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 [0:18]

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 [0:38]

Thank you, Mary, and welcome to episode 62 of Risk Parity Radio. Today on Risk Parity Radio, it is time for our weekly portfolio review of the six sample portfolios that you can find at www.riskparityradio.com. But before that, we also have our monthly rant to do, and we have a little bit from the mailbag, which I'll attend to first. From Tommy V, he writes, hi Frank, I came across this article outlining a belief that RPAR, that risk parity ETF, has strayed from its stated objective by overweighting long-term treasuries and underweighting tips. thought you'd find it worth a read. And this refers to an investment in a fund that we discussed in episodes 31 and 49 of the ticker symbol RPAR. I will put this link in the show notes. If you are interested in that fund, you may be interested in this article. So thank you Tommy V for that. All right, it's time for our rant. What are we going to rant about today? Well, first we got to have The music to warm us up here. Find it, I'm gonna push this button here. Then away we go. This month's rant is about the follies of FOMO investing. If your investing style or process for choosing investments is to get the fear of missing out and chase after what has done well recently on the theory that you can buy high and hope it goes higher. You probably have a problem with your investing process. This is a terrible process that nobody should be following yet people follow it all the time. The latest example of that we see is with the ARK funds. Now, there's nothing wrong with the ARK funds. They've done extremely well. They have a thesis. And if you had invested in them a couple of years ago, that would have made sense. But the reason that you see people investing in the ARK funds now is because they went up a whole lot last year. And so what we saw in February on February 8th and 13th, I believe, February 9th and 11th, excuse me. ARC funds receive $2 billion in inflows coming from FOMO investors, people who saw it went up and they have to get on that train. Well, in the last 12 days, those funds are down 20%. So imagine losing 20% of your investment in three weeks. It's not a good scene. It's not a good look. and it may continue. I don't know whether they're going up or down, but it's just bad. There's an excellent video on chasing hot fund managers that I'll link to in the show notes by Ben Felix, who does a good job going through academic research on various topics and history and showing what the problems are with that kind of a strategy. and the history of it, that it goes back all the way to the 60s. You can find hot fund managers that doubled the money in one or two years. And then after that, the whole, the wheels came off and the whole thing went to pot. And some of them were out of the business within a few more years or their funds simply collapsed. But I wanted to get beyond that and talk about What is the problem with that kind of process? And the problem relates to specifically two kinds of fallacies that are related. One is called the Texas Sharpshooter Fallacy and the other is called the clustering illusion. And if your reasoning is based on a fallacy, you can bet it's probably not going to work for very long or very well. Now what is the Texas Sharpshooter Fallacy? The Texas Sharpshooter Fallacy comes from a joke about a Texan who fires some gunshots into the side of a barn, then paints a target centered on the tightest cluster of hits and claims to be a sharpshooter. Basically you look at the results of something and then fixate on those results without looking at the rest of of the data available or the rest of what's going on. The clustering illusion is similar. The clustering illusion is the tendency to erroneously consider inevitable streaks or clusters arising in small samples from distributions to be non-random. This illusion is caused by the human tendency to under predict the amount of variability likely to appear in a small sample of random or semi-random data. And I will link to two Wikipedia articles about these two fallacies. Now, how do these apply to FOMO investing? Why are they the basis for FOMO investing or chasing hot funds or hot fund managers? I think you need to reverse the question and think about What would be a good process for choosing fund managers or funds? Well, you would have to go and look at what they are actually doing, what their track record is over not just a year or two, but decades, assuming they have decades of performance. And so you'll find very few people that perform well over decades, and they're well-known names like Warren Buffett and people like that. What happens though is this, instead of analyzing the managers or actually what they're doing, a FOMO investor gets fixated on a couple of data points, those data points being recent performance of said fund. So they look at, oh, well, this one did well, hit this target or was on this target. And so I will draw a circle around them, move them into a category of they must know something, they must be doing something right, instead of recognizing that extreme outperformance in investing is mostly going to be a random event, and that every year, there is going to be somebody out there with all of those managers and all of those funds that has some kind of outperformance because they were in the right place at the right time and so they were the lucky one that year. And so you're always going to be able to draw a circle around whomever was lucky in the past few years or the past year. And what that tells you, what that illustrates is just that that kind of investing is fallacious from its underpinnings. And it's not something you want to do. That's why we focus here on having baseline principles to apply. And our three principles are the macro allocation principle, the holy grail principle, and the simplicity principle. And I will link to the episode in the show notes where we began to discuss those. But if you are FOMO investing, you're really not adhering to any principles other than it looked good recently. And we know that something is always going to look good recently because with enough actors in the pool, if you will, there's always going to be a lucky one and there are always going to be some unlucky ones. But that doesn't tell you anything about what's going to happen in the future. But I think that's enough ranting for another month. And let's calm down and do our weekly portfolio review. of the six sample portfolios that you can find on the portfolios page at www.riskparadioradio.com. First we will go through a review of the basic indices and components of these portfolios for reference purposes. And so looking at the markets this past week, we saw the S&P 500 was up 0. 81%, The Nasdaq was down again, it was down 2.06%. Gold was down 2.01%. Long-term treasury bonds represented by the fund TLT were down 3.1%. REITs represented by REET, a global REIT fund, were flat. The big winner again this week was commodities. PBDC, the fund we're using, was up 5.7%. And PFF, the Preferred Shares Fund that we are using in some of our portfolios, was up 0.62%. And so what you can see from this is there was a lot of volatility in the markets as there has been recently, but what does that translate to in our risk parity style portfolios? What you're going to see is that in the base ones we use, they didn't move very much. the only ones that moved a bit more were the most conservative one because it's got so much, so many bonds in it that we keep as a reference portfolio around and then the two experimental portfolios. But let's get into this. The first one is that conservative portfolio, the all seasons portfolio that was designed by Tony Robbins. And he's a great motivator, but he's probably not the best. Portfolio Constructor. But anyway, this portfolio has only 30% stocks in it, and it's got 55% in treasury bonds divided into 40% in the long-term treasuries and 15% in intermediate-term treasuries. And then it's got two other alternatives, which are gold and commodities represented by GLDM and PBDC in this portfolio. and those comprise 7.5% each of this portfolio. It's lucky it's got that PDVC in it because that's what has been keeping it afloat these days. As we've said in the past, this portfolio is a little bit unbalanced and probably has too many bonds in it. But anyway, for the week, it was down 0.67%. It is up 1.66% since inception last July. So it's still bumping along there. still marginally positive, but is not doing great shakes, if you will. But let's move on to our core three portfolios that you might actually use if you're designing a risk parity style portfolio for your retirement or financial independent portfolio. And the first one we have here is the Golden Butterfly. Now this one is 40% in stocks divided into a total stock market fund, VTI, and a long, and I'm sorry, a small cap value fund, VIOV, and then it's got 40% in treasury bonds divided into a short-term treasury bond fund, SHY, and a long-term treasury bond fund, TLT, and then it's got 20% in gold, GLDM. With all that volatility, this was up 0.64% last week, so it barely moved and moved to the positive. It is up 14.31% since inception last July. And, you know, this is a good example of something that because it's got a lot of diversification, when things get volatile, it often does not move a whole lot and tends to advance slowly and sets in steadily most of the time. What's buoying this and what's interesting is the small cap value fund, VIOV, which is up nearly 70% since last July. I think what's kind of amusing about this is part of the reason this is up recently is because of these meme stocks. This portfolio with small cap value in it has got some GameStop in it, it's got some Bed Bath & Beyond, it's got a couple of those other things which have rocketed now to the some of the top holdings in the portfolio. It's really shows you how random some of this can be and that if you hold enough diverse type of assets, you're going to have better results because you're going to be more diversified. If you go back and look at what VIoV was up last week, it was up 4.7% just last week. So it is going gangbusters right now. Nobody could have predicted that, and nobody did predict that, that I am aware of, that you would see such outperformance by small cap value over the past six months or so. We know that small cap value over many decades has performed well, but it has not done nearly as well as large cap growth or even just plain old large cap funds for the past over a decade, and now it's catching up. and this just goes to show you, you never can predict when these things are going to take off. And if you just hold them and wait, you get the benefit of them. And we'll be rebalancing out of this, and we're taking monthly distributions out of it. And it's a great thing. And it's what's keeping that portfolio moving upward right now. That's the reason the Golden Butterfly is our best performer of these sample portfolios, is because it's got the largest component of small cap value in it. Alright, moving on to the Golden Ratio Portfolio, another one of our base portfolios. And this one is 42% in stocks. It's also got some small cap value in there at 14% of it, although it's grown to 22% of this portfolio right now, given it's up 70% since the last July. It's also got 26% in long-term Treasuries in it, which is now down to about 20% since those have not been performing well. And then it's got 16% in gold, which right now is 14% of the portfolio, 10% in REITs, which have been doing well recently and are now up to 11.15% of the portfolio. So you can see how these things have migrated since last July and the inception of it. And there will be some large rebalancing when we get to next July. It's an annual rebalancer. But anyway, this portfolio was up 0.1% last week. A small advance, a nice move for a nice risk parity style portfolio. It is up 10.59% since inception last July. And now moving to our most complicated portfolio, our risk parity ultimate. This also has some VIoV in it, which is starting at 12.5% of the portfolio. It is now up to 17.75% of the portfolio. since last July, but that's the way this works out. There's also some things in here that have not performed well, such as TMF, the leveraged treasury bond fund, is down 43% since last July. The VXX, the volatility fund that's in here is down 52% since last July, but those are very small components in this portfolio and do not affect it that much. What we did see, and just to review, this portfolio is about 40% in stock funds, 25% in long-term treasuries, then it's got 10% in gold, 10% in REITs, 12.5% in preferred shares, and 2.5% in that volatility fund. And it was up 0.03% last week with all the volatility going on. And so it is up 9.16% since inception last July. So it's really nice to see how these things are working out. They are taking all this volatility from the various components of it, you meld it all together in a diversified portfolio, and you get these kind of results, which are exactly the kind of results that we want to have in a drawdown portfolio. But now let's move to our two Experimental portfolios, and it's a good thing these are experiments because they are suffering these days. The Accelerated Permanent Portfolio, which has lost considerably in the past few weeks, this one is 25% UPRO, the leveraged stock fund, follows the S&P 500, 27.5% TMF, the leveraged bond fund, then it's got 22.5% in gold represented by GLDM and 25% in PFF, the preferred shares fund. It was down 1.6% last week, which is not as bad as the Nasdaq, but it was down. It is up 2.74% since inception last July. It will be interesting to see how this recovers, assuming it does recover in the next month because things can't go up or down forever and they turn around at some point. So we'll see. Now going to our last portfolio, our most volatile experimental portfolio, the aggressive 50/50. This one is 33% in UPRO, that leveraged stock fund, 33% in TMF, the leveraged bond fund, although those things have moved out to 41% stocks and 23% in bonds there. We're looking at a rebalancing probably coming up in mid-month if it continues that way. And then it's also got 17% in PFF, the preferred shares fund, and 17% in VGIT, an intermediate treasury bond fund, more as ballast. This one was down 1.12% for the week, and it is up 4.34% since inception last July. So these two experimental portfolios are feeling the volatility. and we will see how they work out over time, but that's why we're running them as experimental portfolios. But now I see our signal is beginning to fade and so it is time for me to say goodbye. If you have questions or comments, I welcome them. You can send them to the email frank@riskparityradio.com that's frank@riskparityradio.com or you can go to the website www.riskparadymradio.com and fill in the contact form and I will get your message that way. I want to thank you all for tuning in. We went over 7,000 downloads this past week with our 62 episodes, which is better than I expected when I started this podcast. A nice little hobby for me. But it's gratifying that I seem to have about 70 loyal listeners who tune in every week. So thank you again for tuning in. This is Frank Vasquez with Risk Parity Radio. Signing off.

Mostly Mary [20:57]

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.