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 [0:36]

Thank you, Mary, and welcome to episode 88 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. But before that, first off, I have a little announcement. There is a new fund finder tool over at Portfolio Charts that was just unveiled in the past few days. And I know there are a lot of listeners in other countries besides the United States who are looking for funds that match particular asset classes. and the fund finder is advertised to do just that to help you find funds in your local country or markets that fit those asset classes. I don't know whether it's a great fund finder or a poor fund finder, but it is at least something more than you're probably going to get from me since I'm not that familiar with the funds available in many of these other Jurisdictions. Man's got to know his limitations. And now...

Mostly Voices [1:54]

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

Mostly Uncle Frank [1:59]

And our first email comes from Jamie E. And I should have read this one before because it's an older one. It's from May 8th. And Jamie E writes, hi again, Frank. Still loving your show. Yeah, baby, yeah! Two questions for you. One, what do you think of covered call ETFs for a risk Risk Parity Style Portfolio, EG QYLD, and two, does it make sense to put riskier high reward asset classes in Roths and less risky asset classes like bonds in traditional retirement accounts? If so, do you have any suggestions on how to execute this strategy in an M1 portfolio? Thanks, Jamie E. Okay, for the answer to your first question, I'm going to punt on that one because we're going to do a whole 10 questions analysis of QYLD and we'll try to do that this coming week and deal with it that way. That would be great. Okay. As to your second question, whether it makes sense to put higher reward asset classes in Roths than in the traditional retirement accounts. I think the issue is when you plan on using the account. if your plan, which like most people is to leave the Roths as the last thing you would use, yes, you would want to put your growth assets in there, which are going to be your stocks and things like that, and then put more of your bonds and REITs in your traditional retirement account. But it really does matter what order you plan on using the assets in. If for some reason you planned on using that Roth account earlier, then this wouldn't make sense because the idea here is to put the longest term assets, if you will, if you're not going to touch a particular account in that account and then just leave it alone. If all goes well, you may never use a Roth account and simply leave it to your heirs. And then you would want it to be almost 100% stocks, probably if it's a 20 or 30 year time frame and you're not planning on touching it. All right, do I have any suggestions as to how to execute this strategy in an M1 portfolio? Actually, I do not. I did not know that. Because I don't have an M1 account. I know they have a pie thing that they do there. If you go to optimize portfolios, it does have a lot of M1 related content there to help you set up various kinds of portfolios at M1. So I'll put that link in the show notes along with the link to portfolio charts and you can take a look at those at your leisure. Man's got to know his limitations. All right, the second email comes from Zach and Zach writes, Frank, your covered art is fantastic. Slap the pentagram on some shirts, mugs, vests, Apparently the family has them and I'm buying Zach. All right, Zach, just so you know what the history of that is, I did create that little logo with with mine own hand, as they would say in the movie gangs of New York. By mine own hand. And I did trademark it. I had a fun time doing that on a logo maker. I'm not very artistic, but I thought it turned out pretty well. The reason that it is a star inside a pentagram is that is a geometric representation of the golden ratio. If you take the length of one of the pieces of the star and put that against one of the lengths of the side of the Pentagon, that is in fact the golden ratio. And you'll also find it in many other parts of that diagram. And then the rest of it is just a lot of types of investments you might make and some ideas. on the mathematics of these kinds of portfolios. So I did get some best just for the family off of Etsy just for fun. I have no plans right now to broaden out a swag factory if you will, but maybe I will sometime in the future. It would be fun to have them. It would not be fun to be shipping them, I can tell you that. As you can see, I've got several here.

Mostly Voices [6:25]

A really big one here, which is huge. Yes!

Mostly Uncle Frank [6:32]

But maybe someday I will create such things since I did go through the trouble of applying for and getting the trademark, which was another interesting adventure in and itself. All right, the next email is from Keith and Keith writes, Thanks for putting together such a tremendous amount of valuable information for us. I'm beginning to think about shifting my accumulation portfolio into something more suitable for retirement, so your podcast is very helpful. A question for you about portfolio visualizer. Why does it seem that every portfolio that doesn't include long-term treasuries is improved by adding them? The default formula for a 60-40 portfolio, for example, has a relatively poor risk return ratio because it uses intermediate term treasuries. Simply changing from the intermediate to long-term treasuries transforms it into one of the top performing portfolios. Something tells me that it isn't that easy in the real world. Is there some bias in the data set that makes long bonds seem like the silver bullet? Is there a hidden risk from using a high allocation in long bonds that isn't accounted for in Portfolio Visualizer? I'm always skeptical of simple games that imitate complicated problem.

Mostly Voices [7:43]

Fire and brimstone coming down from the skies.

Mostly Uncle Frank [7:46]

All right, there are several reasons for this. First off, first of all, there is a time frame issue that a lot of the analyses at Portfolio Visualizer are limited to times after 1980, and this has been a particularly good several decades for long-term treasuries. And so putting those in a portfolio, they have performed well over that period. And I think that is going to help them. And the reason you do want them, though, is because they have a higher volatility in the opposite direction from stocks. And that's why they perform better than intermediate treasuries for diversification purposes. Because what's going to happen and what you see over time is you get very big moves in long-term treasuries that are usually the opposite direction to stocks. which allows you to rebalance them either buying more long-term treasuries or selling the long-term treasuries and buying more stocks in a stock market crash, for example. And so that improves the performance of the portfolio. And it's just that no other asset class really behaves that way in relation to stocks and has not over time. And talking more about that time frame issue though, if you go back to the 1970s, which you can do over at Portfolio Charts and to a limited extent at Portfolio Visualizer, if you use the asset class backtester, you'll find that long term treasuries did not perform well in that environment. And so that is the reason why you would want to have things that did perform well in that kind of environment, which included small cap value stocks, REITs, gold, commodities, all of those kinds of inflation sensitive Asset classes. Now, if you hold if you held those over, say, the past 10 years, they were not a good place to be while long-term treasuries were doing just fine. But that's why you want to have a really truly Diversified portfolio so that you don't have to guess what the environment is going to be next. You just know you have things in your portfolio that are going to perform well in all kinds of environments, even if something else in your portfolio is not doing that well. at that time. And finally, just thinking about bonds, if you really think about bonds of different durations, the ones that are of the shortest durations are most like cash and they're not very volatile in either direction. Intermediate term treasury bonds or other intermediate term bonds are more volatile, but long-term bonds are the most volatile. So what you get with long-term treasuries is negative correlation with the stock market. and more volatility in that direction, which leads to better overall portfolio performance. And that's something that is difficult for people to appreciate why you would want something, a bond that is more volatile as opposed to one that is less volatile, but it has to do with how your total portfolio is constructed and not looking at these bonds in a vacuum, which is the trap that seemingly most financial professionals even fall into trying to look at bonds in a vacuum and constructing a bond portfolio that is separate and apart from your stock portfolio doesn't make a lot of sense and it really doesn't work. So we want to discourage that, really follow the Holy Grail principle, which is to look at all of the correlations of all of the things in your portfolio together. and not as separate units. All right, the next email is from Ian A. And Ian A writes, hi Frank, thanks for the insightful podcast. I've learned a lot so far. I'm still in the accumulation phase, but I have a significant amount of assets in a taxable brokerage currently all in total US stock market. I'm considering how I might eventually transition to something like the Golden Butterfly when I get closer to drawdown phase without huge tax consequences. My current idea is to start to buy VIoV instead of total US in my taxable until I approach 50/50 between VTI and VIoV. Then when I get close to drawdown phase, I can move our retirement accounts into TLT, SHY, and GLDM to approach the 2020-2020-2020 allocation across the portfolio. Does that seem like a good plan to keep the rewards higher for now while also slowly transitioning to a risk parity portfolio? Thanks.

Mostly Voices [12:40]

And the answer to that is, yes, you are correct, sir, yes.

Mostly Uncle Frank [12:44]

And the one thing you just need to bear in mind is that We cannot predict going forward in the future which will perform better, the IOV or VTI. In various decades, one has outperformed the other, and a mixture obviously will not perform as well as the best one. So you'll get kind of the average. But all of these performances, since we're talking about highly correlated stock funds anyway, are likely to be 90% correlated in the future. So yes, moving your stock portfolio to the kind of mixture that you eventually want, but keeping it as a 100% stock portfolio makes a lot of sense. Yeah, baby, yeah! There are a lot of good all stock portfolios and this area has been mined excessively and extensively and any book you pick up will say put it all in the total market or put it all in this five factor fund analysis or put it in these 10 different funds or four different funds. I find all of those can be successful strategies and which one will be the best in the next 10 or 20 years is not a knowable thing. I did not know that.

Mostly Voices [14:05]

So just pick one that you're comfortable with.

Mostly Uncle Frank [14:09]

And it sounds like you've got a good plan here, and I would just go ahead and implement it just like you've described. And you'll be dispatched by mine own hand. All right, next email. Well, it's two emails from the same person. His name is Aldo M, and Aldo M writes, in the first message, Thank you for enlightening me with your wisdom on investing for retirement. Well, I'm very happy to do that. I'm glad it helps.

Mostly Voices [14:36]

Everything is proceeding as I have foreseen.

Mostly Uncle Frank [14:45]

And the second message, which is more substantive, is, hi, thoroughly enjoying your podcast. Thanks for all the good advice you're giving us. I live in Switzerland, and from the 1st of July, my bank wants to charge me negative interest rate of 0.75%. on my cash balance pushing me to act and invest my money. I am USD 100K invested in shares ETFs. I can keep some USD 300K in cash without being charged and need to invest the remaining cash balance of about 600,000 US dollars. I'm 54 and planning to stop working in three years time and will live on my savings at least until I retire at the age of 65 where I'll get some additional income in the way of a moderate pension. As I am still working, I believe I can accept higher risk for now and was planning to go for a modified risk parity fund of yours with a slightly higher percentage invested in shares. My idea would be to invest 60% in shares, 25% in an all fund, and 35% in small cap value, and then 15% in gold, 15% in TLT, and 10% in REET. I would be grateful if you would let me know what you think about my choice. I have a big issue with all the funds you selected as they are mostly not available in Europe and need to find equivalent ones. I have noticed that similar funds in Europe charge higher fees. Particularly, I cannot find an equivalent for the VIoV. I could go for the iShares World Small Cap but I believe the mix of value and growth and for VTI I could adopt For an MSCI world fund. Finally, I could go to the iShares Treasury Bond 20 plus year ETF. As your follower community expands outside the US, would be nice if you could provide some tips for non US based folks like us. Thanks a lot for your valuable opinion and we'll be listening to all of your podcasts. All the best, Aldo. Well, Aldo, I will do my very best, but you know what I Do you have to recognize... Man's got to know his limitations. And it is true, I am not that familiar with funds outside of the US. You can't handle the truth!

Mostly Voices [17:02]

But that link that I mentioned at the beginning of this

Mostly Uncle Frank [17:06]

show to the Portfolio Charts site with the fund picker, it does have Switzerland in there. And so I think that that might be able to help you, at least I hope it would be able to help you. I can't guarantee it will help you, but I thought it was very timely for Tyler over at Portfolio Charts to put that thing out, since I'm getting so many questions from so many people in so many different countries. Don't be saucy with me, Bernays. I think your percentage selection sounds fine. Basically, it is probably going to have the risk profile of something like a 70/30 or 75-25 kind of portfolio that would be just stocks and bonds, they'll have the same kind of risk profile, and that sounds like it'll work given what you're trying to do here. Yeah, I would definitely get more of your money out of cash. I know you have a very strong currency, but still you need to think about the total for the future and some of it needs to be invested as you have Correctly surmised and come up with a good plan for the REET fund. I probably would not use REET. I know I use it for the sample portfolios, but that is just for simplicity purposes. You can probably find other REETs that are better or other funds that are better, but just take a look at those. I like to hold individual REETs myself, and so I hold about 10 different ones. that overly complicates things and is probably not necessary, but I feel better about it that way. By my no hand. There are two REIT episodes if you go back and listen to those with a link to a correlation analysis with listing a whole bunch of different refunds. I don't know if they're available where you are, so you can take that into account. The other thing I would look at for yourself is whether you want to open an account at Interactive Brokers because if you did that then you would have access to more markets and more funds and that is a common thing for people outside the US to do to get access to all of these US funds. All right, and the last email today is from Brad S. Brad S. writes：Frank, I recently invested in the Golden Butterfly, but I've noticed lately that each day all five positions seem to be moving the same direction. Now, obviously I need to give it time to work like you've discussed in past episodes, but I was wondering, is it common for daily gains/losses for all five different positions? Or is this a sign of things starting to become unraveled that could potentially impact the way the risk parity fundamentals work in a portfolio? For fun, I also threw in some VXX, which has really helped stabilize the overall portfolio value over the past couple of days. It's 5% of the total, but pretty small over dollar amount. Thanks again, you've awoken something deeply embedded in me that has greatly impacted my way of thinking over the years. I'm referring, of course, to the Homestar Runner references in your episodes.

Mostly Voices [20:25]

*laughs* Dragador strikes again! Thanks also for the financial wisdom you're sharing. I'll improve on your methods.

Mostly Uncle Frank [20:31]

Well, thank you, Brad, and that's a good question. Yes, it is fairly common to have days where all of the components of one of these portfolios go up or go down. It usually doesn't last longer than a few days before things sort out. Just the chaotic way markets work, some days people are just selling. no matter what they have, they're only thinking about selling. And so, even though they're going to buy something else in the future and shift the portfolio around, on a particular day you could see everything being sold like that. And it is true that on days like that of instability, sometimes you often see the volatility spike and VXX or something similar to that will go up in value. VXX is always this kind of double-edged sword because while it does act in insurance in those environments, it also just is a drag on a portfolio overall because of its nature. It just tends to lose a certain percentage every month for the most part and then only kicks in when you have excessive volatility striking in markets. It's one of those things that actually does have a negative expectation over time. But if you want some more stability in the overall portfolio, it is not a terrible idea to have a little bit of it. Five percent is actually a lot to have for something like that because you can consider that over time that is going to lose all of its value essentially. The other way of reducing risk, of course, in a portfolio would be in that particular portfolio to put more in the short term bond fund, which is one-third to one-fifth less volatile than the other components. It won't make you rich, but it will be the most stable thing if things go down. My experience is once you've had a few days like that, there is a shift or a decision by the market to go in a particular direction next. You never know which one or where it's going to go next. In this circumstance, I realized that was written on the 13th of May when there was some volatility in the markets. But then the next thing you saw was that people started buying gold for whatever reason. And gold has been a good performer over the past couple of weeks here. It was a terrible performer before that. But it's not infrequent to see a massive selling on a few days and then some kind of reevaluation and movement into different assets. And I believe that concludes the email portion of this episode.

Mostly Voices [23:26]

You can actually feel the energy from your ball by just putting your hands in and out.

Mostly Uncle Frank [23:30]

We are through all the emails to May 13th. So if you sent me one after that, it's coming up and hopefully I'll have another bonus episode this week to make a dent in some more of them. But now we're going to shift to the last off portfolio reviews for the week. And just looking at the markets for comparison purposes, the S&P was down 0.43%. The NASDAQ was up for once up 0.31%. Gold was The big winner again, I love gold. Gold was up 3.01% for the week. Long-term Treasuries represented by TLT were up 0.42%. REITs represented by the fund R E E T were up 0.67%. Commodities had a down week. PDBC, our representative fund, was down 1.53%. And PFF, our preferred shares, fund in some of our portfolios was up 0.52%. So overall not too much movement and that was reflected in the performance of our portfolios. Looking at our most conservative one, the first one is the All Seasons and this one is only 30% stocks and it's got 55% in being 7% or 8% long-term treasury bonds, 5% in the M and 7% in major commodities, PTBC. This was up $4 for the week. So it's essentially flat. It is up 4.92% since inception last July. And so it is doing its job. I'm putting you to sleep. Now moving to the more lively portfolios, the sort of bread and butter to the next three, the Golden Butterfly. This one is the one we've been talking about that's 20% total stock market, 20% small cap value, 20% in long-term treasuries, and 20% in short-term treasuries. and then 20% in gold. This one was down 0.57% for the week. It is up 19.47% since inception last July. So is exhibiting its well-known stability. Moving to the next portfolio, the golden ratio. This one is 42% in stocks and three funds, 26% in treasuries, long-term treasuries that is 16% in gold, GLDM. 10% in REITs, R-E-E-T, and then it's got 6% in a money market cash. And so this one was up 0.22% for the week. It is up 16.91% since inception last July and is also showing nice stability. The Risk Parity Ultimate, I think, was our biggest loser this week. This one is 40% in stocks. in a variety of funds, 25% in long-term treasury bond funds, then it's got 10% in gold, 10% in REITs, 12.5% in PFF, the preferred shares fund, and it does have 2.5% in VXX, that volatility fund. It was down 1.12% for the week. It is up 15.40% since inception last July. And now moving to our two experimental portfolios, these were surprisingly stable this week as well the accelerated permanent portfolio is our first one this one is 27.5% in a leverage bond fund TMF 25% in a leveraged stock fund UPRO 25% in PFF for preferred shares fund and 22.5% in gold GLDM and it was up 0.44% for the week, it is up 12.15% since inception last July. This one is actually getting close to perhaps having another rebalancing, but we will have to check it in the middle of next month, because it looks like the UPRO has grown and the TMF has shrunk again. All right, the last one is our aggressive 50/50. This is our most volatile portfolio, although you wouldn't know it this week. It happened once. This one has 33% in UPRO, the leveraged stock fund, 33% in TMF, the leveraged bond fund, 17% in PFF, the preferred shares fund, and 17% in an intermediate term treasury bond fund. It was up all of $8 last week, so essentially flat as well. It is up 13.46% since inception last July. And that concludes our portfolio review. It was a nice boring week, which is what we're really hoping for when we're constructing these risk parity style portfolios. I took the liberty of putting away something in your teeth.

Mostly Voices [28:23]

What are you talking about? I'm putting you to sleep.

Mostly Uncle Frank [28:27]

We want them to perform, as Bernie Madoff would have had things perform, actually only in real life and not just on paper. But with that, I see our signal is beginning to fade. If you have questions or comments for me, you can send them to frank@riskparityradio.com that's frank@riskparityradio.com that email. Or you can go to the website www.riskparityradio.com and fill out the contact form and I'll get your message that way. As I noted, I'm about a week behind on these emails, but hopefully we'll get a little bit caught up. I do see they accumulate more and more. Maybe I shouldn't be telling you where to send them. Danger. Danger. If you haven't had a chance to do it, go to Apple Podcast or wherever you get this podcast and leave it a five star review to get the message out to other potential listeners. That would be great. Okay. We are actually approaching 60,000 downloads and we'll probably hit it after I release this episode. Thank you once again for tuning in. This is Frank Vasquez with Risk Parity Radio signing off.

Mostly Mary [29:41]

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.