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. Thank you, Mary, and welcome to episode 93 of Risk Parity Radio.

Mostly Uncle Frank [0:44]

Today on Risk Parity Radio, we are going to conduct the long awaited analysis of I bonds using the David Stein's 10 questions to master successful investing. to do that analysis. But before that, we do have time for a few emails. Yes!

Mostly Voices [1:02]

Here I go once again with the email.

Mostly Uncle Frank [1:06]

And the first email comes from Bastian. Bastian writes, Dear Frank, my name is Bastian. And first of all, I want to thank you for a fantastic podcast. You've added a whole new dimension to my investment thinking. I found your podcast when I listened to the Choose FI interview, and I'm halfway through your episodes. I am 29 and started my wealth accumulation phase about three years ago after I got my first job after university. I am living in Sweden and currently mostly investing in stock index funds and some gold. I even have a bit of crypto but that is just for fun. After I listen to your podcast, me and my girlfriend put together a risk parity style portfolio to save and invest for the nearer future. The problem is that since we are investing via a Swedish bank, not all Funds and ETFs are available in Swedish Krona, but they usually are in Euro or sometimes dollars. Is there a good way to account for potential influences of exchange rates on my portfolio performance? Especially gold and long-term bonds are not available in Swedish Krona. Thank you and looking forward to more interesting podcast episodes. Best greetings from Sweden. Well, let me send my greetings back to Sweden. It must be nice there at this time of year. But getting to your question, yeah, I'm not an expert on exchange rates and how to balance those out. Man's got to know his limitations. The kind of rule of thumb advice that I have heard over the years is for people in other countries to balance out their investments across the universe of the world basically in proportion to country. I'm not sure that's the best advice actually because it is nice to invest in one's own currency because then one has an idea of how it will perform. And the Swedish Krona is a fine currency and seems to be just as strong or stronger than the dollar most days, not to mention the Euro. But if you're looking for funds in particular, I think if you go to the fund finder at Portfolio Charts, I'll link to it in the show notes, it's a relatively new tool, but you can go there and you can actually change the country to Sweden. And so it will give you selections from the Swedish perspective. It will provide Isins for various funds and for various asset classes. And I think that's probably the best I can do for you at this point. Man's got to know his limitations. But with regard to gold, I don't think I'd worry about it too much because it's going to have the same intrinsic value no matter what currency it's denominated in. So whether you held it denominated in Swedish krona or euro or dollars, when you converted it back, it would end up being about the same thing because it does trade as if it's its own currency. So in effect, the currency fluctuations are already built into it. And hopefully that helps. The next email is from Patrice L. And Patrice L. Writes, hi Frank, what do you think about Fundrise? Pro's to me look like real estate income and potential equity growth without the stock market volatility or hassle/risk of owning individual properties. Cons are that it's not liquid. Do you think this type of investment is a good alternative to publicly traded REITs if the investor is okay with the money being tied up for five years? Thanks Patrice. I've looked at Fundrise not too closely. I've dabbled in various platforms over the years going back to 2007 and 2008 and ahead. long running investments in Lending Club and some in Prosper, which are just more direct lending things. I have some now in what's called worthy bonds, which are very liquid and pay 5%, although they're not currently open to new investments. Fundrise I have looked at a couple times and it seemed a little bit complex and a little bit opaque to me. I think maybe if I spent more time with it, I might get more comfortable with it, as you suggest, I did not like the lack of liquidity there that bothered me and the lack of history also bothered me. My experience with these kind of platforms is they often do well to begin with and then deteriorate over time as they attract capital and have worse and worse investments available to make. So every time I look at one of these, I sort of want to see it perform well for 10 years and keep performing. And I'm not sure Fundrise has gotten to that level yet. The other issue here is that if you own real estate directly and rent it, you get a whole bunch of tax deductions. And I'm not sure you're going to get those out of Fundrise. So as an alternative, I think it's okay to generate some income. But it's not for me, I will tell you that, at least not right now. And so our next email is from Jeff W and Jeff W writes, hi Frank, I love the show. In fact, I find myself looking forward to each episode more than I do with my favorite sports podcast.

Mostly Voices [6:41]

Ain't nothing wrong with that. You're providing an incredible public service. Yeah, baby, yeah!

Mostly Uncle Frank [6:49]

My question is one that might seem to only apply to a narrow group of people who are still in the pension system. However, I humbly suggest that it taps into an interesting theoretical dilemma for the risk parity investment philosophy. I have a 403 tax-deferred annuity that comprises about one-third of my retirement savings. I'm about 20 years away from retirement and still in the accumulation phase. In this account, I'm fully invested in a 7% fixed return fund which offers a guaranteed rate of return. My argument for doing this is this is a good replacement for holding bonds because it provides a higher return and lower risk than bonds. It's clearly not highly correlated with any other investment. It returns 0.019% a day, seven days a week with zero variance. However, I don't really know if this is where I want to be to be invested or even what to make of this investment. I'd love to hear your thoughts. Thanks for all that you do. Well, Jeff, Jeff, Jeff. Danger, danger. It's a trap. It's a trap. I think we need to think about this and what phase you are in right now. You are really in your accumulation phase. So let's take that 20 years as how long you have before you're going to retire and think about this investment in that context, in an accumulation style context, as opposed to if you are actually retired. Okay. Here's the issue with this. That 7% return is not net of inflation. That includes inflation. When we are talking about returns here, we are talking about returns after inflation for the most part, because that is the way you typically describe them in a financial world. That is the real return. which is the return after inflation, and the nominal return is the return before you've taken inflation into account. So you're getting a 7% nominal return, which sounds good until you really think about what the nominal return of the stock market is. And the nominal return of the stock market is over 10%, it's 10 to 11%. The real return of the stock market over long periods of time is about 8%. So this investment is returning about 3% less than the stock market. And as a long-term investment, that is not very good. It's a trap. It is returning a real return of only about 4% to 5%. That's what it is, a 4% to 5% return when you compare it to all these other things we talk about. So how should we think about that? In your accumulation phase, this matter, it doesn't sound like a lot of few percent. Over decades though, that compounds into making a big difference. The easiest way to see this on the back of the envelope is use what's called the rule of 72. And the rule of 72 says that you can take an interest rate and divide it into 72 and that tells you how many years it will take for that investment to double. So, your investment in this 7% annuity is going to double in 10 years in value if you just kept putting the money back in and letting it compound. And I'm assuming it compounds, I don't know that for a fact. So, over the next 20 years, it is likely to double twice. And so, it'll be four times what it is now if you didn't put any more money into it. Now, how does that compare to an investment in the stock market? An investment in the stock market is likely to double nominally in seven years because you divide 10 into 72 and you get about seven. So an investment in the stock market in the same period of time is likely to double three times, which means you are likely to have twice as much money with an investment in the stock market when you retire than you would with this investment. Real wrath of God type stuff. And now you can see the problem with it. That's not an improvement. It's really not growing the way you would want an investment to grow in your accumulation phase.

Mostly Voices [11:02]

Think McFly, think. Think McFly, think.

Mostly Uncle Frank [11:05]

So, if you started with $100,000 now, you put it in the annuity, you're likely to have $400,000 at retirement. If you took that same $100,000 and put it into an index fund, you're likely to have about $800,000 in that scenario. So it really is not where you want to be right now. I would get out of that or minimize it or stop contributing to it right now. You can dodge a wrench, you can dodge a ball. And contribute to something else that's going to generate better longer term returns because you don't care about the volatility right now. Zero volatility does nothing for you. I don't think it means what you think it means.

Mostly Voices [11:48]

Zero volatility is something you want to have later on.

Mostly Uncle Frank [11:51]

Now, when you did get to your retirement phase, this would have some advantages because it generates some income and generates some stability that way. It's more of a substitute for a REIT or something that is a high generator of income. And so in that regard, I could see having a portfolio in retirement that has something like 10 or maybe 15% of this in it to generate some income. It might be something nice to have. I can't see us relying on this long term because it's going to have that kind of drag to it that I already described. Don't be saucy with me, Bernaise. Compared to our standard risk parity style portfolios, something like a golden butterfly or a golden ratio portfolio, portfolio, those actually have nominal returns in the 9 to 10% range. So this is dragging that down. The other issue I see with it is it's not liquid. And since it's not liquid, you can't use it for rebalancing. So if your stocks dropped in value, you couldn't sell a piece of this and then turn that into stocks. You couldn't buy, there's no buying high and selling low with this thing. It's a static thing. So the way you would typically account for it in your retirement would be to say, All right, this is my pool of expenses. This annuity thing is covering this portion of my expenses. Now let's look at the rest of my portfolio and figure out how that's going to cover that part of the portfolio. You would take this off the top of your expenses like you would do for Social Security. So these sorts of things are just not accumulation vehicles. They are retirement vehicles. They are something that you would be interested in when you get to your 70s really. And this is one of the pitfalls we see with 403Bs. This is changing now, but those kind of plans often can be minefields filled with annuity contracts and other expensive things that really don't do the job that they should be doing. And they are also associated with salespeople.

Mostly Voices [14:07]

You know, whenever I see an opportunity now, I charge it like a bull. Ned the bull, that's me now.

Mostly Uncle Frank [14:11]

And whoever recommended this thing to you was not doing you any favors. Always be closing.

Mostly Voices [14:18]

Always be closing. Because only one thing counts in this life. Get them to sign on the line which is dotted. And it's somebody you should probably not listen to.

Mostly Uncle Frank [14:34]

either because they have an interest in the commissions or their company does, if it was the representative of that company that provides this annuity. Tell me, have you ever heard of single premium life? Because I think that really could be the ticket for you. Or they're just ignorant if it was just some HR person that really doesn't know.

Mostly Voices [14:50]

Everyone in this room is now dumber for having listened to it. So I would probably just leave this alone.

Mostly Uncle Frank [14:57]

You probably can't. change it without paying fees on it, stop contributing to that and start contributing to other things that are more likely to grow for you in the future than this.

Mostly Voices [15:09]

And may God have mercy on your soul. All right, last email for today comes from Keith.

Mostly Uncle Frank [15:13]

And Keith writes, this podcast on managed futures sounds like something you'd be interested in. It is long, but some of the best stuff is in the second half, so stick it out and he gives a link. and this is a link to the MEVB favor show, podcast number 225 with Eric Crittenden. I'll put it in the show notes. I did listen to it. It is fairly interesting and kind of reveals sort of the direction where ETFs and other funds are going, that we're going to have more options in the commodity space, in the managed future space that are good options in the future. We're not quite there yet, but we are. Getting there is do-it-yourself investors. That would be great. So thank you for that reference.

Mostly Voices [15:57]

And now for something completely different.

Mostly Uncle Frank [16:02]

And the something completely different is our main event today, which is an analysis of I Bonds using the 10 questions from David Stein to Master Investing and we will proceed right through them. Question one, what is it? All right, I bonds are savings bonds provided by the US government. And they are a version of savings bonds that has an inflation component to it. So the rate on an I bond is composed of a fixed rate of return, which remains the same throughout the life of the I bond, and then a variable semiannual inflation rate based on the Consumer Price Index, and that is adjusted each May and each November. And reading a little more from the website, which I will also link to in the show notes, I bonds increase in value on the first day of each month and interest is compounded semi-annually based on each I bond issue date. An I bond's issue date is the month and year in which full payment for the bond was received. All right, question two：Are I bonds an investment, a speculation, or a gamble? Well, I bonds are a bond that pays interest. They are clearly an investment. And we need not spend any more time with that question. Geez.

Mostly Voices [17:25]

Guy wouldn't know majesty if it came up and bit him in the face.

Mostly Uncle Frank [17:28]

All right, question three：what is the upside? Well, the upside is you're going to get paid this interest rate from the federal government. And right now that interest rate when you add these two things together is about 3.54% on these bonds. And just a couple other parameters to that. Well first you can buy them in denominations as low as $25 and up to $10,000. I-bonds earn interest for 30 years unless you cash them first. You can cash them after one year But if you cash some out before five years, you lose the previous three months of interest. For example, if you cash an I-bond after 18 months, you get the first 15 months of interest. All right, question three. What is the downside? Well, you can't lose money with these things, so there's no downside in that respect. The only real downside that you see here is losing the three months of interest if you cash them out. before five years. But there are a couple other, not really downsides, but kind of limitations on these instruments. Man's got to know his limitations. The first is that you can only buy them from the government. And so the way to do it these days is to go to treasurydirect.gov and open up an account on their website. And then you need to connect your bank account and you buy them that way. The second limitation is you cannot transfer these. They go with your Social Security number. And so basically all you can do is buy them from the government and then cash them in with the government and that's the limits on your transactions with I Bonds. And then the third limitation is that you can only get $10,000 worth of these per year per Social Security number. So if you have a very large pool of assets, these might not be very significant and you will have to have a separate account just to manage this one thing. You cannot get these through ETFs or any other kind of fund. But those are all the downsides for question four. Now question five, who is on the other side of the trade? Well, it's Uncle Sam. and it's just Uncle Sam. And Uncle Sam can print his own dollars, so he's not gonna run out of them.

Mostly Mary [19:58]

A really big one here, which is huge.

Mostly Voices [20:04]

Cool. All right, question six.

Mostly Uncle Frank [20:08]

What is the investment vehicle? Well, I think we've already described it. It used to be paper bonds. They still issue some of these in paper, but it's mostly electronic these days. And so the way you're likely to be buying them is through treasurydirect.gov, and you will essentially own digits in an account that will come back to you when you request them. Au contraire.

Mostly Voices [20:31]

All right, question seven.

Mostly Uncle Frank [20:35]

What does it take to be successful? Not a whole lot. You just need to have a social security number in the US and go and buy them. If you don't have a social security number or a taxpayer ID, I don't think you can buy them. I'm not sure they are available to non-US citizens or residents, so that's another limitation. Man's got to know his limitations. But the other thing you need to be successful is have a little bit of patience because you're not going to lose any money or you're going to get your full allocation of interest if you leave them in there for at least five years. Punk! And as you can see, one strategy that you can have with them is to ladder them. You can Invest $10,000 each year and then within five years you will have a pool of them that is available that you could take back without incurring any interest rate deduction. So that would be a method of helping you be successful with them. Ain't nothing wrong with that. Alright, question eight. Who is getting a cut? Well, nobody really, these are about as cheap a thing as you can buy. And in terms of taxes, they are taxed on federal income tax, but they are not taxable for state and local income tax, at least according to Treasury Direct. So they have those advantages, but that would be the only other cuts being taken out. All right, question nine, how does it impact your portfolio? Well, we can't do a correlation analysis for this at Portfolio Visualizer because you can't buy them like that. But you can see just by the description that they have essentially zero correlation to anything else. They're not going to go down in value. They're going to pay you an interest rate, which is currently about 3.5%, and that's all there is to them. So they would function in your portfolio if you have a cash allocation or if you had a short-term bond allocation. These are going to be just like that only probably a little bit better given the interest rates that they pay. Of course, they are limited by how much you can buy, so if you have a decent sized portfolio, you're not going to be able to allocate all of your short-term bonds to I-bonds. You get 10,000 dollars a year. But to the extent you hold short-term bonds in your portfolio, especially these days, this would be a very good thing to use for part of that. Yes. All right, question 10, should you invest? The answer is yes, you should, particularly going into retirement. And I am embarrassed to admit that I had not held these in the past.

Mostly Voices [23:23]

I award you no points. And may God have mercy on your soul.

Mostly Uncle Frank [23:27]

I hadn't been back to the treasurydirect.gov site in many years. It's only little improved in terms of operation, but this definitely is something that is desirable to hold if you have any kind of cash component or short-term bonds in your retirement portfolio, you might as well put a portion in these. because the interest rate is good, they're completely liquid or close to it, and you have virtually no risk. Yes! you! are correct, sir, yes! So this past week, I loaded up on $10,000 worth of them for this year, and will probably be getting some each year until I've got my fill of them. We may also be looking into using the Social Security numbers of my spouse and others to buy more of them. No more flying solo.

Mostly Voices [24:21]

So the answer is... Yes! Yeah, baby, yeah!

Mostly Uncle Frank [24:28]

And I want to thank the listener who brought this to my attention. I do not have that email present, but if you send me another email, I will make sure that you get credit in the show notes for that. But now I see our signal is beginning to fade. Shut it up, you! If you have questions or comments for me, 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 fill out the contact form and I'll get your message that way.

Mostly Voices [25:04]

Ned the Bull, that's me now.

Mostly Uncle Frank [25:07]

We will pick this up at least this weekend if we don't do another show before then. And the weekend we will have our weekly portfolio reviews and continue to hack away at the mountain of emails. And we are doing them in chronological order for the most part, if I can keep track of them. We are in the middle of May 22nd in terms of when I received them. So if you sent me an email too much before that, you may want to send it to me again. I'm afraid that I'm losing track of a few of these. There's so many of them. You can't handle the emails. If you haven't had a chance to do it, please go over to Apple Podcasts and subscribe and like and leave me a five-star review because all of that helps get the word out about the podcast. Thank you once again for tuning in. This is Frank Vasquez with Risk Parity Radio. Signing off.

Mostly Mary [26:08]

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.