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 73 of Risk Parity Radio. Today on Risk Parity Radio, it is time for our weekly portfolio reviews. But before that, we've been getting a lot of emails, so we'll just take a look at those.

Mostly Voices [0:56]

Here I go once again with the email. Here we go once again.

Mostly Uncle Frank [0:59]

First one is from Jason D. His message is, I really enjoy your show. Keep up the good work. Well, thank you, Jason D. Although I have to say there was an episode of Not so Good Work this week, and that occurred on the Choose FI podcast that I was actually on this past week that you can listen to Friday's episode. It's also on YouTube. Anyway, during that episode, I was asked a question by Claudia S about what I thought about a bond tent. And what I heard in my head was Bond Ladder. GO! And so I answered a different question than the one that she asked. GO! Hello? Hello, anybody home? Think McFly, think! But I guess we all make some mistakes. Anyway, I thought I would correct that now and answer Claudia S's question, which was what did I think about bond tents for retirement style portfolios? And I will link to an article about bond tents by Michael Kitces that I think is pretty good and talks about what they are. The idea of a bond tent is you have a retirement portfolio you want to be in. Let's just say it's a 60/40 portfolio for the purpose of this discussion. But you are concerned about that portfolio, particularly in the first years of your retirement. So in order to deal with that concern, you make the portfolio more conservative to start with. And so often the example is you start with this, what is essentially a 40-60 portfolio, 40% stocks, 60% bonds. You spend down the bonds then the first five years or so, and then eventually it morphs back into a 60-40 portfolio, which you then continue on with throughout your retirement. Now, this works as a method, but I put it into the category with all of these ideas of taking a portfolio that you think you want to have in retirement and then adding some kind of a cash buffer or bond buffer or something on the front end of it. And where this leads is kind of to a philosophical question about retirement style portfolios, which is maybe if you are uncomfortable with that portfolio you've constructed for your retirement, maybe that's just the wrong portfolio to begin with. Maybe you should be in a 40/60 portfolio or a 50/50 portfolio or something more conservative than that thing that you are really worried about. So I look at these bond tents and cash buffers and all those sort of things as like crutches or band-aids on a problem that probably needs to be fixed up front. And the way you would fix that is by constructing a portfolio that is more conservative or more diversified or something along those lines. And that's why we have what we do here, these risk parity style portfolios. Because instead of having projected drawdowns that last 10 years, like a 60/40 portfolio might have, they have projected drawdowns that last three or four years. And so they are just much better. for that purpose. And so I think that this is better dealt with by designing a better portfolio to start with. Because if you are not confident about the retirement portfolio you are going to be using, then you probably just need a different portfolio. And all a bond tent, cash buffer, whatever does is take your portfolio you're not confident about and turn it into a more conservative portfolio. That's the way I would look at this. You're starting with a more conservative portfolio than the one you actually want. And that leads to another question that I don't think people ask enough, which is what is the most conservative portfolio that I could hold in retirement that would still allow me to meet my goals? Because that probably is a better starting point than the starting point where people actually start. Where people usually start is, okay, I have my accumulation portfolio. How do I need to tweak this to turn it into a retirement portfolio? As opposed to thinking it more of a ground up process or thought process, starting with what is the most conservative thing that I could hold that would still allow me to meet my financial goals, not beat other people, not beat some index, but just meet my personal goals. And if you start with that and then maybe add a little more risk if you're comfortable with it, that is probably the way to go. Now let's just think about this though in terms of looking at a couple of our sample portfolios and what they look like. And if you look at something like the Golden Butterfly Portfolio, one of our sample portfolios, that has 20% in short-term treasury bonds in it. So it's already got effectively a built-in bond buffer for that one. If you look at the Golden Ratio Portfolio, 6% of that is in cash. So it's already got a built-in buffer. And if you have a built-in buffer and your portfolio is likely to generate the kind of returns that we've been generating and have been possible for these portfolios in the past, and are likely in the future, then you don't need to be adding these band-aids on the front of your retirement. You can simply hold a better portfolio to begin with. So to sum up where I come out, what do I think of bond tents? I think a bond tent can work in a specific situation, but I also think it's a symptom that you did not have a very good process in constructing your retirement style portfolio, because you wouldn't need a bond tent if you had a portfolio that you had confidence in. All right, next question. This one is from Jane M. And Jane M writes, hi Frank, I just discovered your podcast by listening to Choose FI today. This is the exact podcast I need. I am confused as to what funds go where and hoping to learn by listening. My son is 18 years old and I started a Roth IRA for him when he was 13. He works very hard, so I match his earnings and handle the investing for him. until I can understand if I'm doing it right. Once I have a simple low cost automatic investment plan, I will teach him and hope that he continues as the years march on. He has approximately 40k in it. If this were you at age 18, what aggressive index or stocks would you invest in? Thank you. Looking forward to listening while walking my dog, Jane. Well, thank you Jane. and kudos to what you've been doing. I think this is often an overlooked method of transferring wealth from one generation to the next. And what I call this is the family match that if you have a child with earned income, you match that up to what you're capable of matching, and that money then goes into a Roth IRA. And then they will have that money, that wealth has been transferred, but it's in a safe place where they're unlikely to squander it, even though they can technically get access, at least to the principle that it was deposited there. And when you have compounding, an extra, you get an extra doubling essentially for that money that gets put in there for teens and younger people. Now to get to the question as to what this should be invested in, I do this with our children, we do this with our children, and they typically just put it all in a basic total market index fund. So one of them's got it at Schwab and another one's got it at Fidelity and that's the main thing of what they would do and that's fine. you don't need to be any more complicated than that. If you did want to be more complicated than that, you might try putting it in a large cap growth fund like VUG, that's a Vanguard growth fund, and part of it in a small cap value fund like VIOV, and that would also be a very simple way of allocating this. But I also think this is a chance for a learning experience and your son is old enough now to be given some reigns over this money. So I would take most of it, say 35,000 out of the 40,000 and invest it in a simple fund or funds like I just suggested. But then you might tell him that that remaining 5,000 he can invest any way he wants to. The reason I say any way he wants to is it's better to learn this way and make mistakes with small amounts of money than it is to not learn when you're young and then have a large amount of money later that you might make bigger mistakes with. And your son may or may not be interested in doing this. Our children have various interests in investing and some of them just say, I'll just leave it in these index funds and I don't want to look at or think about it. And that's fine. I have another son that wanted to buy a fund that invested in solar energy and he bought some Hertz stock and he did some other strange things with some of the money. And some of it worked and some of it didn't and that was fine because it gives a chance for learning. Now, in order to make this possible, I think you probably need to move this account to Fidelity right now. And the reason I say Fidelity is this, Fidelity is one of the big three or big four discount brokerages with no fee trading and full service and reliability and all that sort of thing along with Vanguard and Schwab and TD. I think they're getting bought by somebody. But what Fidelity offers that the other ones don't right now is fractional share trading. So you can buy, say, $20 worth of Amazon stock as opposed to trying to buy one share of Amazon stock. And if he is dealing with a small amount, like $5,000, then that would be a way for him to be able to experiment a little buying small bits and pieces of things to his heart's content. And that is the reason I use Fidelity for the sample portfolios that we have here at Risk Parity Radio, because these are portfolios of $10,000 each. And so we are, when we are taking our distributions, we are selling fractional shares, 50 or 30 or 60 dollars at a time. And you can only do that in a brokerage where it has that capability, but also has no fee trading because obviously the fees would just eat up anything that you would have had before. This is also one of the reasons I say we're moving into the age of steel in terms of do-it-yourself investing is concerned because we did not have these Opportunities in the past for taking small amounts of money and really doing some serious investing work with them because it was just not cost effective. The commissions ate up everything. But now we can do that. So I would encourage you to sit down with him, have the talk. The talk is about investing, not about other topics.

Mostly Voices [13:24]

Snap, snap, green, green, wink, wink, nudge, nudge, say no more.

Mostly Uncle Frank [13:27]

And come up with some plan that allows you to keep most of that in a basic, growing pool of assets that he can access later that form a base for the fund, whether that's in a total market index fund or in a couple other funds like I suggested, and then have a little part of it that is the experimental part that he is allowed to experiment with. And that will give him some confidence about being able to handle investments, knowing how to handle accounts, how to buy and sell stocks and funds. Because everybody these days should know how to do that. That should be basic financial knowledge for just about everybody. But the only way you're going to get it, it's like riding the bike, you got to get on the bike and ride it. Because reading about it is not going to make you ride the bike. All right, next question comes from Richard S. Frank, just started listening to your podcast and listened to episode 72, which was great. One thing I think you advocate slash use is long-term treasuries in a portfolio. The two sites that I frequently use for back testing are portfolio charts, and Portfolio Visualizer, which are both great, but they have a limited historical data set starting around 1970 to 1980, which I find particularly concerning when it comes to long-term bond returns, as rates have generally been dropping since 1980. Do you have any thoughts on this or any other back testing tools with a deeper data set, something that encompassed the period from 1940 to 1980 would be great. Of course, I realize rates could continue to stay low for a long time, but I cannot imagine they will continue to fall as they have in the recent past. They would have to go deeply negative. So I wonder how this affects portfolio construction going forward. Thanks, Richard. Well, thank you for that question, Richard. First, I should direct you back to episodes 67 and 69 where we talked a lot more about long-term treasury bonds and interest rates. But to answer your specific questions, if you're looking for a longer data set, I'm aware of one that Big Earn at Early Retirement Now has constructed. It goes back to 1871 and he's got that in the format of a Google sheet. I will link to that in the show notes and you can see that. It's very excellent work. What's unfortunate is that it's very deep but not very broad. So all you have there is a S&P 500 measure or stock market measure, one for 10-year treasury bonds and one for gold. And that's all he can get that goes back all that way. So you're not going to be able to construct very Complex portfolios out of just those those three elements. If you want to know how he dealt with gold, he did that in a specific blog post which is number 34 in his safe withdrawal rate series. And I'll also link to that in the show notes because I think it's interesting. We talked about it back in one of our gold episodes, which I don't have handy right now. But if you search gold at the website, you would find it on the podcast page. In terms of your question about what would happen if bond rates continue to fall, or how much room do they have to fall, and what are the consequences of that, I'm going to direct you to an article at the Portfolio Chart site, and it's about a topic called Bond Convexity. And what this means is there's not a linear relationship as these interest rates get squeezed. And in fact, the capital appreciation as you get closer and closer to zero on long-term treasury bonds would shoot up. And so you're going to get much higher capital appreciation that if, for instance, the 10-year rate, which went down to 0. 4, if it got closer to zero, you would probably see a bond fund like TLT go from where it is at 130 up to over 200, just as the way the convexity works when you squeeze things. It's a complicated topic, but I think that if you read the article, you'll get a good understanding as to why it still makes sense to hold these kind of funds, even though these interest rates are low, just because of the inverse correlation and volatility in the other direction from stocks that these bonds possess as a characteristic. As for what interest rates are going to do, I talked about that in episode 67 or 69. The idea I have is that I don't want to be in the position of having to predict that. And so we want to construct portfolios that will do well regardless of whether the interest rates go up, they stay the same or they go down. And that is sort of our MO here is constructing things that will work well in any environment, not ones that require us to use crystal balls or look at one crystal ball and think it's better than a different crystal ball. We want to stay away from that sort of prognostication. All right, I have two more emails here. One is from Jason D about an ETF called SPLB which is long-term corporate bonds. And then I have one from Eric S who is talking about something called the TIAA real estate account which has a ticker symbol QREAX. that's six letters. What I'm going to do with these is not deal with them now, but we are going to construct episodes around them and go through our 10 questions of analysis to analyze each of these and then determine whether or how they would fit into a risk parity style portfolio. So you can look forward to that in the future and I will then read the emails one when we get to those episodes. But now let us go to the weekly portfolio review. And let's just take a look at the components in the markets of these six sample portfolios, which we have over there at www.riskparadioradio.com on the portfolios page. Looking at the markets, we saw the S&P go up 1.37% last week. NASDAQ was up 1.09%. Gold was up 1.9%, TLT was up 1.16%, REITs represented by the fund REET were up 2.11%, and PBDC, the commodities ETF that we use, was up 3.96% as the big winner for the week. And PFF, the preferred shares fund, was up 0.57% last week. It was an unusual week. Everything went up. That doesn't happen very often, but every once in a while it happens. But as a consequence, all of our portfolios did quite well last week. The All Seasons, which is our most conservative portfolio, this one's 30% stocks, 40% long-term treasuries, 15% intermediate-term treasuries, and then 7.5% gold and 7.5% commodities and it was up 1.51% last week which is a big move for that fund and it is up 5.14% since inception last July. And then moving to our standardish portfolios the next three the first one is the Golden Butterfly all three of these have a risk characteristic that is similar to a 60/40 style portfolio. It's just a bit better on the risk reward scale. So the Golden Butterfly is 20% VTI, the Total Market Stock Fund, 20% VIoV, the Small Cap Value Fund, 20% Long-Term Treasuries, TLT, 20% Short-Term Treasuries, SHY, and 20% Gold GLDM. and that one was up 1.1% for the week. It is slowed down since VIoV has also slowed down. VIoV was only up 1.28% last week. But the Golden Butterfly is up 18.11% since inception last July and is still our leader in this little horse race, even though we're not really racing. The next portfolio is the Golden Ratio portfolio. This one is 42% in stock funds. 26% in long-term treasuries, 16% in gold, 10% in a refund, and then 6% in cash in a money market fund. This one was up 1.5% last week. It is up 16.15% since inception last July. Moving to the next one is the Risk Parity Ultimate. This one has about 12 funds in it. It is our most complicated portfolio. It is approximately 40% in stock funds, 25% in long-term treasury bond funds, 10% in gold, 10% in REITs, 12.5% in a preferred shares fund, and 2.5% in a volatility index fund VXX. This one was up 1.58% for the week as these alternative investments did have a very good week, and so it is up 15.2% since inception last July. And now moving to our experimental portfolios, the ones that use the leveraged funds, and that have a risk profile that is approximately similar to the stock market itself. The first one is the Accelerated Permanent Portfolio. This one is comprised of 27.5% in a leveraged long-term treasury fund, TMF, 25% in a leveraged stock fund, UPRO, and then 25% in PFF, the preferred shares, and 22.5% in the gold fund GLDM. It was up 2.55% last week and is up 12.54% year to date. 4% since inception last July. And then finally our most volatile portfolio, the aggressive 5050. This one is 33% in that leveraged stock fund, UPRO, 33% in the leveraged bond fund, TMF, and then as some ballast, it has 17% in PFF, the preferred shares fund, and 17% in VGIT, an intermediate term treasury bond fund. This one was up 3.02% last week. It's been going up about 3% every week for the past few weeks, so it is up 15.61% since inception last July. If it continues on that trajectory, it will overtake the Golden Butterfly as the best performer in another week or so. Whether that happens is kind of irrelevant, but is interesting all the same. But now I see our signal is beginning to fade. I do have a few housekeeping matters to go through. First of all, I want to thank all of our new listeners as well as our old ones. This podcast is getting exponentially more popular at the moment. It is over 22,000 downloads now and seems to be getting about a thousand a day. which is much better than I ever could have imagined when I started it last July. One of the things I did last July when I started this podcast, and I wasn't sure why I was doing it, but I also created a support page at Patreon, which I have not used at all until this past week. And one of our listeners, Dominic L, said he clicked on it and wanted to support the podcast. but my links were broken. And so I needed to go back and fix that. And that's fine. This podcast is done on a shoestring. What I've learned is the sample portfolios actually pay for it very easily since they are generating over $300 a month in income that we are taking out of it. So I wasn't really sure what to do with the patreon money, but this is what I thought about. Well, first of all, my business model for this podcast can be described this way. I got this inkling. I got this idea for a business model.

Mostly Voices [26:58]

I just want to run it past you. Here's how it would work. You get a bunch of people around the world who are doing highly skilled work, but they're willing to do it for free and volunteer their time, 20, sometimes 30 hours a week. Oh, but I'm not done. And then what they create, they give it away rather than sell it. It's going to be huge. So yes, it's going to be huge.

Mostly Uncle Frank [27:26]

So what I decided to do is this. I am recently elected to the board of a charitable organization called the Father McKenna Center, and it serves hungry and homeless people in Washington DC and all of my family has volunteered at it at one point in time. It is run out of the basement of a church which is connected to a high school and the students at the high school which included our three sons as part of their service requirements generally volunteer at the Father McKenna Center. And so I think what I will be doing with the Patreon money is increasing my donations to the Father McKenna Center. Just so you know where that's going, I will also put a link to the Father McKenna Center's website in the show notes. So if you are so inclined, you can check it out. And if you are even more inclined, you can donate directly to them for your tax purposes. If you have questions or comments for me, I welcome them. I hope I don't get overwhelmed. You can send them to frank@riskparityradio.com that email is frank@riskparityradio.com or you can just go to the website www.riskparityradio.com and fill out the contact form there and I'll get your message that way. Thank you once again for tuning in. This is Frank Vasquez with Risk Parity Radio. Signing off.

Mostly Mary [29:08]

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.