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. 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 [1:22]

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

Mostly Uncle Frank [1:25]

tomorrow. So please enjoy our mostly cold beer served in cans and our coffee served in old, chipped and cracked mugs, along with what our little free library has to offer. Welcome. But now onward, episode 380 Today on Risk Parity Radio. We're just going to do what we do best here, which is tend to your emails. Looks like I picked the wrong week to quit amphetamines and so, without further ado, here I go once again with the email. And first off. First off, we have an email from Melissa.

Mary and Others [2:16]

It's all happening so suddenly.

Mostly Uncle Frank [2:19]

In six months I'll be Laura Ingalls Wilder, and Melissa writes.

Mary and Others [2:26]

Hi Frank. I've started listening to your podcast from the beginning and I'm learning a ton already, thank you. I'm on episode seven and in your show notes the link to the second Ray Dalio video Ray Dalio reveals the most basic components of most risk parity style portfolios has been made private by the uploader. Would you happen to have an alternate link? I searched on Google but I'm not sure if I'm viewing the one you meant. Much appreciated, melissa.

Mostly Uncle Frank [2:55]

Well, I'm glad you're enjoying the podcast and are learning a few things.

Mary and Others [2:59]

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

Mostly Uncle Frank [3:06]

And it was good for you to start at the beginning because I think if you jump into where we are with these podcasts now and everybody's questions, it's kind of confusing and daunting. It's like a box of chocolates.

Mostly Uncle Frank [3:19]

You never know what you're going to get, but it is fairly easy to get up to speed if you listen to those initial ones. Now that video I have not been able to find that video again either, but truth be known, it was not that scintillating and the basic summary of it is that the main ingredients for these kind of portfolios are stocks, treasury bonds and gold. I will link to an article called the Three Ingredients from Tyler at Portfolio Charts and I think that's probably actually more instructive because it's got some data and graphs and other descriptions and will essentially give you the same information in a better format. And I've made so many podcasts over the past few years that it is sometimes difficult to keep track of them and the show notes that went with them. But if you go to the RSS feed page, which I will link to in the show notes and is also linked to on the podcast page at the website, you can see all of the podcasts and all of the show notes on one web page and you can word search that with control F function in your browser and I think a lot of people have found that useful for finding particular topics.

Mostly Uncle Frank [4:38]

As you can imagine, I do not have a staff to go check back all of the links and all of the show notes, but I do appreciate that people bring it to my attention when certain links are broken. It's a problem of motivation, all right. So hopefully that is helpful and thank you for your email, nellie. Your mother wants you. You're such a good friend, nellie, nellie, nellie. Second off. Second off we have an email from Mark All hail, the commander of his majesty's Roman legions, the brave and noble.

Mary and Others [5:39]

Marcus Vindictus.

Mostly Uncle Frank [5:41]

And Mark writes.

Mary and Others [5:43]

Hi Frank, just FYI that the last three episodes will not download play on Apple Podcasts. All others have worked fine. I've shifted to streaming from the website but thought you'd like to know. Thanks for all you do, mark.

Mostly Uncle Frank [5:58]

That is the straight stuff. Oh, funk master. Well, thank you too for bringing that to my attention. Oh, funkmaster, well, thank you too for bringing that to my attention. I do use Buzzsprout to distribute the podcast, so I don't deal with Apple or Spotify or anybody directly, and this does happen from time to time. I have been able to get the Apple podcast version of the podcast without any difficulty, so it might be something on your end, but just in case you're having trouble with the podcast on one format, you can always go to another, like Spotify, and now these are all on YouTube. It's not very interesting watching it, but you can listen to it. The video itself is just the logo and, no, I do not intend to move towards video formats for this. It's not that I'm lazy, it's that I just don't care. But hopefully whatever issues you are having with Apple are cleared up by now, since this email is over a month old. But thank you for bringing it to my attention and thank you for your email.

Mary and Others [7:01]

And that's the way. Uh-huh, uh-huh, I like it.

Mostly Uncle Frank [7:05]

Next off, we have an email from Neil, and Neil writes.

Mary and Others [7:34]

Hi Frank, I'm convinced I want to have a risk parity portfolio in my early retirement. Yeah, baby, yeah. I've been investing for many years using JL Collins' approach 100% VTI. I have a considerable amount of gains and I'm in a high tax bracket. As I'm nearing my stop day, do you think it is smart to open a new account for the risk parity portfolio? Cease investing in VTI and start building my VUG, viov, tlt, gldm, dbmf risk parity portfolio to avoid a tax bill by messing with my old account. Any better advice, considering it's all in taxable accounts? Also, what to do when a big purchase, like a house down payment, throws your allocation way off? Rebuild over time with new money or face the tax bill to rebalance it now. Thanks, neil.

Mostly Uncle Frank [8:34]

Well, welcome to our world, Neil, and you won't be angry, I will not be angry. What you're facing here is just a general question that would apply to converting to any kind of retirement portfolio from one to another, and usually the easiest way to deal with this is to make most of the moves in your retirement accounts, because those transactions are not taxable. But since all of your money is in a taxable account, that's of no use to you, so we won't be talking about that.

Mary and Others [9:08]

That's not an improvement.

Mostly Uncle Frank [9:11]

But there are several techniques you can use when converting from one portfolio to another to minimize taxes. The first one is that simplest one is to simply redirect future contributions to the missing asset classes and build them out that way. However, that's probably not going to be very efficient in your case and would take too long, so that's only a partial solution. The next best idea is to recognize that you can sell tax lots of various assets. So if your portfolio is 100% in VTI, you don't have to sell the oldest asset with the greatest capital gain in there. You can actually sell the more recent contributions you've made to minimize the amount of taxes on those. Now you do have to work with your broker I'm not sure whether it's Vanguard or not to make sure that you are identifying specific tax lots, but this is often a good device that people can use to minimize their tax bills on transactions. So the effect of this would be to undo recent contributions to this portfolio and reset them to the alternative asset classes that you're moving towards. All right. The third recommendation is to spread this out over a period of years, if you can At least two years, because the transactions are taxable in the year that the sales are done, the transactions are taxable in the year that the sales are done, and so if you do some in December and do some in January, they're going to fall in different tax years. But this is also going to depend on what is your other income situation and, along those lines, if you have a year coming up where you know your income is going to be lower, that is also a good time to be making these kinds of moves in portfolios. And then, finally, you should recognize which assets you have that are similar to the ones you'd be moving to, and in this instance, VTI and VUG are actually very highly correlated, something like 98% or 99% correlated. So there may not be any big reason why you would need to sell VTI just to move to VUG and you could just use VTI in that slot. The other observation I'd make along those lines is that you want to start filling up the allocations towards the things that are diversified with VTI, which would be the bonds, gold and managed futures, and that would be before allocating towards the small cap value.

Mostly Uncle Frank [11:54]

And finally, with respect to this, you mentioned opening up a new account to do this in. I'm not sure you actually need to do that. I'm not sure where your funds are now whether they're at Vanguard or somewhere else but you should be able to buy all of these things through the Vanguard brokerage account. I know Vanguard did make an announcement they are consolidating their mutual fund accounts from their regular brokerage accounts, which in the past have been separate and confusing for a lot of people, but now they're all merging them all into one. So it's more like Fidelity, where you just have this one account. You just buy and sell things in it, whether they're mutual funds or ETFs or something else. So make sure that you actually need to open a separate account before doing that, Because obviously fewer accounts are easier to manage than more accounts.

Mary and Others [12:43]

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

Mostly Uncle Frank [12:48]

All right, now let's answer this separate question what to do when a big purchase, like a house down payment, throws your allocation way off. I think this goes to having separate accounts to begin with, or separate pots of money, if you will, because your long-term retirement money, whether it's in a taxable account or something else, should be separate from your very short-term money, which is going to be in some kind of cash money markets or savings accounts. But in between that, you can have a separate account or allocation or pot, if you will, that is devoted to these intermediate goals, like saving for a down payment for a house or buying the new car or some other large purchase, a wedding or something like that. That is going to happen in some period of years You're not sure exactly when and you're kind of flexible on that. Some period of years, you're not sure exactly when, and you're kind of flexible on that. Now our adult children are in their 20s and so have a use for that kind of account in between retirement accounts and cash savings, and they do use a risk parity style portfolio for that kind of accumulation.

Mostly Uncle Frank [14:01]

Now, when you get to retirement, this all collapses into one thing, but in terms of taking money out of a portfolio. It should not throw your allocation way off. In fact, you can use it to readjust your allocation by selling the things that are doing the best, and it is actually a form of rebalancing which will also have you minimizing the number of transactions, which is something that is always desirable in a taxable account. Along those lines, I would also turn off any dividend reinvesting in any of these accounts because that does create another potentially taxable event whenever some small amount of money is reinvested and just makes the management of it more difficult. Amount of money is reinvested and just makes the management of it more difficult. It's much easier and simpler to allow that cash to accumulate for a short period of time out of the income and then, if you're not using it, pick something to reinvest in when you rebalance the entire portfolio.

Mostly Uncle Frank [14:59]

But in general, selling the highest thing is how you would manage the drawing down or distributing out of this kind of portfolio or any kind of retirement portfolio really, and that is what we actually do with the sample portfolios in terms of distributions, except for one of the portfolios which has a dedicated cash allocation for, just for distributions. That's the sample portfolio, the golden ratio that we're doing that in, but all of the other sample portfolios you can see this month to month. We look at the portfolios every month, figure out what is the best performing asset since the last rebalancing and then take the money out of it from that asset if there's not enough cash accumulated, because we would just use the accumulated cash first, if there's enough there to pay a distribution. But that same principle would go for any kind of distributions, whether they be large or small. Hopefully that explanation helps and is not too confusing. It's a common topic and an interesting one that I think people will need to address sooner or later, and so thank you for your email.

Mary and Others [16:12]

Keep me searching for a heart of gold Sooner or later, and so thank you for your email old Last off.

Mostly Uncle Frank [16:29]

Last off is an email from Mike. Let's get Mikey, yeah, and Mike writes.

Mary and Others [16:37]

Love all the great content and valuable insights you provide. Just wondering why none of the portfolios have any international funds. Is it because they are too closely correlated with US stocks?

Mostly Uncle Frank [16:50]

Well, first I would say that we do have some international funds in some of these portfolios. If you look at the newest one, that Optra portfolio, that fund, avgv, is a global value tilted fund, so it has a considerable amount of international stocks in there. In the risk parity ultimate portfolio there is an allocation to KBA, which is a fund that invests in Chinese A shares, so domestic Chinese shares, which is about as diversified as you can get from the US and the rest of the world, which is about as diversified as you can get from the US and the rest of the world. But let's talk about why international is not the focus, and should not be the focus, of trying to diversify a portfolio, and it does have to do with a couple of different realities. This is one of these things that sounds good in theory but in practice doesn't work out the way it sounds. The first thing I should observe and I've heard Oswald de Moteren, the famous professor of valuation, say this recently that the S&P 500 is essentially an international fund now, with all of the global tech firms leading the way in that fund, and he says that wasn't always true, but certainly, just looking at the makeup of it today, there is a very large international exposure there. Now, the second point is the one that you mentioned that international funds are often just very closely correlated with US stocks, and where that is especially true is when you have the large cap companies, and so funds like VXUS, the Total International Stock Fund, and VTI, the Total US Stock Fund, have a lot of these companies that do global, worldwide business. They're all very large, and since those funds are heavily weighted towards large cap stocks, it creates more correlation between funds like that.

Mostly Uncle Frank [18:49]

And if you look at the difference between the performance of large cap international stocks and large cap domestic stocks over time, the reality of the situation is investing in the international large cap stocks is essentially just a currency speculation. Because if you look at the history of the US dollar and when the US dollar is stronger than foreign currencies versus when it's weaker than foreign currencies, if you just know that, you will know whether the large cap US dollar is stronger than foreign currencies versus when it's weaker than foreign currencies. If you just know that, you will know whether the large-cap US fund is outperforming the large-cap international fund or vice versa, because that's the real significant difference there, and if you were to back that out, you would see there isn't really much diversification going on there at all other than the sector makeups of the various funds. And in this case, the US stock market has become very highly tech and growth sector weighted, and so that is the major difference between it and an international total market fund, which is more large cap blend. So what this means is international or not.

Mostly Uncle Frank [19:53]

International is not really a first priority in terms of diversification. I think the first priority should be value versus growth, then size, and then you're talking about international and other factors like profitability and volatility and momentum, if you wanted to get into all of those things. But then the next question is well, how best would you express this kind of diversification? If you want to do it and I think the key is to not use these total market international funds but recognize that a total US or S&P 500 fund is essentially a large cap growth fund or a large cap blend fund leaning towards growth and then think about the best diversifiers to that are going to be value and small. I'm telling you, fellas, you're going to want that cowbell, and so you can now get nice international-focused, small-cap value funds from Avantis or DFA, like AVDV or AVES, and those would satisfy the desirability of getting really good diversification through size and value first, and then adding the international component to that. Guess what I got a fever, and the only prescription is more cowbell.

Mostly Uncle Frank [21:17]

Fortunately, paul Merriman has a very nice list of funds in all of these categories and I will link to that in the show notes, and so, if you are interested in adding international aspects to it, I would look at some of those funds and figure out how you want to balance out your portfolio. But I would focus on making that stock portion half growth and half value as the first priority and then adding these other funds as other priorities. And I think that's the other thing I want to convey, especially to new listeners, about these sample portfolios. They are sample portfolios. They are sample portfolios. They're not designed to be, or intended to be, the be-all, end-all. You must do this. Worship the guru kind of thing, bow to your sensei, bow to your sensei Rather. They are simply examples of what somebody might do, which doesn't mean you can't have variations on those themes and can't add international stocks to these mixes.

Mostly Uncle Frank [22:18]

Because you can Just make sure, though, that you are really focused on the important diversification metrics first, and not simply what I call headquarters diversification, where you're just talking about two global companies and one happens to be headquartered in Japan and one's in the US. It'd be like saying, well, this company is headquartered in Texas and this one's headquartered in Oklahoma, therefore they must be different. It's like, nah, not really. What really matters is what kind of markets they're selling into and what kind of businesses they are. Beyond that, if anything, most international markets outside of the US are worse as capital markets go due to various legal concerns, regulations or other things, and that's why so much capital flows into the US. Now, there are exceptions for countries like the Netherlands and Singapore and Switzerland, but those markets are so small that you can't really allocate too much capital to them. Anyway, I wouldn't get too hung up on international or not international, and you're certainly welcome to add your own variations.

Mostly Uncle Frank [23:23]

I would just caution to stay away from US large-cap weighted fund with international large-cap weighted fund, because you can certainly do better than that in terms of correlations and diversification and, given all the fund choices we have in this day and age we live in, there's no reason not to do that, because that whole rubric of well, let's have a large cap US fund and a large cap international fund is really something from 15 or 20 years ago, when those were really the only options you had for a reasonably low cost fund. We don't live in that world anymore. We live in a more modern world where you have more choices, and so, as you would not use a smartphone or a BlackBerry from 2010, you shouldn't be thinking that you have to use funds from that era even in the face of better choices that we have today. But it's a very good question that we address from time to time, but it does come up fairly frequently and I think it is a big sticking point for people who haven't really thought about investing in diversification beyond these kind of 15 or 20-year-old ideas that form the foolish consistencies that are the hobgoblins of many little minds. So hopefully that helps. Thank you for raising that question and thank you for your email. He likes it, hey, mikey, but now I see our signal is beginning to fade.

Mostly Uncle Frank [24:52]

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 you. 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. Keep me searching for a heart of gold. You, keep me searching, and I'm growing old. Keep me searching for a heart of gold. I've been a miner for a heart of gold.

Mary and Others [26:07]

Oh, 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.