Mostly Voices [0:00]

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.

Mostly Mary [0:17]

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

Mostly Uncle Frank [0:36]

Thank you, Mary, and welcome to episode 52 of Risk Parity Radio. Today on Risk Parity Radio, it's time for our weekly portfolio review. And since it's the end of the month, we'll also discuss distributions for February. And this is for our sample portfolios that you can find at www.riskparityradio.com. portfolio.com on the Portfolios page. But just looking at the markets and we will have a couple of listener questions after the portfolio review by the way. But just looking at the markets last week it was the worst week since October for the stock market. So the S&P was down 3.31%, the NASDAQ was down 3.49%, Gold was a lot better. It was only down 0.31%. Treasury bonds were actually up last week. They were up 0.42%, which is a good sign. I mean, that's usually what you would expect when the stock market is down. The treasuries go up some. REITs were down and we're representing REITs with REET, the International or World REIT Fund, and it was down 1.17% last week. Commodities represented by the fund, PBDC were actually up last week. They were up 0.31%. Preferred shares represented by the ETF PFF were down 1.35%. So what you see here is we have a stock market that's down 3.3 to 3.5% and we'll see how our risk parity style portfolios performed and how that relates to their overall volatility. Now the most conservative one is the All Seasons portfolio. and that one is only 30% stocks and then it's got 40% in long-term treasuries, 15% in intermediate term treasuries, and then the remaining 15% is divided into gold and commodities. Now that one was down 1.23% for the week. It is up 3.03% since inception. This is something that we keep as a reference, we probably wouldn't use it. You can see that it being down 1.23% is disproportional to its nature. It should be a little bit more conservative than that. But it is what it is and it is holding on and able to support its distributions. Now the distribution for February from this fund were taking out distributions at an annualized rate of 4%. So we divide the total by 300 and we get $34 for February, which we will be taking out of the stock fund VTI next month because that has been the best performer in this portfolio. Just looking at the total since inception last July, we will have taken out $240 total after we take out that $34. and that will have come $103 from the stock fund VTI, $35 from the gold fund GLDM, $33 from the intermediate treasury fund VGIT, and $69 from cash over that time period. Moving on to the next portfolio, and this is one of our really core risk parity style portfolios. This is the Golden Butterfly. This is the one that is 40% in stocks divided into a total stock market fund and a small cap value fund. And then it's got 40% in bonds divided between a long-term treasury fund and a short-term treasury fund. And the remaining 20% is in gold in the ETF GLDM. This one was down 1.68% last week, and it is coming right in line with what you would expect for these risk parity style portfolios. If you remember going all the way back to episode one of this What we are trying to accomplish here with these portfolios is to reduce the volatility by about half while only reducing the returns in these portfolios 85% of the total stock market. And so this is showing that kind of performance being down 1.68% for the week, which is about half of what the stock market was down last week. Now it is up 12.21% since inception in July. It's still leading the way as far as the sample portfolios are concerned, largely on the strength of that small cap value fund which has been going crazy the past six months and is up nearly 50%. So for February and we are taking out of this fund at an annualized rate of 5%, so you divide by 240, the total being $10,960.57 right now. And so we'll be taking $46 out of it for February and we'll take it from that small cap value fund, which is the best performer, VIoV is that. And if we look at the totals we've taken out since inception, it's $307 including next month's distribution. $176 of that have come from the small cap value fund, VIoV.$43 have come from the gold fund GLDM and $88 have come out of cash distributed out of those funds over the time period since last July. Now our next risk parity style portfolio, sample portfolio is our Golden Ratio portfolio. This one is 42% stocks, 26% long-term treasuries, 16% gold, 10% REITs represented by the International REIT Fund, REET, which is both worldwide and domestic, and then it's got six percent in cash. This one performed very similarly to the last one. It was down 1.69% for the week, about half of what the stock market was down, and it is up 10.2% since inception in July. Now this one has a built-in cash buffer, so we just removed from cash as we go along. It's more tax efficient than the other portfolios if you were paying taxes on these because you're just pulling out of cash until you get to the rebalancing phase, which happens annually. So we're taking $45 out of this for February from the cash, and that will have been $305 from the cash since inception last July. And now we move to our most complicated portfolio, the Risk Parity Ultimate. We'll go through all 12 of the funds that are in here, but it is approximately 40% in stocks, 25% in long-term treasuries, 10% in gold, 10% in preferred shares. I'm sorry, it's 12.5% in preferred shares, 10% in REITs, and the remaining 2.5% is in a volatility fund, VXX, and this one also performed very similarly to the other two base risk parity style portfolios. It was down 1.66% for the week, it is up 9.4% since inception last July, and we are taking out of this one at a rate of 6% annualized. And so for Next month that'll be $53 we'll be removing. We will be taking out of the small cap value fund which is the best performer for this as well. So that's $53 for February. For the totals since inception it'll be $364 total. There is $10,629 in this right now and that is represented by $158 from the small cap value fund $52 from the Gold Fund, $51 from the Large Cap Growth Fund, and then $103 have come out of cash that's been distributed out of the various funds in this over time. And now we are leaving our standard portfolios and going to our two experimental portfolios, which are intended to mimic the stock market in terms of volatility. And so we're looking at the accelerated permanent portfolio that is comprised of 25% in a leveraged stock fund, 27. 5% in a leveraged bond fund, 25% in preferred shares, and 22.5% in gold. And that one was down 3.07% for the week. slightly less than the stock market was down. It is up 8.8% since inception in July and we are taking out of this fund at a gaudy rate of 8% annualized to see if it can hold up to that. That means we're going to be taking out $70 for it from it for February and that will come from cash because we rebalanced the fund earlier in the month. leaving enough cash for this distribution. It actually came out of UPRO when we rebalanced it in the mid in the middle of the month. For the total since Inception, it's 489 dollars we've taken out of this. 210 has come from the stock fund, the leveraged stock fund, UPRO. 71 has come from the leveraged bond fund, TMF. 65 dollars has come from the Preferred shares fund PFF and $143 has come out of cash from various distributions over that time. And now we go to our other experimental portfolio, the aggressive 5050. This one is 33% in the leveraged stock fund, 33% in the leveraged treasury bond fund, and then it's got 17% in a simple intermediate treasury bond fund and 17% in the preferred shares fund. It was down 4.1% for the week. It is the most volatile of these portfolios. It is up 7.9% since inception last July. And we are taking out of this also at an 8% annualized rate. And so we've taken, or we will be taking $69 from the Leveraged Stock Fund UPRO for February since it's the best performer. And that will total $486 since inception last July, which is comprised of $208 from that leveraged stock fund, $70 from the leveraged bond fund, $63 from the preferred shares fund, and $145 that came out of cash. So you can see that these portfolios are sort of performing as advertised or as you would have expected looking at the data that we constructed them from the 50 years of data. If you go back to the earlier episodes that describe the portfolios charts data that we've used to build most of these out with the exception of the experimental portfolios. Looking at the totals. So if you added up all of these portfolios we started with $60,200 for the six of them. And we have distributed after February, it'll be $2,191 in total distributions in seven months. And that is an annualized rate of 6.2% in terms of overall distributions. And all of them are net positive even after that. So they are in good shape and performing as you would want drawdown portfolios to perform. So despite the awful performance of the stock market last week and last month, really, these risk parity style portfolios are holding up quite well. Now I've got a comment and a question from our listeners. Before I get to that, there is some entertaining things that I get from various podcast trackers. One of them sent me an email saying that my podcast was position 160 in the category of investing in Belgium and position 223 in the category of investing in Norway. I didn't know I was so popular in those northern European countries. But I thought that was kind of amusing from my perspective. This podcast is never intended to have a broad audience, but a very focused audience who are really interested in the particulars of what we talk about here. We have about 70 loyal listeners and over 5,400 downloads now since we started this last July. very pleased with that and everybody that listens in. Now looking at our comment and question first, the comment comes from Jeff W and Jeff W writes, Thanks for providing this public good. Well thank you for acknowledging me, Jeff. I really do appreciate that. As I said, this is a Amateur podcast and so it is all for the listener's sake and to know that people are out there appreciating what we put out is what I really do this for. All right, now going to the question we have here and this question comes from Visitor8080 and Visitor8080 writes, I can't find anything on this question. I was looking to balance the risk in my 457 account. This is turning out to be very difficult since it only allows me to self-direct 20% of my investment. The remaining 80% is limited to a small set of passive index funds. There are generic index funds, per annum bond fund, equity fund, mid-cap fund, small-cap fund, closed per annum, and a series of pre-arranged portfolios with targeted retirement dates. 2020, 2025, 2030, 2035, etc. How can I start thinking about balancing risk within this narrow set of options? Well, that is a narrow set of options and I'm sorry for that. It is the case that 457 funds and 403b funds predate 401k funds and those were originally designed back in the era when people had pensions. And so a lot of those funds or those plans are still set up like defined benefit pensions. And so they are often expensive and have limited selections in them. Hopefully we are growing away from that over time, but it is along Slog and a lot of those types of funds which are typically offered to teachers and public employees frankly do not have the kind of features that you would expect to have in these kinds of plans in the 21st century. But what can we do with this? What can we do with it? We can do something with it. The first thing I would do is just toss out the idea of using the target date funds. simply because they're changing all the time. They may have high fees. A lot of the target dates, particularly in 457 or 403 plans, have actually high fees. It's only if you get to the like the Vanguard target dates where they have reasonable fees on them and a few other purveyors. So you have to be wary of the fees on these target date funds. The other main problem with them is They've got their own setup. They're kind of like a primitive robo-advisor. You would have to look inside of each one to see exactly what's in there. And then it's going to change over time. So it's really not conducive to using it to set up an overall portfolio. And that's particularly true if you have something besides this 457 fund in terms of investments, because it really is not designed for having a target date fund on one hand and then having a bunch of other things on the other hand. It's very difficult to really balance those out in a way that makes sense and that's easy to manage. You're much better off just taking the raw funds and arranging them in the way that you want to arrange them if you're a do-it-yourself investor. The next thing we need to think about though here is the goals and where you are in your investing life cycle. So if you are a long ways away from retirement, you really want to focus on maximizing the equities in the fund or your portfolio. And if you were in your 20s or even your 30s, you could have 100% equities in this sort of thing and keep accumulating or adding to it over time. And in that case, you could just put it all in the equity fund or you could put it in the equity fund and the small cap fund is often a nice two fund combo because they're on other sides of the spectrum in terms of diversification in stocks, which is not a lot of diversification, but it is some diversification. And you could add that mid cap fund too. Really, you need to remember what we call the macro allocation principle. that any reasonably diversified portfolio that is 100% equities or 80/20 or 60/40 is going to perform 90% or more similarly to any other type of portfolio. So you could have any mix of those three equity funds in 100% equity portfolio and figure you're going to get 90% of the same performance and the other factor in it is you don't know in advance, you can't know in advance, which is the best combination of those three funds. That is the nature of reality and the unpredictability of the future. That just looking at the past is not going to tell you in the next 10 or 20 years which of those funds are going to be the best performers. So if you are very far away from Retirement, I would focus on maxing out the equity portion of this and just ride the pony, if you will, for that. If you are more risk averse though, you would probably want to take some of the other self-directed portion of that and put it in other things. And the other things that you would want to put it in are probably long-term treasuries, and something like gold, maybe just five or 10%. But I honestly wouldn't recommend that you do that if you were a very long ways away from retirement. Now let's talk about a situation where your goals are different. You're not just accumulating and you really do want to focus on reducing the risk in this because you are about to use it, about to leave your job, about to rely on this money for distributions, and you really do want to construct a risk parity style portfolio for that. How could you do that with these choices? What you would need to focus on is what's in the bond fund, and I would divide up the bond fund into its components. That bond fund is probably 40 to 60% Treasuries, let's say it's 50% Treasuries. Those Treasuries are going to be negatively correlated with your stocks. The corporate bonds in that bond fund are going to be positively correlated with your stocks. But then that bond fund is also going to have a variety of durations. So the shorter duration things are going to function more like cash or a savings account. The longer durations are going to carry more risk, but they are also going to be more negatively correlated on the Treasury side with the rest of the stocks. So you could take, for instance, suppose you wanted a very simple Risk Parity style portfolio. You might take half of the money that you have invested and so that's 80% in these passive index funds and 20% that we're going to talk about separately. But of that 80%, you would take probably about 50% of that and put it into equity funds. And you could split that into the equity fund and the small cap value, the small cap fund, or split it amongst the three. You would probably want to split it amongst those funds. And so that would leave you with 30% that you could then put into the bond fund. Now let's assume that that bond fund is half Treasuries and half corporates. So you basically creating a situation where now you have 50% in equities, 50% in corporate, 15% in corporate bonds, excuse me, and 15% in treasuries. Okay, now you need to consider what to do with that remaining 20%. Assuming you can take that and invest it in anything you want, any ETF that you can commonly find, you would probably want to devote some of that to gold. Between 10 and 15% of that 20% would be put into a gold fund, and I would probably just take 10% of it. Then I would probably take some portion of that and put it into long-term treasuries to shore up or match the rest of the treasuries that you already have in the bond fund. So you could end up with something like a portfolio that looks like 50% equities, 15% treasuries from the bond fund, an additional 5% long-term treasuries from the self-directed part of this, giving you 20% in treasuries. And then you would have of the remainder, say 15% in gold and then 15% in the corporate bonds that are in that bond fund. Now those corporate bonds, if you match those up to our sample portfolios, those kind of fit in the same location as preferred shares or REITs or some kind of equity that pays income. They don't function as well, but they function in the same way because they have a positive correlation with the stocks. So you can see that that kind of portfolio is going to give you a risk parity profile for this sort of fund. So you could do that with this 457 if you were getting close to retirement or if you just wanted to take the risk off the table. But if you're going to do that, please do it for the long term. Ideally, what you do with this is actually you might put it in that portfolio I described for the last few years you're working there. And then when you stop working there and you're able to get at that money. And the nice thing about a 457 is you can roll it over to an IRA, which is probably the preferred thing for a long-term investment, but you could also access it immediately. if you needed to, but that would depend on what other things you have going on, what other accounts you have. So those are my best suggestions for this. I know it's not ideal, but you could construct a basic risk parity style portfolio out of this, assuming that self-directed 20% does actually allow you to invest in everything that you could invest in with an ordinary account at a Fidelity or a Schwab or a Vanguard. But as always, please do not take this as financial advice. I am not in a position to do that for you. These are just my own thoughts and comments on the situation that was presented. Nevertheless, I hope what I had to say was helpful. But now I see our signal is beginning to fade and it is time for me to say goodbye. If you'd like to send me a comment or a question, please email it to frank@riskparityradio.com that's frank@riskparityradio.com or if you would prefer, you can just go to the website www.riskparityradio.com .com and fill out a contact form and then I will get your message that way as the messages I receive that we talked about today. We'll be picking up later this week. It'll be time for the monthly rant that I know some of you enjoy hearing. Hopefully I'll do something worthy of the times. There are interesting things to rant about these days. but we'll leave that for later this week. Thank you for tuning in. This is Frank Vasquez with Risk Parity Radio, signing off.

Mostly Mary [27:38]

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.