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 92 of Risk Parity Radio. Today on Risk Parity Radio, we're going to have a bonus episode where I plow through some more of these emails to see how close I can get to being caught up with them. But before that, I have a little announcement. I have been asked by some of the emailers whether I do one-on-one coaching. And while I had not planned to do that when I started this podcast, there seems to be a demand for it. So I looked into it and considering that my time is valuable these days, since I've done all the work I really want to do in life, at least for pay, that I am willing to do this for $300 per hour. I will give you the same kinds of advice I've been giving to friends and family over the years and will review your particulars with you and make some suggestions. So knowing how much it would cost, if you're still interested, please email me and we can set that up in a formal way. But now... I'm intrigued by this, how you say, emails. And our first email today is from Randy, and Randy writes, Sorry if this message is a duplicate. I'm not sure it went on the first attempt. I've been recently following your podcast and I've been finding it very enlightening. I'm two years away from retiring. I was planning on continuing my 65-35 VTSAX/VBLTX portfolio into retirement, but I'm now looking hard into the golden ratio. My question is actually on the experimental aggressive 50/50 portfolio. I'm not considering it for my retirement drawdown accounts. but it looks ideal for my Roth account. I don't plan to touch that for 10 years. Here the volatility is not a major concern. This Roth is currently 100% VTSAX. My question is on the 3x leveraged S&P 500 ETF UPRO. I don't know how this is possible to get 3x leverage without the risks of buying on margin. This seems too good to be true. Thanks. Well, if you go and look at this, and I will link to the holdings of UPRO in the show notes, and what you'll see is that it not only holds S&P 500, but it also holds a number of swaps contracts, and these are contracts with large international banks, about 10 different ones that it's got listed there. What those swaps contracts are, are basically a gamble, if you will, Usually the way a swap contract works is it says something and depending on what an index does that it's tracking, if it goes up, somebody has to pay somebody else. If it goes down, the party that would have paid has to pay the other party. And so in that manner, I'm sure they are using as the basis for the swap contract, the S&P 500 index itself, and using that they can create this leverage. Now, what are the risks inherent with that? You always have what's called counterparty risk with a swaps contract because you are counting on the other side to be able to pay if the index goes in your favor. Given the nature of these banks and you can look at them yourselves, I don't think they're gonna have any trouble paying for UPRO, but that's how it's done there. Now, as for using the aggressive 50/50, yes, it is a very aggressive leveraged portfolio, and it's also missing some components that you'd ordinarily see in a risk parity style portfolio, namely some gold or other alternative investments and some small cap value stocks. So if you're comfortable, you know, taking those kind of risks, then go right ahead with it. I personally would probably take something that looks more like the accelerated permanent portfolio and probably add some small cap value into that. You need somebody watching your back at all times. Which is kind of what I do with one of our small Roth accounts that we're not going to touch. Alright, the next email, this one is from Kristen S. And Kristen S writes, hi Frank, I'm one of your long time loyal listeners since sometime last summer when you posted something in the Choose FI Facebook group announcing it. I recognize your name from an episode of the Choose FI that you were on talking about bonds. I often replay episodes of Risk Parity Radio because they are so full of great information. Lately I've noticed the newer episodes have included a lot more audio drops from movies, etc. And in my opinion it is really distracting and way too much. Your voice is very easy to listen to and you are great at getting your message across without all the added audio content. interrupting your flow. Maybe consider limiting the audio drops to the intro outro or when transitioning to a new topic. Thanks for considering this feedback and thanks for putting out such terrific content. Kristen. Kristen. Oh, Kristen. You can't handle the truth.

Mostly Voices [5:52]

You can't handle the crystal ball. You can't handle the gambling problem. You can't handle the banana's. You can't handle the-- Dogs and cats living together. You can't handle the-- Tractor!

Mostly Uncle Frank [6:08]

I have to say that I'm guilty as charged. I do tend to get a little carried away sometimes. I have a quirky sense of humor and I'm just one of those people that if they find something funny, they tend to overdo it.

Mostly Voices [6:27]

What we do is if we need that extra push over the cliff, you know what we do? put it up to 11. Exactly.

Mostly Uncle Frank [6:31]

And so, you are correct that I get a little bit too enthusiastic sometimes with those things, and I hope you can forgive me for that. I do have an ulterior motive to it. I've noticed that my children are much more interested in listening to my podcast if it has more little sound bites in it, particularly things they remember us sharing when they were growing up. Everything is going as planned. I hope you'll tolerate a little bit of it in the interests of my children. I don't think it means what you think it means. That would be great. Mm, okay. Thanks. The next email is from Freya I and Freya I writes, hi Frank, I'm very glad I heard you on the Choose FI podcast, as I've been geeking out on your podcasts and the portfolio charts, and I really enjoy the level of detailed analysis. My questions relate to how to convert the portfolios to a UK alternative, particularly for the commodities ETF as PBDC isn't possible with our tax wrappers. I've looked at the options available which are UCITS and UK reporting compatible, per and tax efficient. These are the US dollar version tickers and believe these are equivalent. And then the ones listed are iCom, ICOM, ROLL, BCOM, COMF, CRBU, WCOA, and UC14. My questions are, these are synthetic swaps, is this equivalent? Second, looking at how they fared during March of 20, ICOM, BCOM, and WCOA performed better approximately 20% so it would seem to be the better risk parity option. I believe this is because they have a higher percentage of precious metals, approximately 20%. However, some of them are very new, only 2017-2018, so there really isn't much of a history to view beyond the pandemic. What do you think? What is your view on the role to minimize losses on futures contracts? And four, in general, what logic would you recommend in selecting a commodity ETF, or would you stay clear altogether? Thanks, Freya. Well, this is a very interesting question, and I'm glad you brought this up. The first thing that I can direct you to, if you go to portfolio charts and turn on the Great Britain setting for the fund finder, there's a fund finder there now that's relatively new, and it will give you sort of the cheapest one in each of the classes that it's got there. And so when you put that in there for the United Kingdom, it comes back with ICOM, which is one of the ones you have on there. It actually gives you what is called the I-S-I-N number, which is IE00BDFL4P12. That's IE00BDFL4P12. But when you search that, you get ICOM out of it. So that would seem to be a good choice for that at least there's somebody else that's reviewed it besides me and you. Now you mentioned these are synthetic swaps, is that equivalent? Yeah, I think that is the way that a lot of these funds are going these days and what that involves what we just talked about with the UPRO where you are basically in a contract or the fund is in a contract with some kind of large financial institution that's willing to take the other side of it. So when the index moves one way or the other, one party has to pay the other one based on the move in the index. That's going to be a more efficient way than using options and futures contracts because of that role you mentioned. So a synthetic swap is actually probably going to be more efficient. The risk involved there is this counterparty risk. Obviously, if that financial institution cannot pay on the swap contract, then you have a problem. But assuming they're dealing with very large reputable institutions and they're not using only one but a group of them, you're probably not going to have too much trouble with these kinds of contracts. But all of these, as you have observed, there has been a outpouring of new ETFs and new ways of putting different asset classes into these ETFs or you CITS is another form of them. And this has only been around for the past, you know, five years or so. So there is some doubt as to how they can work, but they do seem to be working pretty well, and they are working better than some of these older ones that were based on futures contracts, which have that role problem that you mentioned that seemed to just deteriorate over time as to what kind of Commodities fund might be invest? This is also a very interesting question because there are developing many different kinds of commodities funds. And one of the more interesting developments is the idea of a managed futures contract, which we talked a little bit about in episodes 53 and 55 when we were talking about the Dragon Portfolio. And we also talked about a Managed Futures Fund, DBMF, in episodes 55 and 57. But what you are looking for obviously is something that's going to be the most diversified from the other things in your portfolio. And you also want this thing to perform well in inflationary environments because that's when commodities are supposed to perform well. And that's the kind of environment that you want to have your commodities Selection in your portfolio to deal with. So I would think that you would want something that actually does not have precious metals and are not too much or not too much gold simply because you're already going to be holding gold probably separately. And gold does perform differently than most commodities. It seems to trade more like a currency than a true commodity. And that probably has something to do with its intrinsic uses or lack thereof. when you compare it to things that are actually consumed, industrial metals or agricultural products. So I think you would probably want one that has mostly agricultural products and industrial metals in it. But I do view this as an area that is under development, if you will. In the past, hedge funds who have had risk parity style portfolios often resorted to commodity producers, which is not exactly the same as owning a commodities index. And I think there's going to be more options in the future and these are going to shake out over the next decade, probably, as to what is the best way to construct a fund that is designed to reflect commodity indexes. But bear in mind, this is probably not going to be more than 10% of anybody's portfolio and probably going to be more like 5%, I would think. But given all that's been going on in the space, I do think we'll probably make some adjustments in the sample portfolios, at least the Risk Parity Ultimate, to include another one of these commodities funds when we go and rebalance it in July. Just so we have something there that tracks another one of these things. We can get an idea of how it actually works out in a diversified portfolio. All right, the next email is from Koo, and Koo actually sends two emails. The first one says, hello Frank, thanks for the podcast. I love that you explain the why versus just saying what to do. Question, how are you determining safe withdrawal rates for the different risk parity portfolios? Thanks, Koo. Well, I wanted to come up with withdrawal rates that were more aggressive than those that are ordinarily recommended. I see a lot of people in the financial or personal finance area going and recommending 3% or 3.5% withdrawal rates. And to me that kind of defeats the purpose of creating a diversified portfolio. An idea of having a risk parity style portfolio is so you can use a higher safe withdrawal rate because that's historically how they have performed and what they have tolerated. So for the most conservative portfolio, the all seasons, we are using that kind of standard 4% rule to see how it holds up. And that one's a little bit too conservative, as we always say. We wanted to be a little more aggressive with the sort of the standardized risk parity style portfolio. So the golden ratio and golden butterfly, we're going with a 5% withdrawal rate, which is a reasonable withdrawal rate for somebody That's doing a normal retirement. And that is, for instance, the rate that Paul Merriman withdraws from his diversified portfolio. So I thought that was a fair test of that. We stretched it a little bit with the Risk Parity Ultimate just to see what would happen. We're taking 6% out of that. I should say all of these portfolios historically will easily take care of or can withstand these sorts of withdrawal rates. And then for the two experimental portfolios, the Accelerated Permanent Portfolio and the Aggressive 50/50, those are essentially 200% plus leveraged. So I figured, well, if the 4% rule is used for an ordinary portfolio and these have leverage of making them like a 200% portfolio, let's just double that and see how they can If you go back to episode one, I think I did talk about this and wanting to really stress test these kinds of portfolios to show that they are a better option for most people. Because even if you're only going to take 4%, you would like to have that kind of a buffer in your portfolio. And so hopefully that answers your question. At least that question. Your next email says, more specific question from previous email. How did you go from 6.4% growth after inflation to a 5.3% withdrawal rate? Does this have something to do with the standard deviation? Since 1970, it is a compounded annual growth rate after inflation of 6.4% and an expected permanent safe withdrawal rate of 5.3%. Okay, you didn't specify which portfolio you're talking about. I think you're talking about the Golden Butterfly portfolio. And if you go back to episode four, I think that's where I began discussing this in detail. But yes, the safe withdrawal rate or permanent withdrawal rate, the difference between those is a permanent withdrawal rate is the amount you can take out and still keep the same principle in there. So it's lower and a safe withdrawal rate is usually defined as not running out of money within 30 years or 40 years. depending on how you're looking at it. And both of these are removing distributions from the portfolio, added specified annual rate plus inflation and increasing it every year. So when you look and go to portfolio charts, 'cause that's where this data comes from, you will see that the Golden Butterfly, I believe, has a 6.4% compounded annual growth rate and a 5.1% permanent withdrawal rate. There are three factors that go into actually I misspoke. If you look at that portfolio it has a 6.4% compounded annual growth rate which is the return and then it has a 5.1% permanent withdrawal rate which is what you could withdraw from that historically and still maintain all of its principles. Now there are three factors that go into you're safe withdrawal rate or permanent withdrawal rate. And those are related to the standard deviation. But just thinking about what they are, they have to do with the depth of the drawdowns of the portfolio, how far it goes down and its worst, and also how long it stays down. So you're really thinking about worst case scenarios, how far down has this portfolio gone in the past? and then how long has it stayed down? And this is where these risk parity portfolios just really outshine standard portfolios and is why they have higher safe withdrawal rates and permanent withdrawal rates. So if you compare the Golden Butterfly with a standard 60/40 portfolio, and these portfolios have essentially the same kind of risk characteristics otherwise, but what you see is that the Golden Butterfly has over the past 50 years a max drawdown of 11% in only about three years, three or four years. Compare that to the 60/40 and you see a max drawdown of 34% or three times what the golden butterfly has as a max drawdown in 13 years long, which is four times as long as the period that the golden butterfly would have been underwater. And that one has a 6.1% compounded annual growth rate. So what you're getting with the Golden Butterfly over the 60/40 is you're getting a higher compounded annual growth rate and you're getting less risk, less drawdowns. And so that's why it's just a superior portfolio to hold. Well, thank you for that question. It gets back to some core principles as to why we're doing this at all.

Mostly Voices [20:25]

Walk away from the 90%. Walk away from the 97%. Walk away from the 95%. Don't go where they go. Don't do what they do. Don't talk like they talk. Develop you a whole new language. Be part of the few.

Mostly Uncle Frank [20:38]

All right, next email comes from TK and TK writes, How can you apply risk parity principles to someone in their accumulation phase? Also, what are your thoughts on using a conservative portfolio such as the All Seasons portfolio as your emergency fund with a caveat that would be overfunded 20 to 25% compared to a cash equivalent? Guiding principle would be that it would be overfunded by an amount greater than any historical max drawdown. Thanks for what you do, best, TK. And he wrote a follow-up email to that, follow-up question to All Seasons Portfolio as an emergency fund, how does it compare to a conservative life strategy fund such as VASIX, also overfunded by 20 to 25%. All right, taking these two questions together. Well, first of all, I think the solution to this emergency fund question is not having a bigger emergency fund that's invested, but a smaller emergency fund that's just in cash. The sort of preferred MO that I like to use with these kind of portfolios is to have that cash emergency fund and then what goes beyond that or rolls over put it in a intermediate term kind of portfolio, something like the Golden Ratio. And that is designed largely for intermediate term needs, your five to seven year needs, but it's also available there if you need some extra money. Now you could use the All Seasons portfolio as an emergency fund. It should work fine for that, but it's maybe a pain to manage. if you compare that to the conservative life strategy fund that you came up with, I went ahead and went over to Portfolio Visualizer and did a comparison of those. What I did is I didn't compare the funds themselves, but looked in what was inside them and then used those asset classes because they could go back further in time for the comparison. And so if you look in at what's inside of that Vasix conservative life strategy fund that has 12% in the US stock market, 8% in international stocks, then it's got 55% in the total US bond market and 25% in total international bonds. And I ran that comparison against two versions of the all seasons portfolio. The first version is the one that you see on the sample page. So that one's got 30% in the US stock market, 40% in long-term treasuries, 15% in intermediate-term treasuries, 7.5% in gold and 7.5% in commodities. And then I also ran a version that has the same amount of stocks as the VASIX fund. So it's even more conservative. It just has 20% in the US stock market and it's got 45% in long-term treasuries. 18% in intermediate term treasuries, and I went with 8.5% gold and 8.5% commodities. And so when we take a look at the comparison of the portfolio returns, and this goes back to 2007, we see that these all seasons variations tend to outperform the VASIX mix. And so the compounded annual growth rate for the VASIX of this period was 5.27%. compared to 7.14% for the All Seasons and 6.49% for the Modified, more conservative All Seasons portfolio. The best year for VASIX is 13.94%. For All Seasons, it was 18.3% for the Modified All Seasons was 16.46%. Worst years are -5.86% for VASIX. So it actually has a larger worst year than the two All Seasons portfolios, which come in at -3.66 for the regular All Seasons and -4.16 for the modified All Seasons. And how this translates into sharp ratios, which is that risk reward measure, is the All Seasons is higher at 0.91 than the VASIX mix, which is at 0.86. in terms of risk reward, the modified All Seasons though is slightly lower at 0.83. So these portfolios aren't that much different, but the All Seasons is a better portfolio than VA/SIX at least for this period, and probably because it's just more diversified. That's usually what happens when you take a look at these things. One other interesting metric is the US market correlation that the VASIX is much more highly correlated with the US stock market at 0.73 and part of that is those international bonds and corporate bonds in the Total Bond Fund. Those are going to be correlated, positively correlated with stocks, which is why you really probably don't want them in a risk parity style portfolio. If you go look at the All Seasons, that only has a correlation with the US market of 0.56 and that modified all seasons has a correlation with the US market of 0.32. So it's pretty much doing something different than the total stock market. The reason why that might be important to you is because we would assume that your longer term assets are mostly in stocks and if those are going up, you're not too worried about the size of your emergency fund. But if those are doing something different or going down, It might be nice to have an emergency fund that is not very well correlated with the stock market. But I will link to this in the show notes and you can have a look at it for yourself. All right, our next email is from Davis and Davis writes, hi, Alcom Frank, I'm thinking about using a multi-factor ETF to replace the US equities allocation of my portfolio. What do you think about replacing the total stock market and small cap value ETFs with the with a fund like AVUS, DFALRGF, or GSLC and building the rest of my risk parity portfolio off of that. This seems like it would be a simpler portfolio than holding separate factor ETFs, but are these types of all-in-one factor funds worth the cost? Thank you for your thoughts and producing such an incredible podcast. Davis. well looking at these they aren't too expensive I mean I looked at the fees for them avus is a expense ratio of 0. 15 df au has one of 0.12 lrgf is the highest one at 0.2 and gslc is at 0.09 so I don't think that their expense ratios are prohibitive what I would be more concerned about is that these have not been around that long. That factor investing is a relatively new thing. That in theory it should work fine. It should work a little better than total stock market funds. But we don't know what these funds would have done, say, something like in the period of the 1970s, because they weren't around then. We know what they would have done theoretically, and it's probably just fine. But I would prefer actually to have two or three funds in most risk parity style portfolios if you're having at least 40% in stocks, mostly for the rebalancing aspect of it. That these funds, you can't really control what is actually in them other than what their prospectuses say and how they are rebalanced. And so they might not have the same mix that you want. in your risk parity style portfolio. As we talk about these things, we're always talking about the fact that we want all of our assets to work together and we want to be able to compare all of the correlations amongst all the asset classes. These funds are not designed to be put in a risk parity style portfolio, so I don't know what kind of mix they have and how that mix is going to match up with your gold, your treasury bonds, or those other things that are in a risk parity style portfolio. So that would be my only other concern with them. In theory, these are the wave of the future. They just haven't been around as long as some of the other more standardized asset classes. It's all one big crapshoot, anywho. And so with those caveats, I would say you can go right ahead with that plan and it's probably going to work just fine. Expect the unexpected. All right, next email is from Robin B. And Robin B writes, Dear Uncle Frank, your podcast is very informative. Thank you. For a person who is less than a decade away from retirement, do you recommend converting an accumulation stage portfolio into a risk parity portfolio over time on a glide path, or that it be converted to a risk parity portfolio all at once? at one time near the date of retirement. It seems intuitively appealing to convert over time from the perspective of reducing risk, but is it worth the potential foregone return? Many thanks, Robin. Okay, I think you want to turn this question around a little bit, and we need to think about what are our goals, because your email implies that your goal is to have the largest pot of money you can have at retirement. And that would say you would take the risk and leave it all in stocks until you actually pulled the plug. Now that is not that helpful though if your real goal is what I believe it should be, which is to accumulate enough, enough, these go to 11 to satisfy your expense needs. so you should start there. How much do I need to have in terms of annual expenses and then multiply that times 25 to get an estimate of what you need. Because once you have that number, then you know when you have won the game or are close to winning the game. Because you need to define the game as having enough. If you define the game as having the most I could possibly have, then you are playing a different game.

Mostly Voices [31:25]

I think for a safe retirement, what the game you want to play is how much is enough for me and when am I getting there? No more flying solo.

Mostly Uncle Frank [31:29]

So while you can do a glide path, it's six of one half a dozen of the other. If you hit your number early or are about to hit your number, you can and probably should just convert all of that into your retirement style portfolio. And then if you have some left over, you can either spend it or invest it in something more risky or do whatever you want with it. But basically you create the Fortress of Solitude.

Mostly Voices [31:53]

It's used for scrying, healing and meditation

Mostly Uncle Frank [31:58]

that the John Goodman character talks about in the Gambler. I won't be dropping that sound bite because of the language in it, but I can link to it in the show notes. But what he talks about in that clip is once you've achieved a level of wealth, you want to preserve it. So, you want to create this fortress of solitude, which in our case is our risk parity style portfolio. And then you can continue to go on with the rest of your life. I'm asking you to do that. Taking more risks or doing other things with your other money. And I think that's a better way to think about it than worrying about whether you are maximizing your returns or not. Forget about it. Forget about it. But if you're more comfortable using a glide path, there's really nothing wrong with it. You just have to know where you are getting to at the end, what you want your portfolio to look like at retirement, and then start moving those things over. I think you want to do some kind of projections there as to what kind of return do you need from now to say another 10 years to get to the size of portfolio you think you'll need to cover your expenses. Because if that is a low number, if you only need a three or 4% return, there's no reason not to just convert it much earlier because a risk parity style portfolio is going to grow in a more uniform manner than another kind of portfolio. That's the advantage of having these tight standard deviations is that the growth is much more predictable. And you can see these growth charts if you go in particular to portfolio charts and you'll see how narrow the band is for a risk parity style portfolio in terms of its growth compared to something that is like all stocks. ordinary stock bond portfolio that has a very broad or wide variation as to the possibilities. Cool. So I would say as soon as you think you've won the game, that is the time to convert at least with that part of your portfolio. Am I right or am I right or am I right?

Mostly Voices [34:18]

Right, right, right.

Mostly Uncle Frank [34:22]

And our last email for today is from Ayveta A and Ayveta A writes, Did you have a chance to look into this? And what this is, is another email suggesting that I have somebody named Pierre on this show, and somebody named Anthony on this show, who we're going to talk about mineral exploration development companies and battery metals focused investment companies.

Mostly Voices [34:44]

That was weird, wild stuff.

Mostly Uncle Frank [34:48]

And my reaction to that is, Danger, Will Robinson. Danger.

Mostly Voices [34:51]

Danger. Do you think anybody wants a roundhouse kick to the face while I'm wearing these bad boys? Forget about it.

Mostly Uncle Frank [35:02]

So, no, I'm not interested in having those kinds of guests on the show. I'm actually not set up to have any kinds of guests on the show, at least not at this point in time. Man's got to know his limitations. But we will be sticking to our knitting here with our risk parity style portfolio.

Mostly Voices [35:18]

We have been charged by God with a sacred quest. But now I see our signal is beginning to fade. It happened once.

Mostly Uncle Frank [35:31]

If you have comments or questions for me, you can send them to frank@riskparadioradio.com that email is frank@riskparadioradio.com or you can go to the website www.riskparadioradio.com and submit the contact form and I'll get your message that way. If you haven't had a chance to do it yet, please go to Apple Podcasts or wherever you get this podcast and leave me a five-star review. Every little bit helps there. And leave me a comment too. That would be great. M'kay? We'll be picking up later this week with an 10 question analysis of I Bonds. as well as more and more emails as they continue to accumulate. They're actually beginning to compound now.

Mostly Voices [36:19]

I think she's looking pretty good. Thank you once again for tuning in.

Mostly Uncle Frank [36:23]

This is Frank Vasquez with Risk Parity Radio signing

Mostly Mary [36:28]

off. The Risk Parity Radio Show is hosted by Frank Vasquez. The content provided is for entertainment and informational purposes only. and does not constitute financial, investment, tax, or legal advice. Please consult with your own advisors before taking any actions based on any information you have heard here, making sure to take into account your own personal circumstances.