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 [0:38]

Thank you, Mary, and welcome to episode 83 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.riskparadioradio.com on the portfolios page. Here I go once again with the email. All right. First email comes from Aaron I. Aaron I writes, I've been listening to Risk Parity Radio still catching up on old episodes and just wanted to say thank you for putting this out there. You explained things really clearly and I really appreciate all the work that must have gone into preparing these. Aaron, well thank you Aaron. It's always nice to have fan mail and it's always gratifying to know people are getting something out of this. All right, let's go to the second email. This one comes from Mark B. Mark B writes, Uncle Frank, I wanted to add some nuance to the gold tax conversation that I think was skipped over. Gold! From my research, short-term cap gains on gold are treated like as income, as you would expect long-term cap gains on collectibles like gold is also taxed at your ordinary income tax rate, but capped at 28%.

Mostly Voices [2:04]

That was weird, wild stuff.

Mostly Uncle Frank [2:08]

For those with low expenses, this means the tax treatment of gold is not so brutal as to be the full 28% and can be 10%, 12%, or 22% in some cases. When it's 10% or 12%, it lines up pretty well with the 0% long-term capital gains bracket, at least for married joint So it is still notably worse than the long-term capital gains treatment, but far from 28%. And he quotes something from the Journal of Accountancy, which says, For tax purposes, physical gold investments are classified as collectibles. Gains on collectibles held for one year or less are taxed as ordinary income, the same tax treatment as short-term capital gains. Gains on collectibles held for more than one year are taxed as ordinary income except for the maximum collectibles tax rate is 28%. The 28% collectibles maximum tax rate is sharply higher than the 15% long-term capital gains rate that applies to most other assets and taxpayers with a 20% maximum long-term capital gains rate applying to high-income taxpayers in tax years beginning after December 31. 2012, and there is a link which I will put in the show notes. He says, Enjoying the show, Mark. Well, thank you, Mark, for that, because I did get that garbled and teach me a lesson for trying to go through too much tax stuff on a podcast. I will link to this in the show notes.

Mostly Voices [3:38]

Let's just say, Yes, you are correct, sir. Yes. And thank you again for those corrections.

Mostly Uncle Frank [3:46]

I do invite those as well. No more flying solo.

Mostly Voices [3:50]

You need somebody watching your back at all times.

Mostly Uncle Frank [3:53]

All right, next email comes from Rob L. Rob L writes, Thanks for your podcast and website. It has opened my eyes beyond the basic increase in the amount of bonds in my portfolio during retirement strategy. Sorry if I missed it in a previous podcast, but which any of your sample portfolios do you use? On portfolio charts it appears the Golden Butterfly allows the largest PWR, which is the perpetual withdrawal rate. Also, what are your thoughts regarding this article? And he links to an article at Seeking Alpha that I will also link to in the show notes that is called Building Risk Parity Portfolios example. Okay, so what do I use personally? I use a combination between the Golden Ratio Portfolio and the Risk Parity Ultimate Portfolio. Because I'm a little bit adventurous, I have a lot of different things in those portfolios that go beyond what you see in the sample portfolios. I wanted to keep the sample portfolios kind of more reasonable. One area that I have a number of individual companies is with property and casualty insurance companies like Allstate and Progressive. because those function like small cap value stocks, even though they're not that small. So having a group of those is also a decent allocation that I've found. For me, I would not recommend you fooling around with all of that if you don't have to. As I've also mentioned, I do tend to hold individual REITs as opposed to holding REIT funds, and so I hold many of the ones that are on that list if you go back to the REIT episodes, there's a correlation link and I own a lot of those. I can't say that I own all of them, but I own at least 10 of them. So yes, I've made my life a little overly complicated, but I enjoy it that way. I also do have a small experimental portfolio in a Roth that is sort of off to the side that represents about 3% of our investments. What's in that looks like 26% UPRO, 26% TMF, and then for the other four components is to divide it equally into small cap value, intermediate treasury bonds, gold, and either a preferred shares or a REIT or some combination of both. If you want to track what's in my taxable account, it is on the About page. on the portfolio website. I haven't updated it recently, but I need to do that, I suppose. That account is described and it's also takes some leverage in that account, which accounts for its returns, which are more in the line of about 18% annualized. Trogdor strikes again! All right, let's talk about this article you mentioned from Seeking Alpha. I thought that was a pretty good article conceptually because it goes over the idea of picking things that are not correlated or negatively correlated, and then adjusting their percentages based on their volatility, which are two ideas that you want to have when you're constructing a risk parity style portfolio. I thought the choices that they used were a little bit odd. They used gold miners instead of gold, and gold miners are more volatile and more correlated with stocks than gold is. And they also use high yield corporate bonds, which I can't see recommending these days given how they are taxed and their risk profile is much worse than something like preferred shares. So I probably would not use those either. But in terms of how they went about constructing it, using the assets they chose, I thought it did quite well with that. One other thing that they did not do well was really consider how this portfolio would have performed in all kinds of economic environments. And so in my view, they have too many long-term treasuries in that sample portfolio. And that portfolio would have performed particularly poorly if you put it back in the 1970s. Part of that is using the gold miners instead of the gold. But I think you, after you've constructed something, then you want to go and model it in as close a ways with as many different data sets as possible. And if you can do one at portfolio charts, even if you can't pick the exact same assets, pick similar ones and figure out what that would have looked like in the 1970s. I think we really need to make sure we're doing that because the past 20 or 30 years just have not been like that at all, which tends to make some assets look better. than others. So for instance, large cap growth stocks look much better than small cap value stocks over the past 10 years. They just have performed a lot better. But that would have been reversed if you were looking at the 1970s and the early 1980s.

Mostly Voices [9:05]

Am I right or am I right or am I right? Right, right, right.

Mostly Uncle Frank [9:13]

And as always, we want to think about having a portfolio that's going to perform decently in all of these environments without us having to predict which environment is coming next. Gotta stay away from those crystal balls. My name's Sonia.

Mostly Voices [9:25]

I'm going to be showing you the crystal ball and how to use it or how I use it. We can put that check in a money market mutual fund. Then we'll reinvest the earnings into foreign currency accounts with compounding interest and it's gone. Uh, what? It's gone. It's all gone. What's all gone? The money in your account. It didn't do too well. It's gone.

Mostly Uncle Frank [9:48]

All right, fourth email today comes from Joel G. Subject, thank you and one question. Hi Frank, I have only recently come across the Fy Movement through a winding path I won't bore you with. Brad and Jonathan at Choose Fi mentioned your podcast and I immediately subscribed on Castbox. And now I've gotten caught up on nearly every episode and listened to several of them multiple times. Maybe you need another page on your site with a best of list. I am enjoying it immensely. Thank you very much for your insights and for sharing your knowledge. Your initial episode with Brad and Jonathan was the first time I finally understood the purpose of bonds in an overall portfolio and my undergraduate major was in finance, sadly. I don't work in finance, finishing off my professional training this year with a significant amount of debt. Thanks for everything you're doing with this podcast, especially loving all the new references you've been throwing out there. How I Miss Strong Bad. Well, there'll be plenty more of that for you because the strong bad sayings are a legend in my family and we use them frequently.

Mostly Voices [11:03]

I do what I'm told.

Mostly Uncle Frank [11:07]

Moving on, I will be sending a few questions, portfolio ideas, but we'll separate them out into different emails. Now to this email's question, what do you think about using BND, that's the Total Bond Fund, instead of GLDM, that's a gold fund, in a portfolio? I would still use TLT or other long-term Treasuries as a portion of the portfolio, but swap BND for the gold allocation. Gold is in there for stability and BND acts fairly stable from what I've been able to determine from backtests using VB MFX as a BND proxy. It tends towards zero correlation but also provides that slight bit of return. I know it isn't truly a different asset class, but due to the way it behaves over time, I thought it would be an interesting discussion at least. Thoughts on this switch? Thanks. Well, I don't think that's going to work, and they really are not the same. In a couple of different ways. First off, the reason BND, that Total Bond Fund, seems to have a kind of a zero correlation with the rest of the universe is a third of it is in short-term bonds. So they're like CDs or cash or something. That really becomes a drag on a portfolio actually. And so you really want to not have a total bond fund. And to the extent you want short-term treasuries or cash, just make that a separate allocation. that you can monitor and control so it's not hidden inside of this bond fund. I said consummate these consummate. Geez, I wouldn't know majesty if it came up and bit him in the face. It happened once. The other part of it is that if you look at the total history of gold from the time you were able to trade it and own it going back to the 1970s or if you You can go back even farther, but it's not quite the same in the days when it was illegal to own in the United States. But it does perform much differently than stocks and bonds. And when it really shines is when you may really need it in some very strange circumstances, either when inflation is moving much faster than growth, like you saw particularly in the late 1970s, or you have a situation where growth is declining quicker than inflation is, like you saw in the early 2000s, and it has some very peculiar qualities. You also want the volatility that gold has. One of the other problems with B&D is it's not volatile enough in a risk parity style portfolio, so you'd have to hold a lot more of it to have the same kind of impact that you would have with gold. And then the reason it would have that impact would be this cash drag. So what you're doing with gold is just holding it there, knowing that every once in a while it's just going to shoot up, you're going to sell some of it, and then it's going to fall back and drag along, and you're going to be acquiring it slowly through that time. And that pattern will not follow anything else. It does it on its own. It does it by itself over time. It will keep pace with inflation, but that's over decades of time. In any one given decade, it could be the best performer or worst performer in your portfolio. And it's one of those things that really goes to the fractal nature of these kind of portfolios. And what I mean by that is looking at gold on its own, you would not expect that it would have the effect that it happens to have on these kind of portfolios. It really is what is known as an emergent property. You put it in there as an ingredient and all of a sudden the whole thing works better. Whereas if you had it on the side or you were trying to analyze it, you would never expect it or suspect that using something like that in a otherwise diversified portfolio would in fact make the portfolio perform better. So it's got one of those kind of unique properties. Trogdor strikes again! Which also means there really isn't any good substitute for it because nothing behaves quite like it.

Mostly Voices [15:31]

Trogdor the Burninator! Oh yeah! Check out all his majesty!

Mostly Uncle Frank [15:39]

That being said, you really don't need that much of it. If you go to episodes 12 and 40, we talk about this. The sort of sweet spot for it seems to be between 10 and 15% of a portfolio. If your portfolio is more conservative, you probably have less gold in it, so you'd have 5% or something like that. We do have sample portfolios with, you know, anywhere from nothing to 20% and you can see how different ones perform differently, but it's one of those things that acts as a seasoning for your meal and makes it a whole lot better. And just one other thing I should add, I have added an index in the front of the podcast on the podcast page at the website www.riskparityradio.com. it doesn't index everything, but it does index all of the episodes that talk about specific assets, if you're interested in that. That list of podcasts is also searchable if you have particular words or things and you wondered if we talked about it and it will search through the titles in the show notes so you can find things as well that way. All right, next email comes from Jake T and Jake T writes, hi Frank, Thank you so much for your great content. I'm working my way through your show episodes. I have a question that I haven't heard directly answered, but if you have, apologies for the redundancy. The question is around long-term treasuries and a taxable account. Our goal is to retire in five years, 2026. We plan to live off our taxable brokerage funds for roughly 14 years until we can withdraw from retirement accounts. My question lies around a risk parity type portfolio and our taxable brokerage. I'd prefer to keep More long-term Treasuries in retirement accounts, but the options in our 401 s are awful and our Roth is very newly funded by using a mega backdoor contributions since we don't qualify for direct contributions. Some quick info on the brokerage. There is about 550k currently divided up as follows：90% in stocks, which is 40% US large cap, 20% international blend, 20% small value, 10% mid cap blend, 7% is in bonds, mostly VTEB, which is a municipal bond fund. 3% is in REITs and gold. I know this is not diversified, but now that we are inside of five years from withdrawals, I think it's time to move slowly towards a more risk parity style portfolio. The goal is to get close to 1.4 million by 2026. This will be done through roughly $10,000 per month investments from our salaries, $600,000 over the next five years, and any gains in that account. Does it make sense to start adding VG LT, prefer Vanguard with some of the monthly investments to slowly bring the allocation closer to 40% long-term treasuries? Does it make sense to hold close to $500,000 eventually in a taxable account? We are in the 30% plus tax bracket for ordinary income. This is my dilemma, Frank. I'd like to rebalance into the Risk Parity allocation by adding the new money to VG L T then sell since we have so much left to contribute. Or would adding V T E B suffice although it's not negatively correlated with stocks? We'd like to hear your thoughts. Thanks and keep up the great show, Jake T. Yes, that's a good idea. I mean, you're in a higher tax bracket so you don't want to be selling your stocks now because they would hit the highest Long-term capital gains tax rates, you would prefer just to leave them. And since you are contributing so much, basically the same amount that's already in there, it does make sense to do that by just adjusting your contributions to make this thing look more like a risk parity style portfolio as you go forward. A couple of things you should appreciate about long-term treasuries. Well, first, VGLT, yes, you can use that. I don't know how liquid it is these days. It didn't used to be that liquid, but it should work fine if you put in a limit order and buy it that way. I'm not sure you want to go all the way up to 40% long-term treasuries unless you are constructing something that's very conservative like that all seasons portfolio. That most of our portfolios were really looking at 20 to 25% in long-term treasuries. So, You might think more about that, but you're not going to have that much right away, so you got plenty of time to think about it. One thing that's interesting about these long-term treasury bond funds is they actually don't generate that much income. These interest rates are pretty low. They're down around 2% right now. So that is the only income you're going to be getting out of this that's going to feed into your ordinary income. Where they actually gain the most or lose the most is in capital gains or capital losses. because they can move 20 or 25% in a year and then that turns into a capital gain or a capital loss if you were to sell it. And so that is where you are going to get most of the gains and losses out of a long-term treasury bond fund that differs substantially from something that you would hold for income, like a preferred shares fund or some corporate high yield fund Where it's everything is income and there's really not much to speak of in terms of capital gains and losses. But you are not going to be, for instance, having huge amounts of income off of this, particularly when you're building it out. I mean, think about it. If you had $100,000 in long-term treasuries paying 2%, that's $2,000 a year and that would you have to pay ordinary income on that as far as any gains it might have went up 20% and you've sold part of it, that would be a long-term capital gains. So keep that in mind as you go forward with it. In effect, I like to say it holding long-term treasuries is like holding a weird dividend stock that pays a decent dividend but moves in the opposite direction to the stock market most of the time. And it really does behave that way. If you didn't know it was a bond fund, you could look at it and say, Wow, here's a dividend stock that goes the opposite way of the stock market that's diversified with it. And if you packaged it and sold it that way, many more people might be interested in it just because they hear dividend stock and they go crazy. But that is the way it behaves most of the time, and you can think about it that way. All right, the other possibility that you have here, and I say possibilities, I'm not necessarily recommending it, but you can look into it, is to buy some of the leveraged bond fund TMF in your taxable account. Now, why would you do this? You would do this to jumpstart what you're doing because it effectively acts like three times the TLT or VG LT in your account. So if you put $10,000 of TMF in your account, it would behave as if it were $30,000 of a long-term treasury bond fund. It also has extremely low distributions from it just because of the way it's structured. It does not throw off a lot of ordinary income. So for part of your taxable portion in your account, you could use some of that. There are two caveats with it. One that we've talked about a lot, this is an experimental leveraged fund that is not designed for the purpose that I'm Talking about using it for. We have used it in our experimental portfolios and we have a little bit in the risk parity ultimate. And you can see that it has behaved sort of as advertised as you would have expected to behave, at least it's done that since it came into existence in 2009. But there is a risk there that it will stop behaving like you would want it or expect it to behave. And then the other thing about it is it is extremely volatile. So it could go up 100% one year or go down 50%. another year or even 70%. So if you're gonna hold any of that, you have to be cognizant of it that it really can move a lot and look pretty bad like it has over, say, the past three months. And then when it goes the other way, it goes the other way big time. So I think last March 2020, I think that fund was up about 70%, 60 or 70%. In that bad time period, so it really did ameliorate a portfolio that was mostly stocks. And as I said, you should probably leave the rest of this portfolio alone, given your current tax rate. And then when you come off of that, you'll be able to move things around a lot better. If you do end up holding something like TMF though, the other thing that it may generate if the stocks are continued to do well, is large capital losses. And so you'll be able to tax laws harvested while you're still in the higher tax bracket to a certain extent. All right, our last email today is from the mysterious visitor 9380 and the mysterious visitor 9380 writes, thank you, Frank, for an outstanding and much needed risk parity education. We are 70 retired for three years and received teachers pensions along with some Social Security. We anticipate they will account for 60 to 80% of our ongoing monthly income needs. We have been using a 60/40 VTI BND allocation, I guess for the remainder. Do you suggest moving to a risk parity portfolio now or remain more aggressive for now due to our pension cushion? Well, thank you for writing that. This is an interesting situation. I think what I would really want to think about first is How much income or expenses does this portfolio cover? And I mean in dollar amounts, because how you structure it, if it only has to support 3% of its value out of it, that's much different if it needs to support 5% of its value out of it. So if you take your total expenses, subtract out all the Social Security and other pension money that you're getting from that, You'll have a smaller expense number, multiply that times 25 and compare that to what you have in your other portfolio because that's really where you want to think about working with. Now, a risk parity style portfolio, there are typical ones like if you look at the Golden Butterfly or Golden Ratio or Risk Parity Ultimate, those are structured to have the same risk characteristics as a 60/40 portfolio. So you could move to one of those and it would be the same kind of risk you were taking and you're probably going to get better performance out of these because that's the point of this, is to improve on a 60/40 portfolio. If you wanted to move to something more conservative, it would look more like a 30/70 portfolio, look more like that all seasons portfolio. But you would only do that if you knew that you only needed a small amount from this part of your portfolio to support your expense levels. So you may have a lot of options. You do have a lot of options here, depending on how much risk you want to take. One thing I would think about as you, if you're constructing a risk parity style portfolio, you really don't need any cash or short term bonds or anything like that in this portfolio simply because you have that big pile of cash coming off Social Securities and pensions coming in. So I assume you're using that for your daily needs and all that sort of thing. And so you don't need to have another cash bucket for this. You could take whatever cash bucket that you would have thought in a typical risk parity style portfolio and just redistribute that amongst the other asset classes that are in there. And finally, you do need to be mindful of what accounts you specifically have and the tax implications of them, whether this money is behind IRAs or 401 s, whether it's traditional and you're going to have to start taking required minimum distributions in a couple of years here. That's one thing to think about. It sounds like you are in kind of an ordinary income tax bracket. So if some of this is in a taxable account, Pretty advantageous for you because you can probably get, you're probably in the 0% tax bracket on long-term capital gains or are in the 15%, I would guess, given what your profile is here. But you have to take those things into account when you're putting this thing together. And with that, now it is time for our weekly portfolio reviews of the six sample portfolios you can find at www.riskparityradio.com. www.parityradio.com on the portfolios page. Yes!

Mostly Voices [28:55]

This was another nice, fairly uneventful week for these portfolios.

Mostly Uncle Frank [28:59]

I'm putting you to sleep. The only interesting thing that really happened was that gold decided to wake up and go up a lot this week and so that helped out the portfolios that have gold in them. And so just looking at the markets last week, the S&P was up 1.23%, NASDAQ was down 1.51%, Gold was up 3.57% and TLT, the long-term treasury bond fund we use, was up 0.4%. REITs represented by the REIT fund R-E-E-T were flat. The commodities fund we use, PBDC, was up 4.7% as the big winner for the week. And then PFF, the preferred shares fund that we use, was up 0.2%. 1%. So looking at the portfolios, the first one is the All Seasons, and this one is only 30% in stocks, then it's got 40% in long-term treasuries, 15% in intermediate-term treasuries, with 7.5% in gold and 7. 5% in the commodities fund, PBDC. And those helped this portfolio this past week. So it was up 1.18%, which is a large move for this portfolio. It is up 6.07% since inception last July. The next one, as we get into our more standard portfolios, these are the ones that are comparable to a 60/40 style portfolio in terms of their risk profile. And the first one is the Golden Butterfly. This one is 40% in stocks divided into a small cap value fund, VIoV, and a total stock market fund, VTI. And it's got 40% in treasury bonds split into long term and short term TLT and SHY and then 20% in gold GLDM. And so this also benefited from its gold in it. It was up 1.92% for the week. It is up 20.14% since inception last July and is our leader these days still in the portfolio horse race.

Mostly Voices [31:09]

I'll improve on your methods.

Mostly Uncle Frank [31:13]

All right, the Golden Ratio Portfolio is the next one. This one is 42% in stocks and three funds, 26% in long-term Treasuries, TLT, 16% in gold, GLDM, 10% in REITs, REET, and then it's got 6% in a money market that rounds it out. It was up 1.03% for the week. It is up 17.74%. since inception last July. And you can see all these portfolios are performing quite well and meeting their obligations in terms of distributions quite handily. So we're looking next at the Risk Parity Ultimate. This is our most complex. It is 40% in stock funds. I won't go through them all. It is 25% in long-term treasury bond funds. And then it's got 10% in REITs. REET, 10% in gold GLDM, 12.5% in PFF, or preferred shares fund, and 2.5% in a volatility fund, VXUS. It was up 1.35% for the week. It is up 16. 65% since inception last July, and so is also doing quite well. And now we move to these two experimental portfolios with the leveraged funds in him. The first one is the Accelerated Permanent Portfolio. This one is 27.5% TMF, that long-term treasury bond fund. UPRO, the leveraged S&P 500 fund, comes in at 25%. 25% in PFF, a preferred shares fund, and 22.5% in gold, GLDM. This one was up 2.37% for the week. It is up 14.38% 25% since inception last July. I think it was the big winner this week. Yes! And finally, the aggressive 5050, which is our most volatile portfolio. This one has 33% in UPRO, the leveraged stock fund, 33% in TMF, the leveraged long-term treasury bond fund, 17% in PFF, the preferred shares fund, and then 17% in in VGIT, an intermediate treasury bond fund. This one was up 1.98% for the week. It is up 16. 99% since inception last July. All in all, a nice boring week for our risk parity style portfolios, which is what we'd like to see. Everything that has transpired has done so according to my design. But now I see our signal is beginning to fade, and so it'll be time for me to say goodbye once again. Yes! This next week we will be slogging through more emails. I will get to yours eventually. I know I'm a couple weeks behind, but they continue to pile up, and I appreciate each and every one of them. If you want to contact me, I invite your questions and comments. Send them to frank@riskparityradio.com that email is frank@riskparityradio.com or you can go to the website www.riskparityradio.com and follow the contact form and I'll get your message that way. You could ask yourself a question. Do I feel lucky? We will be continuing also this week with a analysis of what Wealthfront has done with a risk parity style portfolio. which is kind of ugly looking as a preview. That's not how it works.

Mostly Voices [34:46]

That's not how any of this works. But we'll get to talk about that.

Mostly Uncle Frank [34:49]

It was raised by one of our listeners and I think is a good topic to show you why certain kinds of bonds don't belong in a risk parity style portfolio. That's not an improvement. If you haven't had a chance to do it, please go over to Apple Podcasts and leave a five-star review. or wherever you get this podcast. I'm asking you to do that. But what's easy to do is what?

Mostly Voices [35:16]

Easy not to do. Thank you once again for tuning in.

Mostly Uncle Frank [35:20]

This is Frank Vasquez with Risk Parity Radio. Signing off.

Mostly Mary [35:27]

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.