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 [0:37]

Thank you, Mary, and welcome to episode 71 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 get to that, the mailbag is full and we have some interesting ones today. And so we're going to go through five emails. And the first one is from Anita S. And she writes, Dear Frank, thank you for your show. I just discovered it and am becoming a financial nerd more and more each day. The show will do that to you. Real wrath of God type stuff. I am a 57 year old female thinking of early retirement with a 50/50 portfolio and some of the 50 is not invested but held as a safe cash bucket. The rest is well diversified in various funds and various accounts. Our company financial advisor for our 401 plan talked to me specifically about Cappable contingent interest notes from various banks in which you can make a certain interest rate for a fixed period of time or lose your entire investment if certain indices in the market fall below certain thresholds. They range from two to five years and have thresholds between 30 to 50% in which those indices can't fall below. Do you have any opinions on whether the risk is worth the reward on these. I'm not a huge risk taker. These are not FDIC insured. Seems like a risk I do not need to take with my cash. But then again, some of the returns could yield 8.5% as long as the market stays strong. Thoughts? Thank you for your thoughtful answers and your intricate insights. Well, Anita, I think the answer is no thank you on that sort of thing. this falls into a category of investments which includes indexed annuities and what we call structured products, things that are not the stock market, but are somehow based on the performance of the stock market. And they have ceilings and floors and various rules about what the payoff is going to be. Essentially what they are is a form of gambling with a contract with the other side of it. And so depending on what happens in the world, the contract decides whether you get the payoff, what it is, or the company gets the payoff. And so that's the way you need to look at these things. And I tend to follow Paul Merriman's advice on these and what he has said, and I wish I could remember which podcast he said it in. It's just these are things that you need to stay away from, something that is heavily promoted, has commissions is out there because it makes a lot of money for who's ever promoting it. And if it's making a lot of money for who's ever promoting it, then you're getting the short end of the deal when it all comes down to it because they have calculated for themselves how much profits they could make over this over time. So getting involved in something like this is Generally a bad idea. This seems particularly risky because you're taking 100% risk for a limited reward, essentially. So if the index goes down too much, you lose all your money, but your maximum reward is 8.5%. That's not a good trade-off. The other problem with this and why you want to stay away in particular from structured products based on the stock market is you already have exposure to the stock market in your funds. And so, for instance, if the stock market were to decline, you would not only lose money in the stock market, you would also lose all your money with these sorts of things. So they're correlated. And if they're correlated, that means they are not diversified and they are actually increasing your risk profile. So anything that you would add into your portfolio, that is highly correlated with the performance of the stock market increases your overall risk as a general matter. If it were not correlated with the stock market, if it were something else, then at least it would have that going for it. But this really does not have anything going for it that I can see, and it's something I would definitely stay away from, particularly if you are a conservative investor. The way to really deal with or think about your portfolio and the stock market is that you need to decide how much risk you're going to put in the stock market, how much exposure you're going to have. And the way to adjust that is simply by adding a larger stock allocation or reducing your stock allocation or if your really aggressive, you would take leverage and add that and buy more stock funds with it. But you can do that through index funds. And so you want to keep the cost of the investment as low as possible and make your adjustments to your portfolio to match your risk profile. I detect maybe there's something behind this is you're wondering where to put the cash. The first answer, when you get to retirement, you're probably going to want 1 to 2 years of cash, but you probably don't want more of that. One year is generally what people will do. And I'll give you Paul Merriman as an example. Every year they take 5% of their 50/50 portfolio, which is stocks on one side and treasury bonds on the other side. Put that in a cash bucket. Essentially, he uses short-term bonds for that. And then they just live on that for the year. And that's how they manage their portfolio. And that's a perfect example of how somebody uses a cash bucket to manage a portfolio. I don't think you need years and years and years of cash, though. And if you have a portfolio like that, it's just going to be what's called a cash drag. and you would be better off thinking about other things to put that in. And those things might include things like preferred shares, which pay a nice qualified dividend, or some REITs or some bonds. Those are lower risk profile items or investments that pay some income and are reasonably well diversified from the larger component that's driving your portfolio, which is the stock market component. All right, email number two. This one is from Ethan A. Ethan A writes, Hey Frank, just spent a seven hour car ride on the first 15 episodes of your podcast. And I can say I've learned more in that seven hours than I have in the last few months probably. You do a great job of consistently and thoroughly explaining these concepts. I realize you focus on the risk parity style of investment for the retiree with the goal of being as high of a safe withdrawal rate as possible and minimal volatility with the underlying idea being having a portfolio that does better than our traditional 60/40 portfolio for the retiree. My only question is how one in the wealth accumulation phase ought to utilize this idea. My original thought is that we should still ignore volatility and focus on equities and other high growth assets during accumulation and then pivot towards a risk parity style portfolio at or near retirement. I did hear that some of these portfolios could be useful for a shorter period investment goal as well, but I thought I'd reach out and see if you have more to add on this perspective. and see if I've not entirely missed the mark on your underlying message so far. Thanks for all your work, Ethan. Now, Ethan, you got the message that the main driver and what you should be doing in your accumulation phase is taking as much exposure to the stock market as you can stomach. And it can be a hundred percent when you're young and you have decades to go. And the assets that you're putting in there are not to be used for anything anytime soon. But the use that you might make, and this is what my son and his girlfriend do with a risk parity style portfolio. You can use this kind of portfolio, really any kind of retirement style portfolio for your intermediate term goals. So if you are trying to save for a down payment for a house and you think it's going to take you know, four to 10 years, you can use a risk parity style portfolio to do that kind of saving investing. And the reason it's appropriate is that when you project these and run the data, you see that these kinds of portfolios generally only have drawdowns of a maximum of about 20%. But more importantly, they only stay underwater for three years max. And that's over the past 50 years of data that we have for these things. And so that makes it appropriate for your intermediate term goals. I think this always comes up when people are thinking, well, I've got short term, I have cash, long term, I have this stock portfolio, and then they get caught in this false dilemma. of that those are the only two things. Either I can put my money in cash or put it all in stocks. And that is a cognitive bias we have. Daniel Kahneman refers to it as WYSIATI, which stands for, it's an acronym, what you see is all there is. And if you're given a menu and all you see on it is stocks and cash, and those are your only two choices, and you get fixated on that, you forget that actually there are also always two other categories which are some of the above and none of the above. And so you should think outside that box of just putting things in cash and just putting things in stocks when you're talking or thinking about these intermediate term goals. What's nice about it, it will give you if you have a small portfolio devoted to this, a chance is kind of test drive what a retirement portfolio is going to be like for you in the end. And one thing about these portfolios is you see things going up and down. And so there is a little bit more excitement to them, I would say, than if you look at the individual components, although they balance out to have a smooth performance overall. So one of the things, for example, that my son and his girlfriend put in their portfolio, just a small portion of it, they put in the REIT Warehouser, which is ticker symbol YWY. And this thing is up something like 116% since last year. And so they are rebalancing out of it as it grows. And it's just one of those things that you can't predict. that because all Warehouser does is grow timber and sell it to places like Home Depot. We have a run on timber and it's worth a lot of money these days. And so you see these sorts of things can go on in these kinds of portfolios and then will give you some comfort if you're not putting too much into this that you can manage a retirement style portfolio when you get there, and also you can use this for those intermediate term goals. Also, if you're interested more in REITs, you should check out episodes 19 and 21. And I should say that the portfolio style that my son and his girlfriend are using is a variation of the Golden Ratio portfolio that you'll find at the Sample Portfolios page. All right, next email from Julie T. Julie T writes, Just wanted to say thanks for putting out such a useful and engaging podcast. Like many of your subscribers, I suspect the wild upside in stocks of the past year put early retirement on my doorstep rather than three to four years away. What I'm learning from you is helping me make a plan and to shape the conversations I'm having with the the neutral flat fee financial advisor I look to to convince me that what I think I see retirement in my mid 50s isn't a mirage. Well thank you for that Julie, that's very nice to hear and I'm glad you're able to make use of this information. A lot of this is therapeutic for people my age and what I'm talking about is when men go past their 50s and are on the downsides of their careers or have retired suddenly they think or need to create things to pass information on to their children and others. And if you listen to people like JL Collins or Doug Nordman, you get a sense that this becomes important not for a financial goal necessarily, But just important for being able to be relevant and to create things in the world and have purpose. And so when I get emails like this, it makes me feel really good. And thank you. All right, email number four. This is from Jeff VK. Jeff writes, Frank, I've been binge listening to your podcast for the past two plus weeks now. since hearing about it on the Choose FI podcast. I am on episode 38 now. Fun fact, I can actually get away with listening to it at 2x speed. I've done that a few times. I am interested in understanding exactly how you decided on using the ETF VIoV for your small cap fund compared to VIoO, VB and VBR. These are all small cap ETFs from Vanguard, by the way. What about its differences make it better when paired with VTI and the other risk parity asset classes? Love the podcast and I'm a huge fan. Okay, well, truth be told, these funds aren't all that different. I mean, they're all small cap funds, but they are based on different indexes. VIOV and VBR are both small cap value funds, but they're based on different indexes and VIOV happens to be smaller cap companies, just slightly smaller, just because they're based on slightly different indexes or they're not that much different. The other two, VIoO and VB are balanced funds. They include all the small cap universe, so they include some growth stocks in them. When you run the correlation analysis, and I will link to this in the show notes, you will see that VIoO happens to be the least correlated with your large cap growth funds like VUG and your total market funds like VTI, which are heavily weighted towards large cap growth stocks anyway. And so having that balance, keeping them as far away as possible just gives you more diversification. I think the other thing that is noteworthy about Small cap value funds in particular is that if you are concerned about inflation, and I'm really not, I'm concerned of just having a portfolio that will perform well in an inflationary environment or a deflationary environment, whichever one comes along, and I don't need to predict that. But small cap value funds have a history of performing well in inflationary environments. So if you go back to the 1970s, you will see that there was a recession in '73-'74 in which all stocks declined. After that, starting in 1975, the large cap stocks and the large cap growth stocks still had lots of trouble through the rest of the 1970s. But if you had an investment in small cap value stocks, they went up every year from 1975 until 1987. and so covered that entire inflationary period. So having those in there, if you are thinking about I need something to cover inflation, that is part of why that is in there. And it's also then reflected in the lower correlation with the other items in the portfolio, some of which perform well or better in deflationary or lower interest environments. And our last email is from Ron. And Ron writes, hi Frank, I've been enjoying your podcast and have a question. I'm very intrigued by the two experimental portfolios. Two questions. First, I know you said you only recommend a small actual investment, but I'd be willing to do more. I'm thinking upwards of 25% of my portfolio. and wondering if anyone has actually invested into one of the experimentals at that level to your knowledge. My second question is based on your podcast on Bitcoin. I've been tinkering on portfoliovisualizer.com with a modification to the aggressive 50/50 using Bitcoin GBTC, that's an ETF, as a proxy. I'm thinking about a split of 30/30, 15/15, 5 and that would be 30% UPRO, the leveraged stock fund, 30% TMF, the leveraged bond fund, and then I'm assuming the 15 and 15 are the preferred shares and the intermediate treasury bond fund, and then the five being the Bitcoin. And he says, Where five is the Bitcoin as a modification to the 33-33-17-17 and was hoping to get your thoughts on that. I'm generally a high risk tolerance investor and I'm close to a retirement as I approach 50. Well thank you Ron for that very interesting question and ideas. I'm glad that the work I've done here is sparking people to think in different ways. Just for reference, if anybody's looking for the Bitcoin episode, it is number 29. and in that we analyzed it and concluded that it is something you could put in your portfolio if you wanted to, but do not have to. But you need to be careful about it, particularly right now, because it is a speculative investment and it is very volatile, about 10 times more volatile than, say, gold or the stock market.

Mostly Voices [20:31]

You could ask yourself a question.

Mostly Uncle Frank [20:43]

Do I feel lucky? Do I feel lucky? And so you would want to keep that percentage relatively small, otherwise it will dominate the performance of the portfolio no matter what it does. As for use of the experimental portfolios, no, I'm not aware of anyone in particular making use or great use of the experimental portfolios. They are called experimental because those leverage funds in them have only been around since about 2009. So I don't know how they will ultimately perform. Man's got to know his limitations. But over the course of the past 12 years, they have outperformed the stock market with similar risk profiles, and that's what they are designed to do. to do. Now, if you're looking for a lot more information about using leveraged funds in these kinds of portfolios, there is a website called Optimized Portfolios, and I'll link to that in the show notes where the author of that website has taken traditional portfolios of many shapes and sizes and then turned them into leveraged or experimental portfolios using things like UPRO and TMF in them. I think that's the best resource for lots and lots of different kinds of ideas in terms of Bitcoin and the portfolio you propose. I'd be interested to see how that works out. You know, it could work out really well. I think that there is one danger here that you need to be aware of, and this is true whether we're talking about Bitcoin or anything that in its worst case scenario could go to zero. so a single stock, your brother-in-law's restaurant business, Bitcoin, all of those things have the potential to go to zero in the worst case scenario. Let's think about that worst case scenario. You have 5% in Bitcoin. It goes down 80% in one year. You rebalance into it to get it back up to 5%. Then it goes down 80% the next year. And then you keep rebalancing and so you're constantly feeding that as kind of a money pit or hole where your money keeps going in and it keeps going down. And so you could not only lose 5%, you could lose multiples of that as you rebalance into it over and over again and it never recovers. The way to get around that is to change your rebalancing rule for something like that and basically just put a limit as to how much you're willing to lose on it. Say you have a portfolio that's $100,000 and $5,000 of it is Bitcoin. You might say, okay, I'm going to put a limit on this that I'm only going to put up to $10,000 in this total through rebalancing. And so that is your limit. So you modify your rebalancing that if you go up to that 10,000, you never put any more of that in there and you just wait for it to recover. So I would employ some kind of rule like that for this kind of investment, whether it's Bitcoin or a single stock or anything that could potentially go to zero. Okay, thank you for those most excellent emails. And now it is time for the weekly portfolio review of the six portfolios at www.riskparadioradio.com on the portfolios page. Just going through what the markets did this week, most things were up. So we saw the S&P 500 up 2.71%. The Nasdaq was up 3.12%. Gold was up 0.8%. Treasury bonds represented by the ETF TLT were up 0.13%. REITs represented by the Global REIT Fund REET were up 0.73%. Commodities were down. Commodities represented by PBDC were down 0.51% and the preferred shares fund PFF was up 0.73%, which was a large move for that kind of fund. It's interesting to note also that small cap value, which has been doing so well for the past six months, it's actually down last week. VIoV, the ETF we commonly use, was down 0.39%. And this is just an example that these different assets and different categories of assets move around a lot and in very unpredictable ways. And so we hope to smooth out the performance of our portfolios by holding allocations to all of them or many of them. And so going to our portfolios, the first one is the All Seasons portfolio. This is the reference portfolio that is hyper conservative. It is 55% in bonds, in treasury bonds specifically, which 40% of that is in TLT, long-term treasury bonds, and 15% is in VGIT, the intermediate treasury bond fund from Vanguard. Then it's got 30% in VTI, the total market stock fund from Vanguard. and then the remaining 15% is divided into gold, GLDM, and commodities, PTBC 75.5% each. This had a big week for it. It was up 0.94% and when it moves more than half a percent, that's a big move for it. It is up 3. 66% since inception last July. You can see how conservative it is, but it is holding its ground and able to withstand the 4% withdrawal rate we are applying to it. Now moving to our more core risk parity style portfolios that you might consider actually using in one form or another. The first one is the Golden Butterfly and that one is 20% in VTI, the Total Market Index Fund, 20% in VIoV, the Small Cap Value Fund, 20% in long-term treasuries, TLT, 20% in short-term treasuries, SHY, which are a lot like cash, and then 20% in gold, GLDM, for that. This one has slowed down. It's still our best performer since inception. It is up 0.59% for the week, largely due to the drag coming from the small cap value now. It is up 16. 87% since inception last July, so is outperforming what we would have expected it to perform and is certainly able to withstand the 5% annualized withdrawal rate that we are applying to it. And now we get to our next portfolio, the Golden Ratio. This is 42% stocks divided into a small cap value fund, a large cap growth fund, and a low volatility fund in stocks. And then we have 26% in long-term treasuries, that's TLT, 16% in gold, that's GLDM, 10% in global REITs, our EET, and then we have 6% in cash, money market fund. And this one was up 1.01% for the week. It is up 14.48% since inception in July. is beginning to gain ground on the golden butterfly. It's interesting to see these little horse races going on between these portfolios. And now we'll move to our next portfolio, the Risk Parity Ultimate. This is our most complex portfolio. It has 12 funds in it. It is roughly 40% in stock funds, 25% in long-term treasury bond funds, 10% in REITs, 12.5% in preferred shares, 10% in gold. and then it's got 2. 5% in a volatility index fund, VXX, which is by far the worst performer in this portfolio. This portfolio has performances since inception ranging from -67.94% for that VXX fund to positive 102.85% for the leveraged stock fund that is also in it. It was up 1.33% for the week and so is trying to catch the golden butterfly as well. It is up 13.48% since inception last July. And now we move to those two experimental portfolios. The first one is the Accelerated Permanent Portfolio. This one is 27.5% Leveraged Bond Fund, TMF, 25% UPRO, the Leveraged Stock Fund, 25% PFF, and 22.5% gold. And it is a one of the more volatile portfolios. It has been recovering the past couple weeks. It is up 2.97% for the week and is up 9. 79% since inception last July. And you can see how much more volatile these experimental portfolios are with that leverage in it. And we move to the aggressive 50/50, our last portfolio and most volatile It is comprised of 33% leveraged stock fund, UPRO, 33% leveraged bond fund, TMF, 17% PFF, the preferred shares fund, and 17% in a intermediate term treasury bond fund. And it is up 3.05% for the week, the big winner last week, and it is up 12.55% since inception last July. And it'll be interesting to see if these things keep advancing weekly the way they have been recently because they've gone from almost flat to 10% and 12% respectively. They are very volatile and also not that correlated with the overall stock market, so you'll see them move in different directions at different times. They only have a correlation coefficient of about 0.55 with the overall stock market. But now I see our signal is beginning to fade. Thank you for all the wonderful questions that we got to go through today. If you have questions or comments, you can email them to me at frank@riskparityradio.com that's frank@riskparityradio.com or you can go to the website www.riskparityradio.com and send a message to me through the contact form there and I'll get your message. that way. If you haven't done so already, I'd appreciate it if you went to iTunes or wherever you get this podcast and left a five-star review to spread the word. I am also going to be appearing on a Choose FI Facebook Live on Tuesday, April 13th. If you're interested in that, go to their Choose FI Facebook page and there are links and instructions for that there. Thank you once again for tuning in.

Mostly Mary [31:50]

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 into account your own personal circumstances.