Cold Open And Show Setup

Voices [0:10]

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

Mostly Queen Mary [0:19]

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

Mostly Uncle Frank [0:36]

Thank you, Mary, and welcome to Risk Parity Radio. If you are new here and wonder what we are talking about, you may wish to go back and listen to some of the foundational episodes for this program. And the basic foundational episodes are episodes 1, 3, 5, 7, and 9. Yes, it is still in my memory, thanks. We have also created an additional resource, a collection of additional foundational episodes and other popular episodes.

Voices [1:07]

We have top men working on it right now. Ooh.

Mostly Uncle Frank [1:14]

Top men. And you can find those on the episode guide page at www.riskparty radio.com. Inconceivable. All thanks to our friend Luke, our volunteer in Quebec. Sacosh. We'd be helpless without him.

Voices [1:35]

I have always depended on the kindness of strangers.

Mostly Uncle Frank [1:41]

Because other than him, it's just me and Marion here. I'll give you the moon, right?

Voices [1:46]

I'll take it.

Mostly Uncle Frank [1:48]

We have no sponsors, we have no guests, and we have no expansion plans.

Voices [1:52]

I don't think I'd like another job.

Mostly Uncle Frank [1:55]

Over the years, our podcast has become very audienced focused, and I must say we do have the finest podcast audience available.

Voices [2:04]

Really top drawer.

Mostly Uncle Frank [2:07]

Along with a host named after a hot dog.

Voices [2:10]

Lighten up Francis.

Mostly Uncle Frank [2:13]

But

Season Finale And Listener Thanks

Mostly Uncle Frank [2:14]

now onward, episode 528. Today and Risk Parity Radio. As is the tradition around here, we end the season with a rebalancing episode. So this is the end of season six, and we are going to talk about how we've been rebalancing the four sample portfolios that we rebalance on an annual basis.

Voices [2:40]

Looks like I picked the wrong week to put on filmage.

Mostly Uncle Frank [2:44]

But before we get to that, I just did want to thank all of you listeners who have been sending me messages and cards of encouragement and condolences about the passing of my mother a couple of weeks ago. I'm very grateful for the listeners we have, and thank you very much for your kind words and encouragement. And we will be getting back to your emails soon enough. I do have them stacking up for the donors to the top of the t-shirt campaign that we rolled out in episode 518 for the Father McKenna Center. And thank all of you who have donated to that so far as well. But as they say, on with the show. So we started this podcast in July of 2020, and each July we do a rebalancing of the four basic portfolios or more basic portfolios, which are the all seasons, the golden butterfly, the golden ratio, and the risk parity ultimate portfolios. We don't rebalance the experimental portfolios at this time because they are all on different kinds of rebalancing schedules that depend more on performance and other factors and not on a strict calendar basis. So we actually did all these rebalancings last week on July 21st, based on the amounts in the portfolios as of that date, or July 20th actually. And all of that is up on the website right now if you want to check it out, because it is kind of difficult to listen to, even though I do think it's worth going through once a year.

Voices [4:15]

This is pretty much the worst video ever made.

Mostly Uncle Frank [4:18]

So the

All Seasons Portfolio Rebalance

Mostly Uncle Frank [4:19]

first portfolio we're going to talk about is the All Seasons Portfolio. This is a reference portfolio, which means that we do not actually use it in our everyday lives as something we would want to hold in retirement, mostly because it's too conservative. The reason we keep it around is this was the original idea that Ray Dalio gave to Tony Robbins in the book Money Master the Game back around 2013 as a simplified risk parody style portfolio. And for a while people thought of this as the risk parity portfolio, even though it's just one of many examples. But it makes for a good point of comparison with other portfolios that you might actually want to use in a retirement scenario. Because you would only use something like this if you were extremely conservative. So this portfolio only has 30% in stocks in it. It's held in a total stock market fund, VTI. The bulk of this portfolio is made up by treasury bonds. There is 40% in long-term treasury bonds in the fund VGLT and 15% in the intermediate treasury bond fund VGIT, which are both Vanguard funds that invest in those kinds of treasury bonds. The remaining 15% is held in gold and commodities, and the funds used are GDLM for gold and PDBC for commodities. 7.5% each is the target amount. And you can see from this construction that this portfolio has characteristics that are outside of the range that you would usually find for portfolios with higher safe withdrawal rates. In particular, it only has 30% in stocks in it. And we know from Bill Bangin's research and other research that you need 40-something to 70-something percent stocks in a portfolio to really have a higher safe withdrawal rate. It also has not diversified the stock holding at all out of a total stock market fund. And you would want to diversify at least half of that into value-tilted stocks. And then its biggest problem is it's just got too many bonds in it. With 55% in treasury bonds, that is well outside of the useful norm or target for bonds in a risk parity style portfolio that has a high safe withdrawal rate, you'd want to see it more like between 15 and 30% in those kind of assets. That being said, it does manage to plug along, and we've been applying a 4% annualized withdrawal rate to it as described on the website. So at the end of July 20th, it had $10,271 in it, which is just a little bit more than it started with. And to do the rebalancing, we generally first subtract about $50 from that. The reason we subtract $50 from that is we want to have money for the next distribution. We don't want to have to rebalance these things and then a couple weeks later have to sell something again. So we account for the next distribution in the rebalancing. Now, if you were doing a quarterly or an annual distribution schedule, you would account for that by putting enough money into cash to cover the next series of distributions if you were doing it that way. But we're doing a monthly distribution, so we only worry about the next month. So based on a target total of $10,220, we then determined the targets for all of the assets. So for VTI, since we want 30% in that, the target there is $3,066. For VGLT, the target is $40 or $4,088. For VGIT, the target is 15%. So that's $1,533. And for PDBC and Gold, GLDM, the target is 7.5% each. And so that is $766 when we multiply that times the total. And then we compare that to what's actually in there as of July 20th and make the appropriate buy or sale transaction to rebalance this back to those percentages. What that turned out being in this case was we sold $312 worth of VTI, we sold $122 worth of PDBC, and we sold $56 worth of GLDM. And those were all the ones that were over their target percentages. Now the ones that were below their target percentages were the bonds. And so we bought $337 worth of VGLT, the long-term treasury bond targeted at 40%. And we bought $125 worth of VGIT to bring that up to its 15% target. And with that, the rebalancing was complete. So we recorded all of those transactions at the website in the rebalancing section. And now we are done with that for another year. And now

Golden Butterfly And Reverse Glide Path

Mostly Uncle Frank [9:18]

we're moving on to the next one, the golden butterfly, which is more like something that somebody might actually hold in a retirement portfolio. This is, of course, a portfolio that was invented by Tyler over at Portfolio Charts, and he's written about it extensively over there for the past decade. So we did something a little bit different here besides a straight rebalancing. One of the topics we've talked about over the years and that has been written up in many books, including Bill Bangin's last book about the safe withdrawal rates, is the idea of a reverse glide path. Because as Michael Kitsis and others have found, actually increasing the stocks in a portfolio can make sense in a retirement scenario to start with a lower percentage of stocks and move it up to a higher percentage of stocks over time. And so I wanted to implement that idea in at least one of these portfolios. And I picked this one because it's the simplest way to do this adjustment. Now there are no specific standards for the way this needs to be done. There's still research to be done as to sort of the best practices or way to do it, but I came up with something that I thought was reasonable and is similar to what I've seen in the articles about this and discussed in Bill Bangin's book. So what I decided to do is take this portfolio, which is 40% in stocks, and do a reverse glide path to increase it to 50% in stocks, but over the course of the next 10 years. So we're only increasing the percentage of stocks by 1% each year. Now, to fund that, what made the most sense to me is to look at the least volatile and lowest yielding asset in this portfolio, which in this case is SHY, which is the short-term treasury bond fund. So essentially we are moving a little bit from the lowest return reward asset to the highest return reward assets over a 10-year period. So just looking at the portfolio for targeting purposes, it ordinarily is 20% each in a total stock market fund, VTI, small cap value fund, VIOV, a long-term treasury bond fund, VGLT, a short-term treasury bond fund, SHY, and a gold fund, GLDM. We'll be setting the targets the same for gold and long-term treasury bonds. We'll reduce the SHY target from 20 to 19%, and then we will increase the target percentages for VTI and VIOV to 20.5% each. So as of July 20th, this portfolio had $12,349 in it, including $60 in accumulated cash. I used a base of $12,288 to determine the target percentages, leaving the rest in cash for the next distribution. So looking at those targets, the target for VTI, the total stock market fund, is 20.5%, and that is $2,519 in this calculation. And that's the same target for VIOV, that'll be $2,519. Then for VGLT, the long-term treasury bonds, the target is 20%, and so that calculates out to $2,457. And the same target is for gold, GLDM is $2,457. And then the new target for SHY will be 19%, and that calculates out to $2,334. Now comparing that to what is actually in the portfolio as of July 20th resulted in us selling $112 worth of VTI. We sold $310 worth of VIOV.

Voices [13:10]

I'm telling you, fellas, you're going to want that cowbell.

Mostly Uncle Frank [13:14]

And you can see that was the best performer in the past year, really, particularly in the last six months. Small cap value has kind of gone on a run.

Voices [13:24]

I gotta have more cowbell. I gotta have more cowbell.

Mostly Uncle Frank [13:28]

So we ended up buying $26 worth of GLDM. We bought $129 worth of SHY, the short-term bond fund. And we bought $267 worth of VGLT, the long-term treasury bond fund. I thought it was interesting that we ended up having to buy some gold, the GLDM fund, because as we all know, for the past couple of years we've been taking most of our distributions out of that fund, the monthly distributions, up until earlier this year. But as fortune would have it, gold has not performed very well this year, and it peaked in January and then has fallen about 25%.

Voices [14:06]

I think you've made your point, Goldfinger. Thank you for the demonstration.

Mostly Uncle Frank [14:10]

And now that it has gone down, we ended up buying some, a little bit, because that's the whole purpose of rebalancing is to sell high and buy low.

Voices [14:19]

Think quick. Think positive. Never show any sign of weakness. Always go for the throne. Buy low, sell high. Fear, that's the other guy's problem.

Mostly Uncle Frank [14:28]

And it's interesting over the lifetime of this portfolio since we started this podcast, we've actually sold about $954 worth of gold, which is about a third of all the distributions that we've made, because I think it has been the best performer in this most recent time period. But that's why you hold a variety of assets, because you never know which one is going to be doing well and which one's going to be doing poorly, and you want to be selling from the highest one, which is now small cap value. And that way you don't have to predict what's going to happen next, because you have assets that tend to do well in all kinds of different kinds of environments.

Golden Ratio And Simple Cash Bucket

Mostly Uncle Frank [15:05]

So now moving to our next one: the golden ratio portfolio.

Voices [15:09]

A number is so perfect, perfect. We find it everywhere, everywhere. A mathematical property hardwired into nature. The golden radio, the golden radio, the golden radio, it's the influence, the answer, the answer, comedy, comedy, comet. The golden ratio. The golden ratio.

Mostly Uncle Frank [15:45]

This one is 42% in stocks divided into a large cap growth fund VUG and a small cap value fund, VIOV. It has 26% in long-term treasury bonds in the fund VGLT. It has 16% in gold in the fund GLDM, 10% in managed futures in the fund DBMF, and the remaining 6% is held in a money market fund. Now we've set this one up intentionally to have the simplest form of asset management you can have for those who like simplicity. And it essentially adopts what was the original bucket strategy invented by Harold Levinsky over 30 years ago. And originally that idea of a bucket strategy was not some kind of complicated thing that was supposed to take care of sequence of return risk, which it really doesn't, or not very well.

Voices [16:35]

That's not how it works. That's not how any of this works.

Mostly Uncle Frank [16:39]

But simply to make things simple for a client that for an entire quarter or an entire year, we would use the rebalancing process to carve off at least that amount in cash and then take all the distributions for the next quarter or years out of that cash. So over the course of the year, we always take money out of the money market fund out of this portfolio, and we don't do anything with the rest of these assets in this portfolio, which means that we only have to do five transactions a year in order to manage this portfolio, and we only have to do them once a year, which we do in July. So if you're looking for a very simple form of management, this is really it. This is way simpler than anything that you've heard of in terms of buckets, ladders, flower pots, or something else.

Voices [17:32]

Which always makes me laugh because people say, oh, we need this simple three-fund portfolio, but then we also need to have these ladders and these buckets and these flower pots full of stuff. And then we need to maneuver them around depending on what happens.

Voicesb [17:46]

What you just said is one of the most insanely idiotic things I have ever heard.

Mostly Uncle Frank [17:52]

You don't need to do any of that if you have a good portfolio. You can just do something like this. And it'll be far more efficient and far more effective than doing something with all those complications and transactions involved.

Voices [18:06]

Forget about it.

Mostly Uncle Frank [18:08]

So moving to what we actually did here, the amount in the portfolio at the end of July 20th was $11,997. Since this one already has this cash allocation to the money market fund, we don't need to carve off a separate cash allocation for the next distribution because it's all coming out of there anyway, which makes things even simpler. So the target percentages for VUG and VIOV, the large cap growth fund and the small cap value fund are 21% each. That calculates out to $2,519 for each one of those. For VGLT, the long-term treasury bond, 26% calculates out to $3,119. For GLDM, the gold fund, 16% calculates out to $1,919. And for DBMF, the Managed Futures Fund, 10% calculates out to $1,199, which is going to leave $719 at the end in the money market fund for distributions for the entirety of next year. So that ended up being in terms of the actual transactions. We sold $59 worth of VUG, the large cap growth fund. We sold $467 worth of VIOV, that small cap value fund. And you can see how well it performed over the past year by looking at how much you sold out of it in your rebalancing.

Voices [19:36]

Guess what? I got a fever. And the only prescription is small cowbell.

Mostly Uncle Frank [19:44]

Then out of gold, GLDM, we sold $144 worth of that. And from DBMF, we sold $90 worth of that. So the only thing we had to buy was the long-term treasury bond fund, which is underperformed, the rest of those things. And so we ended up buying $363 of VGLT, the long-term treasury bond fund. Now you will find in these portfolios, even when your bond funds are actually performing like you expect, you'll often be buying more of them simply because a lot of that performance is already paid out in cash. And so as the year goes along, any bond fund that you have is basically paying out part of its value into whatever cash holding you have, and you're probably spending that, which ends up leaving you rebalancing into it typically at rebalancing time. The exception being is if you are having a recession and your other assets are not performing well, you'd probably be selling out of that bond fund. But with those five transactions, we are done rebalancing this golden ratio portfolio for another year and we don't have to do that anymore. Now, if you have a different kind of golden ratio portfolio, for instance, the one that we hold does not have 6% in cash in it because we don't want to hold that much cash. Instead, we allocate that 6% back to stocks. Specifically, we allocate it to international stocks divided into growth and value. But if you do something like that, then you will be managing your portfolio like these other portfolios, like we talked about with the golden butterfly and the all seasons. Because the way you manage the portfolio specifically and what's in the portfolio are two different things or two different ideas. So you can often apply a management system to a variety of different portfolios depending on what your preferences

Risk Parity Ultimate Kitchen Sink

Mostly Uncle Frank [21:34]

are. But now we need to move to our most complex portfolio, the Risk Parity Ultimate. Everything that has transpired has done so according to my design. We use this as kind of a kitchen sink with the idea that somebody might want to have some of these assets in their portfolio. They probably don't want to have all of these assets in their portfolio, but I didn't want to have too many sample portfolios to keep. Track of. It's not that I'm lazy, it's that I just don't care. So we do use the Risk Parity Ultimate Portfolio to show examples of different kinds of assets in the portfolio, even though it's unlikely somebody would want to hold 12 funds like that are in this portfolio. But when you break this portfolio down, it is essentially 45% in stock funds, including REIT funds. 5% of that is in a leveraged fund UPRO. So it is effectively like having 55% exposure in the portfolio. The portfolio has 25% in bonds or bond-like funds in the form of Treasury Strips funds and 5% in the preferred shares fund. It has 15% in gold. And then for the alternatives, we have essentially 30% in alternatives, and that includes gold, managed futures, a long short fund, and a bitcoin fund. So you can see this portfolio has something for everybody and does make interesting watching, if nothing else. Breaking down the specific percentages, we have 10% in VUG, that is the Vanguard Large Cap Growth Fund. 15% in VIOV, which is the Vanguard Small Cap Value Fund, 5% in USMV, which is a low volatility fund, so it's a value kind of fund. 5% in UPRO, which is that levered S P 500 fund, so that kind of goes with on the growth side of things. Then we have 5% in REITs in the fund REET. And we have 5% in KBA, which is a Chinese A shares fund, which tends to move to its own beat, its own drum. For the bonds, we have 20% in GOVZ, that's the Treasury Strips Fund. And that acts kind of like a levered long-term treasury bond fund in terms of how it responds to changes in interest rates. And then we also have 5% in PFFV, which is that preferred shares fund, which is kind of ballast in this portfolio. Looking at the alternatives, we have 15% in GLDM for the gold fund, 10% in DBMF for the Managed Futures Fund, 3% in BTAL, which is that long short fund. It goes long value tilted stocks and short growth tilted stocks. So it tends to perform well when the stock market is going down, actually, most of the time. And then we have 2% in IBIT, which is the Bitcoin fund. So we take distributions out of this portfolio at a 6% annualized rate most of the time. And that means it has a lower balance right now, which is $10,669 to work with. We're using $10,600 as the base for our calculation of the targets. I'm going to go through these target and transaction for each one together rather than the way I did it for the other portfolios, since there's so many of them. So for the large cap growth fund VUG, the target percentage is 10%. The amount is $1,060. And so the transaction we made was to sell $43 worth of that. For the small cap value fund VIOV, the target percentage is 15%, which calculates out to $1,590. We ended up selling $325 worth of that to get it to its target percentage because as we know, small cap value has been pretty much the best performer in the past year in most of these portfolios.

Voices [25:40]

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

Mostly Uncle Frank [25:46]

For USMV, that is the low volatility fund, it's kind of like a large cap value fund. The target percentage there is 5% or $530 when we calculated out. So we had to buy $29 worth of that to true it up to 10%. For UPro, the levered SP 500 fund, the target percentage is also 5% or $530. So we sold $123 worth of that to get it down to its target percentage. For the REIT fund, R E E T, the target percentage is also 5% or $530. And that was also a decent performer in the past year. So we sold $23 out of that to get it to its target percentage. And then for that last one, KBA, the Chinese A Shares Fund. That had a most excellent year last year as well. It's got a 5% target or $530. We had to sell $106 worth of that to get it back to its target percentage. Moving on to these bond funds, GOVZ at 20% target, that targets out to $2,120. So we had to buy $312 worth of that to true that up. For PFFV, the target percentage is $1% or $530 when we calculated out. We had to buy $68 worth of that to true that one up. Now moving to these alternatives, first one is gold GLDM at 15%. That targets out to $1,590. We actually had to buy $47 worth of that to true that one up. And again, mostly because we've been selling gold to take monthly distributions fairly frequently out of this portfolio over the past year. At least until we got to about February of this year. For BTAL, that long short fund, the target percentage is 3% or $318, so we had to buy $108 worth of that to get it back to its target percentage. And then for Bitcoin, which is I think the worst performer last year, the target percentage is only 2% though, which is $212. But in order to get to that, we had to buy $107 worth of IBIT to return it to its 2% target percentage. That is an interesting example of how different funds, particularly when they're very volatile, will often result in either large sales or large buys, at least on a relative basis. Because when we were doing this last year, we were certainly selling out of the crypto funds before they crashed. But that's the way it goes. Buy low, sell high.

Voices [28:35]

Nothing you have ever experienced in preparing you for the unbridled carnet you're about to witness. You make no friends in the pits and you take no prisoners. One minute you're up half a million and stilly beans in the next boom. Your kids don't go to college and they've repossessed your building. Are you with me?

Mostly Uncle Frank [28:52]

And that concludes our rebalancings for year six of Risk Parity Radio. And we'll be

Resources, Email, Subscribe, Sign Off

Mostly Uncle Frank [28:58]

moving on to season seven next. If you want to learn more about some of these more esoteric kind of assets, we did do episodes talking about most or all of them that you can find on the episode guide page. Just change the drop down there to specific investment analysis, and you will see episodes analyzing BTAL and gold and a number of these other things, which you can peruse at your leisure. And as I mentioned, all of these transactions are also laid out on the portfolios page at www.riskpartyreader.com under each of the portfolios.

Voices [29:41]

That's the fact Jack! That's the fact, Jack!

Mostly Uncle Frank [29:46]

And with that, now I see our signal is beginning to fade. We will pick up again this weekend with your emails and portfolio reviews again, of course. We'll have monthly distributions to talk about, and I guess most of them are going to be in cash. I wonder why. I'm not a smart man. In the meantime, if you have comments or questions for me, please send them to Frank at RiskPardiRear.com. That email is Frank at RiskPardyRear.com, or you can go to the website www.riskparty.com, 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 Party Radio. Signing off. And it's gone. Uh what?

Voices [30:43]

It's gone. It's all gone.

Mostly Queen Mary [30:45]

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.