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 86 of Risk Parity Radio. Today on Risk Parity Radio, it is time for our weekly portfolio reviews of the six sample portfolios that you can find at www.riskparityradio.com on the portfolios page. And just for a little preview of that, here's the theme. I love gold.

Mostly Voices [1:03]

But first off, I'm intrigued by this, how you say, emails.

Mostly Uncle Frank [1:10]

And we have a number of emails we're going to try and get through here today. First one is from Russell. Russell writes, hello, I've been listening to your podcast and have learned so much. I'm 35 and wondering if adding long-term treasuries to a mostly equities index Fund Portfolio for Diversity Purposes. I know that's broad and each situation is different, but looking forward to any advice you can offer. Yeah, baby, yeah! All right, Russell. Well, I don't think you need to have a risk parity style portfolio if you've got a long way to go until retirement or until you are starting to actually use your portfolio to live on whenever that. occurs, so you don't need it yet if you are still in the accumulation phase. One thing you need to recognize about diversification using long-term treasury bonds or anything else is that the purpose of diversification is not to increase the returns of your portfolio. The purpose of diversification is to reduce the volatility in a portfolio. And generally, especially when you add bonds to an all-stock portfolio, you are going to be reducing the returns in exchange for hopefully dampening the volatility of the portfolio. And reducing the volatility in the portfolio reduces the drawdowns and increases the projected safe withdrawal rate. But if you're not going to use the money anytime soon, you don't need to worry about any of that because you're just going to ride out any downturns while you continue to put more money into this portfolio. When you are accumulating, you're in a situation where you are forced to dollar cost average simply because all of your income isn't coming into you at once. And so you are putting some in throughout the period of accumulation. And if there is a trough, you want to continue to contribute through the trough. And that is how you'll end up ahead, even if the market just goes down and goes back up to where it was. For example, if you were someone who started investing in 1929, the stock market did not return to that level until about 1954, the early 50s. But if you had invested throughout that time period, you would have made a return of 11% annualized simply by investing through the downturn. So that is really what your focus should be at this point in time. Now there are a couple of exceptions. If you were saving for a particular event or expense, like a down payment on a house or something within five to seven years, then yes, you could construct a risk parity style portfolio and invest in that knowing that you're going to need that money relatively soon. The other exception is if your risk tolerance is just very low. And what I mean by that is if you would panic when you see a drawdown like we saw in March of last year, which is almost guaranteed to occur again within our investing lifetimes. And something like that happens on average every decade. And if you cannot tolerate that, then you would want to move to a more conservative portfolio because we are our own worst enemies in terms of psychology and how we fail to manage portfolios properly because we see something happening and react to it as opposed to taking a long-term view on it. So I think you're just fine with your mostly equity portfolio right now. All right, next one comes from Carter V. Frank, love the podcast long way from retirement, age 24, so likely 10 to 15 years at the earliest. Currently saving for a house and using index funds. Is it a bad idea to use PFF to take a little less risk? Also, I was struggling to figure out if the dividend is qualified or not as that would be in a taxable account. Well, no, PFF has about half of the risk profile of the stock market, but it also has half of the returns essentially. It's done better recently because it also recovered out of the March 2020 stock market crash. But if you look at that and if you look at say 2008, you'll see that PFF went down about half as much as the overall stock market and then returned back to where it was and continued growing a little. But almost all of its value is paid out in income that comes out of it in the form of those dividends. Now, the dividends that come out of PFF are mostly qualified dividends. I think the last statistic I saw said it was 80%. It does depend on whether it is coming out of a stock or a BDC that is held by PFF, so it varies from year to year, but it's roughly that. What I think I'd be most concerned about using PFF simply is that, and this depends on your tax bracket. If you're in the 0% tax bracket, use PFF all day long and you won't pay anything on the qualified dividends. If you're in the 15% tax bracket, it won't be that bad, but just having something that is generating income in this kind of savings pile, you're going to get taxed on it every year. It's just the fact of the matter, which may not be that bad, but it's just something to be aware of. So the answer is yes with those qualifications. Yes. Next email is from visitor 4541. and Visitor4541 sent two emails. The first one was asking about the difference between REET, which is a REIT fund that we use in the sample portfolios, and a combination of VNQ and VNYI. VNQ is a Vanguard US REIT fund, VNQI is a Vanguard International REIT fund. And he asked the question why The combination seemed to perform better than R-E-E-T. And then he found his own answer, which I will read to you. Well, this could be a she. I don't know whether it's a he or a she. But visitor4541 writes, well, I did some more research and found some possible answers to my question. I found a pretty good explanation of why R-E-E-T trails a proportional combo of VNQ/VNQI on Seeking Alpha. And he leaves a link there, which I will put in the show notes. With some further research I did, I could summarize by saying REET skews more heavily to commercial than specialty REITs, is very light on development and operations firms, and is significantly underweight in emerging markets due to the requirements of the FTSE index it uses. As a result, it has trailed the S&P Global REIT index by a good margin and produces lower comparative returns to Vanguard index funds sticking with VNQ/VNQI for international reit diversification. And that sounds like a good plan. The main reason I use REET in the sample portfolios is I just wanted to use one basic reit fund for those and didn't want to overcomplicate it by using multiple funds or individual REITs. As I've discussed in the REIT episodes, which I believe are episodes 14 and 16, although it's on the index on the podcast page at the website. I believe that investing in individual REITs is probably the best way to go, and you can select those. Looking at very large REITs, they are diversified businesses as far as being diversified across many properties or many acres of land, depending on what they're doing. And that way you can focus your investments on particular sectors or industries because REITs cover not only real estate but a lot of other things. Warehouser, for instance, is an investment in timber. A REIT like Lamar is a billboard business. PSA public storage is storage facilities. There are ones that do warehouses. There are ones that do cell towers. All of these are different kinds of businesses and it's useful for diversification purposes simply to pick a few of those large ones in the different sectors they are in because you're going to get better diversification that way than by using one of these funds is what I found. So thank you for that email. That is a good solution to REET and its shortcomings, which I agree it has. You are correct, sir. Yes.

Mostly Voices [10:08]

All right, next email is from O and T.

Mostly Uncle Frank [10:11]

O and T writes, hi Frank, I found your podcast about four weeks ago from the Choose FI episode and I've already binged through to episode 60. We'll be caught up within the week, hopefully. Thank you for putting out this content. It is music to my ears. I've been pretty into the FI movement for a long time and have saved a decent amount of money over the amount I need to live a 4% lifestyle on our me and my wife. anticipated needs for a 60 to 70k per year lifestyle. At 2.5 million invested today, we could pull 100,000 and with some of the things I'm hearing in your show, we could maybe even extend that to 125k or beyond, which is pretty mind blowing giving that we set our sights on a number well under six figures. Yeah, baby, yeah. Even knowing we could pull much more, we honestly feel that we can travel the world and enjoy ourselves pretty well on even an expanded budget of 70 to 80k. So we have an entirely different problem, not the focus of this email, about what to do with the excess. So I'm feeling pretty confident in the dollar amount, but it's close to 100% in the stock market. 10% of or so is in cash. I haven't got around to investing primarily VTSAX with some other diversification or so I thought in things like VTIAAX, QQQ, IWN, M and some miscellaneous individual stocks. Square and a company he works for, which I won't reveal. I'm 36 and still working partially because of a high tech job that pays pretty well and that I don't hate, not fully in love but don't hate, partially because of quarantine lockdowns and wanting to have something to do while locked down indoors all day, partially Inersa, the one more year syndrome, and so on. I'm strongly considering being done working full time this next year though, but maybe continuing to work part time for some good cause, a personal project, or some other more fun, meaningful job. Since the follow on job slash work slash project wouldn't necessarily earn enough to fully sustain our needs, I anticipate we're needing the transition from accumulation to drawdown over the period of the next 12 to 36 months. So here's the basic problem. I'd like to get some portion 25 to 50% of the portfolio out of stocks and into some combo of bonds, gold. I've always been hesitant, but you You're selling it well. I love gold. Preferred shares and maybe some REITs or some other miscellaneous. That means selling on the order of 1 million in assets that have had some significant gains, roughly 400 to 500k in capital gains outside the tax advantage accounts. Only 700k of our portfolios in tax advantage accounts total. I was hoping to hold onto the assets with taxable gains until I no longer have income to take advantage of selling them off slowly with 0% capital gains in retirement. So the idea of selling them now before I quit and paying 20% since I'm nearing the cutoff of the 15% even without incurring extra gains is upsetting. I've considered sectioning off 1.5 million to put in a risk parity style portfolio and keeping the other 1 million in 100% stocks since we can almost certainly live off the 1.5 million and with the cushion of the other stock portfolio in case there's a nasty downturn we should be fine. That would allow me to find 1. 5 million with the lowest gains and convert that. I'm curious what you think of this although even still we'd probably be paying tax on 200 to 300k in gains which is 40 to 60k I'd love to hold on to. by selling later at 0%, all else equal. Any advice for a situation like this? Basically how to go about converting large portions of taxable gains into a risk parity without nasty tax hits or how to justify the tax hits as worth it. Also, I know you mentioned being interested in getting some social component out of this podcast. So if you're interested in a video chat sometime instead of an email reply, I'd be more than happy to do so. I'm sorry this got a bit long-winded. Hope you don't mind. Thanks again for the content and your contributions to the community. O and T. Thanks O and T. Yeah, mostly I am using these emails for this podcast because I think that giving answers to different questions will help a lot of different people along the way who may be in similar circumstances. So in most case, I do not respond directly to emails, but bring them out for the podcast. So I only respond to a few of them actually by email. But considering your situation, yeah, I mean, the first and easiest solution would be to move your 700K that is in the tax advantaged accounts into the risk parity style investments or the alternative investments and not touch the money that is in the taxable account. right away until you stop working and stop having another income and then you can reduce your taxes that way. You may have to or want to convert some in the meantime though. You are in a difficult situation. I would look into though using tax lots of things that have been recently purchased. Make sure they're over a year so you have long-term capital gains on them. but that may give you a way to reduce the tax burden simply by selling the things that have not increased as much right now. But you're going to have to pay taxes now or later. Paying them a little later is probably worth the taking the risk that you have here of a sharp drawdown in the stock market before you retire. That, I mean, that's the risk you're taking and you need to balance that out with how much the taxes are. So I think converting everything in the taxed advantaged accounts is sort of the first step and then thinking about how much do I need to convert from what's in the taxable accounts in the stock funds would be the next step. I'm afraid there isn't any magic button you can push here. It's either, you know, take a risk and pay less taxes later or pay some more taxes now and take less risk. going forward, and only you, I think, can decide how much you're willing to pay in taxes to reduce your risk at this point. But I think with 700K in that taxable account, if you convert that all into things like bonds and REITs and gold and things like that, that may cover everything. Because what you can do once you're retired then is sell some more in the taxable account until you get to a point where you have the portfolio that you desire to keep long term. And I think we've got time for one more of these emails today. This one comes from Travis H. Travis H writes, Hey Frank, as I've evaluated my asset allocation, your podcast has been wonderful and funny way to review my personal Let me understand this. I'm funny how? I mean funny like I'm a clown. I amuse you. What are your thoughts on utilizing TLT at a 10 to 15% allocation as we've hit such low interest rates? Backtesting isn't necessarily a realistic view of the future. What would you say to a split of 10% SHY and 10% TLT to balance out the short-term and long-term treasuries considering potential inflation? I really loved your message around correlation for diversification and am in a heavy equities portfolio looking to move towards the golden butterfly and curious on your thoughts with Treasuries. Thanks Frank, Travis. All right, well, it looks like we've got a little bit of a crystal ball here. My name's Sonia.

Mostly Voices [18:06]

I'm going to be showing you the crystal ball and how to use it or how I use it. Danger, Will Robinson. Danger, Will Robinson. Danger. But you know what I've learned dealing with balls? If you can dodge a wrench, you can dodge a ball. It happened once.

Mostly Uncle Frank [18:22]

So here's how I think you should think about it. Fat, drunk, and stupid is no way to go through life, son. I think you should not be trying to deal with the concept of inflation by monkeying with the assets in your portfolio that are designed to deal with deflation. Because those are the only ones you have to deal with deflation. What you need to think about is the assets that are there to deal with an inflationary environment and making sure you have some of those. If you're going to the golden butterfly, the ones that deal best with inflation are the small cap value funds and the gold when inflation gets out of control. And you'll understand that when you listen to the rest of this podcast, understand that a little bit better. The short-term treasuries are useful, but they're more like ballast. I mean, they don't move around a lot either way. So they are pretty close to cash or a savings account. And the more short-term treasuries you put into your portfolio, the more It's gonna have this kind of cash drag to it that it's just not doing anything. So the, I mean, the answer is don't short change your long term treasuries thinking you can skew your portfolio based on the crystal ball you have about inflation. Forget about it. Because people who have done that and people have done that over the past 15 years and they really shot themselves in the foot in 2008. and they shot themselves in the foot again in March 2020. Fortunately, it didn't go on too long, but that downturn could have lasted a long time. And those treasury bonds were up even from their low levels. That interest rate can go right back down to 0.4 where it went last March. And if it does that, the TLT is going to go up 25 or 30% again. And that has happened repeatedly, regardless of what level it's at when you get to a market crash deflation, like 2008 or 2020 or even going back to 2000, what happens is the market crashes and people run into long-term treasury bonds. They'll run into all kinds of treasury bonds, but the long-term treasury bonds will go up the most in that circumstance. So yeah, they're going to go down if there's inflation. But if that's your bet, you're trying to predict the future using a crystal ball. And I wouldn't use that process. I would construct a portfolio that will do okay in all environments as opposed to thinking you know what's going to happen next. That would be great. Okay. And now it is time for our weekly portfolio review. of the six sample portfolios that you find at www.riskparityradio.com on the portfolios page. And this week was a good example of a panic week. In a panic week, people just sell everything. They sell their bonds, they sell their stocks. There's one thing they don't sell. I love gold. So let's just take a look at what happened this week in the markets. The S&P was down 1.39%. NASDAQ was down 2.34%, was a big loser for the week. TLT, which is our long-term treasury bond fund, was down 1.5% for the week. REITs represented by the ETF R E E T were down 0.91%. Commodities represented by PDBC we're down 1.34% and preferred shares represented by the fund PFF were down 1.14%. Now what didn't I mention in that list?

Mostly Voices [22:25]

Gold! Gold was up 1.56%.

Mostly Uncle Frank [22:31]

Gold was up 1.56% because in panic times people don't sell their gold, they hold on to their gold and some more people buy some gold and that's a very common occurrence in these sort of short-term panic markets. What you'll see then is everybody sells one day and then things get kind of reordered and people kind of figure out, well, what do I really want to be in? But the buying takes longer to occur. Meanwhile, gold usually shines in those kinds of circumstances. What really took it on the chin last week was Bitcoin was down 13.3%. So, if you're thinking, or you have this narrative in your head that Bitcoin is taking the place of gold, that's not happening. The data doesn't support that. Geez, I wouldn't know majesty if it came up and bit him in the face. Bitcoin tends to be a risk asset, like a commodity, at least that's the way it trades right now. And when people are dumping everything else, they're dumping that too. Yes. All right, looking at the how the portfolio is performed. The first one is the All Seasons portfolio, and this one is 55% Treasury bonds divided into 40% TLT and 15% VGIT. That's intermediate term Treasuries. It's got 30% in stocks in the Vanguard Total Market Index Fund VTI, and then it's got 7.5% in gold, GLDM, and 7.5% in PBDC. and this one was down 1.15% for the week. It is up 4.88% since inception last July. What you'll see in these portfolios is the ones that have more gold in them did better. They were down, but they weren't down as much. This one was not down as much as the stock market or the bonds it holds. The next one is the golden butterfly. This one is 40% in stocks divided into VIOV, the small cap value fund, VTI, the total market fund, then it's got 40% in bonds divided into short-term bonds, SHY, and long-term treasuries, TLT, and then it's got 20% in gold in GLDM. Now, what did this one do last week? It was down, but it was down 0.67%. and it is up 19.37% since inception last July. And this is a very good illustration of why having gold in your portfolio can really make a difference in these bad times. When something bad is going on, oftentimes gold is just out there and performing just fine, and it reduces the volatility of the portfolio. This actually is a very... because this portfolio will tend to drop only about half as much as the stock market in stock market crashes. In fact, it is down about half of what the stock market was down last week. I think that's coincidental, but it is due to its diversification. The next one is the Golden Ratio Portfolio. This one is comprised of 42% stocks in three funds. and then it's got 26% in long-term treasury bonds, TLT, and then it's got 16% in gold, GLDM, and 10% in REITs, REET, and 6% in cash in a money market fund. This one was down 0.95% for the week. It is up 16.66% since inception last July. And again, you see how these portfolios are down, but they're not down as much as the markets. They have just have lower volatility than the markets do. And then we go to the Risk Parity Ultimate. This one had a little bit less gold in it, so it did a little worse. And it has 40% in stocks. It has 25% in long-term treasury funds. It's got three of them. We'll go through all these funds. Then it's got 10% in REITs, REET, 10% in gold, GLDM, 12.5% in PFF, the Preferred Shares Fund, and 2.5% in VXX, the Volatility Fund, which was up last week. I did not look and see how far it was up, but it was the big winner for sure, probably up about five to 10%. So anyway, this portfolio was down 1.32% for the week. It is up 15.18% since since inception last July. And now we go to our two experimental portfolios that are much more volatile because they have leveraged funds in them. The Accelerated Permanent Portfolio, this one is 27.5% TMF, that's a leveraged bond fund. It is 25% UPRO, a leveraged stock fund, 25% PFF, that's a preferred shares fund, and 22.5% in gold GLDM. It was down 2.51% for the week. It is up 11.68% since inception last July, and that gold really helped it out this week. And now we go to the aggressive 50/50, and what's notable about this is it does not have any gold in it, and you'll see the results here from that. This one has 33% in the TMF, the leveraged bond fund, 33% in UPRO, the leveraged stock fund, Then it's got 17% in PFF Preferred Shares Fund and 17% in VTIT and Intermediate Bond Fund, which are the two ballast components of this really. This one was down 3.27% for the week. It is the most volatile portfolio and you can see how volatile it was. It is up 13.38% since inception last July. So still doing fine as far as that's concerned. So what can we say?

Mostly Voices [28:40]

I love gold!

Mostly Uncle Frank [28:44]

Well, at least for this week we do. Ha ha ha ha ha!

Mostly Voices [28:47]

Trogdor strikes again!

Mostly Uncle Frank [28:50]

But now I see our signal is beginning to fade. In the next several episodes we'll be going through a lot more emails since they keep piling up. We will also be analyzing a covered call ETF, QYLD. coming up and also I Bonds, and we will use David Stein's 10 questions to analyze any investment for those episodes in the next couple of weeks here. If you have questions or comments, 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 put in your comment in the contact form and I will get your message that way. Yes! If you haven't had a chance to yet, please go to the Apple Podcasts site or wherever you get this podcast and leave it a five-star review because every bit helps on that front.

Mostly Voices [29:56]

I'm asking you to do that. But what's easy to do is what? Easy not to do. Thank you once again for tuning in.

Mostly Uncle Frank [30:03]

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

Mostly Mary [30:10]

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.