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.

Mostly Mary [0:18]

A different drummer. 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 79 of Risk Parity Radio. 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. And we'll also talk about our monthly distributions for May. But before that, we have some of this. Here I go once again with the email. And we do have a large brimming bag of email. I'm only going to get to a few of them today, but I probably will be doing some bonus episodes because I've got about 20 of them stacked up here and we will be getting through them. But this also brings to mind that if you are a Patreon of the show and have supported the show, your email gets to go to the top. We haven't had that yet, but today is the first time we have four Patrons. We few, we happy few, we band of brothers. Two of them have emails in the queue, and so those will go to the top. If you want to support the show that way, Go to the website and go to the support page and you can do that. As a reminder, the money collected through this Patreon program will be donated to the Father McKenna Center, which is a charity that supports homeless and hungry people in Washington, DC. And with that, let's get to our first Patreon email from Dominic and Dominic L writes, Hi, Frank. If gold is always taxed at 28% and higher than most capital gains rates, would it make sense to hold GDLM in a Roth account? And the answer to that is, well, yes, you could hold it there, or you could hold it in the deferred account that you have an ordinary IRA or 401k. But honestly, unless you're holding lots and lots of gold, you'll probably not be doing a whole lot of transactions with it. Most of the time it just kind of sits there and then occasionally does very well and then you sell some of it and then it goes back to sitting there for a while and you start accumulating it again. So having some in a taxable account isn't that big a deal. There is one sort of hack that you can use with gold, which is to put part of your gold, at least the part that is going to be in a taxable account, into the gold miners fund, which is ticker symbol GDX. Now GDX is not exactly gold. It trades kind of like gold, but it's also more volatile than gold and it's also more correlated with the stock market. The advantage to using or having some of your gold in GDX though is that it follows the taxation rules for stocks. So you can use that and follow the long-term capital gains rules, assuming you hold it for more than a year and get into those 0 and 15% tax brackets. So that's a little hack to think about. You can put some of your gold or most of your gold in your deferred accounts and then put a little GDX in the taxable account and maybe just say 10% of your gold in that form. and that will help you out with the taxes. Now, if you're in a very low tax bracket anyway, it might not make a difference. But that's just a little suggestion for you. And the next email comes from patron Jenny C. Well, I don't got your number, but I do got your email. Jenny writes, hi Frank, my mind is blown over your podcast. Thank you so much for the data approach to good investing strategies. I'm 49, husband 48. Both have recently left our W-2 jobs and will pursue our side gigs to bring in enough income along with a brokerage account and savings to get to 59.5 where we can withdraw from retirement accounts. Question is should we be considering a risk parity portfolio now for our retirement accounts or keep in the accumulation phase mindset, potentially more risky as long as possible. Then perhaps five years before 59 and a half, rearrange for better risk parity. It seems as if a couple of your portfolios would fit for us even now being 10 years out, but since we aren't in the drawdown stage, didn't know whether it would be most logical for us. This may be a personal preference or a very bonehead question, sorry, but wanted your take. Thank you, Jenny. No, it's not a boneheaded question. It's an excellent question because it's something that we all need to consider as we get towards that part where we are moving from an accumulation portfolio to a risk parity or retirement style portfolio. And what you really need to do is think about what are your expenses and think about what they are now and what they're likely to be in 10 years. I know that might be a little difficult, but if you think of what they are now, the chances are they're not going to be that much different unless you are living a much different life at that point in time. Because what that gets you is to tell you how close you are to that number. And what I mean by that number, if you multiply your expenses, your annual expenses in 10 years by 25, if you're following the 4% guideline that gives you a target and then you can compare that to what you have already accumulated. Because if you are already there, if you know that you're going to either you have that much money right now or you only need to make 4, 5, 6% on that money over the next 10 years to glide into your retirement, then you could shift that money now because you've already won the game in effect. And you know you've won the game because you've calculated what you needed to win. So what might make sense for you if you can't quite figure out what that's going to be, is just move some of it into a risk parity style portfolio now. There's nothing to say this is a black or white decision that it needs to be done all at once. But the general rule is as soon as you have won the game, You can stop playing the game, at least with that pile of your chips. So perhaps you take a portion of your portfolio that if it grows by 4% or 5% each year for the next 10 years, it will get you to your number. And you take that portion and you put that in your risk parity style portfolio. And then you have this other part of it that you can still leave in your accumulation phase or you can take other risks with it. But that sort of guarantees that you're going to have that core that will get you to your number so that you won't have any nasty surprises when you get there. Now the other way is simply to wait another five years and look at it again. There's another perfectly acceptable way to go. But it sounds like you're in good shape, so there are more than one pathway that you can take here. and still get to where you want to be. And just to leave you with a little earworm for those of us of a certain age.

Mostly Voices [8:25]

Thank you again, Jenny, for that email.

Mostly Uncle Frank [8:29]

All right, our next email comes from the mysterious visitor4593. Hi Frank, I really enjoyed your podcast number 76 and have listened to it twice. I am a Canadian about 10 years away from retirement and working on building a risk parity ultimate style portfolio. My current asset holdings aren't far off. But I lack the gold, long term T-bills and VXX components. Instead, I have a Canadian Materials ETF and short term bonds. Your podcast persuaded me to add long term treasuries to my mix. However, I'm concerned about gold as a store of value given the rise of Bitcoin as a presumed substitute. Why is gold a better store of value than Bitcoin? Thank you for that email. But, oh, oh, oh, crystal ball alert. Danger, Will Robinson. Danger, danger. And some of these crystal balls can be so enticing.

Mostly Voices [9:29]

My name's Sonia. I'm going to be showing you the crystal ball and how to use it or how I use it.

Mostly Uncle Frank [9:38]

But the crystal ball we see here is a very peculiar one that I like to call the Highlander crystal ball. And you look in the Highlander crystal ball, And ask it for an answer and this is what it usually tells you.

Mostly Voices [9:52]

There can be only one.

Mostly Uncle Frank [9:56]

And let's just look at that again. There can be only one.

Mostly Voices [10:02]

And one more time.

Mostly Uncle Frank [10:06]

There can be only one. Now what this raises is something that is called a false dilemma. Anytime you have a choice between two investments, investment A and investment B, you could go to the Highlander crystal ball and demand a definitive answer that there can be only one. But that's not really not looking at the problem in a way that makes a lot of sense because it limits the choices. Your choices are actually A, or B, or both or neither. Both or neither are usually the better answers to this question. I mean, it's not like gold and Bitcoin are going to jump into a ring with swords and try to chop each other's heads off so there can be only one and they absorb the energy from the other one, like in the Highlander movie. That's not how it works. That's not how it works. That's not how any of this works. But let's take this question more head on from a practical point of view. Why is gold a better store of value than Bitcoin? And the rise of Bitcoin is a presumed substitute for gold. And of course, the best way to tackle these kinds of questions is to invert them. And so let's invert this question and ask ourselves, How many times over the course of gold's history has some asset come along and taken its place? Well, gold's been a store of value for 6,000 years or more. And the answer is exactly zero. Exactly zero. Because while other assets have become valuable over time, things like crude oil and other kinds of metals, that doesn't mean they take the place of something. So there really isn't any evidence for that thesis other than somebody's attractive story narrative that it sounds like you've been listening to. That's not how it works.

Mostly Voices [12:13]

That's not how any of this works.

Mostly Uncle Frank [12:17]

Both Bitcoin and gold can exist and have value in the future, and they probably will. The other factor or idea that you might not be aware of is something called the Lindy Effect. Now the Lindy Effect is something that Nassim Taleb liked to write about a lot in his books such as the Black Swan and Antifragile. But he really gets that from a mathematician named Benoit Mandelbrot. And Benoit Mandelbrot is probably the most important thinker of the second half of the 20th century. He was a mathematician that came up with fractal mathematics. Now what the Lynde Effect says, and it's just kind of a rule of thumb, that if you want to guess as to how long some idea or some technology is going to be around in the future, your best estimate is how long it's already been around and being used for that purpose in the past. So if something has been used in society for a hundred years, Your best estimate as to how long it's going to be around is 100 years. Applying that to gold, it's been around for 6,000 years, maybe. We'll just call it that. So the Lindy Effect says it's likely to be used to store value for another 6,000 years. With respect to Bitcoin, though, the Lindy Effect suggests that the best estimate is it's been around for 13 years. That 13 years is the best estimate as to how long It will retain its properties right now. Now, that doesn't mean that that is a prophecy. That's just a gross estimate for any given technology or idea. And the longer that Bitcoin continues to be used and have value, the longer it's likely to continue in that role. And that's the Lindy Effect. For another measurement or consideration, You should of course look at the correlations between Bitcoin and gold, because if Bitcoin is displacing gold, you would expect them to have a negative correlation that Bitcoin would be going up when gold's going down and vice versa. If you look at their correlation analysis, and I'll link to this in the show notes, you do it at Portfolio Visualizer, and if you do that, they see they have a correlation of 0.12, which is close to zero, which means they're essentially uncorrelated. So if you believe that both are likely to have value and they're uncorrelated, you would hold both would be your solution in this case. And you would proportion them based on their volatility. And right now Bitcoin is about 10 times more volatile than gold. So for every 10% of gold you'd have in your portfolio, you'd probably want to have 1% of Bitcoin if you chose to hold both of them. And that's how you could align your portfolio. Now, if you are looking for more information about gold and Bitcoin, we talked about gold as an investment in episodes 12 and 40 in particular, and how that might fit into a risk parity style portfolio, because it works pretty well. And then we talked about Bitcoin in episode 29 and so you'll want to go back and listen to those. And just one more thing about Benoit Mandelbrot. If you look at the logo for Risk Parity Radio, you will see a little red figure there that looks like a little Buddha at the top of the star that's in the logo. That is actually a graphical representation of a function called the Mandelbrot Set. and the Mandelbrot set is a representation of fractal mathematics, which is the math that applies to most things in the natural world that include coastlines and the way trees grow and the way that insects using very limited commands are able to create very complex systems or complex hives and things like that. It also applies to the weather and to earthquakes and to financial markets. And the idea is that you can get infinite complexity out of something that originates with a very simple function, like a lot of people buying and selling a lot of different things at a market. And I will link to a YouTube video in the show notes to show you what that set actually looks like if you go in and zoom in on it, because it does have infinite complexity and it's highly interesting. But anyway, it's there in my logo because it does represent the mathematics behind financial markets. So thank you for bringing that up and I'm sure we'll talk more about it in the future.

Mostly Voices [17:21]

Everything is proceeding as I have foreseen. And now I think we have time for at least one more email.

Mostly Uncle Frank [17:33]

We'll just make it one email, the lengthy one here. This one comes from Phil R and Phil R writes, Frank, what a great show, podcast. I learned about your show through the Choose FI newsletter and have been enjoying your focus on the preservation portfolio. I've been very focused on accumulation portfolio until this year when the numbers looked like I could shift my focus. I was pretty happy with a large allocation in stocks and had worked to optimize this through factor investing. One of my primary sources for information has been Ben Felix at Common Sense Investing, in particular the episode Five Factor Investing with ETFs. And he put some links here which has a paper and he puts another link there that goes deeper. In this paper on page 17 there is a correlation matrix in this matrix all factors except small cap SMB are negative with the market. To my way of thinking this looks like a great way to diversify my portfolio and remain in stocks. I guess it would be a great thing to have TLT, SHY, GLDNR, EET or O. Can you help me out here? Do we have a data problem or I'm missing a point about diversification? As a note, Dimensional Fund Advisors has an ETF DFAQ that is said to track these factors in US markets. Thanks for any insight into factor investing correlations and risk parity preservation portfolios. Best regards, Phil. Well, thank you, Phil, for this email because it also raises some interesting points. I did go and look at the paper and page 17 of it. What is being measured? There is not actually the gross correlations between these assets What is being measured there is a relative correlation that is starting with the base stock market and then looking at returns from these various assets over time as the difference, a differential. So no, it's not related to absolute correlations. And if you go further in that paper, you'll see, I think on table 21 or something, gives sort of the sample portfolio If you take that portfolio, you'll need to translate it back into US funds because it's listing some Canadian ETFs. But what you'll find is that all of those asset classes are 90% plus correlated, all those factors there. And really what this is getting you to is this problem of alchemy, that trying to turn a group of stock funds into a risk parity style portfolio doesn't work. It's like the old problem that people up to Isaac Newton were trying to turn lead into gold. You just can't do it. And Isaac Newton spent 20 years fiddling around with things like that. He was into all sorts of things besides the physics he's known for. Where this gets you to is the macro allocation principle that we've talked about. And that macro allocation principle is basically saying you can't turn lead into gold. The macro allocation principle, if you recall, comes from the book of Jack, at least that's the easiest place to find it and appreciate it. Jack Bogle's Common Sense Investing chapters 18 and 19. And what that says is that all reasonably well diversified portfolios that have the same macro allocation are going to have 90% plus the same kind of performance. So while this five factor portfolio of stocks is a great portfolio to have, it's going to be 90% the same in terms of performance as a simple portfolio of just a total stock market fund. It's going to be 90% the same as the Merriman portfolios we've talked about, that Merriman four factor portfolio we talked about a couple of episodes ago. There is no way you can take a bunch of stock funds and reconfigure them in some form and get a truly diversified portfolio, like a risk parity style portfolio. It just doesn't work. That's not how it works. That's not how any of this works. And that macro allocation principle is a limiting factor here. Am I right or am I right or am I right? Right, right, right. Well, what's interesting about this is it creates oftentimes some frustrations because people spend a lot of time massaging an all stock portfolio, hoping it's going to do better. And oftentimes it just doesn't for any given period of time. If you took this five factor portfolio for the past 10 years or so and compared it to say just a portfolio that was a total stock market fund, the total stock market fund is probably going to outperform it in that period because the past period was not very good to small cap value stocks. It was not very good to international or emerging market stocks. like you find in that five factor portfolio. And so probably would have underperformed a simple portfolio of a total stock market fund. There's an interesting interview that just came out on the Rational Reminder podcast, which is Ben Felix's podcast. And he was interviewing Paul Merriman. And Paul Merriman was talking about his history of being a financial advisor and how back in the 1990s he constructed a very nice balanced portfolio of stocks that included some small cap value. and put that in front of his clients and had his clients in a portfolio like that in the late 1990s. And of course, they were livid about it because the portfolio he created had returns of around 11-12%, which sounds great, except the S&P 500 at the time was yielding 20% a year. So they were very upset with that portfolio. Now, if they held on, they were not too upset with it when the dot-com bubble burst and all of those high flying stocks went down a whole lot, whereas his portfolio, which was more balanced, performed a lot better than the total stock market in the periods shortly after 2000. But I thought that that was an interesting illustration of this macro allocation principle. And so what you need to take away from that is that If you want a diversified risk parity style portfolio, you can't do it with just stocks. Forget about it. You need to take whatever your stock portfolio is, and there's many nice ones, you can use the same one you were using for accumulation if you want to, and put that as your stock portion of your risk parity style portfolio. But you do have to add treasury bonds, and you do have to add things like gold, and you do have to add other things. Because you're not going to get there with just stocks. You're just not. You're not going to turn lead into gold. That's not an improvement. Am I right or am I right? Am I right? Am I right? Am I right? So that may beg the question as to because we know that people do get vastly different performances out of stock portfolios. But the limiting factor here is that if you want a vastly different performance from an all stock portfolio from a total stock market fund or a diversified stock portfolio, what you need is a concentration then in something. And if you're concentrating in something, then you're essentially stock picking, which is fine if you want to do that, but that's not what we do here, basically. That's really not what I do, Peter. And your chances of doing better than the market, as Jack Bogle tells us, over time, there's always going to be somebody stock picking that does better than the market. But over time, almost nobody can do it consistently over long periods of time, which gets you back to the idea that you are going to do better as far as your stock portfolio is concerned than 80% of other investors simply by sticking to low cost, well diversified funds, and you probably only need between one and four of them in your stock side of your portfolio. Although you could have more if you really want them. With my trusty quarter staff.

Mostly Voices [25:44]

Actually, it's a buck and a quarter quarter staff, but I'm not telling him that.

Mostly Uncle Frank [25:52]

But now we should get to our weekly portfolio reviews of the six sample portfolios that you can find at www.riskparityradio.com. www.riskparityradio.com and just looking at the markets, not much happened this week. S&P was up 0.2%. The Nasdaq was down 0.39%. Gold was up, actually it was down 0.45%. Long-term treasury bonds represented by the ETF TLT were up 1.1%. REITs represented by the ETF R E E T were up 1.2%. Commodities represented by the ETF PDBC were up 1.91%, they were the big winner this week, and preferred shares were down 0.54% this week. All this resulted in very muted performances for our risk parity style portfolios. Looking at those portfolios, the All Seasons portfolio was down 0.24% for the week. It's up 5.21% since inception. That's our most conservative portfolio. Then the next three are our kind of baseline portfolios. The Golden Butterfly was down 0. 3% for the week. It is up 17.95% since inception last July. The Golden Ratio was down 0.33% for the week. It is up 16.11% since inception last July. The Risk Parity Ultimate was down 0.36% for the week. It is up 15.16% since inception last July. And then our two experimental portfolios using the leveraged funds. The Accelerated Permanent Portfolio was down 0.81% for the week. It is up 11.88% since inception last July. and the aggressive 5050, our most volatile portfolio, is down 1.03% for the week. It is up 14.84% since inception last July. Now, since it is the end of the month, we are doing our distributions. And the way we do our distributions is that we look at the portfolios and each one has a distribution rule for it. For the most conservative portfolio, the All Seasons, we are taking 4% annualized out of that. So we take 4% divided by 12, and we end up taking out $35 from that for May, and we take it from the best performing fund recently, which happens to be that commodities fund, PBDC, which is a lot. And so we will take $35 from the commodities fund, and that will be our distribution from that portfolio. for May. For the Golden Butterfly we are taking out at an annualized variable rate of 5% from that one, so we end up taking out $47 for May and we'll be taking that from VIoV, the Small Cap Value Fund, which has been doing the best recently. Now the Golden Ratio portfolio has a built-in cash buffer that we just take the money from that and so we'll be taking $47 out of that for May from the cash buffer, which will be replenished when we rebalance that portfolio in July. The Risk Parity Ultimate Portfolio we are taking out of that at a higher rate, 6% for that one annualized. And so we are taking $55 out of that for May. And that distribution will come from cash this month because it had accumulated dividends and other income from its holdings. that allow us simply to take the 55 from the accumulated cash there. For the Accelerated Permanent Portfolio and Aggressive 5050, our experimental portfolios, we are putting a lot of stress on these. We are taking out of them at a rate of 8% annualized just to see how well they can take it. And so we are taking out $70 for May from the Accelerated Permanent Portfolio and $72 for May from the aggressive 5050, and in both those instances we're taking out of the leveraged stock fund, UPRO, that is in them, which has been the best performer in both of those portfolios recently. So we have been distributing out of these portfolios for now 10 months, and we have taken out a total of $3,168 from them. and that is at a rate of 6.3% annualized. We are taking out of these at aggressive rates because we are wanting to stress test them and to make it more interesting. Any portfolio you can hold will take out at a 3% or a 3.5% rate, but the point of having these portfolios is that they are more robust than your standard retirement style portfolios. so they can take it and we're putting them through those paces. If we look at what is remaining in these portfolios, we started with a total of $60,200 in them right now after the distributions there'll be $65,185 left. So in addition to the distributions we are up $4,985 and that is essentially a 9.9% annualized return over 10 months. So as we can see they're all doing well, but of course the stock market has been doing particularly well these past 10 months or so, so that's not really very surprising. What will be more interesting is when there is a stock market downturn and we can see how these portfolios hold up. But with that, I see our signal is beginning to fade, so it's going to be time for me to say goodbye once again. Just a couple of notes. I've updated the podcast page of the website www.riskparityradio.com and put a little index up at the top so you can see the list of the investments that we have put through the 10-question analysis. and there are the identification of which episodes those occurred in. So if you're wondering about a particular asset and whether we've talked about it in the past, you can go look there and see and then go listen to that particular episode and we'll continue to update that as we go forward. We have the tools, we have the talent. Since we have so many emails, I will be doing some bonus episodes coming up in the next a couple days here and then we will be proceeding to analyze a real estate fund, QREAX, as requested by one of our listeners and we'll put that through the 10 questions analysis beginning later this week. It looks like we have at least a thousand loyal listeners now, which is absolutely fabulous. If you could Go and leave a five-star review at Apple Podcast or wherever you get this. That would be great and that would help support the podcast. Thank you once again for tuning in. This is Frank Vasquez with Risk Parity Radio signing off.

Mostly Mary [33:17]

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.