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. A different drummer.

Mostly 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 episode 57 of Risk Parity Radio. Today on Risk Parity Radio, we are going to follow up on episodes 53 and 55, where we began talking about the dragon portfolio in episode 53, And then we were talking about an investment in a managed futures ETF called DBMF in episode 55. And we went through the first five questions about whether to invest in that in that episode, and we'll be doing the next five in this episode. And then talking about whether it would be appropriate for a Risk Parity Style portfolio. But before that, I had something that I thought was amusing out of the mailbag this week. And what it is, is an request to be a guest on my podcast from somebody that sells something that I ranted about in episode 46. It seemed kind of odd or or amusing and interesting that they would even consider or want to be on my podcast, given what I had to say about their products and their industry. But I will read this to you. I'll change the names to protect the dubious. And this did come to me on February 11th at 3：04 a.m. Which is, I guess, when all the emails from these folks go out. And it is from M. And she says, hello, Frank. We reached out to you about a few weeks ago to see if you would be open to having this unnamed person as a guest on your podcast to talk about the bank on yourself concept. This person has helped business owners, real estate investors, and full-time employees protect, save, and grow their wealth regardless of market conditions. on a tax favored basis. This is why he'll be a good fit for your audience. And then following with some references and links to other materials from this person. Thank you, MM, executive assistant. Now, what was that concept that they were talking about? And again, it does go back to the rant because what it says here is like, Helping business owners and talking about real estate and employees protecting, saving, growing. What does this person actually sell? They sell insurance. Why don't you just say they sell insurance? The reason you don't say they sell insurance is because it's all marketing. Bank on yourself is a marketing platform for selling insurance. and it seems these days I find every week there's another one of these people appearing on a podcast, and I think they all work together at some point and now have gone off their separate ways, all brokering away using this marketing platform to sell insurance products, but they never tell you that. It's like one of these car commercials where you see somebody zipping down a windy road or something like that that is really nothing to do with buying the car. It has to do with how you're supposed to feel about yourself if you buy this product. And the product is secondary in the advertising. And that's basically the way these people advertise. I won't continue on, but obviously I will not be having this person on as a guest on this podcast. They are welcome to seek other podcasts to be on the end. As far as having a guest, I might do that someday. I'm kind of lazy when it comes to that. I'm a one-man shop here just creating these podcasts myself. And I would have to tell you that my interviewing style is probably not very conducive to this kind of format because my interviewing style comes from cross-examining expert witnesses about financial topics. So it's more of an interrogation than an interview. And while that might be entertaining for people listening, some people listening to it, I don't think it would be very pleasant for the guest. But let's go on and talk about DBMF, this ETF that we had been discussing. Now this to refresh your recollection is a exchange traded fund that invests in managed futures and it is from Dynamic Beta Capital. I have linked to some things in the show notes about this and I'll link to them again including this little fact sheet. And we were going through the 10 questions to master successful investing from J. David Stein to apply to this particular investment and we had already exhausted the first five. What is it? Is it an investment speculation or gamble? What is the upside? What is the downside? Who is on the other side of the trade? And you can go back to episode 55 if you want to refresh your recollection on those. And so now we're moving on to question six. Question six is a simple answer here. The question is, what is the investment vehicle? And the investment vehicle is an exchange traded fund, one of the most convenient ways for a do-it-yourself investor to get involved in all kinds of different things. They've packaged it up. It's on the stock market exchanges, and you can trade it just like a stock. And these days, you can trade it with no fees in most places. Okay, question 7. What does it take to be successful? Well, it doesn't take a whole lot to be successful in this. If you're going to invest it, it's just a matter of deciding whether to invest in it or not because then you just leave your money in there and look at the returns. And if you're keeping it in a portfolio, hopefully you rebalance into it or out of it periodically. You can see on this fact sheet that it had a good 2019. It was up 10.76% in 2020, it was up 1.84%. So it looks like a kind of conservative investment with reasonable returns, but not excessive returns on it to be successful. You just buy it and hold it for the most part. All right, question eight. Who is getting a cut? Well, this has a total expense ratio, you see on the fact sheet, of 0.85%, which would be high for an index fund. It is actually not that high for a specialty fund such as this having an expense ratio you would have expected it to be somewhere between 0.75% and 1%, and if it actually performs, it should be able to cover that. But that is a cut. It is a more significant cut than a stock market index fund. So if we're just replacing a stock market index fund, you would say, well, why bother with this? It's just more expensive doing the same thing. The real question is when we get to question nine, the next one is, is it doing the same thing or not? How does it relate to other investments in our portfolios? Other than that, nobody seems to be getting a cut, so it's at 0.85%. Now let's go to that question number nine. How does it impact your portfolio? Well, we took a look at this using the asset correlation analyzer and matrix you can find at PortfolioVisualizer. And I put it into a little matrix along with VTI for the stock market, TLT for long-term treasury bonds, GLD for gold, and PBDC as a commodities fund, just for comparison purposes. And this is just looking for what is the correlations between the other assets in the portfolio, because we want to know whether this is actually adding something different in terms of diversification, if it were highly correlated with one or more of the assets that we already may be holding in our portfolio, there's really no point in adding it because it has a high expense ratio and a short time frame for knowing what it does. So there's a risk factor there. So this question is kind of the key in terms of whether this is useful or not for you. And if we do look at these correlations, it actually has low or negative correlations to all of the other types of assets that we ordinarily find in our risk parity style portfolio. So compared with the total stock market, it has a correlation of 0.12, and that's on a scale of negative one being negatively correlated to positive one. So it's near zero. basically uncorrelated. With the long-term treasury bonds, the correlation is 0.49, so it's positively correlated with those. It's also positively correlated with gold, probably because it's got some gold futures in it, and the correlation there is 0.59. But it was negatively correlated with the commodities fund, which is PBDC, and that is at negative 0.13 for that. So this is pretty good in terms of correlations or lack thereof. It does seem to be something different that could go in a portfolio. The other interesting or useful thing to note here is its annualized return so far and its 20-month existence is about 6.42%, which is okay, it's not great, but it also does seem to have a lower volatility than these other funds, a daily standard deviation of 0.74, which compares it's about half of the volatility of the stock market or the Treasury Bond fund and lower than the gold and the commodities fund. So it has a relatively lower volatility and should therefore make the overall portfolio less volatile. And so we get to question 10 now, and question 10 is, should you invest? And I think the answer is maybe, but not yet. If this fund had a long track record or this asset class in a fund form had a long track record, you might be able to tell how well it would perform over time. Unfortunately, the data we have is only a little more than a year and a half, so these correlations might not hold up over time. We might find out that it's actually highly correlated with one or more of the parts of the portfolio. The other issue we have with these kinds of managed funds in an ETF form is that none of them have really been successful. in previous iterations of managed futures and an ETF, pretty much all of those efforts have failed. But this is something different in that they did not just use some kind of a program for their managed futures, but are actually, if you recall from our last episode, it's more complicated than that. They look at all of the other managed futures funds out there. and then reverse engineer essentially what a portfolio of assets would match essentially the average performance of the best managed futures funds out there. So it is a different process that is being used here. And I'll be interested to see whether over time it continues to have a stable performance with a low volatility, because if it does continue to do that, this could be a viable option as another portion of a risk parity style portfolio. Now, I don't know whether you would go as much as 19% in a fund like this, which is what is recommended in the Dragon portfolio, but you hopefully, if this is around in 10 years, that you'd be able to do some more reasonable analysis. If we see it go through a couple more different cycles, it would be interesting to see how it comes out. I do note for the period last year when we were in that big crisis, this fund actually held up quite well. It was down 1.84% in February of 2020, up 1.03% in March, up 1.84 in April. It went down 3.22 in May, but that was its worst month of the year and it came back in July at positive 4.29. So it does seem to have some real benefits in a crisis period, but I still think that the jury is out as to whether this will be able to perform consistently well over time. It certainly does not appear that it's going to be a big driver of returns in your portfolio. So it is best used as a diversifier or to reduce the risk in the portfolio. But if it could hold up with this lower volatility and still be getting you returns in that 6-7-8% range, then this would be a very viable piece to add to a risk parity style portfolio. And I think this is very interesting in that we are at a stage in financial developments, what I call the age of steel, where It is going to be possible for the do-it-yourself investor to invest in many more kinds of things through ETFs. And so what we're seeing is kind of an explosion of options that started about 10 years ago, but has really accelerated in the past five years or so. And hedge fund managers and other managers are getting a lot more creative about constructing these sorts of things. You do have to be really careful about them. We talked and I ranted about another bad idea back in November about something called a stacker that was not really diversifying, but it was just trying to get a free lunch. This one is different though. This one does seem to have attributes that are different or uncorrelated from the other assets in the portfolio while performing reasonably well and not having some kind of weird problem with it that it might blow up or something like that. So I'm going to be watching this more carefully. We may when we get to July on our first year anniversary of the sample portfolios we'll be probably making some adjustments in the Risk Parity Ultimate portfolio just because We want that one to kind of have everything in the kitchen sink in it and it's missing a few components now. So maybe we'll put a little piece of this in there just to see how it works out over time because I think that will be a reasonable experiment or approach. But I don't think I'll be taking this and putting it into any of my main investments right now. But now I see our signal is beginning to fade. if you have comments or questions or want to be a guest on the show, but there probably aren't going to be any anytime soon, but I'm happy to be a guest on somebody else's show. I'm too lazy to figure the rest of that out, but you can send your email to frank@riskparadioradio.com that's frank@riskparadioradio.com or you can go to the website www.riskparadioradio.com and fill out the contact and I will get your message that way. We will pick this up on the weekend with our weekly portfolio review and hopefully have another portfolio of the week to talk about. Thank you for tuning in. This is Frank Vasquez with Risk Parity Radio signing off.

Mostly Mary [18:26]

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.