do you do with it? When you get to decumulation, you probably have to sell it and get into something that you can actually rebalance in a meaningful way, and I think we do need to talk about how this would affect a retirement or decumulation portfolio, since that is the more interesting question and is really what we generally talk about around here. We use the buddy system, but it's an interesting question from the perspective of revealing a kind of mindset that is pervasive in personal finance circles, and that mindset is overvaluing or worship of the simplicity principle.

Mary and Others [4:46]

I am the great Cornholio.

Mostly Uncle Frank [4:49]

As if the simplest combination is the most important thing and is something we should be striving for. That doesn't make any sense, actually.

Mary and Others [4:59]

Are you threatening me?

Mostly Uncle Frank [5:00]

Your portfolio is not supposed to look the prettiest or the simplest. Your portfolio is not supposed to look the prettiest or the simplest. Your portfolio is supposed to fulfill a particular purpose in your real life, not on a screen. And here the purpose we are trying to serve is to have a higher safe withdrawal rate out of our portfolio, and that means the application of three principles that we talk about here, and those are the Holy Grail principle about diversification, the macro allocation principle about the balance between different asset classes in a portfolio and multiple assets in a portfolio, and then, lastly, the simplicity principle. And I do mean lastly. This should not be the most important principle in your retirement portfolio. The reason the simplicity principle has to come last is because higher safe withdrawal rates are driven by better diversification and the ability to rebalance a portfolio. So the role of the simplicity principle in your retirement portfolio is simply to reduce the overall cost of the portfolio when you get down to choosing funds, and to make things simpler to manage in the context of rebalancing. And this fund actually makes things more complicated, believe it or not. But let's talk about some other false assumptions that are embedded in your email. The most critical false assumption you have is that diversification by headquarters of a company is the most meaningful kind of diversification you can have. So having a company headquartered in Japan like Toyota is the most meaningful thing. When you're comparing that with, say, a company like Ford in the US, you can see that that's kind of just misguided from the get-go because so many companies these days are worldwide companies, which plays into the other fallacy or false assumption that compounds this problem that you've got, which is that you are cap weighting this fund. This fund is cap weighted. That means you hold more of the largest companies and less of the smaller companies, which means you are holding more of these worldwide companies and less of the more diversified companies that are actually only doing business in one part of the world. So it's almost like this structure defeats the purpose and there is nothing showing that this particular formula for constructing a fund cap weighting it formula for constructing a fund cap weighting it has ever been the best way to organize a fund, and the truth is it's just not. It's a convenient way to organize a fund, it has a useful place in a portfolio, but ultimately it is a very large cap tilted construction and if it's US, it's more tilted towards growth and if it's international, it's more tilted towards value. But that gets at the real ways of diversifying a portfolio.

Mostly Uncle Frank [8:13]

And the real ways of diversifying a portfolio, the ones that work the best, are not what country or countries our headquarters are in. They have to do with two things that are related. One is sectors what kinds of businesses are we talking about? Different countries have different mixes of businesses on their stock markets, and that is the defining characteristics of them, not where they're located. The reason Canadian and Australian companies or their stock markets perform similarly a lot is because they have a lot of companies involved in natural resources, or a much higher percentage than the US market or many other markets. And the reason the US market performs the way it does these days is that it has a high proportion of tech firms. So those sectors are one way you could diversify a portfolio, although they're difficult to work with.

Mostly Uncle Frank [9:07]

The easier and better way that Fama and French discovered and many others have been working with for the past 30 years, is by factors, and factors tend to capture the performance characteristics of these various sectors. So if you look at what's in the growth side, the growth factor, the kinds of companies, you see there tend to be things like tech firms, and if you look on the value side of the factor world, the kinds of companies you tend to see there are involved in consumer goods, utilities and relatively stable businesses with lower P-E ratios. And so the best way to diversify a portfolio and we're just talking about the stock portion of a portfolio right now is to use the factors first, then use sectors, then look at international considerations, and you can find these now in a great set of ETFs from Avantis and one from DFA that embed these factors along with international, so you can get international small cap value or emerging market small cap value, and so what seems to work the best is what Paul Merriman has discovered or revealed from working with people like DFA is a portfolio that is essentially half growth tilted and half value tilted, and you can do that as simply as just having two funds. You take your growthy thing, say the S&P 500 or a large cap growth fund. You could kind of do it with this VT, although it's more of a blend than a growth fund, and that serves as your growth allocation, your large cap growth allocation, and then you just add to that like a small cap value fund and there is a very simple two fundfund portfolio that you can use for accumulation, or you can use it in a retirement portfolio for the stock portion of that portfolio, or you can add more funds.

Mostly Uncle Frank [11:14]

There are many ways to mix and match this, but the principle should be start with half growth and half value. Then start monkeying around with other sectors whether you want just small-cap value or some large half value. Then start monkeying around with other sectors whether you want just small cap value or some large cap value and whether you want some international funds. Now, if you want a total world value fund, there is one that exists now. It is called AVGV. We have it in our most recent sample portfolio, the Optra portfolio. We've combined that in that portfolio with essentially an S&P 500 fund as the growth side of things, but it is large cap tilted.

Mostly Uncle Frank [11:52]

So it may not be the best choice and you could try to weight the whole thing by various countries, as you say. Or you could just toss that idea out, because I know that idea is popular and people spout that idea, but it's like they're repeating something and there's no basis for it. Just toss that idea out, because I know that idea is popular and people spout that idea, but it's like they're repeating something and there's no basis for it. There's no basis to say that organizing a portfolio that way results in any kind of improved performance on any metric that you would really want or need. It's a very artificial construction. But if you disagree with me, I would be happy to entertain your information and I'm not just talking about to you, I'm talking to the group of listenership that shows that this construction is better in some intrinsic performance way that you would want it in a portfolio, either for growth purposes or for decumulation purposes, because, other than people telling stories about it, I don't think there's any basis for it. I'd like to see some data.

Mostly Uncle Frank [12:50]

Every time I've run these kind of funds in simulators or anything else, they don't perform that well either in accumulation or decumulation, which goes to a reverse view of the old adage. You can't judge a book by its cover goes to a reverse view of the old adage. You can't judge a book by its cover. And the reason people seem to like this book of a global cap-weighted fund seems to be because it looks better on the cover of the book, but when you stick it in anything and try to analyze and try to do something with it. The outputs aren't any better. The outputs are generally worse, and so this really ends up being that kind of simplicity worship that unfortunately pervades personal finance.

Mary and Others [13:32]

Senor Vives, donde esta tu halpas? Are you threatening me? You will give me tipi bongolio.

Mostly Uncle Frank [13:39]

But I just do want to point out another thing. That's untrue that you said that you were assuming. But I just do want to point out another thing that's untrue that you said that you were assuming that VT has all of these things in it in terms of small cap value and diversification. It really doesn't, just because it has something in it. That's like saying do you want cream in your coffee? Okay, here's one drip. That's basically the amount of small cap value in a fund like VT. It's one drip. That is not a useful amount to make any difference at all.

Mary and Others [14:12]

That's not an improvement.

Mostly Uncle Frank [14:14]

VT is a large cap tilted fund driven by its large cap companies. That is all. It is not small cap, it is not value, it is not diversified in that way, forget about it. And if you are assuming that you are just wrong and I don't care about the gurus that say oh, it's got some of everything in it, therefore it's diversified.

Mary and Others [14:40]

Oh, how convenient.

Mostly Uncle Frank [14:43]

Well, they haven't done their homework. I'm sorry they have not done their homework. And they are telling stories simplicity stories that sound good but don't work good.

Mary and Others [14:54]

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

Mostly Uncle Frank [14:57]

Now I know it sounds like I'm giving you a hard time, but I don't blame you for thinking the way you're thinking and saying the things you're saying, because these misassumptions, bad assumptions, run rampant in personal finance.

Mostly Uncle Frank [15:12]

They just do, and they've been running rampant in personal finance for about 20 years or more, and it's past time that we start questioning these 20-year-old assumptions and throwing out these ideas because they don't stand up to scrutiny. I will tell you, the professional investing world knows this, and it's really mostly in personal finance that this kind of thinking is still pervasive, and I do expect it'll take another 10 years for it to totally wash out, but it will, because it is just obvious now that this is a suboptimal approach. Not going to do it Wouldn't be prudent at this juncture and, other than this kind of simplicity worship, it has nothing to stand on. I have officially amounted to Jack U Squat, so I'm glad you brought this to our attention in this format, because it is something that is worth revisiting and worth discussing, since it's like a bad penny that keeps turning up over and over again and we're just going to have to play whack-a-mole until it goes away.

Mary and Others [16:17]

Hammer time.

Mostly Uncle Frank [16:18]

And so thank you very much for your email, allison, I know this world is killing you.

Mary and Others [16:32]

Oh, allison, my aim is true, my aim is true, my aim is true, my aim is true, my aim is true, my aim is true.

Mostly Uncle Frank [17:05]

Second off, second off. We have an email from Martine.

Mary and Others [17:10]

Yes.

Mostly Uncle Frank [17:11]

And Martine writes.

Mary and Others [17:14]

Love your insights. Can you provide or update the test fall URL that is mentioned and maybe add all three levered portfolios for comparison?

Mostly Uncle Frank [17:24]

Well, I wasn't sure which three levered portfolios you were talking about, since we have four of the accelerated permanent portfolio, the aggressive 50-50, and the Optra portfolio in Testfolio and I'll link to that in the show notes so you can check it out and the simulation goes back to 1994, so it's at least 30 years and what you see is that the more levered portfolios the accelerated permanent portfolio and aggressive 50-50, do perform better over time, but they are extremely volatile and really took a big hit in 2022, which was the worst year in 40 for portfolios that are comprised mostly of stocks and bonds.

Mostly Uncle Frank [18:12]

So they have a much lower sharp ratio and are much more volatile than that Optra portfolio, which is more efficient and obviously would work much better in a drawdown scenario. But that's part of why we put these in as experiments. In particular, that aggressive 50-50 portfolio is basically 50% stocks, 50% bonds levered up over two times, percent stocks, 50 percent bonds levered up over two times, and over the past four years there have been times when it was the best performing portfolio. Right now it's the worst performing of all those portfolios. But what it illustrates is why you want things besides stocks and bonds in a portfolio that you're trying to draw down on, because you want more diversification and less volatility.

Mary and Others [19:00]

That's the fact, Jack. That's the fact, Jack.

Mostly Uncle Frank [19:05]

So it makes a good illustration and contrast between that and the more diversified portfolios. So feel free to check that out in that link. Be apprised that it's just a simulation and it's better just used for comparison purposes between the portfolios, because I did not account for the drags that you were going to have with respect to either using levered funds or using margin interest and the funds in question did not exist back in 1994, so he had to simulate them. But it is an interesting illustration and thank you for your email.

Mary and Others [19:46]

Last off.

Mostly Uncle Frank [19:56]

Last off we have an email from Russell. You know I haven't had much of a chance to talk to you man to man, russ.

Mary and Others [20:03]

Well, I've only been a man a few days, Dad. And Russell writes Frank quick question For the accumulation phase 100% total market or 50% small cap value, 50% large cap growth? You know what I want to do.

Mostly Uncle Frank [20:22]

When I was your age, my dad shared a beer with me and I thought it was about the best thing in the world. When I was a boy, just about every summer we'd take a vacation. Yeah, when I was a boy, just about every summer we'd take a vacation. And you know, in 18 years we never had fun. But now I have my own family and well, we're on our own vacation. And you know something, russ, what Dad we're going our own vacation. And you know something, russ, what Dad we're going to have fun.

Mostly Uncle Frank [21:02]

Well, the truth is, russell, that either one of those is going to work and in any given decade or two, there's no way of predicting whether the 100% total market portfolio or the 50% small cap value 50% large cap growth portfolio is going to be the best one. Their overall performances are going to be relatively similar over decades for the most part, simply because they're both 100% stock portfolios. Personally, I would prefer the 50% small cap value and 50% large cap growth for a couple of reasons. First, historically, that has performed better, except in the last decade or so, and it gives you some opportunity for rebalancing as you go, which, when you are accumulating, you're essentially dollar cost averaging in and you want to be buying low, and so if you're buying the low one over decades, you're going to have a better performance when they switch, which is performing better. The other thing that I like about having the value growth split set up in accumulation is that when you get to decumulation, you could just stick with that as the stock part of your portfolio, or you could expand it out, like we talked about earlier. But from a management perspective, that is going to be an easier portfolio to segue from accumulation to decumulation than the 100% total stock market portfolio.

Mostly Uncle Frank [22:34]

That being said, I do have to caveat this with at the beginning of your journey, when you are just starting out and saving money, it really doesn't matter what you put the money in.

Mostly Uncle Frank [22:45]

I would rather have somebody just get going, start saving in a 100% total stock market portfolio and deal with figuring out what they want more of or less of later, because until you get up to, say, around $100,000 or the point where the returns annually in the portfolio are larger than the savings that you're putting into the portfolio or new money you're putting into the portfolio, until you get there, this is kind of an irrelevant conversation or a very academic conversation, because it's your saving and investing new money that is dominating the performance of the portfolio.

Mostly Uncle Frank [23:27]

So just getting it going is more important than worrying about fund selection. Honestly, and for many people, I would rather point them in that direction to begin with, in particular because otherwise they get pointed in directions of like using a target date fund or signing up for one of these robo thingies, which are both worse, much worse than the simple index fund. So you don't want the perfect to be the enemy of the good If you're just starting out or helping somebody just get started out and picking that index fund in their 401k, for example.

Mary and Others [24:03]

And you won't be angry.

Mostly Uncle Frank [24:04]

I will not be angry.

Mostly Uncle Frank [24:08]

Because those first few years of accumulating the fund selection really doesn't matter matter.

Mostly Uncle Frank [24:13]

So I'd rather the process be get started, use the one index fund, then spend the next three, four, five years learning more about investing, and then you can adjust your funds after that, with either future contributions or if it's in a retirement account. You can just switch funds then, and that keeps you away from these other bad ideas and concoctions and also gets rid of the analysis paralysis that many people engage in when they're only talking about a small amount of money and it's not worth their time. And for the more curious and adventurous, I do think it's worthwhile just to take a small part of your portfolio less than 10% and invest it in whatever you darn well please, no one can stop me and hopefully you'll lose a lot of money doing that, because that's the best way to teach you something. If you happen to be the adventurous type, I once went out with a dame who told me I'm the glamorous type and if you're going to make mistakes in investing, it's better to do it when the stakes are small.

Mostly Uncle Frank [25:20]

Hey Stella so if you have a teenager who wants to engage in stock picking, I would say let them go right ahead, because for many people that is the only way to learn and will save them from making much bigger mistakes decades later. But that probably more than answers your question, and so thank you for your email.

Mostly Uncle Frank [25:45]

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 wwwriskparityravecom on the portfolios page. And it was a fun week now, wasn't it?

Mary and Others [26:01]

I'll be honest, fellas, it was sounding great, but I could have used a little more cowbell.

Mostly Uncle Frank [26:07]

Just looking at the markets last week the S&P 500 was up 4.66% for the week. The NASDAQ was up 5.74% for the week, but small cap value was the big winner last week.

Mary and Others [26:21]

Guess what.

Mostly Uncle Frank [26:23]

Our representative fund at VIOV was up 8.68% for the week. I got a fever and the only prescription is more cowbell. Who would have thunk it? Before we're done here, y'all be wearing gold-plated diapers. Gold was actually the big loser last week. Gold was down 1.98% for the week. It's still up over 30% for the year. Long-term treasury bonds, represented by the fund VGLT were up 1.68% for the week. Wreaths were up. Representative fund REET was up 2.37% for the week. Commodities represented by the fund PDBC were down. They were down 0.37% for the week. Commodities represented by the fund PDBC were down. They were down 0.52% for the week. Preferred shares, represented by the fund PFF, were up 2.36% for the week and managed futures managed to gain 0.93% at least our representative fund DBMF did.

Mostly Uncle Frank [27:24]

Now moving to these sample portfolios. First one's this reference portfolio we call the all seasons. It is only 30% in stocks in a total stock market fund, 55% in intermediate and long-term treasury bonds and the remaining 15% in gold and commodities. It was up 2.34% for the week. It's up 9.6% year-to-date and up 11.27% since inception in July 2020. Moving to these more bread-and-butter kind of portfolios, first one's Golden Butterfly. This one's 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 the remaining 20% in gold. It was up 2.81% for the week. It's up 14.14% year-to-date and up 37.57% since inception in July 2020. Next one's the golden ratio. This one is 42% in stocks and three funds, 26% in long-term treasuries, 16% in gold, 10% in a REIT fund and the remaining 6% in cash in a money market. It was up 3.00% for the week. It's up 14.89% year-to-date and up 34.48% since inception in July 2020. Next one's the risk parity ultimate Continues to have a banner year. I'm not going to go through all 15 of these funds. It's kind of like our kitchen sink with a little bit of everything. It was up 3.54% for the week. It's up 17.09% year-to-date and up 24.86% since inception in July 2020.

Mostly Uncle Frank [29:08]

Now, moving to these experimental portfolios Look away, I'm hideios, which were not hideous at all this time around. 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 up 5.14% for the week. It's up 19.00% year-to-date and up 9.06% since inception in July 2020.

Mostly Uncle Frank [29:35]

Next one's the aggressive 50-50, which I mentioned earlier. This is the least diversified and most levered of these portfolios and it shows it is 33% in a levered stock fund UPRO, 33% in a levered bond fund TMF and the remaining third divided into a preferred shares fund and an intermediate treasury bond fund. It was up 7.59% for the week and is up 16.82% year-to-date, but is down 4.2% since inception in July 2020. Now, moving to the seventh portfolio, the levered golden ratio. This one's 35% in a composite levered fund called NTSX that is, the S&P 500 and Treasury bonds, 25% in gold, 15% in a REIT called O, 10% each in a levered bond fund TMF and a levered small cap fund TNA, and the remaining 5% in a managed futures fund KMLM. It was up 4.14% for the week. It's up 17.88% year to date and up 2.01% since inception in July 2021.

Mostly Uncle Frank [30:42]

It started at a very inauspicious time. And moving to our last one and newest one, the Optra portfolio, this one is 16% in a levered stock fund Upro, 24% in that global value fund AVGV, 24% in a Strips treasury Bond Fund GOVZ, and the remaining 36% divided into Gold and a Managed Futures Fund DBMF. It was up 3.9% for the week, it's up 7.87% year-to-date and up 7.8% since inception in July 2024. So its year has been a short year and so overall, it was the best week in a very long time and made up for the lackluster performance in October. So what's up next, everybody's wondering. Well, we can consult our crystal ball here.

Mary and Others [31:37]

My name's Sonia. I'm going to be showing you the crystal ball and how to use it, or how I use it.

Mostly Uncle Frank [31:44]

But our crystal ball at Risk. Parity Radio always says the same thing.

Mary and Others [31:48]

We don't know. What do we know? You don't know, I don't know.

Mostly Uncle Frank [31:52]

Nobody knows. Hey, at least it's honest. But now I see our signal is beginning to fade. If you have comments or questions for me, please send them to frank at riskparityradarcom. That email is frank at riskparityradarcom. Or you can go to the website wwwriskparityradarcom. Put your message into the 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 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 parody radio signing off. Hey, stella, stella, stella Stella.

Mary and Others [32:35]

Stella, stella, hey Stella 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.