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 [0:36]

Thank you, Mary, and welcome to episode 78 of Risk Parity Radio. Today on Risk Parity Radio, we are going to complete the analysis we began in episode 75, and that analysis is of the Spyder Portfolio Long-Term Corporate Bond ETF. Ticker symbol SPLB and we were going through David Stein's 10 Questions to Master Investing and we were up to questions 9 and 10. But before we get to that, we do have a few emails. Here I go once again with the email. Actually, I have more than a few emails, but we're just going to do some of the easier ones today and we'll be getting into more of them In future episodes. Man's got to know his limitations. First one here is from Brad S. Message is, Just wanted to say thanks for answering my question in episode 69. Getting caught up on the podcast and was really excited to hear your thoughts on that. Thanks for all you do. Well, thank you, Brad. That's very kind of you. You know I do it all for you. Man's got to know his limitations. the next question is from visitor number 6369 and visitor number 6369 writes, hello Frank, you loaded up on TLT at the end of 2016. What percentage of your portfolio is TLT in December 2016? Well, actually this is an interesting history. I first started getting involved or looking at these kind of portfolios back in around 2010 or 2011 after my experience with TIPS in the 2008 crash was not very pleasant. And I wanted to find out which were the right bonds to hold in those circumstances. And so I read a number of things, including some early publications by Bridgewater and Ray Dalio that were on there. at the time very primitive website. There were interesting papers to read and some other things about the permanent portfolio and some other things that were sort of floating around out there. And then between around that time, 2011, 2012, I began experimenting with some portfolios. I really wasn't ready to fully move to more of a risk parity style, ready to retire type of portfolio until we got to around 2016. But the experiments I ran sometimes I had little portfolios of only 15% TLT, up to 33% TLT in some of the experiments. And after a while, it seemed that around 20 to 25% in that range, or 28%, depending on which one I was looking at, seemed to be the right range. And then it was interesting around 2016, we started seeing the these calculators at Portfolio Charts and Portfolio Visualizer come online. And so I was able to test these things more thoroughly and come up with asset allocations that are roughly between 20 and 26% in TLT or similar long-term treasury related instruments like EDV sometimes. So I hope that answers your question. And I did load up on them every time they went down, and then when they go up, I would sell them. Just in a rebalancing operation. Next email is from Robin and Robin writes, thanks for your excellent podcast. Well, thank you, Robin. I do it all for you too. Man's got to know his limitations. And the next email comes from Zach and the subject of this is the case of the missing tips. And he writes, hey, Frank, the canonical risk parity or all weather portfolio seem to contain tips as the method to protect returns during inflationary periods. I found that odd since I expect commodities and probably gold and equities to fare well during inflation. Tips seem redundant and possibly even dead weight since they aren't easily levered. Perhaps you share the same view since I see no tips in your example portfolios. Would love to hear your thoughts, particularly knowing that you've had misadventures with tips in the past. Keep up the great work, Zach. And yes, those misadventures occurred back in 2008 when I was convinced by reading a couple of books that tips were the thing to hold in your portfolio for bonds and rebalancing purposes. Then they went down 10% during 2008, and I realized that information and advice was an error. And I think you hit the nail on the head. My experience with trying to use tips in a portfolio is that they do tend to be kind of dead weight and they really don't move the way you would want them in an inflationary period or when the economy is picking up. And for example, over the past several months, we've seen inflation rising. So we've seen things like small cap value stocks do well, commodities do well, but you haven't seen that with regard to tips. I think that ETF IVOL, IVOL that we analyzed a couple of episodes back is an attempt to try and remedy that, but it's hard to see how these things really work because they tend to be more like cash or more like an intermediate term bond. They have about the same risk characteristics as an intermediate term bond fund. and I will post a little asset correlation thing in the show notes so you can take a look at that. But I really have not found a good use for them, and they certainly do not respond very well in the kind of inflationary periods we've had, whether they would do well in more extended inflationary periods. Nobody really knows because they've only been around since the 1990s. So my experience is, although they were designed for that, they don't seem to be performing that very well. And so I would think that the only place you would want them is in a bond heavy portfolio where you wanted just some variety in there for that purpose, or even as a cash substitute for the tips that are on the short end. Forget about it. But thank you for that email because you make a very good point because I read about how these tips are supposed to be useful and good for this purpose and my experience is they just really haven't lived up to that at least not so far during the entire time of their existence. So I will let somebody else try and figure out why they're not working the way they were advertised.

Mostly Voices [7:43]

Forget about it.

Mostly Uncle Frank [7:47]

And the last email we will look at today is from Young L. And the message is, hi Uncle Frank, I love your podcast and am so relieved to have found you as my Sherpa in preparing for our retirement. I am putting together an aggressive 50/50 type of portfolio and my Wells Fargo brokerage account does not allow me to buy TMF while UPRO is allowed. The goal is to create a portfolio similar to the one you have in your Roth account. What alternative would I have to replace TMF without changing brokerage accounts? Thank you in advance for your time. Best, Young L. Okay, just a couple of things. First, I do view those portfolios as experimental portfolios, so I don't put a whole lot into them or use those leveraged ETFs in any extended manner simply because the jury is out on them. I do have a small Roth account where we've used a couple of those. What that portfolio looks like is its 26% UPRO 26% TMF, and then for the remaining 40% that's divided equally into intermediate treasury bonds, gold, small cap value, and the preferred shares fund PFF. And that actually seems to be a good balance between the to experimental portfolios we've got on the samples page. But again, I'm not recommending that. I'm just telling you what I'm doing with a very tiny part of our portfolio, like two or 3% of it. Now, as to your quandary with Wells Fargo brokerage, well, I would consider leaving Wells Fargo brokerage because it's a bank and typically banks and insurance companies do not do a good job serving their clients. and you would be better served at a place like Fidelity Schwab, TD Ameritrade, Interactive Brokers, Vanguard, any of those large established brokerages would be probably better off for you than the Wells Fargo. But TMF, there is another fund called TYD. I don't know whether you can trade that or not, and hopefully I got the right ticker symbol, and that is a leveraged intermediate bond fund. you would need to add a lot more of that to balance out UPRO, so that should be a consideration, but you should or could look into that. Other than that, I'm not aware of any other leveraged fund that I have used or would recommend. And that's all your uncle has for you today, at least with respect to the emails. Fat, drunk, and stupid is no way to go through life, son. Now getting back to this analysis of SPLB, recall this was initiated or requested by one of our listeners, Jason D, and his ultimate question that we will be addressing now in these last two questions was, Looks like income taxes is likely what is pushing you to choose PFF over SPLB, but the correlations to the stock market look better for SPLB, maybe hold SPLB in tax deferred exempt accounts, and PFF in taxable accounts. Now we are going to question nine of these questions, and we already talked about metrics and parameters of SPLB, but this question is how does it impact your portfolio? And if you use SPLB in a portfolio, it does act a lot like PFF and that is it can perform a function as an income driver that is slightly correlated with stocks. So you're not really using it as a diversifier per se. It's kind of in the middle. It's not going to save you in a stock market crash. It's going to go down some with the stock market, but it's not going to kill you either. So its primary purpose is that income. And it does resemble PFF in that regard. Recall that PFF is preferred shares. And we did do a 10 questions analysis of preferred shares and PFF all the way back in episode 9. And so you can have a look at that and we discovered it could be a good diversifier if you're looking for in particular an income generator. that would do better than some of these bonds. But in order to figure out how SPLB affects the portfolio, we went and did a correlation analysis over at Portfolio Visualizer, and I'll link to this in the show notes. And you can see how these things performed. We compared it against a total stock market fund, VTI, a long-term treasury bond fund, TLT, Gold, GLD, Reits VNQ, and we have SPLB there and PFF. And just looking at the line for SPLB, it is positively correlated with the stock market at 0.26, not bad. It is also positively correlated with the TLT at 0.54. It's positively correlated with everything, in fact. It's positively correlated with gold at 0.32. VNQ REITs at 0.5 and PFF at 0.48. And so it is one of these things that's just kind of in the middle there. Now it does resemble in its characteristics, at least as performance, the PFF fund. The PFF fund does have a higher return. Right now preferred shares are paying 4.6% or 4.63% compared to SPLB's return of 3.46%. So in terms of income, it's about 33% more that you would get out of the preferred shares fund PFF. And that is reflected in the annualized returns on this asset correlation analysis, where you see that at least for the past 12 years, the annualized return for SPLB has been 8.42% versus PFF's annualized return of 11.1%. They have a similar volatility to them. PFF is just a little bit more volatile than SPLB. PFF is more correlated with the stock market at 0.61 compared to 0.26 for SPLB. So it looks like something that is potentially useful that is essentially a little less volatile than PFF and pays a little less income. So basically you are lowering your risk there and getting a little less income is what those two things look like when compared with each other. Now I also did another analysis of back testing sort of a generic risk parity style portfolio One with PFF in it, and then one with SPLB in it, and then one with a combination of it in it. And I'll also link to that in the show notes. But what we've done here is we've taken this portfolio, and these are the common elements I'll give you. It has 40% in stocks divided into a Vanguard Growth Fund, VUG, and a small cap value fund. We've used IJS in this analysis because it's got a longer time frame of existence. And then it's got 25% in TLT, the long-term treasury bond fund. It's got 15% in gold, GLD, and 10% in REITs, VNQ. And so in the first portfolio, then it also has 10% in PFF as that income generator. We swap that out for SPDB. in the second version of this portfolio, too, which has no PFF in it and 10% SPLB. And then we do a combo of 5% each in the third portfolio. And the reason we select these amounts is typically this is the amount you would be holding of this sort of thing in a portfolio that it's not going to be one of your dominant funds. So just looking at the portfolio returns, they are very similar. If you look at the compounded annual growth rate for the version with PFF in it, that's at 12.63%, which compares to the one with SPLB in it at 12.31%, and the combo is at 12.47%, and this analysis goes back to 2009. the best years are 35% for the one with PFF in it, 30% for the one with SPLB in it, and 33% for the one that's the combo of 5% each. The worst years are not very bad at all. The PFF one has the least worst year of -4.99%. The SPLB version has -5.26%. and the combo version is a worst year of minus 5.1% with max drawdowns of 10.1 for the PFF version, 9.33 for the SPLB version, and 9.71 for the combo. What this comes out to in terms of the risk reward, they're almost the same. The one with the PFF in it has a slightly better Sharpe ratio of 1.35, But the other two portfolios have sharp ratios of 1.34. So that is virtually a distinction without a difference in terms of those performances. All right, question 10. Should you invest? Well, this is one of those things where if you already have PFF there, I'm not sure you would need this. If you didn't have anything like PFF in your portfolio, you might consider adding this fund. It's basically going to give you slightly less volatility but less income in your portfolio if you're comparing those two things. The one thing that Jason did point out is also a relevant consideration that the income coming from SPLB would be fully taxed at ordinary tax rates, whereas the income from PFF, it pays a qualified dividend, so it qualifies for long-term capital gains tax treatment. So if you are using one of these in a taxable account, really PFF is the preferred choice of the two. In a tax deferred account, you could probably use either one of them depending on how much risk you wanted to take in that particular account. So our conclusion is that SPLB may have a place in a risk parity style account. but it may not be as good as some of the other options available. But now I see our signal is beginning to fade. And just to give you a preview of what's coming up in the next few podcasts, we're going to have our weekly portfolio review and monthly distributions this weekend with some more emails, and then we will be moving to an analysis for Eric S. of the TIAA Real Estate Account, Q-R-E-A-R-X. Yes, that is six letters in that thing. And then after that, in a couple of weeks, we'll be going to be talking about an interesting analysis raised by one of our listeners about Wealthfront's attempt at a risk parity style portfolio. And I use those words loosely in this circumstance. That's not how it works.

Mostly Voices [19:55]

That's not how any of this works.

Mostly Uncle Frank [19:58]

If you have questions or comments for me, you can send them to frank@riskparityradio.com that email is frank@riskparityradio.com or you can go to the website www.riskparityradio.com and fill out the contact form and I'll get your message that way. Looks like we have over a thousand loyal listeners now, which is very exciting. if you haven't had a chance to, if you would pop over to Apple Podcasts and leave a five-star review, I would very much appreciate it because that's a lot of the ways that people find this program. It is in the top 100 now regularly for investment podcasts, and I appreciate that too because it's all because of you. Thank you once again for tuning in.

Mostly Mary [20:47]

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.