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 [0:37]

Thank you, Mary, and welcome to episode 67 of Risk Parity Radio. Today on Risk Parity Radio, it is time for our weekly portfolio reviews of the six sample portfolios that you can find at www.riskparityradio.com on the portfolios page. But before we do that, we have some mail and some questions that we will address. So we'll just dip into the mailbag here. And the first one comes from Christopher B. And Christopher B. Writes, hi Frank, I have two questions about portfolio construction. I suspect that the answer to both questions are likely it doesn't really matter which way you do it, but I figured I'd ask anyway. Question 1：Was there a reason you selected the Vanguard S&P Small Cap 600 Value ETF to represent small cap value in the portfolios you constructed? Specifically, it appears that Vanguard offers not one but three different low-cost small cap value ETFs, each which appears to be built around a slightly different index. Was there something that attracted you to this fund other than the other two? Is one index better at tracking the world of small cap value companies than the others? And I'll go ahead and answer that. Yes, there are two different indexes that are commonly used. The one used by VIoV is called the S&P Small Cap 600 Value Index. That is also used by an older fund called IJS, which had been the leader in the area and may still be the leading fund in this area. Vanguard also has an older ETF called VBR and then some mutual funds, and those are based on the CRSP small cap index. Now, Vanguard was essentially forced by public outcry to add VIOV a few years ago because VIOV actually is smaller in the index it has. VBR is known to veer a little bit. into the mid cap range. And so we wanted to go with VIoV. And if you go over and do a correlation analysis, you'll see that VIoV is slightly less correlated with your large cap funds or your total market stock funds. So we use VIoV in the portfolios. Now they are not that much different. And one nice use that you could use the two of them for is if you are doing some tax loss harvesting and you wanted to replace one with the other in the portfolio for a while, that would work just fine for those kind of purposes. So they both are available there. All right, question two. In the experimental portfolios you use Proshares UltraPro S&P 500 UPRO and DRX Daily 20 Plus Year Treasury Bull 2x TMF as a way of incorporating leverage into the portfolios. In my previous research into risk parity, anytime somebody presented an aggressive or experimental portfolio, they created a portfolio that optimized risk versus reward and then applied leverage to the overall portfolio. Was there a specific reason why you chose to incorporate leverage inside of two of the funds rather than leveraging the portfolio as a whole? Specifically, I'd be interested to know if one method of leverage would have any benefits that would add any safety and stability when compared with the other method. Now, the method that he's talking about is typically the way hedge funds approach this. And we have looked at some ETFs, RPAR in one of our episodes that employs some leverage with futures and NTSX, which is another fund that employs leverage with futures. Other hedge funds, traditional hedge funds, will simply borrow money and add it to the portfolio. It's like a margin account. The reason that I went with the UPRO and the TMF is that I was trying to find a simplified way of adding leverage to a portfolio. Now, these two funds have only been around since 2009. That's one of the reasons these are experimental portfolios because they haven't been around long enough. to really rely upon them. But if they work, if they work, and the jury is still out on that, this would be a nice way for a do-it-yourself investor to be able to just take funds off the shelf, create a portfolio, and have that kind of leverage in them. Now, the reason I use the amount of leverage that I used is to make them approximately have the same volatility characteristics as the total stock market. And so if you look at the accelerated permanent portfolio that has about the same volatility characteristics as the S&P 500 and the aggressive 5050 has about the same volatility characteristics as the NASDAQ. And I will link to a little analysis of Portfolio Visualizer analysis in the show notes and you can see that. What's interesting about those two portfolios is they have actually low correlations with the overall stock market of only about positive 0.5 to 0.6. And so they often move differently than the stock market at different times. And you'll actually see a little bit of that this week when we go through the samples. Okay, let's go to the next questions. and they come from Jeff B. And Jeff B. Writes, Dear Frank, thank you so much for your excellent work with this podcast. You have the heart of a teacher and the gift of explaining these financial concepts. Please keep up the excellent work. Thank you for that. That was very kind of you. Okay, two questions or suggestions for future podcasts. One, you can't help but read about the weakness in bonds, government bonds, Ray Dalio was quoted last week saying, the economics of investing in bonds has become stupid. Can you talk about bonds, government bonds, their weaknesses, current, and if they should still be part of a risk parity portfolio? Are there other options, asset classes that might be viable substitutes for these bonds? I will talk a little bit about that here. These are always subject to debates, and you can find people that will insist that bonds are going negative and they've largely been right in their forecast for the past 20 years, namely a guy named Lacy Hunt. If you look up Hoisington, that's spelled H-O-I-S-I-N-G-T-O-N. It's a series of funds and they have these newsletters and they talk all about the theory that they are working with that the amount of debt being created actually tends to force interest rates lower over time. I don't know if that theory is right, but it seems to have been more right than many other theories that you've had over time. The goal of having these bonds in there is we know that they do well in deflationary environments, and we know that our other assets, the stocks and other things, do better in inflationary environments where there's growth. And so the reason we hold them is for their negative correlation. We do not try to predict what we're going to see next, 'cause I think it's really just as difficult or more difficult to predict the direction of interest rates and what's gonna happen with the economy next. as it is to protect the stock market. And the other question, is there a substitute for them? If there is, I'm not aware of it because at least you can't get it in an ETF form. Those long-term US Treasury bonds happen to be the most negatively correlated thing that's easily available to invest in in terms of the stock market. So they are there because we know that If the stock market falls in a deflationary crashed scenario like we saw in 2008 or 2000 or last year, that those bonds will go up in value substantially, often 25% to 30%. You can see also though when the stock market is performing well as it is now, that those bonds do not do that as well, which just tells you you need to put them in a in there in a proportion that makes sense. That if you have too many, like our most conservative portfolio probably has, then it really does affect the performance. If you have a more moderated amount, then it just moderates out the diversification of the portfolio. So while I appreciate what Ray Dalio has to say, and I do rely on his Holy Grail principle as one of our base principles. I do not go in for various predictions or try to predict what's going to happen next with interest rates. I'll also link to another chart that shows you what interest rates have done over the past 30 years. And the dominant thing that they do is just fluctuate up and down. They go one way over long periods of time, but over a period, a short period of a few years, they're dominantly just going up and down, which in our portfolios will end up just giving us rebalancing opportunities as they go the opposite way of the stock market. Okay, question number two from Jeff B. From time to time you talk about withdrawing from your model portfolios and do discuss a bit about How you are doing that for people who are near or at retirement age, the withdrawal question becomes a significant one. Could you please talk in some detail about this? How, when, how much, what percentage, when not to guardrails, PS, you have many more listeners than your podcast aggregator data suggests. Smiley face. Thank you, Jeff. Yes, I will address that more coming up probably in the next episode when we talk about Chuck H and what he's thinking about doing because he's about to retire in a few years and has questions about his portfolio. But the upshot of it is that you can generally remove or segregate that money annually, which is something like Paul Merriman does. They just take 5% out of their portfolio and use that for the year. The other way to do it is on a monthly basis, which if you are just getting going sometimes that's a little more comforting because you're really kind of looking at what your budget is for that month, your expenses, and then looking at where the money is going to come from from various sources. And particularly if you have a number of different potential sources, you might want to look at that on a monthly basis. We do have, you know, some of our portfolios are just set up with a cash buffer in them. Particularly the Golden Ratio portfolio has 6% in cash or money market is what it is. And so the money just comes out of that every month and we leave it alone and then it'll get rebalanced and the cash bucket will get refilled during the rebalancing and it'll go off again that way. and that might be the simplest way to do it. Most people in retirement are either going to have a cash bucket allocation or they're just going to keep their cash separately, but generally people keep 1 to 2 years in cash or cash equivalents around for that purpose. So that's a partial answer to your question and we'll talk about it more next week. All right, the last one comes from Mark B. And he writes, Subject：Uncle Frank, I made a Reddit forum for risk parity. And he says, In your latest episode you mentioned not wanting to let the community vibe slip away. I totally agree. I find Reddit to be a nice place to share ideas, knowing you're a big Facebook user. Any who just sharing, we'll see if it tracks a following best Mark. and he leaves a link to the forum that he has created over at Reddit. I will put that link in the show notes. I don't know if I'll be there or be there very much. I try to keep my diet of social media down to mostly just Facebook just for time purposes. The reason I prefer that is simply because my initial use and most of my personal use is just to share pictures of family and stuff with other family members. And now we will move to the portfolio reviews for the week of the sample portfolios on the website. And just looking at the metrics of the things that are components of the portfolios, we saw that the S&P was up 1.57% last week, the NASDAQ was down 0.58% last week, gold was down 0.74% last week, Treasury bonds were the big winner. TLT was up 1.25% last week. REITs were up 0.97% last week. That's represented by REET and the bonds are represented by TLT. And then commodities represented by the fund PDBC were down 0.23%. Preferred shares represented by the fund PFF were up 0.9%. And just another note here, the small cap value fund that we've been tracking and has been leading the way for a number of our portfolios, VIoV was actually down last week, 2. 09% was kind of the biggest loser and you'll see how that impacts some of these portfolios. All right, looking at our first portfolio, first sample portfolio, it's the All Seasons. This is the one that I mentioned is overly conservative and probably has too many bonds in it, and it is 30% stocks represented by VTI, 55% treasury bonds divided into 40% TLT and 15% VGIT, those are long term and intermediate term bonds respectively, and then the remaining 15% is divided into GLDM, a gold fund, and PBDC, a commodities fund. This one was up all of 0.65% last week, it is up 1.89% since inception it is benefiting by the at least recovery last week of of the bonds and is kind of just treading water if you will. And now we'll move to the Golden Butterfly. Our next three portfolios are kind of the sweet spot for these kinds of portfolios. And the Golden Butterfly is 40% in stocks divided into total stock market fund VTI and a small cap value fund VIoV, and then it's 40% in Treasury bonds divided equally into TLT long term and SHY, the very short term bonds, which are almost like cash. And then it's got 20% in gold in the fund GLDM. Now this one was down 0.37% last week. I think it's the only one that's down. It is still up 15.67% since inception last July. And the reason it was down was because of that VIoV, what it comes down to it. And our next portfolio is the Golden Ratio Portfolio. This one is 42% in stocks divided into a large cap growth fund, VUG, a small cap value fund, VIoV, and a low volatility fund, USMV. It's got 26% in bonds, long-term treasuries represented by TLT, 16% in gold, GLDM, 10% in REITs represented by the Global REIT Fund, R-EE-T, and then it's got 6% in a money market or cash. And this one was up 0.33% last week. So this is actually the kind of performance we hope to have out of these portfolios in most weeks. They don't move very much in advance upward most of the time. And so it is up 12.48% since inception last July, which is looking very good. And now we go to our risk parity ultimate portfolio, which is our most complicated. I won't go through all 12 funds, but it's approximately 40% in stock funds, 25% in Treasury bond funds, 10% in gold, 10% in REITs, 12.5% in a preferred shares fund PFF, and then it's got a volatility fund VXX that makes up that remaining 2.5%. And this one was up a little more. It was up 0. 74% last week on the strength of REITs and preferreds and some of those bonds, and it is up 11.1% since inception last July. And now we move to our two experimental portfolios, which actually kicked back in this past week. You can see how different they sometimes move from the stock market. But the first one is the Accelerated Permanent Portfolio, and this one is 27.5% in Long-term Treasuries in the leveraged fund, TMF, 25% in UPRO, the leveraged S&P 500 fund, 25% in preferred shares PFF, and 22.5% in gold represented by GLDM. And it was up 2.38% for the week and is now up 5.27% since inception. last July, it had been suffering on the foibles of its treasury bonds for the past few weeks, but it is now recovering. And now we are looking at the aggressive 5050 as our final portfolio, and this one is the most volatile. This one is 33% in that UPRO fund, the leveraged stock fund 33% in the leveraged bond fund TMF, and And then it's got 17% in intermediate term treasuries and 17% in PFF, the preferred shares fund. And it was up 3.07% last week. So a big jump for that also different than what you saw for what the stock markets were doing. And then it's up 7.57% since inception last July. So you can see from those, to funds that they are very volatile when compared to our core risk parity style portfolios. But now I see our signal is beginning to fade and it's time for me to say goodbye. I want to thank all of our new listeners and our old listeners according to BuzzSprout which calculates my viewership. It's over 14,000 downloads now which is greatly appreciated and much improved from just even a couple of weeks ago. Next time we will be addressing Chuck H's questions and following up from last time about what to do when you are approaching retirement in the context that he presents. If you are so inclined, if you could leave a review over at the Apple podcast or wherever you get this podcast. That would be greatly appreciated. Thank you for tuning in.

Mostly Mary [21:32]

This is Frank Vasquez with Risk Parity Radio. Signing off. 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 take into account your own personal circumstances.