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. Thank you, Mary, and welcome to episode 69 of Risk Parity Radio.

Mostly Uncle Frank [0:45]

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. It's also a monthly review, so we have distributions to talk about. Before we get to that, we are going to look in the mailbag, which is getting a little bit stuffed here. So let's go through a few of these and see what we have. First one comes from Carlos. Carlos writes, Hey Frank, I found your podcast last week and have been listening ever since. I've listened to 32 of your 67 podcast episodes. I will continue today when I get to work. The more I listen, the funnier you get. A few things that made me laugh out loud. Episode 20, something you said like, Not only will this portfolio help you sleep at night, but this portfolio will put you to sleep at night. Number two, you said something like, Since it's election week, I have a special treat for you. And that treat is I'm not going to talk about the election. Hahaha, we are going to stay in our lane. Number three, episode 29, where you started your monthly rant about financial mis-wisdom, which I really like. You introduced that theme music. Number four, episode 33, I only listened to the first few minutes, we'll continue today, but love the dirty hairy line, man's got to know his limitations. There were a couple of others that made me laugh, but those are what I could think off the top of my head right now. Keep up the good work. I'll continue listening to the rest of the podcast. Well, thank you, Carlos. It is actually one of my personal goals in life to laugh every day, and I give myself bonus points if I can make somebody else laugh every day. And to the extent I made you laugh today or any day, I'm very happy with that. All right, next one. Brad S. Writes, hello, great podcast, very informative. Question, You mentioned that the golden ratio was good for intermediate term investing. What if I plan to add to the fund every month instead of withdrawing? Would it fit the model to buy a set percentage of each fund on a monthly basis? Or would it be better to buy the lowest performing ETF to get the portfolio closer to the original allocation? Thanks. Well, thank you for that question, Brad. This is actually what our Eldest Son does with his golden ratio style portfolio. And from a perspective of performance, this is one of those things that falls into the category of uncertainty. So you cannot say for any given future period that it's a short term that one strategy is better than the other one. I think though that in terms of Portfolio management, it's easier if you buy the lowest performing ETF to get the portfolio back to its original structure. And the reason that is, it's simply this, because then you'll have to do less rebalancing and so you'll have fewer taxable events in the portfolio. I'm assuming you're doing this in a taxable account. And so, Adding to the lowest performer probably makes the most sense. I believe what our son does is just put it in cash because he saves randomly into that portfolio. It sits there in cash and then he looks at it every couple of months and allocates it into the appropriate ETFs to balance the thing out. But either way should work. All right. Next email, this one is from Brandon. Brandon has a long email, I will summarize. He says, hi Frank, I hope you answer the following questions about tax loss harvesting. I own some mutual funds and taxable accounts. I've never tried this. I'd like to understand the basics of selling shares after a drop and purchasing different or similar funds, but not identical to realize the loss for Income tax purposes, I've read that you can do up to 3,000 a year to offset ordinary income and federal taxes. And then he's got some questions. All right, before I get into the questions, let me just say that I'm not a tax expert. I have somebody else do my taxes for me, although I do help our adult children with their taxes, which are more simpler along these lines. So I am familiar with these provisions in the tax forms and can explain them to you, but you should go and verify them for yourself. I will tell you what I know and I believe it to be correct, but I will not promise that it is correct. So question one, is this a deduction or a tax credit and how do I reach max tax loss harvesting? I believe it's a credit, meaning I only need to sell $3,000 worth of losses. Okay, I would not characterize it as a credit because that just has a different definition. It is a deduction to your gross income. But yes, in terms of realizing the loss, if you bought something for $10,000, some shares for $10,000, and you sold them for $7,000, that is a $3,000 loss. and that will go on your Schedule D and then it gets moved to the first page of the tax form where you're listing your income and it comes off as a $3,000 deduction to your AGI or adjusted gross income and that's how it works. Question two, I've owned the same funds for many years. My early purchase prices were much cheaper when compared to today's prices. if we have a small dip in the market fund price, can I choose to sell only recent purchases of the fund to qualify for tax loss harvesting? Can I leave older purchases in my account that were bought cheaper than today's rates? Okay, you need to go to your brokerage to do this and you can, or you should be able to at your brokerage, it looks like you're using Vanguard, to designate specific lots when you make the sale. There is a different way to do that at each brokerage. You may have to call somebody to ask them how to do it. If you just put in the order, it's probably going to sell the oldest thing first. The reason it does that is because that is more likely to be a long-term capital gain for you, assuming you're selling it for a gain. But you should be able to go in and designate specific lots for the losses and sell those particular ones. It will be a slightly different procedure at every brokerage and you need to go find out what the procedure is there and then figure out which lots or purchases are generating the losses and make sure you are only selling those. So it has that little complication to it. Question three, how do my reinvested dividends factor into tax loss harvesting? Well, they really don't. This is the way dividends work. Reinvesting them means nothing, really. You get paid a dividend. It's taxable in the year it gets paid. Whether you reinvest it or spend it or do anything else with it, it is actually just your money. Reinvesting is just a convenience that brokerages offer so they don't pay you the money and then you actually have to go in and manually reinvest it. they say they will do it for you, but it's just like you got it in cash and then went in and manually bought. Every time you get a dividend that's reinvested, that is a new purchase that will go on the list of purchases of whatever it is, and so that is going to be one of your tax lots, and it might be very small when you have a mutual fund that has consistent reinvestment like this, you do end up with lots and lots of small purchases over time. Those are your tax lots and that's what we referred to in the previous question and that's how that will work. So the dividends really don't affect the tax loss harvesting themselves other than they represent repurchases that should be recorded by the brokerage. All right, question four, selling a mutual fund to purchase an ETF too similar. Should I sell VFIAx, VFWAX, VESMAX for a loss to purchase their ETF equivalents immediately or would I still need to wait 30 days? Can you give an example of a similar fund that could be purchased immediately after sale? This part I have never understood. I would not want to wait 30 days out of the market after a loss sale as again I would not want to miss likely market rebounds. And then he says, I'd be thrilled to hear any of these questions answered on an upcoming show. Keep up the great work. So that last question, the rules on this are a little bit murky from the IRS. Basically, you cannot purchase the exact same thing. Now, what is the exact same thing is not well defined. The safest course is to purchase something that is very similar and highly correlated. So for instance, if you had a total market fund, you could sell that and purchase an S&P 500 fund. If you have two funds that are say both small cap value, but one is based on one index and another is based on a different index, those are different as well. I'd be hesitant myself to purchase an ETF that is based on the same index as the mutual fund being sold. I can't tell you that's wrong, but I can't tell you it's right. So I would not do something like sell the VTSAX and purchase VTI. I would purchase VOO, which is the S&P 500 fund. The way to really tell whether two things are similar enough to make that kind of exchange and Hurt you very much or hurt you at all is to do a correlation analysis, go to portfolio visualizer, go to their asset correlation tab, put in the two funds you're thinking about and see what their correlation is. If it's 95% plus, then a lot of these things are 99% correlated. For instance, a total stock market fund and an S&P 500 fund are going to be 99% correlated and they have similar return profiles. that's what you're looking for. You just need to find something that is different but has a similar correlation and return profile and then you're pretty much going to be good to go with those sorts of things. So that's what I would do. Okay, our last email which segues into discussion of monthly performances, JB writes and gives me a URL to Dalio's criticism about Bonds and gives the link to what Ray Dalio wrote about bonds and why he doesn't like to invest in them right now. Thank you for that. I think what I will link to actually in the show notes is an excellent episode of the Money for the Rest of Us podcast by J. David Stein, and in that he discusses this very topic and he links to three different discussions of bonds, one from Ray Dalio, which is the critical don't own them, buy some Chinese bonds instead. Another one is from Hoisington Investment Management, which says that yes, you should continue to own them because they are likely to go up in value. And then one intermediate forecast from Capital Economics who believes that for the 10 year rate will go from about 1.7% where it is now up to about 2.5% in the next year or so. And his point is really the same point that I've made that you can find many different forecasts for any asset class bonds in particular seem to get a lot of attention because people seem to worry about them more than they worry about other things. And let's talk about why that is. But if you want to go and listen to that podcast, I think that really goes over the idea that for any asset class you can find very intelligent people that have different views of what's going to happen in the future. But that's not a basis for how we invest here. at Risk Parity Radio we are forming allocations for the long term that get rebalanced, recognizing that in any given time period we're probably going to have some asset classes that are doing poorly at the same time we have other asset classes doing well. And that is the meaning and purpose of diversification, which gets us to our higher safe withdrawal rates overall. So along those lines, let's talk about what's been going on with long-term treasuries in the past three months. In fact, what has happened is the worst calamity in over 40 years. The worst calamity. Listen to it. This is what happened. Fire and brimstone coming down from the skies. Rivers and seas boiling. 40 years of darkness, earthquakes, volcanoes, the dead rising from the Human sacrifice, dogs and cats living together, mass hysteria. Yes, dogs and cats are living together. The long-term treasuries had the worst quarter since 1980. They crashed. They're down 14%. What does that really mean though? What does that really mean for our risk parity style portfolios? Did our risk parity style portfolios blow up because they have these bonds in them? I just put up on the website, on the portfolios page, the monthlies for all the portfolios. And if you look, the one that has the most bonds in it was down 3%, about 3% for the quarter. The Golden Butterfly, which has 20% of these treasuries in them, It was actually up close to 3% for the quarter. The golden ratio was up about a half a percent for the quarter, and the Risk Parity Ultimate was up about a quarter to half a percent for the quarter, even holding all those horrible bonds that crashed. As you can see, if you really look at what's going on here, the reality doesn't match the stories that people tell. And the stories that people tell are that you can't own these things because they might have this problem and then the world is going to end in my portfolio if I have any of them. And that's just not the way it works. What this is an example of, if you're familiar with Danny Kahneman and Thinking Fast and Slow, and the model of system one and system two, there are two cognitive biases going on here, three of them actually. One is called the possibility effect where we think because something's possible it's likely. And here we had something that was possible that people think this is likely all of the time. In fact, it's happened once in 40 years. So how possible is that? And then there are two other cognitive biases at play here. One is called intuitive predictions and a related one is called ignoring algorithms. And this is when we tell ourselves stories about things that might happen, but we magnify in our minds the impact of that calamity or alleged calamity instead of actually looking at data, numbers, algorithms that tell us what's likely to be the result of that. And we've gone through the calamity and we see the result of it is not significant at all. And so if you thought it was going to be significant, you were wrong. And you need to go back and really think about what's going on here? Because the reality is that if you hold a proportion of an asset that declines substantially in value, it's probably not going to have a huge impact in your portfolio if it's only a part of your portfolio and if other things in your portfolio are performing well. And that's the reality of these risk parity style portfolios. And that is why we should look at these things collectively or together as a mixture of things and not analyze them apart from each other, one each apart from each other. Because if you do that, then you'll never get diversified. You'll be trying to predict which assets perform well. You'll pick all the ones that perform similarly based on your crystal ball, and then you'll end up with a highly correlated portfolio. that's going to do very poorly when the market crashes and they'll all go down together. And that's what we're trying to avoid. So we don't mind that we have assets in our portfolio that are going to perform poorly because we know that we have other ones that are going to perform well. And that's how diversification works. In the end, we should all listen to Sergeant Hulka.

Mostly Voices [19:19]

Lighten up, Francis. Lighten up, Francis. And pay attention to our data and our algorithms.

Mostly Uncle Frank [19:28]

And now let's go to that weekly portfolio review of the six sample portfolios that you can find at the portfolios page at www.riskparityradio.com and also discuss the monthly distributions that we made for April. The transactions have occurred, but the money has not been withdrawn from the account. and will be taken out next week. But just looking at the markets themselves, we saw the S&P 500 was up 1.13% last week. The Nasdaq was up 2.6%. Gold was down 0.12%. Long-term treasury bonds represented by the ETF TLT were up 0.47%. REITs represented by the Global REIT Fund REET were up 0.58%. Commodities represented by the fund, PBDC, were up 0.63% and preferred shares represented by the ETF PFF were up 0.31%. I should also note that the high flying small cap value fund, VIoV, or what had been high flying for several months now was down 0.05%. So it's not a significant factor. this time around. But going to these portfolios, our most conservative portfolio, this is the one with all the bonds in it, that allegedly imploded but actually did not, the All Seasons portfolio, it was up 1.48% for the week. It is up 2.72% since inception last July. It is basically holding approximately where you would want it to hold for withdrawing 4% a year, which is what we're doing from this portfolio. So that amounts to taking out $34 for April, and we're taking that from the stock fund VTI, which is the best performer there. This portfolio is 30% stocks, 55% treasury bonds, 7.5% commodities, and 7.5% gold. So for the life of this portfolio, we've taken out $308 at an annualized rate of 4% and $35 of that came out of gold, $33 came out of the intermediate term treasury bond fund, $137 have come out of VTI, $34 have come out of PDBC and $69 have come out of cash. Portfolio started with $10,200 and basically has about that much in it right now. Now going to our three core risk parity style portfolios. The first one is the Golden Butterfly. This is the one that is 20% total stock market fund, 20% small cap value, 20% long term treasuries, 20% short term treasuries and 20% gold. and it was up 0.1% for the week since the VIoV is not going great gangbusters anymore. This portfolio has slowed down, but it is still up 16.2% since inception last July. Our withdrawal is $46 for April, and that comes out of VIoV because that is still the best performing fund of the bunch. So since inception we've removed $399 $43 of that coming from gold, $268 from VIoV, and $88 from cash. And this one started with $10,000 and now it's up to $11,267 after all of the withdrawals. All these portfolios basically started out with $10,000 except for the first one. So the next portfolio in the bunch is the Golden Ratio. This is the one that is 42% stock funds, 26% long-term treasuries, 16% gold, and 10% REITs. And then it's got 6% in cash and a money market fund, which we withdraw from. And this one was up 1.15% for the week. It is up 13.37% since inception last July. We are removing $45 from the money market for April and have taken out $395 from this since inception last July. This one we are distributing at a 5% annualized rate. And we're doing the same thing for the Golden Butterfly, by the way. And now we are moving to the Risk Parity Ultimate. This is our most diversified portfolio. It has 40% in stock funds. 25% in long-term treasury bond funds, 10% in gold, 10% in REITs, 12.5% in a preferred shares fund, PFF, and then it's got 2.5% in a volatility fund, VXX. We are taking out distributions from that at an annualized rate of 6%. This one was up 1.64% for the week. It is catching back up with the other two there. It is up 12.05% since inception last July. We are taking $53 from it. We're taking it out of the small cap value that's in it to the IOV for April. And we will have taken out $470 total, including $52 from gold, $264 from that small cap value fund that has been flying high. $51 from the large cap growth fund that's in there and $103 from the cash that has accumulated through the payment of dividends and income from the bonds. It is interesting to look through the various funds that the Risk Parity Ultimate Portfolio holds because you can see funds in there that have performances going from minus 65% up to a positive 87% with a lot of them in double digits one way or the other. But you put them all together and it ends up having a nice smooth performance. I think this is the least volatile of the portfolios and that's why it's up 12.05% since inception and is really quite able to sustain that 6% withdrawal rate without any trouble. All right, now we're going to go to our two experimental portfolios and these are the ones that have the leveraged ETFs in them and they were very exciting this week. We had for the Accelerated Permanent Portfolio was up 3.93% for the week. This was the one that is 25% leveraged S&P 500 fund, UPRO 27.5% leveraged treasury bond fund, TMF, and it's got 25% in preferred shares and 22.5% in gold, GLDM. And as I mentioned, it was up 3.93% for the week. You can see how it's much more volatile than the standard risk parity style portfolios that we just discussed. It is up 6.78% since inception. And for the month of April, we are removing or distributing out of this at a rate of 8% annualized. We're taking 66% out of that leveraged stock fund, UPRO. We will have taken out $621 from this since inception. 71 from TMF 342 from UPRO, 65 from the PFF fund in $143. from cash. And then our last portfolio, the most volatile of these portfolios, it has 33% in that leveraged stock fund, UPRO, 33% in the leveraged bond fund, TMF. We call this the aggressive 50/50 portfolio, by the way. It's got 17% in preferred shares, PFF, and then 17% in A Vanguard Intermediate Treasury Bond Fund, VGIT. This one was up 4.95% for the week. The best performance it's had for a while. It's had some pretty bad weeks over the past several months, but it is up 9.43% since inception last July. We took $68 out of this for April. It came out of cash because we had some cash from a rebalancing that occurred in mid-March. and we have taken out $621 from this one since inception, $70 from TMF, $275 from the UPRO fund, $63 from PFF, the preferred shares fund, and $213 have come out of it in cash. There were two rebalancings in this, one in November and one in March due to all that movement in the bond fund. going down and the stock fund going up. That is the way this portfolio is really designed to work. And now I see our signal is beginning to fade. I wanted to thank our contributors, our emailers, for their questions. If you have questions or comments, you can send them to me by email to frank@riskparityradio.com that's frank@riskparityradio.com or you can go to the website www.riskparadioradio.com and fill out the contact form and I'll get your message that way. We will continue this week with a suggestion from a listener that we analyze the ETF iVOL, which is an interesting fund that involves tips and some options. And so we will be doing that this week and we'll see whether we get through the whole thing or just half of it. But it should be interesting. If you want to help out the show, please go leave a five-star review wherever you pick up this podcast. We went over 15,000 downloads this past week according to My provider and we have about 400 regular listeners now, which is very gratifying. Thank you for that. Thank you for tuning in. This is Frank Vasquez with Risk Parity Radio. Signing off.

Mostly Mary [30:20]

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.